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![ECONOMY OVERVIEW
purchasing power parity. In real terms, GDP rose by
over 60%, while GDP per capita was up 40%.
The government has also been keen to stress its
stewardship of public finances. During the height of
the euro crisis at the end of 2011, for example,
Turkey’s performance compared favourably with that
of its European neighbours. Turkey’s budget deficit
at the time stood at 2.5% of GDP, within the EU
benchmark of 3% and well below that of its troubled
European neighbour, Greece, at close to 10%. A
decade of single party governments has also brought
public debt under control. At nearly 80% of GDP in
2001, it fell to 36% by 2013, substantially below
Greece (142.8%), Italy (119%) and Portugal (93%).
By 2016, the World Bank predicts it will reach 33%.
MAKING THE GRADE:Thecountrywasrewardedfor
itscoursecorrectionin2013,whenMoody’sInvestors
Service raised Turkey’s sovereign bond rating to
investmentgrade,bumpingitupfrom“Ba1”to“Baa3”,
with a stable outlook. This gave Turkey the same
credit rating as India, Spain and Columbia, bolster-
ing hopes it would attract a wider investor base.
However, by April 2014 Moody’s revised the coun-
try’s outlook from stable to negative, citing greater
external financing vulnerability due to lower global
liquidity and domestic political uncertainty, as well
as less optimistic near- and medium-term growth
forecasts. Moody’s most recently upheld this posi-
tion in April 2015. In terms of the banking sector, in
March2015Moody’salsoreaffirmeditsnegativeout-
look for the second year running, after putting 10
of its banks on notice for downgrades in early 2014
and lowering various ratings of 11 banks that June.
Standard and Poor’s (S&P) has been similarly bear-
ish. As the only one of the big three credit ratings
agencies not to grant Turkey investment-grade sta-
tus, S&P has maintained a “BB+” rating with a neg-
ative outlook, the highest junk status. However,
according to statements from Nihat Zeybekci, min-
ister of economic affairs, the outcome of the June
elections could have a positive impact on ratings.
BIG PLANS: Turkey’s track record over the last
decade has encouraged the government to set high-
ly ambitious growth targets for the country’s econ-
omy. Between 2014 and 2023 the government is
working to boost GDP from around $800bn to $2trn;
GDP per capita from $10,400 to $25,000; and total
exports from $157.6bn to $500bn.
For some time analysts have warned that it will be
difficult to replicate the performance of the past
decade, and that such ambitious growth figures can-
not be sustained with a burgeoning current account
deficit (CAD) and the structural problems that cre-
ated it. In January 2014 Sinan Ülgen, the director of
the Istanbul-based, Centre for Economics and For-
eign Policy Studies, told the press that Turkey’s
growth model based on low global interest rates and
large capital inflows was outdated. “For years, it has
been clear that this model would come to an end
the moment central banks, like the [US Federal
Reserve], started raising interest rates again.”
UP & AWAY: Much of Turkey’s growth since 2008
has been based on domestic consumption, rapid
credit expansion, and the construction and servic-
es sectors. This has led to rising energy and inter-
mediate imports to fuel manufacturing and exports.
While the loan-to-deposit ratio of the banking sec-
tor stood at 40% in 2003, from 2010 to end-2013 it
grew from 88% to 114%, according to Moody’s.
Although the sector’s 13.4% core tier-1 capital ade-
quacy ratio insulates it from a certain degree of risk,
banks are still exposed to market turbulence, espe-
cially with leverage rising from 8x to 9x since 2010.
Consumer debt has also increased, from 4.3% of
household disposable income in 2002 to 55% by the
end of 2013. Credit card debt alone rose by 22% in
2013 on the back of a 31% rise in 2012. Such con-
sumer-led growth is unsustainable in the long run.
STRUCTURAL CONCERNS: To achieve this kind of
persistent growth again, Turkey needs to do more to
tackle the problems of low-value production and
28
Credit card debt rose by 31% in 2012 and 22% in 2013
Between 2014 and 2023
the government is working
to boost GDP from around
$800bn to $2trn; GDP per
capita from $10,400 to
$25,000; and total exports
from $157.6bn to $500bn.
www.oxfordbusinessgroup.com/country/turkey
SOURCE: IMF
2014 2015 2016
GDP, current prices (TL trn) 1.72 1.88 2.06
GDP per capita, current prices (TL) 22,448.41 24,262.19 26,210.20
Total investment (% GDP) 21.91 22.19 22.25
Inflation, avg. consumer prices (% change) 5.30 5.00 5.00
Vol. of imports of goods & services (% change) 7.17 8.54 10.15
Vol. of exports of goods & services (% change) 4.01 4.97 5.31
Population (m) 76.71 77.60 78.48
General gov't revenue (TL bn) 610.38 659.24 721.23
General gov't revenue (% GDP) 35.45 35.01 35.06
Total gov't expenditure (TL bn) 649.33 701.92 768.17
Total gov't expenditure (% GDP) 37.71 37.28 37.35
Gov't net lending/borrowing (TL bn) 8.10 4.10 4.09
Gov't net lending/borrowing (% GDP) 0.47 0.22 0.20
Gov't gross debt (TL bn) 609.26 660.64 716.34
Gov't gross debt (% GDP) 35.38 35.09 34.83
Select economic indicators, 2014-16](https://image.slidesharecdn.com/bc9404e3-9a0b-49e9-8bf3-2bf8b66261b3-150621145612-lva1-app6891/85/Turkey-2015-30-320.jpg)
![ECONOMY OVERVIEW
growth being fuelled by imports and short-term cap-
ital flows. According to the IMF roughly 75% of the
downward adjustment in the current account in
2012camefromacyclicaldropinimportsandunusu-
ally large net exports of gold. It was also the result
of a decline in investment rather than an increase
in savings. The fund’s annual staff report on Turkey
from 2014 notes, “The current account deficit
remains 2.5-5% of GDP higher than warranted by
fundamentals and optimal policy settings.”
Turkey’s reliance on imported energy is one of the
main factors behind the deficit. Indeed, the coun-
try’s net energy import bill reached $55bn in 2014,
with net energy imports accounting for 74% of ener-
gy use and 59% of electricity generation.
TAPER TANTRUM: Given the size of the CAD, the
country is particularly vulnerable to any external
shocks that could halt capital inflows, which are cur-
rently financing Turkey’s deficit. In the event of an
abrupt and pronounced reversal of inflows, the econ-
omy would almost certainly face a rough and rapid
adjustment leading to negative growth. Although
analystshavewarnedofthisscenarioforyears,avari-
ety of internal and external factors gained pace in
2013, lending greater credence to risk assessments.
In May 2013 the US Federal Reserve announced
that it might begin to wind down its large-scale asset
purchases. The programme, enacted in response to
the global financial crisis, has spurred lower US inter-
est rates, bringing greater liquidity to emerging mar-
kets offering higher returns. The tapering, which
began in December 2013, signals an eventual US
interest rate hike, which is likely to have a negative
impact on portfolio investment in emerging mar-
kets. However, weaker than expected job and infla-
tion figures in March 2015 have fuelled expectations
that the increase will not happen before September.
A reversal in investment flows is particularly trou-
blesome for a country like Turkey, which has become
so highly dependent on short-term capital inflows.
However, according the IMF, low interest rates in the
EU and Turkey’s investment-grade status could help
to mitigate this effect, creating more of a “mixed”
environment for capital flows. The Foreign Econom-
ic Relations Board (DEİK), having been restructured
in September 2014, is focused on reaching the Vision
2023 targets of boosting exports to $500bn and
the volume of foreign trade to $1trn. To this end, DEİK
works with international organisations to bolster
ties with the global business community and increase
opportunities for domestic firms (see interview).
EXTERNAL EXPOSURE: The more pressing concern
for Turkey at present is the amount of foreign debt
held that is set to mature in the near term. The short-
term external debt stock on a remaining maturity
basis, meaning debt that is set to mature within one
year, stood at $164.9bn as of end-February 2015, up
26% since the end of 2011. The vast majority – over
85% – of this debt is held by the private sector, with
more than two-thirds accounted for by banks. While
this increases economic vulnerability and presents
a long-term challenge to sustainable growth, the
banking sector has had “no difficulty in rolling over
its external borrowings and has adequate buffers
against any [foreign exchange] liquidity shocks that
may emanate from abroad”, according to the TCMB’s
most recent Financial Stability Report from Novem-
ber 2014. Moody’s has echoed this view, noting that
the country’s banks, corporates and public institu-
tions alike have historically been able to roll over
maturing debt even during times of crisis.
CURRENCY WOES: The currency composition of
Turkey’s short-term external debt stock is also note-
worthy, particularly in light of recent depreciations
in the lira. According to the TCMB, as of the end of
February 2015, just 12.1% of all short-term external
debt was denominated in lira, while more than half
was in US dollars and nearly one-third was in euros.
The CAD, fed by high imports, a substantial trade
deficit and newly vulnerable to capital outflows, has
had a sizable impact on the strength of the lira. The
currency depreciated 28% against the dollar between
May 2013 and the end of 2014, before falling by
another 15% through to the end of April 2015.
The depreciation of the lira has also been exacer-
bated by risk-averse local actors. According to Ozer
Balkız, the director of economic research at the Inde-
32
Just 12.1% of short-term external debt was denominated in lira as of the end of February 2015
According the IMF, low
interest rates in the EU
and Turkey’s
investment-grade status
could help to mitigate the
effect of a US interest rate
hike on capital flows.
The short-term external
debt stock on a remaining
maturity basis stood at
$164.9bn as of the end of
February 2015, up 26%
since the end of 2011.
www.oxfordbusinessgroup.com/country/turkey
SOURCE: TUIK
Manufacturing 15.8
Wholesale & retail trade 12
Transport & storage 12
Real estate activities 9.8
Agriculture, forestry & fishing 7.1
Construction 4.6
Public admin., defence & social security 4.2
Professional, scientific & technical activities 3.4
Financial & insurance activities 3
Other 28.1
Contribution to GDP by economic sector,2014(%)](https://image.slidesharecdn.com/bc9404e3-9a0b-49e9-8bf3-2bf8b66261b3-150621145612-lva1-app6891/85/Turkey-2015-34-320.jpg)
![ECONOMY OVERVIEW
pendent Industrialists and Businessmen’s Associa-
tion, “Turkey is a dollarised economy. When some-
thing bad happens, not only corporates, but also
consumers go into foreign exchange.” Since mid-
2013 many Turkish residents have been transferring
their bank deposits into foreign currencies – name-
ly euros, dollars and sterling – in an attempt to pro-
tect themselves from further currency volatility.
The instability of the lira has left the banking and
business sector exposed to substantial risk, given the
private sector’s share of foreign currency debt.
According to Emre Sezan, head of equity research
at İş Investment, private sector foreign currency net
debt stands at 22% of GDP, and depreciation of the
lira will necessarily increase the cost of servicing
these loans. According to the TCMB’s November
2014 report, currency risk is comparably higher
amongst electricity producing firms and real estate
investment companies, as they generate less revenue
inforeigncurrencies.However,non-performingloans
have been stable thus far, at 2.6-2.7% since 2011.
The depreciation of the euro against the dollar has
also had an effect on the corporate segment, with
45% of the country’s exports invoiced in euros,
according to the World Bank. This in turn has made
it more difficult for firms to finance dollar-denom-
inated imports, though the impact on the wider
economy has been negligible.
DOMESTIC DEMAND: In general terms, the new
regulations regarding consumer credit introduced
in early 2014 could have a negative effect on domes-
tic demand, though they are also likely to improve
the consumer loan portfolios of banks. Domestic
uncertainty ahead of the June 2015 general elec-
tions is also depressing demand. According to the
World Bank’s April 2015 Regular Economic Note,
consumer confidence is at its lowest level since
March 2009, when the global economy was in the
throes of the financial crisis. While major spending
decisions by households and corporates are being
put off until after the elections, the World Bank’s
3% GDP growth forecast for 2015 assumes that
domestic demand will recover shortly thereafter.
COURTING CONFIDENCE: In the short term,
Moody’s outlook downgrade in April 2014, which it
reaffirmed most recently in April 2015, is unlikely to
have a dramatic impact. However, if Turkey were
downgraded further, losing its investment grade sta-
tus, the country could witness more serious capital
outflows. According to Moody’s, while the country’s
sovereign rating is unlikely to see any improvements
in the near term, a move backwards in terms of pub-
lic finances, heightened political instability or a dete-
rioration in its external finances are all possible alert
signals for a ratings downgrade.
Fortunately, the government has had few problems
with its external financing needs. In April 2015 Turkey
issued a $1.5bn dollar-denominated bond with a
yield of 4.4% – some 250 basis points over compa-
rable US Treasury bills, according to the Turkish Treas-
ury. Combined with another $1.5bn issue in January,
this sale marks $3bn out of the $4.5bn in planned
issues for 2015. Oversubscribed by five times, the
April sale signals continued interest in the country’s
sovereign debt from international investors. Indeed,
just15%ofthebondsweresoldtodomesticinvestors.
MEASURED PROGRESS: Further improvements to
Turkey’s external position could be in the offing. As
of February 2015 the CAD was down by nearly 9%
from $46.9bn in September 2014 to $42.8bn, driv-
en by a $3.1bn drop in the energy deficit and a $2.1bn
adjustment on higher gold exports. This represents
a drop from 5.8% of GDP to 5.4% over the period.
Looking ahead, the depreciation of the lira should
also have a positive impact on exports and the cur-
rent account. Balkız told OBG, “We do not want the
lira to go to 2 [against the dollar] again, because it
kills the competitiveness of Turkish exports. We see
the effect of exports increasing. As developed coun-
tries show better performances, this is good for us.
Also, it will be positive for the CAD.” Indeed, most pre-
dictions are for a further contraction of the CAD in
2015. According to the World Bank, weak oil prices
could help cut it to 4.4% of GDP, which should help
to reduce the country’s external financing burden
from $220bn in 2014 to $200bn in 2015.
OUTLOOK: While a reduction in external vulnerabil-
ities is welcome in the short term, it belies persist-
ent structural concerns. As it stands, the country
remains reliant on domestic demand and a large
CAD to reach its growth targets, generate sufficient
employment or boost per capita income. In the long
run,thecountryneedstoaddresssupply-sidereforms
such as labour market regulations and education.
While Turkey has recorded impressive growth in
the past decade, it may have reached its limit with-
out substantial structural overhauls of the econo-
my. If the country can overcome the current investor
uncertainty and improve productivity through much-
needed reforms, the ambitious growth targets
set by the government could eventually be reached.
34
Since mid-2013 many Turkish residents have been transferring their bank deposits into foreign currencies
Turkey issued a $1.5bn
dollar-denominated bond
in April 2015, its second of
the year. The sale, which
was oversubscribed by five
times, is indicative of
continued interest in the
country’s sovereign debt.
As of February 2015 the
current account deficit
was down by nearly 9%
from $46.9bn in
September 2014 to
$42.8bn. This represents a
drop from 5.8% of GDP to
5.4% over the period.
www.oxfordbusinessgroup.com/country/turkey](https://image.slidesharecdn.com/bc9404e3-9a0b-49e9-8bf3-2bf8b66261b3-150621145612-lva1-app6891/85/Turkey-2015-36-320.jpg)
![ENERGY OVERVIEW
of Turkey’s total energy needs. The plant began oper-
ations in the third quarter of 2014.
RENEWABLES: Turkey could also boost supply more
sustainably.Greenpeacesaysrehabilitatingageinginfra-
structurewouldsave16%ofelectricitywastedintrans-
mission.Environmentalistsalsopointtosunlight,wind,
biomass and rivers as sources of relief. Green energy
is only now being tapped, accounting for just 25% of
theenergymix(nearlyallfromhydroelectricity),accord-
ing to the state Electricity Generation Company.
Published at the end of 2014, the National Renew-
ableEnergyActionPlanoutlinesthecountry’sapproach
for developing renewable sources of energy. By 2023
Turkeywantstoexploitallviablehydroelectricresources,
up from the current 50%. The country has 1% of the
world’s hydropower potential, and 16% of Europe’s.
That could produce about 128bn KWh, according to
state estimates. But hydropower rouses mixed feel-
ings. Although it generates almost no carbon emis-
sions,thedammingofriversharmsbiodiversityandlocal
populations’ ways of life. The government appears to
havetakenastepbackfromitspreviousunbridledsup-
port for smaller hydropower projects, especially run-
of-riverdams.Inlate2013theEnvironmentandUrban
Planning Ministry said it would no longer back hydro
projects with capacity below 10 MW. Environmental-
ists fear this may prompt the government to resume
mega-damprojects,liketheIlısuDaminsouth-eastern
Turkey, which threatens to submerge the ancient city
ofHasankeyf.Acourtin2013blockeditsconstruction;
however, activists report that work quietly continues,
such as resettling residents, despite the injunction.
WIND-BLOWN:Turkeyranks16thinwind-energycapac-
ity worldwide, with installed capacity of 3.7 GW and
another 11 GW in the pipeline. Its wind potential rivals
that of Spain, according to MENR. “Wind energy is
becomingincreasinglyimportantinTurkey.Inthepast,
connectioncapacitylimitedtheamountofwindlicences
thatcouldbeawarded,butnowimprovementsintrans-
missionandgridtechnologyshouldresultinanincrease
in the number of available licences,” said Serdar Nişli,
chief executive at Aksa Energy, one of Turkey’s biggest
power producers. “Improved wind-capturing technol-
ogyhasalsoresultedinhighercapacityutilisationrates,
making the economics of certain sites more viable.”
The Energy Market Regulatory Authority (EPDK)
received over 1500 applications for 600-MW wind
licences that were being tendered in 2014, according
to local media. “Growth potential in the Turkish wind
sector is higher than in Europe, as there are better
wind sites available. That said, many of the best sites
havealreadybeendeveloped,andlower-windsitesare
harder to make economically viable. Turkey needs to
concentrateoninvestingindevelopingbetterwind-cap-
turetechnology,”saidMaltepe.Windturbinesdesigned
tocapturemoreenergyareneededforsuchlesser-rat-
ed sites. Turkey has a manufacturing base for blades
andtowers,butnoturbineproduction;thereforeoper-
ators must import key components. Better education
isneededassomedevelopersareusingtechnologythat
is incompatible with their licensed site, Nişli told OBG.
NEW COSTS & DELAYS: Changes to regulations gov-
erningforestrylandcouldsteeplyraiserentalcostsfor
wind-farmoperatorsonstate-ownedpropertiesandban
certainregionsoutrightthattheForestryMinistrywants
to protect. Some €1.5bn of wind-energy projects are
on hold, according to Mustafa Serdar Ataseven, chair-
man of the Turkish Wind Energy Association.
“Projects approved in the last quarter of 2011 were
first hampered by problems with radar. After that was
resolved, permission was suddenly required from the
National Intelligence Organisation, which was also
resolved,butthennationalisationfromtheprimemin-
ister’s office has slowed because of a backlog there.
Trouble stemming from permission [to build] in forest-
land has been under way for a year,” Ataseven told
trade magazine GreenPower in March 2014. Industry
insiders say another 800 MW of wind power could
become available if the forestry dispute is resolved.
SUN-KISSED: Turkey’s raw solar potential rivals that
of Europe’s sunniest nations, including Spain and Italy.
It ranks 27th in the world for solar capacity. The aim is
to lift capacity to 3000 MW by 2023, according to the
Renewable Energy Law, ratified in 2011. Currently,
expensive large-scale projects are mainly in the hands
of state bodies, like the solar photovoltaic array cover-
ing 10,000 sq metres near the city of Izmir on the
Aegean coast. It was expected to come online in mid-
2014 and produce 493 KW to power three municipal
facilities, Radikal newspaper reported, but at the time
of writing had yet to begin production.
The EPDK held a second round of bidding for 2 GW
worth of solar licences in January 2015, and as OBG
wenttopress,thewinnerswereawaitingconfirmation
oftheirawardforthe5-MWand8-MWprojectsinthe
Erzurum and Elazığ regions, respectively. There will be
additionaltendersfor302MWofnewsolarphotovolta-
ic capacity at the end of April 2015, according to the
Turkish Electricity Transmission Company (TEİAŞ).
Additionalmarketdevelopmentsincludetheentrance
of Germany’s energy firm Conergy, and a joint venture
involving the UK's Belectric, which tendered success-
fullytoTEİAŞfortwolarge-scale,ground-mountedsolar
energy projects. The two projects have a combined
101
THEREPORT Turkey 2015
SOURCE:BPStatisticalReviewof
WorldEnergy2014
Coal production, 2003-13 (m toe)
0
4
8
12
16
20
20132012201120102009200820072006200520042003
Green energy is only now
being tapped and accounts
for just 25% of the energy
mix, and almost all of that
is from hydroelectricity,
according to figures from
the state Electricity
Generation Company.](https://image.slidesharecdn.com/bc9404e3-9a0b-49e9-8bf3-2bf8b66261b3-150621145612-lva1-app6891/85/Turkey-2015-103-320.jpg)
Turkey 2015
- 5. CONTENTS TURKEY 2015 Greatexpectations Page 27 The government’s ambitious econom- ic targets for 2023 are getting a boost from a declining current account deficit, thanks partly to lower oil prices. However, substantial structur- al reforms are likely to be necessary in order to regain the country’s strong growth trajectory, including achiev- ing the political stability needed to attract more investor interest in the state’s recent privatisation efforts. 6 10 13 16 18 21 23 24 27 35 36 37 38 Snapshot: Turkey in figures COUNTRY PROFILE A new page: Significant developments have occurred over the last decade Forging a new path: The country has been through several changes and is set to make new economic and political gains in the years ahead Viewpoint: President Recep Tayyip Erdoğan TRADE & INVESTMENT Onwards and upwards: The country has significant potential to boost trade and foreign investment Maximising potential: Efforts to pursue further trade agreements Interview: Richard Moore, UK Ambassador to Turkey Viewpoint: Dr Jim Yong Kim, President, World Bank Group ECONOMY Great expectations: Structural reforms key to regaining the economy’s positive trajectory Interview: Mehmet Şimşek, Minister of Finance Interview: Mark Lewis, Former Senior Resident Representative in Turkey, International Monetary Fund A private line: The government continues liberalisation efforts Interview: Ömer Cihad Vardan, President, Foreign Economic Relations Board of Turkey 40 47 48 49 51 52 53 57 60 65 66 68 72 73 74 75 BANKING Keeping a watchful eye: The prospects for growth are excellent so long as risks are heeded Interview: Erdem Başçı, Governor, Central Bank of the Republic of Turkey Interview: Ali Fuat Taşkesenlioğlu, CEO, Halkbank Entries and exits: The international presence in the sector is set to change markedly Interview: Suat İnce, Deputy Chief Executive, Türkiye İş Bankası Interview: Hikmet Ersek, President and CEO, Western Union Loan rangers: The main players are alert to the risk of the level of bad debt rising Rate and see: The agencies’ verdicts shine a revealing light on the sector CAPITAL MARKETS To the marketplace: With its bourse easing after a recent surge, the country looks to regulatory reforms and multi-tier platforms to encourage new listings Interview: Vahdettin Ertaş, Chairman, Capital Markets Board Interview: İbrahim Turhan, Former Chairman and CEO, Borsa Istanbul INSURANCE Providing and expanding coverage: The country’s insurance sector continues to offer new and better products to a growing population Pensions boom: Newly passed legislation ushers in a new era for private pension contributions Interview: Mehmet Bostan, General Manager, Vakıf Emeklilik Interview: M Uğur Erkan, CEO, Anadolu Hayat Emeklilik Talking takaful: Sharia-compliant insurance is poised to receive government support ISBN 978-1-910068-32-8 Editor-in-Chief: Andrew Jeffreys Managing Editor, Asia: Paulius Kuncinas Editorial Managers: Joshua Blair, Geoff Cooke Group Managing Editor: Alistair Taylor Chief Sub-Editor: Barbara Isenberg Deputy Chief Sub-Editor: Martin Stegman Web Editor: Lorraine Turner Senior Sub-Editor: Jennie Patterson Sub-Editors: Usman Ahmedani, Abraham Armstrong, Danya Chudacoff, Sean Cox, Karla Green, Sam Inglis, Krystell Jimenez, Jamie Leptien, Laura Nelson Contributing Sub-Editor: Miia Bogdanoff Analysts: Paige Aarhus, Jon Gorvett, Andy MacDowall, Patrick Wrigley, Ayla Jean Yackley Senior Editorial Researcher: Susan Manoğlu Editorial Researchers: Sara Costa, Billy Fitzherbert, Souhir Mzali, Jenna Oelschlegel, Teresa Meoni Creative Director: Yonca Ergin Art Editor: Meltem Muzmuz Graphic Assistants: Gülhan Atbaş, Arzu Çimen Illustrations: Shi-Ji Liang Photographer: Mourad Hammami Production Manager: Selin Bolu Operations & Administration Manager: Burçin Ilgaz Logistics & Distribution Coordinator: Esra Sezgin Logistics Executive: Öznur Usta Onwards & upwards Page 18 An advantageous geographical position meansTurkeyoffersahighpotentialfortrade. With the economy long hampered by a heavy dependence on imports, the government has taken many steps recently to diversify mar- kets, as well as cut the trade and current accountdeficits.Thishasalsohelpedtotrans- form the investment environment, with FDI reaching record levels over the past decade.
- 6. CONTENTS TURKEY 2015 www.oxfordbusinessgroup.com/country/turkey 4 Madein Turkey Page 78 Despite a slowdown in overall industrial growth, Turkey’s demographic fundamentals arehelpingfuelexpansioninmanysegments, from jewellery to metals, with a strong long- term outlook for domestic retail. While fur- ther growth may depend on broader recov- eryintheEU,thedefenceandautoindustries areboostingexportsanddrawinginvestment. 78 83 84 85 86 87 89 90 92 95 98 105 107 INDUSTRY & RETAIL Made in Turkey: Although industrial growth is slowing, exports are up and a number of segments have scope for expansion Interview: Bora Yalınay, CFO, Ülker Interview: Sadettin Korkut, General Manager, Petkim Petrokimya Holding High performance: The defence sector is thriving with a range of new equipment and systems being produced locally Interview: Muharrem Dörtkaşlı, CEO, Turkish Aerospace Industries Iron in the soul: Metals industry will benefit from an expected rise in demand More precious: Legislative changes to further boost growth of the jewellery industry A leading light: Automotive sector sees a rise in investment, output and exports A growth market: Formalisation is being driven by a new retail law as local outfits seek new opportunities abroad Slower growth: Although consumer sentiment is weakening, the outlook remains positive ENERGY Opportunity knocks: Taking advantage of low prices to increase hydrocarbons supply Liberalising power: The privatisation of assets and infrastructure in the country’s electricity sector continues Trans-Anatolian steps: Natural gas is poised to traverse the country through a new pipeline project connecting Azerbaijan to Europe 108 109 111 114 119 120 122 123 124 130 133 136 141 142 143 Interview: Besim Şişman, CEO and Chairman of the Board, Turkish Petroleum Still searching: Drilling for hydrocarbons resources continues Splitting the atom: Nuclear ambitions encounter unexpected delays CONSTRUCTION & REAL ESTATE Full speed ahead: Several large projects are under way or in planning stages, while Turkish firms are also in demand overseas Keeping up with demand: The construction and mining machinery and equipment segment benefits from the vast amount of activity taking place Dialogue: Ergil Ersü, Chairman, Gama Holding, and Orhan Paçacı, Member of the Executive Committee and Shareholder, Mesa Holding Interview: Emin Sazak, CEO, Yüksel İnşaat, and Former President, Turkish Contractors Association Efficiency upgrade: Demand for insulation surges due to regulations and growing awareness Safe as houses: Population and income growth as well as strong foreign interest drive sector expansion AGRICULTURE Reap what you sow: With the country already a major agricultural producer, the government is looking to consolidate growth Good enough to eat: Turkey has made important strides in food safety to meet EU regulations and expand export markets TRANSPORT On the road: A spate of new highways, trains, airports and other infrastructure projects are in the works Interview: Turgut Erkeskin, President, Association of International Forwarding and Logistics Services Providers Interview: Mümin Kahveci, General Manager, Istanbul Electric Tramway and Tunnel Establishments Age of rail: New investments are set to improve and expand both intercity and national rail connections Chairman: Michael Benson-Colpi Director of Field Operations: Elizabeth Boissevain Managing Director, Africa: Karine Loehman Country Directors: Solene Pignet, Clémentine Hazeran Field Operations Executive: Meltem Okur Field Operations Assistant: Arda Özgen Project Coordinator: Firdevs İrem Güller For all editorial and advertising enquiries please contact us at: enquiries@oxfordbusinessgroup.com. To order a copy of this publication or to enquire about your subscription please contact us at: booksales@oxfordbusinessgroup.com. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, without the prior written permission of Oxford Business Group. Whilst every effort has been made to ensure the accuracy of the informa- tion contained in this book, the authors and publisher accept no responsibility for any errors it may contain, or for any loss, financial or otherwise, sustained by any person using this publication. Updates for the information provided in this volume can be found in Oxford Business Group's 'Economic Updates' service available via email or at www.oxfordbusinessgroup.com
- 7. CONTENTS TURKEY 20155 THEREPORT Turkey 2015 Full speed ahead Page 114 The construction sector has been one of Turkey’sleadingdriversofGDPgrowthover the past few years, worth about €28.1bn at current prices as of end-2014, up 14.5% on a year earlier. With some $700bn in infrastructure spending in the works and about 1m permits issued for new projects in 2014, up 21% on the previous year, growth in the sector looks set to continue. On the road Page 136 State-backedmega-projectsinIstanbulare leading the way in the rapidly expanding transport sector. The Marmaray tunnel and metrobus corridor now link the city’s Asian and European sides, while national airport capacity has doubled since 2003. The gov- ernment push for transport infrastructure shows no signs of slowing, with high-speed raillinks,bridgesandtunnelsinthepipeline. Reap what you sow Page 130 A top global producer of seven crops, in the top five for 35 others, and with a third of its landmass devoted to farm- ing, the country’s agriculture sector is strongly positioned to provide for both domestic needs and export markets. While the sector’s share of GDP has declined from 12.1% in 1998 to 7.2% in 2013, its value has expanded each year. Young and tech-savvy Page 146 A technologically adept population is driving continued growth in the tele- coms sector’s mobile voice and data segments, which should only rise fur- therwiththeimpendingintroductionof 4G. In the IT sector, fast-paced growth in internet usage looks set to continue with the roll-out of fibre-optic cables. 146 150 151 152 156 158 162 164 169 170 176 181 184 185 187 192 196 198 199 200 203 204 TELECOMS & IT Young and tech-savvy: Demographic forces are driving mobile up-take and expansion Who you gonna call?: The take-off of business process outsourcing Next generation: The country rolls up its sleeves to launch its 4G mobile network Servers of joy: Mobile networks and fibre-optic cables are expanding to meet demand Interview: Mehmet Nalbantoğlu, CEO, KoçSistem HEALTH Smooth operators: Indicators are improving under a far-reaching government programme Interview: Hasan Ulusoy, Chairman, Nobel İlaç EDUCATION & RESEARCH Walking the walk: The government is investing heavily to achieve its education targets Interview: Turgut Şenol, General Manager, Teknopark İstanbul Showing promise: Government incentives and increased private sector participation are helping to boost the sector TOURISM Diverse appeal: An increasingly versatile tourist offering is ensuring continued sector growth Making room: Rising visitor numbers have prompted a rush of international hoteliers to the country TAX Grant Thornton Clarifications coming: A new income tax act is in the making Drawing down duties: A look at how tax law deals with corporations Attracting attention: Recommendations for improving the investment climate LEGAL FRAMEWORK Kılıç and Partners Regulating for growth: Legal changes are guiding and enabling foreign investment across the board Viewpoint: Harun Kılıç, Partner, Kılıç and Partners THE GUIDE What’s in a name?: A small tower with a big history Upon a time: History and viticulture beckon visitors to a small treasure offshore A good night’s rest: Some hotels to consider for your stay Listings: Useful phone numbers for local services Facts for visitors: Useful information for first-time and returning visitors
- 8. SNAPSHOT6 www.oxfordbusinessgroup.com/country/turkey Turkey in figures FDI,net inflows, 2004-14 ($ bn) SOURCE:WorldBank 0 5 10 15 20 25 1413121110090807060504 SOURCE:InvestmentSupport&Promotion Agency,Deloitte Net FDI in real estate, 2008-14 ($ bn) 0 1 2 3 4 5 2014201320122011201020092008 SOURCE:TUIK Tourism sector income, 2004-14 (bn $) 0 7 14 21 28 35 1413121110090807060504 SOURCE: TUIK Manufacturing 15.8 Wholesale & retail trade 12 Transport & storage 12 Real estate activities 9.8 Agriculture, forestry & fishing 7.1 Construction 4.6 Public admin., defence & social security 4.2 Professional, scientific & technical activities 3.4 Financial & insurance activities 3 Contribution to GDP by economic sector,2014(%) Production of selected crops, 2013-14 (m tonnes) SOURCE:TUIK 0 1 2 3 4 5 Green teaHazelnutsOrangesOlivesApplesGrapes 20142013
- 9. SNAPSHOT 7 THEREPORT Turkey2015 SOURCE:TUIK Fixed-line & mobile subscribers, 2004-14 (m) 0 16 32 48 64 80 No. of mobile tel. subscribers No. of fixed tel. subscribers 1413121110090807060504 Amount raised via IPOs by industry, 2014 ($ m) SOURCE:PwC 0 40 80 120 160 200 Financial services Real estatePharma & biotech Food & beverage Ind. goods & services Insurance SOURCE:BPStatisticalReviewof WorldEnergy2014 Natural gas consumption, 2003-13 (bn cu metres) 0 10 20 30 40 50 1312111009080706050403 Construction GDP, 2004-14 (TL bn, current prices) SOURCE:TUIK 0 16 32 48 64 80 1413121110090807060504 SOURCE: IMF 2013 2014 2015 2016 2017 GDP, current prices (TL trn) 1.57 1.72 1.88 2.06 2.25 GDP per capita, current prices (TL) 20,708.57 22,448.41 24,262.19 26,210.20 28,314.31 Total investment (% GDP) 20.96 21.91 22.19 22.25 22.37 Inflation, avg. consumer prices 6.64 5.30 5.00 5.00 5.00 (% change) Vol. of imports of goods & services 11.33 7.17 8.54 10.15 10.16 (% change) Vol. of exports of goods & services 3.14 4.01 4.97 5.31 5.42 (% change) Population (m) 75.81 76.71 77.60 78.48 79.34 General gov't revenue (TL bn) 559.27 610.38 659.24 721.23 790.44 General gov't revenue (% GDP) 35.62 35.45 35.01 35.06 35.19 Total gov't expenditure (TL bn) 593.21 649.33 701.92 768.17 839.32 Total gov't expenditure (% GDP) 37.79 37.71 37.28 37.35 37.36 Gov't net lending/borrowing (TL bn) 12.29 8.10 4.10 4.09 5.88 Gov't net lending/borrowing (% GDP) 0.78 0.47 0.22 0.20 0.26 Gov't gross debt (TL bn) 557.29 609.26 660.64 716.34 774.63 Gov't gross debt (% GDP) 35.50 35.38 35.09 34.83 34.48 Select economic indicators, 2013-17 Internet banking transactions, 2005-14 (TL bn) SOURCE:TBB 0 600 1200 1800 2400 3000 20142013201220102005 SOURCE:TUIK*2010=100 Industrial production index, 2005-14* 0 30 60 90 120 150 2014201320122011201020092008200720062005
- 11. 9 Renewed efforts toaddress economic challenges Concerns remain regarding freedom of the press Election cycle creating a bevy of new developments Government is maintaining strong regional ties Country Profile
- 12. COUNTRY PROFILE ATA GLANCE The country aims to make significant economic gains by 2023 Many have hailed Turkey’s notable development per- formance over the past decade, and for good rea- son. The country averaged 5.4% growth between 2003 and 2013, one of the highest rates in the world. This was accompanied by drops in joblessness and poverty, as well as gains in school enrolment, home- ownership and life expectancy. Furthermore, in November 2012, the republic received its first investment-grade rating since 1994 – a testament to the success that policymakers have had in reducing sovereign debt and external imbal- ances. As part of the statement, Fitch also cited the country’s strong sovereign, bank and household bal- ance sheets as influencing the upgrade decision. INDICATORS: Due to weak economic conditions and tight monetary policies adopted by the central bank, the country’s GDP growth rate was 2.9% in 2014, which was lower than the 3.3% predicted for the year as borrowing costs curtailed domestic demand. More worrying, perhaps, was the continuing drop in net foreign direct investment (FDI) inflow, from $12.7bn in 2013 to $12.14bn in 2014, and the highest unem- ployment rate in five years at 11.3%, which cast a shadow over hopes of generating growth. Declines in the current account deficit notwith- standing, the downtrend in FDI also means that Turkey is still heavily dependent on foreign portfo- lio inflows to meet its funding needs. Yet the gov- ernment is taking the long view, confident that progress will continue if the country can maintain political stability and leverage its competitive advan- tages. These include a large domestic market, young population, resilient financial system and strategic geographic location. Buoyed by these strengths, Turkey aims to become one of the world’s 10 largest economies by the year 2023, when the republic will mark the centennial of its founding. INFRASTRUCTURE & TECHNOLOGY: A key pillar of Vision 2023, as the long-term national development plan is called, is infrastructure development. Over the last decade public expenditure on transportation infrastructure as a percentage of GDP has nearly doubled, allowing for the construction of new ports, airports, tunnels, railway lines and divided highways nationwide. This upward spending trajectory is set to continue, with the 2015 budget estimated to be TL473bn (€166.54bn) as various infrastructure proj- ects are planned or under way. Much of this capital will need to come from the private sector, which means that the state must improve the tendering process for public works. The quality of Turkey’s information and commu- nications technology infrastructure has improved markedly in recent years, with the domestic fibre net- work reaching roughly 245,000 km as of end-2014. According to the Information and Communication Technology Authority, total broadband subscribers reached 40m in the third quarter of 2014, more than tripling since 2008, when the total was only 6m. Given Turkey’s young demographic profile, it is perhaps not surprising that the country is a leader in mobile phone, internet and social media use. Aver- age per person mobile phone talking time was 370 minutes per month in the third quarter of 2014, which was well above Europe’s average of 170. EDUCATION: Continued socioeconomic progress will also require meaningful education reforms. More students are entering the system, but Turkey still lags behind similarly developed nations in enrol- ment. Further, Turkish pupils achieved relatively low scoresonthe2012InternationalStudentAssessment (PISA), which revealed performance gaps between male and female test-takers, and between test-tak- ers in urban and rural areas. Skills gaps are also an issue, with many local employers reporting that col- lege graduates are unqualified for entry-level jobs. To address these and other challenges, education officials made big changes to the sector in 2012, when the ruling Justice and Development Party (AK Party) introduced a new “4 + 4 + 4” educational mod- 10 A new page Significant developments have occurred over the last decade www.oxfordbusinessgroup.com/country/turkey
- 13. COUNTRY PROFILE ATA GLANCE eldividingtheschoolsystemintothreefour-yearseg- ments: primary school, middle school and second- ary school. Equally important, the model increased the mandatory enrolment period from eight to 12 years. Though many welcomed this development, especially the extension of the mandatory enrol- ment period, others criticised the move as a dis- guised attempt to increase student enrolment at the religiously oriented imam hatip schools. ENERGY: Another challenge is the country’s lack of energy resources. Turkey ranks among the top 25 nations globally for energy consumption, and domes- tic electricity demand is rising by 6% per year. Yet Turkey produces only small amounts of oil and nat- ural gas, which has led to severe import dependence. The national energy import bill reached $56bn in 2014, and is expected to hit $64bn by 2017. In response, the state is implementing an all-of- the-above energy strategy calling for more on and offshore drilling, greater use of coal, additional devel- opment of renewable sources, and the construction of the country’s first nuclear power facilities. Efforts are also under way to further liberalise the gas mar- ket, which is dominated by the loss-making state operator, BOTAŞ. Yet many have questioned why lib- eralisation is proceeding so slowly; whether foreign partners can be found to assist in exploration; how a nuclear programme will be funded; and if regula- tors can create market conditions that attract gen- uine renewable investments. To achieve its goal of becoming an energy transit state, Turkey also aims to build regional gas pipeline projects. According to officials from Turkey and Azer- baijan, the Trans-Anatolian Pipeline (TANAP), which will deliver 16bn cu metres of gas per year from the Shah Deniz II field, will be operational in 2017. Turkey itself will receive 6bn of the gas volume, and collect handsome transit fees. GEOGRAPHIC IMPLICATIONS: Turkey’s favourable geography – it is surrounded by four bodies of water and sits at the intersection of the Middle East, Cen- tral Asia and Europe – also makes it a trading hub. From 2002 to 2014 the volume of Turkish exports rose more than four-fold, jumping from $36bn to $157.6bn. By 2023, Turkey aims to achieve an annu- al export volume of $500bn. Reaching this target will largely depend on the performance of the manufac- turing sector, especially the automotive, chemicals, textiles and metals industries. Turkey’s central location, combined with its sun- ny climate, plethora of famous historical sites and welcomingculture,alsomakesitanattractivetourism destination. The 2023 development target for the tourism sector is 50m annual visitors, up from an esti- mated 31.78m visitors in 2012. Some industry stake- holders are concerned that the rapid growth in the tourism sector is threatening the integrity of some sensitive areas; however, tourism has had an unde- niably positive impact on the economy through mul- tipliereffects.In2014thesectorcontributed580,000 jobs, which accounts for 2.2% of total employment. GLOBALIMAGE: As more foreigners come to Turkey, more Turks are also leaving their footprint abroad. The country now has the second-highest number of major international contractors in the world, with firms especially active in MENA, where infrastructure demand is rising fast. While competing in nearby states, Turkish contractors typically benefit from an understanding of local market conditions and cul- tural ties dating back to Ottoman times. Indeed, Turkey’s history as the last seat of the Islamic caliphate, along with its current status as a secular Muslim democracy, gives it a unique role in global affairs. It is the only country, for example, to hold membership in both NATO and the Organisa- tion of Islamic Cooperation (OIC). However, some regard Turkey’s Islamic identity as a barrier in its EU accession negotiations, which remain stalled. When the AK Party came to power in 2002, then- Foreign Minister Ahmet Davutoğlu, who is now prime minister, signalled that the new administration would adopt a “zero problems with neighbours” policy that prioritisedgreaterregionalcooperation.Tosome,this vision has been challenged by the outbreak of the Arab Spring, and by the Syrian conflict in particular. In light of the unrest, the AK Party, which has repeat- edly called for Syrian President Bashar Al Assad to step down, maintains that the “zero problems” approach has simply been adjusted to account for other considerations, including the need to protect human rights and new regional conflicts. Indeed, Turkey’s soft power may have grown under a more principled foreign policy, especially in the Arabworld.TheTurkishInternationalCooperationand Development Agency, which is building hospitals and schools in some of the most impoverished places on earth, is also playing a key role in establishing and enhancing the country's image internationally. Yet, given the rising number of journalists in Turkish jail cells, as well as restrictive legislation on publish- ing, more progress could still be beneficial at home. 11 THEREPORT Turkey 2015 The country is among the top 25 economies in terms of energy usage, with demand rising 6% per year
- 15. COUNTRY PROFILE OVERVIEW Asof 2013 the country had a per capita income of $10,971 The country is now in the midst of a lengthy politi- cal cycle, with the local elections in March 2014 being followed in August by the country’s first-ever, direct presidential elections. 2015 will also see the country’s 18th general election, currently sched- uled for June 7. Thus, these are very much political and busy times for Turkey, a characteristic given some edge by the turbulence of 2013, when the country saw a sharpening of disagreement over the direction of Turkey’s development and the role of its leaders and institutions. Nonetheless, the resounding victory of the sitting government in the March 2014 local elections – which were accepted by all sides as a ballot on the national government, too – demonstrated the wide- spread and continuous support for the leadership of Recep Tayyip Erdoğan. This 60-year old leader from the poorer, Kasımpaşa neighbourhood of Istan- bul has come to dominate and symbolise modern Turkey more than any other politician of the recent Republican era. He now leads a nation that has grown greatly in confidence, wealth and international stature since his party took power in 2002. PLANS FOR THE FUTURE: Now, the government is looking forward to 2023, the centenary of the foun- dation of the Turkish Republic, as a target year for the achievement of a string of developmental goals. If these are reached, Turkey will be among the world’s top 10 countries in terms of the size of its econo- my, with its per capita income around twice what it was in 2013 at $10,971 and the country’s GDP planned to grow from $822.13bn in 2013 to $2trn. In doing so, it will also have likely become a region- al political leader, powerfully influential in capitals that range from the western Chinese frontier to the Aegean Sea, and from Europe to the Congo. Whether such ambition will be achieved remains to be seen, but for sure, there is a great spirit of dynamism in Turkey today – and national pride in the country’s achievements, both contemporary and historical. LAND OF EMPIRES: Today’s Anatolian Turks trace their ancestry back to a group of tribes in eastern central Asia that began westwards migration from the 6th century onwards. Bringing with them their Turkic language – the modern versions of which are still spoken over a geography ranging from Western China to Azerbaijan – and converting to Islam, the Seljuk Turks were the first to establish a permanent presence in Anatolia, starting from the 11th centu- ry. There, they clashed with the Byzantine Empire, beginning a conflict that would last until 1453, when the Seljuk’s successors, the Ottomans, captured Con- stantinople, now Istanbul. By then, the Ottoman Empire had expanded into the Balkans as well. It added territories over the fol- lowing decades until reaching a golden age under Sultan Suleyman the Magnificent in the 16th cen- tury. By that time, most of the Middle East was under Ottoman rule, along with North Africa, the Cauca- sus, the Crimea and South-eastern Europe as far north as the gates of Vienna. A multi-ethnic empire, Ottoman Turkish, Greek, Arab, Kurdish, Caucasian and Balkan subjects dominated trade, culture, poli- tics and warfare in the Mediterranean, Black and Red Seas for decades, while also holding the west- ern end of that great medieval bundle of overland trade routes, the Silk Road. The Ottoman Empire then began a protracted decline, however, in the centuries that followed, as the power of an industrialising Europe and resurgent RussiagraduallypushedtheOttomansoutoftheCau- casus, the Crimea and the Balkans, then, in the late 19th and early 20th centuries, out of North Africa andtheMiddleEast.Thefinaldenouementcamewith the First World War, when the Ottoman Empire joined the losing side and was subsequently partitioned and shared between the victorious Allies. Confined to Anatolia and a sliver of Thracian land, a period of great turmoil then ensued out of which modern Turkey was born. In this, Mustafa Kemal The Turks can trace their ancestry back to confederations of tribes from central Asia that began migrating in the 6th century, before settling in Anatolia around the 11th century. 13 THEREPORT Turkey 2015 Anatolia was also the seat of power for the Ottoman Empire, which stretched across most of the Middle East and North Africa, as well as part of south-eastern Europe. Forging a new path The country has been through several changes and is set to make new economic and political gains in the years ahead
- 16. COUNTRY PROFILE OVERVIEW Atatürkemerged as the leader of the resurgent Turk- ish nationalists. Fighting off an invading Greek army in western Anatolia and French occupation along the country’s south-east coast, Atatürk also manoeu- vred the British out of their occupation of Istanbul and established the Turkish Republic in 1923, after the last sultan had gone into exile. An unprecedent- ed modernisation drive then began. The Latin alpha- bet was adopted, in place of the Arabic, modes of dress were changed, a command economy was insti- tuted, and a national, rather than religious, interpre- tation of history and the modern state was enforced. A NEW ERA: Atatürk died in 1938, with İsmet İnönü taking over as president in what was largely an authoritarian state, under a single political party – the Republican People’s Party (CHP), founded by Atatürk and the ancestor of the modern opposition grouping. İnönü kept Turkey neutral during the Sec- ond World War, while also allowing the first free elections in 1950. However, the elections led to his ouster by the Democratic Party of Ceylal Bayar and Adnan Menderes, who then became prime minister. Menderes was, however, overthrown in a military coup in 1960 and subsequently executed. The mili- tary restored civilian power soon after though, with a succession of coalition governments following, led once again by İnönü for a time, then Süleyman Demirel and Bülent Ecevit, who became major polit- ical leaders of the 1970s, 1980s and 1990s. Two more military coups followed, in 1971 and 1980, with the 1970s also seeing the Turkish mili- tary’s intervention in Cyprus in 1974, which estab- lished the current de facto division of the island. The 1980s premiership of Turgut Özal was also signifi- cant, as his government launched a major liberali- sation programme for the economy. The post-Cold War period – Turkey has been a member of NATO since 1952 and fought on the Allied/UN side in the Korean War – saw the coun- try’s first female prime minister, Tansu Çiller, and the signing of a Customs Union with the EU. Turkey has been pursuing membership of the EU and its predecessors since the Ankara Agreement of 1963. The 1990s were also a period of successive and short-lived coalition governments, with Çiller going into coalition with the Welfare Party in 1996. A “soft coup” was subsequently unleashed by the military in 1997 that saw this government ejected from office. The coalitions that followed were also unsta- ble, however, with major financial crises striking in 2000 and then again in 2001. In 2002, general elections thus saw a resounding victory for the Justice and Development Party (AK Party), which had grown out of the Welfare Party, but with a more politically and economically liberal agen- da. Able to establish single party rule for the first time since 1960, the AK Party won subsequent general elections in 2007 and 2011. Its term of office has also seen a major shift in power away from the mil- itary – many members of which have since been prosecuted for their role in the 1997 soft coup and alleged role in other conspiracies. There has also been a pronounced shift in power away from the old, secularist, Kemalist elite that had dominated Turk- ish politics since before the Second World War. HEADOFSTATE: Under the current constitution, the president is the head of state, with the power to appoint the prime minister (usually the person able to command a majority in parliament), the ministers of government, (on the prime minister’s advice) the Chief of the General Staff, the members of the Con- stitutional Court and other top legal officials. He or she also presides over the National Securi- ty Council, at which the leading members of the gov- ernment meet with the chiefs of the security forces, and the Council of Ministers. He or she also appoints rectors of universities and the members of a string of key – and sometimes controversial– bodies, such as the Higher Education Council. The president may alsoissuedecrees,althoughinmostcases,thesemust also be signed by the prime minister. The president may also exercise a power of veto over bills presented by the parliament, returning them for further debate. If parliament continues to approve the bill, however, the president is obliged to sign the bill into law, or call a referendum. Until a constitutional amendment was passed by just such a referendum in 2007, the president was elected for a single, seven-year term by parliament, rather than by popular vote. The presidential election in August 2014 was the first time the head of state had been elected by universal suffrage. The president can also now run for a maximum of two, five-year terms. EXECUTIVE POWER: Most political power lies cur- rently with the prime minister, who is usually the head of the largest party in parliament and who appoints ministers and others to the cabinet. The prime minister has considerable powers of appoint- ment within state agencies, as well as being able to dissolve parliament and call elections within the five-year term of the assembly. The prime minister’s 14 smet nönü headed the Republican People’s Party and took over the presidency after Atatürk died in 1938 The Justice and Development Party came to power in 2002, and since then the country has seen a significant shift away from military involvement in political decisions. The president is the head of state and has the power to appoint the prime minister, government ministers, the Chief of the General Staff, members of the Constitutional Court and other top legal officials, among others. www.oxfordbusinessgroup.com/country/turkey
- 17. COUNTRY PROFILE OVERVIEW governmentdrafts and submits laws to the parlia- ment while also deciding policy for, and giving direc- tion to, state ministries, departments and agencies. LEGISLATIVE MATTERS: The full name of the sin- gle-chamberparliamentistheGrandNationalAssem- bly of Turkey (TBMM). It is composed of 550 deputies, elected for four-year terms under a proportional representation, party-list system. Parties must also get at least 10% of the national vote in order to qual- ify for seats in the TBMM, a threshold which has worked strongly against minority and regional par- ties. Independents may stand without requirement for the 10% threshold, however, with some region- al and minority parties thus unofficially fielding can- didates in this category. The 2011 elections pro- duced a victory for the AK Party, which garnered 49.83% of the vote, and 327 deputies. Runners up were the CHP, with 25.98% of the vote and 135 deputies, followed by the National Action Party, with 13.01% of the vote and 53 deputies. Some 6.57% of the vote went to “independent” candidates, many of who subsequently became Peace and Democra- cy Party (BDP) deputies. The BDP was a pro-Kurdish party, based mainly in the south-east. Some 12 oth- er parties ran candidates, but all received less than 1.5% of the vote and failed to gain any deputies. Bills must be debated and passed by the TBMM before going to the president for final approval. In 2013- 14, faced with a large number of bills, the TBMM began bundling these together in a manner that has been controversial. The current speaker of the TBMM is Cemil Çiçek of the AK Party. LOCAL AUTHORITIES: Turkey is divided into 81 provinces, with these further divided into 892 dis- tricts. Each district has its own municipality, while cities and towns within a district may also have a municipal authority – the larger ones have several – while cities of more than 750,000 inhabitants also have a greater metropolitan municipality. For this rea- son there are around 2856 municipalities country- wide, following a reduction in numbers after some smaller units were amalgamated ahead of the 2009 local elections. Each municipality is headed by an elected mayor, who presides over an elected coun- cil. There are also village councils in rural areas, and sub-district units in urban areas, known as mahalles, headed by a muhtar, who is also subject to election. Local government is a significant force in Turkish politics, as well as in the local economy. In 2013 around 30% of all public investment in the country was carried out by local government units, with approximately 80% of these carried out by munici- palities. They are active in local health care and edu- cation provision, as well as investing in transport and communications infrastructure, environmental protection and even tourism. THE LAW: The judicial system divides first into civil- ian and military branches, with each of these in turn dividing into administrative and ordinary. In the mil- itary branch, the Military Court of Cassation is the highest ordinary body, presiding over military courts and beneath them, disciplinary courts. On the civil- ian side, the Court of Cassation is the highest ordi- nary court, with district courts of appeals, then courts of civil law and courts of criminal law com- ing under this. On the administrative side, the Coun- cil of State is the highest judicial body, followed by district administrative courts, then administrative courts and lastly tax courts. Over the whole hierarchy sits the Constitutional Court, with the Court of Jurisdictional Disputes on the same level, deciding on issues between judicial bodies. The High Council of Judges and Prosecutors (HSYK), established in 1982, makes decisions on appointments and promotions of judges, with HSYK’s powers expanded under 2010 constitutional reforms from seven to 22 members. Police and gendarmerie (the rural police force) are affiliated to the Ministry of the Interior, while prisons and detention centres are affiliated to the Ministry of Justice. OUTLOOK: The 2015 period is likely to be dominat- ed by electoral activity, as the rival parties vie for the presidency, followed by general elections to decide on the government itself. In August 2014, one of the earliest results in the first of these critical ballots was Erdoğan’s presidency. This is widely expected to lead to a sharp change in the role and powers of the position too, as he was elected by popular will, rather than decided by parliamentary vote. As Erdoğan’s presidency continues it is likely to develop a more active, chief-executive character than the position previously did, with one challenge likely to be that of achieving greater consensus with those that voted for other parties, while also forg- ing ahead with the kind of development the presi- dent wants. The presidency may also likely have a significant effect on the vote in the 2015 general elections. The long history of the country and the lessons of its turbulent past will likely stand Turkey in good stead though, as it moves through a packed agenda towards the republic’s first centennial. 15 THEREPORT Turkey 2015 In urban areas, sub-districts are known as mahalles and each is headed by a local official, or muhtar Turkey is divided into 81 provinces, with these further divided into 892 districts. Each district has its own municipality, while cities and towns within a district may also have a municipal authority. Cities of more than 750,000 inhabitants also have a greater metropolitan municipality. The Constitutional Court presides over the entire judicial system, while the High Council of Judges and Prosecutors makes decisions on the appointment and promotion of judges.
- 18. COUNTRY PROFILE VIEWPOINT PresidentRecep Tayyip Erdo€an Since the establishment of the republic in 1923, Turkey has been in a state of constant flux. Due to domestic and global developments, the country was marred by political and economic instability for decades. The economy was hindered by political set- backs, growth was underperforming and the coun- try struggled with skyrocketing, chronic inflation. By the end of 2002, however, Turkey had entered a new era of stability, prosperity and economic devel- opment under the stewardship of the Justice and Development (AK) Party. Hand in hand with demo- cratic reforms, the country has significantly improved its investment environment. With a staunch belief in the entrepreneurial spirit of the private sector, the current administration has embarked on a compre- hensive reform programme that over the years has created a robust business climate in which the pri- vate sector has flourished. Turkey’s economic growth, led by the private sec- tor, has yielded impressive results in many areas, such as macroeconomic stability and socioeconom- ic development. Over the past 11 years, the econo- my has grown by an average of about 5% a year in real terms. As a result, the size of the economy reached $820bn by the end of 2013, up from $230bn at the end of 2002. Inflation has meanwhile been tamed down to the single digits, budget discipline has been achieved and public debt has been reduced from 74% of GDP in 2002 to 36% in 2013. We have also made sure that our economic poli- cies improve people’s socioeconomic conditions. In this regard, per capita income has more than tripled, reaching about $11,000, while poverty has been drastically reduced. As an illustration of this, back in 2002 the portion of the population that was living on less than $4.30 a day was more than 30%. With- in a decade, this figure had been reduced to 2.9%, and we remain determined to eradicate it complete- ly. Alongside this decrease in poverty, a new middle class has emerged and spurred economic growth. Political and economic stability, together with a favourable investment climate, have also acted as a magnet for foreign investors. Attracting foreign direct investment (FDI) has been one of the main pil- lars of our economic development policy. To this end, in 2003, we introduced a new FDI law granting foreign investors equal treatment to local investors; guaranteeing their rights and the transfer of prof- its; allowing them to purchase real estate in Turkey; and providing them with the mechanisms for set- tling international disputes. Moreover, we reinforced thelegalframeworkwitheffectiveinstitutions,estab- lishing, under the auspices of the prime ministry, the Investment Support and Promotion Agency of Turkey, which serves and assists inbound direct investors and reports directly to the prime minister’s office. These efforts have yielded concrete results. Turkey has attracted more than $140bn of FDI since 2002, compared to a total of less than $15bn dur- ing the preceding eight decades. I believe that this trend will continue apace. We have embarked on a new economic journey that will create more and more opportunities in Turkey. We have set specific targets to achieve by 2023, the centennial of the republic, and after a decade of impressive economic performance, we have not become complacent. Our targets for 2023 include making Turkey one of the top ten economies in the world with a GDP of $2tn, increasing GDP per capi- ta to $25,000 and boosting the country’s exports to $500bn. Also counted among the 2023 targets are important upgrades to Turkey’s education, health care and energy infrastructure. We have already launched many of the infrastruc- ture projects that will pave the road to 2023, and I am happy to see foreign investors contributing on this journey. As the prime minister of the Republic of Turkey, I invite foreign investors to invest here, and I give them my assurance that we will support and assist them at every stage of their engagement. 16 A new journey President Recep Tayyip Erdo€an, on his country’s economic rise www.oxfordbusinessgroup.com/country/turkey
- 19. 17 Trade & Investment Seekingto cut the trade and current account deficits Exports reached an all-time high in 2014 Decline in oil prices lowers energy import bill Foreign direct investment levels returns to growth
- 20. TRADE & INVESTMENTOVERVIEW Great strides have been made in diversifying Turkey’s markets Turkey has spent the last decade trying to maximise the potential of its geographical position and abili- ty to expand its economy with export-led growth. While this has been hampered by a heavy depend- ence on imports and a bulging current account deficit, the country has made great strides in grow- ing trade and diversifying markets. With strong domestic growth and a sense of eco- nomic stability following the difficulties of the 1990s and the 2001 banking crisis, the country has been able to radically transform the investment environ- ment, garnering record numbers for foreign direct investment in the last 10 years. TRADE DEFICIT: In many respects 2014 was typical of Turkey’s recent trade performance. The country ran a significant trade deficit as it has in successive years since the global financial crisis. In 2014 exports grew by 3.9% to $157.6bn, while imports totalled $242.2bn, a drop of 3.7%. As such the republic is run- ning a trade deficit of $84.5bn, or around 10% of GDP. This is the result of a multitude of factors. Even in the pre-crisis years when Turkish exports were grow- ing in double digits, the country was running a large trade deficit. In 2007, for example, exports grew by 25.4% to $107.3bn, but the deficit was still a size- able $62.8bn. This is indicative of the structural lim- itations of the economy, with export and domestic growth and production highly reliant on imports. Indeed, according to the World Economic Forum’s “Global Enabling Trade Report 2014”, intermediate goods accounted for 61.3% of total imports in 2012, with industrial supplies (primary and processed) accounting for 45.5% and parts and accessories accounting for 10.8%. In such circumstances, the country has to run a large foreign trade deficit and current account deficit to achieve strong growth. Indeed, since 2006 the external trade deficit has only been below 9% of GDP once, in 2009, when the economy contracted by 4.8%. Similarly, the current account deficit has only been below 5% of GDP once in the last seven years, again in 2009. The structur- al problems of the economy are also exacerbated by Turkey’s dependency on energy imports. In 2012, for example, net energy imports account- ed for 73% of energy use in Turkey, according to the World Bank. Turkey’s energy import bill stood at $55.9bn in 2012, or 23.6% of the total value of imports. This has been a chronic problem for the country and a significant contributing factor to its balance of payments problem. ENERGY IMPORTS: As the government targets becoming one of the top-10 largest economies by 2023, the demand for energy is likely to increase. The government is adopting a range of measures to lessen the country’s energy dependence and cut the import bill. The primary policy is to boost domes- ticenergyproductionthroughtherolloutofanuclear energy programme. The government plans to bring the private sector on board to build three nuclear plants in the next decade, cutting some $7.2bn from the annual natural gas bill. The government has already signed contracts with a Russian firm, Rosatom, and a Japanese-French con- sortium of Mitsubishi Heavy Industries, Itochu Cor- poration and GDF Suez for the construction of the first two nuclear plants on the Mediterranean and Black Sea coasts, respectively. The construction of the country’s first nuclear plant near Mersin on the Mediterranean coast start- ed in April 2015. Initially expected to begin genera- tion in 2019, the Akkuyu plant is now likely to start operations by 2020, while the second facility in Sinop is expected to be operational by 2023. However, the current account deficit is narrow- ing: the 2014 deficit decreased to $45.8bn from $65bn in 2013, according to the Turkish Central Bank. In its “World Economic Outlook April 2015” report, the IMF estimates Turkey’s ratio of current account deficit to GDP to narrow to 4.2% of GDP in 2015 from 5.7% of GDP in 2014 thanks to a substan- As the government aims to become one of the top-10 largest economies by 2023, the demand for energy is likely to increase. The government is thus adopting a range of measures to lessen the country’s energy dependence and cut the import bill. 18 Onwards and upwards The country has significant potential to boost trade and foreign investment www.oxfordbusinessgroup.com/country/turkey
- 21. TRADE & INVESTMENTOVERVIEW tial fall in the cost of energy imports. As an energy importer, lower oil prices have benefitted Turkey and are positively impacting the current account. The price of Brent crude was at $45.25 per barrel in April 2015 – its lowest level since March 2009. GOLD TRADE: In addition to energy imports, the other major distorting factor for Turkey’s trade bal- ance has been gold. In 2012 net gold trade record- ed a surplus of almost $6bn on the back of a deal to send gold to Iran as payment for natural gas and oil imports. However, as the US closed a loophole in its sanctions regime against Iran in the second half of 2013, these exports declined. Indeed, in 2013, Turkey recorded a net gold trade deficit of almost $12bn, as it replenished gold stocks while taking advantage of cheaper prices in the international market. In 2013 gold imports reached some 302.3 tonnes, more than double the level one year earlier when imports totalled 120.8 tonnes. This massive fluctu- ation in gold trade had a substantial impact on the country’s trade deficit for 2013. Indeed, excluding the gold trade, exports grew faster than imports in 2013. Furthermore, excluding energy and gold imports, Turkey’s current account deficit looked much more healthy, standing at less than 1% of GDP. In 2014 gold imports declined sharply, totalling 130.9 tonnes, according to data from Borsa Istanbul. TARGET MARKETS: The prospects for foreign trade and the current account in 2015 look promising. The IMF says Turkey’s economic growth is likely to increase to 3.1% in 2015, up from 2.9% in 2014, as consumption will be boosted by lower energy prices. Turkish exports have also become more competitive as a consequence of a depreciating lira in 2013-15. The country’s export growth is likely to be helped bytherecoveryofitsleadingtargetmarkets.Theslow but steady recovery of the eurozone bodes well for Turkishexports.Althoughthegovernmenthaslooked to diversify Turkey’s export markets, the EU as a whole remains a critical part of the republic’s trade performance, accounting for 41.5% of total exports in 2013 (down from close to 60% a decade earlier) and 43.5% in 2014. The eurozone is showing clear signs of recovery, growing 0.3% in the fourth quar- ter of 2014 as a whole, while its largest economy, Germany, expanded by 0.7%. The European Commis- sion is forecasting growth in 2015 of 1.3%, which would be the area’s best outcome since 2011 when it grew by 1.6%. Meanwhile, the European Central Bank has raised its GDP forecasts for 2015 and 2016 and projected 2.1% growth in 2017, the first time in a decade that it has forecasted growth above 2%. This augurs well for Turkey, especially considering the impact the fallout from the Arab Spring has had on its other main export market. Turkish exports to the Near and Middle East declined by 16.1% to $35.6bn in 2013 and to $35.4bn in 2014. As such, the region’s share in Turkish exports fell from 27.8% in 2013 to 22.5%. Excluding this unstable region, Turkey is well placed to grow exports across all regions. The country’s leading exports are automo- tives, textiles and chemicals. One potential growth market could be Iran. Given the loosening of the US sanctions regime, Turkey’s neighbour could realise its potential as a destination for Turkish goods. His- torically, Turkish exports to Iraq and Iran have large- ly run in parallel. However, since the introduction of sanctions, their paths have diverged. Iraq is now Turkey’s second-biggest export market after Ger- many, with exports reaching some $10.9bn in 2014, while Iran ranks tenth with around $3.9bn worth of exports, according to TurkStat. FOREIGN INVESTMENT: Beyond the general trade environment, the government is also looking to bol- ster foreign direct investment (FDI) to fund the cur- rent account deficit. An uptick in FDI could help the country to reduce its dependence on intermediate imports and thus reduce the trade deficit in the manufacturing and industrial sectors. It can also help the country to develop higher-value products and transfer knowledge to the local economy. Turkey has certainly improved its ability to attract foreign investment in the last decade. Put simply, 19 THEREPORT Turkey 2015 Top 10 countries by import, 2014 (bn $) SOURCE:TUIK 0 6 12 18 24 30 SpainIndiaSouth Africa FranceIranItalyUSGermanyChinaRussia Lower oil prices have reduced the cost of energy imports The country’s export growth is also likely to be helped by the recovery of its leading export markets, such as the EU, which accounted for 43.5% of total exports in 2014.
