THE REPORT Turkey 2012 ECONOMY ENERGY COUNTRY PROFILE BANKING TOURISM CAPITAL MARKETS INSURANCE REAL ESTATE CONSTRUCTION INDUSTRY TELECOMS & IT INTERVIEWS

THE REPORTTurkey 2012

ECONOMY ENERGY COUNTRY PROFILEBANKING TOURISM CAPITAL MARKETSINSURANCE REAL ESTATE CONSTRUCTIONINDUSTRY TELECOMS & IT INTERVIEWS 9 7 8 1 9 0 7 0 6 5 5 9 0

CONTENTS TURKEY 2012

New realitiesPage 12

As it moves forward with its third term in office,the Justice and Development Party has over-seen several significant developments. Thecountry has come to be regarded as a region-al leader, and an ongoing legal case againstformer members of the military (though notwithout its critics) is a sign of a new opennessabout formerly taboo subjects. A number of con-stitutional reforms are also under discussion.

A country transformedPage 25

After a year of remarkable growth in2011, which saw the country’s GDPexpand by an estimated 7.8% year-on-year, analysts are predicting a slowerpace for 2012, with the governmentforecasting 4%. The country has beena magnet for foreign direct investmentin recent years, while privatisationefforts continue in earnest. Challengesremain, including a large currentaccount deficit and the risk of inflation.

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COUNTRY PROFILEGrowing influence: The country is a political andeconomic link between the West and the Middle East

POLITICSNew realities: Recent years have brought aremarkable political transformationSetting an example: Regional peace is high onthe agenda as the country seeks to strengthenits role model statusViewpoint: Prime Minister Recep Tayyip Erdo!anInterview: Ahmet Davuto!lu, Minister of ForeignAffairsInterview: Rifat Hisarcıklıo!lu, President, Foreign Economic Relations BoardThe only show in town: High-profile investigations and court cases are dominatingthe headlinesViewpoint: Joe Biden, US Vice-President

ECONOMYA country transformed: Growth is expected tocontinue at a measured paceFacilitating business: While the country is moving up in the rankings, there is still plenty ofroom for improvementInterview: Ali Babacan, Deputy Prime Minister Raising revenue: Fresh bidding rounds are underway for privatisation of state assetsInterview: Mustafa Koç, Chairman, Koç HoldingInterview: Hüsnü Özye!in, Chairman, FIBA Holding

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A win-win relationship: Recent years have seena jump in trade with Gulf statesTowards 100: Setting the long-term sights highViewpoint: Jim O’Neill, Chairman, GoldmanSachs Asset Management

BANKINGStrong strategies, good growth: As banksexpand financial practices, the sector benefitsInterview: Mehmet "im#ek, Minister of FinanceViewpoint: Erdem Ba#çı, Governor, Central Bankof the Republic of TurkeyAlternatively growing: Online and mobile banking cast a wide net for new customersBig lenders: Critical changes and growth signsRoundtable: Martin Spurling, CEO, HSBC Turkey;Adnan Bali, CEO, $# Bankası; and Hüseyin Aydın,General Manager, Ziraat BankasıAs the market swings: The sector’s response toa rapidly shifting monetary policy

CAPITAL MARKETSOn the rebound: The prospects are bright aftera tough year in 2011The next big thing: Legal changes have pavedthe way for the growth of Islamic bondsInterview: Vedat Akgiray, Chairman, Capital Markets BoardInterview: $brahim Turhan, Chairman and CEO,$MKB Borsa IstanbulTaking the middle ground: Significant opportunities open to private equity investorsViewpoint: $lhami Koç, General Manager, $#Investment

Stocks & Bonds: Share analysis & data provided by !" InvestmentTürk Traktör: Agricultural equipmentArçelik: White goodsHalkbank: BankingTAV: TransportTüpra#: HydrocarbonsTurkcell: Telecoms

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Power playsPage 94

Located between the Middle East andEurasian regions and Western markets,Turkey is a key player in energy trade. Withso many projects in the pipeline and the gov-ernment pledging full liberalisation of thesector, plenty of opportunities await bothinvestors and contractors. Reducing the ener-gy import bill is a key government priority.

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INSURANCECleared for take-off: Strong growth potentialcontinues to attract the attention of foreignprovidersOpening the door: Government-drivenchanges are set to make pensions more attractive

ENERGYPower plays: Transit, pipeline and renewableprojects are all in the worksSo crazy it just might work: A massive canalmay one day reshape IstanbulInterview: Taner Yıldız, Minister of Energy andNatural ResourcesInterview: Alexander Medvedev, Director-General, Gazprom ExportIt’s in the pipeline: Investments in the oil andgas infrastructure continueInterview: Tony Hayward, CEO, Genel EnergyWater world: Hydroelectric power plants are amajor renewable energy sourceInterview: Rövnag Abdullayev, President andCEO, SOCARPush for renewables: Turning to wind, sun andwater to boost energy security and protect theenvironment

INDUSTRYGaining ground: Building a global reputationfor exporting high-quality productsInterview: Hüseyin Özdilek, President, ÖzdilekHolding

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Interview: Tuncay Özilhan, CEO, Anadolu GroupSteel resolve: Production of steel remains strong Interview: Muharrem Dörtka#lı, President andCEO, Turkish Aerospace IndustriesA driving force: Automobile production hasbeen increasing steadilyIn the zone: Industrial parks provide incentivesfor both local and foreign investors

CONSTRUCTION & REAL ESTATEPlanned development: Urban renewal programmes and infrastructure projects Interview: Ahmet Haluk Karabel, President,Housing Development AdministrationInterview: Avni Çelik, Chairman, SINPA"Further afield: Contractors working abroad Rising star: Increased demands in both the residential and commercial marketsBuyers from abroad: A proposed law will makeit easier for foreigners to purchase propertyInterview: Erman Ilıcak, Chairman, RönesansHoldingViewpoint: Anthony Khoi, President and CEO,Aerium Turkey

TRANSPORTMore ways than one: Multiple projects areunder way for continued economic growthIn stops and starts: The privatisation portfolioincludes a number of big-ticket itemsInterview: Binali Yıldırım, Minister of Transport,Communications and Maritime AffairsInterview: Temel Kotil, CEO, Turkish Airlines

AGRICULTURENew pastures: A varied climate and fertile soilmake the country a breadbasket for the regionInterview: Recep Konuk, Chairman, Konya "ekerOut in the country: Gulf states look to acquirefarmland to meet growing demand at home

TELECOMS & ITStaying in touch: The growth of the mobilesector and internet is driving competition andinnovation among providers Come together: Sector players seek to expand their reach into different segments Interview: K. Gökhan Bozkurt, CEO, Türk TelekomInterview: Süreyya Ciliv, General Manager, Turkcell

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CONTENTS TURKEY 2012 5

THE REPORT Turkey 2012

Gaining groundPage 116

Rising domestic demand and growingexports are keeping the industrial sectorbusy, with production up 9% in 2011. Carsand chemicals lead the pack in terms ofexports, with textiles and steel also keysectors. As many raw materials are import-ed, reining in the trade deficit is increas-ingly important, and adding value andincentivising investors are key to growth.

A growing dynamismPage 180

The government currently funds 90% offormal education activities, but with thepassage of a new education law that intro-duces a number of changes, private insti-tutions are likely to play an increasing role,helping to reduce pressure on the sector.The health care system is also undergoingmajor reforms that are aimed at boostingthe quality and the accessibility of provision.

More ways than onePage 150

Strengthening infrastructure to relievebottlenecks caused by a growing popu-lation and rising trade volumes remainsa key priority. Some $180bn is due to bespent in the sector over the next decade,including large-scale plans across allmodes of transport. PPPs and BOT con-tracts are expected to play a signifi-cant role in expansion and upgrade work.

Put it to printPage 206

With an attentive audience across mul-tiple platforms, the sector is working tomake use of several new connections.A new media law introduced in 2011aims to increase foreign investmentand resolve allocation disputes. As con-tent moves online, advertisers are hop-ing to benefit from its monetisation.

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Technological upgrade: A growing populationof web users is driving demand Need for speed: Investments by operators areleading to faster internet connections

EDUCATION & HEALTHA growing dynamism: Increasing state investment and an expanding private role Interview: Zekeriya Yıldırım, Chairman,Darü##afaka FoundationInvesting in the future: Competition is growing Comprehensive growth: A rising economy iscreating opportunities for expansion Interview: Recep Akda!, Minister of HealthGrowth spurt: A wave of private investment

TOURISMMaking room for more: A promising futureInterview: Kadir Topba#, Mayor of IstanbulNeighbourhood guests: Closer regional ties arehelping to boost the number of visitors

MEDIA & ADVERTISINGPut it to print: Legal reforms create opportunitiesRefreshing the page: Providing content in newand innovative waysInterview: Hanzade Do!an Boyner, Chairwoman, Do!an OnlineGoing digital: Social media and online advertising are taking hold Connected to the market: Popular internetplatforms are the targets for sector growth

TAXDeloitte TurkeyNew principles: The updated commercial codewill boost transparency and auditing standardsA business-friendly package: Incentives andother recent tax developmentsLegal liabilities: Ins and outs of Turkish tax lawViewpoint: Anthony Wilson, Partner in Charge,Deloitte Turkey

LEGAL FRAMEWORKHergüner Bilgen ÖzekeModernising corporate law: An up-to-datelegal code will make for a healthier economy Change for the better: An overview of the current legal landscapeViewpoint: Ümit Hergüner, Managing Partner,Hergüner Bilgen Özeke

THE GUIDEArt boom: Greater importance is being placedon arts and cultureSoap power: The success of Turkish television Rewriting pre-history: Excavations at GöbekliTepe have unearthed some spectacular findsFinding a place to stay: HotelsListings: Important numbers Facts for visitors: Useful information

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Country ProfilePer capita GDP has tripled over the past decadeGreater spending power among the youth populationIncreased post-secondary school attendanceRising technological entrepreneurship and internet useGeographical location is advantageous for trade

COUNTRY PROFILE

Per capita GDP rose from $2900 in 2001 to over $10,500 in 2011

Over the past decade, Turkey has experienced a num-ber of important transitions that have led to demograph-ic, economic and cultural transformation. These changeshave made contemporary Turkey a regional focal pointthat many Turks regard as an extension of its influencein Ottoman times.

Following the onset of a devastating banking crisisand severe economic recession in 2001, the Justiceand Development Party (AKP) won a landslide victoryin national elections and set about reforming the coun-try’s regulatory environment. A decade of stable AKPleadership has been largely responsible for the coun-try’s economic success, though the political transfor-mation of the country has been source of concernamong Turkey’s traditional elites.

Per capita GDP, which was $2905 in 2001, reached$10,576 in 2011. The young population is increasing-ly mobile and consumption-oriented, which has helpedexpand the nation's service industries while also caus-ing the current account deficit to triple.

While the Turkey of today is vastly more affluent thanthat of a decade ago, the country's conservative andfamily-oriented culture has seen few changes. Manyunmarried men and women still live with their families,even in urban areas, and as a result the availability ofresources among the under-30 demographic is quitehigh, fuelling consumption in everything from textilesto automobiles and cultivating the emergence of aninvestment culture. This demographic strength is amongthe most frequently cited reasons international busi-nesses have given for entering the Turkish market.FOREIGN POLITICS: The EU accession process hasseen waning support from the population over the pastsix years. The relevance of Europe to Turkish experiencehas declined with both the economic recession andstronger political ties with non-European countries. Asa result, the Turkish government is committed to bal-ancing its regional and international interests with softpower and trade, while reducing the role of the Westand NATO in setting policy. This has alarmed many

observers, who have accused the country of "turningEast". Rather, Turkey has risen in prominence as a polit-ical and trade liaison for Western countries, many ofwhich are isolated from the Middle East and NorthAfrica as a result of their history of colonisation andimperialism. Thus, as Turkey’s ties with its Middle East-ern neighbours have grown stronger, its importance inWestern politics has increased in kind.POPULATION: As of December 2011 the populationwas estimated at 74.7m, with nearly 77% of Turkey'scitizens residing in urban areas. Istanbul, the country'slargest city, is home to an estimated 18.2% of the pop-ulation, or 13.6m people, and is the second-largest cityin Europe. Ankara, the capital, has 4.8m residents andthe Aegean city of Izmir has 3.9m.

The country is young compared to other regionalcounterparts – 50% are under the age of 30. The 15-64 age group makes up 67% of the total population,indicating that the youth segment’s dominance of thecountry will continue for some time.

The populace is has a slightly disproportionate num-ber of males, who comprise 50.2% compared to 49.8%females. Women account for 43% of university gradu-ates and are well-represented in white collar positions,particularly in banking and academia. However, femaleworkplace participation has declined overall, from 34.1%in 1990 to 21.6% in 2010.EDUCATION: The country has 166 universities offer-ing two- and four-year degrees, and the expandingyouth population has seen the proliferation of privatetraining institutes providing post-secondary vocation-al training. Despite improvements in the educationalsystem, Turkey still lags in gender equality. Females areunder-represented at all levels of education betweenmiddle school and post-graduate. Additionally, while theliteracy rate was over 94%, illiteracy was four timesmore common among females.INFRASTRUCTURE & TECHNOLOGY: Turkey has invest-ed significant resources in the expansion of air and roadinfrastructure over the past decade and continues to

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Growing influenceA political and economic link between the West and the Middle East

COUNTRY PROFILE

expand and upgrade both commuter and inter-city railoptions. Public transportation is readily available inmost of the major cities and is steadily expanding,though the long history of habitation in Istanbul andAnatolia mean projects that require significant diggingcan be challenging given the likelihood of coming acrosshistorical artefacts.

The recent increase in per-capita income and easedaccess to credit have resulted in a rise in automobileownership. Particularly in Istanbul, this has caused con-gestion, often leading to gridlock during peak com-muting hours. However, less populated cities have beenbetter able to cope with the increased traffic.

Turks are a technology-savvy people; around 25mhouseholds are served by the internet and over 33mTurks are Facebook users. While this penetration rateis only approximately 40%, usage rate are comparableto the UK, as users are engaged at home, in the office,in internet cafes and on their mobile devices.LANGUAGE & ETHNICITY: The country is home to avast number of ethnically distinct groups, though thesedistinctions are often subtle and are not officially quan-tified by the state. Most statistics estimate the ethnicTurkish population at 70-75%, with Kurds comprisingroughly 18% and other minorities 7-12%.

Turkish is the official language of the state and thefirst language of more than 90% of the population.Kurdish, having been officially banned for decades, isbecoming steadily more accepted and is even taughtin some schools; however, societal challenges remainfor Kurdish speakers and the language is not often spo-ken in public outside of the south-east. Arabic is alsocommonly used by about 1.6% of the population, par-ticularly in the south-east of the country.CULTURAL SENSITIVITY: Turkish people are general-ly fairly conservative and expect foreign visitors torespect national and personal values. It is wise to dressconservatively for business, and while in day-to-day lifemeeting times are less important, punctuality is a mustin the business world. Turks are generally patriotic and

proud of their nation, particularly given its economicgrowth and success over the past decade, and they aremore comfortable with foreigners who demonstratesome knowledge – or at least curiosity – about the his-tory and language of their country. In general, business-people and politicians regard Turkey as an importantdestination and do not feel that this is a “fly-in, fly-out”market. It is important to maintain eye contact, partic-ularly in the business world, as this is seen as an indi-cation of one's honesty.GEOGRAPHY & NATURAL RESOURCES: Turkey is bor-dered by eight countries and surrounded by four sig-nificant bodies of water. The Bosphorus Strait flows fromthe Black Sea into the Marmara Sea, dividing the cityof Istanbul into two parts. The European portion of thecountry, comprising 3% of the country’s land mass, issevered again from Anatolia by the Dardanelles, whichflows between the Marmara and the Aegean Sea. Thecountry is also bordered by the Mediterranean to thesouth. In total, Turkey has 7200 km of coastline – near-ly triple the length of its 2600 km of land borders.

The country is in a somewhat precarious political sit-uation given the diversity and varying dispositions ofbordering nations, but it has for the past decade main-tained a "good neighbour" policy that has seen fairlypositive bilateral relations with surrounding countries:Greece and Bulgaria in the west and north, Georgia andArmenia to the north-east, Azerbaijan and Iran to theeast, and Iraq and Syria to the south-east.ECONOMY & CONTRIBUTING SECTORS: While thereare some hydrocarbons resources, the country is stillheavily dependent on imports for electricity genera-tion and motorised vehicles. Energy spending accountsfor more than 50% of the nation’s current deficit.Increasingly, the government is exploring opportuni-ties in on- and offshore exploration, particularly in theeast, and in the Black and Mediterranean Seas.

Despite the dearth of accessible hydrocarbonsreserves, Turkey is a major producer of a number of valu-able minerals. It has more than 70% of the world’sboron reserves and is also home to significant reservesof coal, copper, gold, iron ore, limestone and marble.

Approximately 30% of the country’s land is arable andagriculture accounts for roughly 10% of total GDP. Theagriculture sector also accounts for 30% of employment;however, the scale of the sector’s contribution to GDPhas been reduced by the expansion of both the ener-gy generation and manufacturing industries. The coun-try is a net importer of energy and finished goods, buthas a thriving manufacturing sector, the output ofwhich is predominantly directed to exports.

Europe is the nation's primary trade partner, with theEU importing 52% of Turkey's output. This has exposedthe economy to very real risks of a slowdown. As of end-2011, however, the Turkish economy has still record-ed unexpected growth due to high demand for thecountry's exports following the devaluation of the lira.The country suffers from a current account deficit ofroughly 10%, given the deflated value of the lira, whichhit a low of !.39 in December 2011. This decrease can be partly attributed to oil and natural gas imports.

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With a population of 13.6m, Istanbul is the biggest city in the country and the second largest in Europe


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PoliticsJustice and Development Party consolidates its positionEU accession process at a standstill for the time beingDebate on constitutional reform on the agenda in 2012Regional upheaval brings challenges and opportunitiesErgenekon investigations and court cases continue

POLITICS OVERVIEW

The Justice and Development Party is in its third term in office

Reforms to bring the country more into line with EUstandards, driven by a widespread desire to makeTurkey a more democratic and free-market-basedeconomy, have gone hand-in-hand with increasedgovernment popularity, stability and economicgrowth. Indeed, there is a great new confidence inTurkish politics and society. This has also led to agreater assertiveness in the international field, wheremany now see the country as a positive role modelfor development throughout the Muslim world.

The country still faces some long-standing chal-lenges, however. The Kurdish issue continues tohaunt political life, stunting development of thesouth-east in particular. The tension between a moresocially conservative and a more secular outlookalso provides the framework for much debate inpublic and private life. Various human rights issuesare also a concern, as is the treatment of journalistsand the perceived state censorship of criticism (seeMedia & Advertising chapter). Meanwhile, the ArabSpring presents challenges for Turkey’s relationswith its neighbours – in particular with Syria. Effortsto end long-standing disputes with Armenia and theArmenian diaspora have made slow progress. EU: Progress toward EU accession has also faltered.Turkey’s application for membership was filed in1987. It joined the Customs Union in 1995, yet didnot begin full membership negotiations until 2005.These involve Turkey completing the 35 chapters ofEU law, known as aquis. As of December 2011, nego-tiations had been opened on 13 chapters, one ofwhich had been provisionally closed. Eight chapterscould not be opened, as they are related to Turkey’srelations with the Republic of Cyprus, an EU mem-ber that Turkey does not recognise. The deadlock,combined with growing hostility from some Europeangovernments toward Turkish membership, continuesto stymie progress on EU accession (see analysis).

Nonetheless, as it moves forward with its thirdterm in power, the Justice and Development Party

(AKP) of Prime Minister Recep Tayyip Erdo!an canlook back on a series of significant achievements.RULING BODIES: Turkey is a democratic republic,with a president as head of state and a governmentled by a prime minister. It has a single-chamber par-liament, the Grand National Assembly of Turkey(TBMM), with a multiparty system in operation.

The political system is governed by the constitu-tion, the current version of which was originallydrawn up under military rule, in 1982. Since then,the constitution has been extensively amended, witha new version also now under debate.

The current president, Abdullah Gül, was electedto the office by parliament in 2007. At that time, thiswas the method for electing the head of state, asoutlined in the 1982 constitution. Yet an amendmentthat same year then introduced direct nationwideelections for the office. Under the old constitution,presidents were elected for a single, seven-year term,with this changed to a maximum of two five-yearterms by the 2007 amendment. This constitutionalchange threw a question mark over Abdullah Gül’srights to re-election, with the possibility that 2012might see the first direct presidential vote – fiveyears after Gül took office. Instead, in January 2012parliament voted to allow the incumbent his full,seven-year term, with the first direct elections nowscheduled for 2014 – subject to a legal challengeto this decision made by the opposition.

The president’s powers are not purely ceremoni-al. As commander-in-chief, he or she can appoint thechief of the general staff and presides over meet-ings of the National Security Council – the key bodybringing together politicians and military leaders. Thepresident also has the power of appointment in keyinstitutions inside the judiciary, the Higher Educa-tion Council, the State Supervisory Council and theuniversities. These areas have all traditionally beenareas of political controversy. While the president maynot initiate legislation, the office holder does hold

Turkey’s currentconstitution was drawn upin 1982 but has since beenextensively amended, and anew version is now underdebate.

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New realitiesRecent years have brought a remarkable political transformation


POLITICS OVERVIEW

veto powers over bills passed by the TBMM, whichif exercised, returns them for further debate. If thebill is then passed again without any changes, thepresident is obliged to pass it, though he or she mayalso refer it to the Constitutional Court or put it toreferendum, if still opposing the bill.GRAND NATIONAL ASSEMBLY: The TBMM is thusthe supreme legislature, with its single chambercomprising 550 deputies elected for four-year termsvia a system of proportional representation, knownas the D’Hondt method. For this, the country is divid-ed into 85 electoral districts. There is also a nation-al party threshold of 10%, meaning votes cast for par-ties receiving less than 10% of the national votehave their ballots re-cast for the next preference.

This has tended to work against minority andregionally based parties. There have been repeatedcalls from the EU and electoral reformers in Turkeyfor the threshold to be lowered in any future con-stitutional amendments. However, the rules alsoallow for independent candidates to be elected, pro-vided they garner more than 10% of the vote in theirprovince. This enabled the supporters of minority par-ties, such as the largely Kurdish Peace and Democ-racy Party (BDP), to run as independents in 2011 andreform as a party group once elected to office. It isat the TBMM that the future prime minister must wina vote of confidence to form a government. He orshe is then appointed by the president.

In the past, when parliament was deeply dividedamong many parties, this usually meant a coalitionwould have to be formed before an administrationcould take office. Since the AKP victory in 2002,however, the prime minister has been able to counton a clear majority in the TBMM from his own par-ty alone. The president appoints the Council of Min-isters, or cabinet, the members of which do not haveto be deputies, but usually are. The 61st cabinet,appointed in July 2011, consisted of the prime min-ister, four deputy prime ministers and 21 ministers.

The government initiates legislation in the formof bills that go before a number of committees – therewere 17 specialised committees in 2011 – and thenbefore the TBMM for voting. Bills go to the presi-dent for final ratification. Deputies and oppositionparties may also attempt to bring their own billsbefore committee and the TBMM.ELECTION RESULTS: The three last general elec-tions for the TBMM, in 2002, 2007 and 2011, sawvictories for the AKP in each. The party won 363seats, with 34.28% of the vote in 2002, 341 seatsand 46.66% of the votes in 2007, and 327 seats with49.83% of the votes in 2011 – illustrating growingpopular support, yet also showing the vagaries ofthe proportional electoral system.

In 2002 the only other party to win representa-tion was the Republican People’s Party (CHP), Turkey’soldest party. Formed in 1923 by the Republic’sfounder, Mustafa Kemal Atatürk, this won 178 seatsin 2002, with 19.38% of the votes. The 2002 elec-tion was a watershed, in that it saw the demise of a

string of parties that had dominated Turkish politicsin the 1990s – the True Path Party, the MotherlandParty and the Democratic Left Party. These all failedto gain a single seat and have yet to recover fromthis defeat, failing again to win any in 2007 or 2011.

After the 2007 election the CHP was joined inopposition by the Nationalist Action Party (MHP),which won 71 seats with 14.29% of the vote. The CHPitself won 112 seats with 20.85% of the vote, whilethe “independents” won 26 seats, 22 of which lat-er became the Kurdish Democratic Society Party(DTP). This was banned in 2009, after the courtsfound links between it and the outlawed KurdishWorkers’ Party (PKK) – an armed group branded “ter-rorist” by Turkey, the US and EU.

In 2011 the CHP won 135 seats with 25.98% ofthe votes, the MHP 53 seats with 13.01% of the votesand the independents 35 seats, all of which becamethe ethnic-Kurdish BDP’s representation.

Thus a pattern appears in which parliament – andthe country as a whole – divides roughly half behindthe government and half against, with the opposi-tion split between left-leaning nationalists in theCHP, right-leaning nationalists in the MHP and minor-ity independents like those comprising the BDP, orits previous incarnations. The CHP, led by KemalK›l›çdaro!lu, and MHP, led by Devlet Bahçeli, have alsooften found themselves cast in the role of defend-ers of an older, more statist Turkey, in the face of thepro-free-market policies of the AKP.

The divide has also often been characterised assecular versus religious, given the Islamist back-ground of the AKP, with both Erdo!an and Gül hav-ing been members of the ill-fated 1995-97 WelfareParty government, which was ousted by the militaryand its allies in what became known as the soft coup,or the February 28 process (see analysis).

Yet many of the AKP leaders are anxious to describetheir party as a conservative democratic group, akinto the Christian Democrats in Germany. Clearly the

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Victories in the last three general elections have demonstrated the AKP’s growing popular support

The government initiateslegislation in the form ofbills that go before severalcommittees and the TBMM.Bills go to the president forfinal ratification.

POLITICS OVERVIEW

AKP is a broad movement, encompassing both lib-eral and more pious opinion, with this also a sourceof speculation over disputes within the ranks.Nonetheless, in early 2012, the party seemed uni-fied behind its current leadership, with little to chal-lenge it within the walls of the TBMM.JUDICIAL POWERS: The Turkish penal code is basedon those of Switzerland and Italy, with separate judi-cial, military and administrative courts. Each has itsown courts of first instance and appellate courts,with the court of jurisdictional disputes chargedwith resolving any disagreement over which systemshould try a case. The supreme courts of the judi-cial system are the Constitutional Court and theCourt of Appeals. The former can be called in by thepresident, or 20% of the TBMM’s deputies, to decideif a new law is constitutional.

Since the constitutional referendum of Septem-ber 2010, the court has had 17 members, ratherthan the previous 11. Parliament was given theauthority to appoint three of these new judges, withother nominating bodies also brought into theprocess. The Court of Appeals (or Court of Cassa-tion) reviews the decisions of the civil and criminallower courts. There is no jury system, with decisionstaken by a panel of three judges in serious cases, whilesingle judges deal with trials at the lower levels.

In the administrative system, the highest cham-ber is the Council of State. This reviews decisions ofthe lower administrative courts and can also give itsopinions on new legislation to the government. Inthe military system, the highest court is the SupremeMilitary Court of Appeals. The military courts underit have jurisdiction in cases involving military per-sonnel acting against other military personnel, or overcrimes committed on military property or during theexercise of military duty. They also have jurisdictionin areas under martial law, or emergency rule.

In 2009 civilian courts were vested with the pow-er to try military personnel accused of threatening

national security or being involved in organisedcrime. This opened the door to prosecution of anumber of military commanders accused of involve-ment in conspiracies to overthrow the government– the “Ergenekon” case (see analysis).

This also further aligned the Turkish judiciary withEU accession requirements, such as full civilian over-sight of the military. Turkey is also a signatory to anumber of European conventions with legal ramifi-cations, such as the European Convention on HumanRights. Crimes against the security of the state werepreviously tried by state security courts (DGMs), withthree judges, one of whom was military. This systemwas changed in 2005 after constitutional reforms,with DGMs replaced by heavy penal courts. Theseremain controversial, as debate on the nature ofcrimes against the security of the state continues.

The promotion and appointment of judges, abo-lition or establishment of courts and review of objec-tions is carried out by the High Council of Judges andPublic Prosecutors, which is overseen by the minis-ter of justice. This was also expanded by the 2010referendum changes, from seven to 22 members, withseveral new bodies receiving the right to nominate.

Currently, there is major debate on further con-stitutional reforms, with 2012 set as a year in whichthe government is due to launch its proposals, witha further referendum likely. Advocates say a newpackage will complete the shift away from the mil-itary-written constitution of 1982, aligning Turkey’spolitics with European states and placing the soldiersfirmly under civilian, political authority. Others, mean-while, fear that such a move may undermine the bal-ance between secular and religious forces in thecountry, paving the way for a more radical, IslamistTurkey; the military has long been seen by many CHPand MHP supporters as a guarantor of secularism.Given this polarity, finding cross-party agreement ona new charter has not been easy, with the processwidely seen likely to take most of 2012 to complete. OUTLOOK: The year ahead, then, is likely to see con-tinued debate on constitutional reform. It shouldalso see Turkey taking an important role in regionalconflicts, such as that in Syria, while its role as a mod-el for the wider Muslim world will also continue tobe debated. The EU accession process is unlikely tosee much progress, meanwhile, with EU domestic pol-itics and the deadlocked Cyprus dispute set to con-tinue to jam the wheels. Greek Cyprus also becomesEU term president in July 2012, and Turkey does notrecognise the Greek Cypriot state.

Domestically, the AKP looks well positioned to con-solidate its hold on the levers of power, with theparty’s different wings seeking to maintain theirauthority, while preserving overall balance. For theopposition, these will continue to be difficult times,as they seek to convince Turks that they have a moreforward-looking vision for the country’s youthfulpopulation. Meanwhile, the old Turkey continues to retreat, with its institutions increasingly com-ing under the influence of the new political realities.

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President Abdullah Gül was elected by parliament in 2007, though the system has since been changed

There is ongoing debateover constitutionalreforms. The government isexpected to launch itsproposals in 2012, with areferendum likely.


POLITICS ANALYSIS

Turkey has pursued a “zero problems with the neighbours” policy

With its thriving economy, democratic system and mod-erately Islamist leadership, in recent years, Turkey hasbeen frequently put forward as a role model for othernations in the Islamic world. This has been helped bygrowing soft power, evident in everything from thepopularity of Turkish soap operas in Egypt to the ubiq-uity of Turkish goods in Iraq. Turkey appears to com-bine successfully both Western and Muslim worlds;indeed, what was once seen by many to be an identi-ty crisis is now widely seen as a valuable flexibility – andunparalleled ability to bridge global divides.

Turkey’s foreign relations have benefitted consider-ably from this widely prevalent view, particularly underthe guidance of the current foreign minister, AhmetDavuto!lu. Taking office in May 2009, he reaffirmed hiscommitment to the “zero problems with the neigh-bours” policy, a stated commitment to address therange of long-standing disputes Turkey has had withmany of the countries immediately surrounding it. Threeyears on, this policy may have fallen foul of events inmany areas, yet as an example of a new spirit of engage-ment – and confidence – it has much to commend it. GEOSTRATEGIES: Turkey shares land borders withGreece, Bulgaria, Syria, Iraq, Iran, Armenia and Georgia,all of which have been hostile neighbours at some pointin recent decades. In 1998 Syria and Turkey came closeto war, over Syrian support of the Kurdish Workers Par-ty (PKK) terrorist group, while relations with Iraq andIran have gone through major ups and downs over theyears. Relations with Greece have frequently also beenpoor, particularly over the Cyprus issue.

Turkey’s land frontiers had been largely frozen overby the NATO/Soviet divide, but after 1990 they beganto open up again. The end of the Cold War also changedbalances in the Middle East, beginning a period of on-the-ground Western, and particularly US, involvementin Iraq. In the Caucasus the collapse of Soviet powerand the eruption of armed conflict between Armeniaand Azerbaijan led to the Nagorno-Karabakh dispute,which still dominates relations between these two

Germany and France haveargued in favour of“privileged partnership” asan alternative to Turkish EUmembership, an idea thecountry rejects.

15


Setting an exampleRegional peace high on the agenda as the country seeks to strengthenits role model status

countries and Turkey. Georgia’s fragmentation andRussian support for breakaway Abkhazia and SouthOssetia also demonstrates the fragility of this region.In the Balkans, relations have dramatically improved withGreece and Bulgaria, although the treatment of eth-nic Turks in both countries remains a concern. Turkeyhas also extended its influence in former Ottoman ter-ritories with Muslim populations, such as Kosovo andBosnia. With Syria, hostility remained, with Turkey alsoforging an alliance with Israel during the 1990s. EU NEGOTIATIONS: The EU path has been a tortuousone, however. The political leaderships in France andGermany have both been opposed to Turkish member-ship. Berlin and Paris have argued in favour of an ill-defined “privileged partnership” as an alternative, astatus Turkey rejects. Therefore, while negotiations maycontinue – and the government is keen that they shoulddo – progress is likely to be extremely slow. In the cur-rent climate of eurozone crisis, too, the issue is nothigh on the agenda in Brussels or Ankara.

Concurrent with this cooling in relations, under theJustice and Development Party (AKP) Turkey initiated amultilateral foreign policy, in particular turning greaterattention toward the Arab world. Prime Minister RecepTayyip Erdo!an began a process of breaking with Israelat the Davos summit in 2009, verbally attacking Israelipolitician Shimon Peres. Relations then reached an all-time low after the Mavi Marmara incident, on whicheight Turks and an American of Turkish origin werekilled by Israeli commandos in May 2010. Turkey stillawaits an apology from Israel for the event and has inthe meantime suspended all military cooperation.Turkey’s stance against Israel was immediately popu-lar in the Arab world and beyond. Relations with Syria,Lebanon, Jordan, Egypt and Libya improved greatly, withcommentators suggesting a period of “neo-Ottoman-ism” had begun. Davuto!lu instead sees Turkish policyas being aimed at creating a new framework for region-al peace. With the region going through enormouschanges, the need for this has perhaps been reinforced.

POLITICS VIEWPOINT

Prime Minister Recep Tayyip Erdo!an

Turkey is in a unique economic position and is sig-nificantly more prosperous than it was a decadeago. This is due, in large part, to our party’s effortsto create a reliable, stable and predictable polit-ical and economic environment.

Since late 2002 – except during the peak of therecent global financial crisis in 2009 – the Turk-ish economy has been in constant development,and today, investors can look forward with trustthat the government is paving the way for busi-ness with safe steps.

Among the government’s actions that haveenabled this development is the implementationof a series of incentive schemes. During our gov-ernments we have implemented three incentiveprogrammes – in 2003, 2006 and in 2009 – andwe announced the fourth one in April 2012. Theseschemes have resulted in a radical transforma-tion of the Turkish economy.

Turkey’s GDP was around $230bn when theJustice and Development Party (AKP) came topower in 2002, and over a nine-year period ithas more than tripled, reaching $772bn by theend of 2011. Similarly, the value of exports hasclimbed from $36bn to $135bn, and the reservesheld by the Central Bank of the Republic of Turkeyhave grown from around $27bn to $91bn between2002 and 2011. Over the same period, the lev-els of chronic inflation, unemployment and inter-est rates have all declined, and the ratio of grosspublic debt stock to GDP has fallen from about74% to 39% as well.

In the current economic environment, invest-ments carry a larger share in the growth of theeconomy than ever before. The total value ofinvestments in 2002 was $59bn, while at the endof 2011 this figure stood at $283bn.

Of this, private sector investments accountedfor $235bn of the total in 2011, up from around$43bn in 2002. This surge in investment is the

result of the confidence and stability prevailingin contemporary Turkey.

The schemes put into action during the pastnine years have played an important role in soar-ing investment. Each programme has been adapt-ed to trends in the global economy, as well asrecent changes in the domestic market. The incen-tive scheme that we announced in April has beenprepared and improved according to the newconditions, trends and requirements of domes-tic and global conditions. The latest programmewas prepared for an economy growing at a recordrate of 8.5%, with declining unemployment,increasing exports and a high level of resilienceto the shocks experienced by other economiesduring this time of global uncertainty.

The previous incentive programmes have con-siderably increased investment in Turkey. Forexample, the 2009 incentive programme result-ed in $157bn of investments and created morethan 375,000 jobs, just as it was intended to do.Compared to the 2006 programme, the 2009 pro-gramme saw investments increase by 73%.

What is more, in regards to the previous incen-tive programme in 2009, of the total amount offixed investment, 72% of the investment proj-ects granted incentives were greenfield projectswhose contribution to the economy has a signif-icant multiplier effect. The previous incentivesystem has proved successful, and we are nowupgrading and updating it in accordance withthe changing economic conditions as well as theneeds of investors.

The main objectives of the new incentivescheme are to reduce the current account deficitand boost production and investment for high-import-dependent intermediate goods. Thismeans increasing investment support in the least-developed regions of the country, improving effi-ciency in industry and logistics, and investing in

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Supporting developmentPrime Minister Recep Tayyip Erdo!an on the government’s new investment incentives programme


POLITICS VIEWPOINT

mid- and high-technology products to achieve atechnological transformation.

The new system comprises four differentschemes: general incentives, regional incentives,incentives for large-scale investments and incen-tives for strategic investments. More specifical-ly, we are offering investors value-added tax (VAT)exemptions and corporate tax reductions, as wellas support for insurance premiums, interest pay-ments and land provisions.

This new system will contribute to a structur-al transformation of Turkey’s industries, partic-ularly through strategic investments, by encour-aging domestic production of commonly importedgoods. With the new system, we have redefinedthe regions, decreased the minimum fixed invest-ment amount for large-scale investments andintroduced a new instrument, namely incentivesfor strategic investments that are intended toreduce the country’s current account deficit.

Under the new system, we intend to balancethe levels of local development nationwide, par-ticularly focusing on raising investment in theleast-developed areas. To maximise the impact ofthe programme as a balancing mechanism, wehave categorised the regions according to theirlevels of development. In preparation for thisregion-based approach, we have conducted thor-ough research to update information on eachprovince’s socio-economical ranking and groupedthem into six categories. This ranking system isalso flexible and will be constantly updated as dif-ferent areas reach new levels of development.

With this new incentive scheme, our main pur-pose is to focus on the least-developed regions,therefore incentives for investors in these areaswill benefit from more support. We have alreadyachieved great success in increasing investmentin the least-developed regions; under the incen-tive system launched in 2009, more than half of

incentive certificates were granted to investmentprojects in the least-developed regions.

The new incentive system gives also priority toseveral specific sectors, such as defence, auto-motives, aerospace and aviation, rail and seatransportation, pharmaceuticals, education,tourism and mining. Investments in these sectorswill be supported across Turkey as if they weremade in the fifth incentive region, which coversunderdeveloped areas in the east and south-east.

As for the incentives for strategic investments,the main goal is to promote and support invest-ments in sectors in which we have a considerabletrade deficit. By reducing the trade deficit in keyindustries, we are aiming to reduce our currentaccount deficit. It is important to highlight thatstrategic investments will be strongly supportedin all regions with the same incentives.

I believe that both domestic and foreigninvestors will utilise these incentives in the bestpossible way. In addition to introducing incentiveprogrammes, we are also actively supporting localand foreign investors through public institutions.To this end, we have established the InvestmentSupport and Promotion Agency of Turkey, whichis attached to the Prime Ministry and reportsdirectly to me. The agency assists investors before,during and after their investments.

The government is committed to attracting for-eign direct investment (FDI), and therefore it hasbeen doing its best to create an attractive invest-ment climate in Turkey. That is why, as a result ofour efforts, Turkey has attracted $110bn in FDIover the past nine years, whereas it had attract-ed only $15bn in the preceding eight decadesbefore 2002. I do believe that with the new incen-tive system, we will see more FDI flowing in. Wewill closely follow the implementation of the new incentive programme and work to supportinvestors at every stage of their investments.

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POLITICS INTERVIEW

Ahmet Davuto!lu, Minister of Foreign Affairs

How does Turkey hope to influence and be influ-enced by its foreign partnerships? DAVUTO!LU: Thanks to the economic, political andsocial progress that Turkey achieved in the past decade,we were entrusted with more responsibility and haveconcurrently acquired more tools for engaging theregion and beyond. We began pursuing a more pro-active foreign policy fashioned around the vision ofaverting crisis, reaping opportunities of the post-Sovi-et age and contributing to global efforts to make theworld secure and stable. We are aware that foreignpolicy and economic success go hand in hand.

Economic relations between countries often createa favourable atmosphere to solve political problems,enhancing peace and security. We have thus adopteda multi-dimensional foreign policy based on maximumeconomic cooperation, integration and interdepend-ence with the international community.

To what extent can Turkey leverage its status as arole model for emerging Muslim democracies ineconomic and political terms?DAVUTO!LU: With the political transformation takingplace in the Middle East and North Africa (MENA) region,it is natural that Turkey follows developments closely,especially given that it shares a common history andculture with these countries. We hope that the legiti-mate expectations of the people will be addressed ina peaceful and democratic way.

Currently, Turkey is the 16th-largest economy in theworld and sixth-biggest in Europe, in terms of purchas-ing power parity, and we have raised democratic stan-dards as well. As a result, our soft power has increasedthroughout our neighbourhood and beyond. Turkey isoften described as a model for those countries in theMENA region that are currently undergoing a politicalshift towards a democracy. However, I do not com-pletely agree with this description. In modern interna-tional relations there is no “one size fits all” concept.Each country has its own dynamics and characteristics.

Turkey’s increased soft power is partly the result ofthe comparatively democratic approach taken by thegovernment, so people in neighbouring countries appre-ciate our progress and continue to further expresstheir desires for similar developments in their owncountries. This is why surveys of people throughout theMENA region show a very high favourability rates in atti-tudes toward Turkey. This is not to say that we are amodel for them, but it is apparent that Turkey providesa source of inspiration for peoples of the region.

The challenge for us is to respond in the most effec-tive way possible to this heightened interest in Turkey.We are by no means willing to impose our own rightsor preach to others as to what they should do. Our rela-tionships will first and foremost be guided by the desiresand needs of the countries in question. There is nodoubt that Turkey is strongly committed to the com-mon quest to upholding individual freedoms, humanrights, political liberty and rule of law, as well as to theconsolidation of reforms in this region.

What are the long-term plans for relations withIran, the rest of the MENA region and Central Asia? DAVUTO!LU: Iran is our neighbour and an importantregional actor at the confluence of the Middle East,South Asia and the Caucasus. Last year 2m Iranians vis-ited Turkey and bilateral trade volumes reached $16bn.I believe our efforts to bring lasting solutions to ten-sions in the region are welcomed by the internationalcommunity, and in the long term we intend to increaseour dialogue and cooperation to these ends.

The preservation of peace and stability in the regionis one of the main priorities of Turkey’s foreign policy.At a time when the MENA region is experiencing amoment of awakening, Turkey supports the peacefuland successful conclusion of political transformationon the basis of the legitimate demands of the people.Turkey attaches great importance to close dialogueand cooperation with Arab states in the MENA region,and we have taken important steps in the past few

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Multi-dimensional policyOBG talks to Ahmet Davuto!lu, Minister of Foreign Affairs


POLITICS INTERVIEW

years to develop and diversify relations with the Arabworld – both bilaterally and multilaterally. A number ofhigh-level bilateral strategic mechanisms have beenestablished between Turkey and some Arab countries,in addition to the Turkish-Arab Cooperation Forum, cre-ated in 2007 between Turkey and the Arab League.

Turkey aims to maximise the benefits of the existingbilateral and multilateral cooperation structures withits Arab partners and spares no effort to supportingthe processes of change in the MENA region. In the longterm, Turkey hopes to see the MENA region as a beltof stability, security and prosperity, where the will ofthe people reigns and universal values such as humanrights, rule of law and good governance thrive.

Turkey was the first country to recognise the inde-pendence of the Central Asian countries after the fallof the Soviet Union. Since 1991, our desire for a sta-ble, democratic and prosperous Central Asia has guid-ed our policy priorities in the region. In the last 20 yearswe have sought to increase engagement with thisregion. Some of our long-term objectives towards thesecountries include promoting political and economicreform processes; advancing stability and prosperity;and contributing to the emergence of an environmentconducive to regional cooperation. We foster an envi-ronment of cooperation through bilateral strategicpartnership agreements via the mechanisms of theHigh-Level Strategic Cooperation Council, in additionto multilateral approaches via the Cooperation Coun-cil of Turkic Speaking States.

In what ways can new diplomatic partners, specif-ically in Africa, help diversify Turkey’s foreign trade? DAVUTO!LU: In 2003 Turkey started to implement anew trade development strategy with African Countries,and in the following five years our trade volume withAfrica jumped three-fold to $17bn. Under this strate-gy, we plan to increase Turkey’s share in African nation-s’ total trade to 3% in the coming three years, and like-wise the share of African countries in our own total trade

volume to 10% – double the end-2010 figure of 5.2%.We hope to help develop cooperation with Africancountries in construction, contracting and consultan-cy, engineering and energy, and to enhance Turkey’scompetitiveness in African market.

Turkish businesses have worked hard to limit theadverse effects of the global economic fluctuations ontheir exports, and in 2011 Turkey's total exportsincreased to $134.6bn – a record in the history of coun-try. In 2010 and 2011, Turkey’s exports saw a record-breaking rise destined to more than 60 countries inSouth America, Africa and Asia thanks to its ability toreorient some of its export capacity from traditionalmarkets to new geographies offering untapped poten-tial. I must add that we do not see our policy with Africaas purely economic; we believe we can develop strate-gic partnerships on a regional and global level.

How can the heightened tension with Cyprus overincreased drilling in the Mediterranean be solved? DAVUTO!LU: I foresee two possible options for dif-fusing the current tension due to the Greek Cypriots’unilateral off-shore activities. First, by settling the Cyprusissue by July 1, 2012, and second, by establishing anad-hoc committee between the Turkish and Greek Cypri-ots – under the auspices of the UN – that will enableboth sides to determine the future course of off-shoreactivities in and around Cyprus. The island’s naturalresources, on the shore or at sea, belong to all Cypri-ots and they have equal inherent rights over them.

If our goal is to unite the island, it will not be fair forone side to take unilateral steps without consent of theother. Greek Cypriots should wait for a comprehensivesettlement or immediately launch bilateral talks withTurkish Cypriots. If our aims were beyond reunifying theisland, we would encourage each side to explore forhydrocarbon off their respective territories, but this isnot what Turkey or Turkish Cypriots want. It is very muchat the hands of Greek Cypriots to relieve the currenttension and to turn it into an opportunity to benefit all.

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POLITICS INTERVIEW

Rifat Hisarcıklıo!lu, President, Foreign Economic Relations Board(DE"K)

How did MENA political unrest and EU/US econom-ic stagnation effect Turkish firms? Have Turkishexporters been able to diversify to other markets? H"SARCIKLIO!LU: Historically, European countrieshave been the major trading partners of Turkish firms.The share of Turkey’s total exports to Europe was 66%in 2007. After global financial crisis started, the demandfor Turkish goods from the European market declined,so Turkish firms began looking for alternative markets.Countries in the MENA region, due to their resiliencyto the global financial crisis and geographical prox-imity to Turkey increased in importance, and MENA’sshare grew from 18% before the crisis, to 27% in 2010.This was the beginning of the diversification process,and it helped to mitigate the contraction in Europe.

However, we are facing problems in the MENA mar-ket following the Arab Spring. The uprising in Syria isparticularly important, as Syria has been the maintransit route for trade to the MENA region. So, theunrest there has negatively affected our exports tothe entire region, because transport via Syria is impos-sible. The government is looking for alternate traderoutes, and one option is Iraq. Overland transport canbe maintained by opening new lines to the south.

As a broader strategy, we are looking beyond theMediterranean region. Our exports to the East Asiaand the Americas have been quite low but the prob-lems in the MENA region and the crisis in Europe haveorientated us to focus on these markets.

What impact has the depreciation of the lira hadon Turkish products in the global market? H"SARCIKLIO!LU: The depreciation of lira has helpedexporters. Starting in 2001, the Turkish lira increasedin value, and for years we complained about its appre-ciation, because the increase in imports was unavoid-able and the rate of export growth was very gradual.Today, the link between the value of the lira and exportsis not as strong as it once was, and exports havebecome more resilient to changes in the value of lira.

The challenge is that the depreciation of lira hascaused an increase in inflation. Imported input costsrose due to the exchange rate. Our energy importsamount to $40bn annually and the currency’s declineraises these costs. Additionally, the private sector has$150bn in external debt and $110bn in foreign cur-rency debt to banks in Turkey.

Depreciation might be an obstacle against the prof-itability of domestic firms which have borrowed inforeign currency. However, the exchange rate had amore stable outlook in the first quarter of 2012 thanit did in 2011, so we are not expecting an intense prob-lem due to exchange rate volatility.

What factors are driving the current accountdeficit, and how can these issues be addressed?H"SARCIKLIO!LU: The current account deficit hasbeen a major source of vulnerability for Turkey for years.In 2011 we hit the record of $134.6bn in exports, butat the same time we recorded $241bn in imports,resulting in a deficit-to-GDP ratio above 10%. Thisrapid deterioration resulted from the buoyant econom-ic growth driven by domestic demand in the absenceof export recovery. It had been expected that thegrowth in 2011 would be around 8%, but the econo-my surpassed 9.6% growth in nine months, and suchelevated growth leads to increased imports.

Our production structure is one of the other rea-sons for the existing level of the deficit. We need toimport to produce. This is a structural problem, andto solve it we need effective industrial policies at thenational level. The Ministry of Economy is currently inthe process of developing an input acquisition strat-egy aimed at improving the availability of inputs need-ed by industry, enhancing efficiency and increasingthe competitive capacity of industry by reducing the dependency on imported intermediate goods.The input acquisition strategy can help us to solve our current dilemma by analysing the needs of pro-ducers and encouraging local alternatives to imports.

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Shifting focusOBG talks to Rifat Hisarcıklıo!lu, President, Foreign Economic RelationsBoard (DE!K)


POLITICS ANALYSIS

The military has had a powerful hold on Turkish politics in the past

Perhaps nothing has been more symbolic of the trans-formation in Turkish society over the past few years thanthe string of indictments the country’s courts haverecently been issuing against senior military figures. Thecountry is in the thick of a major, public reassessmentand reform of the relationship between its soldiers andcivilians – and thus between its past and present. Thisprovokes a deal of controversy both inside and outsideTurkey, and is part of a complex process.

It has seen both a new openness in discussion of pre-viously taboo subjects, such as past military coups,while also leading to allegations of a curtailment of freespeech in the prosecution of several anti-governmentand often pro-military figures. This controversy is like-ly to continue, with the year ahead seeing some majorcourt appearances by senior military leaders.SHIRTS OF STEEL: The Turkish Armed Forces is thesecond-largest military in NATO after the US, and hasplayed a key role in the country’s politics since thefoundation of the modern republic in 1923. Seeingitself as principle guardian of the secular nature of thatrepublic, and responsible for ensuring Turkey’s progresstowards the goals set by the republic’s founder, MustafaKemal Atatürk, the military has not hesitated to inter-vene if it saw this progress threatened.

In 1980 the September 12 coup was launched. Themilitary undoubtedly restored order in a country thatwas, at the time, beset by violent confrontation betweenleft and right. The military then wrote the 1982 con-stitution under which Turkey is still governed – albeitin amended form – and withdrew from outright rule.

However, the generals maintained a powerful holdon politics over the years that followed, predominant-ly through the National Security Council, on which thetop generals met with the leading politicians. For manyyears, the General Staff and its decisions were seen asbeing more important than those of the government,both inside and outside Turkey.

In 1997 the pro-Islamist Welfare Party (RP) was elect-ed to government, however. The military, seeing the RP

Recent events havebrought a new openness inthe discussion of previouslytaboo subjects, while alsoleading to allegations of acurtailment of free speechin the prosecution of anti-government figures.

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The Ergenekon andSledgehammer cases haveinvolved the prosecution ofa number of journalists,academics and politicalactivists accused of linkswith the conspiracies.

The only show in townHigh-profile investigations and court cases are dominating the headlines

as a threat to the Kemalist state they had sworn to pro-tect, organised a “soft coup” – known as the February28 process – that saw the government obliged to resign,this time without overt military action.

The leaders of the current Justice and DevelopmentParty (AKP) government were all important figures inthat RP administration. Therefore, when the AKP wonthe general election of 2002, some in the military andothers were, allegedly, very concerned. What happenednext is highly controversial and has been the subjectof a lengthy series of court cases. ERGENEKON: Known as the “Ergenekon” conspiracy,after an alleged group that sought to trigger anothercoup and oust the AKP, this has since widened to includethe “Sledgehammer” case – which includes allegationsof sinister plots to create instability and overthrow thegovernment, hatched from within the military. This inturn has led to a major investigation of the military itself.Most spectacularly, in March 2012 the former chief ofthe general staff General Ya"ar Büyükanıt was obligedto give testimony in court on the Sledgehammer case.Then in April 2012 the trial of the leader of the 1980military coup, General Kenan Evren, began. At issue ishis role in the alleged torture and disappearance of manyTurks following the takeover. Both these events wouldhave been unthinkable even a few years ago. They indi-cate just how diminished the role of the military is inTurkish politics and how open the discussion now is oversome of the darkest hours in the country’s recent past.

These moves have not been without their critics.Also prosecuted in the Ergenekon and Sledgehammercase have been a number of journalists, academicsand political activists accused of links with the conspir-acy, with this sounding alarm bells for many inside andoutside Turkey. There are also concerns over the capac-ity of the judicial system to deal fairly and efficientlywith such momentous cases. Yet the period ahead islikely to see much re-examination of the recent past.This will likely increase civilian oversight of the mili-tary, while shedding welcome light on recent darkness.

POLITICS VIEWPOINT

Joe Biden, US Vice-President

The US and Turkey have been NATO allies since 1952,and our economic and military relationships are flour-ishing. Trade between the two countries grew by 45%in 2011 alone, to the benefit of both the American andthe Turkish people. In June of 2009 President BarackObama announced our intent to deepen ties betweenAmerican entrepreneurs and their counterparts fromcountries around the world that have significant Mus-lim populations. Nearly a year later, the first GlobalEntrepreneurship Summit brought innovators from 50nations to meet in Washington, DC.

At the summit, President Obama said, ”We’ve cometogether today because of what we share, a belief thatwe are all bound together by certain common aspira-tions – to live in dignity, to get an education, to livehealthy lives and maybe start a business without hav-ing to pay tribute or a bribe to anyone, to speak freelyand have a say in how we are governed, to live in peaceand security and to give our children a better future.”So we might ask the question: what does entrepreneur-ship have to do with those larger aspirations?

Entrepreneurship must be built on solid foundations.This includes a political system that guarantees basicliberties, including the freedom of speech and the free-dom of religion; an educational system that trains itsstudents to challenge established orthodoxy, and aneconomic system that encourages fair competition andrewards those who excel. These foundations haveenabled generations of Americans and others to givelife to world-changing ideas.

It is no coincidence that the most prosperous coun-tries in the world are also the most entrepreneurial coun-tries in the world. This is the group Turkey aspires tojoin. A remarkable economic success story is unfold-ing in Turkey – the economy has tripled in size over thepast decade, exports have quadrupled and per capitaincome has grown dramatically – allowing families tobuild better lives for themselves and for their children.

Turkey is cultivating its own brand of homegrown tal-ents, but it will need a collective effort by society. Estab-

lished entrepreneurs and chambers of commerce mustmentor the next generation, sharing the wisdom gainedby their successes and their failures. Universities andcorporations must work together through researchand internships to nurture and develop the entrepre-neurial skills of students. Investors must occasionallybe willing to take a chance on an unknown talent andan unproven dream. And governments must unlock thecommercial marketplace by facilitating access to cap-ital, removing cumbersome regulations and endingcorrupt practices that stifle competition.

In eight countries and territories, including Turkey,we have launched a programme called Partnership fora New Beginning, which brings together government,private sector and civil society leaders to build anddeepen engagement in areas of economic opportuni-ty, science and technology, and education. The US isparticularly focused on encouraging women entrepre-neurs, because societies that deny women basic rightsare squandering half of their intellectual capital. Studyafter study has shown that those nations that refuseto empower women’s participation in economic affairsare being left behind. Already, in the developing world,almost half of new businesses are women-owned.

We’re also fulfilling a pledge President Obama madein Cairo to build networks of entrepreneurs and expandexchanges in education and to foster cooperation inscience and technology. We have led delegations of busi-nesspeople and investors to Lebanon, Turkey, Egypt, Jor-dan, Tunisia, Indonesia, Morocco and Algeria. We alsounderstand that in these exchanges the US stands tolearn something, because the seeds of innovation andchange do not rest in the US alone.

The objective is to see nations grow in a secure fash-ion. We as a country benefit when democracies flour-ish. I am optimistic about the future because I see thata new generation of entrepreneurs has a chance, likeno other generation before it, to set the course ofdirection for the world, to steer it, to bend the curve in the direction of progress, openness, and humanity.

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The direction of progressJoe Biden, US Vice-President, on the importance of entrepreneurship


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EconomyPer capita income levels rising at a steady paceAn increasingly simple regulatory system for businessesPrivatisation remains a chief government objectiveTrade with Gulf states is on the riseA series of ambitious long-term development plans

ECONOMY OVERVIEW

The republic now ranks as the world’s 15th-largest economy

Undergoing a major transformation over the pastdecade, the Turkish economy is now the world’s 15thlargest and the sixth largest in Europe, according to 2011World Bank figures for GDP at purchasing power par-ity (PPP). The country has an estimated population of74.7m, giving it the second-largest internal market inEurope, after Germany. Bordering that continent, as wellas the Middle East and the Caucasus, and with a coast-line on both the Mediterranean and Black Seas, Turkeyalso has a unique position in international trade. Thisgives it direct access to a variety of markets, while alsomaking it a major transit route for many more.

A decade ago the economy had just been hit by amajor financial crisis, which had seen the currencyhalve in value overnight, a string of high-street bankscollapse and inflation reach around 100%. Back then,a series of unstable coalition governments presided overan economy that was still heavily state dominated; atthe same time, despite its central economic role, thestate also faced the problem of limited revenues, giv-en the size of the unregistered or “grey” economy. Percapita income in 2001, when the crisis hit, was just $2905at current prices, according to IMF figures – less thanhalf that of Mexico. A decade later, things are very dif-ferent. In 2011, Turkey’s per capita GDP stood at $10,576,a three-fold increase (and higher than that of Mexico). FAST-PACED EXPANSION: In recent years, the statehas withdrawn from many areas of the economy, whileregulation and taxation have been strengthened. Thecurrent government of Prime Minister Recep TayyipErdo!an’s Justice and Development Party (AKP) haswon three general elections in a row, all by a large mar-gin. Inflation has been largely in single digits until recent-ly, while the banking system emerged stronger than everfrom 2001 and was able to withstand the global finan-cial crisis far better than its European peers.

Indeed, in the first quarter of 2011, Turkey outpacedeven China in terms of economic growth, recording ablistering 11.9% GDP expansion year-on-year (y-o-y) atcurrent prices. This was the highest GDP growth in the

world for a quarter where the Organisation for Econom-ic Cooperation and Development’s average was 0.5%.

Yet despite this performance, there are some caus-es for concern, both in terms of its own structures andin external factors. The continued eurozone crisis andsluggish recovery elsewhere will likely have an impact,as Turkey is reliant on external sources for growth.Nonetheless, the economy is expected to continue itsexpansion in 2012 – albeit at a more measured pace.KEY PLAYERS: Turkey’s macroeconomic policy hasbeen determined by the ruling AKP government since2002, with the key institutions at the political levelincluding the Office of the Prime Minister, with Erdo!anthe current prime minister, Ali Babacan the deputyprime minister responsible for the economy and $brahimHalil Çanakçı undersecretary of the treasury; the Min-istry of Finance, with Mehmet "im#ek the current min-ister; and the Ministry of Economy, headed politicallyby Zafer Ça!layan. There are also ministries dedicatedto development; energy and natural resources; food,agriculture and animal husbandry; science, industryand technology; and others all with important roles inpolicy-making and implementation. The Central Bankof the Republic of Turkey (CBRT), meanwhile, is inde-pendent of the government, with its primary objectivemaintaining price stability. Since 2005, its Monetary Pol-icy Committee has held regular, scheduled meetings toannounce policy decisions. For the banking sector,meanwhile, the Banking Regulation and SupervisionAgency acts as its name suggests, while the Capital Mar-kets Board oversees capital markets.

Turkey is also home to a number of economic asso-ciations, from chambers of commerce to trade unions.Some of the well-known and influential today includethe Turkish Business and Industry Association, the Unionof Chambers and Commodity Exchanges of Turkey, theIndependent Industrialists’ and Businessmen’s Associ-ation, and finally the Turkish Exporters Assembly. INDICATORS: While the double-digit growth of first-quarter 2011 grabbed headlines, Turkey’s economy

In 2011 per capita GDPstood at $10,576, a three-fold increase over figuresseen during the country’seconomic crisis in 2001.

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Macroeconomic policy isdetermined by thegovernment, with inputfrom key institutions suchas the Office of the PrimeMinister, the Ministry ofFinance and the Ministry ofEconomy.

A country transformedGrowth is expected to continue at a measured pace

ECONOMY OVERVIEW

had begun picking up speed some time before. Indeed,2010 saw a major recovery under way, after the effectsof the global downturn sent the economy into a divein 2009. Using the expenditure approach to calculation,in that year, GDP at constant prices shrank by 4.7%year-on-year (y-o-y), according to figures from thenational statistical office, TurkStat. Yet by the thirdquarter of 2009, the economy had moved back intogrowth, expanding 6% after three quarters of succes-sive shrinkage. Thus, as 2010 began, the economy wasin recovery. GDP growth at constant prices was 9.2%over the year, with the first two quarters showing 12.6%and 10.4% expansion. Most analysts saw the main fac-tor behind this as a series of major interest rate cuts.The CBRT knocked 10.25 percentage points off therate between October 2008 and November 2009, withthe overnight borrowing rate reaching 6.5% by the lat-ter month. This stoked consumer and business spend-ing, accelerating Turkey out of the downturn.

At constant prices, GDP for 2010 thus ended 8.9%up on 2009, with the final quarter seeing 9.2% growth.The headline first-quarter 2011 figure of 11% repre-sented a continuation of an increasing trend. The sec-ond and third quarters of 2011 recorded 9.1% and 8.4%growth, respectively, with some analysts pointing tofrontloading of projects during the first half of 2011due to the June general elections as a further factorbehind growth. Figures released at the beginning of April2012 put growth at 5.2% for the fourth quarter of

2011, and according to TurkStat’s consolidated fig-ures, annual growth for 2011 was 8.5% at constantprices. This brought total GDP at current prices toTL1.29trn (!550.33bn) for the year, equivalent to aper capita GDP of TL17,510 (!7441.75). VALUE ADDED BY REGION: TurkStat figures show thevast majority of gross value added in Turkey has its ori-gins in the western half of the country, with the Istan-bul region itself accounting for 27-28% of the totalbetween 2004 and 2008. The next largest contributorwas the Aegean region, with 13.8%; then East Marmarawith 12.8%; followed by Western Anatolia and theMediterranean regions, with 10.9% and 10.4%, respec-tively. In the last few years there has, however, beenthe start of shift towards the so-called Anatolian tigersin the country’s east. While exports from companiesoutside Istanbul, Izmir and Ankara amounted to only 34%of total exports in 2008, by 2010 they had risen to42.5%, according to figures from Turkey’s Foreign Eco-nomic Relations Board (DE$K).

Turkey’s trade relationships with its Middle Easternneighbours underwent considerable improvement inthe years 2008-11, particularly with Iraq, Egypt andIran, as well as with Syria prior to the Arab Spring.SECTOR FIGURES: Sector by sector, meanwhile, Turk-Stat figures show that the three largest contributorsto GDP, using a production-based approach, were man-ufacturing, which contributed 16% in 2011; followedby transport, storage and communications, with 13.3%;and then wholesale and retail, with 11.75%.

Ownership and dwellings went from 11.3% to 10%,while agriculture, hunting, forestry and fisheries totalled8.4% of GDP at current prices in 2010, with this fallingto 8.12% in 2011. Meanwhile, real estate, renting andrelated business activity went from 4.8% to 4.73%. Pub-lic administration, defence and compulsory social secu-rity fell slightly from 4.2% to 4.06%, and the educationsector stayed steady at about 3.3%. Construction’s con-tribution increased from 4.1% to 4.5%, while financialintermediation dipped from 3.7% to 3.15%. Electricity,gas and water contributed 2.1% to GDP in 2010 and2.2% in 2011, while mining and quarrying was 1.4% and1.49% . The rest was hotels and restaurants, health,social work, community activities and household staff.

In terms of growth rates, when looking at the sup-ply-side, trade contributed 1.6 percentage points tothe 9% GDP growth seen in 2010, and industry 3.1points. Transport and communications contributed 1.5points, construction and financial intermediation 0.9points each, and agriculture 0.2 points. In terms of thedemand side, private consumption contributed 4.7points to the 9% GDP growth total, private investment5.4 points, public consumption 0.2 points, public invest-ment 0.6 points and net exports a negative 4.4 points.

The demand-side statistics show the private sectoris now definitely the main contributor to growth. Lookedat over time, private consumption and investment alsoshow remarkable swings. In 2009, both were negativecontributors to growth, as the global downturn bit, yetwithin 12 months they were on the other side of whatmany are coming to look at as a “V-shaped” recovery.

26

Domestic consumption is important to growth, hovering around 70%

The three largestcontributors to GDP bysector in 2011 weremanufacturing; transport,storage andcommunications; andwholesale and retail.


SOURCE: Turkstat

Growth rate by economic activity, 2009-11 (at 1998 prices)

2009 2010* 2011*

3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Agriculture, hunting and forestry 4.4 2.4 3.8 2.8 0.9 4.5 7.1 5 4.2 6.7

Manufacturing industry -4.4 12.7 21.2 15.1 7.2 11.2 14.9 9.1 9.2 5.2

Wholesale and retail trade -7.1 10.4 20.8 13.8 7.5 13.3 17.3 14.2 11.5 3.9

Transport, storage and communication -4.8 2.9 11.9 10 6.7 13.6 12.4 12.4 12 6.8

GDP (purchasers’ price) -2.8 5.9 12.2 10.2 5.3 9.2 11.9 9.1 8.4 5.2

*Provisional data

ECONOMY OVERVIEW

GDP growth is also a story of the importance ofdomestic consumption. TurkStat figures show that finalconsumption of resident and non-resident householdson Turkish economic territory was 72.5% of GDP in2010 and 71.5% in the second quarter of 2011. Indeed,domestic consumption has hovered around 70% formany years. Exports have thus also remained fairly con-stant from 2006 through mid-2011, varying betweena low of 23.1% in the second quarter of 2011 and ahigh of 26.6% in the first quarter of 2009.BALANCE OF TRADE: Historically, Turkey’s main trad-ing partner has been Europe, and this is still very muchthe case. This link was further strengthened by theCustoms Union with the EU which came into force onDecember 31, 1995, while Turkey’s efforts to join theEU have also led to a process of harmonisation betweenTurkish and EU economic and trading standards – aprocess still under way, although very little progress hasbeen recorded of late, due to political obstacles, suchas the Cyprus issue and opposition to Turkish EU mem-bership from some key EU governments.

Figures from TurkStat for March 2012 showed exportsto the EU decreased by 3.3% y-o-y. The proportion ofEU countries was also down significantly, to 41.6% from48.4% one year earlier. For the full-year period this fig-ure stood at 46.3% in 2010 and 46.2% in 2011.

In 2011, according to TurkStat, Turkey’s total exportswere $135bn, up from $114bn in 2010. The top desti-nations for exports in February 2012 were Germany,which took $1.08bn; Iraq, with $800m; the UK, with$795m; the US, with $533m; and France, with $533m.

In terms of the goods and services exported, thefront-runner in March 2012 – and indeed, for many yearsnow – was road vehicles. In March 2012, exports of thesestood at $1.51bn. Road vehicles were followed by boil-ers, machinery and mechanical appliances at $1.1bn,and then iron and steel at $1.02bn. Electrical machin-ery and equipment was fourth at $917m, while pearls,precious stones, precious metals and related articlescame in fifth with $830m.

Thus, exports are heavily oriented towards manufac-tured goods. Indeed, figures for the whole 12 monthsof 2009 show manufactured goods responsible for93.4% of all exports, a figure falling to 92.6% in 2010before rising back to 93.4% in 2011. Agriculture andforestry is the only other sector that makes it out ofdecimal places, proportionately, accounting for 4.3%in 2009 and 2010, and 3.8% in 2011.

On the imports side, 2009 saw Turkey bring in a totalof $140.9bn, rising to $185.5bn in 2010 and $240.8bnin 2011. Thus, in 2009, exports covered 72.5% of imports,a figure falling to 61.4% in 2010 and 56% in 2011,demonstrating a growing trade deficit.

The main country importing to Turkey is Russia, whichwas responsible for $2.04bn in imports in March 2012.Following closely in second place was Germany, withsome $2.02bn in March 2012, and then China, importsfrom which totalled $1.73bn during the same month.The EU as a whole also makes up a significant, albeitdeclining, share of the import total, accounting for 40.2% in 2009, 38.9% in 2010 and 37.8% in 2011.

The vast majority of the goods imported are inter-mediate goods, with these responsible for 70.6% ofimports in 2009, 70.8% in 2010 and 71.9% in 2011. Thenext largest group is usually capital goods, with theirshare going from 15.2% in 2009 to 15.5% in 2010 and2011. Consumption goods, meanwhile, went from 13.7%to 13.3% to 12.3% over the same three years. LOOK OUT AHEAD: The pattern of exports and importsshows certain risks for the Turkish economy in the peri-od ahead. First, there is the continued risk presentedby the difficulties of the EU as it attempts to solve theeurozone crisis, while also suffering from sluggishgrowth and slow recovery. Indeed, three of the coun-try’s leading export destinations – Germany, the UK andItaly – are all predicted to see low growth in 2012. Aslowdown in Germany in particular would have majorimplications, with that country alone accounting foraround 10% of Turkey’s exports and imports.

Yet some remain optimistic that slow growth and fur-ther belt-tightening in Europe may not be as bad forTurkish manufacturers as it first seems. “Some Turkishexporters have turned the crisis into an opportunity,”Burcu Ünüvar, the chief economist at $# Investment, toldOBG. “As European households tighten their belts, theydon’t buy the expensive new fridge, but the more mod-est one. Chances are, the latter was made in Turkey.”

At the same time, Turkish exporters are known fortheir resilience and adaptability. Many have sought outnew markets in the Middle East, North Africa, Central

27


Regulating the country’s extensive “grey” economy remains an issue

The vast majority ofimported goods areintermediate goods (71.9%of imports in 2011),followed by capital goods(15.5%).

SOURCE: Central Bank of the Republic of Turkey

FDI, 2005-11 ($ m)

2005 2006 2007 2008 2009 2010 2011

FDI total (net) 10,031 20,185 22,046 19,504 8411 9038 15,904

Equity investment (net) 8134 16,982 18,393 14,712 6170 6203 13,896

Inflows 8535 17,639 19,136 14,747 6252 6238 15,887

Liquidation outflows -401 -657 -743 -35 -82 -35 -1991

Intra-company loans* 56 281 727 1855 459 341 -5

Real estate (net) 1841 2922 2926 2937 1782 2494 2013

*Loans that companies with foreign capitalare given by foreign partners

ECONOMY OVERVIEW

Asia and East Asia. Indeed, in 2011, while Turkey had a$29bn trade deficit with the EU, it also had a $6bn sur-plus with the Islamic world.

In addition to Iraq, the UAE, Iran, Saudi Arabia, Egyptand Azerbaijan are significant markets – even if polit-ical stability in the Middle East remains a concern. Thatsaid, worries about stability are not alien to certainnearby European countries either. Robert Yıldırım, thechairman of Yıldırım Holding, told OBG, “Industrialistsand exporters need to make diversifying their interna-tional customer base a priority. New markets in Africaand Latin America, in particular, are going to be key.”

In sum, the widespread expectation is that externaldemand will be under pressure in 2012, with this hav-ing implications for exporters. FOREIGN EXCHANGE: Perhaps even more significantthough will be the exchange rate, with the Turkish liradepreciating 18% against the dollar during 2011. Thestart of 2012 saw major CBRT action to halt the slide,action that proved successful, with the general expec-tation that the lira will strengthen as 2012 plays out.

Figures also point the way to what many see as themost serious risk to Turkey’s economy going forwards– namely, the growing current account deficit (CAD).CBRT data showed that in 2011, the CAD had reacheda record level – $77.8bn – which was 65.3% higher thanit had been in 2010. This was equivalent to around 10%of the country’s GDP in 2011.

Kaan Ba#aran, the CEO of UniCredit Securities, toldOBG, “If the world has changed, following the 2008-09 crisis, then our definition of ‘emerging market’ mustalso change. The ‘West-vs-rest’ economic paradigm isno longer useful. There are merely countries, clustersof problems and forms of interdependence. The cur-rent account problem needs to be considered in lightof a great many more factors expanding the country’sreach of pursuit for capital beyond European markets.”CAD TROUBLE: The declining ability of exports to cov-er imports demonstrated above – the main reason forthe swelling CAD in 2011, according to the CBRT – is

indicative of the nature of much of Turkish business andconsumption, as well as of larger structural issues cur-rently within the Turkish economy.

Structurally, companies are often highly dependenton imported materials – which they then use to assem-ble products – and on imported energy, as Turkey lackssignificant oil and gas reserves of its own.

Meanwhile, more cyclically, economic growth – whichclipped along at an average of 6.8% per annum from2002 to 2007, before the global downturn, and has out-performed that rate since the end of 2009 – feedsdemand for consumption and intermediate goods.

On the structural side, energy costs are dependenton a number of external factors. Oil prices, the stan-dard measure, rose in 2011, with Brent crude averag-ing around $111 a barrel. Early 2012 also saw pricesrise further, just under $120 a barrel in early May.

Thus, energy prices will likely continue to add to theimport bill in 2012. At the same time, tackling the struc-tural problem of reliance on imports of other materi-als is a difficult and long-term one.

Government officials are, of course, well aware of thisand are trying with their long-term development plan– which runs through to the Turkish Republic’s 100thbirthday in 2023 – to boost more value-added domes-tic industries (see analysis). In the near term though,the structural pattern is unlikely to see much change.On the cyclical side though, more immediate action can– and is – being taken.

High economic growth is being fuelled in large partby ever-higher domestic consumption, itself enabledby historically low real interest rates, an assertive andcapable banking sector willing to loan – coupled withrelatively low levels of existing leverage among house-holds – and the availability of external financing.

The concern among many economists is that thelatter part of that equation may be more uncertain inthe year ahead, with potentially troubling consequences. SAVINGS & LOANS: While Turkish households have rel-atively low levels of leverage, their savings ratios havealso been fairly low. Indeed, historically, the banking sys-tem was often seen as highly unreliable, and many peo-ple kept their surplus funds in foreign exchange (FX),traditionally “under the mattress”.

“The low savings ratio is a deep-rooted problem,”said Yarkın Cebeci, executive director with JPMorgan inIstanbul. “Historically, due to high inflation, people spentall they earned and thus now have few savings.”

In 2011 though, the ratio of household liabilities toGDP was around 17%, lower than in any European coun-try and about a quarter the EU average. Nonetheless,the figure is rising fast. According to CBRT data, in 2010,credit growth was around 40%, and in 2011 around 42%.In the same years, most developed world economiessaw zero or negative growth when it came to credit.At the same time, the ratio of deposit growth to GDPhas been declining, down from around 9% at the endof 2010 to 6% by mid-2011, and dropping further toaround 5% by the end of the third quarter of 2011.

The result of this is a savings gap, with gross nation-al savings around 13% of GDP in 2011, down from

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The manufacturing sector remains the largest contributor to GDP, making up 16% of the total in 2011

The beginning of 2012 sawmajor action by the CBRTto halt a slide in the Turkishlira, which depreciated 18%against the dollar over thecourse of 2011.

The growing currentaccount deficit is a causefor economic concern. Itreached $77.8bn in 2011,which was 65.3% higherthan it had been in 2010.


ECONOMY OVERVIEW

about 23% in 1998 – illustrating the growing level ofleveraging in the economy.

At this point, some demographic factors highlight theconundrum, too. With a growing population (around1.35% growth in 2011 according to TurkStat) the econ-omy needs GDP growth of about 4% to create enoughjobs, and an investment rate of 22-23% of GDP, accord-ing to predictions by many analysts.

Although the relationship between savings and invest-ment is a complex one, most economists agree that thismeans there is a major need for external savings to keepthe Turkish economy growing. The CAD is the result ofthis mismatch, with future economic growth highlydependent on the continued availability of foreignfinancing for the country.FOREIGN DIRECT INVESTMENT: Foreign direct invest-ment (FDI) flows for Turkey have seen spectaculargrowth in recent years. Between 1980 and 1999, totalrealised FDI stood at just $12.5bn, according to figuresreleased by the Treasury. Indeed, yearly averages ofaround $1bn continued until around 2005, when theyjumped to $10bn, doubling the next year to $20.2bnand peaking at $22bn in 2007. The global downturn thentook its toll, yet by 2010 they were back up to $8.9bnand in 2011 were $15.9bn, according to the CBRT.

“Turkey’s geography is serving it well, with European,Russian and Gulf investment growing,” Ba#aran toldOBG. “The country has every single ingredient neces-sary for a decade of economic growth.” In the January-December 2011 period, Turkey recorded an as-yetunexplained $13bn net inflow in “net errors and omis-sions” in its balance sheet. Theories on this money’sorigin include repatriated household capital to unoffi-cial Middle Eastern money in flight from the Arab Spring.

There are also major programmes of quantitativeeasing ongoing in Western economies, with part of theEuropean Central Bank (ECB) issuances also seen aspotentially ending up in Turkey. Historically though,larger Turkish companies have seldom had difficultyrolling over their debts – even when the recent glob-al crisis was at its peak. This is especially significant atthe moment, as private sector debt – particularly thatof the non-banking segment – is much larger than thatexisting in the public sector.

Still, there is room for improvement. “Turkey is miss-ing out on some big projects because there is insuffi-cient inventive to invest in greenfield projects at themoment,” Yıldırım told OBG. “Better support for localsto move to global-standard corporate structures, andbetter auditing and control systems, would help buildconfidence for those bearing FDI.”FISCAL REBALANCING: Indeed, Turkey’s fiscal policyhas been a tight one for many years, with the excep-tion of the 2008-09 crisis, when the budget deficitjumped. According to Ministry of Finance figures, thedeficit has been in decline since – at 3.6% of GDP in2010 and an estimated -1.5% in 2011.

A small primary surplus has emerged, of 0.8% in 2010and an estimated 2.2% in 2011. Data for January 2012showed the budget with a monthly surplus of TL1.7bn(!722.5m), 73% higher y-o-y. The primary surplus was

at TL7.1bn (!3bn), 48% higher and around a quarterof the target that had been set for the entire year.Helping with this has been an expansion in tax revenues,which accounted for 83.5% of total state revenue in Jan-uary 2012. Higher levels of consumption have boost-ed indirect tax collection – the main tax revenue com-ponent in Turkey, at 69% of the tax total in 2011– whilethere has also been an improvement in direct tax col-lection due to more efficient tax office activities bring-ing more of the grey economy under scrutiny.

At the same time, the government has raised rev-enues from sales of state enterprises in past years, withplans to sell deforested public land, real estate andintroduce payment schemes in military service in theperiod ahead (see analysis).

Government fiscal policy is currently being conduct-ed in the context of a series of medium-term pro-grammes, the current one running from 2010 to 2012and the next 2012-14. There is also the 9th Develop-ment Plan, 2007-13, while the government also haslonger-term plans through to 2023 (see analysis).HOT MONEY, INTEREST RATES & INFLATION: Facedwith growing credit extension domestically and a surgein short-term foreign capital inflows after the onset ofthe downturn in 2008-2009 and following its exit strat-egy from a period of crisis management to overcome

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Banks, once seen as unreliable, are now experiencing more activity

Fiscal policy has beenhelped by an expansion oftax revenues, whichaccounted for 83.5% oftotal state revenues at thebeginning of 2012.

SOURCE: CBRT, Is Investment

Selected economic indicators, 2008-11E2008 2009 2010 2011E

GDP growth (real, %,y-o-y) 0.7 -4.8 9 7.8

CPI (%, y-o-y, end of period) 10.1 6.5 6.4 10.5

CPI (%, y-o-y, average) 10.4 6.3 8.6 6.47

PPI (%, y-o-y, end of period) 8.1 5.9 8.9 13.3

CBRT policy rate (%)* 15 6.5 6.5 5.75

TL/basket exchange rate eq. weighted (YE) 1.84 1.82 1.8 2.44

Current account balance (% of GDP) -5.7 -2.2 -6.4 -10

Central govt. budget balance (% of GDP) -1.8 -5.5 -3.6 -1.5

Central govt. budget primary surplus (% GDP) 3.5 0.1 0.8 2.2

*One week repo rate from May 2010

ECONOMY OVERVIEW

the immediate effects of the global downturn, in Novem-ber 2010 the CBRT began a campaign to both reducebanks’ lending abilities and deter “hot money”, whichhad been causing currency appreciation.

This produced what many saw as an unconvention-al policy in which banks’ reserve requirement ratios(RRRs) were increased, while the difference betweenlending and borrowing rates was deliberately expand-ed, a policy known as the interest rate corridor.

This was aimed at increasing the maturity of deposits,a goal which was partly achieved – as CBRT data showedaverage Turkish lira deposits rising in maturity from45.1 days in June 2010 to 62.6 days a year later.

Yet credit continued to expand into 2011, despite theweighted average RRR rising from 5.5% in September2010 to a high of 13.3% in April-May 2011. LENDING & BORROWING: The difference betweenlending and borrowing rates also widened, with bor-rowing as low as 1.5% from December 2010 to July2011, while lending stayed at 9%. The interest rate cor-ridor, while controversial, did lead to depreciation in thelira though, as hot money was deterred.

Yet this depreciation was perhaps greater than intend-ed, with the lira losing 18% of its value against the dol-lar over the course of 2011. By the end of the year andinto 2012, the CBRT was conducting major operationsto prop up the currency by selling FX. By the end of 2011,the interest rate corridor was between 5.75% and 12.5%,too, with frequent adjustments by the CBRT, whichessentially set the rate according to daily circumstances. UNCERTAINTY IN THE MARKET: This created uncer-tainty, if not a little confusion in the market. The CBRTset the higher-end rate more frequently during later2011 too, while undermining the significance of thepolicy rate. This continued until a policy reversal in Jan-uary 2012 saw the CBRT opt for a rate that was clos-er to the lower end of the band. This rate cut probablyhad more impact on the defence of the lira than FX salesdid. The lira began appreciating again in early 2012, ral-lying 7% by mid-February. The CBRT, which had seen amajor reduction in its FX reserves due to this defenceof the lira, was thus able to begin focusing on rebuild-ing its dollar stocks in late February 2012, as the liraappreciated, and this should continue during the year.

Banks, meanwhile, began hiking their bond issuances,as the deposits-to-loans ratios worsened, with dataprovided by Bloomberg for the first six weeks of 2012showing $4bn in issuances by Turkish banks, four timesthat of the same period of 2011.

With credit expansion and lira depreciation in 2011,an old Turkish bugbear had also returned to the scene– inflation. The extent of this was unexpected, as theglobal slowdown had been widely anticipated to seeimported inflation under control.

The CBRT, which operates a system of inflation tar-geting, had predicted the year-end 2011 consumerprice index to stand at 5.5%, yet the eventual figure was10.45%. Other culprits blamed by the governmentincluded rising food costs and more taxes being placedon tobacco products and alcohol. OUTLOOK: Turkey’s economy faces a number of chal-lenges in 2012. These include finding the externalfinancing for the CAD, bringing down inflation, ensur-ing a stable lira, checking credit growth, and maintain-ing the levels of GDP expansion and job creation thatare necessary for its youthful population. All of this willbe undertaken in an uncertain global environment.

Most analysts have therefore seen 2012 as likely tobe a year of slower growth than 2011; the governmentforecasts 4% GDP expansion, with the IMF going for 2.2%and a Bloomberg poll of economists finding an aver-age of 2.7%. Indeed, some agencies have even predict-ed negative growth, although based on figures avail-able in early 2012 this seems unlikely.

The GDP slowdown will have some potential upsides.Amongst other things, it should be helpful in shrinkingthe CAD and bringing down inflation, which the CBRTis now targeting much more aggressively.

Some unexpectedly good industrial production fig-ures for December 2011 (up 3.7%, y-o-y) also give somehope, when combined with similar figures in Europe,that the economy is still basically strong. Indeed, in Feb-ruary 2012, Goldman Sachs revised up its forecast forGDP growth from 0.8% to 2.5%.

Meanwhile, “Turkey attracted around $11bn of FDIin 2011,” said Güldem Atabay, the director-economistfor UniCredit in Istanbul, “which can be replicated in2012. Indeed, around $20bn a year is quite sustainable.”If so, financing the CAD may not end up being such anuphill struggle after all.

With a strong note of caution, given external uncer-tainties – particularly in the eurozone – it may be thenthat Turkey’s growth will remain on the higher side ofpredictions in 2012, while declines regarding the CADmay end up being on the lower side of predictions.

The first half though is widely expected to see a sig-nificant drop in the CAD and growth, while the secondhalf of 2012 may see a rapid re-expansion. In the longerterm, Turkey’s economy will also be addressing thestructural issues behind its dependence on importedintermediary goods and external financing through itsmedium- and long-term development plans.

The destination that the Turkish economy is headedto seems to be clear. The speed with which it is reached,however, may vary considerably in the coming period.

32

Challenges for theeconomy in 2012 includefinding external financingfor the CAD, reducinginflation, checking creditgrowth and continuing GDPexpansion.


SOURCE: TurkStat

Foreign trade, 2002-11Balance of Volume of Proportion of

Exports Change Imports Change trade foreign trade imports coveredValue ($ bn) (%) va lue ($ bn) (%) va lue ($ bn) va lue ($ bn) by exports (%)

2002 36.06 15.1 51.55 24.5 -15.49 87.61 69.9

2003 47.25 31.0 69.34 34.5 -22.09 116.59 68.1

2004 63.17 33.7 97.54 40.7 -34.37 160.71 64.8

2005 73.48 16.3 116.77 19.7 -43.30 190.25 62.9

2006 85.53 16.4 139.58 19.5 -54.04 225.11 61.3

2007 107.27 25.4 170.06 21.8 -62.79 277.33 63.1

2008 132.03 23.1 201.96 18.8 -69.94 333.99 65.4

2009 102.14 -22.6 140.93 -30.2 -38.79 243.07 72.5

2010 113.88 11.5 185.54 31.7 -71.66 299.43 61.4

2011* 134.97 18.5 240.84 29.8 -105.87 375.81 56.0

* Provisonal

ECONOMY ANALYSIS

Opening a business is becoming an increasingly simple process

There was good news for Turkey in 2012 in the pagesof the World Bank/International Finance Corporation’s“Doing Business 2012” report. In 2011 the countryrose two places in the global rankings, to 71st out of183 economies. This placed it ahead of the EasternEurope and Central Asia average of 77th and well aheadof some regional competitors, such as Russia – whichtook 120th place – and Ukraine on 152nd. BUSINESS REGULATIONS: The report – the ninthissued so far – takes a look at the regulations in 10 cru-cial areas affecting businesses, measuring their changesyear-to-year and providing a key international bench-mark for investors. The report looks at the proceduresinvolved in starting a business, dealing with construc-tion permits, getting electricity, registering property,obtaining credit, protecting investors, paying taxes,trading across borders, enforcing contracts and resolv-ing insolvency. In these 10 areas, the 2012 reportshowed Turkey had improved its ranking in four areas,stayed steady in one and slid in the remaining five.

These results are also a good measure of the gov-ernment’s effectiveness in fulfilling the objectives ofits medium-term programmes (MTPs), with the 2010-12 and 2012-14 versions of this both stressing theneed for the economy to enhance its competitiveness.

In particular, the programmes aim to improve the busi-ness climate by easing bureaucratic procedures, whileboosting access to finance for small and medium-sizedenterprises and improving their competitiveness. Theyalso aim to reform the judicial system to reduce uncer-tainties with investments, improve the Customs andintellectual property rights framework, and enhancemonitoring and information collection.

The “Doing Business” report highlighted success inreducing the cost of starting a business. This was dueto the elimination of notarisation fees for articles ofassociation and other documents. Turkey went up twoplaces in the rankings for this category, from 63 to 61. UP THE RANKING: The average number of proceduresto start a business fell from 13 in 2004 to just six in

2011, while the average number of days needed tostart a business has fallen from 38 to six. The cost ofstarting a business has also fallen, relative to per capi-ta GDP. In 2004, on average, starting a business cost36.8% of per capita GDP, while in 2011 it cost 11.2%.

Another major area of improvement – up four placesfrom 83rd to 79th – was in paying taxes. The averagenumber of hours a year spent doing this fell from 254in 2004 to 223 in 2011, while the total tax rate as apercentage of profit fell from 53% in 2004 to 41.1%. In2011, Turkey also reduced the social security contri-bution rate by offering a 5% rebate to companies.

Other pluses included the ease of getting electrici-ty, which went up from 73rd to 72nd, and the ease ofresolving insolvency, which went from 122nd to 120th.With the former, Turkey far outstrips the Eastern Europeand Central Asia average of 129th, due to a quicker con-nection service and lower percentage costs. With thelatter, the average recovery rate has improved, from$0.11 to $0.22 on the dollar between 2004 and 2011. AREAS TO ADDRESS: There are still many areas inneed of improvement, however. The report shows majordeclines in standing – both of five ranks – for register-ing property and protecting investors. For the first, thiswas from a relatively high position, however – fallingfrom 39th to 44th; for the second, the drop was from60th to 65th. Behind the decline in property registra-tion was an increase in costs as a percentage of prop-erty value – from 3% to 3.3%. Other factors stayedlargely constant, showing no improvement.

Turkey also continued to score low on constructionpermits, ranking 155th in 2011, down from 153rd in2010. The amount of time taken to obtain permits –an average 189 days via 24 separate procedures – isstill a major cause for concern for businesses.

Rankings are by their very nature relative, withimprovements in other competitor countries also exert-ing downwards pressure on Turkey’s place. Many hopethat the plans laid out under the MTPs to improve thebusiness environment further will be given priority.

The country was ranked71st out of 183 economiesin the World Bank/International FinanceCorporation’s “DoingBusiness 2012” report.

33


Improved areas the reporthighlighted include aloosening of bureaucraticprocedures, the tax codeand easier access toelectricity.

Facilitating businessWhile the country is moving up in the rankings, there is still plenty ofroom for improvement

ECONOMY INTERVIEW

Ali Babacan, Deputy Prime Minister

What steps is Turkey taking to achieve a sustainablelevel of economic expansion? What factors drivegrowth in the face of global instability? BABACAN: Turkey’s endurance during the global cri-sis is the result of consistent and determined effortsto achieve structural reforms in economic, financialand social issues. Reforms of the past decade havesuccessfully transformed the Turkish economy into oneof high growth rates, generating jobs for millions.

One of the key factors behind this favourable eco-nomic performance is our determination to preserveand improve the confidence of producers, consumersand investors through political stability. During a peri-od of skyrocketing debt, ballooning budget deficits anddeteriorating credibility on a global scale, Turkey dif-ferentiated itself by announcing a fiscal consolidationplan early in its recovery. Our strong banking systemwas another important factor in preserving confidence.

Crisis management through prudent, timely and tar-geted fiscal and monetary policies, together with medi-um-term programmes to help manage expectations, ledto a strong recovery phase. Overall confidence andcredit conditions, coupled with GDP growth of 9% in2010, made the Turkish economy the fastest grow-ing in Europe. This rise was maintained in 2011, withan annual growth rate of 8.5%.

The government is committed to further strength-ening the economy’s fundamentals with complemen-tary legal provisions that consolidate the successes wehave achieved so far. One of the priority areas is abrand-new constitution in line with EU standards, whichwill improve democratic standards and introduce moreliberties. In the meantime, we will implement activeemployment policies to create jobs and enhance thequality of labour, which will bring efficiency gains andsupport the sustainability of growth.

Energy investments will also be given priority. Weintend to ensure the reliable energy supply needed forgrowth while reducing the country’s dependence onforeign energy, which constitutes the bulk of our cur-

rent account deficit (CAD). The structural reform processin health and education is likewise continuing at anaccelerating pace, which is reflected by budget appro-priations for these areas. Transportation infrastructureinvestments are under way, and legislative reforms fol-lowing developments in international law will help bringus harmonise with EU standards.

With exports to Europe declining, what new mar-kets are Turkish exporters targeting? BABACAN: Competition for a higher share of globaltrade volumes is escalating, since exports are becom-ing the driving force of growth. Bearing in mind therecent turbulence in the financial markets and pres-sure on countries to push for more trade in order toavert stagnation, “trade wars” may become the maintheme of 2012. Thus, being pro-active in targeting newmarkets and improving presence in the existing mar-kets are critical issues for every economy. In this envi-ronment, we have established “country desks” to analysecountry-specific issues in order to improve trade rela-tions with the specific markets. These desks have beenestablished for 15 target nations and 27 priority coun-tries. “We have been trying to deepen our economicrelations with African countries, and to this end we areincreasing the number of our embassies from 12 to 34.”

How is the government working to stabilise theCAD? What role does domestic production of renew-able energies play in these efforts? BABACAN: The measures we have implemented tocontrol credit growth have thus far narrowed the diver-gence in foreign and domestic demand – hence, theCAD is being kept in check. In the meantime, we aregiving utmost importance to structural solutions thatwill decrease CAD. In this regard, we have implement-ed structural and medium-term policies for loweringthe dependency on intermediate goods imports. In theface of widening CAD, increasing domestic savings is acrucial issue and our economic policy framework has

34

Proactive policiesOBG talks to Ali Babacan, Deputy Prime Minister


ECONOMY INTERVIEW

been designed accordingly. We consider the reductionof our dependence on external sources to financegrowth as a matter of priority. For this purpose, we areprioritising policies that will increase domestic savings,and public savings in particular.

As the government, we are determined to improvepublic savings through sustained fiscal discipline. Weare highly dependent on energy imports. Thus, it is cru-cial to enhance energy efficiency, boost productivity anddiversify energy sources. Our long-term strategy includesutilisation of all available domestic resources and alsomaximum usage of renewable energy resources. Theintegration of nuclear energy will be a major achieve-ment that will reduce the need for energy imports.

What role is the government playing in fosteringentrepreneurship and innovation? How is successin this emerging field being measured? BABACAN: The economic restructuring of the pastdecade necessitated a shift in our industrial approachto technological developments. We believe that it is theright time to take steps to transform Turkey into an inno-vation-driven economy. A law to support research anddevelopment (R&D) was enacted to stimulate innova-tion and build R&D capacity within the economy. Wehave recently increased state support and incentivesfor R&D projects, and raised the number of the tech-nology development zones and research centres in thecountry. Improvements in R&D and innovation haveextended information technologies and will move oureconomy to a higher level of the value chain.

We have taken measures to ensure that small andmedium-sized enterprises (SMEs) strengthen their R&Dcapacity and adapt to new technologies and circum-stances of a knowledge-based economy. To this end,the SME development organisation, KOSGEB, providessupports under the R&D, Innovation and IndustrialApplication Support Programme. Our success is mon-itored by public and private bodies, and internationalstatistics on comparative R&D expenditures and patent

files indicate that Turkey is improving in innovativeactivities, though we still have a long way to go.

With major projects focused on Istanbul, how is thegovernment fostering growth elsewhere Turkey? BABACAN: Istanbul was the capital of two great civil-isations and centre of the old world for centuries. Now,it is on the eve of becoming the cultural, economic andcommercial centre of the region. The Istanbul FinansMerkezi Project emerged as a natural extension of theeconomic and social transformation that Turkey hasundergone over the past decade. The main aim of thisproject is to create a principle-oriented, reliable, effi-cient and comprehensive financial centre. Initially region-al, in the long-run this global financial centre will bemutually beneficial for our country and our partnersworldwide. The project will stimulate a number ofreforms to maintain an environment conducive for asuccessful financial centre. These reforms will alsoenhance the investment environment across Turkey.

To promote links in the areas of transportation, ener-gy, education and employment, Kanal Istanbul is a mul-ti-faceted project that will ease the overload of trafficon the Bosphorus Strait. Although physically centredon Istanbul, these two projects will benefit the coun-try as a whole. For instance, capital inflows to the finan-cial centre would create ample financing opportunitiesacross the real sector. Meanwhile, the canal project, byeasing the burden on the Bosphorus, will contribute tothe preservation of the natural and historical heritageof Turkey, not just Istanbul.

The degree of stability we have maintained over thepast decade allows us to introduce long-term targets.Among these, we aim to make Turkey one of the top10 economies of the world, in terms of total GDP by2023. In line with these objectives, we will continue ourstructural reform agenda to improve the capacity anddynamism of Turkey in the fields of industry, trans-portation infrastructure, education, science and tech-nology, and in legislative and institutional structure.

35


ECONOMY ANALYSIS

A push towards privatisation is happening in many major sectors

The year 2012 is scheduled to be a banner one forprivatisation in Turkey, if all goes according to plan,with moves ahead on gas and electricity grids,bridges, highways and ports. Yet these plans are alsolikely to be subject to the temperature of the glob-al economy, as those charged with organising thesell-offs try to launch when investor interest is at apeak. With 2012 starting out on uncertain terms,there were several postponements to scheduled pri-vatisations announced, with the dates rescheduledfor times with fairer economic weather. By the endof the year though, if the target is met, the sell-offswill have ultimately added some TL10bn (!4.25bn)in funds to the state’s coffers.PROGRAMME PEDIGREE: While privatisation hasbeen on the political agenda in Turkey since the mid-1980s, the programme really only began to make sig-nificant progress in the past decade. Partly this wasbecause the law governing such sell-offs of stateassets, passed in 1994, left a large number of diffi-culties in implementation (including exposure tolegal challenges), while at the same time internation-al investor interest in Turkey was low.

It was not until a new law was passed in 2003amending the 1994 law that many of these issueswere resolved, with this leading to a take-off in pri-vatisation deals. The 1994 law did, however, set upthe two main bodies that are responsible for run-ning the sell-off programme.

These are the Privatisation High Council (PHC) andthe Privatisation Administration (PA). The PHC isheaded by the prime minister and takes the politi-cal decisions as to which bodies will be included inthe privatisation portfolio, or withdrawn from it. ThePA then conducts the privatisation process itself,reporting directly to the prime minister.

The process follows international practices, witha value assessment commission established prior toeach tendering, then a tender commission, which canthen decide whether movement should proceed via

sealed bid, negotiation, public auction, or a sealedbid among designated bidders. A third body, theCompetition Authority, is also involved, if the pri-vatisation may impact the competitive environment. SALES DRIVE: Between 1985 and year-end 2011,the PA’s privatisation portfolio has seen state sharesin some 270 companies, 114 establishments, eighttoll motorways, 22 incomplete industrial plants, bothBosphorus bridges, 929 items of real estate, six portsand one service unit placed within it. By the start of2012, only 23 companies and 13 entities remained,according to the PA. Total proceeds in the privatisa-tion programme, meanwhile, were $55.9bn in theperiod between 1985 and the end of 2010.

The programme marked a radical change in thevery structure of the Turkish economy. The state –which had long been the primary player in manysectors – all but vanished from industries such ascement, petroleum distribution and refining, bank-ing, telecoms, dairy and forestry, while seeing a morethan 50% reduction in its presence in areas such astourism, iron and steel, sea freight and textiles.

The programme has also had some headline suc-cesses – such as the 2005 privatisation of 55% of TürkTelekom, a tender won by the Ojer Telekomünikasy-on consortium (comprising Saudi Arabia’s Oger and Telecom Italia) for $6.55bn. The 2005-06 peri-od also saw the sale of stakes in steel maker Erdemirand refiner Tüpra#, netting a total of $16.5bn in proceeds for the PA over that period.YEAR IN REVIEW: In 2011, however, the programmerealised just some $265.1m in total asset sales,according to government data, despite a $9.5bn tar-get. In contrast, 2010 saw proceeds reach some$3bn, thanks to a number of major sales of electric-ity distribution companies.

In addition to that 2011 figure, some $7.52bn inprivatisation proceeds were still at the signaturestage, with a further $734.5m at the approvals stage.These latter two figures include privatisations from

Privatisation is under thecontrol of two main bodies:the Privatisation HighCouncil, which determineswhat will be included in theportfolio for privatisation,and the PrivatisationAdministration, whichhandles the process itself.

37


The privatisationprogramme in 2011realised $265.1m in totalasset sales, despite a targetof $9.5bn. However, manyadditional deals were in the pipeline, awaitingsignatures or final approval.

Raising revenueFresh bidding rounds are under way for privatisation of state assets

ECONOMY ANALYSIS

previous years, with the earliest back in 2008. The$265.1m also does not include the $861m agreedfor the privatisation of Istanbul’s ferry serviceprovider, Istanbul Deniz Otobüsleri, which was car-ried out successfully in June 2011, with operatingrights transferred to a consortium of Tepe, Akfen,Souter and Sera. In value terms, most of the salescompleted in 2011 were in the hydroelectric damsector, while there were also sales in real estate.

The hydroelectric schemes were part of the stateElectricity Generation Company (EÜA"), an outfitwhich had owned around 53% of Turkey’s power sta-tions. The government began selling off its hydroplants in 2010, with 2011 seeing the completion ofthis with the sale of seven more packages of damsout of a total of 19. Most of the real estate sold wasland that had belonged to the Treasury in Aydın,Istanbul, Malatya and Balıkesir. There were alsoparcels of land sold belonging to Turkish sugar pro-ducer Türk "eker and electricity authority TEDA".ON THE TABLE: For 2012, the TL10bn (!4.25bn) tar-get is much more ambitious. One of the stars in thetender portfolio this time is a large package of high-ways and bridges with a 25-year operating licence.The package includes eight toll motorways and Istan-bul’s two bridges over the Bosphorus. Press reportssuggest Italian Autostrade, Turkey’s Koç, Sabancı,Akfen and Çukurova groups, and Portugal’s Brisa areamongst the parties interested in making a bid.

Also up for accelerated privatisation in 2012 areassets in the marine sector. These include Izmir Kru-vaze Port, Izmir Pasaport, Istanbul’s Galataport,Kalamı# marina and Mersin-Ta#ucu marina.

A third highlight was the natural gas grid for Ankara,currently run by Ba#kent Do!algaz. An 80% stake inthis company was up for sale prior to April 2012.Meanwhile, government stakes in two electricity gridcompanies are also coming under the hammer. Theseare Aksu Elektrik and Kayseri ve Civar Elektrik, inwhich 20% shares are on offer. Finally, and also

38

The ferry service provider for the Istanbul metropolitan area was successfully privatised in June 2011

One recently announcedprivatisation projectpossibly worth up to!11.1bn is the selling ofthe country’s 2-B publicland, meaning land thatwas once forested but is nolonger.


attracting international interest, is the tendering forsale of 10.3% of Petkim, the country’s largest com-pany operating in the area of petrochemicals work. EXTENDED DEADLINES: By February 2012, howev-er, many of the deadlines for the above processeshad been extended. The bridges and highways pack-age, announced in August 2011, came with a finalbidding deadline of February 16, 2012. This was thenextended to August 9, 2012. Ba#kent Do!algaz alsosaw its final bidding deadline extended from Janu-ary 27 to April 16, 2012. The tender was then can-celled once that date passed, due to a lack of offers.The ports, meanwhile, are still scheduled for 2012,although no specific dates have yet been announced.

Delays and postponements are a feature of pri-vatisation programmes in many countries, oftenreflecting estimations of market sentiment, ratherthan any significant hiccups with the process itself.With global economic uncertainty high as 2012 gotunder way, and concerns as to whether investorappetite was there in strongly risk-averse times,postponement was largely about finding a time whenmarkets and investors would be more receptive tomaking an offer on the tenders. MAJOR LEAGUES: There are also several big-ticketitems in the PA’s portfolio that have been about tobe privatised for some years, yet still remain on thebooks. These include stakes in Turkish Airlines, Halk-bank – the last state-owned bank in the portfolio –and even the national lottery company. On the firstof these, the PA has said that it still intends to sellits 49.12% stake in the national carrier, yet has stillto decide on the privatisation model. On Halkbanktoo, the strategy was yet to be determined. Reasonsfor the delays vary from political to market-driven.REVENUE RAISING: Meanwhile, the governmenthas also announced some additional revenue gen-eration plans that may have an impact on the budg-et in the year ahead. These include the selling of 2-B public lands – land that was once forested but isno longer. With around 3.4% of just Istanbul’s terri-tory having this classification, this is a resource thatcould be worth up to TL26bn (!11.1bn) nationwide,according to the government. In late 2011, the Min-istry of Finance had approved two draft laws on 2-B land for submission to the country’s parliament,with this legislation also allowing sales of such landto proceed for foreigner purchasers.

Another revenue raiser will be the introduction ofpaid military service. Under this, Turkish nationals over30 years of age will be able to exempt themselvesfrom military service by paying TL30,000 (!12,750).Turks who have worked for three years or moreabroad can also gain exemption for !10,000. A newlaw on this was passed by parliament and approvedby the president in December 2011.

These steps, along with the planned privatisationreceipts and an ongoing debt restructuring exer-cise that from January to November 2011 broughtin TL13.1bn (!5.6bn), should help allay many budg-etary worries the government may currently have.

ECONOMY INTERVIEW

Mustafa Koç, Chairman, Koç Holding

Which sectors of the economy have attractedthe most attention from the country’s holdingcompanies and investors more generally? KOÇ: The country’s growth prospects, demograph-ic dynamics and low penetration and consumptionrates (compared to developed countries) make manysectors in Turkey very attractive to local and inter-national players alike. The energy sector is one spe-cific area to which the large holdings are shifting theirattention. Demand for electricity is expected toincrease 6-7% per year in the coming decade, soalmost all the groups have focused on this sector.However, not all have the ability to execute projectsin today’s financial market conditions. We see thatmany assets put on the market are not able to besold. As the privatisation process proceeds, there willbe consolidation and players with non-viable proj-ects will drop out, opening the space for others.

To what extent do Turkish companies purchaseforeign assets? Have the challenges in the euro-zone presented opportunities in this regard?KOÇ: The Turkish business community needs toimprove its international dimension, which is current-ly limited. Until the 1980s, businesses were prima-rily focused on the domestic market. However, afterthe 1980s, export-oriented manufacturing picked upand Turkey became an important exporter in a num-ber of sectors. The 2000s saw an influx of foreigndirect investment that grew quickly before the 2008-09 global crisis. However, few Turkish firms took thesteps to become truly international, invest abroador build international brands. The troubled state ofthe economies in Europe and elsewhere may pres-ent an opportunity for Turkish companies to catchup. However, one has to be careful about what toacquire. Firms that are focused on European mar-kets are not likely to be attractive targets. However,brands and technologies that can be leveraged indeveloping markets could be profitable acquisitions.

To what degree have Turkish exports recoveredsince the global economic crisis?KOÇ: International sales were negatively affectedby the contraction in 2008-09, but the economyrecovered quickly. On a consolidated basis, foreignsales make up about 25% of our revenues, and weaccount for almost 10% of Turkey’s total exports.Europe is the main export market, making up about60% of international sales. In 2011 we were wellabove pre-crisis levels, and we expect significantgrowth on top of this in 2012.

Having a well-balanced portfolio of businessesensures stability. There are consumer sectors, suchas appliances and automotive, that tend to be moresensitive to fluctuations in GDP and interest rates.However, energy and food are more stable. The bank-ing sector, on the other hand, has completely dif-ferent dynamics. Thus, diversification reduces theexposure of Turkish firms to market fluctuations.

How could the government support additionalinvestment in research and development (R&D)?KOÇ: Although government R&D incentives havereached a significant level in Turkey, I think we arestill behind both the EU and other developing coun-tries, especially in terms of indirect and local sup-port schemes. When you examine R&D incentives,the main focus is usually on the technology andproduct development phase rather than manufac-turing and production. It is important to supportand provide incentives for production stages as well,especially to increase the quality of output.

In this light, further incentives could be providedfor manufacturing equipment investment and per-sonnel training. As production methods becomemore complex and sophisticated, automation equip-ment is used, increasing the need for a highly skilledworkforce. This will require additional vocational and educational programmes and greater corporate social responsibility to provide internships for students.

39


New opportunitiesOBG talks to Mustafa Koç, Chairman, Koç Holding

ECONOMY INTERVIEW

Hüsnü Özye!in, Chairman, FIBA Holding

As e-commerce grows, how can small and medium-sized enterprises (SMEs) use technology to theiradvantage and what is its overall economic impact?ÖZYE!"N: Turkish companies and consumers haveadapted to increased use of the internet and socialmedia networks. Turkish “.com” companies such asyemeksepeti.com, a food delivery website, are now try-ing to enter foreign markets like Russia, while some largeUS .coms have paid hundreds of millions of dollars toacquire successful Turkish counterparts.

As the government increasingly focuses on encour-aging high-tech research, more Turkish engineers andfirms are looking into the opportunities online. Current-ly, research and development (R&D) expenditures rep-resent about 0.9% of GDP, but the government’s goalis to push R&D expenditures to 3% in the medium-to-long term. This will add to the share of value added byinnovative manufactured products, and it will requiregreater dependency on the services available online.

Furthermore, the number of research institutionsand techno-parks established by universities is rising.Since these groups are in closer cooperation with pri-vate industry actors the opportunities for smaller firmsto produce higher value added products, with easieraccessibility to markets within Turkey and internation-ally is likewise growing. Diversification has, in part, beendriven by the ability to more easily seek out new cus-tomers, or for customers to find Turkish producers, asa result of their online presence.

How vital is it for Turkey to intensify its English-pro-ficiency programmes? Is there a concern that sec-ond languages could be overemphasised?ÖZYE!"N: I think English proficiency is absolutely impor-tant to be successful in the global economy that existstoday. This is one area in which Turkey has been strug-gling to maintain and emphasise. In an attempt to over-come insufficient language instruction students to takein the national curriculum, many universities require 12-18 months of English instruction, followed by a profi-

ciency test, as a prerequisite to enrolling in a degreeprogramme.

In an era where we are connected to people all overthe world via technology, it is not possible to sustaineconomic growth with a labour force that is not fluentin English. There needs to be a concerted effort tooverhaul the English-language education system inTurkey to improve proficiency.

What are Turkey’s plans to encourage more womento enter the workforce?ÖZYE!"N: Women constitute the largest group ofunemployed people in Turkey, and female participationin the labour force is only 23%. All stakeholders in theeconomy agree that entrepreneurship is the way toreduce unemployment and generate sustainable growth,and the government has begun to take important stepsto this end. Thus, the first and the most crucial way toreduce unemployment should be to increase not mere-ly the number of entrepreneurs, but the number ofwomen entrepreneurs, as economic plans that excludehalf of the population are destined to fail.

Several institutions have recognised this, includingthe Union of Chambers and Commodity Exchanges ofTurkey, with its Women Entrepreneurs Board, and theTurkish Women Entrepreneurs Association. Turkishbanks have recently begun offering special loans andrates for women entrepreneurs. As the country’s pros-perity and education levels continue to rise, the obsta-cles that stand in the way of women entrepreneurshipwill gradually be overcome.

Entrepreneurship training programmes designed forwomen are on the rise, and, in terms of professional-ism, the women I have met in these programmes areon par with their male counterparts. I have no doubtthat when they are given an opportunity to exhibit theirskills, Turkish women will lay the foundations of high-impact business ventures. As the number of success-ful female role models grows, more young women will be encouraged and inspired to be entrepreneurs.

40

Going globalOBG talks to Hüsnü Özye!in, Chairman, FIBA Holding


ECONOMY ANALYSIS

Tourism is on the rise, especially from countries in the GCC

One major success story in recent years has been therapid rise in bilateral trade between Turkey and thecountries of the Gulf Cooperation Council (GCC).Indeed, Turkey enjoys trade surpluses with all the GCCstates except Saudi Arabia and Qatar, with energyimports accounting for the deficits there. With theUAE, Kuwait, Bahrain and Oman, Turkish goods andservices exported outstrip imports, with trade in allregards expanding significantly in the past few years.BOLSTERING TRADE: Early 2012 also saw an impor-tant step in this relationship, with a major gatheringin Istanbul in January of officials and businesspeoplefrom the GCC and Turkey. A commitment was signedto try to double trade from the $13bn achieved in 2011,with $10m being put forward to found a joint invest-ment promotion company. The gathering was seen asa first step towards greater cooperation. A joint min-isterial meeting was also held, with Turkish and GCCministers lauding progress in the implementation ofa joint action plan (2011-12) agreed in October 2010.

This had been carried out via a whole string of jointworking groups and committees, looking into areasas diverse as energy and education. Amongst thepoints in this plan too, was a target to improve trans-portation and communications links between Turkeyand the GCC states. This includes ambitious plans fora railway hook-up that would feed into current raildevelopments in the Gulf, which foresee a unifiedGCC railway, running from Oman to the Iraq-Kuwaitborder. This could then be linked to Turkey via a com-bination of new track and improved existing routes.

Such a move would inevitably boost Gulf trade thathas historically been dominated by commerce betweenTurkey and Saudi Arabia and the UAE, deepening thetrade with other Gulf countries.

Saudi Arabia is the third-largest source of Turkishcrude oil imports, after Iran and Russia, averaging2.8m tonnes per year between 2006 and 2010. Thefigure for the first half of 2011 was 749,000 tonnes,according to data released by TurkStat, the country’s

statistics agency, or around 8.5% of Turkey’s totalimports for the period. Saudi Arabia has run a tradesurplus with Turkey for many years, with this at $219min 2010, the last year with full figures available.

At the same time, natural gas is in greater demandin Turkey, with this increasingly evident in trade withgas-rich Qatar. Trade there slipped from a healthy sur-plus a few years ago to a deficit in 2010 of $14.5m.

Elsewhere though, Turkey’s major role in providingthe thriving GCC construction sector with everythingfrom iron and steel to engineers (around 115,000Turks live in Saudi Arabia alone) and equipment is evi-dent in the large trade surpluses.

For 2010, Turkey enjoyed a $2.6bn trade surplus withthe UAE, a $100m surplus with Bahrain, a $180m sur-plus with Kuwait and a $90m surplus with Oman. TOURISTS & PILGRIMS: At the same time, Turkeyhas become increasingly of interest to Gulf travellers,in part due to the success of Turkish soap opera TVexports. According to a recent report by Saudi Ara-bia’s National Commercial Bank (NCB), the number ofSaudi tourists visiting Turkey rose from 55,636 in 2008to 84,934 in 2010, when some 55,000 UAE touristsalso visited the country.

Going the other way, many Turks complete the hajjto Saudi Arabia, with 85,871 taking part in the annu-al journey to Mecca in 2010, according to TurkStatLikewise, there were 146,039 Turks undertaking umrah– a pilgrimage at any time of year – in 2010.

In terms of non-oil and gas imports from the GCC,one sector that catches the eye is gold and jewellery.Turkey is Dubai’s second-largest market for goldexports. Shipments of the precious metal to Turkeyrose from $60m in 2006 to $426m in 2010.INVESTMENT FLOWS: Meanwhile, the NCB also esti-mated that the GCC’s current total investment inTurkey stands at around $10bn, with $6.5bn of thisinvested in the 2004-11 period. The UAE has been thelargest single investor, accounting for around 56% ofthe GCC total during the above period. Meanwhile,

Trade relations with theGCC are based on a numberof sectors in the Turkisheconomy. Construction isone such area, with Turkishsuppliers providingeverything from iron andsteel to engineers andequipment to Gulf firms.

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Tourism interest from Gulfstates, piqued in part bythe popularity of Turkishsoap operas, has been onthe rise, with some 85,000Saudi and 55,000 UAEvisitors in 2010.

A win-win relationshipRecent years have seen a jump in trade with Gulf states

ECONOMY ANALYSIS

some $6bn had been invested by Turkey in the UAEbetween 2004 and 2011, mainly in construction, withsome 500 Turkish companies undertaking operationsin the UAE during that time.

The NCB report also showed some $1.3bn invest-ed in Turkey by Saudi companies between 2004 and2009. The Kuwait Investment Authority, which man-ages overseas investments by the Kuwaiti govern-ment, is also a major investor in Turkey, with some$1.7bn invested, according to the NCB.

One area where GCC companies are fairly visible inTurkey is in Islamic banking. Out of four sharia-com-pliant banks registered in Turkey, two have GCC par-ents – Albaraka Türk and Kuveyt Türk. FREE TRADE: Meanwhile, there have been on-and-off negotiations over a free-trade agreement betweenTurkey and the GCC for a number of years. Talks, thathad been launched in November 2005, were suspend-ed during the heights of the economic crisis, yet havenow recently been revived.

The expectation is that a conclusion may now notbe far off. This will be good for Turkey’s exporters asthey seek to find alternatives to sclerotic eurozonemarkets, and it is also likely to benefit GCC membersin their efforts to diversify away from oil and gas.

Indeed, one of the main reasons for the growth inTurkish-GCC trade in recent years has likely been theproblems that investors in both areas have faced with-in their traditional overseas markets. The financial

crisis beginning in 2008 saw Arab investors in partic-ular switch away from regional area markets like Europeand North America, with emerging markets, such asTurkey, the beneficiaries.

Meanwhile, the low growth rates and poor returnson European investments in particular have meantTurkish companies and investors too have been look-ing for alternatives. The high growth rates of the GCCstates seemed almost tailor-made for this develop-ment. Turkey’s overall shift in emphasis away fromthe West in recent years and towards a more multi-polar approach to foreign relations has also provid-ed a welcoming context for these moves.CHALLENGES: There are, of course, certain chal-lenges. There is a general lack of reciprocity agree-ments between Turkey and the GCC in areas such asreal estate, while GCC investors – in common with oth-ers – also look for exchange rate stability when com-ing into markets. This has been an issue in recenttimes, although one being continuously addressedby the central bank. There are also some historical fac-tors, with each side seeking to re-establish trust andconfidence in the other after many years of mutualneglect in their relationships.

The January joint ministerial meeting also saw agree-ment on the next step – a new joint action plan forthe 2013-15 period. The GCC Secretariat is to preparethis, with expectations high that the next few years will thus see a further surge in Turkish-Gulf links.

42

Investment in the countryhas come from a number ofGulf states, including SaudiArabia ($1.3bn between2004 and 2009) and Kuwait($1.7bn).

ECONOMY ANALYSIS

Increasing employment is one goal of the government’s MTPs

With 2023 the centennial of the establishment of theRepublic of Turkey, elections in 2011 saw the govern-ment unveil a long-term vision for the country’s devel-opment that stretches ahead for more than a decade.The ruling Justice and Development Party (AKP), ableto capitalise on an unprecedented period of politicalstability after winning its third consecutive generalelection, has set some ambitious goals.

By 2023, the government expects to be exporting$500bn of goods and services. With four times its cur-rent output, Istanbul will have a third bridge across theBosphorus, while the world’s second-longest suspen-sion bridge will be part of a new Istanbul-Izmir high-way. The prime minister has even revealed plans for acanal between the Black and Marmara Seas, bypass-ing Istanbul – labelling it his “crazy project”. PLANS & PROJECTS: Currently though, the governmentis working on the somewhat less ambitious 9th Devel-opment Plan (9DP), which runs from 2007 to 2013. Thissets out a number of long-term objectives, with thesethen focused into a series of short-term and medium-term programmes – with the 2010-12 Medium-TermProgramme (MTP) followed in 2012 by the 2012-14 MTP.

At the same time, there is a programme for harmon-isation with EU accession requirements. In this, some35 chapters have to be completed, each devoted to adifferent area of activity. This programme has effective-ly come to a halt of late, due to various political dis-putes. The 9DP sets out a series of goals: increased glob-al competitiveness (see analysis), stable growth and amore equitable income distribution. A series of struc-tural changes underpin this, centred on a shift to amore value-added, information-based society.

The 2012-14 MTP, meanwhile, aims to increaseemployment, maintain fiscal discipline, boost domes-tic savings, decrease the current account deficit (CAD)and thus strengthen macroeconomic stability.

Fiscal discipline has been strong. January 2012 sawthe government post a TL1.7bn (!722.5m) budget sur-plus, 73% up year-on-year (y-o-y). The primary surplus,

meanwhile, stood at TL7.1bn (!3bn), some 48% high-er y-o-y. Overall, 2011 saw a budget deficit of TL17.4bn(!7.4bn), or 1.4% of GDP, though this was under the1.7% expectation in the 2010-12 MTP. 2012 BUDGET: Thus, the government is confident thatthe 2012-14 MTP, beginning with the budget for 2012,can continue to drive growth, even at a time of globaluncertainty. This budget, approved by parliament inDecember 2011, targets a year-end deficit of TL21.1bn(!9bn) and a primary surplus of TL29.1bn (!12.4bn).Expenditure has been increased from TL312.6bn(!132.9bn) in 2011 to TL350.9bn (!149bn), with non-interest expenditure at TL300.9bn (!127.8bn). The bigbeneficiary from the hike is the civil service, with plansfor some 90,000 new jobs and a 12.25% increase in thecentral government budget. The MTP also addressessome structural issues surrounding the CAD.

Efforts to make Istanbul a global financial centre –reflected in ongoing debates about moving governmentfinancial sector institutions from Ankara to Istanbul –are noted, as is a commitment to boost research anddevelopment. Only if Turkey breaks its dependence onimported value added, the argument runs, can it real-ly break away from the CAD. The programme also takesaim at taxes, in particular reducing the proportion ofindirect taxes in government revenue. This means tack-ling the unregistered or “grey” economy, which thefinance minister, Mehmet "im#ek, said had alreadyshrunk 10 percentage points between 2002 and 2011.The exact size of the grey economy is highly disputedthough, with figures ranging from 28% of GDP to 60%. GROWTH TARGETS: The MTP also predicts that GDPwill rise from $822bn in 2012 to $952bn by 2014. Overthe same period, per capita GDP is to rise from $10,973to $12,412, as GDP expands at 4-5% per annum. Underthis scenario, unemployment will fall from 10.4% to9.9%, while the CAD drops from 8% of GDP to 7% andannual inflation runs at around 5%. The governmentremains bullish about Turkey’s prospects and ability torise above the crises in the eurozone and the region.

By the 100th anniversary ofthe Turkish Republic in2023, the governmenthopes the country will beexporting some $500bn ingoods and services.

43


The current MTP predictsGDP will rise from $822bnin 2012 to some $952bn bythe year 2014, whileunemployment will dropfrom 10.4% to 9.9%.

Towards 100Setting the sights high for long-term development

ECONOMY VIEWPOINT

Jim O’Neill, Chairman, Goldman Sachs Asset Management

Many years ago, Goldman Sachs studied the growthprospects of a number of economies which we felthad the potential to become as big as the so-calledBRICs (Brazil, Russia, India and China) in the future.We examined all those nations that had populationsjust below their BRIC counterparts – the next-largestcountries, in terms of number of people – becausethe key features determining economic size are thenumber of people that work and their level of pro-ductivity. None of the countries on the “Next 11,”(N11), which includes Turkey, is likely to be as big asthe four BRIC countries in the future, but their growthpotential is nevertheless enormous. Indeed, four ofthe N11 are already sufficiently large that, like theBRIC nations, we think it is inappropriate to refer tothem as traditional “emerging” economies, becausetheir size gives them distinct advantages.

In addition to BRIC, the list of countries we are call-ing “growth economies” includes Turkey, Korea,Indonesia and Mexico, each of which accounts formore than 1% of global GDP.

In terms of measuring the economic potential ofa country, it is important to look at the factors thatdrive its productivity. Goldman Sachs monitors thesefactors using an index we call the growth environ-ment score (GES), which measures 18 different vari-ables that are pertinent to a nation’s productivity andsustainable growth. The scores tabulated in the indexcan range from zero to 10, with 10 being the high-est. We simply aggregate the 18 variables into sixdifferent categories which we then weight equally.Turkey scores 4.9, which means it ranks fifth out ofthe N11, behind Korea, Vietnam, Mexico and Iran.However, it fared better than six of the others, includ-ing Indonesia. Korea is easily the top ranked, with avery high 7.7. Indeed, Korea’s score is above all theG7 countries on such a ranking.

Turkey, meanwhile, achieved scores similar to thoseof Russia, and ranked quite a bit higher than India.Within its overall scores, Turkey scored relatively well

on some areas of macroeconomic performance, suchas inflationary controls and external debt. Howev-er, the country also performed poorly in terms ofinvestment spending and the low level of interna-tional trade, given the size of its overall GDP. ForTurkey to reach its vast economic potential, it needsto certainly boost both of these.

I often think of Korea as being some sort of a rolemodel for the rest of the N11 and BRIC countries. Itis the only country I can think of, during my career,that has transformed itself from a low-income nationinto one that enjoys a level of prosperity compara-ble to some developed nations, such as Spain. Thepolicies which enabled Korea to achieve these impres-sive results can be a template for other economieshoping to follow in its footsteps.

Some observers may be surprised to read thatTurkey scores quite well in terms of the rule of lawand corruption levels. Although Korea is regarded asa level for which the other N11 should be aiming,Turkey compares quite well in the group.

Many of the 18 variables relate to the uptake ofmodern technology, as well as other key attributesthat are required to be an attractive business des-tination. Turkey ranks lower than it should, in thisregard, but efforts to spread the benefits of mod-ern technology across more of the population, boostthe number of patents and improve research anddevelopment, are all smart policy goals for Turkey.If Turkey can successfully implement these policies,then over the next two decades and beyond thecountry could achieve spectacular growth.

In light of the country’s unique geographic location, which puts it in a position of bringing Eastand West together, and given the upheaval current-ly taking place in the Middle East and North Africaregion, I feel that Turkey embodies a goal for otheremerging economies; it provides a good example of how Western-style capitalism can function, even in different cultural and religious circumstances.

44

Smart policy goalsJim O’Neill, Chairman, Goldman Sachs Asset Management, on Turkeyand the Next 11


45

BankingLoans as a percentage of total assets are on the riseMore banks focus greater attention on the SME sectorNew types of bonds make a debut in the marketOnline and mobile banking are new revenue sourcesThe central bank moves to protect the value of the lira

BANKING OVERVIEW

As of March 2012 total assets were close to reaching !510bn

While some peers have struggled following the glob-al economic crisis, Turkey’s banks have grown rap-idly in recent years. Moreover, they remain healthy,liquid and well capitalised. Profits declined in 2011,particularly at the larger banks, as interest marginsfell due to competition for loans and increased fund-ing costs. However, there is still plenty of room forsector expansion, with a growing population that isincreasingly turning to banks to finance their pur-chases of consumer goods, cars and homes. MARKET SIZE & STRUCTURE: As of March 2012,total assets in the Turkish banking sector were closeto reaching TL1.2trn (!510bn), according to data pro-vided by the sector’s regulator, the Banking Regu-lation and Supervision Agency (BDDK). This figurehas experienced a steady rise over the last severalyears, increasing from TL732.5bn (!311.3bn) as ofthe end of 2008 to TL834bn (!354.5bn) in 2009 andTL1trn (!425bn) as of December 2010.

There are currently 29 commercial banks operat-ing in Turkey: three state-owned, 10 private and 16foreign (including six branches of banks establishedoutside of the country), plus four participation banks,Turkey’s version of Islamic lenders. The top five play-ers account for around 60% of assets, and their mar-ket shares have remained relatively stable over thelast few years. According to data from company fil-ings and the BDDK, $#Bankası and state-owned ZiraatBankası each held around 13% of total assets as ofthe end of 2011, followed closely by Garanti Bank(12%), Akbank (11%) and Yapı Kredi (10%). The twosmaller state-controlled banks – Halkbank and Vakıf-bank – each accounted for about 7% of assets. Thetop banks tend to act in parallel: if one bank intro-duces a new product or changes interest rates, it istypically not long until they all follow suit.

Ziraat, Halkbank and Vakıfbank are all state-ownedinstitutions, although the latter two have free-floatshares that are traded on the !MKB Borsa Istanbul(!MKB). Public ownership confers certain advan-

tages, such as less expensive and more stable depositfunding, thanks to the perception that these banksare less risky. For many years, state banks maintainedlower loan-to-deposit (LTD) ratios than their pri-vate-sector counterparts, which allowed them togrow more quickly over the last several years.

Foreign banks present in Turkey include Citibank,DenizBank (Dexia Group), Finansbank (National Bankof Greece), HSBC and ING. International players inter-ested in establishing a local retail presence find thatone of the easiest methods to enter the market isto purchase an existing bank. For example, INGacquired Oyak Bank in 2007, prior to which it hadbeen providing mainly top-end wholesale banking toforeign and major local companies. Similarly, in 2001HSBC expanded its retail presence in Turkey by pur-chasing local troubled institution Demirbank.

Alternatively, over the last several years, foreignbanks have acquired significant ownership positionsin local lenders. In 2005 French bank BNP Paribaspurchased a 50% stake in TEB Mali Yatırımlar, the prin-cipal shareholder of Türk Ekonomi Bankasi (TEB),acquiring a 42.1% indirect stake in the Turkish bank.TEB further expanded in 2010 by purchasing thelocal unit of Europe-based Fortis Bank, with the twobanks now merged under the name of TEB.

Also in 2005, international financial institutionUniCredit Group purchased a 50% stake in Koç Finan-cial Services, which subsequently merged with YapıKredi, giving UniCredit an indirect 41% stake in thecombined entity. In 2007 Citigroup acquired a 20%stake in Akbank, while in 2010 Spanish bank BBVApurchased 24.9% of Garanti’s shares from US con-glomerate, General Electric. As part of the latterdeal, BBVA also acquired an option to raise its own-ership by an additional 1% and gain a majority ofboard seats after five years’ time. ROOM TO GROW: While there has been a rise merg-er and acquisition activity in recent years, there stillremain a large number of small and medium-sized

The banking sector is a mixof state-owned,commercial, foreign, andparticipation, or Islamic,banks. The sector is robustand has experiencedimpressive growth despitethe global economic woes.

With strong indicators anddemonstrable room togrow, the Turkish bankingsector has caught theattention of foreign banks,mainly European.Consequently, the industryhas witnessed a number ofacquisitions over the lastdecade.

46

Strong strategies, good growthAs banks expand their financial practices, the sector benefits


BANKING OVERVIEW

banks, suggesting that further consolidation of themarket could occur, particularly as profitability inthe sector has declined. However, Zeki Önder, theexecutive vice-president of "ekerbank, told OBG thatit is unlikely that this will occur soon. “With a grow-ing market there is room for everyone, as long as theyhave the right strategies. Smaller players can win newbusiness if they position themselves well,” he said.This statement was echoed by Martin Spurling, thechief executive of HSBC Turkey, who highlighted thatTurkey has a rapidly growing population and thatthe country is by no means overbanked.

However, Spurling noted that the one area in whichthere could be merger and acquisition activity isamong the foreign banks, as their owners look toretrench in the face of growing woes in the euro-zone. For example, DenizBank, one of the best-per-forming units of troubled Franco-Belgian bank Dex-ia, has been up for sale since late 2011. The ownerhas struggled to find a buyer, but as of May 2012,Russia’s Sberbank was said to be interested, joiningQatar National Bank as a potential bidder. Alterna-tively, Vakıfbank and Halkbank could be targets foracquisition, should the state decide to fully privatisethem. However, there has been speculation regard-ing this possibility for several years, and it seemsunlikely to occur in the short to medium-term future. REGULATION: In the wake of a severe financial cri-sis in 2001, the country’s banking regulations wereoverhauled and the independence of the centralbank was established. The system that has been inplace since then has been widely credited with keep-ing the country’s financial institutions from takingoverly risky positions. Thanks to its strong regulato-ry system, the sector was well-positioned to facethe global economic challenges of 2008 and 2009,V. Derya Gürerk, the CEO of Türkiye Finans, told OBG.“Turkey was prepared for the global financial crisis,having entirely reformed the regulatory environ-ment following its own 2001 downturn, and theongoing uncertainty around the globe is not beingfelt by the banking sector here,” he said.

Since 2001, the Central Bank of the Republic ofTurkey (CBRT) has held a dual mandate to ensure bothprice and financial stability by using short-term inter-est rates as its primary policy instrument. The CBRTmakes funding available to the country’s banksthrough several channels, including one-week repos(the cost of which has been considered the coun-try’s policy rate since May 2010) and overnight lend-ing schemes. The CBRT also has the ability to setreserve requirement ratios for both lira- and foreignexchange-denominated assets and liabilities heldby the banks. The central bank was active in 2011,taking steps to cool the economy and ensure a so-called soft landing, while at the same time interven-ing to reduce volatility in the value of the lira.

Meanwhile, the BDDK oversees the banking sys-tem, making sure that it remains stable and inter-vening to protect the interests of consumers. Amongthe regulator’s responsibilities are establishing and

enforcing rules regarding capital adequacy ratio(CAR) requirements. Capitalisation rates are gener-ally strong in the sector, although they have steadi-ly fallen over the last two years, as banks haveincreased their lending activities and reduced theirholdings of zero-risk-weighted government securi-ties. As of March 2012, the sector-wide CAR stoodat 16.6%, well above the BDDK’s minimum of 12% tocontinue opening branches, but down from 19% and21% at the end of 2010 and 2009, respectively. TheBDDK has also in recent years limited dividend pay-ments for banks with low CARs.

The implementation of Basel II, which will go intoeffect in July 2012, will put further downward pres-sure on CARs. Kutlu! Do!anay, a banking analyst at$# Investment, told OBG that he expects capitalisa-tion rates to fall by an average of 130-150 basispoints once the new rules come into effect, althoughCARs will remain well above the regulatory mini-mum. However, he added that the impact is expect-ed to vary from bank to bank. For example, lendersthat hold large amounts of foreign exchange reserves

47


Room for growth can be found in the still sizeable unbanked market

The 2001 financial crisisushered in a series ofregulatory reforms,including theestablishment of thecentral bank’sindependence.Consequently, Turkishbanks were able to weatherthe 2008-09 globaleconomic downturn withlittle negative impact.

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Jan-12

Feb-12

Mar-12

250

300

350

400

450

500

550

600

650

700

Total sector loans combined TL & FX, 2007-12 Q1 (TL bn)

SOUR

CE: B

DDK

BANKING OVERVIEW

and Eurobonds and have lower levels of collateralisedloans will need to set aside additional capital. On theother hand, risk weights for mortgages and loans tosmall and medium-sized enterprises (SMEs) will bereduced. Akbank in particular has been identified byDo!anay and other banking sector analysts as a bankthat could in fact be positively affected by the intro-duction and new mechanisms of Basel II, due to thefact that it currently uses a 100% risk weighting forits mortgages and SME loans. LENDING: As noted above, the recent decline inCARs in large part reflects a fundamental transitionin Turkey’s banking sector, as it has shifted fromusing deposits to purchase government securitiesto a system in which lending plays a far greater role.Indeed, according to the “Turkey Article IV StaffReport” from the IMF, loans as a percentage of totalassets for the sector as a whole rose from 38.4% in2005 to 54.5% as of September 2011. This beenfacilitated by historically low real interest rates in2010 and 2011, as well as competition for banks towin market share, which has kept lending rates low.

This transformation is also apparent in observingthe rise in the volume of loans over the last severalyears. BDDK data shows that the value of total out-standing loans in December 2009 amounted toTL392.6bn (!140.1bn); by December 2010 this hadreached TL528.9bn (!224.8bn), rising further toTL682.9bn (!292.2bn) by December 2011 andTL699.1bn ( !297.1bn) by March 2012. This is equiv-alent to 33.9% growth in 2010 and nearly 30% in 2011.The expansion in credit occurred across the board,but was strongest in lending to SMEs and consumers.

Indeed, the share of loans accounted for by SMEshas increased over time, growing from about 21%to nearly 24% between December 2009 and March2012. According to Do!anay, this figure is still rela-tively low compared to the pre-crisis level of 27%between 2006 and 2008 as well as internationalstandards, particularly given that SMEs represent alarge part of the economy. Historically, the state-owned banks – particularly Halkbank – have focusedon lending to small businesses. However, over thecourse of the last decade, private lenders haveincreasingly focused on this segment. One impor-tant player in this area of the market is "ekerbank,with SMEs accounting for about 60% of its loan book.However, as Önder told OBG, there is still significantroom for growth in this area, as it remains a largelyunder-banked segment. Loans to SMEs also repre-sent an attractive opportunity because they are bet-ter collateralised than credit card loans and lendingto larger commercial borrowers, Cenk Karacao!lu,vice-president at Bank Asya, told OBG. DEMOGRAPHICS: The growth in consumer lendingis partially driven by demographics, given the expand-ing population that is increasingly affluent. As JohnMcCarthy, the chairman of ING Bank Turkey, toldOBG, “Turkey is a strong demographic story: the pop-ulation is nearly 80m strong, young and growing at1.2% per year. The economy is worth $800bn; and

consumer spending is focused on bigger-ticket items(houses, cars, white goods) that banks can helpfinance.” Consumer loans are heavily marketed, withmany banks advertising instant credit lines that canbe approved by phone. Lenders are using increas-ingly sophisticated data-mining activities, analysingcustomer profiles to market specific products thatmight appeal to individual borrowers (see analysis).

Of course, attracting new retail customers to thebanking sector has potential downside. As lendersbring on consumers who are not used to havingdebt, this could push up non-performing loan (NPL)rates. However, between 2009 and 2011 NPLs actu-ally fell, with the sector average declining from 5.16%to 2.71% over this period, as reported by Cross AssetResearch, a division of French bank Société Générale.There is some variation across the top banks, withHalkbank having the highest ratio in 2011 (at 3.1%),while Akbank enjoys the lowest at 1.6%. In terms ofthe downward trend over time, the IMF has attrib-uted this decline in part to a steady amount of NPLswhile total lending has increased. Looking ahead,NPLs could go up, but Emre Alpan !nan, researchmanager at the Banks Association of Turkey (TBB),told OBG that the performance of loans will largelydepend on how the economy does as a whole in2012. If growth meets the government target of 4%,the rate of NPLs is unlikely to go up, he said. SLOW DOWN: Rapid growth in lending in 2010 and2011 contributed to a rising current account deficit(CAD), as consumers were using their newly acquiredcredit to purchase imported goods from abroad. Thistrend was exacerbated by the rising value of theTurkish lira. Not unaware of the link between cred-it growth and the expanding CAD, the governmenttook steps starting in late 2010 to curb lending,unofficially targeting loan growth of about 25% in2011. This figure was never formally announced, butit was noted in several official speeches during thefinal quarter of 2010. As written in the IMF Article

49


Lending is expanding as banks use sophisticated techniques to individually target customers

Loans as a percentage oftotal assets rose from38.4% in 2005 to 54.5% bythe second half of 2011.The trend has beensupported by low realinterest rates.

Over the last decade,lending in the SME sectorhas expanded, with privatebanks joining larger state-owned lenders to offerfunds to this growing anddynamic business segment.

BANKING OVERVIEW

IV report, one element of the CBRT’s efforts to ensurefinancial stability starting in late 2010 was “usingmoral suasion to target a maximum 25% increase onbanks’ annual loan growth”.

“To have a large and unsustainable CAD is a seri-ous problem for the economy and Turkey’s can real-ly only be addressed with micro reforms, because ofthe huge energy-import component,” SüleymanAslan, CEO of Halkbank, told OBG. “Controlling it isa difficult process that is working, albeit slowly.”NEW CONTROLS: Of course, the central bank alsocan, and did, draw upon its monetary policy tools toslow lending in 2011 (see analysis). The challengewas how to effectively reduce credit growth with-out raising interest rates, as this would have increasedinflows of so-called hot money, which would havefurther strengthened the lira and raised the priceof Turkey’s exports. Instead, the bank chose to ini-tially lower the policy rate in late 2010, while at thesame time raising reserve requirements, in what issometimes referred to as an “unorthodox” approach.

However, the CBRT’s initial efforts were for themost part ineffective at curbing lending. This is in

part because the central bank continued to pumpliquidity into the economy through its open marketoperations. Moreover, rather than raise interest ratesto cover these higher intermediation costs, the banksinstead opted to earn lower margins instead of beingthe first to raise rates in a competitive environment.

Subsequently, in mid-2011, authorities decidedto take a different approach. In June 2011, the BDDKraised provisioning requirements for certain typesof consumer loans, as well as increasing the riskweighting for this same set of products. Unlike theearlier efforts by the government, this move had aclear effect, with interest rates jumping almost imme-diately and growth in the volume of loans slowingin the following months. Moreover, the BDDK imposedfurther restrictions on credit card lending.

The situation shifted again in late 2011. As the liracontinued to weaken, the CBRT took steps to raiseits rates, most significantly lifting the overnight bor-rowing rate from 9% to 12.5% in October of thatyear. Perhaps more importantly, however, it did soin a way that that left the banks with very little vis-ibility, with the governor of CBRT announcing inOctober 2011 that it would balance the mix betweenone-week repos and overnight lending as deemednecessary by market conditions. Banks, being risk-averse institutions, then again pushed up their rates,further slowing lending. While central bank fundingstayed at about 7.5% in November and early Decem-ber 2011, late in the year the CBRT tightened liquid-ity substantially, with the average cost of financinghitting nearly 12% in early January 2012. However,the situation improved by the end of the month, asthe central bank eased its stance, and accordinglylending rates at the bank have also come down. FUNDING: Just as the composition of the asset sideof banks’ balance sheets has changed over the lastfew years, lenders’ liabilities have also shifted. His-torically, deposits were the main funding source forbanks, but growth in deposits has not kept pace withthe rise in lending. Indeed, the LTD ratio increasedfrom 76% at the end of 2009 to 98% as of 2011 year-end, according to the BDDK. For this reason alone,lending in 2012 may expand at a slower rate thanin 2010 and 2011, according $# Investment’s Do!anay.In other words, there simply is less room to grow thanthere was in previous years.

Of course, banks do have access to other sourcesof funding, including the issuance of Eurobonds andsyndicated loans from foreign lenders. As the euro-zone crisis continues to unfold, Turkish banks couldfind it more difficult to tap into the international mar-kets, although CBRT Governor Erdem Ba#ç› has down-played the likelihood of this happening. Speaking toexecutives in Bursa on January 6, 2012, he said, “evenif there is a serious problem with European banks,other banks will still extend credit to Turkey becausethere is still plenty of cheap financing standing atabout 0% interest rate all over the world.”

Alternatively, local lenders have also started issu-ing lira-denominated bonds, which they have been

50

Turkish banks have access to funding from foreign institutions

The CBRT started toimplement measures in late2010 to slow lending,taking an unorthodoxapproach that initiallylowered interest rates andraised reserverequirements.


Cash Vehicle Housing Commercial

8

10

12

14

16

18

20

22

Weighted avg. interest rates for TL bank loans, 2010-12 (%)

Jun-10 Dec-10 Jul-11 Feb-12

SOUR

CE: C

BRT

BANKING OVERVIEW

allowed to do since October 2010, although theBDDK does place limits on the amount of outstand-ing debt of this type that can be issued. The capvaries by bank size, going as high as TL51bn (!21.7bn)for some lenders. However, at this point, the limitdoes not impose a constraint on any of the banks,according to !nan of the TBB, and moreover, it couldbe raised in the future, he said.

Banks were quick to enter the local bond marketafter having gained permission to do so, floatingfour bond issuances during January and February2011. Yields on these fixed-income instruments werebroadly comparable to the cost of deposit funding,which likely helped alleviate competition in thedeposit market, an important factor at a time whenyields on banks’ assets were falling. It is interestingto note that the duration of these bonds was quiteshort (with three of the four maturing within lessthan a year), but in fact this is not unusual for Turkey,where duration of loans is typically one to two years,with the exception of mortgages, which are still arelatively small part of the market.

Since early 2011, banks have continued to issuedebt in the local bond market. For example, Finans-bank finalised two six-month lira bond issuances ofTL150m (!63.8m) and TL200m (!85m) in October2011 and November 2011, respectively. In January2012 both Akbank and Garanti issued local curren-cy bonds. Akbank sold TL650m (!276.3m) in lira-denominated bonds at an 11.6% yield, followed aweek later by Garanti’s sale of TL1bn (!425m) in localbonds at 11%. While this type of debt remains asmall part of the banking sector’s liabilities, it isexpected to grow, in part because in February 2012the BDDK announced that they would allow lendersto add 50% of the local bonds that they issue totheir liquidity adequacy ratio. COVERED BONDS: Turkish banks continue to searchfor new sources of funding. In mid-2011 "ekerbankintroduced covered bonds as a new alternative tothe market. Not only was it the first covered bondissued in Turkey, it was also the first of its type glob-ally to be backed by loans to SMEs. Covered bondsare typically secured by mortgage pools, and indeed,the 2007 Turkish legislation that made this issuancepossible was originally intended for mortgage loans,although the law allows for other assets to be used.

The total value of "ekerbank’s covered bond pro-gramme has been set at TL800m (!340m), which thebank has already tapped a number of times. For itsfirst tranche, the lender sold TL228m (!97m) inbonds to Italian bank UniCredit, Dutch developmentbank FMO and the Washington-based and WorldBank member group, International Finance Corpo-ration. The European Bank for Reconstruction andDevelopment and the European Development Bankwere the investors for the second tranche, whichtotalled TL180m (!76.5m). The pricing of the bondwas attractive, at Euro Interbank Offered Rate (EURI-BOR) plus 200-250 basis points, about half the costof deposits in Turkey, according to Önder. Moreover,

he added that other advantages of this issuanceinclude access to new sources of funding and an inno-vative structure that allows additional issuances asmore loans are put into the pool.

Turkey’s participation banks have also startedturning to the bond market for longer-term fund-ing, although in these institutions’ case, this hasinvolved tapping into the growing global sukuk (Islam-ic bond) market. Issuances of sharia-compliant bonds,which are locally known as “leasing certificates”,have been allowed in Turkey only since April 2010.Lawmakers subsequently amended the tax laws inearly 2011 such that leasing certificates of the AlIjara type would be exempt from certain taxes, bring-ing the tax structure for Islamic debt in line with thatapplied to conventional bonds.

One participation bank, Kuveyt Türk, has alreadycarried out two issuances of sharia-compliant debt,beginning with its August 2010 floating of a three-year $100m sukuk offering. The lender, which ismajority owned by Kuwait Finance House, then helda second sukuk round in October 2011. Bank Asyaand Bank Albaraka had both planned to have sukukofferings before the end of 2012, but they laterannounced delays due to adverse market conditions.

Finally, while the sukuk are an important first stepin increasing funding alternatives for Turkey’s par-ticipation banks, they may still operate at a disad-vantage when compared to their sharia-compliantcounterparts in the Gulf and Asia, according to Gür-erk of Türkiye Finans. “One key challenge facing thesegment is access to funding. Sukuk are emergingin Turkey, but funding sources that are available atIslamic banks elsewhere in the world are still laggingbehind or missing here,” he told OBG.EARNINGS: While the volume of loans grew signif-icantly over 2010 and 2011, bank profitabilitydeclined over this period. According to the IMF, thesector’s return on equity (ROE) and return on assets(ROA) have steadily fallen since 2009, standing at

51


Despite higher costs, banks kept interest rates low in the first half of 2011 to maintain their customer bases

Since October 2010 bankshave been allowed to issuelira-denominated bonds,although there are limitsplaced on the amount ofthis type of debt that canbe issued.

As of 2010, participationbanks in Turkey have beenallowed to float sukuk(Islamic bonds), and thefirst two issuances by aforeign-backed local lenderproved successful.

BANKING OVERVIEW

13.6% and 1.6% as of August 2011, respectively. Thistrend has been true across the board: for example,the ROE at $# Bank – the country’s largest privatebank – fell from 20.7% in 2009 to 12.9% in 2011, whileits ROA declined from 2.1% to 1.4%, according toCross Asset Research.

While this is a significant drop in ROEs over twoyears, Spurling told OBG, these figures are still high-er than many of the returns that banks achieve inthe more developed markets of the West, whereROEs in the range of 8-10% are the norm. Moreover,the drop from 2009 is at least in part due to the arti-ficially high returns earned that year as a result of aone-time event, namely the CBRT’s steep reductionin interest rates between November 2008 andNovember 2009. Over this period, the policy rate fellfrom 16.75% to 6.75%. For the banks, which holdlarge portfolios of government securities (and heldeven more at the time), this was a windfall, as itwidened their net interest margins (NIMs).

Since 2009 and up until the fourth quarter of2011, margins steadily narrowed for a couple of rea-sons. First, the CBRT began imposing higher reserverequirements starting in late 2010 and also stoppedpaying interest on reserves. Second, increased com-petition among banks for both deposits and loans,particularly during the first half of 2011, kept NIMslow. While margins did start to move up for somebanks in the fourth quarter of 2011, the trend onan annual basis is clearly downward. To give just twoexamples, at Akbank, the NIM fell from 5% to 3.3%between 2009 and 2011, while this figure declinedfrom 5.2% to 3.6% at Garanti.

In response to declining margins, banks havefocused greater attention on lowering costs, accord-ing to Adnan Bali, general manager of $# Bank. “If weconsider the contraction in NIMs, controlling oper-ating expenses is becoming a more important issuefor the sector,” he told OBG. A report from CrossAsset Research shows that the average cost-to-

income ratio for the six top banks (Akbank, Garan-ti, Halkbank, $# Bank, Vakıfbank and Yapı Kredi)increased from 35.2% in 2009 to 41.3% in 2011;however the research group anticipates that thisfigure will fall over the next few years. Moreover, theequities research outfit considers Turkish banks tobe among the most efficient of the lenders that theyfollow, noting that “cost control performance in2011 in response to lower revenue levels resultingfrom higher reserve requirements and general pro-visioning has been good.” ALTERNATIVE INCOME SOURCES: Banks are look-ing for new solutions to offset falling NIMs and boostprofits, and one such opportunity can be found inthe rise in banks’ fee and commission income. Indeed,as was pointed out in the IMF Article IV report, oneof the reasons that the banks may have kept theirlending rates low in 2011 was to ensure that theymaintained their customer base, and therefore safe-guarded the opportunities to earn more non-inter-est revenues from these same people. “A large mar-ket share supports fee income – a growingcontributor to bank profits,” the IMF report explained.

The fees-to-income ratio actually varies signifi-cantly across the major players, according to a March2012 report from UK-based bank Standard Char-tered. For example, at $# Bank in 2011, this ratiostood at 9.8%, while Garanti, Akbank and Yapı Krediheld ratios of 23.9%, 25.6% and 29.6%, respectively.At Vakıfbank, which is majority owned by the state,this ratio was lower, at 12.6%. In general, banks withhigher credit card market shares tend to enjoy morerobust fee incomes, so it is therefore not surprisingthat Yapı Kredi – as Turkey’s leader in credit cardissuance – has the highest fee-to-income ratio.

In terms of trends over time, this ratio at all fiveof these banks, with the exception of $# Bank,increased during the 2009-11 period. This is consis-tent with research done by Citibank (covering Garan-ti, Halkbank, $#Bank, Vakıfbank and Yapı Kredi), whichdemonstrated that fee and commission income atthese institutions rose between 2010 and 2011 by6.4% and 15%, respectively. At the same time, inter-est income declined by 5.7% in 2010, followed by asmall rise (0.8%) in 2011. OUTLOOK: While profits took a hit in 2011, analystsexpect NIMs to recover in 2012. This will in part bedependent upon the CBRT’s monetary policy andgrowth in deposits. Rising fees and commissions, aswell as continued efforts to reduce costs, could alsoplay a role in making Turkish banks more profitablein upcoming years. Moreover, with a loan-to-GDPratio of just 48%, Turkey’s banking sector still hasmuch room to expand. According to TBB’S !nan, thesector is preparing for loan growth between 15% and20% in 2012, adding that the composition of loanswill depend on the economy, as retail loans are moresensitive to general economic growth. Nonetheless,given that Turkey’s population is young and grow-ing, it is likely that the country’s banks will contin-ued to enjoy substantial opportunities for lending.

52

Banks are looking to non-interest fees as a way to offset falling interest and revenue margins

Net interest margins fellbetween 2009 and late2011 in part as a result ofthe CBRT’s policies raisingreserve requirements andfreezing payments onreserve interest.

Banks kept their lendingrates low in 2011 tosafeguard their marketshare and maintain the inflow of non-interestincome from fees, anincreasingly importantrevenue source.


BANKING INTERVIEW

Mehmet #im"ek, Minister of Finance

How did the government perform in fiscal termsduring 2011, and what steps have been taken toreduce the trade deficit? #"M#EK: On the fiscal front, our core achievementssince 2002 have been a significant reduction in debtand the deficit. We lowered the general governmentdeficit from 10.8% of GDP in 2002 to 0.6% in 2011.Similarly, gross public sector debt fell to 39.4% of GDPfrom 74% in 2002. Thanks to the restoration of fis-cal health, we have improved the credibility of Turkey’sfiscal stance. During the 2008-09 global crisis, debtand deficit rose, but we managed to reduce it topre-crisis levels in two years. A combination of strongrevenues and spending controls has provided uswith a small surplus in the first nine months of 2011.In the last quarter of the year, had we not spentTL11.1bn (!4.7bn) on infrastructure, we would havehad a small surplus in the general government budg-et. However, Turkey needs to invest in infrastruc-ture, in people, and in research and development(R&D). Nevertheless, we overperformed relative toour general government deficit target of 1% of GDP,which is well within the Maastricht criteria.

Given our current account deficit (CAD) and strongdomestic demand, it is important to maintain fiscaldiscipline and tighten fiscal conditions. To maintainsuccess, we unveiled a medium-term economic pro-gramme that foresees the general government budg-et deficit declining to 0.4% of GDP and debt fallingto 32% by the end of 2014.

What role will the new taxes announced in late2011 play in reducing the CAD? #"M#EK: The tax increases in October 2011 wereaimed at containing demand and helping moderatethe CAD. For example, we increased taxes on carswith engines over a certain size. Taxes on mobilephones also went up, because in the first half of2011, Turkey imported 7.9m mobile phones. Unlesswe had taken measures, it would have been almost

20m. We raised a surcharge on loans for imports, soif you import products and pay in instalments or byborrowing, the credit is more expensive. These meas-ures help moderate the size of the CAD.

What are the primary factors driving the growthin the country’s economy? #"M#EK: Growth is predominately driven by privateconsumption and investment. These two compo-nents have been strong partly due to the bankingsector, which has a very healthy balance sheet. Oncethe crisis was over, banks were in such good shapethat they were able to support the economy. Thehousehold sector is also strong, due to the creationof 1.5m jobs in 2011 and 3.8m since the end of 2007.During 2007-11, some 26m jobs were lost globally,including 5.1m in the US and 8m in the EU. New jobsin Turkey support the recovery and the recovery cre-ates more jobs. The jobless recoveries seen in theUS and EU have resulted in an unemployment thatremains stuck at about 8-11%. In Turkey the rate alsowent up, but then it fell well below pre-crisis levels.

How willing is the government to employ fiscalstimulus in the event the crisis in Europe becomesa bigger challenge for Turkey? #"M#EK: Since we were able to bring the deficit anddebt down, we have room to manoeuvre. We willmaintain fiscal discipline and keep the debt-to-GDPand deficit-to-GDP ratios on a downward trend, butif there is a significant external shock, we can pro-vide stimulus, as we did in 2009. However, becausewe withdrew that programme relatively quickly, wedid not find ourselves in a position where our debtsustainability was in question. We have a lot of expe-rience in terms of crisis management, and 2008-09was a great stress test from which we emerged suc-cessfully. None of this means that we would not be affected by a global or regional crisis. However,the issue is not what happens, but how we respond.

53


Fiscal disciplineOBG talks to Mehmet #im$ek, Minister of Finance

BANKING VIEWPOINT

The expansionary monetary policies which were adopt-ed by central banks of developed countries to containthe impact of the global financial crisis had significantreverberations on developing economies. The Turkisheconomy was no exception in this regard. During thisperiod, the availability of ample low-cost and short-termforeign financing led to rapid credit expansion and anappreciation of the Turkish lira. This caused an accu-mulation of macro-financial risks and rising externalimbalances as of the second half of 2010. As escalat-ing risks pertaining to financial stability have the poten-tial to hamper price stability over the medium term, theCBRT adopted different approaches to incorporatingfinancial stability into the monetary policy framework.

In line with its mandates of price stability and finan-cial stability as detailed in the Central Bank Law, theCBRT adopted an integrated policy that combines man-agement of the policy rate with complementary toolssuch as reserve requirement ratios and the interestrate corridor. By lowering financial imbalances, thesepolicies aim to ensure sounder economic growth, in thecontext of price stability.

In the period between November 2010 – when thenew policy strategy was introduced – and August 2011the monetary policy strategy was shaped around twoaxes. The first was to channel capital inflows to longer-term instruments and prevent the over-appreciationof the lira. Secondly, the CBRT set out to achieve a morecontrolled growth in domestic loans and domesticdemand and rebalance domestic and external demand.During this period the interest rate corridor was wideneddownwards due to the strong risk appetite and intenseshort-term capital inflows. Reserve requirement ratioswere significantly increased, and foreign exchange buy-ing auctions were held regularly to take advantage ofstrong capital inflows to build up reserves. These meas-ures made a significant contribution in mitigating exces-sive appreciation pressures on the lira. Meanwhile, anotable deceleration was observed in loan growth aftermid-2011, owing also to the measures taken by the Bank-

ing Regulation and Supervision Agency. As a conse-quence, the key indicators began to improve and theeconomy assumed a rebalancing trend as of mid-2011.

Due to the mounting concerns over the global growthoutlook and sovereign debt problems in some Europeaneconomies, as of August 2011 global risk aversion esca-lated and the volatility in risk appetite reached historicheights. As capital outflows from developing countriesaccelerated in this period, the CBRT used the same pol-icy tools in the opposite direction compared to the pre-vious period. The interest rate corridor was narrowedby raising overnight borrowing rates and Turkish lirareserve requirements were revised to decrease the liq-uidity requirement of the banking sector.

However, the rise in inflation was higher than expect-ed due to excessive depreciation of the lira stemmingfrom deterioration in the global risk appetite sinceAugust and adjustments in administered goods pricesin the final quarter of 2011. In order to contain theadverse effects on the medium-term inflation expec-tations and outlook, the CBRT raised overnight lend-ing rates in October 2011 and widened the interest ratecorridor upwards. Thus, overnight lending rates werepermitted to materialise above the policy rate throughadjustments to the funding provided to the market. Inthe meantime, the reserve requirement ratio wasreduced in order to prevent an undesirable tighteningin liquidity conditions driven by the increase in overnightinterest rates. The measures taken since August havesignificantly alleviated the adverse effects of fluctua-tions on the Turkish economy, which emerged in par-allel to uncertainties in the European economy. TheCBRT’s measures regarding the foreign exchange mar-ket and decisions related to the interest rate corridorin August and October reduced the extent of the fluc-tuations in the exchange rate compared to that of oth-er emerging market economies. The monetary tight-ening started in October 2011 has proven successful,and loan growth and domestic demand are predictedto follow a moderate course in the upcoming period.

54

Rebalancing policiesErdem Ba$çı, Governor, Central Bank of the Republic of Turkey (CBRT),on measures to preserve financial stability


Erdem Ba"çı, Governor, Central Bank of the Republic of Turkey(CBRT)

BANKING ANALYSIS

There were 8m active online banking customers by the end of 2011

In the last decade, Turkey’s lenders invested heavily indeveloping alternative banking practices, starting withATMs and recently expanding to internet and mobileplatforms. Moving transactions out of the branchesactually increased contact between banks and their cus-tomers, who now have nearly constant access to theiraccounts. This has helped banks reduce costs, attractnew customers and tap into alternative revenue sources. PRODUCT DIFFERENTIATION: The availability of robustinternet and mobile platforms could be an increasing-ly important factor in a customer’s decision of whereto bank. Multiple channels raises customer satisfactionby providing flexibility and continuous access to serv-ices, Sedat Tosyalı, the division head for $# Bankası’salter-native distribution channels strategy division, told OBG.Moreover, as more people begin performing their trans-actions online, waiting times at branches are reduced,further boosting overall customer satisfaction, he added.

While mobile and internet banking may help lendersincrease customer bases, they can also generate rev-enues from transaction fees and commission – partic-ularly important as banks’ interest margins are now athistorical lows. As Tolga Tavla#, vice-president of inter-net and mobile banking at Yapı Kredi, told OBG, lenderswant customers to conduct as many transactions aspossible, and having continuous access to accounts viathe internet or mobiles is helpful in this sense.

The variety of transactions available to Turkish cus-tomers on alternative platforms is impressive. Moneytransfers, foreign currency exchanges, bill payments,stock and bond trades, and access to investment fundsare just a few of the options available via the internetor mobile channels, and usage levels are high. Accord-ing to data from the Turkish Banking Association (TBB),about 11.4m investment transactions, including optionslike stock purchases, were carried out on internet plat-forms for the three-month period ending December2011. This represents substantial growth in the lastyears, as this figure stood at 9.2m in the final quarterof 2008. The internet is even more popular for basic

financial transactions, like cash transfers and bill pay,with 90.4m of these transactions occurring betweenOctober and December 2011.

These data underscore the major difference betweeninternet and mobile banking in Turkey and more devel-oped markets like Europe and the US. While the lattermay have higher penetration rates – there were about8m active users of internet bank accounts in Turkey asof the end of 2011 according to TBB, or slightly lessthan 10% of the population – Turkish banks offer farmore services via alternative channels and are betterpositioned to use technology to boost their bottom line.

As Tavlas told OBG, “Europe may have more internetusers, but its banks could use more advanced data min-ing and web-optimised sales techniques to offer prod-ucts tailored to individuals to sell more.” Turkish lendersemploy sophisticated methods to offer loans, and thenumber of these requests processed via the internetand mobile channels is impressive. Each year $# receivesabout 3m loan and credit card applications from its inter-net-mobile-ATM channel. Applicants with a good cred-it history can receive a loan immediately. COST SAVINGS: While generating extra revenue andselling more loans are important benefits, a more fun-damental and important effect is cost reduction. Branch-es are expensive to maintain, and costs can be reducedto the extent that transactions can be moved to alter-native channels. Even the introduction of ATMs, whichin Turkey offer services beyond cash withdrawal, helpedin this sense, reducing the burden on branches.

Although there will likely always be a need for phys-ical outlets, banks could be staffed by fewer people andoffer fewer transactions requiring structural presence.In fact, the number of branches in Turkey is growing,reaching nearly 11,000 in 2011, according to the TBB.On the other hand, as lending has expanded rapidly inthe last two years, this figure may be lower than itwould have been had banks not so successfully per-suaded customers to bank via alternative channels,which has increased demand in the sector as a whole.

Alternative online andmobile banking services areever more important forattracting new customers,who value the ease andflexibility of theseadvanced platforms.

55


Turkish banks are ahead ofmany of their European andUS counterparts in terms ofutilising sophisticatedonline sales techniques forcapturing and servicinginternet and mobilebanking customers.

Alternatively growingOnline and mobile banking cast a wide net for new customers

BANKING ANALYSIS

The sector is robust, with state-owned, local and foreign banks active

The top five Turkish lenders in account for nearly 60%of the assets in the banking sector. The state has own-ership stakes in three of Turkey’s top 10 banks; andthe second-largest bank, Ziraat, is 100% state-owned.While domestic players account for eight of the 10biggest lenders in the country, four of these are atleast partially owned by foreign banks. Financial per-formance in 2011 was characterised in general byfalling profits at the larger banks, while smaller insti-tutions saw improvements. Assets for nearly all ofthe lenders were up significantly in 2011."# BANKASI: $# bank was the largest lender in Turkeyas of December 2011, with assets amounting toTL161.7bn (!68.7bn), a 23% increase over year-end2010. The institution’s employee pension fund owns40% of the bank, while the Republican People’s Par-ty is the second-largest shareholder with a 28.1%stake. The remainder of the bank’s shares are pub-licly traded on the !MKB Borsa Istanbul (!MKB).

Net profits fell from nearly TL3bn (!1.3bn) in 2010to TL2.7bn (!1.1bn) in 2011. However, lendingjumped sharply, rising by 43% and ending 2011 atTL91.6bn (!38.9bn). However, net income margins(excluding central bank reserves) declined from4.56% to 3.85%, contributing to a fall in profits. Likemany Turkish banks in 2011, $#’s loans as a percentof assets jumped (rising from 49% to 57%), while secu-rities fell from 34% to 26%. As of December 31, 2011,corporate and commercial lending accounted forroughly 50% of its loan book, followed by retail loans(including credit cards) at 28% and small and medi-um-sized enterprises (SMEs) at 22%.

Analysts at BNP Paribas and Citigroup noted in in-house analytic reports that one downside risk for thecountry’s largest lender was its relatively high relianceon repo funding. If the central bank were to raisefunding rates as it did in late 2011 and early 2012,this could negatively impact on $# throughout the year. Z"RAAT BANKASI: Established in 1888, Ziraat is thesecond-largest bank in Turkey as measured by assets

and 100% state-owned. In December 2011, its totalassets stood at TL161bn (!68.4bn), a 6% increaseover year-end 2010. Net profits for 2011 amount-ed to TL2.1bn (!892.5m), compared to TL3.7bn(!1.5bn) for the prior year. As of September 2011(the latest data available), its loans were valued atTL70.2bn (!29.8bn), roughly 43% of total assets andrepresenting a 22% increase over year-end 2010.According to Cross Asset Research, a division ofFrench bank Société Générale, the bank ranked num-ber one in retail loans as of the third quarter of2011, capturing about 14% of the market. Its posi-tion was smaller in the corporate/SME loan seg-ment, where it held a 9% share.

As its name suggests, Ziraat has historically focusedon the agricultural sector, and it is still a major play-er in that area. As of the end of 2010, the agricul-tural sector accounted for about 30% of its loanbook. The bank has a wide geographical presence,with 1434 branches across Turkey and 78 offices in17 other countries. As the company noted in its2010 annual report, some 71% of its loans are chan-nelled to its customers in Anatolia, which makes itmarkedly different from its more urban competitors,which tend to focus their lending activities in the Mar-mara region and other major metropolitan areas.GARANT" BANKASI: The two largest shareholdersof Garanti, founded in 1946, are the Do!us Group(24%) and Spanish bank BBVA (25%). The latteracquired its ownership in the company in Novem-ber 2010, buying out General Electric, an Americanconglomerate, in a $5.8bn deal. As part of this trans-action, BBVA gained the option to purchase an addi-tional 1% of the company and acquire a majority ofboard seats after five years’ time. The remainder ofthe bank’s shares are publicly traded. As of Decem-ber 31, 2011, total assets amounted to TL146.6bn(!62.3bn), a slight decline from the year-end figurefor 2010. Loans grew by 30% in 2011, from TL64.5bn(!27.4bn) to TL83.5bn (!35.5bn). Profitable lend-

56

Big lendersImportant changes and promising signs of growth


BANKING ANALYSIS

ing products drove this growth, with general-purposeloans up by 45% and credit cards up by 23% over theprior year. However, net profits for 2011 stood atabout TL3.1bn (!1.3bn), a 2% decline from 2010.

Garanti is well-capitalised, with a capital adequa-cy ratio (CAR) of 16.9% as of the end of 2011. Accord-ing to UniCredit equity research, the bank’s strongcapitalisation is a competitive advantage that willallow the company to grow in the future, particular-ly in areas that are more risky, such as high-yieldunsecured consumer loans. In a January 2012 report,Cross Asset Research noted that Garanti is highly effi-cient and is optimised for generating fee incomeand cross-selling. Finally, according to a report fromCitibank, one of the bank’s strengths is its ability toattract deposits, which was particularly importantduring the fourth quarter of 2011, when the cost offunds from the central bank increased sharply. AKBANK: Founded in Adana in 1948, Akbank is thefourth-largest bank in terms of assets. Akbank is49% owned by Sabancı Holding, with Citigroup hold-ing a 20% stake in the company. The remaining 31%of shares are free-floating. In 2011 the bank post-ed profits of TL2.5bn (!1.1bn), a decline of 16%from the previous year’s performance. Total assetsover the year grew by 17%, reaching TL140bn(!59.5bn). Loan growth was about on par with thesector as a whole, increasing by 30% to reach morethan TL88bn (!37.4bn). SMEs, which accounted forabout 27% of loans at year-end 2011, experiencedthe highest rate of growth, at 34%. Consumer loansgrew but at a slower pace, increasing by 18.7%.

According to a Moody’s Investors Services creditevaluation for Akbank, the bank ‘s strengths includea robust retail banking business, solid corporate andSME franchises, good risk-management practicesand a comfortable liquidity profile. Akbank is amongthe country’s best-capitalised banks, with a CAR of16.8% as of December 2011. Moreover, the effectof Basel II is expected to be minimal – that is to saythat risk weighting for foreign-currency Turkish gov-ernment securities will rise, but this will be offset bylower risk rates of other assets, including mortgages. YAPI KRED": The bank’s principal shareholder is KoçFinancial Services, arranged via a 50:50 joint ven-ture between UniCredit and Koç Group, with an 81.8%stake. Minority shareholders account for the remain-ing 18.2%. Yapı Kredi’s shares are traded on the !MKBas well as the London Stock Exchange. As of Decem-ber 2011, its assets stood at TL117.5bn (!49.9bn),making it the fifth-largest lender in Turkey. The bank’snet profits in 2011 amounted to TL2.3bn (!977.5m),up 2% over the prior year. Loans grew by 28% in2011, with a focus on lira-denominated retail loansincluding high-margin general purpose (63% year-on-year growth) and SME loans (50% year-on-year).

Yapı Kredi is focused on retail banking activities,which it defines as card payments, SME lending andindividual banking. Retail banking products includeconsumer and SME loans, investment accounts andinsurance products. At the end of 2011, about half

of its loans and 63% of its deposits came from theretail segment. The bank has a particularly strongpresence in the credit card market, accounting for18.3% of volume in this segment. According to sec-tor analysts, challenges for the bank include its rel-atively weak liquidity profile, with its loan-to-depositratio standing above 100% and a CAR of 14.7%. Imple-mentation of Basel II is expected to have a negativeimpact of 150-170 basis points on its capital ratio. HALKBANK: After Ziraat, Halkbank is the second-largest state-controlled bank, although 25% of itsshares have traded on the !MKB since its initial pub-lic offering (IPO) in 2007. At year-end 2011, its totalassets stood at TL91bn (!38.7bn), an increase of 25%over the prior year. Outstanding loans grew by 30%in 2011, amounting to TL74bn (!31.5bn) as ofDecember 31, 2011. The bank also did well in termsof profitability, closing the year with net income ofTL2bn (!850m), a 1.7% increase over the prior year.

Halkbank has a historical focus on SMEs, whichaccounted for about 36% of its loan book in 2011.It also has a reputation for a relatively conservativelending approach, according to Cross Asset Research.For example, it typically will not accept a loan-to-val-ue ratio of more than 50% for mortgages, while theBanking Regulation and Supervision Agency ( BDDK)allows this figure to be as high as 75%. In line withits conservative stance, it has a low loan-to-depositratio compared to its peers, standing at 84.9% by 2011year-end. This should help fund growth in the future,as will continued access to global capital markets.In early 2012, Süleyman Aslan, general manager ofHalkbank, publicly stated that the bank’s manage-ment believed that it would be able to obtain fundsamounting to $2bn in 2012 through bilateral agree-ments and the issuance of Eurobonds, noting thatthe bank enjoys a “position of high creditworthi-ness” across the global borrowing market.VAKIFBANK: A collective of several Ottoman-erafoundations (vakıf), represented by the General

57


The five largest banks account for nearly 60% of the assets in the sector

BANKING ANALYSIS

Directorate of Foundations, controls almost 60% ofVakıfBank. Another 16% is owned by the bank’s pen-sion fund, to which all employees must contribute.Remaining shares trade on the !MKB, following thebank’s IPO in 2005. As of December 31, 2011, Vakıf-Bank’s assets totalled TL89.2bn (!37.9bn), a 20.6%increase over the prior year. Net profits amountedto TL1.2bn (!510m), up year-on-year by 6%.

Outstanding loans at the end of 2011 reachedTL72.9bn (!31bn). Retail loans are an increasinglyimportant part of the business, growing by 41.5% in2011 to reach TL21.1bn (!9bn). This segment includ-ed 37.4% growth in general-purpose consumer loansand a 47.6% increase in residential mortgage lend-ing. VakıfBank stated that its strategic plan is tofocus on retail lending and increase its market sharein this area. Loans to SMEs doubled in 2011, in partthanks to Kobidost, a project aimed at helping smallbusiness owners finance various needs, initiated inthat year. According to Cross Asset Research, Vakıf-Bank was an attractive stock pick as of January 2012,noting that the bank is focused on increasing itsfee-to-total income ratio, which remains low at 13.5%. F"NANSBANK: The country’s eighth-largest lender,Finansbank, was founded in 1987 by Turkish bankerHüsnü Özye!in. In 2006, a total of 77.2% of the bank’sshares were sold to the National Bank of Greece(NBG). Today, the balance of shares is held by theInternational Finance Corporation (5%), NBGI Hold-ings (7.9%) and NBG Finance (9.68%), plus otherunidentified minority shareholders (0. 19%). Despitethe economic troubles in Greece, in November 2011NBG announced that it had no intention of sellinga controlling position in the Turkish unit beyond aplanned sale of a 20% stake in the bank.

In September 2011 (the latest data available) thebank’s assets amounted to TL47.4bn (!20.1bn), anincrease of 24% over 2010 year-end. Loans, whichaccount for 67% of the bank’s assets, grew by 23%in the first three quarters of 2011. In the same peri-od, customer deposits increased by 24%. Meanwhile,

net income from fees and commissions surged by27% year-on-year. The bank has a strong position inthe credit card segment, where it holds a 15.2% mar-ket share according to a presentation by the bank.DEN"ZBANK: Founded in 1938 as a state-ownedbank to finance the Turkish maritime sector,DenizBank was acquired by Zorlu Holding in 1997from the Privatisation Administration. The lenderwas subsequently sold to European financial groupDexia in October 2006, and at present operates aspart of the Dexia Group, although a small portion ofits shares (less than 1%) are publicly traded. Thebank has been up for sale since late 2011, but itsfinancially troubled owner has had difficulties find-ing a buyer. As of March 2012, Qatar National Bank(QNB) was the only serious bidder that remained, butthe CEO of UniCredit, partial owner of Yapı Kredi, toldreporters in March that his institution might consid-er purchasing DenizBank if the QNB deal fell through.At the end of the third quarter 2011, the bank’sassets amounted to TL45.7bn (!20.2bn), a 35% riseover year-end 2010. Net loans increased during thisperiod, from TL23.8bn (!10.1bn) to TL31.5bn(!13.4bn). Net profits for the first three quarters of2011 stood at TL912m (!387.6m), already abovethe 2010 full-year result of TL616m (!261.8m). TEB: Founded in 1927 as Kocaeli Halk Bankası, thebank was acquired by the Çolako!lu Group in 1982and renamed Türk Ekonomi Bankası (TEB). In 2005French bank BNP Paribas purchased a 50% stake inTEB Mali Yatırımlar, principal shareholder of TEB,acquiring a 42.1% indirect stake in the lender. In2010 TEB announced it was acquiring the local unitof Europe-based Fortis Bank, with operations to becarried out under TEB’s name. The deal was finalisedin early 2011. As of year-end 2011, 4.5% of TEB’sshares were traded on the !MKB, where the bank hasbeen listed since its IPO in 2000. TEB’s total assetswere TL38.1bn (!16.2bn) in December 2011, andearned TL206.7m (!87.8m) in net profits that year.

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Domestic lenders hold eight of the top 10 spots in the sector, with half of these partly foreign-owned

Assets rose significantly at nearly all banks in 2011

BANKING ROUNDTABLE

Martin Spurling, CEO, HSBC Turkey

The Central Bank of the Republic of Turkey (CBRT)implemented unconventional policies in 2011, low-ering the interest rate but raising reserve and cap-ital requirements. How did this affect banks? SPURLING: Some of the central bank’s more “unortho-dox” policies can make it more difficult for banks to planfor the period ahead, as these make funding costs morevolatile and unpredictable. This is not unusual, howev-er, for many markets, and look at where the central bankhas gotten us to today – these policies have proved tohelp Turkey achieve a stronger economic performanceand are proving successful in our view. Most bankerswill tell you that stricter regulations create a more chal-lenging operating environment for banks. However, weare the first to acknowledge that Turkey’s regulatorsand public authorities have worked very well togetherto create a positive environment for sustainable growth.They were doing really well and when in early 2011 theeurozone crisis kicked in they reacted very fast. That isone of the reasons why we believe in Turkey, and wewant to grow here – the ability of local businesses andthe economy to bounce back quickly. AYDIN: The central bank uses a mix of tools that givesthe opportunity to follow both expansionary and tight-ening monetary policies efficiently and effectively whenneeded. As of early 2012, the weight of the monetarypolicy rate in the policy mix has decreased comparedto other instruments, so the interest rate corridor andforeign reserve management have become more promi-nent. The policy mix has increased the cost of fundingfor the banking sector, which has hurt its bottom line.However, the current monetary policy stance is expect-ed to continue until the CBRT’s goal of price and finan-cial stability is achieved. Regarding capital adequacyrates, high levels of capital immunised the sector againstthe kind of crises that have been seen in recent years.Capital adequacy regulation does not create difficultyin bank management, rather it protects the sector. BAL": The quality and stability of banking regulation hasplayed a huge role in the positive performance of the

sector. I think this context needs to inform the recentdebate about how capital and liquidity requirementslimit the abilities of banks in Turkey, especially in termsof lending, which may lead to high credit spreads andless available credit. These constraints may also slowgrowth, but we should also take into consideration thecurrent global crisis, and the frequency and severity ofcrises in the financial sector. In that particularly con-text, there is a trade-off between stricter regulationsand their impact on the financial sector, on the one hand,and the security to remain profitable during crisis, onthe other. The long-term benefits of the regulations canout-weigh the short-terms costs, in that sense.

The current account deficit doubled between thethird quarters of 2010 and 2011. Has this affectedyour confidence in the authorities? AYDIN: It is more appropriate to discuss the currentaccount balance, rather than the deficit, because thenwe can examine the context to see if a balance is beingachieved. For Turkey, just like other emerging economiesthat have few resources and a high savings deficit, thecurrent account deficit is generally the major engineof growth. Turkey imports investment goods and ener-gy to increase future production capacity. The impor-tant question is how the deficit is financed. Monetaryand fiscal policies strive to finance the gap with for-eign direct investment flows. Our current accountdeficit doubled during 2011, even though our growthrate was among the best in the world. The goal is toensure sustainable growth. Monetary and fiscal author-ities have put this issue at the top of the agenda. Also,the CBRT has comfortable foreign currency reserves,compared with short-term FX debt and average month-ly import figures, so the deficit is under control.BAL": We are not in the same position we were in themid-1990s, the economy is rapidly expanding and itneeds energy, which means significant imports. Themost important issue here is the fragility of the cur-rent economic system, which needs to be supported

60

Well-managed growthOBG talks to Martin Spurling, CEO, HSBC Turkey; Adnan Bali, CEO, $#Bankas›; and Hüseyin Ayd›n, General Manager, Ziraat Bankası


BANKING ROUNDTABLE

by active commerce. This, combined with the recenteconomic measures, will help us eventually to seeimprovements in terms of the current-account-to-GPDratio. It is important to note that we have successfullychanged the composition of the export base as well,diversifying away from European markets such thattheir share accounts for just 42% of total exports. Ourexports to North African, Middle Eastern and othercountries have expanded. This is providing an oppor-tunity for balance, in that sense Turkey can offset thenegative impact of the contraction in the eurozoneand maintain strong inflows to help finance the deficit. SPURLING: If you look at historical examples of coun-tries where the current account deficit reached 10%or more of GDP for a long time, we see that in somecases it triggered a foreign exchange crisis, which thenturned into a wider economic crisis, followed by a con-traction in the economy. Turkey is a country that isreliant on a significant amount of foreign financing foreconomic growth. The share of foreign investors inIstanbul Stock Exchange is high and in the past, Turkeywitnessed fluctuations in short-term capital inflows.Moreover, energy is one of the country’s biggest importsand so a rise in the price of oil negatively impacts thecurrent account balance. The government is very awareof this, however, and we are pleased to see proactivemanagement of this challenge.

How has growth in the provision of electronic bank-ing services changed the sector? BAL": We have well-developed, secure, user-friendlyfinancial services networks that provide a diverse rangeof financial transactions. The average person on thestreet can invest in government bonds through an ATMor buy securities through internet banking. These arenew applications, and I do not think there are similarexamples in other countries. In our case, about 77% oftotal transactions are made through the non-branchchannels, so it is very much a business climate in whichconvenience and service are driving customer behav-

iour. However, all of these services have made for a muchmore competitive sector, with customer convenienceincreasingly the primary focus. Service is essential now.SPURLING: The banking sector was one of the keyareas of the economy that was directly affected by thetechnological developments of the past two decadesin Turkey. Leaving aside advancements in internal bank-ing systems, the main technological evolution tookplace in customer-facing channels, especially onlinebanking. Most banking customers enjoy 24/7 serviceaccess, instead of travelling to a nearby branch. And,on the flip side, this change created a cost reductionopportunity for the banks. This win-win situation gen-erated a new facet of competition for the bankingindustry, namely online and mobile banking. To be com-petitive in this new field, Turkish banks have been devel-oping innovative products and services, improving theironline and mobile customer value propositions andincreasing investments in IT. According to the bankingassociation, retail internet banking users in Turkeyincreased by 162% in the past five years. Based onrecent economic and demographic research, mostincreases in the bankable population are expected tocome from young internet users. This explains the shiftin competition towards electronic banking. AYDIN: As a general trend, the banking sector has beenconfronted with narrowing net interest margins due tocompetition in the market and the CBRT’s unorthodoxpolicy. All of the banks are attempting to propose val-ue to their customers through the right distributionchannels in timely and effective ways. It is about increas-ing customer loyalty. Internet banking is gaining moreimportance, with the number of customers growing by23% in 2011. Similarly, during that period, total finan-cial and investment transactions through this channelincreased by 60%. There is no doubt the banks that investmore in electronic banking will be more competitive inthe short to medium term. Given the decreasing aver-age age of customers, Turkish banks need to providethem better-designed relations management systems.