- 22. TRADE & INVESTMENTOVERVIEW between 2004 and 2014, the country attracted 8.5 times more FDI ($123.7bn) than it did in the whole of the previous 80 years. And yet since a peak of $22bn in 2007, Turkey’s FDI performance has been stuttering. In 2013 the country received $12.4bn in FDI, a decrease of 6% on the previous year, accord- ing to the central bank. However, 2014 saw a slight improvement to $12.5bn. The country’s sluggish per- formance is the result, to some extent, of a weak export environment. This is particularly true in the automotive sector, a significant recipient of FDI, and an industry that exports the majority of its products. With Europe gradually recovering from its long recession,theopportunitiesforexport-ledFDIgrowth in Turkey are improving. Indeed, for the first time, Turkey was ranked as one of the most promising economies for FDI between 2013 and 2015 on the UN Conference on Trade and Development “World Investment Report 2013”. The government has cer- tainly taken great strides to attract more FDI. In April 2012, for example, then-Prime Minister Recep Tayyip Erdoğan (now the president) announced a package of measures to incentivise investment including export tax exemptions, value-added tax exemptions and refunds, employment insurance support and interest rate support. Turkey has also been growing its base of special economic zones with 59 technology development zones (40 of which are currently operational) aimed at bolstering research and development innovation across the country, 289 organised industrial zones (212 of which are operational) and 20 free zones (of which 19 are operational). All of these zones offer investors a range of exemptions and incentives to support investment. OBSTACLES: However, challenges remain to boost FDI in the country. The corporate tax rate has been brought down to 20% from 35% and foreign investors are subject to exactly the same regulations, levies and laws as domestic companies, however, taxation remains a major concern for investors. According to EY’s Turkey Attractiveness Survey 2013, corporate tax remains an issue for potential investors. Turkey ranks 56th out of 189 economies for pay- ing taxes in the “World Bank Doing Business 2015” Report. The bureaucracy surrounding tax payment, as well as payment rates, is preventing the country from a higher ranking. In August 2013 the Revenue Administration altered its interpretation of build- operate-transfer(BOT)agreements,effectivelymean- ing that investments made in a BOT project could now be subject to taxation. Fırat Yalçın, a partner at Pekin & Pekin, an Istan- bul-based law firm, told OBG that the tax ruling is a significant change in the taxation of BOT. “The rul- ing is likely to significantly increase the tax burden of investments made through BOT, and although the tax burden may not have any major effect on the gov- ernment budget, considering that investors will include such cost items when bidding for public- private projects, it will impact the cost of invest- ment to the government,” he said. Higher interest rates since January 2014 may also have a negative effect on FDI given that it increas- es the cost of money. While this is unlikely to deter investors, coupled with the general economic envi- ronment, it may lead to a wait-and-see attitude. Indeed, the interest rate environment is likely to have an impact on large-scale infrastructure projects in the country, financed by private and foreign capital predominantly on a BOT basis. OUTLOOK: However, there is substantial potential for FDI in the country. Turkey’s location, population and longer-term growth potential make it an attrac- tive option. In the short term, the weaker lira will also offer opportunities, in terms of establishment costs and export potential for foreign investors. Indeed, the coming year is likely to see Turkey’s trade deficit shrink as a number of factors converge to boost exports. The return of growth to Europe, the growth potential of the Iranian market, a weak- er lira and weaker domestic demand all point to an upsurge in exports, while imports are likely to decline. 20 FDI, net inflows, 2004-14 ($ bn) SOURCE:WorldBank 0 5 10 15 20 25 20142013201220112010200920082007200620052004 In 2014 foreign direct investment reached $12.5bn Turkey has been expanding its number of special economic zones, with 40 technology development zones, 212 organised industrial zones and 19 free zones currently operational. All the zones offer a range of exemptions and incentives to support investment. www.oxfordbusinessgroup.com/country/turkey
- 23. TRADE & INVESTMENTANALYSIS The country scores relatively well for trade and investment freedom Turkey’s trade record over the last few years has been relatively impressive. Exports have risen substantially, iferratically.In2006,exportsstoodat$85.5bn.By2014, the figure reached a record high of $157.6bn. Howev- er,importshavealsogrownrapidly,reaching$242.2bn in 2014. This trade deficit, which reached 10% of GDP in 2014, has been a perennial problem for the coun- try. The country is looking to change this balance and has placed better export performance at the heart of its growth strategy up to 2023, the centenary of the Turkish Republic. The government is targeting exports of $500bn by that date as part of a plan to reach an annual GDP figure of $2trn (up from around $800bn in 2014) and a per capita income of $25,000 (up from $10,400 in 2014). The country is certainly well placed to bolster its trade volumes, both for import, export and re-export. Turkey’s geographic location gives it proximitytothemarketsofEurasia,AfricaandtheMid- dleEast.Some56countriesliewithinafour-hourflight of Turkey, a swathe of countries with around 1.5bn peopleandexportpotentialofupto$10bn,according to EY. The republic has also developed the infrastruc- ture to maximise this trade potential. FREER TRADE: The country scores relatively well on theHeritageFoundation’sIndexofEconomicFreedom 2015 for trade freedom and investment freedom. Turkey’s overall score of 63.2 ranks it 70th globally. However, it scores 84.6 on trade freedom and 75 on investment freedom (with a score above 70 denoting that a country is mostly free and a score above 80 sig- nifyingthatitisfree).TurkeyalsoscoreswellintheWorld EconomicForum’s“GlobalEnablingTrade2014”report, ranking 46th overall, 34th for domestic market access and 26th for its transport infrastructure. According to thereport,Turkeyalsohasamaximumscore,alongwith 34 other countries, on Customs transparency. But this generallyliberaltraderegimewillonlygetTurkeysofar. The government has also been pushing hard to con- clude comprehensive and limited free trade agree- ments (FTAs) with several partners to bolster trade. The republic has 17 FTAs in force, is in negotiations forafurther13andhasbegunpreliminarydiscussions to commence negotiations on a further 10 with coun- tries or country blocks including the US and Canada. TheseFTAshavebenefittedTurkey.Intheyearsfrom 2000 to 2012, trade with FTA partners outperformed the country’s overall trade. According to a November 2013articlebyCerenSavaseratHerdemAttorneyson Mondaq.com, total exports in this period increased by 446%, while Turkish exports to FTA partners rose by 551%. By 2012 Turkey’s exports to FTA partners had reached $14.5bn, compared to overall exports of $152.5bn. In the same period, total imports to Turkey increasedby340%,whereasimportsfromFTApartners increasedby280%.By2012theyhadreached$10.7bn, or 4.5% of the total. As the statistics suggest, Turkey’s FTAtrade,whilerelativelysmall,hasoutshonethecoun- try’s general trade performance. Moreover, it has ben- efitted disproportionately from its FTAs compared to its partners. These countries have a 4.5% share in Turkey’s imports, but a much more impressive 9.5% shareinitsexports.OutofTurkey’s17FTAs,sevenpart- ners ranked in the top-40 export destinations in 2012 (Egypt,Israel,Georgia,Lebanon,Morocco,Switzerland and Tunisia). While the government has struggled in generaltermstoboostexportswithoutaconcomitant increase in imports, the country has had no problems inremainingcompetitivewithitsFTApartners.Turkey’s generaltradedeficitstoodat$84.1bn,or10.7%ofGDP, in 2012. However, with FTA partners, the country was running a $3.9bn trade surplus. NEGOTIATIONS:Itishardlysurprisingthatthegovern- ment is keen to conclude more FTAs. In April 2014 the country signed an agreement with Malaysia; negotia- tions with Singapore and Peru are progressing rapidly. The Turkey-Malaysia FTA is targeted to boost bilateral trade to $5bn by 2018 from around $1.1bn currently. The two countries will also abolish visa requirements for their citizens, and Malaysia has agreed to invest $1.5bn in the Turkish economy across several sectors In 2014 Turkey concluded an agreement with Malaysia, with the aim to boost bilateral trade to $5bn by 2018, while negotiations with Singapore and Peru are progressing rapidly. 21 THEREPORT Turkey 2015 The country is looking to change its trade balance and has placed better export performance at the heart of its growth strategy up to 2023, the centenary of the Turkish Republic. The government is targeting exports of $500bn by that year. Maximising potential Further trade agreements are in the works
- 24. TRADE & INVESTMENTANALYSIS from transport infrastructure to health care. The gov- ernment also began a second round of FTA negotia- tionswithPeruinJanuary2014.AccordingtoPeru’smin- ister of foreign trade and tourism, Magali Silva, while negotiations could take up to four years, the ministry is hopeful they will be concluded sooner. Turkey’s FTA negotiationswithSingaporebeganin2014.Oneofthe sticking points in the negotiations has been Singa- pore’sservicessectorandthepotentialimpactitcould have on the local economy. Indeed, while Turkey has benefitted from such agreements in the past decade, the government is trying to remain vigilant about the potentialdamagethatagreementswithhighlycompet- itive nations could have on the local economy. ACROSS THE ATLANTIC: One of the main concerns forTurkey’stradepolicycurrentlyisthepotentialTransat- lantic Trade and Investment Partnership (TTIP), or FTA between the US and the EU. Under the terms of the CustomsunionbetweenTurkeyandtheEU,established in 1996, Turkey is obliged to apply the same tariffs as theEUdoestoindustrialproductsandprocessedagri- culture products imported from third-party countries. Assuch,ifTTIPweresigned,USproductswouldgetpref- erential access to the Turkish market, while Turkish productswouldgainnoreciprocalbenefitwhenenter- ingtheUSmarket.Theagreementcouldthereforehave a deleterious effect on bilateral trade with the US. The trade balance between the two countries is alreadyintheUS’sfavour.In2014USexportstoTurkey were worth $12.7bn, while Turkish exports to the US reached $6.3bn. Nonetheless, exports to the US are growing rapidly. In 2012, they grew at 22%, almost twice the rate of exports to the rest of the world, and in 2014 they were up 12.4% year-on-year. Companies exportingautomotiveparts,machineryparts,andiron and steel have all gained a substantial foothold in the US market. In order for exports to the US to continue growing, Turkey is likely to look for a bilateral FTA with its North Atlantic counterpart. Discussions have been held regarding the commencement of FTA negotia- tions, but there are impediments to the talks that go beyond technicalities on the free movement of goods. In any negotiations, the US is likely to raise concerns aboutareaslikefreedomofpressandthelackoftrans- parency in public procurement. CHALLENGES: Among the steep challenges that still need to be met to boost trade and investment, one of the biggest is the issue of intellectual property and counterfeitgoods,whichhampersbothforeigninvest- ment and progress on FTAs. Turkey remained on the watch list of the Office of the US Trade Representative (USTR) in 2014. In a report from that year, the USTR noted that several successful enforcement initiatives led to the prosecution of individuals selling counter- feitmedicinesonlineandtheseizureofprintingpress- es and materials used to counterfeit pharmaceutical packaging, as well as the seizure of pirated books, fake food products and counterfeit cancer treatments. Nonetheless, the report said, “US rights holders con- tinue to raise serious concerns regarding the export from, and trans-shipment through, Turkey of counter- feit and pirated products. In particular, industry has expressedconcernaboutthemanufactureofcounter- feitedluxurygoods,digitalmediaandtextiles.”Enhance- mentofTurkey’scopyrightandintellectualpropertyleg- islation could thus give a sizable boost to trade. Another issue whose resolution could have large benefitsforinvestmentistheeliminationofvisarequire- ments for Turkish citizens visiting Europe’s Schengen area. This took a step forward in May 2015, when the EU trade commissioner and Turkish interior minister announced a decision to revise the framework and expand the scope of the EU Customs union, including eventual visa liberalisation. Turkey has gained much from the Customs union in terms of attracting foreign investors. Its proximity to both the EU and the Middle East, as well as its liberalised trade environment with many of the countries in its hinterland, make it a desir- able location for production and export – a case illus- trated by high FDI levels in its automotive industry. If Turkey is to get its external financing on a surer foot- ing and meet its 2023 targets, FTA negotiations with a host of countries will be crucial in the coming years. 22 Top 10 countries by export, 2014 (bn $) SOURCE:TUIK 0 4 8 12 16 20 IranUAESpainRussiaUSFranceItalyUKIraqGermany Exports reached a record high of $157.6bn in 2014 The growth in free-trade agreements is likely to be beneficial for the country’s FDI stock. Indeed, Turkey has already been able to benefit from its Customs union with the EU as a means of attracting foreign investors. www.oxfordbusinessgroup.com/country/turkey
- 25. TRADE & INVESTMENTINTERVIEW Richard Moore, UK Ambassador to Turkey Fromaneconomicstandpoint,howdoestheUKview the importance of its relationship with Turkey? MOORE: The relationship between our two countries goes back a long way and has been rooted in econom- ic and trading issues from the day the first English ambassador arrived in Turkey in 1583. As Europe, and theUKinparticular,hasreorienteditselftowardsmore export-led growth over the past few years, there has been a real focus on building better trading relation- shipswithemergingmarkets.TurkeyisrightonEurope’s doorstep and, as such, is a country on which European nationsshouldfocus.In2010theUKandTurkeyagreed on an ambitious plan to double trade by 2015 based on 2009 figures, and I can happily say we are current- ly on track to meet this goal. Whatindustriesposethegreatestpotentialinterms of foreign involvement in the Turkish economy? MOORE: UK companies are active in Turkey across a wide range of fields. Some 2400 UK companies oper- ate here, including household names such as BP, Shell, Vodafone, Compass, HSBC, Tesco, B&Q and Harvey Nichols. We focus our efforts where we can bring expertiseandexperiencetoTurkey.TheCityofLondon is working to support Istanbul’s plans to become a major financial centre. We are also currently focusing on three other high-value areas. One is nuclear energy, where there are real oppor- tunities for British and other European firms to help Turkeydevelopcapacity.Theplansforthreenuclearpow- er plants have created demand for the expertise of all types of companies, for example, engineering consul- tancy firms. Another area of focus for us is healthcare, in which the current Turkish government has invested heavilysincetakingoffice.Theconstructionofthethird Istanbul airport will also provide significant opportu- nities for international companies. The sheer scope of the project necessitates the involvement of many dif- ferentspecialtycompanies,suchasdesignfirms,high- tech engineering consultancies and specialists in the public-privatepartnershipmodel.Overall,welookvery favourablyonthevariousinfrastructureimprovements upon which Turkey is currently embarking, and our companiesarecommittedtosharingtheirexpertisein order to help the country reach the ambitious devel- opmentgoalsofits2023vision.UKcompaniesarealso increasingly partnering with Turkish companies in the engineering and construction sectors to work togeth- er in third country markets. What more can the government of Turkey do to attract increased foreign investment? MOORE: Turkey has come a long way economically, especially in the last decade or so of the AKP govern- ment’s tenure. Overall the Turkish government is very open to foreign investment and keen to encourage it. The country has made great strides in this area since opening up to increased international involvement in the late 1980s under Turgut Özal. That said, when it comestovariouseaseofdoingbusinessindices,Turkey’s rankingisnotcommensuratewithitsimportancetothe global economy, as the 16th largest economy in the world. There seems to be a general consensus among policymakers that they need to deliver new measures todriveforeigndirectinvestment,suchasreducingbar- riers to entry and encouraging further deregulation, as well as implementing key supply side structural reforms (e.g. in education) if the Turkish economy is to develop its higher-value added export capacity. Foreign investors want political stability allied to the rule of law, as well as transparency and consistency in the implementation of legislation. The EU accession process, in its active phases, has been a very signifi- cantdriverofthesetypesofreforms.Thatisoneofthe reasons the UK is so strong an advocate of Turkey’s EU vocation. I am confident that progress will continue to be made over the coming years and that Jim (“BRICS”) O’Neill, the British economist, was right to put the “T” into MINTS – the countries with the best chance of providing the new economic giants of the 2050s. 23 THEREPORT Turkey 2015 Open doors OBG talks to Richard Moore, UK Ambassador to Turkey
- 26. TRADE & INVESTMENTVIEWPOINT Dr Jim Yong Kim, President, World Bank Group The founding father of the Turkish Republic, Mustafa KemalAtatürk,said,“Economicdevelopmentformsthe backboneoftheidealofTurkey,whichisfree,independ- ent, ever stronger and more prosperous”. Turkey has madegreatstridesintherealisationofthisideal,thanks toasolidtrackrecordofmacroeconomicmanagement and structural reforms. It is thus fitting that the gov- ernment, led by Prime Minister Recep Tayyip Erdoğan, has set ambitious targets for 2023, the centennial of the foundation of the Republic. At the World Bank, we are also setting some ambi- tiousgoals:toendextremepovertyby2030andboost shared prosperity for the bottom 40% in developing countries.Wewillthereforeneedthesupportofallmem- ber countries of the World Bank, as well as the private sector, civil society and private foundations. Turkey, given the significant progress it has made in itsowndevelopment,willplayakeyrole.Thecountry’s economic achievements are an inspiration to many developing nations. Indeed, we have started a project withthegovernmenttoshareitsdevelopmentlessons with policymakers throughout the world. Already, our teamsarebringingdelegationsfromvariouscountries toTurkeyforknowledgeexchanges:MalaysiaandKoso- vowereinterestedinthehealthsector;Iraqinthesocial security system; and Mauritania in the use of informa- tion technology. Let me share just three of the many lessons Turkey can offer the development community. First,anexamplethatisparticularlyclosetomyheart, as someone who has worked in public health for many years,isthatTurkeytooklessthanadecadetoachieve universal health coverage. The introduction of the Health Transformation Programme in 2003 initiated a root and branch reform of the health system. Since 1990, infant mortality has fallen by two-thirds and maternalmortalityby80%,whileaveragelifeexpectan- cy has risen by 10 years. Countries can learn much from Turkey’s policies, as well as the sequencing of reforms to create quick wins for the population and overcome the resistance of vested interests. In our flagship training course on healthreform,wehighlightthecountryasacasestudy of success in achieving universal health coverage. Second, Turkey’s energy sector stands out among many emerging market economies for the strength of itsregulatoryframework,aswellasitsabilitytoattract significant private investment. It is also notable for its focusonrenewableenergyasakeyelementofagreen- er growth path. The country has largely eliminated energysubsidies,whicharefiscallycostlyanddiscour- agemuch-neededinvestmentsinenergyefficiency.As a result, energy prices reflect market costs. Third, lessons have been learnt from the devastat- ing effects of the 1999 Marmara Earthquake and an improved capacity to anticipate, mitigate and respond to the risks of natural disasters. The Istanbul Seismic Risk Mitigation and Emergency Preparedness Project is a great example of a city-wide effort to improve resilience to shocks that are likely to strike along the North Anatolian fault line. In our “2014 World Devel- opmentReport:RiskandOpportunity–ManagingRisk for Development”, Turkey is featured prominently for its work in this area. I could also mention progress in the country’s banking system and fiscal consolidation. Of course, Turkey’s own development agenda is not complete. Many challenges remain: from boosting the participation of women in the labour force to increas- ing the skill levels of a young and growing labour pool; from raising domestic savings to attracting more for- eign direct investment to make growth less depend- ent on short-term capital from abroad. In addition, we have seen around the world how importantitisforcitizenstofeeltheyhaveavoiceand a stake in their country’s development. To be sustain- able,economicprosperityhastoprovideopportunities forall.ThisisanobjectiveIknowwesharewithTurkey’s citizens and policymakers. The World Bank is grateful for our partnership with Turkey because it is based on mutual learning and on a shared quest for the best development solutions. 24 Valuable lessons Dr Jim Yong Kim, President, World Bank Group, on the development lessons Turkey can share with the world www.oxfordbusinessgroup.com/country/turkey
- 27. 25 Economy Ambitious growth targetson the horizon for 2023 Current account deficit in decline due to lower oil prices Structural reforms needed to strengthen the economy Privatisation efforts continue despite some challenges
- 29. ECONOMY OVERVIEW Turkey hastripled its national income in the decade to 2013 Throughout 2014 Turkey had to shoulder its fair share of international financial turbulence, espe- cially in terms of currency volatility. However, despite investor concerns, the country has largely retained its appeal as a success story in the region with rel- atively sound long-term growth potential, provided the appropriate structural reforms are enacted. The past decade has seen the economy thrive as Turkey took significant steps forward in its develop- ment. A young and growing population in a strate- gically important location have marked Turkey as a potential economic heavyweight. However, concerns remain over renewed political uncertainty and the private sector’s exposure to external debt. FULL SPEED AHEAD: The government has set an ambitious target of becoming one of the top-10 economies in the world by 2023, to coincide with the centenary of the founding of the Republic of Turkey. However, the optimism that gave birth to this goal has dimmed somewhat, as external factors have placed significant stress on the economy in recent months. While it is better positioned than a decade ago, the economy has also become more vul- nerable and investors are beginning to question whetherTurkeycankeeppacewiththegrowthtrends of the past decade given its structural imbalances. Since 1999 Turkey has recorded average annual growth of 3.9%, making it one of the best perform- ing emerging markets. Growth fell below 3% in 2014, but there is potential for an uptick in 2015, with support coming from domestic investment and the prospect of modest growth in the eurozone. GROWTH BY NUMBERS: While construction has been a leading source of growth in recent years, recording double-digit growth in constant prices in 2010 and 2011, this slowed to 2.2% in 2014. Accord- ing to the Turkish Statistical Institute (TurkStat), the largest contributors to the economy in 2014 were manufacturing, with a 15.8% share of GDP in cur- rent prices; wholesale and retail trade, with 12%; transport and storage, at 12%; and real estate activ- ities, with 9.8%. As a whole, services accounted for 58.4% of GDP in constant prices in 2014, while indus- try contributed 28.7% and agriculture brought in the remaining 12.9%, TurkStat figures show. DEMOGRAPHIC DIVIDEND: Turkey’s fundamentals bode well for strong economic growth. With a mar- ket of 77.7m people as of the end of 2014, nearly half of which are under the age of 30, there is room for rapid expansion. As the country faces a falling dependency ratio, which stood at around 50% in 2013, there will be less pressure on recurring gov- ernment expenditure and a growing workforce to generate government revenues. Government poli- cies on labour and education are likely to have a large impact on whether this potential is realised. Additionally, Turkey’s strategic trade location, with- in four hours’ flying distance of 1.5bn consumers, presents opportunities for export-led expansion and an attractive incentive for foreign direct investment. TRACKING PROGRESS: Over the course of the last decade, these factors have worked in the country’s favour, as evidenced by a long run of sustained eco- nomic growth. Between 2003 and 2013 Turkey’s economy grew by a compound annual growth rate of 4.4%, according to data from TurkStat, making it one of the top performers in the G20. In 2010 and 2011 alone the country recorded 9.2% and 8.8% year-on-year (y-o-y) growth. Indeed, Turkey has expe- rienced a decade of heady growth and development following the uncertainty of the 1990s, which were marked by coalition governments, an insurgent war in the east and the 2001 banking crisis. STATE MEASURES: The ruling Justice and Develop- ment Party (AK Party) has not been shy about laud- ing its own achievements. In a November 2013 speech, Ali Babacan, deputy prime minister respon- sible for the economy, reported that Turkey had tripled its national income in the decade to 2013, surpassing $17,000 in per capita national income at 27 THEREPORT Turkey 2015 Between 2003 and 2013 Turkey’s economy grew by a compound annual growth rate of 4.4%, making it one of the top performers in the G20. In 2010 and 2011 alone the country recorded 9.2% and 8.8% year-on-year growth. Great expectations Structural reforms are key to regaining the economy’s positive trajectory
- 30. ECONOMY OVERVIEW purchasing powerparity. In real terms, GDP rose by over 60%, while GDP per capita was up 40%. The government has also been keen to stress its stewardship of public finances. During the height of the euro crisis at the end of 2011, for example, Turkey’s performance compared favourably with that of its European neighbours. Turkey’s budget deficit at the time stood at 2.5% of GDP, within the EU benchmark of 3% and well below that of its troubled European neighbour, Greece, at close to 10%. A decade of single party governments has also brought public debt under control. At nearly 80% of GDP in 2001, it fell to 36% by 2013, substantially below Greece (142.8%), Italy (119%) and Portugal (93%). By 2016, the World Bank predicts it will reach 33%. MAKING THE GRADE:Thecountrywasrewardedfor itscoursecorrectionin2013,whenMoody’sInvestors Service raised Turkey’s sovereign bond rating to investmentgrade,bumpingitupfrom“Ba1”to“Baa3”, with a stable outlook. This gave Turkey the same credit rating as India, Spain and Columbia, bolster- ing hopes it would attract a wider investor base. However, by April 2014 Moody’s revised the coun- try’s outlook from stable to negative, citing greater external financing vulnerability due to lower global liquidity and domestic political uncertainty, as well as less optimistic near- and medium-term growth forecasts. Moody’s most recently upheld this posi- tion in April 2015. In terms of the banking sector, in March2015Moody’salsoreaffirmeditsnegativeout- look for the second year running, after putting 10 of its banks on notice for downgrades in early 2014 and lowering various ratings of 11 banks that June. Standard and Poor’s (S&P) has been similarly bear- ish. As the only one of the big three credit ratings agencies not to grant Turkey investment-grade sta- tus, S&P has maintained a “BB+” rating with a neg- ative outlook, the highest junk status. However, according to statements from Nihat Zeybekci, min- ister of economic affairs, the outcome of the June elections could have a positive impact on ratings. BIG PLANS: Turkey’s track record over the last decade has encouraged the government to set high- ly ambitious growth targets for the country’s econ- omy. Between 2014 and 2023 the government is working to boost GDP from around $800bn to $2trn; GDP per capita from $10,400 to $25,000; and total exports from $157.6bn to $500bn. For some time analysts have warned that it will be difficult to replicate the performance of the past decade, and that such ambitious growth figures can- not be sustained with a burgeoning current account deficit (CAD) and the structural problems that cre- ated it. In January 2014 Sinan Ülgen, the director of the Istanbul-based, Centre for Economics and For- eign Policy Studies, told the press that Turkey’s growth model based on low global interest rates and large capital inflows was outdated. “For years, it has been clear that this model would come to an end the moment central banks, like the [US Federal Reserve], started raising interest rates again.” UP & AWAY: Much of Turkey’s growth since 2008 has been based on domestic consumption, rapid credit expansion, and the construction and servic- es sectors. This has led to rising energy and inter- mediate imports to fuel manufacturing and exports. While the loan-to-deposit ratio of the banking sec- tor stood at 40% in 2003, from 2010 to end-2013 it grew from 88% to 114%, according to Moody’s. Although the sector’s 13.4% core tier-1 capital ade- quacy ratio insulates it from a certain degree of risk, banks are still exposed to market turbulence, espe- cially with leverage rising from 8x to 9x since 2010. Consumer debt has also increased, from 4.3% of household disposable income in 2002 to 55% by the end of 2013. Credit card debt alone rose by 22% in 2013 on the back of a 31% rise in 2012. Such con- sumer-led growth is unsustainable in the long run. STRUCTURAL CONCERNS: To achieve this kind of persistent growth again, Turkey needs to do more to tackle the problems of low-value production and 28 Credit card debt rose by 31% in 2012 and 22% in 2013 Between 2014 and 2023 the government is working to boost GDP from around $800bn to $2trn; GDP per capita from $10,400 to $25,000; and total exports from $157.6bn to $500bn. www.oxfordbusinessgroup.com/country/turkey SOURCE: IMF 2014 2015 2016 GDP, current prices (TL trn) 1.72 1.88 2.06 GDP per capita, current prices (TL) 22,448.41 24,262.19 26,210.20 Total investment (% GDP) 21.91 22.19 22.25 Inflation, avg. consumer prices (% change) 5.30 5.00 5.00 Vol. of imports of goods & services (% change) 7.17 8.54 10.15 Vol. of exports of goods & services (% change) 4.01 4.97 5.31 Population (m) 76.71 77.60 78.48 General gov't revenue (TL bn) 610.38 659.24 721.23 General gov't revenue (% GDP) 35.45 35.01 35.06 Total gov't expenditure (TL bn) 649.33 701.92 768.17 Total gov't expenditure (% GDP) 37.71 37.28 37.35 Gov't net lending/borrowing (TL bn) 8.10 4.10 4.09 Gov't net lending/borrowing (% GDP) 0.47 0.22 0.20 Gov't gross debt (TL bn) 609.26 660.64 716.34 Gov't gross debt (% GDP) 35.38 35.09 34.83 Select economic indicators, 2014-16
- 33. ECONOMY OVERVIEW pursue supply-sidereforms that will lead to greater labour productivity and larger domestic savings. According to a report released by the Bahçeşehir Uni- versity Centre for Economic and Social Research in August 2013, the country runs the near-term risk of falling into the middle income trap, as it continues to face a lack of sufficient labour productivity and a consequent inability to push up per capita income. The events of 2014 highlighted the structural chal- lenges and risks faced by the Turkish economy. Per- ceptions of political uncertainty have discouraged risk-averse investors and led to a flight to foreign exchange for domestic deposits. At the same time, external conditions, such as the US Federal Reserve’s decision to pull back on quantitative easing, coupled with the structural problems of Turkey’s chronic CAD, are putting substantial pressure on the country’s economy. The consequences of these trends – most notably a falling lira and creeping inflation – pres- ent a challenge to the strategy of growth at all costs. Inflation concerns have been stoked by consecu- tive interest rate cuts in January and February 2015, on political pressure to boost domestic growth. Although inflation remains above the 5% target set by the Central Bank of the Republic of Turkey (TCMB), as of April 2015 the consumer price index had risen 7.91% y-o-y, compared to 9.38% one year prior. While lower oil prices are helping compensate for the infla- tionary pressure of the rate cuts, continuing depre- ciation of the lira is limiting this effect. MORE NEEDED: The central crux for the country is that annual growth of 4% may not be enough to keep pace with population growth. “Turkey has a young population and it is growing, so a fast growth rate is crucial. If we grow 4-5% on average, it will not generate unemployment,” Uğur Küçük, senior econ- omist at Garanti Bank, told OBG. “This is an assump- tion that is largely shared across the board, as well as by the central bank.” However,withGDPgrowthof2.9%in2014,accord- ing to the IMF, the country’s unemployment rate increased from 9.6% at the end of 2013 to 11.3% as of January 2015. To both regain and sustain econom- ic momentum, restructuring will need to be priori- tised. In its medium term outlook, the government has conceded that a 5% growth rate in 2014 will not be possible. Instead, it is emphasising growth of 4%, a lower CAD and greater productivity. The government is aware that it is in a difficult eco- nomic period, with US monetary policy and the EU’s halting recovery continuing to have an impact. Back in August 2013 Babacan told local press that, in light of Federal Reserve tapering, “It should not be sur- prising for Turkey to revise its growth rate below 4%… We set our annual exports target at $158m, but it looks difficult to reach this target as well.” STRONG CURRENT: The most significant obstacle to the long-term health of the economy is Turkey’s persistent CAD. Indeed, in the seven years to 2014, the CAD registered below 5% of GDP just once, in 2009. Although the figure decreased by nearly 30% in 2014, from $65bn in 2013 to $45.8bn, according to figures from the TCMB, this was primarily due to lower oil prices, which drove down the cost of ener- gy imports. Weaker oil prices are expected to foster further improvements in the current account in 2015 (see Energy chapter). In relative terms, the IMF expects Turkey’s CAD to fall from 7.9% and 5.7% of GDP in 2013 and 2014, respectively, to 4.2% in 2015. However, as economic growth picks up to an esti- mated 3.9% in 2016, the CAD could increase to 4.8%. GROWING PAINS: The high CAD in 2013, up 34.2% over 2012, was indicative of strong economic expan- sion that year, at 4.1%, compared to sluggish growth in 2012, when GDP rose by 2.1%, according to the IMF. While a higher CAD can signify growth, its per- sistence in Turkey underscores the need for restruc- turing. IMF staff estimates put the medium-term CAD at 5.5-6% of GDP based on current policies. Turkey’s current account is particularly vulnera- ble as GDP grows, with the deficit swelling as the economy expands. Indeed, Turkey has become stuck in what the IMF terms “boom and bust cycles”, with 31 THEREPORT Turkey 2015 Inflation has largely remained above the central bank’s target of 5% Thanks to lower oil prices, the IMF expects the current account deficit to fall from 7.9% and 5.7% of GDP in 2013 and 2014, respectively, to 4.2% in 2015. SOURCE:TUIK Number of people in the labour force, 2005-14 (m persons) 0 6 12 18 24 30 2014201320122011201020092008200720062005
- 34. ECONOMY OVERVIEW growth beingfuelled by imports and short-term cap- ital flows. According to the IMF roughly 75% of the downward adjustment in the current account in 2012camefromacyclicaldropinimportsandunusu- ally large net exports of gold. It was also the result of a decline in investment rather than an increase in savings. The fund’s annual staff report on Turkey from 2014 notes, “The current account deficit remains 2.5-5% of GDP higher than warranted by fundamentals and optimal policy settings.” Turkey’s reliance on imported energy is one of the main factors behind the deficit. Indeed, the coun- try’s net energy import bill reached $55bn in 2014, with net energy imports accounting for 74% of ener- gy use and 59% of electricity generation. TAPER TANTRUM: Given the size of the CAD, the country is particularly vulnerable to any external shocks that could halt capital inflows, which are cur- rently financing Turkey’s deficit. In the event of an abrupt and pronounced reversal of inflows, the econ- omy would almost certainly face a rough and rapid adjustment leading to negative growth. Although analystshavewarnedofthisscenarioforyears,avari- ety of internal and external factors gained pace in 2013, lending greater credence to risk assessments. In May 2013 the US Federal Reserve announced that it might begin to wind down its large-scale asset purchases. The programme, enacted in response to the global financial crisis, has spurred lower US inter- est rates, bringing greater liquidity to emerging mar- kets offering higher returns. The tapering, which began in December 2013, signals an eventual US interest rate hike, which is likely to have a negative impact on portfolio investment in emerging mar- kets. However, weaker than expected job and infla- tion figures in March 2015 have fuelled expectations that the increase will not happen before September. A reversal in investment flows is particularly trou- blesome for a country like Turkey, which has become so highly dependent on short-term capital inflows. However, according the IMF, low interest rates in the EU and Turkey’s investment-grade status could help to mitigate this effect, creating more of a “mixed” environment for capital flows. The Foreign Econom- ic Relations Board (DEİK), having been restructured in September 2014, is focused on reaching the Vision 2023 targets of boosting exports to $500bn and the volume of foreign trade to $1trn. To this end, DEİK works with international organisations to bolster ties with the global business community and increase opportunities for domestic firms (see interview). EXTERNAL EXPOSURE: The more pressing concern for Turkey at present is the amount of foreign debt held that is set to mature in the near term. The short- term external debt stock on a remaining maturity basis, meaning debt that is set to mature within one year, stood at $164.9bn as of end-February 2015, up 26% since the end of 2011. The vast majority – over 85% – of this debt is held by the private sector, with more than two-thirds accounted for by banks. While this increases economic vulnerability and presents a long-term challenge to sustainable growth, the banking sector has had “no difficulty in rolling over its external borrowings and has adequate buffers against any [foreign exchange] liquidity shocks that may emanate from abroad”, according to the TCMB’s most recent Financial Stability Report from Novem- ber 2014. Moody’s has echoed this view, noting that the country’s banks, corporates and public institu- tions alike have historically been able to roll over maturing debt even during times of crisis. CURRENCY WOES: The currency composition of Turkey’s short-term external debt stock is also note- worthy, particularly in light of recent depreciations in the lira. According to the TCMB, as of the end of February 2015, just 12.1% of all short-term external debt was denominated in lira, while more than half was in US dollars and nearly one-third was in euros. The CAD, fed by high imports, a substantial trade deficit and newly vulnerable to capital outflows, has had a sizable impact on the strength of the lira. The currency depreciated 28% against the dollar between May 2013 and the end of 2014, before falling by another 15% through to the end of April 2015. The depreciation of the lira has also been exacer- bated by risk-averse local actors. According to Ozer Balkız, the director of economic research at the Inde- 32 Just 12.1% of short-term external debt was denominated in lira as of the end of February 2015 According the IMF, low interest rates in the EU and Turkey’s investment-grade status could help to mitigate the effect of a US interest rate hike on capital flows. The short-term external debt stock on a remaining maturity basis stood at $164.9bn as of the end of February 2015, up 26% since the end of 2011. www.oxfordbusinessgroup.com/country/turkey SOURCE: TUIK Manufacturing 15.8 Wholesale & retail trade 12 Transport & storage 12 Real estate activities 9.8 Agriculture, forestry & fishing 7.1 Construction 4.6 Public admin., defence & social security 4.2 Professional, scientific & technical activities 3.4 Financial & insurance activities 3 Other 28.1 Contribution to GDP by economic sector,2014(%)
- 36. ECONOMY OVERVIEW pendent Industrialistsand Businessmen’s Associa- tion, “Turkey is a dollarised economy. When some- thing bad happens, not only corporates, but also consumers go into foreign exchange.” Since mid- 2013 many Turkish residents have been transferring their bank deposits into foreign currencies – name- ly euros, dollars and sterling – in an attempt to pro- tect themselves from further currency volatility. The instability of the lira has left the banking and business sector exposed to substantial risk, given the private sector’s share of foreign currency debt. According to Emre Sezan, head of equity research at İş Investment, private sector foreign currency net debt stands at 22% of GDP, and depreciation of the lira will necessarily increase the cost of servicing these loans. According to the TCMB’s November 2014 report, currency risk is comparably higher amongst electricity producing firms and real estate investment companies, as they generate less revenue inforeigncurrencies.However,non-performingloans have been stable thus far, at 2.6-2.7% since 2011. The depreciation of the euro against the dollar has also had an effect on the corporate segment, with 45% of the country’s exports invoiced in euros, according to the World Bank. This in turn has made it more difficult for firms to finance dollar-denom- inated imports, though the impact on the wider economy has been negligible. DOMESTIC DEMAND: In general terms, the new regulations regarding consumer credit introduced in early 2014 could have a negative effect on domes- tic demand, though they are also likely to improve the consumer loan portfolios of banks. Domestic uncertainty ahead of the June 2015 general elec- tions is also depressing demand. According to the World Bank’s April 2015 Regular Economic Note, consumer confidence is at its lowest level since March 2009, when the global economy was in the throes of the financial crisis. While major spending decisions by households and corporates are being put off until after the elections, the World Bank’s 3% GDP growth forecast for 2015 assumes that domestic demand will recover shortly thereafter. COURTING CONFIDENCE: In the short term, Moody’s outlook downgrade in April 2014, which it reaffirmed most recently in April 2015, is unlikely to have a dramatic impact. However, if Turkey were downgraded further, losing its investment grade sta- tus, the country could witness more serious capital outflows. According to Moody’s, while the country’s sovereign rating is unlikely to see any improvements in the near term, a move backwards in terms of pub- lic finances, heightened political instability or a dete- rioration in its external finances are all possible alert signals for a ratings downgrade. Fortunately, the government has had few problems with its external financing needs. In April 2015 Turkey issued a $1.5bn dollar-denominated bond with a yield of 4.4% – some 250 basis points over compa- rable US Treasury bills, according to the Turkish Treas- ury. Combined with another $1.5bn issue in January, this sale marks $3bn out of the $4.5bn in planned issues for 2015. Oversubscribed by five times, the April sale signals continued interest in the country’s sovereign debt from international investors. Indeed, just15%ofthebondsweresoldtodomesticinvestors. MEASURED PROGRESS: Further improvements to Turkey’s external position could be in the offing. As of February 2015 the CAD was down by nearly 9% from $46.9bn in September 2014 to $42.8bn, driv- en by a $3.1bn drop in the energy deficit and a $2.1bn adjustment on higher gold exports. This represents a drop from 5.8% of GDP to 5.4% over the period. Looking ahead, the depreciation of the lira should also have a positive impact on exports and the cur- rent account. Balkız told OBG, “We do not want the lira to go to 2 [against the dollar] again, because it kills the competitiveness of Turkish exports. We see the effect of exports increasing. As developed coun- tries show better performances, this is good for us. Also, it will be positive for the CAD.” Indeed, most pre- dictions are for a further contraction of the CAD in 2015. According to the World Bank, weak oil prices could help cut it to 4.4% of GDP, which should help to reduce the country’s external financing burden from $220bn in 2014 to $200bn in 2015. OUTLOOK: While a reduction in external vulnerabil- ities is welcome in the short term, it belies persist- ent structural concerns. As it stands, the country remains reliant on domestic demand and a large CAD to reach its growth targets, generate sufficient employment or boost per capita income. In the long run,thecountryneedstoaddresssupply-sidereforms such as labour market regulations and education. While Turkey has recorded impressive growth in the past decade, it may have reached its limit with- out substantial structural overhauls of the econo- my. If the country can overcome the current investor uncertainty and improve productivity through much- needed reforms, the ambitious growth targets set by the government could eventually be reached. 34 Since mid-2013 many Turkish residents have been transferring their bank deposits into foreign currencies Turkey issued a $1.5bn dollar-denominated bond in April 2015, its second of the year. The sale, which was oversubscribed by five times, is indicative of continued interest in the country’s sovereign debt. As of February 2015 the current account deficit was down by nearly 9% from $46.9bn in September 2014 to $42.8bn. This represents a drop from 5.8% of GDP to 5.4% over the period. www.oxfordbusinessgroup.com/country/turkey
- 37. ECONOMY INTERVIEW Mehmet Şimşek,Minister of Finance ShouldtheUSFederalReserveraiseinterestrates, we may see a reversal in capital flows back to the US. What impact would this have on Turkey? ŞİMŞEK: The Federal Reserve’s potential interest rate hike is a downside risk for emerging markets, but it is manageable.Wedonotexpectagloballysynchronised monetary tightening, as the European Central Bank (ECB) and the Bank of Japan’s (BoJ’s) expansionary monetary policy will mitigate the potential impact of theFederalReserve’sratehike.Lowerpetrolpriceswill alsoputdownwardpressureoninflationratesandhelp to defer the Federal Reserve’s rate hike, as well as encourage both the ECB and BoJ to pursue monetary easingpoliciesmoreaggressively.Theeconomicrecov- ery in the US should support the global economy throughtradeandinvestments.AsfarasTurkeyiscon- cerned, domestic policies will greatly impact Turkey’s growth. While the country has political stability, it also has sound macro-economic fundamentals. What impact is regional instability having on the economy, and how difficult is it to plan a budget with events seeming so precarious in the region? ŞİMŞEK: We have significant fiscal space to respond to external shocks. We have reduced the general gov- ernment-deficit-to-GDPratiofrom10.8%in2002to0.7% in 2014. This is less than one-fifth of the Organisation for Economic Cooperation and Development (OECD) average and one-quarter of the Maastricht criteria. Similarly,publicsectordebthasfallenfrom74%in2002 to 33.5% of GDP in 2014. In 2014 Turkey’s debt ratio was less than one-third the OECD average. We have also strengthened the regional dimension of the incentives system and improved the attractive- ness of the 6th Region – a grouping of low-income provincesintheeastandsouth-east–makingthisarea more resilient. We believe that in the long run, border tensions will turn into a promising Middle East that embraces stability and democracy, and Turkey, with its high democratic standards, will benefit the most. Towhatextentisitpossibletoquantifythecostof the Syrian refugee crisis? ŞİMŞEK:TheSyrianmigrationisthelargestrefugeeflow of the century. The total number of Syrian refugees in Turkeyhasreachedalmost2mpeople,andoverthelast three years 22 camps have been built in 10 cities. Asy- lumseekershavebeenprovidedwithhealthcare,edu- cation and food assistance. Turkey alone has spent $4.6bn on the crisis. With this being said, it is difficult to quantify the impact of the refugee crisis on the economy, though there is evidence of food shortages and housing prices increasing in border provinces. Where does participation banking stand in Turkey in terms of becoming a major financial centre? ŞİMŞEK: Islamic finance is an area that dates back 30 years in Turkey and 50 years around the world. The WorldBank’sGlobalIslamicFinanceDevelopmentCen- tre was established on Borsa Istanbul’s premises. The centre is the World Bank’s only representative office for Islamic finance in the international arena. We are also planning to increase the share of Islamic banking, which is currently around 6% of the banking sector in Turkey today, to 15% by 2023. With falling oil prices, the current account deficit (CAD)isexpectedtodipbelow5.5%ofGDPin2015. What other measures have been put in place to shrink the deficit should oil prices rise again? ŞİMŞEK:Ona12-monthrollingbasis,CADdeclinedfrom $65bnatyear-end2013to$45.9bnatend-2014.Like- wise, the current account balance, excluding gold and energy, saw a $6.3bn surplus at end-2014, up from a $4.1bn deficit in 2013. The CAD-to-GDP ratio declined from 7.9% in 2013 to 5.7% in 2014. We had projected the CAD-to-GDP ratio would be 5.4% in 2015 and 5.2% in 2017; however, these number were based on oil prices staying at $101.90. On the condition that oil prices per barrel remain at around $60, these figures will be lower by about two percentage points. 35 THEREPORT Turkey 2015 A new path OBG talks to Mehmet Şimşek, Minister of Finance
- 38. ECONOMY INTERVIEW Mark Lewis,Former Senior Resident Representative in Turkey, International Monetary Fund What are the Turkish economy’s key strengths? LEWIS: In addition to the obvious factors, like demo- graphics and geography, Turkey’s private sector is very dynamic and has demonstrated an ability to quickly adapttochangesintheglobaleconomythroughadjust- mentstoproducts,targetmarketsandsize.Inaddition, thecountry’sbalancesheetsaregenerallystrong,espe- cially with respect to the public and banking sectors. This strength provides resilience to shocks and is one of the reasons Turkey was able to ride through the recent economic crisis relatively unscathed. However, there are potential weaknesses, notably forcorporationsandhouseholdsthataremoreexposed to financial risks than the two sectors above. Foreign exchange (FX) risk has grown over the past few years as more firms have turned to foreign-denominated debttofundbusiness.Whilesomeentitiesarehedged, others are not, making many companies vulnerable to exchange rate depreciation. Corporations also have some interest rate risk and rollover risk, as a result of short maturities. While these risks are not that high, they have been growing and need to be closely moni- tored. Households are generally in a better position, as agroup.ThereisverylittleFXrisk,andinterestrateand rollover risks are much lower than for corporations. Aggregate household financial assets are solid – 20% higher than liabilities. That said, those with the assets are not necessarily the same that hold the liabilities, creating pockets of vulnerability among certain seg- ments.Somemiddle-andlower-incomehouseholdsmay be overextended, resulting in high levels of consumer debt. While the government’s consumer lending and creditcardregulationshavebeenreasonablyeffective at containing excesses, more may be needed. To what extent does the sizeable current account deficit (CAD) pose a risk to economic stability? LEWIS: For 2014 we are forecasting a decline in the CAD to 6.3% of GDP from 7.9% in 2013, due primarily toanexpectedslowdowninoverallGDPgrowth.Despite this decrease, Turkey’s deficit remains considerably higherthanthoseinmanyotheremergingmarkets.The size of a CAD is less important than the ability of a country to finance it. Over the past few years, emerg- ing markets have benefitted from high global liquidity because of loose monetary policies in the West. As a result,theyhavebeenabletoeasilyfinancetheirdeficits. In Turkey’s case, this has been financed with short- term foreign debt. However, as the US has begun to movetowardsanormalisationofitsfinancialconditions, global capital inflows have slowed. For a country like Turkey, where inflows fuel a large amount of domestic consumption and investment, an abrupt decline in internationalfundingwouldresultinasharpslowdown in the economy. While the country has not yet experi- encedanysignificantproblemsattractingtheseincome sources,itwillremainvulnerabletocapitalflowvolatil- ity as long as the CAD remains at its present level. How can Turkey work to overcome its CAD risks? LEWIS:Onewaytodealwiththisriskisbyboostingthe country’s domestic savings rate, which at about 12% of GDP is lower than in comparable markets. Increas- ing this figure by 4% to 5% over the long term would allowTurkeytofinancemoreofitsgrowthwithitsown savings, as opposed to those of foreign countries. This wouldreduceTurkey’sexposuretoforeigncapitalflows and, by allowing a larger amount of investment, would lead to higher growth. The government’s overhaul of thepensionsystemwasonestepintherightdirection. Interest rates also play a role in encouraging savings, especially when they are at a level enticing to savers, but not too stimulative of consumption. And, while public sector finances have seen steady improvement over the past few years, their continued strengthen- ingwouldhelptoraisethecountry’soverallsavingsrate. The other major solution lies with improving Turkey’s overall competitiveness. If its exports were more com- petitive globally and its domestic goods were more competitive with imports, this would reduce the CAD. 36 Tackling challenges OBG talks to Mark Lewis, Former Senior Resident Representative in Turkey, International Monetary Fund www.oxfordbusinessgroup.com/country/turkey
- 39. ECONOMY ANALYSIS The Turkishstock market is slated for partial privatisation by end-2015 Followingtheglobalfinancialcrisisandtheslowdown in international financing, Turkey struggled to garner interest in its privatisation programme and nearly a decade of successful liberalisation slowed dramati- cally. In 2011 privatisation revenues were $1.4bn, down from a peak of $8.1bn in 2006. However, the programme came roaring back in 2012. While some obstacles had begun to emerge in 2015, several sig- nificant sales have taken place in the past two years. THE RIGHT TIME TO BUY?: Privatisation proceeds reachedarecordhighin2013,amountingto$12.4bn, and while figures were unavailable for full-year 2015 at time of print, as of October 2014 the government had generated $10bn from the sale of state assets. As a result, expectations for 2015 were high at the endof2014.MinisterofFinanceMehmetŞimşektold the press in January 2015 that the government was planning to raise TL8.7bn (€3bn) from asset sales for the year and TL6.8bn (€2.4) in 2016. The tenders for the privatisation of the life insurance and pension provider, Halk Hayat ve Emeklilik, and the non-life insurer, Halk Sigorta, have been announced with a deadlineofSeptember2015,andfivethermicand49 hydroelectricpowerplantsareslatedforprivatisation in the next two years. In October 2014 comments to the press, Şimşek noted that highways and bridges, seaports, the venues for the Erzurum Winter Univer- siade, 25 sugar factories, the Güllük Marina and state real estate would also be up for sale in this period. TOUCHY SUBJECT: In the past, privatisation efforts have been a contentious political issue – with critics fromdomesticlabourgroupsandTurkishcourtsassert- ing that the sales of state-owned assets were taking place for less than their market value. For example, then-PrimeMinisterRecepTayyipErdoğanraisedcon- cerns about the value achieved during the 2013 sale of the struggling Başkentgaz, Turkey’s largest natu- ral gas grid serving Ankara. The company was sold to the Torunlar Food Company for $1.16bn after three previous tenders failed to find a qualified buyer. Despite the critics, the privatisation programme hashelpedtoreducethegovernment’sbalancesheet obligations and created a revenue stream to support its fiscal position. In 2012, for example, privatisation payments far exceeded the $2.2bn target in revenue from asset sales that the government had set at the beginning of the year. This had a positive impact on the country’s budget deficit, which fell to 1.2% of GDP in 2013, below forecasts and the 2012 deficit of 2%ofGDP.Thedeficitroseonlyslightlyin2014to1.3% ofGDP.Theprimarysurplusalsobeganrisingin2012, from 1.2% of GDP to 1.6% in 2014. Budget revenues increased by 17.1% to TL389.4bn (€137.1bn). Of this, non-tax revenues accounted for 16.3% of the total. TAKING IT SLOW:Recently,theoptimismoflate2014 has been tempered by volatility in the lira and the uncertain political environment preceding the June 2015parliamentaryelections.AccordingtoBloomberg, borrowingcostshaverisendramatically,withtheyield on Turkey’s benchmark two-year up 2.38 percentage points in early 2015 to a one-year high of 10.4%, in late April. Meanwhile, the lira had fallen to a near-all- time low against the dollar ($1:TL2.71) as of April 2015, a decline of 13% from the beginning of 2015 and 33% since 2013. The combination of high costs and lira volatility has dissuaded investors, and the governmenthasdelayedtenders.Thetenderforcon- struction of highways connecting Kinalı-Odayeri and Kurtköy-Akyazı were moved to July 7 and June 30, 2015, respectively, from their original May 6 launch. Meanwhile, the $2.76bn privatisation tender for the national lottery to Net Holding and Hitay Invest- ment Holding also fell through, when the consortium failed to complete the deal by its April deadline, althoughthegovernmentcompletedthesaletoERG- Ahlatci, the second-highest bidder, for $2.75bn. In spite of these challenges, Borsa Istanbul, the Turkish stock market, announced a partial privatisation in March 2015. The world’s 29th-largest exchange will list up to 43% of its shares in a sale set for end-2015. Privatisation proceeds reached a record high in 2013, totalling $12.4bn, and as of October 2014 the state had generated $10bn from asset sales. 37 THEREPORT Turkey 2015 The government is expected to conduct sales of highways and bridges, seaports, sports venues, sugar factories, a marina and state real estate property in the coming two years. A private line The government continues liberalisation efforts
- 40. ECONOMY INTERVIEW Omer CihadVardan, Foreign Economic Relations Board of Turkey How will DE K’s new role aid efforts to attract for- eigndirectinvestment(FDI)andcultivatebusiness? VARDAN: In September 2014 the Grand National Assembly voted to restructure DE K, which will contin- uetosupporttheintegrationofTurkishindustrythrough tradeandinvestmentrelations.Operationswerestream- lined within the organisation. The offices of the pres- identandtheprimeministerprovideincreasedsupport, and our priority is to increase the capacity and effec- tiveness of foreign trade relations. We want to see Turkeyemergeasatranscontinentalbusinessdestina- tion for multinational corporations. To help us in that direction we are concentrating on exporting services, as well as goods. We will also establish new business councils and launch business development projects. We are revamping our investment promotion strat- egywithatwo-prongedapproach.First,wearesetting sector-specific investment targets. Attracting foreign capitalisanincreasinglycompetitiveendeavour,sowe need to send a clear message to investors and show them that Turkey is ready for higher levels of invest- ment. While we are shifting our focus to new sectors, we will not stray too far from the industrial manufac- turing base, where we have created attractive incen- tives. Second, we are diversifying the global spectrum of our foreign investors. Currently, 70% of FDI comes from the EU. This needs to be balanced across other parts of the globe to protect Turkey from economic shocks from the EU. Thus far, we have not been suc- cessful at attracting investment from new and emerg- ing markets like the GCC, China and Latin America, but webelievewecanraiseinvestmentfromtheseregions. TowhatextentwilltheUSFederalReserve’stighter monetarypolicyposearisktoinvestmentinTurkey? VARDAN:Taperingisaprocesswhichhasbeenaffect- ing not only Turkey but a number of countries around theworld,particularlythedevelopingones.Ontheoth- er hand, it is important to underline that Turkey’s main focus in terms of capital flows in the following years will be FDI, rather than short-term inflows. This kind of long-terminvestmentlooksfortwomainpropertiesin a candidate economy: stability and growth potential. Turkey, with its ongoing macroeconomic and political stability–anditsdemographicandgeopoliticaladvan- tages for growth – will therefore still be an attractive destination for global investors. At this point, the economic restructuring package recentlyannouncedbythegovernmentshouldalsobe emphasised as the path to the transformation of the Turkish economy. In that regard, one of the central goalsofeconomicandindustrialrestructuringistosee Turkey become a technology-exporting country and, generally, export higher-value-added goods in addi- tion to services. In light of this, the importance of the Transatlantic Trade and Investment Partnership (TTIP) shouldbenoted.Whencompleted,theTTIPwill see an astonishingone-thirdofglobaltradevolumesfallunder its umbrella. The benefits of this cannot be stressed enough. Though not part of the EU, Turkey is a mem- ber of the Customs union, and will surely be a partici- pantinthepartnership,whetherthroughtheinsertion ofasetofspecialclauses,orseparatefree-tradeagree- ments with the US. In any case, the economic benefits expected to come Turkey’s way are significant. To what extent is foreign capital inflow important for fuelling Turkey’s GDP growth? VARDAN:Thenewnormoftheglobaleconomyismod- erate growth. In such a world, where external adversi- tiesarereflectedonitseconomicperformance,Turkey still manages to grow at a pace of 3-4%. What it needs intheyearstocomewillbeasustainable,qualitygrowth patternsupportedbyinvestment.Socapitalinflowswill matter not only for acceleration through investment and trade, but also for further technological develop- ment. Foreign capital inflows will also help finance the current account deficit, which has been in a down- wardtrendandisexpectedtobereducedtomorerea- sonablelevelsthroughcertainstructuralimprovements. 38 Renewed purpose OBG talks to Ömer Cihad Vardan, President, Foreign Economic Relations Board of Turkey (DEİK) www.oxfordbusinessgroup.com/country/turkey
- 41. 39 Banking Attractive demographics contributeto sector potential Moves to trim loan growth help guard against risk Buffers against potential shocks remains ample Major international players continue to arrive Slowing profitability likely to prompt consolidation
- 42. BANKING OVERVIEW The sectorhas proved its resilience in recent years Turkey’s banking sector has proved resilient to both the global economic crisis and more recent fluctu- ationsinthecountry’seconomy.Loangrowthremains fairly high by developed-market standards but has trimmed in recent years, reflecting the market’s increasing maturity as well as regulatory moves to contain credit expansion with an eye on risk profiles. Inthemediumtolongterm,themarketshouldben- efit from the large population, the scope for growth in a country with moderate levels of banking pene- tration, and the expansion of a diversified economy. However, recent events have shown that risks exist from foreign currency exposure, concentration risk in the construction sector, and the impact of eco- nomic and political events on the incomes of cor- porate and household borrowers. TAKING THE PULSE: In February 2015, Deloitte, the global professional services company, issued a report which highlighted the industry’s strong growth over the past few years, and the opportunities for future expansion. Between 2007 and 2014, Turkey’s finan- cial assets as a proportion of GDP rose from 146% to 202%, according to Deloitte, which noted a fore- cast rise to 247% by 2018. Despite rapid growth, financial assets remain well below global averages and even those for “economies in transition”: 813% and 242%, respectively in 2014, forecast to rise to 854% and 320%, respectively, in 2018. Turkey’s private sector loans-to-GDP ratio jumped from just 33% in 2007 to 54% in 2014, although it is still less than half the global average of 115%. Loan growth in US dollar terms grew at a compound annual growth rate of 12% between 2007 and 2014, and is expected to clock up a similar rate up to 2018, with the ratio of private sector loans to GDP fore- cast to reach 66% in 2018. This compares favourably to a global average of 6% and a G7 rate of 2%, and is slightly above the average for economies in tran- sition (11%). Meanwhile, deposit growth is forecast to pick up from 6% in 2007-14 to 11% in 2014-18. As the market has matured, and competition on an already competitive market intensified, the net interest margin has narrowed, from 4.5% in 2007 to 3.2% in 2014. Further compression is likely, to 2.8% in 2018, just below the economies in transition aver- age of 2.9% but still above the global level of 1.6%. The message is that the sector has had a period of strong growth and will maintain positive forward momentum, while stabilising and moving towards global norms. In the long term the scope for growth is excellent, even in a competitive environment. RECENT PERFORMANCE: In the early months of 2015 the sector’s performance picked up, despite concern over Turkey’s political future with an elec- tion looming, and the weakening of the lira. Assets in lira increased by 4% to the end of Feb- ruary from the end of 2014, while net profit jumped 8.6% from February 2014, with the sector as a whole posting net profits of TL3.46bn (€1.22bn). Loan growth in the first two months of the year was 3.8%, reaching a total of TL1.29trn (€453bn). However, in US dollar terms, assets fell due to the decline in the lira. In April 2015 Intesa Sanpaolo’s executive vice-chairman, Marcello Sala, announc- ing his bank’s launch in Turkey, said that the four main risks to the system are high levels of private debt, the current account deficit, the lira’s depreciation against the US dollar and high inflation. STRENGTHS & WEAKNESSES: The IMF issued a detailed staff report on Turkey in December 2014 as part of its “Article IV consultation” with the coun- try. Under the fund’s Article IV, the IMF holds bilat- eral consultations with its members, usually once a year, with its representatives meeting a range of officials, including those from the government and from the Central Bank of Turkey (TCMB). The report highlights the sector’s strengths and weaknesses, noting its relative current stability, but also the considerable risks that could arise, as well as suggesting means by which the authorities could In the medium to long term, the market should benefit from the large population and the scope for growth in a country with moderate levels of banking penetration. As the market has matured and competition has intensified, the net interest margin has narrowed, from 4.5% in 2007 to 3.2% in 2014. Further compression to 2.8% in 2018 is likely. 40 Keeping a watchful eye The prospects for growth are excellent so long as risks are heeded www.oxfordbusinessgroup.com/country/turkey
- 43. BANKING OVERVIEW enhance thesystem’s operations and improve its insulation from these risks. HOLDING FIRM: As the report noted, Turkey’s banks are fairly well-capitalised, with non-performing loans (NPLs) relatively low, at just 2.8%. The fall in the lira and rising interest rates had not, at the time of the IMF’s consultations, substantially increased the NPL ratio. Loan growth has helped offset a rise in bad assets, keeping the NPL ratio in check. Banks have been able to pass interest rate hikes on to borrowers, maintaining the net interest mar- gin at around 2%. Some analysts had expected a tightening of margins, but this did not occur. Banks’ on balance sheet short FX position also bolstered margins in the wake of the lira’s fall. However, the rising rates (as well as factors such as lower econom- ic growth and a higher risk perception) did trim cred- it growth somewhat, putting downward pressure on return on equity, which stood at 126%. Banks’ buffers to shocks remain ample, with cap- ital adequacy standing at 16%, well above the min- imum demanded by regulators, and most capital is Tier 1. Liquidity adequacy ratios (at maturities of oneweekoronemonthtotalorforeigncurrencyonly) are also ample, with liquid assets covering more than 100% of short-term liabilities – and this despite rather conservative assumptions on the proportion of deposits that are vulnerable to capital flight. Stress tests have also shown that the system is well pre- pared for even significant shocks. FOREX EXPOSURE: One of the biggest risks to the banking sector – and to the Turkish economy as a whole – is over-reliance on foreign exchange financ- ing. In recent years, banks have relied on cheap wholesale financing to fund lira-denominated loans. Given the lira’s historic vulnerability and its recent depreciation, this has become a concern for the sec- tor and the authorities overseeing it. At the end of 2014 the sector had an overall loan- to-deposit (LTD) ratio of 114%. In other emerging markets, including in Turkey’s neighbours in Central and Eastern Europe, with which the country is some- times bracketed by financial institutions, there have been efforts to reduce the LTD to 100% or below in the wake of the global financial crisis. There is a sense that banks need to rely more on deposits to finance loans, in order to reduce risk. Turkish banks’ foreigncurrencyLTDratioremainsbelowthat,at84%, while local currency LTD is at 131%. According to the IMF, wholesale external funding denominated in foreign currency is helping drive the expansion of lira-denominated lending. Naturally, this exposes banks to risk of their external obliga- tions rising in value relative to the debt that they can call on from their own customers. According to the IMF,foreignexchangeliabilitiesnowoutstripdeposits by TL397bn (€140bn), or 21% of total assets. The fund says that foreign exchange exposure through this mechanism more than doubled to €103bn by early 2014, from €46bn in 2009. Banks are aware of the risk, and hedge it off balance sheet, so the sector’s net open foreign exchange position is only around 0.1% of GDP. However, the IMF has warned that in the event of market sentiment turning negative, the rollover risk (refinancing risk) – and thus foreign exchange liq- uidity risk from gross forex exposure – is significant. The fund suggests that banks’ required reserve deposits with the central bank could be used to sup- port foreign exchange liquidity. Banks also have indirect exposure to exchange rate risk via foreign currency lending to non-finan- cial corporates. These types of loans have increased more than three-fold in less than a decade, reach- ing some €114bn in July 2014, up from less than €30bn in 2008, partly as a result of tax and pruden- tial policies that encouraged the shifting of foreign currency lending onshore. MITIGATION:Risk is somewhat mitigated by pruden- tial regulations that restrict foreign currency lend- ing, limiting them to those with export receipts, and those with better ability to hedge financially and access foreign currency denominated assets. 41 THEREPORT Turkey 2015 Internet banking transactions, 2005-14 (TL bn) SOURCE:TBB 0 600 1200 1800 2400 3000 20142013201220102005 Banks have been able to pass interest rate hikes on to borrowers At the end of 2014 the sector had a loan-to-deposit ratio of 114%. In the wake of the global financial crisis there have been efforts to reduce this ratio to 100% or below.
- 44. BANKING OVERVIEW A recentTCMB study suggested that export receipts help hedge a net open position. However, the IMF calculates that around €20bn in foreign exchange-indexed loans is not covered by these pru- dential regulations, despite similar risks. One blessing for the sector is that foreign curren- cylendingtohouseholdsisforbidden.Thishashelped prevent the soaring NPLs seen in parts of Central and Eastern Europe, where banks lent freely in euros and Swiss francs to households during the boom years of the last decade, only to see households unable to service the debt when the economy turned down- wards and currencies fell in value. Hungary and Romania have been particularly affected. PROFITABILITY EASING: Sector profitability as a whole has declined in recent years, dragged down- wards largely by lower net interest income and less efficiency. Despite a doubling in loan volume and a 50% increase in equity since 2010, profits have scarcely risen, according to the IMF. Between 2005 and 2010, return on average equi- ty (ROAE) averaged 23% and return on average assets 3%, but these have now fallen to 13-15% and 1.5- 2%, respectively. Since 2010 ROAE has slipped by an average 9.5 percentage points, with approximately 80% of the reduction due to falling net interest income, and most of the remainder caused by a decline in net non-interest income. Netinterestincomehasfallenduetoadropincred- it extended to the government, without a corre- sponding fall in interest expenses. Interest income dropped by 17.4 percentage points after a 1.8 per- centage point fall in loan book profitability, but large- ly driven by a 13.5 percentage point fall in interest derived from securities after a decline in the pro- portion of government securities in banks’ portfo- lios. Government securities accounted for 38% of total assets in 2010, falling to 16% in 2014. CONSOLIDATION: Falling profits and rising risk may catalyse consolidation, or at least efforts to improve efficiency in the sector. As the IMF notes, “over the medium term, banks will need to bring loan growth, equity and profits back into line, with a focus on enhancing margins”. Banks can boost efficiency by better pricing, cost efficiencies (which in some cas- es slipped during the years of strong growth, due to a lack of incentive), improved risk management and increasing revenues earned from fees. The IMF has praised the TCMB for its efforts to slow consumer credit growth and improve its stress-test- ing procedures. In 2013 credit card limits were tight- ened and provisioning rates were increased, and in February 2014 the central bank tightened limits on instalment purchases. These measures caused a rap- id deceleration in credit growth from 40% to 18% in the year to August 2014, based on an annualised 13- week moving average. “The heightened scrutiny for credit cards and consumer loans that the regulations introduced were needed, especially the strict rules for fees, loan sizes and settlement periods,” Cem Mengi, the former deputy CEO of ING Bank, told OBG. TheIMFnotedthatfurthermacroprudientialmeas- ures to target banks’ wholesale foreign currency financing would be worthwhile, to trim foreign exchange leverage in the banking system. Measures it suggested included reducing inducements for the non-financial corporate sector to take on foreign currency risk, for example increasing capital charges or greater provisioning for foreign exchange loans to unhedged corporates, and matching the pruden- tial regulation of foreign exchange-indexed lending with direct foreign exchange lending. “Considerationshouldalsobegiventocomplemen- tarynon-pricemeasures,”thefundsaid.“Forinstance, a ceiling on the use of derivatives for FX hedging pur- poses while keeping the current net open position limits, or on the non-core to core foreign exchange liabilities ratio would have the obvious impact of containing wholesale FX funding.” The IMF said that these measures would indirect- ly affect domestic demand, but would not stand in place of a tighter macroeconomic strategy as a whole from the government. Furthermore, such measures would have to be implemented carefully, taking into account the extent to which banks can pass costs on to customers, whether creditors or debtors. 42 SOURCE: TBB Name Type Assets ($ bn) Türkiye Cumhuriyeti Ziraat Bankası A.Ş. State-owned deposit bank 104.67 Türkiye İş Bankası A.Ş. Privately-owned deposit bank 101.44 Türkiye Garanti Bankası A.Ş. Privately-owned deposit bank 94.37 Akbank T.A.Ş. Privately-owned deposit bank 88.73 Yapı ve Kredi Bankası A.Ş. Privately-owned deposit bank 74.09 Türkiye Halk Bankası A.Ş. State-owned deposit bank 65.79 Türkiye Vakıflar Bankası T.A.O. State-owned deposit bank 64.67 Finans Bank A.Ş. Foreign bank 32.74 Denizbank A.Ş. Foreign bank 30.82 Türk Ekonomi Bankası A.Ş. Privately-owned deposit bank 26.98 Top 10 banks by assets, Sept. 2014 Falling profits and rising risk may prompt consolidation in the sector Tightened credit card limits, increased provisioning rates and stricter limits on instalment purchases caused a rapid deceleration in credit growth, from 40% to 18%, in the year to August 2014. www.oxfordbusinessgroup.com/country/turkey
- 47. BANKING OVERVIEW AML &CFT: In another area of regulation, Turkey has made significant progress: tackling money laun- dering and financing of terrorism. This is particular- ly significant for Turkey, which has historically had issues with corruption and has suffered from terror- ist attacks, and has been seen as a conduit to the wars in the Middle East. In October 2014 Turkey was removed from the Financial Action Task Force list of countries with “strategic deficiencies” in their anti- money laundering and combating financing of ter- rorism frameworks, having made steps to tighten rulescriminalisingfinancingofterroristorganisations andsettingupprocedurestoidentify,freeze,andcon- fiscate assets linked to terrorism. PLAYERS: As of the end of the third quarter of 2014 there were 46 banks in Turkey, with total assets of €604bn, employing close to 200,000 people. The market is dominated by seven institutions, though there are a range of other players as well as devel- opment banks, investment banks and banks focus- ing on specific market niches. The biggest bank in terms of assets is the state- owned Ziraat Bank, established in 1863, with assets of €78.8bn as of the end of the third quarter of 2014. The other banks in the top five are all private- lyowned:İşbank,withassetsof€76.4bn;GarantiBank (€71.1bn); Akbank (€66.8bn); and YapıKredi (€55.8bn). They are followed by two state-owned banks, Halkbank (with assets totalling €49.6bn) and Vakif Bank (€48.7bn), two foreign-owned institu- tions – Finansbank (owned by the National Bank of Greece), with assets of €24.7bn; and DenizBank, acquired by Sberbank in 2012, with €23.2bn. Com- pleting the top 10 is Ekonomi Bank, with assets of €20.3bn. Other major international banks present on the market include HSBC, Citibank, ING and RBS. PERFORMANCE: The major banks’ key performance figures differ considerably, reflecting differences in their management and strategies. As of the first quarter of 2014 – the last year for which figures were availableattimeofpress–netinterestmarginranged from 3.9% for Vakıfbank to 5.1% for Finansbank, according to a report by investment bank JP Mor- gan. Akbank stood at 4.4%, İşbank at 4.2%, Garanti at 4%, Halkbank at 4.6% and YapıKredi at 4.1%. Garanti had the highest return on equity, at 15.3%, with Halkbank at 15.2%, İşbank at 12.8%, Akbank at 12.1%, Vakıfbank at 10.9%, YapıKredi at 9.4% and Finansbank with 7.1%. Loan impairment charges as a proportion of average loans varied from 2% for Finansbank to 0.9% for Halkbank. Despite the variations in performance, in its report JP Morgan said that it continued to see Turkey’s biggest systemic banks as a “generally homogenous asset class, with the broadly similar credit metrics and the same assumptions of systemic importance”. However, it did highlight potentially slightly weaker performance from Finansbank and YapıKredi due to their stronger focus on consumer lending. Consumer confidence has dipped in late 2014 and early 2015 due to lower economic growth, rising inflation and a new degree of political uncertainty. COMING & GOING: Thanks to its size and growth potential, the Turkish banking market continues to attract international institutions looking to establish or expand their presence in the country. This is despite the cooling of market sentiment and the growing appreciation of risks from loan growth, the depreciating lira, and the slowing economy – indeed, for some investors, this is the time to capitalise on more attractive capital values. In November 2014, Spain’s Banco Bilbao Vizcaya Argentaria (BBVA) raised its stake in Garanti from 24.9% to 40% for an additional €2bn, giving it con- trol of the bank’s board, with seven of 10 members. BBVA had acquired its stake in Garanti for €4.4bn in 2011, with a view to expanding its holding and tak- ing board control in 2016; in the end, it moved ear- lier to capitalise on market conditions. Jaime Saénz de Tejada, BBVA’s chief financial offi- cer, told the press that his bank had achieved a “very 45 THEREPORT Turkey 2015 There are 46 banks in Turkey, employing almost 200,000 people and with total assets of €604bn Consumer confidence dipped in late 2014 and early 2015 In 2014 Turkey was removed from the Financial Action Task Force list of countries with “strategic deficiencies” in their anti-money laundering and combating financing of terrorism frameworks.
- 48. BANKING OVERVIEW good price”,and expressed confidence in long-term growth. The Spanish lender brings its expertise in mortgage lending and small and medium enterprise (SME) finance in particular to Turkey – two current- ly under-banked segments. “Many Turkish banks are looking into ways to increase services to SMEs,” Ümit Leblebici, general manager at TEB, told OBG. “Given their large share of total companies and relatively limited use of financial services, they offer a huge opportunity to banks that are willing to become their partners and to help them grow”. SME lending is also an area of focus for Italian bank Intesa Sanpaolo, which in April 2015 announced plans to expand further in Turkey, having opened a branch in Istanbul in June 2014. Intesa will also look to serve the 1200 or more Italian-owned companies present in Turkey, as well as new entrants from its home country, bank officials said. The BBVA and Intesa announcements followed one of the biggest deals in recent years, the €2.92bn acquisition of a 99.85% stake in DenizBank by Rus- sia’s state-owned Sberbank from Belgium’s Dexia in June 2012. The deal reflects both growing interest in Turkey from emerging market banks, and the real- ity of exits by Western institutions under pressure after the financial crisis. Dexia’s sale was forced by the French and Belgian governments as part of a restructuring plan, and it achieved only 1.33 times Garanti’s book value, having made the acquisition at a ratio of 4.62 times book value. Both HSBC and Citigroup, two major internation- al institutions, have also announced plans to down- size in or exit the Turkish market, with HSBC look- ing to shed its retail division, which has 300 branches and assets of around €3bn. RATINGS:International ratings agencies keep a close eye on the sector, and ratings movements can affect the borrowing costs of Turkish financial institutions. With Turkish banks having taken on substantial for- eign debt, ratings can be a gauge of the borrowing costs they are set to bear. In April 2015 Moody’s Investors Service said it would be maintaining a neg- ative outlook for Turkey, and a Baa3 rating, with low- er economic growth and currency volatility drivers behind its decision, and that both would lead to the continuation of a negative outlook for the banking sector. Fitch reached similar conclusions. Pressure on the TCMB from President Recep Tayyip Erdoğan also had an impact on the ratings, calling into question the bank’s independence from politi- cal interference and shaking economic confidence. With parliamentary elections due in June 2015, Erdoğan has been keen to boost flagging growth, while the TCMB has tried to stick to its official man- date of price control, trimming rising inflation. In early 2015 senior government representatives mounted a campaign to convince investors that the central bank remains independent (see analysis). OUTLOOK: As of mid-2015, a consensus has formed on the Turkish banking sector: it is secure, has a pos- itive growth outlook, and is well-capitalised enough to deal with rising risks from foreign exchange expo- sure and investor sentiment. However, these risks should not be discounted, and further depreciation of the lira could make the going tougher for exposed banks. The environment is already more difficult, as economic growth has fallen, inflation has risen and political uncertainty has emerged. In this context, moves in 2013 to trim loan growth seem prescient. Despite a more becalmed market in 2015, the out- look for the longer term is still very positive. “The demographics offer considerable opportunities for banks looking to enter the market. Where else can a new player service more than 100,000 customers in its first year?”, Hüseyin Özkaya, a board member and general manager at Odeabank, told OBG. Turkey has one of the world’s largest emerging economies, a large and growing population, and a diversified eco- nomic base. The continued entry of new players to the market is indicative of the sector’s potential. 46 Banks are looking to increase the range of services they offer to small and medium-sized enterprises The sector is sufficiently well capitalised to cope with rising risks In April 2015 one major ratings agency reported that it would be maintaining a negative outlook for Turkey, and a Baa3 rating, with lower economic growth and currency volatility key drivers behind its decision. www.oxfordbusinessgroup.com/country/turkey
- 49. BANKING INTERVIEW Erdem Başçı,Governor, Central Bank of the Republic of Turkey (TCMB) How will tapering of the US Federal Reserve’s quantitative easing programme affect Turkey’s economy?Whatisbeingdonetoprepareforthis? BAŞÇI:TheFed’ssignalsontaperingquantitativeeas- ing since May 2013 have increased volatility in the global appetite for risk and caused capital to flow out of emerging economies. As of the first quarter of 2014, capital flows to emerging markets, partic- ularly in portfolio investment, remain weak. Most emerging-market currencies fell against the dollar, especially in the early days after the Fed signalled its exit strategy. At first, depreciation in the Turkish lira was somewhat limited relative to currencies in similar emerging markets. However, due to the rise in domestic uncertainty towards the end of 2013, the lira fell further against the dollar, and Turkey’s risk relative to its economic peers increased. In response, the TCMB boosted its sales of foreign exchange reserves and implemented a direct cur- rency intervention followed by a strong front-loaded monetary tightening in an interim meeting on Jan- uary 28. Under current circumstances, tight mone- tary policy will not only contribute to price stability but will also support macroeconomic stability by reducing exchange rate uncertainty and risk per- ceptions. All told, the Turkish lira performed relative- ly well after the tightening delivered in January. How prepared is the Turkish banking system for thepossibilityoffuturemacroeconomicshocks? BAŞÇI: As part of the economic programme adopt- ed following the 2001 economic crisis, the Turkish banking system underwent major structural reform. This was a key factor that helped the Turkish econ- omy recover from the global financial crisis of 2009 relatively quickly. Since then, the Turkish banking sector has maintained a sound structure in terms of asset quality and capital adequacy. The share of non- performing out of the total is actually relatively low, at about 2.9%. The sector’s capital adequacy ratio, at approximately 15%, is well above both the legal minimum of 8% and the regulator’s minimum of 12%. The ratio of equity to total assets, i.e. the leverage ratio, is well above the 3% minimum set by the Basel III regulations and is on a stable course. Stresstestsalsoconfirmthatthesystemhasstrong capital buffers that would contain the effects of possible adverse shocks to exchange rates, asset prices, interest rates and non-performing loans. Though the sector’s foreign liabilities have increased considerably in the post-crisis period, banks do not have difficulty maintaining external funding, even in times of tightened global liquidity, as shown by the sector’s relatively high roll-over ratios. What is the outlook for inflation and how is the TCMB preparing to help stabilise prices? BAŞÇI: As of March 2014, consumer price inflation standsat8.4%year-on-yearandisexpectedtoremain high due to the unfavourable course of food prices and the lagged effects of the recent currency depre- ciation. The TCMB, expecting that the factors driv- ing inflation will keep it considerably above the 5% target for a while, has opted for monetary tighten- ing to prevent deterioration in inflation expecta- tions and pricing behaviour. The combination of a tight monetary policy stance and weak portfolio flows have begun to be reflected in the growth rates for loans and private domestic demand. Data for the first quarter of 2014 indicate that there has been somedecelerationinprivatedomesticdemand,which will support disinflation in the forthcoming period. Meanwhile, the contribution of net exports to economic growth is expected to increase, as exter- nal demand for Turkish goods recovers. This, in turn, should bring about a significant improvement in the nation’s current account deficit in 2014. Thanks to the recent deceleration of consumer loans, disinfla- tion will resume from June 2013 onwards. Infla- tion is expected to reach the 5% target by mid-2015. 47 THEREPORT Turkey 2015 Curbing volatility OBG talks to Erdem Başçı, Governor, Central Bank of the Republic of Turkey (TCMB)
- 50. BANKING INTERVIEW Ali FuatTaşkesenlioğlu, CEO, Halkbank How did recent changes in the global macroeco- nomic landscape affect Turkish banks? TAŞKESENLİOĞLU: In 2014 the global economy con- tinued on a path to normalisation, with the US econo- my signaling a strong recovery and the EU displaying stable growth figures. Tapering by the Fed and easing ofconcernsaboutapossibledropinliquidityabundance inemergingcountriesgavewaytoreliefaftertheEuro- peanCentralBankinitiatedmonetaryexpansion.These developments led to lower global economic growth figures compared to previous years, but the Turkish economy continued to perform soundly during this period, thanks to the resilience acquired as a result of consistent economic policies over the last decade. Global economic developments affected the bank- ingindustry’sprofitabilitybetweentheendof2013and the first quarter of 2014. However, we project gener- aleconomicrecoverytobringaturnforthebetterand leadtoimprovedprofitmargins.Weexpectpositiveprof- itability results in the Turkish banking industry in 2015. With its continued growth performance, we are con- fident that the Turkish banking sector will continue to maintain its influence on the international markets. CanTurkishbankshandlefurtherexternalshocks? TAŞKESENLİOĞLU:TheTurkisheconomyispushingfor- ward with successful growth figures and, as a result, it has become a major global actor. Turkey has gone through an economic restructuring, after its economy andbankingsectorreceivedaseriousblowinthe2001 crisis. Following restructuring, Turkey achieved stable resultsandescapedtheglobaleconomiccrisisof2008 unscathed. We believe that thanks to sound balance sheet management, Turkish banks will continue oper- ating, with nominal impact from global fluctuations. How are banks diversifying their loan portfolios to lendtosmallandmedium-sizedenterprises(SMEs)? TAŞKESENLİOĞLU: We focus our solutions on the main product categories designed to facilitate trade, guarantee collections, improve productivity, cut costs, encouragecapacityincreasesandnewinvestments,and provideassuranceforentrepreneurswhocannotsecure collateral,andwealsoofferloanstonewestablishments. Oursupportisnotlimitedtoourownresources:wepro- vide SMEs with funding from abroad, through proto- colssignedwithinternationalfinanceinstitutions,such astheEuropeanInvestmentBankandtheWorldBank. CreatingplatformstosupportthegrowthoftheSME segment has been an industry priority. Developing a strong,well-roundedanddiversifiedSMEsegmentwill benefitTurkeyinthelong-run,asbeingover-relianton any single or even a few industries is risky, especially in times of uncertainty. Concrete steps have been taken which affirms the industry’s efforts in harmonising lendingportfoliosamongtheretail,corporateandSME segments. Accordingly, banks have begun to renovate service platforms, most notably online, with SMEs in mind. Online advancements have made it easier for customers to apply for SME products and services. Anotherareaofimprovementisdirectconsultation, where there is a dedicated SME support team offering advice on matters including business operations, legal issues, taxes and more. Numerous deposit and invest- ment products are also available to increase deposit ratesandencourageaccountholderstoinvesttheirsav- ingsinbanks.Webelievethatitiscriticalforconsumers to analyse their risk profiles when determining the most suitable savings instrument. How are banks becoming more sophisticated and diversified, and where are they investing? TAŞKESENLİOĞLU: There is a transformation taking place in every industry and it is crucial to stay dynam- ictoachievesuccess,andbankingisnodifferent.Tech- nologyoffersnewopportunitieswitheachpassingday. Today, the industry is flourishing as it focuses on tech- nologicalinnovations.Accordingly,banksareinvesting intechnology,andalternativedistributionchannelsare currently taking the lion’s share of banks’ investments. 48 Technological shift OBG talks to Ali Fuat Taşkesenlioğlu, CEO, Halkbank www.oxfordbusinessgroup.com/country/turkey
- 51. BANKING ANALYSIS New arrivalsare attracted by the dynamic and expanding market The foreign presence in the Turkish banking market is currently undergoing a shake up, with new entrants arriving looking to expand their presence in a large and dynamic emerging market, while others are look- ing to pull out due to external pressures. RAISING THE STAKES: In 2011 Spain’s Banco Bil- bao Vizcaya Argentaria (BBVA) bought 24.9% of Garanti Bank for €4.4bn. In November 2014 it raised this stake to 40% for an additional €2bn, giving it control of the bank’s board (with seven of 10 mem- bers) and reflecting its confidence in the Turkish market’s outlook, despite the economic slowdown and a dip in profitability, as well as political tensions. “We believe that Turkey is a very exciting market where we can achieve strong long-term growth,” Jaime Saénz de Tejada, BBVA’s chief financial offi- cer, told the press. “We are maximising economic exposure to Garanti at a very good price.” BBVAboughtthe14.89%stakefromTurkey’sDoğuş Holding, which will retain a 10% share in Garanti. The deal allowed BBVA to take control of the board and increase its holding in Garanti before the March 2016 date stipulated in its investment deal, reflect- ing its keenness to expand its Turkish presence even at a time when the banking sector faces a degree of uncertainty. BBVA is under no obligation to buy out the bank’s remaining shareholders. BBVA asserts that Garanti benefits from the moth- er bank’s experience in mortgage and small and medium-sized enterprise (SME) lending in particu- lar. Both segments are gaining traction as new cus- tomers engage with banking services, and have been underserved by developed economy standards. NEWCOMERS:Anotherofthebiggestdealsinrecent years was the €2.92bn acquisition of a 99.85% stake in DenizBank by Russia’s state-owned Sberbank from Belgium’s Dexia in June 2012. Sberbank also acquired Austrain and Russian units of DenizBank in the deal. German Gref, Sberbank’s CEO and chairman, said that banking penetration was low in Turkey, giving “great potential for growth”, and that it had the most attractive market outlook in Europe over the next 15 years. Sberbank has also been expanding in Cen- tral and Eastern Europe as Western lenders have backed away following the global financial crisis. Dexia’s sale of DenizBank is indicative of this process, with the Belgian bank selling its Turkish subsidiary for 1.3 times its book value, having acquired it for 4.6 times its book value in 2006. It withdrew from Turkey under obligation from the French and Belgian governments under a state-led restructuring plan. Sberbank’s strategy for expansion in Turkey is organic growth, and it has invested strongly in mar- keting to support this. However, DenizBank has not been unaffected by sanctions imposed by the US and the EU. In October 2014, international press report- ed that DenizBank was seeing routine transactions with Western counterparts blocked due to sanc- tions. While the US waived sanctions on DenizBank itself, software has been unable to distinguish some legal transactions from the Turkish bank from sanc- tioned movements by the mother company. NEW OPPORTUNITIES: In April 2015, Italian bank IntesaSanpaoloannouncedplanstoexpandinTurkey, havingopenedabranchinIstanbulinJune2014.Inte- sa is the second Italian bank in the country, follow- ing UniCredit, Italy’s largest bank and a big player in Central and Eastern Europe. In partnership with Koç Holding, a major Turkish company, UniCredit is a major shareholder in YapıKredi. Intesa’s Istanbul branch opened with initial share capital of €226m, the minimum required for open- ing a bank in Turkey. Intesa’s executive vice-chair- man, Marcello Sala, said that it would probably focus on corporate lending in Turkey, particularly for the 1200-plus Italian-owned companies present in the country. This is a common model for banks launch- ing in emerging markets with a corporate focus, sup- porting clients from the home country. The bank aims to support Italian firms in sectors including Mortgages and small and medium-sized enterprise lending are gaining traction as new customers engage with banking services. Both have been underserved in Turkey by developed economy standards. 49 THEREPORT Turkey 2015 Entries and exits The international presence in the sector is set to change markedly
- 52. BANKING ANALYSIS infrastructure, textiles,energy and manufacturing, which are looking to enter the Turkish market and take advantage of investment incentives. However, Sala also said that the bank saw potential in the SME segment, comparing Turkey’s thriving but under- banked SMEs to those of Italy, where they account for nearly 70% of all companies. Intesa had previously expressed interest in acquir- ing a stake in Garanti and Finansbank, but in the end opted to acquire its own banking licence in 2012. For the time being, Intesa’s strategy remains organ- ic growth, rather than acquisitions. Expansion in Turkey fits with Intesa’s international policy of expan- sioninemergingmarkets;thebankalreadyhasapres- ence in Brazil, China, Russia and Poland. Sala said he was aware of the risks to the Turkish banking sys- tem, including levels of private debt, the current account deficit, inflation, and the lira’s depreciation. In April 2014 Göksenin Karagöz, a banking ana- lyst at Standard and Poor’s, said that Turkey’s bank- ing sector was likely to attract more investments from foreign institutions, particularly Gulf banks seeking to tap into high profits and excellent growth potential. Most Gulf markets, while affluent, are rather small and fairly heavily banked, and thus the large and relatively low-penetration Turkish market represents an interesting opportunity. Karagöz cit- ed Commercial Bank of Qatar, Kuwait’s Burgan and SaudiNationalCommercialBankasinstitutionswhich have entered Turkey in recent years. LEAVING THE SCENE: While international players are entering Turkey, and more may join in the com- ing years, others have decided that the increasing- ly competitive market is not for them. In April 2015 HSBC, Europe’s largest bank, announced that it was accelerating plans to pull out of emerging markets, with a withdrawal from retail banking in Turkey top- ping the list. The bank has come under pressure, partly due to losses in some of its emerging market operations. In Turkey, the bank earned revenue of €596m in 2014 but still posted a net loss of €117m. The bank is reportedly already scoping out poten- tial buyers for its 300-branch Turkish network. In April 2015 it was reported that HSBC had start- ed the process of selling its branches in Turkey. How- ever, interest in buying its branch network could be muted in the current banking environment, given the weakening growth outlook and softening investor sentiment. The bank’s Turkish network – the 13th- largest on the market – is an awkward size, not big enough to provide a potential new entrant with the scale to gain a strong foothold in the market, yet extensive enough to prove costly for smaller local players looking to step up. Larger players present on the market already have extensive branch networks, making the acquisition less appealing for them. Nonetheless, Citibank ana- lysts said that HSBC’s retail business in Turkey, with approximately €3bn of assets, could be sold for around book value, allowing the British institution to exit without a loss, though also without a profit. Reports suggest that HSBC may be encouraged to sell its Turkish investment and corporate banking divisions with its retail business to secure a sale, with potential buyers coming from China or the Gulf, where banks are more cash-rich and enthusiastic about expansion than in the West. Yet the size and growth potential of the Turkish market will make HSBC reluctant to offload these valuable assets. EQUITY EXIT: In March 2015 Citigroup announced that it had sold its remaining 9.9% stake in Akbank, the second-largest bank by market value, for €866m, with a €603m loss. Citi acquired a 20% stake in Akbank 2007 and exited via sales to SabancıHold- ing, Akbank’s main shareholder. The US-based bank will continue to service corporate clients, it said. The bank’s operations have been hit by the inter- national financial crisis, bringing down its capital values, and analysts said that the sale reflected concerns relating to the outlook of Turkish banks’ futureequityvaluesinthecontextofthedeclininglira. 50 Turkey’s banking sector is likely to attract further investments from foreign institutions Some players are looking to pull out due to external pressures Most Gulf markets, while affluent, are rather small and heavily banked, so the large, relatively low-penetration Turkish market is an interesting opportunity for Gulf banks. www.oxfordbusinessgroup.com/country/turkey
- 53. BANKING INTERVIEW Suat ‹nce,Deputy Chief Executive, Türkiye İfl Bankası How important is foreign investment to the Turk- isheconomy?Whyshouldmultinationalsconsider Turkey an attractive market in which to invest? İNCE: Over the past decade, foreign direct investment (FDI)intheTurkisheconomyhasrisenconsiderably.As one of the fastest-growing economies in the OECD, Turkeyhasattractedmorethan$120bnofforeigncap- ital in the last 10 years. Indeed, Turkey was the 13th most attractive FDI destination in 2012, received $12.7bnofFDIin2013and,asofDecember2013,had about 37,000 foreign firms operating in the country. Given Turkey’s reliance on foreign capital to finance itssizeablecurrentaccountdeficit,thegovernmenthas made it a major goal to attract larger amounts of FDI. It sees this as more sustainable than portfolio inflows, which are subject to sudden swings of volatility. Besides being a gateway between Europe, Asia, the MiddleEastandAfrica,Turkeyhasmanyattractivequal- ities for foreign investors: a large and growing domes- ticmarket,aliberalandsecureinvestmentenvironment, a mature and dynamic private sector, a high-quality and cost-effective labour force, the Customs union it shares with the EU, developed infrastructure, an insti- tutionalised economy and a competitive tax system. When investing in the Turkish market, what spe- cialised banking needs do multinationals have? İNCE:MostTurkishBankshavelargenationalnetworks with commercial branches across the country, experi- enced field teams, customer relationship managers andcustomerrepresentatives.Throughthesenetworks, Turkish banks are able to serve their clients effective- ly from the incorporation phase, helping to identify their needs and facilitating growth. While the banking system in Turkey is very mature, similar to those in Europe and other more developed markets, there are slightdifferencesbetweenthesystemsthatmaybecon- fusing to foreign investors – especially what types of financialproductsandservicesaremostsuitabletothe Turkish market. Turkey’s strong local banks, with their significant clout in certain industries, can help foreign entrants navigate the market. For example, as a part ofİşbanks’strategyofbeingacustomer-orientedbank, anewandunprecedentedunitwasestablishedin2012 thatisdedicatedtomeetingtheneedsofmultination- al companies that have operations in Turkey. Anothercommonissuewithmultinationalsthathave started their operations recently is finding domestic sources of financing for their investments. Turkey- based branches of many of these foreign firms are young, relatively small and do not have strong credit histories, making it hard for them to attract loans. To remedythis,itisimportanttotakeintoaccounttheglob- al operations and growth plans of the mother compa- nywhenevaluatingloanprospects,makingiteasierfor local subsidiaries to leverage their parent companies’ balancesheetstoacquirefundingandreceivehigh-qual- ity services regardless of size. This approach is only possiblewithateamexperiencedandspecialisedinpro- viding banking services for new foreign companies in their growing phase. This innovation, plus other solu- tions being devised for companies backed by foreign capital, will help multinationals investing the country. WhichsectorsholdthebestopportunitiesforFDI? İNCE:IfyoulookatthebreakdownofFDIbysector,three stand out as attracting the most foreign capital in the lastfiveyears:finance(30%),manufacturing(27%)and energy (19%). Banks and insurance companies have beenthemainbeneficiariesofthisinflow,butweexpect otherfieldsinthefinancesectortoattractmoreinter- est in the future, such as leasing, factoring and asset management.Asforenergy,theongoingliberalisation processhascreatedamorevibrantandcompetitivemar- ket, which has already seen large foreign investments and is likely to see more in the near future. There are alsoconsiderableopportunitiesacrossenergysub-sec- tors in each link of the value chain. Industry is anoth- er area with high potential: for example, machinery manufacturing has seen a 64% rise in FDI since 2005. 51 THEREPORT Turkey 2015 Attracting investment OBG talks to Suat İnce, Deputy Chief Executive, Türkiye İfl Bankası
- 54. BANKING INTERVIEW Hikmet Ersek,President and CEO, Western Union HowisTurkeyseenbyglobalfinancialfirmslook- ing to expand their operations in the region? ERSEK: Half the population in Turkey is under 30, andtheyareverytech-savvy–thecountryranks18th in the world by number of internet users, and 66m people have mobile phones out of a population of 77m. Banks and other financial institutions in Turkey and around the world are looking for innovative ways to attract new customers and retain current ones. Many are introducing services like mobile banking and remittances to attract these new customers. Some are partnering with money transfer firms like Western Union to offer services like cross-border money transfer. Western Union has partnerships with a number of banks in Turkey, including Garan- ti Bank and Akbank, to allow customers to receive money transfers at ATMs throughout the country and to manage their money transfers online. We also offer online banking with TEB and Şekerbank. What opportunities for innovation do expat and migrant communities in Turkey present banks? ERSEK: According to the Ministry of Foreign Affairs, around 5m Turks live outside of Turkey in countries like Germany, France, Russia, the UK, the Nether- lands,Belgium and the US. Many of these expats send money home to their loved ones: in 2013 they remit- ted nearly $1bn. In addition, migrants from around the world are moving to Turkey, especially from East- ern Europe and the Commonwealth of Independent States, and they send money from Turkey to their home countries. Banks in Turkey and worldwide have a unique opportunity to serve these customers, with a range of services that allow them to manage their money how, when and where they want. How can large payments companies aid global efforts against money laundering and fraud? ERSEK: One of the most important things these companies can do is simply to uphold the highest standards of integrity, which to me means investing in compliance. Compliance and consumer protection are not just departments or sets of rules to follow; they are at the heart of what it means to be a respon- sible company. At Western Union, we are strength- ening our programmes, hiring more people and implementing more measures in the increasingly complex, demanding and fast-changing global reg- ulatory environment. We believe the steps we are taking are the right ones for the company, and the hope is that these investments will help us differ- entiate and improve our position. Together, every- one in the financial services industry must work harder than ever to protect the money transfer sys- tem from misuse and to educate customers about fraud and money laundering. They should do this not only because it is required, but because it is the right thing to do for business and for the millions of peo- ple around the globe who depend on us. Inwhatwayscantechnologyhelpsmallandmedi- um-sized enterprises (SMEs) in emerging mar- kets meet the challenges of expanding abroad? ERSEK: Technology can help SMEs in many ways. In more developed countries like the US, SMEs often import goods and thus need to make payments in several different currencies. They need access to a variety of tools to help them pay online, track their payments and manage foreign-exchange risk. SMEs in emerging countries are often on the receiving end of cross-border transactions. They need access to technology that allows them to receive payment in whatever currency they want, and also trans- parency in transactions so that they can be sure they receive the amount they are supposed to. Not just SMEs can benefit from these services; so can entities like NGOs – for example, Mercy Corps, which needstogetfundstoruralareasafteradisaster.Tech- nology can help them do that – delivering funds in minutes from around the globe for payout in cash. 52 Outside looking in OBG talks to Hikmet Ersek, President and CEO, Western Union www.oxfordbusinessgroup.com/country/turkey
- 55. BANKING ANALYSIS The non-performingloan ratio is currently relatively low As the IMF and others have noted, the Turkish bank- ing system’s non-performing loan (NPL) ratio is rela- tivelylow,despitetherecenteconomicslowdownand foreign exchange risk. The ratio varies across the sec- tor, however, with some banks more susceptible than others. While NPLs are not high by regional standards –andevenbythoseofsomeeurozonemembers–and are well-provisioned, analysts and sector players have becomeincreasinglyawareoftherisksofarisingratio to balance sheets. After several years of rapid credit growth,anumberoffactorscoulddriveNPLsupwards, includingslowingeconomicgrowth,thefallinthelira, and cooling investor sentiment. UNDER CONTROL: As of late April 2015, the system- wideNPLratiostoodat2.8%,downslightlyfrom2.82% at the end of 2014, according to the Turkish Banking RegulationandSupervisionAgency.Theratiohasbeen fairly steady in recent years, standing at 2.7% at the end of 2013 and 2.84% at the end of 2012. NPLs have been brought down since the turn of the millennium,fromashighas17.5%in2002,andremain atlevelsbelowthoseseenjustbeforetheinternation- al financial crisis. System-wide NPLs rose from 3.04% in March 2008 to 5.41% in October 2009 as the econ- omy slipped into recession, before falling back below 3% by June 2011. The ratio rose to 3.01% in November 2014, then once again dropped. While Turkey’s NPL ratio is impressive, it has been reduced partly by the sale of bad loans to manage- ment companies by banks. In December 2014, for example, Akbank sold its NPL portfolio, which totalled TL250.5m (€88.2m), to Efes Asset Management for TL41m (€14.4m). The month before, ING Bank Turkey had sold TL47.86m (€16.9m) in NPLs for TL7.25m (€2.55m) to an unnamed buyer. INTERNATIONAL COMPARISON: The NPL ratio com- pares very favourably to many European countries. In Central and Eastern Europe, a region in which Turkey is sometimes included by financial institutions, NPLs have reached as high as 20% in the wake of the crisis. As of April 2015, the NPL ratio stood at 5.6% in Russia and 8% in Poland; Turkey has also been compared to these two other sizeable emerging markets. As of 2014, NPLs in the eurozone stood at 7.8%, according to professional services firm EY, reaching 14.6% for Italy and 13.3% for Spain. Turkey’s ratio was comparable to that of Germany – a historically debt- averse society – where the ratio was 3%. NPLs across emerging markets are more variable – in China, for example, the ratio stood at 1.2% in 2014, according to the IMF, while in India it was 4.3% and in Pakistan it was 12.3%. In some countries, authorities have acted to write off or restructure NPLs, keeping the level down.Insome–andtoanextentthisappliestoTurkey in recent years – the rapid growth of loan books has helped “dilute” NPLs, which are rising in value terms. InTurkey,creditgrowthaveragedover25%peryear between 2010 and 2013, according to Bloomberg. Though it has been trimmed since regulatory meas- ures were introduced in 2013, the expectation is for double-digit growth up to 2018. With Turkey’s econ- omy cooling, this has increased the risk of NPLs. RISKRISING:InNovember2014GarantiBankwarned that bad loans would grow “across the board” in the Turkish banking sector, as Bloomberg said that NPLs posed the greatest risk to banks’ profitability for over adecade.Thesamemonth,DenizBank’sgeneralman- ager, Hakan Ateş, said that tackling NPLs would have to be a priority for the sector in 2015. ThisfollowedHalkbank’sannouncementthatithad cut its end-2014 profit forecast by 15%, saying that it wasfacingNPLstotallingTL1.08bn(€380m).Theover- all sector’s profit in the first nine months of 2014 was TL18.8bn (€6.62bn), down from TL19.8bn (€6.97bn) a year previously. Bad consumer debts grew by 41% in the 12 months to September 2014, the highest rate since2010,whenTurkeywasstillabsorbingtheimpact oftheglobalcreditcrunchandsubsequentrecession. Analysts expect NPLs to rise in the coming years, weighing on earnings at a time when buffers have Various factors could drive non-performing loans upwards, including slowing economic growth, the falling lira and cooling investor sentiment. 53 THEREPORT Turkey 2015 Credit growth averaged more than 25% a year between 2010 and 2013. While it has slowed considerably since regulatory measures were introduced in 2013, double-digit growth to 2018 is expected. Loan rangers The main players are alert to the risk of the level of bad debt rising
- 56. BANKING ANALYSIS beenreduced.Sensitivetoinflationandunemployment, the consumersegment is particularly susceptible to NPLgrowth.AriseinNPLscanoccurdespitetheslow- down in credit growth, as there is invariably a lag between lending and the build up of bad debt. In April 2015 the World Bank cut its 2015 GDP growth forecast from 3.5% to 3%, due to domestic uncertainty,anunexpectedinventorybuild-upandthe strength of the dollar. This followed growth of 2.9% in 2014, below the government’s 3.3% target and down from4.2%in2013.Thebankraiseditsforecastofinfla- tion – which erodes spending power and consumer confidence–to7%fromapreviousprojectionof6.7%. BUILDING BLOCKS: Risks may also arise from expo- sure to the construction industry. Loans to the sector accountforsome66%ofGDP,androserapidlyin2014. The IMF noted in December 2014 that a substantial dropinconstructionemploymentmightsignaladown- turn, but that there had not been a significant rise in NPLs in the sector. Many loans in the sector are for- eign currency denominated, increasing risk. As the IMF pointed out, construction – particularly residential property construction – does not always have a foreign currency hedge. Even with rents and purchase prices denominated in euros or dollars, incomes remain in lira: most end-users earn in local currency, leading to exchange rate risk for developers and those that lend to them. Furthermore, the fund warned that the flow of lending to construction may be depriving more productive sectors of capital. DIFFERINGVIEWS:However, in April 2015, Deutsche Bank said that the risks to Turkish banks should not be overstated, noting that the top five banks’ NPL ratioshadnotrisennoticeably.Thisfollowedwarnings that the lira’s depreciation would make it harder for Turkish companies to repay loans, despite regulations limiting foreign currency lending to businesses. KubilayÖztürk,aneconomistatDeutscheBank,said that only an event similar to the 2007 collapse of Lehman Brothers would create a “serious problem” for Turkish banks. Reports noted that Turkish banks’ profitability in the first quarter of 2015 had beaten expectations. Deutsche’s note may not fully take into account the longer term outlook, with the effect of the depreciating lira still fully to feed through to the broader economy. Furthermore, with an election in June, investor uncertainty could push down the cur- rency further, or trim growth with negative effects on employment and wages. However, banks should be able to cope with NPLs in any case. VARIATIONS: A 2014 report by international invest- ment bank JP Morgan revealed the variation in NPL ratios between different Turkish financial institutions. FinansbankpostedanNPLratioof6.5%inthefirstquar- ter of 2014, higher than the average, while Akbank’s wasjust1.5%.İşbank’sstoodat1.8%,Garanti’sat2.8%, Halkbank’s at 2.7%, Vakıfbank’s at 4% and YapıKredi’s at 3.5%. Perhaps due to regulatory imperatives, Tier 1 capitaladequacyratios(CARs)showedatighterrange, from 11.3% for YapıKredi and Vakıfbank to 13.5% for Akbank. Finansbank and İşbank’s Tier 1 CAR stood at 12.3%, Halkbank’s at 12.5% and Garanti’s at 12.3%. The Turkish Banks Association has highlighted the risktostate-ownedbanksinparticular.InJanuary2015, it noted that the volume of NPLs in the segment had grown by 131% between 2009 and 2014, compared to an increase of 62% in the private sector. The total volume of NPLs on public banks’ balance sheets hit TL10.22bn (€3.6bn) in the third quarter of 2014,almostdoubletheTL5.48bn(€1.93bn)fiveyears before. Of the TL12.34bn (€4.34bn) increase in sec- tor-wideNPLsin2009-14,thestatesegmentaccount- ed for TL5.8bn (€2.04bn), despite having only 30% of overall sector assets. Ziraat Bank was particularly affected,seeingitsNPLvolumerise224%overfiveyears, while Halkbank’s rose 131% and Vakif’s 93%. Howev- er, Ziraat’s rise came from a lower base: by Septem- ber 2014, the bank’s bad loan book totalled TL2.64bn (€930m), compared to TL3.67bn (€1.29bn) for Halk- bank and TL3.91bn (€1.38bn) for VakifBank. The rise can partly be attributed to the structure of public tenders. Ramazan Taş, professor at and chair of Turgut Özal University’s department of economics, told local press that the NPL ratio of state banks had been driven up by lending to firms executing public projects,someofwhichhavestruggledtorepayloans. Restructuring of loans before they reach maturity has helped government-owned institutions in bringing down NPL ratios, if not necessarily improving their balance sheets. The NPL ratio did not rise as expect- edinthefirstfewmonthsof2015–indeed,itdropped very slightly – reinforcing the argument that bad debt remains under control, and that currency risk and the effects of political uncertainty to the banking sector should not be exaggerated. Public banks may be more exposed, but they also enjoy exchequer backing. Regulatory changes have helped reduce credit risk, and banks look well-positioned to absorb shock in all but a severe crisis. However, banks are aware of the growth in NPL volumes after years of rapid credit expansion, and are right to look to address the issue. 54 Turkish banks’ profitability in the first quarter of 2015 surpassed most expectations The volume of non-performing loans in the state-owned banking segment grew by 131% between 2009 and 2014, compared to an increase of 62% in the private sector. www.oxfordbusinessgroup.com/country/turkey
- 59. BANKING ANALYSIS Ratings movementscan affect financial institutions’ borrowing costs International ratings agencies keep a close eye on Turkey’s banking sector, given its size and importance, andthepenetrationofmajorforeigninvestors.Ratings movements can affect the borrowing costs of Turkish financialinstitutionsand,atatimewhenTurkishbanks havetakenonsubstantialforeigndebt,canbeagauge of the borrowing costs they are likely to bear. POLITICALRISK:InApril2015,Moody’sInvestorsServ- ice reported that it would be maintaining a negative outlook for Turkey and a Baa3 rating. It said that low- er economic growth and currency volatility were the keydriversbehinditsdecision,andthatbothwouldlead to a continued negative outlook for the banking sec- torspecifically.Dayspreviously,FitchRatingshadreached similar conclusions in its report on Turkey. Pressure on the Central Bank of Turkey (TCMB) from President Recep Tayyip Erdoğan also had an impact on the ratings, calling into question the bank’s independ- encefrompoliticalinterferenceandhelpingdrivedown thelira,aswellasshakingbroadereconomicconfidence. WithparliamentaryelectionsdueinJune2015,Erdoğan has been keen to boost flagging growth, while the TCMB has tried to stick to its official mandate of price control, trimming rising inflation. In March and April, senior government representatives – including the primeminister,AhmetDavutoğlu–mountedacampaign toconvinceinvestorsthatthecentralbankremainsinde- pendent, travelling to the US with this message. FITCH:InDecember2014,Fitchforecast“atoughoper- atingenvironmentforTurkishbanksin2015”,whilenot- ing its fairly stable outlook thanks to risk buffers. The agencysaidthatbankswouldfindthegoingharderdue to slower economic growth, a degree of asset quality deteriorationandcompetitionfordeposits(whichtends to narrow interest rate spreads and thus margins). Fitch said that it expected GDP growth in the medi- umtermtoremainbelowthehighsofrecentyears.The agency said that rising reliance on short-term foreign currency financing was the biggest risk to the sector outlook, but that while interest rates and exchange rates would remain volatile, it expected that volatility to be manageable. It said that international financing would remain accessible. Asset quality erosion would be driven by the matu- rity of loan portfolios, a rise in consumer debt and the declining lira, which could make it harder for foreign currency borrowers to service their debts. High inter- est rates and competition for deposits would drive up funding costs, but pressure on margins would proba- blyonlybemoderate,withTurkishbankslikelytoreprice loans as they have done in the past. Likemostanalysts,Fitchhighlightedtheriskfromthe rapidriseinforeign-currencyliabilities,withbanks’for- eign currency debt trebling since 2008, with shorter maturities. This leaves them vulnerable to shocks and a reversal in investor sentiment cutting off market access, but Fitch asserts that foreign currency liquidi- ty remains ample enough to deal with most scenarios. S&P: Standard and Poor’s (S&P) issed a more upbeat assessment in November 2014, saying that Turkey’s banks remained resilient despite tough conditions, thanks partly to regulatory moves to trim lending and credit card expenditure. S&P said that lower credit growth would be positive forthesector.Theagencynotedsomemargincontrac- tion,butfromarelativelyhighlevel,andanon-perform- ing loan (NPL) ratio of below 5%, though this is vulner- able to external and internal shocks. Bankshavealsobenefittedfromamplegloballiquid- ity, with the European Central Bank embarking upon quantitative easing, and it and other central banks maintaining low interest rates. In February 2015 S&P said that the seizure of Bank AsyabytheBankingRegulationandSupervisionAgency did not represent a systemic risk to Turkey’s banks. It added that it was not a sign of a “determined politici- sation of Turkey’s regulatory institutions”. One reason that contagion from Asya’s seizure does not present a system risk is the bank’s small size;thebankholdsjust0.1%ofTurkey’sbankingassets. Pressure on the Central Bank of Turkey from the president has had an impact on ratings, calling into question the bank’s independence from political interference and helping drive down the lira, as well as shaking broader economic confidence. 57 THEREPORT Turkey 2015 Banks have benefitted from ample global liquidity, with the European Central Bank embarking upon quantitative easing and many major central banks setting low interest rates. Rate and see The agencies’ verdicts shine a revealing light on the sector
- 60. BANKING ANALYSIS BREAKDOWN: Oneof the most thorough recent reviews of the outlook for individual banks was con- ducted in June 2014 by Moody’s Investors Services. The agency lowered its rating on Akbank, saying that pressures from the operating environment and the expectation of loan growth outstripping capital gen- eration would weaken its credit profile. However, Moody’ssaidthatthebankhadastableoutlook,reflect- ing its resilience due to its strong franchise, core cap- ital and granular deposit funding profile which means only moderate reliance on market financing. Moody’s was also sceptical of the outlook for DenizBank, saying that its strategy of increasing com- mercial lending via new products and high loan book growth were potential risks. It noted that DenizBank’s Tier 1 capital ratio of 8% gives it a limited loss buffer, andthatthebank’sexpansionplansarereliantoncash injectionsfrommothercompanySberbank,whichfaces sanctions in the EU and US, and is suffering from the drop in the Russian rouble. The downgrade of Şeker- bank’s rating and its negative outlook reflect its weak- er capital position, the erosion of asset quality and its more vulnerable loan composition. Furthermore, as a resultofhigheroperationalandcreditcosts,thebank’s bottomlineprofitabilitysomewhatunderperformsthe system average, despite its strong margins. For market leader Ziraat, Moody’s noted the weight of a negative outlook on sovereign Turkish bonds on the state-owned bank, but also its strong nationwide network,itsgranularcoredepositfundingstance,which givesitrelativelylowrelianceonmarketfinancing,and itsmoderateassetquality.However,itsawnegativesin Ziraat’schangingrisk-managementstemmingfromits rising commercial lending and high loan growth. Moody’s said Türk Ekonomi Bank was at a disadvan- tage against higher-rated peers due to its leaner Tier 1 capital, moderate market share and efficiency, and weaker bottom line. Yet it said that operation efficien- cy was improving and resilience should stop its credit profile from deteriorating. Ekonomi is also restrained by the sovereign bond outlook, as is Garanti. TheagencysaidthatitexpectedGaranti’screditpro- file to decline, with loan growth outstripping internal capitalgeneration.Nonetheless,thebank’sstrongfran- chise, core capital and granular deposit base are all upsides.Similarupsidesanddownsidesapplytothelarge Halkbank,İşbankandVakıfbank.Vakıfbank,however,has aparticularlystrongassetbasewithlowlevelsofrestruc- tured loans and those under monitoring – though it also has higher costs of capital than most in the sys- tem, with equity and subordinated debt components. BALANCE: The agencies have thus taken a balanced approach to Turkey’s banks, noting both considerable strengths–highlevelsofcapitalisationand,inthecase of most big banks, diversified asset bases – and risks arising from the economic environment and high loan growth.Adegreeofcautionisjustified,butmostbanks are now well positioned to weather potential shocks. 58 The agencies have taken a balanced approach to Turkey’s banks, noting both their considerable strengths and the risks arising from the economic environment and high loan growth.