61


Adnan Bali, CEO, !" Bankası Hüseyin Ayd›n, General Manager, Ziraat Bankası

BANKING ANALYSIS

Raising provisioning requirements helped curb consumer lending

The downside to the growth in retail lending in Turkeyin 2010 and 2011 was a rapid increase in the currentaccount deficit as consumers took advantage of greateraccess to credit to purchase imported products thatwere previously out of reach financially. At the sametime, the lira, buoyed by strong capital inflows, strength-ened, making imports less expensive and raising the costof Turkish exports. The government thus faced a dilem-ma that was not uncommon for emerging markets dur-ing 2010 and 2011: how to slow the economy withoutraising interest rates, which would exacerbate hot mon-ey inflows and further appreciate the lira.AN UNORTHODOX POLICY: From October 2010 toApril 2011, the Central Bank of the Republic of Turkey(CBRT) had a so-called two-pronged approach: raisingreserve requirements while at the same time loweringthe policy rate, known in Turkey since May 2010 as theone-week repo rate. The process of increasing reserverequirements began in a fairly mild manner, increasinglira and foreign exchange reserve requirements from5% to 5.5% in October 2010. However, the schemequickly escalated over the following months; by the endof April 2011, the reserve requirement for lira depositsof maturity of up to one month had hit 16%.

At the same time, the policy rate was also loweredin late 2010 and early 2011. In attempt to slow hot mon-ey inflows the rate was lowered from 7% to 6.5% inDecember 2010, and then further to 6.25% in January2011. Finally, in an effort to deter currency specula-tion and curb excess volatility in the value of the lira,the CBRT widened the interest rate corridor, definedas the difference between its overnight lending and bor-rowing rates. A dramatic changes occurred in Novem-ber 2010 when the overnight borrowing rate wasreduced by 400 basis points from 5.75% to 1.75%. Thecentral bank’s general approach during this period(late-2010 to August 2011) was one of so-called down-side interest rate volatility. INITIAL EFFECTS: Raising reserve requirements can intheory slow lending, although it is considered to be an

indirect channel. In late 2010 and the first half of 2011the, CBRT continued to provide liquidity to the marketthrough its open market operations. At the same time,the banks enjoyed comfortable loan-to-deposit ratiosand no rush for deposits, reducing their willingness toraise rates on their loans. Given the high competitionin the Turkish banking sector, in the early months of2011, it appears that lenders hesitated to be the firstto raise rates and instead took a hit on their margins.

Indeed, loan pricing in the sector remained fairlyconstant during this period, initially even falling. Accord-ing to data from the CBRT, the weighted average inter-est rate for lira cash loans stood at 12.3% on October15, 2010, falling to 11.95% by March 4, 2011. Similar-ly, over this same period, the price of vehicle loandeclined from 10.7% to 10.4%. Prices drifted up a bitbetween March and June, with cash loans priced at12.9% as of June 3, 2011, while vehicle loans hit 11.1%.The effect on the volume of lending was limited as well,with the value of outstanding consumer loans contin-uing to grow, rising from about TL118bn (!50.2bn) inOctober 2010 to TL154.5bn (!65.7bn) in June 2011,according to data from the Banking Regulation andSupervision Agency (BDDK).AN ALTERNATIVE: Finding it difficult to slow lendingthrough these channels, the government turned to theBDDK, altering the regulations that affect the ability ofbanks to lend. In June 2011, the sector’s regulatorannounced two changes on the same day. First, itincreased general provisioning for consumer loans(general and credit card) from 1% to 4% for bankswhose consumer loan portfolio exceeded 20% of theirtotal loan book. It was hoped that this change woulddiscourage banks from extending this type of credit,as more provisions mean lower profitability results.

However, the second change was likely more effec-tive in curbing lending. For this same set of consumerloans, the BDDK increased the risk weights that are usedin calculating capital adequacy ratios (CARs). For loansof maturity of up to two years, the weight increased

Initial attempts by the CBRTto curb lending by raisingthe reserve requirementhad little impact on banks’practices, as lenders optedfor smaller margins ratherthan lose market share.

62

As the market swingsThe sector’s response to a rapidly shifting monetary policy


BANKING ANALYSIS

from 100% to 150%. For longer loans, it was raised from100% to 200%. Increasing these weights required banksto set aside more funds, therefore reducing the amountof money they had available to lend.

Unlike the adjustments to the reserve requirements,this policy change had a nearly immediate impact, asbanks translated increased capitalisation requirementsto higher loan rates. The average price for a cash loanjumped from 12.93% on June 3, 2011 to 15.63% on July1, according to data from the CBRT. Data from the BDDKshow that the rate of growth of personal finance loansalso slowed. Between January 2010 and June 2011, thiscategory of lending increased at a compound month-ly growth rate of 2.6%, while between July 2011 andDecember 2011, this figure fell to less than 1%. NOT OVER YET: The CBRT shifted gears in August 2011,lowering the policy rate to 5.75% due to concern arenewed global economic slowdown. The central bankalso narrowed the interest rate corridor, raising theovernight borrowing rate by 350 basis points to 5% toreduce currency volatility and boost the lira. As the liracontinued to slide in the markets, the CBRT took a moredramatic step, and in October it raised the overnightlending rate from 9% to 12.5%, significantly above theprevailing policy rate of 5.75%. Again, the point was toincrease uncertainty to deter currency speculation andsupport appreciation of the lira, which had fallen sub-stantially over the course of 2011.

At the time that the new overnight lending rate wasannounced, the CBRT’s governor Erdem Ba#çı told thepress that the central bank would alternate betweenmaking funding available through one-week repos andovernight lending, as deemed necessary given marketconditions. From late October until late December 2011,the weighted average cost of funding from the CBRThovered around 7%, according to an analysis by $# Invest-ment. However, without having any clarity as to whererates might be on a day-to-day basis, banks raised theirpricing following the October announcement, with theweighted average interest rate for lira loans jumpingalmost immediately for cash, vehicle, housing and com-

63

Adjusting reserve requirements had an immediate effect on lending

To combat the depreciationof the lira, in October 2011the CBRT raised theovernight lending rate to12.5%, significantly abovethe prevailing policy rate atthe time.

mercial loans. For example, between October 21 andNovember 4, the price of a commercial loan increasedfrom 11.88% to 14.66%.

On December 27, 2011, the CBRT announced a newpolicy, again creating confusion in the markets, thistime stating that, going forward, the central bank woulddefine each day as “normal” or “extraordinary”. On theextraordinary days, the bank would suspend sellingone-week repos. Strangely, these such days turned outto be the norm, and by January 6, 2012, the averagecost of funding had reached 11.88%. Much to the reliefof the banks, the CBRT subsequently eased monetaryconditions mid-month, resuming funding at 5.75% onJanuary 10, which caused the weighted cost of fund-ing to fall again to about 7.5%. The country’s lendersshifted their rates in response, with cash loan ratesdeclining from 20.1% on January 6 to 19.3% on Febru-ary 24. This same trend was observed in commercialand housing credit. However, loan pricing still sits farabove the lows that were seen in the first half of 2011.

65

Capital MarketsRecovery under way following a difficult 2011Private equity investors arriving in increasing numbersIslamic bonds set for growth after legal changesPush to increase the number of listings bearing fruit

CAPITAL MARKETS OVERVIEW

The government is aiming to increase the number of IPOs

After outperforming many of its peers in 2010, the$MKB Borsa Istanbul ($MKB), had a challenging yearin 2011. While bourses in many emerging marketsdeclined, Turkey was particularly hard hit, mostly dueto its weakening currency and the country’s exposureto the eurozone. Capital markets in Turkey remainamong the most liquid in the region but are still under-developed and an underutilised source of financingfor local businesses. However, the government has tak-en steps to expand the financial markets, encourag-ing initial public offerings and making legal changesto boost issuance of corporate bonds. Moreover, thesector’s regulator – the Capital Markets Board (CMB)– has implemented new rules that are likely to increaseconfidence in the market and attract investors. SIZE & STRUCTURE: The $MKB has four main com-ponents: the stock market, the emerging companiesmarket (ECM), the bonds and bills market, and the for-eign securities market. The stock market is made upof several different sub-categories: the national mar-ket; the collective products market, including realestate investment trusts (REITs); the fund market,where exchange-traded funds (ETFs) and certain typesof mutual funds are traded; the second national mar-ket, which lists small and medium-sized enterprises(SMEs) as well as companies that have been tem-porarily or permanently delisted from the nationalmarket; and the watchlist companies market.

In January 2012 there were 244 businesses tradedon the national market, 53 for the collective market,63 on the second national market and 11 on thewatchlist market. Total market capitalisation at the endof March 2012 was TL435.4bn (!185bn). The nation-al market covers a range of sectors, with banks aloneaccounting for 34% of total capitalisation as of Janu-ary 2012, followed by manufacturing at 27%.

Most listings are small cap companies with marketvalues of less than $1bn. The larger stocks include tele-coms providers Turkcell and Türk Telekom, severalbanks (Akbank, Garanti Bank, Denizbank, Finansbank,

Halkbank, I"bank, Vakıfbank and Yapı Kredi), drinksmanufacturer Anadolu Efes, oil refinery Tüpra", steelcompany Ere$li Demir Çelik, white goods producerArçelik, construction firm Enka !n"aat and two hold-ing companies (Koç and Sabancı). BOURSE OWNERSHIP: At present, the $MKB, whichwas established in 1985, is a public corporation thatoperates as an autonomous institution. However, thegovernment has signalled its intention to make thebourse a joint-stock company, possibly as a first steptowards privatisation. Privatising it would make it moreefficient and be beneficial to its members, Ay"e Çolak,assistant general manager of Tera Brokers, told OBG.

Recent legal changes, implemented in January 2012,have altered the structure of the board of directorsat the $MKB, increasing the number of members fromfive to seven, with four directors appointed by the gov-ernment. While some members of the exchange havepublicly expressed concern regarding the new com-position, proponents of the law have said that it couldhasten the privatisation process. While no target datefor privatisation has been set, in January 2012 DeputyPrime Minister Ali Babacan told journalists that thenecessary legal framework would be finalised beforethe summer and that any public offering for theexchange would depend on market conditions. PERFORMANCE: Turkey’s stellar economic growth in2010 helped the performance of the country’s bourse.The $MKB 100, the stock exchange’s main index, rosesharply in 2010 as the economy strongly reboundedfrom the global crisis. GDP increased by 8.9% thatyear, making it the second-fastest-growing economyamong the G20 countries. The return on the $MKB 100in 2010 was 21% as measured in dollar terms, com-pared to 16% growth in the MSCI emerging marketsindex, which covers 21 countries. The $MKB 100 hitan all-time closing high that year, reaching 71,543.3on November 9, 2010. While the $MKB 100 climbedduring the first several months of 2011, it fell steadi-ly through the second half of 2011, ending the year

The !MKB Borsa Istanbulhas four main components:the stock market, theemerging companiesmarket, the bonds and billsmarket, and the foreignsecurities market.

66

On the reboundThe prospects are bright after a tough year in 2011



down 22% (in lira terms) from December 2010, at51,266.62. In dollar terms, the index declined by 35%.One possible explanation is that foreign investorspulled out of emerging markets across the board inlight of economic challenges in their home countries,but the $MKB in fact underperformed the MSCI emerg-ing markets index in 2011, which fell by 20.6%.CHALLENGES: Several reasons have been suggest-ed for the challenges faced by Turkey’s equities mar-kets in 2011. First, sovereign debt troubles in theeurozone had a potentially larger economic impacton the country than they did on its emerging marketspeers. European banks are a significant source offunding for Turkish businesses, and there was con-cern that, as they pulled out of emerging markets tomeet their capital requirements, this could have hada negative effect on local companies. Moreover, Europeis major destination for Turkish goods, accounting fornearly half of the country’s exports in 2010 and 2011.However, as Cüneyt Demirgüre", the head of Turkishequity research at UniCredit, told OBG, even if totaldemand in Europe was shrinking, market share forTurkey’s exports actually increased as consumersturned to less expensive products coming from Turkey.

Another factor that may have discouraged foreigninvestors and softened the market in 2011 was increas-ing concern regarding Turkey’s growing currentaccount deficit, which stood at nearly 8% of GDP inMarch 2011, 9% in June and almost 10% by Septem-ber. With the economy largely dependent on exter-nal borrowing, investors may have shied away fromTurkey for fear of a sudden stop in capital flows, a chal-lenge that other emerging markets have faced.

However, it was the central bank’s response to thecurrent account deficit that was perhaps the singlemost likely explanation for the fall in the $MKB 100 in2011. Starting in late 2010, the Central Bank of theRepublic of Turkey (CBRT) began to lower the policyinterest rate to curb hot money inflows that werebeing used by banks to fund consumer lending, push-ing up demand for imported goods. The result of thispolicy was, not surprisingly, a weakening of the lira,which continued to fall throughout most of 2011.This had several effects on publicly listed companies.Some, particularly in the industrial sector, carry un-hedged short foreign exchange positions, exposingtheir balance sheets to a weaker lira. Moreover, adecline in the lira discouraged foreign investors, whowould rather not hold assets in a currency that is los-ing strength. The departure of foreign investors canbe seen in the change of their share of the market’sfree float, which declined from 66.2% at year-end2010 to 61.9% as of December 2011. BANKS: Finally, to understand the performance ofthe $MKB 100 in the past few years, it is important toremember that banks account for 34% of the marketcap. Therefore, to the extent that they do well – ornot – this can have an impact on the market as awhole. While lending volumes at banks increased sig-nificantly over 2010 and 2011, their profitabilitydeclined (see Banking chapter). According to the IMF’s

Article IV staff report for Turkey, published in January2012, the banking sector’s return on equity and returnon assets have steadily fallen since 2009, standing at13.6% and 1.6% as of August 2011, respectively.

This trend occurred for several reasons. Banks expe-rienced windfall profits in 2009, as the central bankreduced the policy rate by 10 percentage pointsbetween November 2008 and November 2009.Because banks hold significant portfolios of govern-ment bonds, this immediately widened their interestmargins. However, from 2010 to mid-2011, bank mar-gins steadily fell, as the central bank took steps toincrease funding costs to the banks to slow the growthin credit, and competition for loans kept lending rateslow, particularly during the first half of 2011. MARKET EXPANSION: Lenders are not only an impor-tant component of the stock exchange, they also faroutweigh capital markets in terms of their impor-tance in financing the economy. As the World Bankwrote in a March 2012 report on domestic savings inTurkey, “A unique feature of Turkish financial marketsis the absolute dominance of the banking system.”

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The $MKB underperformed the MSCI emerging markets index in 2011

Sovereign debt troubles inthe eurozone had a majoreconomic impact, withEuropean banks asignificant source offunding for Turkishbusinesses.

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Closing value of ‹MKB 100, 2009-Jan. 2012 (lira based)

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The relatively small role of the $MKB is underscoredby the World Bank’s ranking of countries by marketcapitalisation as a percentage of GDP. In 2010, Turkey,at 42%, scored quite low compared not only to moredeveloped economies, but also to emerging markets.The average among OECD countries was around 90%in 2010, while Brazil (74%), India (93%) and Russia(68%) also all ranked higher than Turkey.

There are several explanations for the small size ofthe $MKB relative to the country’s GDP and Turkey’scapital markets more generally, most of which haveto do with the limited role of domestic investors. First,the stock market has historically been volatile, at thevery least discouraging local investors who might havea lower appetite for risk than their foreign counter-parts. Moreover, in the past, the rate of return onbank deposit accounts and government bonds washigh and essentially zero-risk. For this reason, domes-tic investors largely avoided equities funds, MehmetGerz, the chief investment officer of ATA Asset Man-agement, told OBG. He noted that as long as interestrates stay above 7.5%, domestic investors will likelyremain the minority in their own stock market. PENSIONS: Finally, large institutional investors suchas pension funds that might provide a mechanism forsavings to be channelled into equities and corporatebond markets remain underdeveloped in Turkey. How-ever, this is changing, as pension funds continue tobecome more popular, in part thanks to policy changes.In April 2012 the government announced new rulesfor the private pension system that should encour-age higher rates of participation. The governmentwill now match 25% of individual contributions topension funds, replacing a previous set of incentivesthat involved tax breaks on contributions (see Insur-ance chapter). This should encourage private savingsthat can be directed, at least in part, towards the equi-ties market. In another step designed to increase sav-ings, the government also said in April that gains frominvestments in mutual funds would no longer be sub-ject to a 10% withholding tax, as long as equitiesaccount for at least 75% of the mutual fund’s assets.

These changes are the latest manifestations of ashift in the government’s focus, as policymakers haveturned their attention to increasing the domestic sav-ings rate in response to a growing current accountdeficit that has been financed by foreign capital flows.As Vedat Akgiray, the chairman of the CMB, told OBG,“Capital markets should be a major source of financ-ing. We are trying to do everything to make sure thatthey grow healthily and fast enough to catch up withthe world.” This process should help transform Turkeyfrom a bank credit-based to a capital market-basedeconomy, which will likely enhance productivity growth. IPOS: One way in which the authorities have tried tohasten the expansion of the $MKB is by boostingawareness of IPOs and making it easier to list on thebourse. Despite the fact that the equities market rep-resents an opportunity for low-cost financing, manylarge companies in Turkey are not listed. From the listof the top 1000 Turkish companies, as compiled by

the Istanbul Chamber of Industry, 414 of the largest500 businesses are not listed. Similarly, for the next500, 459 are not currently publicly traded.

To address this challenge, in 2008 the $MKB, the CMB,the Union of Chambers and Commodity Exchanges ofTurkey, and the Association of Capital Market Inter-mediary Institutions of Turkey launched the IPO Cam-paign. Within the context of the campaign, summitswere held in Istanbul and Bursa, and various seminarswere organised in different cities. Changes were alsomade to the $MKB listing regulations, reducing therestrictions on profitability, minimum capital require-ments and free-float ratio. The $MKB also discountedinitial listing fees. For example, for firms with a mini-mum free-float rate of 25% and free-float market capof at least TL100m (!42.5m), these charges havebeen reduced by 25% until the end of 2012.

Perhaps as a result of these efforts, the number ofIPOs has jumped in recent years, with 22 new com-panies and three ETFs starting to trade on the $MKBStock Market during 2010, compared to an averageof six IPOs per year between 2001 and 2009. During2010, six of the 22 IPOs involved REITs, including EmlakKonut REIT’s offering, which was the largest IPO of theyear and the fifth-largest in the bourse’s history. Dur-ing 2011, an additional 27 companies went public,mostly in the first half of the year when the marketwas stronger. Major IPOs included the Akfen REIT inMay 2011, with 54.12m shares offered to the publicand a free float of 29.4%. The longer-term goal is tohave 1000 companies listed on the $MKB by 2023.

Looking ahead, additional listings could come fromstate-owned or formerly state-owned enterprises thathave already been privatised. The energy minister,Taner Yıldız, announced in mid-August 2011 that thegovernment intended to start work on an IPO for stateoil and gas exploration firm Türkiye Petrolleri in 2012.Adding already-privatised entities, which include someenergy interests and the country’s ports, to the boursecould also boost the $MKB, Hüsnü Özye$in, chairman

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Market capitalisation as a percentage of GDP is relatively low at present, standing at 42%

The number of IPOs hasjumped in recent years,with 22 new companiesand three ETFs starting totrade on the $MKB in 2010,compared to an average ofsix IPOs per year from2001-09.


of Fiba Holding, told the local press in December 2011,noting that listing privatised energy firms wouldincrease the $MKB’s size by nearly 25%.

The $MKB has also taken steps to encourage the list-ing of SMEs by establishing the ECM, which enablesbusinesses with growth potential to raise funds eas-ily and at a low cost. The listing requirements of theECM, which has been active since January 2011, areless stringent than those of the national market. Thelatter requires businesses to have three years of audit-ed financials and profits for one to two years, plus min-imum requirements regarding free-float and marketcap. Fees for listing on the ECM are much lower, ataround one-tenth of those for other $MKB markets.In late 2011 there were two SMEs traded on the ECM,with additional applications under evaluation. DERIVATIVES TRADING: An additional way in whichactivity on the $MKB could be increased would be toadd derivatives such as futures and options, which arenot currently available on the bourse.

In December 2011 the then-CEO of the $MKB,Hüseyin Erkan, told OBG that the exchange would beintroducing options on individual equities as soon asthey received regulatory approval, with trading optionson the $MKB indices to be added later.

At present, the only exchange for trading deriva-tives in Turkey is the Turkish Derivatives Exchange,(TurkDEX). Futures contracts currently traded atTurkDEX include equity indices (eg, $MKB 100 Index,

$MKB 30 Index), interest rates, currency (eg, lira/dollar,lira/euro), commodities (eg, cotton, wheat) and ener-gy. By far the most heavily traded contracts are equi-ty index futures, which accounted for 91% of volumein 2011. However, currency futures trading picked upsubstantially in 2011 due to volatility in the lira. Ener-gy futures, which were introduced in 2011, could bean important product going forward. TurkDEX expectsto add the trading of options by the end of 2012; itis awaiting regulatory approval to do so.

Foreign investors accounted for around 15% oftrading volume in 2011. This percentage has stayedfairly constant since trading started on TurkDEX in2005, although it did decline in 2008 and 2009, mostlikely as a result of the global financial crisis.

While this figure may seem low, foreign investorsare larger in terms of open positions, as domesticinvestors trade more frequently. The primary purposeof the exchange is to provide risk management toolsfor domestic companies. To this end, TurkDEX person-nel work with real economy companies as well as vis-it universities to teach market participants about thederivatives market.MINORITY SHAREHOLDERS: While reducing free-float ratio requirements may encourage more firmsto list, it could also discourage investors, particular-ly large foreign institutional investors, from purchas-ing equities on the $MKB. If only a small portion of thecompany – say 15% – is offered, this can mean that

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The $MKB has taken stepsto encourage the listing ofsmall and medium-sizedenterprises by establishingthe emerging companiesmarket, which enablesbusinesses with growthpotential to raise fundseasily and at a low cost.


owners of publicly traded shares have little say overthe management of the company.

The protection of minority shareholder rights hasbeen widely discussed in 2011, in part due to an ongo-ing shareholder dispute at Turkcell, the country’slargest mobile phone operator. In October 2011 MuratVargı, a founder and minority shareholder in the com-pany, called for the resignation of Turkcell’s existingseven-member board of directors, subsequently tellingBloomberg in an interview that four independentboard members should be appointed to ensure theprotection of minority shareholder rights.

Recent legal changes could go some way towardsalleviating foreign investor concerns when it comesto minority shareholder rights, particularly with respectto the appointment of independent directors. Accord-ing to a decree issued by the CMB on October 11, 2011,for all $MKB National-30 Index companies (excludingbanks), the “number of independent directors shouldbe defined in line with free-float rate of the compa-ny”. Moreover, this number must be at least two andequivalent to at least one-third of the board mem-bers. However, if the free-float rate is above 50%, thenumber of independent directors need not exceed halfthe total number of board members. In addition, therole of the independent members was strengthened.

According to the decree, any “significant” decisions(for example the sale or purchase of material tangi-ble assets, or delisting decisions) must be made in thepresence of independent members.

While these changes seemed reasonable andbrought the Turkish stock exchange into line withmarket regulations around the world, one element ofthe decree was met with less positive reaction, name-ly the fact that independent directors would have tobe approved by the CMB, or at least this was how theregulation was initially interpreted.

However, in February 2012, the regulator clarifiedthe rules, noting that the CMB would review appoint-ments only to verify that they met the criteria forindependence. For example, appointed independentmembers could not have worked as an auditor for thecompany in the prior five years. Rules such as this canhelp ensure that independent directors represent theinterests of smaller shareholders and are not behold-en to company management.FIXED-INCOME: While the stock market representsone option for companies seeking financing, an alter-native in many well-developed capital markets is tooffer corporate bonds. However, the issuance of lira-denominated corporate debt in Turkey has been lim-ited over the past decade, partly because in the pastgovernment borrowing may well have crowded outprivate sector bonds. According to an April 2011 pres-entation by the World Bank, government securitiesaccounted for 99.8% of outstanding bonds in Turkeyin 2011, compared to 65% in Brazil, 48% in Malaysiaand 58% in Mexico. However, as the government hasbrought its fiscal deficit under control over the lastfew years and interest rates have declined, corporatebonds have gained momentum, with outstanding val-

ue growing from less than TL200m (!85m) in 2006to more than TL2.5bn (!1.1bn) in 2010.

The market received a boost in October 2010, whenthe banking regulator announced that lenders wouldbe able to issue lira-denominated bonds. Several havesince floated local bonds, including Akbank, GarantiBank, !"bank and Finansbank. In January 2012 Akbanksold TL650m (!276m) in lira-denominated bonds atan 11.6% yield, followed a week later by Garanti’s saleof TL1bn (!425m) in local bonds at 11%. The govern-ment has taken several other steps in recent years toencourage corporate debt issuance, including lower-ing transaction costs, removing tax distortions andreducing the costs of trading in the secondary mar-ket. In January 2012 Erdem Ba"çı, the governor of theCBRT, told Bloomberg that promoting the market forcorporate debt is a priority for the government.

According to Çolak of Tera Brokers, the market forcorporate bond issuance has significant potential andis going to “boom”. A study from the World Bank hasprojected the market could grow as large as $70bnassuming that just 50% of foreign currency loans were

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The value of the lira continued to fall through most of 2011

The government has takenvarious steps to encouragecorporate debt issuance,including loweringtransaction costs, removingtax distortions andreducing the costs involvedwith trading in thesecondary market.

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‹MKB market cap, 2009-Jan. 2012 (TL bn)

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refinanced using local currency fixed-income instru-ments. For potential issuers of bonds, the benefitsinclude longer maturity periods vis-à-vis loans, andcollateral is not required. From the perspective ofinvestors, corporate bonds are attractive becausethey offer a better return than government debt andare less risky than equities. However, one factor thatcould constrain growth in this area is the limitedamount of secondary trading, but this is expected toimprove as sales increase. ISLAMIC FINANCE: Islamic financial services are stillfairly limited in Turkey, although there are several par-ticipation banks, as sharia-compliant lenders areknown locally. While historically they have relied ondeposits to fund their lending activity, these banks havestarted to sell sukuks, or Islamic bonds, as an alterna-tive. Sukuk issuance has been allowed in Turkey onlysince April 2010, when the CMB promulgated a newrule regarding “leasing certificates”, as sukuks arecalled in Turkey. Legislation was subsequently amend-

ed in early 2011 such that the tax structure for Islam-ic debt has been brought into line with the rulesapplied to conventional bonds (see analysis).

As of March 2012, only one participation bank,Kuveyt Türk, had issued sukuks, tapping global capi-tal markets in August 2010 with a three-year, $100msukuk, followed by five-year, $350m Islamic bond inOctober 2011. Two other Turkish participation banks– Bank Al Baraka and Bank Asya – had signalled theirintention to sell Islamic bonds, but in late 2011 bothlenders announced that they were putting these planson hold until market conditions improved.

One factor that could encourage more activity inthe Islamic finance sector would be the issuance ofa sukuk by the Turkish government, as it would pro-vide a benchmark for the pricing of private sectorIslamic bonds issued in Turkey. This could happensoon, with Deputy Prime Minister Ali Babacan announc-ing in January 2012 that the government plans toissue a sukuk once the necessary laws are in place.

While the trading of sukuks – or any Islamic secu-rities – is not currently available on the $MKB, this couldchange, the $MKB’s chairman and CEO, $brahim Turhan,said in early 2012. Moreover, these products couldprove popular, according to Re"at Karabıyık, a man-aging director at Bizim Securities. “Regulators andthe $MKB are conducting ongoing studies on thenature of Islamic instruments. There is a great deal ofpotential for the sector over the coming years. Evenif all asset classes are not accepted, over the comingfive years we will see an emergence of ethical prod-ucts that we expect to be quite popular,” he told OBG. ISTANBUL FINANCE CENTRE: Adding new financialinstruments such as sukuk to the $MKB is part of thestrategy to transform Istanbul into a global financialcentre, along the lines of New York, London or Tokyo.In September 2009 the government unveiled its “Strat-egy and Action Plan for Istanbul International Finan-cial Centre”, which identified 71 action items thataddressed issues as diverse as improving the judicialsystem, simplifying tax laws, encouraging IPOs,

72

Corporate bonds offer a better rate than government debt

Legislative amendments inearly 2011 saw the taxstructure for Islamic debtbrought into line with therules applied toconventional bonds.


strengthening technology and communications infra-structure, and improving human resources in thefinancial services field. The government has also iden-tified the location of the financial centre, which is tobe located in Ata"ehir on the Asian side of the Bospho-rus. Major regulatory institutions such as the CMB andthe Banking Regulation and Supervision Agency wouldbe moved there from their current location in Ankara,as would the headquarters of the state-owned banks,Ziraat Bank, Halkbank and VakıfBank.

Challenges remain, however. Istanbul is certainlynot alone in its hopes to become a financial centre.Moscow is sometimes considered a competitor inthis, as are Johannesburg and Mumbai. Moreover, thegovernment has been somewhat slow to implementthe proposed changes. Speaking at a conference inApril 2011, Babacan said that nine of the 71 actionitems had been completed and another 13 were beingaddressed. However, progress continues to be made,with Mehmet #im"ek, minister of finance, announc-ing in April 2012 that new rules would make it easi-er to set up portfolio firms to manage internationalfunds. For income earned from investments abroad,these funds will be exempt from any tax liabilities. PRIVATE EQUITY: Regardless of the challengesinvolved in turning Istanbul into a financial centre, itis clear that foreign investor interest in Turkey con-tinues to increase, particularly in the area of privateequity. The number of private equity firms operatingin Turkey has increased substantially over the lastdecade, according to !lhami Koç, general manager of!" Investment. “Prior to 2000 there were only two pri-vate equity firms in the country: now there are over50. Interest is coming from Europe and the US toTurkey’s capital markets, while Gulf and Russianinvestors are heavily involved in real estate,” Koç said."ebnem Kalyoncuo!lu Ünlü, CEO of Alkhair Capital,

also highlighted the importance of Gulf investment. “Gulfinvestors, particularly investors in sharia-compliantproducts, see that there is great value in income-gen-erating assets in Turkey. Thus, Islamic funds are tryingto balance their real estate development portfolioswith office rental investments,” she told OBG.

Significant deals in the past few years have includ-ed BC Partners’ 2008 acquisition of local retail chainMigros; TPG Capital’s purchase of a 90% stake in Turk-ish spirits company Mey Içki Sanayi, which it acquiredfor $810m in 2006 and sold in 2011 to Diageo for$2.1bn; and Abraaj’s 2007 purchase of a 50% stakein Turkish hospital chain Acıbadem, which it sold for$1bn in January 2012 (see analysis).

As the Mey Içki and Acıbadem deals indicate, todate the most common form of exit has been sellingto a corporate buyer, rather than an IPO. Mert Tarlan,a managing director in the investment banking unitand head of corporate finance at UniCredit, told OBGthat this will likely be the preferred exit strategy forthe next few years. “Private equity firms are keen tomake sure their first forays achieve the best moneymultiple so that they continue deploying funds intoTurkey. A trade sale of majority shares invariably

achieves the highest money multiple, as witnessed inAcıbadem and Mey Içki, especially the latter. Firmshave chosen to play it safe. I expect this trend to con-tinue in the next two to three years, and then we willgradually start seeing more minority sales, IPOs andsecondary public offerings (SPOs). Private equity inTurkey will see the real take-off when we start to seethe good exits through IPOs and SPOs,” he said.

In terms of sectoral focus, many private equityinvestors are looking at consumer products and serv-ices, with retail and health care two particularly impor-tant areas. For example, Carlyle MENA, the Turkishunit of Carlyle Group, has invested in Medical ParkSa!l›k Hizmetleri, which operates general hospitals andrelated facilities, as well as purchased a 48% stake inBahçe"ehir Kolejleri, a Turkish education group.

While the attention paid to consumer-driven seg-ments is not surprising given Turkey’s demographics,these sectors have become increasingly crowded fromthe perspective of investors, with a large amount ofcapital chasing a shrinking number of deals. On theother hand, these areas of the economy continue toenjoy strong growth and consolidation could createfurther opportunities. In terms of alternatives, ener-gy and infrastructure are also likely candidates toattract the interest of private equity investors. OUTLOOK: While 2011 was not easy for the $MKB, per-formance improved in the first months of 2012, withthe $MKB 100 closing March at 62,423.04, up 22% onyear-end 2011. Market analysts have attributed thisrapid increase to actions taken by the European Cen-tral Bank and the US Federal Reserve to increase glob-al liquidity. However, it is important to note that thesemoves generally supported the performance of bours-es across all emerging markets, and that Turkey like-ly does not represent a special case. The outlook for2012 is positive, with a lira that has risen above itslows of 2011, inflation under control and the CBRTadopting a looser monetary policy stance, all of whichtogether bode well for the country’s equities market.

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It is hoped that Istanbul will soon become a leading financial centre

Many private equityinvestors are looking atconsumer products andservices, with health careand retail two particularlyimportant areas.

CAPITAL MARKETS ANALYSIS

A state-issued sukuk could provide a useful benchmark

While the growing global Islamic bond (sukuk) marketrepresents an increasingly important source of financ-ing for businesses across the world, to date interest hasbeen fairly limited in Turkey. However, the market isexpected to grow rapidly, partly thanks to legal changesthat make sukuk issuance more attractive, as well asthe government’s plans to float sharia-compliant bonds. A NEW PRODUCT: Issuance of sukuks has been allowedin Turkey since April 2010, when the Capital MarketsBoard promulgated a new rule regarding “leasing cer-tificates”, as sukuks are known locally. Lawmakers sub-sequently amended the tax laws in February 2011 suchthat leasing certifications of the Al Ijara type are exemptfrom value-added, stamp and corporate taxes, whilereducing withholding taxes to 10%. Then in April 2011,legislation was passed that exempts sukuks with a min-imum tenure of five years from revenue taxes, whilethose of a shorter maturity are subject to rates of 3-5%, bringing them in line with those of corporate bonds.

These changes have already started to have an effect,beginning with Kuveyt Türk’s August 2010 issuance ofa three-year, $100m sukuk. The participation bank – asTurkey’s Islamic lenders are known – then floated a$350m, five-year sukuk in October 2011. Liquidity Man-agement House, an investment company wholly ownedby Kuwait Finance House, which also holds a 62% stakein Kuveyt Türk, was one of the joint lead managers onthe sukuk, along with HSBC, Standard Chartered Bank,Abu Dhabi Islamic Bank and Commerz Bank. Issued atpar with a coupon of 5.875%, the sukuk is listed on theLondon Stock Exchange. While the trading of sukuks– or any Islamic securities for that matter – is not cur-rently available on the Turkish bourse, !MKB Borsa Istan-bul (!MKB), this could change, $brahim Turhan, the chair-man and CEO of the !MKB, told OBG.

The Kuveyt Türk sukuk attracted orders totallingalmost $550m, with investors from the Gulf account-ing for nearly 70% of subscribers. Osman Arslan, thegeneral manager of AT Bank, told OBG, “Gulf investorslike Turkey – it is easy to do business, the population is

very young, the country is experiencing rapid GDPgrowth and it is a safer place to invest than the Westas the regulatory authorities are more cautious.”

Two other Turkish participation banks – Bank Al Bara-ka and Bank Asya – have signalled their intention tosell Islamic bonds, in part due to their limited fundingoptions beyond deposits. In October 2011 Bank Asyaannounced it had lined up Citigroup and UBS to man-age the issuance of a five-year sukuk with a volume ofup to $300m, but in November the lender said it hadpostponed the project due to adverse market condi-tions. Bank Al Baraka had intended to issue a $200mIslamic bond in December 2011 but delayed the sale.However, the lender’s CEO told Bloomberg in February2012 that the bank might offer the Islamic bond by June. SOVEREIGN BORROWING: Banks and other business-es could be encouraged to borrow using Islamic instru-ments by the issuance of a sukuk by the state, as it wouldprovide a benchmark for corporate Islamic bond issuesin Turkey. A number of governments in the Gulf andAsia, as well as in European countries such as Germanyand France, have issued sharia-compliant sovereigndebt in recent years. In January 2012 Deputy PrimeMinister Ali Babacan announced that Turkey plannedto issue a sukuk once the necessary laws are in place.

While the government has not revealed the amountthat it might borrowing using this instrument, OsmanAkyuz, the secretary-general of the Participation Banks’Association, told Reuters that he expected issuancesof $500m or $1bn, adding that these funds could beused to finance major infrastructure projects such asthe third bridge over the Bosphorus. However, chal-lenges to a sovereign issuance remain. For example, theyield premiums on government sukuks are generallyhigher than those for conventional sovereign debt,with a differential of perhaps more than 100 basispoints expected in the case of Turkey. On the other hand,continually turning to conventional debt markets coulddrive up costs for the government, so access to newsources of funding could ultimately prove beneficial.

Tax laws were amended inFebruary 2011 to makeleasing certifications of theAl Ijara type exempt fromvalue-added, stamp andcorporate taxes, whilewithholding taxes werereduced to 10%.

74

The next big thingLegal changes have paved the way for the growth of Islamic bonds


CAPITAL MARKETS INTERVIEW

Vedat Akgiray, Chairman, Capital Markets Board

What effect will recent changes to the Turkish Com-mercial Code have on foreign investment? AKG"RAY: This is the first time there is specific refer-ence to issues about corporate governance in the code.It is not only shareholders’ rights that are beingaddressed. but many topics under corporate gover-nance are also being considered. A commercial codeis for companies, corporations and units, not for mar-ket regulation. Hence, for the code to produce thedesired results, we first have to prepare a new capitalmarkets regulatory framework. We are doing so with anew capital markets law. This is down the road, but weanticipate it will be in effect before the Commercial Codebecomes active in July 2012. The framework is expect-ed to go through the Parliament before summer 2012.

On December 30, 2011, (the last business day of theyear) we published our regulations on corporate gov-ernance – a hot topic for companies. Corporate gov-ernance is about how money is utilised, but much morethan that, it is crucial to have proper governance in anycountry for all companies, both private and public. Thisis especially the case for publicly held companies,because then international investors feel more secure.Our expectation is that the new code will enhance thecapacity for long-term capital to come into Turkey.

By enforcing tax residency for independent boardmembers, is there a risk foreign investors will be dis-couraged from involvement in Turkey's listed firms? AKG"RAY: Traditionally in Turkey, bigger corporationsliked to have famous international names on theirboards – the former prime minister of a foreign coun-try, for instance – and that person would fly in for ameeting once or twice a year, have a nice time on theBosphorus, attend the meeting and the next morningfly back home. Other than having their name on theboard members’ list, they were not making any realcontribution to the company.

Therefore, we included a tax residency requirementin our code as a message to the marketplace: be seri-

ous in selecting your board members, and be particu-larly serious when it comes to independent board mem-bers. A company can benefit from the expertise andthe knowledge of high-profile figures. Even now, anyperson from anywhere in the world can serve as a boardmember of a Turkish company, and it is always possi-ble for a firm to get special exemption from the require-ments for independent members. Thus, foreign expert-ise has a variety of ways to come to the board.

Based on regulatory changes, what role do you seethe diversification of financial products playing inthe future for Turkey's capital markets? AKG"RAY: Our approach has not targeted the launchof a distinct set of rules for Islamic instruments (cur-rently ijara certificates), participation instruments orany other class of financial assets. One of the majorthings that we have done in the new capital marketslaw, which is in draft form now, is basically to make avery clear and detailed description of what securitiesand financial instruments are.

The new description is flexible enough to put any-thing that legally could be a financial instrument underthe umbrella, and this includes participation instru-ments. We want to encourage the diversification ofinstruments while building Istanbul as a financial cen-tre, but inadequate regulation in the past has posedchallenges. For instance, the derivatives market hasbeen lagging in Turkey. So, while there are some goodproducts, the number has to be increased.

We are not going to have a full range of options withcontracts, futures, swaps and the like in the exchange,but we regulated the foreign exchange market to even-tually channel them through organised exchanges andit is doing quite well. Our long-term goal is to push alltransactions through exchanges to the greatest extentpossible. Standardisation is, I think, a difficult task – par-ticularly in cases where participation instruments areconcerned. However, we have the opportunity to designeverything with a focus on standardisation in mind.

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Serious businessOBG talks to Vedat Akgiray, Chairman, Capital Markets Board

CAPITAL MARKETS INTERVIEW

"brahim Turhan, Chairman & CEO, "MKB Borsa Istanbul ("MKB)

The "MKB lost 40% of its value in 2011, while theeconomy grew 8%. How will changes in the mar-ket diminish the risks of future losses on this scale? TURHAN: The $MKB 100 index went down for prima-rily two reasons. First, due to the depreciation of thelira against the dollar by 22-25%, and second, becauseof the European debt crisis. The European fiscal cri-sis caused global investors’ risk appetites to decreasesignificantly. The $MKB has to become more immuneto such external shocks, because they might happenagain. To do so, we need to increase the scale and scopeof the bourse, both vertically and horizontally.

“Vertically” means increasing the liquidity of themarket, in terms of both domestic and global liquidi-ty. “Horizontal” expansion will mean offering morevariety – growing the range of financial instruments –with those that will be based on real estate or asset-backed financial securities, rental certificates andsharia-compliant options. This is an emerging segment,but even today, the total asset size for such securitiesis $1.2trn and growing. We are trying to combine thecash, the securities and commodities markets, etc.After that, there will be greater synergy, which willcontribute positively to the liquidity of the market.

What is driving the steady decrease in the shareof stocks held by foreigners, which fell to approx-imately 60% at the start of 2012? TURHAN: The share of foreign investors in the stockmarket is not an issue for us; rather, the problem is thatdomestic participation is low. We want the participa-tion of foreign investors to increase, but at the sametime, as we raise the scale and scope of investableinstruments or the investable asset pool, we wantdomestic participants to take part more and more often.We want foreign capital to increase, but domestic cap-ital needs to expand even further.

Turkey lost a whole decade – the 1990s – due to highinflation, high volatility, uncertainty and myopia, veryhigh real interest rates, and problems in the banking

and financial services industry that ended up resultingin the crisis during the year 2001.

Now that we have accomplished a fiscal restoration– with the budget deficit approaching 1.7 and declin-ing, and the debt-to-GDP ratio at 38% in 2011 – we areable to raise domestic confidence. Inflation is slowing,though it is still high because of some external and sup-ply-side shocks, but we are confident that the centralbank will bring inflation down to the 5% target, consis-tent with the price stability framework. The financialservices industry is much more tightly regulated andvery profitable, compared to a decade ago. Thus, thisrestoration has offered us a new beginning from whichto develop our capital markets. In terms of their size,differentiation and company competitiveness, the cap-ital markets are in a much better position to see highgrowth, particularly from the domestic side.

Do exchange-traded funds (ETFs) offer an avenuefor increased listings in the greater “participa-tion” segment and what reforms are taking place? TURHAN: ETFs have been discussed as a key means bywhich the participation segment could become moreinvolved in the bourse; however, the 10% withholdingtax presented a key obstacle to investors. Now, the taxissue is – in theory – resolved, because we have theconsent of all the parties and are now just waiting forthe legislature to approve the changes. The stakehold-ers have lobbied for the removal of the tax, and thegovernment and the minister of finance have agreed.

The government will issue a decree solving the taxissue for ETFs. This is crucial as they are currently thefastest-growing segment in the capital markets sec-tor. They are very important instruments, and $MKBcannot miss this opportunity. We will do whatever ittakes to open the way for their development and are fortunate to have the support of internationalexperts. We are also drawing on the competency ofother institutions like the Deutsche Börse, the NewYork Stock Exchange and the London Stock Exchange.

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Furthering participationOBG talks to "brahim Turhan, Chairman & CEO, "MKB Borsa Istanbul ("MKB)


CAPITAL MARKETS ANALYSIS

The new Commercial Code will take effect in July 2012

Private equity investors are increasingly being drawnto Turkey by its fast-growing economy, macroeconom-ic and political stability, strong demographics and abun-dance of family-owned businesses. Many large buyoutdeals have been struck in recent years, but more oppor-tunities for growth may exist for private equity fundsthat are willing to invest in mid-sized businesses.

Turkey has already attracted some of the biggestnames in the field, including Abraaj Capital of Dubai,European fund BC Partners, international private equi-ty firm Bridgepoint, global asset management fundCarlyle Group and US-based TPG Capital. Moreover,some of these private equity funds have been success-ful in divesting their holdings with handsome profits,including TPG and Abraaj. In February 2011, the for-mer sold its 90% interest in Turkish spirits companyMey Içki Sanayi to Diageo for $2.1bn. TGP had boughtits stake in the formerly state-owned enterprise in 2006for $810m. In January 2012, Abraaj sold its 50% posi-tion in Turkish hospital chain Acıbadem, acquired in2007, for about $1bn to Integrated Healthcare. WhileAbraaj has not disclosed the amount it paid for itsshares in the health care provider, it has publicly saidthat it made an attractive return on its investment.MID-SIZED BUSINESSES: While these deals attract-ed international media attention, Turkey also offersopportunities to invest in mid-market growth compa-nies, according to Serkan Elden, the managing partnerof investment management firm capitAlinka.

These are typically first- or second-generation fam-ily-owned operations, with an interest in expandingtheir businesses by attracting new customers and enter-ing markets, acquiring other firms and setting up inter-national partnerships. For medium-sized privately heldfirms in Turkey, private equity represents an attractiveform of financing. These family-owned businesses aregenerally undercapitalised and cannot attain morecredit from banks without an additional injection of equi-ty. Moreover, they are increasingly viewing private equi-ty as an acceptable form of capital and partnership.

Private equity representsan attractive form offinancing for mid-sizedprivately held firms inTurkey. These businessesare often undercapitalisedand cannot attain morecredit from banks withoutadditional equity.

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Tag-along and drag-alongrights will now be includedin shareholder agreementsrather than in the articlesof association for all joint-stock companies.

Taking the middle groundSignificant opportunities open to private equity investors

However, challenges remain. First, the investor needsto establish trust with the owner. Second, a presencein Turkey is likely required, as much of the deal flow iscoming from outside Istanbul, and international firmscould find it difficult to access family-owned business-es. Third, most of these owners are keen to work withtheir financial partners in executing growth strategies.Therefore, passive minority ownership – the style of pri-vate equity deals that was traditionally prevalent in theregion – may not be possible when it comes to deal-ing with Turkish mid-market family-owned businesses.LEGAL CHANGES: The new Turkish Commercial Code,set to go into effect in July 2012, could also presentchallenges to private equity firms doing business inTurkey, according to Ismail Esin, managing partner atEsin Attorney Partnership. Private equity investors oftenuse bank loans to help finance buyouts, with the tar-get firm typically providing assets (eg, their receiveables)as collateral. While this form of financial assistance islegal under the current Turkish law, the new Commer-cial Code prohibits the target from giving collateral tosecure acquisition-related loan repayment. This willmake it more difficult for the potential acquirer, suchas a private equity firm, to secure financing.

However, the Commercial Code will bring some pos-itive changes as well. Tag-along and drag-along rights– both of which are important to private equity investors– will now be included in shareholder agreementsrather than in the articles of association for all joint-stock companies. Moreover, minority shareholder rightswill in general be enhanced, which is a useful change.

While some of these elements of the new Commer-cial Code could give some private equity investors pause,it is important to remember that this is an area that isstill largely in the early stages of development. Thecountry’s comparative depth in its management talentand private enterprise culture, in addition to its region-al economic ties to the Middle East, Russia, Central Asia and North Africa, make local mid-market compa-nies an attractive target for private equity investments.

CAPITAL MARKETS VIEWPOINT

!lhami Koç, General Manager, "$ Investment

The corporate scandals in global markets over recentyears and institutional investors’ power to lead com-panies have made corporate governance principles asubstantial and noteworthy investment criteria. Thisis especially true for developing countries, due to con-cerns over distinguishing the company’s ownership andmanagement, independent functioning and the exer-cise of rights for the minority.

In 2003, when the concept of corporate governancewas introduced in Turkey, the Capital Markets Board(CMB) announced corporate governance principlesfor publicly traded firms. These regulations brought intoforce the "comply or explain" principle that had alreadybeen established in developed markets. It was expect-ed that companies would observe and comply withthese principles at the demand of investors.

However, the number of firms that have adopted andcomplied with the principles has remained relativelylow. Corporate governance principles have not gonebeyond being a checklist for small and medium-sizedenterprises, and while the Istanbul stock exchange, the$MKB, established the Corporate Governance Index in2007, the number of the firms listed in the index wasonly 38 at the end of 2011.

Investors, who could be the most active party inseeking company compliance, have not done so andthe style of "shareholder activism" experienced in theUS during the 1990s has not as of yet been forthcom-ing in Turkey’s business environment.

Instead, corporate governance principles have beenplaced on the agenda following the problems amongshareholders at a few firms. At the end of 2011 theCMB adopted several resolutions that could be con-sidered radical, and firms have been obliged to prac-tice compliance in ways different from global practice.Thus, Turkey has, maybe for the first time, leapt aheadwith respect to international practices. The enforce-ment of such regulations led to some discussions. Ingeneral, the principles were adopted, though a few ofthem were criticised by some for being mandatory.

The critics were addressing mainly the regulationsgoverning the number of the independent memberswho can serve on a board, the requirement that theirindependent members be approved by the CMB andthe privileges granted to independent members inrelation to certain board resolutions.

Pursuant to these regulations, for companies witha minimum market capitalisation of $560m and a free-float market cap of at least $140m, no less than one-third of the members on their boards must be inde-pendent members. Thus, roughly 50 large firms listedon the $MKB are obliged to increase the independentpresence on their boards to the one-third minimum,while other firms may continue operating so long asthey have at least two independent members.

Another issue that has garnered a reaction fromthe public is the fact that the execution of certain sig-nificant transactions, especially related party opera-tions without the assenting votes of the majority ofthe independent board members, will require a share-holders’ assembly resolution. This has been perceivedas a transfer of control from the majority to the minor-ity in Turkey, a country that has many family-ownedbusinesses. However, we have seen that publicly trad-ed companies are quickly complying with the new reg-ulations, without too much trouble.

While investing in developing countries, interna-tional investors pay significant attention to matters likeshareholding culture and the exercise of the minori-ty shareholders’ rights. These investors generally applydiscounts to firms in such countries to accommodatepossible deficiencies in these areas.

Turkey has moved ahead of developed nations withrespect to corporate governance, and we believe thatsuch discounts will not be in effect much longer.Investors should be acquainted with the new regula-tions and should closely monitor these matters whenit comes to the companies in which they have invest-ed. Unless the investors claim for corporate gover-nance practices, the principles shall remain on paper.

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Mandating compliance!lhami Koç, General Manager, $# Investment, on corporate governance


Share analysis & data provided by "$ Investment

CAPITAL MARKETS SHARE ANALYSIS

THE COMPANY: Agriculture is a major contributor toTurkey’s GDP, despite sluggish growth in recent years.The sector’s share of GDP dropped from 10.1% in 2000to 8.3% in 2009, and its share of total employment hasalso declined, falling from 35% in 2001 to 30% in 2007.Though Turkey is one of the few countries to be self-sufficient in food, the agricultural sector is poorly struc-tured and inefficient. It is fragmented, with a largenumber of small farms highly dependent on govern-ment subsidies for survival, and which have a low rateof mechanisation due to the high cost of machinery.

Economic growth and stability, government supportfor agriculture, farmers’ purchasing power, weatherconditions affecting harvests and interest rates arethe primary drivers for tractor sales in Turkey. With90% of purchases financed through bank loans, restrict-ed accessibility to credit in the wake of the global eco-nomic crisis had an impact on sales.

Thanks to its presence since 1954, wide productrange and extensive dealership network, Türk Traktöris the leader in the domestic tractor market, with a shareof over 50%. Being a Koç Holding and CNH joint ven-ture has enhanced customers’ trust and loyalty, and thefirm has preserved its dominance in the domestic mar-ket despite the number of competitors increasing fromfour in 2001 to 36 in 2010.

The fact that Türk Traktör’s rival, Uzel, has been los-ing ground in the domestic tractor market as a man-ufacturer since 2008, due to ownership disputes,enabled the company to grab further market share. TürkTraktör also has an advantage in export markets, thanksto its access to CNH’s global sales network. Exports con-tribute around 30% of total revenues. The predominantdestination for exports is the US, with a share of 45%.

Following rapid growth in the domestic tractor mar-ket in 2011, we project it will drop to 54,000 units in2012, down 10% year-on-year, due to the high baseyear and the reclassification of the state bank’s sub-sidy rate on agricultural loans. On the contrary to theearlier practice in 2011, government subsidy rate for

tractor purchases up to the price of TL35,000 (!14,875)will be 50% and between TL35,001 (!14,875.43) andTL500,000 (!212,500) will be 25% in 2012. It shouldbe noted that there was no price limitations in tractorpurchases for subsidy rates in earlier practices. How-ever, the extension of the assembly support coopera-tion agreement between Türk Traktör and Otokar to theend of July 2012 signals a positive outlook for the firsthalf of the year. The company’s domestic sales are pro-jected to fall with the market’s contraction, with exportsholding at 9000 units in 2012. The contracting domes-tic volumes combined with flat exports are expectedto create pressure on profitability in 2012.

Our target price of TL39.85 (!16.94) per share forTürk Traktör yields 48% upside potential. The compa-ny has an attractive dividend distribution policy, hav-ing completed investments of over $100m over the pastdecade. Türk Traktör distributed TL200m (!85m) grossdividends from its 2011 net earnings in April 2012, offer-ing a dividend yield of 10.2%. It trades at 49% discount,based on a 2012 enterprise value/earnings beforeinterest, taxes, depreciation and amortisation multi-ple of 4.7x over its global peers’ median of 9.7x. Thestock outperformed the $MKB 100 by 71% in 2011 onthe back of rapid growth in the domestic tractor mar-ket, which reached 60,341 units, up from 36,000 in 2010.

Turkey has the sixth-largest number of tractors inthe world, at 1.3m. However, 44% of these are morethan 25 years old and ready to be replaced. Based onthem having an approximate economic life of 20-24years, Turkey has an annual replacement potential of55,000. A scrap incentive to stimulate domestic trac-tor sales is on the government’s agenda, but this is notexpected to materialise in 2012.

Considering the volatile nature of the business wedid not incorporate the replacement potential into ourgrowth estimates. We believe that the domestic mar-ket will be within the range of 35,000-50,000 units inthe long term even without a scrap incentive, which isabove its historical level of some 30,000-40,000 units.

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TTRAK price & index relative performance

Mar-09 Apr-10 Apr-11 May-12

Price (TL)

12M High (TL)

12M Low (TL)

EPS (2011/12)

Net Income (TL bn)

Market Cap. (TL m)

PERFORMANCE

TTRAK market ratiosData as of 5/21/12

Reuters code: TTRAK

29.20

36.19

3.47

5.20

1.18

277.4

Türk Traktör Agricultural equipment



THE COMPANY: Domestic demand for white goodscorrelates with GDP. In times of economic expansion,white goods demand growth outpaces GDP growth,whereas the decline in sales exceeds the decline inGDP at times of economic contraction. From 2003-10 the average multiplier of domestic white goodsdemand growth was 1.26 times GDP growth.

The domestic market is dominated by four localproducers: Arçelik, Vestel, BSH-Turkey and Indesit.Arçelik is the leading household appliances produc-er, with an average market share of 50% as of 2011and ranking as the third-largest white goods manu-facturer in terms of production in Europe since 2006.The company produces, markets and offers after-saleservice for a full range of household appliances,including consumer electronics.

Domestic demand continued at full throttle in2011. Domestic white goods sales of four majorproducts (refrigerators, washing machines, dish-washers and ovens) rose by 19% y-o-y to 6.47m unitsin 2011, in line with our growth expectation of 20%.

Construction permits are expected to reach700,000 in 2011, the second-highest all-time figureafter 2010’s 800,000. Having the record number ofnew permits two years in a row is expected to havean impact on white goods demand with an 18-monthlag, and will support the domestic market in 2012.We forecast 4% growth within the domestic whitegoods market for the coming year. DOMESTIC SALES: Two-thirds of domestic sales arebelieved to be driven by replacement demand, whilethe remaining third is new demand. In developedcountries, replacement demand typically accountsfor 90% of total sales. Faced with contracting demandin European markets, foreign players are aggressive-ly marketing their products in Turkey, and this result-ed in a decline in real prices in the domestic marketin 2011. A similar trend is expected in 2012.EXPORT GROWTH: Cumulative export volume for2011 increased by 5% y-o-y, broadly in line with our

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ARCLK price & index relative performance


Price (TL)

12M high (TL)

12M low (TL)

EPS (2011/12)

Net income (TL m)

Market cap (TL bn)

PERFORMANCE

ARCLK market ratiosData as of 5/21/12

Reuters code: ARCLK

7.78

8.46

1.70

0.75

506.51

5.24

ArçelikWhite goods


year-end estimate of 6%. Close proximity to Europe,flexible production capability, high-quality products,low prices, and a relatively inexpensive and qualifiedlabour force are all amongst the current advantagesheld by Turkish producers.

We forecast 6% y-o-y growth in exports in 2012,as European consumers trade down to less expen-sive brands during times of economic slowdown, asseen in the global financial crisis that began in 2008.

Demand conditions in developed countries havebeen deteriorating and consolidation is expected inthe international markets. This may create opportu-nities for Arçelik, which has higher operating mar-gins and lower leverage than its European peers.

The company had been seeking to acquire a pre-mium brand in developed markets to help it gainaccess to the high-end segment, while looking foracquisitions or greenfield investments in MiddleEast, Africa and South Asia to add capacity.

The acquisition of Defy Appliances fits with the lat-ter objective. Defy has a 40% market share in SouthAfrica and the company produces refrigerators, freez-ers, dryers, ovens and cooking appliances in its threeplants there. Arçelik wants to penetrate the sub-Saharan market through Defy.

This region is expected to add an additional 3-4%top-line growth for Arçelik in the long term. It is afragmented market with no local manufacturers,and is dominated by Chinese and Korean compa-nies. Consolidation of Defy will add 8% to Arçelik’stop line in 2012, while Defy itself has a higher earn-ings before interest, taxes, depreciation and amor-tisation margin of 12.5%.

Arçelik is aiming to improve Defy’s production effi-ciency by using its know-how in refrigeration tech-nology. We use a blended approach to value thecompany, attaching a 50% weight to both discount-ed cash flow and peer multiple comparison analy-sis, and under this method we have reached a 12-month target share price amounting to TL9.23 (!3.92).



THE COMPANY: In 2011 the central bank’s macro-prudential policy measures utilised tools that direct-ly and adversely affected Turkish banks. However, thetightening should lessen in 2012 as we foreseegrowth concerns surfacing and supportive macrodata. Accompanied by improving global risk appetiteand capital flows to emerging markets, this shouldeliminate the need for further tightening, relax liq-uidity and reduce the pressure on lira funding costs.Net interest margin (NIM) should remain resilient asasset repricings outstrip the adverse impacts of thetake-up in deposit costs.

Lower loan growth due to reduced demand, mon-etary policy and possible degrading foreign fundinginflows may lessen detrimental competition in 2012.Foreign funding will be the key issue, especially inthe first half of 2012, yet we are sanguine on this,projecting that at least 90% of short-term foreignfunding will be rolled over at higher costs.

Non-performing loans (NPLs) and cost of risk (CoR)will be the main elements shaping banks’ bottom linesin 2012. Inflows should remain well above collectionsdue to the expected slowdown in the economy,resulting in inflated NPL ratios. The upward trend inNPLs will, however, not be reminiscent of the oneseen in 2009/10, with gross CoR levelling out atclose to 150 basis points (bps) in 2012, against the2011 average of 100 bps. Single-digit bottom-linegrowth is on the cards for Turkish banks in 2012, withperformance differing from bank to bank.

State-owned Halkbank has a free float of 25%. Itsassets grew rapidly through the absorption of failedstate banks in 2001 when the Turkish banking crisishit. Halkbank is now the sixth-largest bank by totalassets, and has a nationwide network of 784 branch-es. Its real strength has been outside metropolitancities, giving it a better funding cost structure thanits peers. Small and medium-sized enterprise (SME)banking is Halkbank’s main focus, accounting for37% of its loan book, while it has also been increas-

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HALKB price & index relative performance


Price (TL)

12M high (TL)

12M low (TL)

EPS (2011/12)

Net income (TL bn)

Market cap (TL bn)

PERFORMANCE

HALKB market ratiosData as of 5/21/12

Reuters code: HALKB

11.75

15.77

4.29

1.64

2.05

14.56

HalkbankBanking

ing its penetration in consumer banking through theacquisition of payroll accounts. We predict Halkbankwill continue to post higher return on equity (RoE)than its peers (24% on average for the next threeyears, against 16% for its peers) on the back of widerloan-to-deposit spreads thanks to its strong pres-ence in the SME segment, better asset quality dueto lower exposure to unsecured consumer lendingand credit cards, and improving efficiency.

With the lowest loan-to-deposit ratio for lira anda comfortable capital adequacy ratio (CAR), Halkbankis well-positioned to outpace sector growth. We esti-mate 70 bps CAR erosion with the implementationof the Basel II rules. Halkbank’s CAR remains wellabove the 12% regulatory threshold for branch net-work expansion and projected risk-weighted assetsgrowth. We forecast 18% loan growth, mostly driv-en by lira retail loans and flattish NIM, which trans-lates into 21% year-on-year (y-o-y) net interestincome growth in 2012. Asset quality should not bea problem for the bank given its successful trackrecord in SME business during economic downturns.

Higher provisioning expenses due to normalisingcost of risk and increasing general provisioning,together with above-inflation operational expendi-ture growth, will trim operating revenues, and weforecast 17% y-o-y bottom-line growth for Halkbankin 2012. Our valuation for Halk yields TL15.90 (!6.76)per share, 47% up from the current price. Trading at5.6x its 2012 net earnings, Halkbank is one of thecheapest assets among Tier-I banks in forward-look-ing private equity terms. We think 1.2x 2012Eprice/book value, at a premium to the Tier-I peers’average, deserves a premium with higher sustain-able RoE. A potential secondary public offering (SPO)in 2013 and onwards is the main risk for the stock.The potential stake sale of the Privatisation Admin-istration has been the sword of Damocles hangingover Halkbank’s valuation as its shares trade at sub-stantial discount to its peers due to the expected SPO.



THE COMPANY: TAV Airports Holding was establishedin 1997 for the purpose of building and operating Istan-bul Atatürk Airport (IAA) from 2000-05. With a marketshare of 41%, it is Turkey’s leading airport operator,managing three of the country’s largest four. In addi-tion to IAA, which is one of the busiest airports inEurope, TAV operates the Ankara Esenbo$a, Izmir AdnanMenderes and Antalya Gazipa"a airports. Elsewhere, itoperates the airports of Tbilisi and Batumi in Georgia,Monastir and Enfidha in Tunisia, Alexander the Greatand St Paul the Apostle in Macedonia, and PrinceMohammad bin Abdulaziz in Saudi Arabia. TAV is alsoactive in branches of airport operations such as duty-free sales through ATU, food and beverage servicesthrough BTA, ground handling services through HAVAfi,information technology, security and operation serv-ices. As the company generates revenues through theseareas, it is of course dependent on passenger figures.Following a sharp rise in 2010, growth in Turkish traf-fic slowed in 2011. The figure was 118.4m at year-end2011, for year-on-year (y-o-y) growth of 14.2%, versus21% in 2010. Aggressive capacity additions that exceed-ed demand growth deteriorated load factors anddepressed ticket prices in 2011. In addition, companies– especially Turkish Airlines – could not reflect risingoil prices in their fares, which reduced profitability.

TAV’s total 2011 traffic rose by 11% y-o-y to 52.8m:domestic traffic grew by 14% to 20.7m and internation-al traffic was up 9% to 32m. In 2011 the major contri-bution to growth came from IAA, which is the sourceof 50% of TAV’s revenues, as total traffic reached 37.4m,at a rate of 17% y-o-y. International traffic grew by 17%to 23.8m, and domestic traffic rose 15% to 13.6m. Turk-ish Airlines’ new routes, increasing load factors – thanksto promotional campaigns, new routes and an increasein the number of long-haul aircraft, which carry morepassengers – as well as the entrance of new airlinesare the main reasons behind IAA’s growth. Traffic atAnkara and Izmir grew by 10% and 16% respectively.Traffic at Ankara and Izmir was 8.5m and 2.5m respec-

tively. Passenger traffic in Turkey grew by a compoundannual growth rate of 13.3% from 2002-11.

Aeroports de Paris (ADP) purchased 38% stake at TAVAirports at TL11.50 (!4.89) per share, implying a mar-ket capitalisation of $2.3bn for the company. Accord-ing to the purchase agreement, current top manage-ment and the board's chairman commit to remain until2021. Since ADP serves as an airport managementcompany at 25 airports worldwide, the partnershipmay create significant new businesses for TAVHL’s serv-ice companies including HAVAfi, BTA and ATU, as ADPdo not offer such services. The combined entity, whichwill manage 37 airports, will be in a stronger positionto win new tenders. TAVHL is keen on winning therenewal tender for Istanbul’s main airport, scheduledfor 2021. TAVHL will have the priority to participate innew tenders in the region, while ADP will have the pri-ority in Europe and Latin America. There will be no geo-graphical limitations for TAVHL’s service companies.

TAV will pay dividends in 2012 from its 2011 profits.We have calculated a 2.5% dividend yield for 2012, andexpect solid growth figures for the year. In line with our67.5m (up 30% y-o-y) total passenger estimate for thefinancial year 2012, we forecasted consolidated rev-enues of !1.04bn, up 21% y-o-y, driven mainly by dou-ble-digit international traffic growth at IAA, higherduty-free spending, the addition of Medina and Izmirairports, and support to HAVAfi revenues from TurkishGround Services and North Hub Services operations.Our 2012 EBITDAR and EBITDA estimates of !484mand !315m suggest 47% and 30% respective margins.

We expect higher operational profitability in 2012.Appreciation of the euro against the lira is an upsideopportunity for TAV. Some 49% of its revenues are euro-denominated, against 33% of its costs. IAA captures a45% share of TAV’s valuation. Any negative event affect-ing IAA’s passenger traffic, such as the construction ofa third airport in Istanbul before 2021, when TAV’s con-cession ends, or a contraction of Turkish Airlines’ traf-fic growth, will of course create pressure on the stock.

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TAVHL price & index relative performance


Price (TL)

12M high (TL)

12M low (TL)

EPS (2011/12)

Net income (TL m)

Market cap (TL bn)

PERFORMANCE

TAVHL market ratiosData as of 5/21/12

Reuters code: TAVHL

9.74

9.74

3.13

0.34

122.64

3.31

TAVTransport




THE COMPANY: Turkey plays a key role connectingoil-producing countries in the Middle East and theCaspian region with consumers in Europe. Not amajor oil producer itself, most of Turkey’s crude oilconsumption is fed by imports, especially from Iran,Russia, Saudi Arabia and Kazakhstan. Refining is dom-inated by Tüpra#, which has a total processing capac-ity of 28.1m tonnes of crude and meets 85% ofdomestic demand. The company owns four refiner-ies: in Izmir and Izmit – with 11m tonnes per annum(tpa) capacity each – Kırıkkale (5m tpa) and Batman(1.1m tpa). All are located close to major consump-tion areas to cater to the domestic market. Tüpra#has activities in production, distribution and ship-ping. On the fuel distribution side, Tüpra# owns 40%of Opet, which has a market share of 18%.

Tüpra#has extended its services to cover the wholecountry, utilising Opet’s terminal facilities and stor-age capacity in areas where it does not have anyrefineries. Shipping subsidiary DITAS Marine andTanker Operations, which is 80% owned by Tüpra#,is responsible for domestic and overseas shippingof the company’s crude oil and petroleum products.Its refineries can crack heavy crude and have ben-efitted from the widening spread between heavyand light crude. Around 70% of the company’sprocessed crude is heavy, which affects marginsfavourably. On the back of cheaper crude slate, high-er white product yields and its monopolistic positionin the domestic market, Tüpra# should continue tooutpace the med-complex margin.

We believe Tüpra#’ capacity utilisation rate willreach 82% in 2012. We do not foresee major fluc-tuation in demand or crude oil prices, and estimatean average price of $110/bbl in 2012. As of March2012, Tüpra# has decided to cut their purchases ofIranian crude oil by 20%. Tüpra# obtained a total of9.75m tonnes of Iranian crude oil in 2011 and ini-tially, the company was planning to obtain a total of9.2m tonnes of Iranian crude oil in 2012. The firm

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TUPRS price & index relative performance


Price (TL)

12M high (TL)

12M low (TL)

EPS (2011/12)

Net income (TL bn)

Market cap (TL bn)

PERFORMANCE

TUPRS market ratiosData as of 5/21/12

Reuters code: TUPRS

35.40

47.88

11.88

4.96

1.24

8.86

Tüpra!Hydrocarbons

plans to replace the reduced amount (1.95m tonnes)from other resources such as 1m tonnes from Libyaand the rest from Saudi Arabia and other countries.After the reduced amount, Tüpra# will get a total of7.25m tons of Iranian crude oil. The impact of thecut on 2012E refining margin is expected to be some$0.05-0.06/bbl. In our valuation for Tüpra#, we assumea gross refining margin of $10.4/bbl for 2012. Tüpra#has completed the long-awaited financing of itsResiduum Upgrade project, which will convert 3.2mtonnes of fuel oil and asphalt into 2.56m tonnes ofvalue-added white products. Construction began in2011 and is expected to be complete by 2015. Theproject continues on track and a total of $705m hasbeen spent so far. Only a mere 2% of the construc-tion work has been completed by the end of March2012 and the company management emphasisedthat the construction will speed up in the summer.The company targets to spend $1bn in 2012, whilethe equity portion of it will be around $50m. Weestimate the project will generate $480m in addi-tional earnings annually, before interest, taxes, depre-ciation and amortisation, based on an average crudeprice assumption of $115/bbl.

A generous dividend policy is one of the major trig-gers for the stock. We expect high dividends to con-tinue in upcoming years. Considering parent’s $220mannual debt redemptions during 2012-2015, thecompany is expected to at least pay annual divi-dends of $448m during 2012-2015. Tüpra# tradesat respective 12E enterprise value/earnings beforeinterest, taxes, depreciation and amortisation andprice/earnings multiples of 6.5x and 7.9x respec-tively, versus peers’ median multiples of 5.4x and9.2x respectively. It is hard to find an exact peer,because similar firms have upstream activities, whileTüpra# has operations only in refining and distribu-tion. We maintain our outperform recommenda-tion for Tüpra# based on 48% upside potential toour target share price of TL48.71 (!20.70) per share.



THE COMPANY: With 34.5m subscribers in Turkey atthe end of the first quarter of 2012, Turkcell is theleading mobile operator in Turkey with around 53%market share. The company covers 87% of the Turkishpopulation through its 3G and 99% through its 2G tech-nology supported network. According to Ericsson’sresearch, Turkcell ranked 1st among 53 countries for3G data download speed. It has become one of the firstamong the global operators to have implemented HSD-PA+ and achieved a 42.2 Mbps speed using the HSPAmulti carrier solution. The company also has opera-tions in 8 other countries (primarily in Kazakhstan,Ukraine and Azerbaijan), reaching 65.3m subscribersin total. Turkcell is expected to generate TL9.9-10.1bn(!3.95bn) in revenues with TL3-3.2bn (!1.28bn-1.36bn)earnings before interest, taxes, depreciation and amor-tisation (EBITDA) margin in 2012. In line with the com-pany’s growth strategy to provide superlative services,Turkcell continues to invest in a fibre-optic backbonenetwork through its fixed broadband subsidiary, Super-online. Thus, the company targets to differentiate itselffrom competition via fibre-optic infrastructure. Super-online has continued its growth in the ¨fibre-to-the-home¨ (FTTH) league and according to the Internation-al FTTH Council’s latest report, Turkey is ranked one notchabove 2011, coming in at 7th in fibre internet pene-tration among G20 countries.

Turkey’s mobile penetration at 88.6% levels as of theend of 2011 is even lower than that of the lowest pen-etration in EU-15 countries. While EU average standsat 126% levels, Greece has the highest penetrationwith 161%. We expect mobile penetration in Turkey in2012 to be flat at 88%, growing in line with population,reaching 66m SIMs, primarily led by tablet growth. Akey performance indicator is average revenue per user(ARPU) in telecoms. Turkey’s average ARPU is $12.2(Turkcell’s blended ARPU is $12.70), which is nearly onethird of European countries. Since ARPU can be relat-ed to GDP per capita, Turkey’s ARPU could grow withincreasing GDP per capita. The total share of post-paid

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TCELL price & index relative performance


Price (TL)

12M high (TL)

12M low (TL)

EPS (2011/12)

Net income (TL bn)

Market cap (TL bn)

PERFORMANCE

TCELL market ratiosData as of 5/21/12

Reuters code: TCELL

8.16

11.18

6.86

0.54

1.18

18

TurkcellTelecoms


subscribers in Turkey continues to grow, reaching 31%,yet still compares low to the European average of 47%.The share of post-paid subscribers in Turkcell is 35%and continues to grow due to the company’s on-goingfocus on the post-paid segment.

Mobile taxes in Turkey are the highest in the worldat around 60%, including the 15% Treasury share (includ-ing universal service fund) equal to 15% of mobile oper-ators’ gross revenue, 25% special communication taxon voice and 18% value-added tax. Should the taxesbe reduced with improving economic conditions, thiscould lead to increasing revenues.

3G now accounts for 48% of total subscribers inTurkey and 50% for Turkcell, despite the fact that serv-ices only became available in the country in July 2009.Mobile internet accounts for 9% for mobile revenuesin Turkey compared to 30% in Europe, signalling growthpotential that could be driven by increasing smart-phone (SP) penetration, which is likely given moreaffordable pricing in that area. SMARTPHONES: This has been the year of SPs (tabletsnot included) outgrowing PCs and laptops globally. By2013 the number of tablets and SPs is expected to bedouble that of PCs and laptops. By 2015, according toindependent research, global data traffic is expectedto grow to sixfold what it is today, primarily driven byvideo – which is projected to grow tenfold and will con-stitute 66% of data traffic – and also machine-to-machine as a newcomer, with 5%. There could be fur-ther opportunities related to cloud computing, mobilepayment and services, which could be hugely enhanced,creating further amounts of revenue.

Turkcell has been on the Istanbul Stock Exchangeand the New York Stock Exchange (NYSE) since July2000, and is the only Turkish company listed on the NYSE.It is trading at a 17% discount to 2012 peer medianenterprise value/EBITDA multiple and 6% discount to2012 peer median P/E multiple. We have used a blend-ed approach (50% DCF, 50% peer comparison) andassign a value to Turkcell at TL10.40 (!4.42) per share.

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InsuranceGross written premiums up by 10% in real terms in 2011Rapid economic growth enhances expansion potentialUptick in the number of foreign providers continuesLegal moves clear path for further rise in pension fundsBanks still the main provider in the life segment

INSURANCE OVERVIEW

Banks are looking to expand their influence in the non-life segment

As a relatively small market in a rapidly growing econ-omy, the insurance sector in Turkey has significantroom for expansion. Indeed, the large number of for-eign players that have entered the market over thepast decade signals opportunities for growth. Whilelow pricing has been a challenge – particularly in thenon-life segment – underwriting practices are improv-ing and core profits are expected to rise. Distributionchannels are also shifting, as banks look to expandfrom their traditional stronghold of life cover intonon-life. While life insurance is not expected to growsignificantly, private pensions – which are typicallyoffered by the same firms that sell life policies – haveexpanded substantially in their nine years of exis-tence and are likely to continue in this direction.MARKET SIZE & SHARES: According to the Associ-ation of Insurance and Reinsurance Companies ofTurkey (TSR"B), gross written premiums in 2011amounted to TL17.2bn (!7.3bn), compared toTL14.1bn (!6bn) in 2010. This is equivalent to growthin nominal terms of 21.5%, or 10% in real terms.

The association has calculated premium growth indollar terms between 2006 and 2010, showing anincrease every year except 2009. That dip is not sur-prising, given that insurance premiums in Turkey typ-ically correlate with GDP, which fell by 4.8% in 2009.

Despite the upward trend in premiums, Turkeyremains relatively under-penetrated, with premiumsequivalent to just 1.3% of GDP in 2010, compared to8.7% and 3% in developed and developing countries,respectively, according to Swiss Re. “Awareness canonly be created through a consolidated effort betweenthe industry, the association and the regulator. If theywork well together, with campaigns and educationalprogrammes, awareness of insurance will rise,” Alexan-der Ankel, the CEO of Allianz Turkey, told OBG.

The Turkish market is split into three categories: non-life, life and pension. While insurers are allowed to offerboth life and pension products, they are required toestablish a separate entity for selling non-life policies.

As of November 2011, there were 64 licensed insur-ers: 39 non-life, 11 life-only and 14 combined life andpension. Life policies accounted for 15.6% of premi-ums in 2011. In non-life the largest product lines weremotor (compulsory third-party liability and motorown-damage combined accounted for 46.7% of non-life premiums), followed by fire (15.9%), health (13.8%)and other property damage (10.2%).

The largest non-life providers by premiums as ofDecember 2011 were Axa Sigorta (13.8%), AnadoluSigorta (13.3%), Aksigorta (7.9%), Allianz Sigorta (7.8%)and Yapı Kredi Sigorta (6.7%). On the life side, themajor underwriters were Ziraat Hayat ve Emeklilik(30%), Anadolu Hayat ve Emeklilik (12.9%), GarantiEmeklilik (9%), Halk Hayat ve Emeklilik (6.8%) and YapıKredi Emeklilik (6.4%). Most of the larger domesticinsurers are part of major financial services holdingcompanies that are typically anchored by a bank.Indeed, the six largest lenders in Turkey (Ziraat,!"/Anadolu, Garanti, Akbank, Yapı Kredi and Halkbank)are well-represented among these providers. FOREIGN ENTRY: Over the past decade – and partic-ularly since 2007 – foreign players have made majorinroads, especially in non-life. Analysis by the sector’sregulator, the Insurance Supervision Board of the

Gross written premiums in2011 amounted to !7.3bn,compared to !6bn in 2010,equivalent to growth innominal terms of 21.5%, or10% in real terms.

Turkey is a relatively under-penetrated market, withpremiums equivalent to just1.3% of GDP in 2010,compared to 8.7% and 3%in developed anddeveloping countries,respectively.

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Cleared for take-offStrong growth potential continues to attract foreign providers


SOURCE: TSRfiB

Top 10 non-life insurers, 2011Premiums (TL m) Share (%)

1 Axa 1997.6 13.79

2 Anadolu 1926.1 13.29

3 Ak 1136.6 7.85

4 Allianz 1129.0 7.79

5 Yapı Kredi 973.1 6.72

6 Günefl 819.9 5.66

7 Groupama 818.3 5.65

8 Eureko 709.0 4.89

9 Ergo 700.0 4.83

10 Mapfre Genel 557.8 3.85

INSURANCE OVERVIEW

Treasury, shows that the number of insurance firmswith foreign partners increased from 14 in 2002 to44 in 2010, the last year covered by the study. Simi-larly, the number with foreign partners holding morethan 50% of the company grew from eight to 37 overthe same period. This increase in foreign penetrationcan also be seen in the presence of major global play-ers like Axa, Allianz, Groupama, Ergo, Eureko andMapfre among the top 10 non-life insurers. Thesecompanies combined accounted for 41% of premiumsin this segment in 2011. Moreover, this figure doesnot take into consideration sizeable foreign-owner-ship stakes in both Güne" Sigorta and Aksigorta.GAINING A FOOTHOLD: For foreign insurers lookingto enter the Turkish market, perhaps the easiest routeis to acquire an existing local company. Axa, the largestnon-life insurer in Turkey, initially came to the coun-try in 1999 through a joint venture with local partnerOYAK, the army pension fund, and it later bought outOYAK’s 50% share in the business for $525m. Groupa-ma, the seventh-largest player in the non-life segment,first entered the market in 1991 by buying a 30%share in Güne" Sigorta, which at present is the sixth-largest insurer in non-life. Groupama then acquiredBa"ak Sigorta in 2006, followed by the purchase ofGüven Sigorta in 2008, with these two entities mergedunder the Groupama brand and management in 2010.Similarly, Dutch insurer Eureko, the ninth-largest insur-ance company in non-life, bought 80% of Garanti’s non-life business in 2007, purchasing the remaining sharesin 2011. On the life and pension side, AvivaSA, a top10 provider of life insurance and the second-largestplayer in the pension segment, was formed in 2007as a merger between Aviva Hayat ve Emeklilik, part ofUK-based insurer Aviva International, and AK Emeklilik,part of Aksigorta under Sabancı Holding.RECENT ENTRIES: More recently, in February 2011Belgium-based insurer Ageas disclosed that it wouldbuy a 31% stake in Aksigorta, acquiring half of Sabancı’sstake for $220m, a deal that was completed in July2011. Ageas paid a 53% premium over the price ofAksigorta’s publicly traded shares, but analysts not-ed that the insurer is a major player in a growing mar-ket and that its advantages include a distribution dealwith Akbank, the fourth-largest bank in Turkey. Sabancıand Ageas announced in November 2011 that the two

partners would acquire additional publicly tradedshares over a period of 12 months. While the exactnumber of shares was not revealed, the parties didsay that they would each acquire an equivalent amountand the combined total would not exceed 10% of thetotal number of shares outstanding. With Aksigortahaving lined up a foreign partner, that leaves Yapı Kre-di and Anadolu as the two remaining domesticallyheld companies in the top five non-life insurers. While!"bank is unlikely to sell Anadolu, Yapı Kredi could bea target for acquisition. In January 2012, local pressreported that Zurich Insurance had offered to buy YapıKredi, although the insurer’s parent company deniedthat there was any sale process under way.

Other major acquisitions in 2011 included MetLife’spurchase of Deniz Emeklilik, the life insurance and pen-sion subsidiary of DenizBank, from Dexia, the bank’sowner, for !162m. MetLife was already present inthe Turkish market but was a relatively small player,accounting for 2% of non-life and less than 1% of lifepremiums in 2011. As part of the deal the partiessigned a 15-year exclusive agreement for the distri-bution of Metlife’s life, pension, personal accidentand unemployment insurance products throughDenizBank. Also in 2011, DenizBank signed an exclu-sive agreement with AXA to distribute and sell the lat-ter’s non-life products through the bank’s branches.

Acquisition is not the only way to enter the market,with several companies acquiring licences to operatein Turkey in recent years. US-based insurer Cignaopened a local office in 2011, announcing that itwould offer life, supplemental health and accidentinsurance through partnerships and via direct chan-nels such as the internet. This followed a 2010 licencegranted to Euler Hermes Sigorta, which provides cred-it insurance. In 2009, two insurance firms, Neova(owned by Kuwait Finance House) and London-basedACE European Group were licensed by the authori-ties. Neova announced in 2011 that it plans to offertakaful, or sharia-compliant insurance, in the future.

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Compulsory third-party liability and motor-own damage combined account for 47% of non-life premiums

The increase in foreigninvolvement isdemonstrated by thepresence of six foreignplayers among the top 10non-life insurers. In 2011these firms combinedaccounted for 41% ofpremiums in the segment.

SOURCE: TSRfiB

Top 10 life insurers, 2011Premiums (TL m) Share (%)

1 Ziraat Hayat ve Emeklilik 806.0 30.01

2 Anadolu Hayat Emeklilik 347.6 12.94

3 Garanti Emeklilik 240.5 8.95

4 Halk Hayat ve Emeklilik 183.8 6.84

5 Yapı Kredi Emeklilik 172.1 6.41

6 Vakıf Emeklilik 126.6 4.71

7 Finans Emeklilik ve Hayat 124.6 4.64

8 AvivaSA 121.6 4.53

9 Deniz Emeklilik ve Hayat 91.7 3.41

10 Allianz Hayat ve Emeklilik 83.4 3.11

INSURANCE OVERVIEW

DISTRIBUTION: There are four distribution channelsin the Turkish insurance sector: agents, banks, bro-kers and the companies themselves. For life policies,banks are by far the largest distributor, accounting for75.3% of premiums in 2011, followed by agents (13.7%),companies (10.5%) and brokers (under 1%). Banksare an important source of business because theytypically sell credit life insurance policies to their bor-rowers. According to Burak Sayın, the group manag-er of research and development at Yapı Kredi Emeklilik,credit life accounts for 64% of life premiums, drivesthe market and is the key to future growth in the seg-ment. Moreover, even if they are not the direct sourceof business, the banks can share leads with their part-ner insurance companies if the two entities are partof a larger financial services holding company. AGENTS: The picture in the non-life segment is dif-ferent, with agents as the largest distributors, account-ing for 67.4% of premiums in 2011, followed by banks(13.6%), brokers (11.4%) and companies (7.7%). Thereare currently nearly 17,000 agents in Turkey, and thevast majority of them deal with multiple insurers.Moreover, customers in this segment typically have aclose relationship with their agent rather than the ulti-mate insurer. Agents often “own the clients”, and ifthe agent is unhappy with his commission from theinsurance company, he can move the business.

Agents hold a strong position in non-life but thismay be changing, with banks and brokers likely totake share from agents in the coming years, accord-ing to Fahri Altıngöz, the assistant general managerat Aksigorta. He told OBG that banks are investing heav-ily in insurance sales, and that their share of non-lifepremiums should continue to grow. Brokers are alsoincreasing their presence. “In the past there were per-haps 15 brokers but now there are almost 100,” saidAltıngöz, adding that he expects brokers’ share of themarket to grow to 15-20%. While many believe agentswill ultimately lose out to the banks, the former arenot sitting idle in the meantime. Agent representa-tives have “put pressure on the Treasury to limit the

banking sector’s activity in the insurance market”,according to a January 2011 report in local newspa-per Hurriyet Daily News. The TSR"B and the TurkishBanks Association have objected to changes proposedby the agents, with the insurers arguing that bankshave been instrumental in expanding the sector.GROWTH POTENTIAL: According to Mehmet Kalka-van, the deputy secretary-general of the TSR"B, twomajor areas of growth in the non-life segment arehealth and agriculture insurance. Only 2.3m peoplein Turkey currently have health cover – around 3% ofthe population – and Kalkavan expects this to increaseto 8m. Legal changes are also in the works that couldcreate opportunities for firms to sell complementa-ry health insurance products that would supplementbasic coverage provided by the government.

While agricultural insurance has existed in Turkeysince the 1950s, the system was overhauled in 2005,resulting in a new programme that has been in placesince 2006. The primary features of this system arean agricultural insurance pool, cooperation betweenthe public and private sectors, 50% government sub-sidies for premiums and a management entity for thepool that is joint-owned by the insurance companiesoffering agricultural coverage. At present only 3-4%of farmers participate in this voluntary programme,but efforts to educate farmers about the benefits ofinsurance could increase penetration in this market. PRIVATISATION: The privatisation of state-ownedenterprises may also present opportunities for thecountry’s insurers, Tarik Serpil, a senior vice-presi-dent in the risk management practice of Marsh, oneof Turkey’s largest brokers, told OBG. Since the late1990s the government has privatised some of thecountry’s existing power plants and granted licencesto the private sector for new power plants.

While the government does not buy insurance asa general rule, private sector players are often requiredto do so by their creditors. Naturally this has had asignificant impact on the insurance industry. The sameis true in the transport sector, with new highways,

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Agents are the largestdistributors in the non-lifesegment, accounting for67.4% of premiums in 2011,followed by banks (13.6%),brokers (11.4%) andcompanies (7.7%).

INSURANCE OVERVIEW

bridges and tunnels being built and managed by theprivate sector. This will initially result in new under-writing opportunities during the construction phase,followed by property damage, fire and liability cover-age once operations begin.PROFITABILITY: Until 2008 a high-interest-rate envi-ronment reduced the need for insurers to focus onproper risk assessment, with yields on investmentsmore than compensating for underwriting losses. Ingeneral, Turkey’s insurance companies prefer to holdtheir assets in government bonds and treasury bills,which have historically provided high returns and areessentially zero-risk. However, in more recent years,as interest rates have come down, losses from coreoperations are starting to take a toll on the sector.

Pricing has yet to fully adjust, with negative tech-nical profit ratios in major product lines such as motorthird-party liability (-10%) and health (-4%) for thefirst half of 2011, according to the TSR"B. Kalkavantold OBG there is intense competition in these areas,with insurers lowering premiums to maintain theirmarket share because they believe pricing will go upin future. This may already be starting to happen, withmotor third-party liability prices starting to rise indus-try-wide since the third quarter of 2011. Health insur-ance prices have also started to harden, according toSerpil, who expects that underwriting practices willbegin to improve across the non-life segment in 2012and 2013. Moreover, product differentiation is pos-sible in health cover, for example based on services,unlike in other more commoditised segments likemotor third-party liability insurance. REGULATORY CHANGES: In 2007 the legal struc-ture for the insurance sector was entirely overhauled,resulting in a stronger industry and paving the wayfor increased entry by foreign insurers. The new law

made for some significant changes in the operationsof insurance companies, particularly with respect tothe calculation of technical reserves and capitalrequirements. While no major regulatory changeshave been implemented since, the sector has beenworking towards the implementation of the Solven-cy II capital adequacy regime as part of Turkey’s EUharmonisation process. The current solvency rulesresemble those of the Solvency I framework that is inplace in the EU, although the Treasury has addedsome risk-based capital adequacy requirements thatare similar to those found in Solvency II.