- 61. 59 Capital Markets Main bourseeases after a bumper year in 2014 A substantial share of foreign ownership maintained Legal reforms in 2012 merged several exchanges Multi-tier system encourages a variety of listings A clutch of IPOs launched in 2014, with others pending
- 62. CAPITAL MARKETS OVERVIEW Thecountry’s stock exchange was the fifth most profitable in 2014 Turkey’s stock exchange, the Borsa Istanbul (BIST), had a bumper year in 2014. It was ranked as the fifth most profitable exchange globally, with the BIST 100 index rising by 26% and closing at a record year-end high. While the early months of 2015 were more muted for the BIST, the appeal of the exchange and many of its listed stocks to investors is still strong. CORE FEATURES: As of the end of 2014, there were 217 companies listed on the main National Market, with a total market capitalisation of $248bn, while the Second National Market, which focuses more on small and medium-sized enterprises (SMEs), had 94 companies with a $10bn market capitalisation, according to the 2015 handbook published by the Turkish Capital Markets Association (TCMA). Includ- ing the “collective products” market and the “watch list” of companies in specific situations, there were 401 companies listed on the equity market, with a total market capitalisation of $268.5bn. A substantial share of foreign ownership is a char- acteristic of the Turkish system, with foreign investors accounting for “a large but steady” 61% to 73% since 2006, according to JP Morgan Cazenove, an invest- ment bank. The growth of Turkey’s pensions sector, reinvigorated by reforms in 2013, has also boosted the market, with assets under management dou- bling to $15bn since then, though this remains low by international standards, indicating scope for con- siderable growth as the population starts to age. CHIEF REGULATOR: The Turkish financial system is overseen by a range of organisations and has a num- ber of different stakeholders, including industry associations which represent different groups. The main regulator of the country’s capital mar- kets is the Capital Markets Board of Turkey (CMB), a supervisory authority overseeing securities mar- kets and institutions. It sets the operational princi- ples of the market and is responsible for protecting the rights and interests of investors. The CMB reg- ulates and supervises public and listed companies; investment companies; exchanges; mutual, closed- end and pension funds; and leveraged transactions on foreign exchange and precious metals – includ- ing gold, an important commodity in the Turkish market. It also oversees capital markets institutions including the Settlement and Custody Bank (Takas- bank), the TCMA, the Investor Compensation Cen- tre, the Central Registry Agency, and many other companies and bodies working in capital markets, including ratings agencies, independent audit com- panies, asset leasing companies, market operators, appraisal firms, and trade repositories. MARKET AUTHORITIES: The TCMA is a self-regula- tory institution to which all investment companies, banks authorised for capital market activities, port- folio management companies and investment trusts are obliged to belong. The association’s remit is to set rules for professional operation on the capital markets and monitor members to ensure “a fair and disciplined” market. It is thus responsible for enforc- ing regulations enshrined in the country’s legisla- tion or in the decisions of the CMB. The Banking Regulation and Supervision Agency (BRSA) is the top regulatory authority for the entire banking sector, and thus has significant overlap into capital markets, as well as an important impact on banks, which are among Turkey’s bigger listed com- panies. The BRSA regulates deposit banks, Islamic banks and development and investment banks (including Takasbank), as well as foreign branches operating in Turkey, audit firms, ratings agencies, financial holding companies, and firms involved in leasing, consumer finance and factoring. The Central Bank of the Republic of Turkey is the regulator of money and foreign exchange markets, with a remit to promote both price and financial sta- bility. Besides its core banking regulatory responsi- bilities, the central bank is also responsible for the secure operation of payment, settlement and secu- rity transfer systems. Other notable institutions The 217 companies listed on the BIST’s main National Market have a total market capitalisation of $248bn, while the SME-focused Second National Market had 94 companies with a $10bn market capitalisation. The growth of the pensions sector, reinvigorated by reforms in 2013, has boosted Turkey’s capital markets, with assets under management doubling to $15bn since then. 60 To the marketplace With its bourse easing after a recent surge, the country looks to regulatory reforms and multi-tier platforms to encourage new listings www.oxfordbusinessgroup.com/country/turkey
- 63. CAPITAL MARKETS OVERVIEW includethe Capital Markets Licensing and Training Agency, responsible for organising licensing exams and training market professionals; the Banks Asso- ciation of Turkey, a self-regulatory body for all banks except the “participation banks” working in Islamic or sharia-compliant finance, which fall under the Participation Banks Association of Turkey; and the Association of Financial Institutions. LEGAL REFORMS: In December 2012, the govern- ment passed a Capital Markets Law that saw Turkey’s exchanges restructured. This law created the BIST by essentially renaming the Istanbul Stock Exchange, merging it with the Istanbul Gold Exchange and transforming it into a for-profit company. In 2013 another exchange was merged into the BIST – Izmir- based TurkDex, which was the second-biggest in Turkey, specialising in derivatives and one of dozens of commodities exchanges spread around the coun- try, most of which are of very modest size. The 2012 reforms were intended to broaden and deepen Turkey’s capital markets by encouraging more companies to list, offering a wider range of financial instruments, promoting international mar- ket integration, and increasing visibility, accessibili- ty and transparency. The new law was also aimed at improving investor protection. The longer-term aim is to prepare the BIST for pri- vatisation. International counterparts have long expressed interest in potentially taking a stake in the company. For now, the BIST is 48.9% owned by the government, which has indicated an intent to sell its stake in an initial public offering (IPO) planned for early 2016. The 36% stake currently held by the BIST management company itself may go on the block first as the firm looks for financial institutions to act as “anchors” prior to the IPO. Other sharehold- ers include OMX Technology (5%), the TCMA (1.3%), and various investment firms and banks. The Capital Markets Law replaced the previous law, first enacted in 1981 and leading to the foun- dation of the Istanbul Stock Exchange in 1985. The new legislation follows EU standards – namely, the acquis communautaire, the body of EU law to which states theoretically must adhere prior to member- ship. Joint stock companies with more than 500 shareholders, or those which have public offerings, are subject to the law. Its disclosure requirements also apply to securities issued by state-owned enter- prises (including those lined up for privatisation), municipalities and related institutions. Overall, the series of reforms to Turkey’s capital markets have greatly increased their value, marketability and vis- ibility, while enhancing their operations. TIERS & MARKETS: The BIST has several tiers and anumberofseparatemarkets,givinginvestorsaccess to a broad range of companies and instruments. The first tier is the National Market for companies that fulfil listing and liquidity criteria, including all those on the BIST 100, the main capital markets index. Those not fulfilling criteria of the National Market are transferred to the Second National Market, tem- porarily or otherwise. The Second National Market, with 94 firms as of end-2014, is largely intended for SMEs. There is also a National Market index, a track- er for the main market that is broader than the BIST 100. A third tier is the Watch List Companies Mar- ket, into which companies are transferred while under investigation or special regulatory surveil- lance. This might include unusual trades; incomplete, inconsistent or delayed disclosure of information; or breachofrulesandregulations.Asoftheendof2014, there were 29 such watch-listed companies. OTHER PLATFORMS: In November 2009, the BIST launched the Collective Products Market, offering trading of certificates from a range of listed finan- cial instruments, which as of end-2014 included nine investment trusts, 31 real estate investment trusts, six venture capital trusts and 15 exchange-traded funds. The market also allows trading of covered warrants and turbo certificates. In May 2012, trading commenced on the BIST’s new Free Trade Platform, which offers trading of unlisted public companies. The idea behind this new 61 THEREPORT Turkey 2015 Amount raised via IPOs by industry, 2014 ($ m) SOURCE:PwC 0 40 80 120 160 200 Financial services Real estatePharma & biotech Food & beverage Ind. goods & services Insurance Reforms passed in 2012 merged several exchanges into one body Alternatives to the country’s two main markets include the Collective Products Market, which offers trading of certificates from a range of listed financial instruments such as real estate investment trusts and exchange-traded funds.
- 64. CAPITAL MARKETS OVERVIEW marketis to provide a platform for companies to raise capital and raise their profile vis-a-vis investors, with the hope that, over the longer term, many will move on to launch IPOs on one of the main markets. The Emerging Companies Market (ECM) was launched in October 2010 following the passage of regulations the previous year. The first listing came in January 2011, and as of end-2014 there were 22 companies listed with a total market capitalisation of $403m. The ECM is for companies that have high growth potential but do not meet the criteria for list- ing on the National Market – strictly speaking, the companies are not listed, but rather are included in the ECM Directory. Companies are expected to meet some criteria, but do not have to meet quantitative criteria on market capitalisation, profitability, paid- in capital, company age or size of offering. As with the Free Trade Platform, the hope is that these firms will find new access to capital, grow and move towards full listing on the National Market. SENTIMENT MODERATES: In the early months of 2015, Turkey’s capital markets went through a dif- ficult period, reflecting the reality of lower econom- ic growth, uncertainty surrounding the June 2015 parliamentary elections, and rising inflation. In April 2015, the IMF cut Turkey's growth forecast from 3.4% to 3.1% for the full year. Headwinds came espe- cially from the rising dollar, but also from political uncertainty, growing caution among both banks and consumers, and questions over monetary policy. Weakening sentiment towards Turkey pushed the lira down 13% against the dollar in the year to late April, while the BIST 30 fell more than 15%, against a benchmark emerging markets index of more than 10% growth, according to Bloomberg. Nonetheless, a return to the instability of the 1990s is unlikely – Turkey is on a much sounder footing now, even if it canbebuffetedmorethandevelopedmarkets.More- over, it is a large and youthful market with substan- tial long-term growth potential, both in terms of its broader economy and its capital markets. QUANTITATIVE EASING: Short-term factors should also help buoy the market somewhat. As JP Morgan Cazenove noted in its CEEMEA Year Ahead 2015 report,Turkeystandsoutasoneofthecountriesbest- placed to benefit from the new quantitative easing programme of the European Central Bank (ECB), begun in March 2015. The ECB’s action is expected to boost bank lending, thus benefitting Turkey’s pri- vate sector, which borrows heavily from the euro- zone. Turkey is also well-placed to benefit from the expansionary effect on the eurozone economy, its major trading and investment partner. Earlier in the year, JP Morgan stated that it remained positive on Turkish equities, drawing attention in particular to conglomerates like Koç and Sabancı, which offer a well-diversified exposure to equities. It also com- mended Akbank’s market-beating return on equity. 62 The new quantitative easing by the ECB stands to benefit Turkey’s private sector, which borrows heavily from the eurozone, as well as Turkey generally, for which the eurozone economy is its main trading and investment partner.
- 65. CAPITAL MARKETS OVERVIEW INITIALPUBLIC OFFERINGS: In 2014, the BIST saw 13 IPOs that raised $306m, compared to 11 raising $727m in 2013. Much of the most significant activ- ity was concentrated in the final quarter of the year. By far the biggest IPO was that of insurance com- panyAvivaSA,whichraised$146m,or45%ofthetotal proceeds. Ranking second was Ulusoy Elektrik, rais- ing $75m. According to a report by PwC, “IPO Watch: Turkey Focus 2014”, out of the 13 IPOs, nine were on the main National Market and four on the ECM. As of February 2015, there were eight pending appli- cations for listing on the BIST, two for the main mar- ket and six for the ECM, indicating the growing momentum behind the emerging-companies mar- ket. The more muted IPO market in Turkey to an extent reflected concerns about investor sentiment towards the country, and contrasted with what was the best global IPO haul since 2010, and an 80% increase in proceeds from European IPOs. FORWARD PROSPECTS: Turkey’s IPO market may be somewhat subdued again in 2015, as investors await the outcome of the June parliamentary elec- tions and shy away from a country which has seen a degree of volatility over the past year and a half, following several years of admirable stability. But sound fundamentals that could underpin a bright future for Turkey’s capital markets should draw more IPOs in the longer term. Past years have seen strong growth from SMEs in particular; more of these can be brought to market, allowing investors to capi- talise on that growth and the companies themselves to raise capital for further expansion. As across the world, private equity funds are increasingly looking to exit their investments through IPOs. In January 2015, for example, Global Yatırım Holding AS, a Turkish investment and financial serv- ices company, announced that it had hired interna- tional and local advisors to manage the planned IPO of its port operator unit, Global Liman. This sub- sidiary runs ports in the Turkish cities of Antalya, Kuşadası and Bodrum, as well as in Lisbon and Barcelona in partnership with other players. Global Yatırım expects to raise capital of between $250m and $500m in the IPO of Global Liman, which it fore- casts will earn total revenues of $85m in 2015 before interest, taxes, depreciation and amortisation. BOND MARKET: Turkey has been one of the biggest issuersofsovereignemerging-marketbondsinrecent years. Its domestic corporate bond segment, how- ever, did not take off until reforms introduced in 2010 slashed the red tape that had held back devel- opment. The government had good reason to ease regulations, as the effective non-existence of a domestic corporate bond market had pushed Turk- ish firms – including banks, which are major issuers – to borrow from abroad, thus increasing foreign exchange risk. The government’s own stance at the time had been to shy away from bond issues to an extent, which pushed investors towards corporate bonds as the perceived next-safest option. The stock market’s volatility and high interest rates (which tend to draw investors towards time deposits rather than equities) have led to suggestions that the bond market may be a better bet than Turkish stocks. This is questionable: higher interest rates erode bond prices. But generous yields on Turkish bonds may yet draw in cash – as of May 2015, yields on 10-year lira-denominated sovereign bonds stood at just over 9%, compared to 2.3% for US Treasuries. In May 2015 ratings agency Standard and Poor’s warned of a one-in-three chance of a ratings down- grade for Turkey within 6-12 months, largely due to the lira’s depreciation. The outlook for sovereign bonds is somewhat uncertain, hinging on regained economic momentum and, in the shorter term, the June election and the make-up of the government formed thereafter. But in an environment which has seen equities lose some of the ground gained in 2014, bonds may seem safer to some investors. CORPORATEBONDISSUES:A number of major cor- porates issued bonds in the early months of 2015, including $500m issues by Akbank, Halkbank and Vakifbank, a second $500m offer by Akbank, and $328m from Turkish Airlines, which it will use to pur- chase new aircraft. These issues – and upcoming floats by the likes of Türkiye İş Bankası and Ziraat 63 THEREPORT Turkey 2015 SOURCE: Cbonds Value Mercedes-Benz Finansman Turk, 2018 €50m Turkiye Sinai Kalkinma Bankasi, 2020 $350m Mercedes-Benz Finansman Turk, 2017 €50m Turkey, 2026 $1.5bn Akbank, 2025 $500m Turkish Airlines, 2027 $328m Halkbank, 2021 $500m AK Finansal Kiralama, 2016 CZK350m Vakifbank, 2025 $500m Akbank, 2020 $500m Major bond issues, Jan-May 2015 Eight applications to list on the BIST were pending in February 2015 The BIST saw 13 IPOs in 2014 that raised $306m, compared to the 11 that raised $727m in 2013, with much of the most significant activity concentrated in the final quarter of the year. The yields on domestic 10-year lira-denominated sovereign bonds stood at just over 9% as of May 2015, compared to 2.3% for US Treasuries.
- 66. CAPITAL MARKETS OVERVIEW Bankası– indicate that the bond market remains liquid despite macro concerns, but somewhat dom- inated by banks and a few large corporates. FUTURE SALE: In January 2015 the CEO of BIST, brahim Turhan, announced that the exchange’s management company was looking to sell its 36% stake to strategic foreign and domestic “anchor investors” in the run-up to a full IPO in early 2016. The IPO would reduce the government’s stake in the exchange. According to a Bloomberg report from early 2015, the offering would value the company at around $1bn; by decree of the Council of Minis- ters, it cannot exceed 42.75% of the company. INTERNATIONAL PARTNERSHIPS: Such an IPO would be the latest step in the restructuring and growthofTurkey’scapitalmarkets,whichhasinvolved a growing range of international partnerships, some bringing capital and expertise to Turkey, and some allowing BIST to take its own capital and expertise to new markets. In January 2015, the BIST signed a partnership agreement with the London Stock Exchange, which enables the latter’s global clients to trade and clear Turkish futures and options on international markets. The LSE Derivatives Market offers trading in futures and options on the BIST 30 Index and on leading Turkish stocks. In 2013, the US- based exchange company Nasdaq bought a 5% stake in the BIST, a deal that led to BIST adopting Nasdaq systems – an upgrade on the technology it was pre- viously using. Nasdaq also pledged to support the BIST’s efforts to establish itself as a regional finan- cial centre. In January 2015, the BIST raised its stake in the Sarajevo Stock Exchange (SASE), the main bourse in Bosnia and Herzegovina, to 10%. The pre- vious month, it had started trading index futures of the top 10 SASE-listed companies. FINANCIAL CENTRE: The development of the BIST fits with the government’s vision of making Istanbul into a global financial centre. The main target mar- kets that backers of the strategy hope it will serve are those with geographical, linguistic, cultural or his- toric links to Turkey: the MENA region, Central Asia, and Central and Eastern Europe. Naturally, it has strong competitors as a financial capital for such a variedrangeofcountries,particularlyDubai,Moscow, Vienna and, most recently, Warsaw. Nonetheless, supporters assert that Turkey has a number of com- petitiveadvantages,notleastitsbeingalarge,dynam- ic emerging market in its own right. In this vein, a new financial district known as the Istanbul International Financial Centre (IFC) is tak- ing shape on the Asian side of the city, drawing many financial institutions from the traditional business districts such as Levent and Maslak. The plan is also to relocate institutions like the central bank, the CMB, the BRSA and the headquarters of some state banks from Ankara to Istanbul. The development of the IFC is very much a work in progress. Geographical issues are one challenge: many financial institutions are well-established on the city’s European side, and relocating to Asia has limited appeal, especially given issues with traffic across the Bosporus and around bottlenecks on each side. Another hurdle is human resources – Turkey has abuddinggroupofyoungfundmanagersandtraders, but many still move abroad to pursue their careers, and others who remain are still quite young and need to develop years of experience, particularly at international level. Other more experienced profes- sionals may be reluctant to relocate from cities seen as the world leaders in finance (London, New York, Frankfurt) or those with more appealing tax and res- idency regimes (Dubai, Singapore, Hong Kong). Realistically, the process will be an incremental one – speaking of Istanbul as a rival to London and New York or even Dubai would be somewhat pre- mature. Nonetheless, the size and strength of the Turkish market and the expansion of Istanbul as a business centre serving a diverse range of regions, as well as the government’s vocal support of the proj- ect, are building momentum behind the IFC. OUTLOOK: Turkey’s equity and bond markets felt the impact of cooling investor sentiment and the relat- ed fall in the lira in the first few months of 2015. A degree of uncertainty over the fiscal and monetary policy outlook with an election looming – also not unrelated – had an effect as well. However, the reforms of the past few years have left the coun- try’s capital markets larger, more liquid, more acces- sible to foreign capital and altogether better-off. One indication of this is the particularly strong per- formance of the BIST in 2014, a year of subdued eco- nomic growth. In sectors such as financial services, consumer goods and manufacturing, the country offers a number of large, high-quality companies, while lower tiers of the market are preparing small- er players for senior listing. Tough as some periods may be, the market’s future is founded on that of its economy,andinthisregardTurkey’slarge,youngpop- ulace, diverse services and status as a major busi- ness centre all point to a bright long-term outlook. 64 The country’s main stock exchange was renamed in 2012 and merged with a number of other exchanges The BIST’s management company is looking to sell its 36% stake to strategic foreign and domestic “anchor investors” in the run-up to a full IPO in early 2016, which would value it at around $1bn. www.oxfordbusinessgroup.com/country/turkey
- 67. CAPITAL MARKETS INTERVIEW VahdettinErtafl, Chairman, Capital Markets Board (CMB) Are there any new initiatives to further develop Turkey’s financial services sector? ERTAŞ: Our new capital markets legislation provides marketinfrastructureinharmonywithcurrentEUprac- tices, especially the Markets in Financial Instruments Directive. This is important, as it integrates Turkey’s capitalmarketsintotheglobalfinancialsystem.Thenew Capital Markets Law and our new regulations have begunreturningsuccessfulresults.Theintroductionof new incentives for issuers, such as easing of CMB pro- cedures and the lowering of registration fees, aims to make the issuance process more user-friendly. Whileallmarketnumbersprogressedpositively,two marketsstandout.Overthecourseofthepasttwoyears, the issuance limit assigned by the CMB in the fixed- incomemarkethasnearlytripled,fromTL78bn(€29bn) in 2012 to TL216bn (€80bn) by the end of 2014. Also, theissuancelimitinthesukukmarkethasjumpedfrom TL2.9bn (€1.02bn) in 2013 to TL10.8bn (€3.8bn) in 2014. Despite the structural changes that our market participants had to undergo, alongside geopolitical challenges and global financial turmoil, Borsa Istanbul was one of the top-five global performers in 2014. We do not feel our achievements are sufficient to reach our 2023 target of making Istanbul a prominent global financial centre, so our work continues. One of the latest developments is the establishment of the Istanbul Arbitration Centre, which will start function- ing in 2015. The centre will serve the needs of global investors in dispute resolution and play a crucial role as Istanbul becomes a global financial centre. Thegovernmenthasintroducedtwotransformation programmes: the Istanbul Finance Centre programme, which will enhance physical, technological and legal infrastructure, as well as intellectual capacity; and the new financial literacy action plan which aims to help increasing domestic savings. These accompany tax reforms and incentives to promote equity financ- ing and initial public offerings. Our goal is to make Turkishcapitalmarketsasoundfinancialcentreby2023. Whateffortsareunderwaytoincreaseliquidityon the secondary market for financial products? ERTAŞ: Increasing liquidity is the key to growing capi- tal markets in Turkey. The CMB is working in collabora- tion with market participants to develop more robust secondary markets for specific products. The latest developmentinthisregardhasbeentheestablishment of the Turkey Electronic Fund Distribution Platform, a fund supermarket to ease investor access to mutual funds via a single investment account. Improvements in trading infrastructure combined withthegrowingsizeofthefundindustryshouldresult in a boost in market liquidity. The latter trend is corre- lated to growth in the private pension system follow- ing reform designed to promote savings and deepen our capital markets. In 2014 the private pension sys- tem attracted 1m new members and the assets under management rose from TL25bn (€9.3bn) to TL35bn (€13bn).Weexpecttoseethesamepatternasinvestors become more comfortable with and aware of the new scheme. We are also working with Borsa Istanbul to developmorerobustsecondarymarketsforcorporate bonds and sukuks. For example, the Islamic Develop- mentBank’s$6bnsukukofferingwasadmittedtoBor- sa Istanbul in November 2014, so we are attracting new players to the organised market. Domoresophisticatedinstrumentsposechallenges to securities regulators in Turkey? ERTAŞ: The use of sophisticated products is not at the desired level. Turkish firms are not very active in this space,andtheoneswhicharetendtobelargeandpri- marilytransactforhedgingpurposes.Ontheexchange trading side, Borsa Istanbul has signed a cooperation agreementwiththeLondonStockExchangetoincrease liquidity in the derivatives market. We are also work- ingonover-the-counterregulationssomoreinvestment firms can participate in this market and we can attain greater transparency. The current challenge is to get moremarketparticipantstousethesevariedproducts. 65 THEREPORT Turkey 2015 Working towards the centre OBG talks to Vahdettin Ertafl, Chairman, Capital Markets Board (CMB)
- 68. CAPITAL MARKETS INTERVIEW brahimTurhan, Former Chairman and CEO, Borsa Istanbul Givenrecentmacroeconomicvolatility,whyshould international investors remain confident in the growth prospects of the Turkish equities market? TURHAN: In 2014 Turkey was rated as the 14th most attractive foreign direct investment (FDI) destination intheworld.Assessingtheconditionsinanymarketby lookingatjustshort-termmovementswillleadtowrong conclusions. Emerging markets are affected by the monetary policy of international central banks and experience some volatility, but it is temporary. Turkey’s economic fundamentals are strong. The economy has grown by an average of 5% since 2003. Fiscal discipline is maintained, as shown by the EU- defined government debt stock-to-GDP ratio, which is 36%. Turkey has received two upgrades to its invest- ment grade, the latter of which came in May 2013 just before the US Federal Reserve’s announcement which caused the volatility in emerging markets. Since then, nothing has changed that will affect economic funda- mentals in Turkey. The recent drops in oil prices actu- ally work in Turkey’s favour and improve the outlook on the inflation and external balance fronts. The attractiveness of Turkey as an investment des- tination is also reflected in FDI statistics. While FDI amounted to only $9.6bn between 1995 and 2002, it totalledaround$146bnbetween2003and2014.More- over,thenumberofcompanieswithinternationalcap- ital in Turkey rose to 43,700 by September 2014. Towhatdoyouattributetherecentfallinthenum- ber of initial public offerings (IPOs)? TURHAN:Thereare422companiescurrentlylisted,and 109 IPOs were realised between 2008 and 2014, yet the market capitalisation-to-GDP ratio reached only 32%attheendof2013.Asoneofthemostliquidstock exchanges in the world, we have the potential to sup- port a higher market capitalisation. Borsa Istanbul has stepped up its efforts through organised events, on- site visits and media campaigns, and a new project, “Listing Istanbul”, has been initiated to attract foreign companiestolistonourplatforms.Increasingthemar- ket capitalisation-to-GDP ratio to 70-80% is also one ofourmajortargets.TherecentslowdowninIPOactiv- ity is mainly due to the increased volatility of the last two years in emerging markets, including Turkey. It shouldalsobenotedthatcompaniesdonotjustaccess funding through IPOs at Borsa Istanbul. In the last four years corporate issues also have been used actively by Turkishfirms.Theamountofissuancesroseto$30.3bn in 2014, from almost nothing in 2010. As a result, the overall public offering is on the rise. Hastheflare-upinregionalinstabilityaffectedcon- fidence?Wherearecorporateslookingtoexpand? TURHAN: Thanks to its young population and strong domesticdemand,companiescontinuetoexpandtheir operationsthroughmergersandacquisitionsinTurkey, especially in energy, finance and the service industry. Intermsofnumberoftransactions,IT,energyandman- ufacturingwerethetopthreeindustriesin2014,while intermsofvalueoftransactions,energy,transportand financial services were the top three segments. How can private equity increase its portfolio of small and medium-sized enterprises (SMEs)? TURHAN: SMEs account for 95% of all enterprises in emerging markets, employing 60% of the workforce. Companiesinthiscategoryhavelimitedaccesstofunds in organised markets, as they do not have the neces- saryresourcesandcapacitytogopublicorrealisecor- porate issuances. Private equity can play a critical role in facilitating investment into those companies while benefittingfromtheopportunitiesofferedbythem.Pri- vateequityshouldusebetterchannelstoconnectwith SMEs.Forexample,BorsaIstanbulstartedPrivateMar- ket, where private equity firms, angel investors or oth- er qualified investors can meet start-up companies. The creation of such platforms is crucial, as both par- ties can develop a more sound relationship based on trust thanks to the organised nature of these markets. 66 Market movers OBG talks to brahim Turhan, Former Chairman and CEO, Borsa Istanbul www.oxfordbusinessgroup.com/country/turkey
- 69. 67 Insurance Population growth akey driver of sector expansion Stalled savings get a boost from the government Mergers and acquisitions have been high among insurers Sharia-compliant segment continues to expand
- 70. INSURANCE OVERVIEW Turkey’s youngand mobile population has driven insurance growth Whereas the global insurance industry saw growth slowoverthecourseof2013and2014,Turkey’sinsur- ance sector displayed resilience, making it an attrac- tive industry for investment and expansion opportu- nities. Despite fluctuations in other sectors and a depreciationofthelocalcurrency,inrealtermsTurkey’s insurance sector experienced significant expansion in both life and non-life segments. CONSOLIDATION: One of the key drivers of growth in the sector has been the rise in mergers and acqui- sitions (M&A) in the country in recent years. In 2013 Turkey’s insurance segment saw more M&A activity than any other part of the country’s financial sector. Indeed,invalueterms,some70%ofallM&Asinfinance were to do with insurance companies, with a record €874m in deals struck, according to a 2014 report by globalconsultancyPwC.Thetrendisillustrativeofthe recent strength of the sector, as well as of its ability to attract foreign investors – the largest M&A trans- action was Allianz SE’s €684m purchase of a 94% stake in Yapı Kredi Sigorta. In 2014 the financial serv- ices sector was the second most active sector for M&A activity, with the vast majority of deals, includ- ing foreign investment, in banking and insurance. International giants are thus looking at Turkey as a growth market, with the potential for significant expansion in life, pensions and more specialised non- life products. The implications for the wider financial sector in Turkey are significant, as the recent growth oftheprivatepensionssegmenthasgivenawelcome boost to the country’s asset management industry. Yet challenges remain. Sustaining recent growth may prove demanding, while taking to the next level the number of Turks willing to pay in to non-compul- sory insurance schemes will test companies’ resolve and ingenuity. Political uncertainties over the next yearmayalsocreategreatercaution,withconsumers less likely to try out new products in consequence. Nonetheless, with growth rates that most European insurerswouldenvy,alongwithsomesoundeconom- ic fundamentals, the insurance market is widely seen as a good pick for the years ahead. FACTS&FIGURES:AccordingtodatafromtheInsur- ance Association of Turkey (TSB), non-life by far exceeds life in terms of premiums. In January 2015 the split was 89.3% non-life, 10.7% life. Amongst the former segment, the biggest share of premiums was heldbysickness/health,with23.3%;followedbymotor vehicle liability, with 17.7%; land vehicles, with 17.6%; then fire and applied perils, with 17.4%; and miscel- laneous losses at 11.9%. After that, accident took 3.4%, general liability took 3%, and all the other lines of business took shares of less than 1%. Based on a month-to-month comparison of the market shares recorded in January 2014, non-life slightly increased its share over the year – back then the split had been 88% to 12% – and the ranking spreadbymarketsegmentsawsickness/healthover- come motor vehicle liability. Over the course of 2014, sector premiums grew 10.7%, with non-life up some 12.4% and life down some 1.4%. Thiswasquiteadifferentpicture,however,frompre- vious years, when the market shares held by the dif- ferent lines of business maintained the same ranking – with motor vehicle liability in the lead – and both life and non-life also experiencing real growth. The TSB figures for 2012 and 2013, the latest years for which full-year data are available, show total premi- ums at TL19.8bn (€7bn) in 2012 and TL24.2bn (€8.5bn) in 2013 – growth of some 22.21% in mon- etary terms, or 13.79% if an inflation rate of 7.4% is factored in. Non-life grew 13.34% in real terms over those two years, from TL17.1bn (€6bn) to TL20.8bn (€7.3bn), while life grew 16.62% in real terms, from TL2.7bn (€954.2m) to TL3.4bn (€1.2bn). This growth had come on top of overall growth in the 2011-12 period as well. The TSB figures indicate that total premiums for the first 11 months of 2011 ofTL17.2bn(€6bn),comparedtoTL19.8bn(€7bn)for thefirst11monthsof2012,or8.8%realgrowth,with The insurance segment has been seeing significant consolidation activity in recent years. In 2013, some 70% of financial sector M&As involved an insurer. In terms of premiums, non-life is the leading segment, with 89.3% of the total. The biggest share of premiums was held by sickness/health, with 23.3%, and motor vehicle liability, with 17.7%. 68 Providing and expanding coverage The insurance sector continues to offer new and improved products to a growing population www.oxfordbusinessgroup.com/country/turkey
- 71. INSURANCE OVERVIEW aninflationrate6.16%.Non-lifegrewevenfasterover the period,at 11.35% in real terms, while life shrank, by4.92%.Thefiguresthusshowrobustgrowthforthe past three years, although they also demonstrate a fragility in the life sector in particular. The reasons for continued growth in non-life and volatility in life lie in some of the fundamentals of the Turkish market. POPULATION BOOM: One of the main growth fac- tors is the country’s demographic composition. The Turkish Statistical Institute (TurkStat) declared that Turkey’s population stood at 77.7m at year-end 2014, up by nearly 1.3m over 2013 and indicating an annu- al growth rate of 1.7%. While in certain areas of the countrythepopulationregularlygrowsfasterthanthe national average. Turkey’s largest city, Istanbul, is at the epicentre of this demographic trend. According to TurkStat, Istanbul saw population growth of 1.5% between 2013 and 2014 to reach 14.4m people. The city is home to 18.5% of Turkey’s total population. The country is also young. TurkStat figures show a median age of 30.7 in 2014, slightly up from 30.4 in 2013. In 2008 the median was 28.5 years. Thus, the population is ageing, yet almost half of the people in Turkey are still under the age of 30. This implies a strong organic growth in the market, alongside increased future need for insurance products of all kinds, particularly in the currently non-compulsory vehicle, home, life, health and pensions areas. At the sametime,Turksincreasinglyhavethemeanstomeet those needs. The Turkish economy has been growing, withaconcomitantincreaseinpercapitaincomesand an expansion of the middle class. Between 2010 and 2013, real GDP grew by some 24%, with 2010 seeing 9.2% and 2011, 8.8% growth, according to World Bank figures. While the economy has slowed since – 2013 saw GDP growth of around 4%, falling to 2.9% in 2014 – the long-term trend is a positive one. The World Bank’s data figures show per capitaGDPrisefrom$8626in2009to$10,660in2012, with TurkStat figures showing that rising again, to $10,822, in 2013. A recent BBVA report predicted thatby2020,Turkey’saffluentandmedium-uppermid- dle class will account for some 45% of the population – up from 27% in 2010. The insurance market thus looks set to grow robustly over the next few years, as the target market, especially for non-compulsory insurance,expandsandmoreawarenessoftheinsur- ance of insurance products grows. GOVERNMENTSUPPORT:Atthesametime,theTurk- ish government has been eager to support the sec- tor, with older compulsory insurance regulations recently complemented with some major incentives. Currently, only two major lines of insurance are com- pulsory in Turkey – motor and earthquake. For vehi- cles, motor third party liability (MTPL) is compulsory, along with bus seat personal accident insurance and passenger transport liability insurance. Earthquake insurance came in after the devastating 1999 quake, which hit just south of Istanbul. Many of Turkey’s urban centres lie on or near fault lines, with this also spurring a major urban renewal programme that has seen building codes tightened and widespread dem- olition and replacement of substandard housing – both with insurance implications. There are also compulsory insurance regulations coveringdangerouscargoesandtheirhandling,stor- age and transportation, as well as workers’ compen- sation insurance. The latter is compulsory for all employees, but can only be handled by the state, although an employer may add on private insurance coverage for employees. MOTORING ON: Compulsory motor insurance has been a mainstay of the non-life sector since it was instated in 1983, and the above figures for market sharedemonstrateitssignificance.Themotorsegment also had a better year in 2013 due to an increase in average premiums. For some time, companies in the motor segment had raised concerns about the low level of premiums allowed, particularly in a segment that often incurs high losses. For example, in 2012 the MTPL segment, which is required and regulated bytheTrafficLaw,recordedaTL1.3bn(€454m)tech- nical loss, while motor vehicles liability recorded a technicallossofTL1.1bn(€387m).Theselosseswere far higher than any other line of business. After the premium increase, however, these losses were considerably reduced. The price increase, com- bined with general growth in the market fired by demographic and per capita income factors, led to a neardoublingofpremiumscollected.TheTSBfigures show total net written premiums for 2012 stood at TL2.6bn(€919m)forMTPL,risingtoTL4.1bn(€1.4bn) in2013.For2013overall,MTPLrecordedaTL654.4m (€230m) loss, while motor vehicle liability saw loss- esofTL479.8m(€169m).Motorvehiclephysicaldam- age also went from a loss of TL61.12m (€21.5m) in 2012 to a profit of TL702m (€247.2m) in 2013. Another potential downside for the motor sector in particular is the devaluation of the Turkish lira, which slid 34% against the dollar between May 2013 and May 2015. With many spare parts imported, this 69 THEREPORT Turkey 2015 Real GDP experienced significant growth in the 2010-13 period, expanding by approximately 24% There are currently only two major lines of compulsory insurance in Turkey: motor vehicle coverage and earthquake insurance, with the former a mainstay of the sector since 1983.
- 72. INSURANCE OVERVIEW will likelyimpact costs. A similar effect is expected in areas such as aviation and marine. Pressure thus remains for further hikes in premi- ums in the year ahead and for further changes in the way the motor segment is regulated. A standardisa- tion in the way claims are dealt with is also strongly advocated by the TSB, which works to end perceived inconsistencies in court judgements and has pro- posed amendment drafts to the Traffic Law. The year 2013 also saw the establishment of Turkey’s first MTPL club, with six firms joining. This should have an important impact on car valuations in particular, by helpingtostandardiseproceduressurroundingthem. GOLDEN YEARS: Recently, the life segment – more specifically,pensions–wasgivenamajorboostthanks togovernment-ledreforms.Privatepensionsareboth a new industry in Turkey and, historically, a small one. In 2001 parliament approved the establishment of a private pensions sector, with this selling its first prod- ucts in 2003. Six companies began offering these products, and by end-2013 there were 18 such firms. In 2012 the government, anxious to counter a signif- icantdeclineinsavingsrates(WorldBankdatashowed this rate had fallen from around 17% of national out- put during the 2002-08 period to just 12% in 2010), introduced a major new measure to support private pensions. This was to offer a direct matching contri- bution of 25% from the government on all contribu- tions up to the national minimum wage. The new rules also offered employers a tax deduc- tion on pension contributions up to 15% of employ- ee income, with a cap equal to the national minimum wage. The tax on distributions at retirement was also cut, from 3.75% of the total account value to just 3.75% of the investment income portion of the account.Thenewrulesalsoallowedfortransfersfrom defined benefit to defined contribution plans with- out any tax liability being imposed. Thepackagewasconsideredbymanytobeamajor success.AccordingtoReuters,duringthefirstmonth of implementation – January 2013 – 120,000 people joined private pension plans. This reached 1m by the end of 2013, a twofold increase over 2012. Industry figuresshowthat18firmstookadvantageoftherise, investing €9.95bn for some 4.53m pension savers and boosting assets in the segment 29% in that year. By end-2014, the total number of contributors grew to 5.1m, with €12.21m in investments. SECTORPLAYERS:In2013thetopthreeoutfitsinthe life sector were Ziraat Hayat ve Emeklilik, Anadolu Hayat Emeklilik, and Garanti Emeklilik, which demon- strated gross written premium (GWP) market shares of 23.4%, 11.6% and 8.8%, respectively. Fourth place was held by Halk Hayat ve Emeklilik with 8.2% market share,andinfifthplacestoodthenewlyformedAllianz Yaşam ve Emeklilik at 7.1%, following Allianz’s pur- chase of Yapı Kredi Sigorta in early 2013. The top 10 companies in life held 84.8% of the total market between them. In non-life, the top three by market share of GWP in 2013 were Axa, with 15.2%; Anadolu Sigorta with 13.2%; and Allianz at 9.3%. The top 10 non-lifefirmshadsome73.9%ofthemarketbetween them, illustrating the more fragmented structure of thenon-lifebusiness.Fourthandfifthplaceweretak- enbyAkSigortaat7.3%andMapfreGenel,whichrose two places from 2012 to a 6.5% market share. All insurance and reinsurance companies working inTurkeyaremembersoftheTSB.Theassociationhas 40 companies in its non-life section, 26 in its life and pensions section, and two in its reinsurance section –ArtıReasuransandMilliReasurans.AccordingtoTSB, some 18,137 people were employed, either full or part time, at these companies’ head offices at year- end 2013, up from 16,568 in 2010. RecenttimeshavealsoseensomemajorM&Aactiv- ity in the sector. The largest of these deals was Allianz SE’s€684mpurchaseofa94%stakeinYapıKrediSig- orta in the first quarter of 2013, which included the Turkish company’s life and pensions arm, Yapı Kredi Emeklilik.Afterasubsequentmandatorytenderoffer, Allianz’s stake increased to 99.78%. Other insurance deals included Malaysia’s Avicennia Capital purchas- ing a 90% stake in health and life insurance provider AcibademSağlikveHayatSigortafor$252minNovem- ber 2013, and the Lebanese/UAE Hariri family’s pur- chase of a 90% stake in Demir Sigorta. Intermsofdistributionchannels,thereisgreatvari- ation between life and non-life. TSB figures for the first two months of 2014 illustrate a pattern that has been in place for some years; in non-life, the bulk of written premiums were through agencies, capturing TL2.5bn (€880.25m) out of a TL4bn (€1.4bn) total, or 62.13%. Brokers wrote TL596.8m (€210m), or 14.87%, banks TL532.5m (€187.5m), or 13.27%, and direct channels accounted for TL390.1m (€137.4m), or 9.72%. In life, however, banks took the lion’s share, with 78.39% of all premiums written, or TL424.23m (€149.4m). Direct sales accounted for 10.98%, or TL59.4m (€21m), agencies for 9.17%, or TL49.6m (€17.5m), and brokers for 1.47%, or TL7.9m (€2.8m). ThisispartlybecauseeachTurkishbankbranchisalso 70 With employers supporting savings, about 1m people opened private pension plans during 2013 Turkey currently has 40 insurance companies in the non-life segment, 26 working in life and pensions, and two reinsurance firms. Employers receive tax deductions on pension contributions up to 15%, and employees can have their savings matched by the government. www.oxfordbusinessgroup.com/country/turkey
- 73. INSURANCE OVERVIEW considered aninsurance agent, once it receives its license. The result is that the country’s four largest banks – Akbank, Yapı Kredi Bank, Garanti Bank and Iş Bank – have long been active in bancassurance, with the major insurers all having banking affiliates. In terms of regulation, the sector is covered by the 2007 Insurance Law, along with a range of laws gov- erning brokers, loss adjusters and others working in thesector.TheTurkishCommercialCodecoversinsur- ancecontractsandwasupdatedin2012,withstronger provisionsforconsumerprotectionandthecategori- sationofinsuranceclasses.ACodeofObligationswas also enacted in 2012, relating to the obligations betweenlegalandnaturalpersons,withthisalsohav- ing clauses pertaining to the insurance sector. The General Directorate of Insurance (GDI) regu- lates the sector, while also issuing permits for insur- ancefirms.ThesecanbeeitherTurkishjointstockcom- paniesorcooperatives,orTurkishbranchesofforeign insuranceandreinsuranceoutfits.TheGDIitselfcomes undertheUndersecretaryoftheTreasuryandalsohas the task of harmonising Turkish insurance legislation with that of the relevant EU acquis. A number of new regulations were introduced into the Turkish insurance section in 2014, and a number of important amendments were signed as well. In April 2014 the new Insurance Agencies Regulation replaced the former regulation, with the aim of clar- ifying insurance agency activities and providing pro- tective provisions for both insurers and the insured by institutionalising agency systems. Following the enactment of the new regulation, the Treasury also released a new circular in May 2014 known as the ImplementationoftheInsuranceAgenciesRegulation to regulate the implementation rules. Thelawhelpsclarifytherelationshipbetweenboth parties in an insurance agreement, and reifies the scope of permissible insurance activities and obliga- tions. Additional changes include a raise in minimum paid-in capital for incorporating an insurance agency toTL50,000(€17,605);newmandatoryprovisionsfor agency agreements; new requirements on technical personnel; and the requirement that leasing, factor- ing and financing companies now form as separate firms to provide insurance services. PROFIT&LOSS:Whilepremiumsareupandthemar- ket fundamentals look healthy, many sector players havefoundprofitabilitymoreofachallenge.Partlythis is due to the high level of competition, particularly as companies seek to secure market share by charging lower premiums. In addition, the number of people takingupnon-compulsoryinsurancepoliciesremains low as a percentage of the population. “Turkey has a young and active population,” Tarık Serpil, executive director at Marsh, Turkey’s largest insurance broker, told OBG. “But there are perhaps only 2m willing clients.Turksarenotbuyinginsurancepartlybecause the sector has not been providing policies that Turks want to buy.” That is now changing. In terms of per- suadingyoungTurksthatinsuranceissomethingthey should consider, companies have been moving more into the online world. All the main issuers have launched internet sites, while exclusive, online-only deals are also being offered as an incentive. Online advertising by insurers is also becoming a more fre- quently used channel. This all ties well into the young profile of Turkey’s potential insurance buyers. Comparing premiums growth between 2012 and 2013 shows that non-compulsory areas benefitted from these strategies. Accident saw a technical prof- it of TL147.9m (€52m) in 2012 grow to TL241.5m (€85m) in 2013; fire and natural forces was up from TL47.5m (€16.7m) to TL218.8m (€77m) in the same period. Indeed, non-life overall went from a 2012 loss of TL658m (€231.7m) to a 2013 profit of TL768m (€270.4m) – though some losses were due to Axa strengtheningitsreserves,withaTL600m(€211.3m) loss reported. In the life segment, meanwhile, tech- nical profits grew from TL246.7m (€87m) in 2012 to TL428.3m (€150.8m) in 2013. Life thus had annual average profit growth of 13% in the 2008-13 period. OUTLOOK: Overall, the expectation is of continued premium growth in 2014-15, with companies also takinggreatercontroloftheirtechnicalresults,boost- ing profitability. Pensions will likely continue seeing positive growth as well, although political uncertain- ties may impact consumers negatively in the period up to elections in 2015. With major international expertise increasingly widespread in the sector, com- binedwithexperiencedlocalfirmsandemployees,the standard and diversity of products is set to expand. 71 THEREPORT Turkey 2015 Companies are using online campaigns and bank partners to incentivise Turks to buy insurance products New legislation passed in 2014 has helped institutionalise components of the insurance industry and improve protections for companies and customers.SOURCE: Insurance Association of Turkey 2009 2010 2011 2012 2013 Non-life 36 38 39 39 40 Life 9 11 9 8 8 Pension 13 13 16 17 18 Reinsurance 2 2 2 2 2 Total 60 64 66 66 68 Number of insurance companies, 2009-13
- 74. INSURANCE ANALYSIS The governmentmatches 25% of individual pension contributions Private pensions showed significant growth in Turkey overthecourseof2013and2014,followingimplemen- tationofanewlawthatintroducedgovernmentmatch- ing of contributions for private pension. With the new law, designed as an incentive scheme to encourage morecontributionsintothesystem,asofJanuary1,2013 the government matches 25% of individual contribu- tions to the pension system. Over the course of 2013 alone, 1m individuals signed on to the new pensions scheme, with over 5.1m pension savers registered by the end of 2014. The new rise in the market is a trend that is expected to continue, with a product now firm- lyestablishedafteradecadeofslowbutsteadygrowth. At the same time, going forwards, companies offer- ing private pensions will likely have to think of new ways to develop the product, widening its appeal to Turkey’sexpandingmiddleclass.Maintainingprofitabil- ity will also be a challenge. Nonetheless, with assets under management in pensions more than tripling in the last five years – to some €12.2m at end-2014 accordingtoTurkey’sPensionMonitoringCentre–pri- vatepensionscontinuetobeamajordrawforinvestors looking at the Turkish market. The scheme also has positiveimplicationsforthenation’ssavingsrate,aswell as for the development of its capital markets. THREE PILLARS: Turkey has had a state social securi- ty system in place since the early post-second world warperiod.Thishasprovidedafirstpillar,PAYG,defined benefit mandatory contribution schemes to cover retirement and other social security benefits. This underwentmajorreorganisationsin1999andin2006, whenthreeexistingstateschemeswerebroughttogeth- erunderoneroof,theGeneralDirectorateofPensions Services at the Social Security Institution (SGK). At the same time, retirement ages and the minimum number of years of contribution were extended. The official retirement ages were set at 58 for women and 60 for men, with these being raised in stages to equalise at 65 in the year 2048. The motivation for the reforms was a common one – a rising level of the system’s deficit, with a shrinking premium base paying for sev- eraldiscretionaryrisesinthelevelofpensionpayments. There is also a second pillar of voluntary occupational pensions schemes, mainly among larger firms. These operate as either defined benefit or defined contribu- tion schemes, or sometimes both, and are managed by the General Directorate for Non-profit Organisa- tions, as they are run by non-profit foundations. SAVINGSINCENTIVES:Akeytothesegment’sgrowth has been government action. Turkey had a domestic savings rate of just 14% of GDP at year-end 2013, with thethird-lowestassetsinpensionsintheOECDtheyear before, at just 1.4% of GDP. The risks inherent in this have motivated the government’s efforts to switch fromtheprevioussystemofgivinga15-35%taxdeduc- tionongrossincomeorminimumwagetoprivatepen- sions, to matching 25% of individual contributions up to the minimum annual wage of TL14,850 (€5228). Participants have access to the government contri- butionsatanacceleratingrate–15%afterthefirstthree years,35%aftersixyears,60%after10yearsand100% at retirement age. At the same time, the tax taken at exit is levied on net investment returns, rather than on thetotalamountaccumulated.Theeffecthasbeenclear. Inthefirstquarterof2013,thenumberofparticipants in private pension schemes went up 9.8% over 2012, with 306,000 new contributors. By the end of the first year1mnewpeoplehadsignedupforprivatepensions. “These were big incentives,” Sezgi Biçe Özener, sen- iorresearchanalystatYapıKrediYatırımEquityResearch, toldOBG.“Theprivatepensionbecamethebestmethod to save. In the future, it will continue to be attractive for participants and for insurance companies, with some of the latter now migrating into the private pen- sions business.” One drawback is that the government also imposed a cap on the fees companies can charge for providing private pension services, reducing them from 3.6% to 1.9%. Nevertheless, private pensions are amongthemostattractiveaspectsoftheTurkishinsur- ancemarketandmaytotalTL240bn(€84.5bn)by2023. The current retirement age for women is 58 and 60 for men, but these will be steadily raised until 2048 to be equalised at 65. This is reducing the burden on the public pension system. 72 Pensions boom New legislation ushers in a new era for private pension contributions www.oxfordbusinessgroup.com/country/turkey
- 75. INSURANCE INTERVIEW Mehmet Bostan,General Manager, Vakıf Emeklilik Since its implementation in early 2013, how has the government’s matching scheme affected growth of the private pensions industry? BOSTAN: We can confidently say that the govern- ment’s matching scheme in early 2013 affected the privatepensionindustryinaverypositiveway.Thepri- vate pension system started to make a huge impact on the Turkish economy, especially after 2013. Since the government introduced a 25% contribution to each pension plan at the beginning of 2013, pension fund assets grew 85% in only two years, according to thePensionMonitoringCentre.Weexpectthisgrowth willcontinuein2015.By2023weprojectthatthenum- ber of contributors will be roughly 12m and that total funds will reach approximately TL400bn (€140.8bn). What is the importance of the new rules? BOSTAN: In my opinion, 2013 was a groundbreaking year for the Turkish pension system. Before 2013, when we lacked the government’s 25% contribution, the general public was not aware of the significance ofthepensionsystemanditscriticaleffectontheecon- omy. The new pension fund landscape has changed this mentality among people and the media, in par- ticular, and this new understanding has started to transform investment habits in the country. Before 2013 people used to invest in gold, real estate and deposits, but after the new legislation people have started to notice the benefits and viability of the pen- sion system. In my opinion, this is the most important change brought about by the new rules. Inadditiontothismainbenefit,thenewregulations havealsoopeneduptheindustrytothemasses.After 2013,withthegovernment’s25%contribution,every- one now has a motivation to save and people can start saving with a relatively small amount. The new system also introduced new saving options for infor- mal workers such as homemakers, students and sen- ior citizens. Since the new system began, more than 62% of people in the pool of potential contributors, i.e. 5m individuals, have entered the system. From my point of view, this is a significant achievement for the industry. Between 2003 and 2013, 3m people joined the pension system in Turkey. After 2013, with the government’s 25% contribution, there was a sharp increase and 2m new people were added to the total in only two years, and the system has reached over 5mpeopletoday.Finally,inmyopinion,thelastimpor- tant benefit is reflected in the saving rate. The saving ratehasreacheditshighestpointsince2008,at14.6% in the third quarter of 2014. These improvements are very important for the future well-being of the Turk- ish economy and people. Whatreformscanhelptheindustrygrowfurther? BOSTAN:Inhigh-incomecountries,corporationsplay a significant role in the pension industry by matching their employees’ contributions. In contrast, Turkish corporations provide only around 6.42% of total con- tributions. The government has started to encourage corporate contributions with some tax advantages and revisions to the vesting process. These incentives are not yet sufficient and this is currently the weak- est point in the pension system. However,theTurkishgovernmenthasrecentlypro- posed a solution to this problem by introducing a tri- al period for auto-enrolment in 2014. Under this new trial period, employers will be required to enrol their employees in the pension system automatically. Peo- plecurrentlydonotsaveadequatelyinTurkeysoauto- enrolment will be an effective incentive to help them save for their retirement. We expect that this auto- enrolmentprocesswillbefinalisedbytheendof2015. As a leading player in the pension fund industry, we also believe that the current pension fund system in Turkeywillbemuchstrongerandlargerwiththeimple- mentation of these new strategies, meaning both the government and corporate contributions. And con- sequently, an increased savings rate will provide a boost to the Turkish economy in the coming years. 73 THEREPORT Turkey 2015 Savings on the rise OBG talks to Mehmet Bostan, General Manager, Vakıf Emeklilik
- 76. INSURANCE INTERVIEW M UğurErkan, CEO, Anadolu Hayat Emeklilik Whateffecthavemultinationalinsurancefirmshad on the growth prospects of domestic players? ERKAN:Turkey’spositiveeconomicgrowth,favourable demographics and low penetration rates have drawn the attention of local and multinational players to the Turkish insurance sector. International companies, in particular, are increasingly looking to take advantage ofthesefactors.Infact,theforeignshareoftotalpaid- in capital in the life and pension business grew to 69% in2013,upfrom52%in2008;quiteasignificantuptick ingrowth.Atthesametimeinternationalfirmsaccount- edforsome45%oftotalpremiumsin2013,compared toabout53%in2008,whichisprimarilyduetothefact that individual life insurance premiums have grown substantially in recent years. So, yes, there have been more foreign players in the market, but there is still considerable room for growth bylocalfirms.Inaddition,banksarestillthemostimpor- tant distribution channel in Turkey for insurance prod- ucts, giving domestic companies an advantage when it comes to reaching customers. That said, I believe that they have a positive impact onthedevelopmentoftheinsurancesectoroverall,not only in terms of customers who gain access to a wider range of products and services, but also in terms of domestic companies that are incentivised to innovate andbecomemoreefficientasaresultoftheincreased competition.Ahealthylevelofcompetitionisgoodfor all of the parties involved. What efforts are being made to extend life insur- ance coverage to underinsured segments? ERKAN:TheleveloflifeinsurancepenetrationinTurkey is quite low compared to countries with a similar level ofdevelopment,andTurkeylagsfarbehinddeveloped nations. While there has been some improvement in this regard over the past few years, there is still signif- icantuntappedpotential,especiallygiventhecountry’s young population. In my opinion, the situation is pri- marilyduetoeconomicandsocio-culturalfactors,such as an unfamiliarity with insurance products and reluc- tance to invest in them. One thing that we have observed is that loan cus- tomersoftenbuyinsurancewhenitiseasilyunderstand- ableandofferedwithreasonablepremiumlevels.Inthis line of business it is very important to match customer needs with products offered, so creating positive cus- tomer experiences through high service standards, during both the sales and post-sales phases, will help the long-term development of Turkey’s life insurance segment. Thus, it is important that companies, associ- ations and agents work to increase insurance appreci- ation among the populace. This effort should not only betakenbylocalplayers,butbyforeignentrantsaswell. Many firms have been working to increase trust and awareness in collaboration with the Insurance Associ- ation of Turkey, which is empowered to develop insur- ancebusinessesandservices.Theseactivitieshavehad a very positive development on the life market. Howareemployersbeingincentivisedtocontribute to employees’ private pension accounts? ERKAN: According to the data provided by Pension Monitoring Centre, as of December 2014, the individ- ual participation rate is higher than the corporate par- ticipation rate. Only 27% of contracts are group con- tracts, and 24% of these group contracts are non-contributory group contracts. Our country has strong potential, in terms of increasing the number of participants and growing fund resources, but the ratio of group contracts in the system has not reached the desiredlevel.Legislationin2013extendedadvantages toemployers.Thevestingperiodwasincreasedtosev- en years and a more flexible structure was introduced for corporate contracts to improve employee loyalty. Tax relief was also revised so employers could claim a tax deduction on pension contributions of up to 15% of employee income with a cap on contributions that equates to the national minimum wage. Thus, I antici- pate a significant increase in corporate participation. 74 Getting involved OBG talks to M Uğur Erkan, CEO, Anadolu Hayat Emeklilik www.oxfordbusinessgroup.com/country/turkey
- 77. INSURANCE ANALYSIS Some 38%of Turks surveyed expressed interest in takaful insurance Sharia-compliant insurance, or takaful, is set to grow in Turkey, with its predominantly Muslim population showing increasing interest in Islamic finance prod- uctsandthegovernmentkeentosupporttheirgrowth. Insurance of any kind can be a hard sell in Turkey, with thepopulationgenerallyaversetoinsurancecoverand penetration levels as low as 1.4%, according to some estimates.TakafulalsohasaminimalprofileintheTurk- ish market at present. The two firms that offer Islam- icinsuranceproducts,NeovaSigortaandAsyaEmeklilik, account for less than 0.5% of the insurance sector’s assets, which stood at an overall TL24.2bn (€8.5bn) in 2013, according to official data. However, the increas- ing success of Islamic banks could point to a market opening for takaful underwriters. Turkey’sfourfunctioningIslamicbanks,knownas“par- ticipation banks”, have posted strong asset growth since 2005, with their holdings now accounting for around 5% of the $811bn of sector assets in August 2014 and consultancy firm EY has identified Turkey as a new market for sharia-compliant insurance. In the “Global Takaful Insights 2014” report, released in Sep- tember 2014 the market dynamics of Turkey’s takaful segment were noted as gaining traction thanks to the establishment of new participation banks. GOVERNMENT SUPPORT: With the government announcing plans to launch three state-owned Islam- ic banks as subsidiaries of the state-run conventional banks,ZiraatBank,HalkbankandVakıfBank,bytheend of2015,itisexpectedthatgreaterdepthwillbeadded to Islamic finance. This, in turn, may encourage new entrantsandbroadentheproductbasetoincludetaka- ful options. The EY report explained that the state is poised to offer long-term help. “The Turkish govern- ment’saimtotripletheshareofIslamicbankingassets in the country by 2023 with the help of state-owned participationbanksandincomingplayerswillhelpsup- port the gradual growth of Turkey’s takaful industry.” SLOW TAKE-OFF: Even though Turkey’s large and rel- atively young population offers a potentially lucrative market for takaful underwriters, EY suggests a num- ber of hurdles have to be removed before such prod- ucts could take off, with supply side constraints and a limitedlegalinfrastructureforIslamicfinancecurrent- ly hindering growth. Challenges for Turkey’s takaful market also include a fragmented market which lacks thepricingpowerandtoughcompetitionamonginsur- ers at the lower end of the market,” EY noted. Another study prepared by the General Council for Islamic Banks and Financial Institutions (CIBFI) and ThomsonReuters,agreedonTurkey’sdevelopingpoten- tial as a takaful market. In its survey, up to 38% of respondents expressed some interest in participation banking,with10%sayingtheywoulddefinitelybeinter- ested. The study, “Turkey Participation Finance Report 2014”, said while 10% was a low figure it nonetheless indicatedmarketpotentialfortakafulserviceproviders. “The government and industry are working to cre- ate more universal standards, but this is not easy to accomplishandwilltaketime,”ReşatKarabıyık,thegen- eral manager of BMD Securities, told OBG. “That said, therecentestablishmentoftheGlobalCenterforIslam- ic Finance by the World Bank and IFC is a step in the right direction. Two state banks are also expected to enter the space sometime in 2015, which will help to focustheeffortsoncreatingmorestandardisedrules.” PERSONNEL GAP: Specialist training for staff is an area highlighted by the CIBFI report as necessary for the development of a strong Islamic financial market inTurkey,whichrequirestheestablishmentofdedicat- edstudyprogrammesatuniversities.Thispersonnelgap couldbebridgedthroughproposalssuchastheestab- lishment of an Islamic university. The government announcedplansinOctober2014todevelopIstanbul’s May 29 University into an international Islamic univer- sity. Advanced courses in Islamic finance could help deepen knowledge and understanding on subjects such as takaful insurance. Another boost may come if thegovernmentincludestakafuloptionsincompulso- ry schemes like automotive or catastrophe insurance. Currently, the two companies offering Islamic insurance products account for about 0.5% of the insurance sector’s total assets. 75 THEREPORT Turkey 2015 With state financial institutions poised to enter the Islamic financial segment, it is expected that takaful insurance could see greater uptake. Talking takaful Sharia-complaint insurance is poised for state support
- 79. 77 Industry & Retail Defenceequipment manufacturers boosting exports Automotives industry aims for more value added Jewellery and precious metals exports are rising rapidly Good prospects for long-term retail sector expansion The first law governing retail enacted in January 2015
- 80. INDUSTRY OVERVIEW Industrial productsaccounted for almost 80% of exports in 2014 Turkey’s industry includes a wide variety of manufac- turers, primary producers and traders, responsible between them for a major share of the country’s GDP. Indeed, in 2014, exports by the entire automotive industry (including components) alone reached $22.27bn – more than the entire GDP of Iceland. Steel, chemicals, pharmaceuticals, electrical and electronic equipment, building materials, cars, jew- ellery and clothing are all major export earners – and major magnets for international investors. All have benefitted from – and, indeed, driven – much of the country’s recent economic growth, with “Made in Turkey” now more prevalent than ever as a label on all manner of products sold in world markets. INDEXES & EXPORTS: Figures from the Turkish Sta- tisticalInstitute(TurkStat)showthatatconstant1998 prices, the manufacturing sector contributed 24.2% of the country’s GDP in 2014. This compares to 8.8% fromagriculture,huntingandforestry;13.2%fromthe financialsector;and12.6%fromthewholesaleandretail trade sector. The manufacturing and retail sectors are also growing – they were up 3.78% and 1.4%, respec- tively, in 2014, year-on-year (y-o-y) – although this has been slowing in recent years; the 2000-14 peak was in 2010, when manufacturing growth hit 13.8%, followed by 10% growth in 2011. TurkStat also produces an industrial production index (IPI), which measures gross activity against a 2010 base line of 100 points. In 2014 the unadjusted IPI average increased by 3.6% to 120.5, while season- allyadjustedIPIroseby3.6%to120.8.Theannualaver- age for 2013 for industry was 116.3, up from 112.9 in 2012 and just 86.1 in 2005. Into the first quarter of 2015, and in January 2015 seasonallyandcalendaradjustedIPIdecreasedby1.4% comparedwiththepreviousmonth.Industrialproduc- tion declined by 2.2% in January 2015 y-o-y, with the biggestdroprecordedintheminingoutput,whichfell by 11.5% y-o-y. This was followed by manufacturing at -2.4%. However, electricity, gas, steam and air condi- tioning supply rose 2.8% y-o-y. The decline in exports to Iraq and Russia, as well as the overall growth slow- down in the European continent, hampered Turkey’s industrialproductivity.TurkStatfiguresalsoshowthat the seasonally and calendar-adjusted industrial turnover index stood at 167.3 in January 2015, down 4.9% compared to the previous month. In 2014 the less-than-friendly environmental fac- tors included a major rise in interest rates. In January 2014, the Central Bank hiked overnight rates from 7.75% to 12% and the weekly repo from 4.5% to 10%. However, rates were cut several times during the year starting in May, and as of March 2015 the upper overnightlendingratestoodat10.75%andthebench- mark weekly repo rate at 7.5%. The year 2014 also saw a major fall in value by the Turkishlira,whichdepreciatedaround15%againstthe US dollar during the year, a slide that continued in 2015. A third factor to contend with too has been political uncertainty and domestic turbulence. Busi- nessandconsumerconfidencehavetakensomething of a hit during these events. LABOUR: Industry also accounts for a large share of employment.AccordingtoTurkStat’sfigures,inDecem- ber 2014, out of a total labour force of 28.8m (all those over 15 years of age), 25.6m were employed, of which 20.5% worked in industry. This was less than services – the largest employer, with 52.8%, and agri- culture, with 19.5%. Given the 24.2% contribution to GDP of the sector, however, industry emerges as one of Turkey’s most productive activities. Usingthesame2010,100-pointbaseline,thenum- ber of people employed in industry has also been increasing. Calendar-adjusted industrial employment was up by 2.7% in 2014 compared with the previous year. The annual average for 2014 was 118.8, an increase from 115.6 in 2013. The hours worked have also gone up – from 110.4 in 2012 and 112.8 in 2013 to 114.7 in 2014, and so have the wages – the gross wages and salaries index Turkey’s industrial production index, which measures gross activity against a 2010 base line of 100 points, shows steady growth, with the annual average for 2014 at around 120, up from 116 in 2013, 113 in 2012 and 86 in 2005. 78 Made in Turkey Although industrial growth is slowing, exports are up and a number of segments have scope for expansion www.oxfordbusinessgroup.com/country/turkey
- 81. INDUSTRY OVERVIEW forthesectorrosefrom153.1in2013to176.8in2014. Productivity, itwould seem, has been rewarded. THETIGER’SROAR: Turkey’s industrial and manufac- turing heartland has long been the north-west – the region stretching from the Greek and Bulgarian bor- dersthroughIstanbulandsouthtoIzmit,Bursa,Eskişe- hir and around the Marmara region. This is still the area with the highest concentration of industry, although other important clusters exist around the capital, Ankara, the Aegean city of Izmir, and, increasingly, out across Anatolia, with cities such as Konya, Şanlıurfa, Adana and Kayseri also seeing industrial growth in recent times. This has led to them being dubbed the “Anatolian Tigers”. Yet while these businesses may have started out in Anatolia, many now have a quite global reach. Indeed, research by the Turkish business magazine Ekonomist inearly2014showedthatthetop500AnatolianTigers now account for around 10-11% of Turkey’s total exports and around 10% of the country’s GDP. This has led in recent times to a blurring of the dis- tinctions between the traditional, mainly Istanbul and north-western-based industries – often members of the Turkish Industry and Business Association (TÜSİ- AD), – and the Anatolians, often previously concen- tratedinorganisationssuchastheAssociationofInde- pendent Industrialists and Businessmen (MÜSİAD). In recent times, some of the most prominent Anatolian TigershavefoundaplaceinTÜSİAD,whichrepresents around 600 leading businesses, representing around halfthecountry’sworkforce.Indeed,severalseniorposi- tions in TÜSİAD are now held by the Tigers. TÜSİAD and MÜSİAD are thus the two largest and mostinfluentialprofessionalorganisationsinTurkey’s industrial world. The private sector is also represent- ed by the Union of Chambers and Commodity ExchangesofTurkey(TOBB),whose365membersare all representatives of local chambers of commerce, industry and commodity exchanges. On the governmental side, the Ministry of Science, IndustryandTechnologyhasbeentheleadbodysince 2011, when the previous, Ministry of Industry and Trade was reorganised and renamed. In addition, there are several other ministries that are also crucial for the sector, including the Ministry of Economy, the Ministry for EU Affairs, the Ministry of Environment and Urbanisation, and the Ministry of Energy and Natural Resources. IMPORTANCEOFSMES:WhileTurkeyhasmanylarge enterprises of domestic origin in its industrial sector, small and medium-sized enterprises (SMEs) still con- stitute a key part of the sector. Indeed, according to Turkish Treasury figures, SMEs account for 99% of all enterprises in the country, at 1.9m, along with around 78% of all employment, 62% of exports and 57% of total value-added. The sector receives support too from both the gov- ernment and from international organisations such as the European Investment Bank, which gives assis- tanceviaAkbank,bolsteringitsfinancingofSMEs.The SME Development Organisation is also there to assist in training, technology development and innovation, export orientation and quality improvement. TheTurkishCreditGuaranteeFund(KGF)alsoworks asanintermediarytohelpSMEsgainbankcredit,with anemphasisonhelpingnewSMEsinthehigh-techfield and those located in the regions. Post 2007/08 crisis, theKGFprovidedcounterguaranteesofaroundTL1bn (€352.1m), enabling SMEs to access some TL10bn (€3.5bn) in credit and helping fuel the rapid econom- ic turnaround of the 2010-11 period. Several other bodies are important players in the SME world, including the SME Venture Capital Invest- ment Trust and the Istanbul Venture Capital Initiative. The former is a risk capital intermediary in the finan- cialmarkets,thelatterTurkey’sfirstfundoffundsand co-investment programme. A third important force now is the Anatolian Ven- ture Capital Fund, which is being supported by EU pre- accession funding and will see some €16m of invest- mentsinSMEsintargetedAnatolianregions.Thefund is investing in companies in the 43 most disadvan- taged regions of Turkey, where there is considerable 79 THEREPORT Turkey 2015 SOURCE:TUIK*2010=100 Industrial production index, 2005-14* 0 30 60 90 120 150 2014201320122011201020092008200720062005 SMEs account for 99% of all enterprises in the country Small and medium-sized enterprises (SMEs) constitute a key part of the industrial sector. The SME sector receives support from the government, international organisations and several bodies providing funding.