As part of its efforts to transition to Solvency II, theTreasury carried out the Quantitative Impact Study 4,a Solvency II test scheme that had previously been usedby the European Commission, with 10 insurers par-ticipating. The results, announced in September 2010,indicated that non-life insurers would need to increasecapital by about 10% to meet the requirements of Sol-vency II, but it was difficult to draw any conclusionsregarding the potential impact on life insurers. Sub-sequently the Treasury mandated that all insurancefirms carry out the Quantitative Impact Study 5, aprocess that began in December 2010, but results havenot been made public. The Treasury has not set adeadline for the implementation of Solvency II, but itis expected to occur in 2014 or 2015. PENSIONS: While private pensions are a relativelynew phenomenon in Turkey – having only been intro-duced in 2003 – they have grown substantially sincethen. Total assets under management by pensioncompanies amounted to TL14.3bn (!6.1bn) as of theend of 2011. The largest players in the pension seg-ment at year-end 2011 were Anadolu Hayat veEmeklilik (21%), AvivaSA (21%), Garanti Emeklilik (16%),Yapı Kredi Hayat ve Emeklilik (16%) and Vakıf Hayat veEmeklilik (6%), by assets under management.

The market for pension funds is expected to con-tinue to grow, but there are two key challenges. First,there is the issue of persistence, with customers tend-ing to drop out, despite the fact that they are penalisedfor doing so (see analysis). Second, people have hes-titated to enrol in the programme, despite such finan-cial advantages such as tax breaks. However, in April2011 the government announced changes that willmake the benefits of paying in more obvious to users,including an automatic percentage contribution bythe state to pension account holders, which shouldmake the programme more attractive to consumers. OUTLOOK: As income levels in Turkey continue torise, it is expected that insurance penetration willincrease, as people have more disposable income andproperty to protect. Limited insurance activity to datemeans that there is plenty of room for expansion, aswould be expected given the large number of foreigninsurers that have entered in recent years.

According to Altıngöz, the industry is expectingpremiums to rise at a compound annual growth rateof 17% between 2012 and 2023. This bodes well forthe sector and for the companies that choose toinvest in this area of the Turkish economy in the future.

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The sector is workingtowards implementation ofthe Solvency II capitaladequacy regime as part ofTurkey’s EU harmonisationprocess. The currentsolvency rules resemblethose of the Solvency Iframework.

SOURCE: TSRfiB

2011 GWP (non-life and life), by segment (TL m)

Accident 663.2

Sickness/health 1999.5

Land vehicles 3787.9

Railway rolling stock 0.8

Aircraft 69.4

Ships 122.3

Goods in transit 359.0

Fire and natural forces 2310.3

General losses 1475.2

Motor vehicle liability 2974.4

Aircraft liability 75.8

Liability for ships 0.3

General liability 389.9

Credit 51.4

Suretyship 12.3

Misc. financial losses 140.5

Legal expenses 52.6

Assistance 2.5

Total non-life 14,487.4

Life 2685.7

Total 17,173.1

INSURANCE ANALYSIS

There were 2.7m pension fund policyholders at the end of 2011

The concept of private pensions is relatively new inTurkey, with the first private scheme having beenintroduced only in 2003. Since then, the system hasgrown rapidly, although it is still small relative to thesize of the economy. Furthermore, it is expected toexpand in the coming years, as the government hasintroduced legal changes to make pensions a moreattractive form of savings for retirement. THE BASICS: Turkey’s private pension plan is a vol-untary, defined contribution system that has beendesigned to supplement the state’s social securitysystem. Plan participants make regular contributions(typically monthly) to a pension fund. The retirementsavings that accrue are a function of contributions,investment returns and administrative expensescharged by the pension fund.

Various investment alternatives are typicallyoffered by the funds, allowing participants to choosea level of risk that suits his or her preferences.Because Turkish pension customers are generallyconservative in their savings preferences, govern-ment debt instruments account for 58% of assestsunder management by pension funds. This is fol-lowed by time deposits (20%), equity (14%), foreigndebt instruments (5%) and corporate bonds (3%).CURRENT UPTAKE: At the end of 2011, total assetsunder management by pension funds stood atTL14.3bn (!6.1bn), representing 2.7m policyholders.While this represents tremendous growth in justnine years, this number still equates to only 3.5% ofthe population. Moreover, for the targeted group –people aged between 25 and 45 – the figure is notmuch higher, standing at just 7.7%. In terms of assetsunder management as a percentage of GDP, Turkeyis also well behind not only the global average butalso its peers. According to a report from the OECD,as of 2009, (the latest figures available at time ofpress) the value of Turkey’s pension funds was equiv-alent to 2.3% of GDP, far below the global weightedaverage of 67.1% and less than the rates found in

some markets to which Turkey is sometimes com-pared (Poland at 13.5%, Mexico at 7.5%).MAJOR PLAYERS: As measured by assets undermanagement, the two largest players in this marketare Anadolu Hayat ve Emeklilik (21%) and AvivaSA(21%), followed by Garanti Emeklilik (16%), Yapı Kre-di Hayat ve Emeklilik (16%) and Vakıf Hayat veEmeklilik (6%). These firms are all part of larger finan-cial holding companies that represent some of thelargest banks in Turkey. Anadolu is a unit of the samegroup as !"bank, the largest bank in the country asmeasured by assets, while AvivaSA is 49.83% ownedby Aksigorta, the insurance division of Akbank.

Having an established relationship with a bank isan important competitive advantage, as more than55% of pension contracts are sold either directlythrough banks or result from leads provided bylenders. As Meral Eredenk, the general manager ofAvivaSA, told OBG, “The market has seen seven newentrants in the past four years, going from 10 to 17players. However, the market itself has not seen 70%growth, so it is unlikely that all these players willremain. In particular, those without a bancassur-ance partner will face great difficulty, as the returnon direct channels often takes a decade.”ROOM FOR IMPROVEMENT: While the system hasgrown significantly during its nine years, the sectorhas faced some barriers to expansion. According toBurak Sayın, the group manager for research anddevelopment at Yapı Kredi Emeklilik, persistence isthe greatest challenge for pension funds becausepeople can enter and exit the system at any time.While this flexibility may make the system moreattractive for contributors, some 1.6m of the 4.6mcontracts issued since 2003 have lapsed.

This figure is consistent with research by AvivaSA,which shows that customers contribute to their pen-sion plans for seven years on average, despite thefact that contributions withdrawn before 10 yearsare subject to a 15% withholding tax on cash value.

The value of Turkey’spension funds wasequivalent to just 2.3% ofGDP in 2009, well belowthe global weightedaverage of 67.1%.

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Opening the doorGovernment-driven changes are set to make pensions more attractive


INSURANCE ANALYSIS

Convincing people to stay in the system can be dif-ficult, but pension funds also face hurdles when itcomes to persuading potential customers to openan account in the first place. While tax incentivesexist – for example, contributions of up to 10% ofannual income are not subject to income tax at thetime of contribution – only around 35% of accountholders benefit from these rules, according to Sayın.

This is in part because the process is cumbersomefor individuals. They are required to provide docu-mentation of contributions to their payroll depart-ment, which can take time and effort. In addition,because Turkey has a sizeable grey economy, a largenumber of workers do not pay taxes, so a tax breakmay well be less meaningful for many citizens.CULTURAL DIFFERENCES: Finally, pension fundsare facing some cultural barriers when in it comesto investment preferences. As the World Bank wrotein a March 2012 report on domestic savings in Turkey,73% of household assets were accounted for by bankdeposits as of 2010. Lenders have historically offeredcompetitive rates at a low level of risk, making timedeposits a more attractive vehicle for savings thanequities, which are perceived to be risky, particular-ly given the volatility in the performance of the Istan-bul Stock Exchange over the last several years. Whilegovernment bonds are less risky, they are generallyof a longer term than time deposits and some gov-ernment instruments, such as inflation-linked bonds,can be difficult to fully understand.

Moreover, stepping beyond the realm of liquidassets, another popular form of retirement savingsin Turkey is real estate, according to Eredenk. “Thereremains a preference for real estate among investors.There are 2.7m pension clients compared to 10m realestate investors. The history of inflation and econom-ic uncertainty has made consumers uncomfortablewith liquid assets, but I am confident that this willchange with the new tax regime and continued eco-nomic stability,” she told OBG.PROPOSED AMENDMENTS: Indeed, as Eredenk hasindicated, to help make the pension scheme moreattractive, in 2011 the industry collectively proposeda set of changes that could encourage higher lev-els of participation. The main proposal from theindustry involved a shift away from tax incentivestowards state contributions.

In this model, the state would supplement an indi-vidual’s pension contribution with a deposit of somepercentage of the amount an individual invested.Access to this state credit would only be availableto those who contribute for a minimum of 10 yearsand start withdrawing after the age of 56.

Moreover, because income taxes would be paid oncontributions at the time they are made, only theinvestment return would be taxed.

In April 2012 the government announced that itwould indeed modify the private pension system,largely along the lines of the proposal made by indus-try participants. The primary change was a switchfrom tax breaks to government matching, with the

state promising to supplement pension plan pay-ments by 25%, just as suggested by industry, accord-ing to a presentation by Ali Babacan, the deputyprime minister responsible for the economy. How-ever, this amount would be subject to a maximumof 25% of the national gross minimum wage. Taxeswould be paid only on returns, which again is sensi-ble given that individual contributions would betaxed during the investment period.

One final new feature introduced by the govern-ment was that this state contribution will not beaccessible until at least three years had passed. Afterthis initial period, 15% of the government supple-ment will be available, rising to 35% after six yearsand 60% after 10 years. The full state contributionwill not be available until retirement. MOTIVATION: While most governments aim toencourage private savings, it is particularly impor-tant in Turkey, where authorities are struggling torein in a current account deficit that is being financedby foreign capital inflows and is equivalent to 10%of GDP. While it is unclear how quickly the new pen-sion scheme could have an effect, it is a positivechange, according to Özlem Derici, the chief econ-omist at Erste Securities. “These announcementsare important and positive, as the current accountdeficit is effectively a savings gap,” she told DowJones in April 2012, “But it is not likely to help reducethe current account gap this year, and it will proba-bly have an impact on the gap in two or three years.”

The reaction from industry participants was unsur-prisingly positive, with some sector representa-tives saying publicly that they expect the new incen-tives to raise the number of participants by 50%.Indeed, the stock price of the only publicly tradedcompany that sells pension plans – Anadolu Hayatve Emeklilik – rose sharply in the days following theannouncement, strongly suggesting that at least themarket believes that the new policy will have a pos-itive impact on the country’s pension plan providers.

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The number of pension scheme participants is set to rise steeply

Encouraging privatesavings is particularlyimportant in Turkey, withthe authorities aiming torein in a current accountdeficit that is beingfinanced by foreign capitalinflows and is equivalent to10% of GDP.

93

EnergyInnovative projects could change power usageEnergy corridor between West and Middle East/EurasiaGoals are set to reduce high import billsNew pipelines will transport oil and gas more efficientlyAffordable labour encourages sector investment

ENERGY OVERVIEW

Electricity output was 228.4 TWh in 2011, mostly from gas-fired plants

Long-time aspirations to become an energy corridorare now within Turkey’s grasp. A raft of pipeline proj-ects and a grand canal have been proposed, with hopesthese projects will be under way soon. Turkey’s loca-tion between the hydrocarbons-rich Middle Eastand Eurasian regions and energy-hungry Westernmarkets makes it a key player in energy trade.

But challenges abound as well. The economy is sad-dled with a crippling energy import bill that may jump25% to $68bn in 2012, which will make Turkey one ofthe world’s biggest energy importers, according to theInternational Energy Agency (IEA). Blackouts are a fea-ture of daily life, as the country struggles to keep upwith demand for electricity, which increases about 7-8% annually. Pledges to fully liberalise energy marketshave been repeatedly put off. And Turkey needs toinvest some $130bn by 2023 to overhaul ageing ener-gy infrastructure and boost capacity. PIPELINES: Two major oil pipelines already transitTurkey. BP’s 1760-km Baku-Tbilisi-Ceyhan link has thecapacity to carry up to 1.2m bpd of Azeri crude. The986-km Kirkuk-Ceyhan dual pipe has the annual capac-ity to carry 1.6m bpd, but typically pumps about 500,000bpd. Flows in the 25-year-old dual line are frequentlycut due to faults or sabotage by insurgents in Turkeyand Iraq. More pipelines between Iraq and Turkey maybe part of future plans. The autonomous KurdistanRegional Government (KRG) in the north of Iraq hasproposed an oil pipeline and a gas pipeline to Turkey,and Baghdad has also proposed an oil link.

“Turkey is a logical choice for regional business forseveral reasons,” said UB Holding Chairman, Hadi Nezir.“The financing, communications, transport and all oth-er needed logistical infrastructures are well developedand the opportunity for exports from Iraq is very high,making it an ideal point to export Iraqi oil.”

Efforts are under way to protect the environmentas well, including the proposed construction of a canalnear Istanbul’s environmentally sensitive BosphorusStrait (see analysis). Likewise, in 2010, the Ministry of

Energy mooted a $20bn environmental fund to whichoil majors would contribute. The government has alsothrown its weight behind the planned $3bn Samsun-Ceyhan-Adana Pipeline (SCP), a venture betweenTurkey’s Çalık Holding and Italy’s Eni, which aims tocarry 1.5m barrels per day (bpd) from the Black Seato the Mediterranean. But Russian supplies are essen-tial, and Moscow has dragged its feet on committingoil, seeking Turkish support for other energy projectsin exchange. Although one of the aims of the projectis to reduce tanker traffic on the Bosphorus, even ifSCP were to open, it is not clear how much traffic wouldease in Turkish waters. Firms that do not join the proj-ect are likely to continue using the narrow waterways.Analysts also point out that the least-safe vesselstransiting the Istanbul strait are the ones carryingrefined products, and therefore would not be affect-ed by the bypass since they do not carry crude.TRANSIT: Turkey re-exports Azeri gas through theTurkey-Greece pipeline, which has 7bn cu metres ofcapacity per annum. It is a partner in the planned !14bnNabucco project, backed by the EU and US because itbypasses Russia, upon which Europe is overly fueldependent. Nabucco aims to send 31bn cu metres ofCaspian and Middle Eastern gas through Turkey and intoEurope, but the project has stalled due to financing, alack of committed supplies and a rival Russian project,Gazprom’s South Stream. Turkey expressed support forSouth Stream in late 2011, betting there is enoughdemand for both. Either way, it stands to gain as bothprojects would pass through its territory, offering tran-sit fees and gas. If Turkey is to become a linchpin in theglobal gas trade, it must import enough fuel to meetboth domestic demand and re-export commitments.It also must expand its pipeline capacity. While it cur-rently has excess capacity, as domestic demand rises,that surplus will decline. “It could disappear altogeth-er within the next decade without additional invest-ment,” the EIA said. Other pipeline projects include theItaly-Turkey-Greece Interconnector, the Trans-Anatolian

The sheer size of theenergy import bill makes ita central challenge for theeconomy; some project itwill jump by 25% over thecourse of 2012, reachingan estimated $68bn.

Two major oil pipelinesalready transit the country: the 1760-km Baku-Tbilisi-Ceyhan link and the 986-km dual pipe connectingKirkuk and Ceyhan.

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Power playsTransit, pipeline and renewable projects are all in the works


ENERGY OVERVIEW

Natural Gas Pipeline and the Trans-Adriatic Pipeline,which the Shah Deniz consortium selected as a desti-nation for their gas in February 2012.OIL RESERVES & IMPORTS: At home, proven oilreserves, located largely in the south-east, are 270mbarrels, the US Energy Information Administration (EIA)said. Oil production was 16.4m barrels in 2011, meet-ing about 8% of national demand, Energy Minister Tan-er Yıldız told parliament in March 2012. Because it issuch a large net importer of oil, Turkey is among theworld’s “most negatively” affected by the recent risein oil prices, Morgan Stanley said in February 2012. Itis also worth noting that Turkey’s petrol prices at thepump are the highest in the world at $1.97 per litre,according to official data in early 2012.

In recent years, Iran has become Turkey’s top suppli-er of crude, sending 9.7m tonnes in 2011, while Rus-sia is number two, delivering 2.1m tonnes that year,according to an investor presentation from Tüpra#,Turkey’s main refiner. As sanctions against Iran over itsnuclear programme bite, Turkey, Iran’s fifth-biggestexport market, has agreed to reduce its imports fromIran, running at about 200,000 bpd in first-quarter2012, by 20%. Yıldız has said Turkey will replace the lostIranian fuel with 1m tonnes of Libyan fuel and is in talkswith Saudi Arabia on boosting spot purchases. REFINING: Turkey’s six refineries process 714,275 bpd,and four of them are owned by Koç Holding’s Tüpra#,the country’s biggest industrial firm. With a marketshare of 85%, the Izmit-based company has annualcapacity of 28m tonnes, and utilises nearly 80% of it.The company said record automobile sales in 2011 andstrong jet fuel growth have boosted demand for its prod-ucts. It is one of just three companies in Turkey thatDeutsche Bank predicts will profit from the spike inglobal oil prices. “The companies that we believe couldpotentially benefit from rising oil prices are refinerTüpra#, petrochemicals producer Petkim and LPG dis-tributor Aygaz,” analysts said in a March 2012 report.Existing refineries are upgrading to meet EU environ-mental criteria, and new refineries at the Ceyhan ter-minal hub are in the planning stages.

A new refinery being developed jointly by Turcaspetrol, a domestic fuel retailer and Azerbaijan’s SOCAR,is due to come on-line in 2015. “Increasing oil refiningcapacity in Turkey is a strategic way to offset the cur-rent account deficit,” Kenan Yavuz, the president andCEO of SOCAR Enerji Turkey, told OBG. “Since the out-put from this new refinery will be used as inputs fordownstream olefins and aromatics, we anticipate a val-ue add of $3-4 per barrel of oil.”

The state-owned Turkish Petroleum Company (TPAO)has pledged to boost exploration and production (E&P)to reach the government’s goal of covering all gas andoil demand with domestic means by 2020. It plans todrill up to five extra-deep exploration wells by 2013 inthe Black Sea at a cost of $1bn. Chevron acquired a50% stake in a Black Sea deep-water exploration licencewith TPAO in 2011. Brazil’s Petrobras and US-basedExxonMobil are exploring in the Black Sea as well. TPAOthinks Turkish waters hold up to 10m barrels of oil.

Territorial disputes with Greece, the country’s west-ern neighbour, have deterred oil exploration in theAegean Sea, but Turkey is searching for hydrocarbonsoff of its Mediterranean coast. TPAO inked a deal withShell in November 2011 to explore for oil and gas andsaid it aims to begin processing by 2014. ExxonMobil,Chevron, Total, Petrobras, Statoil and RWE are interest-ed in exploring in the Mediterranean, TPAO officials havesaid. TPAO is also involved in E&P for both oil and gasin Iraq, Azerbaijan, Kazakhstan, Libya and Colombia. WATER WITH GAS: Turkey and Greek Cyprus in 2011ratcheted up a war of words over gas exploration offof the latter’s coast. The two nations have a history oftension due to territorial disputes over the island.Exploratory drilling in September 2011 showed a Cypri-ot prospect may contain between 85bn cu metres and255bn cu metres, enough to make the Mediterraneanisland self-sufficient for up to 250 years. Turkey fearsthat Turkish Cypriots, who have no peace settlementwith the internationally recognised Greek Cypriot gov-ernment, will not share in the profits. Recep TayyipErdo!an, Turkey’s prime minister, accused Cyprus of

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Major pipeline projects are in the works to transport oil and gas

Looking to find alternativeenergy sources, Turkey issearching for hydrocarbonsoff the Mediterraneancoast. Gas exploration offthe coast of Cyprus hasproved a point ofcontention due toterritorial disputes.

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Oil consumption, 2005-10 (’000 bpd)

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ENERGY OVERVIEW

“oil-exploration madness” and said Greek Cypriots want-ed to sabotage the latest round of reunification talkson the island, which has been ethnically divided for 37years. Turkey then dispatched naval ships to accompa-ny its own seismic survey vessel to an area just 10 kmfrom the Cyprus drill site.

“The dependency of Turkey on fossil resources, espe-cially natural gas, is above the world average,” the Ener-gy Market Regulatory Board (EPDK) said in a 2010report. “The share of natural gas in electricity produc-tion in Turkey is more than two times its share in therest of the world.” Domestic natural gas production wasjust 679.6m cu metres in 2010, while 39bn cu metreswere consumed, according to BP’s “Statistical Reviewof World Energy”. Unless new discoveries are made,Turkey’s gas reserves – about 6bn cu metres, accord-ing to the IEA – will last eight years.

Most gas, about 25bn cu metres a year, comes fromRussia. Iran is Turkey’s second-biggest supplier, send-ing 10bn cu metres annually. Turkey said in January2012 it would take Tehran to international arbitrationover the price it charges, and Iran promptly reducedflows. Azerbaijan is the next main supplier at 6.6bn cumetres per year, and Turkey also has liquefied naturalgas (LNG) contracts with Algeria and Nigeria. Gas stor-age capacity is 2.6bn cu metres, which Turkey wants tosee double by the year 2020.

State pipeline operator BOTA"dominates the importbusiness, though companies like Shell and Gazprom haveentered the natural gas market and there are calls forliberalisation. “This business is becoming quite complexand multi-faceted. It needs to be run by a private enter-prise, driven by profit,” said $brahim Palaz, president ofBOTA" International. “The government’s role needs tobe more on the regulation side.”

Still, others say Turkey is reducing the government’srole in the sector swiftly. “Energy liberalisation in theEU took a very long time, and Turkey is accomplishingthis same feat comparatively quickly,” said Metin "en,CEO of Bosphorus Gaz, Gazprom’s Turkish unit. “There

is room within the sector for many players, particular-ly considering that the number of customers that arelooking for a licensed importer has doubled since 2010.”RISING PRICES: For now, Turkey is struggling to coverdemand at home, and a weaker lira and higher oil priceshave forced the government to raise prices for con-sumers. The Ministry of Energy announced gas wouldcost almost 19% more in March 2012. Besides theknock-on effect in inflation and the wider economy, priceshocks contribute to urban air pollution.

Due to rising costs, Turks refrain from turning on nat-ural gas heating and instead burn dirty coal or uncon-ventional fuel, like scrap wood. Newspapers reportedair quality indices in major cities, including non-indus-trial centres like Erzurum and Van, are at record highs.Conservation is also an issue. Insulating buildings couldsave Turkey TL10bn (!4.25) a year in heating and cool-ing costs. But only 10% of the country’s 18m buildingsare insulated, according to local press. POWER PLAY: High gas prices push up power pricestoo, and the EPDK hiked tariffs by 8% in March 2012.Turkey produced 228.4 TWh of electricity in 2011, ofwhich half is from gas-fired plants, the Ministry of Ener-gy said. EPDK figures showed coal-fired stations accountfor 30% of production, 17% is from hydropower, 4% isoil and less than 1% is wind, solar and other resources.Installed capacity is now almost 55 GW, which the gov-ernment wants to lift to 125 GW in the next 10 years.

Economy Minister Zafer Ca!layan in April 2012announced a massive incentive scheme to attract invest-ment and boost development, and pledged to backenergy as a strategic industry. “We will support ener-gy investments by including them in our incentivescheme. Investment in electricity production, will be sup-ported, except for natural gas,” he said. But industry exec-utives warn Turkey cannot entirely give up its gas habit.“Turkey will be dependent on importing gas for sometime,” said Turcas Petrol’s chief executive, Batu Aksoy.“The government is working to see the share of renew-ables increased to balance the similarly growing needfor natural gas. Ideally, a ratio of 50:50 can be achieved.”

As it stands, the government has pledged to raise theshare of renewables in the mix to 30% of total installedcapacity by 2020. Of that 30 GW will be from hydropow-er and 3 GW will be from other alternative sources, pri-marily wind. The private sector is taking a lead, with non-state-owned renewable generation going to 3840 GWhfrom 1490 GWh in 2002, according to the EPDK.

The rapid shift has not been without complications.The issuance of some 1000 licences for small hydropow-er projects has raised charges of improper environ-mental-impact assessments, and projects are being

96

It is hoped that an increase in exploration efforts will translate into new discoveries, driving growth

State pipeline operatorBOTA# dominates imports.However, companies likeShell and Gazprom haveentered the natural gasmarket and there are callsfor liberalisation.

High gas prices and carbonemissions are pushing thecountry to explorealternative energy options.Among them is the buildingof two nuclear powerstations.


SOURCE: Invest in Turkey/IRENA

Fixed feed-in tariffs* (per KWh)

Wind $0.073

Hydro $0.073

Geothermal $0.105

Biomass & organic waste biogas $0.133

Solar $0.133

*Apply for a 10-year period togenerators built in 2005-15.

ENERGY OVERVIEW

delayed by lawsuits. The hasty issuing of wind-farmlicences in 2007 saw permission going to unqualifiedapplicants, likely speculating in the new market. “Theenergy regulators are quickly learning from both theEuropean experience and challenges in the domesticmarket,” said Selahattin Hakman, president of Enerjisa,a venture between Sabancı Holding and Austria’s Ver-bund. “For instance, the authorities are responsive andare steadily weeding out the kind of speculative behav-iour that causes irregularities in the energy trade.”

The shift towards renewable energy options will alsohelp Turkey contain its fast-rising carbon emissions. In2009, the country released some 230m tonnes of car-bon dioxide, according to data from the EIA, ranking it23rd among global polluters.

About half of power generation in Turkey is still state-owned, though 16 GW of existing generation capaci-ty is set for sale. “The government is still the singlebiggest player in the country’s energy sector,” said AdilTekin, the head of French engineering group Alstom’soperations in Turkey. “However, it is no longer invest-ing in new generation facilities. Full liberalisation of theenergy market is still 10 years away, but the marketsare increasingly liquid and this is enabling the growth.”GOING NUCLEAR: A cornerstone in the government’sefforts to reduce reliance on energy imports is its plansfor two nuclear power stations. The government wantsto establish 12 nuclear reactors with total capacity of15 GW. Its goal is to have nuclear energy provide 5%of electricity, according to the European Energy Obser-vatory. It is seeking to build two plants, one on theMediterranean and the other on the Black Sea. Seis-mologists have said both plants lie near earthquake-prone areas in a country with many fault lines.

While Japan, Germany and other countries movetowards decommissioning nuclear industries, Turkey isabout to launch one. “The Justice and DevelopmentParty (AKP) government is moving in the opposite direc-tion from the rest of the world in its determination tobuild a nuclear plant,” "ahin Alpay, a professor of polit-ical science at Bahçe#ehir University, wrote in Zamannewspaper in March 2012.

For the first plant at Akkuyu, Ankara and Moscowsigned an agreement that gives Russian state nuclearcompany Rosatom a contract to build a station withcapacity of 4.8 GW of power at a cost of $20bn by thetime it is completed in 2019. This will be Russia’s firstforeign nuclear station, and Rosatom will fully own andoperate the plant for 100 years. The four-unit stationwill sell power to the state for 12.35 cents per KWh,compared with the average wholesale price of 9.38cents per KWh, bringing the total nuclear bill to $70bn.

In 2011, a 9.0-magnitude earthquake shook Japan;the quake and subsequent tsunami resulted in a par-tial meltdown of the Fukushima Daiichi nuclear plantand drew international media attention. In its wake, apoll of 2469 Turks by opinion research firm A&G found64% opposed the construction of both nuclear plants.

“If the AKP government represents the people, it can-not establish a nuclear plant that an overwhelmingmajority does not want. A referendum on nuclear ener-

gy must be held,” said Alpay. Other critics say Turkey stilllacks a clear legal framework to launch a nuclear indus-try and question whether Rosatom will be able to raisethe funds. “If the aim is to diversify supply, then itshouldn’t be Russia building the plant. It is already oneof our main suppliers of oil, gas and coal,” said NecdetPamir of the World Energy Council.GRID LOCK: Regardless of major improvements toTurkey’s power generation facilities, its distribution net-works still lose about 20% of electricity, which the gov-ernment hopes to reduce to 5% in the next decade.

The privatisation of 21 dilapidated and inefficient gridshas seen varying success. Well-subscribed tenders,despite upfront prices and the large investmentsrequired to upgrade infrastructure, have brought Turkey’smajor industrial companies into the auction room.

The latest round of privatisations in 2010 receivedoffers worth $5.7bn, with state-owned distributor TEDA"calling for the entire grid to be sold off. In January 2012,IC Holding won a tender to operate the Thrace grid until2035 for $575m with a loan backed by local banksGaranti, Vakıf and $fl Bank. The original winner for thegrid, whose 822,000 subscribers consumed 5000 GWhin 2011, was Aksa, whose $622m bid was rejected bythe Competition Board after it won other tenders.

In June 2011, Turkey began commercially tradingpower with Europe after synchronising its electricity net-work with Greece and Bulgaria in 2010. Private com-panies like Akenerji, a Turkish power producer thatexported 5 MW to Greece in November, have interna-tional service provisions to sell power.OUTLOOK: Opportunities for the private sector aboundas liberalisation of the energy market continues, par-ticularly in the gas-import business and power gener-ation and distribution. But profits will only stack uponce ageing infrastructure is rehabilitated. New ener-gy sources will help Turkey become more self-reliantwhile increasing overall capacity. As international oil andgas links are slowly realised, Turkey’s aspirations tobecome an energy hub look like they may be in its grasp.

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Research and development in renewables should help to ease rising power costs and reduce emissions

As Turkey moves towardsproducing nuclear energy,seismologists have said theproposed plants are to bebuilt near earthquake-prone regions, increasingthe risk of disasters.

The power grid has beenundergoing privatisation,with varying degrees ofsuccess. Turkey startedcommercially tradingpower with Europe in 2011.

ENERGY ANALYSIS

The Bosphorus is projected to see over 50 tankers per day by 2020

After two years of secret planning, Prime MinisterRecep Tayyip Erdo!an in 2011 revealed his “crazy proj-ect”: digging a 50-km-long, 150-metre-wide canalfrom the Black Sea to the Sea of Marmara. The canalwould turn half of Istanbul, a city of some 16m-18mresidents, into an island and rival the engineeringfeats at Suez and Panama.

“We are rolling up our sleeves for what will be oneof the greatest projects of the century,” Erdo!anannounced on live television in April 2011. The $10bncanal would slice through the western land nearIstanbul, creating a means for potentially dangerouscargo to bypass the city’s already very overcrowdedand busy Bosphorus Strait.

Supertankers of up to 300,000 deadweight tonneswould be able sail through the canal, which wouldinclude enough width for passing lanes and a moor-ing basin midway to allow simultaneous traffic to pro-ceed in either direction.

Erdo!an’s project highlights Turkey’s indispensa-ble role as a transit route for global energy supplies.Though it has very little natural gas or oil produc-tion of its own, its location between the hydrocar-bons-rich Middle East and Eurasian regions and theenergy-hungry markets of the West make it a key play-er in the global energy trade. Europe’s fastest-grow-ing population with an economy whose expansionis second in the world only to China’s has spurredrecord-high demand for energy.A STRAITJACKET: Nowhere is Turkey’s strategic posi-tion more apparent than on the Bosphorus, one ofthe world’s few oil chokepoints. Just 550 metreswide at its narrowest point, the overcrowded straitmust be closed in both directions to allow largetankers to pass. Vessels longer than 200 metres –effectively all crude oil and petroleum carriers – areprohibited from transiting at night. Turkish pilotsguide roughly 10,000 vessels transporting 150mtonnes of oil and petroleum products through thestrait a year. If oil from the Caspian Basin, which has

no other maritime outlet into the world’s oceans,doubles to 40m tonnes by 2020, as is expected, thenthe number of oil tankers in the Bosphorus will alsohave to double to more than 50 per day.

The winding, crowded strait invites a human, eco-logical and economic disaster, some have said. “Acci-dents in the past have turned the Bosphorus into akind of hell,” Erdo!an said when he announced theIstanbul Canal project. “We are taking this big stepto protect Istanbul, which provides 40% of nationalincome, from such large risks, to ensure people’ssecurity and preserve our cultural assets. This canalwill finally put an end to all traffic in the Bosphorus.” A NECESSITY: Besides expediting passage from BlackSea ports to the Mediterranean and doing away withexpensive moorage costs on either side of Turkey’sstraits, the Istanbul Canal may also open up a newstream of revenue for the government by givingTurkey the right to levy a toll on passing vessels.

Although the Montreux Convention of 1936 grant-ed Turkey control of the Bosphorus and the Dard-anelles Strait at the other end of the Marmara Sea,the government is barred from charging fees or hin-dering free passage during peacetime. These require-ments would presumably not apply to any traffictaking place through the canal.

Even some conservationists back the IstanbulCanal. “The current situation is madness and doesrequire a ‘crazy’ solution,” said historian $lber Ortaylı.“If we are to live in this city in peace, we have no choicebut to relocate external, unaccountable traffic toside canals and otherwise.”

The canal is not a new idea. A manmade water-way skirting Istanbul was first proposed by theOttoman Sultan Süleyman in the early 16th centu-ry and was periodically mooted by officials within theimperial court in every century since its first sugges-tion. Most recently, the late Bülent Ecevit, a formerprime minister, put forth a similar idea in 1994,though it did not come anywhere close to fruition.

Spring 2011 marked theannouncement of a projectto build a canal throughIstanbul. If carried out, thecanal would alleviate cargotraffic in the overcrowdedBosphorus Strait.

As the Bosphorus is only550 metres wide at itsnarrowest point, it must beclosed in both directions toallow large tankers to pass.The largest are alsoprohibited from transitingat night.

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So crazy it just might workA massive canal may one day reshape Istanbul


ENERGY INTERVIEW

Taner Yıldız, Minister of Energy and Natural Resources

How does the government plan to achieve greaterenergy resource independence, and how will windand solar resources play a role in this process?YILDIZ: Turkey is an import-dependent country – 72%of our energy comes from abroad. To reduce our cur-rent dependence on imports, we need to increase util-isation of domestic and renewable resources. The searchfor petroleum and natural gas, on land or underwater,continues, but we are also working to unleash our windand solar resources. The installed capacity for windincreased from 17 MW to 1700 MW over the pastdecade, and we are continuing construction of windenergy facilities. Our objective is to have 2000 MW ofinstalled capacity in 2012, which we will raise to 20,000MW by 2023. For solar energy, we will soon begin alicensing process for 600 MW of installed capacity, andour 2023 target is 3000 MW. At this time, we are alsotransferring geothermal fields to the private sector; 62fields have already been handed over. The investmentsfor electricity generation, heating, greenhousing andthermal tourism are being carried out by the privatesector. The government is working to activate thermicand hydroelectric potential; accelerate oil and naturalgas exploration; increase mining exports to $20bn; andconstruct two nuclear power plants by 2023.

In what ways is the government working to attractinvestment in solar and wind manufacturing? YILDIZ: Solar energy is the most expensive energyresource. As such, there should be a point at which theprice for wind- and solar-generated power will attractinvestments and earn a reasonable profit. Althoughwe desire to provide cheap electricity to our citizensand industries and increase resource production, weare working to transfer this job to the private sector.Thus, these resources must be competitive withoutgovernment guarantees, otherwise we cannot keepthe private sector alive. We are offering tariffs to bal-ance between the needs of wind and solar produc-ers and the demand in the market for clean energy.

Where does the government see Turkey with regardto future petroleum and natural gas generationand transportation? YILDIZ: Turkey is located in a region of great geopolit-ical importance. Turkey’s neighbours have 65% of theworld’s proven oil reserves and 71% of natural gasreserves. Our strategy it to become a bridge betweenthe energy-rich countries of the Caspian Sea region,Central Asia and the Middle East, and the European mar-kets. Turkey pursues a multi-purpose policy to ensureenergy supply security for itself and its partners. Thecountry actualised east-west and north-south energycorridors rapidly, with projects like the Baku-Tbilisi-Cey-han Main Export Oil Pipeline; the Baku-Tbilisi-ErzurumNatural Gas Pipeline; and the "ah Deniz, Nabucco Proj-ects and ITGI. In the field of energy, if Europe wants torealise resource and source diversity, the role and impor-tance of Turkey cannot be understated.

What other natural resources are currently beingcultivated in Turkey’s mines? YILDIZ: Our efforts to develop local natural resourcesare continuing. Turkey is among the top-10 countriesin the world in terms of the diversity of its mines. Ofthe global total of 90 types of mines, 60 are to be foundin Turkey. Both the public and private sectors haveincreased prospecting through drilling, and the amountof drilled territory has expanded from 100,000 metresnine years ago to over 1m metres today. We have founda new coal reserve of 4.8bn tonnes, increased our owncoal reserve by 50% (to 11.5bn tonnes), and in thecoming years we will transfer fields with 2.8bn tonnesof reserves to the private sector. This will also bring theprofit from the boron mining segment to $800m. Boronis particularly precious, and Turkey has 72% of theworld’s reserves. While our production of boron chem-icals was 436,000 tonnes in 2002, current productionlevels stand at 1.9m tonnes. We consider the boron mining segment sufficiently strategic so that at this time there are no plans to see the segment privatised.

101


Powering upOBG talks to Taner Yıldız, Minister of Energy and Natural Resources

ENERGY INTERVIEW

Alexander Medvedev, Director-General, Gazprom Export

How does Gazprom assess bids from importers inTurkey and what are the possible implications ofmarket liberalisation in the gas sector? MEDVEDEV: Turkey is an important partner forGazprom as it is our second-largest market in Europeafter Germany. We have a long-standing relationshipwith BOTAfi,and since 2007 we have successfully soldour gas to private companies in Turkey as well. In prin-ciple, we do not distinguish between buyers, be theypublic or private sector companies.

During the recent negotiations to find importers totake over the Western Pipeline imports from BOTAfiwe did not manage to agree with the private buyers.There is nothing unusual in this, business is a hit-and-miss affair. As we were able to agree a new, short-termdeal with BOTAfi, the Turkish market will not be with-out gas. In general, there is nothing against anotherround of import liberalisation in Turkey, as it happenedin 2007. As the Turkish market is liberalised more inthe future, we may find different buyers for our gas.

Does Turkey’s lack of storage capacity for gas pres-ent an opportunity for Gazprom? MEDVEDEV: To ensure an uninterrupted supply of gasto European consumers, some of which are more than6000 km away from the main Russian deposits,Gazprom has adopted a strategy of developing under-ground gas storage (UGS) facilities in Europe. The stor-age system helps maintain the smooth supply level inthe periods of extremely high offtake, like the verycold February 2012 in Europe, during which we quadru-pled the daily productivity of our UGS facilities, muchin the way our European partners did. I would like tostress that this was absolutely normal as the UGS facil-ities are intended to complement pipeline deliverieswhen the demand is high, and to help keep the pipesworking when the demand is low. It’s simply anotherway to maintain flexibility, and it is beneficial for Turkeyas well, as it has experienced a number of problemswith supply interruptions from certain unstable coun-

tries. We would be happy to consider UGS projects inTurkey, but, taking into account the regulatory frame-work, we do not have any concrete offers now.

In light of the costs involved in pipeline infrastruc-ture, what potential is there for cooperation withTurkey on a liquefied natural gas (LNG) terminal? MEDVEDEV: For Mediterranean and European geog-raphy, we still see pipelines as the most economicallyefficient way of transporting natural gas, and we areworking on that by focusing our efforts on the SouthStream project so as to contribute to European ener-gy security through diversification of energy trans-port routes. In 2011 we supplied 26bn cu metres ofgas to Turkey from Russia. Our natural gas is export-ed to Turkey via two routes: the Trans-Balkan gaspipeline and the Blue Stream gas pipeline.

As to the LNG terminal, we take for granted that sucha project deserves proper consideration, but severalfactors need to be in place first. An LNG terminal can-not work by itself: it has to be connected to the onshorepipeline, there has to be enough gas available in thispipeline, and demand needs to be secured. So far, wehave not received any concrete offer for an LNG proj-ect on the part of any of our Turkish partners.

Given the high value of gas that South Stream willbring to Europe, will the project undermine Turkey’sefforts to become a gas-trading centre?MEDVEDEV: We do not see any reason for SouthStream becoming a threat to Turkey. Once completedin 2015 South Stream will be an important componentof the strategy to enhance European energy supplysecurity, and we see Turkey’s involvement in the proj-ect as a positive development. Turkey is, of course,engaged in other regional energy projects, but we donot see any contradiction in Turkey’s support for SouthStream and its participation in these other endeavours,and vice-versa. The trends in Europe indicate there will be ample room for several infrastructure projects.

102

Important partnersOBG talks to Alexander Medvedev, Director-General, Gazprom Export


ENERGY ANALYSIS

Developing oil and gas transit infrastructure is a top priority

With so many proposed supply routes on the drawingboard and its position as a key transit route secure,Turkey waits to see who will pull the trigger first.

When it comes to hydrocarbons, geography is des-tiny. Despite its limited domestic supplies, the adagealso rings true for Turkey. With some of the world’slargest oil and natural gas reserves to its east and hun-gry markets to its west, Turkey is an indispensable pieceof a complex and evolving regional energy puzzle.

For decades, energy producers have shipped oil andgas to world markets through Turkey’s Bosphorus andDardanelles straits. Ankara is wary of potentially cata-strophic effects of an accident in these narrow and envi-ronmentally sensitive chokepoints and has renewedefforts to ease tanker traffic by building new pipelines.”There are no established pipelines for the transport ofrefined petrol, so fuel must be delivered by road andthis raises costs,” said Murat Lecompte of BP. Withdomestic demand on the rise and new discoveries ofoil and gas in the Caspian Basin, Turkey requires signif-icant investment to fulfil its role as a transit state.OIL: Turkey is pushing new oil pipelines in order toreduce tanker traffic in the Bosphorus. In 2009, rough-ly 2.9m barrels per day (bpd) of oil traversed the straiteach day, off the 2004 peak of 3.4m bpd, after Russiabegan exporting more crude from Baltic ports. Butincreased production in the Caspian region means thefigure may rise again. Turkey has diverted some Azerioil to a terminal in the Mediterranean port city of Cey-han. The 2000-km Baku-Tbilisi-Ceyhan oil pipeline beganoperation in 2006 and carries 1.2m bpd of light Azericrude via Georgia to the Mediterranean.

Ceyhan is also the terminus for a pipeline that skirtsSyria and brings northern Iraqi oil from Kirkuk’s fieldsto world markets. The 1100-km-long link, which openedin 1977, remains Turkey’s largest oil pipeline with a dai-ly theoretical capacity of 1.65m bpd, though typicallyabout 500,000 bpd flow through the aging infrastruc-ture. Bomb and arson attacks carried out by insurgentsin Iraq and Turkey also regularly knock the pipe offline.

In addition to the Azeri and Iraqi lines, Turkey plansto build a link from the Black Sea city of Samsun to Cey-han. The 550-km pipeline would pump an initial 1m bpdfrom north to south with the ability to raise that figureto 1.5m. If expanded, this pipeline could halve the num-ber of oil tankers passing through the Bosphorus,experts say. But the $3bn project has stalled due to adispute between Turkey and Russia. Moscow claimsthat the project would make transporting oil threetimes as expensive as moving it by tanker through theBosphorus Straits. The oil pipeline monopoly Transneft,slated to build the pipeline, has sought more tax incen-tives to help cover costs.NATURAL GAS: As it seeks to diversify its source of gasaway from Russia, the EU hopes Turkey can be the tran-sit state it is looking for. Europe consumes some 500bncu metres of natural gas each year, and Russia current-ly supplies a quarter of the EU’s gas and more than halfof the continent’s imported gas. About 80% of Russ-ian gas travels through Ukraine.

A series of rows between Russia and Ukraine overpricing and supplies in recent years saw the former turn-ing off the tap, in turn reducing supplies to Europe. Inan effort to become less dependent on Russia, the EUis turning to the Caspian region and Middle East, butit needs Turkey as a transit state to aid in that effort.BUILDING INFRASTRUCTURE: The past few years haveseen significant investment in pipelines, ports, stationsand refineries in Turkey. Much of the investment hasbeen driven by the promise of the enormous ShahDeniz gas field in Azerbaijan. Estimated to hold at least1.2 trn cu metres of natural gas, Shah Deniz would goa long way in satisfying European demand. A leadingproducer of Azeri gas, Russian energy giant Gazpromestimates it will boost production in Azerbaijan to morethan 100bn cubic feet in 2012, a 70% increase from2011. Shah Deniz is being developed by BP, Statoil andSOCAR, the Azeri state-owned oil company. Productionon phase one began in 2006. The project’s secondphase, known as Shah Deniz-2, is set to begin in 2017.

The EU depends on Russiafor a great deal of its gas,but it hopes to rely moreon alternative producerssupplied through Turkey inthe near future.

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It’s in the pipelineInvestments in the oil and gas infrastructure continue

ENERGY ANALYSIS

Two major and several smaller pipeline schemes arecompeting to carry Azeri gas to Europe. The first com-petitor is the so-called Southern Corridor, the heart ofwhich is the long-discussed Nabucco project, a 3300-km pipeline from eastern Turkey to Baumgarten, Aus-tria. Nabucco would carry 31bn cu metres of gas annu-ally from the Caspian region and other supplying nationsthrough Turkey and the Balkans. The EU has backedNabucco as part of a long-term effort to link with theCaspian region to secure a steady stream of fuel. TheUS also favours Nabucco, which would bypass Russiaand transit entirely through friendly territory.NABUCCO PROJECT: But Nabucco has fallen out offavour in other important circles. At an estimated!14bn, it would cost more than initially expected andhas run into several delays. A lack of committed gas isa major hindrance. Azeri fuel could fill the pipeline’s ini-tial stage, but more is needed. Among other suppliersthat have been mooted, Turkmenistan has failed tocommit, Iraq lacks enough viable supplies, Iran is anunstable partner, and Egypt wants to export to otherpipelines as well as liquefy its gas.

Cracks are beginning to show among Nabucco’s part-ners, which are Austria’s OMV, Budapest-based MOL,Romania’s Transgaz, Bulgargaz of Bulgaria, Ankara’sBOTA" and RWE of Germany. Turkish Energy MinisterTaner Yıldız appeared to back away from the projectwhen referring to it as “part of the solution for Euro-pean supply security” at a January 2012 conference inTbilisi, Georgia. German utility RWE, which was in lineto become one of Nabucco’s biggest end users, has alsodistanced itself, with CEO Jürgen Grossmann referringto it as “a sinking ship” early in 2012. Later in a presen-tation in Brussels in March 2012, RWE declared “Nabuc-co is alive, not dead” and insisted the project remaineda core part of its gas strategy. Mixed feelings aside, theproject was first discussed in 2002, but constructionis unlikely to begin before 2017, if at all.

The Trans-Adriatic Pipeline (TAP) will carry some20bn cu metres of gas per year across 520 km between

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Plans for oil pipeline projects have been in place for years, with progress slowly inching forward

Nabucco’s main rival, SouthStream, is meant to takeRussian gas to Bulgaria viathe Black Sea to service therest of Europe. Although itscapacity is greater thanthat of Nabucco,construction costs are alsolikely to be higher.

The pipeline projects willgo beyond providinganother means totransport oil and gas. Jobgrowth and newinvestment opportunitieswill go hand-in-hand withthese changes ininfrastructure.


eastern Greece and southern Italy for $2bn. TAP is ajoint venture between Swiss EGL (42.5%), NorwegianStatoil (42.5%) and Germany’s E.ON Ruhrgas (15%). Itshould also help extend the reach of the Trans-Anato-lian Pipeline (TANAP, see below).MAIN RIVAL: The planned South Stream would trans-port Russian gas under the Black Sea to Bulgaria beforesplitting into two legs, one servicing Serbia, Hungary,Slovenia, Austria and Italy and the other stretching intoCroatia, Macedonia, Greece and Turkey. With an annu-al capacity of 63bn cu metres, South Stream offerstwice the volume of Nabucco – at a significant cost,estimated at $25bn to $32bn. Originally signed byGazprom and Italy’s Eni in 2007, South Stream nowincludes France’s EDF and Germany’s Wintershall. It ispoised to beat Nabucco to the punch after Gazpromannounced construction could begin as early as Decem-ber 2012 with operations commencing in 2015.

Nabucco was dealt another blow in late 2011, whenTurkey and Azerbaijan signed a memorandum of under-standing to build a 2000-km gas pipeline across Turkey.TANAP will provide 16bn cu metres per year from ShahDeniz-2, 6bn of which would be consumed in Turkeyand the remainder piped to Europe.

TANAP appears to be “the death of Nabucco, unlessTurkmenistan and Azerbaijan sort out a deal to provideTurkmen gas to the project,” said Cenk Pala, the formerhead of strategy at BOTA" as well as TAP’s represen-tative in Turkey. “Currently, TAP is the only feasibleoption for transporting natural gas from Turkey intoSouth-east Europe and the Balkans.”

The decision on which route to pursue belongs tothe Caspian Sea consortium, which is led by SOCAR. TheEU has argued that the Southern Gas Corridor wouldbe more profitable and makes more sense than SouthStream if the aim of the new routes is to diversify sup-plies. Turkey argues that it would like to see both proj-ects move forward as complements. Europe is goingto need a lot of gas from many directions, it says.WIDER IMPACT: Although these natural gas lines aredesigned principally to satisfy Europe’s energy demands,Turkey stands to benefit in several ways. Turkey current-ly relies on foreign sources for more than 90% of its oiland gas needs. Though it still enjoys excess importcapacity, a large population and expanding economycould boost demand 6% annually over the next decade.The new pipelines will not only help meet that need,but they will also lower the cost of energy for consumers.

Besides oil and gas, the pipelines will bring incomein the form of transit fees. Building the pipelines willhelp create jobs in construction and operations and newinvestment opportunities. With so much oil flowingthrough Ceyhan, for instance, Ankara envisions a region-al energy hub with expanded port and storage facili-ties and new refineries. These pipelines have the poten-tial to reshape regional energy flows, influencing thegeopolitical landscape. Turkey sees the pipelines as away to cement ties with its neighbours, but as the ten-sion between Russia and Ukraine illustrates, pipelinescan also give rise to considerable friction. Exploiting thebenefits while avoiding the risks will require a deft hand.

ENERGY INTERVIEW

Tony Hayward, CEO, Genel Energy

How much has security and stability contributedto the economic success of the Kurdistan regionand to attracting investment? HAYWARD: I think you have to recognise the greatsuccess the Kurdistan region has had in creating asecure and stable operational environment. That is,of course, where we are focused and it is the bedrockof economic success. Without security and stabilityit is very difficult to have the amount of foreign invest-ment required for the oil industry to grow as it has. Ithink the Kurdistan region is a wonderful example ofhow to create a secure, stable operational environ-ment and how to embrace the private sector when itcomes to encouraging investment in the country. Thishas taken place not only in the oil sector but alsoacross all sectors of the economy in the last seven oreight years, and there is a sufficient interest now inmaintaining this because private industry is booming.

There has been an enormous amount of directinvestment made by Turkey in the Kurdistan region. Ifyou look at the balance of trade between Turkey andIran, $9bn a year flows from Turkey to Iran, while$7.5bn a year goes into Kurdistan.

Tremendous investment is being made in the Kur-distan region by Turkey and its businessmen and thisis creating great commercial integration between thetwo countries, which is also helping to encourage amore secure business environment.

Some 500 incidents of illegal oil tapping occurredbetween 2003 and 2011. Is the Turkish governmentinvesting enough to ensure pipeline security? HAYWARD: I think a lot has been done by the secu-rity operations of both the Kurdistan and the Turkishmilitary, but I think it is also clear that the resolutionof the Kurdistan Workers’ Party (PKK) issue will not bethrough military means. While further investment inthis area may be necessary, it is not a permanent solu-tion. A political resolution is needed and I understandthat this is increasingly the approach being taken.

While it is important to have the military ability tocontain the PKK, the real issue is to have the right dia-logue to bring them into the political process. It seemsto me that this is now under way and that this willlead to a more secure infrastructure.

More broadly, I cannot think of one example any-where in the world where a conflict of that type hasbeen resolved ultimately via the military. I can thinkof an example in my own country, Northern Ireland,where there was a very similar conflict for decadesthat was ultimately solved politically. There are exam-ples in many parts of the world where the only reso-lution lies in bringing people into the tent.

Other than its strategic geography, which puts itclose to hydrocarbons resources, what makes Turkeyan important partner for international businesses? HAYWARD: About 500,000 to 600,000 bpd of crudeflows from Iraq into Turkey and down to Ceyhan, butthis is not the only industry that is thriving.

I think Turkey has made extraordinary strides in thelast 10 years, and you can see this everywhere youlook, from the very proactive private sector approachto investment to the encouragement that the gov-ernment gives to Turkish companies to go overseas.This sort of free-market approach has been blazed bythe Justice and Development Party (AKP).

Turkey has certainly become one of the most pop-ular destinations for international companies lookingto grow their businesses, which is really a reflectionof the economic policies of the country, and of course,a reflection of demographics, since 65% of the pop-ulation is under 30, which is a tremendous marketopportunity for any company.

When you create an economic policy that is driv-ing economic growth between 8% and 10%, I do notthink you need to be doing any more. I am sure thereare some areas that I am not aware of where sometuning can be done; however, on the whole, I thinkthat the government in Turkey has got it just right.

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Making extraordinary stridesOBG talks to Tony Hayward, CEO, Genel Energy

ENERGY ANALYSIS

Dams are peppered throughout the nation to provide power

Hydroelectricity is the cornerstone of Turkey’s goal toboost renewable energy supply, but building thousandsof dams comes at an environmental cost.

Retired imam Kazım Delal avoids visits to his belovedKüçükcayır, the village where he grew up and that hisfamily has called home for five generations. Located inthe lush Salarha Valley in the emerald-green moun-tains of the eastern Black Sea, Küçükcayır is famous forits sweet honey made from wild roses and fresh troutthat swim in its ice-cold streams.

It is also the construction site of a hydroelectric pow-er station project; one of almost 1000 licensed in Turkeyand at various stages of completion, according to theEnergy Market Regulatory Authority (EPDK). Anotherthousand hydro-power projects are planned. “It feelslike a stab in the heart when I see Küçükcayır now,” Delalsaid. “For almost 70 years, I watched that water flow.There was nowhere like it in the world. Now they’vedestroyed the forest and turned it into hell.”

Delal, 66, is embroiled in a three-year lawsuit to blockReda# Elektrik, owned by Madrid-based builder Essen-tium Group, from completing the plant in Küçükcayır.His complaint alleges that the project harms the envi-ronment, including sources of drinking water for thenearby town of Rize, his lawyer, Remzi Kazmaz, said.Essentium Enerji, the subsidiary in Istanbul, did notrespond to email or phone calls. Construction on theplant on the Pa#açur Stream has been halted pendinga final verdict, Kazmaz said.HUNDREDS OF SMALL DAMS: Delal’s lawsuit is oneof an estimated 90 brought by villagers against similarrun-off river hydropower projects in northern Turkey,Kazmaz said. Locals fear the plants will siphon off waterused to irrigate farms and supply households. With 250hydropower projects at various stages of completion,the predominantly rural Black Sea region has the mostin Turkey, according to the state Investment Supportand Promotion Agency. Another 110 small hydro proj-ects are under way in eastern Turkey, 104 in the Mediter-ranean, 44 in central Turkey, 26 in the south-east, 20

off the western Aegean coast and 16 in north-west-ern Turkey, the agency said. The project’s total capac-ity will be 15,000 MW once they are all built.

Since 2010, Turkey has pursued small hydro plantsbecause of its abundance of river and stream systems.Geology has blessed Turkey with 27 watersheds, morethan in all of Europe, according to Istanbul-based con-servation group Do!a Derne!i. Since these projectsreroute the river flow through pipes and tunnels, oftenunderground, they do not require major dam reser-voirs and are therefore seen as having a more limitedenvironmental impact than the large-scale projectsTurkey has historically pursued. ACTIVE DAM-BUILDING: Turkey is “one of the world’smost active dam-building countries,” said Internation-al Rivers, a California-based non-governmental organ-isation. The country has 635 large dams and 24 morein the works, it said. Hydroelectric potential in Turkeyis nearly 1% of the world’s total potential, according togovernment figures. Among the headline projects area !500m hydroelectric power plant in southeast Turkeybeing built by Norway’s Statkraft, Europe’s biggest pro-ducer of renewable energy. The Çetin plant will haveinstalled capacity of 517 MW when completed in 2015.Statkraft is also building a 102-MW hydro plant and hasalready finished a 20-MW facility in Turkey. Since 2003,the government’s Privatisation Administration (Ö$B)has been charged with selling 83 hydroelectric plantsand has sold 50 run-of-the-river plants. It plans to sellanother 12 stations around the country in the first halfof 2012, Ö$B’s deputy president, Ahmet Aksu, told thestate Anatolia News Agency.

About a fifth of Turkish power production comesfrom hydroelectric sources, including large-scale dams,the US Energy Information Agency said. The countryuses 43% of its technically and economically viablehydro potential and wants to lift that to 100% by 2023as it seeks to boost clean energy and reduce its depend-ence on costly fossil fuel imports. Despite disadvantagesincluding massive primary capital costs and unreliable

Using water as a source ofpower is one of Turkey’smain renewable energystrategies. An unfortunateconsequence is thepotential environmentalimpact, however.

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The government hasaggressively pursuedhydroelectric power tomeet domestic energydemand. Some 635 damshave been built, withdozens more in the works.

Water worldHydroelectric power plants are a major renewable energy source

ENERGY ANALYSIS

power supplies during dry weather, the Ministry ofEnergy target for hydro capacity over the next decadeis as much as 35,000 MW. (Today total installed capac-ity from all sources is 50,000 MW.)ILISU DAM PROJECT: The heart of Turkish dam-build-ing country lies in the basins of the Tigris and EuphratesRivers in the south-east. The $32bn South-eastern Ana-tolia Project (GAP), an irrigation and energy develop-ment plan, includes the construction of an additional28 hydroelectric power plants with combined capaci-ty of 6.2 GW. Among the most controversial of the GAPplans is the Ilısu Dam, a $1.5bn investment that will pro-vide an annual 3800 GW, or 2% of the nation’s annualelectricity needs. It will also submerge the ancient townof Hasankeyf, a city hewn from sandstone cliffs abovethe Tigris River that claims 10 millennia of history.

Conservationists say Ilısu will lay to waste to criticalnatural habitats, destroy more than 300 historic sitesand cause the force evacuation of tens of thousandsof people. Government officials say Turkey needs themega-project if it is to become more self-reliant andsustain its rapid economic growth.

Questions over the environmental, social and cultur-al impact scared off financial backers from Germany,Austria and Switzerland in 2009, but Ankara quicklyraised the financing domestically and has pressed aheadwith construction on the dam and resettlement of thepopulation. Although several NGOs and celebrities havemobilised to try to prevent the flooding of Hasankeyf,recent history does not bode well for the town’s fate.Turkey ignored an international outcry in 2000 andflooded the Roman city of Zeugma, and 10 years lat-er, it buried the second-century settlement of Allianoiunder 61m cu metres of water.ECONOMIC DEVELOPMENT: Prime Minister RecepTayyip Erdo!an has said that GAP’s irrigation anddamming projects aim primarily to improve the plightof impoverished Kurds who live in south-eastern Turkeyand have suffered loss of life and land during decadesof fighting between separatists and the Turkish army.

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The building of hydropower plants and dams is intended to encourage economic development

One of the largest andmost controversial damprojects, the Ilısu Dam, willflood the ancient city ofHasankeyf. The project isintended to provide 2% ofthe nation’s energy needs.

The government says theGAP damming andirrigation projects aremeant to facilitateeconomic development inthe south-east, a poor and a largely Kurdish region.


“The Ilısu Dam won’t destroy Hasankeyf. Just the oppo-site, it will save it. It is the chance to benefit future gen-erations,” Erdo!an said in late 2010.

Still, the negative publicity from protests by local andinternational activists against large dam schemes likeIlısu are one reason why the government has turnedto the seemingly more sustainable small run-offhydropower projects, like at Küçükcayır. Private investors,many of them foreign, could spend as much as $22bn,according to the government’s investment agency, onthese plants. Many are drawn in part because the proj-ects are eligible for carbon trade, compensating for emis-sions made elsewhere, said Güven Eken, head of Do!aDerne!i. But that is a false dichotomy, he said. “We aresacrificing nature to save the climate, but destroyingstreams and forests undermines a stable and healthyclimate system,” Eken said. “The larger dam projectshad severe negative effects, but only on one river’scourse, making it a concentrated threat. The smallerhydropower project’s impact is much more expansive.”

In the haste to get so many small projects off theground, environmental-impact assessments have beensloppy, Eken said. Ecosystems and several key indige-nous species are under threat, especially in the TorosMountains of the Mediterranean, he said. His group esti-mates that 185 of Turkey’s 305 specially-determinedkey biodiversity areas, will be hit. “The length of riversystems in Turkey that will be converted to power plantsor dams is about 10,000 km, leaving very little room fornatural ecosystems,” according to a Do!a Derne!i report.Construction of dams, as well as polluted streams andlakes, have contributed to more than half of Turkish fishand lamprey species landing on the so-called Red List,which ranks species as critical in terms of the risk ofextinction, according to research by Germany’s StuttgartState Museum of Natural History. OWNERSHIP: Besides the damage to biodiversity, localactivists like Delal worry private firms could also exploitwater for profit, since the licenses to build the plantsgive effective ownership of water through a 50-yearlease on the portion of the river upon which the sta-tion is built. “It’s not just the streams. Our wells are dry-ing up because the plants draw off the water table,”Delal said. Others complain of the landscape beingdestroyed, including the felling of thousands of trees,in their surroundings by construction.

Poorly laid underground pipes have exploded underpressure, flooding farmland, newspapers reported. Ener-gy Minister Taner Yıldız blamed environmental damageon shoddy engineering. Hydropower is an effort “to bringTurkey’s natural, environmentally friendly resources on-line,” Yıldız said in January 2012. “At times builders haveoperated crudely without regard for the environment.I don’t support them. We need to invest with respectfor nature and the environment.”

For his part, Delal vows to continue his legal battleto stop the plant at Küçükcayır from ever opening. Hislawyer, Kazmaz, is providing his legal services pro bono,but Delal was still forced to sell his cow to pay expertwitness fees. “I would give everything for my land,” he said. “I don’t need money. I just want to go home.”

ENERGY INTERVIEW

Rövnag Abdullayev, President and CEO, SOCAR

How has SOCAR’s Trans-Anatolian Natural GasPipeline (TANAP) affected the competition to trans-port Azerbaijani natural gas to Europe? ABDULLAYEV: The way I see it, TANAP is not compet-ing with other projects in the region; it is just an alter-native to projects aimed at reducing the natural gasshortages in Turkey and the EU. The aim of this projectis to transport Azeri gas, produced in Shah Deniz II andother Azeri reservoirs, to Turkey and then to Europeby the end of 2017 at the latest. Azeri natural gas canand will be supplied to Europe along the most cost-efficient path, ensuring price competition and diver-sification of gas supplies for Europe.

This is a very important project for Azerbaijan, sincethe government regards the TANAP project to be equalin significance to the Baku-Tbilisi-Ceyhan (BTC) oilpipeline for Azerbaijan’s national development. Thegas pipeline, headed for South-east Europe, will markAzerbaijan’s emergence as a significant gas exporterin its own right, adding to the country’s role as a majoroil industry player in the region.

What is the outlook for gas production, especiallyfrom Shah Deniz II field, and how much of the newgas is going to be allocated for European end-users? ABDULLAYEV: The transit line’s capacity is projectedat 16bn cu metres annually in the first stage. Of thatamount, Turkey will be entitled to buy 6bn cu metresannually from Shah Deniz II during phase two of pro-duction (from 2017 onward). We expect to add sig-nificant gas volumes from other fields for export toEurope. TANAP will run from the Georgia-Turkey bor-der to the Turkey-Bulgaria border, and then connectwith another pipelines going into EU territory.

What potential do you see for the various South-ern Corridor projects to work in cooperation? ABDULLAYEV: Currently, there are many projects beingundertaken in the region, with both political and eco-nomic objectives. The Trans-Adriatic Pipeline is on its

way, and there are a number of new projects in the worksas well, with TANAP coming into the picture alongsideNabucco. However, it is important that countries andcompanies find common ground and work towardssolutions to achieve the goal of providing a reliable gassupply to Europe in the coming years.

As demand in Turkey rises, how likely is it that greaterquantities of gas will be reserved for Turkey? ABDULLAYEV: Azerbaijan is the most significant gassupplier within the Southern Gas Corridor at themoment. It is ready to transport approximately 10bncu metres of gas to Europe with TANAP, with fullcapacity expected to reach 16bn cu metres. Howev-er, there is a chance that this volume can be increased,offering the possibility to supply greater quantitiesof gas to additional countries, including Turkey. Therecently discovered Absheron and Umid gas fieldspresent just this opportunity. Furthermore, deep gasis expected to be obtained from the Azeri-Chirag-Guneshli block of fields in the future. In addition tothis, other sources of gas can be transported via Azer-baijan to Turkey and to Europe.

Turkey and Azerbaijan have had historically closeties. How important is this relationship for thefuture of petroleum projects in the region? ABDULLAYEV: The long history of mutual friendshipand bilateral relations between Azerbaijan and Turkeyis one of the main drivers behind the close coopera-tion in the energy field between two countries. Turk-ish companies have been actively involved in major oiland gas projects in Azerbaijan since the countryachieved independence. Hence, the biggest invest-ment plans of SOCAR are and will remain closely relat-ed to the Turkish oil, gas and petrochemicals sectors.

With the BTC and South Caucus Pipeline projects,SOCAR has built a solid foundation with a bright out-look for oil production in the country. We expect to con-tinue playing an active role in Turkey’s energy security.

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Regional cooperationOBG talks to Rövnag Abdullayev, President and CEO, SOCAR

ENERGY ANALYSIS

A major shift in focus to renewable power sources is taking place

The world’s first hybrid combined-cycle power plant,developed by General Electric and California-basedeSolar, will not be built in the US or Europe. Instead,MetCap Energy Investments is launching the ground-breaking !450m project in the central Turkishprovince of Karaman.

Revolutionary technology that combines naturalgas with wind and solar power will fire the 532-MWplant, playing a part in the Turkish government’s tar-get to generate 30% of electricity from renewableenergy by 2023. The bulk of that – 36,000 MW – isto come from hydropower, while 20,000 MW will befrom wind. The rest of the mix is 3000 MW solar, 600MW geothermal and 2000 MW biomass.

Turkey, the world’s 23rd highest carbon emitter,releases 2.8m tonnes of greenhouse gases each year.“Emissions in Turkey have almost doubled since 1990,”according to a 2010 European Environment Agency(EEA) report. “The increase has been driven by eco-nomic development, which resulted both in increas-ing energy demand and energy production.” ENERGY BILL: Besides environmental concerns, thegovernment is desperate to reduce its energy importbill, which is expected to hit $68bn in 2012, anincrease of about 25% from 2011, according to theInternational Energy Agency. Turkey imports morethan 90% of its natural gas, which fires about halfof its power plants. Using plenty of wind, solar andgeothermal makes economic sense.

Hydro potential is 433 terawatt hours (TWh),almost 1% of the world’s capacity, and wind capac-ity is seen at 120 GW. Turkey has biomass reservesof 32m tonnes of oil equivalent, and geothermalpotential has been estimated at 38 GW. The poten-tial solar thermal energy is estimated at 26.4m tonnesof oil equivalent, while solar photovoltaic (PV) hasthe potential for 8.8m tonnes of oil equivalent.

So far, that potential is not being tapped. Of thecountry’s 47 GW of total installed capacity, about20% comes from hydroelectricity, while only 1%

comes from other renewables, despite having theworld’s third-highest installed solar thermal capac-ity. “The support for renewables has varied depend-ing on the segment. Currently, hydropower is gar-nering the greatest support with the government’sfeed-in tariffs,” said Aygen Yayıko!lu, managing part-ner at private-equity firm Crescent Capital. GONE WITH THE WIND: However, the past five yearshave shown relatively strong growth in renewables,despite regulatory uncertainty and limited govern-ment support for the industry. As recently as 2006,for example, Turkey had only 50 MW of installedwind power capacity. Growing private sector inter-est increased this figure to 458 MW by 2008 and1329 MW by 2010. Still, delays in obtaining permitsheld back the industry.

In response to a 2007 call for applications, 751proposals for wind projects totalling 78 GW were sub-mitted in a single day. However, the overlappingnature of most of these applications required theEnergy Market Regulatory Agency to hold individualtenders in areas with more than one proposed proj-ect. This led to significant delays, with the first per-mit approval issued in May 2010, and setting the stagefor 66% growth in installed capacity that year.

At the same time, the government issued licenceswithout verifying whether the bidders could actu-ally pull off projects, said Ahmet Ümit Danı#man,CEO of Akenerji, which is part-owned by Czech util-ity CEZ and is one of Turkey’s largest private powerproducers. Renewables make up 46% of Akenerji’selectricity generation, and although only 2% is fromwind, the company purchased the output of PolatEnerji’s 128 MW of wind power in 2010.

“While the initial cost is high, over the long term,wind is a significantly more cost-effective optionthan natural gas,” said Zeki Eri#, CEO of Polat Ener-ji. “If the true cost, in terms of infrastructure, werecalculated into the cost per KWh of natural gas, thegrid-parity price for wind would look much more

In an effort to reduce itscarbon emissions andbecome less reliant onforeign oil and gas, Turkeywill be home to the firstpower plant to combinenatural gas with wind andsolar power.

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With its energy import billexpected to jump 25% in2012, the country aims todevelop renewable energysources domestically.Currently, less than aquarter of power comesfrom renewables.

Push for renewablesTurning to wind, sun and water to enhance energy security and protectthe environment

ENERGY ANALYSIS

appealing.” According to Eri#, the government couldboost investment in renewables by privatising BOTA"and phasing out natural gas subsidies, as well ascommitting to develop wind and solar energy.

The government has acted to provide financialsupport for renewables, but not nearly as stronglyas green power advocates would have hoped. Par-liament first passed legislation introducing feed-intariffs in 2004, but the incentives for renewables wereminimal. The price for energy generated by photo-voltaics and wind power was set at $0.07 per kWh,which significantly lagged European competitors.Moreover, the price was lower than that paid for nat-ural gas facilities, and renewable producers couldsometimes get better prices by negotiating direct-ly with power consumers and utilities. New tariffspassed in late 2011 will boost the rate to $0.13 perKWh for solar and waste-to-energy projects.

The price of hydroelectric power will be set at$0.105 per KWh, while wind will remain at the $0.073per KWh rate. Renewable power sources will also beprivileged in utility purchasing, and the state-rungrid is required to build the infrastructure to con-nect new power stations. The increase in prices inparticular should help the fledgling renewable indus-try, especially after European countries like Germanymoved to cut their tariffs to save money. Minister ofEnergy Taner Yıldız has said that government incen-tives and support will attract $30bn of investmentto build wind power capacity alone. However, manyin the industry are concerned that the tariffs are stilltoo low. Even after Turkey’s rate hike and Germany’scuts, Turkey’s tariffs are still lower.

At the same time, the new law may act as a stim-ulus of the local component manufacturing indus-try, as it guarantees up to $0.067 in tariff supportfor projects that use domestically sourced materi-als. This may help address the high cost of import-ing kit, which Danı#man identified as an obstacle tofurther adoption of green tech. “The manufactur-ing of equipment locally should be encouraged. Thisis a long-term business, and if the manufacturing basewere here, this would help to bring down the cur-rent-account deficit,” Danı#man told OBG.

The 365 residents of the village of Akbıyık in north-west Turkey think wind is a better deal. After powerto the village was cut off over an unpaid 33,000 TL(!14,025) electric bill for a vital reservoir pump, thecommunity decided to generate its own power andreceived state funding to build a wind mill that canproduce 50 KWh of power, Sabah newspaper report-ed. Soon Akbıyık will produce a surplus of wind vil-lagers plan to sell back to the government grid.HERE COMES SUNSHINE: Hydro power, and to a less-er extent wind, have a big head start, but a lack ofsupport has held back the Turkish solar industry inthe past. Solar thermal is a common method of heat-ing, with cheap rooftop systems a common sightaround Turkey. But photovoltaics have struggled togain traction, with just 1 MW of electricity-generat-ing solar systems installed. The 2011 revisions to

the Renewable Energy Law mark a pivot toward solar,finally establishing an above-market price for PVelectricity. The government estimates that invest-ments under the new law could total $2.8bn. How-ever, the decision to limit solar projects to 600 MWuntil 2013 has upset some in the private sector, whofeel that solar has even higher potential.

Private projects have filled the gap somewhat,with recent announcements such as the collabora-tion between Germany’s Gehrlicher Solar andTurkey’s Merk Solar Energy to produce solar powerin Turkey. 2011, meanwhile, saw US-Dutch solar com-pany GiraSolar declare its intention to build Europe’sbiggest photovoltaic power station in Turkey, pro-ducing 100 MW of power, according to Turkish dai-ly newspaper Hurriyet. GiraSolar also plans to makesolar panels for export to Europe.

At 8.2m sq metres, Turkey leads the world ininstalled solar panels. Domestic solar manufactur-ing is thriving, with around 100 companies produc-ing 750,000 square metres of panel per year, helpedby Chinese technology to now make cheap polysili-con, a key component of solar panels.GEOTHERMAL: Turkey is the fifth-richest countryin the world in geothermal energy potential. Its sup-ply of thermal energy trapped beneath the Earth’scrust could eventually produce some 800 MW ofpower and 22,000 MW of direct-use heating, Insid-eClimate reported. The government has tenderedthree geothermal fields for $95m and plans 29 more.

Turkey’s declared targets for alternative energy areambitious and may be elusive as the natural-gas sec-tor is liberalised and global gas prices fall. Moreover,despite recent regulatory changes, there is a sensethat the government’s commitment to promotingrenewables does not match its promises. But oppor-tunities for entrepreneurs are plentiful in the renew-ables market. Those who want to can take advan-tage of domestic manufacturing capabilities, cheaplabour costs and a country hungry for more power.

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The world’s first combined natural gas, wind and solar power plant is being built in central Turkey

Despite the government’sstated commitment todeveloping renewableenergy, incentives havebeen very limited so far.Still, the parliament haspassed legislation toprovide financial support tothe industry.

Turkey’s ambitious goals tomove away from importednatural gas and towardsrenewable energy may beeasier said than done, butthe country’s need formore energy andaffordable labour costsoffer many opportunities.

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IndustryThe automobile sector is the biggest exporterDomestic growth has boosted steel consumptionTextiles account for one-third of industrial jobsSpecial industrial zones provide incentivesThe government aims to produce more vehicles locally

INDUSTRY OVERVIEW

Industrial production increased by almost 9% in 2011

From Ottoman textiles to high-tech weapons systems,Turkey has a long history of industrial activity. The chal-lenge now is reducing the trade imbalance while main-taining impressive growth. Booming domestic demandand record exports increased industrial production inTurkey by almost 9% in 2011, powering economic growththat was second only to China among G20 nations.Productivity gains, proximity to affluent export marketsand government incentives to lure investment are alllifting manufacturing to new levels.

Growth could be hindered by stalling economies inEurope, Turkey’s main export destination. Another riskis the massive current-account deficit, which balloonedto about 10% of GDP in 2011, second only to the USdeficit in dollar terms. Such rapid industrial growthmeans Turkey must import more raw materials andintermediate goods to feed production. This has forcedthe central bank to take monetary measures to coolthe economy, which is likely to rein in growth for 2012.DRIVING GROWTH: Exports jumped 18% to $135bnin 2011, with the highest percentage of goods – worth$11.6bn – headed for Germany. Italy was Turkey’s nextbiggest market, taking $6.8bn. Iraq came third, buying$6.6bn of Turkish goods, followed by the UK, France andRussia. This growth trend continued in 2012, withexports climbing 8% to $12.6bn in March 2012 alone,according to the Turkish Exporters Assembly (T!M). “IfTurkey is to reach its export target of $500bn per yearby 2023, there needs to be 10% growth in exports year-on-year,” said Hüseyin Durmaz, chairman of machinerymaker Durmazlar Makina. “Turkish products are moreaffordable right now, due to the current devaluationof the Turkish lira. However, in order for Turkey to havestrong and healthy exports, it needs to focus on cre-ating a sustainable edge that is based on the compet-itiveness of its products,” Hakan Bayman, the generalmanager of tyre manufacturer BriSA, told OBG.

The biggest export sector was the automotive indus-try, at $1.91bn. Turkish carmakers have more thanquadrupled output since 2000 and have surpassed

Poland and the Czech Republic in manufacturing glob-al brands. Now Prime Minister Recep Tayyip Erdo!an iscalling for a Turkish brand, saying the country has theability and technology to do so (see analysis).

Production of cars and other vehicles rose 10% in2011 to 1.2m units, said the Automotive Manufactur-ers’ Association (OSD). Oyak Renault, a venture betweenthe French carmaker and the Turkish military pensionfund (OYAK), accounted for more than a quarter ofthat production. Tofa#, which is a joint venture betweenTurkey’s Koç Holding and Italy’s Fiat, and Ford Otosan,a venture of US-based Ford and Koç, were the second-and third-biggest manufacturers. PREPARING FOR GROWTH: Vehicle sales rose almost14% in 2011, reaching a record 910,867 units, includ-ing cars, light commercial vehicles and trucks, a rise of15% over 2010. But the bumper year of 2011 has beenfollowed by a rapid slowdown in production and salesin the first quarter of 2012 as demand at home andabroad has slipped. Car manufacturing fell 8%, whileexports were down 6% and domestic sales shrunk 26%,according to the OSD. “The central bank’s decisionsthat are restricting the volume of credit in order tocool the economy are negatively affecting the rate ofgrowth in automobile sales,” the association said in abulletin in April 2012. The OSD now “aims for 2012 tobe a year in preparation of rapid growth.”NEW INVESTMENTS: To that aim, planned investmentsinclude Ford Otosan’s !205m expenditure on a newplant in Gölcük, adjacent to its existing factory in Kocaeli,according to the government’s Investment Supportand Promotion Agency (ISPAT) in January 2012. Furtherinvestments in other new products worth an addition-al $1bn are also due to be made by 2014. The expand-ed capacity will raise Ford Otosan’s production to400,000 units from the current 320,000. Its cars areexported to more than 75 countries.

The Gölcük plant is scheduled to make a new lightcommercial vehicle (LCV) that is still on the drawingboard, but should enter production in early 2014. The

Exports increased by 18%in 2011, reaching $135bn,with the highestpercentage of goodsheaded to Germany,followed by Italy, Iraq, theUK, France and Russia.

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Gaining groundBuilding a global reputation for exporting high-quality products


INDUSTRY OVERVIEW

plant will also create 1500 new positions. Based on 2011statistics, Ford controls 15.6% of the market share inTurkey, its fourth-largest retail market in Europe. “Theoverall economy in Turkey is not deteriorating, but weare not anticipating much growth in the automotivesector because of increased costs to domestic buyers,in the form of new taxes, and limited growth in termsof export opportunities,” Ford Otosan’s general man-ager, Haydar Yenigün, told OBG.

Oyak Renault, Turkey’s largest carmaker by sales, willinvest $254m in 2012, Reuters reported its generalmanager, Tarık Tunalıo!lu, as saying in February 2012.Honda shares Ford and Renault’s confidence. Japan’sthird-largest carmaker recently spent $40m renovat-ing its Turkish plant as it gears up for increased exportsto North Africa. Honda has a 2012 production sched-ule of 25,000 of its popular Civic model, which it alreadyships to Egypt, Israel, Jordan, Poland and Russia, accord-ing to local media reports. German carmaker Volkswa-gen is considering starting up production of up to250,000 vehicles of one or more of its models, accord-ing to Hürriyet newspaper in February 2012.

French car group PSA, which owns Citroen and Peu-geot, is considering opening a plant in Turkey, ISPAT said.PSA already uses Turkish suppliers for LCV production,including Tofa# and automaker Karsan, which producethree models of LCV, and buys parts worth !90m a year.A new package of government incentives make Turkeyas attractive as Brazil, China and India, Marc Bergeretti,Peugeot’s chief in Turkey, told local newspaper Hürriyet.The government’s incentive package includes land allo-cation, measures to increase production capacity,enhance investment attractiveness, reduce labour costsand provide employee benefits assistance, accordingto the economy minister, Zafer Ça!layan.

Companies in the large auxiliary automotive indus-try are upbeat, even in the face of a slowdown. “Turkeyis building a proper middle class and this leads to high-er consumption, as well as higher-value consumption.People are buying lots of cars,” said Hakan Tiftik, pres-ident and CEO of Istanbul-based Kordsa Global, theworld’s top producer of the yarns used in tyre produc-tion. “Some 80% of the tyre market is replacements, soeven if the economy slows, we expect to see businessas people maintain their vehicles and buy new tyres.”REAL CHEMISTRY: Chemicals were the second-biggestexporting segment at $1.65bn in 2011, according toT!M. It is a diverse sector, active in 14 distinct productcategories. Petrochemicals, thermoplastics, fertiliser,organic and inorganic chemicals, pharmaceuticals, syn-thetic fibres, paints, soaps and detergents are the mainareas of production, according to the Turkish Chemi-cal Manufacturers Association.

Most firms are located in and around Istanbul, Izmir,Adana, Gaziantep and Ankara. The Turkish Union ofChambers of Industry and Exchanges (TOBB) said 83%of the 13,118 registered chemical companies are smalland medium-sized enterprises.

Combined capacity is 180m tonnes for the produc-tion of about 2600 chemicals, though actual output in2010 was 126m tonnes. The industry has developed

significantly in terms of quality, productivity and the envi-ronment and is in the process of adopting the EU’stechnical standards, increasing the sector’s exportpotential across the continent.

Turkey’s biggest petrochemicals maker Petkim alonehad 2011 exports of $834m, a rise of 57%, CEO HayatiÖztürk said in March 2012. Azerbaijan’s State Oil Com-pany, or SOCAR, controls 61% of it after buying out itsTurkish partner in late 2011 and the government’s 10%stake in March. SOCAR will invest $177m in 2012 toboost capacity and productivity at Petkim, which aimsto meet 40% of Turkey’s petrochemical needs from acurrent 25%, according to Dünya newspaper. Turkey nowimports about 75% of the petrochemicals it uses.

SOCAR is set to become Turkey’s biggest foreigninvestor as it spends $17bn over the next five years onthe construction of a gas pipeline and its upgrades atPetkim, SOCAR’s president, Rövnag Abdullayev, said inApril 2012. The investments include the constructionof a refinery at the Alia!a plant on the Aegean. Oilrefiner Tüpra#, Turkey’s biggest industrial company,operates some 85% of the country’s refining capacity.

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Several foreign carmakers have joint ventures with Turkish firms

Chemicals are the second-biggest export segment,with $1.65bn worth ofgoods being sent overseasin 2011 covering 14product categories.

Q1 total

Germany Iraq UK Italy France Russia US Spain KSA NL0.0

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Top 10 export markets, Q1 2012 ($ bn)

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INDUSTRY OVERVIEW

DRUGS: Pharmaceuticals account for about a tenth ofchemical production. Turkey meets 90% of its pharma-ceutical needs domestically and exports a significantamount of products as well. The Afyon Alcaloids facto-ry, for example, produces 20% of the morphine usedby the pharmaceuticals industry worldwide. Certainmedicines, including cancer drugs, vaccines and hor-mones, are generally imported.

The government buys 90% of drugs sold in Turkeythrough its national health service and uses the low-est prices in EU states to set a ceiling. This is part of anattempt to close a budget deficit by reining in healthcare costs; state spending on drugs is about $10bn ayear. The government has slashed prices 250 timessince 2004, according to the Chamber of Pharmacists.“Price pressure in the market is irrational, because ofthe limitations imposed by the government. Prices havebeen discounted 11%, on top of previous discounts in2010 of 32.5% on originals and 20.5% on originals withgenerics. This will have to change in 2012,” said #eb-nem Girgin, director of public affairs at Pfizer Turkey.

Other key segments in the domestic chemicals indus-try are fertilisers, with about 5.8m tonnes of annualcapacity; synthetic fibre production at 850,000 tonnesper year; detergent and soap capacity of 1.3m tonnesand 550,000 tonnes per year, respectively; and pro-duction of paints and coatings at 800,000 tonnes a year. Turkey has the largest soda factory in the MiddleEast with a total capacity of 750,000 tonnes per year.

GOING UP: The construction industry grew by 10.6%in the third quarter of 2011, earning TL16bn (!6.8bn),according to a report by the Turkish Contractors Asso-ciation. A thriving building industry requires large quan-tities of steel and copper. Steel production reached34.1m tonnes in 2011, a 17% increase on 2010 out-put, according to industry data. Turkey has knownreserves of 4m tonnes of copper, but that could morethan triple with Asya Mining’s discovery of a depositwith as much as 10m tonnes, the state-run AnatolianNews Agency reported in March 2012.

Cement is also key to industry, and Turkish produc-ers are running at almost full capacity. The country pro-duced 66m tonnes in 2011, of which some 15m tonneswere exported. Cement accounts for some 2% of totalexports, making Turkey the world’s fourth-largestexporter, according to the Turkish Cement Association.It predicts growth of 60% over the next 10 years.

However, cement exports dropped by 35% in 2011,Zeki Gürses, general manager of the Antalya Free TradeZone, told Hürriyet. Gürses attributed the decline to civ-il unrest in the Middle East, a region that buys almosthalf of Turkish cement. Some firms are looking to SouthAmerica and Russia to make up for the drop in exportsto those countries affected by the Arab Spring. Abouta quarter of Sabancı Holding’s subsidiaries’ cementexports went to Brazil, helping lift revenue by 22% in2011. Sabancı Holding sees 4.5% growth in cement onthe back of a 5-6% increase in the construction sector

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Cement producers arerunning at nearly fullcapacity, manufacturing66m tonnes of cement in2011. Of this, 15m tonneswere exported, makingTurkey the world’s fourth-largest exporter of cement.

INDUSTRY OVERVIEW

in 2012. This follows an 11% expansion to 56m tonnes,or 763 kg per capita, in 2011. EXPANDING: Akçansa and Çimsa, cement manufactur-ers owned by Sabancı Holding, which together controlabout 20% of the local market, are looking to expandoverseas by acquiring a company, probably in south-ern Europe or the Middle East, Mehmet Göçmen, headof Sabancı’s cement group, said in February. The com-panies could also acquire Turkish firms, he said. APPLIANCES: White goods also saw success in 2011,largely due to a housing boom, according to the Turk-ish White Goods Manufacturers’ Association(TÜRKBESD). Sales jumped 19.3% to a record 6.47m unitsin 2011. Other factors were easy credit and increasedconsumer confidence. Growth will likely slow to about7% in 2012 due to economic uncertainty in Europe andits effect on consumer confidence, as well as slowinghome sales, TÜRKBESD said. Koç-owned Arçelik, Europe’slargest appliance maker, still expects its sales to increaseby 20% in 2012 on higher exports. According to Nor-bert Klein, CEO of Bosch Siemens Home Appliances, realestate projects are a key demand driver. “The Turkishmarket is transitioning away from solo appliances, andthe uptake of built-in white goods is being driven bynew real estate developments,” he told OBG.ON THE DEFENSIVE: Defence exports have more thandoubled in the last five years, from $486.9m in 2006to more than $1bn in 2011, figures from the Under-secretariat for Defence Industries showed. The govern-ment has been actively promoting the sector througha number of diplomatic efforts, as showcased by Pres-ident Abdullah Gül’s trip to Indonesia in April 2011 tosign $400m defence agreement.

But domestic military equipment manufacturers havebeen quite successful on their own too. Despite frostydiplomatic relations with Israel, it remains a strong mil-itary trading partner. For example, boot maker Yakupo!luis still outfitting the Israeli Defence Force. Sales to theTurkish armed forces and foreign militaries rose by18% in 2010 to $2.7bn. The growth was mainly in elec-tronics, the aerospace sector and weapons, accord-ing to the Defence Industrial Manufacturers’ Associa-tion. Turkey is still a net importer of arms, but thegovernment wants to devise its own defence systemsto even out the balance. One such project is the devel-opment of a drone aircraft – the military deploys 200unmanned vehicles; another is an indigenous fighter jet.

FABRIC OF TURKEY: The third-largest source of exportrevenue in Turkey is the clothing trade, shipping $1.49bnworth of goods overseas. Textile production has a 500-year history in Turkey and was a staple of the Ottomaneconomy up until the empire’s end. Modernisation andcapacity upgrades in the industry spanned the TurkishRepublic’s first 40 years. With expanded cotton plant-ing in the 1960s, the industry came into its own, andin the 1980s, it boomed with the opening of foreigntrade. The peak was in the 1990s, when Turkey enteredthe Customs Union agreement with the EU.

Today, ready-to-wear clothing accounts for 11% ofall exports, about half of its share in the 1990s, accord-ing to the Ministry of Economy. Half of all exports goto the EU. Germany is the top importer of Turkish gar-ments, buying $3.8bn worth, followed by the UK at$2bn and Spain at $1.3bn, data from 2011 showed. Asfor textiles and related raw materials, Turkey ships$7.7bn worth of goods overseas; Russia is its biggestmarket, buying more than $1bn worth.

Proximity to European markets, a qualified work-force, liberal trade policies and the Customs Union havehelped make Turkey the world’s eighth-biggest textilemanufacturer, according to a report by the GeneralSecretariat of Istanbul Textile and Apparel ExporterAssociations. Most of Turkey’s 7500 textile manufac-turers are medium-scale, the trade group said. As forready-to-wear, there are more than 11,000 manufac-turers producing for export. This helped make Turkeythe world’s fourth-biggest clothing exporter in 2008,according to World Trade Organisation statistics.ABUNDANCE OF SUPPLIES: Domestic suppliers cov-er most of the industry’s raw materials needs. Turkeyis the world’s seventh-biggest cotton producer as wellas a major manufacturer of synthetic fibres. Textiles andclothing account for one-third of Turkey’s industrialemployment, according to the OECD.

Competition from ultra-low-cost producers in Cam-bodia, Laos and Vietnam has forced Turkey and otherwealthier textile-making countries to concede global

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There are 7500 textile manufacturers operating in the country

As the world’s seventh-biggest producer of cottonand a major manufacturerof synthetic fibres, textilesand clothing account forone-third of the country’sindustrial employment.

SOURCE: Istanbul Chamber of Industry

Top 10 private industrial firms by earnings (TL bn)

Tüprafl (refining) 20.82

Ford Otosan (automotive) 9.74

Oyak Renault (automotive) 5.87

Tofafl (automotive) 5.45

Arçelik (white goods and electronics) 5.1

Aygaz (gas) 3.99

Erdemir (steel) 3.72

Içdas (steel) 3.52

Iskenderun Demir (steel) 3.24

Habafl (gas) 2.83

INDUSTRY OVERVIEW

market share over the past decade or more. To remainrelevant, the industry should bolster high-end fashiondesign, Murat Yalçınta#, head of the Istanbul Chamberof Commerce, told an industry conference in 2010,“Turkey should become a trendsetter with its fashiondesigns and designers. We should have done this ear-lier, so as not to lose market share in the world.” Already,world-famous brands like Levi’s and Gap are made inTurkish factories under patent. Now Turkey’s own brandsare being distributed overseas, among them Mavi Jeans,Network and Vakko. VALUE-ADDED: This is part of a wider shift away fromlow-cost production to create value in industrial out-put and widen profit margins. “Our goal is to use tech-nology to develop a more efficient infrastructure inorder to bring Turkey to the top levels of the value-addedchain in industry,” the finance minister, Mehmet "im#ek,said at a conference in 2011. Expanding the benefitsof setting up shop in special investment zones is a partof the government’s incentives scheme announced inApril 2012. Turkey has three types of zones, the incen-tives of which include exemptions from taxes and labourcharges (see analysis). Turkey has 260 organised indus-trial zones, which provide infrastructure, including water,electricity and communications, to investors. STRATEGY: The government’s Industrial Strategy Doc-ument through 2014 pledges a policy framework fora long-term vision of Turkey as the regional productionbase for medium- and high-tech products, such asmotor, air and space vehicles, medical tools, electron-ics and pharmaceuticals. It aims to do so by increasingcompanies’ competitiveness and efficiency, boostingexports, shifting towards high-tech products, traininglabour and maintaining respect for the environmentand society, the document said. “In order to achievethese objectives, industrial strategy will have a criticalfunction,” the document said. “The manufacturing indus-try is meant to be the main sector leading the econom-ic growth in an outward-looking structure.”