- 83. INDUSTRY OVERVIEW growth potential.A minimum of 50% of the fund will be invested in provinces in the south-eastern Anato- lia region, for example. Government legislation was also enacted in early 2014 allowing for licensed angel investors to deduct from their annual tax base 75% of the capital they invest in certain, targeted SMEs, with this rising to 100%iftheinvestmentisinresearchanddevelopment (R&D). The legislation introduces for the first time a formal licensing procedure for angel investors and an accreditation process for angel investor networks. When looking at Turkey’s exports, several sub-sec- tors stand out as major performers. In 2014 accord- ing to statistics from the Turkish Exporters Assembly, of a total $157.7bn in exports, industrial products accountedfor78.8%.Withinthis,theautomotivesec- tor was the most valuable (see analysis) at $22.27bn, followed by the textiles sector at $18.7bn. The chem- icals sector came in third at $17.8bn. CHEMICALS: The Turkish Chemical Industry Assem- bly, which is under the umbrella of the TOBB, contains all the leading sector bodies, including professional organisations such as the Turkish Chemical Manufac- turers’ Association (TKSD) and the Istanbul Chemical Exporters’ Union, and representatives of the major companies and government agencies. Turkey’s chemical companies have been losing out intheArabSpring,aspreviouslyattractiveNorthAfrican markets have become volatile. Nonetheless, expecta- tions are for continued growth in exports, although at a lower level than in previous years. Aswithautomotives,thechemicalssectorhadbeen heavily dependent on European trade, but since the 2007/08 crisis, manufacturers have been looking increasingly to new markets in Latin America, Africa, theMiddleEastandAsia.ExportstotheEU,whichhad averagedaround60%beforethecrisis,wereataround 39% in 2013. Consumer goods such as cosmetics, soaps, glues and adhesives are one area where Turk- ish companies have done well in the new markets of LatinAmericaandAfrica,thoughsectorinsidersexpect tough competition, going forwards, in these areas. This is because South-east Asian countries – particu- larly Malaysia and Indonesia – have direct access to raw materials such as palm oil. One consequence of this has been that some Turkish companies, such as Evyap,havepurchasedplantationsinIndonesiainorder to secure their supply chains. One recurrent challenge for the subsector is its heavy dependence on imported intermediary goods. These account for approximately 40% of all imports for the sector, according to the TKSD, which with a depreciatingTurkishlirain2014and2015hasfurther squeezed company bottom lines. The TKSD is there- fore pushing government to back plans to build more integrated chemical ports in Turkey, along the lines of the Port of Tarragona in Spain. The idea is to import raw materials and then man- ufacture more of the intermediary products on Turk- ish soil, before re-exporting the higher value-added finished products. In 2014 the TKSD was carrying out pre-feasibility studies on approximately 10 potential sites for such ports. The plan does face some opposition, however, with the“chemports”havingtobelocatedonthecoastwith good access to existing industrial areas. Largely, this means the Aegean coast and other coastal areas – all placeswherethereisstrongcompetitionforlandwith tourism and real estate. The TKSD sees this as a bot- tleneck for foreign investment, however, which in recentyearshasconcentratedonconsumerproducts such as paints, soaps, detergents and cosmetics for the fast-growing Turkish market. In terms of base chemical investments, there have been only three majoronesinthepastfiveyears–anacrylicfibrejoint venture between Dow Chemicals and AKSA, and a polypropylene plant launched by Bayagen Group and Saudi Arabia’s Advanced Petrochemical Company – plus the largest petrochemical investment in recent years, the Azeri state energy company Socar’s Star refineryinvestment(seeEnergychapter).Inthemean- time, Turkey continues to manufacture low or middle- priced products, with the TKSD estimating an average 81 THEREPORT Turkey 2015 The chemicals segment’s exports were worth $17.8bn in 2014 The chemicals segment was heavily dependent on European trade, but since the economic crisis, manufacturers have been looking increasingly to new markets in Latin America, Africa, the Middle East and Asia. SOURCE:TUIK*2010=100 Industrial turnover index, 2005-14* 0 40 80 120 160 200 2014201320122011201020092008200720062005
- 84. INDUSTRY OVERVIEW cost pertonne of sector products at just $1.70. Rais- ing this requires major investment in value-adding technologies and R&D, to secure intellectual proper- ty rights on future products. The sector will likely be pushing for the government to take a more active stance on this too in the years to come. “In general, the Turkish chemical sector is dominat- ed by small companies, many of which are family- owned. Future development should move the sector further up the value chain, and it would also require consolidation and the formation of partnership in the sector,”VolkerHammes,CEOofBASFTurkey,toldOBG. KNITTINGITTOGETHER:Turkeyhaslongbeenfamous for its textiles – images of Turkish carpets reach back to early medieval times – while in recent years, its ready-to-wear industry has also been making great strides internationally. According to the Ministry of Economy, taken together, in 2013 – the latest year for which figures were available – textiles and clothing accounted for around 7% of Turkey’s GDP, plus an 18.3% share of Turkey’s total exports. Around1mpeopleworkinthetextile,ready-to-wear and leather industries too, in some 58,000 compa- nies, according to the Social Security Institution. Fur- ther2013datashowsthattheTurkishclothingindus- tryistheworld’sseventh-largestsupplierintheworld, and the second-largest supplier in the EU. It regularly ranks in the global top 10 of textile exporters. Traditionally, while raw materials were produced in Anatolia – Turkey ranked eighth in the world in terms of cotton production in 2013– they were then processed in Istanbul and other major north-western urban centres, such as Bursa. The industry was based in distinct quarters of the cities, where factories would produce usually low- priced, low value-added products for domestic sales and exports. Turkey was thus seen largely by interna- tional companies as an outsourcing destination. Thismodelhaschangeddrasticallyinthelastdecade, ascheapercommoditiesandlabour,mainlyinAsia,have undercutTurkey.Theresponseoflocalcompanieshas beentoshiftup-market,withTurkishtextileandcloth- ing companies now producing much higher-quality products, often now the result of world-class design. In recent years too, the factories have shifted out of Istanbul into Anatolia, with Adana and Kahraman- maraş currently major production centres. Meanwhile,someofthemoresuccessfulcompanies, such as Koton and İpekyol, have become boutique houses, opening their own stores in Europe and the Middle East, as well as supplying goods to existing international chains. Now too, Turkish companies are doing the outsourcing, having basic materials manu- factured in Asia and elsewhere. The Ministry of Economy figures also show that the sector exports around 65% of its production, with some80%ofthiscottonclothing.Knittedclothingand accessories accounted for 61.8% of the total, woven clothing the rest, with T-shirts and pullovers the most popular among the former group. Turkey is also the world’s second-largest manufacturer of hosiery, with this alone responsible for some $1.2bn in exports in 2013.Overall,2013sawsectorexpansion,too.Interms of knitted or crocheted exports, these were up 9.9% on2012,whilewovenexportswentup5.2%.Bothout- performed overall GDP growth of 4% and the overall export figures, which largely flat-lined. Whatobstaclestherearetofurthergrowthin2015 are those that apply to the economy as a whole: a slowdown in domestic growth, political uncertainty and the slow pace of recovery in key markets such as Europe.Atthesametimetoo,thegovernmenthasbeen trying to control credit growth. The lira depreciation has also hit those reliant on imported materials, with costs rising due to foreign exchange issues. This has undoubtedly put considerable pressure on some bot- tom lines, as Turkish consumers remain highly cost- conscious, with companies thus reluctant to pass on costs to customers. Even so, expectations are high thatexportswillremainonasolidgrowthpath.Cheap- erTurkishproductshavealsomademajorinroadsinto marketssuchasRussia,Ukraine,andtheotherformer Soviet countries, as well as the Middle East. OUTLOOK: Although industrial growth has slowed, strongfundamentals,suchasagrowingpopulationand geographical location, as well as good trade relations with key markets now in recovery, such as the EU, will stand the country in good stead. Challengesdoremain.Globalconcernsformpartof these,whileperceptionsofpoliticaluncertaintydomes- ticallymayalsoputnewinvestmentsonhold.Thehigh targets set by the government for 2023 (see Econo- my chapter) may also be difficult to achieve without a major surge in the European economy, in particular. For all these challenges, however, Turkey remains a strong economy, with its industries at the forefront of growth.Withexperienceofandconnectionswithboth the Western world and the Middle East and Asia, the country’s industrialists and business leaders remain in an advantageous position to leverage Turkey’s uniquestatusintofutureprofitsandinvestorrewards. 82 The north-west region has the highest concentration of industry in the country With competition mainly from Asia undercutting local textiles firms, Turkish companies have shifted up-market and now produce high-quality products. Some companies have opened their own stores in Europe and the Middle East and supply goods to existing international chains. www.oxfordbusinessgroup.com/country/turkey
- 85. INDUSTRY & RETAILINTERVIEW Bora Yalınay, CFO, Ülker What does Ülker’s $550m syndication loan, secured in November 2014, indicate for the potential of the industry and retail sector in par- ticular and for Turkey as a whole? YALINAY: First, it is important to mention that the size and attention of this syndication was unprece- dented in Turkey before this. A total of 26 banks comprising more than 10 new lending relationships from Europe, the US and Asia committed to the deal. Thesyndicationloanwasthelargestandmostdiverse syndicate of banks for any Turkish corporate, exclud- ing banks, in the past 10 years. Banks from Asia, including those from China, Tai- wan and Japan that had not taken part in any loan agreements in Turkey previously, participated in the syndication loan. The diversity of the participating banks resulted in the largest transaction seen in Turkey in the last 10 years. Indeed, we have been observing an increasing demand from international banks towards a wide range of blue chip Turkish companies in the last three years, as these companies have become sounder and more secure in the global financial are- na and are increasingly looking abroad to expand. What does Yıldız Holding’s recent acquisition of UK-basedUnitedBiscuitsmeanforthesector,and do you believe more acquisitions will come from the Turkish side in the future? YALINAY: If you happened to look at this deal from a confectionery company’s point of view, this type of transaction, i.e., the acquisition of United Biscuits, does not occur frequently. This type of deal tends to be rare and when it does occur, it boosts compa- nies’ brand strength and recognition, widens their geographical presence, and develops their distribu- tion capabilities in their operating countries, which is essential to doing business. Not only are Turkish firms becoming more active in foreign markets, but their brands are also gain- ing more recognition from non-Turkish customers around the world. Thus, it is fair to expect addition- al similar moves from Turkish companies that are also aiming to expand into international markets to strengthen and improve their operations. How has the recent rise in the price of cocoa impacted the processed food industry, and to what degree does this necessitate price hikes? YALINAY:Thevolatilityinthecommoditymarket,par- ticularly as it pertains to cocoa, which is one of the major raw materials for our business, has been a critical issue for almost a decade. There are several concernsasregardstheglobalsupply-demandimbal- ance of cocoa, including the fact that global demand increases by an average of 2% per year. Despite this, great parts of Asia, mainly China, consume very low levels of chocolate. Other challenges include farm- ers often having limited knowledge of modern farm- ing techniques and often confronting structural problems such as ageing of trees, decline in soil fer- tility, and pests and disease that attack cocoa trees, all of which drive the price of cocoa up. Price volatil- ity certainly has an impact on operations in a way that the increase in the commodity costs should partly be reflected to our end prices. What is the general growth outlook for the food products industry in 2015? YALINAY: In 2015 consumer demand in Turkey is expected to recover along with the country’s macro- economic indicators. Many will recall that 2014 was a year with high commodity costs mainly in cocoa, nuts, pistachio and wheat. However, as the prices for these products have since softened and visibility has increased, we are expecting higher domestic con- sumption of these products in 2015. Under these circumstances and expectations, we believe that the confectionery market is poised to outgrow the rate of the wider Turkish economy. 83 THEREPORT Turkey 2015 Front and centre OBG talks to Bora Yalınay, CFO, Ülker
- 86. INDUSTRY & RETAILINTERVIEW Sadettin Korkut, General Manager, Petkim Petrokimya Holding What do you believe are the primary factors driv- inggrowthintheTurkishpetrochemicalsindustry? KORKUT: The petrochemicals industry provides raw materialstonumeroussectors.Globally,ithasassumed alevelofimportanceonparwiththeironandsteelsec- tor, as one of the primary forces in the development of a country’s industrial base. In Turkey, demand for petrochemical goods outpaces GDP growth by a fac- tor of two. In fact, Turkey is one of the fastest growing markets for thermoplastics after China. GivenTurkey’slackofdomestichydrocarbons,what keeps the chemicals industry competitive? KORKUT:AlthoughTurkeyreliesonimportsforthevast majorityofitsnaturalgasandpetroleumneeds,itdoes have other advantages. The chemicals industry is a capital-intensive sector requiring advanced informa- tion and technology. Turkey is able to leverage its flex- ible manufacturing model, highly-productive human resources, and its proximity to sources of hydrocar- bons and to potential export markets. In addition, the governmentprovidesspecialsubsidiesforlocalproduc- tion that also add to the country’s competitiveness. When you look at some of the most successful coun- tries in the sector, such as Germany, France and South Korea,youseethatmanyofthempossessrelativelyfew hydrocarbon resources themselves. What is the role of the petrochemicals industry in helpingTurkeytoreachits2023targetsandthegoal of having $50bn in chemical exports in particular? KORKUT:Turkeyiscurrentlyanetimporterinthechem- icals sector, unlike the EU countries mentioned above. In 2014, the trade deficit for the chemicals sector, excludingmineraloils,stoodat$20.47bn.Turkeyisthe 19th largest economy in the world, but ranks 29th in chemical product sales and 32nd in ethylene produc- tion. Given the considerable trade deficit facing the country,itisimportantthatitdevelopsitsexportcapac- ity across all industries, including chemicals, which is whythegovernmenthassetthesegoals.Overthepast few years, the global chemicals industry has suffered as a result of the lingering effects of the financial cri- sis. The petrochemicals segment was growing at an annual rate of 6-8% before 2008 but has experienced annual growth of 4-4.5% since then. That said, some regionshavefaredbetterthanothers.Whilemanynew projects have been cancelled in Europe, the resource- rich countries of the Middle East and North America continue to attract investment; for example, by 2018, 10m tonnes of new ethylene capacity is expected to come into play in North America and 7.5m tonnes is expected to be added in the Middle East. To reach its ambitious 2023 export goals, the Turk- ish chemicals sector will need to grow at an average annual rate of 12%. Developing the petrochemicals segment is essential, as all other segments within the sectorrelyontherawmaterialsthatitprovidesfortheir own manufacturing needs. In order to ensure that our chemicalexportsarecompetitive,wealsoneedtokeep costs down and finances under control. Aggregation of production facilities will play a very important role in addressing both of these needs. Plans for an inte- gratedrefinery,petrochemicals,energyandlogisticshub are currently being developed for the Petkim Peninsu- la with the help of SOCAR, the Azeri state-owned oil company. By bringing together these disparate inputs, webelievethattherearelargegainstobehadinterms of the development of the country’s chemical manu- facturing industry as a whole. How successful has the sector been in moving towardstheproductionofhighervalue-addedprod- ucts and reducing imports of intermediate goods? KORKUT: In 2014, high-technology goods accounted for 5-6% of Turkey’s $157bn of exports. In order for thisproportiontoreachthetargetof20%,thereneeds tobealong-termplanforthesector.Additionally,Turkey needs to decrease its reliance on imported intermedi- ategoods,whichcurrentlyaccountfor70%ofimports. 84 Growth chemistry OBG talks to Sadettin Korkut, General Manager, Petkim Petrokimya Holding www.oxfordbusinessgroup.com/country/turkey
- 87. INDUSTRY ANALYSIS Turkey hasnumerous manufacturers of defence equipment Turkey has seen a transformation in its defence indus- try in recent years, with a noticeable shift from arms procurement to arms manufacture and sales. Turkish- made defence equipment has been attracting buyers fromaroundtheworld,buildingongrowingconfidence and skill in a string of related domestic sectors, from automotives to shipbuilding and aerospace. The over- all aim of the country’s defence producers is an ambi- tious one: the goal is to boost exports to $25bn by 2023, from around $1.6bn in 2014. Indeed, they have beenrisingrapidly,asthedefenceandaviationsector’s exports were up by 18.7% in 2014. According to the IHS Jane’s Annual Defence Budg- etsReport,in2014Turkeywasranked15thintheworld with a defence budget of $17.2bn, while the Defence Ministry reported that the country’s defence spend- ing totalled TL29.4bn (€10.4bn) in 2014. Two Turkish companiesarelistedamongtheworld’stop-100defence companies too – Turkish Aerospace Industries (TAI) and Aselsan, a military electronics specialist. TURKISH MADE: In terms of soldiers, Turkey has the second-largest army in NATO, after the US, at 290,000, accordingtoa2014TurkishLandForcesstatement.The Turkish army has a fleet of ageing US M48 and M60 tanks, with some of the latter modernised with Israeli cooperation into M60 Sabras, and it also has German LeopardIandIIs.Thisfleetwillbemodernisedwiththe addition of a main battle tank (MBT) built in Turkey – the Altay. In partnership with South Korea, 200-250 of these will be produced. This deal is a good example of thetransformationtakingplace,asuntilrecently,South Korea had been a major arms exporter to Turkey. The expectation was that Turkey would also buy the Kore- ans’ XK2 MBT – but instead, this now forms the basis of the Altay being designed and built in Turkey. In the deal will be a revamp of Otokar, a subsidiary of Koç Holding, which is a producer of light military vehicles, includingtheCobraarmouredcar,whichhasbeensuc- cessfullyexported.ThearmyalsodrawsonTurkishfirms for small arms. The Mechanical and Chemical Industry Corporation produces assault rifles, explosives, rock- ets and other munitions, while also holding a stake in Roketsan, which produces missiles, mortar and other typesofshells,alongwithrockets.Turkeyisalsoexpand- ing its navy, signing an important contract for a land- ingplatformdockprogrammeinearly2014withSedef Shipyard, in partnership with Spain’s Navantia. TOP FIRMS: TAI became the coproducer with Gener- al Dynamics/Lockheed Martin of F-16 fighter jets for theTurkishAirForcein1984.Over30yearslater,ithas been in the news as the producer of Turkey’s first indigenousun-mannedaerialvehicle,ordrone,known as the Anka. Serial production of this is due to start in 2016, with the drone marking a serious advancement in the technological level and sophistication of the Turkish defence industry. The Turkish Armed Forces (TAF) owns 55% of TAI’s shares, with the Under-secre- tariat of Defence Industries at the Ministry of Defence holding the rest. TAI earned $1bn in exports in 2013, with the business split roughly 50:50 between military and civilian uses. Aselsan, meanwhile, was set up in 1975, with the task of supplying the TAF with its com- municationsequipment.Ithassincebranchedoutinto electronicwarfare,radar,guidancesystems,microelec- tronics and other defence-related electronic and dig- ital applications. By 2014 it placed 67th in the world among defence companies in terms of total sales on US-based Defence News’ top 100 list. Also in 2014, the company signed memoranda of understandingwithRolls-Roycetoworkonenginecon- trolsystems,anditsignedaframeworkagreementwith Airbus outlining future cooperation on satellites, civil andmilitaryavionics,lasersystemsandsecuretelecom- munications. Havelsan is a Turkish military electronics systems manufacturer, producing reconnaissance and surveillancesystems,intelligencesuitesandflightsim- ulators.ThustheTurkishdefencesectorhasagrowing portfolio of products and list of internationally minded partners. State backing for technological advancesisalsobeingtranslatedintohighperformance. In the past few years the country has shifted from arms procurement to arms manufacture and sales. Two Turkish companies are now listed among the world’s top-100 defence companies. 85 THEREPORT Turkey 2015 High performance The defence sector is thriving with a range of new equipment and systems being produced locally
- 88. INDUSTRY & RETAILINTERVIEW Muharrem Dörtkaşlı, CEO, Turkish Aerospace Industries Whatisthestrategicimportanceofdevelopingthe Turkish aerospace and defence industries? DÖRTKAŞLI:Theaerospaceanddefenceindustrypro- motes the development of different segments of the economysuchasaeronautics,software,sensorsystems and information technologies, as well as the country’s industrial base. Between 2006 and 2014, the annual revenue of Turkey’s aerospace and defence industry increasedby220%,andexportsroseby240%.By2014 the industry’s revenues reached $5.5bn, with exports of$1.65bn.Fromitsbeginning30yearsago,theindus- try continues to grow as more finances are allocated to research and development (R&D) activities, driving greater innovations in products and technologies. TomeetthefutureneedsoftheTurkishArmedForces, theindustryisworkingonthenextgenerationoffight- eraircraft,lightutilityhelicopters(LUH)andunmanned airvehicle(UAV)systems.Theseprojectsofferanoppor- tunity to collaborate in technical fields with allied nations.Otherprojectsinvolvingtanks,frigatesandair defencesystemsprovidesimilaropportunitiesforjoint working. Technologies developed as part of these mil- itary programmes also help drive future commercial developments, with the LUH and regional airliner pro- grammes two key examples. Further, the Ministry of Transportation, Maritime Affairs and Communications isencouragingtheaerospaceindustrytobuildanation- al regional passenger aircraft by 2023. Inwhatwayisthegovernmentworkingtoincrease R&D spending in the sector? DÖRTKAŞLI: For industries to achieve long-term sus- tainability and stay competitive globally, they must invest in R&D activities to produce new technologies and processes. However, individual businesses, espe- ciallythoseincompetitiveandhigh-techfields,require government support. Similarly, universities and small andmedium-sizedenterprisesneedtobeencouraged bystateincentivestoparticipate.Withthisinmind,the governmentandthedomesticaerospaceanddefence industry are taking a number of different steps. Indi- vidual businesses, for example, have invested in tech- nology development zones such as the Middle East Technical University Technopolis. Not only do the busi- nesses benefit from physical proximity to university research centres, but universities are also exposed to abusiness-orientedapproach.Thegovernmentiscon- tinuing to help incentivise such investments. Government development programmes are also important drivers of innovation, with individual com- panies taking on the technical and financial risks, as well as being able to operate as an original equipment manufacturer (OEM) if they are successful. Products developed this way include the UAV platform and advancedtraineraircrafts.Thesameapproachwastak- enfortheLUHdevelopmentprogrammeandweexpect thefighter/traineraircraftdevelopmentprogrammeto followthesamemodel.Inaddition,EUR&Dprogrammes such as Horizon 2020, the Clean Sky Joint Technology Initiative, the Single European Sky ATM Research Joint Undertaking and the Seventh Framework Programme are also key initiatives taking place. To what extent are Turkish aerospace and defence products in demand at a global level? DÖRTKAŞLI: Over the past decade there has been a steady rise in international demand for Turkish-pro- duceddefencesolutions.Between2005and2014the compoundannualgrowthrate(CAGR)oftotalexports was8.8%,andtheCAGRfordefenceexportswas19.3%. In 2014 Turkey’s total export volume was $157.6bn, with $1.65bn in defence and aerospace. Most interest is currently concentrated in the Middle East, North Africa and Asia, though sub-Saharan Africa and South America are expected to play a key role going forward. WesternOEMscompriseashareofthemarketforTurk- ish component and sub-system manufacturing. The governmenthasassistedprivatecompaniesinhelping to develop these relationships and is focused on fur- ther strengthening the sector’s global export market. 86 Incentivising growth OBG talks to Muharrem Dörtkaşlı, CEO, Turkish Aerospace Industries www.oxfordbusinessgroup.com/country/turkey
- 89. INDUSTRY ANALYSIS Turkey’s steelproduction capacity increased to 50.2m tonnes in 2014 While Turkey’s metals industry may not be globally renowned, its products are a major export and source of revenue. Indeed, a “Made in Turkey” stamp can now befoundoneverythingfromthecopperwiresinNASA spacecraft to the steel pots and pans in many of the world’skitchens.Thesectorfacessomeimportantchal- lenges, however, in its future development. Sourcing rawmaterialsisoneofthechiefones,withmovesafoot toboostdomesticexploration,aswellastofreeupsup- ply beyond the current warehouse system. Meanwhile, exports fell in 2014, with metals manu- facturerslookingtoexpandtheirreachtountappedmar- ketsinAfrica,SouthAmericaandbeyond.Lowdemand in the global flat steel export markets such as the EU and the entrance of some exporters to Turkey’s tradi- tionalmarketswithlow-pricedsteelproductsaresome of the challenges faced by Turkish steel producers. DOMESTIC CAPACITY: In terms of steel, Turkey’s pro- ductioncapacityincreasedfrom49.04mtonnesin2012 to 49.6m tonnes in 2013, reaching a level some 35% higherthanin2007,thelastyearbeforetheglobaldown- turn. In 2014 production capacity climbed to 50.2m tonnes,accordingtotheTurkishIronandSteelProduc- ers’ Association. Some 77% of production in 2014 was done by electric arc furnaces (EAFs), with the most common product steel billets. Some 24.6m tonnes of these were produced, down 6.4% on 2013, while slab productionstoodat9.42mtonnes,up12.7%onthepre- vious year. According to the World Steel Association, theworld’scapacityutilisationrateforcrudesteelpro- duction fell to 70.8% in 2014 from 72.4 % in 2013. In linewiththeglobaltrend,capacityutilisationofTurkey’s steelindustrydroppedfrom70%in2013to68%in2014. The dominance of EAFs, rather than blast furnaces, indicates that Turkish steel is primarily reliant on scrap metal–muchofitimported–asarawmaterial.Sourc- ing this though has been proving increasingly difficult, as countries with their own EAFs have begun limiting their exports of scrap. The EU has also debated intro- ducing limits. Sourcing raw materials is also a growing concern for the aluminium sector. As with steel, the domesticconstructionboomhasaddedtodemandfor thismaterial,whichwasalreadybenefittingfromgrowth in the automotive sector and other aluminium-using industries. The most recent available figures put pri- mary production at around 65,000 tonnes per annum, withEtiAluminiumthesoleprimaryproducer.Second- aryproductiondoestakeplace,againusingscrap.While Turkey has extensive reserves of bauxite, raw materi- als such as alumina have to be imported, with sector participants concerned that the prices of such mate- rials include too high a premium due to control of the supply chain at the warehouse level by an internation- al monopoly. Istanbul Minerals and Metals Exporters Association (IMMIB) says that its members claim two- thirds of the price of their products is made up of raw materialcosts.Anotherchallengeiselectricity.Electric- ity, which is a staple of aluminium and copper produc- tionandofEAFsteelproduction,ispricey,anditsunre- liable availability can be a limitation on expansion. CHANGING TACK: One way the sector has respond- edtothesedifficultiesisbyboostingtheimportofingots manufactured in countries where electricity is cheap- er, then using these to make finished or semi-finished products for domestic consumption or export. At the same time, there is increasing interest in exploration within Turkey to try and source more local raw materi- als. Another response has been to go up-market, pro- ducing higher-quality aluminium and steel products for specialist sectors, such as aerospace. These strate- gies appear to be having an effect. In 2014, according to the IMMIB, aluminium exports were up 7.6%. The expectation is that recovery in Europe and the devel- oped markets will keep business buoyant, with metals exports to the EU accounting for 50% of the total. Turkey has also gained a good reputation in competi- tion against the world’s largest metals producer, Chi- na. Turkish metals are known for being better quality, and,whilemoreexpensivethanChina’smetal,theyare cheaperthanthoseproducedindevelopedeconomies. Turkey’s steel production capacity increased from 49.04m tonnes in 2012 to 49.6m tonnes in 2013, reaching a level some 35% higher than in 2007, the last year before the global downturn. In 2014 production capacity climbed to 50.2m tonnes. 87 THEREPORT Turkey 2015 Iron in the soul Metals industry will benefit from an expected rise in demand
- 91. INDUSTRY ANALYSIS Jewellery exportshave recorded significant growth in recent years Turkey is one of the world’s top gold and jewellery exporters, sending manufactured pieces and fine pre- cious metals and stones to many regional countries as well as further afield. The country imports a great deal of these valuable commodities and products, while its domestic market is a robust one – for both the buying and selling of gold, diamonds and jewellery. There is a large and developed domestic production industry for jewellery,withagrowinginternationalreputation.Leg- islative moves taken in 2014 could also see the indus- try expand further, with the 20% special consumption tax (SCT) on polished diamond imports abolished in 2014, further liberalising an already liberalised sector. In the meantime, gold and jewellery continue to be in greatdemandasstoresofvalueinuncertaintimesand as items of high artistic and decorative quality. SURGING EXPORTS: According to figures from the Jewellery Exporters Association (JTR), in 2012, Turkey exported 100,852.36 kg of gold jewellery – a figure whichincludesbothplaingoldanddiamondpieces.This was worth some $1.66bn. For 2013, the numbers rose to108,480.66kgand$2.01bn–thevaluejumpingfur- ther than the quantity due to fluctuations in interna- tional prices. According to the JRT, jewellery exports recorded substantial growth in 2014 too, rising to around $4.5bn. The latest available data shows that in terms of silver jewellery, the totals for 2012 were 113,430.2kg,worth$108.3m,andfor2013,120,401.8 kgand $108.4m – illustrating weak silver prices during the year. Jewellery composed of both gold and dia- monds worth $44.8m was exported in 2012, with this rising to $54.68m in 2013. Silver and diamond jew- ellery showed even more spectacular gains, with the value of these pieces exported rising from $820,970 to$2.25m.Pearlsandpearljewelleryareanothermar- ket segment in Turkey, with these seeing exports of $2.13m in 2012 rise to $2.35m in 2013. The top five destinations for these exports have remained roughly thesameforthelastfewyears:theUAEisusuallynum- ber one, followed by Iraq, then Russia, Germany and the US. Iraq is largely northern Iraq, as Erbil has estab- lished itself as the centre for gold and jewellery trad- ing throughout the rest of the country. TheArabmarketisakeyoneforTurkey,withdemand for precious metals, stones and jewellery as a store of valuehighthere,whileculturalvalues,suchasrequire- ments for gold as a wedding gift, also boost demand. SHIFTINGSANDS:Turkey’smodernjewellerybusiness took off following the liberalisation of the gold trade in the 1980s. Restrictions on the import and export of gold were gradually lifted, and by the 1990s, the trade was established enough to set up the Istanbul Gold Exchange in 1995. Production techniques improved, along with designs, which often achieved a fine, east- west synthesis. From 2004 onwards, however, when global gold prices began to march upwards, demand startedshiftingtowardsdiamonds.Thisshiftisthemain reason organisations such as the JTI pushed the gov- ernmentfornewlegislation.Unlikegold,orfinisheddia- mond products, imports of pure diamonds used to be subject to the SCT of 20%. In addition to the removal of the SCT for polished diamond imports, the 18% val- ue-added tax for diamond trading for members of the Borsa Istanbul was lifted in 2014, enabling registered diamondtransactions.OnOctober1,2014,BorsaIstan- bul began diamond trading in an effort to capture a share of the $10bn market that is currently dominat- ed by Israel, Belgium and Dubai. Meanwhile, Istanbul Diamond Exchange, which has alreadybeenofficiallyregisteredandhas200members, has yet to start trading. Insiders suggest that with the 20% SCT now abolished, the exchange is expected be a great success, with many traders from Tel Aviv to Mumbai waiting to come in. In March 2015 it was reported that Turkish and Israeli industry leaders are working together to open the exchange, with the plan including a 150,000-sq-metre diamond compound in Istanbul. At the same time, sector stakeholders are making efforts to widen registration of traders and businesses, further regularising the growing sector. 89 THEREPORT Turkey 2015 Recent legislative changes expected include abolishing the 20% special consumption tax on polished diamond imports and lifting the 18% value-added tax for diamond trading for members of the Borsa Istanbul. More precious Legislative changes to further boost growth of the jewellery industry
- 92. INDUSTRY ANALYSIS The developmentof more value-added segments remains a priority WhiletheeconomicdownturninneighbouringEurope affectedTurkey’sautomotiveindustrynegativelyinthe years after 2008 – as its largest export market shrank – 2013 saw some signs of a recovery north of the bor- der,withaconcomitantboosttoEuropeansales.Euro- pean car sales grew in 2014 and early 2015, with the vast majority of Turkey’s automotive exports destined fortheEU.Now,thesectorfacesthechallengeofbuild- ing on that while also keeping its interests to the fore in the increasingly important trade talks now under way between the EU and the US. At the same time, the development of more value-added segments of the industryremainsapriority,aseffortstoboostmorelocal- lyproducedcontentinTurkish-assembledvehiclescon- tinue.Despitethesechallenges,Turkey’sautomotivesec- tor remains one of the largest in the region and the world,witharaftofassociatedindustries,investments and jobs also dependent upon it. FACTS & FIGURES: The first major automotive plant in Turkey was established in 1956, when Otosan was licensed to produce Ford vehicles. Import substitution policeswereoftenfavouredbackthen,withtheDevrim sedan the first locally designed and manufactured car. By 1963, the total number of units produced was only 3000though,althoughin1968,Fiatcamein,viaTOFAŞ, and in 1969, Renault entered, via Oyak-Renault. By 1976, output had reached 110,000 units. Since then, Toyota, Opel, Mercedes, Hyundai, Isuzu and MAN have all started producing vehicles in Turkey, with output reaching 421,000 units in 1993, then 431,000 in 2000 and1.23min2011,accordingtotheAutomotiveMan- ufacturers’ Association (OSD). There are now 14 original equipment manufactur- ers (OEMs) in Turkey, with a total capacity in 2014 of 1.73m units between them. The largest capacities are Ford Otosan, with 410,200 units; TOFAŞ, with 400,000 units;OyakRenault,with360,000;HyundaiAssan,with 200,000 units; and Toyota, with 150,000 units. In 2013 some $1.2bn of realised investments were made in the sector, bringing the total since 2009 to $4.28bn. Mostproductionisbasedinthenorth-westofTurkey, with Kocaeli the location for Honda Türkiye, Hyundai Assan, Ford Otosan (who are also in Eskişehir) and AnadoluIsuzu(AIOS).ToyotaisinneighbouringSakarya, along with Otokar, and Temsa Global (who are also in Adana). Bursa is home for Karsan and Oyak Renault. In 2013, OSD figures show that 42,330 people were employedbytheOEMs,downfrom44,655in2012and 44,896 in 2011. In addition to the OEMs though, there are4000othermanufacturersoperatinginandaround the sector, employing 200,000 people in associated trades such as wheel and radiator production, electri- cal equipment, springs and batteries. The plastics, leather and glass industries, as well as the steel and aluminiumsectors,arealsoheavilyinvolvedinautomo- tives, alongside the chemical industry, which provides paints, coatings and a range of other materials. OUTPUT & EXPORTS: The total output for 2014 was 1.22m–upfrom1.17min2013.OyakRenaultproduced themostunitsin2014,at318,246units,aheadofFord Otosan, with 244,682, and TOFAŞ, with 222,807. In the 2006-14 period, capacity utilisation rates (CURs) have thushoveredbetween60%and80%,dependingonthe unit type, with the average CUR across all varieties in 2013 standing at 69.11%, according to the OSD. In2014too,Turkeyexportedapproximately902,194 units – or around 74% of its total production, accord- ing to OSD. This export total was worth some $13.3bn, uponthe$12.5bntheindustryearnedTurkeyin2013. The number of units exported was also up on the pre- vious year’s total of 843,467. Thetwomaintypesofunitsexportedhavelongbeen passengercars(PCs)–in2014,thesemadeup581,993 units – and pick-ups, which accounted for 269,995 units. In terms of value, buses are also a significant export – in 2014, although only 4629 buses were exported, these were worth some $985m. Yet for all its export success, a feature of the Turk- ishmarketisthatitisalsoalargeautomotiveimporter. In2014,indeed,theOSDfiguresshowatotalof429,982 In 2014 Turkey exported approximately 902,194 units – or around 74% of its total production. This export total was worth some $13.3bn, up on the $12.5bn the industry earned in 2013. 90 A leading light Automotive sector sees a rise in investment, output and exports www.oxfordbusinessgroup.com/country/turkey
- 93. INDUSTRY ANALYSIS PCs imported.However, imports dropped substantial- ly in 2014 – a total of 517,527 PCs were imported the previous year. THE RISE OF CAR OWNERSHIP: With per capita GDP inTurkeyrisingto$10,404in2014from$4565in2003, according to TurkStat, domestic sales have also risen over recent years. In 2009, OSD figures show, 575,869 unitsweresolddomestically,risingto910,867in2011. In 2012, sales were down, to 817,620, but picked up to 893,125 in 2013. In 2014 sales dropped again, to 807,486, with the increase in interest rates in early 2014 and a slowdown in economic growth impacting themarket.ThemajorityofthesesaleswerePCs,which weredown11.6%year-on-year(y-o-y)with563,456of the total vehicles sold. By early 2015 retail sales were picking up again. New car sales recorded their fifth consecutive month of y-o-y gains at +57% in February 2015. The first two months of 2015 recorded a 32.9% jump in sales compared to the same period in 2014. In 2014, some 73.2% of all PCs sold in Turkey were imported.Theleadingmanufacturerinthesesaleswas Volkswagen, followed by Opel and Ford. Light commercial vehicles (LCVs) have also been populardomestically,astheirdualfunctionality–busi- ness and family – tend to make them an entry vehicle to car ownership. LCVs are also subject to lower taxes than passenger cars. As most LCVs cost less than TL50,000 (€17,605), they also benefit from a lower minimumdown-paymentrateof15%–afterTL50,000, the rate rises to 50%. Special consumption tax is also being raised incrementally on vehicles, further widen- ing the gap between passenger car and LCV prices. In2013and2014,however,LCVsalesweredownby 14.8%and1.4%,respectively.Commercialvehiclesales domestically dropped as a whole in 2014, by 15.1%, according to the OSD, with heavy commercial vehicles (HCVs) also shrinking, by 14.8%. Also impacting sales here has been a passing on of the cost of lira devalu- ation in 2013 – many companies kept prices low into the new year, while many consumers also anticipated a future price rise and brought their vehicle purchas- es forwards. The 2014 hike in interest rates also made the cost of car loans more expensive. The year 2015 is likelytoseehigherdemandthanin2014,giventhesurge in sales seen in the first two months of the year. Con- sumer confidence, however, has shown persistent decline,withtheconsumerconfidenceindexfallingto 64.4 in March 2015 – the lowest level since 2009. AGLOBALPLAYER:ThedownturnintheEUeconomies following the 2007-08 crisis was felt sharply by the Turkish automotive sector – the loss of demand was around 30% in the years 2008-13, according to the OSD.Sincethen,thesectorhasbeenlookingtoincrease exports to other countries, with some success. While exports to the Middle East, Africa and Central Asia had beenlessthan5%inthepast,theyhadgrowntoaround 15%byearly2014.Atthesametimethough,thedomes- tic market, while growing, is also not expanding fast enoughformanymanufacturers.TheOSDpointsathigh taxesondomesticsalesascrimpingdevelopment,while also hindering investment; with demand based large- lyonexports–andthusthevagariesofothereconomies –itismoredifficultforinvestorstoplanfutureincreas- es in capacity. The government, however, is trying to cut the country’s current account deficit by restrain- ing consumption. IMPACT OF INTERNATIONAL TRADE DEALS: Thus, the EU market remains crucial for Turkey, which bene- fits greatly from a Customs Union (CU) with the Euro- peans, enabling duty-free exports. Now, however, a concerninthesectoristheprogressoftalksonaTrans- Atlantic Trade and Investment Partnership (TTIP) between the EU and the US. These negotiations may have a profound effect on Turkey, due to its CU with the EU, yet, as a non-EU member, Turkey has no direct influenceonthenegotiations.TheTTIPmayalsodove- tail with free trade agreements throughout the Amer- icas and across the Pacific, creating a concern that Turkey may get left behind. While US goods would be able to enter the EU – and thus Turkey, via the CU – duty-free, there would be no obligation on the US to accept Turkish goods under the same terms. In March 2014, the US declared that it was in favour of Turkey being brought into the TTIP, preferably as an EUmember.Thelikelihoodofthisbeingachievedunder current circumstances, however, seems remote, leav- ing an edge of uncertainty. Nonetheless, for now, with the EU economies grad- uallyimproving,themedium-termpicturemayseeben- efitsforthosemanufacturersreadytohittheEuropean marketonceagain.AfterclosingitsfactoryinSouthamp- ton in the UK in 2013, Ford Otosan has shifted produc- tion to Turkey, opening a new $511m plant in Yeniköy in the north-western province of Kocaeli in May 2014. ThenewplantproducesminivansandLCVswhichcould bolsterthecompany’sroleasaleadingexporter.TOFAŞ too is expected to see a new PC roll off the assembly linesin2015,whilecreditrestrictionshavebeeneased withinterestratecutsintherunuptopresidentialbal- lot in 2014 and general elections in 2015. Plenty still to aim for then in Turkey’s dynamic automotive sector. 91 THEREPORT Turkey 2015 There are 14 original equipment manufacturers in Turkey, with a total capacity in 2014 of 1.731m units Although in 2014 domestic car sales declined on the back of an increase in interest rates and a slowdown in economic growth, by early 2015 retail sales were picking up again. The first two months of 2015 saw a 32.9% surge in sales compared to the same period in 2014.
- 94. RETAIL OVERVIEW The fundamentalsof the market support long-term retail growth With the size of the market widely expected to double overthenextdecade,Turkeyrepresentsamajoroppor- tunity for retailers. Yet with recent years seeing big internationals pulling out or downsizing their partici- pations, and as the pace of economic growth slows, consumer confidence is weakening and some chal- lengesdoremain.Atthesametimethough,localgroups have thrived, with this applying not just to modern retail, but to traditional outlets as well. Turkish retail therefore demonstrates that while strong GDP and populationgrowthcanprovidesomegoodfundamen- tals, flexible management, good organisation and a deepunderstandingoflocalmarketandhabitsarealso invaluable in determining which retailers will thrive. FACTS & FIGURES: The fundamentals of the Turkish marketsupportlong-termgrowthoftheretailmarket, althougheconomicgrowthhassloweddowninrecent years – the GDP expanded 2.9% in 2014, according to data from the Turkish Statistical Institute (TurkStat). The mean annual GDP growth rate over the 2003-13 period was 5% though, despite the global economic downturn.PercapitaGDPhasrisenfrom$4565in2003 to$10,404in2014.Populationexpansionhasalsodriv- enthisgrowth.TurkStatdatashowTurkey’spopulation at 77.7m at the end of 2014, giving an annual growth rate of 1.3% – down from 1.37% in 2013. The median age in 2014 was 30.7, while in 2008 the median was 28.5years.Thus,whilethepopulationisageing,almost half of all citizens are under the age of 30. According toareportbyBancoBilbaoVizcayaArgentaria,by2020 Turkey’s affluent and medium-upper middle class will accountforsome45%ofthepopulation–upfrom27% in 2010. Much of the country’s growth has been con- sumption-driven,too.Householdconsumptionwasup 4.6% year-on-year in 2013, and 1.3% in 2014. DuetorecentchangesinTurkStat’sstatisticalmeth- ods, however, comparing retail market data directly between2013andotheryearshasbecomemoreprob- lematic. The figures in any case have long been inex- actduetothesizeofthegreyeconomy,withmanysmall, corner-shop retailers operating in an only semi-regis- tered fashion. The government is making efforts to bringthesetradersintothesystem,however.Onemajor thrust in this in recent times has been that of increas- ingtheusageofelectronicdataexchanges.Wheneven small local stores have electronic card readers, for example, it is more straightforward for the tax author- ities to bring that store into the system. The available data on the retail market is impacted by the relative effectiveness of these measures over time, though. Nonetheless, according to the Trade Council of Shop- ping Centres and Retailers, on the basis of household expenditure,totalretailturnoverfor2013was$285bn – an increase from $171bn in 2010. Of this, around $100bn,or35%,wasinmodernretailing,upfrom$75bn in 2010 (see analysis). Thus, the numbers would tend to indicate growth in the modern and traditional retail sectorshasbeenhighoverrecentyears,althoughpro- portionately, the modern sector has been growing faster. This is especially so in food, where the share of supermarkets in the total consumable goods market, excluding cigarettes, rose 57% in the last 10 years, accordingtoaNovember2014USDepartmentofAgri- culture (USDA) report. The expected decisive shift to modern at the expense of traditional has been likely offset to some extent though by an important charac- teristic of the Turkish market. Many prefer to shop for groceries in a local bakkal (a corner shop that is often family run) rather than the local supermarket, due to strong local loyalties and communal and familial links. A NEW LAW: The government seeks to protect small- and medium-sized enterprises from larger chains via a long-awaited new retail law – the Law on Regulation of Retail Trade enacted in January 2015. The law limits the ‘days payable’ limits for organised retailers, which may oblige them to hike prices. This is because many of the larger retailers sell in cash, but pay in terms; shortening the days payable will force them to gener- ate more short-term operating income. This would negatethecompetitiveadvantagelargestoresareable Economic and population growth as well as a rise in per capita income have been major factors contributing to sector growth in recent years. Expansion in both the modern and traditional retail sectors has been high, although proportionately, the modern segment has been growing faster. 92 A growth market Formalisation is being driven by a new retail law as local outfits seek new opportunities abroad www.oxfordbusinessgroup.com/country/turkey
- 95. RETAIL OVERVIEW to leveragedue to economies of scale – an advantage that has historically tended to offset the benefit the traditional stores gain from operating sometimes out- side the tax system. The first set of regulations to govern the sector, the new law regulates the establishment, operation and auditing of shopping malls, retail dealers, department stores, chain stores, artisans and craftsmen, giving retailersoneyearand,insomeinstances,uptotwoyears, to bring their operations into compliance. The regula- tionaimstofacilitatetheopeningandoperationofretail businesses,establishanefficientandsustainablecom- petitive environment, protect the consumer, achieve balanced growth of stores and organise the opera- tionalrelationshipofstoresamongeachother,withthe consumer and with suppliers. A retail information sys- tem and a sector databasewill also be formed. The law also states that space for artisans and craftsmen must be allocated in shopping malls and at least 1% of shelf space shall be reserved for local products. MARKET SEGMENTATION: TurkStat’s retail sales vol- ume index shows steady improvement over the years since its 100-point base line in 2010 – hiking to 125 in February 2015 on a calendar- and seasonal-adjusted basis in constant prices, having increased 2.9% com- paredwithFebruary2014.Thebiggesthikehasoccurred in the non-food segment (except automotive fuel), with the index on this rising from 100 in 2010 to 129.1 inFebruary2015.Food,drinksandtobacco,meanwhile, climbedto118.4overthesameperiod.Withinthenon- foodsegment,thetopthreegrowthareasinretailover the last few years have been internet and mail order retail, which stood at 217 in February 2015; second, textiles,clothingandfootwear–risingfrom100to155.7; and then computers, books and telecommunications equipment,withtheserisingfrom100to124.9.E-com- merce was a highly marginal activity only a few years ago,whichillustratesthechangingtastesandpatterns of behaviour of Turkish consumers, as they become wealthier and more technologically connected. DISCOUNT STORE SUCCESS: The Turkish consumer remainshighlyprice-conscious,though.Thisisreflect- ed in particular in the food segment – which is still the largest retail area, with some 62% of all stores – and with the remarkable success of discount supermarket chains. There were 149 chains (those with more than 10 outlets) of supermarkets of all kinds as of October 2014, according to a USDA report, with the top-three national discount chains operating around half the total number of 18,960 supermarkets. The largest dis- countstoreintermsofbranchnumbers,BIM,saw20% year-on-yearrevenuegrowthbetweenFY12andFY13, along with 25% net profit growth. In 2014 the chain’s net sales rose by 22% and net profit fell 4.3%, while it had 4452 stores across the country as of October, up from just 21 when it started in 1995. It also now oper- ates in Morocco and Egypt. The chain has been a pio- neer in Turkey for the no-frills, hard-discount model. 93 The new retail law regulates the establishment, operation and auditing of all retail entities, while a retail information system and a sector database will also be set up.
- 96. RETAIL OVERVIEW mainlyAnkara-basedchainBeğendik.Meanwhile,nego- tiations startedin 2013 over the sale of the UK firm Tesco’s Kipa subsidiary in Turkey ended in May 2014. Tesco had been talking with potential partners to sell its loss-making subsidiary. The company said it would accelerate plans to “focus the business on its heart- lands” at its profitable stores around the Aegean and Izmir, which would suggest the group is likely to close stores in the east of the country where the brand has not taken off, as the company said it wanted to min- imise capital spend and improve profitability. The reasons for these withdrawals are partly inter- naltotheparticularcompanies,butalsotodowiththe peculiaritiesoftheTurkishmarket.InacitysuchasIstan- bul, where traffic and transport are major issues, few consumers are attracted by the idea of visiting a large, out-of-town hypermarket. One other result of local success has been expan- sionabroadbyTurkishretailers.ÖzdilekGroup,ahome textilescompany,openedastoreinLondon’sWestfield Shopping Centre in 2011, while Turkish bagel store Simit Sarayı and café chain Kahve Dünyası opened a store each in London in 2014. Fashion brands Koton and LC Waikiki are also reportedly looking for Euro- pean and Middle Eastern outlets. Some 84 Turkish brands have 1951 outlets in 90 countries, as reported by the United Brands Association MARCH OF THE MALLS: Meanwhile, the number of dedicated retail locations is expanding exponentially, with some 76 new malls in the pipeline as of 2014, nationwide, according to Jones Lang LaSalle research. In2014totalsupplyintheshoppingcentresegment reached 9.9m sq metres in 350 malls, with 635,000 sq metres of space added during the year, according to real estate firm Cushman & Wakefield. New supply growthsloweddownin2014,ascloseto1msqmetres were added the previous year, however, another 2.3m sq metres of retail space are expected within the next three years. One of the recent trends with shopping centres has been the spread of these to secondary cities–2013sawtwocompleteinGaziantep,forexam- ple, along with new centres in Şanlıurfa, Kahraman- maraş and Samsun. The second trend is towards more exclusiveoutletsinthemoredevelopedmarketofIstan- bul.TheZorluCentre,forexample,whichwasalsocom- pleted in 2013, now houses a variety of luxury outlets, initiatinganewwaveofexclusive,high-endretailmalls. OUTLOOK: With much new retail space coming on stream, Turkey’s retail market remains buoyant. The slowdown in economic growth in 2014-15 will likely impact this, however, as might political uncertainties in the run up to general elections. Traditional retailers too may see their share of the market continue to decline.Forforeigninvestors,thelessonofrecenttimes would appear to be that retail businesses still need a good dose of local knowledge, even in these times of globally integrated business chains. Good geographi- calpositioningandstronglocalpartnershipsmaythere- fore be the way forward. At the same time, Turkish retailers are increasingly on the lookout abroad foropportunities–andadditionalglobalpartnerships. 94 SOURCE:TUIK*2010=100 Retail sales volume index & percentage changes, 2014* 0 30 60 90 120 150 DecNovOctSeptAugJulyJuneMayAprMarFebJan The number of retail locations is expanding, with some 76 new malls in the pipeline as of 2014. Some 2.3m sq metres of retail space are also expected within the few three years. www.oxfordbusinessgroup.com/country/turkey The second-largest discount chain is A101 Yeni Mağazacılık.Foundedin2008,thishasexpandedaggres- sively since, with 3427 stores as of October 2014. Turnover in 2013 was TL3.2bn (€1.1bn). The firm saw one of its shareholders, Bank Asya, exit in April 2014, as part of a capital raising exercise by the bank. Third on the list of discount chains is Şok Marketler, which also started business in 1995. This had 2216 storesasofOctober2014.ŞokisownedbyYıldızHold- ing, which, as Yıldız-Şok, bought out DiaSA in 2013, a joint venture between Spanish supermarket chain Dia andTurkey’sSabancıHolding,forsome$177.8m.DiaSA’s stores were rebranded as Şok stores. Thesuccessofthethreebigdiscountstoreshasalso attracted other outfits. In 2013 Ekonomi and UCZ entered the market, hoping for a slice of the pie. As of October2014Ekonomihad1060storesandUCZ1430. Yetwhilethebigthreediscounterscrowdthetopend ofthefoodbusiness,anon-discountbusinessremains number two in terms of turnover: Migros. Originally a Swiss entry in 1954 – and the first foreign supermar- ket in Turkey – the Koç Group took a majority stake in it in 1975. In 2008 Koç sold the chain to the UK-based BCPartnersprivateequityfund.MigroshadrunŞoktoo, selling it to Yıldız in 2011. The chain’s turnover in 2013 reached TL7.1bn (€2.5bn). In early 2015, it was con- firmed that Turkish Anadolu Group is buying a 40.25% stakeinthefirmfromBCPartners.AlthoughMigroshad international ownership, its management has been entirely Turkish. This is a point often stressed by ana- lysts as explaining why the chain has been so success- ful, while other international chains have not done so well.Indeed,2013sawnotonlyDiaexitthemarket,but the UK’s Dixon’s – an electronics and electrical (E&E) goods retail chain – also announced it was selling its loss-making Turkish interest, ElectroWorld, to Turkey’s Bimeks – which also purchased French E&E Darty’s Turkish operations – during the same year. In 2013 French multinational retailer Carrefour also reduced its holding in its Turkish operation to 46.2%, selling12%ofitssharestopartnerSabancıHoldingfor €60m, giving the local conglomerate control of the chain, while Germany’s food retailer, Real, sold up to
- 97. RETAIL ANALYSIS Retail turnoverincreased to $285bn in 2013 from $171bn in 2010 ConsumersentimentinTurkeyisweakeningasthepace ofeconomicgrowthslowsandconsumerstightentheir pursestrings,potentiallyslowingtheretailsector’sstel- larperformanceinrecentyears.Turkishretailhasbeen oneofthemostappealingsectorsforinvestorsandcon- sumers thanks to a rapidly expanding economy and a surge in per capita disposable income. On the basis of household expenditure, total retail turnoverfor2013wasaround$285bn–upfrom$171bn in 2010, according to the Turkish Council of Shopping CentresandRetailers(AMPD).Ofthis,around$100bn, or 35%, was in modern retailing – the shopping cen- tresandretailparkswhoseoperatorsareusuallymem- bersoftheAMPD.Thiswasupfromsome$75bnin2010, withthecouncilpredictingatotalretailmarketofabout $400bn plus by 2023 – the centennial of the founding oftheTurkishRepublicandatargetdateformanygov- ernmentdevelopmentplans.However,consumersen- timentfellin2014,withtheTurkStatconfidenceindex droppingfrom72.4inJanuaryto67.7inDecember.The index rose slightly to 68.1 in February 2015 and decreasedagaininMarchby5.4%comparedtothepre- viousmonth.Thegeneraleconomicexpectationsindex fell 10.5% from a positive 102.1 points in September 2014 to 86.3 points in March 2015. SLOWER GROWTH: Borrowing trends also indicate slackening consumer activity. Data from the Banking RegulationandSupervisionAgency(BDDK)showedan 8.1% increase in household debt in the 12 months to September 2014. However, with the impact of infla- tion included, debt stock has eased in real value terms. This suggests that Turkish consumers have been tak- ing a more cautious approach to spending. A steep jump in interest rates imposed in January 2014, and tightercreditmeasuresputinplacebytheauthorities, includinglimitingrepaymenttermsonarangeofcred- it card purchases, have reduced the appetite for bor- rowing. Demand may remain muted for some time to come.At7.61%inMarch2015,inflationremainsabove the central bank’s target of 5%, due to high food costs andaweakeningcurrency.Thelikelihoodofinterestrates beingcuttoanygreatdegreeintheshorttermissmall, despite government pressure to lower rates to boost growth before a general election in June 2015. AreportissuedinNovember2014byratingsagency Moody’snotedthattheTurkisheconomyislikelytocome under increased pressure, with external vulnerabilities weighing on the credit profile of the government as wellasthoseofitsbanksandcorporates.Turkishcom- panies will be hit by slower growth while a reduction of capital inflows may diminish their access to fund- ing, as inflation and geopolitical risks dampen con- sumer and investor sentiment. Over the past four years Turkey’s economic growth had been driven by externally financed domestic demand. With borrowing costs set to climb due to fac- tors such as the end of the US Federal Reserve’s bond buying programme − which will see capital flow back to the US economy − further steam will be taken out of Turkish spending, impacting the retail sector. RETAILEROPTIMISM:Thoughdataappearsmutedfor theconsumeroutlook,theretailsectoritselfislesscau- tious in its outlook. According TurkStat, sentiment amongretailersiswellabovethatofitsclients,at101.8 pointsontheseasonallyadjustedscaleasofApril2015. Results for the retail industry are in marked contrast to the construction sector, which slipped further into negative territory in April, while the services sector remained just above the 100 mark. And there is some causeforoptimism.EstimatesfromDeloitteshowthat thesectorisearmarkedforacompoundannualgrowth rate of 7% between 2014 and 2018 after the number ofshoppingmallshasmorethanquadrupledinthepast decade,topping330bytheendof2013inover54cities. Still, with a number of big internationals pulling out or downsizing their presence, the market also poses somechallenges(seeoverview).Analystspointtoafrag- mented market, which is dominated by thriving local businesses, while global supermarket chains find it difficulttodifferentiatethemselvesfromlocalplayers. Turkish retail has been one of the most attractive sectors for both investors and consumers thanks to the rapidly expanding economy and a jump in per capita disposable income. 95 THEREPORT Turkey 2015 Slower growth Although consumer sentiment is weakening, the outlook remains positive
- 99. 97 Energy Energy import billreaches $55bn in 2014 Delays in tendering remain a concern for investors Working to keep up with domestic energy demands Lower oil prices help to close account deficit Privatising the energy sector to keep up with demand
- 100. ENERGY OVERVIEW The countrybuys some 18.5m tonnes of oil from overseas Giventhecountry'srelianceonenergyimportsandthe recent economic slow-down, Turkey has benefitted fromthecollapseofoilpricesinlate2014.Ithasboost- ed energy supplies to support future growth, while seeking to reduce its energy dependence. In addition, a long-running dream to become a global energy hub is starting to become a reality, bolstered by efforts like the EU-Turkey high-level energy dialogue and strate- gicenergycooperationprocess,launchedinearly2015. ENERGYSECURITY:OneofTurkey’stopstrategiccon- cerns is energy security. Largely deprived of hydrocar- bons reserves, Turkey buys some 18.5m tonnes of its oilfromoverseas–92%ofconsumption–andimports 98%ofitsnaturalgas,whichfiresalmosthalfofitspow- er plants. It has coal but most of it is cooler-burning lignite, and so it imports most of the coal needed to generatepower.ThisweighsheavilyonTurkey’sbalance of payments and leaves it vulnerable to supply disrup- tions abroad. The country's 12-month rolling external energy shortfall has hovered between 6% and 6.8% of GDP since January 2012, according to the World Bank, and as of 2014 the nation’s energy shortfall amount- ed to 58% of the trade deficit. Thus, lower oil prices havehelpedTurkeycloseitstradedeficit,butithasnot changed its dependence on foreign energy sources. Turkey’sannualenergyimportbillwas$56bnin2013, accounting for the bulk of a current account deficit (CAD)thatswelledto$65bnthatyear.Fromtheendof 2013 through January 2015, Turkey’s CAD fell roughly 30% as a result of lower oil prices. The 2014 energy importbillwasapproximately$55bn,whilethetotalCAD was $45.84bn for the year. The imbalance has histori- cally been the weakest point of an economy that was among Europe’s fastest growing in the past five years. Energy import dependency was 74%, including 59% foritselectricitygeneration,accordingtoenvironmen- talists at Greenpeace. Rapid economic expansion has translated into greater demand for energy, rising about 5% annually. Since 1990 energy demand has jumped270%–themostamonganycountryintheOECD. The trend is likely to continue. The government expects electricity consumption to more than double by 2023 to about 500bn KWh and therefore needs to liftcapacityby50%to100,000MW.TheMinistryofEner- gy and Natural Resources (MENR) has ambitious plans to bring domestic coal-fired and hydroelectric power production to 130bn KWh, raise wind-power capacity to20,000MWandliftgeothermalcapacityto600MW. Nuclear power is planned to account for 5% of power productionin2023,thecentenaryoftherepublic,after Turkey launches its first nuclear plant, built by Russian and Japanese firms, in 2015. The government also wants to wean Turkey off nat- ural gas and oil imports, and instead explore Black Sea territorial waters and cooperate with oil- and gas-pro- ducing partners in Iran, Iraq, Azerbaijan, Russia and Turkmenistantoexploreanddevelopresourcesinthose countries. In the meantime, it is chasing new suppliers todiversifyitssources.Achievingthesegoalswillrequire between $5bn and $10bn of investment each year in the energy sector, MENR estimates. POWER HUNGRY: Turkey is the world’s 20th-largest consumer of electricity. According to MENR, installed capacitywas69,520MWin2014,up5.3%from66,000 in 2013, following a jump of 13% over the previous year. Natural gas was the main resource firing electric plants (48%), followed by coal (29%), hydroelectric (16%) and wind (3%), according to MENR. Consump- tion during 2014 saw a modest gain of 4.1% year-on- year, up from a 2013 increase of just 1.3%. Demand is still expected to hit 450bn KWh by 2023, and in order to fulfil the requisite capacity, investment of some $100bn is required, according to the World Nuclear Association. The minister of energy and natural resources,TanerYıldız,toldlocalpressinApril2015that the government expected to add 4000 MW to its sup- ply over the course of the year. To fuel this growing demand, domestic coal sources areattractingrenewedinterest,astheAnatolianplateau is richer in coal than in any other carbon-based fuel The government expects electricity consumption to more than double by 2023 to about 500bn KWh. To meet this demand, it needs to lift capacity by 50% to 100,000 MW. To fuel growing electricity demand, the nation's domestic coal sources have attracted renewed interest, as the Anatolian plateau is richer in coal than in any other carbon-based fuel source. 98 Opportunity knocks Taking advantage of low prices to increase hydrocarbons supply www.oxfordbusinessgroup.com/country/turkey
- 101. ENERGY OVERVIEW source. TheEuropean Association for Coal and Lignite estimates Turkish reserves at 13bn tonnes. Proven reservesare500mtonnesofhardcoaland9.8bntonnes of lignite, or brown coal, which has low calorific value, containsmoresulphur,producesenergylessefficient- ly and pollutes more heavily than hard coal. According totheUSEnergyInformationAssociation,approximate- ly 75-90% of Turkish coal is lignite. Plants using coal accounted for 21% of electricity capacity in 2014, with some 25,925 tonnes of coal mined that year. The push to raise domestic coal pro- ductionhasposedseriousrisks.InMay2014inthewest- ern town of Soma, a fire in an underground coalmine created conditions that led to the deaths of at least 301miners.ItwasTurkey’sworstindustrialaccidentin history. Necdet Pamir, an instructor in energy policy at Bilkent University and former vice-president of TP, the state oil company, said mining engineers had warned aboutthedangers,particularlyhighlevelsofmethane, at Soma but there is a rush to extract local resources. “The truth is that coal is an important resource to reduceourcountry’senergydependenceandtosecure employment. But it has to be produced while meeting the highest standards of workplace safety,” he said. BIGCOAL:Turkeyisranked14thinworldcoalconsump- tion and possesses the 17th-largest coal reserves, according to MENR. Large discoveries continue: the ministryrecentlyfound1.8bntonnesoflignitereserves near Konya in central Turkey. At present, just 37% of Turkish coal sources are tapped, but the government wants to boost capacity to 30,000 MW, or 30% of the overall mix, in 2023 from about 20,000 MW in 2014. Abouthalfofallcoalisimported,costingTurkey$4.5bn a year, according to Pamir. “TherecentfocusoncoalproductioninTurkeyisnot necessarily a negative development. Given new tech- nologies available, coal is a much cleaner source of energy than it used to be,” Mete Maltepe, GE Energy Turkey’s general manager, told OBG. “That said, the government and the market need to make sure that theycarefullybalancethebenefitswiththecosts,with specific emphasis on managing the environmental impact of higher coal usage.” Lignite deposits are scattered across Turkey, with the Afşin-Elbistan field accounting for 40% or more of the national total. China is interested in a $12bn deal to develop the field after Abu Dhabi National Energy Company effectively pulled out of the project in 2013, ReutersreportedinMay2014.Theprojectincludesthe constructionofan8000-MWcoal-firedelectricityplant. GREATER INDEPENDENCE: “If lignite and renewable forms of energy are developed sufficiently over the next 5-10 years, Turkey could meet around 50% of its energy needs on its own, compared to 30% currently. If developed properly, lignite could account for 30- 35%,” said Adil Tekin, Turkey’s country president for French energy and transport giant Alstom. At present, power imports help cover a shortfall. AccordingtoIstanbul-basedbrokerageOyakSecurities, Turkey is a net importer of electricity, buying about 2% ofitspowerfromoverseassuppliers.In2013netimports were 4.6bn KWh at a cost of $335m, Turkish daily Mil- liyetreportedinMay2014.Morethanhalf–2.5bnKWh – came from Bulgaria. Greece and Iran provided a fur- ther 1.2bn and 845m, respectively. Imports are expected to rise, after Yıldız said in April 2014 that Turkey might purchase power from Iran, Georgia and Bulgaria to offset the impact of drought- like conditions that have halved capacity at national reservoirs.Greece’sstate-runPublicPowerCorporation set up a company in Istanbul to begin selling power to the Turkish market and is in talks with authorities over licensing, Milliyet newspaper reported. Someofthe$900mGEisinvestinginTurkeyincludes powerplants.Sofar,GEhassuppliedturbinesfora35- MW wind farm and gas turbines for an 840-MW pow- er plant that will be run by its Turkish partner, Gama Energy. GE and Gama are also building Istanbul-based Akenerji’s $930m, combined-cycle, natural-gas power plant project in Erzin in southern Hatay Province. The plant has 904 MW of installed capacity and can gen- erate an annual 6.7bn KWh on average, meeting 2.6% 99 THEREPORT Turkey 2015 SOURCE:BPStatisticalReviewof WorldEnergy2014 Natural gas consumption, 2003-13 (bn cu metres) 0 10 20 30 40 50 20132012201120102009200820072006200520042003 The energy import bill decreased to about $55bn in 2014 Energy imports are expected to rise, after the minister of energy and natural resources said in April 2014 that Turkey might purchase power from Iran, Georgia and Bulgaria to offset the impact of drought-like conditions that have halved capacity at national reservoirs.
- 103. ENERGY OVERVIEW of Turkey’stotal energy needs. The plant began oper- ations in the third quarter of 2014. RENEWABLES: Turkey could also boost supply more sustainably.Greenpeacesaysrehabilitatingageinginfra- structurewouldsave16%ofelectricitywastedintrans- mission.Environmentalistsalsopointtosunlight,wind, biomass and rivers as sources of relief. Green energy is only now being tapped, accounting for just 25% of theenergymix(nearlyallfromhydroelectricity),accord- ing to the state Electricity Generation Company. Published at the end of 2014, the National Renew- ableEnergyActionPlanoutlinesthecountry’sapproach for developing renewable sources of energy. By 2023 Turkeywantstoexploitallviablehydroelectricresources, up from the current 50%. The country has 1% of the world’s hydropower potential, and 16% of Europe’s. That could produce about 128bn KWh, according to state estimates. But hydropower rouses mixed feel- ings. Although it generates almost no carbon emis- sions,thedammingofriversharmsbiodiversityandlocal populations’ ways of life. The government appears to havetakenastepbackfromitspreviousunbridledsup- port for smaller hydropower projects, especially run- of-riverdams.Inlate2013theEnvironmentandUrban Planning Ministry said it would no longer back hydro projects with capacity below 10 MW. Environmental- ists fear this may prompt the government to resume mega-damprojects,liketheIlısuDaminsouth-eastern Turkey, which threatens to submerge the ancient city ofHasankeyf.Acourtin2013blockeditsconstruction; however, activists report that work quietly continues, such as resettling residents, despite the injunction. WIND-BLOWN:Turkeyranks16thinwind-energycapac- ity worldwide, with installed capacity of 3.7 GW and another 11 GW in the pipeline. Its wind potential rivals that of Spain, according to MENR. “Wind energy is becomingincreasinglyimportantinTurkey.Inthepast, connectioncapacitylimitedtheamountofwindlicences thatcouldbeawarded,butnowimprovementsintrans- missionandgridtechnologyshouldresultinanincrease in the number of available licences,” said Serdar Nişli, chief executive at Aksa Energy, one of Turkey’s biggest power producers. “Improved wind-capturing technol- ogyhasalsoresultedinhighercapacityutilisationrates, making the economics of certain sites more viable.” The Energy Market Regulatory Authority (EPDK) received over 1500 applications for 600-MW wind licences that were being tendered in 2014, according to local media. “Growth potential in the Turkish wind sector is higher than in Europe, as there are better wind sites available. That said, many of the best sites havealreadybeendeveloped,andlower-windsitesare harder to make economically viable. Turkey needs to concentrateoninvestingindevelopingbetterwind-cap- turetechnology,”saidMaltepe.Windturbinesdesigned tocapturemoreenergyareneededforsuchlesser-rat- ed sites. Turkey has a manufacturing base for blades andtowers,butnoturbineproduction;thereforeoper- ators must import key components. Better education isneededassomedevelopersareusingtechnologythat is incompatible with their licensed site, Nişli told OBG. NEW COSTS & DELAYS: Changes to regulations gov- erningforestrylandcouldsteeplyraiserentalcostsfor wind-farmoperatorsonstate-ownedpropertiesandban certainregionsoutrightthattheForestryMinistrywants to protect. Some €1.5bn of wind-energy projects are on hold, according to Mustafa Serdar Ataseven, chair- man of the Turkish Wind Energy Association. “Projects approved in the last quarter of 2011 were first hampered by problems with radar. After that was resolved, permission was suddenly required from the National Intelligence Organisation, which was also resolved,butthennationalisationfromtheprimemin- ister’s office has slowed because of a backlog there. Trouble stemming from permission [to build] in forest- land has been under way for a year,” Ataseven told trade magazine GreenPower in March 2014. Industry insiders say another 800 MW of wind power could become available if the forestry dispute is resolved. SUN-KISSED: Turkey’s raw solar potential rivals that of Europe’s sunniest nations, including Spain and Italy. It ranks 27th in the world for solar capacity. The aim is to lift capacity to 3000 MW by 2023, according to the Renewable Energy Law, ratified in 2011. Currently, expensive large-scale projects are mainly in the hands of state bodies, like the solar photovoltaic array cover- ing 10,000 sq metres near the city of Izmir on the Aegean coast. It was expected to come online in mid- 2014 and produce 493 KW to power three municipal facilities, Radikal newspaper reported, but at the time of writing had yet to begin production. The EPDK held a second round of bidding for 2 GW worth of solar licences in January 2015, and as OBG wenttopress,thewinnerswereawaitingconfirmation oftheirawardforthe5-MWand8-MWprojectsinthe Erzurum and Elazığ regions, respectively. There will be additionaltendersfor302MWofnewsolarphotovolta- ic capacity at the end of April 2015, according to the Turkish Electricity Transmission Company (TEİAŞ). Additionalmarketdevelopmentsincludetheentrance of Germany’s energy firm Conergy, and a joint venture involving the UK's Belectric, which tendered success- fullytoTEİAŞfortwolarge-scale,ground-mountedsolar energy projects. The two projects have a combined 101 THEREPORT Turkey 2015 SOURCE:BPStatisticalReviewof WorldEnergy2014 Coal production, 2003-13 (m toe) 0 4 8 12 16 20 20132012201120102009200820072006200520042003 Green energy is only now being tapped and accounts for just 25% of the energy mix, and almost all of that is from hydroelectricity, according to figures from the state Electricity Generation Company.
- 104. ENERGY OVERVIEW alternating currentconnection capacity of 32.4 MW, 14% of the tendered capacity. Despitethelarger-scaleefforts,smallindividualinstal- ments may promise the greatest potential in the solar segment.Asthemarketmatures,ashiftfromlarge-scale, government projects to smaller, individual-driven util- isation has been occurring. “Solar has considerable potential in Turkey, especially on the unlicensed side," ArdaBeştaş,deputygeneralmanagerofmarketingand sales at Enerya, told OBG, "As a licence is not neces- sary for a project of up to 1 MW, there are unlimited projects available within the 1-MW scope.” Still, regulations of unlicensed panels could be loos- ened further. “The 1-MW ceiling for unlicensed solar panels is likely to be increased in the near future and couldpossiblyreach5MW.Suchadevelopmentwould lead to significant growth of smaller-scale solar ener- gy in Turkey, such as rooftop panels,” Evren Evcit, the CEO of Anel Enerji, told OBG. HEATFROMWITHIN:Turkeyranksseventhintheworld andfirstinEuropeforgeothermalresources,theener- gyderivedfromtheheatintheearth’sinterior,accord- ing to the state Mineral Research and Exploration Agency.Ithasinstalledcapacityof250MW,theworld’s 12th biggest, and direct use potential is estimated at 31.5GW.RecentventuresintogeothermalincludeSun Group of Turkey and Japanese-owned Italian turbine manufacturer Turboden agreeing in January 2014 to developtwogeothermalplantsinÇanakkaleandMan- isa. The deal covers planning, investment and technol- ogy transfer for two, 100-MW sites costing a total of €300m. Yeni Başak Enerji, a Sun Group company, has three geothermal drilling licences. Manyforeigninvestorsremainonthesidelinesamid questions about local partners’ strategic planning. “While Turkey has a very dynamic market for renew- ables,itisnotnecessarilythemostcompatibleforfor- eign institutional investors. Many Turkish companies involvedinthesectordonothavelong-termplansand cannotguaranteesteadyreturns.Thatsaid,theupside potential for investors remains considerably higher than in many other markets, and high feed-in tariffs for wind mean that large amounts of money can be made in the area,” David DeLaire, a managing partner at DD Energy Services, told OBG. According to Nişli, renewables in Turkey should be profitable for the next decade or so given the current feed-in tariff regime, evenifnaturalgaspricesremainlow.“Thatsaid,renew- able sources will never be able to compete with gas or coal in terms of providing a dependable base load, so therewillalwaysalsobedemandforthelatter,”hesaid. GAS GUZZLING: Indeed, Turkey’s love affair with nat- ural gas continues, even as the government seeks to reduce gas-fired power generation to below 30%. It is theonlymajorEuropeanmarketthathasshownstrong growth in gas demand since 2009, with consumption reachingapproximately52bncumetresin2014–put- tingitonparwithFrance,accordingtoaFebruary2014 report from the Oxford Institute for Energy Studies. Turkey is the world’s 20th-largest consumer of gas, and with domestic production meeting just 2% of requirements,Turkeyisamajorimporter.Itpipesinhalf ofitsgasfromRussia,orabout20bncumetres,ontwo links, according to natural gas purchase agreements posted on state pipeline operator Botaş’ website. Iran sells 10bn cu metres and Azerbaijan sends 6.6bn cu metres annually. As for liquefied natural gas (LNG), Algeria and Nigeria have contracts to ship 4.4bn cu metres and 1.2bn cu metres, respectively. Political instability in 2014 and 2015 between Rus- siaandUkrainehasyettoimpactflowstoTurkey.Since thelastUkraine-Russiagasdisputein2009,Turkeyhas done virtually nothing to mitigate potential stoppages from Russia. At the time, all it did was temporarily increase supply volumes through Blue Stream and buy afewspotLNGcargoesfromAlgeriaandOman.Mean- while, countries in Europe have built new routes and increased LNG terminal construction and cargoes. Turkey,bycontrast,stillonlyoperatesthesametwoLNG terminalsandhasnotincreasedstoragecapacityabove 3bn cu metres. Turkey has expressed support for the controversial Gazprom-led South Stream pipeline, includinggrantingaccessforthelinkifMoscowwants to use Turkish territory. The South Stream pipeline would transport gas to Europe beneath the Black Sea. The $32bn South Stream is a rival to the Trans-Anato- lianNaturalGasPipelineProject(TANAP),thoughthere are few signs of it moving off the drawing board, and there were discussions that it could be rerouted to Turkey and linked to TANAP as of December 2014. IRANIAN SUPPLIES: Turkey takes about 90% of Iran’s gas exports, according to the US Energy Information Administration. Although Western sanctions against Iran for its nuclear programme do not apply to these gas exports, conducting business with Tehran still car- ries political risk for Turkey. A1996take-or-paycontractwithIranexpiresin2015, and the neighbours are negotiating how much and at what price Turkey will buy. In the meantime, Turkey has sought international mediation to force Iran to lower its prices under the existing deal. While Europe pays an average of $400 per 1000 cu metres of gas, Turkey paysIran$492,AlJazeeraTurkreportedinFebruary2014. Iran,whichholdstheworld’slargestnatural-gasreserves, 102 Crude oil supply mix, 2012 (%) SOURCE:EIA 0 7 14 21 28 35 OtherDomestic production AfricaKazakhstanRussiaSaudi Arabia IraqIran Turkey ranks seventh in the world and first in Europe for geothermal resources. It has installed capacity of 250 MW, the world’s 12th biggest, and direct use potential is estimated at 31.5 GW. www.oxfordbusinessgroup.com/country/turkey
- 105. ENERGY OVERVIEW may slashits prices if Turkey agrees to double the imports, according to Turkish media. That would, how- ever,exceedconsumption,soTurkeywouldlikelyresell the fuel, probably to Europe, if sanctions allow. This, in turn, could spark a price war between Azeri andIraniangas,andthreatentheviabilityofTANAP,which aims to ship Azeri gas to Europe and is a major plank ofTurkey’scampaigntobecomeatransithub,OlguOku- muş, a lecturer in energy diplomacy at Sciences Po in Paris and the director of strategy development at LEO Advisors, wrote in Al Monitor. HaldunYavaş,secretary-generaloftheIstanbul-based think tank Caspian Strategy Institute, shrugged off the idea that greater Iranian supplies to Europe via Turkey could harm TANAP’s prospects. “TANAP is a commer- ciallyandeconomicallywell-studiedprojectanditsfea- sibility is proven. The project is not in any kind of com- petitionwithotherpotentialsupplierstojointhemarket,” he told OBG. “There may be other projects envisioned, but TANAP is the only one on the way to being realised with agreements and finances committed.” EASTERN MEDITERRANEAN: Iranian gas is not the onlyfuelonoffer.USexplorationcompanyNobleEner- gy made a big splash in the global offshore gas busi- ness in 2010 when it announced the discovery of a potential 540bn cu metres of gas from its Leviathan-1 well 130 km off the coast of Israel. The discovery has the potential to turn Israel into a regional energy pow- er. Only 35 km west of Leviathan is the Aphrodite gas field in southern Cypriot waters, where Noble is again the operator. An exploratory well could contain 141bn cumetresofnaturalgas,itestimates.Thisstringofdis- coveries has rattled Turkey, which, in turn, rattled its sabre at its arch foe Cyprus in response. Most recent- ly,inFebruary2014,aTurkishnavalvesselharriedaNor- wegian seismic ship operating in Cypriot waters. With such large reserves a stone’s throw from the Turkish maritime border, it was a given that Turkey would go looking for reserves of its own. If Turkey can resolve its political differences with bothCyprusandIsrael,itcouldofferbothcountriesthe moststableandviableexportroutefortheirgas.Turkey isitselfahungrycustomer.ButstrainedtiesoverNorth- ernCyprus,whereTurkeyhaskept30,000troopssince 1974, and frosty diplomatic links with Israel since a diplomatic spat in 2010 are major obstacles to the monetisation of Eastern Mediterranean gas. A NEW FRIEND: Iraqi Kurdish oil is already transiting Turkey to world markets, despite a dispute with the central government in Baghdad, which argues such tradeamountstooilsmuggling.InMay2014morethan 1mbarrelsofpipedoilfromfieldscontrolledbytheKur- distan Regional Government (KRG) were loaded for the first time onto tankers at Turkey’s Ceyhan port on the Mediterranean. Turkey had stored the crude for months at Ceyhan, but reversed itself on a pledge to await an agreement between Baghdad and Irbil. AninfuriatedBaghdadimmediatelysoughtaninter- national injunction against Turkey to stop the flow of Kurdishoil,warningthatAnkarawaspushingNorthern Iraq towards greater independence and undermining Iraqi territorial unity. However, Ankara has maintained itsrelationshipwithKRGauthoritiesandasofearly2015, some550,000barrelsofoiladaywereflowingintoCey- hanfromtheKurdishregionandKirkuk.SomeinTurkey warnthatAnkaraisnotonlytestingtieswithanimpor- tant neighbour; stoking greater Kurdish autonomy in Iraqcouldkindlethesameaspirationswithitsfargreater populationofKurds,theysay.“TheplentitudeofNorth- ern Iraq’s hydrocarbons and the low costs of develop- ing its fields are indisputable. But political stability is justasimportant.Thecentralgovernmentissupposed to be Turkey’s interlocutor, not the regional adminis- tration in the north,” said Pamir. Iraq supplies 17% of Turkish oil requirements, sec- ond only to Iran at 35%. Saudi Arabia covers 13% and Russiasupplies10%.Turkeyistheworld’s26th-biggest consumer of oil, and consumption at the pump is ris- ing.Asoftheendof2014,oilproductioninTurkeywas 17.1m barrels, 12.1m barrels of which was produced by the Turkish Petroleum Corporation. Domestic con- sumption was about 157.17m barrels. Approximately 60% of the total oil demand is imported as crude oil and then refined in Turkey. Foreign investment in the oil sector includes the planned $5.5bn Star Refinery, to be built on Turkey’s Aegean coast by Socar, Azerbai- jan’s state oil company. Yıldız has said the plant will reduce Turkey’s current-account deficit by $2.5bn. OUTLOOK:Awillingnesstoundertakethedelicatebal- ancing act with Iraq and the KRG shows how resolute Turkey is in diversifying supplies as demand continues toriserelentlessly.Significantinvestmentfromthepri- vatesectorandboostingrenewablesinitspower-gen- eration mix can help the government meet ever-rising demand for power. Procuring new sources of oil and gas, including from its own territory, while expanding itsburgeoningroleasanenergytransithub,remaincen- tral to its energy strategy. Whether it is Turkey’s own rapidly growing market or its ever-greater function in facilitatingglobalenergytrade,long-runningaspirations tobecomeanenergycorridorarenowwithinitsgrasp. 103 THEREPORT Turkey 2015 Turkey’s offshore exploration efforts have thus far focused on the Black Sea Iraq supplies 17% of Turkish oil requirements, second only to Iran at 35%. Saudi Arabia covers 13% and Russia supplies 10%. Turkey is the world’s 26th-biggest consumer of oil, and consumption at the pump is rising. As of the end of 2014, oil production in Turkey was 17.1m barrels; approximately 60% of the country’s total oil demand is imported as crude oil and then refined in-country.
- 107. ENERGY ANALYSIS Turkey isthe world’s 20th-largest consumer of electricity Turkey wants to raise the private sector’s share in the electricity market to 75% to raise government rev- enue, boost investment to keep up with demand and reducetheroleofthestateintheeconomy.Underleg- islation that existed until the start of 2013, this would havebeendifficult.However,theElectricityMarketLaw 6446, enacted in March 2013, sought to open up the sectortoprivateinvestorswhocannowindependent- ly generate, distribute, export and import electricity onawholesaleandretailbasis,alongsideexistingstate companies. The law aims to improve market trans- parency, establish a regulator, create an energy-trad- ing exchange and, crucially, increase private sector investment in ageing infrastructure. Among the main sales in 2014 were those of the transmissionlinesofthenationalgascompany,BOTAŞ, and a 49% stake of the public Turkish Electricity Dis- tribution Company (TEDAŞ). In 2014 six thermoelec- tricplantsand10hydroelectricplantswereprivatised, sold primarily to local investors, and as of the end of that year the share of energy produced by the private sector had reached 72%, up from 57% in 2003. UNDERINVESTED:Economicinstabilityandhighpub- licdebtplaguedTurkeyfordecades,makinginvestment in the electricity sector a low priority. However, rapid economic growth over the past decade has sparked greater energy consumption, exposing the electricity networks’shortcomings.Overloadsandblackoutswere common, and still are, and there are leakages across much of the network. An average of 16% of transmit- tedelectricityislost,reachingashighas70%inimpov- erished south-eastern areas. To keep up with demand that has risen only second toChina,analystsarguethatTurkeymustinvest$5bn- 10bn a year over the next decade. A revamp of the legal underpinnings of the electricity sector was required to attract private monies to distribution and generation. For the former, the tender of the grids AnadoluYakasıElektrikDağıtım,DicleElektrikDağıtım, Toroslar Elektrik Dağıtım and Vangölü Elektrik Dağıtım in March 2013 earned the government $3.5bn, with nearly$3bnofthatfigurecomingfromEnerjisa,Sabancı GroupandGermany’sE.ON’sjoint-ownedenergygroup, which won the two largest grids. Already, Turkey has increased the private sector’s role in the power mar- ket to 61% from 38% a decade ago. OLD LAW & NEW: The foundation for the privatisa- tionofTurkey’senergymarketbeganin2001,withthe enactment of Law 4628, which enabled participation byforeignanddomesticprivateinvestorswhilereduc- ing the state’s role. The law established the independ- ent Energy Markets Regulatory Authority (EPDK) to smooth the transition to a fully liberalised market. But the transition was not especially smooth, and many assetswerestillinstatehandsatthebeginningofthis decade. Uncertainties lingered over the stipulations ofthelawuntilthenewlegislationwasenactedin2013. This situation is typified by the failed attempt to sell off generation assets belonging to the state-owned electricitycompanyElektrikÜretimAŞ(EÜAŞ)andthe failed bid by the MMEKA consortium to buy Istanbul’s two transmission companies in 2011. Under the old legislation, distribution companies could carry out distribution, generation and retail undertheumbrellaofthesamelegalentity.Anamend- mentin2008meanttheseactivitieshadtobeunbun- dled by January 1, 2013. The now-repealed Law 4628 also stipulated that foreign players could not wholly, jointly or indirectly have control of electricity gener- ation,transmissionorretailsectors.Marketcontrolhad rested with three state entities: EÜAŞ, the monopoly Turkish Electricity Transmission Corporation (TEİAŞ), which is unlikely to be privatised, and the Turkish Elec- tricityTradingandContractingCompany(TETAŞ),which still has a 40% share of the market. INCENTIVES: The new legislation makes substantial changes to the licensing and approval system, includ- ing to the types of licences available. It has brought in apre-licensingprocessandextendedthecut-offdates for some incentives, such as stamp-duty exemption The Electricity Market Law 6446, enacted in March 2013, sought to open up the sector to private investors who can now independently generate, distribute, export and import electricity on a wholesale and retail basis, alongside existing state companies. 105 THEREPORT Turkey 2015 In 2014 six thermoelectric plants and 10 hydroelectric plants were privatised, sold primarily to local investors, and as of the end of that year the share of energy produced by the private sector had reached 72%, up from 57% in 2003. Liberalising power The privatisation of power infrastructure continues
- 108. ENERGY ANALYSIS forgenerationcompanies,theprice-equalisationmech- anism fortariffs (until the end of 2015) and an exten- sion for tax exemptions for unbundling. The new framework also allows for the establish- mentofanenergyexchange,theEnergyMarketsOper- ating Corporation, or EPIAS. Previously, companies wereabletotradederivativecontractsatafixedprice. Nowreferencepriceswillbethetarget,providingmore transparency and competition, and helping to lower power prices. The exchange also reduces the role of TETAŞ to regulation, developing the national grid and improving interconnection with neighbouring coun- tries’ grids. The law reduces the government’s stake in EPIAS to 30%, and European energy exchanges ICE Endex and EEX have expressed interest in Turkey’s energy trading market, Reuters reported in 2013. TYPES OF FIRMS: There are five types of operators in the market. EÜAŞ and its subsidiaries comprise more thantwo-fifthsofthemarket.Thisisfollowedbybuild- operate-transfer and build-operate-own companies with rights to build and operate thermal plants that were developed before the previous electricity mar- ket law. Then there are companies operating under transfer of operational rights agreements, independ- ent power producers and companies licensed to pro- duce only for their own needs. Turkey completed its sale of all 18 state-run power distributorsin21regionsbylate2013,adding$12.7bn tostatecoffers.Withfullprivatisation,TEDAŞnolonger distributespower.However,itcontinuestoownassets and permit privateers to use them under a transfer of operation rights model. Distribution companies must make connection agreements with TEİAŞ for trans- mission services, connection and system-utilisation agreements, approved by the EPDK. Supply was provided by state and private whole- salers,andretailerswereregulatedbytherepealedElec- tricity Market Law as two activities. The new law com- binesthemunderonesupplylicencewithoutsubjecting firmstoanyregionalrestrictionsforeligibleconsumers. Public utilities still dominate the electricity genera- tion and wholesale sectors. Trading agreements are generally between a generation company or a whole- sale company and a distribution company or an end user. Their form and terms are subject to negotiation between parties. As yet, the EPDK has no supervisory poweroverthetermsofagreementssignedbyprivate sector wholesalers. Bilateral energy-sale agreements with TETAŞ are subject to EPDK approval but agree- ments signed by private wholesalers are not. LICENCES: The EPDK has issued some 1500 genera- tion licences, of which 87 are held by EÜAŞ and 1377 by independent power producers. The build-operate- transfer and build-operate companies operate based on contracts with the Ministry of Energy and Natural Resources, which acts as a second regulator, without a generation licence issued by the EPDK. Any direct or indirect transfer of 10% or more of a licence holder’s shares is subject to approval by the EPDK. This rate is 5% for publicly held companies. The market share of a private sector generation company cannotexceed20%ofthetotalinstalledelectricitygen- eration capacity in Turkey in the previous year. One aspect of the legislation encourages uptake of renewable energy. In line with the government’s tar- get of 30% of electricity generated by renewable sources by 2023, each supply licence holder must buy power from the country’s two nuclear plants after they become operational in 10 years. This amount is equal to a determined percentage that the supply licence holder sold in the previous year. TETAŞ is obli- gatedtobuyelectricitygeneratedbynuclearandcoal- fired plants exceeding 1 GW of installed capacity. The government is eyeing another $13bn it says it can raise by privatising assets generating 16,000 MW of installed capacity now held by EÜAŞ. In April 2014 operating rights to lignite-fired plants at Yeniköy, with capacityof420MW,andthe630-MWKemerköyplant were sold to builder IC İçtas for $2.67bn. Also in April, Demir Madencilik, a Zonguldak, Turkey-based mining concern,placedthehighestbidof$351mforthe300- MW Catalgazi lignite power plant. The Privatisation Administration will also privatise Yatağan,alignite-firedgiantwithcapacityof630MW. Yatağan, located in the southern Mugla Province, for decadesmadeheadlinesforcreatingexcesswaste,and localshavesaiditspewspollutantsneartourismresorts, leading to health problems. Raising environmental standardsisalsorequiredunderthenewelectricitylaw, althoughinvestorsaregivenagraceperioduntil2018 inwhichtheirlicencescannotbecancelledandnosanc- tions can be applied while they seek to make their newly acquired plants compliant with environmental protection statutes. Non-state companies have already added an extra 22,000 MW to their installed capacities through pri- vatisation and new investments in the last decade. A total of approximately 32,000 MW are held in private hands, leaving roughly 25,000 MW with EÜAŞ, which includes 28 hydro-electric and 16 thermal power plants,oratotalof16,200MW,thatareslatedforsale. 106 The government is aiming for 30% of electricity to be generated by renewable sources by 2023 The sale of all 18 state-run power distributors in 21 regions was completed by late 2013, adding $12.7bn to state coffers. With full privatisation, TEDAŞ no longer distributes power. www.oxfordbusinessgroup.com/country/turkey
- 109. ENERGY ANALYSIS TANAP willhelp Turkey realise its goal of being an energy transit hub Thecountry’sdemandforenergyisrisingandnewsup- ply sources for natural gas are needed to generate electricity,heathomesandcook.Duetoscarcedomes- tic supplies and a lack of sufficient liquefied natural gas infrastructure, those supplies will mostly come via pipeline. Turkey has trained its eyes on tapping the planned link from the Shah Deniz II gas development in Azerbaijan to markets in the EU. Overthepastdecade,severalplansforgaspipelines alongthe“southerncorridor”havebeenmooted.This initiative by the European Commission seeks to pro- cure fuel from the Caspian Sea and Middle East via Turkey to reduce its reliance on Russian gas, which accountsfornearlyathirdofEurope’ssupply.Withpolit- ical relations strained over Russia’s interference in Ukraine in 2014-15, the EU is more eager than ever to diversify supplies and avoid potential disruptions. Among the many schemes that have failed to leave the drawing board, the biggest flop has been the Nabuccoproject.The$10bnproject,initiatedin2002, aimed to carry 31bn cu metres of gas annually from the Caspian Sea along a 3300-km route, but fell afoul of its unfeasible budget, low returns, lack of consen- sus among its partners and a failure to procure sup- plies.ButthedeathknellforNabuccomostlikelycame inJune2013,whentheShahDenizconsortium,formed by British energy giant BP and the state oil company of Azerbaijan, Socar, decided on the Trans-Anatolian Pipeline (TANAP) to transport Azeri gas west. What differentiates TANAP from Nabucco is that the former has committed supplies, financial backing and customers, Haldun Yavaş, head of the Istanbul- based think tank Caspian Strategy Institute, told OBG. “TANAP is an important undertaking in the sense that it brings additional and diversified supply to both Europe and Turkey,” he said. “The significance of the project is that it opens a fourth supply corridor for Europe: the Southern Gas Corridor.” ROUTE:The1850-km,$10bnTANAPwillstartinAzer- baijan, transit Georgia, then traverse Turkey to the Greek border. TANAP will be the second-largest such projectintheworldintechnicalterms,saidSocarrep- resentativeVusalMammadovataconferenceinIstan- bul in March 2014. Georgia is a key component of the transitroutefromAzerbaijan.TheGeorgiansareexpect- ed to stump up $2bn for the section crossing its ter- ritoryandwillincludetwocompressorstationsaswell asthepipe.TheprojectisjointlyownedbySocar(58%), BOTAŞ (30%) and BP (12%). Annual designed capacity is 16bn cu metres, but TANAPismeanttobescalable,withitscapacityincreas- ing with the additions of parallel loops and compres- sorpowerasproductionincreasesupstream.Thepro- ject’s second phase would raise capacity to 23bn cu metresby2023,then31bncumetresby2026and60bn cu metres by 2060. Initially, Turkey will receive 6bn cu metres per year and the rest will go to Europe via the connecting Trans-Adriatic Pipeline (TAP), which will spantheseafromGreecetoItaly.TANAPwillalsohave two exit/entry points in Turkey, in Eskişehir and in Thrace, allowing gas to be sold domestically. TAP will have an initial capacity of 10bn cu metres, scalable to 20bn cu metres per year. The sharehold- ers in TAP are BP Socar and Norway’s Statoil, which eachcontrol20%.Belgium-basedFluxysraiseditsstake in2014to19%,whiletheSpanishenergycompanyEna- gas bought a 16% stake. The Swiss energy firm Axpo has 5% of the project's shares. Turkey does not cur- rently plan to partner in TAP, the energy minister, Tan- er Yıldız, told Reuters in May 2014, though TANAP will link to the line at Kipoi on the Greek-Turkish border. PROGRESS: “The implementation of the TANAP proj- ect is underway and is proceeding in a timely manner,” Yavaş said. As of December 2014, the builders of the project had been selected by shareholders, with Fer- nasConstruction,theSicim-Yüksel-Akkordconsortium and Tekfen Construction slated to build the line. Initial gas flow is expected sometime in 2020. A project the size of TANAP will finally help Turkey realise its long- sustained dream of becoming an energy transit hub. TANAP’s annual designed capacity is 16bn cu metres, but the project is meant to be scalable, with its capacity increasing with the additions of parallel loops and compressor power as production increases upstream. 107 THEREPORT Turkey 2015 The 1850-km, $10bn TANAP will start in Azerbaijan, transit Georgia, then traverse Turkey to the Greek border, and will be the second-largest such project in the world in technical terms. Trans-Anatolian steps Natural gas is poised to traverse the country
- 110. ENERGY INTERVIEW Besim Şişman,CEO and Chairman of the Board, Turkish Petroleum Corporation (TP) How can Turkey work towards decreasing its dependence on costly energy imports? ŞİŞMAN:Turkeyisamajorconsumerofenergy,account- ing for about 1% of global primary energy consump- tion, or 120m tonnes of oil equivalents per year. This figure will continue to rise as the country works to becomeoneoftheworld’stop10economiesby2023. Unlike some of its neighbours, Turkey is not a hydro- carbon-rich country and has to purchase resources abroad to cover around 70% of its energy consump- tion,importing90%ofitsoiland98%ofitsnaturalgas. Havingtoimportsomuchfromabroadputssignificant strains on the country’s finances: in 2013 alone, ener- gy made up the largest portion of Turkey’s $65bn cur- rent account deficit. TP is the primary exploration and production entity in the country and works to develop Turkey’s domestic oil and gas supplies. The firm is also investing in production abroad to help reduce expen- ditures and meet Turkey’s energy needs. What role is domestic production playing in meet- ing Turkey’s energy needs? ŞİŞMAN: In terms of domestic petroleum production, around 50,000 barrels per day are produced in Turkey, of which TP produces 40,000. Unfortunately, this puts only a small dent in overall daily consumption, which stands at 700,000 barrels. While Turkey will never be a major producer of oil and gas, some areas, like shale gas,presentopportunities.Accordingtoareportbythe International Energy Agency, Turkey has a production potential of 20trn cu ft of shale gas and oil. As such, we are currently working on two shale proj- ects. One, near Diyarbakır, is being developed in part- nership with Shell. Drilling has finished and the well is being fractured. Once this process is complete we will have a better idea of the basin’s potential. There is a similar project in Thrace on which TP and ExxonMobil are collaborating. We signed a memoran- dum of understanding with ExxonMobil and Hallibur- toninSeptember2014toassessThrace’spotentialfor unconventional hydrocarbons. Hopefully, in 2016 we should have a better idea of the production potential of the nation’s shale reservoirs. Another area of opportunity is the Black Sea, where we have engaged in seismic mapping operations to identifypromisingareas.Ingeneral,itappearsthatthe eastern portion of the sea can produce oil, while there is more gas on the western side. Given the expense of deepwater wells – $250m-300m each – TP has part- neredwithinternationalplayerslikeExxonMobil,Petro- bras and Chevron to develop six wells. We are hoping to drill more wells in the area in 2015. In addition, new exploration and production activities are going on in the Mediterranean, off Antalya and İskenderun. WhereistherethemostpotentialforTurkishexplo- ration and production abroad? ŞİŞMAN:Theeasiestplacesinwhichtooperatearethe ones close to Turkey, such as Azerbaijan, which shares cultural and historical links with the country. Turkey is already involved in projects in Azerbaijan, such as the ShahDenizfields,andwearehopingtoworkwiththem moreinthefuture.WearealsoactiveinplaceslikeIraq and Afghanistan, which are very attractive from a pro- ductionstandpoint,thoughpoliticalissuessometimes overshadow investments in the Middle East. Africaalsohassignificantpotential.Whilemostpeo- ple know that North Africa is rich in oil and gas, many overlook nations in the continent’s interior. Countries like Somalia, Sudan, Angola and Mozambique, while somewhat risky from an economic and political stand- point, will likely be important oil-producing countries going forward. Where there is risk, there is return; so, we are currently focused on this part of the world. In addition,ifTurkey’srelationshipwithIsraelandGreece were to improve, places like the Levantine Basin in the Eastern Mediterranean and the areas around Cyprus could also yield resources. Given the costs associated with exploration and production, it is more realistic for TP to be an operator in countries close to Turkey. 108 Seeking potential OBG talks to Besim Şişman, CEO and Chairman of the Board, Turkish Petroleum Corporation (TP) www.oxfordbusinessgroup.com/country/turkey
- 111. ENERGY ANALYSIS Conventional explorerscontinue the search for oil onshore WhileTurkeymaybeatthecrossroadsofcivilisations, it is in a hydrocarbons cul-de-sac. The country is sur- roundedonallsidesbysignificantoilandgasdeposits that all stop short of Turkish frontiers. The bounti- ful Zagros fold and thrust belt, which extends from theArabianPeninsulaupthroughMesopotamia,ends at the Turkish-Iraqi border. A few hundred miles away is the super giant Kirkuk oil field. To Turkey’s east are Azerbaijan’s massive oil and gas fields. To the west, in the Aegean and Ionian Seas, are an estimated 26bn barrels of oil in Greek waters. To the south, large gas deposits have been found offshore in Cyprus, Lebanon and Israel. In the north, Black Sea neighbours have had some prom- ising results, but the search has failed to yield com- mercial hydrocarbons in Turkish territorial waters. This is despite the best efforts of international oil companiessuchasBPandBrazil’sdeepwaterexperts Petrobras. To date, the cost of exploration activities has reached $4bn and is rising. DOMESTIC INTEREST: State-run Turkish Petroleum Corporation (TP) has not abandoned all hope in the Black Sea. In early 2014 the company was reported- ly in talks with US major ExxonMobil, Bulgaria’s Mag- yar Olaj and Vienna-based OMV on continued explo- ration efforts, Besim Şişman, CEO and chairman of theboardofTP,toldReuters.ExxonMobilandChevron already have existing exploration agreements with TP. “In terms of Turkey’s oil and natural gas poten- tial, the areas to be most hopeful about are offshore, primarilyintheBlackSeaandtheMediterranean,and it is possible to include the Aegean as well,” Necdet Pamir, an instructor in energy policy at Bilkent Uni- versity and former vice-president of TP, the state oil company, told OBG. “When comparing the Black Sea to the Mediter- ranean and the Aegean, an important factor is the resolution of the question of ‘exclusive economic zones’ among littoral states, which is important because it indicates that there are no disputes over sovereignty, meaning less political risk for companies considering investing in our country,” he said. The discovery of associate gas, albeit modest amounts,offshorefromtheBlackSeatownofAkçako- ca is a concrete indicator of the presence of hydro- carbons,Pamirsaid.“However,wehavetoacceptthat conditions like the deepwater environment and high sulphur content increase the costs of investment.” PRODUCTION & RESERVES: Turkish hydrocarbons production is less than 700,000 barrels of oil equiv- alent per day, and proven reserves are 270m barrels of oil and 218bn cu feet of natural gas. Convention- al explorers continue the search on dry land. In Octo- ber 2013 Turkish energy company Arp Petrol was awarded a four-year licence to search for oil near the Syrian border. Arp’s thinking is that there is poten- tial for oil migration or an extension from nearby Syrian formations just over the border, where there are many producing wells. In addition to a seismic campaign, Arp says it is also looking at 30 plugged and abandoned wells that, although were claimed to be dry, were undeveloped most likely due to the now dormant armed conflict with the Kurdistan Workers Party that has taken more than 40,000 lives since erupting in 1984. TP also made a discovery at its Çalışkan-1 well in Şirnak province. The company hit oil at 2800 metres that it says is the same gravity as Kurdish oil across the border. This lends credence to Arp’s theory that there may be similar formations on the Turkish side. Turkish Petroleum Overseas Company (TPOC), a TP subsidiary, has been exploring in Libya since 2000. The company’s drilling campaign scored a strike rate of seven out of 11 wells, but operations have been low-key since political upheaval there in 2011. TPOC is currently prequalifying service companies for an exploration drilling campaign in the Murzuq Basin onshore block. In Iraq, TP was awarded a contract to develop the Barda field in a consortium with Gazprom and Korea While Turkey may be at the crossroads of civilisations, it is in a hydrocarbons cul-de-sac. The country is surrounded on all sides by significant oil and gas deposits that all stop short of Turkish frontiers. 109 THEREPORT Turkey 2015 Turkish hydrocarbons production is less than 700,000 barrels of oil equivalent per day, and proven reserves are 270m barrels of oil and 218bn cu feet of natural gas. Still searching Drilling for hydrocarbons resources continues
- 112. ENERGY ANALYSIS Gas Corporation,has an 11.25% stake in the Missan oilfield development project, a 40% share in the Siba gasfielddevelopmentprojectwithKuwaitEnergyand a 50% operator share in the Mansuriya gas field development project with Kuwait Energy. Other overseas operations include a limited and controversial seismic survey of Turkish territorial waters around Cyprus in November 2014 in an attempt to bag some of the large gas reserves found off the southern part of the island. TP began onshore drilling in Cyprus’ Turkish-held north in 2012 amid a row with Greek Cypriots, who had made vast discov- eries offshore. But newspapers later reported the search had been abandoned after the 3000-metre- deep Türkyurdu-1 yielded no results. SHALEGAS:Entershale,thegame-changing,uncon- ventional oil-and-gas formation that has turned around the energy fortunes of the US and other unlikely places across the globe where substantial conventional resources are absent. In Turkey shale gas, which is found trapped in sedimentary rock for- mations, could finally make six decades of oil and gas exploration bear substantial fruit, perhaps enough to partly mitigate the 18.5m tonnes of oil and 47bn cu metres of gas that Turkey imports every year, the mainculpritsbehindanannualenergyimportbillthat totalled $55bn for 2014. Large shale gas deposits have been discovered in Turkey’s north-west Thrace Basin and in the south- east of the county. At the end of 2013 Royal Dutch Shell and TP spudded their first shale gas well in Turkey at the Sanbuğday-1 gas field formation near Diyarbakır in the south-east, estimated to contain up to 6bn cu metres of gas. Shell is also contracted to drill five wells in the nearby Dadaş shale formation. When combined with the Hamitabat shale formation in Thrace and a few deposits in Central Anatolia, these finds could mean Turkey has shale gas deposits of 13trn cu metres, of which1.8trnaretechnicallyrecoverable,IsmailBahtı- yar, chairman of the Turkish Association of Petrole- um Geologists, told Bloomberg. This would be enough to meet Turkey’s gas sup- ply needs for 14 years and help offset the massive gas import bill form Iran and Russia, according to the government’s Investment Support and Promotion Agency. ExxonMobil has also expressed interest in the south-east region. This all bodes well after a number of conventional oil wells drilled in the south- east region came up dry in 2013. LEGAL FRAMEWORK: Turkey’s new Petroleum Law came into force in June 2013 and could be the key to unlocking potential reserves by the private sec- tor. The legislation replaced a law enacted in 1954 before concerted exploration activities began. Its objectives are to attract foreign investment into a sector that has been dominated by the state monop- oly, TP, by doing away with the company’s preferen- tial rights to exploration and production. TP will no longer be defined as the de facto nation- al oil company in charge of exploring and drilling for reserves.Itwillnotbeautomaticallyawardedlicences when terms expire, without putting them up for auc- tion. The new law simplifies the licensing process, restricts the application process to 60 days and reducesthecountryintojusttwogeographicallicens- ing areas – onshore and offshore. The new law brings Turkey in closer step with EU regulationsaspartofadrawn-outaccessionprocess. The new legal framework provides companies with tax breaks and incentives on earnings and equip- ment imports, which will increase the level of tech- nology used to develop fields. It also eases existing restrictionsonhiringforeignworkers,permitslicence mergers with adjacent operators, allows for the con- struction of pipelines, extends licence periods from four to five years for onshore and from eight to nine years in territorial waters, and, importantly, lifts restrictions on the repatriation of capital. The legislation also aims to solve a problem seen across Turkey’s energy industry, namely the trading of operating licences as commodities by companies that have no intention of developing the resource. “The new law seeks to prevent companies acquiring licencessolelyforthepotentialtosellonwithoutmak- ing an investment in exploration activities,” accord- ing to international law firm King & Spalding. Applicants must hold collateral bonds worth 1% for offshore and 2% for onshore of the financial invest- ment outlined in their bids, it said. The intention is to restrict applicants to only those with the finan- cial and technical capability to develop blocks. The upshot of the new petroleum law is to finally throw the market open to participation by foreign as well as domestic entities to search for oil and gas in Turkey while the state retains sovereign rights over the land and resources themselves. Operators no longer have to partner with TP for every offshore licence, meaning international majors may return. With Turkey’s growing demand for energy, every bar- rel of oil discovered is a step in the right direction. 110 A new legal framework provides companies with tax incentives on earnings and equipment imports In Turkey shale gas could finally make six decades of oil and gas exploration bear substantial fruit, perhaps enough to partly mitigate the 18.5m tonnes of oil and 47bn cu metres of gas that is imported every year. Turkey’s new Petroleum Law came into force in June 2013 and could be the key to unlocking potential reserves by the private sector. The legislation replaced a law enacted in 1954 before concerted exploration activities began. www.oxfordbusinessgroup.com/country/turkey
- 113. ENERGY ANALYSIS Nuclear poweris expected to provide 15 GW, or 5%, of electricity In an effort to join the club of nuclear nations, Turkey has announced plans to build 12 nuclear reactors by 2030, with the intention that 20% of power genera- tion capacity will be provided from this source. How- ever, while eight projects have been approved, delays have already befallen the initial build-own-operate (BOO) project, Akkuyu 1, pushing the commencement ofitsoperationsto2022fromthepreviouslyannounced 2020, and numerous other obstacles remain. Chief amongtheseareeconomicconditions,theenvironment and the fact that some 64% of Turks oppose atomic power,accordingtoenvironmentalgroupGreenpeace. LONG-HELD DREAM: Turkey’s nuclear aspirations harken to the 1970s, but gained renewed momentum in2006whenPresidentRecepTayyipErdoğan,whowas primeministeratthetime,announcedplansforatom- ic power stations to be up and running in time for the republic's centennial in 2023. The new industry will contributetoanotheranniversarygoal:tohaveatleast 30% of electricity generated via renewable resources. The target looks attainable, but much of this capacity isexpectedtocomefromwindfarms,solarparks,geot- hermal plants and hydroelectric dams. Nuclear power would provide 15 GW, or 5% of overall electricity, the European Energy Markets Observatory notes. Progressonbuildingtheplantshasbeenslow.Reuters reported in January 2014 that work on the country’s firstnuclearpowerplant,atanexpectedcostof$20bn, on the Mediterranean coast near the town of Akkuyu was behind schedule, and the original 2019 comple- tion date was delayed. Construction of the first of four 1.2-GW pressurised-water reactors by Russian state atomic engineering company Rosatom was delayed until later in 2015, awaiting the approval of an envi- ronmental impact assessment, pushing back the start dateto2020.Followingthecollapseofoilpricesinlate 2014 and new regulatory challenges, further delays were expected to hamper activation until 2022. Akkuyu’s lead contractor, Atomstroyexport, Russia’s atomic-power equipment provider, cited difficulty in awarding construction subcontracts due to regulato- ry issues. Furthermore, Russia's financial position fol- lowing the decline in oil prices is impeding funding of theproject.DuringameetingwithTurkishenergymin- ister,TanerYıldız,inMarch2014,Rosatom’schiefexec- utive, Sergei Kirienko, said Akkuyu could provide $5bn in contracts for Turkish companies. Another challenge has involved a tender for the inspection company that will review Rosatom’s design specifications. As of early 2015 the tender had been cancelledthreetimesbecausebiddershadnotmetthe government’s pre-qualification criteria. Yıldız had said thetenderingprocesswouldnotaffectprogressonthe plant and analysts have suggested the delay may be due to both sides continuing to bargain over other aspects of a broader energy deal. However, it is clear the 2023 deadline is becoming more of a challenge. FLICKTHESWITCH: Once up and running, Akkuyu will be operated by Rosatom and its subsidiaries on a BOO basis. The International Atomic Energy Agency (IAEA) notedthiswasthefirsttimeaBOOapproachhadbeen applied to a nuclear plant. “The BOO model has been successfullyimplementedinotherenergyprojects.The model allows newcomer countries to benefit from the human resource capacity of the technology providing country in the short term and may save time in devel- oping its nuclear capacity in the long term,” Necati Yamaç, head of the nuclear energy project at the Min- istry of Energy and Natural Resources, told the IAEA. “The BOO model may help in ascending the steep learning curve that a newcomer country faces when implementingitsfirstnuclearpowerproject:thefuture workforce in embarking countries comes from either anuclearresearchgroup,whichhastoquicklylearnthe challenges of implementing a big industrial project, or from an existing utility that would be faced with the challenges of such a project. The financial risk is left to the project company, which enters into contracts with its own shareholders for the design, construction, operationandmaintenanceoftheplant,”Yamaçadded. Turkey has announced plans to build 12 nuclear reactors by 2030, with the intention that 20% of power generation capacity will be provided from this source. 111 THEREPORT Turkey 2015 Work on the country’s first nuclear power plant, at an expected cost of $20bn, on the Mediterranean coast near the town of Akkuyu is behind schedule, and the original 2019 completion date has been delayed. Splitting the atom Nuclear ambitions encounter unexpected delays
- 114. ENERGY ANALYSIS Electricity fromAkkuyu will be sold to the transmis- sion network operator Turkish Electricity Trading and ContractingCompanyataguaranteedpower-purchase agreement price of $12.35 per KWh – a 30% premium overtheaveragewholesaleprice–for70%oftheout- put of two of the reactors and 30% of the other two for the initial 15 years of operation. Rosatom will sell the remaining electricity itself on the open market. Rosatom has also agreed to pay 20% of its profits back to the Turkish state after 15 years and will provide fuel rodsandarrangefortheirdisposalfortheplant’soper- ating lifetime, which is between 60 and 80 years. DEPENDENCY: Sceptics object to the deal because it will do little to reduce Turkey’s energy imports. “From construction to operating this power station, from procuring its fuel supply to managing nuclear waste – it is apparent that at every stage everything is under the Russian Federation’s control,” said Necdet Pamir, chairman of the opposition Republican People's Party energycommission.“Withtheseconditions,sayingthat the power station will reduce our country’s energy dependence is, to put it lightly, a frivolous approach.” Turkey’s second planned reactor along a wooded, windsweptpatchoftheBlackSeacoastisfurtherfrom reality.Followinganation-widepoweroutage,theTurk- ish Parliament approved a bill in April 2015 allowing a consortium of Japanese and French engineering com- panies to build a plant near the town of Sinop, which isexpectedtocost$22bn.MitsubishiHeavyIndustries, the Itochu Corporation and GDF Suez have agreed to build and operate the facility. Erdoğan and the Japan- ese prime minister, Shinzo Abe, inked the agreement in 2013. At the time, it was the first Japanese nuclear deal to follow the Fukushima disaster in 2011. The contract is for a 4.8-GW battery of four third- generation, pressurised-water reactors developed by Atmea, a joint venture between Mitsubishi and French industrial conglomerate Areva. The Turkish Electricity Generation Corporation is set to take a 25% stake, according to World Nuclear News. The power plant is expected to come online in phases: the first is set for 2023 and the fourth for 2028. TheIAEAconductedareviewofTurkishpreparations for nuclear power. “The report concludes that Turkey has made important progress in its development of nuclearinfrastructureforanuclearpowerprogramme and that strong government support for the project is evident,” the IAEA said in February 2014. However, it also noted that Turkey needed a national policy on nuclear energy, a firm regulatory body and a national planforhuman-resourcedevelopment.TurkishMinistry of Energy and Natural Resources officials pledged to address all of the IAEA recommendations. Despitethechallengeswiththefirsttwoplannedfacil- ities,YıldızhasconveyedErdoğan’sdesireforyetanoth- erplant.“Hopefully,wewillbuildthethirdnuclearplant under the management of Turkish engineers. This will be an important test, and I think we will be ready for thetaskafter2023,”hetoldlocalmedia.Theproposed site in Turkey's Kırklareli Province near the Greek bor- der is near one of the last floodplain forests in Europe. Neighbours like Greece could raise geostrategic red flags,worriedthatanuclearisedTurkeycouldupsetthe region’ssecuritybalancesandpromptotherMiddleEast- ern states – already wary about atomic-armed Israel and,potentially,Iran–togonuclear.Terrorismisanoth- er risk, whether to the plant itself or in the manage- ment and transportation of nuclear waste, Turkey’s Centre for Economics and Foreign Policy Studies said. NUCLEAR THREAT: But the main concerns are envi- ronmental. Seismologists say both Sinop and Akkuyu areinearthquake-proneareasinacountrycrisscrossed by geological fault lines, increasing the risk of a melt- down. Since Akkuyu’s nuclear waste will be reclaimed byRussia,itmustbetransportedthroughIstanbul’ssen- sitiveBosporusStrait,onthebanksofwhichsome15m people reside. Rare Mediterranean species like the indigenoussealandthecarettacarettaturtlecouldface further endangerment from higher water tempera- turescausedbyAkkuyuusingseawatertocoolitsreac- tors, according to Greenpeace. “In the event of an accident, all of Turkey and its neighbours would be affected by radiation fallout,” Greenpeace said, arguing that the launch of an indus- try as costly as nuclear is unnecessary when Turkey’s projected green-energy potential of nearly 36 GW by 2018 would more than cover demand. Memoriespersistofthe1986disasteratChernobyl, built by Rosatom, in Soviet-era Ukraine, with some experts linking the rate of cancer deaths in parts of northern Turkey – more than double that of the rest of the country – to the catastrophe across the Black Sea. The more recent triple meltdown at Fukushima in 2011 has convinced others that atomic power is still too risky. That the government has chosen Russia and Japan, whose plants were behind the worst disasters inrecenthistory,worriesmany.“Untiltheissuesofhigh costs, operational security, disposing waste and the risks that terrorists could get their hands on the waste are resolved in a reasonable and satisfying way, we need to stay away from atomic power,” Pamir added. 112 Electricity consumption in 2014 saw an increase of 4.1% year-on-year, up from a 2013 increase of 1.3% Following a nation-wide power outage, the Turkish Parliament approved a bill in April 2015 allowing a consortium of Japanese and French engineering companies to build a plant near the town of Sinop, which is expected to cost $22bn. www.oxfordbusinessgroup.com/country/turkey
- 115. 113 Construction & RealEstate Construction sector plays a key role in the economy Turkish companies are active in many overseas markets Manufacture of construction machinery poised to expand Regulations and awareness boost insulation demand Strong fundamentals drive real estate sector expansion Legal change has made it easier for foreigners to buy
- 116. CONSTRUCTION OVERVIEW The sectorhas grown at double-digit rates in the past two years Directly responsible for a significant share of GDP and withitscontractorsactiverightacrosstheglobe,Turkey’s construction sector has been at the forefront of the country’srecenteconomicdevelopment.Overthelast decade,thesectorhastransformedtheskylineofIstan- bul and other cities, renewed and extended Turkey’s transportinfrastructure,andbuiltnewcommunitiesand facilities from the Aegean to the Caucasus. Construc- tion employs tens of thousands directly and has also establishedarangeofrelatedindustries–suchascon- struction machinery (see analysis), building materials, engineering and architecture – as major sub-sectors of the nation’s domestic and export trade. Despite recent signs of an economic slowdown – Turkey’s GDP growth came in at 2.9% for 2014, down from4.4%in2013,accordingtoTurkStat,thestatesta- tisticsagency,andtheIMFforecastsexpansionof3.1% in 2015 – construction looks set to continue to play a significantroleintheeconomyasthecountryembarks on an ambitious programme of urban renewal and a string of large-scale projects, while also seeking to accommodate the needs of a growing and increasing- ly prosperous population. According to Ali Babacan, deputyprimeministerforeconomicandfinancialaffairs, Turkey will need to spend $700bn on infrastructure in theyearsto2023ifitistomeetthegovernment’sgoal of boosting GDP to $2trn by then. FACTS & FIGURES: According to TurkStat data, at the endof2014theconstructionsectorwaswortharound TL79.7bn(€28.1bn)atcurrentprices,upfromTL69.6bn (€24.5bn)ayearearlier.Thatrepresented4.6%ofGDP, though if a constant price formula is used, with 1998 as the baseline, the figure rises to 5.9%. A report from theEuropeanconstructionsectorbody,EuropeanInter- nationalContractors(EIC),argues,however,thatwhen the sector’s impact on other parts of the economy is taken into account, the share of GDP attributable to it could be as high as 30%, with some 10% of the work- ing population employed in and around the sector. At current prices, meanwhile, the sector has shown con- sistent growth every year since the global economic downturn hit Turkey hard in 2009. That year, the sec- tor shrank 18.1%, but it rebounded quickly, growing by 24.9%in2010and26.5%in2011.Inthefollowingthree years, growth was more moderate, coming in at 7.6%, 11.9%and14.6%.TurkStat’sConstructionTurnoverand Production Index, which takes 2010 as a 100-point baseline,alsoshowsgrowthinthatperiod,withthecal- endar-adjusted index rising to 111.4 in 2011, 112.3 in 2012,120.9in2013and124.6in2014.Quarterlyyear- on-year figures for 2014, however, showed growth slowing, falling from 6.3% in the first quarter to 4.5% in the second, 2.6% in the third and -0.8% in the fourth. Areflectionofthesegrowthtrends–aswellasabell- wether for the near term – may be seen in TurkStat’s records for building permits. In the whole of 2014, some 1m permits were issued, up 21.2% from around 837,000 the year before and well above the roughly 650,000 issued in 2011. In terms of floor area, the fig- ure was even stronger, growing at 24.3%, indicating a shift towards projects of a larger size. PLAYERS: Of the world’s top 250 construction com- panies by overseas operations, 42 were Turkish outfits in 2014, according to rankings by the magazine Engi- neeringNews-Record(ENR).Thiswasthesecond-largest group from one country in the list, after China. The top Turkish firm in the list was Enka Construc- tion and Industry at 52nd place, with headquarters in Istanbuland$2.4bnininternationalrevenues,justone place ahead of Ankara-based Rönesans Construction, with$2.39bn.ThirdlargestwasTAVConstruction(83rd place globally with $1.27bn in overseas revenue), fol- lowedbyPolimeksİnşaatTaahhütveSanayi(86thwith $1.25bn) and Tekfen Construction and Installation (101st with $906m). In 2013, ENR gave TAV the title of second-largest airport construction company in the world(basedontheprojectsitundertookin2012),after US-based giant Bechtel. The rankings are also signifi- cant in that 11 years earlier, only eight Turkish compa- nies made the list. Growth in the last decade has thus Of the world’s top 250 construction firms by overseas operations, a total of 42 were Turkish outfits in 2014, according to one ranking. Despite recent signs of an economic slowdown, the construction sector is set to continue to play a major role in the economy as the country embarks on an ambitious programme of urban renewal and a string of large-scale projects. 114 Full speed ahead Several large projects are under way or in planning stages, while Turkish firms are also in demand overseas www.oxfordbusinessgroup.com/country/turkey
- 117. CONSTRUCTION OVERVIEW been exponential.From 1972 to March 2015, Turkish construction firms carried out some 7735 projects in 104 foreign countries. All of the above companies are also active domestically, as are key companies such as ÇalıkHolding’sGapİnşaat,busyeverywherefromIstan- bul’sTarlabaşıRedevelopmentProjecttoastringofhos- pitals in Turkmenistan; Tepe İnşaat, which constructed the now-iconic İş Bank complex in Istanbul; and Cen- giz İnşaat, part of the consortium building the new Istanbulairport,alongwithfourotherTurkishcontrac- tors, Kolin, Limak, Mapa and Kalyon. RISINGDEMAND:Domesticconstructionhasbenefit- tedfromstrongeconomicgrowthinrecentyears,boost- ing demand for projects. Indeed, since emerging from a major financial crisis in 2001-02, Turkey has seen continuousGDPexpansion–albeitwithashrinkagein 2008-09. In the 10 years to 2013, the country’s GDP grew by an average of 5% a year, although it slowed to 2.9% in 2014. Per capita GDP, meanwhile, rose from $4565in2003to$10,404in2014,TurkStatfiguresshow. At the same time, foreign direct investment in Turkey hasgrown,addingtodemandfornewfactories,offices and facilities. These two factors – economic and pop- ulation growth – have boosted demand for a sector whichwasalreadywellestablished,abletodrawonexpe- rience in many overseas markets too, particularly Ger- many. The country had also experienced an earlier boom, in the 1980s, following the first steps towards liberalisingtheeconomy.Thisbuiltupausefulskillsbase among workers in the sector. The 1980s saw major housing developments, with the establishment of the Turkish Housing Development Authority (TOKİ), large transport projects – including around 2000 km of motorways – and construction activity in energy, with the South-east Anatolian Project seeing a string of dams built. The decade also ended with a surge over- seas into the former Soviet states (Commonwealth of Independent States, CIS), particularly those with Tur- kic populations in the Caucasus and Central Asia. WORK ABROAD: Turkey’s construction firms have for decades been increasing their footprint outside the country’sborders.Libya,SaudiArabiaandIraqhavebeen key markets, between them accounting for around 55.2%ofalloverseasbusinessbytheendofthe1980s. TheMENAregionhaslongbeenacrucialareaforTurk- ishconstruction.Inrecentyearsthough,companieshave learnedtobalancethiswithactivityintheCIS,aspolit- ical instability has rocked the Middle East. This has stood the sector in good stead, particularly with the recentconflictsinIraq,LibyaandSyria.Whenthesecon- flicts come to an end too, Turkey will likely be one of the first helping in the reconstruction. “There are sig- nificant opportunities abroad for Turkish contractors, especially in the Middle East, North Africa and sub- Saharan Africa. Countries like Iraq, Jordan, Libya, Alge- ria and Ghana have considerable potential,” Eyüp Yiğit, chairman of Beta Tek, told OBG. “Africa, in particular, is becomingincreasinglyimportantandwillbeevenmore soinfiveyearstimeasitseconomycontinuestogrow.” The countries of the Gulf region, meanwhile, saw a major construction boom start in the 2000s, with the rise in oil and gas prices fuelling the development of whole new city developments in the UAE, Qatar and SaudiArabia,inparticular.Turkishcompanieswerewell positionedtotakeupmuchofthiswork,leveragingtheir domestic experience, lower costs than Western out- fits and reputation for good quality. A recent strong example of this is the Doha Metro in Qatar, with Turk- ishcontractorsYapıMerkeziandSTFAamongthecon- sortium of contractors that won the $4.4bn contract there to deliver the Gold Line. Reconstruction in Iraq has also resulted in contracts for Turkey, while eco- nomic growth in Northern Iraq, driven by oil revenues andrelativestability,hasbeenasourceofworkaswell. TheCISregion,meanwhile,hasgrowninimportance, especiallyRussia,althoughRussia’seconomictroubles are likely to dampen prospects in the near term. By 2014 Rönesans Holding had established itself as the largest foreign contractor in Russia, with $2bn of proj- ects in its portfolio there. These days too, Turkish firms are busy in new markets in Africa and Asia – a move givenimpetusbytheeconomicdownturninmoredevel- oped countries and the political turbulence in MENA. 115 THEREPORT Turkey 2015 Construction sector GDP, 2004-14 (TL bn, current prices) SOURCE:TUIK 0 16 32 48 64 80 20142013201220112010200920082007200620052004 Economic growth has boosted demand for many types of projects Turkish construction companies have for decades been increasing their footprint outside the country’s borders. From 1972 to March 2015, Turkish construction firms carried out some 7735 projects in 104 foreign countries.
- 119. CONSTRUCTION OVERVIEW FUTURE GROWTH:Back home, a rash of public and private investment in buildings and infrastructure has alsotakenplaceinrecentyears,withmuchmoreinthe pipeline. Again, the main focus for giant projects is Istanbul, which President Recep Tayyip Erdoğan has taken a particular interest in. He announced a string of major works for the city during his three terms as prime minister, with these likely to continue to be the focus of much political attention in the years ahead. THIRDS:Alreadyunderwayistheconstructionofathird Bosphorusbridge,furthernorththantheexistingtwo. This requires a new road network as well, with one of theselinkingtothesiteofanothergrandproject,Istan- bul’s third airport. The $2.5bn bridge, to be named the Yavuz Sultan Selim Bridge, will carry both road and rail, with the road part of the planned 260-km Northern Marmara Motorway, a major bypass highway for the city. The bridge is being constructed by Turkey’s İçtaş İnşaatandItaly’sAstaldi,withaninitialcompletiondate of May 29, 2015. However, as of April 2015 the proj- ect was expected to be completed by the end of the year. When finished, it will become the world’s longest combined road and rail bridge. The third airport, meanwhile, is being constructed tothenorthofthecity’sEuropeanside,inalargelyforest- edareatowardstheBlackSeacoast.Constructionthus involves the clearing of 7569 ha of land, with the four- stage project seeing runway and terminal space grad- ually expanded. By completion of the fourth phase, in 2025, the airport will have a capacity of 150m passen- gers per year, six runways, 1.4m sq metres of indoor space and four terminal buildings, along with a range of associated facilities. The five-company consortium thatwonthetenderforconstructionbidsome€22.2bn, and was granted a 25-year operating lease. A MAN, A PLAN, A CANAL: The government also has plans to construct an even larger project in the years ahead–acanallinkingtheBlackSeaandMarmaraSea. Known as Kanal Istanbul, this would cut across the European outskirts of the city, running for 43 km with a reported depth of 25 metres, allowing the passage of the new generation of supertankers and even sub- marines. The cost was first announced in 2011 as around $10bn, although it is widely expected to be much higher and feasibility studies are still ongoing. While the canal – as with the airport and the third bridge – has proven controversial, attracting a great dealofcriticismonenvironmentalgrounds,itsconstruc- tion would likely provide a major boost for the sector. It is also intended to shift Istanbul’s real estate focus to the north, with plans for new communities mooted along its course. Then-Prime Minister Erdoğan announced he would like to see its completion coin- cide with the 100th anniversary of the Turkish Repub- lic’s founding, in 2023, although there are doubts that this will be achieved. As of early 2015, the project had not yet moved forward, but Erdoğan had reiterated his support and called for it to be expedited. URBAN RENEWAL:Onanotherlevel,thegovernment has also begun a major urban renewal programme, aimed at readying Istanbul and other cities for future earthquakes.TheNorthAnatolianFaultrunsacrossthe northofthecountry,passingsouthofIstanbul.In1999, a giant earthquake struck, centred on the north-west- ern industrial cities of Izmit and Adapazarı, causing great devastation and loss of life. Much of this could havebeenavertedwithbetterbuildingquality,withthe urban renewal programme aiming to either demolish or strengthen at-risk structures. The programme is set torolloutovera20-yearperiodandcost$400bn,with some 6.5m housing units affected. TOKİ is spearhead- ing the programme, which is already under way. ROADS & HOSPITALS: Turkey is also carrying out a major motorway expansion project, with the 2200-km network of 2013 set to expand to 9680 km by 2035, according to the General Directorate of Highways. Another key project is the City Hospitals initiative, a €12bn programme to build or expand around 60 hos- pitals across the country in collaboration with the pri- vate sector. As of the end of the first quarter of 2014, contracts for 17 hospital public-private partnership (PPP) projects across Turkey had been signed, with three of these already under construction. A new law 117 THEREPORT Turkey 2015 SOURCE:TUIK*2010=100 Construction sector production index, 2005-14* 0 30 60 90 120 150 2014201320122011201020092008200720062005 Turkey’s urban renewal programme is set to cost around $400bn Large-scale projects in the works include Istanbul’s third airport, a third Bosphorus bridge, a canal linking the Black Sea and Marmara Sea, a major urban renewal programme, a vast motorway expansion project and the City Hospitals initiative.
- 120. CONSTRUCTION OVERVIEW on PPPsin the health sector supports this effort, with the hospitals built and run by private sector compa- nies on the basis of 25-year leases. PIPELINE & POWER: Another large project in the works is the 1850-km Trans Anatolian Natural Gas Pipeline (Tanap), which began construction in April 2015. When completed in 2019 at an estimated cost of$10bn,itwillcarrygasallthewayacrossTurkeyfrom Kars in the north-east, where it will tie into the exist- ingSouthCaucasuspipelinecarryinggasfromtheShah Deniz field in Azerbaijan, to its border with the EU in EasternThrace,whereitwilltieintotheplannedTrans- Adriatic Pipeline running through Greece and Albania to Italy. Jointly owned by Azerbaijan’s state oil compa- nySocar(58%),Turkey’sstate-ownedoilandgaspipeline operator Botaş (30%), and BP (12%), Tanap forms the keylinkinamajorplanbytheEU–the3500-kmSouth- ern Gas Corridor – to reduce its dependence on Russ- ian gas and diversify export routes for supplies from the Caspian Sea region. As of March 2015, $3.4bn in contracts had been signed, with more on the way for buildingstations,compressionunitsandoffshoreoper- ations,accordingtoSaltukDüzyol,Tanap’sgeneralman- ager,whosaidtheprojectwillcreate5000Turkishjobs. Two large nuclear power projects are also planned. As of April 2015, bidding was under way for a contract todesignandbuildthefirsthydraulicstructuresforthe Akkuyu nuclear power plant, the country’s first, to be built in the south-central province of Mersin at a cost of$20bn.ConsistingoffourRussian-designedunitsof 1200 MW each, the plant will eventually produce a total of 35bn KWh a year. Also in April the Turkish par- liament approved a law creating the legal framework to start construction on a 4800-MW plant in the Black SeatownofSinop.ItwillbebuiltjointlybyFrance’sGDF Suez and Japanese firms Mitsubishi Heavy Industries andItochuCorporationatanestimatedcostof$22bn. Construction was expected to begin after approval is grantedbydomesticandinternationalregulatorybod- ies,withatargetofbringingthefacilityon-lineby2023. BUILDINGBLOCKS:Withmanyoftheseprojects,Turkey hastheadvantageofhavingdevelopeditsownPPPmod- el in the 1990s, with a proven track record for build- operate-transfer agreements with the private sector. Such major works have also helped develop a signifi- cant domestic construction materials sector in Turkey. Iron and steel have long been manufactured in the country, but both have undergone a major expansion onthebackofgrowingdemandforrebar,girders,steel pipesandpipefittingsforconstruction.Turkey’scrude steel production capacity reached 50.2m tonnes in 2014, up slightly from 49.25m in 2013, according to the Turkish Steel Producers Association. The country also produces aluminium, with Eti Aluminyum a global player and Turkey’s sole liquid aluminium producer. AccordingtoaMinistryofEconomy(MoE)reportfrom 2014, Turkey has 67 cement plants, divided between 19 grinding units and 48 integrated units. Much of the output of these plants is also exported. Total produc- tion in 2014 was 71.2m tonnes, with 63.2m tonnes sold domestically and 7.7m tonnes exported. Turkeyalsohasaroundone-thirdoftheworld’stotal marbledeposits.TheMoEstatestherearesome5.1bn sq metres of probable reserves in the country, with around 4m tonnes of marble, worth around $2.2bn exported in 2013, according to the Turkish Natural Stone, Marble and Machinery Manufacturers’ Associ- ation.TheIstanbulMineralExporters’Associationesti- mates that total natural stone exports were worth $2.2bn in 2013 and $2.13bn in 2014. Thecountryalsohasmajorceramictilesandceram- icsanitarywareindustries.MoEfiguresplacetotalpro- ductioncapacityofwallandfloortilesataround2.37bn sq feet, with 1.12bn of these exported. The MoE also ranksTurkeyasEurope’slargestproducerandexporter of ceramic sanitary ware, with production of 112,200 tonnes in 2012. Glass production is also extensive – with one group of companies, Şişecam, producing around 90% of Turkey’s total output in this field. The MoE ranks the company sixth in Europe and 13th in the world in terms of glass production capacity. Turkey has a significant building plastics subsector as well, with around 5000 firms operating in this field. There is also a thriving domestic paints and coatings segment, which–aswithplastics–hasdevelopedexpertiseand grown in tandem with Turkey’s automotive sector. OUTLOOK:Withthedomesticmarketprovidingastrong base, and with Turkish contractors having successful- lydiversifiedtheirmarketsandprojectsinrecentyears, the construction sector is well positioned to continue growing, though Turkey’s reliance on foreign capital inflows to fund its high current account deficit makes itvulnerabletoexternalshocksandconstitutesachief concerninthemediumterm,accordingtotheIMF.The sector’sfortunesgloballyarecloselylinkedtoeconom- ic growth in general. In this regard, the recovery in developedmarketsisaplus,althoughthedeclineinoil pricesandongoingturmoilinsomeareaswillnodoubt impact the key MENA and CIS markets. That the sec- tor has managed such strong growth in difficult times is a tribute to its continued resilience and foresight. 118 Around 10% of Turkey’s working population is employed in and around the construction sector The country’s first nuclear power plant will be built in Akkuyu in the province of Mersin at a cost of $20bn, consisting of four units of 1200 MW each. The Turkish parliament has also approved a law to start construction of a 4800-MW nuclear facility in the Black Sea town of Sinop. Construction of the 1850-km Trans Anatolian Natural Gas Pipeline began in April 2015, and it will carry gas across Turkey, forming the key link in a major plan by the EU – the 3500-km Southern Gas Corridor – to reduce its dependence on Russian gas. www.oxfordbusinessgroup.com/country/turkey
- 121. CONSTRUCTION ANALYSIS CMME accountsfor 16% of Turkey’s total machinery production value As Turkey’s economy and population have expanded, growth in its construction sector has benefitted from the existence of a vibrant domestic industry for man- ufacturing machinery. According to 2013 data from the Turkish Construction Equipment Manufacturers and Distributors Association (IMDER), the construc- tion and mining machinery and equipment (CMME) sub-sector posted the second-fastest growth in the world between 2005 and 2013, after China. Turkey’s CMME industry is the ninth largest in the world. EXPORTS:According to a 2014 report on the industry bytheMinistryofEconomy(MoE),CMMEaccountsfor around 16% of Turkey’s machinery production value. The CMME sub-sector also exported $1.6bn worth of equipment in 2013, with Germany, Romania, Iraq, the UK and Iran the main markets. Since 2002, all Turkish exportedmachineryhasalsobornethe“CE”label,iden- tifying it as meeting EU standards for quality. Broken down by type and value, spare parts came in first among exports within the CMME subsector in 2013, responsible for $553m, followed by machinery forsorting,separating,screening,washing,crushingand grindingminerals,with$407m.Otherimportantexport items included bulldozers, angle dozers, grazers and excavators, at $162.2m, and lifting, handling, loading andunloadingmachinery,at$156.6m.Growthinthese export figures has been impressive. The total stood at $927.5m in 2009, showing growth of $668m, or 72% over five years, at current prices. TheMoEnumbersfurthershowthatsome500com- panies are engaged in the manufacture of CMME, nationwide. Around 60% of all of these firms are in the MarmaraandAegeanregions,locatedclosetothesites of major work and good transportation links. Further supporting the sector are several related industries. Automotives has long been a major part of the Turk- isheconomy,withmanyinternationalcompaniesactive inthecountryviajointventureswithlocals(seeIndus- try chapter). At the same time, the steel and non-fer- rous metals industries are long established, providing locallysourcedmaterialsforCMMEmanufacture.Plas- tics too are a local industry, as are glass and synthetic rubber. There is also a pool of experienced and quali- fied staff, with CMME manufacturing, which tends to requireamuchhighertechnicalandresearchanddevel- opment capacity than many other kinds of manufac- turing,abletocountongood-qualitylocalhires.Inaddi- tion, Turkey offers 21 free zones with a range of tax exemptions for industrial and manufacturing compa- nies. All this has facilitated CMME growth. DEMANDUP:Yetthescaleoftheboominthedomes- tic construction sector, with giant projects such as the third Bosphorus bridge and the new Istanbul airport, has meant that the domestic CMME subsector has been unable to keep up with demand. The latest fig- uresavailable,for2012,showthattherewasademand for around $2bn of CMME domestically that year, with a 37% annual hike in demand since 2009. In conse- quence,importsofCMMEhavebeguntoincrease,with around half of all new demand since 2009 being met by these. A major opportunity exists too for the devel- opment and manufacture of small-sized construction equipment, given that a lot of the domestic demand is for projects in existing areas. The government’s urban regeneration project, which seeks to demolish and rebuild or upgrade 6.5m housing units over a 20-year period, creates a huge demand for such equipment. Muchoftheexpertiseforthemanufactureofsmall- scaleCMMEhasalreadybeendeveloped,withthesub- sector looking for investment to boost capacity and reach.Suchinvestmentsalsohavelowercapitalrequire- ments than those for the manufacture of larger units. The industry, therefore, faces some of the same chal- lenges and opportunities as the Turkish market as a whole:thereissoliddomesticdemandandastrongneed for foreign investment to meet that demand in a sus- tainable fashion. In the meantime, however, this sub- sector is set to continue to expand, with many of the cranes towering over the world’s construction hotspotsalreadybearingthe“MadeinTurkey”trademark. Approximately 500 companies are engaged in the manufacture of construction and mining machinery and equipment across Turkey. Exports totalled around $1.6bn in 2013, with Germany, Romania, Iraq, the UK and Iran the main markets. 119 THEREPORT Turkey 2015 Keeping up with demand The construction and mining machinery and equipment segment is benefitting from renewed activity
- 122. CONSTRUCTION DIALOGUE Ergil Ersü,Chairman, Gama Holding Whatarethefactorsyouevaluatewhendetermin- ing whether or not to invest in a project abroad? ERSÜ:Constructionisaninherentlyunpredictablebusi- nessbothinandoutsideofTurkey.Sometimesyoucan spend a lot of time preparing a bid and then lose or it getscancelled.Othertimesyoucanexertverylittleeffort during the planning stage and get rewarded with a very profitable project. In the past, we tried to balance ourdomesticandinternationalworkbutinrecentyears we have been more focused on the latter because of intense competition within Turkey. Right now, around 70% of our overall business takes place overseas. First, the type of international project matters. For our general contracting unit we look at a different set of factors than for our engineering, procurement and construction(EPC)arm.ItisnotlogicalforTurkishcon- tractors to go to sub-Saharan Africa or South America for relatively simple undertakings like infrastructure developments,superstructures,generalcivilconstruc- tion and certain types of industrial plants; the logistics requiredaretoocostlyandcomplex.Ontheotherhand, these costs are more justifiable for highly specialised EPCcontractswiththepotentialforlargeprofits,espe- ciallyprojectsinthepowerandoilandgasspaces.Sec- ond, partnership considerations are very important. In marketswherecooperationisneeded,eitherwithalocal orinternationalcompany,potentialpartnersmustbring some sort of value-added benefit to the project to make it worthwhile; for instance, they may possess a special expertise or provide access to local suppliers. Thesizeoftheprojectisthethirdconsideration.Giv- en their high overhead costs, it is difficult for large companies to engage in too many small projects. It is equally hard for small companies to compete for big projects that require considerable expertise. In gener- al, the construction industry has very thin margins so participating in the right project is essential. The last thing that needs to be mentioned is the impact of political instability. Pre-uprising Libya was a very lucrative market for Turkish contractors for many yearsbutisnowmuchlessofafocus.Theworldchanges quickly,andpromisingmarketscaneasilybecomeless- so overnight, just as an average market today can turn into a hot market tomorrow. As we speak, our neigh- bours in the north are experiencing a crisis that may have a profound impact on the construction outlook acrossRussiaandthecountriesoftheformerCommon- wealth of Independent States. PAÇACI: While there are many factors that drive our investmentdecisionsoutsideofTurkey,wetendtolook atthreekeycriteriawhenevaluatingopportunities.We evaluate the genuine need and feasibility for a project first.Forinstance,infrastructureorhousingprojectsin marketsthatareveryunderdeveloped,butgrowing,are attractiveiftheprojectsmatchourportfolioofexpert- ise, and we have the financial and human resources to completethem.Thenwetendtolookatproximity.Giv- en transport and material costs, it is very difficult for Turkishcontractorstocompeteforprojectsveryfaraway, like in the US and East Asia. Some construction firms areactiveintheseareas,butTurkishcompaniesaremore competitive in regions like MENA and Central Asia. A final key element is the political and economic stabili- ty of the country where the project will take place. Politicalstabilityhasbecomeamoreimportantcon- sideration,oflate,especiallygivenallofthesignificant changesthathaveswepttheregioninthepastfewyears. Libya was a very profitable market for Turkish contrac- torsbeforetheArabSpringandmanyfirmsarestilllook- ingtorecovermoneyfromprojectsthatstoppedwhen the movement began. Unfortunately, it is very hard to recovertheselosses,astherearenopoliticalriskguar- antees in place and the Turkish government has not been able to secure ample repayments from Libyan authorities. Judicial systems are also important. Dis- putes can last years in some places, like Russia, nega- tively affecting the attractiveness of doing business in those markets. All this is to say that there are signifi- cantopportunitiesabroad,butthattheyneedtobewell- researched before making any investment decisions. 120 Trending markets OBG talks to Ergil Ersü, Chairman, Gama Holding, and Orhan Paçacı, Member of the Executive Committee and Shareholder, Mesa Holding www.oxfordbusinessgroup.com/country/turkey Orhan Paçacı, Member of the Executive Committee and Shareholder, Mesa Holding
- 123. CONSTRUCTION DIALOGUE Inwhatmarketsdoyouforeseethemostopportu- nities forTurkish contractors going forward? PAÇACI: There are many opportunities both domesti- cally and internationally. Starting with the latter, it is hard to say what countries or regions pose the great- est potential, as attractiveness is highly dependent on the project in question, as explained above. That said, there has been a general trend away from more tradi- tionalmarketsforTurkishcontractorslikeRussia,Libya or Saudi Arabia to other, less-penetrated areas. Specific countries in Eastern Europe, Central Asia and MENA all have potential; places like Poland, Bul- garia, Romania, Iraq, Qatar, Kuwait, Latvia, Kazakhstan, Azerbaijan and Turkmenistan all come to mind. Many of these countries are growing, have money and need industrial and transport infrastructure, as well as oth- erstructureslikehousingandhospitals.Evencountries in sub-Saharan Africa, East Asia and Pakistan have begun to attract Turkish contractors. Again, however, any potential projects in these countries will need to bescrutinisedtomakesurethattheyarefinanciallyfea- sible,especiallygiventhedifficultyofattainingfinanc- ing in some of these markets. Overall profitability also matters. For companies of a certain size it only makes economic sense to mobilise and enter a new market for a project worth more than $60m or $70m. There is also a great deal of potential in the domes- ticmarket.TurkeyandIstanbul,inparticular,havebeen transformedmarkedlyinthepastdecade,asnewhous- ingprojects,commercialcentresandlarge-scaleinfra- structure projects have sprouted up across previously uninhabitedland.Rightnow,thereareanumberofmul- ti-use developments worth billions of dollars being developed and constructed. While some commenta- tors have expressed concern about the sustainability of such a building boom, given the country’s slowing economy and higher interest rates, especially in terms of residential real estate, there are still many areas whereconstructionisneeded.Hospitals,tourism-relat- ed facilities and high-tech industrial buildings remain in high demand. Office space is also needed in a num- ber of areas. These sorts of projects, however, need to beapproachedinthesamewayinternationalonesare examined,withrigorousattentiontothespecificneeds and the overall economic feasibility of the undertak- ing. It is no longer sufficient to build haphazardly any- wherethatthereisspace.Itisnecessarytothinkabout the impact of a structure on the surrounding area. ERSÜ: There are many attractive markets. Historically, Turkish contractors have been instrumental in meet- ing the infrastructure and housing needs of countries like Russia and Saudi Arabia. They have also been very active across North Africa and some of the countries ofCentralAsia.Therearestillmanyopportunitiesinthese markets, but some are more challenging than others. Libya is rather unstable and will take time to recover. Saudi Arabia, on the other hand, is very stable and continues to have significant potential, especially for oilandgasandpowerprojects.Itcanbeadifficultmar- ket to operate in, given the complexity of registration processes and strict qualification rules. In addition, competition in attractive markets is very high because financing is generally less of an issue in these coun- tries and payments are usually made on time, which is a marked difference from some other fast-developing markets. For instance, Korean contractors are very strong in Saudi Arabia and compete for many of the same projects that Turkish companies are chasing. Right now, Iraq is a huge market with significant potential, both in the north and south of the country. That said, recent political tensions throughout the region have made it a significantly more difficult to competeforprojectsthere.NorthAfricancountrieslike Algeria also may play more of a role going forward as a result of the amount of financing available in the region. In Algeria’s case, however, Turkish companies will need to make some adjustments to operate in the country, especially from a language perspective. Sub- Saharan Africa is also a largely unexplored market and is on the top of the lists of many Turkish contractors. 121 THEREPORT Turkey 2015
- 124. CONSTRUCTION INTERVIEW Emin Sazak,CEO, Yüksel İnşaat, and Former President, Turkish Contractors Association In what way have local construction firms con- tributedtothedevelopmentofthesectorinTurkey? SAZAK: Construction accounts for about 3.5% of Turkey’s GDP, but, when related industries are includ- ed in the calculation, this contribution is closer to 30% ofeconomicactivity.Segmentssuchasbuildingmate- rials and logistics have seen considerable growth as a result of the increasing size and strength of the local constructionindustry.Thesectoralsoemploys1.8mto 2m people, and this number is much higher when you takeintoaccountindirectemployment.Thisiswhygov- ernmentsingeneraltrytostimulateconstructionwhen they want to speed up the economy, as it encompass- es various sectors, businesses and job opportunities. Howwilltherecentrateincreaseandslowdownin domestic growth impact the Turkish construction sector at home and internationally? SAZAK: Over the past decade the sector has vacillat- ed between very high levels of growth and more lean times, but the overall trend is a positive one. This sus- tained rise has been driven by two main factors, major government spending on large-scale infrastructure projectsandincreasedprivateinvestmentinrealestate developments. Higher interest rates will have a nega- tiveimpactonbothareas.Themostimmediateeffects will likely be felt on the private side, as less people will be able take out loans to invest in property and real estate developers will have a far more difficult time financingnewprojects.Whilealotofgovernmentinfra- structure projects, especially public-private partner- ship projects, have been lined up and tendered in the past few years, many of them are still in the process of financial closure and will become more expensive as a result of the increase. It is expected that 2014 will be a more difficult year for the industry than 2013, which sawsolidgrowthofaround6.8%.Thatsaid,alowerrate has more to do with macroeconomic and political fac- tors than any issues with the industry itself. The sector will continue to expand at a faster pace than the over- alleconomyinthecomingyear.Inanycase,manyTurk- ish contractors are doing more business abroad than domestically,thusallowingforothersourcesofrevenue less dependent on the performance of the economy. Whatcountriesorregionsofferthegreatestoppor- tunities for Turkish contractors abroad? SAZAK:ThemajorityofworkdonebyTurkishcontrac- tors abroad is concentrated in the Middle East, North Africa, Russia and Central Asia. Markets such as Qatar, Saudi Arabia and the UAE have been very lucrative for the sector, and this will continue going forward owing tosignificantplannedconstructionforupcomingevents, namelythe2022FIFAWorldCupinQatarandExpo2020 inDubai.Sincethe1990s,RussiaandCentralAsiahave also proven attractive markets, and still have major potential, especially as hydrocarbons-rich countries suchasKazakhstanembarkonmassiveinfrastructure- buildingcampaigns.Inrecentyears,followingtheArab Spring, Turkish contractors have begun moving away from their traditional markets, particularly in North Africa. Turkey was second only to China on the Engi- neering News-Record’s “Top 250 International Con- tractors List” in 2013, with a total of 38 companies. OneareaoffocusisSub-SaharanAfrica.Indeed,Turk- ish contractors are pursuing opportunities in Angola, Ghana, Mozambique, Tanzania, Ethiopia, Kenya, Niger and Cameroon, among other markets. They are being aided by the spread of Turkish institutions across the continent,includingTurkishAirlinesandtheForeignMin- istry, which has opened more than 20 new embassies and consulates in the region over the past few years. Having said this, Africa is still a very tough market and it will take time for Turkish contractors to make major inroads.Whilemanyofthesecountriesdobenefitfrom natural resources, they are not yet in a position to ful- lyexploitthemanddirecttheproceedsintoinfrastruc- ture projects. Moreover, competition from China and easier access to cheap financing for Chinese compa- niesthanfortheirTurkishcounterpartsisanotherissue. 122 Global horizons OBG talks to Emin Sazak, CEO, Yüksel İnşaat, and Former President, Turkish Contractors Association www.oxfordbusinessgroup.com/country/turkey
- 125. CONSTRUCTION ANALYSIS The vastmajority of the country’s housing units lack insulation With Turkey undergoing a major construction drive duringthelastfewyears,manyassociatedtradeshave seen solid growth. One segment showing particularly impressive expansion has been insulation, which has averaged higher growth than construction as a whole, onthebackoftheinsulationofbothexistingbuildings andnewones.Thereisalsostillmuchroomforfurther growth,asTurkeyaimstoachievesimilarlevelsandstan- dards in insulation as its EU neighbours. GROWINGAWARENESS:AccordingtotheAssociation of Thermal Insulation, Waterproofing, Sound Insula- tionandFireproofingMaterialProducers,Suppliersand Applicators (İZODER), the sector had an annual aver- agegrowthrateof25-30%from2011to2013,andhas grown tenfold in as many years. By 2012, the sector had a turnover of €4bn, up from just €300m in 2004, with İZODER expecting €5.1bn in turnover in 2013. In terms of raw volume, according to the Istanbul Chamber of Industry, the sector sold 14.2m cu metres of heat insulation material in 2012, the latest year for whichfigureswereavailable,upfrom11.7mayearear- lier and just 6.1m as recently as 2006. The forecast for 2013was16.4mcumetres,representinggrowthof15%. Thesectoremploys80,000peopleamong200com- panies, according to İZODER, with 20 key local players, of which the top five are Kalekim, Ode, Eryapı, Izober andGrofen.Foreignfirmsalsohavestakesintheindus- try – mostly from Germany, Austria, France and the US –andhavebeenincreasingtheirsharesthroughawave of mergers and acquisitions in the past half-decade. It is estimated that some 85% of the 19m houses in thecountrylackinsulation.Indeed,thegovernmenthas set a deadline of 2017 for the completion of a nation- al insulation programme. The energy loss due to the lackofinsulationishuge.Around75%ofTurkey’sener- gyisimported,withsome$60bnspentonTurkey’scur- rent 115.3m tonnes of oil equivalent (toe) of energy consumption, according to İZODER data. Some 36.8m toe of this is consumed by buildings. The association estimatesthatenergyworthsome$11.5bnisthuslost eachyearduetolackofbuildinginsulation.Atthesame time, this energy loss causes significant carbon emis- sions. This makes plans to insulate every building in Turkey both enormous in scope and potential savings. CHALLENGES: İZODER and its supporters would like to see the value-added tax on insulation materials reduced and for banks to receive tax incentives on financing insulation materials and loans for projects related to energy efficiency, while investors could also get subventions on interest for these. İZODER would also like estate taxes to be reduced for buildings with higher-grade energy efficiency – from January 2011, newbuildingsarerequiredtogetanenergycertificate, passingwithaminimumCgrade,whileallexistingbuild- ings have to acquire one by 2017. Awareness is grow- ing, although more could be done. Insulation schemes tendtopayforthemselvesinthemediumtolongterm, buteconomicuncertaintiesandlowincomescanmean homeowners postpone upgrades. To overcome this obstacle,publiceducationcampaignsarevitaltomak- ing owners aware of the benefits of insulation. One move in this direction was the summit on ther- mal insulation held in September 2014 by İZODER and the Istanbul Directorate of Environmental and Urban Planning,attendedbyindustrystakeholdersandintend- ed to raise awareness. Though themes ranged from proper thickness, quality and inspection for insulation systems, one of the hottest topics was unfair compe- tition. Some domestic firms produce below-standard insulation materials, undercutting competitors, but construction firms install them all the same – a prob- lem only exacerbated by lack of proper inspection. Water insulation, too, is vital in a city such as Istan- bul,whereresearchafterthe1999earthquakeshowed that64%ofthebuildingsthatcollapseddidsobecause of rusting rebar in their concrete supports – often because no water-proofing system had been installed. For insulation companies, the hope is that the Turkish government will soon bring in a package of incentives that will help address what remains a pressing issue. The insulation segment has shown tremendous growth, registering an annual average growth rate of 25-30% from 2011 to 2013. There is also much room for further growth, as the country aims to achieve similar levels and standards in insulation as its EU neighbours. 123 THEREPORT Turkey 2015 Effective as of January 2011, all new buildings have been required to get an energy certificate, passing with a minimum C grade, while all existing buildings have to acquire one by 2017. Efficiency upgrade Demand for insulation surges due to regulations and growing awareness
- 126. REAL ESTATE OVERVIEW Foreigninvestment in real estate has risen steadily in recent years Fromresidentialtoretailproperty,theTurkishrealestate market has flourished in the last few years. Buoyed by economic and demographic growth, rising incomes, market liberalisation and a major urban renewal pro- gramme, the sector has also been attracting strong international interest which has spread beyond tradi- tional buyers in Europe and the Gulf, and beyond the traditionallocationsoftheAegeanandMediterranean coastsandIstanbul.Thereisoptimisminthesector,too, thatdespitetherecenteconomicslowdown,thisrobust growth will continue in 2015 and beyond. IN NUMBERS: Indeed, the Turkish economy has seen substantial expansion in recent years, with a rapid recoveryfromtheglobalfinancialcrisis.For2013,GDP grew4%,withameanannualGDPgrowthrateoverthe 2003-13 period of 5%, according to TurkStat, the offi- cialstatisticsagency,thoughtheIMFforecastsgrowth of 3.1% in 2015 and 3.6% in 2016, in part due to the weakness of the Turkish lira and a slow shift in foreign capital out of the country ahead of an expected rise in globalinterestrates.ThishasgivenTurksalotmoredis- posable income than they had in the past – per capi- taGDPhasrisenfrom$4565in2003to$10,404in2014. At the same time, the country has undergone sig- nificant demographic changes. TurkStat figures put the total population at 77.7m at the end of 2014, with an annual growth rate of 1.6%, up from 1.37% in 2013. Around half of all citizens are under the age of 30. Sig- nificanthere,too,arechangesinthesizeofhouseholds. With the growth of the middle class – which is expect- edtoexpandfromaround27%ofthepopulationin2010 to 45% by 2020 – has come a rise in demand for home ownership, along with a rise in the number of nuclear families, breaking way from traditional, extended fam- ily structures. This is particularly prevalent in urban centres, such as Istanbul, Ankara, Antalya and Izmir. A 2012 survey by TurkStat showed 19.8m households in the country, with an average size of 3.7 members – althoughthespreadacrosscountrywaswide,from7.9 in Şırnak to 2.8 in Çanakkale. In addition, the rate of urbanisation has meant that today, 71% of the popu- lation lives in urban areas, with the north-west in par- ticular a major population centre. Economic growth anddemographicchangeshaveprovidedsomefunda- mentalgrowthdriversforTurkey.Economicgrowthhas also increased demand for office, commercial and industrial real estate, with this further heightened by the rise in foreign investment. Istanbul’s geostrategic location has boosted its standing as a regional and internationalheadquarters.InApril2015,forexample, the UN Development Programme opened the Istanbul Regional HubtosupportitsprojectsinEuropeandthe Commonwealth of Independent States. NON-RECIPROCITY: Foreign purchases of real estate were boosted by a change in the law in 2012 that expandedthenumberofnationalitiespermittedtobuy from 89 to 183. Previously, only nationals of countries that had reciprocal arrangements with Turkey were allowed to own property. The Real Estate Reciprocity Law was amended to include countries that do not have such arrangements. This meant citizens of Mid- dle Eastern and former Soviet states became eligible, along with China and many Asian nations. Some limits do,however,remain.Foreigncitizenscannotownmore than 30 ha each, countrywide, for example. GLOBALFLOWS:Recenteconomicdevelopmentshave hadmixedresultsforTurkey’srealestatesector.Agen- eral retreat of foreign capital from emerging markets hasimpactedFDI:accordingtocentralbankfigures,total FDI inflows declined from $16.1bn in 2011 to $12.4bn in 2013, though these were up slightly in 2014 to $12.5bn.Yet,thecentralbankdatashowthatFDIspecif- ically into real estate has been rising steadily over the same period: net real estate FDI was $2.01bn in 2011, $2.64bn in 2012, $3bn in 2013 and $4.32bn in 2014 –anaverageannualriseof29.5%.Movestowardstaper- ingofthequantitativeeasingprogrammebytheUSFed- eral Reserve in 2013 and 2014, along with measures torestrictthecurrentaccountdeficit–along-termbug- bear of the Turkish economy – have also recently Foreign purchases were boosted by a 2012 change in the law that increased the number of nationalities permitted to buy real estate, meaning that citizens of Middle Eastern and former Soviet states became eligible, along with China and many Asian nations. 124 Safe as houses Population and income growth, as well as strong foreign interest, are driving sector expansion www.oxfordbusinessgroup.com/country/turkey
- 127. REAL ESTATE OVERVIEW depressedconsumer spending, while political turbu- lence has also dented consumer confidence. The underlying trend in Turkey remains that of sig- nificantly higher rates of growth than in neighbouring Europe though, coupled with much greater political and economic stability than in the Middle East and Central Asia – despite recent turbulence. Overallthen,inspiteofthedecelerationofeconom- ic activity generally, the real estate sector has contin- ued expanding. According to TurkStat, the number of construction permits issued in 2014 passed the 1m mark,up21.2%fromroughly837,000in2013andcov- ering a floor area of nearly 218m sq metres, up 24.3% on 2013. Occupancy permit issuance also rose – 6.2% by number of units and 9.4% by floor area, reaching around 767,000 and 151m sq metres, respectively. House sales, meanwhile, held steady, with the 2014 figureof1.17munitsjustsurpassingthatof2013.With economicgrowthandstabilityhasalsocomeanincrease in housing loans. Total housing loans were around TL110bn (€38.73bn) as of September 2014, up from TL20bn (€7bn) in the first quarter of 2007. The sur- prise interest rate hike at the start of 2014 may have slowedtherateofexpansionsomewhat,butwithpres- sure on the central bank to cut rates in the run-up to parliamentaryelectionsinearlyJune2015,thehistoric trend is still clearly upwards. RESIDENTIAL: Adding to the demand growth caused by the above economic and social factors is a major programme of urban renewal now under way in Istan- bul that is transforming neighbourhoods across the city.Themotivationfortheprogrammeissafety:Istan- bul lies close to a major fault line, with poor building standards responsible for much of the damage inflict- ed by the 1999 Marmara earthquake, which hit near- by Izmit and Adapazarı, among other locations. Given the sheer quantity of substandard housing, the pro- gramme is a giant one, set to roll out over a 20-year period and cost some $400bn. Of Turkey’s total of around 18.5m housing units, the programme aims to regenerate some 6.5m of them. Spearheaded by the Housing Development Admin- istration of Turkey (TOKİ), the programme is not with- out its critics – the protests in Istanbul that began in May 2013 were motivated in part by perceived gentri- fication and lack of consultation in the execution of the programme. Nonetheless, regeneration is moving forward and has seen major residential developments in areas such as Tarlabaşı and Sarıgazi, among others. Underscoring the programme is the 2012 Regener- ation of Regions Under Disaster Risk Law. This states that if two-thirds of the tenants of a building agree, theirat-riskbuildingmaybedemolished,withtaxincen- tivestosellup–value-addedtax(VAT)iscutfrom19% to 1%, while apartments sold under the scheme are excluded from stamp duty and title deed tax. Accord- ing to the Ministry of Environment and Urbanisation, around 100,000 housing units had applied for the incentives during 2013, and 79,000 in 2014. The usu- alarrangementisfortheoldbuildingtobedemolished and replaced by a private developer, via a unit-sharing agreementwiththeownersandtenants.Newunitsare built for those tenants wishing to stay, with extra units going to the developer. Since the programme began, much private investment has gone into urban regen- eration, rather than greenfield development, a move also incentivised by changes to VAT on all greenfield units. Previously, those under 150 sq metres had paid just1%,butunderthenewrules,ifthevalueoftheunit is between TL500 and 1000 (€176-352) per sq metre, the VAT is 8%, rising to 18% for those valued higher. Recent years have also seen the house price index climb steadily. The central bank’s index for Turkey as a whole rose in the 2010-14 period to 172.2 points, giv- ingacompoundannualgrowthrateof12.2%–healthy growth and an important indicator that today’s resi- dential market is far from just an Istanbul concern. OFFICE:Onceagain,Istanbulisthefocusfortheoffice market, with its increasing importance globally serv- ingtoboostdemandfrominternationalcompaniesfor prime office space, while economic growth domesti- cally has also led to demand for better accommoda- tionandupgradestoexistingestablishments.Thishigh demand has helped keep rental rates stable, as more high-qualityofficespacehascomeon-line.Afterpeak- ing at about €40 per sq metre in 2008 – when supply was tight – prime rent levels for office have stabilised at around €35 per sq metre, according to research by Jones Lang LaSalle (JLL). Rental prices at the high end are often set in euros or dollars, a practice which, giv- en the depreciation of the lira in 2013-15, has put sig- nificant pressure on some tenants. Many landlords havecometoarrangementswithtenantstofixanom- inal exchange rate that is lower than the real one in order to maintain occupancy levels. A similar practice is common in the retail segment as well. Prime yields have been stable in recent years, with peaks of around 8% in 2009-10 declining to a level of around 7% since the fourth quarter of 2011. Asthetransportinfrastructureofthecityhasdevel- oped in recent years – 2013 saw the first metro trains passundertheBosphorus,andin2014Istanbul’smain metro line was extended across the Golden Horn to Aksaray – so too have new commercial and financial 125 THEREPORT Turkey 2015 SOURCE:InvestmentSupport&Promotion Agency,Deloitte Net FDI in real estate, 2008-14 ($ bn) 0 1 2 3 4 5 2014201320122011201020092008 Despite the deceleration of economic activity, the real estate sector has continued to expand, with the number of construction permits and occupancy permits issued in 2014 growing by 21.2% and 6.2%, respectively, according to TurkStat.
- 128. REAL ESTATE OVERVIEW centres,spreading demand for office space around thecity.Whiletraditionally,thecentralbusinessdistrict (CBD)aroundLeventandMaslakontheEuropeanside and the commercial and trading district around the airport have seen the most demand for high-quality office space, the Asian-side districts of Umraniye and Kozyatağı have also developed in recent years. AccordingtofiguresfromJLL,Istanbul,whichaccounts for around 80% of the country’s high-quality modern office stock, had a total of 4.1m sq metres of grade-A office supply as of 2014, up 680,000 sq metres from 2013.Around380,000sqmetresofthisnewsupplywas in the CBD, but despite this, rental rates remained sta- bleduring2014ataround€35persqmetrepermonth, unchanged from end-2012. The vacancy rate in the CBD was 16.5% in 2014, according to JLL, and the dis- trictaccountedforthemajorityofnewtake-up,at59%. Istanbul’stotalgrade-Aofficesupplyisforecasttoreach 6.5m sq metres by the end of 2017. RETAIL: The last few years have seen increased inter- estintheTurkishretailmarketfrominternationalchains, particularly in the non-food, higher-end segment. As moreshoppingcentreshaveopened,demandforspace in prime malls has risen. In recent years Brooks Broth- ers, Galeries Lafayette and Industrie Denim in retail and Hard Rock Café, Tom’s Kitchen and Jamie’s Italian in restaurants have all come in, amongst others, tar- geting higher-end malls. In the food retail end, howev- er,recenttimeshavebeenmoremarkedbydepartures, as Real and Dia exited, while Tesco’s Kipa sought a new formula and Carrefour handed over management to locals (see Retail chapter). One major challenge over the past few years has been the depreciation of the lira,whichledmanymallownersandmanagerstooffer discounted exchange rates for rents, which are usual- ly set in dollars or euros. This was done in an effort to prevent stores from leaving, as empty shops can have a magnified negative effect on those that remain. Nonetheless, for prime retail in shopping centres, averagerentsstillincreasedduringtheyear,according to the most recent data from JLL. At the end of 2014, average rents were €90 per sq metre per month, up from €85 per sq metre the previous year. Shopping centres have evolved, often forming part of mixed-use complexes, offering office and residen- tialspace,withIstanbul’sZorluCentrecitedasastrong example. Offering luxury apartments as well as offices and retail, this has been the destination for many of the high-end international brands coming in. In the pipelineheretooistheEmaarSquareproject,amixed- usedevelopmentinÇamlıcaincorporatingresidences, a mall, a hotel, offices and entertainment venues. Totalgrossleasablearea(GLA)forshoppingcentres inTurkeystoodat10msqmetresatend-2014,up5.5% on the previous year, according to JLL. Nationally, the numberofmallsisforecasttoincreasefrom344in2014 to415in2017,withtotalGLArisingto12.5msqmetres inthelatteryear.Anadditionalfivemallsofover50,000 sqmetresareduetobecompletedbytheendof2015, including the 52,000-sq-metre Forum Diyarbakır and the 71,100-sq-metre Podium in Ankara. Turkey’s average retail density increased from 126 sq metres per 1000 inhabitants in 2013 to 129 sq metres in 2014, although this is still well below the European average of 198 sq metres, suggesting there issignificantroomforexpansiongoingforward.Ankara had the highest retail density at the end of 2014, with 270sqmetresper1000inhabitants,againstIstanbul’s 268,althoughthelatterisforecasttoovertakethefor- mer by end-2017 with 317 versus 296 sq metres. In terms of high street retail, prime space has long been limited in Turkey, and even within Istanbul. In the city, Bağdat Caddesi on the Asian side and Istiklal Cad- desi on the European are the main shopping areas, with Nişantaşı a recent focus for food and beverages. Gaziosmanpaşa Boulevard is also a prime destination in Ankara. Prime rents for Bağdat and Istiklal were around €240 per sq metre per month at end-2014, up from €225 per sq metre one year earlier. With the development of e-commerce, a further segment that is expected to do well is logistics real estate.Again,Istanbulisthecentreforthis,withrentals for prime logistics space near communications and transportcorridorspickingupfrom$6.50persqmetre per month in 2010 to $7 in 2014. Total logistics sup- ply is forecast to reach 8.5m sq metres of GLA by end- 2017, and another 2.6m sq metres is planned. OUTLOOK:Withstrongfundamentalsintermsofpop- ulationandincomegrowth,themarketlookssettomain- tainitsexpansionintheyearsahead.Themoveoutfrom Istanbulintermsofhigher-graderesidential,officeand retailspaceisprimedtocontinue,andTurkey’sgrowth as a tourism destination will likely spread demand to the coastal regions in particular. However, the broad- er economic slowdown, combined with attempts to control credit growth and consumer spending, may haveanimpactonlocaldemand.Whileallofthesefac- torsarelikelytoaffectthemarketgoingforward,inthe mediumtolongtermthefundamentalswilllikelyreassert themselves, and real estate is expected to remain one ofthemostappealingsectorsforinternationalinvestors. 126 Economic and population growth have significantly boosted demand for residential real estate Istanbul, which accounts for around 80% of the country’s high-quality modern office stock, had a total of 4.1m sq metres of grade-A office supply as of 2014, up 680,000 sq metres from 2013. Total GLA for shopping centres stood at 10m sq metres at the end of 2014, up 5.5% on the previous year. Nationally, the number of shopping centres is forecast to increase from 344 in 2014 to 415 in 2017, with total GLA rising to 12.5m sq metres in the latter year. www.oxfordbusinessgroup.com/country/turkey
- 131. 129 Agriculture Improved conditions expectedto lead to export growth Growing potential for produce and food processing Enhanced safety standards creating new opportunities Greater emphasis on consumer rights and transparency
- 132. AGRICULTURE OVERVIEW The sectoris gradually recovering from a brief drought in 2013-14 Substantial winter and spring rainfalls, coupled with heavy snow in many regions, broke the drought that blighted Turkey’s agriculture sector in 2013-14, with farmers looking forward to improved yields and high- erearnings,reboundingfromaleanyearthatsawone of the region’s leading agricultural producers having to import grain and other foodstuffs. OneofEurope’slargestgrainproducers,Turkeywas forced to import wheat in 2014, and the drought also restricted its ability to take advantage of a number of exportopportunitiesthatpresentedthemselves.Rus- sia’s banning of many EU produce imports, a response to the bloc’s sanctions over Moscow’s actions in the CrimeaandUkraine,openedadoorforincreasedTurk- ishexportstoitsBlackSeaneighbour.Shortfallsinfruit and vegetable production, however, along with the weakening of the Russian currency, meant the Turk- ish agriculture sector accrued only limited benefits from the opening left in the market by the closing out of the EU. Similarly, Turkey was not able to boost out- put to meet increased demand for foodstuffs from other Mediterranean countries that had their own farming production dried up by the drought. DOWN THE LINE: It was not just export earnings that were hit by the extended dry spell. The high price of many basic foodstuffs, particularly vegetables, was cited by the central bank as one of the factors behind rising inflation in 2014 and early into the next year. With better prospects for the agriculture sector in 2015 – combined with lower fuel costs that will help farmers – food’s input into inflation can be expected to ease once the harvest season begins in summer. Despite short-term events such as the 2013-14 drought and the longer-term shift away from rural production towards industrialisation and the services sector, agriculture makes an important contribution to the economy. Though having eased from account- ing for 12.1% of GDP in 1998 to just 7.2% in 2013, the lastyearforwhichfulldatawasavailable,agriculture’s valueinputhasexpandedannuallyinaneconomythat has grown strongly over that period. In the fourth quarter of 2014, agriculture’s value added grew by 8.1% year-on-year (y-o-y), reaching TL125.18bn ($44.07bn) at current prices, according to the state statistics agency TurkStat. For a country still trying to rein in unemployment, agriculture provides jobs for around a quarter of the national workforce, a figure that rises further when the value-added component of processing and agri- business is factored in. Self-sufficient in many prod- ucts, Turkey is also a major agricultural powerhouse internationally.TurkeyisrankedfirstinEuropeinterms of agriculture output and seventh globally. According to the Ministry of Food, Agriculture and Livestock (MFAL), Turkey is the top producer of seven crops and is in the top five for 35 others. Nearly 24m ha of farm- land blanket Turkey, or 30% of its landmass. FRAGMENTATION: Yet obstacles to investment per- sist, primarily Turkey’s fragmented landholding struc- ture. As Turkey’s rural population grows, agricultural land is split successively into smaller farms. The aver- age parcel in Turkey is 5.9 ha, compared with 12 ha in the EU and 180 ha in the US. All together, Turkey has 3m agricultural land holdings, and the average farm size is just under 6 ha, according to the MFAL. Small farms are more difficult to irrigate and mech- anise; only half of Turkish farms have access to irriga- tion and transport networks, according to the World Bank.Economiesofscaleareincreasinglycominginto play, with many smallholdings becoming only margin- allyviable.Thishaspromotedsuccessivegovernments to encourage consolidation, a process that began in the 1980s. In 2005 a law set minimum parcel sizes, empowering the government to merge holdings. Between2002and2011,1.3mhaoflandwasmerged, with another 1.8m ha under way. Turkey seeks to con- solidate another 8m ha of land by 2020. GOVERNMENTSUPPORT:Theplightofthesmallland- holder means the government must provide financial aid. Support for the sector amounted to TL9.7bn While agriculture’s contribution to GDP fell from 12.1% in 1998 to 7.2% in 2013, the sector’s value has expanded, reaching $44.07bn in the fourth quarter of 2014. The average parcel size in Turkey is 5.9 ha, compared to 12 ha in the EU and 180 ha in the US. As the rural population grows, farms are becoming increasingly fragmented, which makes it difficult to properly irrigate and mechanise holdings. 130 Reap what you sow With the country already a major agricultural producer, the government is looking to consolidate growth www.oxfordbusinessgroup.com/country/turkey
- 133. AGRICULTURE OVERVIEW ($3.41bn) in2014, according to MFAL data. Direct income support and subsidised fuel and fertiliser are the main sources of assistance, but the state also offers premiums for crops deemed low in supply, help for livestock and feed production, low-interest loans and irrigation equipment. Theprivatesectorhasalsosteppedintolendtofarm- ers.İşBankası,Turkey’sbiggestnon-statebank,loaned farmers almost TL2bn ($704.2m) in 2013, with small operators alone borrowing TL850m ($299.28m), according to a statement from the bank. Other major non-statelenderswithlargeagriculturalcreditintheir portfoliosareŞekerbankandTEB.However,the2013- 14droughtandpoorreturnsforthesectorareexpect- edtohaveincreasedtheratioofnon-performingloans, withlendingtoagriculturalenterprisesalreadyaccount- ing for 3.6% of all inactive loans on banks’ books as of early 2014, according to the OECD. EXPORTS: Turkey exports 1663 different agricultural products to 188 nations. Exports jumped from $4bn in 2002 to $17.7bn in 2013, according to the MFAL. Exports have picked up in part because of Turkish effortstomeetEUcriteria,suchasfoodsafety,tosup- ply one of its biggest markets. The EU lifted testing requirements for some Turkish produce in 2013, in particular for tomatoes, as a result of improved food safety standards and a marked reduction in the inci- dence of pesticide residue. FRUIT & VEG: The country is among the world’s top producers of figs, apricots, cherries and hazelnuts, the latter of which accounts for nearly two-thirds of global production. It is among the top five producers forleeks,watermelons,peanuts,cucumbers,peppers, apples, walnuts, tea and aubergines, according to the MFAL’s General Directorate of Vegetative Production. Turkey is also a leading producer of tomatoes, devot- ing a total of 328,000 ha to tomato growing, with industrial-scale production dating back to the early 1980s. Today Turkey raises about 11m tonnes of the fruit each year, triple what Mediterranean rival Spain does, according to UN Food and Agriculture Organi- sation data. A third of the crop goes to European mar- kets, and tomatoes are the biggest organically raised crop in Turkey, according to the Scientific and Tech- nological Research Council of Turkey. Organic farming more than doubled between 2009 and 2014, and organic food now accounts for about 1% of the total food market in Turkey. Exports are worth an estimated $400m, according to Ekonomist magazine,withtotaloutputofmorethan1.6mtonnes frommorethan200differentcropsundercultivation. The MFAL is also stepping up efforts to encourage organic farming, and is mid-way through a five-year plan to expand the segment. State-provided assis- tancefororganicgrowersincludeslow-interestloans, fuelandfertilisersubsidies,andtrainingprogrammes. FOODPROCESSING:Thoughfloodinginsomeregions in early 2015 may impact plantings and harvests for somecrops,Turkeyisstillamongthetop10globalpro- ducers of fruit and vegetables, which gives it a com- petitiveadvantageforprocessedfoods.Tomatosauce and paste, fruit juices, and frozen and canned vegeta- bles and fruit are the leading sub-sectors. Fruit juice consumption has risen rapidly over the past decade from around 2 litres per capita in 2002 to around 13 litres, and while only half that of the EU average, it is likely to rise, offering increased opportunities. Though much of Turkey’s landmass is still devoted to agriculture, plantings of some key crops have decreased over the past two decades. In 2004, 9.3m ha of land were planted for wheat, 1.4m ha more than in 2014, when it fell to 7.9m ha, while the total cover- age for all grain crops was 15.7m ha in 2014, down from 17.96m ha 10 years ago. Despite the reduction in area under production, wheat production has remained constant at around 20m tonnes annually – thoughthetotaloutputfrom2014waswellbelowthis as poor rainfall led to output dropping 13.8% y-o-y. Turkey produces some 1m tonnes of pulses, half of itsproductionof2mtonnes20yearsago,yetitremains the world’s third-largest producer of lentils. Produc- tion of millet, oats, spelt and barley is also down over the past decade. Rice paddy production hovers at 131 THEREPORT Turkey 2015 Production of selected crops, 2013-14 (m tonnes) SOURCE:TUIK 0 1 2 3 4 5 Green teaHazelnutsOrangesOlivesApplesGrapes 20142013 The country is among the top exporters for several kinds of produce Organic farming more than doubled between 2009 and 2014, and organic food now accounts for about 1% of the total food market in Turkey. Exports are worth an estimated $400m, with total output of more than 1.6m tonnes from more than 200 different crops under cultivation.