Among the threats to this strategy that the docu-ment outlines is the country’s dependence on foreignfuel. The International Energy Agency estimates Turkey’senergy imports may jump 25% to $68bn in 2012. The

country must also import far too many intermediateproducts to power its industry, which has inflated thecurrent-account deficit to its current record levels, thetaming of which "im#ek has said is the government’stop priority. Turkish businesses tend to stay small to avoidstifling regulations, which prevents them from becom-ing adequate suppliers of components that larger com-panies find cheaper to import. Ça!layan said industry’sdependence on imports stood at 43% at the end of 2011. R&D: A lack of research and development (R&D) andinnovation could be another threat, the Industrial Strat-egy Document said. “While Turkey’s science and inno-vation indicators lag those of most OECD countries, therehas been some strong performance in recent years,”the OECD said in a report published in 2010. Grossexpenditure on R&D in 2008 was 0.73% of GDP, dou-bling since 1998, the OECD said. Industry paid for almosthalf of R&D in 2008, and the government financed32%, the OECD report said.

The R&D Law, introduced in 2008, has helped, intro-ducing incentives and support for investors involvedin R&D activities, including land allocations and taxincentives. The Scientific and Technological ResearchCouncil of Turkey and the Turkish Technology Develop-ment Foundation both offer incentives for R&D proj-ects as well. “The R&D Law was a good first step, but itis important for the government to expand the incen-tives to companies that cannot reach the minimumlevel of 50 R&D employees. Small firms have a greatdeal of innovation to offer, if supported correctly,”Steven Young, head of Bosch Turkey.

While a young population – half of the country isunder the age of 29 – provides ample labour, the gov-ernment’s document says workers lack the skills requiredfor a higher-tech transition. But productivity has beenrising since 2000, according to a paper by Harvard Pro-fessor Dani Rodrik. The rate of growth is between 3%and 3.5% of GDP per worker. “The post-2000 period looksuniformly good, irrespective of which measure of pro-ductivity growth we focus on,” Rodrik wrote.

Yet productivity gains have come at a price. It is onefactor behind Turkey’s unsatisfactory work safety record,according to experts cited by Hürriyet in April 2012. In2010, 1454 people died on the job, up 67% from 2002,the International Labour Organisation said. Every day,176 work accidents occur, three people die and fiveare crippled. Among other causes are increasing indus-trial output and high demand for workers, the transi-tion from labour-intensive to technology-intensive pro-duction, the widespread treatment of workers as justanother bit of machinery and a lack of education aboutsafety techniques, according to Hürriyet. The fast-grow-ing construction and steel industries, big contributorsto Turkey’s industrial output, are especially dangerous.OUTLOOK: For industry to power growth, the govern-ment will have to rein in inflation, restrict lending andreduce the trade imbalance – and attempt to keepindustrial expansion consistent at the same time. Theoutlook for growth will likely improve once the econom-ic situation in Europe stabilises. Until then, the sectorwill be dependent on the emerging local middle class.

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The government ispromoting value-addeddomestic production byproviding increasedincentives and specialinvestment zones.


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INDUSTRY INTERVIEW

Hüseyin Özdilek, President, Özdilek Holding

In January 2012 the Turkish Exporters Assemblyregistered a 10% year-on-year increase in exports,but textiles exports declined by 4.2% in the sameperiod. What are the factors behind this? ÖZD"LEK: The textiles sector is labour intensive, andbecause cotton can be speculated on the stock mar-ket its price rises artificially. Currently, the price ofcotton is distorted by speculation, which is natural-ly having an effect on supply and demand, and, ulti-mately, the production of finished goods. In addition,it is impossible for Turkish firms to compete with Chi-na and India in terms of labour costs. Turkey there-fore has to rely on its proximity to Europe and usethis logistical advantage to reduce costs. Overre-liance on the European market has had a negativeaffect, in light of the downturn there. However,Turkey has organisational, planning and design skillsand quality, which, combined with our advantageouslocation, means we can maintain a competitive edgeby shifting exports to other regional markets. Thereare also opportunities if the country becomes moreactive in the production of technical textiles, forinstance, those used in the medical industry.

Is there an ideal exchange basket for textilesproducers, and what challenges or opportunitieshave resulted from the lira’s devaluation?ÖZD"LEK: The value of money should depend onthe GNP of a nation. I am having a difficult timeunderstanding the volatile changes in the dollar andthe euro, because I don’t believe there have beencorresponding changes to GNP. For example, firmsthat go into debt in dollars and invest in euro canprofit or lose money due to the parity between thecurrencies, and because investments depend on fea-sibility we support investing with debt. However, theglobal crises are also affecting investments. Invest-ments in industry, services and agriculture will lendto the development of Turkey, as these lead to moreemployment, greater tax returns and higher GNP.

How worrisome are figures, such as the decreasein credit expansion, that seem to suggest an eco-nomic slowdown may be on the way?ÖZD"LEK: I do not agree with the concerns about aslowdown. Recently, investment in construction hasbeen rising as a result of migration to big cities, andlarge transport infrastructure projects are also underway. The level of education is much improved fromyears past, and access to the internet and informa-tion is much higher, with almost every household con-nected and mobile use surging. Even families wherethe parents had no opportunity of higher educationare competing to put their children into universities.People are aware of the importance of combiningtheoretical and practical education. In the past,young Turkish people who studied abroad oftenremained abroad for work, but increasingly, they arereturning to Turkey to start their own businesses,bringing renewed dynamism to the economy.

In terms of the expenses associated with produc-tion and inputs, what is the greatest challengefor players in the textiles sector? ÖZD"LEK: There are few challenges in this business– you find the customer and you sell the product.Producers need to work effectively to be competi-tive, providing reliable quality at a stable price. It isimportant to have a solid background and a cus-tomer portfolio that can be served sustainably. Therewill be no problems once that is accomplished,because there is supply and there is demand.

Turkey has a strategic location to work from anda steady and reliable source of human capital. Some30% of the population works in agriculture, but thisis set to decline to around 10%, just like in developedcountries. We cannot say that we will necessarily havea great deal more efficiency in agriculture produc-tion, but the country’s pool of employees will increaseas those who leave agricultural work migrate to thecities or into jobs in the industrial and service sectors.

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Standing strongOBG talks to Hüseyin Özdilek, President, Özdilek Holding

INDUSTRY INTERVIEW

Tuncay Özilhan, CEO, Anadolu Group

Is increased competition from foreign compa-nies, which are drawn by demographic growth,squeezing local manufacturers? ÖZ"LHAN: Over the past two decades, Turkey has expe-rienced two major economic transformations. First, itbecame part of the EU’s Customs Union, and second,following the 2001 financial crisis, Turkey transformeditself into a real market economy through IMF stand-by agreements. This opened the door to global com-petitors, and since 2003, the country has ushered in$90bn of foreign direct investment, while in 2011,annual foreign trade volumes reached $375bn.

During this period, the consumer goods segmentdeveloped and diversified on both the supply anddemand sides. Increased competition did not squeezelocal manufacturers; on the contrary, it empoweredthe domestic industry. Turkish firms adapted to thenew market reality of global competition, learned toproduce European-quality goods at competitive costs,and exploited the financial flows into Turkey and theincreased purchasing power of the nation’s consumerbase. At the same time, producers diversified indus-trial production in terms of both product segmentsand geographic location of production.

What is the main cause of Turkey’s current accountdeficit (CAD) and what is being done to offset it?ÖZ"LHAN: The country’s high energy needs anddependency on intermediate goods imports is caus-ing the deficit, which is hovering at around 10% ofGDP. The consumer goods segment also plays a smallpart. A lack of research and development, innova-tion and advanced technology in many sectors arethe principal reasons behind Turkey’s import depend-ency, however. Machinery imports alone in the pastfive years have amounted to $180bn.

There are challenges involved in the local produc-tion of currently imported goods because industriesmust increase their productivity through economiesof scale and innovation. But the market is large, and

therefore, localising production offers many opportu-nities. A new investment incentive package recentlyintroduced by the government should also encour-age Turkish firms to invest and produce goods thatcan be substituted for imports.

In the event of slowing economic growth, to whatextent can per capita income and demographictrends sustain consumer goods producers?ÖZ"LHAN: Turkey’s dynamic, fast growing economyand young population offers great opportunities for theretail market. The country was able to recover veryquickly from the global economic crisis in 2008; Turkeywas, in fact, extremely well positioned. Internal consump-tion potential is very high, and there are over 70m peo-ple – 60 % of them under 30-years-old – moving theTurkish economy to high consumption.

Macroeconomic and financial stabilisation of thepast decade has been accompanied by greater con-sumer access to financial markets. Household liabili-ties reached 17% of GDP in 2010, with total housingloans comprising 6.2% of GDP the same year. The num-ber of active credit cards has reached 51m, with a totalspending of TL188bn (!79.9bn). This financial expan-sion has been a major contributor to the rapid growthof private consumption. In 2011 sales growth in somesectors was fantastic – around 15%, with a GDP growthrate of 8.5%. Potential for expansion is still great, anda growth of 4% has been projected for the next threeyears. Turkish consumers’ tendency to spend moneyis also still high, despite the ongoing global crisis, andconsumer demand has not declined. The retail sectorgrew to TL300bn (!127.5bn) in 2011, and is expect-ed to reach around TL345bn (!146.63bn) in 2015.

In 2011 Turkey jumped eight spots in AT Kearney’sGlobal Retail Development Index to 10th place. Sucha leap could be evaluated as a sign of the economy’sconsumption potential. Under-penetration in manysectors and strong growth potential of per capita nation-al income can sustain private consumption growth.

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Local potentialOBG talks to Tuncay Özilhan, CEO, Anadolu Group


INDUSTRY ANALYSIS

Steel output reached 34.1m tonnes in 2011, up 17% year-on-year

Even as global steel output hit a new record, Turkeyclocked the world’s fastest growth in steel produc-tion in 2011. Now consumption worldwide is set todecrease due to continued economic strains inEurope and a slowdown in China. In spite of thesechallenges, however, Turkish steel should still seerobust growth in the coming years as domesticdemand remains strong.

Turkey ranked as Europe’s second- and the world’s10th-largest producer of steel in 2011, with outputhitting 34.1m tonnes, according to data from theWorld Steel Association – a year-on-year jump of 17%,far outstripping global growth of 6.8%. Capacity util-isation was nearly 80%, Veysel Yayan, head of the Turk-ish Iron and Steel Producers’ Association (DÇÜD),told a steel conference in November 2011.DOMESTIC DEMAND: Much of the demand has beenat home, as Turkey’s economy expanded more than8%. Consumption rose 10% to 375 kg per capita in2011 and could reach 380 kg in 2012 – 70% high-er than the global average, the Istanbul-based SteelExporters’ Association (C!B) said. Preliminary figuresfrom DÇÜD show total finished steel consumptionin Turkey probably climbed 15% to 27m tonnes, ofwhich long products accounted for 13m tonnes, a10% year-on-year rise. The trade group sees longproducts hitting 30m tonnes in 2012 and predictsflat steel will rise 15%, to 14m tonnes.

Exports remain the bigger business. Iron and steelhave become Turkey’s third-largest export sector,accounting for about 10% of all products shippedoverseas. Steel sold on international markets reached18.4m tonnes in 2011, generating revenue of$15.4bn, a 25% increase compared with 2010, accord-ing to the C!B. Neighbouring Iraq, which is rebuild-ing its oil and gas industry and other infrastructureafter decades of war and sanctions, is the biggestmarket for Turkish steel, buying 1.5m tonnes in 2011,a 24% year-on-year rise. The UAE and Italy follow-ed, with $1bn and $890m in purchases, respectively.

Those markets illustrate Turkey’s geographic advan-tage, having easy access to markets in the MiddleEast and North Africa. “Even without Europe, therecovery in places that underwent the Arab Spring,such as Libya, has created pent-up demand that willbe supportive, compensating for Europe,” said KorayPamir, a steel analyst at Finansinvest in Istanbul. Arabneighbours now developing their own industries willonly become competitive in the long term, thoughTurkish producers are already beginning to look atemerging markets in Africa and Latin America. CONVERSION: Turkey is the world’s leading manu-facturer of rebar, or reinforced bars. In fact, around75% of Turkish steel production is rebar and otherlong products, like wire rod and billet, used in con-struction, while just a quarter is flat steel products,used to make cars and white goods. With overcapac-ity in the global long steel market, Turkish produc-ers are switching their production facilities to makehigher-margin flat steel. Capacity for slab produc-tion is expected to hit 20m tonnes a year by 2015,according to the DÇÜD. Investment has also boost-ed melting production capacity to 45.5m tonnes atthe end of 2011, more than doubling since 2000. Afinal draft of the National Restructuring Plan, a blue-print for Turkey’s steel industry, was submitted to theEuropean Commission in 2010. This plan allows sub-sidies for steelmakers to convert facilities, whichshould help sustain steel production in the long term.

The steel industry meets most of its raw materialrequirements through imports. Turkey is now theworld’s biggest importer of scrap, a key ingredientin crude steel production. Overall scrap consump-tion rose 22% to 30.1m tonnes in 2011, the DÇÜDsaid. Even though the domestic supply rose 54% to9.33m tonnes, two-thirds of this as imported. Of the$12bn worth of raw material that Turkey imports tomake steel, $9bn is scrap, it said. In 2011, Turkish pro-ducers have complained about low quality and impu-rities in imports. Now the government is devising a

The economy expanded bymore than 8% in 2011, witha number of constructionand infrastructure projectsboosting per capita steelconsumption by 10%.

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Steel resolveProduction of steel remains strong with high domestic demand andnew export markets

INDUSTRY ANALYSIS

quality-certification process on sellers and tradersof imported steel scrap. INCENTIVE SCHEME: More critically, incentives toencourage greater local production of input mate-rials are planned. “Strategic investments are need-ed in the iron and steel sector, which accounts forone of the main trade imbalances. We are planningspecial incentives for this,” the economy minister,Zafer Ça!layan, said in December 2011. Though afinal law has yet to be passed, the incentives will aimto boost local production of scrap, coal, iron ore andferroalloy, the DÇÜD’s Yayan told SteelOrbis. He saidsuch mechanisms would not violate the EuropeanCoal and Steel Community (ECSC) Treaty, which Turkeyjoined in 1996. It bars direct aid to the steel indus-try. Instead, the government will target input supplyfor automotive and machinery production, whichwill boost overall steel consumption.

It is not surprising the government feels com-pelled to take such measures; it must redress a bal-looning current account deficit, which soared 64%to hit a record $77bn at the end of 2011, or one tenthof total economic output. “In order to address thecurrent account deficit, it is vital for Turkish busi-nesses to increase value-added and the margins onexported goods and services,” Erdal Karamercan, theCEO of Eczacıba#ı Group, told OBG. Iron and steel isthe nation’s third-most imported product. A boomin the construction of homes and businesses, mas-sive highway projects and industrial growth led byautomakers, shipbuilders and white goods produc-ers mean domestic steel production cannot coverdemand. In December 2011, Turkey imported $1.73bnof iron and steel, compared with exports of $1.08bn.

To help meet Turkey’s appetite for steel, foreigninvestment is lining up. Turkish steelmaker Tosyalı andJapan’s Toyo Koha, announced in February 2011, tomake steel in Osmaniye in southern Turkey. Koreansteelmaker Posco is building a stainless plant inKocaeli that will have annual capacity of 200,000

tonnes when it opens in 2013, according to Steel-Guru. Stainless steel is seen reaching 430,000 tonnesby 2015, still far below expected demand of 900,000tonnes. Turkey’s advantageous location may lureother investors, but the lack of plentiful iron ore andquality coal, used in blast-furnace systems, softensthe industry’s competitive edge.

Meanwhile, Turkish companies are looking toexpand overseas. Istanbul-based pipemaker BorusanMannesmann has said it wants to acquire a compa-ny in the Middle East. Karabük-based Kardemir, whichmakes ingot steel, won a 2011 tender to provide30,000 tonnes of rail to the Iraqi Republic Railwaysand a !27m contract in 2012 with the Turkish Repub-lic Railways to supply 41,500 tonnes of rail. Kardemir’srail and beam-rolling mill has a capacity of 450,000tonnes a year. Net income in 2011 soared 780% toTL185m (!78.6m) on sales of TL1.59bn (!676m),according to a company financial statement. MAIN STEELMAKER: Turkey’s biggest steelmakeris the formerly state-run Erdemir, which is now con-trolled by OYAK, the Turkish military’s pension fund.About 47% is publicly traded, and 60% of those sharesare foreign-owned. The company posted a 31% risein profit to TL1.01bn (!429m) in 2011 on sales ofTL8.92bn (!3.79bn), its balance sheet showed.

Erdemir now has capacity to produce 4m tonnesof crude steel and 5m tonnes of finished product ayear, according to its annual report. Hot rolled flatproducts account for 71% of the company’s prod-uct mix. It controls a quarter of the local market andowns 80% of Turkish iron ore reserves. However,increased capacity has dented some of that domi-nance. “Erdemir has enjoyed a premium on pricesbecause of its dominance in the flat-steel market.With rising capacity, we are seeing more competi-tion in the domestic market and a trend towardslower prices,” Pamir said.NEW INVESMENTS: Recent private-sector invest-ments include the world’s largest electric arc fur-nace, owned by Çolako!lu Metalurji, which it uses toproduce flat-steel products from scrap at its Kocaeliplant. Bursa-based Borçelik Çelik is boosting capac-ity at its cold-rolling mill, including a new reversingmill and galvanising line, to raise output nearly 80%to 1.6m tonnes a year, according to the C!B.

As global steel consumption falters because ofthe slowdown in Europe and China, a strong domes-tic market will continue to fire the Turkish industry.Turkish production will likely increase by 10% in 2012,thanks to the construction boom. On the globalfront, Arab countries rebuilding after revolutionagainst decades of economic and political stagna-tion will also spur growth. The silver lining in Europeis that fiscally ailing nations are likely to rely moreon lower-cost imports from Turkey. ArcelorMittal isidling a number of its European plants, creating anopening for Turkish steel. In the last 20 years, West-ern Europe ceded about a third of production toother regions. Now Turkey is set to take the lead andmay eventually become Europe’s biggest producer.

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A number of incentives are in the works to increase domestic production of steel and iron

Foreign companies arebeginning to invest in thesteel segment, with manyplanning to establishproduction facilitiesthroughout the country.


INDUSTRY INTERVIEW

Muharrem Dörtka$lı, President and CEO, Turkish AerospaceIndustries (TAI)

How is the defence industry tailored to addressnational security concerns?DÖRTKA#LI: Turkey shares borders with eight coun-tries and has coastal borders extending some 7200 km.Externally, Turkey is maintaining relationships all overthe world, and homeland security and national defenceare closely related with our neighbours’ political sta-tus. Meanwhile internally, Turkey has suffered fromdecades of terrorism and ethnic conflict. Thus, thedefence industry has to provide conventional andunconventional solutions for various challenges.

Given the multinational and variable milieu in whichTurkey exists, the defence industry has forged many part-nerships. The political and economic relations Turkeymaintains with the US, EU, Middle East and North Africaare key strategic factors for ensuring peace, defenceprocurement and exports. However, the country hasincreasingly sought independence in the production ofcritical defence equipment.

What could boost the proportion of domesticdefence manufacturing? DÖRTKA#LI: The Undersecretariat for Defence Indus-tries (SSM) is working to harmonise the strategies forthe private sector, procurement, technology manage-ment and defence exports. The share of domestic pro-duction varies widely among the different armed forces.Between 80% and 90% of production for land and navalforces is in Turkey, whereas aviation and aircraft enginessee the lowest percentage of domestic production.

To increase self-sufficiency and the domestic addedvalue, key technologies are a priority along with the Turk-ish Armed Forces’ requirements and procurement plans.At this point, Turkey manufactures a variety of defenceplatforms, however, the manufacturing of electronicsand components for key subsystems still needs greaterattention. Important investment areas includeautonomous command and control, advanced mate-rials, aerospace, energy and propulsion and sensors,among others. Currently, much of the required tech-

nology in these areas is obtained via procurement orthrough development partnerships. The ultimate goalis for Turkish manufacturers to create these products.

How does the government ensure that spendingon defence is directed to local firms? DÖRTKA#LI: SSM’s procurement models are struc-tured according to the strategic plan and sector strate-gies. Priority is given to in-house development, in orderto enrich the product portfolio and to increase theinternational market share. SSM is also encouragingindigenous design and development for the criticaltechnologies discussed above.

The second priority is given to the international con-sortiums – joint developments in the cases where adomestic project is not cost-effective. Partnershipswith international consortiums are evaluated with risksharing models, but on the whole these are seen as amajor tool for increasing collaboration with internation-al markets. When the first and second approaches arenot achievable, co-production is preferred and priori-ty is given to a local industry player. The last approachis direct procurement, with a prerequisite that localcontent and export opportunities for domestic indus-try – via offset tools and direct contracting with theoriginal equipment manufacturer – be made available.

To what extent are the products of defence-indus-try manufacturing applicable to civilian uses?DÖRTKA#LI: Goods and technologies are considered“dual-use” when they can be used for both civil and mil-itary purposes. Military technologies are always theleading technologies for strengthening the scientificand technological basis of national industry. Within thehealth, energy and transportation sectors, whereexpenses are in the billions of dollars, it has been veryimportant to use resources in the most effective way.For the aviation sector in particular, TAI’s produc-tion capabilities are covering design-development and manufacturing for both military and civilian aircraft.

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Domestic productionOBG talks to Muharrem Dörtka#l›, President and CEO, Turkish AerospaceIndustries (TAI)

INDUSTRY ANALYSIS

The automotive sector is dominated by five foreign-local JVs

With production expanding, heightened foreign inter-est and a new push to build a domestic car brand,the automotive sector in Turkey is currently experi-encing a surge in output. This comes as the coun-try has established itself as a natural base for sup-plying both European and Middle Eastern markets,with the sector’s contributions to exports being ofmajor importance to the economy as a whole.

At the same time, economic growth, credit expan-sion and an improving transport infrastructure –combined with a growing young population – havealso made Turkey’s domestic market a significantadvantage for the companies now based there. Theyear ahead is thus likely to bring some major newforeign investments, as well as some significant stepstoward the development of local automotive prod-ucts and services, including more locally basedresearch and development (R&D) projects.PLAYERS AND PEDIGREES: Automotive productionunder licence has been present in Turkey since the1950s, with Ford, Renault and Fiat being the longest-standing international players. Each of these firmshas formed a joint venture with local investors: FordOtosan, which mainly produces light commercialvehicles; Oyak-Renault, which makes passenger cars;and Tofa#, a partnership of Fiat and Koç Holding pro-ducing passenger cars and light commercial vehicles(LCVs). Toyota produces passenger vehicles in thecountry, while a fifth manufacturer, Hyundai Assan– a joint venture between Hyundai and Kibar Hold-ing – has also gained ground recently.

These five joint ventures were responsible for 93%of all vehicles (excluding tractors) manufactured inTurkey during the first two months of 2012, accord-ing to data from the Turkish Automotive Manufac-turers Association (OSD). With regard to the totalnumber of units produced, Oyak-Renault manufac-tured 30.8% of the 178,918 vehicles produced inthat period, followed by Ford Otosan (25.9%), Tofa#,(20.21%), Toyota (8.27%) and Hyundai Assan (7.9%).

SMALLER FIRMS: The remaining 7% of output wasdivided between eight other manufacturers: pas-senger car producer Honda Türkiye; pick-up, truckand minibus producer Karsan; truck and bus manu-facturer Mercedes-Benz Türk; pick-up, bus andmidibus manufacturer Temsa Global; truck, pick-upand midibus producer Anadolu Isuzu; truck, bus andmidibus producer BMC; pick-up, bus, mini and midibusmanufacturer Otokar; and bus producer MAN Türkiye.

In terms of vehicle types, the “big five” also dom-inate each variety. Some 57% of the 96,540 passen-ger vehicles produced in the first two months of2012 were made by Oyak-Renault, while Ford Oto-san manufactured 57.8% of the 72,443 pick-ups.Tofa# took a further 38.6% of the latter market. Toy-ota and Hyundai, meanwhile, took 15.3% and 14.8%shares of the passenger car market, respectively. TRUCK MARKET: Where smaller manufacturers dodominate is in trucks, buses and midibuses. In thetruck market, Mercedes-Benz Türk produced 55.8%of the 4534 trucks manufactured during the two-month period, and 42% of the 882 buses. In the lat-ter market, MAN Türkiye produced a further 29%. Allthe 514 midibuses produced were attributed tosmaller manufacturers, with A. Isuzu taking thelargest share, at 43.4%, and Otokar at 34.4%.

According to Wolf Dieter Kurz, CEO of Mercedes-Benz Turkey, buses are a particular growth segment.“Coach-style buses are in very high demand. Peoplein Turkey are active travellers, and this is drivinggreater demand for coaches,” he told OBG.

Looked at on an annual basis, the sector’s totalproduction has been increasing steadily over thelast few years. In 2009 production stood at 869,605vehicles, according to the OSD. This rose to 1.09min 2010 and 1.19m in 2011. However, the first twomonths of 2012 saw a decline of 6.3% year-on-year.The main reason for this, according to the OSD, wasa decline in domestic retail sales, which went down31.8% year-on-year, and factory sales, which declined

Joint ventures formedbetween Turkish companiesand international firmsaccount for most of thepassenger vehicles, whiledomestic companiesproduce more trucks andmidibuses.

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A driving forceAutomobile production has been increasing steadily


INDUSTRY ANALYSIS

33.8%, due to central bank measures to curb creditand loan growth, alongside a weaker Turkish lira.These factors contributed to unusually weak per-formance in passenger car and pick-up sales, withmanufacturers having trimmed output accordingly.

Nonetheless, the long-term picture continues tobe one of expansion. Indeed, Ford Otosan plans toroll out a new LCV in early 2014, with around !205mof investment in its plants in Turkey, while Toyota plansto build the new Corolla saloon car at its plant inSakarya on the Black Sea coast, investing up to!150m, with production set to start in 2013. Tofa#,meanwhile, intends to sell its Doblo van model underUS firm Chrysler’s Ram brand in the US starting in2013, following a $160m investment.

Indeed, the strength of the sector is partly due toits overseas links, with exports making up a major,if declining, share of total sales. Exports accountedfor 628,970 units in 2009, rising to 754,469 in 2010and 790,966 in 2011. Domestic retail sales alsoincreased from 575,869 units in 2009 to 793,172 in2010 and 910,867 in 2011. Passenger vehicles makeup the largest share of exports, accounting for 55.9%in 2011, although this has declined from 61.8% in2009 and 58.3% in 2010. Among the commercialvehicles that comprise the rest of the export total,pick-ups take the largest share, accounting for 42.9%in 2011, up from 40.7% in 2010 and 36.8% in 2009.

The export market is also dominated by three out-fits – Oyak-Renault, which accounted for 35% oftotal exports in 2009, 30.8% in 2010 and 28.4% in2011; Ford Otosan, which took 20.4% in 2009, 23.3%in 2010 and 26.7% in 2011; and Tofa#, which took26.8% in 2009, 25.7% in 2010 and 22.8% in 2011.

In the first 11 months of 2011, the sector gener-ated $18.6bn worth of export revenue, accountingfor a 15.3% stake of the country’s total exports,according to the Turkish Exporters Assembly. Themain destination for these exports has long been theEU, with around 50% heading there in 2011, accord-ing to the Automotive Industry Exporters Union. GETTING IN THE HARVEST: With agriculture still amajor contributor, tractor manufacture is a signifi-cant local industry. Indeed, in 2011, Turkey becamethe fourth-largest tractor market in the world, afterrecord harvests, strong economic growth and a majorhike in agricultural loan subsidies by the state agri-cultural bank. Dominating this segment is Türk Trak-tor, a partnership between Koç Holding and CNHGlobal NV, which took 51% of the domestic marketin the first 11 months of 2011, selling around 28,000units. Around half its output is also exported.SUPPORTING INDUSTRIES: The automotive sectoris underpinned by a variety of local suppliers. In tyremanufacturing, BriSA, Pirelli, Goodyear and Petlasdominate, all producing in Turkey and accounting for60% of the local market between them, accordingto BriSA. Importers include Michelin and Hancock.

The first of the locally based outfits, BriSA, is a jointventure between Bridgestone and the Sabancı Group,and is Turkey’s leading manufacturer and the sixth-

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Passenger vehicles account for 55.9% of exports, while commercial vehicles make up the rest

In recent years, thegovernment hasannounced plans for anincentive scheme topromote domestic designand manufacturing ofvehicles and parts.

largest in Europe. Petlas, meanwhile, started out astate tyre manufacturer, was privatised and now isowned by the Abdulkadir Özcan Group, which alsomanufactures tyres for the Turkish Air Force.

Replacement tyres are the most profitable segmentfor the sector. The devaluation of the Turkish lira in2011 also led to a jump in export demand fromEurope in particular, with downturn-hit Europeansgoing for cheaper Turkish products. This has alsomade up for recent declines in exports to the Mid-dle East and North Africa due to the Arab Spring.

Another key local outfit is KordSA, a Sabancı firmthat manufactures tyre reinforcement and mechan-ical rubber, key ingredients for tyres and other autoparts. Some 90% of its output goes to tyre manu-facturers, producing the kind of supply chain thatthe government would now like to see elsewhere.NATIONAL CARS: Indeed, recent months have seenthe government come forward with a major push tomanufacture vehicles domestically, using entirelylocally produced parts. Behind this initiative lies along-term strategy to reduce Turkey’s perennial cur-rent account deficit problems, which partly stemfrom the country’s dependence on imports for manyitems. The automotive sector imports many of itsmaterials, with a deficit having appeared in 2010-11 as exports of finished products to Europe declined,while the price of imported parts continued to rise.

The government thus announced in April 2012 anincentive scheme to benefit the automotive sector,with full details to be announced. This dovetails withexisting incentives to help R&D in particular. Indeed,Turkey has been a growing R&D centre in automo-tives in recent years, given cheaper labour costs andthe availability of qualified engineers and scientists.

The future thus looks to be one increasingly dom-inated by local production. The domestic market willlikely start leaning toward Turkish-designed and -pro-duced cars. At the same time, exports will remainkey, with a more diversified export market the goal.

INDUSTRY ANALYSIS

Special zones offer one-stop-shop solutions for new companies

With economic activity in Turkey traditionally centredon the north-western provinces around Istanbul, alongwith the Izmir and Ankara urban areas, successive gov-ernments have attempted to incentivise businesses toestablish themselves in other, less-developed regions.

Since the 1960s, a key part of this strategy has beenthe creation of a variety of different classes of indus-trial zone. These aim to create a fairer spread of wealtharound the country, while also, more recently, to encour-age particular industries, with dedicated parks offer-ing more tailored packages to investors.

The industrial zone strategy also offers economiesof scale, reducing infrastructure costs as firms becomeclustered and thus able to share transport and utilities.This grouping into zones also aims to reduce the indus-trial footprint on the environment, while it also offersa one-stop-shop solution, with the zone administrationoffering the whole range of licences and permits underone roof. Over the last few years in particular, this strat-egy has led to strong growth in the numbers of suchzones, as well as in the variety of their locations. Now,as Turkey seeks to boost its value-added industries andencourage much more local production, these zonesseem set for further expansion.VARIETIES AND NUMBERS: Turkey currently has threemain categories of industrial parks, often referred toas special investment zones. The first and most com-mon of these is the organised industrial zone (OIZ). Firstdistinguished in 2000 by a law that was modified in 2009,these come under the regulatory oversight of the Direc-torate General of Industrial Zones, located within theMinistry of Science, Industry and Technology (knownas the Ministry of Industry and Trade until June 2011).

Some 263 OIZs are currently licensed, with 148 inoperation, according to the Prime Ministry’s Invest-ment Support and Promotion Agency. The OIZs can befound in 80 provinces across the country.

These zones offer businesses zero value-added taxon land purchases; exemption from real estate duty onplants for the five years following construction; exemp-

There are three types ofzones, offering differentincentives regarding taxes,real estate duties, utilitiescharges, R&D initiativesand other criteria.

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In the zoneIndustrial parks provide incentives for local and foreign investors alike


tions from municipal construction and usage taxes; notax on unification or separation of plots; and lower util-ities charges. These benefits are in addition to any oth-er incentives offered as part of investment promotion.The directorate-general also oversees a number ofsmall-scale industrial estates aimed at helping small andmedium-sized enterprises in a similar fashion.TDZS: A second variety of park is the technology devel-opment zone (TDZ). These naturally aim to provide focalpoints for high-tech industries and research and devel-opment (R&D), with such clusters allowing positiveinteractions between researchers and businesses. Thereare currently a total of 39 licensed TDZs, with 27 in oper-ation. They tend to be close to existing industrial cen-tres, with six in Ankara province, five in Istanbul and threein neighbouring Kocaeli (Izmit).

Firms locating in TDZs benefit from zero income andcorporate taxes on revenue derived from R&D and soft-ware development activity until the end of 2023. Salesof apps developed in the TDZs are also VAT-exempt forthe same period, while salaries of R&D and support per-sonnel employed by companies in the zones are alsotax-free. If a discovery in such a zone reaches the pro-duction stage, this too can be undertaken in the zone.FREE ZONES: The third variety of park is the free zone(FZ). These are aimed at export industries, as they allowexemption from Customs duties, corporate tax andVAT, zero income tax for employees – provided at least85% of production is exported – and free repatriationof profits. There are currently 20 licensed FZs, with 19in operation. They are typically located close to bordersor port areas, giving access to international trade routes.

The industrial zone strategy is not without its chal-lenges. Businesses often stress that such areas also needto be provided with good access to markets, in termsof a better general transport infrastructure. This affectszones located in some of the less-developed areas. Yet the successful growth of the zones is also often now cited as a model for future partnership between government agencies and private sector businesses.

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Construction & Real EstateGrowing population requires additional homesReplacing older structures as part of urban renewalMajor infrastructure projects planned and under wayLower interest rates boost mortgage marketNew law makes it easier for foreigners to buy property

CONSTRUCTION OVERVIEW

The sector bounced back in 2010 with annual growth of 17%

With strong year-end results both in 2010 and 2011,Turkey’s construction sector emerged from the 2008-09 financial crisis in relatively good shape. A project-ed slowdown in the local economy due to Europeansovereign debt woes means the double-digit growthis unlikely to be repeated in the near term, but theunderlying fundamentals look strong.

Turkey is a growing country, with steady migrationfrom rural provinces to large cities, and a burgeoningmiddle class. This has created demand for both afford-able housing as well as an expanding luxury sector,while a growing role in the international business are-na has created demand for office buildings. Firms areparticularly interested in the plans to replace a major-ity of Istanbul’s building stock because of concernsover the threat posed by earthquakes.

Moreover, the country’s infrastructural deficien-cies provide significant opportunities. Many of Turkey’sconstruction companies have experienced huge suc-cess overseas, particularly in the Middle East andNorth Africa and Commonwealth of IndependentStates regions, but even some of these giants arebeing lured back into the domestic market by theinfrastructure contracts now being drawn up.PUBLIC PLAYERS: There are possible obstacles tothe growth of each of the industry’s subsectors. Forexample, in Istanbul the potential for major urbanregeneration projects will depend on key governmentplayers, particularly the Housing Development Admin-istration (TOK$). While TOK$does partner with the pri-vate sector, its policies are not always clear, and thereis considerable confusion about the master plan forrebuilding Istanbul. This regulatory uncertainty extendsto infrastructure projects. In January 2012, for exam-ple, the tender for a third Bosphorus bridge was metwith deafening silence, as none of the prequalifiedcandidates submitted a bid. The proposed culpritswere numerous – a dearth of financing, an unneces-sarily large project and insufficient details from thegovernment. What was clear was that despite great

investor interest in the overall project, there was a gapin communication between public and private sectors.

Private sector participants say that a collaborativeapproach to the construction industry is necessary,whereby the government establishes clear plans andthen invites construction firms to design and imple-ment them. With construction providing employmentfor about 7.5% of the country’s workforce, Turkey can-not afford to let uncertainty and hesitation snag itsambitious development plans.BY THE NUMBERS: In contrast to the slowdown inconstruction and real estate markets in the devel-oped world, the Turkish sector emerged from the2008-09 crisis with two years of double-digit expan-sion. Following contractions of 8.2% and 16.2% in2008 and 2009, respectively, the industry bouncedback with 17% growth in 2010, followed by annu-alised expansion of 12.7% over the first three quar-ters of 2011, according to data from TurkStat. Thetrend, however, has been decelerating steadily froma high point of 22.1% in the third quarter of 2010,reaching 10.6% a year later. Looking ahead, ISI Emerg-ing Markets, a market research outfit, has projected7.2% growth for the sector in 2012.

Expenditures tell a similar story. Total constructionsector spending reached TL30.4bn (!12.9bn) in thethird quarter of 2011, down slightly from TL31.1bn(!13.2bn) in the second quarter. This put third quar-ter growth, year-on-year (y-o-y), at just north of 32%,a touch higher than the previous quarter’s 29.2%expansion. While this is likely a lagging indicator thatwill slow during 2012 as the market cools off, a clos-er look at the figures reveals a moderate shift fromprivate to public spending. Private expenditure onconstruction in the third quarter 2011 amounted toTL17.9bn (!7.6bn), in comparison to TL12.5bn (!5.3bn)in government spending. But the latter figure rosesteadily during the preceding two quarters, from a2010 quarterly average of TL9bn (!3.8bn). With thegovernment focusing on a raft of new infrastructure

In the third quarter of2011, constructionspending exhibited y-o-ygrowth of more than 32%,beating the 29.2% achievedin the previous quarter.

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Planned developmentUrban renewal programmes plus major infrastructure projects equal significant opportunities for investment



projects – rail, roads, bridges and more – public spend-ing may be able to provide a countercyclical boost dur-ing a soft period of growth.

Public sector spending will also preserve jobs in anindustry that is an increasingly important employ-ment provider. The construction sector employed1.89m workers in the third quarter of 2011, a recordfigure. This accounted for 7.6% of total employment,also an unprecedented share. Having added 625,000jobs since the first quarter of 2010, the sector hasplayed an important part in bringing Turkey’s unem-ployment rate down from 13.7% to 8.8%.

Finally, a further headwind that the industry will facein 2012 is the steady increase in construction costssince the end of the economic crisis. According to theconstruction cost index compiled by TurkStat, residen-tial construction costs increased 5.7% during the thirdquarter of 2011, and nearly 14.4% y-o-y. The increaseincluded both labour and material costs, with inputslike steel and cement the primary causes.STARTING OVER: The government is behind twomajor initiatives that should drive growth in the con-struction sector over the next 10 years. The first is anurban renewal plan, inspired by the twin challengesof poor urban areas and unsafe building practices incities across Turkey. The past four decades have seenmassive migration from rural to urban areas, partic-ularly the “big three” of Istanbul, Ankara and Izmir. Newarrivals, mostly from central and south-eastern Ana-tolia, have clustered in cheap housing in these cities,driving Istanbul’s population, for example, above 14m.The name gecekondu, roughly translated as “builtovernight,” has come to describe the low-quality, large-ly illegal housing that has sprung up in these areas.Although the cities offer jobs often not available inthe countryside, many migrants have found it diffi-cult to cope with the cost of living, transport difficul-ties and crowdedness of urban life.

The economic and social conditions experiencedby Turkey’s urban poor are compounded by anotherdanger, namely the threat of earthquakes. With twomajor seismic zones – the North Anatolian and EastAnatolian fault lines – Turkey has experienced sevenearthquakes of magnitude 7.0 or higher since 1939.The most recent quake struck in October 2011 in thecity of Van, killing nearly 600, following a 1999 earth-quake in Izmit that led to more than 17,000 deaths.Given seismologists’ warnings that the next disastercould hit Istanbul itself, and within the next 20 years,government officials are taking the threat very seri-ously. Indeed, on October 28, 2011, Turkish PrimeMinister Recep Tayyip Erdo!an announced, “We willdemolish all illegal buildings and will rebuild them.”Statistics for illegal construction are scarce, but it isestimated that roughly half of Turkey’s 19m buildingsare illegal. Renewing them will be a massive under-taking for the government, but it also offers signifi-cant opportunities to construction companies.

The details of the government’s plans for earth-quake-proofing Istanbul are emerging. Erdo!an Bayrak-tar, the minister of environment and urban planning,

announced in March 2012 that the first renewal proj-ects would begin with four districts in Istanbul, withgroundbreaking slated for April or May. The districtsof Zeytinburnu and Avcılar, on the city’s Europeanside, and Ümraniye and Pendik on the Anatolian side,have been highlighted for their vulnerability to earth-quakes. Municipalities wishing to take part in therenewal project must submit reports to the ministry,and as of March 2012, 110 districts had done so.

The campaign depends on a law that was makingits way through parliament in March 2012, havingbeen approved in sub-committee. According to HakanYener, coordinator at the Urban Land Institute Turkey,the new law would make it easier for private devel-opers to negotiate with residents of unsafe buildings.

Yener told OBG that the threshold required fordevelopers to evict the residents of a building andknock it down would be lowered to two-thirds, where-as previously even one person’s refusal could negatethe redevelopment project. If the remaining one-thirdcannot find affordable housing after being evicted,the government would step in with financial help.

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The sector employed 1.89m workers in the third quarter of 2011

The government hasproposed an urban renewalplan, inspired by the twinchallenges of poor urbanareas and unsafe buildingpractices in cities acrossTurkey. This should presentsignificant opportunities inthe construction sector.

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Beyond Istanbul, the provinces shortlisted for trans-formation, according to Bayraktar, include Balıkesir,Bursa, Izmir, Aydın, Burdur, Mersin, Eski#ehir, Adıya-man, Giresun, Erzincan, Bitlis and Diyarbakır. The esti-mated cost of these projects will be substantial:$400bn for the whole country, with Istanbul account-ing for $100bn of this total figure. OUT WITH THE OLD: Urban renewal of a different sort,meanwhile, is already proceeding. Under Law 5366(“Law for the Protection of Deteriorated Historic andCultural Heritage through Renewal and Re-use”), pri-vate developers can bid to demolish and replace dilap-idated neighbourhoods in historic areas of Istanbul.Renewal has already commenced in two districts: Tar-laba#›, in the Taksim district, and Sulukule in Fatih.These areas, which are mainly poor and inhabited bymarginalised peoples, are being razed and replacedby mixed-use developments that will incorporatehotels, shopping centres and luxury residential units.

These major transformations of the city’s built envi-ronment are not proceeding without controversy.Considerable attention is being paid to TOK$, which isresponsible for overseeing most urban renewal proj-ects, including finding new housing for displaced res-idents. Critics of the plans say that the relocationoptions being offered are located in peripheral areasof the city, sometimes two hours’ commute from thecentral districts. Moreover, even at the reduced pricesoffered to residents, many of them cannot afford therents being charged in these apartments.

In addition, developers and construction companiesare concerned that the process of urban renewalitself may be a bumpy one, due to confusion betweenthe public and private sectors. According to Yener ofthe Urban Land Institute Turkey, the lack of a masterplan for Istanbul means that entrepreneurs are rede-veloping some regions without including adequatesocial facilities, such as parks and sports areas. More-over, zoning and permitting difficulties make involve-ment in renewal programmes quite risky, given that

developments can be cancelled well into the planningstages of a project, according to Yener.CONNECTING THE DOTS: While contractors thatfocus on residential and commercial development areexcited by the prospect of urban renewal opportuni-ties, industrial and infrastructure companies are look-ing at the major transportation projects in the pipeline.According to "ule Kılıç, the head of financial adviso-ry at UniCredit Securities, which has served as thefinancial advisor for several major transportation proj-ects in Turkey, the country will need $100bn in trans-port investment over the next five years, and up to$120bn-140bn over 10 years. Planned investmentsrange from roads and bridges to railways and ports.

The need for the country to invest in infrastructureis clear. With its growth in recent years, Istanbul’spopulation now far exceeds the capacity of its trans-port network, for example. Meanwhile, the boomingeconomy and growing exports necessitates expansionand upgrades to the country’s ports. Some projectsare under way already: the much-hyped Marmaraytunnel under the Bosphorus, for example, began in2004 and is expected to be completed in 2015. The$3bn project is being funded by three multilateralfinancial institutions, while Japanese contractor Tai-sei and a joint venture of two Turkish companies,Gama and Nurol are heading up the construction.

Also in progress is the 421-km Gebze-Izmir motor-way, which will significantly reduce the travel timefrom Istanbul to Turkey’s third-largest city with a bridgeover the Izmit Gulf. The $6.3bn undertaking is beingled by Italy’s Astaldi, along with four Turkish firms.The project will be funded on a build-operate-trans-fer (BOT) basis, which involves a 22-year concessionto collect tolls on the bridge and highways. ON THE HORIZON: There are even more projects inthe pre-construction and pre-tender phase. High-lights include the Eurasia car tunnel under the Bospho-rus, with a BOT contract signed in February 2011 byfour Korean companies, along with the Turkish railand tunnel specialist, Yapı Merkezi. In the rail sector,meanwhile, Turkey plans to construct 6000 km ofhigh-speed rail across the country by the republic’s100th anniversary in 2023. The Ankara-Eski#ehir lineis the first operational segment, and the extension ofthe line to Istanbul is ongoing. Meanwhile, 2012 hasseen tenders for a high-speed line from Ankara toSivas, in central Anatolia, and there are plans for aninternational line connecting Turkey to the Gulf states.This project is being financed out of state funds, aid-ed by a $30bn loan from China.

Finally, the port sector is ramping up, most notablyat the Çandarlı port, which seeks to be one of theworld’s 10 largest ports. Infrastructure works at Çan-darlı are being done via conventional public funding,with a TL230m (!97.8m) contract awarded to a jointventure of Limak and Kolin $n#aat. However, the super-structure will be built through a BOT contract thatincludes a long-term concession, costing up to $4.5bn.

The most controversial recent project, however,has been the third bridge over the Bosphorus, which

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Developers can bid to rebuild dilapidated neighbourhoods in the historic areas of Istanbul

Major infrastructureprojects already under wayinclude the Marmaraytunnel, expected to becompleted in 2015, and the421-km Gebze-Izmirmotorway.



is being packaged with 414 km of highway as part ofthe solution to Istanbul’s transport challenges. The BOTtender was originally scheduled for August 2011, andthen postponed until January 2012 at the request ofseveral companies that planned to bid. Even at thatlater date, however, the tender received no bids.

The failure to attract bids likely reflected not somuch a lack of investment interest as discomfort withthe size and specifications of the project. As BurakBerki, a senior associate in research at $# Yat›r›m, toldOBG, “I think that the banks were not so willing tofinance such a complex programme given the envi-ronmental concerns.” Moreover, the government’sstrategy of packaging attractive and unattractiveassets – the bridges and the roads, respectively – intoone tender decreased interest in bidding. Finally, theproposed location, well north of the city’s most con-gested areas, raised concerns that traffic over thebridge would not be sufficient.

Since the failure of the tender, the transport min-ister, Binali Yıldırım, has indicated that the governmentintends to proceed with the bridge’s construction.Following investor advice, however, it has cut the proj-ect down to size, reducing the tender to the bridgeitself and 90 km of surrounding highway. The remain-ing roads would be built by the state itself. The gov-ernment has also added traffic guarantees of 100,000vehicles per month, which would be paid regardlessof actual vehicle count, and eventually increased thisfigure to 133,000. Traffic guarantees are a standardfeature of infrastructure projects, as they decrease risksfor the BOT investor, according to Kılıç of UniCredit.

At the end of May 2012, the government announcedthat a consortium of Turkey’s $çta# $n#aat and Italy’sAstaldi won the tender for part of the Northern Mar-mara highway project, including the third Bosphorusbridge. According to its proposal, the consortium willcomplete the project in just under 10 years and threemonths. The first section, running from Odayeri toPa#aköy, will be completed in 36 months at a cost ofTL4.5bn (!1.91bn), Yıldırım announced. The bridge isexpected to open by the end of 2015 and will also be linked up with the country’s rail system, he added.

POWERING UP: If its infrastructure projects were notambitious enough, several items on the government’sto-do list hold even more promise for the construc-tion sector. Turkey’s energy sector is undergoing anambitious expansion, with 793 power plants underconstruction at the moment. A record 150 licenceswere expected to be approved in 2011, and the proj-ects currently in the pipeline would expand installedpower capacity by more than 75%, to 93,595 MW.Particularly prominent are the hydroelectric damsincluded in the South-east Anatolia Project, whichthe government has touted as necessary for theregion’s development. Turkey is also avidly pursuingits nuclear ambitions, with a nuclear power plantscheduled for commissioning in 2019 in the south-ern city of Mersin. State-owned RusAtom will constructthe plant and supply the uranium. With these energyprojects, as with a number of major government ini-tiatives, there have been concerns that the state ispursuing development at the expense of the environ-ment and local history and culture. The giant Ilisu Damwill flood historic sites and displace local residents,while public scepticism of nuclear power is high in thewake of Japan’s Fukushima disaster. THINKING BIG: These same feelings – excitementmixed with doubt – apply to Prime Minister Erdo!an’sself-described “crazy project”: an “Istanbul Canal” thatwould divide the city in two and divert freighter traf-fic from the Bosphorus. Little has been decided at thisstage of the project, which was announced to muchfanfare in 2011. The plan’s goals attract sympathy aswell, as the flow of ships through the Bosphorus isconsidered dangerous and an oil spill could precipi-tate an environmental and public health disaster. Butthe sheer logistics of a divided Istanbul – not to men-tion the funding required – have led many analyststo dismiss the project at this stage as a pipe dream.

Finally, Istanbul’s bid to host the 2020 SummerOlympics, if successful, would spur a major construc-tion boom across the city. Istanbul is not new to

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The details of the government’s plans for earthquake-proofing Istanbul are emerging

The tender for the thirdbridge over the Bosphorushas been modified,reducing the contract tothe bridge itself plus 90 kmof surrounding highway.

The energy sector isundergoing an ambitiousexpansion, with 793 powerplants under constructionat the moment. Theprojects will expandinstalled power capacity bymore than 75%.


Olympics intrigue, or heartbreak: its bids for the 2000,2004, 2008 and 2012 games all failed. One upshot ofthese years of anticipation is that the city’s sports infra-structure is surprisingly advanced. Still, opportunitieswould be plentiful; Erdo!an announced recently theconstruction of 18 new stadiums, and an Olympic Vil-lage would be required. The International OlympicCommittee will announce the shortlist in May 2012and the final decision will be made by September ofthe same year. In the meantime, the investment insporting infrastructure has had ancillary benefits.Istanbul was labelled a European Capital of Sport for2012, and the city hosted the IAAF World IndoorChampionships for track and field in March 2012. LEVELLING UP: Turkish construction companies havenot traditionally worked as engineering, procurement,and construction (EPC) contractors on major infra-structure projects, which is due to both technical andfinancial capabilities. On the financial side, major inter-national contractors often provide internal fundingfor some or all of a project, an option unavailable tothe smaller Turkish companies. In addition, financ-ing often comes from foreign development financeinstitutions. These lenders are generally interested infinancing projects led by a contractor from their homecountry. Of course, foreign construction firms sub-con-tract most or all of the work to Turkish companies.

Still, as revealed in a research note from TEPAV, anAnkara-based think tank, the average size of Turkey’sconstruction firms lags that of even developing coun-tries. Turkey had 31 of the top 225 international con-tractors by turnover in 2011, the second-highesttotal behind China, according to the EngineeringNews Record. But these companies together gener-ated only 3.8% of the overall turnover of the ENR-225. China is a leading example of a country that hasexcelled in both numbers and value-added, with 50countries on the ENR-225 accounting for 15% of thelist’s turnover. And while Turkey will likely neverachieve China’s scale, TEPAV pointed to deficiencies

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Turkey accounted for 31 of the top 225 international contractors as measured by turnover in 2011

A study from the RealEstate Investing PartnersAssociation estimateshousing demand will reach2.9m units between 2011and 2015. TOK$ has plans tobuild 500,000 units, leaving2.4m to be provided by theprivate sector.


in the design capabilities of Turkish firms that maybe holding them back from performing more value-added work. Moreover, consolidation could helpthem achieve economies of scale. If they are able toincrease their financial capabilities, they may winsome EPC contracts. TEPAV points out that the workdone by domestic contractors in Turkey’s near abroadis vital to developing the technical capabilitiesrequired for more sophisticated jobs. In 2010, accord-ing to the Turkish Contractors Association, Turkishfirms were actively working in 48 countries, account-ing for 517 projects worth $20.3bn. The benefits ofworking abroad include not only lower competitionbut also a chance to gain experience in major proj-ects, often in leading roles (see analysis).

Despite this trend, unrest in the Middle East andmega-projects in Turkey are drawing contractors backhome. “We are following opportunistic projects inTurkey, which has a lot of potential,” said Tolga Mut,business development manager at STFA ConstructionGroup. Domestically, Turkish contractors continue tofocus on specialty niches where competition is low-er. Examples include TAV Construction in airports,Yapı Merkezi in rail and STFA in marine construction.However, UniCredit’s Kılıç predicts contractors maybe “moving into new roles” as they gain experience.OUTLOOK: Despite the market’s current softness,therefore, plenty of opportunities are available acrossthe spectrum, from residential and commercial devel-opment to major infrastructural works. A study fromthe Real Estate Investing Partners Association showsthat the housing demand between 2011 and 2015 willtotal 2.9m units, of which 500,000 will be built by TOK$.That leaves 2.4m to be provided by the private sector.“With Turkey’s population continuing to rise, demandfor residences is permanently growing,” Selim Koray,the chairman of Koray Construction, told OBG. “City cen-tres, in particular, are seeing an even higher rate ofgrowth, which is characteristic of a trend observedaround the globe.” Meanwhile, Istanbul’s growing rep-utation as a regional financial centre has drawn theattention of contractors specialising in office buildingsand high-rises. According to Ali Pusat, the generalmanager for development of Koray Construction, theplanned development of the Istanbul Finance Centrein the district of Ata#ehir will boost the sector.

The potential of Turkey, and in particular Istanbul,is strong enough that companies are willing to toler-ate occasionally byzantine permitting and planningregulations. Still, investors will look to see that the gov-ernment executes its development plans – whetherurban renewal or infrastructure development – withtransparency and in coordination with the privatesector. “For the next 10-20 years, Istanbul will be likea big construction site. But we have to plan this devel-opment carefully, or else Istanbul will lose its reputa-tion as a global city,” Yener of the Urban Land Insti-tute Turkey told OBG. What construction companies,real estate developers and government plannersaccomplish over the next 10 years will serve as thefoundation upon which the new Turkey will be built.

CONSTRUCTION INTERVIEW

Ahmet Haluk Karabel, President, Housing DevelopmentAdministration (TOK!)

Urbanisation is a global challenge. What is, in yourview, the best way to address this issue in Turkey? KARABEL: Since the 1950s, the world’s urban popu-lation has swelled from one-third to two-thirds of itstotal inhabitants. By 2050 it is expected that approxi-mately 6bn people will reside in cities. Turkey has beena clear example of this trend. Urbanisation here has beenrapid and unplanned. TOK$, within the scope of itsplanned urbanisation and housing production, hascooperated with local municipal governments since2003, following a comprehensive policy of transform-ing slum areas into modern residences. These 184 proj-ects envision the construction of 257,987 houses, ofwhich 45,024 have been completed.

How will the $400bn renewal plan prepare Istan-bul’s structures for a possible earthquake?KARABEL: All TOK$ projects are undertaken with priorconsideration to not only the risks of earthquakes, butalso the threat of other disasters. The risks posed bynatural disasters affect our selection of sites, planningand construction, all of which is done in compliancewith zoning and construction legislation. Constructionis strictly supervised. Auditing mechanisms ensure duediligence in planning, the signing of contracts and proj-ect implementation. Through the use of geological sur-veys in planning, and ribbed steel during construction,we have made structures with enhanced strength andresistance to even complex earthquake risks, like liq-uefaction. Our work continues in compliance with theLaw on Transformation of the Areas under DisasterRisk. The law proposes approximately $400bn worthof projects, stipulating that reliable and habitable areasbe redeveloped or renovated to ensure safety.

How do government agencies utilise financing andproject partnerships to involve the private sector?KARABEL: Over the past nine years, as of May 2012,TOK$ has produced more than 542,000 housing units,an amount equivalent to 21 new cities with populations

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Building the futureOBG talks to Ahmet Haluk Karabel, President, Housing DevelopmentAdministration (TOK")

numbering over 100,000 each. These projects werecompleted without drawing any funds from the Turk-ish Treasury. TOK$ has a legal mandate to zone Treas-ury lands, and we implement projects in cooperationwith the private sector – selling the homes we constructwith loan structures that are favourable to low- and mid-dle-income families. To assist in the financing of thesesocial housing projects, TOK$ utilises a revenue-shar-ing model for particularly high-value land in metropol-itan areas. This model ensures social projects arefinanced without the use of public funds, and con-struction is done by private sector entrepreneurs.

How are TOK"’s international operations related tothe country’s foreign policy? KARABEL: The housing supply methods we have devel-oped have become prominent on an international scale.We have experience in building in disaster-prone areas,so we are able to assist other nations affected by nat-ural disasters, using donations from the Turkish public.For example, following the earthquake and tsunami in2005, TOK$ built 1050 new homes in Indonesia and500 houses in the Matara region of Sri Lanka, all financedby Turkish donors. Following the recent earthquake inthe Mozafferabad region of Pakistan, TOK$helped restorethe city centre and rebuild government buildings. In thescope of the flood response in those areas, TOK$ pro-vided 4620 disaster relief homes and social facilities.

Our efforts are not only motivated by donors seek-ing to respond to the needs of disaster victims. Forexample, following our prime minister’s delegation toSomalia in August 2011 – which was aimed at raisingawareness of the challenges that country faces – TOK$began efforts to construct civil facilities, like a 200-bedhospital, a 40-classroom nursing college and a mosque.

At this time, TOK$ has received requests from near-ly 60 countries around the globe, and we are in ongo-ing negotiations with these governments over howbest to utilise our experience and know-how in hous-ing construction to help fulfil their construction needs.

REAL ESTATE INTERVIEW

Avni Çelik, Chairman, SINPA"

Interest rates in Turkey have dropped in recentyears. How has this affected demand for hous-ing loans? Do you expect growth in mortgages? ÇEL"K: Real interest rates are still quite high whencompared to the average in the developing world.The interest rates for mortgage credit are not below13-14%, making instalment payments high. For exam-ple, paying off the mortgage for an apartment viarental income takes more than 15 years, so purchas-ing with mortgage credit cannot be regarded as aninvestment tool. However, I expect that in time, inter-est rates will fall and the cost of mortgage credit willbe on par with global standards.

Nonetheless, I would still recommend investorsand others to buy apartments using credit, becausethe increase in housing prices exceeds the inflationrate. You can see this if you compare the housingprices of 2002 and those of today. However, thereare two categories of housing prices: the Marmararegion and the rest of Turkey. There is a dramatic dif-ference in these prices. For example, in Istanbul it isvery difficult to purchase an apartment that willrequire monthly payments below TL3000 (!1275),but in the rest of Anatolia, you can find accommo-dation for TL1000 (!425) per month or less. In citieslike Ankara, Izmir, Adana and Samsun, it is unwise tobuy housing using credit, but in Istanbul it remainsa good option because of its high growth rate. Forthose above the middle-income average, it can beprofitable to invest in real estate using a mortgage.

Has the lack of a master plan for Istanbul slowedthe government’s $400bn urban renewal project? ÇEL"K: Istanbul unfortunately still lacks a masterplan, although this is not an obstacle to realising theurban renewal project. Urban renewal is a local issue,requiring the attention to detail that a master plancannot offer. Obviously, if there were a master plan,local rehabilitation projects would be carried out inharmony with the city plan, but local municipalities

cannot execute a plan on that scale, busy as theyare with the details of the renewal.

In connection with a master plan, greater commu-nication between the metropolitan municipality andthe local stakeholders is essential, such that the corecompetencies – laws and legislations – are set outat the metropolitan level. If the metropolitan munic-ipalities would manage the renewal, coordinatingthe interactive relationship between local projectsand the other parts of the city plan in terms of trans-portation and other infrastructure, they could bringgreater harmony to the city’s transformation.

What are the advantages of mixed-used proj-ects, and how profitable are they? ÇEL"K: Mixed-used projects are definitely more prof-itable than other types of developments, but it is notlogical to establish these projects without any regardto location. The mixed-use model has to be able toutilise all of its components to succeed, so the shop-ping malls, recreational facilities and hotels must allbe profitable. Additionally, these projects may notbe suitable for city centres, as these areas couldlikely be more profitably used for residential construc-tion. On the other hand, it is easy to sell mixed-useprojects to the public.

What is your projection for growth in the realestate market? How do your expectations differfor Istanbul compared to the rest of Turkey?ÇEL"K: The real estate market in Turkey is bound togrow, on account of the large youth population. The15-24 age bracket numbers some 12.5m, while the25-34 age group is around 12m. The value of mort-gages in Turkey reached $70bn in 2011, or about 5%of GNP. In the EU countries, this figure averagesaround 59%, so there is a significant gap betweenthese two markets. Turkey will eventually get to thatpoint, but in the meantime, real estate demand willcontinue to increase rapidly, particularly in Istanbul.

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A growing marketOBG talks to Avni Çelik, Chairman, SINPA#


CONSTRUCTION ANALYSIS

In 2010 Turkish contractors won bids for 517 projects in 48 countries

Even as Turkey gears up for a major series of invest-ments in infrastructure, residential and commercialconstruction, its biggest companies are cutting theirteeth in developing countries around the world. A hostof contractors have been making a name for them-selves internationally over the past several decades,working mainly in the Middle East and North Africa(MENA) region and the Commonwealth of Independ-ent States. Data from the Turkish Contractors Associ-ation reveals that Turkish companies won $20.3bn incontracts in 2010 for 517 projects in 48 countries. MAJOR PLAYERS: In fact, many of the largest Turk-ish contractors do most of their work overseas now.For example, the top Turkish companies listed in the2011 ENR-225 Global Contractor Index, which ranksfirms by their total revenues worldwide, were Polimeks,Renaissance Construction and GAMA. All three com-panies, each of which grossed more than $1.3bn in2011, earned at least 90% of their revenue overseas.

In the past, two main reasons underlay the deci-sion for most Turkish firms to go abroad. The first wasthe limited opportunities available in the domesticmarket versus the major infrastructure projects thenbeing undertaken in Turkey’s neighbours. Mehmet AliNeyzi, the CEO of STFA Construction Group, an inter-national contracting firm founded in Turkey, told OBG,“STFA went to Libya in 1972 and Saudi Arabia in 1978,observing the need for development in the MiddleEast, which we saw as an opportunity.” The less intensecompetition for these contracts, particularly in spe-cialised fields, was also a big draw.BENEFITS: Contractors note that working abroadhas led to the development of high quality and safe-ty standards, particularly with so many contractsconnected to the oil and gas industry. However, thestandardisation required when working abroad canmake it difficult to compete on price when contrac-tors return to Turkey to bid on domestic projects. Onerisk faced by contractors working abroad is politicalinstability, which was brought home by the fallout from

Starting in the 1970s manyTurkish construction firmstook advantage ofopportunities in MiddleEastern countries,particularly on majorinfrastructure projects.

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Further afieldContractors gain profits and valuable experience by doing work abroad

the Libyan civil war of 2011. Turkish companies hadcontracts worth a total of $7.6bn there during the2009-10 period, making Libya the number-two sourceof international revenue in 2010, behind Turkmenistan.These projects abruptly stopped in 2011, but com-panies are eager to resume work. Turkey’s governmenthas been proactive in this regard, offering to subsidisethe construction of schools, mosques, police stationsand courts. The uprising in Syria has also threatenedattempts to enter that nascent market by companieslike Renaissance, which had plans to invest in a shop-ping and hotel complex in Aleppo. According to Tol-ga Mut, the business development manager at STFA,governments and companies across MENA are nowbeing “more conservative” with their investments.RETURNING HOME: Meanwhile, some Turkish con-tractors are again looking at the domestic market,with the upcoming mega-projects proving to be ahuge draw. Even companies that had fully aban-doned the Turkish market now appear to want apiece of the action. However, contractors are find-ing that, with the unrest in the MENA region puttinga damper on the business climate, they are not theonly ones invited to the party. As Mut told OBG, “Themost important problem is competition, becauseeveryone is looking for business here. Contractorswho have been working in MENA and Europe arecoming to the Turkish market.”

Over the long term, however, global markets shouldpick up again and Turkish contractors should be ableto continue their expansion. Africa is increasingly seenas a frontier region ready to be tapped, and Turkey’sincreasing diplomatic and economic ties to the conti-nent should smooth the way. The Turkey-Africa TradeBridge summit held in Istanbul in December 2011 wasexpected to lead to $350bn in mutual trade agree-ments, with construction a leading focus. The govern-ment’s 14 new embassies in Africa are another sign ofinterest, and the country’s contractors may hope thatit will not only be diplomats who are building bridges.

REAL ESTATE OVERVIEW

Annual demand for housing stands at around 600,000-650,000 units

Rapid economic growth, a young demographic pro-file, and the stirrings of gentrification in Europe’slargest city combined make Turkey one of the hottestreal estate attractions around. In line with other mar-kets exposed to the European debt crisis, however, itmay see a speed bump in the near term.

External factors aside, Turkey offers a healthy long-term growth horizon. However, investment in thecountry is subject to the typical risks of an emergingmarket: red tape, demand volatility and lack of trans-parency. Nonetheless, investors and developers areexcited by Turkey’s short-term prospects, and Istan-bul in particular. According to a January 2012 surveyby global consultancy PwC, the country’s commercialcapital was the only metropolitan area in Europe tohave “good” investment prospects for all three cate-gories considered (existing investments, new invest-ments and development). Although analysts stressthat Turkey’s country risks and the current cautiousinvestor sentiment make a surge in the value of prop-erties unlikely, they make clear that there is muchpotential for investors who understand the market.GROWTH DRIVERS: The reasons for optimism arewell-documented. Turkey is a classic emerging mar-ket growth story, with a large, young and increasing-ly affluent population looking for modern housingand international shopping experiences. Turkey’s RealEstate Investing Partners Association (GYODER) hasestimated the annual demand for housing stands ataround 600,000-650,000 units. Consumer spending,which is driving the booming retail sector, rose by15% in Istanbul and 10% outside of the city in 2011.

Meanwhile, the increasing prominence of Turkey asa regional business centre is boosting commercialreal estate rates. Moreover, expected regulatorychanges, such as a urban renewal law and liberalisa-tion of property sales to foreigners, promise newdevelopments and higher rents. The risks that Turkeyrepresents – moderate concerns regarding a con-sumer-spending bubble, unclear development policies

– are real, but they have not been enough to damp-en the enthusiasm of sector players. “I believe 2012will not be any worse than 2011. The numbers areamazing, and we are hoping to grow further, at least5%,” Hakan Yener, the coordinator at the Urban LandInstitute Turkey, told OBG. A HUMAN STORY: One of the basic pillars support-ing growth in the real estate sector is the country’sdemographic profile, with 26.5% of the populationunder the age of 15 in 2010, compared to an OECDaverage of 18.4%. Similarly, annual population growthin 2010 was 1.14%, versus 0.49% for the OECD. Mean-while, internal migration continues to transform Turkey,with an urbanisation rate that has risen from under30% in 1950 to more than 70% today. Between 2007and 2010, on average more than 50,000 people movedto Istanbul each year. Indeed, in 2010 migration aloneaccounted for more than 30% of population growthin the country’s largest city.

The last demographic driver of residential demandis household size. As the country modernises andmoves away from large, multi-generational cohabita-tion toward the Western model of small households,the ratio of people to housing units will decrease. Theaverage size of households dropped from 5.25 to 4.5people between 2001 and 2008, the result of fallingbirth rates and increasing homeownership.

This burgeoning, urbanising population translatesinto strong demand for housing, retail and commer-cial space. Turkey’s homeownership rate was 68% inthe 2000 census, although it has jumped to 74% since,according to the OECD. Given space limitations, own-ership is lower in urban areas – it averaged about60% in the largest cities in 2000 – but affordablemortgage rates may soon change this.LENDING A HAND: Housing loans only became sig-nificant in Turkey in the last decade, as part of an over-all growth in consumer lending. According to figuresfrom the Banking Regulation and Supervision Agency,the total volume of housing loans stood at just TL2bn

Key demographic driversfor the sector includepopulation growth,internal migration to majorurban areas and a declinein average household size.

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Rising starAn increasingly affluent population drives demand for homes, whileIstanbul’s role as business centre boosts the commercial market



(!850m) as of December 2004, growing to TL35.3bn(!15bn) by the end of 2008, equivalent to a compoundannual growth rate of 205%. Although the 2008-09financial crisis temporarily slowed this expansion, themortgage market subsequently picked up, growing by40% and 25% in 2010 and 2011, respectively, reach-ing TL73.3bn (!31.2bn). This was paralleled by anunprecedented 35% expansion in new constructionpermits in 2010, from 516,229 to 853,703. MORTGAGE PRICING: One driver in mortgage growthhas been the drop in interest rates, which had longbeen so high as to discourage all but the wealthiestborrowers, with rates as high as 35-40% (2.53-2.84%monthly) prior to 2008. However, the cost of a mort-gage began to fall in late 2008 and sharply declinedin 2009. By March 2011, rates had hit as low as 0.56%month, according to GYODER. However, costs subse-quently went up, as the central bank worked to coolthe economy and increased funding costs to banks,with the cost of a mortgage ending 2011 at 1.19%.

According to Burak Berki of $# Yat›r›m, however, therelatively low rates are here to stay. “We expect inter-est rates to slightly increase and then normalisetowards the end of 2012 or the beginning of 2013,”Berki told OBG. Another change has been the increas-ing maturity of loans. Where once it was difficult tofind even six-month loans, most banks now offermortgages of 10 years or more, with the majority ofthese loans having a tenor of 5-10 years. While thisis an improvement, these mortgages are still far short-er than the 20- to 30-year home loans that are typi-cally available in more developed economies.

One drawback of the current mortgage market isthe mismatch between housing loans and the short-term safety deposits that banks use to fund them.Increasing the tenor of the loan only makes this mis-match greater. Turkey’s 2007 mortgage bill attempt-ed to address this issue by allowing consumer financecompanies to broker loans and permitting the secu-ritisation of mortgages. The former reform has seenresults, with the formation of the first mortgage com-pany, Do!an Group’s DD Mortgage, but Turkey has yetto see significant securitisation activity.

Finally, despite fears that the expansion in con-sumer credit was creating a bubble, the housing mar-ket itself shows little sign of unsustainability. The shareof non-performing house loans has actually droppedin recent years, from 2.10% in the fourth quarter of2009 to 0.93% in the final quarter of 2011. Withsoured mortgages at the core of the recent globalfinancial crisis – more than 8% of housing loans in theUS during 2008 were non-performing – bankers arenaturally cautious to avoid imprudent lending.RESIDENTIAL MARKET: The forecast for near-termresidential demand remains strong, although theheights of construction experienced in 2010 and ear-ly 2011 are unlikely to be matched in 2012. Home salesgrew 21% year-on-year in the third quarter of 2011,while home prices jumped 5.7% in the first 10 monthsof the year. Looking ahead, nearly 5% of consumersin a February 2012 poll conducted by TurkStat said

that they were very likely or fairly likely to buy or builda house in the next year, the second-highest month-ly figure recorded since 2006.

Istanbul is, unsurprisingly, the largest market forhousing. Turkey’s biggest city is home to 16.9% of thecountry’s households, but it commands a dispropor-tionate share of the real estate market. According tothe Global Property Guide, Istanbul will account forabout half of the 500,000 homes needed in Turkeyby 2015. With some 35% of households renting, mean-while, there is a considerable market here for investorsand ample profits to be made. The Global PropertyGuide, which argues that Turkey is one of the topglobal real estate investments, reports that Turkishrental yields were the fifth-highest in Europe, behindlower-profile Balkan countries. This is due primarilyto low acquisition prices, which average !2386 persq metre in Istanbul, making it the eighth-least expen-sive out of 36 cities in the report. Moreover, these lowcosts persist even in central districts like Beyo!lu. REGULATION: The future of the housing market hingesin large part on the regulatory environment and the

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Office vacancy rates were low in 2011 but are expected to rise

Home sales grew 21%year-on-year in the thirdquarter of 2011, whilehouse prices jumped 5.7%during the first 10 monthsof the year.

2003 2004 2005 2006 2007 2008 2009 2010 20110

10

20

30

40

50

60

70

80

Housing loans, 2003-11 (TL bn)

SOUR

CE: C

BRT


government’s urban planning policies. Urban renew-al will be the watchword of the real estate sector forthe next decade at least, with two flavours of rede-velopment in the works. The most high profile proj-ect calls for the replacement of all unsafe buildings– estimated at more than 50% of Turkey’s housing stock– with earthquake-safe buildings. A law enabling thisprocess, which would make it easier for developersto buy out residents of a building and demolish it, wasmaking its way through parliament when OBG wentto print (see Construction overview). URBAN RENEWAL: The second project is directed atrevitalising historical districts in Istanbul by replacingcurrent buildings with higher-rent residential andcommercial areas. Law 5366 (“Preservation by Ren-ovation and Utilisation by Revitalising of Deteriorat-ed Immovable Historical and Cultural Properties”),which was passed in 2005, allows authorities to des-ignate sectors of the city as “regeneration areas”. Thehistoric districts of Tarlaba#›, Sulukule, and Suley-maniye were the first projects taken on, but the listincludes up to 50 neighbourhoods. The model appliedto redevelopment is a public-private partnership; inTarlaba#›, for example, Gap In#aat will be carrying outthe work. Finally, a law allowing the sale of 2B land –deforested land held by the Treasury – was approvedby parliament in April 2012. Land designated as 2Brepresents 3.4% of the metropolitan area of Istanbul,and some analysts have estimated that its sale couldbring in TL20bn (!8.5bn) in revenue.

Given the commercial attractiveness of prime cen-tral districts, property developers are understandablykeen on these projects, but many worry about receiv-ing clear directions from authorities. According toYener, the viability of urban renewal projects is threat-ened by the lack of a master plan for Istanbul and aweb of bureaucracy and taxation. “Developers buythe land, they plan a project, but the municipality orthe government has the right to change the plan,” Yener told OBG. He added that the lack of organisa-tion in renewal projects often means that “the resultis not a cohesive neighbourhood but a collection ofdifferent, separate parcels without the necessarysocial facilities.” Moreover, the urban renewal planshave drawn criticism from the residents of targetedareas and from advocacy organisations that say the plans will push poor people to the outskirts of the city.

AFFORDABLE HOUSING: Turkey’s Housing Develop-ment Administration (TOK$) will have an importantrole to play in the development push, particularlywhen it comes to re-settling people evicted from theaffected neighbourhoods. TOK$’s affordable housingdevelopments are one of the mainstays of the coun-try’s social welfare network, and the organisation hasbuilt 483,000 houses in Turkey since the current gov-ernment came to power in 2002. TOK$ is expected tobe on the front lines of the development of earth-quake-safe housing, since the project is largely gov-ernment-driven and many of the targeted areas areoutside the prime central districts.

At the same time, there are concerns that the gov-ernment’s involvement in low-income housing iscrowding out the private sector. TOK$ owns a major-ity stake in Emlak Konut REIT, one of Turkey’s top fourreal estate developers, which can purchase land fromTOK$ at appraisal value without tenders. In fact, aMarch 2012 investment prospectus from EkspresIn-vest highlighted Emlak as a major beneficiary of urbantransformation and 2B laws. Some observers arguethat the lack of a level playing field hurts the marketas a whole. “Private companies want to get involvedin developing affordable housing, and it would bepossible if they had the same opportunities as the pub-lic sector,” Yener told OBG. “But the current prices willnot allow it. Land prices and taxes are too high, andso they are not competing on the same level as thegovernment.” Ali Pusat, the general manager for devel-opment of Koray Construction, agreed, telling OBG thatwhile “theoretically, the demand is very high” foraffordable housing, “we won’t go that direction.” A NEW HOME: One regulatory change expected toboost the sector is the liberalisation of foreign own-ership laws. Turkey currently limits purchases of realestate to citizens of those countries in which Turkishnationals are allowed to purchase real estate, whichexcludes Russia and many Central Asian and MiddleEastern countries. A new law under consideration by

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The retail market was one of the first real estate segments to benefit from Turkey’s rapid economic growth

The government has calledfor the replacement of allunsafe buildings –estimated at more than50% of housing stock –with earthquake-safebuildings. A law enablingthis process was in theworks as of early 2012.

SOURCE: CBRT

Real estate sales & FDI, 2003-11 ($ bn)

Real estate sales Net FDI inflows

2003 1.0 –

2004 1.34 –

2005 1.84 –

2006 2.92 –

2007 2.93 0.56

2008 2.94 0.64

2009 1.78 0.56

2010 2.49 0.41

2011 2.01 0.58


the parliament would remove this reciprocity require-ment, as well as raise the limits on the maximum landavailable for purchase from 2.5 to 30 ha. Foreign prop-erty ownership is currently dominated by second-home purchases by British and German nationals inthe Mediterranean and Aegean coastal regions. Thelegal change is expected to especially benefit Istan-bul, which has attracted attention from wealthy Gulfresidents in recent years (see analysis). OFFICE SPACE: The commercial real estate sector isalso growing rapidly, thanks to the strength of Turkey’seconomy and the influx of foreign capital. The “bigthree” cities of Istanbul, Ankara and Izmir are the cen-tre of the office market, with 2.88m, 400,000, and85,000 sq metres of Class A office space, respective-ly, according to the global real estate services firm JonesLang LaSalle. Izmir is projected to grow the most inrelative terms, with its supply of top-grade office stockexpected to double by 2013. However, Istanbul is byfar the biggest growth area by volume, with the cityexpected to add 682,000 sq metres of office spaceby 2013. Of this new supply, 44% will be located in thecentral business districts (CBDs) of Levent and Maslak,in line with the current distribution of office space.

Meanwhile, the Asian side of the city is expectedto receive increasing focus, especially with the gov-ernment’s promotion of the Ata#ehir district as theIstanbul Finance Centre. Proponents of this plan hopeto make the city one of the top five centres of glob-

al finance by 2035, joining London, New York, Shang-hai and Tokyo. Under the plan, a 2.5m-sq-metre areaat the intersection of two key highways would be par-celled out to financial institutions and supportingfacilities. The government has announced that Ankara-based organisations, including the Banking Regula-tion and Supervision Agency, Capital Markets Boardand the central bank, would move to the new site. Statelenders Halkbank, VakıfBank and Ziraat Bankası wouldjoin them, although it is unclear whether or not thetop private lenders would move there.

As a district, Ata#ehir is envisioned as a cluster ofhigh-value office, retail and residential properties,with housing for 80,000 individuals. The area hasalready attracted a number of prestige projects, suchas the Ata#ehir Tower, which bills itself as Europe’sfuture tallest building. At around 300 metres in height,the 500,000-sq-metre development would includethree towers, with offices, apartments, stores and ahotel. Ata#ehir has been the fastest-growing districtover the past couple of years, with the opening of theAkkom Plaza alone adding over 70,000 sq metres ofoffice space in 2011. Other developments in the worksinclude the 88,000-sq-metre Renaissance Tower andthe Varyap Meridian, a five-tower apartment and hotelproject slated for completion in 2012.

Office rents in Istanbul vary by region. Accordingto a report from real estate services group DTZ, theLevent region had the highest asking rates in 2011,

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Istanbul, Ankara and Izmirare the key cities for theoffice market, with 2.88m,400,000, and 85,000 sqmetres of Class A officespace, respectively


at about !60 per sq metre per month, while rates inMaslak were lower, at !40 per sq metre. Prices on theAsian side were less expensive, with the highest ask-ing rents at !33 in Kozyata!› and !29 in Ümraniye.Vacancy rates were low in 2011, but with major proj-ects expected to be completed soon, this could pushup vacancy rates and hold down price increases. RETAIL: The retail market was one of the first realestate segments to benefit from Turkey’s rapid eco-nomic development, as foreign investment contributedto the growth of hypermarkets in the 1990s and mallsin the past decade. Gross leasable area (GLA) hasmore than quadrupled since 2000, reaching just under7.6m sq metres in 2011, according to Jones LangLaSalle. These investments are both a reaction to anda stimulant of consumer spending, which has alsobeen boosted by easy access to credit. Householdconsumption grew an average of 9.25% in 2011, dur-ing which time total leasable space expanded by 16.7%.

The density of retail development is highest inAnkara and Istanbul, with over 230 sq metres of GLAper 1000 residents, compared to a national averageof 103. And while the big cities are not quite “over-malled”, attention is turning to secondary cities, withthe hope of capitalising on large cities that lack majorretail facilities. The three fastest-developing areaswere the Mediterranean, Central Anatolian and Mar-mara regions, with considerable growth coming fromcities like Kayseri. Over the long run, meanwhile, ana-lysts see the underserved Black Sea and South-eastAnatolian regions as prime candidates for investment.As Berki told OBG, “There are so many big metropo-lises along the Black Sea coast, and so few shoppingmalls serving these places.”

That being said, Istanbul represents about 40% ofthe country’s retail space, while its 53% share of thedevelopment demonstrates that investors still seeconsiderable opportunity in Turkey’s cultural capital.Istanbul is the only place to find most of the luxurybrands – Chanel, Gucci and Louis Vuitton, among oth-ers – that have entered the market in recent years. Incontrast to the focus on the office market that isfound on the Asian side of the city, four of the fivebiggest retail projects in the pipeline for completionin 2013 are located on the European side. HOTELS: Steady growth in arrivals, government sup-port and a dearth of top properties have made Turkeya hot spot for hotel investment. Given the general con-sensus that Istanbul is still under-hotelled, foreignchains are expanding their offerings.

Marriott is expected open the Istanbul BosphorusHotel in September 2012, bringing its portfolio in thecity to six facilities. The Rezidor group has two Radis-son Blu properties under development, including a305-room hotel in the "i#li district, as well as twoproperties in the greater Istanbul area that are alreadyopen. Meanwhile, Hilton’s pipeline contains four hotelsacross all of its brands.

According to Tu!rul Temel, the development man-ager at Hilton Worldwide in Turkey, the government’ssupport for tourism development includes tax breaks

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In an early 2012 poll, 5% of people said they were very or fairly likely to buy or build a house in the next year

Foreign investmentcontributed to the growthof hypermarkets in the1990s and malls in the2000s. Gross leasable areain the retail sector hasmore than quadrupledsince 2000, reaching nearly7.6m sq metres in 2011.

and other incentives that make investment in hotelsan attractive option. “Other players in the real estatesector may be dealing with one restriction or anoth-er, but in the hotel sector, we expect to open 2000hotel rooms over the next two years,” Temel told OBG.“When you combine that with the other brands, itshows that the hotel market is growing very well com-pared with other real estate sectors.”

Many sector experts note that there is consider-able unmet demand for branded hotels in the three-to four-star range. This is especially true for regionalcities, which are seeing an increase in business trav-ellers who cannot afford five-star accommodations.As Temel told OBG, “In Anatolian cities, mid-class hotelsare a natural choice: the revenues are lower, becauseof the room rates, but they are still highly profitable.”OUTLOOK: PwC’s 2012 designation of Istanbul as thetop European market, and the concurrent optimismabout Turkish real estate as a whole is well support-ed by fundamentals. The country combines strongdemographic and economic growth with a governmentdedicated to development.

Nonetheless, developers both inside and out ofTurkey warn against excess optimism about the mar-ket. Much depends on regulatory decisions expect-ed in 2012 – the disaster law, the foreign investmentlaw – as well as the shifting tides of the IstanbulFinance Centre and other government-sponsoreddevelopment programmes. The ultimate example ofTurkey’s potential, as well its potential hubris, isErdo!an’s proposed “crazy project”, which would splitIstanbul by building a second Bosphorus. The projectis only in the very early planning stages, and could take30 years to complete, but industry figures were scep-tical that the project was either necessary or feasi-ble. Still, government figures declare that they arepushing through with the project, pointing to Istan-bul’s growing population and the congestion of thecurrent Bosphorus. Istanbul, and Turkey as a whole,has room to grow, no matter how “crazy” its plans get.

REAL ESTATE ANALYSIS

Nearly one-third of foreign property owners hail from the UK

With property values rising, the rest of the world hasturned its attention to Turkey’s booming real estatemarket. In addition to the obvious attractions of port-folio investments in this emerging market, the pastseveral years have seen many foreigners buying Turk-ish property as a first or second home. Moreover, legalchanges are expected to expand this roster of home-buyers, especially by opening up the Gulf market. HISTORICAL TRENDS: Net foreign direct investment(FDI) inflows into the real estate sector grew from lessthan $1bn in 2003 to top $2.9bn per annum between2006 and 2008. Although the market took a hit dur-ing the global credit crunch, dropping to $1.7bn in2009, interest picked up in 2010 with $2.49bn beforetailing off slightly in 2011, to $2.01bn.

Foreign investment in Turkish real estate has a com-plex and thorny legal history. For many years, a 1934property act made it next-to-impossible for foreignersto invest in Turkish real estate, but a law in 2003 openedthe sector to nationals of countries where Turkish cit-izens were eligible to buy property. This decision provedcontroversial in Turkey, where fears of foreign encroach-ment on property dates back to pre-republican times,and a Constitutional Court decision in 2005 temporar-ily suspended all property sales to foreigners. In 2006,a law was introduced that re-opened sales, but it lim-ited purchases to 2.5 ha and less than 10% of land inany designated town. It is also necessary for buyers toreceive explicit permission from the military that theirinvestment does not threaten national security, whichcan take several months but is usually pro-forma. RECIPROCITY: The focus now is on eliminating thereciprocity requirement, which is holding back capitalfrom investors in Turkey’s near abroad. The US andmost European countries allow Turkish nationals to buyproperty, enabling their citizens to buy real estate inTurkey. However, citizens of most Gulf countries, includ-ing Saudi Arabia, Kuwait and the UAE, cannot buy prop-erty, while Russian citizens must have a residential per-mit. As a result, the foreign investment profile for Turkish

real estate strongly resembles tourist arrival data. Mostpurchases are second homes, dominated by British andGerman citizens, and concentrated on the coastalregions. As of August 2011, nearly 120,000 foreignersfrom 89 countries had purchased a total of 111,194properties. British citizens lead the way at 35,249, withGermans second at 27,021, and followed by Greeks, Irish,Danes and Russians. The coastal cities of Antalya, Mu!laand Aydın were the biggest draws for home buyers, fol-lowed by Istanbul in fourth place.

A law currently on the parliament’s roster, and expect-ed to be passed during the first half of 2012, wouldremove the reciprocity requirement and allow residentsof 39 countries to buy Turkish real estate for the firsttime. Analysts have estimated that the liberalisationcould double foreign investment in the sector. Theregional focus would shift with an influx of Gulf buy-ers, who are interested in Istanbul, especially luxuryresidences along the Bosphorus. In addition, the draftlaw would allow foreigners to purchase areas of up to30 ha without having to seek approval from the Coun-cil of Ministers, as was previously the case.BUSINESS BUYERS: Real estate investment laws dif-fer for foreign corporate, as opposed to individual, buy-ers. Corporate investment can take place either throughcompanies registered in Turkey with foreign capital orby fully foreign entities. Although FDI in the real estatesector is much lower than direct home purchases byindividuals, it grew strongly from 2010 to 2011, risingfrom $412m to $560m. Unlike individual purchases ofreal estate, meanwhile, Turkish-established companieswith foreign capital are focused on Istanbul. Of the4414 companies based in Turkey with internationalinvestment, 53% were located in Istanbul.

Turkey’s rising profile is drawing buyers of all stripes:major investors seeking premium returns through port-folios, small investors looking for an additional revenuestream and individuals hoping to relocate full- or part-time to Turkey. The latest regulatory changes shouldinject further life into a market that is already buzzing.

A 2003 law opened the realestate market to nationalsof countries where Turkishcitizens are eligible to buyproperty, including the USand most European states.

The parliament is nowconsidering a law thatwould allow citizens of anadditional 39 countries tobuy property in Turkey forthe first time.

146

Buyers from abroadA proposed law will make it easier for foreigners to purchase property


REAL ESTATE INTERVIEW

Erman Ilıcak, Chairman, Rönesans Holding

What obstacles face developers in urban renewal?ILICAK: Since so many buildings are not earthquakeresistant there will be massive renewal in cities vulner-able to earthquakes. The government has passed a billfor city transformation and renovation, and both legal-ly and illegally constructed buildings will be evacuatedand demolished under each region’s master plan. Munic-ipalities need to create attractive environments for res-idential developers to invest in renovation programmes.

One bottleneck to be addressed in metropolitancities is narrow roads, which do not permit access forfire brigades or ambulances. In the event of a disaster,if one building collapses over a road all access to theneighbourhood can be cut off. The legislation ensuresnew structures will have underground parking so thatstreets will have fewer parked cars.

The other challenge is enlarging the streets andallowing developers to build taller buildings on largerparcels of land. It is currently difficult to buy buildingsas a group to achieve a larger footprint, but this wouldpermit for more green space between the parcels.Again, this will allow municipalities to plan for widerstreets free of parked cars, neighbourhoods with moregreen areas and trees, and earthquake-safe buildingserected to new standards. The challenges facing devel-opers on this master planning is to get equipped forlarger-scale projects and to get properly mobilised toacquire bigger plots of land. This means encouragingflat owners to sell or to agree to be moved to otherlocations temporarily, while their rents are paid bydevelopers. Higher building coefficients need to begranted by the municipalities to trigger such a renew-al mechanism, as this will attract developers.