- 134. AGRICULTURE OVERVIEW 850,000tonnes,whichcomestoabout500,000tonnes ofrice.SinceTurkishconsumptionaveragesjustunder 600,000 tonnes,it must import rice each year to cov- erthegap.TurkeymainlyimportsricefromtheUSand Italy and, to a lesser degree, from India and Thailand. Although Turkish annual paddy rice production has jumped 130% in the last decade to cover domestic demand, the lower costs of these major internation- al producers acts as a disincentive for local growers, asitcanbedifficulttocompetewithcheaperimports. FEED & LIVESTOCK: Turkey is a major feed producer, rankingninthworldwideandaccountingforalmost2% of global production. It exports a half million tonnes of animal feed and its top buyer is neighbouring Iraq, though this market has been dented by the upsurge in violence in the region. According to data from the state statistics office, there was a sharp decline in the number of beef cat- tle on Turkish farms, with the 2014 year-end total of 14.24m, down some 288,000 heads from the figure for2013.Thefallwasinpartduetohigherfoddercosts, along with rising meat prices, which promoted some farmers to sell off stock. Offsetting the drop in cattle numberswasariseinbothsheepandgoatherds,with sheepupfrom29.28min2013to31.11min2014and goatnumbersclimbingfrom9.22mto10.35moverthe same period. Despite the reduction in cattle, milk pro- ductionedgedupto18.5mtonnesin2014from18.2m tonnesin2013.Thegovernmenthasalsoeasedrestric- tions on cattle for breeding purposes, though high costs and the requirement that farmers maintain at least 60% domestically raised stock may limit efforts to boost production in the medium term and bring down meat prices in Turkey. FISHERIES&FORESTS:Fisheriesandforestproducts account for 7% of agricultural output. One out of four fish consumed in Europe is Turkish, according to the Fishery and Animal Products Exporters’ Assembly. In 2013 fisheries output, which takes into account salt- watercatches,aquacultureandfreshwaterproduction, was just over 600,000 tonnes, with aquaculture mak- ing an increasingly large contribution, accounting for a third of the total, up from less than 10% in 2002. Some 28% of the country, or nearly 22m ha, is cov- ered in forest, most of it close to or along coastal areas,accordingtotheMinistryofForestryandWater Affairs. Turkey aims to increase its forestland to 30% by 2023. As part of its strategy to deal with climate change, the government has said it wants to expand agricultural activities in forests. An example of a for- estproductishoney,whichrose7.9%to102,486tonnes y-o-y in 2014, TurkStat reported. But degradation poses a constant risk. Turkey’s Mediterraneanregionandotherareasaremostlyunder semi-arid climatic conditions. Over-utilisation, poor forest management, land ownership problems, con- verting forestland to farms or housing developments are the main culprits, as are perennial forest fires. Some 60% of forests are at risk of wildfires each sum- mer, with about 12.5m ha located in high-risk areas, primarily the Aegean, Mediterranean and Marmara coastal regions, according to government data. MACHINERY: Turkey produces 130 different types of agricultural machinery and parts, exporting to 120 countries for a total value of $734.15m, according to the Turkish Association of Agricultural Machinery and Equipment Manufacturers. Of that, tractors account- ed for $434.24m, while equipment was $299.91m. According to the association, output of tractors rose by 14.07% in 2014, from 56,407 in 2013 to 64,342. OUTLOOK: Further automation will increase agricul- tural productivity, which has lagged behind most oth- er sectors in the economy. But for that to occur, land consolidation must also take place. The government has said it wants to unify the rest of Turkey’s frag- mented farms and bring water to all irrigable areas by 2020. This will help the country meet its 2023 target ofgrossharvestsworth$150bn.Itwillalsolureinvest- ment to an already attractive destination situated between Europe and the Middle East. The risks posed again in 2014 by adverse weather conditions, such as drought, flood and frost, is a reminder that Turkey needs strategic policies to maintain food security. 132 One out of every four fish consumed in Europe is from Turkey Turkey has nearly 22m ha of forested land, which is 28% of the country’s area, and the government aims to increase this to 30% by 2023 and increase agricultural output from forested areas, such as honey production. www.oxfordbusinessgroup.com/country/turkey SOURCE:TUIK Organic crop production, 2005-13 (m tonnes) 0.0 0.4 0.8 1.2 1.6 2.0 201320122011201020092008200720062005
- 135. AGRICULTURE ANALYSIS The governmentaims to reach $40bn in agricultural exports by 2023 Few treats are as simple and pleasing to the palette as a fresh tomato from a Turkish summer market. But in2010,worriesaboutpesticidecontaminationbrought strict curbs on exports to the EU, hitting local tomato farmers, among the world’s top five producers of the Mediterranean staple. However, the EU has now abol- ished the more stringent inspection requirements on tomatoes, satisfied with Turkish efforts to meet safe- ty standards. That success followed a vote by the UN’s Food and Agriculture Organisation in June 2013 to makeTurkeyamemberofitscouncil,thehunger-fight- ing body’s most important executive mechanism. A statementfromtheMinistryofForeignAffairsinAnkara hailed the decision as “the manifestation of Turkey’s international role and its efforts carried out in the fieldsoffoodsecurity,sustainabledevelopment,agri- culture, hunger prevention and rural development.” This manifestation was given further substance by the most recent report from the European Food Safe- ty Authority, issued in December 2014. In the report, it found that under 1% of Turkish tomatoes randomly tested for pesticide residue equalled or exceeded EU limits.Thiscomparedwithanoverall1.4%ratefortotal residue testing of food products within EU member states and 7.5% for produce imported into the bloc. Theseendorsementsfrominternationalinstitutions are a clear sign of the Turkish agriculture’s reputation in world markets, essential if the nation is to meet its targetof$40bnofagriculturalexportsby2023.Atthe heartoftheseeffortstosecureinternationaltrustlies food safety, and discipline surrounding the handling, preparation, storage and transport of produce to pre- vent illness. Food safety centres on hygienic produc- tion, for both plants and animals, to help consumers avoid contaminated food. EU STANDARDS: The EU’s food safety strategy, with whichTurkeyseekstocomplyasitaspirestofullmem- bership in the bloc, ensures food is traceable as it moves from the farm to the table, even when cross- ingborders.FoodsafetyistheTurkishMinistryofFood, Agriculture and Livestock’s (MFAL) highest stated pri- ority, and improving it is among its strategic goals for 2023, the centenary of the Turkish Republic. In October 2013 the EU finally ended the require- ment of increased screening of Turkish imports of tomatoes,satisfiedwithtestresultsshowingthecoun- try’s produce was clean. The regulations had required that10%ofproductsbeinspectedforcontamination, addingcostsanddelaystoexports.Topassinspection, farmerswererequiredtopayforariskanalysisoftheir goodsbeforeandafterexport,whichcostabout$1000 per truck transporting tomatoes, undermining pro- duction with sales of about $400m a year, according to Turkish newspaper Zaman. ThoughthechecksarestillrequiredforTurkishcour- gettes,pearsandsweetpeppers,abolishingtheinspec- tion for tomatoes, for which the biggest market is the EU, bodes well for other fruits and vegetables. Most Turkish goods enjoy free trade privileges with the EU, thanks to the 1996 Customs Union. But that pact excludes all non-processed agricultural products. Instead, bilateral trade concessions apply, and Euro- peanquotaslimittheamountofTurkishfruitandveg- etables that can be imported. OPENING DOORS: The change in the inspection pol- icy also means that Turkish food safety standards are now closer to the criteria for membership in the EU, bringing Turkey one small step closer to membership and fully free trade. The European Commission noted in its 2014 progress report on the pace of Turkish reformsregardingfoodsafetythatlegislativealignment and implementation have advanced on a number of issues; however, the report added that more needed to be done to bring Turkey’s standards into line with the acquis requirements. In 2010 Turkey began negotiations on Chapter 12 of the EU acquis, which pertains to food safety, vet- erinary and phytosanitary policy. The chapter covers government regulations on hygiene to protect and inform consumers, such as inspections and other Despite a temporary ban on Turkish tomatoes in the EU, the bloc has now lifted restrictions, and by late 2014 only 1% of the fruit was found to equal or exceed pesticide limits, which is lower than the EU average of 1.4%. 133 THEREPORT Turkey 2015 Changes in food safety standards have brought the country closer to EU standards and full membership in the bloc, with negotiations on food safety beginning in 2010. Good enough to eat Turkey has made important strides in food safety to meet EU regulations and expand export markets
- 136. AGRICULTURE ANALYSIS mechanisms togovern food security. Samim Saner, chairman of the Turkish Food Safety Association, told OBG that Turkish laws and regulations are about 90% in harmony with the EU’s food safety rules, but imple- mentation remains an issue. CONSUMERRIGHTS:MoreandmoreTurksareinsist- ing on hygienic food as income and education levels increase. Consumer rights have expanded, and retail- ers know their liabilities. Supermarket chains are now involved in testing at the factory level to ensure cus- tomers are protected. Where Turkey especially excels is food processing, a sector that is one of the world’s 10 largest. The relatively young industry means it has the latest technology and a large number of experts. “Because Turkey has such a large agricultural sector that is so critical to its economy, its food safety per- formancesurpassesmanyEUnations,especiallyinthe food processing business,” Saner said. In July 2013 the MFAL also updated its regulatory framework to introduce stricter rules for food preser- vatives,banningflavourandcolouradditivesformeat and meat products. That followed new guidance for breadmakers to include less salt and more bran. Con- cerns still persist over the use of additives in Turkish olives, bread and tomato paste, but Saner said it is important not to single out any one food but rather regulate against the misuse of additives in all foods. “When used properly, additives should not be feared. At home, we all use salt or baking soda in our cakes; those are additives, too. The issue is using the right material in the correct way,” he said. The biggest threat to food safety is posed by unla- belled or unpackaged foods as it lacks oversight, said Saner. In Turkey, the only truly safe harbour is pack- aged food with the MFAL’s stamp of approval. “A key issue is communicating risk, because there is a great deal of disinformation out there, such as unpackaged milkbeingpreferableorthatallindustrialproductsare harmful. This confuses consumers. So the authorities need to be more proactive on this front,” said Saner. OUTINTHEFIELD:However,safetybeginsinthefield, and Turkey’s fragmented farm structure makes it hard for small-scale operators to set aside the funds nec- essarytoensuresafetyorforexpertisetodevelop.“We need more organised farming in the field, which will allow for tighter official controls,” Saner said. The latest EU progress report did reflect lingering dissatisfactionwithfoodsafetystandardsdealingwith livestock and animal products. While noting work on identificationandregistrationofbovineshadexpand- ed, and mass vaccination with strict movement on controls between Thrace and Anatolia had continued, the 2014 study said further progress was required to meet acquis standards. “Significant work is needed for the adaptation of the animal by-products sector tothenewrulesandthefullimplementationof these. Inspection funding arrangements have not yet been aligned with the EU system” the report said. SinanÖğün,headoftheMiddleEastSustainableLive- stock Production, Biotechnology and Agro-Ecology Research and Development Centre at Zirve Universi- ty in Gaziantep, said Turkey still has a long way to go in improving safety in the meat business. “Food safe- ty in the meat sector could best be described as poor. The slaughter and the post-handling process is often unsanitary and inadequate, resulting in a shortened shelf life for meat products,” Öğün told OBG. “One majorsupermarketchainhastoldmethattheirannu- aldiscardedmeatproductsamounttoTL5.5m($1.94m), which, obviously, is also reflected in the price. Identi- fication and traceability are also very inadequate and unreliable in the livestock sector, making the fight to improve animal health also very difficult.” IMPROVEDREPUTATION:Still,perceptionsofTurkey’s food industry have improved vastly as the industry matures.TheEU’scleanbillofhealthfortomatoeswill yieldknock-oneffects.Forone,itpromotesotherprod- ucts Turkey ships to the EU. Besides tomatoes, other main fresh produce Turkey sells to the bloc are hazel- nuts, cherries, sweet peppers and cucumbers. And it raises confidence in other, non-EU markets, such as Russia, Ukraine and Moldova, which have become major recipients of Turkish tomatoes in recent years. 134 Consumers are increasingly informed about food safety standards The government is planning to improve the structure of the sector by consolidating holdings and improving controls on the ground, which will be particularly key to improving hygiene standards for animals and animal by-products. www.oxfordbusinessgroup.com/country/turkey SOURCE:TUIK Tomato production, 2004-14 (m tonnes) 0.0 2.4 4.8 7.2 9.6 12.0 20142013201220112010200920082007200620052004
- 137. 135 Transport Major works underway to connect Europe and Anatolia Road developments extend highways across the country New airport to accommodate 150m passengers annually Logistics upgrades raise Turkey’s share of global trade Investments in railways see high-speed inter-city links
- 138. TRANSPORT OVERVIEW Some €222.5mwas budgeted for infrastructure improvements in 2014 The Marmaray tunnel, a rail link beneath the sea con- necting Istanbul’s European and Asian districts, was a panacea for beleaguered commuters when it opened in October 2013. Plans to connect the two shores via an underwater tunnel date back to at least 1891 dur- ingtheglorydaysofOttomanrail,whenaFrenchengi- neerproposedtoSultanAbdülhamitIItobuildanunder- water steel tunnel. However, linking the Üsküdar neighbourhoodinAsiaandtheSeraglioPointinEurope has remained on the drawing board until now. The inauguration of the Marmaray, which coincided withthe90thanniversaryofthefoundingofthemod- ern Turkish Republic in October 2013, was followed a year later by the opening of Istanbul’s Taksim-Hacıos- man metro line extension to Yenikapı, connecting it with the Marmaray and Aksaray-Airport routes. Presi- dent Recep Tayyip Erdoğan, during his time as prime minister, told local press, “Today we are realising the dreams of 150 years ago, uniting the two continents and the people of these two continents.” The €3.27bn Marmaray is just one of Erdoğan’s “mega projects”: dozens of construction plans, most of them in the transport sector, will cost an estimated €188.33bn. Among them are high-speed rail links, bridges, motor- ways, the world’s largest airport and a 50-km channel that will transform half of Istanbul into an island. EXTREME ENGINEERING: Istanbul’s most attractive feature – the 30-km Bosphorus Strait – is also its most challenging,thwartingengineersandcreatingatrans- port black spot in Europe’s biggest city. Indeed, the Marmaray’s €4.14m tunnel section proved to be one of the world’s most technically complex railway proj- ects, consisting of a submerged tube some 60 metres belowsealevel,ratherthanabored-outtunnel.Itskirts a major tectonic fault line, and its construction unearthed a Byzantine port and other archaeological finds dating back eight millennia. The Japanese-Turkish-built tunnel has capacity to take 75,000 passengers per hour to and from either sideofthecityinlittlemorethanfourminutes.TheMar- marayisexpectedtocarry1.5mpassengersperdayby theendof2015and1.7mby2025.AsofOctober2014 the line was estimated to have transported 50m com- muters over the course of its first year of operations. Theprojecthasnotbeenwithoutcontroversy.Istan- bul University is suing the Ministry of Transportation, MaritimeAffairsandCorporation(MTMAC),themunic- ipality and the contractors for damage to its Cerrah- paşamedicalfaculty.HistoriansfearmuchoftheTheo- dosianharbourthatwasdiscoveredhasbeendestroyed. However, the Marmaray has been deemed a landmark in Istanbul’s transport history: “In 20 years we will look backattheMarmarayasamilestonethatchangedthe courseofIstanbul’sdevelopment,”saidMuratGüvenç, directoroftheUrbanStudiesResearchCentreatIstan- bul Şehir University. “It dramatically shrinks the city, bringingdistantgeographicalpositions,suchasKadıköy inAsiaandTaksimSquare,intoclosecoordinates.Near- by rents will increase dramatically, driving out current residents and business owners and encouraging fur- ther development of the historical peninsula.” BIGBUDGET:Turkey’s2014budgetallocatedTL47.5bn (€16.72bn) to transport, of which TL5.8bn (€2.04bn) wasearmarkedforrail,almostdoublethatgoingtothe road network. At TL9.3bn (€3.27bn), the Marmaray project topped the list of spending in 2014, as more stations were opened on the line and rolling stock was acquired. The line extends beyond the subsea section in both directions and will link with existing suburban commuter trains, extending from Halkali in Thrace to GebzeinAnatoliaalong77kmoftrackpassingthrough 37 new and refurbished stations. The line is expected to be completed by the end of 2015. Rolling stock of 440 new cars are being built by Korea’s Hyundai. After the Marmaray, the biggest rail investments were TL850m (€299.3m) for track renewal, TL640m (€225.3m)moreontheIstanbul-Ankarahigh-speedlink and a combined TL632m (€222.5m) for new rolling stock and infrastructure improvements. The Istanbul- Ankara high-speed train began running trips in August Dozens of construction plans are expected to cost an estimated €188.33bn. Among them are high-speed rail links, bridges, motorways, the world’s largest airport and a 50-km channel that will transform half of Istanbul into an island. The 2014 budget allocated €16.72bn to transport, of which €2.04bn was earmarked for rail, almost double that going to the road network. At €3.27bn, the Marmaray project topped the list of spending in 2014. 136 On the road A spate of new highways, trains, airports and massive infrastructure projects are in the works www.oxfordbusinessgroup.com/country/turkey
- 139. TRANSPORT OVERVIEW 2014,andthegovernmentannouncedinlate2014that the followingyear would see a call for tenders for a new line between the cities that would reduce travel timeevenfurther,fromthecurrentthreehoursand45 minutes to around one hour. ROAD TUNNEL: The Marmaray’s twin is the Eurasia Tunnel, known in Turkish as the Avrasya Tüneli, a 14.6- km road tunnel that includes a 5.4-km double-deck portion running below the Bosphorus. Located a kilo- metre south of the Marmaray, the tunnel will sit 25 metresbelowtheseabedandisdesignedtowithstand anearthquakeofamagnitudeof7.5ontheRichterscale. Construction began in April 2014. The $1.25bn proj- ect, financed with loans from the European Bank of Reconstruction and Development (EBRD) and private banks, is being constructed by a Korean-Turkish con- sortiumunderabuild-operate-transfer(BOT)model.It will serve 120,000 cars and other light motor vehicles each day. In addition to the underwater portion of the EurasiaTunnel,theprojectconsistsof9.2kmofaccess roads, transit tunnels and bridges. Turkeywouldbecomethefourthcountryintheworld with undersea vehicular tunnels, after the US, France and Malaysia. The Eurasia Tunnel is expected to signif- icantlycutdowntraveltimesbetweenthecity’sbusiest centres,aswellasreducetrafficcongestionontheFatih Sultan Mehmet Bridge and E-5 highway. The high- speedinter-citytrainwillbeabletoaccommodate1.5m passengers daily, bringing the total capacity of Istan- bul’s metro lines to 6.5m passengers per day. The tun- nel is expected to be completed and open by 2020. Theengineeringdesignforthetunnelhasbeenchal- lenging, and a tunnel-boring machine was designed exclusivelyfortheproject.PrimeMinisterAhmetDavu- toğlu said the Eurasia Tunnel’s most important contri- butionwillbetheintegrationofexistingtransportinfra- structure, from major expressways to the city’s metro and train lines. The project design has also taken into accounttheregion’ssusceptibilitytoearthquakesand the need to cut down on greenhouse gases, with CO2 emissionsandfueloilexpectedtobeloweredby175,000 tonnes and 54m litres annually, respectively. THIRD BRIDGE: Since 60% of workplaces are located ontheEuropeanside,themajorityofthecity’sdwellers in Asia are forced to travel across the water every day, said Ela Babalık-Sutcliffe, a public-transport expert at Ankara’sMiddleEastTechnicalUniversity(METU).“The Istanbul municipality is aware of this issue in their lat- est metropolitan plan. They are proposing new town andemploymentcentresontheAsiansidetomakethe current central business districts of Beyoğlu, Şişli, Lev- ent and Maslak less of a trip attractor.” But the government is also racing to build more roads.Anotherjumbo-sizedtransportprojectisathird bridge across the Bosphorus, which broke ground in May2013.TheYavuzSultanSelimBridge,namedafter the 16th century Ottoman sultan, will be the world’s widest and longest bridge for rail and motor vehicles and the eighth-longest suspension bridge when it opens at the end of 2015. Construction of the two 320-metre high towers at the northern end of the strait were completed in mid-2014, and in early 2015 work began on mounting the deck. PartoftheplannedNorthernMarmaraMotorwaythat will bypass Istanbul’s urban areas, the $3bn bridge is being built by Rome-based builder Astaldi, Turkey’s IC İçtaş and Hyundai of Korea. The crossing aims to ease congestion in a city with 3m cars, with that number expected to reach 4.4m in a decade. That said, the ring road and the bridge are primarily expected to serve freight-carrying vehicles, which make up just 3% of Istanbul traffic, experts say. ENVIRONMENTALCONCERNS:Environmentalistshave raised red flags over developing Istanbul’s northern forests, which provide the city of nearly 15m people withmuchofitsfreshwatersupply.Thewoodlandsalso containnaturalpreserves,sanddunes,endemicplants, animalsandhistoricalruins.Constructionofthebridge alone will fell almost 400,000 trees, according to the Forestry Ministry. “The northern forests provide Istan- bul with its air and its drinking water,” said filmmaker İmre Azem, whose acclaimed 2012 documentary Eku- menopolis tracks the relentless expansion of Europe’s largest city. “The importance of the forests was always clear, which is why until now all city plans have ruled outbuildingnorth.TheexistingplanstillcallsforIstan- bul’s growth along the Sea of Marmara, along an east- west axis, and not to the north.” Historians are also alarmed. Although the government has exempted the bridgefromanenvironmentalimpactreport,thecom- panies building the bridge still need such an assess- menttosecurefinancing,andsoinMay2014theydis- patched archaeologists along the site who discovered atreasuretroveofsarcophagi,pottery,coinsandByzan- tine and Paleolithic ruins in a two-day survey. SOCIALSTRAINS:Somuchconstructionhasalsocre- atedsocialupheaval,andTurkey’sbiggestanti-govern- ment protests in decades that erupted in 2013 cen- tred around plans to destroy the historic Gezi Park in Taksim Square to build a shopping mall. The govern- ment managed to build a tunnel for road traffic to bypass the square before a court ordered it to halt the development. “More roads will not ease congestion as cars continue to fill them,” said Azem. “When you build 137 THEREPORT Turkey 2015 SOURCE:TUIK Total number of vehicles, 2005-15 (m) 0 4 8 12 16 20 2015F2014201320122011201020092008200720062005 The Eurasia Tunnel connecting busy centres in Istanbul’s European and Asian sides would make Turkey the fourth country in the world with an undersea vehicular tunnel.
- 140. TRANSPORT OVERVIEW roads,theirenvironsfill,creatingevenmoretraffic,”he said,addingthatsome8mpeopledwellalongtheTrans- EuropeanMotorwayinIstanbul.“Thesamewillhappen with thethird bridge, regardless of what is being said now about it serving as a transit for freight.” ROAD TO IZMIR: Another link set to open by the end of 2015 is the Izmit Bay Bridge at the eastern end of the Sea of Marmara. Rome-based Astaldi is part of the consortium behind the $1bn BOT project, which fore- sees traffic of 35,000 vehicles per week. The bridge, which will be the world’s fourth-longest suspension bridge,ispartofanTL11bn(€3.87bn)roadprojectspan- ning433kmbetweentheIstanbulsuburbofGebzeand Izmir, Turkey’s third-biggest city, reducing travel time to 3.5 hours from the current 8.5-hour drive. By March 2014, a third of the project was finished, the General Directorate of Highways said, with the bridge expect- ed to be open by the end of 2015. Turkeycertainlyhasbeenonaroad-buildingmission inthelastdecade.Totalhighwaymileagetodayis65,382 km, of which 12,573 km are part of the international highway network, according to government figures. Dualcarriagewaysspanatotal21,277kilometres,com- paredwith6101kmin2003,theMTMAChassaid,esti- matingthathasledtoafuelsavingsof$9.3bn.Themin- istrytargets37,000kmby2023.Evenasairandrailtravel has risen sharply, roads are the main means of trans- port between Turkish cities. In the first two months of 2015,bridgesandtollroadsearnedTL151m(€53.2m) from 68.79m vehicles, according to the General Direc- torateofHighways.Inallof2014,revenuewasTL1.04bn (€366.2m) and 399.49m cars and trucks paid tolls. At Istanbul’s two extant bridges, which see traffic of 1m vehicles a day, revenue was TL296.37m (€104.4m) in 2014 and $4.88bn in the last decade. Turkey is now looking to privatise some of those roads. In February 2014 parliament passed legislation tocreateacompanyandinitialpublicoffering(IPO)for Istanbul’s two bridges, along with certain highways. This followed the cancellation of a 2012 tender by the PrivatisationAdministrationforoperatingrightsfor25 years, won by Koç Holding, Turkey’s biggest company, with a top bid of $5.72bn. Erdoğan later said the rights were worth at least $7bn,andthetenderresultwassubsequentlyrescind- ed. By November 2014 the government was preparing to revive plans for the tender, with a new process expected to start in the first half of 2015. Reuters reportedthatbankingsourcessaidadesignatedadvis- erwilldeterminethemethodofprivatisation,withIPOs, transfer of operating rights, and regrouping and sell- ing of roads and bridges all options. CARS & BUSES: Some 200m passengers each year takebusesoperatedbymorethan500licensedbuscom- panies;another140firmscarrypassengersinternation- ally,accordingtotheMTMAC.In2013therewerealmost 220,000busesonTurkishroads,accordingtotheTurk- ishStatisticalInstitute.“Whilebuspassengernumbers in Turkey have declined as more and more people are abletoaffordairtravel,around85%oftravelinthecoun- tryisstillviabussesandtrains,”saidImranOkumuş,gen- eral manager of Ulusoy and Varan Bus Group. Turkey has the lowest car-density in Europe and the average vehicle age is 12 years old, according to the Global Fuel Economy Initiative (GFEI). Some of the world’s highest fuel prices and stiff taxes have curbed demand for automobiles, keeping ownership at 110 vehiclesper1000people,theWorldBanksaid.Butthe lowrateofownershipmeansTurkeyhasEurope’sbiggest growthpotentialafterRussia,GFEInoted,andestimat- ed that ownership would double by 2020. GlobalSource Partners analyst Atilla Yeşilada said that Istanbul’s traffic problem cannot be solved by buildingmoreroads.“Weneedtoincentivisebusiness- es to move to the Asian side. We need to focus on cre- ating communities where people commute less, and we need to develop our public transport systems,” he said. “Building more roads simply increases the incen- tive for everyone to buy a car.” PUBLIC TRANSPORT: Everyday 7m passengers use Istanbul’s buses, metrobuses, railways and ferryboats, accordingtothecity’sbusauthority,IETT.Amajorsuc- cess story is the metrobus, a 50-km bus rapid transit route spanning Istanbul’s ring road from western dis- trictsacrosstheBosphorusBridgetoAsiathatopened in 2007. It has a daily ridership of 800,000, according toIETT.“Basedonitspassengernumbers,themetrobus is the world’s most successful bus-based mass transit system,” said METU’s Babalık-Sutcliffe. Although officials and citizens alike tend to prefer rail systems, these are large investments that make lit- tle sense for areas with low demand. “What the metrobusshoweduswasthatwithafarsmallerinvest- ment and in a short time, you can have a system that is on par with an underground metro in terms of qual- ity and capacity. The operational speed of Istanbul’s metrobus is faster than the underground metro and created a public transport service in that corridor,” Babalık-Sutcliffe said. Problems still persist like over- crowdinginpeakhours,inadequatecapacityatstations and a lack of other routes on a network, she added. 138 Turkey has one of the lowest car densities in Europe, and public transportation usage is high Istanbul’s public transportation system serves 7m people daily via a variety of methods, including buses, the rapid-transport metrobus system and ferryboats. www.oxfordbusinessgroup.com/country/turkey
- 141. TRANSPORT OVERVIEW TAKETOTHESKIES:Airtravelhasincreasedto166.2m flyersin2014,accordingtotheMTMAC’sGeneralDirec- torateofStateAirport’sAuthority(GDSAA).Inthatyear alone, commercialtraffic grew 9.5%. Domestic flights carried 85.4m people, a 12.17% increase in the last decade, according to the GDSAA. International flights rose9.5%to80.3m.Further,theGDSAAestimatedthat passenger numbers would increase by 12.6% in 2015 to reach 187.13m by the end of the year. By end-2017 the authority said this figure would grow by 35% to 223.7m,largelyduetoanincreaseindomestictravellers. “The growth of the Turkish airline industry over the past few years has been very impressive. As tickets become more affordable, more and more Turkish peo- ple are getting used to traveling abroad, which is good for the economy as a whole,” said Varan’s Okumuş. Turkey’s proximity to Europe, the Middle East and Africahasmadeitanaturaltransithubandhelpedflag carrier Turkish Airlines become one of the world’s fastest-growing airlines. “Turkey is directly between the production and consumption centres of the world andisespeciallywell-placedfortradebetweentheFar EastandAfrica,”saidSedatÖzkazanç,managingdirec- toratIstanbul-basedcargocarrierMNGAirlines.“Infact, a considerable number of the world’s high-growth economies are within a six-hour flight of the country.” The government has doubled the number of air- ports from 26 in 2003 to 52, of which 21 are interna- tional and 31 are domestic. On the drafting board is a plan for a third airport for Istanbul that targets 150m passengersayearby2018.AconsortiumofTurkishcom- panies – Cengiz, Kolin, Limak, Mapa and Kalyon – won a tender to build the airport in 2013, promising to pay the state €22bn, plus taxes, to operate the facility for 25 years from 2017. It will boast six runways, although experts have said its location to the north of Istanbul makes that difficult. Questions have emerged about financing for the project, but Limak Holding, which controls a 40% stake in Istanbul’s Sabiha Gökçen Air- port and 20% of the planned airport, has said the con- sortium has not faced problems raising funds. The airport will occupy an area of 7700 ha and will requirethatalmost700,000treesbecutdownandmore than 1.9m trees be moved, according to the govern- ment.Thereisalsoconcernitwillhaveanenvironmen- tal impact on Istanbul’s drinking water, since it is being builtnearoneofthemainreservoirssupplyingthecity. Non-governmental groups have sued to stop the proj- ect, and a court suspended construction, but Erdoğan broke ground at a ceremony in June 2014, describing the $30bn facility as a “monument to victory”. Istanbul’stwoairports,AtatürkontheEuropeanside and Sabiha Gökçen on the Asian side, serve 37m and 13m people per year, respectively. The number of pas- sengersatAtaturkrose11%to12.4mpeopleinthefirst quarter of 2014, making it Europe’s third-busiest air- port, surpassing Frankfurt and Amsterdam’s airports. AtatürknowtrailsonlyLondon’sHeathrowandCharles deGaulleinParis.By2034,commercialtrafficatIstan- bul’s airports is expected to exceed 1m planes, with 118mpeoplepassingthroughthefacilities,METUesti- mates. “While Turkey is expanding its air facilities, the additionofthethirdairportonitsownisnotsufficient tomeetthecountry’slong-termtransportationneeds. More investment is needed,” said Sedat Gümüşoğlu, chief executive of UN Ro-Ro, a Turkish roll-on, roll-off ferry operator owned by US private-equity firm KKR. LOGISTICALDREAM:Turkeyhaseasyanddirectaccess by road, sea and, to a lesser extent, rail to markets with 1.5bn people with a combined GDP of $25trn. In 2012 1.2% of global trade was carried out by Turkey; this is expected to exceed 1.5% by 2025. The country is a regional hub for more than $2trn worth of freight, according to Invest In Turkey, a state trade promotion agency. The current size of Turkey’s logistics sector is estimated at $80bn to $100bn and this could reach $140bn by 2017, the agency said. Investment over the last 10 years in transport and logistics infrastructure is set to continue. “To take advantage of its location, Turkey must invest in infrastructure so goods can be storedherebeforebeingforwardedtoplaceslikeAfrica,” said Özkazanç. “Infrastructure investment is essential if Turkey wants to reach its 2023 export target. It will need six times more air capacity to meet this goal, includingaircraft,land,warehouses,parkingplacesand people to handle the increased volume.” Currently, 18 public sector and 19 private logistics centres are being built in Turkey. The hubs offer multi- pletransportationoptionsandsomewillparticipatein theEU’sIntraregiologisticalintegrationproject.Thestate railway authority TCDD has set aside TL514.9m (€181.3m) of which it has spent TL111.4m (€39.2m) since 2006. By 2023 estimated total freight through- put value in these centres will reach $500bn. The hubs offer benefits like consolidated warehousing and dis- tribution of products to domestic and international markets through connections with industrial areas. Additional services include on-site packaging, savings onstorageandeasytransportationthroughoutTurkey. The Great Anatolian Logistics Organisation Project, known as BALO, is a TL50m (€17.6m) logistics scheme 139 THEREPORT Turkey 2015 Air travel is rapidly increasing, reaching 166.2m flyers in 2014 and growing 9.5% in that year alone Turkey has easy and direct access by road, sea and, to a lesser extent, rail to markets with 1.5bn people with a combined GDP of $25trn. In 2012, 1.2% of global trade was carried out by Turkey; this is expected to exceed 1.5% by 2025.
- 142. TRANSPORT OVERVIEW initiated bythe Union of Commodity Exchanges, the Association of International Freight Forwarding and LogisticsServicesProvidersand90otherprivateenter- prises.BringinggoodsfromtheTurkishmainlandatthe Marmara port of Bandırma, it ships goods to Tekirdağ across the water and aims to join logistics centres by railforeasyexportsaccessEurope.Ithasalreadyslashed transport costs by 30% and journey times to four days. MORE COMPETITIVE: The market is set to become more competitive but may squeeze out smaller play- ers. “There are not many professional logistics compa- nies in Turkey. Most are smaller, family owned firms thatcannotcompeteontheworldstagebecausethey lackthenecessaryresourcesandinfrastructure.Itisdif- ficult for all but the largest businesses in the sector to carry out trade with sophisticated European clients,” said Çiçek Boydaş, joint venture coordinator at Arkas Holding, which operates shipping lines and ports. Several international firms have entered the logis- ticsfield,mainlycentredinIstanbul,thecountry’scom- mercial capital, and the large port cities of Izmit and Tekirdağ.TheyincludeDHL,CEVALogistics,KühneNagel and Gergo. The news is not all good for international companiestryingtobreakthrough,however.Weakness- es exist in sector standards. “The biggest challenge is the lack of standards across the sector, especially for domestic versus global players, including Turkish firms that also operate abroad. The latter must follow very strict regulations, whereas the former do not always comply with the rules, making it difficult for the inter- national players to effectively compete,” said Boydaş. TWO IF BY SEA: Turkey has almost 90 commercial ports, terminals and piers along more than 8000 km of coastline. The four seas encircling almost the entire country handle more than 6m twenty-foot-equivalent units(TEU)ofcontainers,aswellasmillionsofpassen- gersandvehiclesperyear.“IfTurkeyistoreachits2023 export goals, it must plan and execute improvements to port infrastructure in a more effective and speedy manner,” said UN Ro-Ro’s Gümüşoğlu. “Turkey’s ports can currently handle 7m-8m TEUs but need to be able to handle 30m TEUs in order to meet the targets.” BoydaşofArkasalsonotedthelowcapacityofports. “Around3.9mTEUsarecurrentlytradedinTurkishports, whichisarelativelysmallamount,giventhesizeofthe Turkish population and economy. In more developed countries,theratioisaround1mTEUsper10minpop- ulation, suggesting that there is still significant room for growth in the Turkish shipping space,” she said. Around 90% of Turkey’s foreign trade is transported bysea,with40%ofallcargohandledbystate-controlled ports, and the flow of goods is mostly outgoing. “The uptick in economic growth since 2012 has positively impactedTurkey’sshippingindustry.Foreveryfivecon- tainersimported,mostofwhicharecommoditiesfrom China used for manufacturing electronics, Turkey is exporting around 25 containers to other countries, particularly white goods to Europe, which have seen a rebound of late,” said Tom Gronnegaard Knudsen, a MaerskLinemanagingdirectorfortheBlackSearegion. CRAZYCANAL:OnewayTurkeyhopestoattractmore oftheinternationalshippingbusinessiswithErdoğan’s so-called “crazy project”: a €6.6bn canal stretching from the Black Sea to the Marmara. The 43-km, 400- metre-wide channel would rival the engineering feats atSuezandPanama,slicingthroughthewestern,Euro- pean side of Istanbul in a bid to force dangerous car- goonsupertankersofupto300,000deadweighttonnes to bypass the overcrowded Bosphorus Strait. Critics warn the cost to the environment is too high. Scientistshavealsopointedoutmajorflawsintheplan, claimingthathighersalinityofthewaterfromtheBlack Sea will destroy the ecosystem of the Marmara, which has already been plagued over the decades by indus- trial pollution and is only just recovering. They also argue that freshwater aquifers underneath what will become the isle of Istanbul will fill with saltwater. The municipalityalreadystrugglestosupplythe2.65mlitres per day of potable water that Istanbul requires. Turkey’sMediterraneanandBlackSeaneighboursmay stronglyobjectastheirterritorialwaterscouldbeneg- ativelyaffected,andthecanalmaycontravenetreaties that dictate Turkey cannot control or profit from sea trafficthroughinternationalwaterways.TheMontreux Convention of 1936 granted control to Turkey of the BosphorusandtheDardenellesStraitattheotherend of the Sea of Marmara, but bars it from charging fees orhinderingfreepassageduringpeacetime.Thecanal may make transit traffic faster, but may find it difficult to compete with the Bosphorus, which is cost-free. OUTLOOK: Realising so many grand plans will prove costly, and inevitably some will be scaled back or scrappedalltogether,saidGlobalSourcePartners’Yeşi- lada. If 75% of costs are borrowed, as is typical, all of theprojectswouldadd$180bntoTurkey’sforeigndebt stock. That revenue from the projects would almost entirely be in lira and would also hit Turkey’s balance of payments, he added. Judging by what Turkey has accomplishedsofar,itlookslikelythatmanyoftheproj- ects can still be fulfilled. Either way, there is still a lot ofmoneyonthetableforcontractorswellintothefuture. 140 With almost 90 commercial ports, nearly 90% of Turkey’s foreign trade is transported by sea Turkey’s four surrounding seas make it easily accessible and allow the country to handle some 7m-8m TEUs of container traffic per year, but this will need to grow to 30m TUEs by 2023 in order to meet export goals. www.oxfordbusinessgroup.com/country/turkey
- 143. TRANSPORT INTERVIEW Turgut Erkeskin,President, Association of International Forwarding and Logistics Service Providers WhatfactorsaredrivinglogisticsdemandinTurkey? ERKESKİN:TheTurkisheconomyhasmadesignificant strides over the past 15 years and has grown into one of the largest and most dynamic in the region. Rising production and consumption, a growing population and heightened income levels have resulted in a sub- stantial increase in the amount of goods circulating domestically, posing considerable opportunities to providers of logistics services. Furthermore, the coun- try’s large surface area requires the continued devel- opment of an extensive infrastructure network. Demand for logistics services, however, is not just a functionofdomesticforces.Itisalsoaffectedbyinter- nationaltrade.Turkeyhaslongbeenacentreforimports and exports, and its role as a transit state looks only to be increasing, especially given its advantageous geo- graphic location between the major production areas of the East and the major consumer economies in the West. As the US and Europe recover and the Chinese economyshiftstowardsconsumption,Turkeystandsto benefitfromincreasesintheglobalflowofgoods.Fur- thermore, the country is a natural production and dis- tributionhubformultinationalfirmslookingtotapthe markets of the region, especially Northern Iraq, Africa and the Commonwealth of Independent States. While there are not good statistics on the industry, and this is one area that is in need of improvement, growth has been considerable in the past few years. Demand for logistics services in 2013 grew between 22% and 25%, spurred on by strong private and public investment – over 32% of government investments were in logistics-related projects. This growth has also manifesteditselfintheamountofpeopleenteringthe industry;therearearound60differenthighschooland university programmes dedicated to the profession. What infrastructure improvements are needed to sustain growth in this sector? ERKESKİN: First, I believe that the plan for a third air- port is a major step in the right direction. Turkey is a centreforairtransport–67%ofgoodstransportedby Turkish Airlines are transit goods. If the country can develop its infrastructure properly, it can be the cen- tre of a global trade network from China to Brazil. Already, more and more European companies are fly- ing through Turkey to ship goods to Africa via Turkish Airlines.Second,thecompositionofinternationaltrade has shifted over the past few years and requires extra investment in more advanced infrastructure. The mix of products and countries has changed from low-lev- el goods being traded with neighbouring countries, to higher-value-addedproductsbeingtransportedallover the world, requiring more advanced, high-tech facili- ties such as cold storage warehouses. Third, Turkey’s railinfrastructureisinseriousneedofinvestment.Only 1%ofgoodsaretransportedonthecountry’sraillines. Upcomingprojectsincludeimprovementstoalinefrom Izmir to Germany, via south-eastern Europe, and the establishment of alternative rail links between China andWesternEurope.Ingeneral,railismuchfasterthan seatransportandlesspronetointerruption.Following the completion of the Marmaray tunnel under the Bosphorus, Turkey is well-placed to serve as a link betweenregions.Finally,Turkishlogisticsfirmsmustalso start to think about constructing infrastructure in tar- get export markets, such as Russia, Northern Iraq and Africa, where there is a lack of quality warehouses and packagingfacilities.Forexample,Turkishproduceoften goes bad during storage in Russia, because there are not sufficient cold storage facilities. How is the current Customs regime affecting the development of the sector? ERKESKİN:EuropeanCustomscontrols,includingquo- tas, additional charges at borders and visa issues for drivers,makeshippingTurkishgoodstoEuropeancoun- tries extremely difficult and expensive. Ultimately, the European consumer is the one the most hurt by these measures, as costs are passed on through price increases.Itisessentialthatthesebarriersbelowered. 141 THEREPORT Turkey 2015 Build it and they will come OBG talks to Turgut Erkeskin, President, Association of International Forwarding and Logistics Service Providers (UT KAD)
- 144. TRANSPORT INTERVIEW Mümin Kahveci,General Manager, Istanbul Electric Tramway and Tunnel Establishments How can further investment and cooperation betweenthepublicandprivatesectorshelpimprove urban transport infrastructure? KAHVECİ:The public transportation needs of Istanbul are rising in line with population growth. Congestion in Istanbul has become an enormous challenge; in the past decade we have seen the number of cars on the streetsincreasedrastically.Thescaleofinnerurbantraf- fic does not match the Ottoman structure of the city’s core and its self-contained neighbourhoods, which have narrow streets and few parking spaces. The public transportation system has difficulties keepingpacewithrapidgrowthandthechangingurban structure. That said, it must be noted that the govern- menthasbeenproactiveinintroducingnewinfrastruc- tureprojectstoalleviatecongestion,includingthethird bridge,athirdairport,theMarmaraytrainandtheEura- sia Tunnel high-speed rail system. One of IETT’s major goals is to decrease depend- enceonwhatiscalled“rubber-wheeledtraffic”,orpas- senger cars, through public and private partnership projectsliketheexpansionofbusandmetrobusroutes. Privatelyownedmini-busfirmsalreadyoperateinpart- nership with IETT and play a key role in areas that are not covered by other means of public transportation. IETT is active in promoting greater regulation for pri- vate buses and we work closely with the Istanbul Met- ropolitan Municipality to increase rail links, metro links and bus links with privately owned bus companies What is the IETT doing to address Istanbul’s con- gested roads and promote the shift from individ- ual vehicle usage to mass urban transport? KAHVECİ: The IETT recently announced a partnership with the Scientific and Technological Research Coun- cil of Turkey to increase capacity on the metrobus sys- tem. The partnership will have two phases; the first phase will consist of an analysis of the metrobus sys- tem and provide recommendations for improvements that can increase the number of buses on the line. In the second stage, bus stops will be examined for pas- senger and vehicle details, with the aim of achieving a moreefficientandcomfortabletransportmethod.Our aimistostudyeverypassengerlinethatisactiveinIstan- bul. This will help us improve the system, increase effi- ciency and optimise our routes. The IETT is working toward a more integrated pub- lic transportation network, with rail, metro, taxis and private buses. We are adding new routes and recent examples include a new connection to the Marmaray. We are also investing into new and efficient technol- ogy, with GPS/GPRS tracking systems that can provide us with data to minimise or even avoid congestion. What new and eco-friendly technologies do you intend to deploy in upcoming years? KAHVECİ: The IETT is planning to ensure that by 2019 25% of the transport fleet will be using electricity and 30% will be using compressed natural gas (CNG). We have already started renewing our fleet, with 1800 new vehicles, while about 3000 public buses and oth- er public transportation vehicles have been renewed. Some360vehiclescurrentlyinoperationuseCNGand thesevehiclesconsumelessfuel,aremoreenvironmen- tally friendly and produce less noise. However, the bridges of Istanbul are a problem, as it is not possible toestablishanelectricvehiclesystemusingthebridges’ catenaries, so we are seeking multinational partners to transfer technology that fit Istanbul’s conditions. Howcantransportationbemademoreaffordable? KAHVECİ:Faresaresupervisedandregulatedbymunic- ipal and state authorities. There are several discount initiatives in place to help students, retirees and peo- ple with disabilities. However, an integrated transport system between metrobuses, taxis, rail and metro will improve cost efficiency. There is stronger demand for infrastructure that can help reduce fuel consumption andeco-friendlysolutionsandinfrastructurewillreduce transport costs and be sustainable for the long term. 142 Extending the reach OBG talks to Mümin Kahveci, General Manager, Istanbul Electric Tramway and Tunnel Establishments (IETT) www.oxfordbusinessgroup.com/country/turkey
- 145. TRANSPORT ANALYSIS Since 2003Turkey has seen major investment in its rail network Taking the train to Ankara from Istanbul used to be a leisurely affair. After a snack at Gar Lokantası, the blue-tiled restaurant inside Haydarpaşa station that was built by German engineers in 1872 and once servedastheterminusfortheBaghdad-IstanbulRail- way,travellersboardedthetrainasthesunset.Aclat- tering eight hours later, the train crawled into the capital’smainstation.Nowahigh-speedlinkchanges it all. Turkey has become Europe’s ninth country and the world’s 14th to operate a high-speed train net- work. The Turkish State Railways’ (TCDD) project slashed the journey time to three hours and 45 min- utes as speeds reached 250 km per hour, making rail aviablerivaltoflyingandthepopular,inexpensivebus- es that now dominate inter-city travel. The govern- mentexpects78%ofpeopletravelingbetweenTurkey’s twobiggestcitiestooptforrailfromthecurrent10%. As suitable as railway between Turkey’s political capitalandculturalcapitalmayseem,thepathtolink- ing them has been marked with challenges. Moun- tainous terrain – which required erecting 33 bridges and viaducts and boring 39 tunnels – added to costs and construction time. The current incarnation fol- lowed a fatal false start in 2004, when a fast train between Istanbul and Ankara using the decades-old existing tracks derailed, killing 41 people. NEW TRACKS: Sincethen,therailwayhasbeenover- hauledandhigh-speed-appropriatetrackshavebeen laidafterconstructionbeganinOctober2008.Asec- tion of track between Ankara and the north-west city of Eskişehir opened in 2009, while a line has been in operation between Ankara and Konya to the south since2011.Theseroutessawalmost4.5mpassengers in 2013. The rolling stock includes 11 trains made by Spain’s CAF and an additional seven Siemens’ Velaro trains.InAugust2014,followingaseriesofdelaysdue totechnicalissues,theAnkara-Istanbulhigh-speedline beganoperations.Itwasoriginallyscheduledtoopen at the same time as the cross-continental Marmaray rail link in Istanbul in October 2013. Eventually, it will connect with the Marmaray, which is currently serv- ing metro travellers, providing an unbroken rail link betweenEuropeandAsiaMinorforthefirsttime.The government also announced in late 2014 that the following year would see a call for tenders for a new line between the two cities that would reduce travel time even further, from the current three hours and 45 minutes to around one hour. Although Turkey was an integral part of a route stretchingfromEuropetotheMiddleEast,itsrailways havesufferedfromunderinvestmentsincethe1950s. TheUSpromotedimportsofAmericancarsandroad- building as part of the Marshall Plan, a major aid pro- gramme to Turkey after the Second World War. But Europe’s influence is now more apparent in the renewed interest in rail. In 2003 authorities began implementing a plan to modernise the TCDD and ensure Turkish laws on rail transport complied with EU standards, part of the country’s broader project tojointhebloc.TheEUofferedseveralloansinrecent yearsforrailwayprojects,includingnearly€1bnworth of facilities for the Ankara-Istanbul high-speed line. Overall, Turkey will invest $45bn in its rail network bythe100thanniversaryoftherepublicin2023,Lüt- fi Elvan, the transport minister, has said. The invest- ment will include 10,000 km of high-speed track and another 4000 km of conventional track, connecting 15 cities that include Afyon, Izmir, Bursa, Erzincan and Sivas. The length of track will increase to 26,000 km from the current 10,984 km, including 10,000 km of high-speed and 4000 km of conventional track. Improved rail links will have a knock-on effect for the rest of the economy, especially for eastern regions. “Better rail connections will open up areas in eastern Turkey to increased trade, as rail freight from the area is much more cost effective than road transport giv- en very high petrol rates in Turkey,” said Ozan Önder, managing director at global logistics firm DSV Turkey. LIBERALISATION: Turkey has recently opened the state-controlled rail industry to private operators to A high-speed rail that connects Istanbul and Ankara reduces travel time between the two cities from eight hours to just under four hours and travels at speeds of up to 250 km per hour. 143 THEREPORT Turkey 2015 By the 100th anniversary of the Turkish Republic in 2023, it is expected that some $45bn will be invested in the country’s rail network. Age of rail New investments are set to improve and expand both inter-city and national rail connections
- 146. TRANSPORT ANALYSIS help itmeet targets for rail expansion and upgrades. The Rail System Liberalisation Law, passed by parlia- ment in 2013, overhauls the network by splitting the state operator into two firms and opening the sector to private operators. The law adheres to the British model, keeping control of the tracks with the TCDD, whilegrantingaccessrightstoprivateersforupto49 years. A new operating company, Turktren, will han- dlepassengerandfreightservices.Arailregulatorwas set up in 2012. Liberalisation will increase competi- tion and service quality, Cavit Uğur, head of the Asso- ciationofInternationalForwardingandLogisticsServ- ice Providers, told trade magazine Railway Pro. Initially, private firms will only be allowed to oper- ate freight services, with passenger services permit- ted by 2018. Public and private entities can receive licences to build their own railway infrastructures for whichtheycouldbecomeoperatorsofboththeinfra- structure and transport services, according to the legislation. Industry watchers expect private opera- tors will be allowed to operate on the Ankara-Eskişe- hir and Ankara-Konya lines. Major European rail engi- neers and operators, like Germany’s Deutsche Bahn, SNCFandThalesfromFrance,EuropeangroupThalys, Japan’s Mitsubishi and Hyundai Rotem from Korea have set sights to Turkey. “There is much room for increased development of the rail transport sector. Less than 1% of cargo is currently transported by rail compared to a 20%-40% average in other countries. The recent privatisation of the sector is a step in the rightdirection,”TomGronnegaardKnudsen,aregion- al managing director for MAERSK Line, told OBG. INTERNATIONAL LINKS: Rail links with neighbour- ing countries are essential for boosting trade ties. The TCDD has said reviving Turkey’s historic trade route between Asia and Europe with railroads would boosttradeby$75bnayear.“Traintransportisimprov- ing but has not kept pace with demand; the popula- tion is rising and more investment is needed. Turkey should try to collaborate with other countries in the sector, like Russia,” said Imran Okumuş, general man- ager of Ulusoy and Varan Bus Group. Arailwayconnectionbetweenthenorth-easterncity of Kars and Azerbaijani capital of Baku via Georgia’s Tbilisi will open in 2015. The expected annual volume on the $600m line is 50,000 containers. The link will offerCaucasianandCentralAsiannationsaneast-west corridorfreeofRussiancontrolforthefirsttime.Oth- er international projects include an agreement between Lithuanian Railways and the TCDD. Inter- modal trains traveling through Belarus and Ukraine will arrive at Ukraine’s Odessa port. There, containers will be shipped to Turkish marine ports where the TCDD will distribute to Turkey and the Middle East, according to the journal Rail Turkey. IN THE CITY: Rail is playing a bigger role in the lives of urban commuters, most of whom rely on public transport due to low car ownership rates. In Ankara and Istanbul, about 60% of residents use some form ofpublictransport,accordingtoElaBabalık-Sutcliffe, a professor at the Department of City and Regional Planning at Ankara’s Middle East Technical Universi- ty.In2013thegovernmentannouncedplanstoexpand Istanbul’sunderground,increasingthelengthofroutes to 400 km from 141 km and annual capacity to 7m passengers in 2016, then 11m by 2019. The Yenikapı extensionofthemetro,whichopenedinJanuary2014, is the first step in that direction. The second branch oftheM1lineopenedinJune2013,connectingEsen- ler. Above ground, Istanbul’s tram and rail lines trans- ported an average of 1.6m people per day in 2014. In the capital Ankara, the long-awaited 15-km Batıkent-SincanmetrolineopenedinDecember2013, finishing 13 years after it was started. The Kızılay- Çayyoluline,underconstructionsince2002,wascom- pletedinMarch2014.2015shouldalsoseetheopen- ing of Tandoğan-Keçiören line, which has taken two decadestocomplete.Theslowpaceofbuildingthese lines coincided with major investments in road infra- structure, contributing to a sharp jump in car-usage rate, which Babalık-Sutcliffe said is 35% today, com- pared to less than 20% in 1997. In Bursa, Turkey’s fourth-largest city, a 6.5-km tram lineopenedinOctober2013.SpanishcompanyCOM- SA designed, built and electrified the circular line for €8m. Its 12 stops include two interchanges with the city’s light metro, with a fleet of 14 trains built by Turkish coach builder Durmaray and a bogey con- structedbySiemens.COMSAwaschosenagainbythe Gaziantep municipality in south-eastern Turkey for a €20mtramline,whichincludedinfrastructure,tracks, signals and power supply for a 6.5-km double track with eight stops. “Turkey still has major potential in terms of sustainable urban transport, because car ownership and usage are still relatively low in the cities.Publictransportationuseishigh,duetothenum- ber of ‘captive riders’ who don’t have other vehicles,” Babalik-Sutcliffe told OBG. “But the lack of quality in public transport and local policymakers making cars the priority has created a serious risk for the trend. Already the use of public transport is on the decline.” 144 Low rates of car ownership make for high dependence on public transportation in urban settings Investing in railway links with neighbouring countries like Georgia and Azerbaijan could help boost Turkey’s trade by $75bn per year. www.oxfordbusinessgroup.com/country/turkey
- 147. 145 Telecoms & IT Ayoung and tech-savvy populace drives internet uptake Voice services the biggest telecoms revenue generator Data usage still low but smartphone growth bodes well Business process outsourcing a key source of jobs Tenders announced for 4G mobile data networks
- 148. TELECOMS OVERVIEW The country’sproviders are investing heavily in new infrastructure The telecoms sector in Turkey has long been viewed as a rising star, with a young, digitally adept popula- tion and rising personal incomes driving demand in the mobile voice and data segments. In recent years, the industry has been affected by less-strong macro- economic fundamentals, including a weaker lira, as well as some restrictive regulatory changes. Even so, Turks spent more than TL35.5bn (€12.5bn) on tele- coms in 2014, compared to TL32.2bn (€11.34bn) in 2013, according to Turkey’s Information and Com- munication Technologies Authority (ICTA). Fixed-line services continued a decade-long trend of dwindling subscribership and revenues, although value-addedservicesandnewpromotionalpackages will keep the segment stable in the medium term. While heavy tax burdens and fierce competition have hamperedgrowthprospects,comparativelyhighvoice usage and a growing base of mobile internet sub- scribers will help the market maintain an upward tra- jectory in 2015. The country’s four major telecoms providers–TürkTelekom,Turkcell,VodafoneandAvea –areinvestingheavilyinnewinfrastructureandserv- ices,withmobileoperatorsturningtodomesticsmart- phone production as a result of customer demand, creating an increasingly consumer-friendly environ- ment that should see smartphone purchases, mobile subscribership and data usage increase in 2015. BACKGROUND: Turkey’stelecomssectorunderwent modernisingreformsin1995,whenthepost,telegraph and telephone monopoly was split into two divisions. Türk Telekom became the first service provider in the country in that year, and today holds a majority of the fixed-line market. Mobile telecoms followed in April 1998, when the Ministry of Transport, Maritime and Communication signed a $500m, 25-year Global Sys- tem for Mobile Communications (GSM) licensing agreementwithTurkcellandTelsim,thecountry’sfirst two mobile providers. The economic crisis of 2000-01 spelled the end of TürkTelekom’smonopoly,whenthegovernmentmoved toliberalisethetelecomssectorandreformitthrough legislation similar to that of the EU. In 2000 the gov- ernment created the ICTA to act as sector regulator andoverseeprivatedevelopment,inpartnershipwith the Ministry of Transport. Market liberalisation kicked off with the ICTA’s cre- ation in 2000, and the corresponding 2004 deadline tobeginprivatisingthefixed-linesector.In2005these plans came to fruition as Saudi Arabia’s Oger group bought a 55% majority stake in Türk Telekom, setting aprecedentforforeigninvestmentinTurkishtelecom- munications. Today the Turkish government main- tains a 30% share of Türk Telekom, while 15% was publicly listed in 2008. Plans for a secondary public offeringof6.67%ofthegovernment’ssharewereput onholdindefinitelyinMarch2013,asthelira’sdepre- ciation rendered the deal disadvantageous. Recent regulatory changes are aimed at improving the consumer environment and making the sector more competitive. In July 2013, the ICTA enacted new regulationstosetminimumon-netvoiceandSMStar- iffs, a move meant to improve operating conditions fornon-incumbentoperators,aswellasreducemobile termination rates (MTR) – the charge levied when a call or SMS ends on a different network – by 20% for voiceservicesand75%forSMS.Forexample,anAvea subscriber texting a Vodafone subscriber used to pay an MTR of TL1.87 (€0.66), but now only pays TL0.43 (€0.15).AlthoughthemandatoryMTRcutshavekept tariffs low, they have curbed operator revenues. FIXED LINE: With the advent of mobile technology, Turkey’sfixed-lineserviceshavebeeninsteadydecline for the past 10 years. Fixed-line subscribership stood at 18.98m in 2005, but has since dropped to 12.74m as of the third quarter of 2014, according to ICTA data, down 6.3% on 13.6m in 2013. Fixed-line pene- tration is now 16.6%, although the ICTA notes that, with an average household size of 3.7, these services likelyreachamajorityofthepopulation.“Asfarastele- comsinfrastructureisconcerned,Turkeyisoneofthe Despite a weaker lira, less strong macroeconomic fundamentals and restrictive regulatory changes, Turks spent more than €12.5bn on telecoms in 2014, compared to €11.34bn in 2013. Liberalisation of the telecoms market kicked off with the establishment of a new sector regulator in 2000, and the corresponding 2004 deadline to begin privatising the fixed-line sector. 146 Young and tech-savvy Demographic forces are driving mobile up-take and expansion www.oxfordbusinessgroup.com/country/turkey
- 149. TELECOMS OVERVIEW top countriesin the world,” Barış Öney, managing partner at Globalturk Capital, told OBG. “Some 99% of the population is covered for fixed-line and mobile services, and it is getting closer to 100%.” As the country’s first and long its largest operator, TürkTelekomcommandsthemajorityofthefixed-line market, serving 85.6% of local calls, 67.2% of nation- al calls and 59.3% of international calls. Of its 2014 revenues–whichreachedTL13.6bn(€4.79bn),up3.7% on 2013 – some 71.7% came from fixed-line servic- es. As home usage declines – average minutes used per month for fixed-line subscribers fell from 98.7 to 88.9intheyeartoend-2014–thecompanyhasadopt- ed new strategies to maintain its non-mobile seg- ment. “Fixed-line voice is a declining business, but we approach the problem differently than other opera- tors,” Onur Öz, the firm’s investment relations direc- tor,toldOBG.“We’rehopingtokeepasmanycustomers as possible during the transition from fixed-line voice to broadband and mobile products. Keeping the line in the house is critical because we can build on that; there are services like naked broadband and IPTV packages that make the fixed segment an important cash generator.” With this in mind, Türk Telekom has launched several initiatives to hold on to these cus- tomers, including an agreement with Alliance Insur- ance to provide free home insurance for those with fixed-line contracts, and a new home smartphone called the TT-E4, an Android device that acts as a smartphone but is tied to a customer’s home line. MOBILE: A young, engaged and dynamic population makesTurkeytheidealmarketforgrowthinthemobile segment. The median age of Turkey’s 75m residents is 29, compared to 40 in the UK and 37 in the US, with nearly 25% of the population under 14 years old. With such a high proportion of “digital natives” – those born roughly after 1980 who have thus grown up with the internet – plus strong domestic demand for new products and services, mobile operators are in a good position to capitalise on growth in the Turk- ish market. Although the industry is facing several challenges, such as the world’s highest mobile taxes and fierce competition among major operators, high voice usage, increasing subscribership and a growing data segment will help drive the market forward in the next decade or so. Turkey’smobilemarkethasgrownsignificantlysince 2001, leaping from 19.5m users to some 65.8m in 2008 before declining due to the twin effects of the global financial crisis and the advent of mobile num- ber portability, which allows customers to keep their phonenumberswhenswitchingproviders.Sincethen, however, recovery and new growth have brought mobilesubscribershipaboveandbeyondpre-crisislev- els.Mobilesubscribershipclimbedtoanall-timehigh of 71.9m in the third quarter of 2014, compared to 68.9m four quarters earlier. Moreover, the overall mobile penetration rate now stands at 93.8%, a fig- urethatrisesabove100%ifyouexclude0-9-year-olds. SECTOR PLAYERS: The mobile market is dominat- ed by three providers: Turkcell, Vodafone and Avea. Turkcell was formed in 1994 and become one of the country’s two initial mobile operators in 1998 along- side Telsim, which rebranded as Vodafone following a$4.55bn(€3.43bn)acquisitionin2006.Aveaentered the market in 2004 after Türk Telekom’s GSM opera- tor, Aycell, merged with Is-TiM, which was owned by TürkiyeİşBankasıGroupandItalianoperatorTIM.Türk Telekom held a 89.99% stake in Avea as of April 2015, when it offered to buy the remainder from İş Bankası, citing a “nominal value” of TL820m (€288.7m). Turkcell held the largest market share as of the thirdquarterof2014,at48.3%–aslightdeclinefrom 50.77% in 2013 but still enough to retain the title of incumbent operator. The company reported 34.6m subscribers in 2014, down from 35.2m in 2013. AlthoughTurkcell’smarketsharehasdroppedasnew players entered the market, income and revenues grew in 2014. Turkcell added 75,000 subscribers in 2013,withmonthlyblendedaveragerevenueperuser (ARPU) climbing 3.8% to reach TL21.7 (€7.60). MTR cuts excluded, the company reported TL12bn (€4.23bn) in revenues, compared to TL11.64bn 147 THEREPORT Turkey 2015 SOURCE:TUIK Number of fixed-line & mobile subscribers, 2004-14 (m) 0 16 32 48 64 80 No. of mobile telephone subscribers No. of fixed-line telephone subscribers 20142013201220112010200920082007200620052004 Turkey has a high number of “digital natives” who grew up on the web The country’s largest operator commands the majority of the fixed-line market, serving 85.6% of local calls, 67.2% of national calls and 59.3% of international calls.
- 150. TELECOMS OVERVIEW (€4.1bn) in2013. However, net income fell from TL2.33bn (€820m) in 2013 to TL1.87m (€658m) in 2014. Voice revenues fell by 1%, although mobile broadbandrevenuesgrewby34%,withstrongdemand for data. For 2015 the company has projected rev- enues in the range of TL12.8bn-13.1bn (€4.51bn- 4.61bn), with growth driven especially by its mobile and fibre broadband segments. The second-largest operator in the Turkish market, Vodafone, commanded a 29.13% market share in the third quarter of 2014, a slight improvement over 28.75% in 2013. The company announced revenues between April and September 2014 of £998m, down from £1064m during the same period in 2013. It also reported20.6mmobilesubscribersattheendofSep- tember 2014, up from 19.6m a year earlier. Avea has seen considerable success since entering the market in 2004. As of the third quarter of 2014, the company had a market share of 22.57%, up from 20.48% in 2013, and saw substantial growth in sub- scribership in 2014, reaching 16.23m from 14.12m a year earlier. In its 2014 annual report, Avea’s majori- ty stakeholder, Türk Telekom, announced that the company’s revenues had risen by 3.4% on the previ- ous year to TL13.6bn (€4.79bn), owing largely to growth in the mobile segment. Avea’s ARPU stood at TL22.87 (€8.05) as of the third quarter of 2014. VOICE VS DATA: Voice service usage is the leading revenue generator in the mobile sector: the ICTA reported that Turkish mobile subscribers’ average minutes used per month stood at 370 as of the third quarter of 2014, which was well above the European averageof170.Voiceservicesprovide62.17%ofTurk- cell’srevenues,52.26%ofAvea’sand61.67%ofVoda- fone’s, according to the ICTA. “Voice is still king in Turkey,” Zehra Öney, president of Turkey’s Mobile Marketing Association, told OBG. “Voice and SMS are huge, whereas data has a lot of room to grow.” In Turkey, as globally, voice revenues have been declining as data usage grows. In 2011 voiceservicesaccountedfor76.99%ofoverallmobile revenues, but this dropped to 68.81% in 2012 and 65.60%in2013.SMSservicesshowedasimilardecline, dropping from 11.61% to 9.78% between 2011 and 2013, while data services nearly tripled, from 7.31% of revenues to 19.03% during the same period. SMARTPHONES: High taxes and prices have not quelledstrongdemandforsmartphonesinTurkey.The rapid expansion of 3G infrastructure and services since2008hasboostedsmartphonepopularityenor- mously.3Gsubscribershiphit56.8minthethirdquar- ter of 2014, according to ICTA data, a 13.2% increase over 49.3m in 2013. Of these, some 29.8m used 3G services from their mobile phones. According to data released by ICTA in March 2015, smartphonepenetrationstoodat93.8%asoftheend of 2014, a dramatic increase from February 2013, when a Google report found that smartphone pene- tration in Turkey stood at 29.6%, with research firm EuromonitorInternationalpredictinginJuly2013that smartphone adoption will increase 124.4% between 2012 and 2017. In January 2014, consultancy firm Mediacells ranked Turkey 11th worldwide in terms of expected smartphone uptake, predicting that Turks will purchase 11.6m new smartphones in 2014. Turk- cell in particular is pushing smartphone expansion: the company added 3.1m smartphones to its cus- tomer base in 2014, and now has 12.7m smartphone subscribers on its network, representing a penetra- tion rate of 40%, up from 19% in 2012. However, growth in smartphone ownership has brought with it new fears about rising debt, particu- larlyafterariseinnon-performingloans(NPLs)inthe banking sector, and given the relatively high cost of imported devices. “The government is actually trying to slow demand for smartphones,” Bora Tezgüler, an analystatAk Investment,toldOBG.“They’vejustintro- duced the mobile phone credit card cap, so smart- phones can no longer be financed when purchased. One of the reasons for this is that they’re concerned about the rise in NPLs, and the other is to control the current account deficit.” Inadditiontofinancingplans,mobileoperatorsare lookingtonewresearchanddevelopment(R&D)activ- ities to improve the affordability of smartphones. TurkcelllaunchedTurkey’sfirstdomesticallydesigned smartphones,usingQualcommtechnology,inSeptem- ber 2013. The T-series phones offer all the standard features of an iPhone or Android for an average price of $232 (€175) per unit, about half the average price of other smartphones on the market. The Turkcell T50,Turkey’sfirstoperator-brandedsmartphonewith 4G capability, was launched in 2014, and was the country’s best-selling smartphone in the third quar- ter of the year. “Every 1m phones that will be sold will create TL500m (€176.1m) against the deficit. This moneywillremaininTurkey,”KorayÖztürkler,Turkcell’s chief corporate affairs officer, told local media. Avea also has a line of in-house, low-cost smart- phonescalledinTouch,developedinpartnershipwith the ZTE Corporation, which costs TL399 (€140) and 148 Voice services are still the leading revenue generator for operators in the country’s mobile sector Turkish mobile subscribers’ average minutes used per month stood at 370 as of the third quarter of 2014, well above the European average of 170. www.oxfordbusinessgroup.com/country/turkey
- 151. TELECOMS OVERVIEW offersmobilemusic,navigationandsocialmediaappli- cations. Thecompany launched the inTouch2, with upgraded features and a price tag of TL449 (€158) in May 2013. Vodafone, for its part, announced in November 2013 that it plans to develop locally pro- duced smartphones in partnership with Turkish elec- tronics maker Vestel, which will carry a lower price tagthanimportedmodels.Designandassemblywould take place in Manisa, and Vestel plans to make many components locally, including batteries. AccordingtoICTA,mobilephoneimportsdecreased by 7.5% in 2014, with 14.6m mobile devices import- ed that year, mainly from South Korea, Taiwan, China and Vietnam, compared to 15.8m in 2013. INVESTMENT: In addition to smartphones, new demand for 3G mobile and fibre-optic internet has led operators to invest heavily in infrastructure and networkmaintenancetoretainandattractsubscribers, with investment slowly increasing in recent years. Türk Telekom leads in capital expenditures, with a total of TL2.17bn (€764,000) invested in 2014, down slightly from TL2.21bn (€778,000) in 2013, largely in fixed-line maintenance and fibre infrastructure. The company is currently undergoing significant network expansions involving millions in loans from China, Europe and North America; in December 2012, Türk Telekom obtained $600m (€452m) in financing from the China Development Bank (CDB) and $172m (€129.6m) from Export Development Canada, fol- lowedbyanother$300m(€226m)loanfromtheCBD and a $138m (€104m) from the European Invest- ment Bank in October 2013. Turkcell has seen investments of TL2.14bn (€754,900) in capital expenditures for 2014, up from TL1.82bn (€641,500) in 2013. Moreover, the compa- ny announced plans in February 2014 to increase investment in mobile and fibre-optic infrastructure, after investing TL1.8bn (€633.8m) to improve its mobile and fibre networks in 2013. Vodafone, mean- while,hasinvestedoverTL11bn(€3.87bn)sinceenter- ing the market in 2006, and budgeted an additional TL300m (€105.6m) in 2014 to extend its fibre-optic internet network (see IT overview) and TL40m (€14.1m) to build a new call centre in the south (see analysis). Vodafone investments reached TL463.14m (€163.1m) as of the third quarter of 2013, compared to TL588.5m (€207.2m) in 2012. CHALLENGES: Turkey’s mobile sector boasts the dubioushonourofhavingthehighestindustrytaxbur- denintheworld,whichmanyanalystssayistheindus- try’s biggest obstacle to growth. The special commu- nications tax (SCT), which charges a 25% levy on “all types of installation, transfer, and telecommunica- tions services given by mobile phone operators”, was imposed as an emergency measure following a dev- astating earthquake in 1999 and never abolished. When added to the 18% value-added tax applied on all mobile services, the SCT imposes an effective tax rateof43%onmobilecompaniesandcustomers.The government reduced the SCT to 5% for data usage in 2009, but this reduction has not had a significant impact for operators. “Data is still a very small por- tion of overall revenues,” said Tezgüler. “However, if this reform sets a precedent for further reductions, it could be quite positive.” Otherfeesincludeaspecialconsumptiontaxof25% onthecost(includinginsuranceandfreight)ofhand- sets, a 6% tax paid to the Turkish Radio Television Foundation, an initial subscription charge and a wire- less license fee, paid by consumers when a new con- nectionispurchased.Providersalsopaystandardcor- porate and numbering fees to the ICTA, as well as a TelecommunicationsRegulationAuthorityShare,cal- culatedto0.35%ofnetsalesperyear.Operatorshave taken particular issue with a mobile-specific treasury share premium, applied to all mobile providers and amounting to 15% of turnover before taxes. A 2012 report commissioned by the Global System for Mobile Communications Association, an interna- tional lobby organisation, found that mobile opera- torsinTurkeyprovideadirectcontributionofTL11.3bn (€4bn) to the country’s economy. “Despite the eco- nomiccontribution,mobileconsumersandoperators in Turkey suffer a taxation regime which is specific to thisindustryandmoreseverethanthatfacedbycon- sumersinEuropeancountries,”readthereport.Indeed, localproducershaveurgedthegovernmenttoimpose emergency import tariffs on mobile phones to boost localproductionfurther,addingtoalreadystrictcon- trols on mobiles being brought into the country. OUTLOOK: Thesectorisexpectedtoexpandin2015 on the back of smartphone up-take, growth in data usageandgrowingsubscribership.Thefixed-lineseg- ment is likely to continue its gradual decline, but high demand for smartphones has bolstered the mobile segment and created a fledgling domestic industry thatcouldhelpboostmobilesubscribershipanduser revenuessubstantially.Taxesandcompetitionremain prohibitive to growth, but a young, tech-savvy popu- lationandhighdomesticdemandhavekeptprospects bright for all telecoms operators in the medium term. 149 THEREPORT Turkey 2015 New demand for fibre-optic internet has led operators to invest heavily in infrastructure in recent years Local producers have urged the government to impose emergency import tariffs on mobile phones to boost local production, adding to already strict controls on mobiles being brought into the country.
- 152. TELECOMS ANALYSIS Some 65%of employees at call centres in Turkey are female Astheprivatesectorincreasinglyfocusesoncustomer service as a way to retain business, Turkey’s call centre and business process outsourcing (BPO) sector has gained considerable traction in recent years. Already hometothousandsofBPOcentrescoveringoperations for telecoms operators, airlines and financial institu- tions, the industry will continue expanding in 2015, fedbyayoungandeducatedworkforce,strategicgeo- graphicpositioningandgovernmentincentivesaiming to increase growth in underdeveloped regions. RECENT GROWTH: Since opening its first call centres in the 1990s, Turkey’s BPO sector has seen enormous growth.TheInvestmentSupportandPromotionAgency ofTurkeyreportsthattheindustryhitanannualgrowth rate of 20% in 2010, with 1000 companies, 40,000 employeesandaworthofTL1.2bn(€422.5m).Accord- ing to a 2014 report by the Turkish Call Centres Asso- ciation(ÇMD),theindustrywasworth$1.6bn(€1.2bn) and employed 80,000 people, up from 2013 figures of $1.4bn (€1.1bn) and 70,200 employees at some 1100 centres.“Alotofcompaniesareoutsourcingtheirbusi- ness, and it is not limited to call centres,” Barış Öney, managingpartneratGlobalturkCapital,toldOBG.“BPO activitiesinTurkeyalsoincludetelesalesandcustomer upselling,andbanksareincreasinglyoutsourcingsome services to specialised BPO centres.” The chief focus of these centres is customer service and technical support, especially in telecoms, retail, finance, health care, IT and transport. Major compa- nies with BPO units in Turkey include Turkcell, Türk Telekom, Vodafone, Lufthansa, ING Bank and DHL, and recentdevelopmentsindicatesustainedmedium-term demand: in May 2013, London-based data centre firm TelecityGroupboughtTurkishBPOoperatorSadeceHost- ingforanundisclosedsum,whileVodafoneannounced plans in November 2013 to invest TL40m (€14.1m) in a new call centre in Anatolia, adding to the TL20m (€7m) facility it opened in Elazığ in 2011. SKILLSETS:Thesecentresarealsoasourceofemploy- mentforthousandsofyoung,educatedTurks.TheÇMD estimates that half of call-centre employees are high school graduates and half are post-secondary gradu- ates. Most of them are 24-26 years old, and many are strugglingtoenteranincreasinglytightworkforcewhile developing professional skillsets. Women in particular have flocked to these positions as they seek to build careersorboosthouseholdincome:theÇMDestimates that65%ofthemarefemale.“Callcentresprovidegreat entry-levelemploymentopportunitiesforyoungsters,” saidÖney.“It’slikegoingintothemilitary:youlearnthe basic skills for professional life that you can adapt to any workplace. You’re trying to sell something or solve someone’s problem over the phone, which is quite dif- ficult, thus you are able to build skills enormously. Call centres are great developers of human capital.” REGIONS: They are also critical economic drivers for the less-developed regions of Turkey’s south and east. Though most of the country’s call centres are in Istan- bul(58.6%),followedbyAnkara(9.5%)andIzmir(3.6%), the remaining 28.3% are scattered across the country in cities like Antalya, Diyarbakır, Erzurum, Erzincan, Gümüşhane,Malatya,Sivas,Uşak,Kayseri,Bursa,Düzce, Afyon, Eskişehir and Yalova. ÇMD aims to see at least onecallcentreopenineachprovinceoverthenextsev- eral years, according to its president, Metin Tarakçı. Stateincentivesliketaxbreaksandlandgrantsmake Anatolia an especially attractive option. Teleperfor- mance Turkey, a firm with call centres in Istanbul and Uşak,recordedcumulativegrowthof120%inthe2009- 14 period, according to its general manager, Engin Utkan. In January 2013, Globalturk Capital partnered withJapaneseconglomerateMitsuitoinvestinTempo, alocallyownedBPOfirmwith1500employeesinIstan- bul, Urfa and Afyon, and plans to expand further. Öney said he expects continuous demand in the sector over the long term. As Tarakçı told OBG, “Companies are lookingintotheirinternalcoststructures,andwhileBPO is not a cheap solution, if you can outsource some of your non-core services to someone else’s core servic- es, it will help grow your business in the long term.” The BPO industry in 2014 was worth €1.2bn and employed 80,000 people, up from 2013 figures of €1.1bn and 70,200 employees at some 1100 centres. Though most of the country’s call centres are in Istanbul (58.6%), followed by Ankara (9.5%) and Izmir (3.6%), the remaining 28.3% are scattered across the country in cities like Antalya, Diyarbakır and Erzurum. 150 Who you gonna call? The take-off of business process outsourcing in Turkey www.oxfordbusinessgroup.com/country/turkey
- 153. TELECOMS ANALYSIS The doorwill be opened for a fourth mobile network operator New spectrum allocations and a fourth mobile licence offering are expected to provide a fillip for Turkey's telecoms sector, which in recent years has benefitted from rising mobile and internet penetration, driven by its young, tech-savvy population. In March 2015 the transport and communications minister, Lütfi Elvan, announcedatenderfor4Gmobiledataservices,which isexpectedtoendinAugust.Bidsweresoughtinband- widths of 800, 900, 1800, 2100 and 2600 MHz, with aninitialroll-outplannedbytheendof2015.Thegov- ernment aims to extend 4G services to at least 90% of the population within six years, Elvan said. ECONOMICBOOST:Turkeywillalsobeopeningthedoor to a fourth operator, which will be able to bid for the 2600-MHzbandwidth.Despitestrongdemandforserv- ices and the rapid development of 3G in recent years, a new operator will face tough competition. The three existing ones, Turkcell, Vodafone and Avea, have their network backbones in place, and the two larger play- ers − Turkcell and Vodafone – are already testing 4G. Theseplayersarelookingtoadvancednetworkstopro- vide next-generation mobile web services, hoping to boost revenues in a fiercely competitive market. Serviceproviderswillalsoneeddeeppocketstofund the roll-out. The government has set a minimum price for the spectrum allocations of $2.44bn (€1.84bn), well above previous market expectations of around $1.6bn (€1.21bn). In addition to direct revenue from the spectrum auction, the government expects 4G services to provide a significant boost for the econo- my. The Ministry of Transportation, Maritime Affairs andCommunicationhasestimatedthatthe4Groll-out – based on the assumption of a 10% increase in band- width − may add 1% to Turkey’s GDP growth. To further boost sector growth, the government is implementingmeasuresaspartoftheMinistryofDevel- opment’s 2015-18 Information Society Strategy and Action Plan. Under the scheme, announced in March 2015, families will receive free internet access, with a particular focus on families with students. Another measure will make it compulsory for new buildings to have adequate infrastructure for internet services. BROADBANDDEMAND:Though the telecoms sector is hindered by high taxes, an increasing number of youngTurksareembracingnewtechnologiesandmobile broadbandservices.Thesedevelopmentsareinlinewith thegovernment’sVision2023plan,whichseeksexpo- nential growth in the telecoms sector over the next decade. The number of mobile subscribers in Turkey stood at 71.9m at the end of 2014, corresponding to a92.5%penetrationrate,accordingtotheInformation and Communication Technologies Authority. Mobile and internet penetration is high in Turkey and rates are still climbing. In its most recent survey of household ICT usage, published in August 2014, state statistics agency Turkstat found that internet access in homes had spiked, with nearly two-thirds of house- holds able to access internet at home as of April 2014, up from less than half as of a year earlier. In the first quarter of 2014, 44.9% of those aged 16-74 used the internetatleastonceaweek,upfrom39.5%ayearear- lier. There was also a strong rise in the number of sub- scribers using mobile or portable platforms: mobile phones made up 58% of all web connections, while portable computers contributed 28.5%, compared to 41.1% and 17.1%, respectively, a year earlier. PENETRATION & SPEED: Up-take by businesses was also strong: 89.9% of companies with at least 10 staff had internet access in 2014, rising to 98.7% for firms with at least 250 employees, according to a separate reportbyTurkstatreleasedinNovember2014.Though thisisclosetosaturation,theneedforfaster,morecapa- bleICTserviceswillhelpdrivesalesofnewdevicesand 4Gsubscriptions.ThesecondTurkstatreportalsofound that while most companies had broadband access, morethanhalfsubscribedtotheslowestserviceavail- able – with download speeds below 10 Mbps – while just15.2%ofenterpriseshaddownloadspeedsofabove 100 Mbps. As services become available at higher speeds,manybusinessesarelikelytooptforanupgrade. Public tenders for 4G mobile data services were announced in March 2015, seeking bids in a range of bandwidths, and with an initial roll-out planned by the end of 2015. 151 THEREPORT Turkey 2015 Business up-take of internet was strong in 2014, reaching 89.9% of companies with at least 10 staff, rising to 98.7% for firms with at least 250 employees, as of November. Next generation The country rolls up its sleeves to launch its 4G mobile network
- 154. IT OVERVIEW Fibre-optic servicesare the fastest-growing internet segment Turkey’s IT sector is in the midst of a busy and prosper- ous period marked by rapid, widespread development in internet services, infrastructure investment and e- commerce activity. Internet growth is being driven by extensivefibre-opticexpansion,increasedadoptionof 3G mobile internet and planned nationwide 4G net- work services that will require heavy investment from both the public and private sectors. The youthful, tech-savvy population in Turkey has led its IT industry to become one of the fastest-grow- ing in the country. As new innovation and infrastruc- ture creates faster, high-quality internet access and personalincomescontinuetorise,onlineshoppingwill be a major IT driver in the coming years. Piracy, coun- terfeiting and opposition to controversial new legisla- tion on web censorship have shaken the industry, but thesetroublesareunlikelytosignificantlydiminishthe sector’s long-term growth prospects. BACKGROUND: The Turkish IT sector is governed by theMinistryofScience,IndustryandTechnology,which hadbeentheMinistryofIndustryandTradefrom1971 untilJune2011.DecreeLawNo.635changedthemin- istry’s name to reflect its role of pushing development in the IT sector, in line with the goals of Vision 2023, the country’s development plan. Among these goals are reaching 30m broadband subscribers (attained in 2012), supplying 50% of the ICT sector with domestic productsandservices,raisingtheICTsector’seconom- ic contribution to 8% of GDP, becoming one of the top 10 countries in e-transformation, providing all public serviceselectronicallyby2019andachievingcomput- er literacy for 80% of the population. The High Coun- cil for Telecommunications (TIB) acts as internet reg- ulator and monitors online activity in the country. The TIB has seen its role come under international scruti- ny following the passage of laws in 2014 that gave it tighter control over website censorship and resulted in domestic protests and international condemnation. Internet access was first introduced in 1993 when Türk Telekom, the country’s first telecoms company and today its leading internet service provider (ISP), introduceddial-upconnectionsforitscustomers.Cable internet began a nationwide expansion in 1998, and fibre-optic services, the fastest-growing internet seg- ment today, were first introduced in 2007 by Tellcom, a firm later acquired by Turkcell Superonline, now the country’s second-largest ISP. In 2008 mobile 3G serv- ices were introduced, while 4G-LTE services began tri- al runs in 2012 and are forecast to be offered to con- sumers by the end of 2015. GROWTH: Despite Turkey’s phenomenal expansion in internet services and subscribership over the past decade,thereisstillplentyofroomforgrowth.Between 2002 and 2014, internet users in the country jumped from 11.4% to 53.8%, according to the World Bank. Turkstat, the official statistics agency, reported in its 2014 ICT usage survey that 44.9% of those aged 16- 74 use the internet regularly (at least once a week), up from 39.5% in 2013, while 58% of users accessed the internetusingasmartphone.Moreover,60.2%ofhouse- holds had internet access, up from 49.1% in 2013. The country’s strategic location and demographics are driving internet development and drawing inter- national acclaim. In April 2013 the Internet Corpora- tion for Assigned Names and Numbers (ICANN) – the globalorganisationresponsibleforcoordinatingdomain names,IPaddressesandautonomoussystemnumbers – announced it will open its first hub office in Istanbul. ICANN’s president and CEO, Fadi Chehadé, said Istan- bul was chosen for its quality infrastructure, growing ICT sector, business-friendly environment and close cultural and geographic proximity to Europe, the Mid- dleEastandAfrica.ICANNalsoheldaforumonTurkey’s Domain Name System in Istanbul in November 2014 as part of efforts to build a stronger domain name industry in Turkey. This came two months after ICANN signedaprotocolwiththeIstanbulmunicipalitytoreg- ister .ist and .istanbul as domain extensions. Thegovernmenthasalsoannouncedplanstodevel- op a technology centre in Gebze, about 50 km east of Vision 2023 includes plans to increase the ICT sector’s economic contribution to 8% of GDP and see it supply 50% of the sector with domestic products and services. Between 2002 and 2014, the percentage of internet users in the country jumped from 11.4% to 53.8%. Moreover, 60.2% of households had internet access in 2014, up from 49.1% in 2013. 152 Servers of joy Mobile networks and fibre-optic cables are expanding to meet demand www.oxfordbusinessgroup.com/country/turkey
- 155. IT OVERVIEW Istanbul. Inspiredby Silicon Valley, Turkey’s “Informat- ics Valley” will take up 3m sq metres of land and focus on creating a regional centre for research and devel- opment. According to the Minister of Science, Indus- tryandTechnology,FikriIşık,inMarch2015infrastruc- tureworkhadnearedcompletion,whilesuperstructure work was due to start in April 2015. “Looking at the five-and10-yeartrends,weseetheICTsectorwasgrow- ing between 10-12% each year in dollar terms, except during crisis periods,” Levent Kızıltan, vice chairman of the Informatics Industry Association (TUBISAD), told OBG.“Weexpectthistocontinuefortheyearstocome duetolargegovernmentprojectsanduptakein3G,4G, fibre, and machine-to-machine services.” Over the past several years, Turkey has consistently logged double-digit annual growth in internet sub- scribership. The country’s Information and Communi- cationTechnologyAuthority(ICTA)putsTurkey’sbroad- bandinternetsubscribership(includingfixed,modem, cable modem, and fibre) at 40m as of the third quar- ter of 2014, a dramatic increase from just 6m in 2008. TheICTAreportedatthesametimethatTurkey’sannu- al growth in internet subscribers stood at 28.2%. PROVIDERS: Although the ICTA lists 237 ISPs operat- ing in Turkey, most internet connections in Turkey are made by the country’s dominant telecoms company, TürkTelekom,throughitssubsidiaryTTNet,followedby Turkcell’sinternetsubsidiary,TurkcellSuperonline.TTNet commands a 77.53% market share, followed by Super- online (14.16%), Doğan TV Digital (4.49%) and Voda- foneNet(0.95%),withtheremaindersplitamongsmall- er operators. TTNet’s xDSL is the most widely-used internet service in Turkey, accounting for 65% of total fixedbroadbandsubscribers.AccordingtotheICTA,53% of fixed broadband subscribers in Turkey prefer offers providingspeedsof4-8Mbps,with81%ofthoseusers connecting to mobile internet via computer having data usage of 100 Mbps and above, and 15% of sub- scribers within the 0-50 Mbps interval. While these speeds are on par with much of Europe and North America, new fibre growth could see internet speeds increase exponentially within the next several years. FIBRE-OPTIC:Offeringspeedsupto1000Mbps,more than10timesthatoftraditionalbroadbandandcable, fibre-optic services have experienced phenomenal growth, and are easily the fastest-growing segment in Turkey’sinternetsector,havingsoaredin2013,withnet- work roll-outs leading Turkey to become Europe’s fifth fastest-growing fibre-optic market. In January 2014 the OECD revealed that Turkey has one of the highest fibre-optic growth rates in the world, with fibre sub- scriptions growing by 54.6% between June 2013 and June 2014, the eighth-highest rate out of 40 OECD countriesandfourth-highestinEurope,aheadofJapan (5.9%), the US (14.9%), Germany (31.6%) and Switzer- land(44.4%),andwellabovetheOECDaverageof12.4%. According to the ICTA, growth rates for other internet segments in the year to the second quarter of 2014 were41.36%formobileinternetfromhandsets,0.88% for xDSL and 6.61% for cable internet services. Sub- scribership, though low, is also growing fast: the ICTA reports 1.39m fibre subscribers as of the third quar- ter of 2014, a 43.7% rise on a year earlier. INFRASTRUCTURE: Turkey currently boasts roughly 245,000 km of fibre-optic cables laid, with nearly 182,000 km belonging to Türk Telekom and 33,000 km to Turkcell. Türk Telekom is aggressively pushing devel- opments in fibre to the home and fibre to the building, offering speeds of 100-1000 Mbps, as well as fibre to the curb, which makes it easier to deliver fibre servic- estoaclusterofcustomers,ratherthanbuildingexpen- sive direct fibre lines to each individual household. These developments will make a profound impact on the country’s internet landscape, owing to the sub- stantial speed and quality improvements fibre servic- esoffercustomers.“Withfibreservices,wedon’tcharge people any extra to make the switch,” Onur Öz, the firm’s investor relations director, told OBG. “We want togetpeoplefromlimitedplanstounlimitedplans,and switchingtofibrehelpsusup-sell.Wetripletheirinter- net speed, and triple their usage, with the expectation that they will pay more for better service.” In January 2013 Türk Telekom announced it plans to extenditsfibrenetworknationwideby2015,andwould allocate a significant portion of its planned TL2.1bn (€739.4m) in 2014 investments to this end. These developmentscouldseespeedsjumpevenhigherthan 1000Mbps:inNovember2013thecompanyannounced ithadsuccessfullycompleteda2-terabyte-per-second (Tbps)fieldtrialofa“wavelengthdivisionmultiplexing optical transport system” capable of delivering a total of 40 Tbps on its existing fibre-optic network. More promising developments came in December 2013,whenVodafoneannounceditwouldpayTL128m (€45.1m) to use part of the state power transmission company’sfibrenetworkforthenext15years.Asaresult of the deal, Vodafone will more than double its fibre networkto16,000km,addinglinesfromAnkara’sTeias and investing TL300m (€105m) in overall network expansion,inadditiontotheoriginalaccessfee.Voda- fone’snetworkwilleventuallylinktoSyria,Georgia,Iraq, and India, according to its CEO, Gökhan Öğüt. TurkNet, a smaller player commanding just 0.87% of the internet market, is a fast-growing company whose 153 THEREPORT Turkey 2015 Fibre subscriptions in Turkey grew by 54.6% in the year to June 2014, the eighth-highest rate out of 40 OECD countries and fourth-highest in Europe. Number of internet subscribers, 2004-14 (m) SOURCE:TUIK 0 10 20 30 40 50 20142013201220112010200920082007200620052004
- 156. IT OVERVIEW success isindicative of the potential for new invest- ment in the fibre market. In May 2013, the European BankforReconstructionandDevelopmentannounced a €9.5m loan to TurkNet, to be used on capital expen- diture to extend fibre-optic coverage across Istanbul, Izmir, Izmit and Bursa. Dubai-based Gulf Capital fol- lowed suit in July 2013 when it announced $15m (€11.3m) in funding to TurkNet to be used for infra- structure upgrades and expansion. “SMEs comprise the majority of Turkish companies, and we anticipate that, as productivity and competition are becoming a major concern, SME activities will drive the IT sector in the years to come,” said Kızıltan at TUBISAD. MOBILE NETWORKS: Outside of fibre-optic services, the highest growth potential in Turkey’s internet mar- ket lies in 3G and 4G-LTE services. The country’s “big three”mobileoperators–Turkcell,VodafoneandAvea, aTürkTelekomsubsidiary–eachreceivedgovernment licences to develop 3G networks in 2008. 3G services were rolled out commercially in July 2009, when Turk- cell and Vodafone launched services nationwide, with Avealaunchingin16provincialcentresthesamemonth. Turkeyhasseenasubstantialuptickin3Gadoptionsince itsmarketentrance,withsubscribershipgrowingfrom 49.3min2013to58.3mbytheendof2014,anincrease of 18.3%, according to the ICTA. 4G-LTE services, which offer significant potential to operators, investors and consumers alike given their faster speeds and smoother delivery, are currently in nascentstages.InMarch2015thetransportandcom- munications minister, Lütfi Elvan, announced a tender for4Gmobiledataservices,whichwasrecentlydelayed to August 26, 2015. Bids will be sought in a range of bandwidths, with an initial roll-out planned by the end of2015(seeanalysis).Turkcell,VodafoneandAveaare all expected to participate in the tenders. In terms of 5G, which has yet to reach many of the most advanced Western markets, Avea took the first step in Turkey by joining an international consortium creatingroadmapsfor5GnetworksthroughtheMobile OpportunisticTrafficOffloadingProject,fundedbythe EU Framework Programmes in November 2012. More- over, in July 2014 Türk Telekom decided to deploy new Alcatel-Lucent routers in three locations across Istan- bul,aswellasconsolidateitsexistingones,soastokeep up with the growing bandwidth demands of its resi- dential and business customers. E-COMMERCE: With internet usage and connection speeds rapidly increasing, e-commerce activities hold significant untapped potential for the Turkish IT sec- tor. TurkStat found that 30.8% of internet users aged 16-74 purchased goods or services on the internet in 2014, compared to 24.1% in 2013. Electronics and apparel are the most popular online products: accord- ing to TurkStat, 51.9% of web shoppers buy clothing and sporting goods, 24.9% buy electronic equipment, 27% buy household items and 26.8% travel products. E-commerceispoisedforhugeexpansioninthenext fewyears.TechwebsiteEcommerceEuropefoundthat in 2012, total business-to-consumer (B2C) e-sales reached$7.42bn(€5.59bn)inTurkey,anincreaseofover 50% on 2011, while a March 2013 report commis- sioned from Google by Boston Consulting Group esti- matedthatthecountry’sinterneteconomywouldgrow by 19% a year to 2017, on the back of technological developments, a young population and a rise in online shopping,reaching2.6%ofGDP,orTL64.3bn(€22.64bn). Research website yStats.com reports that private shopping clubs Markafoni.com and Trendyol.com rank amongthetoplocale-commercecompaniesinTurkey, while the largest player on the Turkish B2C e-com- mercemarketwasonlinemallHepsiburada.com(Turk- ishfor“everythingishere”),whichreportedsalesgrowth of50%y-o-yin2013andtotalsalesofTL1bn(€352.1m) in2014.Othernotableplayersincludeelectronicsretail- er TeknoSA and local online food delivery company Yemeksepeti (“food basket”), which was purchased by Berlin-based Delivery Hero for $589m in April 2015. Turkey’s most-visited e-commerce websites in 2013 were automotive marketplace Sahibinden.com and auction website Gittigidiyor.com, followed by Trendy- ol,Markafoni,Hepsiburada,andAmazon-styleretailers Limango.com and Morhipo.com. PIRACY & COUNTERFEITING: Turkey’s technology retailersarealsopoisedtoseesignificantgrowthinthe next few years, with Turkey’s Investment Support and Promotion Agency reporting that spending on hard- ware, software, IT services and telecoms services in Turkeyisexpectedtoreach$25bnby2016.ICTspend- ing is projected to grow at 7.4% a year between 2012 and2017,higherthantheworldaverage,duetoitslarge domestic market and under-tapped potential. Tech- nologymultinationalslikeXerox,Microsoft,Foxconnand Huaweiareopeningregionalofficesandinvestingheav- ilyinresearchanddevelopmentwithintheITsector(see Education & Research chapter). However, online piracy and product counterfeiting are major problems in Turkey’s IT sector. According to theBusinessAssociationtoStopCounterfeitingandPira- cy, Turkey is the second-largest counterfeit product market in the world after China, with 58% of Turkish 154 Call centres are a source of employment for thousands of young Turks in an increasingly tight workforce In 2014 some 30.8% of internet users in Turkey aged 16-74 purchased goods or services on the internet, compared to 24.1% in 2013. www.oxfordbusinessgroup.com/country/turkey
- 157. IT OVERVIEW consumers admittingto regularly purchasing pirated products. The Business Software Alliance estimates piracy costs the economy $526m each year. CounterfeitingactivitiesharmITretailsuppliersespe- cially in the printing and imaging segment, with as much as half of revenues from A4 printing machines lost to counterfeiting activities every year. Police have responded with recent crackdowns – in January 2014, for example, raids of several warehouses in Istanbul seized over 2000 counterfeit Xerox products. “Coun- terfeiting is hurting us a lot, because a significant por- tion of our income comes from back-end sales,” Burak Özer,generalmanageratXeroxTurkey,toldOBG.“Secu- rity-wise, police have been very cooperative, but until stronglegislationispassed,itishardtosuccessfullypros- ecute counterfeiters, and to prevent recidivism.” INTELLECTUALPROPERTY:Aftera2012reportbythe InternationalIntellectualPropertyAlliance(IIPA)placed Turkey on an international watch list for the third year, the government moved to enact new regulations pro- tectingintellectualproperty.InJuly2012,theDirectorate General of Copyright announced new revisions to the Law for Intellectual Property and Artworks, making sharinganddownloadingcopyrightedmaterialsacrim- inal offense, with the government planning to target the IP addresses of computers found to be breaching thelaw.Whenpiratedcontentisdetected,theISPsare issuedwarnings,andifthematerialisnotremoved,fines ofuptoTL50,000($17,605)canbeimposed.Although no official draft copyright bill has yet been published, thegovernmenthasconsultedwithlocalstakeholders, creating a draft proposal in September 2013 that has raised hopes among stakeholders. Thereisstillroomforimprovement.Inits2014report, the IIPA once again advised that Turkey be kept on the international watch list, arguing that “incremental but uneven progress” had been made in addressing pira- cy.Whilenotingthatenforcementagainstunauthorised software usage had improved – the industry brought 80civilandcriminalactionsin2013,upfrom60in2012 – the IIPA said the software piracy rate remained high at 62%, compared to a global average of 42%. CENSORSHIP:TürkTelecom,thecountry’slargest(and partly state-owned) operator, holds significant influ- enceoverthecountry’sinternetaccess.Allinternettraf- fic in Turkey passes through its infrastructure, giving it central control over online content. As Turkey moves closer towards EU accession, censorship has become a point of contention in recent years. Online censorship was introduced in 2007 under Law No. 5651 on the “Regulation of Publications on the Internet and Suppression of Crimes Committed by Means of Such Publications”. The law lists eight areas in which content can be censored: child pornography, obscenity, suicide, gambling, drugs, prostitution, dan- gerous goods and any material seen as disparaging Turkey’sfoundingfather,Atatürk.TheTIB,ICTAandpri- vate individuals can sue to block or shut down a site if there is sufficient evidence that it violates the law. Followingthislegislation,internationalmediareport- ed that as many as 20,000 websites had been blocked by2011.Thatyear,thegovernmentproposednewreg- ulations requiring ISPs to make state-supported cen- sorship software available to consumers, prompting civil protests that led the government to back down. However, censorship intensified in 2014. In the run- up to the country’s March municipal elections, the administration of President Recep Tayyip Erdoğan blockedTwitterandYouTube,promptingpublicprotests and international criticism. Although a constitutional court lifted the Twitter ban in April on grounds of free- dom of speech, YouTube remained blocked until June. ErdoğanlaterannouncedplanstoprosecuteTwitterfor tax evasion. As a result, according the Economic Poli- cy Research Foundation of Turkey, the country now ranks second after China for internet censorship. Further to this, in February 2014 the government passedlegislationgivingtheTIBtherighttoblockweb- sites accused of “privacy violations” without a court order,againsparkingpoliticalcontroversy.Thetensions between the government’s hostile actions towards leading tech companies and Turkey’s attractiveness as adestinationforforeigninvestmentwerefurtherhigh- lighted when Istanbul hosted the UN-backed Internet Governance Forum in September 2014, an annual dis- cussion of internet policy, at the same time as more than two dozen Twitter users were on trial for tweets considered critical of the government. OUTLOOK: While internet censorship and online pira- cy remain two major challenges to IT investment, the sector’s recent history of tremendous growth have helpeditretainitsattractivenessandlong-termpoten- tial. As operators rush to adopt the latest fibre-optic, 3G and 4G-LTE services, internet speeds are increas- ing and Turks are embracing the latest offerings in record numbers. Infrastructure investment by both domestic and foreign firms is on the rise, buoyed by demand from a young and tech-savvy population. Recent growth in e-commerce and online shopping also demonstrates the IT sector’s high potential and shouldcontinuetodrivedemandinto2015andbeyond. 155 THEREPORT Turkey 2015 Turkey has been on the international watch list for intellectual property rights for several years running As many as 20,000 websites had been blocked by the TIB in the four years following the 2007 passage of legislation on internet censorship. Turkey also blocked Twitter and YouTube in 2014, though this was later overruled by a constitutional court.
- 158. IT INTERVIEW Mehmet Nalbantoğlu,CEO, KoçSistem WhatfactorsaredrivingdemandforITservicesand infrastructure in the Turkish market? NALBANTOĞLU: Today Turkish companies, like their international counterparts, face several challenges suchasrisingcompetition,elevatedproductivityexpec- tations and a heightened focus on customer service. Firstofall,therehasbeenanoverallchangeintheway ITisperceivedamongbusinesses.Insteadofbeingseen as a costly one-time expenditure, IT is now seen as an investment in an evolving business tool. Second, the number of companies engaging IT services providers to help them harness the power of trending technolo- gies, such as the cloud, mobile platforms, big data and social media is growing. Third, complex internal IT sys- tems are being transformed into more standard ones that can be outsourced to specialists, freeing up more resources for core operations. Fourth, there has been an increase in demand for customisable, more value- added services from IT service providers. Lastly, acceleration in e-service projects in the pub- lic sector and the need for compliance with new reg- ulations has helped drive market growth in Turkey. Here, I would like to add some notes about the Turk- ish IT market, which had a 10% growth rate in the 2013/14 fiscal year. Market research predicts that in 2015, IT will continue its growth with an increasing acceleration through enhancements in data, cloud computing and value-added services. Services and devicescapableofmeetingcustomerdemandinthese areas will also gain importance. How would consolidation benefit IT providers? NALBANTOĞLU: Consolidation would have positive effects:itwouldhelptoaugmentthediversificationof servicesofferedbyITserviceproviders,leadingtomore customisedsolutionstomeetdiversecustomerexpec- tations and needs. The resulting skills specialisation would allow providers to meet customer demand in a more efficient and rapid manner. Consolidation would also help to develop consultancy and solution delivery processes, increase the number of projects in systems integration and help providers improve their compe- tence in developing end-to-end solutions. What steps have IT service providers taken to address customer concerns over data security? NALBANTOĞLU: They have enhanced their compe- tence to attain certifications, abide by all government regulations in this space and focus on implementing globalstandardsintotheirbusinessprocesses.Inaddi- tion,providershavebroadenedtheirknowledgeofthe increasing number of security threats, have informed their customers about possible attack areas and have increasedtheirportfolioofsecuritysolutionsandtech- nologies to combat the risks. Furthermore, they have developed different business models for effectively managing and offering security as a service. What sectors stand to gain the most from the increased adoption of IT solutions? NALBANTOĞLU: Despite the fact that the financial services industry is the largest consumer of IT servic- es,telecomsandthepublicsectorareamongtheindus- tries to gain the most from increased adoption of IT solutions.Duetothechallengingcompetitivestructure, financial corporations tend to differentiate their com- munication and service channels by utilising technol- ogytomeetcompetitivegoals.Datacentreoperations necessitate continuous modernisation, posing sub- stantial opportunities for IT providers. Big data analyt- ics, data mining, business intelligence and risk analysis tools are now being used extensively, and the financial sector is leading other industries in this. The telecoms industry is also undergoing a big transformation. TheyareinneedofsupportfromITcompaniesindevel- oping and sustaining the demand to expand their currenttelecommunicationservices,whilealsoinvest- ing in cloud-based services and applications. The public sector is actively engaged in e-service projects andinitiatives,providingopportunitiesforITproviders. 156 Intelligent solutions OBG talks to Mehmet Nalbantoğlu, CEO, KoçSistem www.oxfordbusinessgroup.com/country/turkey
- 159. 157 Health Health Transformation Programmedrives improvements Ban on smoking helping to reduce tobacco usage Private health groups continue to enter the market Government support behind growth in medical tourism
- 160. HEALTH OVERVIEW The ratioof hospital beds to patients is low by European standards Great strides have been made in Turkey’s health care sector since 2003, when the government launched its far-reaching Health Transformation Programme (HTP). The HTP eventually led to the establishment of universal health insurance, while opening services andprivatehospitalstothemajorityofTurks.Improve- mentsinpatientsatisfactionandhealthindicatorshave beensteady,withinfantandmaternalmortalitydeclin- ing while life expectancy rises. Ratios of hospital beds, doctors and nurses to patientsremainlowbyEuropeanstandards.Thereare also concerns that the national health insurance sys- tem lacks the necessary support for long-term sus- tainability,astheimport-dependentpharmaceuticals markethasshowntremendousgrowthinrecentyears, while patient numbers and hospital visits continue to rise. The private sector offers some solutions: public- private partnerships will see the number of doctors andhospitalbedsrise,andpatientcareimprove,while rapid expansion in medical tourism will bolster rev- enues and help the sector mature. As Turkey builds morefacilities,2015shouldseeacontinuationofthe positive trends that have already brought investors, professionals and new patients flocking. STRATEGY:TheMinistryofHealth(MoH)overseesall health policy, implementation of national strategies and direct provision of health care services in the country. It is also the sole provider of preventative health care services through a network of facilities, providing primary, secondary and specialised in- and out-patient services. The Strategic Plan of the MoH, which covered the period from 2010 to 2014, was reformulated under the legislative changes made in line with the HTP, and the new Strategic Plan, running from 2013 to 2017, features tenets of Health 2020, thenewEuropeanhealthpolicy,andalsoreflectsprin- ciples outlined in the Tallinn Charter. HEALTHTRANSFORMATIONPROGRAMME:In2003 the government embarked on a major reform initia- tive,theHTP,whichrapidlyexpandedhealthinsurance coverageandaccesstohealthcareservicesforallcit- izens, particularly the low-income segment. It also ledtotheestablishmentofafamilyphysicianscheme and, most importantly, a universal health insurance system,GenelSağlıkSigortası(GSS),whichcombined several social security systems under one umbrella, the Social Security Institute (SSI). In December 2014 the number of those insured under the GSS scheme stood at 11.4m, up from 9.3m in 2008. The programme has also led to quantifiable health care improvements, with increases in services, staff and facilities leading to greater patient satisfaction. Similarly to EU member countries, emergency health care services are also now being coordinated by 112 emergency call centres in major metropolitan areas, withplanstoexpandtovillagesandruralareas,bring- ingTurkeyclosertoEuropeanlevelsofhealthcareserv- ices. “Turkey has lifted its health sector remarkably in just 10 years. As a public citizen I can say it has been a 100% improvement,” Hayati Odabaşı, general man- ager of Türkiye Hastanesi, in Istanbul, told OBG. CHALLENGES: Under HTP reforms access to health care greatly increased, with an improvement in out- comes across all population segments, most notably in child and maternal health. Yet the sector still has plenty of room for improvement. A 2013 report from theOECDhighlightedseveralchallenges,recommend- ing Turkey develop robust systems to standardise and monitor the quality of care, encourage continuous professionaldevelopment,incorporatepatientviews, loosen the governance structure to allow flexible, localised health response and raise staff numbers. Recentyearshaveseensubstantialexpansioningov- ernmentspending,althoughtheproportionofhealth care spending to GDP remains low. According to the Turkish Statistical Institute (TurkStat), health expen- diture reached TL68.6bn (€24.2bn) in 2011, growing to TL74.2bn (€26.1bn) in 2012 and TL84.4bn (€29.7bn) in 2013. The proportion of total health expenditure to GDP was 5.6% in 2010, 5.3% 2011, The strategic plan for the sector, running from 2013 to 2017, features tenets of Health 2020, the new European health policy, and reflects principles outlined in the Tallinn Charter. 158 Smooth operators Indicators are improving under a far-reaching government programme www.oxfordbusinessgroup.com/country/turkey
- 161. HEALTH OVERVIEW 5.2%in2012and5.4%in2013.Whilethisisstillbelow the 2012OECD average of 9.3%, it is a positive step inthegovernment’splantobringTurkey’shealthcare system onto a par with other OECD nations. As of 2012publicfundingcomprised77%ofallhealthcare expenditure, according to TurkStat. SSI: Prior to the HTP, Turkey’s health care system was financed through five separate health insurance schemes, which were brought under one umbrella with the creation of the SSI in 2007. The SSI now acts as a monopsony on the purchas- ing side of health care services, with employees and employers making payments to the system, and patients receiving free hospital treatment and gov- ernment reimbursement for health care costs. Annu- al public health expenditure per capita grew by 281% between 2002 and 2012, reaching $435 per person, up from $114 in 2002, according to MoH data. Financial risk protection has also improved signifi- cantly; the share of households with catastrophic healthexpenditurewascutinhalfbetween2000and 2008, in part due to the expansion of health insur- ance coverage, which grew from 69.7% in 2002 to 99.5% in 2011. The percentage of people paying for medicine and therapy out-of-pocket decreased to 11% in 2011, from 32% in 2003, with significant dis- countsinmedicineandhospitalcostsimprovingaccess and equity across the country. As a result, the MoH reported an increase in general satisfaction with the health sector, which grew from 40% in 2003 to 75% in 2012. However, some stakeholders are concerned about the system’s long-term viability. “Sustainabili- ty is the key. The government has reduced payments for pharmaceutical products and not raised the price for service provision in recent years, and these chal- lenges must be addressed. Complementary private health insurance, for example, is much cheaper than current private health care policies,” Hasan Kuş, the secretary-general at Acıbadem University, told OBG. INDICATORS:HealthindicatorsinTurkeyhaveshown considerableimprovementsincetheimplementation of the HTP, with life expectancy reaching 75 in 2012 accordingtotheWorldBank,comparedto71in2002, a year before the programme’s launch. Othersignificanthealthindicatorsarenowonapar with many European nations. Infant mortality stood at 7 per 1000 live births in 2012, down from 32 in 2002, while maternal mortality dropped from 64 per 100,000 live births to 15. Rising immunisation rates and expansion of immunisation programmes con- tributedtothisdecline,accordingtotheWorldHealth Organisation (WHO), with the rate of full vaccination coverageincreasingfrom78%in2002to97%in2011. While basichealthindicatorshaveshownimprove- ment, Turkey, like many other nations, has seen an increaseintheincidenceoflifestyle-relateddiseases, including cardiovascular and tobacco-related dis- eases, diabetes and hypertension. TurkStat reported that circulatory diseases and malignant neoplasms, including many heart diseases, accounted for 59% of all deaths in Turkey in 2012, with 38% caused by cir- culatory diseases and 21% by malignant neoplasms, whiletheMoHreportedthattheprevalenceofhyper- tension, diabetes, cancer and cardiovascular disease stood at 13.2%, 6.8%, 0.6% and 4.4%, respectively. SMOKING BAN: Tobacco use has been of particular concern. In 2012 the Ministry of Labour and Social Security announced that the annual cost of smoking to Turkey’s economy was TL2.8bn (€986m), while additional expenses of TL7bn (€2.46bn) were attrib- uted to tobacco-related diseases. The current government has worked to reduce tobacco usage, extending a ban on smoking in pub- lic places to shopping malls, indoor cafés and bars in 2009. In January 2013 the government made it ille- gal to use hookahs in cafés, bars or restaurants, and in November 2013 announced plans to introduce smoking areas at outdoor cafés, as well as bans on smoking in public and private sector service vehicles. These programmes have seen considerable suc- cess; according to the Tobacco and Alcohol Market Regulatory Authority, the number of cigarettes con- sumed in Turkey dropped from 107.8bn in 2008 to 159 THEREPORT Turkey 2015 SOURCE:TUIK Total health expenditure, 2003-13 (TL bn) 0 20 40 60 80 100 20132012201120102009200820072006200520042003 Access to health care has greatly increased over the past decade While basic health indicators have improved, Turkey has seen a rise in the incidence of lifestyle-related diseases, including cardiovascular and tobacco-related diseases, diabetes and hypertension.
- 162. HEALTH OVERVIEW 91.7bn in2013, a 15% decline. Tobacco use among adults dropped to 27.1% in 2012, compared to 31.3% in2008,accordingtotheMoH.Thegovernmentisalso workingtoreduceandpreventchronicdiseases,estab- lishingprogrammesincludingtheCardiovascularDis- eases Prevention and Control Programme, and the Diabetes Prevention and Control Programme. MENTAL HEALTH: Mental health facilities have his- torically been underdeveloped in Turkey. Under the HTP, new policies and programmes have been intro- duced to mental health, and in 2011 a community- based model was implemented to replace psychiatric hospitals,withtheMoHannouncingplanstoincrease the number of community mental health centres across Turkey to 240 by 2015, up from 50 in 2011. However,4%ofTurksover15yearsoldsufferedfrom severedepressionandothermentalillnessasof2012, according to MoH data. With the World Bank report- ing that 67% of the population – or about 50m peo- ple – are between 15 and 64 years old, the number of citizens suffering from mental illness stands at a minimum of 2m, meaning there is much room for expansion of mental health services. PUBLIC HOSPITALS: The HTP has led to a rise in the number of hospital beds in Turkey. The MoH report- ed that the total number stood at 202,031 in 2013, upfrom165,465adecadeearlier.Thesectorhasalso drastically expanded in terms of staff numbers, with the HTP introducing a new financing system for pub- lic hospitals in 2004 that has increased the number of medical professionals in public hospitals. Public hospitals are financed from two sources: a line-itembudgetallocatedbytheMinistryofFinance, used mainly for base staff salaries and comprising under 20% of funding; and revolving funds financed by the SSI, which account for the remainder. Before the HTP was implemented, all budget execution deci- sions of public hospitals had to be approved by the MoH, with a high degree of centralisation restricting the use of revolving SSI funds for operating costs. AftertheadventoftheHTP,theMoH’srolefocused moreonstewardship,withaperformance-basedsup- plementarypaymentsystem(P4P)introducedin2004 toprovidepublichospitalswithincreasedfreedomover revolving fund management. Under the P4P scheme, 40% of SSI revenues can be distributed as supple- mentary payments to hospital staff. The scheme is intended to help hospitals address staff shortages by boosting physicians’ wages, with doctors now paid bonuses according to points they collect throughout the month from outpatient physical exams, inpatient procedures,testsanddiagnoses.Thishascontributed to a rise in staffing levels: the number of health pro- fessionals in Turkey – including physicians, midwives, pharmacistsanddentists–reached735,159in2013, up from 409,371 in 2003. The number of nurses rose to 139,544 in 2013, up from 74,483 a decade earlier, and the number of physicians increased to 133,775, up from 94,466, according to TurkStat. Despitethesegains,Turkeystillhassomeofthelow- estratiosofdoctors,nursesandhospitalbedspercapi- ta among OECD countries. It had 1.7 physicians per 1000 people in 2012, compared to the 2011 OECD average of 3.2. Similarly, there were only 2.49 nurses and midwives per 1000 people in 2012, much lower than the average figure among OECD countries of 8.7. There were 2.64 hospital beds per 1000 people in2013,alittleoverhalftheOECDaverageof4.8,and well below the WHO European region average of 6. PRIVATE HOSPITALS: Private hospitals are also expandingtomeetdemand.Regulationspassedinthe 2000s capped medical fees and physician numbers at private facilities, and introduced strict licensing requirements, but the sector has grown nonetheless. Largeprivatehealthgroups–includingUniversalHos- pitals Group, Acibadem Healthcare Group, Medicana Health Group and Medical Park – have entered the market in recent years, expanding outside Istanbul. ThenumberofprivatehospitalsinTurkeyincreased by nearly 100% between 2002 and 2012 to 541. Pri- vatehospitalscomprised36%ofallhospitalsin2012, compared to 23% in 2002. The proportion of private hospital beds has shown similarly dramatic growth, increasing from 12,387 beds, or just 8% of the total, to 35,767, or 18% of the total, in 2012. Thegovernmenthasbeenworkingwiththeprivate sectortoexpandthepublichealthoffering,andin2013 announced that it had awarded contracts worth a total of TL15.7bn (€5.5bn) for the construction of 15 hospitalsandahealthcentre.FirmsincludingTurkey’s Akfen,RönesansInşaat,GamaHolding,KayıInşaat,Dia, Emsas, Yıldızlar, Turkerler and YDA, along with Italy’s Astaldi,havebenefitted,withEmsasawardedaTL2.2bn (€775m) project for a new hospital in Istanbul, Dia awarded a TL1.9bn (€669m) contract for a hospital in Ankara, and a consortium including Astaldi and TurkerlerawardedacontractworthTL1.8bn(€634m). PHARMACEUTICALS: Turkey is one of the world’s fastest-growing pharmaceuticals markets. Domestic demanddrivestheindustry.ThePharmaceuticalsand Medical Devices Institution of Turkey reports that 160 The performance-based supplementary payment system has helped raise staffing levels in recent years The Health Transformation Programme has led to a rise in the number of hospital beds. The total stood at 202,031 in 2013, up from 165,465 a decade earlier. The sector has also drastically expanded in terms of staff numbers. www.oxfordbusinessgroup.com/country/turkey
- 163. HEALTH OVERVIEW consumption ofpharmaceuticals increased from 1.48bn boxes in 2007 to 1.89bn boxes in 2012, and Deloitte’s 2014 Global Life Sciences Outlook report- ed that pharmaceutical sales are set to grow by 8.8% between 2013 and 2017, to reach a total volume of around$19bn.However,theindustryisheavilydepend- ent on imports. Pharmaceutical imports accounted for10%ofTurkey’s2012accountdeficit.Thedomes- tic industry exported just $600m worth of medicine in 2012, with its total value rising at $4.1bn in 2012. AccordingtoMoHstatistics,genericdrugsaccount- edfor36%ofallpharmaceuticalexpendituresin2012, up from 32% in 2007, with 53% of pharmaceuticals consumed in Turkey falling under the generic label. Thecountry’sgenericdrugindustryholdsgreatpoten- tial, with the SSI often choosing to reimburse gener- ic drugs over costlier brand-name products. Yet even in the generics industry, stakeholders have cited low government expenditures as the biggest growth inhibitor. “Price legislation is a difficult challenge. Some companies have withdrawn products because it is too expensive to import,” Dr. Tuanna Unay, med- ical director at Pensa Pharma, told OBG. The majority of pharmaceuticals in Turkey are imported, and purchased in euros. The SSI reimburs- es pharmaceuticals using a euro rate that has been pegged at 1.95 to the lira for four years, but the lira’s recent depreciation has left the exchange rate at €1:TL2.9 as of April 2015. Under the government’s set rate, drug firms are losing up to 20% of revenues tocurrencyfluctuation,accordingtothePharmaceu- ticals Manufacturers Association of Turkey. MEDICAL TOURISM: Turkey is aggressively expand- ing and promoting its offering as a worldwide med- ical tourism destination, with significant growth seen in the segment in recent years. The country is run- ningamulti-prongedhealthtourismstrategydesigned toattractmoreforeignvisitorstoavarietyofsegments, includingmedical,spa,andhealthcareforelderlyand disabled people. Foreigners come to the country for medical care in dentistry, optometry, orthopedics, plastic surgery and hair restoration, and with Turkey having more than 1600 thermal springs, alternative medical tourism is also gaining popularity. In 2014, 496,000 foreigners received treatment in Turkishhospitals,accordingtoInvestinTurkey,a570% risefrom74,000patientsin2008.TheTurkishHealth- care Tourism Development Council announced that foreign visitors spent $4.6bn on health care in Turkey in 2013, drawn by high-quality facilities and services, multilingual staff, and its position at the crossroads ofEurope,AsiaandtheMiddleEast.Thecountry’srap- id growth in medical tourism led Deloitte to list it as one of the top 10 global health care destinations in its 2014 Global Life Sciences Outlook report. In 2012 the government introduced several leg- islative changes, including tax legislation offering a 50% deduction for health institutions serving foreign patients, in an effort to increase investment in new private facilities. It also announced in June 2013 that it will subsidise advertising activities of health insti- tutionsabroad,andplanstointroducetax-freehealth care zones specifically tailored for foreign patients, with the MoH aiming to increase the number of med- ical tourists to 2m by 2023. OUTLOOK: There is no doubt that the HTP has been a great success, with macroeconomic indicators – includinginfantandmaternalmortality,tobaccousage, and numbers of nurses, physicians and hospital beds – improving across the board. Rapidly rising demand forpharmaceuticals,andincreasingpatientnumbers and hospital visits, have raised questions about the sustainabilityoftheGSSscheme.Yetthegovernment has demonstrated its commitment to overcoming these obstacles through increased spending, public- private partnerships in the hospital segment and the expansion of medical tourism. These activities will continuetobolsterrevenuesanddrivegrowthin2015 and beyond, with foreign and domestic patients alike set to benefit from Turkey’s increasingly sophisticated,efficientandeffectivehealthcaresystem. 161 THEREPORT Turkey 2015 In 2014, 496,000 foreigners received treatment in Turkish hospitals, a 570% rise from 74,000 in 2008. Visitors spent $4.6bn on health care, attracted by high-quality facilities and multilingual staff. Insurance coverage has widened in recent years under the umbrella of the Social Security Institute Pharmaceutical sales are set to grow to $19bn by 2017
- 164. HEALTH INTERVIEW Hasan Ulusoy,Chairman, Nobel laç Whatcanbedonetoenhancetheperformanceof Turkey’spharmaceuticalsindustrybothdomestical- ly and in the wider region? ULUSOY: I would like to answer this question with an evaluation of the past 10 years. With the launch of the health care transformation programme a decade ago, medicalservicesbecamemoreeffectiveatreachingour population. Publicly owned treatment institutions are providing more efficient services under one roof, and patients are more easily accessing health care facili- ties and receiving services faster. Patients with access to the Social Security Institution, which covers almost half of the population, can easily obtain medications from commercial pharmacies. Although there may be inconveniences,thefamilypractitionersystemiswork- ing. In 2003 the average was two visits to health care institutions per person, whereas in 2013 this number exceeded the OECD average and quadrupled to eight. These are great accomplishments for our country. However, since resources have not been available to keep up with the sector’s financial growth, there have beentroublesomeconsequencesforpharmaceuticals suppliers.Todaythepricesofmostpharmaceuticalsare lower than they were 10 years ago. It is almost impos- sibletodrawupahealthybudgetasitisunknownwhen andbyhowmuchpriceswilldrop.Thediscountforpub- lic purchases is another problem. One of the hottest topics for debate is the euro exchange rate, which is the basis for our prices. The same parity has been utilised to determine prices for the past five years, and the governing exchange rate is stabilised at 1.9595, whereas it should have been updated four years ago pursuant to the relevant regulations. Today if what is necessary is done, prices should rise by almost 50%. What is the state of research and development (R&D) in Turkey, and what else can be done to increase support for R&D on pharmaceuticals? ULUSOY: Due to the previously mentioned reasons, it is becoming more and more difficult to allocate resources to R&D that is essential for the continued successofpharmaceuticalcompanies.Thissectorsuf- fered a great loss in 2014. This makes it more difficult for companies to make plans for the future. Despite thesechallenges,thereareseriousimprovementstak- ing place, as well as a shift in the government’s per- spective on R&D over the past year. In January 2015 Prime Minister Ahmet Davutoğlu announced an economic transformation programme in which two out of nine targets are related to health and allocating support for local pharmaceuticals pro- ducers. Regardless of the inconvenience, we are allo- cating approximately 5% of our turnover to R&D every year. Nowadays, we are aiming to develop biotechno- logical products for the first time in our country in col- laboration with government research institutes. I am lookingforwardtoannouncinggoodnewsonourcoun- try’s first biosimilar product in the near future. Whatisyouroutlookforthesectorin2015,andwhat challengesdothinkthepharmaceuticalsandwider health care sector will have to overcome? ULUSOY: I am concerned as to whether there will be solutions to the existing challenges in the industry. In order to keep the sector running, we need to export moreofourproducts.Weneedtobuildcapacitytodevel- opandmarketproductswithaddedvalue,andthiscan only be done through increasing the number of R&D initiatives. There are many examples from around the worldonwhichwecanmodelwhenbrainstormingnew strategies to boost the sector. Weknowthatinothercountriesconsistentsupport and incentives come mostly from the government. In this regard, we appreciate that our own government has prioritised the pharmaceuticals industry, albeit a bit late. The importance of pharmaceuticals and R&D inthesegmenthasfinallybeenacknowledged.Encour- agedbythisrecentprocess,Ihope2015willbeaturn- ingpointfortheindustryasawholeandthatthefocus willremainuninterruptedunderTurkey’s2023vision. 162 Feeling fit OBG talks to Hasan Ulusoy, Chairman, Nobel laç www.oxfordbusinessgroup.com/country/turkey
- 165. 163 Education & Research Majorgovernment investment in new incentives Target of 100,000 foreign students enrolled by 2023 School attainment lags behind OECD average National education budget up by $2.4bn in 2015 University enrolment for maths and sciences declining
- 166. EDUCATION OVERVIEW The governmentintroduced a new schooling system in 2012/13 Driven by government reforms, increased private sec- tor investment, and one of the largest young popula- tions in Europe, Turkey’s education sector has grown andmaturedimpressivelyoverthepastdecade.Asthe countrymovesforwardonahostofeducationtargets, including Vision 2023’s goal to reduce unemployment to 5%, macroeconomic fundamentals including litera- cy and enrolment have shown improvement. Howev- er,stakeholdershavehighlightedchallengestofurther improvement,includinglowenrolmentacrossthesec- ondaryandtertiarylevels,genderandregionaldispar- ities at the primary and secondary levels, and serious capacity constraints in the post-secondary segment. Thegovernmenthastakennote,successivelyincreas- ingitsannualeducationbudgeteachyearandlaunch- ingambitiousnewprojectsaimedatincreasingresearch anddevelopment(R&D)atpost-secondaryinstitutions. Asthecountryfocusesoncreatingthebesteducation opportunities for its backbone demographic, Turkey’s vastyoungpopulationispoisedtocapitaliseonagrow- ingandincreasinglyinclusiveeducationsystemthatwill improve employability and employment. SECTOROVERVIEW:EducationinTurkeyishighlycen- tralised and overseen by the Ministry of National Edu- cation (MoNE) at the primary and secondary levels, and the Council of Higher Education (YÖK) at the ter- tiary level. Central and provincial governments are responsible for staff and financial management, and education is largely publicly funded, although schools are permitted receive contributions from parents through school-parent associations. The government has enacted several sweeping reforms in partnership with international institutions overthepastdecade.TheBasicEducationProgramme of1997andtheSecondaryProject2006-11,wereboth launched in partnership with the World Bank, and the Master Implementation Plan, which ran from 2001 to 2005, included UN Children’s Fund projects. The ruling JusticeandDevelopmentParty’s(AKParty)education- al reform programme was a key component of the 2007-13NationalDevelopmentPlan.Itsettwokeypri- oritiesforeducationmodernisationandreform:increas- ing the responsiveness of education to demand, and enhancing quality. Progress has been steady: literacy rates increased from 91% in 2010 to 95.3% in 2013, andschoolingratioshaveincreasedatalllevelsofedu- cation, particularly at the post-secondary level. Today education in Turkey is steered by two key documents: the10thDevelopmentPlanrunningfrom2014to2018, whichtargetsimprovementstoprimaryeducation,and the Lifelong Learning Strategy Paper, which was pub- lished in 2009 and is geared toward the implementa- tion of the European Employment Strategy. The Vision 2023 economic development plan also aims to increase cooperation between the public and private sector in education, reduce unemployment to 5%, build up Turkey’s R&D capabilities, and expand the ICT sector, which will require substantial upgrades to the current education system, including more partici- pation from the private sector. Increased spending in education demonstrates the government’s commitment to improving the sector. In its 2015 budget, the government allocated $38bn to nationaleducation,anincreaseof$2.4bnonthe2014 total. However, challenges and shortfalls persist, most notablyinregionaldisparitiesandgenderinequalityat the primary and secondary levels, and participation, attainmentandemploymentinhighereducation.Turkey still falls short of several key Organisation for Econom- ic Cooperation and Development (OECD) indicators, according to the organisation’s 2015 “Education Poli- cyOutlook”report,butnewreformsandincreasedpri- vatesectorparticipationwillhelpaddresstheseissues. PRIMARY&SECONDARY:Inthe2012/13schoolyear the government introduced a new 4+4+4 schooling systeminanefforttoimprovelearningoutcomes.Five- year-olds begin school in September, with children enrolled in primary, junior high and secondary school for 12 years, compared to eight years previously. Pre- primary education for children three-to-five years of In its 2015 budget, the government allocated $38bn to national education, an increase of $2.4bn on the previous year’s total. The government has enacted several sweeping education reforms in partnership with international institutions over the past decade. 164 Walking the walk The government is investing heavily to achieve its education targets www.oxfordbusinessgroup.com/country/turkey
- 167. EDUCATION OVERVIEW age isvoluntary in Turkey. Government spending and reforms have made an impact on primary education. With the increase in the educational term, there has been a rise in the number of enrolments, with more than 16.2m students listed as attending primary, jun- ior secondary, secondary or vocational and technical secondary schools in 2015. TheMoNElisted26,972pre-primary,27,544primary, 16,969 junior high and 9061 secondary institutions operating in Turkey as of the 2014/15 school year, for atotalof80,546recognisedinstitutionsintheK-12seg- ment. Primary school enrolment reached 96.3% in 2014/15, with 96.04% of boys and 96.57% of girls enrolled in primary school, according to MoNE data. However,atthesecondarylevelthesenumbersdrop to 79.37%, with 79.46% of boys and 79.26% of girls enrolledinuppersecondaryeducation.Whilethisrep- resents a falling off from lower education enrolment levels, secondary education enrolment and retention rates have climbed strongly in recent years, up from 70.06%,70.77%and69.31%foroverall,maleandfemale students, respectively, in the 2012/13 academic year. Enrolment in upper secondary education is much higher in the western, central and northern provinces, including Ankara, than in the eastern and south-east- ernprovinces,indicatingchallengesforoutlyingregions in the distribution of resources and human capital. Inits2014progressreportonTurkey’sEUaccession, the European Commission noted the general increase in enrolment rates, especially in secondary education, though it said drop-out rates could not be monitored systematically. “Continued work is needed to increase attendance at all levels, especially for girls, as despite improvements, 61% of the working age population in 2013onlyhadlowersecondaryeducation(eightyears of schooling),” read the report. “The gender disparity remains considerable in some regions while the gen- dergapinsecondaryeducationcontinuestodecrease.” Absenteeismandschooldrop-outratesarenotpub- lishedofficially,butlocalNGOshavereportedhighlev- els of both, according to the European Commission, which recommended in its report that Turkey contin- uesstrengtheningitsmonitoringofschoolattendance and drop-out rates. The OECD reported in 2013 that only43%of25-34year-oldshadobtainedahighschool diploma, much lower than the OECD average of 82%. PRIVATESCHOOLS:Privateschoolscouldbeoneway to enhance educational offerings and create space in the public system. Private international educational institutions operate in Turkey under Article 5 of Law No.625,andhaveseennumbersandenrolmentrisein recent years. “The private education sector right now is where the private health care sector was in 2002. Todaylessthan4%ofK-12studentsareenrolledinpri- vate schools. We anticipate the government will con- tinue its reforms in supporting private involvement in education and this will lead the sector to expand and mature significantly as a result,” Övünç Okyay, senior associate at the Carlyle Group, told OBG. Asofthe2014/15educationalyear,therewere3490 formal private primary and secondary institutions in Turkey:1205primaryschools,1111juniorhighschools and 1174 secondary schools, employing a total of 144,917teachingstaff.Privateschoolsatalllevelshave become increasingly popular, with enrolment rising fromjust239,988inthe2008/09schoolyearto675,977 in 2014/15, according to MoNE statistics. CONTROVERSY:Praised for their international curric- ula, foreign-language teaching and high learning out- comes, private schools are nonetheless controversial inTurkey.Tuitionfeescanriseashighas$15,000annu- ally, and although they have proven enormously pop- ular with wealthier Turks, critics have argued that income disparity prevents equality of opportunity in a public-privatemodel,andthatsomeprivateschoolsare teachingconservativereligiouscurriculathatriskpoliti- cising the education system. However, the government is increasingly embracing private school expansion: in a 2011 MoNE report pre- pared for the EU, Turkey established an official target to boost the proportion of students attending private schools(atalllevelsofschooling)from2.75%asof2011 to 5%. However, while keen to expand the role of the private sector in education, this enthusiasm is not spread evenly across all segments. PREP SCHOOLS: Though there has been an increase inthenumberofformalprivateschoolsinrecentyears, by far the largest contribution to Turkey’s educational sectoraredershanes,preparatoryschoolsthatprovide supplementaryeducationtostudentsstudyingforthe Level Determination Examinations (SBS), a standard- isedtesttakenbeforeenteringhighschool,andthefor- mal University Entrance Exam. A recent report by the Union of Chamber and Com- modity Exchanges of Turkey found that there were 4055 firms offering private tutoring services in Turkey, and more than 1.2m students attending private tutor- ing courses in 2012. In 2000 there were only 1730 such schools tutoring 174,496 students. It is estimat- ed that there are more than 4000 firms operating pri- vate tutoring courses, with more than 1.2m students 165 THEREPORT Turkey 2015 Tuition fees at private primary and secondary schools can be as high as $15,000 annually The MoNE listed 26,972 pre-primary, 27,544 primary, 16,969 junior high and 9061 secondary institutions operating in Turkey as of the 2014/15 school year, for a total of 80,546 recognised institutions in the K-12 segment.
- 169. EDUCATION OVERVIEW undertaking studiesto help prepare them for univer- sity entrance examinations. These exams had traditionally driven growth in the prep school segment; however, the AK Party recently eliminated the SBS system, with high school admis- sions now determined by grade point averages. The government passed a bill seeking to close der- shanesinOctober2013,withtheprimeministeratthe time, Recep Tayyip Erdoğan, reaffirming the govern- ment’s intention to convert dershanes into private schools. The government argued that dershanes pro- vide unfair advantages to wealthier families, and are not overseen by the MoNE, leading to poor-quality instruction and outcomes at some institutions, while otherstakeholdersarguetheseschoolsarecomplemen- tary, supportive and necessary. Accordingtogovernmentplans,alldershaneswillbe closed as of the beginning of the 2015/16 academic yearinSeptember2015,withownerseitherhavingthe option of converting their establishments to full-serv- ice private schools or shutting their doors. POST-SECONDARY: Turkey’s post-secondary sector hasshownenormousgrowthoverthepastdecadeand offers untapped potential for private investment, although there is much room for improvement. While schools and enrolment have shown promising growth, capacity constraints are limiting expansion across the board, and addressing these challenges will be critical to sustainable long-term development. Therewere103state-fundeduniversitiesasof2015, according to YÖK, with 82 foundation or private non- profit colleges and universities. Notable among these are Boğaziçi University, the only university to make it tothetop200ofTimesHigherEducation’s“WorldUni- versity Rankings 2014-15” (at 199th place); the Istan- bulTechnicalUniversity,theonlyinthecountrywithits own nuclear research reactor; and the Middle East Technical University, a public institution in Ankara with more than 46,000 students. Alittleoverathirdof15-29-year-oldsinTurkeycon- tinuedtheirstudiesaftercompletinglower-secondary educationin2011/12,incontrastwiththeOECDaver- ageof68%,andalthoughtertiaryattainmentlevelshave shown a strong increase in recent years, they are still low compared to other OECD countries. The MoNE reported that 38.5% of the eligible population was enrolled in tertiary education during the 2012/13 schoolyear,withtheOECDreportingthattertiaryattain- ment is 19% for 25-34-year-olds in post-secondary degreesanddiplomas,comparedtotheOECDaverage of39%.Enrolmentratesfor15-19-year-oldsmorethan doubled from 2001 to 2011, from 30% to 64%, though this too sits below the OECD average of 84%. Capacity constraints are one of the biggest chal- lenges facing post-secondary expansion. Roughly 2m high school students sat the first round of university admission exams in early 2015, with just over 70% achieving a pass mark at the initial stage. While not all ofthemwillmoveontouniversity,orbeofferedplaces, the rising numbers of students seeking a place at ter- tiaryinstitutionswillputpressureonthepublicsystem. Private or foundation universities and colleges are the most obvious solution to capacity problems. They wereprohibitedinTurkeyuntilaconstitutionalamend- ment in 1981 opened the door to private institutions, providedtheywerenon-profit,adequatelyendowedand thatthestandardofteachingandresearchwasnolow- er than that of public universities. Private universities will be critical for post-second- ary growth in Turkey. According to a British Council report, 96% of the 4186 students polled across 81 provinces think overseas education will help them secureprofessionaljobs,while86%ofstudentssurveyed citedcostasthebiggestimpedimenttostudyingabroad. TuitionfeesatTurkey’sprivateuniversitiesareoftenhigh- er than those of Western and North American univer- sities,accordingtothereport.Retainingthesefeeswill be important for long-term post-secondary growth. EMPLOYMENT:Employmentisanotherchallengefac- ingpost-secondarystudentsandgraduates.Turkeyhas experiencedaseriousschool-industrymismatchinstu- dents’ training and skills, with many tertiary graduates remaining out of the job market, according to a 2012 167 THEREPORT Turkey 2015 There were 103 state-funded universities as of 2015 According to government plans, all prep schools will be closed as of the beginning of the 2015/16 academic year, with owners having the option of either converting their establishments to full-service private schools or shutting their doors. SOURCE:Turksat Net secondary enrolment, 2007-15 (%) 0 16 32 48 64 80 2014/152013/142012/132011/122010/112009/102008/092007/08
- 170. EDUCATION OVERVIEW report titled“Education as an Investment in Turkey’s Human Capital: A Work in Progress”, published by the Eurasian Journal of Business and Economics. Althoughemploymentratesforpeoplewithsecond- ary and tertiary levels of education are lower than the OECD average, at 62% and 76%, compared to 74% and 83%, respectively, they are similar for those who have not attained secondary education: 51% compared to the OECD average of 55%. Nonetheless, tertiary edu- cationstillincreasesthelikelihoodofemployment,with the OECD reporting that the employment rate among 25-64 year-olds with tertiary qualification was 14% higherthanforthosewithonlyanupper-secondaryedu- cation.Atertiaryeducationalsomakesasignificantdif- ferencetoanindividual’swages:adultsaged25-64with a tertiary education earn 49% more than those with only secondary education, and those without a post- secondaryeducationearnanaverageof31%lessthan their peers with secondary and post-secondary non- tertiary qualifications. GOVERNMENTFUNDING:Increased funding for R&D activities is a government priority under Vision 2023, andTurkey’spost-secondaryinstitutionshavebenefit- tedasaresult.Thegovernmentprovidessupportinthe form of grants and loans for post-secondary students, as well as the Industrial Thesis programme, which pro- vides funding for up to 3.5 years for theses involving technologyandenvironmentaladaptation,inpartner- ship with local universities. As of November 2012, 280,460 undergraduate, 1316 masters and 274 PhD students had received YÖK grants, with an additional 463,965 having received loans from the council. Technology will play an increasingly important role inTurkisheducationasthegovernmentrampsupefforts to expand R&D and grows its ICT sector. In 2010 the governmentlaunchedtheMovementtoIncreaseOppor- tunitiesandTechnology(FATİH),oneofthelargestedu- cation projects in Turkey’s history, which aims to bring tablet computers and liquid-crystal display smart- boardstosome40,000schoolsand570,000classrooms. FATİH is designed to help students pursue technol- ogy-based careers, and is expected to create an $8bn market for IT firms over the next three years. In 2012 the government allocated TL803m (€282.7m) to the FATİH project, with an additional TL1.4bn (€492.9m) earmarked for 2013. As of mid-2014, 732,000 tablet computers had been distributed at schools across Turkey, with plans to distribute an additional 350,000 interactive boards by mid-2015. FOREIGN STUDENTS: Although facing serious capac- ityconstraintsacrossthepost-secondarysector,Turkey is nonetheless moving to mature and internationalise its university landscape by capturing a larger share of the global higher education market. Turkey’s Student Selection and Placement Centre reportedasubstantialincreaseinthenumberofinter- national students in recent years, hitting 43,251 in the 2012/13 academic year, a 38% increase over 31,170 in2011/12.Internationalstudentnumbershavegrown by 179.4% in less than 10 years, with just 15,481 inter- national students reported in the 2005/06 academic year. The government hopes to bump this number to 100,000 by 2023, making Turkey one of the largest global exporters of higher education. “Internationalisation is a critical and vital aspect for the development of the education sector in Turkey. It extendsbeyondrecruitinginternationalstudents,how- ever. In fact, international student recruitment is the first step in the much larger plan to turn Turkey into a globalhubforeducation,”YaseminKilitAklar,theinter- nationalrelationscoordinatoratIstanbulŞehirUniver- sity (ŞEHİR), told OBG. ŞEHİR has seen its number of internationalstudents,currentlytotallingmorethan400, double each year since the university opened in 2010 with just 26 international students. However, Hande Baltci, ŞEHİR’s international rela- tions office manager, points to a YÖK cap on foreign student numbers as one challenge facing growth. AccordingtothecurrentYÖKbylaw,thenumberofinter- nationalstudentsatauniversityinTurkeycannotexceed 50% of the number of Turkish students. “This is a sig- nificant limitation for the university, and will become more of an issue as time progresses,” Baltci said. OUTLOOK: While the government has shown strong commitment to advancing economic development through education reforms, much work remains to be done. Turkey still lags behind its OECD counterparts acrossanumberofsignificanteducationindicators,with stakeholderscomplainingthatregionaldisparitiesand gender inequality are impeding primary- and second- ary-level achievement in the country. While the post- secondaryeducationlandscapehasshownsignificant growthoverthepreviousdecade,capacityconstraints andpost-graduateemploymentcontinuetoposeprob- lems for Turkish students. However, increased government investment and stronggrowthinprivatesectoractivitieswillhelpmeet demand, with international students and ambitious technology projects propelling the sector to become a regional leader and global producer of both educa- tion services and educated professionals in Turkey. 168 The government hopes to increase the number of international university students to 100,000 in 2015 In 2010 the government launched FATİH, which aims to bring tablet computers and liquid-crystal display smartboards to 40,000 schools and 570,000 classrooms. According to the current YÖK bylaw, the number of international students at a university in Turkey cannot exceed 50% of the number of Turkish students. www.oxfordbusinessgroup.com/country/turkey
- 171. RESEARCH INTERVIEW Turgut Şenol,General Manager, Teknopark stanbul How do current incentives for companies located in technoparks foster innovation, and what addi- tional incentives are needed? ŞENOL: There are a number of incentives for compa- nies located in technoparks. They do not have to pay incometaxes,allresearch-basedproductionisexempt from corporate taxes and, finally, software companies do not have to pay value-added tax. This third condi- tionisveryimportant,butsomewhatdangerous.While software firms are an integral part of the economy, there is a tendency, because of this last incentive, to fill parks with them at the expense of other types of businesses. In fact, software companies currently account for 80% of firms in technoparks. Operators need to work towards diversifying this mix. Thatsaid,itismisleadingtothinkthatincentivesare the only ingredients needed in creating effective and successfultechnoparks.Inmyopinion,therearealready enoughincentives.Instead,weshouldbethinkingabout how to create the best possible environment for col- laboration and innovation so that companies can get the maximum value-added results from participating. How do you do this? You become very precise with respect to the types of companies that you admit. For instance, you must look to attract different industries that may benefit from increased contact with each other,ortrytofindspecificsectorsthatmaygainknowl- edgefromthepark’sacademicpartnerships.Aboveall, the companies must be able to conduct research, be interested in innovative practices and products, and know how to collaborate with other businesses. Turkey’s technoparks also need to focus on creating linkswithparksabroadsothatdomesticsynergiescan turn into international ones. Parks across East Asia, specificallyChina,haveshowninterestinworkingwith Turkish institutions. All this is to say that, while incen- tives are important and can open up opportunities for companies,goodtechnoparksshouldnotrelysolelyon providing more incentives. The primary goal should be tocreatethenecessaryenvironmentforcollaboration. Whatistheimportanceofincreasingresearchand development (R&D) for the Turkish economy? ŞENOL:R&DspendingasapercentageofGDPisaround 0.8%.ThisismuchlowerthaninmanyEUcountries;for example, Germany spends almost 3% of its GDP on innovation-related activities. If Turkey wants to move out of the middle-income set of countries, it must increase its R&D spending. Our goal is to reach 3% of GDP by 2023, which is still too low. In 10 years, the bar will have been raised significantly and the more devel- oped countries will not be waiting for us to catch up. While increasing this percent is important for many reasons, the primary one is that the Turkish economy needs to move up the value chain. We are a country of more than 75m people with the potential to develop world-classindustries.Unfortunately,however,manyof thesectorsinwhichwecouldhaveacompetitiveadvan- tage are far less developed than in our Western Euro- pean neighbours, such as Germany. For instance, our automotive manufacturing industry is highly devel- oped, but we still do not have a brand of our own. If we weretoinvestinR&Danddevelopthecapacitytobuild a Turkish car, we would have immediate and preferen- tial access to a huge consumer population. The white goods sector is another one in which we are very strong, but need to make improvements. Our star brands are leaders abroad, but we must import a substantial amount of intermediate goods from low- er-incomecountries.IfTurkeyweretofocusonthesup- plychainsofthesecompanies,moreoftheincomefrom the sales of final products would stay in-country. Thesearenottheonlyindustriesthatwouldgainfrom more R&D spending. Turkey needs to develop indus- tries across the board, from aerospace and engineer- ingtolifesciencesandenergy.Weneedtodevelopour ownindustrialcapabilities,changingthenatureofpro- duction to favour higher-margin products and real, exportable Turkish brands. This will have a positive impact on the balance of trade and will help the coun- trytomoveintothehigh-incomebracketofcountries. 169 THEREPORT Turkey 2015 Setting sights on value OBG talks to Turgut Şenol, General Manager, Teknopark stanbul
- 172. RESEARCH OVERVIEW The governmentaims to increase employment in the research sector As Turkey tackles its Vision 2023 research and devel- opment (R&D) goals, the time is right for private firms and entrepreneurs to expand activities in a burgeon- ing research sector that will expand considerably over the next eight years. Although R&D activities still com- prise a minor share of total GDP, growth in the sector is poised to soar in 2015 as the government invests heavilyinnewincentiveprogrammes,highereducation funding and partnerships with the private sector. Thecountry’sincreasinglysophisticatedpost-second- ary segment has expanded research output as private universities begin to access state and private sector fundingforR&Dactivities,whileahostofforeignmulti- nationals have recently entered the Turkish market, lured by a highly incentivised business environment andfar-reachinggovernmentsupportfornewresearch activities. As the private sector ramps up its involve- mentinhighereducationandITactivities,theresearch sector is expected to show promising returns in 2015. OVERVIEW & GROWTH: The Turkish research system is centralised and led by the Supreme Council for Sci- enceandTechnology(BTYK),undertheauspicesofthe Ministry of Science, Industry and Technology. The Sci- entific and Technological Research Council of Turkey (TÜB TAK) is responsible for improving the research environment, providing scientific advice to the gov- ernmentandactingastheBTYK’ssecretariat.TÜB TAK also maintains the National Researcher Information Systemdatabase.Researchpolicyimperativesareout- lined in the government’s National Science, Technolo- gy and Innovation Strategy 2011-16. The strategy aims to create more output from existing research capaci- ty, enhance the country’s needs-oriented research capacity, and increase employment in the sector. MIDDLE-INCOME TRAP: Turkey’s R&D targets under the Vision 2023 national development plan, as agreed to by the BTYK in 2011, are to increase the number of full-time equivalent (FTE) researchers to 300,000, increase the number of private sector FTE researchers to 180,000, and increase R&D expenditure to 3% of GDP, or $60bn, of which two-thirds will be supplied by the private sector. As a rapidly expanding emerging economy, Turkey is at risk of falling into the middle- income trap, in which high growth over a short period ends with years, or even decades, of economic stag- nation. Heavy spending in R&D has historically helped countries avoid falling into the middle-income trap. EXPENDITURE: According to the results of the “R&D Activities Survey 2013”, published in November 2014 by the Turkish Statistical Institute (TurkStat), gross domestic expenditure on R&D (GERD) increased by 13.4%comparedto2012,reaching$14.8bn.Theshare of GERD in GDP was 0.95% in 2013, up from 0.92% in 2012, and nearly double the 0.48% in 2002, indicating Turkey is making progress on Vision 2023’s 3% target. The country is also moving towards more private sec- torinvolvement:48.9%ofR&Dexpenditurewasfinanced by the private sector in 2013, up from 46.8% in 2012. Therewasaslightdeclineinstatefunding,withthegov- ernment’s share down from 28.2% in 2012 to 26.6%, according to TurkStat. National sources and interna- tional funding comprised 3.3% and 0.8%, respectively. The total number of FTE R&D personnel reached 112,969in2013,welluponthe2012totalof105,000. Ofthepersonnelemployedin2013,morethanhalfwere engaged by the private sector, around 36% in higher education, and just under 11% by the government. Regional disparities have long plagued education and research in Turkey, but R&D activities have increased dramaticallyinTurkey’shistoricallyunder-represented southernregion,indicatingthatgovernmentincentive programmes for these regions have been successful. According to TurkStat, R&D expenditure in 2013 was the highest in West Anatolia at 27.5%, followed by East Marmara at 21.3%, and Istanbul at 20.3%. Deloitte’s“Researcher’sReport2014:Turkey”found thatTurkishresearchandinnovationisbenefittingfrom EU funding, the main instrument being the EU’s Sev- enth Framework Programme for Research and Devel- opment.ThetotalnumberofTurkishparticipantsinthe One of Turkey’s R&D targets under the Vision 2023 national development plan is to increase R&D expenditure to 3% of GDP, or $60bn, of which two-thirds will be supplied by the private sector. As the private sector ramps up its involvement in higher education and IT activities, the research sector is expected to show promising returns in 2015. 170 Showing promise Government incentives and increased private sector participation are helping to boost the sector www.oxfordbusinessgroup.com/country/turkey
- 173. RESEARCH OVERVIEW programmeis879,outof5982applicants,withTurkey’s participants receivingmore than €145.1m. There has alsobeenasteadyflowofpatentapplications,indicat- ing continued end-product activity in R&D, with the state-run Turkish Patent Institute reporting in 2014 that 4529 domestic patent applications were lodged in 2013, almost exactly the same number as in 2012. Unfortunately,TurkeystillfallsbelowmanyEUcoun- tries for R&D activities. On its Innovation Union score- board for 2014, the European Commission (EC) described Turkey as a modest innovator, though one that was improving at a steady rate. The EC ranked Turkey 32nd out of 34 European countries for innova- tion performance, assessed under three main cate- gories: open, excellent and active research systems; finance and support; and human resources. A WAY TO GO: With R&D GDP intensity growing by an averageof5.9%annuallybetween2000and2012,the country’sR&Dexpendituresareprojectedtohit1.48% of GDP by 2020, according to Deloitte, although this will still sit below the projected EU intensity in 2020, andmeansthecountrywilllikelyfallshortofits3%tar- get in 2023, with the report stating that a significant catch-up is required if Turkey is to achieve the objec- tives set for the coming eight years. Turkey ranked 54th on the Global Innovation Index 2014, a composite indicator that ranks countries in termsoftheirinnovationoutputsandenvironment,ris- ing14rungsontheladderfrom2013.Althoughitfared betterthanotherrapid-growthmarketssuchasIndone- sia (87th), the Philippines (100th) and Egypt (99th), it was behind China (29th) and Russia (49th). However, it managed to leapfrog both Brazil (61st) and India (76th), which it had trailed just one year before. INCENTIVES: Government incentives and spending are acting as one of the biggest growth drivers in the researchsector.Turkey’sR&Dlawprovidesspecialincen- tivesforR&Dactivitiesinprivatecompanies,onthestip- ulation that a minimum of 50 personnel be employed in the company’s R&D arm. The incentives within the law, which will be in effect until 2024, also include a 100%deductionofR&Dexpenditurefromthetaxbase if the number of researchers exceeds 500. Other incentives include income tax exemption for R&D employees, a 50% exemption from social securi- ty premiums over five years, stamp duty exemption for applicabledocuments,taxdeductionsforcertainfunds granted by public and international bodies, and tech- no-initiative capital for scientists, to a maximum of TL100,000 (€35,210) per project. TÜB TAK and the Turkish Technology Development Foundation (TTGV) compensate or fund R&D-related expenses as well as capital loans for R&D projects in Turkey.Eligibleprojectsincludeconceptdevelopment, technologicalandfeasibilityresearch,laboratorystud- ies,designandsketchingstudies,prototypeproduction, construction of pilot facilities, test production, patent and licence studies, and activities concerning the removal of post-sale problems from product design. In addition, the TTGV offers long-term, interest-free loans for technology development, renewable energy production, energy efficiency improvement and envi- ronmental impact-reduction projects. The TTGV cov- ers a maximum of 50% of project costs with maximum budgets of $1m, with companies given four years, includingaone-yeargraceperiod,topaybacktheloan. In early April 2015 the prime minister, Ahmet Davu- toğlu, announced plans to provide funding support to R&D-basedindustrialinvestmentsthroughtheTurkish Development Bank. The plan was part of a broader economicsupportpackageaimedatencouraginginvest- mentandwhatDavutoğludescribedas“high-technol- ogy, intensive production and employment”. The new package also envisions tax incentives for companiesmakinginvestmentsinadvancedtechnolo- gies, which would support firms involved in many R&D fields,withhigherlevelsoftaxbreaksbeingofferedfor investors operating in areas away from the main pop- ulation and business hubs. HIGHER EDUCATION: The contribution of post-sec- ondary institutes to the R&D sector has been signifi- cant. According to a 2013 joint research evaluation event with Elsevier and Hacettepe University, Turkey 171 THEREPORT Turkey 2015 R&D expenditures are projected to hit 1.48% of GDP by 2020 Turkey ranked 54th on the Global Innovation Index 2014, a composite indicator that ranks countries in terms of their innovation environment and outputs, rising 14 rungs on the ladder from 2013. Total R&D expenditure, 2001-13 (TL bn) SOURCE:Turksat 0 3 6 9 12 15 2013201220112010200920082007200620052004200320022001
- 174. RESEARCH OVERVIEW ranked 18thout of the world’s top-20 countries for research output, and has already established itself as a global competitor in research. STRONGSUIT:Turkeyhasbeenidentifiedasbeingpar- ticularly strong in chemistry, engineering and medical research,withthecountrybecomingincreasinglyinter- disciplinary in the scientific sector. However, accord- ing to a 2012 Atilim University report titled “A look at the Turkish higher education system from the institu- tionaleconomicspointofview”,“Theemergenceofmul- tidisciplinary fields such as biotechnology, molecular biology and technology studies, has created an urgent needforreorganisationofdepartmentsinuniversities, and a move towards ‘problem-based learning’ ”, rather than independent innovation. Perhaps of more concern for the future of R&D in some of these fields is data from the Higher Board of EducationreleasedinMarch2015showingasteepfall in the number of students opting to undertake sci- ence-based courses at university. From 2010 to 2014 there was a decline in the levels of enrolment in math- ematics, biology, chemistry and physics. NEW FUNDING: The government has been moving to enhance its support of R&D activities at universities in recent years. In 2011 TÜB TAK launched a promising funding programme called the Technology Transfer Offices Support Programme, targeting R&D develop- ment at post-secondary institutions. Under the pro- gramme, various institutions, both public and private, are eligible to receive TL1m (€352,100) annually for five-and10-yearperiods,tobeusedforlong-termsci- enceandtechnologyresearchprojectsandprogrammes. Private universities, which are eligible to receive up to 50% of operating costs from the government, but seldom get more than 1-3%, have benefitted from the technology transfer programme. Boğaziçi University, IstanbulŞehirUniversity(ŞEHİR)andMiddleEastTech- nicalUniversityhaveeachreceivedTÜBİTAKfundingin recentyears.ŞEHİRwasamongtwoprivateinstitutions selectedtoreceivetechnologytransferfundingin2013, andisalsooneofonlytwothathavebeengrantedstate support twice within three years. “These developments are promising, but we see a need for the government to synchronise services. Increasing R&D activities is one of the most important agendaswehave,buttheindustryisstillyoungandmore cooperation is necessary,” Yasemin Kilit Aklar, interna- tional relations coordinator at ŞEHİR, told OBG. PRIVATE SPENDING: While government support is important, increased collaboration between universi- ties and the private sector will be a crucial component of R&D expansion. Indeed, increased private sector partnershipsareakeytargetinthegovernment’splans to expand R&D activities at the post-secondary level. The Public Research Grant Committee was created to increase the number of scientists and researchers workinginTurkey,whiletheEngineeringResearchGrant Committee funds national scientists working on engi- neeringandarchitectureprojects.TheTechnologyand Innovation Funding Programmes Directorate helps industryandacademiacollaborateintechnologydevel- opment and innovation activities across five sectors: manufacturing, electronics, metallurgy and chemistry, biotechnology, and information technology. The past five years have also seen foreign multina- tionals increase their participation in post-secondary R&Dactivities.InFebruary2015SouthKoreanelectron- ics firm Samsung announced that it had established an R&D centre in Turkey in cooperation with local tech companySemper-Tech.Thecentre,locatedatTeknopark Istanbul, will carry out research and development of next-generation wireless technologies, with a partic- ular focus on health care and educational software. TECHNOPARKS:Oftenlocatednearuniversities,tech- nology development zones (TDZs), commonly termed technoparks, have been set up to attract investment inhigh-technologyfieldswhileincreasingcollaboration between private firms and university research depart- ments. There are currently 59 TDZs in Turkey, of which 40areoperationalandafurther19areunderconstruc- tion. These parks host 2500 companies, while 148 domesticandinternationalcompanieshaveactiveR&D centres in Turkey. The concentration of TDZs in Istan- bul and Ankara has made these cities preferred desti- nations for ICT investment, with a significant part of foreign direct investment initiated by European and North American companies. Teknopark Istanbul, the largest in Turkey, opened its first phase in August 2013 on the Asian side of Istan- bul. The $4bn technopark will house the R&D labs of about1000localandforeigncompaniesfromtechnol- ogy-intensivesectors.Thefirstphaseopenedwith100 companies,10oftheminternational,acrossa650,000- sq-metre space that will eventually accommodate 30,000employeesengagedinR&Dprojectsforstrate- gic sectors including defence, ICT, electronics, energy, biotechnology,aviationandaerospace.TeknoparkIstan- bulisexpectedtogenerate$5bn-7bnofannualincome when it becomes fully operational in 2023. WithinitsTDZnetworktheTurkishgovernmentoffers a number of incentives to attract new investment. 172 Of the R&D personnel employed in 2013, more than half were engaged in the private sector Under TÜBİTAK’s Technology Transfer Offices Support Programme, various institutions, both public and private, are eligible to receive €352,100 annually for five- and 10-year periods, to be used for long-term science and technology research. There are currently 59 technology development zones in Turkey, of which 40 are operational and a further 19 are under construction. The concentration of zones in Istanbul and Ankara has made these cities preferred destinations for ICT investment. www.oxfordbusinessgroup.com/country/turkey
- 175. RESEARCH OVERVIEW Offices comeready to rent, with infrastructure facili- ties already provided, while profits derived from soft- waredevelopmentandR&Dactivitiesareexemptfrom corporate tax until 2024. Deliveries of application software produced exclu- sively in TDZs are exempt from value-added tax, and wagesforresearchersinTDZsareexemptfromincome taxoverthesameperiod.Thegovernmentwillalsopay 50% of the employer’s share of social security premi- ums for five years, according to Invest in Turkey. DEFENCE:Turkey’s push to enhance defence self-suf- ficiencywillalsoservetoboostR&Dactivityandinvest- ments. At present, Turkey is able to meet roughly 60% of its own defence equipment and technology needs, a figure that rises to 90% if co-production or technol- ogy transfer agreements or projects undertaken as part of international consortiums are factored in. According to the Undersecretariat for Defence Indus- tries,Turkeynowonlydirectlyimports10%ofitsdefence equipmentrequirements.TheTurkishgovernmenthas saiditwantstobecompletelyself-reliantforitsdefence technologyneedsby2023,thecentenaryofthefound- ing of the Turkish Republic. However, much of the stock in Turkey’s defence inventory is ageing, with new technology required to maintain the military’s cutting edge. Turkey is in the process of developing its first indigenous main battle tanksandunmannedaircraft,andisalsoaimingtopro- duceitsownfront-linefighteraircraft.Alloftheseproj- ects will require further investment in R&D capacity, In mid-March 2015 electronics specialist Aselsan, Turkey’slargestdefencecompany,inaugurateda$157m facility in Gölbaşı outside of Ankara, specialising in radars and electronic warfare suites for land, air, naval, space and unmanned platforms. Aselsan accounts for one-third of all defence-based R&D activity in Turkey. Both the government and TÜBİTAK are expanding theirinvestmentsindefenceresearch,fundingaseries of projects in the defence industry and space sector, withmuchofthisdevelopmenttakingplaceoutsideof Ankara, which is fast becoming a hub for military- focused R&D activities. Also in March 2015, the gov- ernment announced plans to establish a qualified defence-industrysiteinKazan,closetoAnkara,tohouse hundreds of local and foreign defence and aviation companies.Constructiononthe$6bnprojectwillbegin laterin2015,withanestimated30,000peopleexpect- edtobeemployedacrossa3m-sq-metresitewhenthe facility opens for business. TELECOMS:Yearsofintensecompetitioninanincreas- inglychallengingmarkethaveledTurkey’smobileoper- ators to make major investments in R&D activities. Today the country’s big three mobile operators – Turk- cell, Vodafone and Avea – have each established their own R&D centres in Turkey, developing in-house tech- nology to improve smartphone affordability, as well as increasingly fast internet technologies in the 4G and fibre-optic internet segments. Turkcell’sR&Darm,TurkcellTeknoloji,wasestablished in 2006, later launching Turkey’s first domestically designed smartphone in September 2013. Turkcell’s T-series phones offer all the standard features of an importedsmartphoneathalfthepriceofforeignmod- els. Vodafone’s mobile wallet money transfer service launchedinOctober2012,andmajorfinancialinstitu- tions including Garanti Bank, Akbank and Yapı Kredi are among those that have adopted the service. Avea opened the country’s first government-certi- fied R&D facility in 2010, aiming to increase its com- petitiveness through new in-house technologies. AveaLabs Customer Experience Centre opened to the publicinFebruary2012,showcasingprojectsine-serv- ices, digital publishing and health care apps, amongst other services. The centre is currently working on nine projects with companies including Linxa, Intellica, Havooz, Bayt and Crenno, and produced its first batch of graduates in 2013. Avea also has a line of in-house, low-cost smartphones called inTouch. Oksijen, Vodafone Turkey’s R&D arm, was acquired in 2000, and is currently involved in software design for both export and domestic consumption, with the goal of eventually exporting Turkish technology to Sil- iconValley.InFebruary2015Vodafoneannouncedthat its Silicon Valley incubator, Vodafone Zon, would be cooperating with Oksijen for the mutual transfer of technology and know-how. With the planned rollout of4Gmobilephoneservicesinthelatterpartof2015, it is likely that R&D activity and investments in the telecommunicationsandICTsegmentswillgainfurther momentum that year and beyond. OUTLOOK:Althoughthereismuchworktobedonein bringing Turkey up to EU standards in terms of R&D spending and outputs, the country’s R&D sector is nonetheless showing promising growth, with Turkey hoping to avoid the middle-income trap by increasing itsresearchexpenditureandinnovation.Ledbystrong post-secondary output, government incentives and funding, and increased private sector participation, Turkey’sfledglingR&Decosystemwillcontinuetodevel- ophumancapital,enhanceeducationandbolsterover- all economic development well into 2015 and beyond. 173 THEREPORT Turkey 2015 Far-reaching government support for new research activities is attracting multinational companies Turkey is able to meet roughly 60% of its own defence equipment and technology needs, a figure that rises to 90% if co-production or technology transfer agreements or projects undertaken as part of international consortiums are factored in. With the planned rollout of 4G mobile phone services in the latter part of 2015, it is likely that R&D activity and investments in the telecommunications and ICT segments will gain further momentum that year and beyond.
- 177. 175 Tourism Growth slows butrecord visitor numbers continue Government initiatives keep pace to meet 2023 goals Istanbul New Airport set to further boost capacity MICE and halal segments diversify tourist offering International hoteliers invest in high-profile openings
- 178. TOURISM OVERVIEW Turkey’s 7200km of coastline includes 352 Blue Flag beaches WithaselectionofarchaeologicalruinstorivalItalyand Greece, 7200 km of scenic coastline, Istanbul’s unique blend of rich heritage and cosmopolitan culture and an advantageous location at the crux of three conti- nents, Turkey’s diverse visitor offerings have seen its popularity grow rapidly over the past decade in the process of becoming a world-leading tourist hotspot. In the past 10 years the number of visitors to Turkey hasgrown115.7%,goingfrom17.08min2004to2014 in 36.84m. The country ranks as the world’s sixth most populartouristdestination,afterFrance,theUS,Spain, China and Italy: it is within striking distance of achiev- ingitsVision2023goaltorisetofifthplaceworldwide. IntermsofsourcemarketsGermanyremainsthenum- ber one tourist market for Turkey, recording 5.2m vis- itorsin2014.GermanyiscloselyfollowedbyRussia,with 4.48m visitors, and the UK with 2.6m visitors. While visitor arrival numbers continue to grow year- on-year, 2014 saw a slight dip in the rate of growth. A record 36.84m foreign arrivals were recorded in 2014. While an increase of 5.52% on the 34.91m arrivals in 2013, this marked a slight slowdown on the 9.84% increase between 2012 and 2013. Even still, the coun- tryissettomeetmanyofitsVision2023tourismgoals, including welcoming 50m visitors annually. With new hotelandtransportinfrastructure,aswellasincreased government promotion of various tourism sub-seg- ments, the sector is expected to remain healthy. Challenges persist, however. Visitor spending has remainedflatinrecentyears,stillrecoveringfromadip in 2012. Furthermore, Istanbul’s diminished occupan- cy rates during low season have some hoteliers con- cernedaboutafloodofnewroomsover-saturatingthe market. But with a new airport set to greatly expand capacity, anticipated growth in meetings, incentives, conferences and exhibitions (MICE) tourism, and rap- idlyexpandingmedical,halalandcruiseshipsegments, the sector appears to have a promising future. BY THE NUMBERS: The tourism industry’s governing body, the Ministry of Culture and Tourism (MoCT), has played an increasingly proactive role in the sector’s development since President Recep Tayyip Erdoğan – then prime minister – launched the Vision 2023 eco- nomic development plan in 2007. Among the targets set out for achievement before its 2023 centenary, Turkey aims to attract 50m visitors annually, become thefifth-largesttouristdestinationworldwideandgen- erate $50bn in annual revenue. Visitor arrivals have more than doubled in the past decade,withexpansiondrivenbyincreasedgovernment initiativestogrowtheindustry,arushofforeigninvest- ment and international brands entering the market and a well-developed flight network located at the crossroadsofthreecontinents.Acomprehensiverange ofmarketsub-segmentsisrepresentedwithinthecoun- try: from the traditional sun, sand and sea segment to medical to MICE, halal and cruise ship tourism. Turkey’s tourism sector has much to offer, including 11UNESCOWorldHeritagesites,352BlueFlagbeach- es, 19 Blue Flag marinas and 20 international-stan- dard golf courses. Tourism revenues have been rising steadilyasaresultofincreasedinternationalattention and a sizeable domestic tourist base. While Istanbul is still the most popular port of entry to the country, the southern region has seen an enor- mous uptake in visitor arrivals since 2011. In 2013 Erdoğan announced that the government had invest- ed TL13bn (€4.58bn) in Antalya’s development since 2002,anddatafromtheMoCTfoundthatAntalyawas the most popular city for tourist arrivals in 2012 and 2013, and a close second behind Istanbul in 2014. The cityreported11.50marrivalsin2014,justbehindIstan- bul’s 11.82m. The south-western city of Muğla ranked third, with 3m visitors recorded in 2014. PROGRESS: Given its progress in attracting tourists, Turkey’sgoalofattaining50mtouristsannuallyby2023 iscertainlyfeasible:infact,theWorldTourismandTrav- el Council (WTTC) projects that by 2023, the country will attract 50.77m visitors annually. Turkey’s Tourism Investor’s Association (TYD) gave an even brighter The number of visitors to Turkey has more than doubled in the past 10 years, with 2014 witnessing a record 36.84m foreign arrivals. As part of its Vision 2023 development plan, the government aims to attract 50m visitors annually by 2023. While Istanbul was the country’s most popular entry point in 2014, welcoming 11.82m visitors, the city of Antalya was a close second with 11.50m visitors. 176 Diverse appeal An increasingly versatile tourist offering is ensuring continued sector growth www.oxfordbusinessgroup.com/country/turkey
- 179. TOURISM OVERVIEW forecast,predictingthatthecountrywillreach60mvis- itor arrivalsby 2023. “50m visitors is something we could achieve before 2023,” Kerem Demircan, general manager at Midtown Hotel, told OBG. “With a growing supplyofhotelroomsandtheconstructionofthenew Istanbul airport, there is no doubt we can achieve and even surpass these figures by 2023.” INCOME: Tourism income has grown impressively in recent years. The WTTC expects tourism spending will grow by 4.6% annually to reach TL131.8bn (€46.4bn), or 4.7% of GDP, by 2025. WTTC figures include income generated from hotels, travel agents, airlines and oth- erpassengertransportationservices,aswellasrestau- rant and leisure industries supported by tourists. Visitors in the leisure segment dominate tourism, with Turkey offering a diverse array of historical and archaeologicalsites,aswellasamplevarietyinclimate andculture.TheWTTCfoundthatleisuretravelspend- ing generated 84.4% of direct travel and tourism GDP in 2014, compared to 15.6% for business travel spend- ing. WTTC projects 2015’s figures to increase by 2.7% for leisure, and 1.4% for business, reaching TL129bn (€45.4bn) and TL23.6bn (€8.3bn), respectively. Turkey’s domestic segment is also growing; Turk- Stat’sfiguresforthefirstthreequartersof2014showed a25%increaseintotalexpenditurebydomestictourists, compared to the same period in 2013. The WTTC proj- ects domestic travel spending to grow by 1.7% in 2015 to reach TL68.3bn (€24.1bn), and rise by 4.2% annu- ally to reach TL103.1bn (€36.3bn) in 2025. Despite good overall growth, operators have high- lighted low visitor spend as a challenge for the indus- try. Foreign visitors accounted for 80.97% of foreign tourism revenues in 2014, with Turkish citizens living abroad comprising the remainder. However, while vis- itingTurkishcitizensspentanaverageof$1130percapi- ta, foreign visitor spend averaged just $775. “The problem is that expenditures per person for foreigners have not risen in several years, and are not expectedtoincreasesoon,whichweasanindustryneed to work on,” Tugrul Temel, development director at Hilton Worldwide’s Istanbul office, told OBG. However,theindustry’scontributiontoemployment isincreasing;theWTTCreportsthattravelandtourism generated 580,000 jobs directly in 2014 (2.2% of total employment); and the number of jobs generated is expected to rise by 5.9% in 2015. By 2025, the WTTC expects tourism to generate 915,000 jobs in Turkey. HOTELS:Turkey’shotelcapacityissettogrowsubstan- tially. Invest in Turkey reported in 2013 that licensed hotelfacilitiesincreased48%between2005and2012, with the country now offering guests 715,692 beds. The TYD projects the country will need to add an addi- tional 1.5m hotel rooms by 2023 to meet demand. According to the Istanbul Convention & Visitors Bureau (ICVB), Istanbul offers 94,000 hotel beds and over 170 four- and five-star hotels. Significant poten- tial exists outside of Istanbul; while the city is often viewed as the largest tourism city in Turkey, its hotel numbersfallshortofAntalya,whichoffersover400,000 guest beds and 260 five-star hotels, according to the International Congress and Convention Association (ICCA).Izmir,withjust29,000beds,ishopingtoexpand its offerings via increased foreign hotelier investment, according to Invest in Turkey. There is some concern from Istanbul’s operators, however, that with low sea- sonoccupancyratesaveraging25-35%,aninfluxofnew hotel rooms in the city will over-saturate the market. “During the high season there is probably space for more hotels, but with Istanbul Atatürk Airport already atfullcapacity,supplyisthesameformanymorehotel rooms.You’respreadingthesameamountofbutterover a larger piece of toast. High season premium is need- ed to compensate for the low season, when we’re all fighting over the same slice,” Massimilliano Zanardi, generalmanageroftheRitz-CarltonIstanbul,toldOBG. Resorts are becoming increasingly popular; while ownershipofsummerresidencesiscommonfordomes- tic tourists, a rise in disposable income domestically is leadingfamiliestochooselarge,all-inclusiveresortsfor summer holidays, signalling significant investment potential. The example of Bodrum, where Swissôtel Resort and Nikki Beach Resort are opening shortly (in June2015andspring2016,respectively),demonstrates the market potential for international investors. Turkey’s hotel offerings include 165 chains, 15% of which are international brands, according to Invest in Turkey. Hotel beds are expected to greatly increase on thebackofnewforeigninvestment,especiallyinIstan- bul, where new offerings from Hilton, Mondrian and Sheraton are opening in 2015. Internationally brand- ed hotels are in shorter supply outside of Istanbul and Ankara,signifyingfurtherinvestmentopportunitiesfor international operators (See analysis). MICE: Business tourism holds significant potential in Turkey, and Istanbul is becoming a high-profile MICE tourism destination, with national carrier Turkish Air- linesofferingover239directdestinationflightsbetween Istanbul and five continents, and an additional 300 internationalairlinesservingtwomajorairportsonthe European and Asian sides of the city. Along with every othersegment,MICEactivitiesareexpectedtoexpand evenfurtherwiththeopeningoftheIstanbulNewAir- port, which will be the world’s largest and offer an 177 THEREPORT Turkey 2015 SOURCE:TUIK Tourism sector income, 2004-14 (bn $) 0 7 14 21 28 35 20142013201220112010200920082007200620052004 Overall income from tourism has grown impressively in recent years, and is expected to reach €46.4bn by 2025. Nonetheless, concerns remain about the declining expenditure rates of foreign visitors, who have consistently spent less than domestic tourists in recent years.
- 181. TOURISM OVERVIEW annual capacityof 90m passengers when it opens in 2017. Capacity is eventually expected to rise to 150m. “MICE is a rising star, and the most productive area oftourismatthemoment.Thereistremendouspoten- tial in the MICE segment, as evidenced by recent con- struction of exhibition halls and conference centres in Istanbul and elsewhere,” said Demircan. Ina2014reportbytheICCA,Istanbulwastheeighth- mostpopularconferencedestinationworldwide,host- ing 146 international meetings in 2013. The city can accommodate events of up to 30,000 people, accord- ing to the Istanbul CVB, with offerings including seven purpose-builtconventioncentres,threeexhibitioncen- tres, and a large selection of palaces, waterfront ven- ues, and convention hotels. OutsideofIstanbul,MICEtourismhasroomforgrowth, and an increasing number of first- and second-tier citiesareseeingnewconstructionandrenovationproj- ects catering to the MICE segment. Antalya is one such city. In November 2014, when Antalyahostedthe53rdICCACongress,ICCAPresident Arnaldo Nadone noted in his programme notes that “21stcenturyAntalyaisreinventingitselfasatopqual- ity, modern and international conference destination, building on its tremendous success over recent years in the leisure tourism industry.” Izmir is also making strides in increasing its MICE activities,jumpingmorethan100placesinICCA’sinter- national convention cities ranking. The new Izmir Fair ExhibitionCentreopenedin2014,featuring80,000sq metresofspace,withtheexistingexhibitioncentreset to be converted into a smaller 24,000-sq-metre con- ference centre and mixed-use development. The Izmir International Fair, Turkey’s oldest trade show, is set to celebrateits85thanniversaryin2016,andattracts3m visitors annually, including 40,000 foreign visitors. At nearby Kuşadası, the 43,000-sq-metre Ephesus Convention Centre opened in August 2013. Business travellers have the added touristic draw of the ruins of Ephesus, currently under consideration to become Turkey’s 12th UNESCO World Heritage site. Other UNESCO sites in Turkey include the archaeological site of Troy, Göreme National Park, the rock sites of Cap- padocia and the Neolithic site of Çatalhöyük, with evi- dence of human activity dating back to 7200 BC. HALAL: Halal tourism is a rapidly expanding segment worldwide, with the industry expected to reach a val- ue of $160bn by 2017. Designed for Muslim families and business travellers who abide by sharia rules, the segment offers hotels with separate swimming pools and beaches for women and men, halal-certified food and kitchens, and non-alcoholic beverages. Muslim touroperatorsmayalsoprovidepork-andalcohol-free flight options, facilities with prayer announcements and religious broadcast TV options. Turkey’s touristic offerings, adaptable hospitality industry, and proximity to Arab countries have made it asignificantplayerinthehalaltourismmarket;inMarch 2015, Turkey took second place in the MasterCard- CrescentRating Global Muslim Travel Index. Evaluated on attentiveness to the needs of Muslim travellers, includingthepresenceandaccessibilityofhalalrestau- rants and the provision of prayer rooms in airports, malls, and hotels, the survey ranked Turkey ahead of the UAE, Qatar, Saudi Arabia, Singapore and Morocco. A 2014 survey by the Mediterranean Union of Hotel Owners reported that there were 75 halal-friendly hotels currently operating in Turkey. Muslim-friendly offeringsincludetheCapriceThermalPalace,theAdenya Beach Resort & Hotel, the Karya Hotel and the Şah Inn Paradise,andaremainlylocatedinthesouthern,Aegean, north-western and Black Sea regions. HEALTH: With a highly skilled, multilingual workforce andrelativelylowequipmentandHRcosts,Turkey’smed- ical tourism segment holds formidable potential for theindustry.In2014,496,000foreignersreceivedtreat- mentinTurkishhospitals,accordingtoInvestinTurkey. The Ministry of Health (MoH) expects health-related tourism to grow to $20bn by 2023, serving 2m inter- national patients. The government has been working hard to promote investment in the sector, offering incentivestoprovidersandlaunchingaworldwidemar- keting campaign to attract more patients. In2013theMoHbeganinvestinginstate-runresearch hospitals, focusing on core areas that are expected to rise in international popularity over the next decade. In 2014 the ministry also launched a campaign enti- tled“Turkey:RightChoiceforyourLife,”promotingthe most popular segments of Turkey’s medical tourism industry abroad: cosmetic surgery, orthopaedics, car- diology and ophthalmology. Booklets in a variety of languages, including English, French, Spanish and Arabic will be distributed to air- line passengers, espousing the benefits of medical tourism in Turkey, as well as offering information on accredited health institutions and the services they provide. The MoH also plans to launch as many as 20 new websites to promote medical tourism, according to Invest in Turkey. The campaign aims to increase Turkey’s health tourism target of $5.6bn to $10bn by 2018, and to compete with other leading medical 179 THEREPORT Turkey 2015 The Ministry of Health is pursuing a promotion campaign to grow medical tourism to $20bn by 2023 The meetings, incentives, conferences and exhibitions segment is thriving thanks to new venue openings in Istanbul, Kuşadaşı and Izmir. The 2014 International Congress and Convention Association ranked Turkey as the eighth most popular destination for conferences and conventions worldwide. Turkey is well placed to profit from the growing halal tourism segment. Evaluated on factors such as the presence and accessibility of halal restaurants and the provision of prayer rooms in airports, malls and hotels, the country took second place in a 2015 Muslim travel index.