How much potential do secondary cities provide forshopping centre developers? ILICAK: After the shopping centre boom in the biggestcities like Istanbul, Ankara, Izmir, Bursa, Adana andGaziantep, mall developers moved to secondary citiesand even most mid-sized cities have more than one

shopping centre now. Developers are focusing on build-ing smaller centres for cities with populations of lessthan 300,000 people. If we compare such cities to theirEU counterparts, in terms of gross leasable area (GLA)per 1000 people, there appears to be still more poten-tial in such cities. However, it requires greater innova-tion to deliver the right product for each city.

Rent per sq metre of GLA is a function of the rev-enue to be made by each shop, which should be cal-culated to ensure the sustainable rent/turnover ratiosare not higher than 14-15% for small to medium-sizedshop units. If we compare a medium-sized city with Istan-bul or Ankara, the sustainable rental levels are 30%lower. Depending on the return-on-investment calcu-lations, shopping centres still offer the highest in termsof returns overall, but are dangerous in terms of com-petition. They are followed by office buildings and hotelsin terms of returns, while returns on residential devel-opments are rising in the profile of mixed-use projects.

What projects are local banks interested in financ-ing? Is getting funding becoming more difficult? ILICAK: Turkish banks are financing commercial realestate projects as well as residential projects, becauseof their liquidity. We can say Turkish banks have filledthe role once played by foreign real-estate-specialisedfinancial institutions. The subsidiaries of foreign banksin Turkey are competing with domestic banks, eventhough the parent bank may be suffering liquidity orcapital adequacy ratio problems abroad. Due to theslowdown in EU economies, banks are more selectivewith their clients. However, project financing is still inplace – just with higher mark-ups. So far, Turkey hasproven itself to be independent from ailing economiesin the EU. The economy is still very robust. With the lirastable at approximately $1:TL1.8, we are also seeingmany institutional foreign investors in the market, whichreplaced more opportunistic funds with very short-term strategies, due to the stabilisation of the econo-my and the lira following the central bank’s policies.

147


Renewed focusOBG talks to Erman Ilıcak, Chairman, Rönesans Holding

REAL ESTATE VIEWPOINT

Anthony Khoi, President and CEO, Aerium Turkey

Turkey is the 16th-largest economy in the world andsixth-largest in Europe, and has made impressiveprogress over the past decade – a fact well demon-strated by the figures. While European countries havestruggled with a number of economic problems andthe sovereign debt crisis, Turkey has reached a per capi-ta GDP of $10,444, up from $5764 in 2004. Averageconsumer price index was at 71.6% between 1995and 2001, and is currently below 10%; while the pub-lic-debt-to-GDP ratio was cut to 39.4% in 2011 from53% in 2005. The budget deficit is among the few thatsuit the Maastricht criteria, at 1.5%. According to themedium-term programme, GDP growth is expected tobe over 4% for the next three years.

Under the single-party government, political stabil-ity was reached and macroeconomic stability followed.Political power is playing a significant role in improv-ing the long-standing economic situation. The incen-tives scheme recently declared by the prime ministertakes aim at the current account deficit and foreseesa structural reformation of the industrial sector and abalancing of regional economic disparities.

Through the incentives programme, Turkey aims toattract $110bn in foreign direct investment (FDI) overthe next five years, an amount equal to the total receivedin the past 10 years. FDI in 2011 reached $15.7bn, andthrough geographical diversification, the governmentis actively promoting Turkey throughout the world.Efforts are under way to make Istanbul a new financialcentre, and incentives are being issued to attract large-scale investment. Global economic conditions have leftlocal banks as the main source of financing; however,the Turkish banking system has been able to deal withthis through the help of foreign funds and investors.

Looking forward, Turkey will only become more attrac-tive for real estate investments by foreign sources aseconomic conditions and legislation improve. The com-bined efforts of the government and businesses willsee a number of goals achieved, and as the global cri-sis passes, retail markets will recover with renewed

consumer confidence and purchasing power. Theexpected growth in consumption, infrastructure andconstruction are the three major factors that willimprove the real estate landscape. Rapid urbanisationand expansion of retailers, as well as high populationgrowth will also boost the real estate market, provid-ing an attractive opportunity to foreign institutionalinvestors over the coming decade.

The retail real estate sector, in particular, has becomemore interesting during these past seven years. Some$15bn of the total $35bn invested during that periodwas comprised of long-term foreign investment in theretail real estate sector. The still-immature retail mar-ket in Turkey makes it more promising for new invest-ments, with strong urbanisation and a very young pop-ulation providing key advantages. Foreign investmentwill continue to flow in the sector, but the success ofretail real estate investment depends primarily on siteselection, asset quality, strong local partnerships forproperty, tenants and marketing management.

The new Commercial Code, entering into force in July2012, is one of the major government’s actions to bringtransparency and reliability to the markets. Severalamendments to the new Commercial Code have alreadybeen proposed by real estate professionals. These sug-gestions include amendments to the credibility of leasecontracts (regarding currencies, the rights of rentalincreases, contract cancellation and replacement oftenants), as well as to the management and opera-tion of shopping centres. The implementation of reg-ulations for urban planning and the development ofshopping centres in major metropolitan areas will alsohave an important effect on the behaviour of investors.These necessary changes to the new CommercialCode and urban planning regulations will also increasethe market's potential if they are accepted by the gov-ernment. It will definitely improve the security andsustainability of investments for stakeholders in Turkey,and will aid in the promotion of both foreign anddomestic investment in the retail real estate sector.

148

A solid foundationAnthony Khoi, President and CEO, Aerium Turkey, on the future ofinvestment in retail real estate


149

TransportInvestment focuses on the nation’s road networkRelieving congestion in Istanbul with new metro linksThe national carrier expands its fleet and route networkMany items remain on government’s privatisation agendaHigh-speed railway to cross the country in the future

TRANSPORT OVERVIEW

Commuters in Istanbul use public transport for 71% of trips

Long hailed as the crossroads of civilisations and abridge between continents, Turkey is now looking toupgrade its physical infrastructure in a bid to improvecompetitiveness. With a growing population of justunder 75m, it faces bottlenecks in moving people andgoods across its vast area and through its crowded cities.Moreover, strengthening ties in trade and tourism withEurope, Asia and the Middle East make it imperativeto improve international transport connections.

The government has ambitious plans for each of themain transport modes. Turkish Airlines (THY), the nation-al flagship carrier, has come a long way in establishingIstanbul as a transit hub for passengers heading toAsia and Africa. In rail, Turkey is upgrading its ageingnetwork and planning high-speed links both within thecountry and with its neighbours. Expansions to Ankaraand Istanbul’s metro networks are also under way.Turkey’s extensive coastline, meanwhile, makes seatransport an attractive shipping option, and there areplans to expand and upgrade the country’s ports. Final-ly, Turkey is adding new roads and bridges to cope withburgeoning vehicle traffic and car ownership figures.

The government is counting on private sector inter-est to bankroll some of the biggest transport projects.The main financing mechanisms will be the build-oper-ate-transfer (BOT) model, privatisation of operatingrights and direct public funding. While relying on pri-vate investment will save the Treasury billions andencourage cost-effective project management, theauthorities will need to be consistent and transparentin their planning. Realistic expectations and clear com-munication will be the key to unlocking the transportpuzzle and enabling continued economic growth.THE LONG & WINDING ROAD: The country’s road net-work will be a major investment focus in 2012, withtenders for highway privatisations and major construc-tion projects scheduled for April and May. Turkey is moredependent on roads than the denser, more rail-heavyeconomies of Europe. According to Eurostat, 97.8% ofinland transport is road-based, compared to 92.7% in

the EU-27 grouping. The number of vehicles on the roadis increasing along with Turkish prosperity – passen-ger cars’ share of land transport rose from 46% in 2000to 51% of the total in 2008. This increase in demandfor infrastructure, combined with long-term urbanisa-tion, is leading authorities to promote metro and railsolutions within cities. However, more highways andbridges will be needed to ease congestion.

One of the landmark undertakings in urban roadwaysis the planned third Bosphorus bridge, which will belocated north of Istanbul near the Black Sea. Long onthe government’s agenda despite concerns from envi-ronmentalists and urban planners, the project was firsttendered in January 2012. A total of 18 companies hadpurchased tender specifications for the North MarmaraHighway development, which was to include some 415km of roads in addition to the bridge. However, anunfavourable funding environment and concerns aboutthe project’s scope produced no bids and the govern-ment was forced to delay the project again.A NEW ROUND: Four bidders took part in the new ten-der for the Marmara Highway Project in April 2012, witha consortium of Turkey’s $çta# and Italy’s Astaldi win-ning the contract at the end of May. The group prom-ises to open the bridge in 2015, with the full projectscheduled to take just over 10 years to complete.

When the second tender was announced, "ule K›l›ç,managing director and head of financial advisory at Uni-credit, expected the changes made to the second ten-der, which reduced the scope of highway construction,would be crucial to drawing bids. According to a factsheet from the Department of Transportation, maxi-mum fees would be $0.06 per km for roads and $3 (one-way) for the bridge itself. This makes the bridge themost valuable asset of the project. Bundling it with theroad networks represented an attempt to mix goodassets with bad to make the project financially viable.

Another change was the inclusion of traffic guaran-tees. The idea is that if vehicle numbers dip below apredetermined minimum, the government will pay the

Some 97.8% of transport isroad-based, and the majorinvestment focus in 2012will be on highwayprivatisations and large-scale constructionprojects.

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More ways than oneThe public and private sectors enhance links to fuel continued economic growth


TRANSPORT OVERVIEW

remainder of the fees the private operator would haveearned, providing a public backstop. “Banks do notwant to take on any market risk for this project,” K›l›çsaid, “so the traffic guarantees will be important inminimising the downside.”

At the same time, there was widespread dissatisfac-tion among private sector participants with the waythe government handled the project planning process.Standard geotechnical and environmental studies werenot completed, which makes it difficult for companiesto estimate the costs required to carry out the proj-ect. In addition, the proposed location has drawn crit-icism, as the bridge is well to the north of the mostcrowded areas of the city. While traffic guarantees areoften a standard feature of many public-private part-nerships (PPPs), there were concerns that they wereengineered to prop up what could be an otherwisefinancially unfeasible project.

Moreover, the route passes through some of the lastremaining green spaces in Istanbul. Professor HalukGerçek of Istanbul Technical University told reportersin March 2011 that the bridge and construction result-ing from it could “destroy all the wetlands and forests,which we describe as being the lungs of the city”. Oth-ers saw a hidden motive in its location. “The factor thatdetermines the selection of location is not the easingof traffic,” wrote columnist Metin Münir in the localpress, “but the zoning of Istanbul’s vacant areas forhousing and to create construction income unprece-dented in the city’s history.” These issues may havecontributed to the multiple delays on the contract,which was originally scheduled to be awarded in August2011, then tendered (unsuccessfully) in January 2012and again in April 2012, and finally awarded in May.A BRIDGE TO IZMIR: Other initiatives, like the Gebze-Izmir motorway, are gaining more traction. The 421-km highway will connect Gebze, just outside Istanbul,with Izmir on the Aegean coast, and includes the con-struction of a bridge over the Izmit Bay. A concessionwas awarded in 2009 to a consortium consisting of Ital-ian contractor Astaldi and five Turkish companies. TheBOT project is expected to reach an estimated cost of$6.3bn and will be paid for by tolls as part of a 22-year,four-month concession.

When operational – the bridge by 2015, the high-way by 2018 – the government will guarantee an annu-al $690m in traffic fees. Astaldi, with its Turkish part-ners and the Japanese Itochu Corporation that is buildingthe bridge, will seek $3.5bn in loans for the project. Con-struction should begin in 2012. The bridge will replacea 70-minute detour around Izmit Bay with a six-minutecrossing, while the travel time between Istanbul andIzmir will decrease by at least three hours.

Hoping to follow in the footsteps of Gebze-Izmir arethe participants in the Eurasia Tunnel project, whichwill connect Istanbul’s European and Asian sides witha submerged car tunnel under the Bosphorus. Around1 km south of the much-hyped Marmaray rail project,this is a 14.6-km route, one-third of which will be thetunnel. The main Turkish contractor, Yap› Merkez, part-nered with four Korean companies, signed an agree-

ment with Turkey’s highway directorate in 2011, underthe BOT model. Tariffs will be some TL8 (!3.40) for carsand TL11 (!4.70) for heavier vehicles. The project isnotable for the extensive environmental and socialimpact assessment commissioned by the partners toattract international financing. In accordance withstrict criteria set by the European Bank for Recon-struction and Development (EBRD), which is consider-ing providing a loan of up to $100m for the Eurasia Tun-nel, a report was issued in September 2011 thatassessed all facets of the project. As export creditagencies such as the EBRD play an increasingly promi-nent role in financing Turkey’s infrastructure develop-ment, their disclosure requirements may come toeclipse in importance those set by the government.

Finally, perhaps the biggest story in the road infra-structure sector in Turkey in 2012 is the privatisationof six existing motorways and the two Bosphorusbridges. These highways connect highly populatedareas such as Istanbul, Ankara, Izmir and the EastMediterranean/Anatolian cities of Adana andGaziantep. The assets will not be sold wholesale to pri-vate investors; instead, bidders will vie for a 25-year

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Rapid growth in passengers and cargo is straining airport capacity

In 2012 six existingmotorways and the twoBosphorus bridges are setto be privatised. Thesehighways connect highlypopulated areas such asIstanbul, Ankara, Izmir andthe cities of Adana andGaziantep. Winning bidderswill receive a 25-yeartransfer of operatingrights, which grants themtoll receipts.

SOURCE: THY, TCDD, Undersecretariat of Maritime Affairs, GD of Highways

Freight & passenger transport statistics, 2004-10

*Not including int'l transport

2004 2005 2006 2007 2008 2009 2010

Road

Tonne km 156,853 166,831 177,399 181,330 181,935 176,455 190,365

Passenger km 174,312 182,152 187,593 209,115 206,098 212,464 226,913

Maritime*

Tonne mile 3929 3477 3830 5189 6001 6154 6787

Passenger mile 621 670 752 843 847 886 848

Railway

Tonne km 9417 9152 9676 9921 10,739 10,326 11,462

Passenger km 5237 5036 5277 5553 5097 5374 5495

Air transport*

Tonne km 321 392 – – – – –

Passenger km 3223 3992 – – – – –

TRANSPORT OVERVIEW152

China will lend between$28bn and $32bn forseveral new high-speed raillines. These routes, whichcross the entire country,are hoped to be finalised bythe country’s 100thanniversary in 2023.

km of fast track. The most advanced of these projectsis the Ankara-Istanbul HSR, of which parts were madeoperational in 2009. The Eskisehir-Istanbul section isunder construction, with a tentative operation date of2013, while HSR transit between Ankara and Konya wascommissioned in September 2011.NEW CONNECTIONS: Even bigger plans are in theworks for HSR thanks to the largest loan in Chinesehistory. China will lend between $28bn and $32bn fora host of new high-speed lines: one connecting the west-ern city of Edirne to Istanbul; and lines going east fromAnkara to Sivas, Kayseri, Diyarbak›r, Kars and Trabzon;west to Izmir; and south to Antalya. Once these routesare completed – hopefully by 2023, the country’s 100thanniversary – a passenger could travel across Turkeyin about 12 hours, compared to several days now.

Unlike the mainly privately funded highway and roadsprojects, railway investment has been dominated bypublic funding. The government invested approximate-ly !1.83bn in 2005-10 on HSR, and planned !3.57bnin infrastructure investment for 2010-12. Given highupfront capital requirements for railways, it is unsur-prising that the railway operator Turkish State Railways(TCDD) is the biggest loss-making state-run publicenterprise in Turkey. TCDD’s revenues amounted toTL2bn (!850m) in 2010, including TL867m (!368.5m)in subsidies, but expenditures ran to TL2.87bn (!1.2bn)with a loss of TL866m (!368.1m). For TCDD to movetoward operational break-even point, it will need to

transfer of operating rights (TOR), which grants theholder the toll receipts. The Privatisation Administra-tion (Ö‹B) touts the highways and bridges as a primeinvestment, citing gross income of TL576m (!244.8m)annually for the motorways and TL276m (!117.3m) forthe bridge in 2010. According to Ö‹B, Turkish vehicletraffic is growing by 5-10% annually, while it is almostflat in EU markets. Still, there are concerns in the pri-vate sector that some of the assets being privatisedare in poor condition, and that the TOR terms provideinsufficient investor protection (see analysis).HIGH SPEED: The government is looking to lay thou-sands of kilometres of high-speed rail (HSR) trackacross the country and beef up urban metro systems.Train travel in Turkey has a proud history: Istanbul wasthe eastern terminus for the Orient Express from 1889.Separately, the Berlin-Baghdad railway and Hejaz rail-ways connected the eastern parts of the Ottomanempire. After 1950, however, investment in rail slowedas attention turned to building highways. In Istanbul,which built the world’s second-oldest undergroundmetro, buses took priority over subway construction– presaging the city’s current traffic challenges. Railaccounts for just 2.2% of passenger transport – coachbuses are cheaper for long-haul travel, while flights arefaster, and minibuses dominate in the cities.

Now, however, the government is hoping to expandits existing railway network, with 11,052 km of conven-tional and 888 km of HSR, to include more than 10,000

TRANSPORT OVERVIEW

boost passenger figures, which grew just 1.1%, to 24mpassengers per year from 2006 to 2010. The hope isthat HSR, which came on-line in 2009, will attract pas-sengers and, with a cost coverage ratio four timeshigher than that of conventional trains, better mone-tise them. However, delays in finishing the Istanbul-Ankara line mean that these gains would not be realiseduntil 2014 at the earliest. Meanwhile, large inefficien-cies within TCDD persist, particularly with workers’wages. Staff salaries represent more than 100% ofTCDD’s revenues, excluding subsidies, and staff pro-ductivity was measured at 84% of the EU average,according to a World Bank study.

Plans for Turkey’s railway system to be reformedand opened to private investment are in the works,although there is as yet no clear timetable for whenthis will occur. Turkey’s ninth development plan, whichruns from 2007 to 2013, calls for the state to with-draw from the production of locomotives and railwaycar production via privatisation, while maintaining con-trol of the infrastructure. However, these plans mayrun into a number of legacy issues. While TCDD issueda regulation in 2005 allowing private entities to oper-ate trains on state-owned infrastructure, that rule wasstruck down by the Council of State in 2007 as beingillegitimate. In keeping with EU guidelines, legislationhas been promulgated splitting off TCDD’s railway oper-ations activities to a subsidiary. However, the World Bankhas argued that by giving operation rights to a stateenterprise, rather than one with commercial status, thedraft law does not solve the corporate governmentproblems that are inherent in TCDD’s structure.Nonetheless, if adopted, the new rule would open upthe door for private firms to operate on state-ownedinfrastructure with a focus on profit.URBAN RAIL: While TCDD controls intercity and sub-urban rail transit, it is not responsible for providing infra-structure or services to the cities of Turkey. Upgradesto mass transit rail systems are urgent, particularly inIstanbul, as the city tries to cope with population growth.Istanbul’s tram network was abandoned by the 1960sas buses and taxis grew in popularity. Congestion forcedthe authorities to try to reduce traffic, and the tramreturned to operation in 1992. Istanbul’s current offer-ings include a subterranean metro, light rail, two trams,and suburban rail lines on both the European and Asiansides. Ferries transport passengers across the Bospho-rus, and a dedicated rapid-transit metrobus line stretch-es from Asia to Europe, from Sö%ütlüçesme to Avc›lar.The availability of these options has attracted Istan-bul’s commuters – 71% of trips are undertaken usingpublic transport, compared with 60% in 1997.

With most of the central areas served by at leastone mode of transit, the challenge is now to connectthese seamlessly with each other and with the city’speriphery. 2012 should see the opening of the Kad›köy-Kartal M4 (Asian side) and Olympic Stadium M5 (Euro-pean side) metros, as well as the start of constructionon the Üsküdar-Ümraniye M6. Several projects arescheduled to go to tender in 2012 including the Mah-mutbey-Kabata# metro and Bak›rköy light rail system.

The Mahmutbey-Kabata# line is scheduled as a PPPproject according to a BOT model – the city’s first pri-vately funded rapid-transit project. According to metrooperator Istanbul Ula#›m, the high demand for rapidtransit allows operations to break even or turn a prof-it, which makes the city fairly unique. Moreover, cer-tain projects like the Mahmutbey line, which crossesthe prime Be#ikta# and "i#li districts, can feasibly recoupeven investment costs with a long-term BOT contract.

One ambitious project scheduled to wrap up soonis the Marmaray, which will shuttle passengers acrossthe Bosphorus through a submerged tunnel. The ini-tiative will establish a new hub at Yenikap›, where thetunnel would join up with the existing metro and light-rail lines. Originally scheduled to open in April 2009,the tunnel has been delayed at least until October2013 and has exceeded its budget of $500m. The mainculprit was the discovery of the ancient Port of Theo-dosius at the Yenikap› station side, which necessitat-ed extensive archaeological excavations. SHIPPING: Turkey’s recovery from the global recessionof 2008-09 has been strong, but maritime shipping haslagged, part of a worldwide trend. “After five very goodyears, roughly 2003-08, the shipping world became veryvolatile with the global financial crisis,” Ihsan Karave-lio!lu, vice-president of Karavelio!lu Group of Compa-nies, told OBG. Total trade grew 12% (8% in real terms)in 2010-11, a great improvement over contractions of1% and 10% in the preceding two years.

But while road, air, and rail freight volumes had sur-passed their pre-crisis levels by 2010, four of the fivetop Turkish ports saw 2011 throughput still signifi-cantly below that of 2007. Tonnage throughput at thetop five Turkish ports did grow in 2010-11, at 3.84%and 5.9%. Still, outside of the short-term global lull inthe shipping industry, Turkey has strong potential togrow, given its 8400-km coastline and access to mar-kets in Europe, Central Asia and the Middle East. Some94% of imports and 83% of exports go via maritimetransport, according to the EU-funded Transport Infra-structure Needs Assessment (TINA) completed in 2007,which forecasts these ratios remaining stable through2020. The study highlights the potential for Turkey tobecome a multi-modal transport hub, connecting itsroad and railway networks to its ports. “Containerisa-tion continues to expand in Turkey, with a significantpercentage of bulk commodities shifting to contain-ers,” Sean Pierce, the CEO of YilPort, told OBG.

The growth opportunities are motivating a string ofprivate sector investments, both through privatisationand via new port construction projects anticipated touse the BOT model. The two legacy state enterprisesin this sector are the Turkish Maritime Corporation(TDI) and the TCDD, which is also the railways ownersand operator. From 1997 to 2003, the TDI privatisedthe operations of 13 ports via 30-year TOR deals, retain-ing only partial control of Izmir Port.

For its part, TCDD privatised two ports, Mersin andIskenderun, with the 36-year concession for the latterpurchased by Limak Holding in 2012 for $372m. Theprivatisation of the ports of Izmir, Derince, Band›rma

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In 2012 two new metrolines – Kadıköy-Kartal M4and Olympic Stadium M5 –are due to open in Istanbul.Construction of theÜsküdar-Ümraniye M6 isalso scheduled to start.Several other projectsshould go to tender in 2012including the Mahmutbey-Kabatafl metro and Bakırköylight rail system.

TRANSPORT OVERVIEW

and Samsun are expected next. Several new ports arein the works that seek to establish Turkey as a hub forEastern Mediterranean and Aegean traffic. The portof Çandarl›, on the Aegean coast, is planned as a com-petitor to the Greek hub of Piraeus. Its anticipated finalsize – with a capacity to handle some 10m-12m twen-ty-foot equivalent units (TEUs) per year – would makeit one of the largest ports in the world. Infrastructureworks on Çandarl› are being done via conventionalpublic funding, with a TL230m (!97.8m) contractawarded to a joint venture (JV) of Limak and Kolin$n#aat. However, the superstructure will be built througha BOT contract that includes a long-term concession,costing up to $4.5bn. Çandarl› is planned as a majortrans-shipment port, where cargo from large vesselswill be offloaded onto smaller boats for distribution tovarious countries in the region.

BOT port projects in Mersin and Filyos demonstratethe key role Turkey can play in facilitating regionaltrade. The TINA analysis, for example, envisions thehinterland of Mersin port, on the south Mediterraneancoast, to extend to Iraq, Iran and the Caucasus in theeast. The five-stage project would gradually expandcapacity from 1.7m to 12m TEU per year. Meanwhile,Filyos port, on the Black Sea, would have a capacity of25m tonnes. Filyos is designed to absorb some of pro-duction of Anatolia and mitigate the intense conges-tion in the Bosphorus and Dardanelles.

Black Sea traffic, and a demand for port facilities, islikely to expand as trade relations with countries in theregion deepen. Roll-on/roll-off passenger (ROPAX)transport – ships carrying freight vehicles and with apassenger component – will become an increasinglypopular mode in the Black Sea, Karavelio!lu predict-ed. “We cancelled visas between Turkey, Ukraine andRussia, and trade between these countries is doublingevery few years,” Karavelio!lu told OBG. “They need ourfoodstuffs, and we need their petrol and natural gas.”ROPAX, according to Karavelio!lu, avoids border prob-lems, saves on petrol and minimises the safety risks asso-ciated with long-haul trucking.BUILDING UP STEAM: Connected with Turkey’s advan-tages in maritime transport is the success of its ship-building industry. The country, which is home to some70 shipyards, ranks among the top 10 in terms of bothdeadweight construction and number of ships, accord-ing to the OECD. However, the sector has been hit dis-proportionately by the crisis, which caused new ordersto shrink rapidly and production to move eastward. Turk-ish output fell 35% from 2008 to 2010. One compar-ative advantage for Turkey is ship repair, where it ismostly immune to competition from Asian rivals. “About90% of work in the shipbuilding industry is actuallyrepair and maintenance,” Mustafa Ünar, secretary-general of Turkish Association of Ship Industrialists, toldOBG. “This is owed to Turkey’s strategic location inEurope, so ships from countries like Ukraine, Malta orRussia come here for repairs. Our workers are cheap-er than in other ports, and we don’t use the euro.” A NEW ISTANBUL: One cannot discuss Turkish mar-itime transport without acknowledging one of the

country’s most ambitious projects. Prime Minister RecepTayyip Erdo!an’s self-professed “crazy project” wouldsee the construction of a second Bosphorus, bisect-ing the European side of Istanbul and creating an islandbetween the two waterways. The rationale for CanalIstanbul is clear: the Bosphorus is crowded with tankerscarrying oil and chemicals, and a spill could threatenthe lives of millions. But the 48-km canal could takeyears to complete at a cost of at least $10bn, whichthe government has planned to pay for with publicfunds. Moreover, Turkey is constrained by treaties suchas the 1936 Montreux Convention, which limits its abil-ity to restrict traffic on the Bosphorus. Given that thecosts of the canal would need to be recouped by usagefees, it is unclear whether the government could forcetankers to use the more expensive route.

There is a broad consensus that tanker traffic pres-ents a danger to Istanbul, but responses differ as tothe best solution. The Samsun-Ceyhan pipeline, a pro-posed joint project between Turkey and Russia, couldbypass the Bosphorus by shipping oil from the BlackSea across Anatolia to the Mediterranean. Politics playsa big role in these mega-projects: some experts viewthe announcement of the Canal itself as a bargainingploy to force Russia to commit to the pipeline.

“The Turkish government wants petrol traders touse petrol pipelines instead of the Bosphorus and Dar-danelles Straits,” Karavelio!lu told OBG. “I’m sure thata balance will be achieved between pipeline and tankerusage.” However, if the canal goes forward, and Turkeydoes not manage to renegotiate the Montreux Con-vention and charge for passage, it may be forced tofind alternative sources of funding the project. Erdo!anhas suggested that selling land along the canal’s new-ly created banks could bring in money and solve con-gestion problems in Istanbul. COME FLY WITH ME: The prime minister is not alonein having big ambitions for the transport sector. Plansfor THY can only be described as global, with the car-rier hoping to become the main transit hub for millionsof passengers flying between Europe and Asia andAfrica. Turkey’s tourism attractions, meanwhile, haveboosted domestic airlines, with low-cost carriers (LCCs)specialising in short-hop trips to European markets.

Turkish airports saw 117m passengers in 2011, a 14%increase over 2010. THY accounted for 32.9m passen-gers, which represented growth of 12.7% and made2011 the tenth consecutive year of passenger growthfor the carrier. THY’s goal is to become “the largest air-line in the world”, and it already offers more non-stopdestinations from a single airport than any other Mid-dle Eastern or European carrier. It is competing withwhat the airline industry dubs MEB3 – the Middle EastBig 3 of Etihad, Qatar and Emirates – for a slice of theinternational transfer market. Transfer passengers,usually heading to or from India, China or South-eastAsia, totalled 5.6m in 2011, a five-fold increase from2004. New carbon emissions taxes from the EU mayhelp Turkey’s transfer bid goals. Since flights into EUairspace must pay carbon taxes, but previous connect-ing flights are exempt, flights from the east can save

154

A new port at Çandarlı isplanned to rival Piraeus inGreece with its anticipatedsize of 10m-12m twenty-foot equivalent units.Çandarlı will be a major trans-shipment port wherecargo from large ships willbe loaded onto smallerboats and then distributed .


TRANSPORT OVERVIEW

money by connecting as close to Europe as possible.Still, the transfer competition can be overly hyped:almost half of THY’s passengers are domestic, while theMEB3’s lack of a domestic market forces them to focuson transit traffic. Still, long-haul flights are where theprofits are, according to Ilke Tak›mo!lu Homri#, formermanager at I# Invest. “Airlines make the most moneyafter three hours of flight time, and no destinations inTurkey are much more than 1.5 hours apart,” Homri#said. According to Efe Kalkandelen, associate equityresearch analyst at I# Invest, “Most of the growth forTHY in 2012 will come from international passengers.”

THY’s focus has been on expanding its destinationsand increasing frequencies. The carrier added 20 routesin 2011 and is embarking on an expansion of its fleet.THY took delivery of 32 new planes in 2011 and has14 still on order. These capital expenditures, combinedwith increased fuel costs and a volatile lira, contributedto soft earnings data for 2010 and 2011. Net profitsfell by almost half in 2010, to TL286.4m (!121.7m), andthe airline recorded a net loss of TL467m (!198.5m)in the first nine months of 2011. THY’s expansionisttendencies extend to acquisitions, where the carrieris in talks to acquire Poland’s distressed, state-ownedLOT Airlines. According to Kalkandelen, I# Invest’s pre-diction of 8% passenger growth in 2012 makes THY’s16% expectations look rather optimistic. Still, a 66% risein advertising spending in 2011, combined with acco-lades like the “Best Airline in Europe” award from Sky-trax, make its future prospects intriguing indeed.

Even as THY turns its attention to the attractive inter-national market, it is de-emphasising a growing butincreasingly crowded domestic and low-cost market.The biggest fish here is Pegasus, which flew 11.3mpassengers in 2011, making it Europe’s fifth-largest LCC.Pegasus is engaged in an expansion of its own, addingnew flights to destinations such as Almaty, Kazakhstanand Erbil, Iraq from the LLC terminal in Sabiha Gökçen,Istanbul’s second airport. The carrier now flies to 22countries. But it has a growing list of competitors, from

155


With increasing congestionat Istanbul’s two airports,another runway is beingplanned for AtatürkInternational, while a thirdairport in the district ofSilivri is set for 2016.

OnurAir, which serves nine domestic and three inter-national destinations, to SunExpress, which flies main-ly to and from Europe. THY operates AnadoluJet in theshort-hop market. Germany, which dominates Turkishtourism, is the top foreign market for the LCCs. LIBERALISATION: The airline sector has benefittedfrom deregulation since the current government cameto power in 2002. THY’s monopoly on domestic flightswas removed in 2003, allowing the current competi-tors to move in with attractive pricing and better serv-ice. A majority of THY was privatised, with shares totalling51% sold in 2004 and 2006, mainly to foreign investors.

Finally, Turkey is close to signing a unified civil avia-tion agreement with the EU that would allow carrierson both sides greater access. Still, many restrictionsremain: foreign owners cannot control more than 49%of any operator running regularly scheduled domes-tic flights, and Turkey’s airways are not yet fully open.

One major beneficiary of liberalisation is airportoperator and contractor TAV. Starting with a conces-sion to operate the Istanbul Atatürk Airport in 1997,TAV also has built and operated the Ankara, Izmir, and(secondary) Antalya Gazipasa airports, and runs sev-eral airports abroad. In April 2012 TAV was sold toAéroports de Paris, the operator of the French capi-tal’s airports. The success of private firms in buildingairports is motivating the government to choose theBOT model. Zafer Airport, in the province of Kutahya,will be the first airport built from scratch under a BOTmodel, with a 30-year concession by IC holding.

The rapid growth of passengers and cargo is strain-ing capacity. A new runway at Atatürk Airport is in theworks, although there are doubts about its feasibility,given land availability issues in Istanbul. Meanwhile, athird Istanbul airport is scheduled for 2016, but notlikely to arrive until 2020, according to Homri#. The newairport, in Silivri, would be several times bigger thanAtatürk Airport, have five runways and serve up to120m passengers per year.

Although demand is high, with air freight growthaveraging 10% for the past three years, supply limitsare being hit. “We have to refuse high-paying cus-tomers because we don’t have the cargo space avail-able,” Ahmet $zer, director of GSA Logistics, told OBG.The narrow-body plane strategy of the low-cost car-riers, and to some extent THY, makes cargo growth dif-ficult. Adding space at Sabiha Gökçen will be crucial,as will be building a third airport in Istanbul. OUTLOOK: Turkish transport is a story of investmentand challenge. The pipeline of necessary infrastructurespending is estimated at $180bn over the next 10years, according to K›l›ç. With the emphasis on privati-sation and PPPs, there is ample opportunity for con-struction companies, logistics providers and investorsto get a piece of the action. The challenge comes inensuring that the ambitions of government plannersand private sector companies are feasible, both tech-nically and financially. Liberalisation has transformedthe sector, but with infrastructure development stillled by the government, effective communicationbetween public and private sectors will be essential. SOURCE: DHMI

Passenger throughput at key airports, 2011 (m)

Airport Domestic International Total

Istanbul Atatürk 13.60 23.85 37.45

Antalya 4.55 20.56 25.11

Istanbul SabihaGökçen 8.55 4.19 12.75

Izmir Adnan Menderes 6.08 2.46 8.54

Ankara Esenbo%a 7.13 1.39 8.52

Mu%la Dalaman 0.69 3.04 3.73

Mu%la Milas-Bodrum 1.42 1.96 3.38

Adana 2.71 0.56 3.27

Trabzon 2.18 0.09 2.27

Diyarbakır 1.67 0.02 1.69

Gaziantep 1.18 0.13 1.31

Kayseri 0.91 0.25 1.16

Samsun Çarflamba 1.06 0.90 1.15

Van Ferit Melen 1.09 0.002 1.09

Erzurum 0.81 0.02 0.83

Hatay 0.53 0.13 0.66

TRANSPORT ANALYSIS

The two Bosphorus bridges are set to be privatised in 2012

Privatisation has been on the agenda for years, withsales of major state-owned industries in the late 1990sand early 2000s defining the country’s commitmentto free markets. The trend hit a high-water mark in 2005-06, when the government accrued a total of $16.3bnin revenues from the sale of Türk Telekom, the refin-ery company Tüpra# and steel producer Erdemir. Inrecent years, the focus has turned to privatising net-works – electricity grids, gas distribution systems andmotorways. The upcoming transport privatisationshave the potential to raise revenue while improvingoperational efficiency. At the same time, there may bea mismatch between investor and state interests. ON THE ROAD: The privatisation story of the year isthe sale of six motorways and the two existing Bospho-rus bridges. The highways on offer include those con-necting Edirne-$stanbul-Ankara, Pozant›-Tarsus-Mersin,Tarsus-Adana-Gaziantep, Toprakkale-Iskenderun,Gaziantep-"anl›urfa, Izmir-Çe#me, Izmir-Ayd›n as wellas the Izmir and Ankara Ring Motorways. The assetswill be sold via 25-year transfer of operating rights inone tender. This is a controversial approach, and manyindustry players interviewed told OBG that the size ofthe projects would create bankability issues. With thetender for the motorways expected to be $3bn-6bn,financiers might react as they did to the third Bospho-rus bridge project, which had a similar price tag.

Recent experience supports the pessimistic view-point: four of six electricity privatisations worth a totalof $12bn fell through in 2011. In addition to the sizeof the investment, figures involved in the electricity pri-vatisations blamed the long process – one to three years– of getting approval from the Council of State, a con-cern shared by potential investors in the roads deal.The deal does not include termination guarantees incase the authorities default on their obligations. Forits part, Turkey’s Privatisation Administration cites 2010gross income of TL576m (!244.8m) annually for themotorways and TL276m (!117.3m) for the bridges. Thisrepresents 31% growth over toll figures from the pre-

Upcoming transport sectorprivatisations include thesale of six motorways andthe two existing Bosphorusbridges as well as Istanbul’sGalataport.

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In stops and startsThe privatisation portfolio includes a number of big-ticket items


vious high of 2007. Extrapolating from a half to a fullyear of data for 2011 gives a 4.4% annual growth rate.The tender has already drawn interest from Turkishgroups including Akfen and European heavyweightssuch as Vinci and Autostrade per l’Italia. The tender wasscheduled for late May 2012.PORT POSSIBILITIES: The maritime sector is alsoseeing a good deal of activity. The most recent to closewas Limak Holding’s acquisition of Iskenderun Port, a36-year concession for which Limak paid $372m. Theincentive for acquiring entities to maximise profits ontheir new holdings was demonstrated by Limak’sannouncement, just days after the sale was complet-ed, that it would invest $250m in expanding Iskenderun’sfacilities. Limak envisions the port as an entry hub forgoods going to or from Iran, Iraq and Syria.

Still on the agenda despite a troubled history is theprivatisation of Galataport, Istanbul’s passenger port.Having been planned since the 1990s, the port was ten-dered in 2005, and Royal Caribbean Cruises won thebidding. But legal issues related to the rezoning of keywaterfront land cancelled the sale.

Statements from Ahmet Aksu, vice-president of thePrivatisation Administration, indicate that Galataportwill be put to tender once again during 2012, alongwith the port of Izmir. Local construction firm AkfenGroup, among others, has signalled its interest.

Privatisation of state assets once thought to be inte-gral has both promise and pitfalls. Revenues of $62bn,from the past several decades of Turkey’s liberalisa-tion period, are certainly impressive. Successful saleslike the Iskenderun Port demonstrate that the privatesector can often put large amounts of capital to moreproductive use than can the government. The large dol-lar amounts involved and the fact that the govern-ment is directly transferring assets into private handsmakes it important to get the process right. As Turkeysells the rights to some of the last big ticket items in its privatisation portfolio, the question of what is inthe public interest will be very much in the forefront.

TRANSPORT INTERVIEW

Binali Yıldırım, Minister of Transport, Communications and MaritimeAffairs

How will restructuring the ministry enable the fed-eral government to promote greater rail and mar-itime transport coverage nationwide?YILDIRIM: The ministry has always had a wide rangeof responsibilities due to the convergence of transportand communications infrastructure. These responsi-bilities have created the need for restructuring in orderto fulfil our responsibilities in a systematic and up-to-date manner. For example, we have set up three newmaritime directorates: one for regulation of sea andinland waters, another for maritime trade, and the thirdfor dockyard and coastal structures. This restructuringprocess involves adjustments to other directorates aswell. The ministry has been assigned new responsibil-ities following the introduction of the Restructuring Lawand other administrative regulations, yet there is stilla need for certain supporting legislation. Within thenew framework, a General Directorate for the Trans-port of Dangerous Goods and Combined Transport hasbeen established under the ministry.

The new structure promotes collaboration betweenentities with overlapping responsibilities: Turkish StateRailways (TCDD) is a state economic enterprise that alsoindirectly regulates the railway sector. To modernise therailway transport standards, the General Directorate ofRailway Regulation has been created to act as an addi-tional regulator. In addition to the drastic improve-ments recorded in the last nine years in maritime, rail-way and road transport, our new structure will allowfurther focus on issues related to rail and marine lines.

How can local manufacturing of transport indus-try components be promoted?YILDIRIM: We have covered a lot of ground in ship-building so far. Turkey ranks 6th in the world in thenumber of shipbuilding orders received, 11th in dead-weight tonnage and 3rd in yacht building. Focusing onlocal production of rail components, we set up facto-ries for each sub-industry. Kardemir produces andexports high-speed rails and we recently began pro-

duction of switches, rail fastening systems, traverses andwheel sets in other local facilities. We used to importrail system components in the past. However, today, theministry is in charge of constructing the new metro linesin Ankara. In this regard, we have set a condition stip-ulating that at least 51% of the related equipmentshould be manufactured locally. I strongly believe thatthis condition promotes local production and will boostthe competitiveness of our local manufacturers vis-à-vis international firms.

In the light of the challenges facing the Istanbulbridge tender, what measures is the governmenttaking to attract private investors?YILDIRIM: We did not receive any bid for the first ten-der since the size and conditions were quite over-whelming for the investors. Thus, we decided toannounce a new tender with new terms. We decreasedthe total project cost from $10bn to $4bn-4.5bn by scal-ing down the project. Now, the project includes onlythe bridge and its 100-km highway extension; theremaining part of the motorway will be financed fromthe general budget. We have increased the vehicle/dayguarantee provided by the government and extendedthe scope of tax exemptions to the investors. The com-pany to be awarded the contract will commit to buildthe bridge in four years at a total project cost of $4bn-4.5bn. Out of 13 companies to receive the tender doc-uments, six have offered their bids. Four of these sixoffers have been prequalified. The decision has not yetbeen made; however, we have created a competitivetender environment for a healthy outcome.

There are still some oppositions to the constructionof a third bridge over the Bosphorus, but the heavy traf-fic volume in Istanbul rationalises the need for thisbridge. The high number of vehicles crossing over the first and second bridges creates fuel and labourcosts of TL3.5bn (!1.5bn). The third bridge will amor-tise itself in just two years. It is very clear that it is nec-essary to implement the project as soon as possible.

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Structural adjustmentsOBG talks to Binali Yıldırım, Minister of Transport, Communications andMaritime Affairs

TRANSPORT INTERVIEW

Temel Kotil, CEO, Turkish Airlines

Are Turkish carriers facing increased competitionin the domestic market from international players? KOT"L: We have two markets in which we compete. Oneis the Turkish market, including domestic point-to-pointtraffic, and the second is the global transfer market. Inthe former, we have about 60% of the market and thisis growing because Turkey has a healthy economy,which is encouraging more people to travel – bothinternally and internationally. In terms of internation-al competition, we are not facing other airlines direct-ly at home, but are rather competing on a network-widebasis – so the Turkish Airlines network is competing withthe networks of other airlines.

Competition does not focus on a single product, buta mix of offerings. For instance, it is not only about com-peting for passengers flying between Europe and Turkey,but also those travelling between Europe and other des-tinations via Istanbul. Our network consists of severalregions, so that overall success depends on the mix-ture of elements, but is not fully dependent on any sin-gle one. This arrangement also protects us from a down-turn or problem in any single region.

Given the high costs of fuel and the volatility of thelira, how will Turkish Airlines fulfil its goal of post-ing sustainable 15% growth through 2015?KOT"L: We faced the fuel problem in 2008 when theprices were already high. This is unfortunate, but it is areality: when fuel prices go up, all the costs go up. It isa fact of the economy and affects all airlines. Howev-er, even though costs rose, income also grew and 2008was our best year. We were listed as the sixth-most prof-itable firm in terms of operational income, and we werethe sixth-biggest airline at that time.

Fuel prices went up, so fares went up, but as ouroverall costs were more favourable than our competi-tors, we were able to raise fares and still attain a goodmargin of profit. We are facing a similar situation now,so it depends on the strategy for controlling other coststhat makes a difference when fuel prices fluctuate.

Whenever the lira fluctuates, it hurts us. A steadyexchange rate is better. Some 80% of our income is dol-lars and euros, so the lira fluctuation is not affectingthe income. But our accounting is in liras, which meansour debts in euros and dollars become problematic.Because we have debts in foreign currencies, and mustaccount for those in Turkish liras, we are seeing effec-tive income losses at the bottom line. So, we focus onproducing more cash, which maintains operationalprofits and results in a stronger position.

How much of an effect does the government’s for-eign policy have on the growth of Turkish Airlines? KOT"L: One area where the government has a dramat-ic effect is in issuing visas and relaxing visa requirements.For instance, the Russia-Turkey market is massive, andeven before the visa regulations were relaxed there wassignificant travel between the two countries. Howev-er, all Turkish visitors to Russia used to have to applyfor a visa and wait about two weeks before travelling.Today, we can just go and enter Russia without anydelay. The same is also true for Russian visitors to Turkeyand other countries, particularly in the Middle East,which supports the growth in that market.

The relaxation of visa requirements has made Turkeyan important place to come and do business. Thatmeans more people are coming here, increasing the pas-senger loads. As loads rise, we will be able to handle arise in frequency more easily. It improves the productand boosts the effectiveness of the whole network.

Ties between Turkey and the European markets arerobust. The strongest has traditionally been the Ger-many-Turkey market, but today the Italy-Turkey and theSpain-Turkey markets are catching up to the pole posi-tion. The Russian market will most likely be the strongestin the near future. Airline business is shifting, but thebiggest growth is in the niche markets, because thesmallest increases have a greatest impact there. TheAfrica-Turkey market is booming and expanding massively as Turkey opens embassies on the continent.

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Expanding marketsOBG talks to Temel Kotil, CEO, Turkish Airlines


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AgricultureTop crops include wheat, pulses, cotton, nuts and fruitLand fragmentation is an issue as most farms are smallFood price volatility a concern, especially for meatGenetically modified organisms a topic of debateInvestment from import-dependent Gulf states rising

AGRICULTURE OVERVIEW

Citrus fruits account for about one-third of fresh food exports

Grain has a long history in Turkey. In the foothills of theKaracada! Mountains in the south-east, wild grass thatis genetically identical to the first grains domesticated11,000 years ago still grows. Today, agriculture remainsa cornerstone of the economy, employing a quarter ofthe workforce and contributing more than 8% to GDP,according to the Turkish Statistical Institute (TurkStat).

Those numbers show a decline from a decade ago,when farming accounted for 10% of GDP and employedmore than a third of workers. Still, it remains a giant inthe region, thanks to a favourable and varied climateas well as rich soil structure. Roughly 40% of land is arable,making Turkey a key producer for a variety of crops. Itis the world’s number one in hazelnuts, figs, apricotsand cherries, and is second for lentils, honey and pep-pers, according to the General Directorate of Agricul-tural Production and Development (TÜGEM). It alsoranks in the top five for walnuts, olives, chickpeas, toma-toes and aubergines. Other key products include grains,oil seeds, cut flowers, poultry, milk and dairy, fish, cot-ton and tobacco. Overall, crops account for just overtwo-thirds of agricultural production, livestock makesup about a quarter, and fisheries and forest productscontribute 7%. The OECD estimates that Turkey is theworld’s seventh-biggest agricultural producer. GRAIN: Turkey is the king of wheat in the Middle East,producing nearly half of all that is grown in the region.Worldwide, Turkey is the 10th-biggest wheat produc-er, and the 2011 harvest saw a near-record yield ofalmost 19m tonnes. Still, the country is alternately awheat importer and exporter, depending on the sizeof the harvest, and despite the 2011 record, it still hadto import an estimated 1.3m tonnes, mainly from Rus-sia, to cover demand, driving wheat prices to their high-est yet. In early 2012 the Turkish Grain Board (TMO)reversed course and issued a tender to sell 200,000tonnes of wheat and barley to foreign firms to clearout old stocks. Demand from flour mills helps driveconsumption. Turkey is one of the world’s top wheat-flour exporters and sold more than 1.8m tonnes abroad

in 2010, a five-fold increase in 10 years. The record pricesare also in large part due to more wheat being used foranimal feed. Corn output in 2011 was estimated to be3.6m tonnes, according to the US Department of Agri-culture (USDA). With inadequate corn stocks, poultryproducers are using wheat as feed. Corn supplies arealso affected by a 130% tariff on imports.GM STANCE: Tough regulations banning the import ofgenetically modified organisms (GMOs), passed in 2010,have created an additional barrier to sourcing cornfrom abroad. Concerns about the risks to public healthposed by GMOs, corporate control of the food supplyand harm to biodiversity helped usher in legislationthat includes fines and a prison sentence of up to fiveyears for those convicted of growing or importingGMOs. “Turkey uses EU regulations as a basic referencefor its own GMO rules, but in some ways it is ahead ofthe EU, including its ban on planting GMO products andjail terms for violators,” Tarık Nejat Dinç, who headsGreenpeace’s agriculture campaign in Turkey, told OBG.

However, rising food prices are undermining infla-tion targets and could sway politicians to ease GMOcurbs, activists have said. The US, which plants theworld’s biggest share of GM crops, has lobbied thegovernment and food producers to allow GM cornimports. In December 2011 the Official Gazette report-ed that the Biosafety Council had already approved 13varieties of GM corn for animal feed and three kindsof GM soy. It appears to be a slippery slope: in Febru-ary 2012, it began considering lifting the ban on ninemore kinds of GM feed corn, and applications for anoth-er 40 GMO products, including some for human con-sumption, are pending. “Turkey is moving in the wrongdirection by making GMO imports easier,” Dinç said.Proponents of looser regulations argue that GMOs willboost yields and lower prices, making Turkish productsmore competitive abroad and affordable at home.REFORMS: Turkish agricultural policy is often dynam-ic, though some would call it ad hoc. Restructuringbegan in the 1980s, including privatisation and the

Agriculture accounts foraround 8% of GDP andemploys a quarter of theworkforce. Turkey is aleading producer ofhazelnuts, figs, apricotsand cherries, among othercrops. It is also the 10th-largest producer ofwheat, at nearly 19mtonnes in 2011.

While parliament passedtough regulations banningthe import of GMOs in2010, rising food pricescould prompt a reversal.The Biosafety Councilapproved several GManimal feed products in late2011, and several other GMproduct applications arenow being considered.

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New pasturesA varied climate and fertile soil make the country a regional breadbasket



elimination of trade barriers, which helped make Turkeythe Middle East’s biggest exporter. Agricultural exports,including processed foods, more than tripled from 2002to 2010, reaching $13bn, about 11% of the total, accord-ing to the minister of agriculture, Mehdi Eker.

Among the stated objectives of Turkey’s agricultur-al policy are to maintain food security and safety, raiseproductivity, enhance competition and improve self-suf-ficiency, boost farm incomes and develop rural areas,and align laws with EU standards. The governmentoffered financially unsustainable price supports until2001, when World Bank-backed reforms brought aboutmore market-oriented policies, although Turkey stilloffers subsidies for fertilisers and fuel, invests in infra-structure and imposes some trade barriers againstimports. Moreover, the TMO also intervenes in the grainand nut markets to buy up surpluses. Since 2000, it haspurchased almost 18m tonnes of wheat alone.

The Agriculture Law passed in 2006 sought to har-monise farm policy with that of the EU, including tack-ling environmental concerns. But negotiations with theEU on agriculture, fisheries and six other chapters ofthe acquis communautaire were suspended in 2006over the country’s refusal to allow Greek Cypriot shipsand planes to use Turkish harbours and airports.

Even if talks were resumed, Turkey would struggle tomeet EU benchmarks before discussions on the farm-ing chapter could commence. The biggest obstacle isaligning the supports with the Common AgriculturePolicy. The government’s 2012 budget allocates TL7.2bn(!3.06bn) in support payments to farmers, part ofTL11bn (!4.68bn) in funding for agriculture, accord-ing to Eker. The government wants to boost produc-tion to $150bn by 2023, which would make it one ofthe world’s top five producers and raise exports four-fold to $40bn, Eker said, but did not elaborate on how.TOP CROPS: Recent harvests have been a mixed bagfor Turkish crops. Among key products, hazelnuts andother tree nuts had a “devastating” year in 2011 becauseof poor weather conditions, with output of hazelnuts,grown largely in the Black Sea region, plunging to400,000 tonnes, according to the USDA. On the otherhand, the hot weather helped cotton reach 650,000tonnes in 2011. Consumption is still twice that, thanksto the world’s fourth-biggest ready-to-wear manufac-turing sector. Better irrigation and high cotton pricesworldwide have promoted an expanded cotton crop areain Turkey, now estimated at 480,000 ha. Sunfloweroilseed production in 2011 rose to 925,000 tonnes, asthe impact of a drought in Thrace, the main sunflowerregion, was offset by planting in other parts of Turkey.

About a third of Turkey’s fresh food exports are cit-rus, and the main destinations are Russia, Ukraine, Iraqand Iran, according to the Agricultural Food Platformin Mersin, a major citrus-growing region. “In the pastfew years production of most citrus varieties has beenincreasing slowly but steadily. 2010 was a good year...and 2011 is predicted to be a good year as well,” aDecember 2011 USDA report said. Oranges account fora little less than half of citrus production and reachedan estimated 1.73m tonnes in 2011. Tangerines and

lemons each make up 23% of this, or 874,000 tonnesand 850,000 tonnes, respectively. Grapefruit outputcame in at 240,000 tonnes in 2011, the USDA said.FOOD PRICES: Even as farmers plant more land andtechnology gains support productivity levels, food pricesare rising fast, up 11.2% in February 2012 alone, thebiggest increase among the basket of goods used tomeasure inflation, TurkStat said. Turkey has some of theworld’s costliest meat, which has slashed per capita con-sumption to about a third of that in the EU. High fueland feed prices are partly to blame, but the main cul-prit is poor breeding, Sinan Ö!ün, the coordinator ofthe Middle East Sustainable Livestock Production,Biotechnology and Agro-Ecology Research and Devel-opment Centre at Zirve University in Gaziantep, told OBG.“Turkey has primarily relied on the by-product of thedairy industry to produce meat. It can be seen in dozensof efficient meat-producing countries around the worldthat suitable beef and lamb breeds have to be used ifyou are to yield meat productively,” Ö!ün said. “Whenother countries with similar conditions can producemeat for under $2 per kg and Turkey struggles to keepitself afloat at $4, there is something very wrong.”LIVESTOCK: Some 11.4m head of cattle and almost30m sheep and goats constituted the nation’s herdsin 2010, according to TurkStat. Even as production ofmeat dropped 12% in 1991-2009, Turkey kept its curbson imported live dairy and beef cattle, sheep, goats andpoultry, as well as their meat, citing sanitary reasons.

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Crops account for about two-thirds of agricultural production

Agricultural exports,including processed foods,totalled more than $13bnin 2010, a figure thegovernment aims to boostto $40bn by 2023. Recentharvests of key crops havebeen mixed, and rising foodprices are a major concernfor local consumers.

SOURCE: TurkStat

Agricultural production, 2005-10 (m tonnes)

Cereals & other crop prod. Vegetables Fruits bev. & spices Livestock Animal prod. Total

2005 21.52 12.03 17.39 20.92 16.51 88.37

2006 20.08 15.05 19.38 22.94 18.90 96.36

2007 19.56 17.05 20.18 24.67 22.92 104.38

2008 24.04 18.15 23.82 25.52 23.82 115.35

2009 25.89 19.53 22.85 28.15 26.61 123.02

2010 28.46 26.59 24.99 46.87 38.13 165.04


Then, as prices skyrocketed in 2010, it allowed limitedimports of red meat by slashing tariffs from 145% toas low as 30%. The Ministry of Agriculture (MoA) reports2.5m animals were imported in 2010 and 2011 at anestimated cost of $1.77bn. This harmed local produc-ers, with some of the biggest domestic breeders aban-doning beef production. As tariffs were again raisedincrementally in 2011, consumers began to pay dear-ly for meat once more, suggesting that temporary meas-ures may not resolve Turkey’s livestock problem. It alsothreatens new ones: Customs officials have made hun-dreds of busts at Turkey’s borders with Iraq, Syria, Bul-garia and Georgia. Local media reported that in 2010alone, illegal seizures more than tripled.FRAGMENTED: More commercial farms are springingup, particularly in the Aegean and Mediterranean coastalareas, but most farms are still typically family-owned.Due to inheritance laws, the sector is heavily fragment-ed: more than 90% of farm households have a maxi-mum 20 ha of land, and nearly two-thirds of all farmsare smaller than 5 ha, according to the OECD. The aver-age farm size is 5.7 ha, compared with 17 ha in Europeand more than 100 ha in the US. Limited budgets makeit difficult for family-run farms to afford the technolo-gy that will make agriculture more productive.

However, fragmentation has also allowed for one ofEurope’s fastest-growing organic sectors. This has beensupported by state incentives, including sharply reducedinterest rates on agricultural loans to organic farmers.Some 383,000 ha were managed organically in 2011,a seven-fold increase since 2003, the MoA said. Thatis about 1.6% of all farmed lands. Total output of 216types of organic products rose 4% to 331,362 tonnesin 2010, according to TÜGEM. Most are exported. FOREIGN INTEREST: Foreign interest in Turkey’s agri-cultural sector is growing. The Investment Support andPromotion Agency estimated that Gulf funds couldspend up to $9bn in Turkey, most of that on food andagriculture. Many Gulf states are dependent on foodimports, and Turkey can supply their grains, pulses, oilseeds, fruits, vegetables, poultry and dairy, as well asfish and honey. Figures from Saudi lender NationalCommercial Bank show that Turkey exported $144mworth of agriculture products to Saudi Arabia in 2009.Qatar and the UAE also plan to invest heavily in the coun-try to produce food for back home (see analysis).

Large international and domestic companies arelooking for land in the South-eastern Anatolian Proj-ect (GAP) region to establish facilities, especially for live-stock breeding, Mushin Gümü#, an official with theTurkish Agricultural Credit Cooperatives, told local pressin April 2011. GAP is a TL42bn (!17.85bn) developmentscheme that includes irrigation and hydropower proj-ects and investment in infrastructure, education andhealth. As for small and medium-sized farms, the Euro-pean Bank for Reconstruction and Development (EBRD),backed by assistance funds from the US, launched a!400m facility to bolster lending in November 2011.A month later DenizBank, the country’s largest non-state agriculture lender, signed a !40m credit line withthe EBRD to offer local farmers loans of up to !2m.

WATER, WATER: The OECD says Turkey’s overall waterquality is high, although pollution from fertilisers is aproblem in some irrigated areas. Development hasgathered speed under the 2008 GAP action plan, whichaims to put another 1.06m ha of land under irrigation,eventually constituting 20% of the irrigable total. Turkeyconsumed just 41% of its water potential in 2008, butrapid urbanisation, climate change, hydroelectric proj-ects and more agricultural output could push that to100% in 10 years, according to the State HydraulicsWorks. As agriculture consumes two-thirds of waterresources, it must begin to do so more efficiently.FISHERIES: With around 8000 km of coastline andnumerous rivers and lakes, both marine and freshwa-ter fisheries abound. One out of four sea bass andbream consumed in Europe is Turkish, according to theTurkish Exporters’ Assembly. The sector targets exportsof $3bn by 2023 from $500m today. Total fish produc-tion was 653,000 tonnes in 2010, according to theMoA, of which 167,000 came from aquaculture. Com-mercial fishing from wildlife fisheries still accounts for75% of output. Turkey has 16,000 fishing boats, 600dragnets and 750 trawlers, the Istanbul Chamber ofCommerce said. The government wants to make Turk-ish fisheries the biggest in Europe by 2023. Depletionof fish stocks in a growing problem, however. Even theboats selling fish sandwiches on Istanbul’s Golden Hornuse Norwegian mackerel after overfishing decimatedBlack Sea stocks, according to local media reports.

“We want projects that don’t demolish fishing habi-tats, but build new ones,” Eker said in 2011. “We areexploring ways to help fish spawn and to enhance thepresence of marine fishery.” The Istanbul Fish Produc-ers’ Association says marine pollution is the greatestthreat to the city’s fishermen. Other factors includewarmer water temperatures that have forced migra-tion of bonito and other fish before the annual fishingban is lifted in September 2012. The trade group alsowants the minimum legal length that was introducedto protect young lüfer, the Bosphorus Strait’s iconic butthreatened indigenous bluefish, lowered to 18 cm from20 cm. The Turkish Marine Research and Foundation,which runs a campaign to end the sale of bluefish under24 cm, wants fishermen more strictly controlled andnew protection zones established in the Sea of Mar-mara. Newspapers reported that illegal trawlers in Istan-bul have jumped by 600% to 300 vessels in recent years.OUTLOOK: Turkey’s suitable climate and proximity toEurope and the Middle East make it a target for agri-cultural investment. The government’s investments ininfrastructure and the potential for consolidation ofsmall-scale farms also make it attractive. However, thereis concern that Turkey not sell the whole farm, with sec-tor players suggesting a foreign-investment reviewboard that could ensure majority stakeholders are Turk-ish, as well as provide oversight and policy coherence.Despite reforms over the last two decades, efficiencyand productivity remain low compared to the rest of the economy. The OECD recommends an end totrade- and production-distorting measures, while con-tinued research and development will also be essential.

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With nearly two-thirds offarms under 5 ha, landfragmentation is a majorissue. Despite this, organicfarming has been a growthsegment in recent years.Total organic outputreached 331,362 tonnes in2010, with most of thisgoing to export markets.

Foreign interest in thesector is growing,particularly from Gulfstates, which rely heavilyon food imports. Thefisheries segment is alsoexpanding, with a goal ofreaching $3bn in exports by2023, although there areconcerns over thedepletion of fish stocks.


AGRICULTURE INTERVIEW

Recep Konuk, Chairman, Konya #eker

Will greater local manufacturing, mechanisationand new techniques in agriculture lead to con-solidation and unemployment? KONUK: In 2011 agriculture accounted for 8.4% ofGDP and 25% of employment. In 2002, those num-bers were 10.3% and 35% respectively, so there hasbeen some decline in the role of agriculture.

Turkey has a dynamic, fast-growing economy. Asa natural consequence of this process, sectors suchas industry, services and tourism have above aver-age growth. However, we need to also look at oth-er data. For instance, Turkey’s national income was$230bn in 2002 and $734.9bn in 2010. Within thisgrowing economy, the share of agriculture was$23.7bn and $61.8bn, respectively. During this timeTurkey’s crop fields did not expand and productionpatterns did not significantly change, but there wasa 10% decline in unemployment. By increasing pro-ductivity and expanding to crop varieties with moreeconomic value, the sector grew.

Increasing productivity was possible by improvinginfrastructure for agricultural production, as well asseed quality, farming techniques and machines. Withindustrialisation, mechanisation and innovation, theneed for manual labour has been declining, but wecannot conclude that this will lead to unemploy-ment. Increasing the sector’s efficiency and compet-itive capacity causes an accumulation of capital with-in the industry, which provides the basis for thegrowth of agriculture-integrated manufacturing.Consequently, the labour force that is pushed outof the agriculture industry is reabsorbed through sub-industries, services and manufacturing.

Is Turkey primarily focused on raw produce ratherthan refined or processed foodstuffs? KONUK: Turkey is a self-sufficient country in grainproduction, but it is not a major exporter of raw pro-duce. Additionally, much of the material used in theproduction of exported goods is imported. In 2011,

for example, agricultural exports were worth$14.21bn and imports were worth $10.65bn. Import-ed goods include a wide range of products, such aswheat, cotton, leather, wood and rubber. Some ofthese goods are imported for domestic consump-tion, but a large portion is processed and exported.

Until the last 15-20 years, foodstuffs had a bigshare in Turkey’s exports, the majority of which wereexported before being processed. This balance hasshifted in the past decade in favour of processedgoods, which now have a larger share thanunprocessed foodstuffs. Although we cannot claimyet that Turkey has fully moved to the export ofrefined or processed foodstuffs, it can be describedas a country in transition toward that target.

In what way has collaboration and consolidationimproved efficiency and innovation? KONUK: Collaboration has had an absolutely posi-tive effect on the agriculture sector, and, as a coop-erative society, Konya #eker has seen it directlyimpact agricultural production. The first consequenceof this is a demand guarantee, the second is the bet-ter pricing of goods and the third is the possibilityof planned agriculture. Finally, collaboration increas-es productivity. These processes enable researchand development activities and support the produc-ers as they adapt more innovative techniques andtechnologies and offer new products.

Through a series of support mechanisms – suchas helping producers obtain the right seeds, fertilis-ers and soil tests, and facilitating better access tomicro-irrigation techniques – striking improvementshave been achieved in the production methods ofsugar beets, corn, barley and potatoes. Canola, whichis completely new to the region, is now being grownutilising high-productivity methods. These innova-tive goods enabled an increase in production volumesand have helped lead the way for more energy crops,which hold great potential for the sector’s future.

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Fruits of changeOBG talks to Recep Konuk, Chairman, Konya "eker

AGRICULTURE ANALYSIS

Global food demand is expected to rise by 50% over the next 20 years

Little grows in the arid countries of the Gulf withoutlarge quantities of expensive water. The solution maylie in the lush pastures of nearby Turkey, where Qatar,Saudi Arabia and the UAE plan to spend billions of dol-lars to buy or lease farmland. These investments, theyhope, will allow them to become self-sufficient in termsof food. Some argue, however, that the investments mayundermine Turkey’s own food security.

At 23m ha, Turkey’s arable land is twice the size ofGreece’s entire territory. About 4m ha of that lies fal-low, according to the OECD, making Turkey extremelyattractive to its thirstier neighbours. “Turkey is truly aprime piece of agricultural land, in the middle of a mis-managed, poorly depleted region, with good supply ofwater to support its production,” said Sinan Ö!ün, thecoordinator of the Middle East Sustainable LivestockProduction, Biotechnology and Agro-Ecology Researchand Development Centre at Zirve University in Gaziantep. FOOD SECURITY: Qatar aims to meet 70% of its foodneeds domestically by converting semi-desert areasinto agricultural land and boosting crop yields, accord-ing to the Qatar National Food Security Programme. Butthe bulk of the remainder will come from land purchas-es or rentals in Sudan, Australia, Ukraine and Turkey. Has-sad Food, part of the sovereign wealth fund QatarInvestment Authority, wants to buy hundreds of thou-sands of hectares of land in Turkey for crops and live-stock grazing. Such a large purchase would require thesale of at least some Treasury-owned land, which is notlegally possible, local press reported. Hassad may haveto form joint ventures with local firms to get aroundrestrictions on foreign ownership of large tracts of land.

Planet Food World (PFW), based in Riyadh, plans toinvest $3bn in Turkish agriculture over the next five yearsto export food to the Gulf, targeting sales of $20bn inthat period. The project includes 20,000 industrial farmsto grow vegetables and raise livestock. According to thefirm, a 1-ha farm in Turkey can earn $1200 per year.

“In the agriculture space, Turkey has emerged as oneof the top recipients of Saudi investment, as the king-

With 23m ha of arable landand 4m ha lying fallow,Turkey is a prime target forforeign investment,particularly from cash-richbut water-poor Gulf states.The wave of investment hasprompted fears of a landgrab aimed at waterresources from somequarters locally.

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Out in the countryGulf states look to acquire farmland to meet growing demand at home


dom seeks to boost its food security,” Abdul Kareem AbuAl Nasr, the chairman of National Commercial Bank, saidin 2011. In 2011 Saudi Arabia also applied to the South-eastern Anatolia Project (GAP) to set up a 1m-headsheep farm. The Gulf state imports 1m sheep per year,largely for the holiday of Eid Al Adha.

Another Gulf investment fund made up of the AbuDhabi Investment House, Gulf Finance House and Ith-maar Bank has a $6bn agriculture project in Turkey.Bahrain, Kuwait and Italy have also expressed interestin acquiring farmland, Turkish officials have said.PICK & CHOOSE: “Choose and take what you want,”the agriculture minister, Mehdi Eker, told Arab investorsin a 2009 presentation, according to local media. Thisled to criticism that Turkey is succumbing to a newform of colonialism. Some fear a land grab with the realaim of controlling water resources. Others say the entryof foreign capital and corporations into a strategic sec-tor could undermine local competitiveness.

“When you sell the land, you sell the potential des-tiny of the output,” said Ö!ün. “As deregulation becomesmore the norm in Turkey’s free trade with internation-al partners, the owners of the land will put the needsand concerns of the international market before domes-tic needs and will start producing commodities accord-ingly.” He pointed out that already Turkey exports meatdespite falling protein consumption. “Imagine the anom-aly when more land is owned by foreign investors.”FACING A DILEMMA: The dilemma posed by foreigninvestment is not just Turkey’s, but one facing otheremerging economies around the world. The impact ofclimate change on harvests and rapid population expan-sion across the globe are projected to increase fooddemand by 50% in the next two decades, the OECD said.More than 30m ha of arable land has been purchasedor rented by foreign capital since 2007, UN data showed.Investors – hedge funds among them – are buying upfarms across Asia and Africa, and Turkey, with its abun-dance of arable land, is likely to continue attractinginterest from foreign investors in the years to come.

165

Telecoms & ITStrong growth potential leads to vibrant sectorIncreasing popularity of smartphones among subscribersContinued investment in fixed and mobile technologiesRising broadband penetration and higher speedsEncouraging the use of IT in the economy and schoolsOperators’ investments lead to faster connections

TELECOMS OVERVIEW

Sector regulations were adjusted in 2000-01 in line with EU models

As in many other countries, telecommunications inTurkey was originally a component of a larger statemonopoly Post, Telegraph and Telephone (PTT). OnApril 24, 1995, the government split PTT, giving itspostal and telegraph services to the General Direc-torate of Posts and its telecommunications responsi-bilities to a newly created state company, Türk Telekom. SECTOR DEVELOPMENT: The company maintained amonopoly until the government altered the laws gov-erning the sector in the midst of the twin economiccrises of 2000 and 2001. Leading up to that point, thecountry had been adjusting its telecommunicationspolicies, largely in harmony with those of the EU.

As a result of changes made between 2000 and2001, Ankara created the Information and Communi-cation Technologies Authority (ICTA), the country’s firstsector-specific independent regulator. Together withthe Ministry of Transportation, ICTA oversees the sec-tor. Currently, the laws most relevant to telecommuni-cations are the Telegram and Telephone Law No. 406(the Telecommunications Law), the Wireless Law No.2813 and Ministry of Transportation law No. 3348. FIXED SEGMENT: The fixed voice segment was large-ly shaped by the role of former-monopoly Türk Telekom,which was owned by the state between 1995 and 2005.The last two Turkish governments led a broader privati-sation drive in the country, which included Türk Telekomin its provisions. The government set a deadline of 2004for the liberalisation of fixed-line telephony services,which would bring an end to the firm’s monopoly. In2005, the Saudi-based Oger group bought a 55% shareof Türk Telekom, becoming its majority stakeholder. Itretains a controlling stake of the company, while theTurkish government has a 30% share and additional 15%is traded on the Istanbul Stock Exchange.

Since its privatisation in 2005, Türk Telekom has lever-aged the benefits wrought by the strong infrastructurethat it inherited from its former days as the state monop-oly. This network has helped the company remain thefixed voice segment’s juggernaut, with a market share

that has hovered around 90% throughout the privatisedera. At the end of the third quarter of 2011, the mar-ket share was roughly 91% measured by income, accord-ing to data from the ICTA. The other 9% of fixed voicewas shared among a number o f alternative fixed serv-ice providers. Between the third quarter of 2010 andthird quarter of 2011 income in the segment fluctu-ated, but held to around TL1.3bn (!552.5m) overall. FACING CHALLENGES: Newly developed mobile tech-nologies have begun to supplant the role of fixed linesin Turkey. Between 2005 and the third quarter of 2011,the number of fixed-line subscribers fell from 18.98mto 15.47m and overall penetration dropped from 26%to 21%, according to data from ICTA.

Despite shrinking user rates and fears of obsoles-cence, Türk Telekom has demonstrated that operatorsin the fixed-line segment can find ways to retain sub-stantial revenues. The firm has run a number of cam-paigns that bundle fixed voice minutes with calls tomobile phones and international destinations. The com-pany has also been working to maintain partnershipswith different business sectors, including travel, ener-gy and electronics. So far these campaigns seem to beeffective. Fixed-line revenues slipped only about 2%year-on-year (y-o-y) between the third quarter of 2010and third quarter of 2011, from TL3.18bn (!1.35bn)to TL3.12bn (!1.33bn) according to the company’sfinancial data. At the end of the third quarter of 2011,fixed voice still made up 33% of the company’s revenues. MOBILE SEGMENT: Since the dissolution of statemonopoly PTT in the 1990s, the combination of a bur-geoning youth demographic, growing disposableincomes and increasing interest in new technologies,has led to rapid growth in mobile penetration and rev-enues. Between 2001 and 2007 subscriber numbershave more than tripled, rising from 19.5m to 61.9m, thenpeaking in 65.8m in 2008, according to data compiledby Turkish Statistical Institute (TurkStat). Although thefigure dipped during the 2008-09 financial crisis, esti-mates for 2011 yearly results indicate that subscriber

Mobile subscriptions morethan tripled between 2001and 2007 from 19.5m to61.9m thanks to a youngpopulation, increasingdisposable incomes and agrowing interest in newtechnologies.

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Staying in touchThe growth of the mobile sector and internet use are driving competition and innovation among providers


TELECOMS OVERVIEW

numbers have topped the 2008 peak, reaching 66.7m,according to data compiled by !" Investment.

Call traffic has been on the up as well. Between 2007and 2010, total mobile calls ballooned from 57.3bnminutes to 125.8bn, rising continuously through drea-ry global economic conditions. Likewise, use of SMS sawcontinual growth as well, more than quadrupling from36.1bn units to 147.9bn during the same period. Despiteincreasing demand, the mobile area is one contestedwith stiff competition among three major players: Turk-cell, Vodafone and Avea. THE BIG THREE: With more than 34m subscribers anda market share of 53.13% as of September 30, 2011,Turkcell has grown to be by far the largest mobile oper-ator in Turkey. The firm traces its history back to 1994,when it became one of two GSM operators followingthe dissolution of state monopoly PTT. In that year,Ankara granted Turkcell a 25-year GSM licence contractwith the Ministry of Transportation for $500m. Sinceits inception, Turkcell has held onto a majority of mobilemarket share. The company’s hold on the market, how-ever, is by no means a forgone conclusion. Turkcell’s mar-ket share slid from 61.9% to 52.9% between 2005 and2011. This decline has been gradual, and has settledjust above 50% of the market. Although the company’sshare of the market has shrunk, the growth of the over-all market has yielded record-breaking revenues. In thethird quarter of 2011, Turkcell announced its highestquarterly revenue, TL2.52bn (!1.1bn), and 8.6% increasey-o-y from TL2.32bn (!986m) in third-quarter 2010.

The second-largest mobile operator, Vodafone Turkey,had a market share of 27.53% as of September 30,2011, according to the ICTA. The firm is a subsidiary ofUK-based Vodafone, the world’s the largest mobileoperator by revenue. It joined the Turkish market viathe $4.55bn acquisition of Telsim, the company that hadjoined Turkcell as one of the Turkey’s two first GSM oper-ators in 1994. Vodafone announced the plan on Janu-ary 13, 2006 and entered the market soon after.Although it entered Turkey with a market share less thanhalf the size of Turkcell’s, the company’s leadership hasbeen working dispel the idea that it is playing secondfiddle. In the time since its entrance to the Turkish mar-ket, Vodafone has grown its market share from around21.3% to 27.6% and subscriber count from 9.2m to17.99m, according to data compiled by !" Yatarım, theinvestment banking Arm of !" Bank.

Aves, the third-largest of Turkey’s mobile operators,has a customer base of 12.5m and market share of19.33% as of third-quarter 2011, according to the ICTA.The company was founded in 2005 as the result of amerger of Aycell, Türk Telekom’s GSM operator, andAria, owned by !" Bank and Telcom Italia Mobile (TIM).The companies merged and combined their names,creating Avea in the latter half of 2004. In the mobileoperator’s early years, Türk Telekom consolidated itsownership of the company, buying Telecom Italia’s 40.6%stake. Currently, Avea’s shares are split among TürkTelekom (81.37%) and !" Bank (18.63%). TAX CHANGES: The Turkish mobile sector bears thehighest industry tax burden in Europe and is in the run-

ning to be the highest in the world. This is in large partdue to a new tax levied on the sector following twoearthquakes that struck urban centres in the Marmaraand Black Sea regions in August and November of 1999.Called the special communications tax, it required a 25%levy on “all types of installation, transfer and telecom-munications services given by mobile phone opera-tors”, according to the Revenue Administration of Turkey.Although the state originally planned for the tax to bea temporary measure, the government extended thetax and eventually adopted it as part of the tax system.Since mobile communications are also subject to the18% value-added tax, mobile communications compa-nies and their customers pay an effective rate of 43%.

The government has also included mobile phones ina series of tax hikes announced in October 2011 in orderto reduce the budget deficit. The tax rate on handsetswas raised from 20% to 25%, while a flat rate tax apply-ing to sales of mobile phones increased from TL40(!17) to TL100 (!42.50). Politicians expect that themeasure will raise TL660m (!280.5m) for state coffers.The state also levies a tax on the act of signing up for

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Mobile users spent 125.8bn minutes on their phones in 2010

With a specialcommunications tax of 25%and 18% value-added tax,the Turkish mobile sectorbears the highest industrytax burden in Europe.

AveaVodafoneTurkcell

Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 20110

10

20

30

40

50

60

Mobile operators by market share, 2010-11 Q3 (%)

SOUR

CE: I

CTA

TELECOMS OVERVIEW

a GSM network, or buying a SIM card. In 2012 this taxwas increased from TL34 (!14.50) to TL37 (!15.70).

Mobile majors in the country point out that reduc-ing tax burdens on new mobile technology could helpboost overall subscription rates, which over time couldmean tax revenues of equal or even higher value thanthose the government currently receives. In addition,operators point out that lower costs for communica-tions technology could lead more businesspeople toadopt new technologies, which could boost produc-tivity and competitiveness across the economy.

The arguments for lower mobile taxes have not fall-en on deaf ears. On February 18, 2009, the governmentlowered the special communications tax rate on mobileinternet from 25% to 5% and on alternative electroniccommunications services not covered in the originallaw from 25% to 15%. In addition, Sezgin Tanrıkulu, thedeputy chairman of the Republican People’s Party, anda number of other members of parliament haveannounced their intention to push for lower taxes.They point out that in other developed countries onlyvalue-added taxes apply to electronic communications,and that the resulting lower rates could lead to widerusage, recovering revenues lost from eliminating thespecial communications tax. SMARTPHONES: Despite high taxes and high costs,smartphones are increasingly popular in the country.One factor contributing to growth has been the devel-opment of Turkey’s 3G infrastructure. This service is rel-atively young in Turkey, and did not exist in the marketas recently as 2008. By the third quarter of 2011, thenumber of subscriptions had reached 28.6m, or morethan 40% of all mobile users, according to the ICTA.

The advent of smartphones and 3G has opened newavenues of competition for providers. Vodafone signedan agreement with mobile phone manufacturer HTC inearly 2011 to increase the range of HTC products soldin Turkey. “Although Turkey has had a 3G mobile net-work for only two years, its smartphone market hasgrown surprisingly during the period so that we decid-

ed to put a lot of resources in the country,” Peter Chou,the CEO of HTC, told the Taipei Times in May 2011.

Turkcell, meanwhile, has designed its own brandedsmartphone models, the T10, T11 and T20, all of whichrun Google’s Android mobile operating system. The firstincarnation, the T10, became the number-one Androidsmartphone in the country in the first five weeks afterit was introduced in the market, and the data plans soldwith the phone have been an important source of rev-enue for Turkcell. The company has also partnered withMastercard to design the Cep-T Cüzdan wireless pay-ment app for the device using near-field technology. DEVILS IN THE DETAILS: Turkcell, although quite suc-cessful in maintaining its dominant position as Turkey’slargest mobile operator, has the type of size and suc-cess that can invite increasing amounts of legal andregulatory scrutiny. In recent years the company hasbeen holding its own in a legal dispute with the Turk-ish Competition Board, which announced a TL91.9bn(!39.1bn) fine for alleged violations of sales regulations.In June 2011 Turkcell released a statement denying thecharges and announced its intent to submit a stay ofexecution and annulment of the decision.

Legal disputes have also arisen among major share-holders of the firm. Stockholm-based TeliaSonera,Moscow-based Alfa Group and Istanbul-based Çukuro-va Group – the company that founded Turkcell – areembroiled in a dispute dating back to 2005, whenÇukurova backed out of a deal to sell its 13% stake toTeliaSonera for $3.1bn and instead sold it to Alfa Group.

Together, these three shareholders control just over51% of Turkcell. TeliaSonera holds 38% of the compa-ny through indirect and direct holdings, while Alfadirectly holds 13%. Çukurova nominally owns 0.05% ofTurkcell, but also has interest in Turkcell Holding, whichcontrols a 51% majority of the mobile company.

This sale provoked a lawsuit from TeliaSonera, and aseries of court rulings from European courts followed,with the result being rulings that demanded the sharesbe transferred back to TeliaSonera. In September 2011the International Chamber of Commerce (ICC), furtherordered Çukurova to pay $932m in damages. Thesedecisions have not been enforced, however, and Çukuro-va is still challenging them.

In October 2011 the Turkish government announcedchanges in corporate law that are set to affect themakeup of Turkcell’s board. Previously, Turkcell’s sev-en-member board was made up of two members fromeach of the three major shareholders and an inde-pendent. Under the new rules three seats will be occu-pied by Alfa and TeliaSonera, one seat by Çukurova, andtwo by independents. These changes could affect dis-putes by reducing the number of shareholder repre-sentatives on the board in favour of independents. INVESTMENTS: Despite tumult in its corporate board-room, Turkcell has maintained impressive investmentinside and outside of Turkey, indicating that these own-ership disputes have not prevented the firm frommanoeuvring a competitive mobile market. Turkcell hasmade nearly $8m in investments, including in 2G and3G infrastructure, as of the end of the third quarter of

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Fixed-line subscriptions have fallen as mobile contracts have risen in recent years

Smartphone subscriptionsaccounted for more than40% of all mobile contractsby the third quarter of2011. This is particularlyimpressive given that 3Gtechnology only arrived inthe country in 2009.


TELECOMS OVERVIEW

2011, by its own calculations. In April 2011 the com-pany began moving its directly owned operations out-side of Turkey with its subsidiary, Turkcell Europe. Thenew operation, based out of Cologne, Germany, wasmade possible by a five-year wholesale traffic purchaseagreement with Deutsche Telekom. Turkcell Europe istargeting Germany’s 3.5m strong Turkish population,using promotions like local rates for calls to and fromTurkey to draw in customers. As of August 2011, thecompany had attracted 132,000 subscribers.

In addition to its wholly owned subsidiaries, Turkcellhas extensive partially owned investments outside ofTurkey, largely in post-Soviet areas such as Kazakhstan,Georgia, Ukraine, Belarus and Moldova. Many of thesehave also seen significant growth in recent years. R&D: Driven by competition, other telecoms firms havealso been aggressive with investments. In August 2010,Avea became the first mobile operator in the countryto receive a research and development (R&D) centrecertificate from the Ministry of Industry and Commerce.The goals of the centre, located in the Ümraniye dis-trict of Istanbul, are to provide a central facility forresearch activities and work on the long-term plan ofdeveloping technologies that could differentiate Aveafrom its competitors, the company said in a statement.Indeed, the firm has been active in mobile applicationdevelopment, an area that could provide a competi-tive edge in the market. Between 2006 and 2010, Aveainvested over TL65m (!27.6m) in R&D.

Vodafone has been making investments in its Turkey-specific infrastructure. The company opened a call cen-tre in Samsun, a city in the Black Sea Region, at the costof TL16m (!6.8m). The Samsun call centre is part of agrowing wave of call centres opening in the country’seastern and south-eastern regions to serve subscribers.As factors like trade between south-east Turkey and Iraq’snorthern regions help improve the economic situationin the country’s less-developed regions, rising dispos-able incomes could create greater demand for telecom-munications services, and as a result, investments intelecommunications infrastructure as well. MVNO DEVELOPMENTS: The mobile virtual networkoperator (MVNO) market in Turkey received a boostwhen Ankara resolved a double taxation issue for theindustry. MVNOs operate by leasing data from mobilenetwork operators (MNOs), or operators that own andoperate data infrastructure such as cables and broad-casting towers. By leasing at wholesale prices and thenre-selling to customers, MVNOs can turn a profit. InTurkey, however, MVNOs were included in a regulationthat requires all telecommunications companies to pay15% of their revenues to the Treasury. Since both MVNOsand the MNOs had to pay 15% of their profits, the reg-ulation effectively double-taxed MVNO traffic. On August1, 2010, the parliament amended the law, allowing foran exemption from the 15% tax on MVNOs.

So far brands are largely closely integrated to largerfirms, such as Kartalcell and Fenercell and their ties withAvea. Named for two of the three most successfulsports clubs in the country, these two brands havebeen using the intensely competitive football culture

in Istanbul to attract customers. Still, with the double-taxation issue only recently resolved and the stiff com-petition among the three incumbent operators, Turkey’sMVNO potential has been heretofore largely untapped.With the new tax rules implemented, it is possible thatthese firms could find gaps to fill in the mobile sector. OUTLOOK: Enjoying the benefits of a young popula-tion, rising disposable incomes and a growing interestin technological developments, Turkey’s telecommuni-cations sector enjoys substantial growth potential. Thesector will likely to have to manage a number of changes.Fixed-line voice, for example, has been profitable inrecent years, but these services are slowly shrinking ascustomers shift to mobile services. These operatorswill likely search for ways to utilise their existing infra-structure by bundling voice services with mobile offersand using wire backbones to provide internet servicesto maintain their relevance in a changing market.

Mobile operators are also set to face the issue of howto approach 4G mobile internet technology that is evenfaster than its predecessor. With smartphones becom-ing increasingly affordable and tech companies inno-vating new apps to utilise their capabilities, a stronginternet backbone is set to be key in coming years.

169


Rising use of smartphones is creating demand for new apps

Increasing competition inthe mobile market isdriving service providers toinvest in infrastructure andR&D. Expansion outside ofTurkey is another avenue ofgrowth for some operators.

SOURCE: ICTA

Telephone call and message traffic, 2007-10 (’000)

2007 2008 2009 2010

Total outgoing traffic of all networks 90,051 102,752 130,795 147,651

National fixed calls 27,860 24,274 19,907 21,835

National mobile calls 57,367 74,482 108,065 125,816

Calls to internet 1132 407 140 45

Fixed to mobile 2812 2678 2187 2274

Mobile to fixed 1965 2118 5157 7477

Mobile (within network) 51,708 67,475 84,623 90,289

Mobile (btwn operators) 3692 4887 17,846 27,487

Int'l incoming calls 2714 3497 2600 4561

Int'l outgoing calls 881 910 927 948

No. of SMS (bn units) 36.14 77.54 128.22 147.99

TELECOMS ANALYSIS

Given the competition, continued infrastructure spending seems likely

While incumbent operators in other European coun-tries have become market leaders in both mobile andfixed segments, the Turkish example has been definedby large operators who started out strong in either themobile or the fixed segment – but not both. TürkTelekom, the incumbent fixed-line operator, dominatesthe market with the copper infrastructure that inher-ited from its days as a public entity. Turkcell and Voda-fone, on the other hand, have become the two largestmobile operators but have each had a relatively smallfixed presence. All three firms are now branching out.GOING MOBILE: Türk Telekom has been working hardto break with its past as a solely fixed-line operator. Asa result, the company has invested to cultivate a greaterpresence in mobile, internet and other segments. In late2004 on the eve of completing its privatisation, TürkTelekom doubled its stake in its mobile venture, Avea,from 40% to 80%, acquiring Telecom Italia’s share in thecompany. Since then, Avea has grown significantly,increasing its market share from 14% to 19.5% between2005 and 2011, becoming Turkey’s third-largest oper-ator. Türk Telekom has been actively investing in fixedlines as well. Indeed, as mobile data use increases, morefixed-line networks are needed to support that mobileuse. In April 2006 the company created its internetretailer TTNET, which offers bundled plans that includefixed ADSL, mobile broadband using 3G, and access toWi-Fi hotspots utilising its fixed connections through-out the country. In May 2010 the company alsoannounced its acquisition of Invitel International, aHungary wholesale data business, for !221m. FIXED IN PLACE: Turkey’s mobile operators have alsobeen devoting resources to broadening their presence.For Turkcell, a crucial move was the company’s acqui-sition of Superonline, a fixed communications and inter-net operator. The 2008 purchase, Turkcell said, wouldenable it to take advantages of synergies that existbetween Superonline’s operations, Turkcell’s opera-tions and those of Turkcell’s subsidiary broadbandprovider at the time, Tellcom. Since the acquisition,

The largest players in thefixed-line and mobilemarkets have made deals toexpand their services tothe other market segment.Acquisitions have alsoplayed a central role inexpansion efforts.

170

Come togetherSector players seek to expand their reach into different segments of the market


Turkcell Superonline has grown to account 4.6% of themarket, according to the Information and Communi-cation Technologies Authority (ICTA). Next, in August2011, the company announced that it would buy Glob-al $leti#im Hizmetleri, a firm offering fixed telephony,broadband and cloud computing services to a largelycorporate clientele. Superonline plans to integrate Glob-al $leti#im’s data centres and cloud computing serverswith its own fibre-optic network. LINKING UP: Vodafone Turkey has also gotten in onthe action. In January 2010 it announced it wouldacquire Borusan Telekom, a fixed-voice and data serv-ices firm. Similar to Turkcell’s acquisition of Superon-line, Vodafone indicated that it made the move withthe goal of improving its internet infrastructure. Althoughthe selling price was undisclosed, Vodafone reportedBorusan’s sales were $70m in 2009.

A year and a half later, Vodafone reached anotherdeal to boost its fixed presence. In July 2011 it announcedits intent to buy Koç.net, an internet and digital serv-ices provider. As of third-quarter 2011, Koç.net had2.02% of the internet service provider market share,the third-largest alternative operator after Superonline(4.62%) and Do!an Telekom (3.43%), according to ICTAdata. Vodafone paid TL30m ($12.8m) for the operator,which it valued for its fixed infrastructure. The compa-ny plans to create a new internet brand, Vodafone Net.

The significance of Vodafone’s and Turkcell’s shift tothe fixed-line internet sector cannot be understated.Although alternative operators were present in themarket earlier, TTNET has been able to maintain the vastmajority of market share for broadband internet – hov-ering around 82.5% in the third quarter of 2011, accord-ing to ICTA. The growth of these smaller operators hasstarted to change that as their market shares have allbeen increasing and are expected to continue to do so.

As mobile operators establish their presence in thefixed segment and the fixed juggernaut carries on withits mobile infrastructure investments, one major trend– continued investment – seems likely to continue.

TELECOMS INTERVIEW

K. Gökhan Bozkurt, CEO, Türk Telekom

How much new cable is being installed to extendthe fibre-optic network nationwide, and what isthe timeline for the project?BOZKURT: Our aim is to reach every corner of thecountry and provide all citizens with access to thefibre-optic network. With this vision in mind, weinvest in all of Turkey’s 81 cities. We constantly renewour infrastructure, both in big cities and in smalltowns, to provide access for more customers to high-quality, high-speed internet services.