- 182. TOURISM OVERVIEW tourism destinations,including Dubai, Thailand, India and Singapore (See Health chapter). CRUISE SHIPS: Cruise ship tourism holds significant potentialforTurkey,andincreasingactivitiesinthesea tourismsegmenthasbeenlistedasapriorityintheVision 2023 tourism master plan. The Mediterranean region is ranked as the second- largestcruisemarketgloballyaftertheCaribbean.AJuly 2013 report by the International Association of Mar- itime Economists (IAME) found that cruise operators deploy 25% of their vessels with a capacity of 29.5m bed-days to the Mediterranean region, with activities expected to increase in the coming years. The Izmir Chamber of Trade (IZTO) moved to create a Union of Turkish Cruise Ship Ports in 2012, identify- ing 13 port cities that hold significant potential for cruise ship growth. Ports in Istanbul, Kuşadası, Izmir andMarmarisarethemostpopularcruisedestinations inTurkey,withKuşadası,Bodrum,andMarmarisallhost- ing specifically designated cruise ship terminals. In 2012 the Anatolia News Agency reported that passenger numbers in Turkey grew by 276% between 2002 and 2011. The industry has grown by 10% annu- ally,with1623shipscarrying2.2mpassengersinTurkey in2011.Long-termdemandisexpectedtogrow,espe- ciallywithagrowingsegmentofTurkishtouristschoos- ing cruise ship holidays departing domestically. ThePortofIstanbulisthelargestcruiseportinTurkey in terms of traffic. Ideally located on the Bosphorous strait – the only sea passage into Black Sea countries – Istanbul is in an advantageous position to increase its role as a regional hub, with cruise line operators increasingly looking to Romania, Bulgaria, Russia and Georgia for future market expansion. However, cruise shipgrowthinIstanbulisslightlylowerthantheregion- alaverageof13%,accordingtotheIAMEreport,which suggested Istanbul could increase its current market shareifitimprovedportcongestionandcapacityissues. Kuşadasıisalsopoisedtoseecruiseactivitiesexpand. TheMoTreportedKuşadasıwelcomed563,817passen- gers in 2012, many drawn by the ancient ruins of Eph- esusnearby.RoyalCaribbeanCruiseLinesownsa27.5% stake in the port, and the line planned 44 cruise ships for Kuşadası in 2014, with the port receiving over 700,000 cruise ship passengers. OUTLOOK: Tourism growth remained strong in 2014, withrisingvisitorarrivalsinAntalya,Istanbul,andregion- al cities expected to drive hotel and operator expan- sion well into 2023. Although visitor spending and capacity issues pertaining to the new airport and ris- inginfluxofhotelroomsremain,thegovernmentislob- bying hard to increase foreign investment, grow the industry nationwide, and increase visitor spending. Withallmajorsub-segments–especiallyMICE,med- ical,halal,andcruiseshiptourism–forecasttorisesub- stantially in the coming years, Turkish tourism’s inter- national standing and contribution to its domestic economywillimprovesignificantlyintheyearstocome. 180 Following national sector trends, the cruise ship segment has witnessed substantial growth. The segment has grown by 10% annually since 2002, with 1623 ships carrying 2.2m passengers in 2011.
- 183. TOURISM ANALYSIS A spateof high-end hotel offerings will enter the market in 2015-16 New infrastructure and investment will be critical to reachingtourismtargetsasTurkeybarrelstowardsits Vision 2023 goals, including welcoming 50m visitors andearning$50bnintourismrevenuesannually.Hote- liers in Istanbul, the country’s largest city, are invest- ing heavily in new offerings, with thousands of new rooms set to enter the market in 2015. More signifi- cantly,thegovernmentismovingtoincreaseitstrans- portation capacity through a series of infrastructure upgrades,includingconstructionoftheIstanbulNew Airport, which will be the world’s largest commercial air transport hub and offer capacity for 150m trav- ellers when all stages of construction are complete. But the largest potential for infrastructure invest- mentactuallyexistsoutsideofIstanbul,onthenation’s coastlines, where hoteliers and resort operators are rushing to set up shop along the Aegean Sea to the west,theBlackSeatothenorthandtheMediterranean Sea in the south, as well as in second-tier urban cen- tres.Withgovernmentincentiveandpromotionactiv- itiesatanall-timehigh,thefuturelooksbrightforthe Turkey’s tourism infrastructure. REBOUND: Although negatively impacted by the 2008 economic crisis, Turkey’s tourism sector has rebounded in recent years, with the number of hotel facilities growing by 48% between 2007 and 2012, according to the Investment Support and Promotion Agency(InvestinTurkey).Todaythecountryoffersvis- itors 715,692 beds and 2800 hotels. The majority of these are located in the southern city of Antalya, a longstanding tourism hotspot offer- ingover400,000bedsand260five-starhotels.Istan- bul offers 94,000 beds across 1320 establishments, while Muğla and Izmir hold 90,000 and 29,000 beds, respectively. Turkey’s Tourism Investors Association (TYD) projects visitor numbers to rise to 60m annu- allyby2023,wellsurpassingVision2023’starget.The TYD anticipates that the sector will require at least 1.5mnewhotelbeds,$24bninprivateinvestment,and $15bn in government support to reach this target. Within Turkey there are 165 chain hotels, with inter- nationally branded facilities comprising 15% of the total. Hilton International’s portfolio is the largest in the segment, offering 22 facilities spread across 15 cities, with a further 23 under development. Hilton International are followed by Intercontinental Group with 16 hotels, Anemon Hotels (16), Best Western International (15), Dedeman Hotels (14), and Crystal Hotels Resorts and Spa (11). Others, including Accor HotelsTurkey,RixosHotels,WydhamHotelsandMar- riott, also have a presence in Turkey. “Withinthelastdecade,thegovernmenthasrecog- nisedTurkey’spotentialtoattracttourisminvestment, andhasbeenquiteproactiveindevelopingtheindus- try,” Tugrul Temel, development director at Hilton International in Istanbul, told OBG. “We continue to hear positive sentiment from the market.” GOVERNMENT INCENTIVES: There are a number of government support and incentive schemes for tourism operators in Turkey. The main legislation cov- ering incentives for the tourism industry is Law No. 2634, offering a host of benefits to investors, includ- ing loans, public land allocation, provision of commu- nication facilities, reduced utilities rates and funding for up to 15% of investments over 20 years, supplied bytheTourismDevelopmentFund.LawNo.1319pro- videsincomeandcorporatetaxexemptionsfortourism entitieswithintheirfirstfiveyearsofoperation,while private institutions such as EXIM Bank provide loans to tourism promotion and travel agencies in Turkey. The Ministry of Culture and Tourism (MoCT) has allocated significant funds to tourism investment, reporting that infrastructure funding to provinces andmunicipalitiesfortourismdevelopmentincreased by 425% between 2002 and 2012 to reach TL129m (€45.42) in 2012. According to the data gathered by MediterraneanTouristHoteliersAssociation(AKTOB), 107newtourismprojectsreceivedgovernmentincen- tives worth more than TL1.4bn (€492.94m) in the first three months of 2013 alone. Of these, 38% are Spurred by the ongoing development of the Istanbul New Airport, Istanbul’s hotel capacity will continue to increase. However, the largest potential exists outside of Istanbul, where government incentives are driving touristic growth in the Aegean, Mediterranean and Black Sea regions. 181 THEREPORT Turkey 2015 It is anticipated that 1.5m new hotel beds, $24bn in private investment and $15bn in government support are required to meet Turkey’s Vision 2023 tourism targets. Making room Rising visitor numbers have prompted a rush of international hoteliers
- 184. TOURISM ANALYSIS three-star, 36%four-star, and 13% five-star hotels, with 38% located in Antalya and 12% in Istanbul. Inadditiontophysicalinfrastructure,e-government offerings are also aimed at improving tourism serv- ices. In January 2015 the government implemented the e-visa system, in which visitors should apply for a tourist visa online for $20 before arriving in Turkey, as a means to eliminating the waiting times to get a visa on arrival. Applications for a new e-visa can be madefromuptothreemonthsbeforedepartureuntil 24hoursbeforetravel,andcruiseshippassengersstay- ing less than 72 hours will not need a visa. ISTANBUL: Istanbul is set to benefit most from upcominginfrastructureupgrades.Thecityhas20,000 hotel rooms entering the market by the end of 2015, according to the International Congress and Conven- tion Association (ICCA). Hotel openings for 2015 are off to a luxurious start: SoHo House opened its doors in March, with 87 rooms in total, including 17 mez- zanines and one apartment, followed by the St. Reg- is Hotel in the high-end Nişantaşı neighbourhood, with 118 rooms and suites. Raffles Istanbul opened in the fall of 2014 at the Zorlu Centre, boasting 181 rooms and suites in a mixed-use development. Hiltoninparticularhasshownaggressiveinvestment inIstanbul’shotelindustryoverthepastseveralyears. The Hilton Bomonti, the city’s largest hotel, opened inJanuary2014intheŞişlineighbourhoodandoffers 829 rooms and 12,000 sq metres of event space. The HiltonIstanbulKozyatağıConferenceCentreandSpa, offering 320 rooms, opened in late 2014. “We regard Istanbul as a city with many opportunities, and with offerings across all segments of the tourism sector – from mid-market to luxury,” said Temel. The Hilton Garden Inn Istanbul opened in January 2015, with 126 guest rooms within a mixed-use retail space, and the Hampton by Hilton Dolapdere, open- ing in 2016, will offer a further 170 rooms in central Istanbul.InIzmir,DoubletreebyHiltonIzmir-Alsancak involvesa$1mrefurbishmentoftheexistingYıldızhan Hotel, bringing total room numbers to 115, while the Hilton Garden Inn Izmir Bayraklı will offer 182 rooms and eight suites when it opens in 2016. Other proj- ects in the pipeline include a Park Inn by Ataturk Air- port, and a Fairmont, due to open in 2016. THIRD AIRPORT: Ongoing infrastructure develop- ment and government investment will help Istanbul’s operators increase their activities. Building for the much anticipated third Istanbul airport is underway, with an ultimate capacity of 150m travellers, which wouldmakeitthelargestairportintheworld.Thenew airport’s first phase is scheduled to be complete in 2017, with an initial capacity of 90m. The airport will be near the Black Sea coast on Istanbul’sEuropeanside,graduallyreplacingtheexist- ingAtatürkAirportandprovidingmuch-neededextra capacity for national carrier Turkish Airlines. Consult- ing firm Arup is currently overseeing a master plan with the Turkish consortium of Cengiz, Mapa, Limak, Kolin and Kalyon, who won a concession to build and operate the airport for 25 years in May 2013. OUTSIDE ISTANBUL: With the majority of arrivals and visitors flocking to destinations outside of Istan- bul,coastalregionsinthesouthholdsignificantpoten- tial for infrastructure investment. In its Vision 2023 tourism master plan, the MoCT identified the Mediterranean and Aegean regions as a focal area for increased government investment in infrastructure. The Mediterranean-Aegean Tourism Infrastructure Coastal Management Project was cre- ated as a result, with plans to implement a number ofinfrastructureprojectsaimedatimprovingpotable water, sewage, waste treatment, and disposal facili- ties along 2000 km of coastline between the cities of Antalya and Içel by 2023. The region also falls within thegovernment’s“highincentive”zone,withincreased tax exemptions, government land allocations, and other benefits on offer to developers in the area. The private sector has taken note, with Top Hotel Projects reporting that 16 new resorts offering 6000 newbedsopenedalongtheMediterraneancoastdur- ing 2014, including the 501-room Nirvana Lagoon VillasandSuitesinKemer,andthe533-roomRegnum Carya Golf & Spa Resort in Belek. On the Aegean Coast, Bodrum’s recently added offeringsincludetheSwissôtelResortBodrumBeach, a66-roombeachfrontpropertyopeninginTurgutreis in June 2015, while its Bodrum Hill urban resort will open in 2016 with 65 rooms and 35 private resi- dences. Nikki Beach’s Bodrum development will span 40,000 sq metres and offer 57 private suites and vil- las when it opens in the spring of 2016. Further north, Hilton is set to open the 147-room HamptonbyHiltoninKocaeli,oneofthecountry’smost affluent cities, in 2016. Temel said the chain intends to continue to expand beyond Istanbul in the coming years.“WebelievethereisfurtherpotentialintheTurk- ishmarket.EveryyearTurkeyattractsrecordnumbers of visitor arrivals, and we see this trend continuing into the future,” he said. “The country has many resources and tools underpinning its momentum.” 182 With a spate of hotel openings imminent, Istanbul is expected to continue to grow as a tourist attraction The 2000 km of coastline between Antalya and Içel has been targeted as a “high incentive” zone, with increased tax exemptions and government land allocations. In 2014 the private sector responded with 16 new resorts offering 6000 new beds, and further high-profile openings are scheduled for 2015-16. www.oxfordbusinessgroup.com/country/turkey
- 185. 183 Tax Income tax ratecalculated on a progressive basis Better coordination needed for policy implementation Efforts under way to boost voluntary tax compliance Taxes on employment could harm investment prospects
- 186. TAX OVERVIEW Efforts arebeing made to encourage voluntary compliance Tax systems have a high level of impact on econom- ic development. One of the topics criticised in Turkey is the failure to use tax to serve development to the desired level. Therefore, the authorities need to be aware of how tax policies can be used as an effective toolinrapid,fairandbalanceddevelopmentattempts, andintroducethenecessaryregulationstothateffect. Laws in the Turkish taxation system can be com- plex, and may cause conflicts between the fiscal administration and taxpayer. To create a more confi- dent environment, regulators should ensure that tax rulesareasstableandpredictableaspossibletoallow investors to plan for the future, and keep any increas- es in costs for businesses to a minimum. Moreover,theadministrationshouldbecommitted toprovidingahigh-qualityservicetotaxpayers,includ- ingacommitmenttovoluntarycompliancebytaxpay- ers and enabling the collection of tax revenue with the aid of IT platforms and services. TAX PROCEDURE ACT: The Tax Procedure Bill draft- ed by the Tax Council as a result of efforts to renew- ingtaxlawswasmadepubliconSeptember30,2011. However, no changes have been made so far. INCOME TAX ACT: The Income Tax Bill was present- ed to the Turkish Grand National Assembly on June 12, 2013, and remains pending as a bill. If enacted, the provisions of the Income Tax Act and Corporation Tax Act will be combined under the rubric of the IncomeTaxAct.Thispieceoflegislationaimstoencour- agevoluntarycompliancewhileincreasingtheamount of revenue generated from direct taxes. Items sched- uled to be changed by the bill are as follows: • Encouraginginvestments,production,employment and savings; • Enhancing voluntary compliance with taxation; • Broadening the tax base; • Reinforcing tax security; • Introducing regulations in compliance with social and environmental policies; and • Enhancingflexibilityandefficiencyinenforcement. BRINGING CLARITY: The bill deals with various tax exemptions, immunity and other taxation matters concerning each income element in the same chap- ter. As a result, it aims to bring clarity to existing laws. Changes to withholding provisions: • Sections concerning tax deductions are covered in a single section; • Two withholding rates of 15% and 25 % are stipu- lated depending on the type of income; and • Broad authority is granted to the Council of Minis- ters for resetting withholding rates as is the case in existing regulations. It is expected that existing rateswillapplyuntiltheCouncilofMinistersadopts a new decision. Changes to the tax return period: • The fourth period provisional tax return has been eliminated; and • The temporary tax will be at the rate implemented onthefirstincometrancheofthescheduleinpara- graph one of Section 77 for natural person taxpay- ers (15%) and at the rate stipulated in paragraph four of the same section for corporations (20%). Changes planned to the Free Trade Zone Act: Stud- ies on a bill for changes on the Free Trade Zones Act are ongoing and no bill has been drafted so far. The planned changes will be as follows: • Plot changes to fit the needs of the investors; • Clustering and setting up of zones with infrastruc- ture and all supporting elements for projects; and • The provision of an efficient service for the project owner, including the minimisation of bureaucracy and an emphasis on promoting and marketing. Regarding applications for permission to operate in free trade zones under the Free Trade Zones Act, the billwillparticularlyencouragetheproductionofhigh- value-added goods services production that con- tributestoresearchanddevelopment.Thiscanbedone by considering the added value that would be creat- ed by the investment in addition to the nature and sizeoftheprojectanditscontributiontoemployment. 184 Clarifications coming A new income tax act is in the making www.oxfordbusinessgroup.com/country/turkey
- 187. TAX ANALYSIS Regulations forcorporations must be drawn from various acts At present there is no definitive definition for cor- porations under the law and there are no defined criteria. However, it is possible to draw some con- clusions making use of applicable provisions from the Turkish Commercial Code No. 6102 and various oth- er regulations as outlined below. COMMERCIAL CODE: As stated in Section 40 of the Commercial Code, the location of the company head- quarters can determine whether a business is con- sidered to be local or foreign. Under Section 40 of the Commercial Code, “The branch offices of busi- nesses with headquarters in Turkey will also be reg- istered and promulgated in the Trade Registry of the jurisdiction they are in.” However, “branch offices in Turkey of businesses with headquarters outside Turkey will be registered as local businesses without prejudice to the provisions of the laws of their own countries in connection with business title.” BANKINGACTREGULATIONS:The Banking Act out- lines the distinctive features of companies estab- lished in Turkey and outside Turkey. Section 6 of the Banking Act deals with obtaining permission for opening a branch office or representation office in Turkey. It states that the “establishment of a bank in Turkey or opening of the first branch in Turkey of a bank established outside the country will be permit- ted,providedtherequirementssetinthislawaremet.” The opening of representations office in Turkey by banks established outside the country is dealt with as follows in paragraph four of Section 6, “Banks established outside the country may open repre- sentation offices in Turkey with the permission of the Council of Ministers, provided they do not accept deposits or participation funds and operate in line with rules to be set by the council”. FOREIGN INVESTMENT REGULATIONS: Corpora- tions regulated by the Direct Foreign Investments Act No. 4875 designates businesses established under the laws of other countries as foreign investors. Sec- tion 2 of the act defines foreign investors as: • Natural persons who are citizens of foreign coun- tries and Turkish citizens domiciled abroad; and • Legal entities and international organisations established under laws of foreign countries. In light of the above, it is possible to find regulations to assist in the identification of legal entities in the Commercial Code, the Banking Act, and the Direct Foreign Investments Act, as well as the Mining Act. However, there is presently no definition in Turkish laws dealing with the nationality of corporations. An assessment of applicable legislation shows that the predominant opinion in Turkish law is that companies established in Turkey under the rules of Turkish law will have Turkish nationality. TAXES: The major forms of taxation in Turkey are: • Income tax; • Corporation tax; • Taxation on consumption; • Value-added tax (VAT); • Special consumption tax; • Customs tax; • Banking and insurance transactions tax; • Stamp duty; • Valuable papers duty; • Fees duties on wealth; • Motor vehicles tax; • Property tax; and • Inheritance and transfer tax. INCOME TAX: This tax is collected on the earnings of natural persons. Income tax in Turkey is calculat- ed on a progressive basis and contains various allowances, exemptions and exceptions. Income tax- payers must meet the following criteria: • Income must belong to a natural person. Under the Civil Code, a natural person is a person who can be a rightful owner under provisions of the Civil Code and can incur a liability; • The income must be income derived in a calendar year. The taxation period for the purposes of income tax is a past calendar year; 185 THEREPORT Turkey 2015 Drawing down duties A look at how tax law deals with corporations
- 188. TAX ANALYSIS • Incomecan be defined as the sum of any earn- ings and revenues. The sum of all earnings, claims andearnedincomefortheyearissubjecttoincome tax. This is the case even if it has not come into possession directly; and • Incomeisthenettotalofallearningsandrevenues. Any expenses incurred and to be incurred in deriv- ing the income are deducted and the remaining portion becomes subject to taxation. In calcula- tions of net earnings and revenue, expenses that are specified in law will therefore be deducted from the gross income. There are two types of taxpayers, full-fledged tax- payers and foreign-based taxpayers. Natural per- sons residing in Turkey who are taxed in Turkey on all income derived within and outside the country’s borders are treated as full-fledged taxpayers. Conversely, natural persons not residing in Turkey are defined as foreign-based taxpayers and are taxed solely on income obtained in Turkey. Income derived by such taxpayers as a result of their operations abroad are excluded from income tax. CORPORATIONTAX:Corporationtaxisleviedoncor- porate earnings. The same elements deemed to be income under income tax regulations also apply to corporation tax. Regardless of which elements a corporation has obtained an income from, these continue to be classified as corporate earnings. In short, the income elements are the same for both income tax and corporation tax. As a result, the income must be annual, real, net, overall and accrued. Income that is not covered by income tax will not be considered under corporation tax either. Corporation Tax Act No. 5520 has been put into effect and was published in the Official Gazette of June 21, 2006, No. 22205, as a result revoking the Corporation Tax Act of June 3, 2005, No. 5422. The current rate for corporation tax is at 20%. The earn- ings of the various types of corporations listed below are subject to corporation tax: • Share capital companies; • Cooperatives; • Economic state enterprises; • Economic enterprises of associations or founda- tions; and • Business partnerships. Corporation tax is calculated on corporate income derived by taxpayers and specified in the first sec- tion of the act during a given accounting period. Taxes that are imposed on spending can be cate- gorised into three main groups: • Taxes on consumption items; • Taxes on transactions; and • Taxes on value-added goods. VAT was introduced into the taxation system by an act of October 20, 1984, No. 3065, and was put into effect as of January 1, 1985. The tax covers the fol- lowing subjects: • Deliveries and services as part of commercial, industrial and agricultural operations; • Imports of any goods and services; and • Deliveries and services arising from operations that are required to be covered by the tax but are not included among these specified lines of busi- ness which has special taxation characteristics. VAT payers may be listed as follows: • In the delivery of goods and rendering of servic- es, those who deliver such goods or render such services; • In importing of goods and services, those import- ing the good or services; and • In leasing deemed to be property leasing under the Income Tax Act, those leasing out such goods and rights. In terms of an event that leads to VAT, the concepts of the delivery of goods and the rendering of serv- ices are extremely important and must be clarified. Delivery is the transfer of the right of disposition on a good by the owner or his agent to the purchaser or his agent. Services, on the other hand, may take place by doing, processing, creating, manufactur- ing, repairing, cleaning or safekeeping something or pledging not to do something. STAMP DUTY: This is a tax collected on documents showing the validity of legal transactions between individuals and corporations. The payer of the stamp duty is the person who signs the instruments sub- ject to the stamp duty. If one of the signatories is exempt or a govern- ment office, the taxpayer of the stamp duty will be the non-exempt person. If the provisions of the instrument executed abroad are implemented and inured from benefitting domestically, such transac- tions will be subject to the payment of stamp duty. CREATING AN EFFECTIVE STRUCTURE: Taxation systems must adapt to the broader changes occur- ring in economic and social life. This dynamic struc- ture enables a tax system to become more rational and able to balance the competing demands of fair- ness and efficiency that drive a modern economy. Tax reform consists of the redistribution of the national tax load among various social segments. Objectives of tax reform should be the following: • To ensure tax justice; • To enlarge the tax base; • To prevent the growth of an informal economy; • To make tax legislation simple to understand and easily implementable; and • To employ the fairness function in income distri- bution of taxes most effectively. A skewed income distribution weakens the middle segments of society even as the number of signifi- cantly rich individuals continues to grow. That there arefewerwealthyindividualsinJapan,oneofthemost developed economies of the world, than in Turkey, illustrates the extent of the disparity in wealth. To resolve this situation, we propose that individ- uals should be asked to declare the sources of their wealth. To this end, the authority included in section 30/7 of Tax Procedure Act revoked by Act No.4783regardingquestioningthesourceofexpens- es and savings should be re-issued to audit agents. 186 www.oxfordbusinessgroup.com/country/turkey
- 189. TAX ANALYSIS Foreign investmentcan have an important multiplier effect Countries around the world have been making sig- nificant attempts to further direct foreign capital investment. In a globalised economy, the degree of foreign investment that a country attracts can have a significant multiplier effect, contributing to tech- nological advances, employment opportunities and the ability to invest more in welfare. Keeping the state’s taxation system up to date as economies become more integrated on the global stage is especially important for emerging markets such as Turkey in their quest to attract direct for- eign capital investments into the country. Direct foreign capital investments have grown rap- idly in size on the international level since the 1980s. The relatively cautious view of foreign capital that emerged at the end of the Second World War was replacedbyanembraceofaglobalisedeconomyfrom the 1980s onwards. In the aftermath of the war eco- nomic discussion was dominated by the concern of how best to limit and control foreign capital flows and nurture a national economy. In recent decades, however, the question at the forefront of policy- making has been how to attract foreign capital. Therefore, the globalisation of capital has driven countries to employ various instruments to attract external investment. One of the most important tools in this regard is tax incentives. TAXINCENTIVEPOLICIES: The success of any incen- tives policy will ultimately be determined by its effec- tiveness as it is implemented in practice. In terms of taxation, we can define effectiveness as the system having the sufficient power to channel investments intotargetedfieldsandsectors.Moreover,thisshould be done at rates that are desirable and feasible. However, evaluations of tax incentives implement- ed in Turkey have suggested that economic changes since the 1980s have eroded the effectiveness of this policy. The government opted for investment allowance exemptions as the most effective tool with which to encourage investment, while the tax advantage afforded to corporations decreased by a third. Even in the case of an investment allowance of 100%, the maximum incentive, the investor was only able to get back 25% of the total investment amount, which can be attributed in part to the preva- lence of rent-seeking, as well as the ever-expand- ing amount of government regulations with which businesses have to contend. The incentives in the tax system have a dual struc- ture. On the one hand, tax incentives have been implemented by way of changes made to provisions regarding exemptions and exceptions. On the oth- er hand, there has been a concerted attempt to reduce the tax load of the rent-receiving segment, including interest, dividend and rent, by way of low rate and withholding at source taxation directed by Council of Ministers decrees. FOREIGNCAPITALINVESTMENTS: The importance of taxation policy and incentives in terms of direct foreign capital investments have both increased. For example, the impact of tax rates on investment deci- sions tends to be greater for multinational compa- nies oriented towards exports. Therefore, the executives of such firms pay close attention to the development of government poli- cy on taxation, given its direct and significant impact on investment decisions. TAX RATES: Taxation policy, while not necessarily determining the decision of whether or not to invest abroad, can exert a significant influence over the choice of one investment destination over another. The taxation in the host country has a varied impact depending on whether the investment is ori- ented to the marketplace or funds. In a situation where all other conditions are equal, it may be an advantage to invest in countries with low tax rates. So as to keep up with the frantic pace of global economic competition, countries are today increas- ingly engaged in simplifying their tax systems and reducing their tax rates to attract investors. The rate 187 THEREPORT Turkey 2015 Attracting attention Recommendations for improving the investment climate
- 190. TAX ANALYSIS of corporationtax, which affects the profitability of multinationals and so is very pertinent to foreign investors, has been a particular focus. In Turkey, corporation tax rates have decreased so that both local and also foreign capital could ben- efit in terms of tax. The corporation tax rate was set as 20% as of 2007 as per Act No. 5520. Considering the tax rates of Turkey’s potential rivals, this has helped the country attract foreign investors. INDIRECT TAXATION: An important factor influ- encing the decision of whether to invest in a for- eign country is the impact of indirect taxes in the host country on input costs. Presently, for firms oper- ating in the industrial segment, taxes on energy, which is the most basic input for firms, are at a high level compared to other countries. The most expensive electricity in OECD member countriesisfoundininItaly,JapanandTurkey.Approx- imately one half of electricity consumed in Turkey is used in industry. The tax rate on electricity used in production is directly linked to production costs. Countries with the highest ratio of the tax calculat- ed on the cost of electricity used in industry to its price are Italy, Norway and Turkey. HIGH EMPLOYMENT TAXES: The following calcu- lationhasbeenmadeforthepresentstateofemploy- ment taxes in Turkey: in 2007, out of every 100 liras that was paid by an employer to employ a worker, only 71 could make their way to the pocket of a worker. In 2008 the amount going into the pocket of the average worker dropped further to 70 liras. However, by 2009, 79 liras out of each 100 lira paid by the employer could go to the pocket of the work- er. This can be attributed to the implementation of a policy ensuring a minimum subsistence allowance. According to OECD data, Turkey has the highest weight of employment taxes among the 30 OECD countries. An examination of OECD data shows that in top-ranking Turkey, 42.7% of the average labour cost is allocated to employment taxes. This rate is 26.6%acrosstheOECDasawholeandaslowas16.4% in the US and 5.9% in Ireland. ARBITRARYAUDITS:Circumstances that cause con- tinuing concern for investors in terms of legal com- pliance include the following: • The failure to handle tax laws under an overall government investment strategy; • The existence of certain superfluous restrictions on specific grounds and concerns; • The introduction of additional conditions by reg- ulatory and explanatory texts sometimes going beyond the requirements laid down by the law; • The subsequent cancellation of such texts by judi- cial bodies; • The determination of judicial cases in an oppos- ing way by different judicial bodies at the same level; • The issuing of contradictory opinions; and • The perception among auditors of tax audits as a system introduced for the purposes of collecting taxes, fines and interest. OFF-THE-BOOKS ECONOMY: The continued exis- tence and growth of the informal economy remains a fundamental problem for potential investors in Turkey. Businesses are unable to compete with a rival that does not pay taxes or insurance premiums because of off-the-books employment in the same industry, or that fails to pay value-added tax (VAT), corporation tax or income tax on off-the-books sales. Foreign investors do not want to compete with a strong informal economy as there is no living space for formal foreign capital. Indeed, even local capital moves to countries with more favourable invest- ment climates in these conditions. INVESTMENTALLOWANCEEXCEPTION:Theinvest- ment allowance was introduced into the tax system to encourage private investment and to raise capi- tal accumulation in the economy to further devel- opment. Investment allowances increase both the after-tax profitability of private enterprises and also their liquidity. However, the authorities revoked Sec- 188 Turkey’s low rate of corporate tax relative to alternative destinations has helped attract investment Turkey has the highest weight of employment tax among OECD states www.oxfordbusinessgroup.com/country/turkey
- 191. TAX ANALYSIS tion 19of Income Tax Act No. 193 entitled “Invest- ment Allowance Exception in Commercial and Agri- cultural Earnings”, terminating the investment allowance exception as of January 1, 2006. The preamble of the act stated that the practice of this exception was abandoned because the invest- ment allowance exception was starting to be used for tax planning and incentives for unproductive investments in contrast to its purpose of introduc- tion. The revoking of the investment allowance led to criticism, as it was regarded by many as an increase on the tax load for potential foreign investors. EXEMPTIONS & EXCEPTIONS: Customs exemption is an incentives tool implemented by the state by abandoning Customs revenue. The investor is exempt fromthedutypayableupontheimportofthemachin- ery and equipment needed for the investment, lead- ing to a decrease in the cost of investment. This incentives tool is an effective one especially for encouraging investments with high external input requirements to realise the investment. Of the 4179 investment incentive certificates issued for foreign firms between 1980 and 2006, 2501 include the Customs exemption. The share among the total is 60% by quantity. As a result, the Customs exemption is one of the incentive tools utilisedmostfrequentlybyforeigninvestorsinTurkey. VAT SUPPORT: Another important tax incentive in our country is the VAT support. It is implemented as a VAT exemption for imported and domestic machin- ery and equipment covered by the investment incen- tive certificate in recent periods. The exemptions of VAT that exist for capital goods, machinery and equipment have made an important contribution to reducing the financing costs of firms in the phases of investment. According to Section 13/d of the VAT Act, the deliveriesofmachineryandequipmenttoinvestment incentive certificate holders under the certificate are exempt from VAT. Therefore, it has also sought to encourage domestic machinery manufacturers. With this incentive, investments have been encouraged through the elimination of financial load correspon- ding to VAT on investment. TAX, DUTY & FEE EXCEPTION: The tax, duty and fee exception has been implemented since 1985. Tax, duty and fee exception is applied to project loans obtained for investment projects with export pledges and certain rates for five years following the com- pletion of incentive certificate investments. The tax, duty and fee exception is not an incentive made available on their investments. In contrast to other incentives, the tax, duty and fee exception, also encourages a growth in exports. FREE TRADE ZONE PRACTICES IN TURKEY: Turkey has introduced a range of regulations to attract a great degree of international capital, among which is those relating to the free trade zones providing advantages to foreign capital investments. Zero taxes often apply in free trade zones, and in addition to financial advantages such as these, they also provide opportunities for enterprises to be set up using foreign capital as they eliminate the rela- tions that exist between foreign capital and the tax authority, aiding the investment climate. CONCLUSIONS: Based on these regulations, some conclusions can be drawn about the state of Turkey’s taxation system, as well as some further recommen- dations for its future evolution: • Under the present investment incentive system, there is no incentive with a scope that could be expected to affect the quantity, timing, region or sector of investments; • In Turkey, incentives and support provided by the state are commonly regarded as the raison d’être for a job, rather than as an auxiliary element that is able to support a job. This can lead to a fund transfer by excluding investments which can cre- ate additional value to the country’s economy; • In Turkey, in addition to main taxes, transition tax- es are imposed in the form of funds, duties and fees that businesses encounter during the invest- ment process. Given the absence of sound data regarding the amount of the same, no calculation can be made on their contribution to the incen- tive rates; • At a time when fierce competition for incentives has brought about increased costs for many coun- tries,thereremainsinsufficientdataoninvestment amounts and incentives; • There are institutional conflicts, lack of coordina- tion and ambiguity in incentives legislation. Tax administration and investment incentive system are conducted by several public authorities and organisations with most of the time overlapping and often conflicting pieces of legislation and authorities; • Government support must be selective when ori- enting investment projects by industry; • Retroactive tax regulations can create an inse- cure investment environment for foreign investors; 189 THEREPORT Turkey 2015 The Customs exemption is frequently used by foreign investors
- 192. TAX ANALYSIS • Theinformal economy can have an adverse effect on the decisions of investors in addition to the injustice in taxation it creates; • Ambiguous and frequently changing tax regula- tions,aswellasdelayedorunimplementedrebates, are the other most pressing problems relating to taxation concerning investors. These factors can create an unpredictable environment regarding business plans, especially for investors who are in the process of drawing up feasibility studies; and • Taxesonemploymentandindirecttaxationcanalso hurt the investment environment; The following are some recommendations relating to the taxation system for bringing more direct for- eign capital investments to Turkey. They could have a positive effect on the investment environment: • Models of best practices and countries achieving serious success regarding foreign investments include enterprising investment strategies and the targeting approach of this strategy; • The country could better attract direct foreign investment if it adopted a more systematic and selective incentive policy that targeted a set of pri- orities and put industries, products, regions and firms at the centre of its focus; • When rearranging the incentives system, it must be ensured that the incentives like in EU countries are based on innovation, technology and employ- ment. The burden on the employer that creates additional employment from the state must be reduced. Certain incentive mechanisms oriented to training manpower must be introduced; • Greater incentives must be provided for produc- tion in targeted industry, research and develop- ment, ICT. Long-term fiscal tax policies must be planned with strategic targets selected, and appro- priate regulations implemented; • The tax holiday is the most popular tax incentive used by developing countries and transitional economies to attract direct foreign investments; • The concept of a “tax holiday” should be adopt- ed and inserted into legal regulations; • The country’s economic rivals must be monitored closely; • The lifting of the investment allowance, common- ly regarded as the most important tax incentive, has not been received favourably by a wide range of investors. It would be more beneficial to arrange this incentive under the same norms as EU incen- tives. This would help to raise the competitive- ness of local investors and succeed in attracting more foreign investment to the country; and • The rates of direct and indirect taxes should be lowered to a level that can attract greater levels ofinvestment.Tothatend,acomprehensivereform programmemustbeprepared,obtainingtheagree- ment of all relevant parties. The basic criteria considered by businesses as they select an investment location include the following factors, and should be considered by policymakers: • Overall economic performance; • Legal infrastructure; • Economic and political stability; • The level of transparency; • Market size; • Availability of a skilled workforce; • Conditions of competition; • The level of advancement in the stock market; • The trade and foreign currency regime; • Tax rates; • Physical infrastructure; • Raw material supply; • Strategic products; and • Investment costs; Indeed, the level of taxation and incentives, are just some of the elements determining the choice of investment destination, albeit significant ones. The taxation system must therefore continue to evolve. 190 The presence of an informal economy can have an adverse effect on the decisions made by investors The size of the market is an important consideration for investors OBG would like to thank Grant Thornton for its contribution to THE REPORT Turkey 2015 www.oxfordbusinessgroup.com/country/turkey
- 193. 191 Legal Framework Regulation pushto make Istanbul a global financial hub Financial sector reforms to align with EU standards Government moves to increase workplace safety Incentives invite private investment in infrastructure
- 194. LEGAL FRAMEWORK OVERVIEW Newcapital market regulations aim to grow Istanbul as a financial hub With the primary goal of establishing a leading global financialcentreinIstanbul,theTurkishgovernmentcon- tinues to create a legal framework that will encourage and accommodate this goal. The foundation was laid with the recent Capital Markets Law (CML) No. 6362. The Capital Markets Board (CMB) continues to align Turkey’s legal basis to comply with EU regulations. The following enactments and communiqués have been declared by the CMB to ensure the functionality and development of Turkey’s capital markets through the establishment of a secure, transparent, and competi- tive environment for investors. NEW CATEGORISATION SYSTEM FOR BROKERS: Communique No III-37.1 No 39 & No V-134 introduced a categorisation system for intermediaries based on their activities, imposing a minimum capital for these companiesbyJuly2015.Itrescindstheformerlicense- basedapproachandstatestheminimumcapitalrequire- ments as: “Introducing Brokers”: TL2m (€704,200); “ExecutionBrokers”:TL10m(€3.5m)and“MarketMak- ers”: TL25m (€8.8m). This legal change will inevitably result in mergers or acquisitionsofexistinginvestmentfirmsinordertomeet the minimum capital requirements. CMB REGULATES SQUEEZE-OUT & SELL-OUT: The procedure to determine the total expulsion price of minor shareholders in a squeeze-out procedure has been regulated by the Communiqué No. II-27.2, pub- lished in November 2014. Based on Article 27 of the CML, the Communiqué regulates for the first time the rules and principles of a squeeze-out and sell-out. A (groupof)shareholder(s)whowishestoexercisetheir squeeze-out right, shall use that right within a period of three months, starting from the day the amount of their shares reached 98% in total. TheshareholderisrequiredtoprovidetheCMBwith the relevant documents, along with a formal applica- tion.UponapprovaloftheCMB,thecontrollingshare- holder(s) shall deposit the total purchase amount to thecompany’sbankaccount.Othershareholdershave therighttoobjecttothepricewithin30daysfromthe expulsion decision date. Shareholders are entitled to sell their shares to exercise their squeeze-out right to the controlling shareholder after the expiry of the three-month period. The shareholder shall request the company to noti- fy the controlling shareholder in writing to exercise its sell-out right. The procedure foresees a set deadline of six business days for filing required reports to the CMB and being paid for the shares by the company. DIVIDENDPROTECTION:TheCommuniquéNo.II-19.1, published in January 2014, strengthened the protec- tion of dividends. It sets out the principles and proce- duresforthepaymentofdividendsinaccordancewith Articles 19 and 20 of the CML. Corporations will now have to distribute their dividends equally (pro rata) to all existing shares at the date of distribution, regard- lessoftheirdatesofissuanceandacquisition.Dividend- privilegerelatedrightsare,however,reserved.Thedeci- sion to pay dividends in (x number of) instalments lies uponthecorporation’sgeneralmeetingofsharehold- ers. Carrying dividends forward to the following year or distributing dividends to interested parties, direc- tors, employees or other non-shareholders is not per- mitted unless and until the dividend determined for shareholders is fully paid in cash. INTRODUCTIONOFTHEELECTRONICFUNDDISTRI- BUTION PLATFORM (TEFAS): Within the CML, TEFAS came into effect on January 9, 2015. The platform allows investors to buy mutual funds (incorporated by permission of CMB) through a single investment account. TEFAS is open to all foreign, local, individual and institutional investors. TEFAS can be described as a fund supermarket, creating an environment that enables simple access to mutual funds. STIMULATINGTHEVENTURECAPITALMARKET:The CMB announced in March 2015 its plan to change the financialregulationsinitiativestowardsattractingclients to banks and intermediary companies. Currently the promotional benefits are based only on a share of the 192 Regulating for growth Legal changes are guiding and enabling investment across the board www.oxfordbusinessgroup.com/country/turkey
- 195. LEGAL FRAMEWORK OVERVIEW revenueachieved by the venture capital market com- panythroughthegainofthecustomer.Promotionsare onlypermittedwhenclientsarewonthroughtelemar- keting. The CMB wants to allow promotions benefits forattractingcustomersbyanymeans,wherenotonly the person winning the client, but the client themself shall benefit from promotional campaigns. FISCAL INCENTIVES CONTINUE FOR ANGEL INVESTORS:Realising that it is crucial but difficult for small and medium-sized enterprises and start-ups to receive adequate funding, the government enacted fiscal incentives for investing in small businesses. Business angels are entitled to substantial tax ben- efits upon investment, under the Law Regarding AmendmentstothePrivatePensionSavingsandInvest- mentSystemLawNo.6327,itssubsequentRegulation on Individual Capital Participation and the Income Tax Law No. 193. In December 2014, an amendment to the regula- tion increased income tax relief for angel investors to 100%wheninvestinginenterprisesactiveinresearch, development,andinnovation,uptoamaximumamount of TL1m (€352,100) annually. GROWINGBANKINGSECTORCONTINUESTOALIGN WITH INTERNATIONAL STANDARDS: The Banking RegulationandSupervisionAgency(BankacılıkDüzen- leme ve Denetleme Kurumu, BDDK) stated in February 2015 that the total assets of the banking sector had increased by 15% and the primary funding source, the deposits, have gained 11.3% in comparison to 2013. The biggest assets are loans (18.5%) and securities (5.4%). Therefore, the industry’s net profit for 2014 amounted to TL24.67bn (€8.69bn). Starting with the enactment of the International ConvergenceofCapitalMeasurementandCapitalStan- dards,thegovernmentbeganapplyingtherecommen- dationsofBaselIIinJuly2012.Continuingtheprocess, the BDDK issued the Communiqué on Calculation of AmountSubjecttoCreditRiskwithApproachesBased on Internal Rating, and the Communiqué on Calcula- tion of Amount Subject to Operational Risk with Advanced Measurement Approach, both of which became effective January 1, 2015. Thereunder, capital adequacy calculations are subject to BDDK’s permis- sion.Thus,theagencyissuedtwodraftguidelinesthat determinetheapplicationprocess,rulesandpractices to which banks must comply. NEW PLAYERS IN ISLAMIC BANKING: The Islamic bankingsector,commonlyreferredtoas“participation banking”,haswitnessedgrowinginterestduetoincreas- ing demand among Turkish citizens and investments from the Middle East. The BDDK approved three more Islamic bank applications in the first quarter of 2015. NEWREGULATIONPLACESRESTRICTIONSONTHE LEASING, FACTORING AND FINANCING SECTOR: Enacted in December 2014, the Leasing, Factoring, and Financing Companies Law No. 6361 imposed a minimum capitalisation value of TL20m (€7.04m) for companiesdoingbusinessinthissector.However,busi- nessesthatwerefoundedpriortothelawhaveagrace periodofthreeyearsinordertomeetthisrequirement. Thus, this legal obligation is likely to result in mergers and acquisitions in the sector during 2015. ENERGY SELF-SUFFICIENCY: As an emerging mar- ket, Turkey has experienced a significant increase in thedemandforelectricity,andconsequently,thenec- essaryamountofinvestmentandfinancetomeetthis demand is up to $5bn annually. It is projected that the total energy investment required up until 2023 may surpass $120bn. Thus, the market requires capital from private companies. The governmentisaidinginvestmentsthroughtendersfor privatisationandbuildingorallowingnewpowerplants within the next decade. The World Bank’s December 2014 “Focus Note” states that “energy imports contribute significantly to Turkey’sexternalimbalances”.ConsideringthatTurkey imports 60% of its energy, reducing this percentage is essential. Thus, the government has an active liberal- isation policy for the domestic energy market. CREATINGACOMPETITIVEMARKET:Reforms in the energy market are intended to achieve liberalisation by allowing more competition. The Turkish Competi- tion Authority has published a report with the aim of guidingthesectortowardsacompetitivemarketstruc- ture. The report emphasises the period 2018-19, that being when most power purchase agreements and guarantees will expire. Furthermore, the ongoing privatisation process of the state-owned power companies will be concluded by2019.Thesedevelopmentswillundoubtedlyleadto a more competitive market. TAKING ACTION ON RENEWABLE ENERGY: Turkey enacted its first National Renewable Energy Action Plan in December 2014 with the support of the Euro- peanBankforReconstructionandDevelopment(EBRD). This plan is based on the EU Directive 2009/28/EC regarding the promotion of energy use from renew- ablesources.Turkeyhasagreedtomeet30%ofitsener- gyneedsfromrenewablesourcesby2023.Turkeyaims to add 35 GW of hydropower, 20 GW of wind power, 193 THEREPORT Turkey 2015 Growth in the banking sector continues to be strong, with 2014 seeing a 15% increase in total assets
- 196. LEGAL FRAMEWORK OVERVIEW 5GW of solar energy, 1 GW of geothermal and 1 GW ofbiomass.Aswellasthe$70mprovidedbytheEBRD, the World Bank approved another $300m for use in renewable energy projects in Turkey. TheEnergyMarketRegulatoryAuthority(EMRA)ini- tiatedthefirstpre-licensetendersaccordingtotheElec- tricity Market Licensing Regulation (EMLR) while cap- ping the application ceiling at 600 MW. The awarded bidders received two licenses for an 8 MW solar park in Elazığ and a 5 MW project in Erzurum in May 2014. Theseprojectshavecreatedclearproceduresandobli- gationsforfuturebiddersastheEMLRhassinceaward- ed 228 MW of PV projects in January 2015. However the 600-MW capping will be amended in 2015. Under the EMLR, recipients of a pre-license have to complete their power plant within 24 months. In the eventofcompellingreasons,theenterprisemayrequest an extension period for an additional 12 months. The EMRA will decide on the extension petition by evalu- ating the type of energy source and capacity. ANINCREASINGSUPPLYOFNUCLEARPOWER:The Akkuyu Nuclear Power Plant and the Sinop Nuclear Power Plant have paved the way for a third. Turkey’s ElectricityGenerationCompany,China’sStateNuclear Power Technology Corporation, and Westinghouse ElectricCompanyenteredintoanagreementinNovem- ber2014tocommencenegotiationsfortheconstruc- tion of a new four-unit nuclear power plant. A MORE LIBERAL GAS MARKET: The Natural Gas MarketLawwillbeamendedtodividethecurrentver- tically integrated and state-owned Petroleum Pipeline Corporation (BOTAŞ) into three divisions for transmis- sion,storageandotheractivities.Thisamendmentwill abolish the dominant position of BOTAŞ and establish a competitive, investment-friendly oil and gas market. The draft law also includes the privatisation of the Istanbul Gas Distribution Company, subject to the approval of the Istanbul Municipality . SWIFT RESPONSE TO MINING MARKET NEEDS: The Turkish Mining Law No. 3213, was amended on Febru- ary 18, 2015, with significant provisions in terms of workplacehealthandsafetyandalsoroyaltyagreements with third parties. Excluding underground coal mine licensesgrantedbypublicauthorities,nolicencehold- ershallenterintoroyaltyagreementswithsubcontrac- tors for the operation of the coal mine. However, exe- cuted royalty agreements shall be subject to the approval of the Ministry of Energy. CREATINGACOMPETITIVETELECOMMUNICATIONS MARKET:TheInformationCommunicationsTechnolo- gies Authority (ICTA) has recently identified potential growth in the telecommunications sector. According to the ICTA report for the third quarter of 2014, the number of operators in the electronic communica- tions sector is 654 and the number of authorisations granted to those operators is 1094. In the third quarter of 2014, the amount of total mobile traffic was 53.1bn minutes and 3.3bn minutes forfixedtraffic.Thesenumbersconstituteanincrease of approximately 1.9% in mobile traffic and a decrease of11.1%infixed-linetrafficwhencomparedtothefig- ures for the second quarter of 2014. The report outlines that in the mobile industry only three companies have significant market power. Thus, the Turkish government is eager to open this market to an additional mobile service provider when the 4G network is introduced in 2015, particularly when the licences for frequency bands 800, 900, 1800, 2100 and 2700 MHz come up for public tender. The report alsooutlinedtheneedtocreatethetechnicalandlegal basis to introduce and operate 4G services. BIG CHANGES FOR FIXED-LINE PROVIDERS: In December 2014 the ICTA amended the Authorisation Regulation in the Electronic Communications Sector. Pursuant to this amendment, operators shall only be formedasajointstockorlimitedliabilitycompanywith a minimum capital of TL1m (€352,100). The compa- nies will have to apply for fixed-line services authori- sationtotheICTA.Incaseoffailuretoprovidethemin- imumcapitalamount,theauthorisationoftheoperator will be cancelled. Furthermore, Türk Telekom (TT) has been designat- ed as an enterprise with significant market power on call termination in fixed telephone networks. Thus, TT will be subject to certain requirements, such as pro- viding access, non-discrimination, transparency, pub- licationofreferenceoffer,tariffcontrol,accountingsep- aration and cost accounting. E-COMMERCERULESTIGHTENED:EnactedinNovem- ber 2014, the Law on the Regulation of Electronic Commerce comes into force on May 1, 2015. All com- merce by means of an electronic medium without the requirement of personal communication is subject to the regulations of the new law. Ingeneral,thelawwillregulateanddefinethetrade relations, the obligations and liabilities of online serv- ice providers, the form and content of agreements executed for electronic devices, information duties and penalties for violations of the regulations. Most notably, the law requires legal provisions of online service providers. Under the law, they have to 194 The government is responding to rising demand for electricity by incentivising domestic energy investment www.oxfordbusinessgroup.com/country/turkey
- 197. LEGAL FRAMEWORK OVERVIEW providetheconsumerwithclear,accessibleanddetailed informationregarding the terms and conditions of agreements before they are entered into. These regu- lations also include technical possibilities to correct a faultthatmighthaveoccurredintheprocessofenter- ing into agreements by means of e-commerce. PROTECTION FOR CONSUMERS: The Consumer Pro- tection Law came into force in May 2014. The law’s primary purpose is to grant the consumer the right to receiveallrelevantinformationrelatingtothecontract and its terms before concluding legal transactions. Thus, the law imposes on the merchant partner an obligationtoinformtheconsumerbeforeorduringthe conclusion of a contract. If the consumer has not sufficiently been informed on certain matters, he shall benefit from the rights to the detriment of the party who has drafted the con- tract. Furthermore, the law regulates the state prohi- bition of, and subsequent sanctions against, mislead- ing advertisements. REAL ESTATE & PROPERTY LAW: An important fac- tor in the Turkish construction market has been the government introducing the Law on the Transforma- tion of Disaster Risk Areas (LTDRA) in 2012, triggering anurbanregenerationrevolutioninallthemaincities. Within this regeneration process, 6.5m residential homes will be demolished and reconstructed, and it is estimated$400bnwillbespentoverthenext20years. LTDRAanditssubsequentregulationsimplementedsev- eral incentives to support urban regeneration. These includeprovidingfinancialsupport,givingbuyerslow- interestmortgagesandexemptingtherealestatepur- chase from several public charges. Thegovernmentwillalsoenactlawsandregulations tocreatedemandforinvestmentsandenableaninvest- ment-friendly legal environment in the realm of con- struction. PURCHASE OF REAL ESTATE BY FOREIGNERS: The Land Registry Law was amended by Law No. 6302, which simplified the process of purchasing real estate and extended the reciprocity list of countries whose nationals may acquire property in Turkey from 53 to 129.Thelawalsooutlines52countrieswhosecitizens may acquire property but with certain restrictions. COMMERCIAL CORPORATIONS: Commercial corpo- rationsmaypurchaserealestateandlimitedinremprop- erty rights in accordance with special laws such as the Petroleum Law, the Law for the Encouragement of Tourism, and the Organised Industrial Zones Law. If a business duly established under the Turkish Commer- cialCodeNo.6103andtheforeigninvestorseitherindi- vidually or collectively hold 50% or more shares, the company may freely purchase up to 30 ha of proper- ty in Turkey and acquire limited in rem rights. Under the Commercial Code, there are no legal lim- its on real estate purchase for companies in the case of foreign investors who hold less than 50% of the company’s shares. These incentives introduced by the government will benefit both companies and ndividuals alike and create more opportunities for foreigninvestorstoentertheTurkishrealestatemarket. It appears that the Turkish government with its cur- rent agenda will provide more incentives for the prop- erty sector. TIGHTER REGULATION: In response to recent tragic workplaceaccidentscausingthedeathsofmanywork- ers, the Turkish government plans to enact stricter regulationsonupholdingtheOccupationalHealthand SafetyLawNo.6331,whichintroducesasystemofwork- place accident-recording for each employer. This sys- tem will reward companies that have a record of no workplace accidents with tax benefits and impose sanctions on those employers who fail to comply or have a record of continuous workplace accidents. FEWERRESTRICTIONSONFOREIGNWORKERS:With the Law on Foreigners and International Protection No. 6458, Turkey tries to coordinate the legal and bureaucratic prerequisites in response to an increas- ing demand for foreign employees within Turkey. The lawregulatesandsimplifiestheconditionsforobtain- ingaresidencepermit,andArticle6oftheLawonWork PermitforForeignersNo.4817hasbeenmodifiedand now allows foreign nationals to receive permanent work permission after a lawful stay of eight years. Manyquestionsstillremainwithregardstothereal- timeimplicationsofbothlaws.Thesituationisthatnei- therlawiscomprehensiveandbothleaveunnecessary space for interpretation: for example, whether the documents provided by the foreigner for a residence permit meet the criteria of the law and its listed doc- uments, in light of this ultimately being decided dif- ferently by each local authority. Beinginadifferentdistrictwithinthesamecitymay causevariousbureaucraticobstaclesandexpenses.The government has said it plans to enact regulations and internal instructions in order to unify the application procedure and to train each authority adequately. These regulations are expected to be passed in 2015. 195 THEREPORT Turkey 2015 The 2012 Law on the Transformation of Disaster Risk Areas is triggering massive urban renewal OBG would like to thank Kılıç and Partners for its contribution to THE REPORT Turkey 2015
- 198. LEGAL FRAMEWORK VIEWPOINT HarunKılıç, Partner, Kılıç and Partners Turkey seeks to become a top-10 economic power by 2023. The most important step in reaching this tar- get will be the provision of the necessary finance needed for business and investment opportunities. The country will have to triple GDP within the next eight years to achieve this target. It is apparent that todothisTurkeywillrequiresubstantialforeigndirect investment.Reformsandamendmentstocurrentlaw andregulationwillonlyserveaspartofwhatisrequired to attract investors. Confidence and trust in the sys- tem and a clear legal framework is the key to achiev- ing more private investment and some industry sec- tors are clearly benefitting from recent changes. Infrastructure investment is the key to Turkey’s future economic growth. A number of legal reforms have been made in the area of public-private part- nerships(PPPs).Thishascreatedmajorforeigninvest- ment with the assistance of the European Bank for Reconstruction and Development (EBRD) and the World Bank, investing in such mega projects as the Dalaman Airport Concession, with a loan of €175m provided in February 2015. Significant financing is also available in the health sector, with a PPP pro- grammelaunchedbytheTurkishgovernmenttobuild new hospitals. The effectiveness of applicable law plays an important role for these organisations and private investors, who provide finance for PPP proj- ects.ItistoTurkey’screditthatwithintheEBRDassess- ment framework for PPP legislation and effective- ness, it achieved a 70% effectiveness level for the “DefinitionsandScopeoftheLaw”category,and90% effectivenessinthe“SettlementofDisputesandAppli- cableLaws”category,whichgivesthepowertoobtain a proper remedy for any breach through internation- alarbitrationandtheenforcementofarbitralawards. Reforms create new opportunities for investors: changesinthefinancesectorandinitiativestoattract foreign investors are set to expand Turkey’s foreign investment inflow in the financial markets. Through therecentintroductionofnewregulation,Turkeycon- tinues to align its legal basis in financial transactions with the EU. Furthermore, there is stricter regulation on brokers, banks and corporate governance, as well as the introduction of an electronic fund distribution platform (TEFAS) and tax-saving incentives for angel investors. The amendments made to current legisla- tionprovideastrongerandmorerobustfinancialsys- tem and strengthen investor protection. Anotherimportantindustryistheenergysector.The generation, sale and distribution of both electricity and gas has been opened up to competition and pri- vate investment. Due to a high demand for electric- ity, the sector has needed significant infrastructural investment, which has increasingly been provided by private companies via privatisation and investments. In2003theprivateinvestmentcontributionintheelec- tricity sector was 38%; by 2013 this had increased to 61%, by virtue of new legislation and in line with the government’s target. It is expected that the ongoing liberalisation of the energy sector will continue to attract more private companies willing to invest. Energy and finance are not the only sectors being targeted by foreign investors and companies. The reforms in the telecommunications and e-commerce sectors are a hot topic for foreign investment. These priority sectors were targeted for reform during the first quarter of 2015, with moves to open up compe- tition and restrict the monopolisation of the market through amendments to supplier regulation and restrictions on some of the biggest providers in both mobile and fixed-line services. With the recent intro- duction and development of 4G mobile technology, theaimistoopenupthemarketbyintroducingafourth mobile licence to the sector in order to create more competition and to allow for the private investment in infrastructure required by a 4G network. While we do also believe amendments are made to Turkish law far too frequently, they are nonetheless necessary to creating a better business environment for our international investors and business clients. 196 Opening the door Harun Kılıç, Partner, Kılıç and Partners, on reforms inspiring investor trust www.oxfordbusinessgroup.com/country/turkey
- 199. 197 The Guide The country’sislands host a vibrant grape culture Myth mixes with history at a famous Istanbul tower Descriptions of several major hotels Phone listings for local services and foreign missions Tips and tricks for new arrivals
- 200. GUIDE HISTORY The currenttower sits upon the ruins of older defensive structures WhiletheHagiaSophiaandtheBlueMosqueoftenget top billing in the tourism circuit, the Maiden's Tower, or “Kız Kulesi” in Turkish, is a popular spot that has a much deeper history than is widely known. The use of the site of the current tower began in roughly the 5th century BCE. Its history spans both empire and repub- lic, and the tower – on a small islet in the Marmara Sea – has a storied past that runs the gamut from light- house to love nest. It was even featured in two James Bondfilms.Whilethemythsthatinspireditsnametyp- ically get the most attention, the tower’s historical record is a microcosm of the city itself. STUFF OF LEGENDS: According to one legend, the tower takes its name from the daughter of Emperor Constantine, who was made to live on the island after an oracle foretold of her death by snakebite at the age of18.Aftermanylonelyyearsinthetower,theprincess was visited by her father on her 18th birthday, to cel- ebrate having outwitted the fates. However, hidden inside his gift – a basket of fruit or bouquet of flowers, depending on whom you ask – was a snake, which bit and killed the girl, just as the oracle had predicted. LOVE ON THE ROCKS: Over the course of its lifetime, the tower has also been referred to as Leander's Tow- er, erroneously named after the Greek myth of Hero and Leander. A Romeo and Juliet story of sorts, Hero – another emperor's daughter and a priestess of Aphrodite, the Greek goddess of love and beauty – fell in love with Leander, a commoner. Disapproving of the match, Hero's father imprisoned her on the island to keepthemapart.Yet,withanathleticfortitudefuelled by true love, Leander would swim to the tower each night, guided by Hero's lantern. However, one night a storm raged so fiercely that Heros' flame was extin- guished and Leander, unable to find his way, drowned. Uponfindingherbeloved'sremains,Heroplungedher- self into the sea, never to be seen again. EMPIRE STRIKES BACK: While these legends add an air of mystery and romance to the tower, its historical record is no less intriguing. A structure of some kind was constructed on the island around 410 or 408 BCE by the Athenian general Alcibiades, likely serving as a surveystationandCustomscheckpointforshipsenter- ing the Bosporous straight. Given the location’s unob- structedviewoftheMarmaraSea,thesmallislandwas ideally positioned in terms of defence. It was to this end that in 1110 AD Byzantine emper- or Alexius Comnenus constructed a small fortress on the islet. Accounts even detail the use of chains slung through the waters to the shoreline to prevent traffic from freely sailing through the straight. This structure would eventually serve as a prison for exiles before beingusedasaByzantinegarrisonduringtheOttoman conquest of the city in 1453. TURK WORK: Under the Ottomans the tower contin- ued to serve as a lookout and garrison, and was used by the Janissary forces for patriotic demonstrations and war games until it was damaged by an earthquake thatstruckthecityin1509.Afterbeingrebuilt,thestruc- turewasrepurposedasalighthouseandoutfittedwith a tower, castle and cistern. However, tragedy struck againin1719,whenthelighthousecaughtfire.Repairs were made by the head architect of Istanbul on orders fromSultanAhmetIII,thistimeinamorebaroquefash- ion. Adorned with a glass chalet, the tower stood for anothercenturybeforebeingrepurposedinthe1830s to stem a cholera epidemic in the city, sufferers were quarantined on the island and the tower was turned into a makeshift hospital. It continued to serve this purpose in 1836-37, when an outbreak of plague was reported to have killed tens of thousands in the city. ISTANBUL,NOTCONSTANTINOPOLE:Overtheyears, the Maiden's Tower has tracked the development of the city itself – from a beacon of trade, to a garrison ofempires,totourismdestination.ItsplaceintheTurk- ishzeitgeistevensawitfeaturedonthe10-lirabilluntil the 1980s. In 1995 the tower was privatised and con- vertedintoarestaurant, offeringanunparalleledview of the city. Today, in a twist on its tragic and fabled his- tory, the islet has become a popular wedding venue. 198 What’s in a name? A small tower with a big history www.oxfordbusinessgroup.com/country/turkey
- 201. GUIDE TOURISM Approximately 80%of Bozcaada’s farmland is covered in vineyards In the eastern Aegean, just a few hours’ sail from the mouth of the Dardanelles, lies a small, wedge-shaped island that echoes with chords of history. In Vergil’s Aeneid, the epic tale by Rome’s greatest poet, it is said to be where a sly Greek army hid their fleet after leav- ingtheirlegendaryequinegiftattheshoresofancient Troy. In the First World War, the British built an airstrip there, using it as an outpost during the Allies’ abortive Gallipoli campaign. After Turkey’s war of independ- ence, it was handed back to the Turks. Today Bozcaada is known for its warm, dry climate, steady sea breeze and wine, as grapes have flourished theresinceantiquity.One-thirdoftheisland’s40sqkm –and80%ofitsfarmland–isnowcoveredinvineyards. Alongside the three main varietals of Karasakız, Altın- başandKaralahna,farmersnowplantEuropeangrapes like Merlot and Cabernet Sauvignon, and its wines are slowlydrawinginternationalattention,astravellersand connoisseurs visit and write up their experiences. OFF THE MAINLAND: The island’s second asset is its sand.Inthesummermonths,itspopulationoflessthan 3000swellsto10,000asforeigntourists–mainlyGer- man,British,FrenchandDutch–arrivetoenjoythequi- et splendor of its beaches, sip local wine, lounge in the sun or explore the island’s historical sites. Most stay in small guest houses rather than large hotels, in keep- ing with the island’s hushed and intimate character. Another feature visitors tend to notice is a constant, gentlewindblowingfromthenorth.“Theislandisnev- erstill;youfeellikeyouaresailing,”DenizBarlas,alocal painter, told the New YorkTimes. In fact, this air stream –calledtheEtesiansinGreekandflowingfromtheBlack SeatotheMediterranean–madetheislandimportant prior to the advent of windward sailing, as ships pow- ered by rowers could not sail north through the Turk- ish straits and waited favourable winds at Bozcaada. Today, these same winds make the island a comfort- able respite from the intense heat of Turkey’s more well-known tourist haunts like Bodrum, Didyma and Antalya. The average temperature is 14°C and during the summer it is typically a few degrees cooler than themainland.ItisalsoclosertoIstanbul–aseven-hour tripbycarandferrythatisanincreasinglypopularhol- iday spot for Turks. Since 2012 direct flights by sea- plane run from Istanbul’s harbour in the Golden Horn. EMPIRES&CONQUEST:Forthosewithatasteforhis- tory,thereismuchtoseeonBozcaada.Theisland’schoke pointlocationhasmadeitastrategicspotsinceancient times. In the fourth and fifth centuries BCE, at the heightofGreekpower,Athenskeptanavalbasethere. ItwasoverrunbythePersiansin493BCE,thentheSpar- tans in 389 BCE, only for Athens to regain it two years later. En route to conquests in the east, Alexander the Greatsentoneofhisgeneralstoseizeit,whoreturned with a new alliance and 3000 mercenaries. Over the next 15 centuries, it was controlled in turn by the Romans, Byzantines, Venetians, Genoese and Ottomans.WhichgroupfirstbuiltthemajesticBozcaa- da castle is disputed, but Mehmet II had it rebuilt after taking the island after his conquest of Constantinople in1453.Visitorsarrivingbyferrytodaypassthiscitadel on the eastern shoreline, fringed with ramparts and a 250-metre-longmoattothesouth–alltellingsymbols of the island’s most desperate need: defence. ON THE GRAPE: Though records of viticulture before 1923arerare,itiscertaintheislandhasanancientwine culture. Coins unearthed there dating to the Hellenic era depict bunches of grapes – a symbol of the cult of Dionysus, the god of wine in Greek mythology. In the 16thcenturytheOttomantravellerEvliyaÇelebispoke of Bozcaada’s wines and by the 1800s the island was exporting 800,000 barrels a year, with its vintages known throughout the Eastern Mediterranean. Wine was less successful in the early decades of the Turkish Republic,buttheindustryreceivedstatesupporttomod- ernisein1998andhasbeenmakingacomeback.There are now six wineries on the island, including Turkey’s largest wine-maker, Corvus. Many smaller boutique producers have also sprung up in recent years, so sur- prisesthusawaitBozcaada’smoreadventurousvisitors. 199 THEREPORT Turkey 2015 Upon a time History and viticulture beckon visitors to a small treasure offshore
- 202. THE GUIDE HOTELS ISTANBUL CROWNEPLAZA ISTANBUL Dolapdere Cad. No. 161 Harbiye, Şişli 34375 T: (+90) 212 291 60 80 F: (+90) 212 291 91 01 info@cpistanbulharbiye.com www.cpistanbulharbiye.com Rooms: 12 suites, 38 club rooms, 44 standard, 148 deluxe, 40 superior, 2 with facilities for the disabled. Business&ConferenceFacilities: 19 meeting rooms, rooftopballroom,privatemeetingspacefor8persons and4guestroomsonthesamefloor,professionalplan- ners on-hand to assist with all your arrangements for meetings or social functions, and wireless internet. Health&LeisureFacilities:Healthcentre,heatedpool, hammam, massage and skin care units, hairdresser, sauna and steam bath for men and women. Wining&Dining:EgeRestaurant,PalmCourtMediter- raneanRestaurant,LobbyLodge,theClubLounge,and Onyx Lobby Bar and Patisserie. DIVAN ISTANBUL Asker Ocağı Cad. No. 1 Şişli 343670 T: (+90) 212 315 55 00 F: (+90) 212 315 55 15 info.divanistanbul@divan.com.tr www.divan.com.tr Rooms: 41 standard rooms, 108 deluxe rooms, 40 junior suites, 2 presidential suites. Health & Leisure Facilities: Puri Spa, fitness centre, hammam,sauna,steamroom,jacuzziandindoorpool, GuestServices:Concierge,24-hourroomservice,air- port and limousine service upon request, business centre, Wi-Fi, babysitting and doctor upon request, valet parking, helipad, laundry and drycleaning. Wining & Dining: Divan Lokanta (Mediterranean and Turkish cuisine), Divan Pub (international cuisine), Maromi (Japanese Cuisine), Divan Bar and Patisserie. DIVAN ISTANBUL ASIA Cemal Gürsel Sok. No. 209 Üst Kaynarca, Pendik 34899 T: (+90) 216 625 00 00 F: (+90) 216 625 01 01 info.divanasia@divan.com.tr www.divan.com.tr Rooms:56superiortwinrooms,56deluxetwinrooms, 28 deluxe king rooms, 56 corner deluxe king rooms, 12 executive superior rooms, 11 executive deluxe rooms, 4 executive corner deluxe rooms and 7 suites. Health & Leisure Facilities: Spa and fitness centre featuring indoor and outdoor pools, hammam, rain room, jacuzzi and steam bath. GuestServices:Concierge,businesscentre,Wi-Fi,for- eign exchange, 24-hour room service, airport trans- fer and limousine service upon request, laundry and drycleaning, housekeeping and evening “turndown” service,DVDrental,babysittinganddoctoronrequest. Wining & Dining: Brasserie (Turkish and internation- al cuisine), Turku Bar and Restaurant, Lobby Bar. DIVAN ISTANBUL CITY Büyükdere Cad. No. 84 Gayrettepe 34398 T: (+90) 212 337 49 00 F: (+90) 212 337 49 49 info.divancity@divan.com.tr www.divan.com.tr Rooms: 144 rooms, including 98 deluxe and 19 stan- dard guestrooms, and 27 junior and senior suites. GuestServices:Concierge,businesscentre,Wi-Fi,lim- ousineandVIPtransfers,safetydepositboxesatfront desk,foreignexchange,laundryanddrycleaning, room 200 A good night’s rest Crowne Plaza Istanbul Divan Istanbul Asia Divan Istanbul City Divan Istanbul www.oxfordbusinessgroup.com/country/turkey
- 203. THE GUIDE HOTELS service,babysitting and doctor on request, Puri Spa and Score Fitness and Pilates. Wining & Dining: Divan Pub (Turkish and internation- al cuisine), Overtime Bar. THE EDITION ISTANBUL Büyükdere Cad. No. 136 Levent 34330 T: (+90) 212 317 77 00 F: (+90) 212 317 77 10 info@editionhotels.com www.editionhotels.com Rooms: 1 penthouse, 8 lofts with terrace, 12 lofts, 44 deluxe rooms and 13 superior rooms. Guest Services: Custom light fixtures suitable for workingandentertaining,oversizedfive-fixturebath- rooms with showers and rain showerheads, 42-inch flat screen LCD TV with full cable access and movies on-demand,iPods(availableuponrequest)withdock- ingstation,complimentaryhigh-speed,wirelessinter- net,data-portconnectionsformodem/faxhook-ups, portablecomputers,mobilephonesandfaxmachines. Wining&Dining:CiprianiRestaurant(Italian),GoldBar. ARMADA ISTANBUL OLD CITY HOTEL Cankurtaran Mah., Ahırkapı Sok. No: 24, Sultanahmet 34122 T: (+90) 0212 455 44 55 F: (+90) 0212 455 44 99 www.armadahotel.com.tr info@armadahotel.com.tr Rooms:108rooms,including40superiorand8deluxe rooms. Business & Conference Facilities: Express mail, fax, 5 meeting rooms, free wireless internet, computer and printer, photocopying and printing, 1 multi-function- al event room, audio-visual equipment. Guest Services: Room service, baggage storage, cur- rency exchange, free parking service, laundry, safe deposit boxes and facilities for guests to book tours. Wining & Dining: Armada Terrace A la Carte Restau- rant GEZI HOTEL BOSPHORUS Mete Cad. No.34 Taksim 34437 T: (+90) 212 393 27 00 F: (+90) 212 393 27 48 info@gezibosphorus.com www.gezibosphorus.com Rooms: 67 rooms including 11 concept suites. Business & Conference Facilities: 4 meeting rooms for up to 48 people. Health&LeisureFacilities:Spa,fitnesscentre,sauna, steam room, hammam and ice fountain. Guest Services: Free Wi-Fi, concierge, valet parking, laundry and drycleaning and 24-hour room service. Wining&Dining:FiammaRestaurantandBar(Italian). HILTON GARDEN INN Imrahor Cad. Dutluk Sok. Beyoğlu 34445 T: (+90) 212 314 5000 F: (+90) 212 314 5050 www.hiltongardeninn.hilton.com Rooms: 114 single rooms, 89 double/twin rooms, 4 suites and 3 rooms with disabled facilities. Business & Conference Facilities: A total of 7 meet- ing rooms and 1 ballroom, equipped with the latest technology and access to plenty of sunlight. Health & Leisure Facilities: 24-hour fitness centre. Wining&Dining:SumacGrillHiltonGardenInnRestau- rant (Turkish and international cuisines). THE HOUSE HOTEL BOSPHORUS Salhane Sok. No. 1 Ortaköy 34347 T: (+90) 212 327 77 87 F: (+90) 212 244 75 77 info.bosphorus@thehousehotel.com Rooms: The hotel consists of two buildings: the first comprising 23 rooms, while nearby "The Mansion" offers 3 rooms Guest Services: Bar/lounge, business centre, fitness centre,freebreakfastandinternetaccess,roomserv- ice and concierge services. Wining & Dining: Lounge Bar and Restaurant THE HOUSE HOTEL NIŞANTAŞI Abdi Ipekçi Cad. No. 34 Nişantaşı 34367 T: (+90) 212 224 59 99 F: (+90) 212 224 59 74 info.nisantasi@thehousehotel.com Rooms: 44 rooms including 4 terrace suites, 8 junior suites, 9 superior king rooms, 5 deluxe king rooms, 4 classic twin rooms, 14 classic king rooms. GuestServices:Doctoron-call,luggageroom,airport shuttle, free Wi-Fi, babysitting, laundry and dryclean- ing, currency exchange, fax/photocopying, ironing service, ticket service and concierge services. Wining & Dining: Lounge Bar and Restaurant. MARTI ISTANBUL HOTEL Abdülhak Hamit Cad. No. 25/B Taksim 34435 T: (+90) 212 987 40 00 F: (+90) 212 987 40 11 martiistanbulhotel@marti.com.tr www.martiistanbulhotel.com Rooms:91classicrooms,54superiorrooms,94deluxe rooms, 18 corner suites, 9 premium suites, 3 one- bedroom suites and 1 regal suite. GuestServices:Doctoron-call,luggageroom,airport limo service with fee, free Wi-Fi in room and public areas,babysitting,24-hourroomserviceandcarhire. 201 THEREPORT Turkey 2015 The Edition Istanbul Gezi Hotel Bosphorus Hilton Garden Inn The House Hotel Nisantasi Armada Istanbul Old City Hotel
- 204. THE GUIDE HOTELS Wining& Dining: Quad Restaurant and Bar (Turkish cuisine),BRASSRestaurantandBar(FrenchandAsian). MÖVENPICK HOTEL ISTANBUL Büyükdere Cad. No. 4 Levent 34330 T: (+90) 212 319 29 29 F: (+90) 212 319 29 00 hotel.istanbul@moevenpick.com www.moevenpick-hotels.com/istanbul Rooms: 249 rooms including 21 suites, 1 presidential suite, 45 executive rooms and 2 for the disabled. Business&ConferenceFacilities:520-sq-metreball- room,9break-outrooms,atotalof11meetingrooms for up to 550 people, with up-to-date technology. Health&LeisureFacilities:Fitnesscentre,indoorpool, sauna, jacuzzi, steam room and massage services. Guest Services: In-room safe, 24-hour room service, Wi-Fi, hairdresser, executive lounge, business centre, doctor and babysitter on call. Wining & Dining: AzzuR Restaurant (Mediterranean cuisine), BarAdoX (bar and lounge), Skyline Club Lounge (rooftop lounge), Gourmet (pastries). THE RITZ CARLTON, ISTANBUL Süzer Plaza, Elmadağ Cad. No. 9 Şişli 34367 T: (+90) 212 334 4444 F: (+90) 212 334 4455 www.ritzcarlton.com/istanbul Rooms:244 rooms including 57 club rooms, 21 exec- utive suites, presidential suite and Ritz-Carlton suite. Business&ConferenceFacilities:695-sq-metreball- room, 9 individual meeting rooms, document centre, courier services and two executive boardrooms. Health&LeisureFacilities:Spa, indoor pool, 24-hour gym, hammam, sauna, steam room, whirlpool and 9 massage rooms, as well as open-air spa in summer. Guest Services: Free Wi-Fi for all guests rooms and restaurants,giftshops,conciergeservices,valetpark- ing, shoeshine, barber shop, babysitting and laundry. Wining & Dining: Bleu Lounge and Grill (modern din- ing all day and live music at night), Çintemani Restau- rant (“back to flavours” cuisine and casual dining), Lobby Lounge, Living Lounge (billiard tables, a mar- tini bar and internet connectivity). ISTANBUL AIRPORT NOVOTEL ISTANBUL Kennedy Cad. No. 56 Zeytinburnu 34025 T: (+90) 212 414 3600 F: (+90) 212 414 3636 H5997@accor.com www.novotel.com Rooms: 208 sea view rooms, including 6 suites and 2 reduced mobility rooms. Business & Conference Facilities: 7 meeting rooms withhigh-speedinternet,photocopyingandprinting, secretarial services and audio-visual equipment. Health & Leisure Facilities: Fitness center, massage rooms, steam room and sauna, pool (seasonal). Guest Services: Shuttle services, safe deposit boxes, babysitting upon request, children’s corner, baggage storage, 24-hour concierge, currency exchange, gift shop, valet, laundry, high-speed internet and parking. Wining & Dining: 24-hour Room service, Nov’ist Restraurant (local and international cuisine), Nov’ist Bar, terrace seating (seasonal) ANKARA MÖVENPICK HOTEL ANKARA Beştepeler Mah. Yaşam Cad. No. 1 Söğütözü, 06520 T: (+90) 312 258 58 00 F: (+90) 312 258 58 99 hotel.ankara@moevenpick.com www.moevenpick-hotels.com/ankara Rooms: 176 rooms including 18 deluxe rooms, 10 suites and 1 room for physically challenged guests. Business & Conference Facilities: 390-sq-metre ball room and 9 meeting rooms with capacity for 6 to 400 persons, all equipped with audio-visual technology. Health&LeisureFacilities:Fitnesscentre,indoorpool, Turkish bath, sauna, steam bath and massage rooms. Guest Services: Laundry and dry cleaning, 24-hour room service, Wi-Fi, hairdresser, babysitting and doc- tor on demand, in-room electronic safe, television with satellite channels and media hub. Wining & Dining: Plus Restaurant (international and Turkish cuisine), Lobby Lounge and Bar. IZMIR MÖVENPICK HOTEL IZMIR Cumhuriyet Blv. No. 138 Pasaport, 35210 T: (+90) 232 488 1414 F: (+90) 232 484 8070 hotel.izmir@moevenpick.com www.moevenpick-hotels.com/izmir Rooms:185 rooms including 36 executive rooms and 17 junior suites and a king suite. Business & Conference Facilities: A total of 10 mod- ularbanquetandconferenceroomsfor10to350peo- ple, suitable for events of all kinds. Health&LeisureFacilities: Indoor pool, sauna, steam bath, fitness centre and massage services. Guest Services: Executive lounge, business centre, laundry and dry cleaning, 24-hour room service, Wi- Fi, safety deposit box at reception, hairdresser, doc- tor on demand, babysitter on request. Wining & Dining: Margaux Restaurant (international cuisine), Mistral Bar (rooftop bar), Breeze Bar (lobby bar), Swiss Cake (chocolates, cakes and pastries). 202 Marti Istanbul Hotel The Ritz Carlton, Istanbul Novotel Istanbul Mõvenpick Hotel Ankara Mõvenpick Hotel Istanbul www.oxfordbusinessgroup.com/country/turkey
- 205. THE GUIDE LISTINGS203 THEREPORT Turkey 2015 Englishiswidelyspokeninthebusinesscommunity;how- ever,itisadvisabletoconfirmwhetheratranslatorwill beneededformeetings.LearningafewTurkishphras- es will facilitate everyday interactions and is greatly appreciated by locals, who admire the effort. Turkish society blends cosmopolitanism and conser- vatism. Cities like Istanbul, Ankara or Izmir are gener- allyliberal,whiletheeasternandruralprovincesofthe country are traditional. Turkish commonly offer tea at meetingsandconversecasuallybeforedoingbusiness. GOVERNMENT MINISTRIES Office of the President 0312 470 23 08 Prime Ministry 0312 422 10 00 Culture and Tourism 0312 309 08 50 Defence 0312 402 61 00 Energy and Natural Resources 0312 212 64 20 Environment and Urbanisation 0312 410 10 00 EU Affairs 0312 218 13 00 Food, Agriculture and Livestock 0312 287 33 60 Foreign Affairs 0312 292 10 00 Finance 0312 415 29 00 Health 0312 585 10 00 Justice 0312 417 77 70 Labour and Social Security 0312 296 60 00 National Education 0312 419 14 10 Science, Industry and Technology 0312 201 50 00 Transport, Maritime Affairs and Communications 0312 203 11 16 STATE INSTITUTIONS Parliament 0312 420 57 52 Supreme Administration Court 0312 425 99 14 Turkish Statistical Institute 0312 410 04 10 State Planning Organisation 0312 294 50 00 Press and Information 0312 583 60 00 Privatisation Administration 0312 585 80 00 ASSOCIATIONS ABROAD The American-Turkish Council 01 202 783 04 83 US-Turkish Industrialists and Businessmen’s Association 01 202 776 77 70 The EU-Turkish Industrialists’ and Businessmen’s Association 32 2 736 40 47 CONSULTANCY & ACCOUNTANCY SERVICES Grant Thornton 0212 373 0048 Deloitte 0212 366 60 00 Yapı Kredi Yatırım 0212 280 10 30 LEGAL SERVICES Hergüner Bilgen Özeke 0212 310 18 00 Kılıç and Partners 0212 277 4111 COURIER SERVICES Aras Cargo 0216 538 55 00 Yurtiçi Kargo 0212 365 23 65 CHAMBERS OF COMMERCE & INDUSTRY Turkish Union of Chambers and Exchanges 0312 218 2000 Istanbul Chamber of Commerce 0212 455 60 00 Aegean Region Chamber of Industry 0232 455 29 00 Ankara Chamber of Industry 0312 417 12 00 Ankara Chamber of Commerce 0312 201 81 00 Adana Chamber of Commerce 0322 351 55 06 Adana Chamber of Industry 0322 351 76 57 BUSINESS ASSOCIATIONS American Business Forum in Turkey 0212 243 35 11 Foreign Economic Relations Board 0212 339 50 00 International Investors Association 0212 272 50 94 Turkish Industrialists and Businessmen’s Association (TÜS AD) 0212 249 19 29 Association of Independent Businessmen and Industrialists (MÜS AD) 0212 222 04 06 EMERGENCY Ambulance 112 Police 155 Fire 110 PRIVATE HOSPITALS Acıbadem 0216 544 44 44 Anadolu Sağlık Merkezi 0444 42 76 Dünya Göz Hastanesi 0212 413 75 75 American Hospital 0212 311 20 00 Florence Nightingale Hospital 0212 224 49 50 German Hospital 0212 293 21 50 International Hospital 0212 468 44 44 JFK Hospital 0212 441 41 42 Hisar Intercontinental Hospital 0216 524 13 00 CLINICS Euromed 0216 414 62 82 Intermed Medical Centre 0212 225 06 60 LOCAL NEWSPAPERS Hürriyet 0212 677 00 00 Milliyet 0212 505 61 11 Radikal 0212 505 61 11 Referans 0212 677 00 00 Hürriyet Daily News 0212 251 65 80 WEB SITES www.tcmb.gov.tr www.cmb.gov.tr www.ttk.gov.tr www.tubitak.gov.tr
- 206. GUIDE SOCIETY & ETIQUETTE:Turkish society is a unique mix of cosmopolitanism and conservatism, with large citieslikeIstanbul,AnkaraorIzmirgenerallybeingfair- ly liberal, while the eastern and rural provinces of the country tend to be more traditional. It is very common to be offered tea at business meetings, which is fol- lowed by a casual discussion. Initial topics of conver- sation should focus on personal, rather than work- related matters: inquiring about someone’s health, family and origins is generally a good way to break the ice and make everyone comfortable. Turks often find Westerners who skip the personal discussion rude. LANGUAGE:Englishiscommonlyspokenbymembers of the business community; however, it is advisable to confirm whether a translator will be needed ahead of ameeting.LearningafewTurkishphraseswillfacilitate everyday interactions and is appreciated; interpretive gestureswillalsodowonders.Allmajorcitieshavefor- eign language centres that offer Turkish courses. PUBLICHOLIDAYS: There are several official holidays during which time banks, offices and businesses are closed. Holidays often see increased delays in travel as well as traffic congestion. Dates to remember are National Sovereignty and Children’s Day on April 23, Atatürk Commemoration and Youth & Sports Holiday onMay19,VictoryDayonAugust30,andRepublicDay on October 29. Religious holidays are also respected; but dates vary according to Islam’s lunar calendar. TIPPING: Many restaurants will include a 10-15% gra- tuitychargeonthebill,listedasaservis.Smallerestab- lishments will sometimes expect a voluntary 5-10% contribution, although this is not a rule. It is not gen- erally common to tip taxi drivers, as they often round service fees up to the nearest lira. INTERNET&PHONE:Thereareinternetcafesinallcities andmosthotelsofferWi-Fi.Therearethreemainoper- ators offering mobile services, including 3G technolo- gy.Forextendedstays,itisnecessarytoregistermobile phonesthatwerepurchasedabroad,asthecountryhas restricted unregistered phone usage to one month. VISAS: Tourist visas may be obtained online prior to arrival, or at the airport, and are required for most nationalities. If getting a visa at the airport, it must be purchased before going through passport control at a separate window. Other visas may be requested at the TurkishembassyoranyTurkishconsulateinyourcoun- try of residence before departure. Most citizens from the EU as well as citizens from Canada and the US can get a multiple-entry, three-month visa for €16 to €47. HEALTH: Acceptable hygiene standards are enforced throughoutthecountry;howeveritisprudenttodrink onlybottledwater.Turkishfoodismostlyhealthy,fresh andenjoyable,withmanyoptionsavailableforalltypes of diets. Along the coasts, the “Mediterranean” diet is common, while the interior relies heavily on red meat and vegetables. Pharmacies (eczane) are plentiful and run a rota system for night-time and Sunday service. Large cities have a selection of health care facilities, including public and private hospitals, though private health care tends to be expensive. If in doubt, contact yourinsuranceproviderorembassy.Receptionistsand nurses may not speak English, most doctors do. TRANSPORT: Negotiating traffic during peak hours may prove quite challenging in Istanbul, and to a less- er extent in other major cities. Public transport has improvedconsiderablyoverthepastdecadeandmost big cities maintain efficient bus or tram lines. Istanbulalsohasanundergroundmetrosystemthat, while less extensive than those typically found in oth- er European cities, is the most efficient transport methodduringpeakhours.Taxisareplentiful,metered and relatively inexpensive, but local driving habits may seem eccentric. Other modes of transport in Istanbul include ferries, minibuses and shared vans known as dolmufl.Tokensortravelcardsareavailableinmostshops and convenience stores, as well as metro stations. ELECTRICITY: Electricity is 220V and follows the stan- dard, round two-pin plugs. Power adapters are avail- ableinairportsandspecialisedshops.Powersurgesmay damage laptops, thus it is advisable to use a protector. 204 Facts for visitors Useful information for first-time and returning visitors www.oxfordbusinessgroup.com/country/turkey