Over the course of the past six years, Türk Telekomhas increased the total length of the fibre-optic net-work to 150,600 km, and with the acquisition of Pan-tel (an independent wholesale data and capacityprovider in Central and South-eastern Europe), thenetwork traverses Turkey’s national boundaries forthe first time and spans some 177,600 km.

In 2011 our fibre-optic network grew by 9 km perhour, providing fibre-optic service to an additional520 households every 60 minutes.

Currently, there are approximately 1m home-passand ADSL customers that have fibre-service access,either through fibre-to-the-box or fibre-to-the-build-ing installations, at no additional charge. By the endof 2012 we intend to reach approximately 3m house-holds with the fibre-optic network.

Are there plans to seek international fibre-opticnetwork connections to the east?BOZKURT: Turkey’s unique geographic location allowsus to cover a vast area from Europe to the MiddleEast, to become both a bridge and a centre for com-munications infrastructure. In 2010 we began torealise this opportunity through the acquisition ofPantel, which brought Türk Telekom a 27,000 km-longfibre-optic network and enabled the firm to becomea truly international provider.

The realisation of the Jeddah-Amman-Damascus-Istanbul (JADI) Link project, which aims to establisha colossal integrated multi-pass fibre-optic network

encompassing the Middle East, Southern Europeand East Asia, will position Turkey as a key transitcountry for telecommunications infrastructure, aswell as a centre. We like to call it “the digital Silk Road”.With the JADI Link project, the communications infra-structure of the participating countries is used overa single line. These developments are both pivotalin Turkey’s role as a bridge between the Middle Eastand Europe for voice and data transmission.

What can fixed-line providers do to compete withthe growing ubiquity of mobile? BOZKURT: We believe that the global telecommu-nications sector is focusing on delivering voice, dataand visual services over a single platform, and wehave built our long-term vision upon the conver-gence of these services. This transition in the mar-ket is now guiding the way that we manage all ofour transformation processes. To provide this arrayof services, we make no distinction between fixed-line or mobile platforms, and are instead focusingon the added value that can be created by fixed-lineinfrastructure to support user behaviour. This enablescustomers to benefit from communications servic-es over the platform of their choice, without caus-ing any change in their individual experiences.

In what ways has privatisation influenced TürkTelekom’s long-term business strategy? BOZKURT: Türk Telekom’s structural transformationhas been going on since it underwent privatisationin 2005. A change of this nature affects every partof the company, from the business models, to therepositioning of products and services, to a morecompetitive customer-focused approach. This hasrequired investment in human resources, technolo-gy and infrastructure. However, it has also resultedin a shift towards higher speed and capacity in dataprovision, the expansion of the fixed network inter-nationally and fibre-optic upgrades to the network.

171


Digital Silk RoadOBG talks to K. Gökhan Bozkurt, CEO, Türk Telekom

TELECOMS INTERVIEW

Süreyya Ciliv, General Manager, Turkcell

What has Turkcell done to adapt to the intensifiedprice competition in the Turkish market? C"L"V: The Turkish market is quite competitive, par-ticularly since the implementation of mobile numberportability (MNP) in late 2008 and the introductionof flat-rate offers in early 2009.

Since then, usage minutes have risen significantly,and we have seen average prices fall. We reversed thecontraction of voice services revenues, which com-prise over 80% of traffic, in the final quarter of 2011,and continued to increase them on a year-on-year (y-o-y) basis through the first quarter of 2012 for thesecond consecutive quarter. We have focused onimproving our post-paid subscriber base, which gen-erates higher revenues, and promoted contract offersthat ensure loyalty, thus achieving higher revenueswhile sustaining our market leadership.

We have seen rapid growth in the number of smart-phones (SPs) on our network. In the first quarter of2012 it increased by 82% y-o-y to 4.3m, currently 12%of the network. We expect this to reach 20% in 2012.Average revenue per user for SPs on our network fordata is five times higher than that of regular handsetusers. Since 2008 our mobile internet revenues havegrown by more than 60% per year on average, result-ing in a rise in the share of Turkcell’s mobile broad-band and service revenues to around 27% in the firstquarter of 2012, up from 14% in 2008. Turkcell wasrecently proved to have the fastest network, with anaverage of 11.9 Mbps 3G download speed.

How important are branded SPs to retain cus-tomer loyalty and boost value-added services? C"L"V: When we introduced our T-branded SP series,we had three main objectives: increasing SP penetra-tion with affordable prices, expanding our contract-ed subscriber base, and generating incremental mobileinternet revenues by triggering usage with anadvanced experience through embedded local appli-cations. With the launch of three Turkcell-branded SPs

since 2010, the number of SPs on our network rosesignificantly. This enabled more people to buy SPsand resulted in an increase in contracted subscriberswhile also boosting our mobile internet businessthrough data and application usage, which increased13-fold between 2009 and 2011.

We are currently focusing on innovative capabili-ties and new applications, which include mobile pay-ment, mobile signature, mobile education, telemetryand e-government. In the near future, we expect tosee rapid growth taking place in mobile financial serv-ices spanning mobile payments to money transfers,fuelled by near-field communication. Location-basedservices will also continue to thrive and will increas-ingly include social networking.

Can the preference for prepaid lines and the flex-ibility to change services be reversed? C"L"V: Since the launch of MNP in November 2008,we have seen quite an increase in port-in/port-outactivity in the Turkish market. The introduction of flat-rate offers and unlimited free minute incentives hasdriven price-sensitive prepaid subscribers to switchbetween operators to get the best prices.

At the same time, we saw a decline in multiple SIMcard usage on our network, from 19% prior to the intro-duction of MNP to 11% today. However, there has notbeen a dramatic change in the positions of the oper-ators in terms of subscriber market share.

Once operators stop offering aggressive incentivesthat reduce per-minute costs for subscribers, we maysee less porting activity and more loyalty, so a morerational competitive environment in the sector couldreverse this trend. In the Turkish market overall, all play-ers promote switches to post-paid and contractedoffers. As of the first quarter of 2012, the post-paidshare of our subscriber base is 35%, which is low com-pared to the EU average of 46%. I believe the ratio willincrease in time. However, an environment that ismore reasonably competitive must be ensured first.

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Boxing cleverOBG talks to Süreyya Ciliv, General Manager, Turkcell


IT OVERVIEW

Internet connections are largely based on copper telephone lines

In response to a number of factors, including a grow-ing youth demographic and a rising interest in tech-nology, Turkey’s population of high-speed internet usershas ballooned in the previous decade. The country hadnearly 30m total internet users in 2010, the 16th-high-est overall internet population in the world, accordingto the World Bank’s world development indicators.Between 2002 and 2010, the country’s internet usercount rose from 11.4 to 39.8 users per 100 people.Although Turkey’s usage rate tops that of the MiddleEast and North Africa (25 per 100), it is still less thanhalf of the EU rate (70.9), an indication that there isindeed still much room left for growth in the market.

The Ministry of Science, Industry and Technology isthe state’s primary arm for fostering the developmentof Turkey’s IT industry. The ministry traces its history tothe Ministry of Industry and Trade, which was createdin 1971. Subsequently, Decree Law No. 635 on June 3,2011 changed the name to the Ministry of Science,Industry and Technology, emphasising its newfoundroles. In addition to raising industrial growth, the min-istry also took responsibility for maintaining coopera-tion with foreign scientific institutions and expandingthe use of technology in the economy. INTERNET GROWTH: Fast and accessible internet is per-haps the single-most important infrastructure for agrowing IT sector. In Turkey, both speed and accessi-bility are improving thanks to continued investment.As connection quality and accessibility continue to rise,so too does the internet user population. Internet sub-scriptions climbed from 18,600 to 12.7m between 2003and the third quarter of 2011, according to Informa-tion and Communication Technologies Authority (ICTA),the sector regulator. Currently, the most popular high-speed internet services are ADSL (7m), mobile (5m) andcable (450,000). Despite rapid growth, the country’sbroadband penetration stands at just 17.4% (10.2%fixed and 7.2% mobile), giving Turkey one of the low-est broadband penetrations in Europe. Sensing a majoropportunities in this low rate, providers are scrambling

to lay new infrastructure, attract new customers andexpand in what they anticipate will be a high growthsector in coming years (see analysis). EXISTING INFRASTRUCTURE: Within the fixed seg-ment, ADSL users make up the majority of subscribers,about 82.5% according to the ICTA. ADSL is dividedamong TTNET (86.37%), the market leader owned byTürk Telekom, and alternative operators including Turk-cell Superonline (4.62%), Do!an Telekom (3.43%), Koç.net(2.02%), Türknet (1.67%) and others. The major drawof ADSL technology has been its ability to use existingcopper phone lines as infrastructure. Although cabletelevision exists in Turkey, like other countries in theregion, it is quite common for homes to use satellitesfor television rather than fixed-line cable networks.

Without a cable network as prevalent as in other partsof the world, and with fibre-optic infrastructure still awork in progress, phone lines offer a nearly ubiquitouspre-existing network of copper lines. The use of phonelines for internet access helps explain TTNET’s power-ful market position. As a subsidiary of former statemonopoly Türk Telekom, TTNET enjoys use of the largestfixed-cable network in the country, which it has lever-aged to make itself the biggest fixed broadband provider.

The speeds available to users have gradually increasedover the years, with new ADSL technologies like ADSL2,ADSL2+ and VDSL2 (very-high-bit-rate digital sub-scriber line 2) raising maximum data bit rates as highas 100 mbps (see analysis). Although speeds current-ly available have been growing, about 80% of the coun-try’s connections are around 8 mbps, with 7% greaterand 13% less than this rate. FIBRE OPTIC: The next step for Turkey’s internet con-nectivity is laying down a fibre-optic network. As thename implies, fibre-optic cables use light to transmitdata over long distances at high data rates. These cablesare filled with silica fibres that act as “light pipes”, eachabout as thick as a human hair. These types of networkshave been spreading throughout Europe, but in Turkeythey are in their infancy. “European cities, even, for

With almost 30m peoplelogging on in 2010,internet user numbersincreased from 11.4 to39.8 per 100 peoplebetween 2002 and theend of the decade.

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Although broadbandsubscriptions have beenexpanding rapidly,penetration is still relativelylow at 17.4%. Providers areinvesting in newinfrastructure to attractcustomers and expand inthis high-growth sector.

Technological upgradeA growing population of web users is driving demand for faster connections, newer hardware and smarter shopping options

IT OVERVIEW

example, a minor city in Ireland, have metropolitan fibrenetworks. Now what Europe is discussing is last mile,fibre- to-the-home, to provide broadband to a largerpopulation,” Mehmet Çelebiler, the chairman of theboard at internet operator TürkNet, told OBG. “Turkeyis trying to copy them but it has no metropolitan net-works. Not even in Istanbul.” Most fibre-optic networksin Turkey have been laid by operators for their own uses,such as transferring data to base stations. For homesand workplaces near these networks, operators oftenoffer fibre-to-the-building connections.

Providers have plans to invest in creating larger fibreoptic networks. Türk Telekom is set to make majorinvestments to increase coverage of its physical fibreoptic network, raising the number of homes connect-ed from 730,000 to 3m in 2012, its CEO Gökhan Bozkurtannounced in January 2012. Turkcell’s wholly ownedsubsidy, Superonline, has been investing in fibre as well.The company reported that it had reached 1m fibre inter-net users with roughly 30,000 km of cable by the fourthquarter of 2011. Vodafone Turkey has also been mov-ing into fibre. The country’s second-largest mobile oper-ator acquired Borusan Telekom and Koç.net in 2010 and2011, respectively, both of which have their own fibrenetworks (see Telecoms analysis). THE TWEET ECONOMY: Rising broadband internetpenetration and higher speed connections have madethe web ripe for the cultivation of a larger web econ-omy. Markets that did not – and indeed could not –exist prior to the advent of high-speed internet havenow sprouted up. Social apps in particular have woventhemselves into everyday life. The country is home tothe sixth-largest Facebook user population in the world.At 31.25m, roughly 40% of the Turkish population hasan account. Social platforms such as Twitter andFoursquare are also widely used.

Social media sites have also helped catapult othersegments of the Turkish web economy, especially in thecase of online and social gaming. With such high vol-umes of users on social media sites, gaming compa-nies saw an opportunity to provide activities withinsites like Facebook. Istanbul-based Peak Games, whichbrands itself as the fastest-growing social gaming com-pany for emerging markets, says it has 4m daily usersand 16m monthly users, making it the sixth-largestsocial gaming company in the world. The company’s ear-ly games drew on traditional board games and cardgames from the Middle East to tap into the MENAregions growing population of internet users. The firmworks on what it calls “localised and culturally specif-ic” games for markets it says are underserved, includ-ing Turkey, MENA and Latin America. So far, investorshave seen potential in the firm’s business plan – it hasraised $19m from Earlybird Venture Capital, Humming-bird Ventures and an unnamed strategic investor. E-COMMERCE: Perhaps the largest shift Turkey hasbeen experiencing as its web economy continues toexpand is the growth of e-commerce. Europe as a wholehas seen steady gains in the segment. Between Janu-ary and December 2011, daily total unique visitors toEuropean retail sites grew about 10%, from just over

270m to more than 300m, according to data collect-ed by internet data aggregator comScore.

Turkey has been no exception to this growth. Therange of items available online – from cars, comput-ers, stationary, massages – is quite comprehensive.Indeed, online retailers have seen increases in sales, cus-tomers and investments. In April 2011 eBay, the world’slargest online marketplace, announced that it wouldexpand its stake in GittiGidiyor.com, a Turkish online auc-tion marketplace. California-based eBay bought 93%of the company, adding to the minority holding it hadacquired in 2007. Retailers such as Hepsiburada.comhave also done well. The company began offering onlineretail services in 1998. Over a decade later it has growninto one of Turkey’s largest online stores, with more than13m users, who are buying everything from LCD TVsto fishing poles to books from the site. ECONOMIES OF SCALE: The advent of online retail-ing has also brought a new way to shop called groupbuying. Group-buying sites typically offer a handful ofgoods and services at discounted prices every 24 hours.The site and seller set a minimum threshold for the num-ber of buyers. If customer volumes do not meet thatthreshold, the deal is off and no transactions take place.If volumes do meet the threshold, then the seller offersthe discount – which can be as high as 90%. A slew ofgroup-buying sites have grown up in the country in thepast 2-3 years, including Groupon’s CityDeal (calledGroupon #ehirFırsatı), Grupanya.com and Gruponi.com.

The first of these group-buying sites appeared in late2009. In April 2010 CityDeal secured funding from Turk-ish investors and opened an Istanbul office. The low coststo enter the market and image of high profits attract-ed many entrepreneurs and companies who wantedto get in on the action. By March 2011, they createdroughly 80 daily deal sites and 15 aggregator sites. In

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Rising internet penetrationand higher-speedconnections have increasedthe popularity of socialmedia and gaming. As isthe case across Europe, e-commerce has also seenrapid growth.

SOURCE: Survey on ICT usage in households and by individuals, 2004-11

Household penetration by device, 2007-11 (%)

Year PC Portable Mobile Fixed-line Digital DVD, VCD, computer phone telephone camera DivX player

(laptop, tablet)

Turkey

2007 24.0 5.6 87.4 72.7 16.9 40.6

2008 28.1 9.1 88.1 68.4 20.0 42.6

2009 30.7 11.2 87.6 61.9 20.4 42.7

2010 33.8 16.8 90.5 56.1 23.8 40.6

2011 34.3 22.6 91.9 51.4 27.8 40.5

Urban

2007 30.0 7.2 90.3 74.2 19.9 47.4

2008 33.7 11.4 90.2 68.9 24.3 49.2

2009 37.1 14.3 89.6 63.1 24.6 49.6

2010 40.6 20.4 92.8 58.8 28.6 47.4

2011 41.0 27.9 93.6 55.1 34.2 48.2

Rural

2007 8.9 1.8 80.1 68.9 9.2 23.6

2008 13.6 3.2 82.8 67.0 9.1 25.7

2009 15.2 3.6 82.9 58.9 10.2 25.9

2010 16.6 7.6 85.0 49.4 11.7 23.4

2011 17.4 9.2 87.7 41.9 11.7 21.0

IT OVERVIEW

November 2011 Grupfoni, one of the group-buyingsites, sold a controlling stake to Quants Financial Serv-ices, a Swedish investment company.

Still, the sector faces some challenges. “When youlook from outside it is seen as a very profitable busi-ness and at the same time very easy,” $lker Üstüner, thefounder of a daily deal aggregator Firsaton.com, toldOBG. “In truth, it is not that profitable, and it is not thateasy.” The market reached its growth peak around theend of 2011, according to Üstüner, and consolidationis likely in coming years as firms compete for customers,both against other group deals sites and traditionalonline retailers. “By the end of 2011 I counted 300 dai-ly deal sites. But around that time they started to close,”Üstüner told OBG. “They saw you really need to be big,and that there’s only room for four to five big, well-cap-italised players.” In the meantime, well-informed cus-tomers could benefit from competition.

In addition to e-commerce sites offering a broaderrange of products, a number of specialised retail siteshave grown up in recent years. One that stands out isYemeksepeti.com. The online takeout service allowsusers to access a network of over 3500 restaurants thathave home delivery services. Yemeksepeti processesabout 15,000 orders on any given day from a user baseapproaching 1m. The company, through a number ofsubsidies, has also expanded into neighbouring coun-tries, including Russia and the UAE.

These specialised retailers have been generally suc-cessful in attracting foreign investment. Çiçeksepeti.com,an online flower and gift seller, received funding fromBelgian-based Hummingbird Ventures and Americanonline retail giant Amazon. Trendyol, a private shoppingsite, attracted more than $25m from Kleiner Perkins Cau-field & Bryers and Tiger Global in the summer of 2011. TECHNOPARKS: As Turkish websites continue to cre-ate customer-pleasing, front-end experiences, the gov-ernment and industry stakeholders are working to bringabout more back-end innovation through increased

research efforts. Since its renaming in 2011, the Min-istry of Science, Industry and Technology has taken anactive role in encouraging the growth of Turkey’s IT sec-tor. It has set an overall goal of raising research and devel-opment (R&D) activities to 3% of the GDP, by 2023 –an ambitious goal given that GDP spent on R&D was0.84%, or TL9.26m (!3.9m) in 2010, according to datacollected by the Turkish Statistical Institute (TurkStat).To reach the 3% level, the government has createdbenchmarks for growth, with the first set at 2% by 2017.

One of the government’s ongoing incentives forincreasing R&D activities has been the creation oftechnoparks. These are intended to bring academicand industry leaders together for research activities andin time spur more technological and scientific innova-tion. Technoparks obtained legal status in 2001 and wereput under the authority of the Ministry of Science,Industry and Technology. The government offerstechnoparks incentives, including tax and duty exemp-tions, aid in construction and rent subsidies. Thesetechnoparks are also intended to act as a forum andfocal point for competitions and prizes to encourageinnovation. Each year, for example, 500 young entre-preneurs receive grants for TL100,000 (!42,500) fromthe government for work in technoparks.

In the past 10 years, technoparks have grown up ina number of regions. The first and largest of these wasthe Middle East Technical University Technopark(METUTECH), located in Ankara. Since its founding,METUTECH has grown to include 2700 researchers and240 firms. Start-ups and smaller businesses have beenfocal points, with small and medium-sized enterprises(SMEs) making up more than 90% of the companies.Other technoparks are located in Istanbul, Antalya,Konya, Adana, Elazı! and Mersin. FOREIGN INVESTMENT: Foreign investment has beenone of the ministry’s main goals. In 2010 less than 1%of Turkey’s R&D spending was funded by foreign sources,according to TurkStat. To shore up foreign investmentrates, Nihat Ergün, the minister of science, industry andtechnology, took a trip in November and December of2011 to the West Coast of the US, home to Silicon Val-ley. During his trip, he visited major IT universities includ-ing the California Institute of Technology and industryplayers such as Microsoft to learn more about theindustry in the US and encourage investments in Turkey.

Following the US tour, in January 2012, Ergün metwith software programmers, hardware manufacturersand GSM producers in Istanbul to discuss the future ofTurkey’s IT sector. Ergün and attendees discussed top-ics like increased cooperation among universities andthe industry, incentives for foreign firms to establishproduction and research facilities in Turkey, and thedevelopment of technology parks to act as points ofconcentration for the sector. Turkey’s IT sector, alongwith the automotive sector, would receive the bulk ofgovernment incentives, the minister said.

Turkey’s domestic hardware manufacturers and ITservice providers have been successful in attracting for-eign investment. In February 2011 Hewlett-Packard(HP), a US company based in Palo Alto, California, opened

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Technoparks, which offerincentives such as tax andduty exemptions, havebeen developed by thegovernment to boostresearch and developmentactivities in the country.


SOURCE: Turkstat

Corporate take-up of internet connections, 2005-09 (%)

Company size Year Modem ISDN connection DSL Other Mobile connection (GSM,(dial-up) fixed connections GPRS, EDGE etc)

Total 2005 35.3 6.8 79.7 9.4 -

2007 18.4 3.8 94.2 10.1 13.6

2008 16.1 3.7 95.3 8.1 13.8

2009* 19.5 - 94.6 10.2 13.5

10-49 2005 36.7 5.5 78.8 6.1 -

2007 18.8 3.3 94.7 7.2 11.4

2008 16.3 2.6 95.5 4.6 11.7

2009* 19.4 - 94.5 7.6 11.6

50-249 2005 29.8 11.8 86.3 19.2 -

2007 16.2 4.0 92.9 15.4 18.5

2008 15.4 6.0 95.1 15.6 17.9

2009* 18.9 - 95.6 20.0 21.5

250+ 2005 24.3 15.7 70.2 47.7 -

2007 20.5 14.1 91.6 46.0 37.3

2008 14.4 13.5 92.2 44.0 37.2

2009* 23.0 - 91.1 46.5 34.3

(*) ISDN included.

IT OVERVIEW

a manufacturing centre in Tekirda!, a province to theeast of Istanbul in Turkey’s Marmara region. HP, in coop-eration with Taiwan-based Foxconn technology group,established the plant to manufacture PCs and PC com-ponents. “This plant will serve as HP’s supply centre forEurope, the Middle East and Africa,” Serdar Urçar, HPTurkey’s general manager, said at the launch ceremo-ny, according to Today’s Zaman. The plant, which requiredan investment of $60m, is set to export some 90% ofits products to these regions.

Meanwhile, Arena, a company offering logistics andsupply chain management services, received an invest-ment from India-based Redington Group. Founded in1991, the company listed on the Istanbul Stock Exchangein 2000. By 2008, amid domestic political tumult andthe international economic crisis, its profits took a hit,sliding by 48%. Still, even in harder times the companywas doing well compared to the rest of the IT sector,which as a whole shrank by 65% during that period. Sincethen, the company’s revenues have bounced back tothe tune of a compound annual growth rate of 15%. InNovember 2010 the company sold 1.58bn shares,amounting to a 49.40% stake, for $42.5m to Reding-ton Turkey, a supply chain solutions firm. E-GOVERNMENT: In addition to encouraging the useof technology in its economy, the Turkish governmenthas been adamant in increasing the use of technolo-gy among its own agencies. The government’s Socie-ty Strategy Action Plan 2006-10 called for more infor-mation gathering activities to increase the Turkisheconomy’s competitiveness.

Throughout the duration of the programme, the stateintroduced various e-government projects. These haveincluded the Central Population Administration Sys-tem, Tax Authorities Automation Project, National Juris-diction Network Project, Land Registry and CadastreInformation System, as well as databases for the SocialSecurity Authority. By creating these new systems, thegovernment aims to increase the amount of informa-tion gathered, broaden access to that information anduse it to streamline government duties.TECHNOLOGY IN SCHOOLS: Efforts to increase tech-nology use does not stop with bureaucracy, however.In 2012 Ankara initiated a project called the Move-ment to Increase Opportunities and Technology (FAT!H),aimed at providing more opportunities for students tointeract with technology and update curricula in Turkey’sprimary and secondary schools. The government artic-ulated five major goals for the programme: provisionof hardware and software infrastructure, provision andmanagement of educational e-content, instructionalprogrammes and effective use of IT, teacher training,and the promotion of IT usage that is informed, secure,manageable and scalable.

In February 2012, at the start of the 2011/12 schoolyear’s second term, the project started its pilot phasein 52 schools in 17 provinces across the country. In theseareas, schools received tablet PCs and smart boards forclassroom use. The government hopes that the 12,800tablets employed in schools will eventually replace text-books. Ankara expects the project to cost some TL3bn

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Increasing pupils’ interactions with technology and updating curricula are key aims of the FAT!H project

The government has beenpushing for an increase inthe use of IT in the economyas well as among itsagencies. In addition, in2012, a project was set upto enhance the role oftechnology in education.

(!1.3bn), which would make it the largest single edu-cation budget allocation in the country’s history.

The project will certainly face challenges. In additionto the costs, ensuring effective use of the technologyin the classroom and training teachers to integrate theequipment into curricula will not be easy, and a num-ber of stakeholders have brought up these concerns.Still, Ankara and a number of voices in the field focuson the potential for long-term impact on the way Turk-ish children learn to interact with technology, and howthey can apply that knowledge to improve the econo-my. “The FAT!H project will enable the country’s youthto contribute to the economy as producers in 15 yearstime,” Faruk Eczacıba#ı, the president of the TurkishInformatics Foundation, said at an IT sector meetingwith Ergün in January 2012. OUTLOOK: On the back of faster internet and higherbroadband penetration, the IT sector has in many waysbeen able to flourish. The web economy is growing rap-idly, and factors such as credit card usage and overallinternet penetration look set to support growth evenfurther. The partnership between the government andindustry, meanwhile, has helped propel research on theback-end. Although progress in these areas has beenimpressive, the sector still faces a number of chal-lenges. Sustaining the growth of internet infrastruc-ture is set to be critical to remaining competitive. Thegrowing presence of Turkcell and Vodafone in the fixed-line segment should encourage more competition inthe internet market, which could support further growth.

Accessibility also remains a major challenge. Despiteoperators’ success in covering the majority Turkey’sterritory with some form of internet infrastructure,there are still areas where many households lack inter-net connections. Whether the reason for this is highprices or lack of interest or IT skills, the state and theeconomy both have a strong interest in encouragingpeople to connect, especially from a young age. If pro-grammes like FAT!H are successful, they could havemajor impact on the sector and economy as a whole.

IT ANALYSIS

Sector players are building cables within the country and the region

The Turkish broadband market has seen massive growthin the past decade. Between 2003 and the third quar-ter of 2011, the number of subscriptions rose from18,600 to more than 12.7m, according to the Informa-tion and Communication Technologies Authority (ICTA).The subscribers are divided among various fixed andmobile services, the most popular being ADSL (7m),mobile internet (5m) and cable (450,000). As for thespeeds of these connections, by the third quarter of2011, the majority of Turkey’s fixed broadband subscrip-tions, some 80%, offered speeds of 8 mbps.

Of these fixed connections, just over 80% were ADSL,with TTNET, a subsidiary of Türk Telekoma, leading bymarket share (86.37%), followed by several alternativeproviders. In recent years, new ADSL technologies haveallowed companies to expand their overall capacity forADSL lines. These technologies, such as ADSL2, ADSL2+and VDSL2, have steadily increased overall capacity to100 mbps. Between 2006 and 2010, Türk Telekom grewits network by 30% to 128,000 km. In June 2008 itannounced the use of VDSL2. This shift allowed the firmto offer packages with download rates up to 32 mbps.That rate rose in January 2010, when the firm announcedVDSL2 services with speeds of up to 100 mbps. LINKS FROM ABROAD: Infrastructure growth, howev-er, is not merely a national phenomenon. Internation-al networks have been an increasingly important com-ponent of operators’ fixed infrastructures, as demandfor wholesale data leasing services continues to rise.In recent years, Turkish telecom providers haveannounced major projects set to improve Turkey’s inter-national connectivity and access to growing marketssuch as wholesale data services.

Türk Telekom has been leading the charge. In June2010 it announced the Jeddah, Amman, DamascusIstanbul (JADI) LINK project with its partners, SaudiTelecom Group, Jordan Telecom Group and the SyrianTelecommunications Establishment. The 2530-km cablestretches from Saudi Arabia north into Jordan and Dam-ascus, and then across Turkey to Istanbul. JADI is intend-

The broadband market hasseen dramatic growth overthe past decade. Between2003 and the third quarterof 2011, the number ofsubscriptions jumped from18,600 to more than 12.7m.Around 80% of theseconnections have a speedof 8 mbps.

178

Need for speedInvestments by operators are leading to faster internet connections


ed to be the start of a larger terrestrial network thatwould serve as an alternative to the submarine cablenetwork crossing the Red and Mediterranean Seas.The link has a capacity of 200 gbps and is capable ofcarrying both voice and data.

Türk Telekom has also made moves to establish itsnetwork to Turkey’s west. In May 2010 it purchased Hun-garian wholesale data operator Invitel for !221m, giv-ing it access to 27,000 km of fibre-optic infrastructurein Europe. With this acquisition, Türk Telekom aims tomake Turkey into a terrestrial voice and data hub con-necting Europe and the Middle East. GREATER CAPACITY: Turkcell, the country’s largestmobile provider, has also made major moves in the pasttwo years. Following its acquisition of Superonline in2008, Turkcell announced a series of fixed infrastruc-ture investments. In December 2010 it joined a region-al cable network (RCN) project with a consortium ofseven operators – the UAE’s Etisalat, Mobily from Sau-di Arabia, Jordan Telecom, Mada-Zain consortium ofJordan and Syria Telecommunications Establishment.The cable will start in the UAE emirate of Fujairah, andis set to travel through Saudi Arabia, Jordan and Syriabefore crossing Turkey to reach Istanbul. The consor-tium plans to build two parallel lines, which will followslightly different paths to allow a greater data capaci-ty, which is expected to be 12.8 tbps. The cable is setto be 7750 km and carry a price tag of $500m.

With Turkey’s telecoms majors working to spin a webof data cables both inside and outside of the country,it is no surprise that the leaders of these companiesare emphasising the country’s growing role as a datahub for Europe and the Middle East. “This substantialinfrastructure project [the RCN] is planned to positionIstanbul as the world’s newest Internet base,” Turkcell’sCEO Süreyya Ciliv said statement following the pro-ject’s announcement. “Through this highway betweenFujairah and Istanbul we are aiming for faster and eas-ier internet traffic, widening internet expansion and tobring new opportunities to people across the region.”

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Education & HealthLively debate surrounds changes to school systemCompetition for university places drives tutoring industryVocational and private provision to help meet demandMedical tourism segment looks poised for expansionPrivate care sector presents opportunities for growth

EDUCATION OVERVIEW

A total of !19.38bn was allocated to education in the budget in 2011

In the 89 years since its founding, modern Turkey hasmade significant progress in developing a nationaleducation system. The state continues to play a cen-tral role in that development, and currently providesover 90% of funding for formal education activities inthe country. The national budget for education has beenincreasing over the last decade. Between 2001 and2011, the budget grew eight-fold, increasing fromTL5.41bn (!2.3bn) to TL45.61bn (!19.38bn), accord-ing to the Ministry of Education (MEB). During that peri-od, the percentage of GDP devoted to the sectorincreased from 2.6% to 3.8%. Likewise, the Council forHigher Education (YÖK) and university allocations haverisen in step, growing from TL1.36bn (!580m) toTL11.50bn (!4.89bn) during the same period.SYSTEM: The state currently mandates that childrenattend primary school for eight years, between the agesof 7 and 15, but the passage of a new education lawin mid-May 2012 will extend the school system to 12years across three levels. Pre-primary education for chil-dren aged 3-5 is also available but not compulsory inall areas. Options for pre-primary education includeindependent kindergartens or nursery classes inte-grated with primary education. In the current system,primary school is followed by four years of secondaryeducation, but the new law has reinstated four yearsof middle school after primary provision. Some sec-ondary schools have a year of preparatory languagecourses, known as “prep year”. With the growing impor-tance of foreign languages in the job market, the prepyear has become increasingly popular.

At the high school level, there are vocational andgeneral education options offered by the state. Theformer offer training in specific trades and are intend-ed to prepare graduates for employment. The latter isprovided by three types of institutions: public, privateand special focus. Public schools provide the majori-ty of education and are funded by the state. Privateschools are funded by private companies or founda-tions and may accept funds from overseas. Special-

focus high schools, such as science, social science andAnatolian high schools, are public and provide an alter-native to private institutions. Requiring entrance examsfor admission, these schools offer instruction in for-eign languages and, in some cases, have a curricularfocus on specific disciplines.

Following secondary school, the majority of stu-dents apply to one of the country’s 174 universitiesand technical schools, according to the MEB. The 1981Higher Education Law (No. 2547) centralised directionunder YÖK. The higher education board is made up of21 members, seven of whom are presidentialappointees, while a further seven are chosen by theCouncil of Ministers and the rest selected by the Inter-University Council, a group consisting of the rectorand an elected faculty member from each university. GROWING PRIVATE SECTOR: Although centralisa-tion has been a major theme in the government’s edu-cation policies since the 1980s, the state-orientednature of the system has been evolving in the past fewdecades, allowing for the private sector to grow.

In primary education, the number of private schoolsgrew from 613 to 898 between the 2003/04 schoolyear and 2010/11 school year, according to statisticsfrom the MEB. Although still only making up about2.7% of the total number of primary schools, a grow-ing middle class and evolving state policies could seethat figure rise in the future.

Currently, the private sector plays a larger role in sec-ondary education. There were 774 private generaleducation high schools during the 2010/11 school year,a 65% increase from 467 in 2003/04. This outpacedpopulation growth in the same period, which was about9.7%, according to the World Bank. FUNDING FROM ABROAD: Private schools haveattracted the attention of foreign investors. Althoughregulations prevent many types of direct investmentin higher education, regulation is far more liberal forschools offering both primary and secondary educa-tion, also known as K-12 schools. This legislation has

The public sector is themain provider of education,but the private sector isgrowing, especially at thesecondary level, where thenumber of private schoolsrose 65% between 2003and 2010 to 774 facilities.

Secondary education isdivided between vocationaland general educationschools. The latter oftenoffer preparatory languageclasses, an increasinglypopular option forstudents.

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A growing dynamismIncreasing state investment and an expanding private sector role areset to boost quality and accessibility


EDUCATION OVERVIEW

paved the way for private funds to invest in schools.In December 2011, the Carlyle Group, a Washington,DC-based private equity firm, bought a 48% stake inBahçe#ehir Koleji, a private K-12 school operatingacross the country (see analysis).

The growth of private education has drawn somecriticism, however, especially regarding the issue ofinequality in education, which remains one of the majorhurdles in Turkey’s education system. The results of theOECD’s Programme for International Student Assess-ment (PISA) test, a worldwide evaluation of 15-year-old students in Western countries, demonstrate thisgap. In Turkey, well-performing students generallyattend private or Anatolian high schools.

In 2006 one-third of the country’s 15-year-oldsscored above the OECD average of 500 in the mathssection of PISA. However, nearly half had scores under420, indicating only the most basic proficiency. Thisgap was not just limited to maths – science and liter-ature scores saw similar results.

The government has been exploring new ways toraise overall performance. These have included a cur-riculum overhaul that aims to develop a more student-centred approach. The 2009 test saw a markedimprovement over 2006, and with the continuing evo-lution of policies and increasing accessibility, it is pos-sible that these scores will continue to rise.

Bringing technology to bear in the sector is also animportant government initiative. The Movement toIncrease Opportunities and Technology (FAT!H) is aimedat providing more opportunities for students to inter-act with technology by, for example, providing PCtablets and smartboards. In February 2012 a pilotinvolving 52 schools rolled out the programme, whicheventually hopes to see textbooks replaced by 12,800tablets. The government estimates the project willcost a total of around TL3bn (!1.3bn), which wouldmake it the largest single education budget allocationin the country’s history (see IT chapter). A HEAD START: Of the steps that the government hastaken to improve the quality of education and boostattainment levels, its pre-primary education project isone of the largest. Initiated in 2010, the project offersvarious pre-primary education options for pre-kinder-garten students. In the last three years, the govern-ment has been slowly adding to the list of provinceswhere preschool is compulsory. In the 2009/10 schoolyear, it was mandatory in 32 of Turkey’s 81 provinces.In 2010/11, this number grew to 57, and in 2011/12it rose to 71. There has thus been a steady increase inpreschool attendance rates. A decade ago only about11% of 4- to 5-year-olds attended preschool. In2010/11, however, that percentage grew substantial-ly, with pre-primary enrolment reaching 35% for the2-4 age group and 43% for the 4-6 age group.

As student numbers have increased, so too haveproviders. The number of facilities, including nurseryclasses in primary schools, has more than doubledsince 2003, growing from 13,285 to 27,606, accord-ing to the MEB. Likewise, the number of preschoolteachers has risen, increasing from 17,511 to 48,330.

To accommodate this growing demand, the govern-ment is diverting resources from other departmentsto ensure public preschools keep up. In February 2012,Prime Minister Recep Tayyip Erdo!an announced thatthe state would give 181 military recruitment build-ings to the MEB to be converted to public preschools.During the 2010/11 school year, there were 4209preschools (not including nursery classes at primaryschools), 1570 of which were public, and the remain-ing 2639 – or just over 60% – were private. Assumingall of the military recruitment buildings are used, themove would translate into an increase of over 10% inpublic preschool facilities. STRUCTURAL CHANGES: In addition to driving thegrowth of pre-primary education, the ruling Justiceand Development Party (AKP) introduced legislationin early 2012 that would alter the education systemsignificantly. Passed in mid-May, major amendmentsinclude an increase from eight to 12 years of compul-sory schooling for all citizens. This represents a shiftback to the structure of the system before 1997, whenthe government combined primary and middle-schooleducation into eight years of mandatory primary school.

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Some !1.3bn is due to be spent bringing technology to schools

A new education lawpassed in May 2012reintroduces middle schoolto the system, increasingthe number of years ofmandatory education fromeight to 12 in what is calleda “4+4+4” model.

SOURCE: Ministry of Education

Gross enrolment by level, 1999-2011 (%)

1999/00 2004/05 2009/10 2010/11

Primary

Total 97.52 95.74 106.48 107.58

Male 103.31 99.48 107.05 107.36

Female 91.47 91.85 105.88 107.81

Secondary

Total 58.84 80.9 84.19 93.34

Male 67.1 90.29 89.14 99.06

Female 50.15 71.08 78.97 87.31

Higher

Total 21.05 30.61 53.43 –

Male 24.55 34.79 58.14 –

Female 17.42 26.63 48.48 –

EDUCATION OVERVIEW

The AKP’s proposal aims to reintroduce middle schoolsto the education system, changing its current struc-ture to what is known as a “4+4+4” model.

However, the law has drawn criticism from stake-holders, who fear that some of the law’s provisions mayexacerbate the current challenges in the education sys-tem. A number of academic, political and businessleaders spoke out about the bill in the lead up to itspassage. These critics point out that the options to con-tinue education through distance learning or take amore vocational route at an early age could be detri-mental, forcing children into a track too early on in theireducation and providing ways for more conservativefamilies to prevent their daughters from attendingschool. Meanwhile, proponents of the bill point out thatother developing countries allow similar flexibility intheir education systems. A NUMBERS GAME: One of the major drivers of theintense debate on education policy is the competitionin the segment, which is especially visible in the high-er education system. The tertiary segment is made upof 103 state universities, 63 foundation universities andeight vocational colleges, according to YÖK.

For the majority of the country’s history, universi-ties have been inundated with a sea of applicantsapplying for comparably few spots at the country’s topschools. In the 1970s and 1980s, university admissionrates were as low as 9-15% for those who sat the Stu-dent Selection Examination (ÖSS). In subsequent years,the government has pushed to build more universi-ties to create opportunities for students. In 2006-11,50 new public universities and 36 non-profit founda-tion universities were founded, according a reportpublished by the OECD. During this period, the num-ber of students accepted rose by 40% at public facil-ities and 21% at non-profit foundation universities.

These efforts have eased pressure on the system insome ways. In 2010/11 over 1.59m applicants sat theÖSS, and 874,375, or 55%, got places at university,according to data gathered by the World Bank. Theserates are much higher than those of the 1970s and1980s. In addition, legal changes to the higher edu-cation law have loosened restrictions on private uni-versities and their funding sources, which could leadto greater investment in private universities and morecompetition in the sector. In 2011 Yusuf Ziya Özcan,the head of YÖK, said the state was set to make changesto university regulations that could create more oppor-tunities for private investors to provide capital.

Despite the construction of new institutions, studentsstill overwhelmingly prefer the more prestigious uni-versities of major cities like Istanbul, Ankara and Izmir,and demand for places at these schools continues tobe higher than supply. The combination of such demandfor these limited spots and the ÖSS’s role in securingadmission to these schools has given rise to a largeprivate tutoring industry. Private tutoring centres, ordershanes, have proliferated, reaching virtually everycorner of the country. As of the 2009/10 school year,the number of dershanes was nearly equal to the number of non-vocational high schools (see analysis).

VOCATIONAL SCHOOLS: Alternative modes of edu-cation, such as vocational schools, could offer somerelief to the country’s higher education system. Toimprove their efficacy, however, there are some cul-tural challenges that the government aims to overcome.

Many families in Turkey assign particular prestige touniversity degrees, as opposed to vocational and tech-nical diplomas. “We know we should be focusing onvocational training,” Burak Arıkan, coordinator of theinternational relations office at Sabancı University, toldOBG. “Vocational schools need their image to beimproved so students will choose them.” In 2009 lessthan 10% of 25- to 64-year-olds’ highest level of edu-cation is vocational, according to a 2011 report by theOECD, which ranked Turkey 27th out of a total 29 coun-tries surveyed. The effect of the low number of voca-tional graduates is visible in the job market as well.

Turkish employers report a lack of high-demandskills in the labour pool. In 2008 between 20% and 30%of employers considered workers’ skills a “major” or“very severe” constraint, according to a survey pub-lished by the World Bank in 2012. Oftentimes, a tech-nically trained worker can earn more than an academ-ically credentialed counterpart, even when employersassign more prestigious roles to the latter. “If you area computer numerical control operator here in Tuzla,you can earn twice as much as an engineer… who isabove you in rank in the same company,” Arıkan ofSabancı University told OBG. Increasing the numberof vocational school graduates could help chip awayat youth unemployment by providing young people withskills needed in the job market.

Education is, in some ways, starting to move in a direc-tion that could better accommodate the realities ofthe job market, however. The growth rate for vocation-al and technical schools in the last five years has out-paced that of general education secondary schools.The number of vocational secondary schools grew byabout 23%, from 4244 to 5174 between the 2006/07school year and the 2010/11 school year, according

183


The growing middle class and evolving state policies may lead to an increase in private provision

Encouraging vocationaleducation is expected tohelp ease demand onuniversities, while at thesame time providing askilled workforce to thelabour market.

Of the 1.59m students whosat the entrance exam, justover half (55%) got a placeat university. Pressure onthe system, which is madeup of 103 state universitiesand 63 non-profitfoundation universities,continues to grow.

EDUCATION OVERVIEW

to the MEB. General secondary educational institutions,on the other hand, increased from 3690 to 4102 innumber, roughly 11%, in the same period. INTERNATIONALISING EDUCATION: A growing trendin the Turkish education system has been the incor-poration of foreign teachers, students and institutions.In 2001 Turkey joined Europe in the ongoing Bolognaprocess, a series of meetings held between ministersresponsible for higher education with the goal of cre-ating the European Higher Education Area (EHEA),which was established in 2010.

The move reflects the growing popularity of Englishand other foreign language education in Turkey. Indeed,English is extremely useful for Turkish students whowish to study abroad, given that the EU, the US andCanada are among the most popular destinations forTurkish students. These students have been able to takeadvantage of programmes like the EU-sponsored Life-long Learning Programme 2007-13, which includesthe Comenius, Erasmus, Leonardo da Vinci, Grundvig,Transversal and Jean Monnet schemes, allowing themto study or participate in training programmes in theEU. Nearly 250,000 Turkish students have taken partin the programme to date. The European Parliamentallocated roughly !7bn for the 2007-13 programme,and is considering a budget of !15.2bn for 2014-20.

The popularity of studying abroad has helped boostdemand for private language courses, which are preva-lent throughout the country. To better satisfy foreignlanguage needs before students enrol in higher edu-cation, the government also announced plans in March2011 to bring 40,000 foreign teachers to Turkey forlanguage courses, according to Ünal Akyüz, the headof the projects department at the MEB. The govern-ment intends to recruit up to 10,000 teachers annu-ally over the next four years to teach side-by-side withTurkish language teachers. The English language cur-riculum is highly grammar-centric, meaning that despiteyears of studying English most students finishing pub-lic school still have poor speaking skills, Akyüz said.

INCOMING STUDENTS: Just as many Turkish studentslook for experiences abroad in Europe and North Amer-ica, many students in neighbouring Middle Easternand Turkic countries seek education opportunities inTurkey. The government’s foreign policy has beenincreasingly devoted to developing closer relationswith Turkey’s neighbours in the Middle East, Cauca-sus and Central Asia. This has been helpful in promot-ing Turkey’s role as an education provider in the region.“They [the government] are focusing on other areasthat were not highlighted by previous governments,such as Africa, North Africa, the Middle East and Cen-tral Asian Turkic republics,” Arıkan told OBG.

Its participation in the Bologna process has alsohelped boost the value of Turkish education abroadby ensuring that its standards are in sync with the restof Europe. The liberalisation of requirements for for-eign students has also removed an important barrier.Beginning in 2010/11, YÖK lifted compulsory testingrequirements for foreign students, who, instead, maynow use national or international tests.

So far, results have been promising. In the 2010/11school year, there were a total of 26,228 foreign stu-dents at Turkish universities and other academic insti-tutions, including military, vocational and technicalschools, according to the Student Selection and Place-ment Centre (ÖSYM). A total of 1880 foreign studentsgraduated in the 2009/10 school year, while the num-ber of new admissions is much higher at 7039 for2010/11. With the incoming class more than threetimes larger than the most recent graduating, indica-tions are that the number of international studentscoming to Turkey for education is indeed on the up. OUTLOOK: As Turkey’s youth demographic continuesto balloon, pressure on the sector is likely to increase.In 2011 those under the age of 15 comprised 30% ofthe population, making up the nearly 13.5m studentsin compulsory education. Although public institutionscurrently provide over 90% of formal education activ-ities, gradual changes in legislation and the positionof the MEB are transforming the sector’s structure. Asthe government encourages growth of the privatesector, it is likely that private provision will increase.

However, with the large political role that educationplays, these changes are likely to be accompanied bya lively debate between the government, educatorsand the public. Still, with virtually all stakeholders aim-ing to revise the system and improve students’ results,continued changes seem likely in the coming years.

184

Structural changes to the system has been the focus of lively debate

Studying abroad is popularwith Turkish students, some250,000 of whom havetaken part in foreign studyopportunities. Likewise,some 26,228 internationalstudents are enrolled inTurkish universities andother higher educationfacilities.


SOURCE: Ministry of Education

Budgeted education expenditure, 2010-11 (TL bn)

Appropriation by type 2010 2011

Total 28.24 34.11

Personnel 19.98 24.61

Insurance premiums 3.41 3.88

Goods & services 2.15 2.58

Current transfers 0.90 1.03

Capex 1.47 1.67

Capital transfers 0.33 0.35

EDUCATION INTERVIEW

Zekeriya Yıldırım, Chairman, Darüflflafaka Foundation

How can educators assist government efforts to pro-pel Turkey’s economy into the world’s top 10? YILDIRIM: Turkey is in a unique situation compared toless-developed emerging economies. It is able to relyon its young population, moderate per capita GDP andhigh consumer spending as means of achieving eco-nomic growth. However, if we cannot educate theschool-age population now, we will miss this opportu-nity to greatly advance the country. To be among the10 largest economies by 2023, we will need to addressthe current account deficit, which is partly a result ofgrowth in consumer spending. To unlink high growthand high current accounts, we will have to improve thequality of education at the national level. Everybody isaware of this. Better education will improve quality,productivity, innovation and entrepreneurship, whichwill enhance competitiveness and reduce the deficit.

How important is the introduction of technologyin the classroom to the quality in education? YILDIRIM: When I was studying in the US 40 years ago,transparencies were put on the wall with a graphic ornotes, and the professor would draw as he lectured.Things have advanced tremendously since, with tabletsin elementary schools now, for example, and it hasbeen a fast transition. It is important that our teachersbe prepared to use new tools, but we should ask whetherwe are becoming distracted by the tool itself. Are wecreating a copy-and-paste generation, or are we moti-vating innovative thinking and creative research? Wehave to be very careful when reforming our systemaround technology. We must back it up with goodpreparatory work. That is why the government is, fornow, introducing tablets to only 50 schools, to see howthey proceed from here. This is an early step forward.

What role do foundations play in Turkish educa-tion, and how has this role evolved in recent years? YILDIRIM: If you consider the educational model ofcountries such as the US, the success of the system

comes from a combination of investment and interestfrom the government, businesses and foundations incontributing to education. Many different stakehold-ers invest in the system and, as a result, free thinkingis encouraged. A strictly centrally controlled and mech-anised form of education is a barrier to innovativethinking and is contrary to the sorts of educational sys-tems that encourage entrepreneurship.

To a certain extent, increasing foundations’ anddonors’ contribution to education will be a very impor-tant instrument. Currently, only 5% of students attendfoundation universities. The private sector and foun-dations should increase their role in the system. Thefoundation schools traditionally target populations ofstudents that have unique needs – such as orphans,children from less developed regions and students withan aptitude for math or science. Our foundation’s mis-sion focuses on gifted children from economically dis-advantaged backgrounds who have lost a parent.

What steps does Turkey need to take to fulfil its aca-demic needs in the short-to-medium term? YILDIRIM: Training teachers for new programmes, andclosely examining the mechanisms behind dropoutrates are the two most important steps – particularlyconsidering that the underlying reasons behind thedropout rates are largely unknown. That informationneeds further analysis. A third step would be to pro-vide more vocational programmes. These can help stu-dents use their education to gain employment. Sostrengthening the existing vocational schools and offer-ing more programmes should be another goal.

In our own capacity, we can do very little in shapingthe educational code, but what we can do is changehow we convey information to the student. That is partof the mission of education and of the teachers. Every-body who is important in education in Turkey is talkingabout how to train teachers to enable them to find thebest way of conveying critical information to students.

185


Thinking aheadOBG talks to Zekeriya Yıldırım, Chairman, Darüflflafaka Foundation

EDUCATION ANALYSIS

Competition for university places has led to a rise in tutoring

A sizeable influx of foreign investment has been seenin Turkey’s education system in recent years, helpingto meet demand from a growing population with ris-ing disposable incomes. Extreme competition for admis-sion to top universities has encouraged many Turkishfamilies to send their children to private schools or aprivate tutor. This trend has encouraged the growth ofthe private education sector. After a period of rapid con-struction in the 1990s, the rate of new private schoolsopenings has slowed, but remained strong in the pastdecade. The number of private primary schools in thecountry grew over 40% between the 2003/04 schoolyear and the 2010/11 school year, from 613 to 898.The number of private secondary schools also increased,from 6941 to 9281 in the same period.FOREIGN INVESTMENT: With demand on the up, moreprivate schools have emerged. Regulations allow for for-eign investment, and outside funding has been flow-ing in to support the growth of private institutions. TheWashington, DC-based private equity firm Carlyle Groupacquired a 48% share of Bahçe#ehir Koleji, a private edu-cation group, on December 27, 2011.

“Demand for private education in Turkey is increas-ing, driven by a number of factors, including a growingstudent population and higher incomes,” Walid Musal-lam, Carlyle’s managing director and head of Carlyle Mid-dle East and North Africa, said following the sale.

Although primary and secondary schools have seensignificant investment from the private sector, educa-tion legislation has prevented universities from accept-ing private investment. The only non-state universitiesallowed to operate in Turkey are non-profit institutionsknown as foundation universities. This state of affairs,however, is beginning to change. In late spring 2011the head of Turkey’s Higher Education Board (YÖK),Yusuf Ziya Özcan, announced changes to higher edu-cation regulations that could pave the way for privateuniversities with more liberal investment requirements.If regulation continues to be liberalised, an increase inprivate investment in the segment is almost certain to

result. There are opponents to such measures who fearthat allowing private and foreign firms to invest in uni-versities may harm the integrity of provision. Continu-ing growth in demand, however, is necessitating greaterinvestment. In the last decade the number of publicuniversities has doubled, but these universities’ pri-mary source of funding is the state, which has not keptup with rising demand, according to a review of uni-versity facilities published by the OECD.PRIVATE TUTORING: With a shortfall of private financ-ing and national funding and rapid student populationgrowth, there has been increasingly stiff competitionto gain admission to prestigious schools in Turkey. Asa result of this, there has been significant growth inprivate tutoring institutions that help students preparefor the Student Selection Test (ÖSS). These schools,known as dershanes (literally “lesson houses”), emergedto serve students who wanted to have an extra edgeon the ÖSS, and the industry has since blossomed. Inthe 1970s, just 10 years after the exam was introduced,there were more than 150 dershanes, with over 45,000students. Growth has been steady in the years since:between 1975/76 and 2010/11, the number of der-shanes and students grew by about 9.5% annually, withthe number of schools rising from 157 to 4099 and thenumber of students reaching 1.2m, up from 45,600,according to the World Bank.

Annual gross revenues for dershanes have reachedmore than $1bn, according to estimates from the Pri-vate Dershane Union (ÖZDEBIR), the country’s largestprivate tutoring union. For the past 40 years, familieshave been willing to invest money and time in what theysee as the best chance for their children to secure aspot in one of the country’s leading schools. Three keyfactors continue to drive the market: the soaringdemand for higher education, the static number ofplaces available at top universities and the importanceof the ÖSS in admissions decisions. As long as thesethree factors are present, demand, and revenues, forprivate tutoring services are likely to continue growing.

With some 1.2m studentsstudying at 4099dershanes, the privatepreparatory sector is bigbusiness, generating grossrevenues of $1bn.

The number of privateschools at the primary andsecondary level isincreasing to meet thedemands of a growingpopulation with risingincomes. Foreigninvestment has beenflowing into the sector tosupport these new schools.

186

Investing in the futureGrowing foreign investment and increasing competition for universityadmission drive change


HEALTH OVERVIEW

Social security holders can receive treatment at private facilities

With Law No. 3 passed on May 3, 1920, Turkey estab-lished its Ministry of Health (MoH). From that timeonwards, the health care sector, under the direction ofthe government, expanded to offer comprehensivecoverage for Turkish citizens. During the early years ofthe republic, the scope of services on offer and the num-ber of personnel saw major gains, especially between1950 and 1960, when the number of doctors, nursesand midwives more than doubled. By the 1960s, thegovernment was moving forward with plans to socialisethe sector. Throughout the 1970s and 1980s, the sec-tor was in transition as the government underwent itsown changes, and by the 1990s, the MoH was work-ing with the State Planning Organisation on what wasthen called the “Master Plan Study on [the] Health Sec-tor”. It is from this master plan that the current MoHhas picked up with its own reforms, which have driventhe direction of the sector for the last decade. CHANGE IN THE AIR: The latest of these reform effortshas been the 2003-13 Health Transformation Plan (HTP)under the direction of the incumbent Justice and Devel-opment Party (AKP). The goal of the programme is toincrease the quality and accessibility of health careprovision. Major changes have included the unificationof the three social security schemes – the Social Insur-ance Institution, Ba!-kur and Emekli Sandı!ı – underthe Social Security Institution (Sosyal Güvenlik Kuru-mu, SGK), the centralisation of public hospital admin-istration and the reduction of medication prices.

The ways that low-income citizens are covered is setto change as well. To increase accessibility, the govern-ment introduced a green card system in 1992. Greencards allowed holders to access state health care freeof charge. Over 9m have benefitted from the pro-gramme, with infant and maternal mortality rates bothfalling, and measles and malaria being virtually eradi-cated. Still, as part of the state’s drive to consolidatethe health care system, the government announced in2011 that the green card scheme would be phased outand that members of the system would be integrated

into a new general insurance system, in which the gov-ernment assigns monthly premiums between TL33 andTL200 (!14.03 and !85), based on income. Those witha monthly income of less than TL279 (!118.58), orroughly one-third of the minimum wage, are set to con-tinue receiving services free of charge. The govern-ment expects the scheme to generate up to TL4.4bn(!1.87bn) for the state health care budget.STATE SPENDING: That extra income will likely be wel-come at the MoH. Spending on health care in the coun-try increased significantly in the 1990s and 2000s.Between 1998 and 2008, health care spending percapita more than tripled, growing from $295 to $902,according to the OECD’s “Health Data 2011”. Likewise,total expenditures on health care rose from 3.6% to 6.1%of GDP within the same timeframe. Although thesegains are significant, they are still short of the spend-ing rates of most other OECD countries, which gener-ally fall between 8% and 10%.

The Turkish population has been utilising health serv-ices at a higher rate, which has offered a substantialboost to the sector. Consultations with doctors percapita rose from 2.8% to 7.3% between 2003 and 2009.Preventive measures like vaccinations have increasedas well. From the announcement of the government’sHTP in 2003 through 2008, the latest statistics avail-able, the rate of vaccinations against measles grewfrom 75% to 97% and child vaccinations against diph-theria, tetanus and pertussis rose to 98% from 68%.INCREASING OPTIONS: One of the key growth driv-ers in the health care sector has been the growing roleof private care providers. Changes made by the gov-ernment have allowed citizens to use state social secu-rity to cover costs incurred at private hospitals. Thismeasure has broadened the options available for socialsecurity holders, and public opinion towards the pro-gramme has improved over time.

These changing government policies, combined withpopulation and economic growth, have given increas-ing opportunities for private health care providers.

Health care expenditureper person grew three-foldbetween 1998 and 2008,from $295 to $902,indicating health servicesare being used at a higher rate.

187


Comprehensive growth A rising economy is creating opportunities for expansion

HEALTH OVERVIEW

Overall, hospital visits have more than doubled in thepast decade. The private sector’s share of business hasalso increased tremendously. Between 2002 and 2009,private hospital visits as a share of all hospital visits morethan tripled, from 5% to 16%, according to statistics fromthe MoH compiled by the Pharmaceutical Manufactur-ers Association of Turkey (IEIS).PRIVATE CARE: The private health sector is dynamicand includes major hospital groups, independent pri-vate hospitals and smaller practices. Smaller opera-tors may be affected by new regulations governingdoctors. In the past, it was common for doctors to workpart-time at state or university hospitals while oper-ating private practices or working in private clinics onthe side. In January 2010, however, the governmentpassed the Law on Full-Time Employment of Univer-sity and Health Care Personnel, which stipulates thatdoctors cannot work at public or university hospitalspart-time. According to the current administration, thelaw was enforced to improve the quality of medicaltraining, allowing doctors at university and publicinstitutions to focus more on their teaching respon-sibilities as full-time employees.

Larger private health groups, meanwhile, have seensignificant growth in the last 20 years, in part thanksto social security changes. Nearly all of these hospitalnetworks started in Istanbul and began expanding asthe government carried out social security reforms.The prevailing mantra seems to be economies of scale,with health groups rapidly expanding their networksbeyond larger cities like Istanbul and Ankara to thecities of the Black Sea and the central and south-east-ern Anatolia regions. A number of these private oper-ators have been successful in securing foreign capitalto help fund growth (see analysis). HEALTH CARE PROVIDERS: Acıbadem HealthcareGroup, which has operated since 1991, has a 2000-bedcapacity on 105,000 sq metres spread across 16 gen-eral hospitals, nine outpatient clinics, an ophthalmol-ogy centre and other facilities. The health care group

held its initial public offering in 2000. Since then, Acıba-dem has been pushing to further expand and current-ly has seven new hospitals slated for completion inthe near future. In addition to three new locationsin the Be#ikta#, Maslak and Ata#ehir districts of Istan-bul, the health care provider has four new hospitalsplanned across the country in the cities of Bodrum,Eski#ehir, Kayseri and Adana. In December 2011, Khaz-anah Nasional, the sovereign wealth fund of Malaysia,acquired a 75% stake in Acıbadem.

Medical Park opened its first hospital in 1995 in Istan-bul’s Fatih district. In subsequent years, the companyhas expanded to include more far-flung areas of Turkey,such as Batman, in the country’s south-eastern Ana-tolia region, and Elazı!, in eastern Anatolia. MedicalPark currently operates 13 hospitals, two hospital com-plexes and two medical centres across Turkey. In Janu-ary 2012, the Carlyle Group, a private equity firm basedin Washington, DC, bought a 40% stake in Medical Park’soperations. The capital raised is set to support thegroup’s hospital operations and expansion.

Tracing its history back to 1992, Medicana HealthGroup, up until 2011, had expanded only in Istanbul andAnkara, but from 2011-12, it opened two new hospi-tals outside of these areas. The $70m Medicana Sam-sun Hospital, in the Black Sea region, opened in August2011 with a total bed capacity of 220. Medicana Konyain central Anatolia, meanwhile, is set to open in 2012.Moreover, the company demonstrates another trendthat is beginning to take off in Turkey: investing inhealth sectors abroad. The firm plans to go internation-al by opening a 200-bed hospital in Bucharest, Roma-nia, which is currently under construction.

Memorial Health Group, meanwhile, began as aninvestment made in 1996 by the Memorial HealthInvestments Corporation. The group’s first hospital wascompleted at the end of 1999, admitting its first patientin February 2000. As the company grew, it construct-ed additional facilities, including two 450-sq-metreoutpatient clinics in 2001 and another in the Suadiyeneighbourhood on Istanbul’s Asian side in 2003. Inaddition to its Istanbul locations, Memorial also oper-ates a hospital in Antalya, on the Mediterranean coast. Qatar First International Bank and ARGUS Capi-tal acquired a 40% stake in Memorial in August 2010.

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Private health care groups have seen significant growth in the past two decades

Private hospitals accountedfor 16% of the totalnumber of hospital visits in2009, more than threetimes the figure recordedin 2002.


SOURCE: MoH

Inpatient hospital beds, 1980-2010Year Public Private Total

1980 95,249 3868 99,117

1985 99,044 4874 103,918

1990 114,508 6230 120,738

1995 127,138 8934 136,072

2000 122,788 12,162 134,950

2005 144,853 13,876 158,729

2006 152,312 14,639 166,951

2007 152,894 17,397 170,291

2008 151,227 20,938 172,165

2009 154,471 25,178 179,649

2010 155,987 28,063 184,050

HEALTH OVERVIEW

Another company that specialises in private healthcare is the Universal Hospital Group, which has a totalof 1370 beds in facilities covering 170,000 sq metresin 12 general-purpose and branch hospitals. Havingstarted in 1976 with a single hospital in Istanbul, thecompany now runs 12 general-purpose branches inseven cities across Turkey, including Izmir, Bursa,Bodrum, Diyarbakır, Konya, Manisa, Malatya andKarabük. A combined equity investment of $140mfrom the International Finance Corporation, ADM Cap-ital and Dutch-based PGGM will support the compa-ny’s to continue expanding.EYE SPECIALISTS: In addition to major hospital groupsthat provide a full spectrum of medical services, spe-cialist groups are emerging as well. The ophthalmolo-gy sector in particular has been conducive to privatesector growth. Two private eye hospital networks thathave seen impressive growth in the past decade areDünyagöz and Batıgöz. Dünyagöz, founded in 1996,has expanded with branches across Turkey, as well asin Berlin, Cologne, London and Amsterdam. Likewise,Batıgöz, founded in Izmir in 2004, operates hospitalsat various locations in Turkey as well as branches inBucharest and Erbil, in northern Iraq. Both firms spe-cialise in eye treatments, such as laser eye surgery,cataract removal and glaucoma treatment, and arealso highly active in the medical tourism industry,offering packages for foreigners to come and receivetreatment and enjoy Turkey’s tourism offerings. In2010 some 66% of Istanbul’s medical tourists camefor eye treatment, according to data compiled by DrDursun Aydın, the MoH General Directorate of PrimaryHealth Service’s health tourism coordinator.MEDICAL TOURISM ON THE UP: Indeed, in additionto the boost in domestic demand, Turkey’s private healthcare sector has also been marketing its advantages toforeign patients. The MoH estimates that 500,000 for-eigners were treated in Turkish hospitals in 2010, earn-ing the country $850m in health tourism revenues.

Turkey has been competing on three fronts: quality,price and location. “The entire mechanism of medicaltourism is built on the following: you offer better qual-ity patient care along with better or equal medical serv-ice for a reasonably cheaper price,” Melis Abacıo!lu,Dünya Eye Hospital’s international business develop-ment regional manager for Europe and the Balkans, toldOBG. “Patients are attracted to the combination of thethree.” Attracting foreign patients provides an invalu-able source of income, in addition to a prestige boostin what is growing into a highly competitive market.COSTS: In terms of costs, Turkish health care providersare able to offer prices that are far lower than thosein more expensive markets like Europe and North Amer-ica. The US, with some of the world’s highest healthcare costs, is perhaps the most telling example. A heartbypass there, for example, could cost between $129,000and $144,000, whereas the same procedure in Turkeycosts between $11,375 and $15,000, a full 90% less.Even European countries with lower costs than the USare well above Turkish rates. A spinal fusion in Germanycosts between $13,500 and $15,000, while the same

operation is about $7125 in Turkey, according to theForeign Economic Relations Board (DEIK).

“The Ministry of Culture and Tourism is supportingthe promotion of Turkey abroad with incentives forTurkish health firms to attend conferences, produceinternational commercials and purchase foreign hos-pitals that can be used as a bridge for Turkey into for-eign markets,” Dr Ru#en Yıldırım, the CEO of KentHospital Izmir and chairman of the DEIK Health TourismBusiness Council – a reference point for institutions,insurers and medical travellers – told OBG. “This alsohelps Turkey maintain a cost-competitive edge in thelatest treatments and procedures.”

Undercutting European prices is important becausethe majority of medical tourists in the country comefrom Europe. In 2010 Germans made up roughly 36%of arrivals, by far the highest of any country, followedby the Netherlands and Austria, which accounted for8% and 4%, respectively. Although Turkish hospitalscan provide services at a lower cost, the income fromthem is still invaluable for hospitals. In 2008 the gov-ernment started to limit Turkish citizens’ co-payments,which cut into health providers’ margins. The moveencouraged an increase in hospitals to accept more

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Turkey is becoming an attractive medical tourism destination

Turkish hospitals treatedroughly 500,000 foreignersin 2010, earning thecountry some $850m.Around 66% of thosevisiting the country formedical reasons came foreye treatment.

SOURCE: World Bank

Health expenditure key indicators, 2004-092004 2005 2006 2007 2008 2009

Out-of-pocket (% of total health exp.) 19.24 22.76 21.97 21.82 17.4 16.04

Out-of-pocket (% of private health exp.) 66.9 70.78 69.4 67.82 64.66 64.66

Health exp. per capita ($) 309.73 382.19 440.84 553.09 623.28 570.97

Health exp. per capita, PPP (constant 545.84 620.69 729.66 805.06 845.32 965.07international $)

Health exp., private (% of GDP) 1.54 1.75 1.84 1.94 1.63 1.67

Health exp., public (% of total health exp.) 71.25 67.84 68.34 67.83 73.09 75.19

Health exp., public (% of gov't exp.) 10.75 11.28 11.95 12.13 12.79 12.79

Health exp., public (% of GDP) 3.83 3.7 3.97 4.1 4.44 5.07

Health exp., total (% of GDP) 5.37 5.45 5.81 6.04 6.07 6.74

Population, total (m) 67.24 68.14 69.06 69.99 70.92 71.84

HEALTH OVERVIEW

patients from abroad. “[W]e realised the potential ofinternational clients,” Dr Hasan Ku#, president of healthcare business development for Anadolu Medical Cen-tre, a private hospital in Istanbul, told New York-basednews site Eurasianet.org.UP TO SNUFF: Winning the trust of foreign patients,however, is no easy task. To assure customers that theirquality standards measure up to that of their rivalsabroad, Turkish hospital groups have been working togain accreditation from a number of internationallyrecognised health commissions. International accred-itation is a relatively new phenomenon, and as a result,there is not yet any overarching international accred-itation standard. In the past, most nations had their ownschemes for accrediting national health care providers.The international agencies that currently operate havegenerally based their systems on the national systemsfrom which they arose. QHA Trent, for example, runsits standards according to those of Britain’s NationalHealth Service. The Canadian Council on Health Serv-ices Accreditation and the Australian Council on Health-care Standards, on the other hand, have grown out ofthe standards in their respective countries.

The Joint Commission International (JCI), meanwhile,is a US-based standards agency. JCI is the global arm ofthe Joint Commission on Accreditation of HealthcareOrganisations, a non-profit health accreditation organ-isation also based in the US. JCI standards enable hos-pitals to maintain patient safety and keep the risk ofinfection in their facilities at minimum levels. JCI accred-itation has become among the most important crite-ria for medical travellers, and the organisation nowworks with hospitals, clinics and health ministries inover 80 countries, including Turkey. There are current-ly over 40 hospitals in Turkey accredited with JCI – thelargest number for any country globally. These includeprivate and university hospitals located in major urbanareas: Adana, Ankara, Antalya, Bursa, Kocaeli and Izmir.

Quality control standards for equipment are alsoimportant for attracting foreign patients. Technischer

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There are 40 Joint Commission International-accredited hospitals locally, the largest number in the world

The involvement of publichospitals in the treatmentof medical tourists hasshown some growth, from 6% in 2008 to 8% in 2010.


Überwachungsverein (TÜVs) are German organisationsthat offer equipment inspections to ensure qualitymanagement and work environment safety. These arealso attractive for foreigners, especially for Germanmedical tourists. A number of Turkey’s health careproviders, including Universal Hospital Group, Dünyagözand Batigöz, carry TÜV certification.

Applying for and maintaining these accreditations canbe expensive, costing tens of thousands of dollars peraccreditation, and it is typical to hold a handful of cer-tificates to assure potential patients from a wider geo-graphical area. For health care providers, however, thebenefits of increasing international prestige and attract-ing customers from abroad seem to outweigh the costs.

The government has also shown interest in provid-ing care for non-Turkish patients at public hospitals. For-eign patient coordination centres are to be establishedin seven provinces – Istanbul, Ankara, Izmir, Antalya,Mu!la, Aydın and Gaziantep – according to a MoHdirective dated June 13, 2011. Foreign language serv-ices are also planned, providing translation services inthe languages that are most common among visitors:English, German, Arabic and Russian.

A strong public presence in the sector could keepstate officials in closer contact with medical tourismoperators. “The government will now come to us insteadof us going to the government, [and] they will ask us,‘What do you think we can do to drive up these num-bers?’” Abacıo!lu told OBG. “What the government isdoing right now for foreign patients will open up thesector.” In recent years, the number of medical touriststreated in state hospitals has shown some growth. In2008, public hospitals treated about 6% of Turkey’smedical tourists. That percentage went up to 8% in2010, according to projections based on data for thefirst eight months of the year compiled by Dr Aydın.TRAVEL INCENTIVES: Turkish Airlines, the country’sflagship carrier, which is 49% owned by the Prime Min-istry Privatisation Administration, is also involved inthe medical tourism sector. The national carrier offersa number of incentives to travellers coming to Turkeyfor medical purposes. Passengers and two compan-ions can receive up to a 20% discount, or up to 25%for passengers from the US, on airfares. In addition,medical tourists receive an excess luggage allowanceand exemption from rebooking penalties provided therebooking is for medical reasons. OUTLOOK: In the past decade, the sector has seenmajor changes, including a rise in coverage and growthof private hospitals. Still, there are several challengesthe country will have to face in the coming years. Rais-ing the standards of care in rural areas remains a majorissue, one that the private sector is addressing throughexpansion programmes. Maintaining affordability ofcare is also a growing concern as privatisation occurs.

The government for its part has expressed contin-ued determination to push the health care sector for-ward and keep addressing issues as they arise. Withfundamentals like increasing domestic and foreigndemand, as well as rising disposable incomes, thereseems to be a myriad of opportunities for sector growth.

HEALTH INTERVIEW

Recep Akda!, Minister of Health

How can the current dispute regarding US accessto the Turkish pharmaceuticals market be resolved?AKDA!: The US, along with 25 other countries, has atariff schedule of countries exempt from Customsduties. The general system of preferences (GSP) is pre-pared each year by the US Congress and approved bythe president. This year’s list, which includes Turkey, wasapproved in 2011 and is valid up to 2013. Some 4000Turkish products benefit from this arrangement. Thecurrent impasse derives from our good manufacturingpractice (GMP) certificates, which obstruct US prod-ucts entering the Turkish market. As a result, the UShas threatened to remove Turkey from the GSP listingsupon renewal in 2013. Although Turkey does not acceptlicence applications without a GMP inspection, onesolution to the confrontation is to have a parallel appli-cation – planning GMP inspection after the licenceapplication while initiating the licence procedure. How-ever, reciprocity is important, and we are looking outfor the interests of Turkey’s pharmaceuticals industry.We issued 13 import licences and 517 manufacturinglicences in 2010, and another 125 and 870 in 2011,respectively. Clearly, our markets are accessible.

What efforts are being made to improve standardsfor the clinical testing of drugs and to protect thepharmaceuticals industry from the grey economy?AKDA!: Turkish regulations on clinical trials are inaccordance with those currently in force in the EU. Fora population of 75m, we have a sufficient number ofqualified doctors and researchers, as well as soundinfrastructure and hospital equipment. However, Turkeyneeds to garner a larger share of the world’s pharma-ceuticals market. To secure the domestic industry, wehave established market surveillance and inspectionteams that are tasked with monitoring imported prod-ucts and tracking packages of drugs. We have built atracking database that can follow a drug from the timeit is produced to the time it is sold in a pharmacy. Sincethe cost of health care is subsidised by the government,

the tracking system keeps illegal products out of thesupply chain and customers have a cost-based incen-tive to purchase from the real market.

What is the government doing to address chronicdiseases like cancer, diabetes, and circulatory issues?AKDA!: Health culture in Turkey is experiencing sig-nificant changes. Chronic diseases that affect qualityof life and cause early death are on the rise. Thus, weneed to continue ensuring access to acute treatmentswhile also providing preventive measures against suchhealth complications. This includes addressing key riskfactors, such as smoking, alcohol and substance abuse,and stress. The government aims to raise awarenessand pass legislation that encourages people to avoidthese risk factors. The programmes we are implement-ing focus on tobacco control, encourage active livingand consciousness about harmful levels of salt intake,among other things. The government is actively engagedin a fight against chronic diseases through risk avoid-ance, early diagnosis and treatment.

How can medical research add value that could beexported in technologies and pharmaceuticals? AKDA!: Pharmaceuticals companies focusing onresearch and development (R&D) should play a biggerrole in developing exportable products. Generic drugproducers have begun experimenting with new com-binations, and while developing drug release systemsand controlled release systems is a direction in whichthe health industry can grow, pharmaceuticals R&Dshould focus more on new processes for production,rather than new products. Innovative multinationalfirms in Turkey should shift clinical research to Turkey,and the government is using new incentives – such asthe establishment of Health Care Free Zones – to attractmore foreign companies. With the implementation ofthese incentives, our short-term target is to balancepharmaceuticals imports and exports, which meansexpanding exports by nine times, to TL550m (!233.8m).

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Healthy choicesOBG talks to Recep Akda!, Minister of Health

HEALTH ANALYSIS

Foreigners residing in Turkey can join the social security scheme

Since the beginning of the Turgut Özal administrationin the 1980s, the Turkish economy has undergonemajor liberalisation unseen since the earliest years ofthe republic. The government has been working to pri-vatise enterprises, telecommunications, roads andrapid transit. Within the scope of these changes,Turkey’s private health care providers have also tak-en on a greater role in the sector. A combination ofeconomic growth, population expansion and legalchanges has led to mushrooming demand for privatehealth care. As a result, many of the industry’s majorplayers have been seeking capital from abroad to sup-port expansion efforts and facilities upgrades. GROWTH FUNDAMENTALS:The combination of grow-ing GDP per capita and a rising population has con-tributed to the environment of expansion in the healthcare sector. “Health care is a continuing growth sto-ry in emerging markets,” according to Arif Naqvi, thefounder and CEO of Abraaj, which sold its 50% stakein Acıbadem to Malaysia’s sovereign wealth fund in late2011. With disposable income levels and the size ofthe population itself both on the up, it seems naturalthat demand for health care should also be rising. LEGAL CHANGES: In the midst of these demograph-ic and economic changes, government policy, name-ly the 2003-13 Health Transformation Plan (HTP), hasalso been instrumental in bringing about structuralchanges in the sector. A key tenet of the plan has beenan effort to broaden the pool of the population thatqualifies for state coverage. All employees anddependents of employees receive coverage, withmonthly rates adjusted depending on the level ofincome. Pensioners enjoy benefits as well, and cer-tain impoverished citizens can qualify for free cover-age. Even foreigners who reside in Turkey for over ayear can opt to join the state social security scheme,a new policy that was announced in January 2012.

The portion of the population under governmentcoverage has increased accordingly. In 2004, just as theHTP was in its infancy, 84% of the population qualified

In 2011 96% of thepopulation was eligible to receive some form ofsocial security. This is upfrom 84% in 2004, whenchanges to the sector were only beginning to take effect.

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Growth spurtA combination of factors has led to a wave of private investment


for the state’s various types of social security, includ-ing state pensions, social insurance and the green cardscheme for low-income families. This ratio increasedto 96% of the population by 2011, according to sta-tistics from the Social Security Institution. In additionto broadening the pool of insurance holders, new reg-ulations also allow Turkish citizens to use their stateinsurance at private hospitals, provided that the pri-vate hospital chooses to accept state coverage. RISING PRIVATE SECTOR: The results of these changeshave been massive. Between 2002 and 2009, the num-ber of private hospital visits grew at a compound annu-al growth rate of 35%. Overall private hospital visitsincreased from 5% to 16%, according to statistics fromthe Ministry of Health. Although private visits still makeup a minority of overall care, the rate of growth hascaught the eye of Turkey’s private sector and foreigninvestors. Private hospitals have been undertakingexpansion and upgrade projects, and foreign capitalhas been a key source of funding for this growth spurt.In the last three to four years, a number of major pri-vate players have attracted investments from abroad.

On August 28, 2010, Qatar First Investment Bank andLondon-based ARGUS Capital announced that they hadacquired a 40% stake in Memorial Health Group, oneof Turkey’s largest private care providers. UniversalHospital Group, a major private player with locationsacross the country, announced on May 4, 2011 that aset of investors, International Finance Corporation,ADM Capital and Dutch-based PGGM, would be inject-ing a combined equity investment of $140m into thefirm. Khazanah Nasional, the sovereign wealth fund ofMalaysia, on December 23, 2011, acquired a 75% shareof Acıbadem Healthcare Group and affiliated compa-nies from Dubai-based Abraaj, the largest private equi-ty firm in the region, and the Aydınlar family.

Indeed, with several of the country’s leading med-ical groups already utilising foreign investment to helpfund expansion projects, opportunities to join exist-ing ventures or start new companies seem set to grow.

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TourismThe sector rebounds as the number of arrivals growsNew visa regulations encourage visits from neighboursIndustry players to rebrand resort and coastal tourismWarming ties boost the number of regional guestsIstanbul expands as a centre for business and culture

TOURISM OVERVIEW

The sector grew 4.5% in 2011, outperforming the global average

Long described as a “bridge of civilisations” by localsand travel writers alike, Turkey is now enjoying a newinspiring status: an island of stability. Surrounded by Arabuprisings and eurozone crises, the country is attract-ing attention and visitors with its economic growth andincreasing international prominence. In 2011 Turkey hitits goal of 30m tourists and increased its income to$23bn in receipts, which equalled to 3% of GDP. A NEW DAWN: The exciting push is in part driven byprofile-raisers, such as Istanbul being named the 2010European Capital of Culture, and tourism officials hopeto see Turkey in the top five worldwide destinations by2023. The country ranked seventh in internationaltourism arrivals in 2010, according to the UN WorldTourism Organisation. Reaching the top-five bracketwould require surpassing Italy, which drew 43m visitorsin 2010, to join the ranks of France, US, China and Spain.

Turkey’s growth in visitor numbers appears sustain-able for the time being, but the country will need toimprove and diversify its tourism offerings to competewith premier global destinations. Sector analysis showsthat Turkey derives much of its market share from val-ue-focused resort tourism, which boosts raw visitortotals at the expense of per-capita spending. All-inclu-sive tourism has also left resort towns like Antalya cul-turally underdeveloped, as visitors prefer to stay in theirhotels and use complementary services.

Fortunately, Turkey has the opportunity to boost rev-enues by capitalising on underdeveloped resources inits portfolio. This includes the cultural capital of Istan-bul, where the tourism market is still immature com-pared to its European counterparts, despite severaldecades of growth. Istanbul has also been attracting asteadily growing stream of high-spending visitors, par-ticularly tourists from the Middle East who are drawnto Turkey’s Islamic heritage and increasingly positive pub-lic profile in the region. Finally, Turkey’s Anatolian heart-land is famous for its historical sites, natural wonders,and other religious and cultural draws, even thoughinvestment and easy transit options are still lacking.

BY THE NUMBERS: In 2011 Turkey experienced itsmost impressive tourism growth since the onset of theglobal economic crisis. Figures fell away sharply in 2008-09, but 2011 brought Turkey a rise in visitor numbersof 9.86% to 31.5m, thanks to a 21% increase in themonths of January-April. This ended two consecutiveyears of declining revenues, boosting income by 10.6%from $20.8bn to $23bn. Turkey’s growth in tourism sig-nificantly outperformed the global average, havingexpanded an estimated 4.5% in the first eight monthsof 2011. Globally, the tourism sector’s contribution toGDP was expected to increase by only 3.2% in 2011 and3.3% in 2012, given the economic decline.

The German market has dominated the Turkishtourism industry for many years, but its share has beenon the decline. Some 4.83m Germans visited Turkey in2011, accounting for 15.3% of arrivals, compared withtheir peak representation of 26.3% in 2002. Still, Euro-peans and Russians continue rounding out Turkey’stop-visitors list, with 3.47m Russians making up 11% ofarrivals. With 2.6 m visitors, British nationals account-ed for 8.2% of all guests. Visitors from Iran amountedto 1.88m or 6% of the total, and Bulgarians ranked fifth,comprising 4.7% of Turkey’s tourists. Syrians, Dutch,Georgians, French and US visitors followed, with eachgroup representing less than 4% of the total. WELCOME MAT: Tourism industry figures tend to dividethe industry into three segments: Istanbul, Anatolia,and resort tourism in the Mediterranean and Aegeanregions. The resort sector, which has for decades offeredEuropeans a budget holiday destination, is currently themost developed of these segments. Turkish border gatefigures show Antalya, on the Mediterranean coast, tobe the top province for arrivals in 2011 with 10.5m vis-itors, or one-third of all tourists. An additional 3.1m(9.8%) came in through Mu!la province, which featuresthe Aegean resort towns of Bodrum, Ölüdeniz, Marmarisand Fethiye. Rounding out the coastal gateways, Izmirwelcomed 1.4m arrivals, or 4.4%. Together, theseprovinces accounted for over 47% of all arrivals, although

Turkey aims to rank amongthe top-five globaldestinations by 2023,moving up from its currentseventh-place rank andcompeting with popularhotspots like France, theUS, China and Spain.

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Western Europeans andRussians make up the vastmajority of visitors andoverwhelmingly head forthe country’s long andattractive coast, wherethey take advantage ofbudget vacation packages.

Making room for moreEver so popular and with a promising future

TOURISM OVERVIEW

not all visitors headed directly for all-inclusive resorts.At the same time, Istanbul captured 25.6% of visitors– 8m people – while Edirne had 8.6%, or 2.7m arrivals.

One area where Turkey has lagged is in the averagespending of tourists, which has fallen fairly steadilyover the past decade. The high point was 2003, whenTurkey welcomed 14m visitors and gathered $13.2bnin income, or roughly $946 per person. Income hit itsnadir in 2010, when 28.6m visitors spent only $20.8bn,an average spend of $727 per guest. However, bothtotal and per-capita spending ticked upwards in 2011,to $23bn in gross receipts and $731 per person. Manyattribute this in part to an influx of wealthy tourists fromthe Gulf countries, who typically spend far more thanbudget holiday goers (see analysis).LOFTY GOALS: In tourism, as in most other sectors ofthe Turkish economy, all eyes are on 2023, the year inwhich the republic will celebrate its 100th anniversaryand the government hopes to hit a number of growthmilestones, including a rise in tourism’s visitor andincome figures. By 2023, Turkey aims to host 50m guestsand garner $50bn in revenue, establishing a spendinggoal of $1000 per tourist. These targets, announcedin 2008 by $smet Yılmaz, then undersecretary at theMinistry of Culture and Tourism, also included goals for1.25m beds, 5m tourism workers, 500 planes, 10 con-ference centres, 40 marinas and 25 cruise ports.

To reach these figures, in 2007 the government laidout a strategy for several improvement programmes,

including diversifying tourism products, strengtheningtransport infrastructure, increasing city branding andboosting cultural development. Current incentives fortourism include access to public land; long-maturity, low-interest rate loans for investment; the ability to hire upto 10% foreigners; and a variety of tax exemptions suchas value-added tax and Customs. Tu!rul Temel, a busi-ness development manager at Hilton Turkey, notes that“investment in hotels is easier than other types of realestate, as it’s supported by the government.”

The government has designated tourism promotionas a top priority. The budget for advertising abroadgrew to $98.6m in 2011, compared with $27.8m in2002. Asia is a particular focus of the promotional cam-paigns, and the General Directorate of Promotion hasopened offices in Brunei, Malaysia, India and China.

Visa policies play a major role in opening new mar-kets to Turkey’s tourism industry. The cancellation ofvisa requirements for Russian nationals in May 2010should help sustain the recent rise in budget holiday-makers from that country. Arrivals from Russia grew15.3% and 11.6% in 2010 and 2011, respectively, andthe number of visitors has more than doubled since2004. Turkey then eliminated visa requirements forUkrainian nationals in 2011, and the government hasagreed to drop the permit requirement for Belarusianpassport holders as well. Outreach in the Middle Easthas similarly led to visa-free travel for visitors from Syria, Qatar, Lebanon, Yemen and Jordan (see analysis).

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Boosting tourist spendingper head is a key objectivefor the sector. While thecurrent figure is lower thanthat seen in the past, thecountry aims to reach anaverage visitor spend of$1000 by 2023.

TOURISM OVERVIEW

THY: Turkish Airlines (THY), the nation’s flagship carri-er, has a symbiotic relationship with the tourism indus-try, as it both benefits from and contributes to thecountry’s attractiveness to foreigners. It is in the midstof an unprecedented expansion, having added 20 routesand acquired 32 new planes in 2011. This was coupledwith 67% boost in advertising spend in 2011, THY’sgreatest increase on any individual item aside from fuel.As the face of Turkey’s tourism for many visitors, THY’sreputation is crucial. Since its partial privatisation in 2006,the airline has evolved considerably and was recentlynamed Skytrax’s Best Airline in Europe in 2011. REGULATORY MATTERS: The sector is regulated bythe Ministry of Culture and Tourism. There was anabortive proposal in the 2007 strategy to create aNational Tourism Council by bringing together privateand sector figures, and a continuing worry of tourismoperators and organisers is the lack of a clear policydirection. “One minister says, ‘focus on medical tourism,’and everyone focuses on that. Then the cabinet changesand the next minister says we have to focus on con-gress tourism. There is neither continuity nor focus,”said Bulut Ba!cı, the chairman of Gençtur, a local touroperators association. Ba!cı recommends developingTurkey’s diverse tourism attractions, but marketingthem to different audiences. “We have to match coun-tries with their destination. For example, Japanesetourists are interested in cultural tourism, so they trav-el to Cappadocia, Van, Mardin, Urfa and other placesin the south-east. In London we might promote thefinancial sector. To people in Switzerland, we should bepromoting beach tourism in Antalya and Bodrum.”BY THE SEA: With nearly 50% of tourists coming toTurkey in search of sun and sand, resort tourism is theindustry’s primary driver and a key contributor to rev-enue growth. A look at accommodation statistics isinstructive: according to 2010 figures, the Mediter-ranean region accounted for 319,630 hotel beds, or50.7% of the total, while the Aegean region representsanother 25%. Istanbul has only 10% of the country’sovernight hosting capacity. The sheer size of accom-modation capacity, combined with the seasonality ofresort tourism, makes for serious underutilisation in thewinter, even as hotels expand to meet summer demand.Just 110,176 visitors arrived in Antalya in January 2011,

while 1.7m graced its shores the following July, cappingaverage stay at less than six nights per person.

However, given the steady growth of visitors, sup-ply is rising. Statistics show that investments underway in 2010 will expand bed capacity by 25.9% in theMediterranean and 56.5% in the Aegean regions. Addi-tionally, the government has designated six sites alongthe coast – Çe#me, Dalaman, Didim, north Antalya andManavgat – as Tourism Development Regions. Plans,such a land zoning, have been slow to develop in somecases, but progress is being made. In 2011, the Min-istry of Culture and Tourism approved the constructionof five hotels in Didim, with more potentially to follow.In Dalaman environmental protection approvals werefinally obtained, giving the go-ahead to build a new mari-na, which will allow for the docking of large yachts.

The attraction of the coast is obvious: it hosts thevast majority of Turkey’s 324 Blue Flag beaches, whichputs it just behind Spain, Greece and France as a resortdestination. In addition, the region boasts historicalsites – Ephesus near Izmir, a crusader castle in Bodrum,and the Roman sites of Perge and Side, near Antalya.Turkey’s coast as a premier attraction is reflected bythe transportation and accommodation options avail-able throughout the country. There are direct flightsto Antalya from 10 German cities and three Swiss cities,as well as from Moscow, Amsterdam, London, Man-chester, Vienna, Oslo, and most major Turkish hubs.With THY recently redirecting its focus on long-haul andtransit traffic, most of these routes are available throughEuropean airlines or via Turkish budget carriers likePegasus, Onur Air, AtlasJet and SunExpress.

On the hotel front, the focus on budget travel hasnot detracted from the provision of top-quality accom-modation. Statistics from the Ministry of Culture andTourism show that the Mediterranean region hosts392, or 44%, of the country’s total of 841 four- andfive-star hotels, and the Aegean holds an additional 22%.Rates are competitive, and a survey from the websiteMyhotelcost.com rated Turkey the second-cheapest

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Resort tourism along the Mediterranean and Aegean coasts captures over 50% of visitors

A lack of regulatoryefficiency and a clearstrategy for thedevelopment of the sectorare cited as obstacles tomaximising the market’spotential.

Tourism infrastructure inthe coastal regions isunder-utilised in the colderand off-season months.Still, the waves of guests inthe summer continuebringing revenues andinvestment to the region.

SOURCE: TurkStat

Beds in licensed accommodation by region, 2010Istanbul 62,841

Western Marmara 16,040

Aegean 145,922

East Marmara 17,364

Western Anatolia 22,911

Mediterranean 319,630

Central Anatolia 13,489

West Black Sea 6506

East Black Sea 6953

North-east Anatolia 4352

Mid-east Anatolia 3944

South-east Anatolia 9513

TOURISM OVERVIEW

Mediterranean destination after Malta for hotels andrestaurants. Another survey, the UK Post Office’s “World-wide Holiday Costs Barometer 2012”, analyses the aver-age cost of a bundle of goods commonly bought inresorts, including coffee, sun cream, cigarettes, anddinner for two. Turkey ranked as the 17th-cheapest spotworldwide in 2011, with Spain and Cyprus the onlyMediterranean countries to beat it on value. REBALANCING: There is a growing concern that theindustry’s focus on cheap, all-inclusive resorts is short-sighted and risky in the long run. In this view, the steadygrowth in European arrivals seeking cheap holidays hasimpeded the diversification of resort destinations, leav-ing many coastal towns as little more than a collectionof hotels. The predominance of the all-inclusive mod-el is responsible for some of this underinvestment,according to tour operators, because package touriststend to spend very little outside their own hotel.

“Between 70% and 80% of the people arriving at theairport don’t see Antalya as a city,” said Nina Öger ofÖger Tours, a leading tour operator specialising in pack-age tours. “They go straight to their hotel and spendthe rest of the time there.” Öger argues that the lackof development hurts the ability of tour operators, andthus hotels, to charge higher prices.

Hotel operators tend to concur, but they emphasisethat the all-inclusive vacation package phenomenon isbeing driven by tour operators, who would need totake the initiative in shifting approaches. “In the south-ern region – Antalya and Alanya – you have to supplyall-inclusive products,” said Temel. “The resort businessin Turkey is mostly led by international tour operatorsand their local partners. The hotels want a large num-ber of visitors, and they work through the tour opera-tors.” Temel stressed that non-inclusive hotels wouldbe more profitable, if they could attract visitors. “Noneof the hotel operators in this region support all-inclu-sive other than as a means of getting guests.”

Öger told OBG that, in the past, “we saw lots of hotelsbeing built, with little attention paid to infrastructure

or developing the resort towns as destinations with theirown culture. We need to begin marketing Turkey as aproduct.” Öger’ssolution involves promoting Turkish spe-cialties like olive oil and wine, and diversifying the attrac-tions surrounding resort destinations. “We should worktogether with local governments to organise specialtrips, festivals and create the infrastructure to connectthese towns.” Ba!cı also argues against the cookie-cutter trend of massive hotels along the coast. “Thereis an inflation of five-star hotels in Antalya,” he said. “Weneed more boutique and budget hotels.”GOLF TOURISM: The growth of golf tourism in theAntalya region might be evidence that resort destina-tions recognise the need to distinguish themselves andboost spending. The town of Belek near Antalya hascornered the market on Turkish golf tourism, boasting15 of the country’s 19 golf courses. Although invest-ment in the area began in 1994, interest in the coastas a golfing destination has only seriously taken off inthe last 10 years, with the number of rounds playedmore than tripling between 2003 and 2009. In 2008,Belek was named “Best Golf Destination of the Year inEurope” by the International Association of Golf TourOperators, and it will host the 2012 Amateur TeamsChampionship. Given that the average golf touristspends about five times as much as regular visitors, thepotential for luxury tourism is high.

Growth in Turkey’s tourism implies that the chal-lenge of better developing resort destinations is a long-term hurdle, not a short-term crisis. However, giventhat much of Turkey’s draw rests on its value proposi-tion, tour operators will pay close attention to the eco-nomic fallout from Europe’s debt crisis. In the event thatprices fall in embattled countries – as they appear tobe doing in Spain in 2012 – the impetus for Turkey toboost its offerings would become that much stronger. ISTANBUL: Despite being Turkey’s largest city and cul-ture capital, Istanbul is twice second fiddle – to Ankara’spolitics and to Antalya’s tourism. But this underdog sta-tus is disappearing, thanks to a decade of steady eco-nomic growth and an opening toward the outside world.This transition was underscored by Istanbul’s selectionas the 2010 European Capital of Culture, which spurredart exhibitions and renovations across the city.

Cultural centres in major European cities tend toattract a large number of tourists, and in this regard,Istanbul, with 8m tourists in 2011, has been catchingup to its counterparts. “Paris is getting 30m tourists peryear, Turkey as a whole is getting 26m,” said Ba!cı. “Sohow are we going to compete?” The attractions, how-ever, are clear: Istanbul spans Europe and Asia, integrat-ing the finest in Ottoman and Byzantine architecture,with a vibrant nightlife to top it off.

Most industry professionals see huge opportunitiesfor Istanbul. For one, although the city might appearto be entirely populated with hotels, Istanbul is far fromsaturation. “There is a huge potential for hotels in Istan-bul,” Temel told OBG. “To illustrate, Hilton has 50 hotelsin the Charlotte, North Carolina area and only five inIstanbul.” Furthermore, Istanbul’s market is far less sea-sonal than that of the coastal regions, especially giv-

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Istanbul’s importance as an economic and cultural centre draws a growing number of tourists

The all-inclusive vacationand package model bringsmillions of tourists toTurkey’s shores every year,but the phenomenon hasleft many host citiesunderdeveloped with littleemphasis on their culturaland traditional heritage.

Tour operators and resortowners are finding newways to diversify the sectorby tapping into nicheopportunities, such as golftourism, to increase profits,boost standing and attractinternational guests.


TOURISM OVERVIEW

the Business & Finance District, and Conference Valleynear Taksim Square. The airport district is home to twoof the biggest exhibition spaces in the country – CNRExpo, with 150,000 sq metres of exhibition space, andthe Istanbul Expo Centre, which boasts 162,000 sqmetres of exhibition space.

Istanbul’s premier conference facilities include TüyapFair, Convention and Congress Centre (TÜYAP) inBüyükçekmece; CNR in Ye"ilköy; the International Con-gress Centre, which recently opened in the central Tak-sim district; and the WOW Istanbul convention centrethat currently offers a 4000-person-capacity venuebut has major expansion plans for the future.

MICE offerings in the business district are geared moretowards conventions and meetings than exhibitions.These are often linked to hotels, such as the 2500-per-son Grand Cevahir hotel and convention centre. Con-ference Valley, meanwhile, holds two major meetingsand exhibition spaces – the Istanbul Congress Centre(ICC) and the Istanbul Convention and Exhibition Cen-tre (ICEC). According to the Istanbul Convention andVisitors Bureau (IVKB), each of the three main MICE centres can host events of up to 20,000 participants.

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A tramway connects historic Istanbul with the city’s main airport

Like many sectors ofIstanbul’s economy, thehospitality industry isfinding exceptional roomfor growth. Internationalchains are leadingdevelopment efforts, withmany name-brand hotelgroups investing in multipleproperties.

SOURCE: TurkStat

Foreign arrivals by nationality, 2009-11 (’000)

Countries 2009 Share % 2010 Share % 2011 Share %

Germany 4488 16.58 4385 15.32 4826 15.34

Russian Fed. 2695 9.95 3107 10.85 3468 11.03

UK 2427 8.96 2674 9.34 2582 8.21

Iran 1383 5.11 1885 6.58 1879 5.97

Bulgaria 1407 5.19 1434 5.01 1492 4.74

Netherlands 1127 4.16 1073 3.75 1223 3.89

Georgia 995 3.68 1112 3.88 1153 3.66

France 933 3.45 928 3.24 1140 3.63

Syria 510 1.88 899 3.14 974 3.10

US 667 2.46 643 2.24 757 2.41

Others 10,445 38.58 10,491 36.64 11,961 38.03

Total 27,077 100.00 28,632 100.00 31,456 100.00

en its growing status as a business centre for the region.Thus, operators are able to invest in hotel rooms with-out worrying that they will be empty for four monthsof the year. Leisure-focused hotels do have a relative-ly “dead season”, according to Onur Altay, supervisorat the Tünel Residence, but “during the summer, Istan-bul still doesn’t have enough hotel space.” SUPPORTING AN UPTICK: Istanbul also does not suf-fer from a perception that it is a budget destination.Prices are certainly lower than in competing Europeancities: according to the 2011 Hotel Price Index byHotels.com, the average five-star hotel in Istanbul costs$209 per night, compared to $229 in Munich, $347 inLondon and $496 in Geneva. Much of this is owed tothe city’s late start in economic development and thecurrent rapid catch up. “All the top international com-panies in the hospitality sector are coming to Istanbul– Le Méridien, Shangri-La – and prices are rising auto-matically,” Ba!cı told OBG. “If you combine increasedservices with more extensive marketing, prices will rise.”

Foreign chains are quick to open properties in Istan-bul. Marriot will add the Renaissance Istanbul Bospho-rus Hotel in September 2012, bringing its portfolio inthe city to six. Hilton has four hotels in the pipeline, most-ly in the city’s underserved suburbs and outskirts. TheRezidor group has two Radisson Blu operating proper-ties in the Istanbul area and two under construction,including a 305-room hotel in the "i#li district.

Istanbul and its vicinities still face shortcomings interms of transport infrastructure, although this affectsresidents and businesses more than tourists. The maintourist attractions in the historic district of Istanbul areconnected by a tram that links via metro to Atatürk Air-port. Intercity train transport will be interrupted from2012 through at least 2013, when the Haydarpa#a Sta-tion on the Anatolian side will close for construction.The Marmaray project, set to open in 2013, is a mas-sive railway construction and upgrade effort that willserve as an intra-city commuter rail and also connectIstanbul with a greater inter-city rail system. MICE: As Istanbul grows in both size and economicimportance, an increasing number of visitors are arriv-ing for business purposes. The meetings, incentives, con-ventions and exhibitions (MICE) industry is thus in anadvantageous position. According to the Internation-al Congress and Convention Association, which tracksmeetings held by industry associations that rotatebetween destinations, Istanbul ranked seventh world-wide with 109 meetings in 2010. This represents amajor improvement over 2001, when it ranked 29th with35 meetings and in 2009 when it ranked 16th.

“We know the convention potential is strong,” saidTemel. “We expect the demand and supply for conven-tion space to rise significantly in the upcoming years.”According to Temel, conventions maximise both occu-pancy and room rates for operators. Additionally, theymitigate the effects of seasonality, as most conventionshappen outside the summer months when demandfor rooms in Istanbul stretches the existing capacity.

The bulk of Istanbul’s conference settings are locat-ed in three clusters: the Airport & Exhibition District,

TOURISM OVERVIEW

Turkey has the ability to host prominent internation-al events and its importance in regional affairs hasgrown, making Istanbul a convenient destination forhigh-level diplomatic meetings. In recent times it hashosted events such as IMF and World Bank meetings,a NATO summit, the World Water Forum, and World Eco-nomic Forums in 2008 and 2012. “Istanbul became aleading destination for international meetings, con-gresses and exhibitions, and will need more conferencecentre space and hotels,” Kemal Keskin, manager of busi-ness development at Ay’dan MICE, told OBG.

In February 2012, WOW Istanbul announced a $20minvestment that will add meeting rooms, expand seat-ing capacity to 6500 and provide the largest meetingspace of any combined accommodation and conven-tion facilities the city. TÜYAP, a long-standing industryplayer in the western suburb of Büyükçekmece, addedthree halls in 2010, bringing its total exhibition spaceto 98,000 sq metres inside and 75,000 sq metres out-doors. In February 2010 UK-based venue operator SMGEurope opened Ora Arena in Istanbul, which will spe-cialise in conventions and corporate presentations, aswell as concerts and similar entertainment events. BRANCHING OUT: Beyond Istanbul and the coast,Turkey sees valuable potential in diversifying its tourismportfolio to encompass regions that remain outsidethe purview of the average tourist. This includes thecountry’s eastern expanses, which are underdevelopedfor tourism, despite their many historical sites, naturalwonders and places of religious significance.

To realise these opportunities and target the premi-um end of the market, the Ministry of Culture andTourism will address the potential of the east and hasincluded in its 2023 Vision plans for a number of “tourismcorridors”. For example, the north-eastern cities ofErzurum, Erzincan, Kars, Ardahan and A!rı, would belinked together as the winter tourism corridor, pro-moting skiing and other cold-season attractions. Theregion received international attention in 2011 due tothe Winter Universiade collegiate tournament held in

Erzurum. Still, only 15,000 tourists come to Turkey year-ly for winter tourism, a tiny share of the 62m ski touristsworldwide. The ministry’s proposed $10m budget woulddevelop winter tourism centres in several towns andhelp train and coordinate between sector personnel.Other planned areas of promotion include the Silk Roadcorridor around Ankara, the faith tourism corridor insouth-east Anatolia and the western Black Sea coastalcorridor. The Black Sea is particularly amenable to devel-opment, Öger told OBG. “With 15m people in Istanbuland no close destination for weekend holidays, thereis plenty of potential there,” Öger said.HEALTH TOURISM: One niche area already seeinggrowth is health tourism, where Turkey benefits fromlower costs and proximity to Europe. The country saw74,093 visiting patients in 2008, 91,952 in 2009 and109,678 in 2010. Most health tourists are residents ofGermany, the Netherlands and France with Turkishbackgrounds who return for competitively priced med-ical care. However, Turkey’s moderate climate and abun-dant thermal springs offer scope for expansion beyondTurkish-heritage visitors. The ministry, seeking to becomethe world’s leader in “thermal tourism”, aims to have50,000 thermal beds installed in the short term, with250,000 beds as the medium-term target. One exam-ple of investments being made in this sector is the AlilaWellness Park, which will bill itself as Europe’s largestthermal facility with 2000 beds. The $80m project willfeature two hotels and two spas and offer a combined“thermal, summer and religious” holiday. OUTLOOK: Given the volatile nature of the industry, evenan attractive market like Turkey cannot rest on its lau-rels. Obstacles for growth are diverse: a strengtheninglira, price competition with Spain and Greece, unsus-tainable building practices and environmental degra-dation. One concern is a backlash over what Vural Öger,a European MP from Germany’s Social Democratic Par-ty, labelled “concretisation”. As huge resorts replaceonce-beautiful natural spaces and small, traditionaltowns, the region’s attractiveness as a whole diminish-es. The Turkish government faces the challenge of pro-moting tourism without damaging the social fabric oflocal communities or the environment. Sustainabilityis the watchword of the future, and the country will needto adapt if it is to keep the current trend growing strong.

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Istanbul was the seventh-most-popular city for MICE events in 2010

Building upon its growingimportance as a centre ofbusiness and culture,Istanbul is rapidlydeveloping its MICEindustry, which helpsmaintain the rate ofincoming tourists year-round.

New tourism corridors willhelp Turkey rebrand itsofferings and draw visitorsto less popular, butnonetheless attractiveregions of the country.


SOURCE: TurkStat

Arrivals & spending, 2001-11

Year Tourism income ($ bn) Tourists (m) Per tourist spending ($)

2001 10.07 11.62 866.37

2002 11.90 13.25 898.31

2003 13.20 13.96 946.03

2004 15.89 17.55 905.37

2005 18.15 21.12 859.34

2006 16.85 19.82 850.21

2007 18.49 23.34 792.04

2008 21.95 26.34 833.47

2009 21.25 27.08 784.77

2010 20.81 28.63 726.69

2011 23.02 31.46 731.83

Kadir Topba$, Mayor of Istanbul

What changes to the city’s infrastructure couldimprove accessibility for tourists?TOPBA#: Despite the global economic crisis, the num-ber of tourists visiting Istanbul has risen by 300% since2004. By the end of 2011, 10m tourists visited Istan-bul, while approximately 30m came to Turkey in total.

Istanbul is one of the fastest growing tourist desti-nations in the world, alongside New York and Amster-dam. To keep up, Istanbul’s tourism infrastructure isimproving at a fast pace. About 60% of the TL49bn(!20.83bn) invested in the city in the last eight yearswas allocated to public transport, and this has improvedaccessibility for both tourists and locals.

We are planning a new airport to relieve air trafficon the European side of the city, which receives 900flights per day. This new plan indicates that the newairport will have a capacity of 100m passengers per year.We are also planning construct two new cruise ports,one on each side of the city. At the same time we aretransforming our current ports to serve as cruise ports.These projects, along with the imminent completionof the Marmaray underwater tunnel connecting Europeto Asia, will make us more internationally accessible.

Finally, we have also continued developing pedestri-an projects to help improve inner-city commuting. Thiswill help relieve traffic congestion and make it easierto walk shorter distances. As a result, locals are alsobenefitting from these changes, as travelling from onepoint to another becomes easier.

As Istanbul has become a top destination for con-ferences and events, how has the increased needfor hotels in the centre affected city planning? TOPBA#: Because of our goal to become a top desti-nation for tourists, whether they are here for businessor pleasure, the ability to meet hotel demand is crucial.Therefore, we have reorganised the city’s need forhotels accordingly. While a 25-sq-metre room is suffi-cient for an individual, you need 80 sq metres of hotelspace per person. In this respect we have increased the

constructible area for hotel developments to encour-age and incentivise private sector participation.

The fact that Istanbul’s bed capacity has increasedby over 23,000 since 2004 is a clear indication of thesupport we have given hotels to expand to be able toaccommodate visitors. In eight years, Istanbul has seen630 new hotels enter the market, and there are 92 morehotels currently under construction.

Building enough accommodation is crucially impor-tant to expanding the city’s ability to host high stan-dard international events. According to an evaluationby the International Congress and Convention Associ-ation, Istanbul ranked seventh in the world in hostingglobal events and conferences in 2011. Considering thatwe ranked 49th 12 years ago, the progress is clear.

Istanbul was selected as the European Capital ofSport in 2012. How integral is that to the long-termplan of becoming a host for the Olympic Games?TOPBA#: Frankly, the selection of European Capital ofSport 2012 is an important step on the way to hostingthe 2020 Olympic Games. We are at an important stagewhen it comes to international sports organisations:so far, we have hosted the Champions League and UEFACup final games, Formula 1, Moto GP, the World Bas-ketball Championship and World Wrestling Champi-onship. We will also continue hosting the Women’sTennis Association Championships at the Sinan ErdemDome – the third largest indoor sports arena in Europe.

These are taking place in addition to a number of local-ly planned events like the Eurasia Marathon and theBo!aziçi Water Sports Competition, which have attract-ed international audiences. It is very fitting that whenIstanbul was selected as 2012’s European Capital ofSport, the president of the European Capital of SportAssociation, Gian Francesco Lupatelli, specificallyacknowledged that Istanbul earned the name.

The city has long proven its ability and drive to hostthe Olympic Games. We will continue to serve as a des-tination for sporting events for the rest of the region.

201


Welcoming visitorsOBG talks to Kadir Topba$, Mayor of Istanbul

TOURISM INTERVIEW

TOURISM ANALYSIS

Architecture and soap operas are draws for Middle Eastern visitors

If Turkish tourism sector has been struggling to break-ing into the high-value visitor market, the tides may beturning. The past two years have been characterisedby a marked increase in arrivals from the Middle East.Drawn by Turkey’s growing regional presence, expand-ing facilities and cultural similarity, Middle Eastern guestsare diversifying – and expanding – the sector’s revenuestream. Iran currently represents the fourth-biggestsource of arrivals, with 1.9m visitors in 2011, a num-ber that has grown steeply from 865,000 in 2006. Theshare of arrivals from the Gulf states is also on theincrease, although from a much lower base. In 201142,000 Kuwaitis visited Turkey as compared with 27,000in 2010 – a 53% increase. SPENDING BIG: The rise in Gulf visitors is driving a tan-gible spending growth. A November 2011 report byTurkey’s Interbank Card Centre showed that transac-tions on foreign credit cards jumped 35% in the first-half of 2011, attributed in large part to the influx ofMiddle Eastern tourists. The report highlighted the ten-dency of these visitors to spend on individual purchas-es rather than all-inclusive holidays or package tours.

Such industry figures confirm a shift in the tourismsector. “Ten years ago, we saw budget travellers visit-ing Istanbul with little money to spend,” said Bulut Ba!cı,chairman of Gençtur, a local tour operators associa-tion. “Now we see high-value visitors arriving, particu-larly Arab tourists with huge budgets.” In the wake ofthe Arab Spring and the recent instability in the region,wealthy Gulf tourists who typically frequent Egyptianor Syrian resorts and head to Beirut to shop are nowspending their holidays elsewhere. Egypt, Syria, Lebanon,Jordan and Bahrain all posted tourism declines of over15%, with Egypt falling 33% and Syria losing 41%.

Visitors to Lebanon spent over $3000 per person in2010 — over four times as much as tourists in Turkey— with spending driven mostly by wealthy Saudis andKuwaitis in Beirut’s luxury establishments. Should Turkeycapture a slice of this market, it could easily reach thetargeted average of a $1000 spend per touring guest.

The uptick in visitors fromthe GCC and throughoutthe Middle East istranslating into greaterprofits and per capitaspending in the sector.

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Strategic foreign policy andcultural exports havefavourably enhanced theimage and role of Turkeyamong Arab populations, atrend that is helping fuelthe rise in tourist numbersfrom the Middle East.

Neighbourhood guestsCloser regional ties are helping boost the number of visitors

CULTURAL AFFINITIES: Arab tourists enjoy visitingTurkey because of the country’s historical legacy andgrowing soft power in the region, and its moderateMuslim heritage may be more welcoming than citiesin continental Europe. The wealth of Islamic architec-ture is similarly attractive. Moreover, Turkish televisionis popular in the Arab world, and soap operas like Gümü#(“Silver”), Muhtesem Yüzyıl (“The Magnificent Centu-ry”) and A#k-ı Memnu (“Forbidden Love”) broadcastinto millions of living rooms. Entrepreneurial operatorsnow offer tours of the filming locations of these shows.

The growing arrival of conservative-minded guestshas sparked investment in tourism facilities directed atobservant Muslims. Qatar-based and semi-state-ownedcompany Retaj Marketing and Project Managementwill invest up to $500m in hotels in Turkey. Retaj hotelswill be alcohol- and smoke-free. A 107-room propertyin Istanbul is the first goal, with possible expansions tothe historic city of Bursa under consideration. STRATEGIC MOVES: Turkey’s foreign policy has playeda role in the influx of Arab tourist. As per a strategy out-lined by Foreign Minister Ahmet Davuto!lu, Turkey hasimproved political and economic relations with neigh-bouring countries and GCC states. Prime Minister RecepTayyip Erdo!an routinely ranks first among polls ofArabs’ favourite leaders, thanks in part to his vocal sup-port for Palestine and his harsh words on Israel. Moreconcretely, Turkey has eliminated visa requirements forvisitors from Syria, Qatar, Lebanon, Yemen and Jordan.

Despite the media attention Turkey’s Arab tourismstory has grabbed in the past year, it is important notto exaggerate the significance of a 200,000-personincrease to the overall industry. Global politics arevolatile, and renewed stability in Syria and Egypt couldlure back Gulf tourists. Moreover, the success of Turkey’sforeign policy in Arab markets was mirrored by a 28%drop in Israeli arrivals, some 30,000 visitors. Still, thereis no reason to think that Turkey’s growing prominencein regional affairs will not be a long-term phenomenon,and 2011’s tourism boost may be just the beginning.

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Media & AdvertisingStrong growth despite global economic woesNew legislation standardises and opens the marketDigital platforms popular among the young Content-hardware partnerships exploit new technologyMonetising online platforms bring new opportunities

MEDIA OVERVIEW

Law 6112 allows 50% foreign ownership in broadcasting companies

A young, tech-savvy population with rising incomesand a receptivity to new ideas makes today’s Turkishmedia audience a desirable market for investors. A2011 report by global consultants PwC suggested thatby the end of 2015, Turkish entertainment and mediawould be worth roughly $11.4bn, with annual growthrates averaging 13.2% over the 2011-15 period.

In line with these high expectations, several overseaspartnerships in TV and online media have developed,and traditional print and radio continue to see steadygrowth. Media outfits are expanding onto new platformsand forming new ventures with hardware providers,gaining a competitive edge in the global arena. RULES & REGULATIONS: Broadcast is regulated by thestate’s Radio and Television Supreme Council (RTÜK),made up of nine members elected by parliament. Itretains independence in administering and enforcingnational broadcasting laws. However, state-owned Turk-ish Radio and Television (TRT) is governed by a sepa-rate, public broadcasting law.

The Directorate General of Press and Information, gov-erned by the prime minister’s office, oversees printmedia and is responsible for accrediting journalists,monitoring foreign and national press, and liaisingbetween the state and print media. The sector also hasseveral professional bodies, which include the TurkishPress Council, a print self-regulator; a number of jour-nalist associations and federations, often with politi-cal or religious affiliations; and two trades unions – theUnion of Journalists in Turkey and the Media Union.

The telecommunications sector is overseen by anumber of groups, including the government’s Infor-mation and Communication Technologies Authority(BTK), which regulates the internet and mobile com-munications. BTK also liaises with the Ministry of Trans-portation, Communication and Maritime Affairs aboutthe layout of communications lines. Meanwhile, theCommunications High Council is a high-level ministe-rial and national security body that reviews and approvesstate communications policy. Türk Telekom (TT), a state

telecommunications provider privatised in 2005, is stillseen by many as a state entity. TT captures about 84%of the market in internet provision and is the mainfixed-line telephone operator. Since privatisation, TT’scable TV division has been run by Turksat.NEW MEDIA LAW: In March 2011 a new media lawcame into effect, bringing necessary changes andadopting several EU requirements as part of Turkey’sbid for EU accession. The new law also aimed to resolvea dispute between RTÜK and private TV stations overfrequency allocation. When the state’s broadcastingmonopoly was ended in 1993, growing competitionand disputes between sector players ensued. The gov-ernment sought to control tension by restricting licens-ing, giving broadcasters only temporary permits.

A 2002 amendment to the law made 23 of theselicences permanent, but new licences could not beawarded. In 2011 Law 6112 was enacted so as to reopenthe market. Under the law, RTÜK retains control of fre-quency allocation and the BTK administers frequencyplanning. The law’s advances have generated moreinterest among investors, and is expected to open Turk-ish media to further foreign involvement.OWNERSHIP RULES: The new law raises the foreignownership cap from 25% to 50% of paid-in capital andallows direct stakes in two entities with no restrictionson indirect ownership. Domestic investors are limitedto stakes in a maximum of four firms with terrestrialbroadcast licences. To boost competition and reducethe influence of monopolies, annual advertising rev-enues from these holdings cannot exceed 30% of theindustry total. Further, the law brings all platform, mul-tiplex and transmission operators under its remit andrequires that entities dealing with signal transmissionand dissemination be independent of media compa-nies, although under certain circumstances they mayhold stakes in these operators. Another stipulation isthe transition from analogue to digital by March 2013.

Most controversially, however, the new law extendsthe number and type of sanctions that can be imposed

The audience for Turkishmedia is increasing: abooming population withhigher disposable incomesshould translate intogrowth rates of around13% annually for the sectorbetween 2011 and 2015.

The new 2011 media lawhas opened the market,stabilised licensure,increased investmentopportunities andstrengthened regulation.

206

Put it to printLegal reforms pave the way for a raft of opportunities


MEDIA OVERVIEW

in cases of regulation violation. It also gives the primeminister, or any second minister authorised by him orher, the power to temporarily ban any broadcast if it isdeemed a threat to national security or leads to theserious impairment of social order. This power, howev-er, is subject to judicial review, and the BTK has beentasked with making sure the law matches EU specifi-cations regarding spectrum management, authorisa-tion, access and interconnectivity, number portabilityand allocation, rights of way and tariffs.

Criticism of the law focuses on a number of issues,including the switch to digital broadcasting, which setsan imperative but leaves a number of technical issuesunresolved, such as potential subsidies for set-top boxpurchases. Industry players are also concerned thatthe law has given the government too much authori-ty over content with the prime minister’s broadcast ban.Still, the law provides a framework for greater compe-tition, with hopes that it will also sort out the longstand-ing licensing and frequency-allocation dispute.SECTOR PLAYERS: Despite some challenges in recentyears, Turkey’s largest media conglomerate is the Do!anGroup. The group owns five daily national newspapers– Hürriyet, Posta, Radikal, Fanatik, and the English-lan-guage Hürriyet Daily News. The group owns two nation-al TV stations and three radio stations. It maintains aninternational reach through its Türksat satellite system,a digital television subscription service; a news agency;a publishing house, retail stores; a cinema productioncompany; and various joint ventures and partnershipsin Romania, Germany and Italy.

Do!an’s biggest competitor is Feza Group, popular-ly associated with the Gülen movement, an internation-al civic organisation led by the Islamic theologian, Fetul-lah Gülen. Feza publishes two daily newspapers: Zamanand the English-daily, Today’s Zaman, the former beingTurkey’s highest-circulating paper. It too enjoys global

distribution, reaching audiences from the US to Kyr-gyzstan. Feza owns the Cihan news agency; a weeklymagazine, Aksiyon; and has a partnership with theSamanyolu TV Group, also associated with Gülen.COMPETITION: Albayrak Group, another major player,owns the daily Yeni #afak and TVNET news channel.Çukurova Holding owns three daily newspapers, a mag-azine and two TV channels. It also owns Digiturk, asatellite TV provider, and Turkcell, the leading mobilephone network. Turkuvaz Group, part of Çalık Holding,is significant in the print segment and owns the Izmir-based Yeni Asır, four other dailies and five weeklies, alongwith the ATV-Sabah TV channel. Turkish businessmenErdo!an Demirören and Ali Karacan partnered togeth-er and entered the print field, acquiring two dailies, Mil-liyet and Vatan, from Do!an in early 2012.

In TV broadcasting, Do!u# Media Group owns chan-nel NTV, which recently bought Star TV from Do!an andenjoys partnerships with CNBC, National Geographic,NBA, Billboard and Virgin. Ciner Holding owns theHabertürk umbrella, which includes TV, radio and onlinenews channels. It has partnered with international busi-ness and finance market news provider Bloomberg tolaunch BloombergHT, a 24-hour real-time financialnews channel in Turkish. It also publishes the Turkish-language editions of Marie Claire and Maison.

Prior to becoming a holding, the $hlas Group oper-ated the newspaper Türkiye. $hlas then expanded intoTV with TGRT News Television. The company went glob-al with the $hlas News Agency, which has offices inWashington DC, London, Berlin and Paris, and providesoutlet services to a variety of international media groups.ATTENTIVE CROWD: According to the Turkish Statis-tical Institute, 97.3% of adult males and 88.1% of adultfemales were literate in 2010. That same year, the Turk-ish Economic and Social Studies Foundation showedthat 40% of Turks (about 30m individuals) read a news-paper regularly, while 90% watched TV on a regular basis.

Turkey scores highly compared to its European peersin terms of internet usage. A June 2011 survey by Com-Score, a digital analytics firm, showed Europeans aver-aging 26.1 hours per person per month online, whilein Turkey the figure was 31.1 hours. Internet penetra-tion in Turkey has risen rapidly. The InternationalTelecommunications Union (ITU) shows fixed internetsubscriptions at 7.2m in 2010, up from 1.5m in 2000.Internet usage rose from 3.8% to 39.8% of the popula-tion over the same period, with 37.4% of individuals hav-ing access at home. In 2010 there were 61.8m mobilephone subscriptions, a penetration rate of 84.9%.

The highest-circulating newspaper in February 2012was Zaman, with 948,000 copies sold during February20-26. Do!an’s Posta followed with 466,000 copies, andHürriyet with 416,000. Next was Turkuvaz’s Sabah, with344,000 copies and Ciner’s Habertürk with 240,000.

Certain distribution bottlenecks have raised questionsabout the accuracy of circulation figures. Three distri-bution companies dominate the market: Do!an’sYaysat;Turkuvaz’s Turkuvaz Da!ıtım Pazarlama; and CihanDa!ıtım. As these distributors are not publicly traded,the only figures are their own measurements. This has

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Television broadcasting isdue to make a fulltransition from analogue todigital by 2013. Critics areconcerned aboutambiguities over subsidiesfor set-top box purchasesto facilitate this move.

Turks spend an average offive hours more online perperson per month thantheir European peers. Thisgoes hand-in-hand with therapidly rising internetpenetration rate over thelast decade.

SOURCE: www.gazeteciler.com

Weekly newspaper sales, Feb. 20-26, 2012 (’000)

Zaman 948

Posta 466

Hürriyet 416

Sabah 344

Habertürk 240

Sözcü 223

P.Fotomaç 207

Fanatik 191

Star 161

Türkiye 134

Milliyet 129

Takvim 110

Vatan 108

Akflam 105

Yeni fiafak 104

Bugün 93

Günefl 87

Yeni Asya 58

Yeni Ça% 53

A.fiok 53

MEDIA OVERVIEW

lead some advertisers to believe that circulation num-bers are inflated to boost revenues.RATINGS GAME: Kanal D boasts the most-watched TVprogrammes in Turkey, including the top drama, ArkaSokaklar, with 10.8m viewers. The channel also has themost popular newscast, with veteran journalist MehmetAli Birand’s evening programme capturing 6.9m view-ers. Fox, Show TV and ATV also have high ratings, withtheir most popular programmes drawing audiences of7.4m, 4.8m and 4.6m, respectively.

Despite the numerous TV channels, Ahmet MücahidÖren, the chairman of $hlas Holding, believes quality isan issue. “Turkey needs TV with better content, varietyand creativity. Players that explore these opportunitieswill benefit greatly,” Ören told OBG. “The 2012 licens-ing for digital channels will likely lead to consolidation.”

Online, ComScore found two Turkish sites amongEurope’s top 10 online newspapers in terms of hits. Thesewere Hürriyet.com, with 9.45m unique visitors and Mil-liyet.com, with 8.8m in June 2011. The former sitebelongs to the Do!an Group, while the latter was recent-ly acquired by Karacan and Demirören. In June 2011,eight Turkish national newspapers were running iPadapplications, demonstrating the growing importanceof multi-platform online presence (see analysis).CENSORSHIP CONCERNS: In recent years, concernhas grown over the treatment of journalists and theperceived state censorship of criticism. According tothe Turkish Journalists Union, 95 Turkish journalists are

currently incarcerated and awaiting trial. In 2006 Turkeyranked 98th globally in the Reporters Without BordersPress Freedom Index, and that number has fallen sharply,to 148 out of 178 in 2011. The government down-played the issue, claiming that journalists were jailedfor ties to terrorist organisations and not because oftheir profession; but critics point to the broad defini-tion of terrorism under the Turkish penal code as partof the problem. However, in a move that was highlyapplauded at home and abroad, two prominent impris-oned journalists, Ahmet "ık and Nedim "ener, werereleased on March 12, 2012 after over a year in jail. OUTLOOK: New regulations and technological devel-opments changing access to media are evidence of asignificant sector transformation. Traditional wallsbetween TV, internet, print and telephony are comingdown fast, and this demands a response from estab-lished industry players. Like other developed markets,the sector must address how to best monetise new plat-forms and bolster audience bases. International anddomestic firms are just beginning to tap into the majormarket for Turkish-language broadcasts, including thosebeyond Turkey’s borders. The media landscape is becom-ing more liberal in terms of issues it can address, anddespite the continued plight of journalists, 2011 wasa year of unprecedented public criticism of the mili-tary. As the sector continues to contend with a num-ber of challenges, expectations for progress remain high as regulations evolve and investment levels rise.

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Governmental constraintsover content and theextent of criticism allowedin the media haverestricted press andjournalists’ freedom.

MEDIA ANALYSIS

New digital platforms allow TV broadcasting to branch out online

Recent developments in IT infrastructure and the coun-try’s young demographic – the youngest in Europe –are compelling Turkey’s media sector to adapt to a newindustry landscape. Traditional methods and platformsfor accessing media are declining, replaced by newdemands that require creative innovation to keep rev-enues high and growth sustainable.ONLINE & UPWARD: Technological improvement is amajor growth opportunity for online businesses. Indeed,as of 2011, Turkey had the eighth-highest fibre-opticcable penetration rate in the G20. The development of3G has also been spectacular with 31%, penetrationrate in mid-2011, surpassing the EU average of 30%.According to Vodafone, in May 2011 smartphonesaccounted for 16% of mobile phones in the country.

“As the speed of the internet and infrastructureimproves, the entire media landscape will continue toshift,” said Kerem Alkin, the director of Bloomberg HT.“Turk Telekom and Superonline invest $2.5bn-3bn peryear in fibre-optic cable, so the combinations of plat-forms and media services will continue to advance.”

In 2011 the median age of the population was 29.2-years-old, and the population as a whole numbered74.7m, according to the state statistics agency, Turk-Stat. Turkey’s under-29 population is therefore secondonly to Russia among European nations. This youngdemographic has access to a strong IT infrastructureand growing per capita incomes, which rose from $2905to $10,576 between 2001 and 2011, according to theIMF. These factors have significantly influenced newexpectations of the media. “3G is transforming theweb,” said Tümay Asena, the CEO of Nokta Medya, a Turk-ish digital media company. “This may reduce depend-ency on ADSL, as time spent on PCs is falling withmobiles and tablets become more popular. For exam-ple, we recently had 20,000 downloads for our gameapplication in a single week; this is a paradigm shift.”

Reactions to the changing technological scene arevaried. Some agencies have resisted major online invest-ment, preferring to concentrate on print or TV, while

A young and internet-active population ispushing forward Turkey’sonline presence, and themedia industry is keeping instep with new contentplatforms andpartnerships.

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Monetisating onlinecontent is an issue for theindustry worldwide. Mediaproviders tend to preferusing advertising over paywalls to attract bothviewers and revenue.

Refreshing the pageProviding content in new and innovative ways

others have welcomed the shift, with Do!an and Do!u#holdings seemingly leading the charge. Overall, mostcompanies have made significant moves to captureshares of the mobile market. This has in turn spawneda number of partnerships between content providersand hardware manufacturers or retailers.

Content-hardware partnerships are evidenced bythe uptick of “smart” or web-enabled devices, like TV,which has become a highly competitive market. Sam-sung has led the way, engaging media outlets by pro-viding content that comes standard with its smart TVs.Other companies are following the trend, directly link-ing content with platforms, sites and devices. TTNET,the largest internet service provider in Turkey, for exam-ple, has arranged to provide Turkish newspapers via anapplication on new iPads sold in the country. TRAILBLAZING: Meanwhile, much off-line content isstarting to be distributed by smaller online firms. TVchannels like TRT and Do!u#’ NTV are available on Nok-ta Medya’s website. Similar sites provide a range ofnews and media clips, and internet users are increas-ingly turning to these platforms instead of the contentproducers’ original sites. This demonstrates how small-er outfits have grasped new media’s power of interac-tion and networking better than established firms. Asa result, new market players are able to build larger audi-ences and provide more popular forums, and thesemethods of distribution are paving the way for othercompanies looking to break into the nascent market.

Such innovations are frustrating older business mod-els, as monetising online activity is a global challenge.Rather than set up pay walls, many websites prefer tosell advertising backed by high page views. In Turkeythis approach is starting to pay dividends, with theinternet now the third-largest source of ad revenue inTurkey, according to Do!an, whose newspaper Hür-riyet saw internet advertising income grow from 2% to12% between 2006 and mid-2011. Thus Turkey’s onlinemedia business is starting to evolve from good ideasto long-term bankability, with more growth expected.

MEDIA INTERVIEW

Hanzade Do!an Boyner, Chairwoman, Do!an Online

How is the rise of online media affecting spend-ing and competition in the sector? BOYNER: When you look at the Turkey’s online pop-ulation, a few key dynamics jump out. We are thefifth-biggest country on Facebook and number 10 onTwitter. Turkey has somewhere from 35m to 40m inter-net users, representing around 40% of the population.Smartphone penetration is increasing rapidly – thereare 65m mobile users and 10m are using the inter-net from their handsets. When you compare Turkey’seconomic figures and its online statistics, the num-bers make the country look like a more advancedEuropean country.

The main reason behind this is, of course, Turkey’spopulation distribution. We have a young populationunder-16 year olds represent 26% of our demograph-ic, and the majority is between 20-35. However, thesize of the economy does not match internet usageby these young groups. In terms of revenue, the onlinesegment comes in third as an advertising medium,accounting for around 12% of total advertising; some52-53% goes to TV and roughly 25% goes to print. Interms of e-commerce, only 2% of total retail comesfrom the internet, which is very low.

As for newspapers, Turkey is a unique case. The driveto put content online is continuous, but in Turkeythere was a great deal of convergence between printand online media early on. The most visited Turkishwebsites are newspapers; Hürriyet is the third-mostvisited newspaper website in Europe, thanks in partto its early online presence. The main problem mostnewspapers around the world faced was that they werelate to realise that online media would pick up early,and then they rushed to defend their territory. Turk-ish media responded to market demand quickly andwent online before it was clear how to earn revenue.In Turkey, unlike elsewhere in the world, newspaperadvertising is still growing. It is not expanding at 20-30% like the online segment, but it is moving forwardat double-digit pace – 10% in 2011 and, hopefully,

another 8-10% in 2012. While long-term websiteadvertising revenues will need enough volume torecover costs, as print goes into decline, the compe-tition is more focused around the content available,and less on the platform. Newspapers have to do twothings: first, they have to redesign their business mod-els, as it is unlikely they will be able to afford the samenumber of people and international offices. Second,newspapers need to let go of their commitment toplatform. If newspapers start saying, “I provide con-tent and I build an emotional relationship with my read-er,” they become a brand that the reader can dependon. So the newspapers should make their contentavailable in forms their readership uses – online, video,mobile, etc. – and focus on their core competency,which is the emotional relationship with the reader.

What role do leaders in the media industry havein pushing for a more liberal and democratic press? BOYNER: I believe that the main value of the reporteris trust. There is increasing talk about user-generat-ed content and how the position of the reporter ischanging, but in my view, the crucial function ofreportage has stayed the same. User-generated con-tent is important – we have seen how the Arab Springaccelerated because of user-generated content oversocial media. However, we still went to the reportersand brands we trust to understand what was happen-ing. If we one day have a world where we do not havequality journalism and official reporters, there will beinformational chaos. The trust and the integrity thata reporter represents are critical. As platform providersand owners, it is our responsibility to make sure thatthe platform allows the reporters to do what they areobliged to do, report critical information to the pub-lic. However, in terms of protecting freedom of pressand freedom of speech, the scope and role of medialeadership is limited. This issue of press freedom needsto be owned by the intelligentsia at large, because free-dom of the press is important necessity for everybody.

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Redesigning the businessOBG talks to Hanzade Do!an Boyner, Chairwoman, Do!an Online


ADVERTISING OVERVIEW

Mobile platform advertising is key for targeting younger markets

Robust economic growth, fuelled by the recent spikein domestic credit and consumer activity, makes forheady days for the local advertising industry. That thisgrowth is occurring as neighbouring European marketscontinue to be mired in difficulties further highlightsthe potential of Turkey’s economy going forward.GROWTH TREND: According to global consultancyPwC’s “Global Entertainment and Media Outlook 2011-15”, Turkey’s advertising spend increased to $2.34bnfrom $1.98bn during the 2006-10 period, while West-ern Europe saw advertising spend decline from $108.2bnto around $104.5bn in the same period. PwC estimatesthat advertising spend in Turkey will increase to $3.9bnby 2015, and the country’s compound annual growthrate (CAGR) is expected to reach 10.6% by that year –substantially higher than the 3.9% CAGR predicted forWestern Europe as a whole.

The key to such positive indicators has been thecountry’s GDP growth, which at 11% was the highestin the world in the first quarter of 2011. The figure forthe whole year is estimated to be around 9%. Per-capi-ta income rose from $2905 to $10,576 between 2001and 2011, with significantly higher rises in urban cen-tres like Istanbul, Izmir and Ankara. Consumer credit,meanwhile, has skyrocketed. According to the centralbank, credit grew 40% in 2010 and 42% in 2011. Thishas been a welcome move for the advertising segment,which benefits from increased consumer spending,despite efforts to curb lending (see Economy chapter).SOPHISTICATION & RANGE: The Turkish advertisingmarket is growing in size, sophistication and range. Giv-en the levels of online activity, digital marketing andweb-based ad ventures have become increasingly impor-tant to the industry and its beneficiaries.

The use of social networking sites as advertising plat-forms is also a growing trend, and many online start-ups seek to monetise their ventures by securing adrevenue. With more platforms, consumers ready tospend and a clutch of international awards, this uptickis attracting multinational brands to local ad agencies.

MARKET INDICATORS: Figures released in March 2012by the Turkish Association of Advertising Agencies(TAAA) show that ad spend rose roughly 20% between2010 and 2011. This valued the market at about TL4.3bn(!1.8bn) in 2011, up from TL3.6bn (!1.5bn) the pre-vious year. There were some signs of a slowdown in thelater part of 2011, however. The TAAA had earlierannounced, in December 2011, that the first half ofthe year had seen a 24% increase in ad spend over thefirst six months of 2010 – the highest rise in Europe.Some TL2.2bn (!935m) was in the first half of 2011,according to the earlier TAAA figures.

Regarding platforms, the TAAA’s data showed thatTV continued to dominate in 2011, capturing 56.7% ofall ad spend. Print was second, with 24.3%, followed bythe internet, with 8%; outdoor advertising took 7.1%,radio had a 2.8% share, and cinema ads garnered 1.3%.

These rankings were similar to the previous year,according to Do!an Yay›n Holding (DYH) Ad Research.DYH’s 2010 figures showed a total ad spend of TL3.86bn(!1.6bn), slightly higher than the TAAA total, with TL2bn(!850m) going to TV, TL920m (!391m) to newspapers,TL410m (!174.2m) to internet and TL263m (!111.8m)to outdoor advertising. The rest was divided betweenmagazines, radio and cinema at TL111m (!47.2m),TL107m (!45.5m) and TL51m (!21.7m), respectively.

Looked at in comparison to 2009, when DYH showedtotal spend at TL2.96bn (!1.3bn), the market expand-ed substantially – 2009 was, after all, a year of eco-nomic shrinkage, following the global downturn. Allplatforms demonstrated substantial gains between2009 and 2010, with TV up about 40%, and newspa-per up 13%. Internet ad revenues rose 32%, growingfrom 10.5% to 10.6% of the total. The top three sectorsby ad spend in both years were food, telecommunica-tions and finance. Each saw growth of around a thirdbetween 2009 and 2010. Excluding online adverts,food saw TL367m (!156m) of ad spend in 2010,telecommunications TL364m (!154.7m) and financeTL336m (!142.8m). Another sector to spend heavily

Turkey’s boomingadvertising sector hasbenefitted from a growingpopulation and risingpersonal incomes. Futuregrowth is dependent onthe industry’s ability tokeep pace with the fluidand high expectations ofthe young generation.

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The industry posted majorgains in 2009-10, despiteprevailing economichardships worldwide and acontracting market inneighbouring Europe.

Going digitalSocial media and online advertising are taking hold

ADVERTISING OVERVIEW

was construction and decoration, which registered 65%growth at TL227m (!96.5m).SECTOR BODIES: The TAAA and its related organisa-tion, the Turkish Foundation of Advertising (TFA), rep-resent about 85% of the advertising industry. The TAAAestablished the TFA in 1998 to work on improving pro-fessional standards, while the TAAA continues to focuson industry representation and data collection.

The TAAA is also a member of the Brussels-basedEuropean Association of Communications Agencies(EACA), which represents the sector on a continent-wide basis. The EACA has been instrumental in settingprofessional standards for the industry, and these prac-tices have been incorporated by the TAAA’s members.

Another important sector body is the Turkish branchof the global Interactive Advertising Bureau (IAB). IABTurkey opened in 2007 to coordinate internet meas-urement research and aid the growth of the interac-tive industry. Finally, many major cities have their ownsector organisations. These include advertising cham-bers in Ankara, Antalya, Bursa, and Izmir.

On the government side, the Ministry of Science,Industry and Technology’s (formerly Ministry of Indus-try and Trade) Board of Advertisement and the Radioand Television Supreme Council (RTÜK) are concernedwith consumer protection and industry standards, whilethe Advertising Self-Regulatory Board (RÖK), composedof market players, also monitors the sector’s output.

The TAAA claims that there are around 100 fullydeveloped advertising agencies in Turkey – firms thatinclude customer relations, creative and media depart-ments and are in line with European Union standards.Most of these are among the association’s members. HIGH PRAISE: TAAA agencies have been winningnumerous international industry awards, with bothglobal and local firms receiving recognition. Awardshave been handed for both independent and collabo-rative campaigns as nearly a quarter of TAAA membershave agreements with foreign partners.

In the past, international brands turned to globaloutfits like McCann Erickson or Ogilvy & Mather – orthose with local partners, like Manajans Thompson,Medina Turgul DDB, or Güzel Sanatlar/Saatchi & Saatchi – for advertising campaigns. This dynamic is changing,however, and major firms are partnering with leadinglocal agencies, like Çözüm – a Silver Pen award winner– which lists Unilever and 3M among its clients. Otherleading local independents include Alametifarika and

its digital agency, Rabarba, both of which won EFFIEawards for outstanding marketing communications in2011. Indeed, Turkish advertising agencies are begin-ning to be regularly featured at international advertis-ing awards. In 2011, for example, 11 advertising worksfrom Turkish agencies reached the finals of the NewYork Festival Advertising Awards, with a campaign fromGrey Istanbul winning silver and bronze awards.

In 2007 41?29!, Turkey’s first digital marketing com-pany, set up shop in Istanbul, and several others soonfollowed. These digital ad agencies offer completepackages, from strategy and design to shooting videos,a model that represents an important departure fromprevious digital outfits that concentrated mostly onwebsite hosting, design and development. OUTLOOK: The digital-advertising revolution hasbrought waves of change and progress to the sector,translated into exciting growth in ad spend. Still, tradi-tional TV and newspaper advertising continue to enjoythe largest advertising shares and will likely to contin-ue to do so for some time to come.

Expectations for 2012 are high, with the TAAA pre-dicting a further 15% hike in ad spend. First quarter fig-ures for 2012 showed Turkish buyers continuing tospend – in fact, the consumer confidence indexincreased in February 2012 – despite rising inflationand a general economic growth slowdown.

However, the wider economic health of the nationmay be a reason for caution, as the impact of higherfuel and food prices affects consumer behaviour. Thus,the second half of 2012 may witness a slowdown inadvertising revenues as companies tighten their belts.

The ability of agencies to sustain high levels of growthdepends on how fast they develop and secure the kind of multi-platform agility that captivates the coun-try’s young population. To successfully engage Turkey’smost active online audience, continued effort will beneeded to harness and keep pace with the multipledevices and mobile platforms that are changing as rap-idly as the people who use them and the industry itself.

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Local advertising agencies have been winning awards and new business in recent years

A number of international,governmental and localprofessional associationsoversee the sector,providing best practicestandards and measuringindustry outcomes.

SOURCE: DYH Ad Research

Advertising by platform, 2009-10 (TL m)

2009 2010

TV 1423 1998

Newspaper 811 920

Internet 310 410

Outdoor 196 263

Radio 95 107

Magazine 86 111

Cinema 44 51

Total 2964 3860

ADVERTISING ANALYSIS

Digital media has benefitted as advertisers look for alternative outlets

As elsewhere, a long-term trend in Turkish advertisinghas been the relentless rise of digital and internet-based platforms increasing the pressure for new adspend. These platforms are ever more mobile, as smart-phones and tablets replace desktops and laptops. STRONG SOCIAL ROLE: Central to this phenomenonis the growth of social networking sites, with promis-ing prospects for advertising. In Turkey, the top social-networking sites are Facebook and Twitter. “Turkey isamong the top Facebook markets in terms of user base,”said Güray Mert, the general manager of 41?29!, a dig-ital marketing company. “As such, in the last years, com-panies have emerged calling themselves social mediaagencies.” Facebook counted over 30m Turkish usersin February 2012, making it the sixth most-represent-ed in the world on the site. Some 63.3% of Facebookusers were male, and the predominant age group wasthe 18- to 24-year-old bracket.

Twitter, another key social media player, launched Turk-ish-language services in April 2011, although the plat-form’s usage was already high with a 16.6% nationalpenetration rate. With such high user bases for Face-book and Twitter, there is relatively little space for nicheor local players in the social media segment. This is par-tially explained by pricing plans of mobile providers. Turk-cell, for example, charges subscribers a flat fee forFacebook usage, but not for other similar applications.

Digital media benefitted from the 2008-09 down-turn, when companies turned to digital formats as acheaper alternative to TV in a bid to slash advertisingbudgets. Consequently, the Interactive AdvertisingBureau’s (IAB) Turkish website figures are as keenly fol-lowed as print circulation and broadcast data. TOP HITS: According to IAB figures, the top three sitesin terms of active users as of January 2012 were Google,with 23.5m users and 6.6bn page views, followed byFacebook, with 22.6m users and 15.9bn page views. Thirdwas YouTube, with 15.26m users and 1.5bn page views,and Twitter was eighth, with 7.755m real users and409m views. The website belonging to the Ministry of

National Education ranked sixth, with 9.8m active usersand 670.7m page views, perhaps indicative of the schooland college age profile of many Turkish internet users.

There are, however, limits to growth. Among theseare staffing. Digital media advertising suffers fromintense competition for a limited pool of talent, whilethe rising global standing of Turkey’s advertising pro-fessionals makes it easier for local talent to pursueopportunities abroad. Another constraint is monetisa-tion; while 30m Turks have Facebook accounts, fewspend money on content on the site. Yet digital adver-tising can offer areas of potential that other mediumscannot. According to Tümay Asena, the CEO of NoktaMedya, a locally based digital media company, “Target-ing users is the Holy Grail. More tailored ads will bringmuch more advertising revenue.”E-COMMERCE: E-commerce sites also offer ad poten-tial. Markafoni, a private shopping site, announced atthe 2011 Webrazzi Summit and Retail Days in Ankarathat the company spends $1m a month on online mar-keting tools, and is aiming for a $1bn valuation by 2014.

According to Do!an Online, which has e-business,tourism, news portals and digital media in its portfo-lio, e-commerce grew 56% between 2010 and 2011,with roughly 25% of internet users shopping online.

This represents a market with major potential, whichhas already been acknowledged by several foreigninvestors. South Africa’s Naspers, a digital media com-pany, bought a 70% share in Markafoni, while Califor-nia’s Kleiner Perkins and Tiger Global invested $26m infashion e-commerce site trendyol.com in August 2011.Intel has also taken an interest, investing in Nokta Medyaand Grupanya, a company offering daily discount deals.

The shift to digital media will further develop as morecomprehensive and sophisticated techniques like behav-ioural targeting – still relatively new in Turkey – takeoff. “It is important to offer niche services,” said YenalGökyıldırım, the CEO of Do!an Online, “so that productdevelopers can reach a wide range of customers with targeted products. Personalisation is everything.”

The rise of socialnetworking platformsoffers lucrative prospectsfor the advertising sectorthat have yet to be fullyharnessed. Key to thissuccess will be developingthe best tools for targetingindividual users.

With 25% of the country’sinternet users shoppingonline, e-commerce hassignificant potential as agrowth market for bothretailers and advertisers.

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Connected to the marketPopular internet platforms are the targets for sector growth


215

TaxRevised commercial code to bring in many changesNew investment incentive package announcedOne-off amnesty attracts a high number of applicationsProblems of the unrecorded economy explainedTips for evaluating the financial records of companies

TAX ANALYSIS

The first stage of the new commercial code comes into force in 2012

The present Commercial Code – the basic law govern-ing companies – has been in force since 1957 almostwithout modification. Its replacement has now beenenacted and comes into force in stages. The first mainstage is expected to be implemented on July 1, 2012. THE CODE: The new law’s requirements include: • Every company must maintain a website. The web-

site must publish the company’s financial statements (starting from the 2013 statements). Until now there has been no public access to financial statements, which were usually given only to the shareholders, the tax office and any lending banks.

• Information on the remuneration of senior manage-ment must be disclosed on the website.

• Explanations of the company’s corporate gover-nance principles and risk management policies must also be disclosed. Until now, there had been no requirement for companies to have such policies in place, let alone disclose them. Moreover, internalaudit must be established.

• The concept of groups of companies, under a hold-ing company, is introduced for the first time. Group reporting is also established. Under the old arrange-ments, consolidation was never considered.

• The published financial statements must be independ-ently audited. Only 5000-6000 companies in Turkey are independently audited, so this provision repre-sents a vast expansion of the audit requirement.

• The financial statements must be prepared in accor-dance with International Financial Reporting Stan-dards (IFRS).

• The new governance principles must include clear delineation of duties, including at the board level, with board committees such as an audit committee and risk management committee. Reporting lines must be defined.

• The old requirements for at least two shareholders in a limited company (Ltd. #ti.) and at least five in a corporation (A.#.) will no longer apply; a company may have a single, 100% shareholder.

• Directors no longer have to hold shares, and a direc-tor need not be a real person, it can be corporate. But at least one-quarter of the directors must have further education and directors must not be indebt-ed to the company.

• The articles of association of each company will have to be redrafted to comply with new requirements.

• Interim dividends will now be possible, as will share options to employees.

• There are new prohibitions on loans to and from shareholders, an area of considerable abuse under the old law.

• Improvements are introduced in shareholders’ rights to company information.

• Minority rights are strengthened.• New possibilities are granted for electronic commu-

nication; for example, board meetings may be held by video link instead of by physical attendance.

• There are extensive changes to shares and the processes for capital increases, public offers, merg-ers and de-mergers.

IMPACT: There are currently more than 700,000 com-panies in Turkey. We expect that this number will beslimmed down as shareholders close down or mergeinactive companies to avoid these new requirements.At least 300,000 companies are likely to be affected,and, therefore, the transformation will take substantialtime and effort. Doubts have been expressed aboutwhether the new law will be implemented thoroughly,and on time. The author of new codes, Ünal Tekinalp,has said it is an “encouragement law, not a penalty law”but still there are penalties for failing to comply: up tothree months in prison for failure to create and main-tain a website, for example.

For foreign investors, the law is good news. By mak-ing information about each company more available,the law should also allow a much better understand-ing of the actual position of each sector within theTurkish economy. This should be helpful in ensuringinvestment reaches the most promising industries.

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New principlesThe updated commercial code will boost transparency and auditing standards

TAX ANALYSIS

The tax inspection mechanism has been recently restructured

Foreign direct investment to Turkey totalled $74.8bnin the past five years. This is mostly due to the busi-ness-friendly environment prevailing in the countryand the government’s continuous efforts to incentiviseinvestments by both local and international investors.NEW REGIME: Within this framework, the governmenthas recently announced a new investment incentiveregime which can be described as the most compre-hensive incentive package to date. The incentives pro-vided by the new regime stand on four pillars:• General incentives: Customs duty and value-added

tax (VAT) exemptions are provided for the importor domestic purchase of machinery and equipment.

• Regional incentives: Under the new regime, Turkey has been divided into six regions based on the socio-economic level of development. As the system seeks to reduce the socio-economic disparities between the regions, the least-developed regions are incen-tivised the most. The incentives include a reduction of the corporate tax rate (i.e. the size of the reduc-tion varies from one region to another), free alloca-tion of land for factory locations, compensation by the Treasury of the employer’s share of social secu-rity premiums and support on interest payments arising from investment loans.

• Incentives for large-scale investments: Provided thatthe total investment amount exceeds cer-tain thresholds, research and development (R&D) and intensive investments, which will enhance Turkey’s competitive capacity in international markets, can benefit from the majority of the above-mentioned incentives regardless of where the investment is located. However, the level and duration of the incen-tives will vary by region.

• Incentives for strategic investments: Investmentsregarding the production of finished or inter-mediate goods in sectors which currently suffer a high level of import dependency, as well as R&D andtechnology-intensive investments, qualify as “strate-gic investments” for the purposes of the new regime.

218

A business-friendly packageIncentives and other recent tax developments


These investments will benefit from the majority of the above-mentioned incentives regardless of where the investment is located.

As Turkey embraces the principle of non-discriminationamong local and international investors, both sets ofinvestors will have equal access to these incentives.COOLING DOWN: The Turkish economy enjoyed strik-ingly high growth rates in 2010 and 2011, leading tocomments that it was “overheating”, particularly sincethe foreign trade deficit has become so unsustainablylarge. The government has recently taken certain meas-ures to address these two linked issues.

The resource utilisation support fund applicable tonon-cash imports (i.e. imports which are paid for aftera credit period, rather than immediately in cash at thetime of import) has been raised from 3% to 6%. Thisfund is essentially a tax on such imports. Moreover, thespecial consumption tax applicable on the import ofcertain automobiles and vehicles has been increased. INSPECTION REFORM: Another recent change to thesystem is the restructuring of the tax inspection mech-anism. In the past, tax inspections were carried out bydifferent bodies, which were affiliated with the Min-istry of Finance or the Revenue Administration. Underthe new structure, these bodies are merged under oneentity – the Directorate of Tax Inspection Board – whichis directly affiliated with the Ministry of Finance.

With this change, the government is looking toimprove the efficiency of the system through elimina-tion of any bottlenecks arising from a lack of coordi-nation among the different bodies and also to increasethe independence of the inspectors.

A more fundamental issue is that the Tax ProceduresCode and the Income Tax Code currently in force werewritten in 1960. Unsurprisingly, the comprehensibilityof these codes has deteriorated over time and certaincontemporary concepts such as financial derivativesare not covered. A main objective is to simplify thewording and reduce the number of articles. The newcodes are not likely to come into effect until 2013.

TAX OVERVIEW

Businesses are liable for corporate tax at a rate of 20%

RESIDENCE: Residents are fully liable under theTurkish tax system: that is, they pay taxes based ontheir worldwide income. Non-residents have limit-ed liability and are subject to tax on their businessearnings derived in Turkey.

Corporations have full liability to Turkish taxationif their legal headquarters or business centres arein Turkey. Business centre is defined as a place wherebusiness transactions are concentrated or carriedout. All companies established in Turkey with foreigncapital have full liability. If a foreign company – withcorporate status abroad and legal and business head-quarters outside of Turkey – is operating in the coun-try without having a legal entity incorporated here,it is usually regarded as having limited liability underthe Corporation Tax Law.

Under Turkish tax legislation, for the income of anon-resident company to be deemed to be taxable,the company must have a place of business or a per-manent representative in Turkey and the earningsmust have been realised either at this place of busi-ness or through this representative. CORPORATION TAX: The corporate tax rate in Turkeyis 20%. The dividend withholding tax rate is now 15%on distributions of profit to non-resident sharehold-ers and sums repatriated by a branch to its headoffice. Thus the total tax burden is 32% (20% +0.8*15%), though double-tax treaties can reduce thewithholding tax rate. Dividends distributed by a Turk-ish entity to another resident entity remain exemptfrom dividend withholding tax. Tax losses may be car-ried forward for five years but may not be carriedback. If a company incurs such losses that its sharecapital becomes impaired or that it becomes insol-vent (technical bankruptcy), the shareholders should“repair the equity” in accordance with Article 324of the Turkish Commercial Code.

Losses of one company cannot be used to offsetprofits in another company: all companies are taxedseparately even when they form part of a group.

Dividends received from foreign participations areexempt from corporate income tax in Turkey if cer-tain conditions are satisfied.

Corporation tax returns must be filed within fourmonths from the end of a company’s accountingperiod (normally the calendar year – exceptionsrequire Ministry of Finance approval). Advance cor-poration tax is payable quarterly during the year,with a final instalment in the month of filing. CAPITAL GAINS: In general, capital gains form partof a company’s taxable income and are subject to20% corporate income tax just like any other income.A corporate income tax exemption is granted for75% of capital gains derived from the sale of partic-ipations and immovable property that have beenheld for at least two years, provided that certainconditions are satisfied.

Capital gains derived from the sale of foreign par-ticipations that have been held for at least two yearsby an international holding company resident inTurkey are exempt from corporate income tax. How-ever, to qualify, certain conditions must be met.

Controlled foreign companies’ rules are applica-ble where a Turkish resident company controls,directly or indirectly, at least 50% of the share cap-ital, dividends or voting power of a foreign entity andcertain specified conditions are met. In that case,the Turkish company’s share of the foreign profitswill be taxable in Turkey regardless of whether or notthey are remitted to Turkey.TRANSFER PRICING: Turkey’s transfer pricing rulesare in line with OECD guidelines. The transfer pric-ing rules apply when transactions between relatedparties (either resident or non-resident) are not atarm’s length prices. In such cases, the profits aris-ing from the transaction will be deemed to be “con-structive dividends” subject to both corporate incometax and dividend withholding tax.

The rules provide for both traditional and profit-based transfer pricing methods listed in the OECD

219


Legal liabilitiesIns and outs of Turkish tax law

TAX OVERVIEW

transfer pricing guidelines. Taxpayers are requiredto maintain documentation to support the transferprices determined and used.

Corporate taxpayers have the right to apply for anadvance pricing agreement (APA). Applications forunilateral (i.e., with the Turkish tax authority only)as well as bilateral and multilateral APAs are allowed.

The thin capitalisation rules are triggered whereloans from shareholders or related parties exceed adebt-to-equity ratio of 3:1 at any time in an account-ing period. Loans from related party banks or finan-cial institutions will not trigger the rules unless theratio exceeds 6:1. Where the debt-to-equity ratio isexceeded, interest and any relevant related expens-es will be deemed to be “hidden profit distributions”or a “remittance of profits”. Such expenses will benon-deductible and subject to dividend withholdingtax at the rate of 15%. Under certain conditions,borrowings from related parties may not trigger thincapitalisation provisions.

Costs incurred by headquarters located abroadmay be allocated to Turkish branches and deductedthrough distribution keys in accordance with thearm’s length principle, provided the costs incurredabroad relate directly to the commercial activitiesof the Turkish branch. Branches of foreign compa-nies are considered to have limited tax liability basedon their income derived in Turkey.

Non-resident limited-liability taxpayers’ income(other than business income) is subject to withhold-ing tax, ranging from 0% to 20%. Income such asroyalties, consulting income and technical fees issubject to withholding tax at 20%.DOUBLE-TAX TREATIES: Turkey has double-taxtreaties with 76 countries, including the US, mostEuropean nations and many Middle Eastern and EastAsian countries. Under Turkey’s treaties, incomederived from foreign countries is generally exclud-ed from consideration in Turkish tax computations,or tax paid in treaty countries is deductible from tax

assessments in Turkey. However, the details of thetreaties should be consulted. Among the benefitsoffered by the tax treaties are reduced rates of Turk-ish withholding taxes on dividends and royalties.

In the case of countries that do not have a tax treatywith Turkey, taxpayers that have full tax liability inTurkey are also taxed on their worldwide income.However, they are allowed to deduct taxes paidabroad up to the applicable Turkish rate from theirTurkish tax liabilities. TAX PAYMENTS: Delays in paying taxes are subjectto a monthly delay charge at the rate of 1.4% (effec-tive from October 19, 2010). This rate can be amend-ed by the tax authorities at any time.

If a taxpayer fails to file a return, the tax author-ities may impose an ex-officio assessment. In caseof fraudulent transactions there may be imprison-ment penalties from 18 months to five years in addi-tion to the monetary tax penalties.

Advance corporation tax payments must be madebased on 20% of quarterly profits, as shown in thecorporate taxpayer’s quarterly income statements. Direct inspections for tax purposes are carried outby government tax inspectors under the supervi-sion of the Ministry of Finance. Controls are strictand tax inspectors from the Ministry of Finance makespot checks of tax returns.

Certain transactions and documentation requirecertification by YMM financial accountants. Thereis an optional service available from YMM financialaccountants called tax certification, in which theaccountant reviews a company’s tax complianceduring the year and writes an opinion to the taxauthorities after the year-end about the compli-ance. Although optional, tax certification is widelyused among businesses because the tax authoritieshave indicated that they are unlikely to conductdirect inspections at companies which have obtainedsuch reports. There is also the benefit that expertadvice is then available to the company’s ownaccountants during the year.INDIVIDUAL INCOME TAX: In general, individualsresiding in Turkey are liable for personal income taxon all of their worldwide income. However, individ-uals who do not reside in Turkey but receive part oftheir income from Turkey are liable for income taxonly on their income derived in Turkey. The formerare known as full-liability taxpayers, and the latteras limited-liability taxpayers.

Expatriates who reside in Turkey for more than sixmonths in one calendar year are generally consid-ered as full-liability taxpayers. Foreigners who are in

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Special consumption tax is applied to the producers or importers of various products such as vehicles


SOURCE: Deloitte Turkey

Individual income tax rates for 2012Taxable income (TL) Rate (%)

Up to 10,000 15

10,000-25,000 20

25,000-88,000 27

Above 88,000 35

TAX OVERVIEW

Turkey for a fixed period on a temporary mission arenot regarded as settled or residing in Turkey, evenif they stay for more than six months. To determinethe Turkish tax liability of an expatriate, the provi-sions of double-tax treaties with the individual’shome country should also be considered.

Regardless of their nationality, most Turkish resi-dents, unless covered by exemption, are subject topersonal income tax. The emoluments of employeesof liaison offices are exempt from income tax sub-ject to certain conditions. Income tax is levied onthe following types of personal income:• Business profits;• Agricultural profits;• Salaries and wages;• Income from professional services (such as serv-

ices rendered by lawyers, tax consultants and engi-neers etc.);

• Income from immovable property (mainly rental income);

• Income derived from securities (interests, divi-dends); and

• Other income (capital gains and non-recurring income).

All income arising from an individual’s employmentis subject to personal income tax. As a rule, all ben-efits received from employment (in cash or in kind)are taxable, but there are some exceptions: for exam-ple, equipment that the employer owns but assignsto the employee’s use. Reimbursed business expens-es are also allowable expenses, as well as addition-al insurance premiums for sickness and life policies.

Income tax rates for personal income are progres-sive. The tax bands are raised each year, normallyapproximately in line with inflation. The tax year forindividuals is the calendar year. Generally, individu-als must file their income tax return by March 25 ofthe following year and pay any taxes owed in twoinstalments in March and July.

Individuals earning commercial and/or profes-sional service income are required to make advanceincome tax payments based on 15% of quarterlyprofits shown in their quarterly income statements.

Tax is withheld at source from a wide range ofpayments, including employment income. General-ly, employees and a number of other individuals arenot required to submit annual individual income taxreturns if the tax withheld at source constitutes thefinal tax burden of that individual.VAT: VAT is levied on goods delivered and servicesrendered in Turkey, as well as on all imported goods

and services. Exports are exempt from VAT, as arecertain specified goods and services.

Taxpayers deduct the VAT that they have paid toother suppliers (input VAT) from the VAT that havethey collected on their own sales (output VAT). Thus,the ultimate consumer is the one who finally bearsthe VAT burden, not the provider.OTHER TAXES: Special consumption tax is an indi-rect tax applied on the producers or importers ofvarious products such as natural gas and petroleumproducts, vehicles, tobacco products and luxurygoods. The special consumption tax rate on a car above2000 cc is now 130%, in addition to VAT at 18%, so thatthe showroom sticker price now approaches threetimes the pre-tax price of the vehicle.

Stamp duties are levied on a wide range of trans-action documents, including all contracts whichspecify a monetary amount. The rates vary from0.165% to 0.825% depending on the type of thepaper. It is also payable on payrolls at a rate of 0.66%of wages paid to a company’s workforce.

A banking and insurance transaction tax (BITT) islevied on all transactions carried out by banks andinsurance companies. The general rate is 5% of theincome received by a bank or insurance company asa result of a transaction subject to BITT. But reducedrates are applicable for certain transactions (e.g.deposits among banks, foreign exchange sales, etc.). SOCIAL SECURITY PREMIUMS: Social security pre-miums (as a percentage of employee’s gross earn-ings) are payable by both employers and employees.The normal rates for office employees in the privatesector are 19.5% of gross salary as the employer’scontribution and 14% as the employee’s contribu-tion. Employers may benefit from 5% premium incen-tive (19.5%-5%), which is covered by the Treasury if certain conditions are met. Rates for employeesemployed in specific sectors, including mining and oil and gas exploration, may vary depending on the risk category of the work involved in the job.

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Expatriates who reside in Turkey for more than six months in one year are generally liable for tax

SOURCE: Deloitte Turkey

Value-added tax ratesRate (%)

Most supplies (including services) 18

Basic foodstuffs, books, education by private

schools, textile and leather products 8

Agricultural products sold as raw materials,

newspapers, houses up to 150 sq metres 1

TAX OVERVIEW

Maximum and minimum bases for calculation ofmonthly social security premiums are TL5762.40(!2449) and TL886.50 (!377), respectively, for thefirst half of the year 2012. Foreigners making socialsecurity contributions in their home countries do nothave to pay the Turkish social security premiums ifthere is a reciprocal agreement between the expa-triate’s home country and Turkey.

Unemployment insurance premiums must be paidto the Social Security Organisation together with anemployee’s social security premiums. The rates ofunemployment insurance are 2% of gross salary forthe employer and 1% for the employee.THE UNRECORDED ECONOMY: The unrecordedeconomy remains a major problem for Turkey. Theshare of unrecorded activity in Turkey’s overall econ-omy (estimated to be around 30-40%) is high whencompared to OECD countries.

An OECD study found that the unrecorded elementin Turkey varies widely between sectors, from a full91% of total activity in the agricultural sector downto 20% in financial services and 14% in mining. Fur-ther, the authors identified three main reasons forthe unrecorded activity. The first is demographic anddevelopmental factors, with much unrecordedemployment being in very small enterprises.

The second reason is policy factors. Turkey hasthe highest tax burden on employment of any OECDcountry: 35.9% on labour costs in 2011, comparedto an OECD average of 24.8%. The figure in the USis 16.3% and 15.5% in Mexico. The third reason con-sists of cultural factors: in economies with lowunrecorded elements, tax evasion tends to be con-sidered unacceptable by most of the population.

It is clear that the government has been workingon to reduce the size of the unrecorded economyand bring tax revenues more in line with total eco-nomic activity. One key solution is the encourage-ment of recorded activity through the lowering oftaxes and social security contributions on employ-

ment, allowing regional variations in minimum wagesand more flexibility in employment regulations. Thestate can also encourage those areas of the econ-omy where the unrecorded problem is smallest.

The strengthening and expansion of inspectionteams and increases in penalties for unrecordedactivity is also important as a deterrent, while gen-erating public disapproval of tax evasion, ideallythrough better transparency and services, is the ide-al solution. This is a long-term objective given thatimproved services often depend on investment. INVESTOR CONFIDENCE: Our impression is thatthere is a wide range of compliance, from total com-pliance in some companies to serious levels of eva-sion in others. While compliance does appear to bestrongly correlated with size of the firm (the small-er the business, the more likely it is to have unrecord-ed transactions) and also varies by sector, it alsoclearly depends on the outlook and ethics of the indi-vidual owners and managers involved.

Few companies maintain two sets of books. To doso would increase the risk of detection, might requirethe cooperation of the whole accounting department(raising the risk of whistle-blowing), and would involvesignificant time and costs. Instead, one set of bookswill be maintained but the owner/managers and aclose circle of others will be aware of the amountof adjustments needed to reach “real” figures, basedon a separate spreadsheet or other “back-of-the-envelope” type records.

Very few businesses would record expense invoic-es which are fake (so-called “nylon invoices”) orwould issue invoices for wholly fictitious transactions.Such activities are considered fraud and carry veryhigh penalties which discourage this activity.

What is more likely is that actual sales, purchas-es or wage payments have occurred without anyaccounting record being made: no invoice, no cashmovement record, no payroll entry.

An investor considering coming into a business isquite likely to be informed about any unrecordedtransactions, because the “real” figures are likely topresent a more attractive picture of profitability.Note that this is not always the case: sometimeslosses are concealed rather than profits, because ofa company’s intention to mislead lending banksrather than the tax authorities.

Vendors sometimes do not seem to appreciatethat investors, especially foreign investors, will notfind this risk acceptable. Vendors may have got usedto their way of running a company, whereas investorsfocus on the risk of tax penalties which, in the worstcase, could ruin the company.

Representations and warranties can only go someway to mitigating this risk. Moreover, the investor nev-er really knows whether the “real” figures present-ed are indeed real: there is no way of verifying them,and there is always a risk of unrecorded expensesor liabilities not disclosed to the investor. Any poten-tial investor is very likely to insist that no fur-ther unrecorded transactions take place in the firm.

222

Many companies made applications under the one-off tax amnesty granted in 2011


TAX OVERVIEW

Note that there is also an important efficiencypenalty in companies with unrecorded transactions:the statutory accounts do not present the real pic-ture so any management accounts based on themwould be similarly misleading. In practice there maybe a complete absence of management accounts,making it more difficult for the firm’s line manage-ment to do their jobs effectively.INDICATORS OF UNRELIABLE ACCOUNTS: Investorsare encouraged to be aware of the following signsof potential unrecorded activity. Large balances dueto or from shareholders in the balance sheet can bea sign of trouble. Sometimes shareholders really areinjecting cash to their business to meet its workingcapital needs. But other times, large balances withshareholders (especially if they show frequent move-ment) actually arise because the firm is earningunrecorded cash and the accountants could not findany other way to show it coming into the business,other than via from the shareholders as a loan. Sim-ilarly, if money has been paid out on an expensewhich cannot be recorded (i.e. there is no invoice forit), it may be shown as a loan to shareholders. Thistype of problem builds up over time until the record-ed balances start to look very odd.

Large petty cash balances shown in the recordsare also likely to be unreal. The reality is that mon-ey was actually paid out for expenses with no invoice,but no accounting record could be made.

Paying the legal minimum wage may be the real-ity for unskilled jobs, but it may also conceal the factthat a proportion of employees’ total salary is beingpaid in cash, with no payroll record, using the cashearned from unrecorded sales. The total problem isthus evaded VAT on the sales, evaded corporationtax on the profit, and evaded income tax and socialsecurity contributions on the undeclared wages.

A surprisingly high figure for stock (inventories)might conceal the fact that goods have been soldwithout an invoice and, therefore, without any record.Conversely, a low stock figure might conceal the factthat incoming goods (especially any “free” stockreceived as premiums) have not been recorded, buthave been sold in recorded transactions.

Tangible fixed asset figures might not be reliable.Sometimes the purchase price of land or buildingsis actually higher than the recorded amount, becausethe company was trying to save on the title trans-fer tax (which used to be a total burden of almost10% of the value) or VAT by declaring a lower value.

However, the main reason why tangible fixed assetvalues are of little use in statutory financial state-ments is just the cumulative effects of inflation andchanges in market values of land and buildings.Depreciation rates may also be out of line with actu-al useful lives, even though acceptable under tax law.THE TAX AMNESTY: The government introduced aone-off tax amnesty (Law 6111) which allowed tax-payers to escape from the penalties they might oth-erwise have suffered on past irregularities inexchange for a moderate extra tax payment. Appli-

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Social security and unemployment insurance premiums are paid by both employers and employees

OBG would like to thank Deloitte Turkey for compilingthese articles for THE REPORT Turkey 2012

cations were made under the tax amnesty lawbetween February and May 2011. Many companiesmade such applications, which were encouraged bytax offices. This arrangement provided the govern-ment with a one-off source of revenue. It also facil-itated merger and acquisition transactions becauseit removed or mitigated the past tax risks in manycompanies for sale. The taxes covered by the amnestywere as follows:• Income tax;• Corporate tax;• VAT; and• Income withholding tax (i.e. on salary payments,

rental payments, independent professional serv-ice fee payments and the payments associated with multi-year construction works).

A separate application was required in respect of eachtax, and companies were free to elect to benefitfrom the amnesty in respect of some of the abovetaxes but not others. Where an application was made,the tax base for the relevant years was accepted tobe increased by a percentage and therefore extrataxes (at 15% or 20%) became payable on thatincreased tax base. These extra taxes could be paidin instalments. The applications could be made forany or all of the years 2006, 2007, 2008 and 2009.Once the application was made, the Ministry ofFinance would never investigate the years covered.

In addition, the law included provisions allowingtaxpayers to make one-off corrections to certainbalance sheet accounts which had become misstat-ed through previous tax evasion. These accountswere inventories (both upward or downward adjust-ment were allowed), cash balances and balancesdue from shareholders. A moderate tax paymentwas due in respect of such adjustments (for exam-ple, 3% on the write-off of fictitious cash balances).

TAX VIEWPOINT

Anthony Wilson, Partner in Charge, Deloitte Turkey

Over the course of 2011, Turkey saw a significantincrease in deal transactions, both numerically and interms of volume, and the outlook for the remainder of2012 is very positive indeed. Some 74% of the deals in2011, by value, involved foreign investors, represent-ing a significant recovery from 2010, when only 36%of deals involved an international firm. The total dealvalue in 2010 was $29bn. However, it later transpiredthat $11.8bn of these deals (mainly large energy sec-tor privatisations) could not be closed due to financ-ing difficulties. Compare those figures to the ones fromrecord-breaking 2011, during which 241 deals, com-prising a volume of $15bn, were transacted, account-ing for both Turkish and foreign acquiring entities.

The first half of 2012 has seen a strong start. Thereare 40-50 private equity funds constantly focused onTurkey, and a wide range of multinational strategicinvestors. However, deal volume is still modest by inter-national standards. The aforementioned $15bn wasequivalent to only 2% of GDP, while in the Europe, Mid-dle East and Africa region the average was 4.4% of GDP.

The attractions of the local market are centred onpositive expectations, based on a variety of support-ing factors: high growth rates achieved in the pastdecade; political stability under a government willingand able to implement reforms and planning measureswith a long-term perspective; a large population withgood demographics; the Customs union with the EUand increasing regional trade in the Middle East andAfrica; the absence of banking problems or excessivepublic debt levels; businesses engaged in processes toimprove efficiency; and the absence of bias againstforeign companies, in theory and in practice, in theCommercial Code and the Tax Law. Turkey was the 21st-largest economy in the world in 1980; the 19th in 1990;the 18th in 2000; the 17th in 2010. This steady climbis expected to continue, and Goldman Sachs estimatesit will be the 13th-largest economy by 2050.

The numbers for deal volume usually depend on thevolume of privatisations, especially those privatisations

in the energy sector, since those are big-ticket items.The total volume of privatisations was only around $1bnin 2011, but is likely to be higher later in 2012.

What holds back deal volume for private sector deals?The key factor is often a lack of supply. Many privateequity executives will tell you they have looked at hun-dreds of candidates for investment. Nevertheless, thenumber of realistic options is quite low. The owners ofmany successful businesses do not yet need externalcapital, and would prefer not to dilute or lose controlof their businesses. Accordingly, when an attractive com-pany does come up for sale there is widespread inter-est. Since Turkish deals are always focused on futuregrowth prospects, there is room for differences in opin-ion about future growth rates, and therefore value.

As a result of the limited supply of top businesses,we see deals occurring with those of lesser quality. Per-haps the most typical case is one in which growth hasbeen good, maybe even spectacular, but profitabilityhas been weak. In a good market, those businesses canbe sold, sometimes for eye-watering multiples, basedon a belief that adequate profitability will emerge lat-er. Recently we have seen businesses that remind meof hormone-enhanced tomatoes: shiny, superficiallyattractive and displaying an amazing growth rate. How-ever, it is unclear if they can provide sustenance.

Even where compliance with the accounting stan-dards is faultless, the current Turkish general accept-ed accounting principles are simple and limited, faraway from international financial reporting standards(IFRS). Revenue and costs may be recognised in thewrong periods, provisions even for almost certain loss-es may be missing and classifications of what is in orout of earnings before interest, taxes, depreciation,and amortisation may be wrong. We trust these prob-lems will be reduced under the new commercial code.However, there is a view that the IFRS and auditing pro-visions of the new code are just a racket to benefitaccountants, so maybe the bad old ways will linger.Make sure that you get good financial due diligence.

224

A strong startAnthony Wilson, Partner in Charge, Deloitte Turkey, on the potential fordeal volumes in Turkey to rise


225

Legal FrameworkRadical changes see commercial law brought up-to-dateMeasures taken to tackle protracted legal proceedings Renewable energy support scheme introducedNew contract law to give individuals better protection

LEGAL FRAMEWORK REVIEW

The new commercial code will be effective as of July 1, 2012

The Turkish economy has emerged from the world’s mostrecent financial troubles relatively unscathed. That,coupled with its image as a star performer amongemerging markets, has made the country a favouritedestination for foreign capital. As a result of both thisinflow of foreign capital and the accumulation andlivening of domestic capital, the amount of large-scaleinvestments in Turkey has drastically increased overthe last few decades. The changing nature of invest-ments has made the old Turkish Commercial Code (TCC),which was enacted in the 1950s, seem increasinglyoutdated, and, as a result, the parliament has taken theinitiative to comprehensively overhaul corporate law andrework it to fit the modern business environment.

To avoid any downturn and to stabilise the econo-my, one of the government’s priorities has been toreplace the “hot money” coming in from abroad withmore stable foreign direct investment (FDI). Thechanges brought about by the new TCC will contributeimmensely towards this goal, by assuring foreigninvestors of a safe and stable legal system to protecttheir interests. The new TCC, which will go into effecton July 1, 2012, will give global investors protectionmatching, if not exceeding, what they have come toexpect in their home jurisdictions, and remove what-ever negative effect Turkey’s outdated commercialjurisprudence may have had on FDI.THE NEW TCC: The new TCC will bring numerousinnovations to commercial law. The overarching themeof the reformulation of the legislation will be therecognition of the distinction between publicly andclosely held companies. The law will widen the gulfbetween the treatment of joint-stock corporations andlimited liability partnerships, with the joint-stock cor-poration being cultivated as the format organised foran eventual public float, whereas the limited liabilitypartnership will retain the properties that make it theform of choice for closely held companies. The lawwill achieve this result through its differential treat-ment of the two forms of association with respect to

the availability of share buybacks, the enforceabilityof option rights and the permissibility of share trans-fer restrictions, and other similar subtle differences.

Another major innovation brought by the new TCCwill be its reform of the corporate governance prin-ciples applicable to corporate bodies. It will allow foreasier delegation of duties to smaller groups with-in the board or to company management. Thischange, together with a shift to the liability regimethat will allow for a closer matching of responsibil-ity with liability, will enable companies to recruitmore knowledgeable directors, and increase the effi-ciency of Turkish businesses.

A further change on the corporate law front that willdovetail with the new TCC will be the change to theCapital Markets Law. The Capital Markets Board hasrecently announced a new draft of this law that will inte-grate discrete strands of the law into a coherent whole.

A new Code of Obligations will also go into effecton July 1, 2012. Most of the changes in this body oflaw will affect the relationship between employersand employees, and between lessors and lessees.While the effects of these changes will tend to bemore directly felt in relations among Turkish citizens,an updated law of contracts will no doubt result inthe economy operating more efficiently.BENEFITS: With its volatile current accounts balance,the country is in a promising but potentially precari-ous position in these first years of the second decadeof the 2000s. A similar predicament in the early 2000s,which unfortunately culminated in the 2001 financialcrisis, yielded an overhaul of the economic system,which ended up securing a more solid footing for theTurkish economy from that point forward. The mostrecent major changes on the legal scene have comeat the urging of less dramatic but no less powerfulforces. The modernisation of Turkish law will undoubt-edly help the country draw in more stable foreigninvestment, and result in a healthier economy throughthe efficiency-oriented changes that it will bring.

226

Modernising corporate lawAn up-to-date legal code will make for a healthier economy


LEGAL FRAMEWORK OVERVIEW

A new 2011 code addresses the slow pace of legal proceedings

In keeping with the country’s growing social needsand the breakneck pace of technological advancesthat the world has seen since the turn of the cen-tury, the need to amend and improve major codesin the law has become indispensable as of late. Thegovernment has been very active in trying to keepthe legal environment current, and has introducedmajor improvements to the existing legal frameworkin recent years. The year 2012 will see some of themost important of these newly enacted laws go intoeffect. In this overview, some of the most notablechanges that will be brought about as a result of thismodernisation effort will be discussed.COMMERCIAL LAW: One of the most notable over-hauls in Turkish law in recent memory is the intro-duction of the new Turkish Commercial Code (TCC),which will enter into force on July 1, 2012. The newTCC will update the commercial legal environmentto bring it in line with modern trends, and introducenew concepts that were absent from the law in itsprevious incarnation. In this section we will addressseven of the most significant changes that the newTCC will bring to the legal landscape.GROUP OF COMPANIES: The new TCC will intro-duce the concept of a group of companies. Underthe new TCC, a group of companies is composed ofa parent company (dominant company) and sub-sidiary companies under its dominance. In otherwords, the existence of a group of companies willdepend on the existence of dominance among thegroup members. The new TCC does not define “dom-inance”, and we can, therefore, assume that the lawadopts the existing definition of the concept. Legaldoctrine currently defines dominance as the pow-er to determine and control decisions of a compa-ny concerning its finances and operations, and alsoinfluence decisions relating to its budget, invest-ments and all other financial matters, dividend pol-icy, production, marketing, sales and humanresources. The new TCC lists the sources of domi-

nant power as: (i) dominance through voting rights,(ii) dominance through agreements and (iii) domi-nance through other sources.

The new TCC also establishes certain rules oblig-ing dominant companies not to inflict losses on theirsubsidiaries through the exercise of their dominance.It enumerates two situations of dominance abuse:(i) abuse of dominance through transactions with-in the scope of authority of the board of directorsand (ii) abuse of dominance through transactionswithin the scope of authority of the general assem-bly. In addition to these, the new TCC also addressesa third situation of abuse in Article 209, which pro-hibits (iii) the abuse of public trust in the goodwillof the group of companies. SHARE BUYBACK: The purchase by a company ofits own shares is generally referred to as a “share buy-back.” Companies follow this process in order toreduce the number of their shares on the market.The two main reasons that companies may elect toreduce their shares on the market are: (i) increas-ing the value of shares still available, and (ii) elimi-nating threats by shareholders who may be lookingto gain a controlling stake. Although share buybackshave been allowed in many common law countriesalong with many European Union countries sincethe mid-1970s, share buybacks have generally beenprohibited under Turkish law.

The new TCC will allow share buybacks by compa-nies under certain conditions, essentially enactinginto law the principles regulated under EU law. Underthe new TCC, joint-stock corporations will be allowedto repurchase up to 10% of their own shares; thissort of a buyback will have to be carried out by theboard of directors, pursuant to the authorisation ofthe general assembly. A repurchasing company willonly be allowed to buy back shares that representcapital that has been fully paid-in. As for limited lia-bility partnerships, the new TCC will allow the repur-chase of 10% of shares as a matter of course, but in

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Change for the betterAn overview of the current legal landscape


this form of association the repurchase ratio will beallowed to go up to as high as 20% in the event thata partner wants to leave the partnership and the com-pany’s articles of association provide for a buybackof this scale in such an event.LIABILITY OF BOARD MEMBERS: The new TCC willhold members of the board of directors up to thestandard of the prudent executive and require themto protect the interest of the company under a dutyof good faith. Directors will face liability if they breachthe obligations entrusted upon them by the law orby the company’s articles, unless they can provethey have not acted negligently. In the event thatmanagerial powers have been delegated, directorsdelegating authority may not be held liable for theirdelegates’ acts unless they are proven to have act-ed negligently in choosing their managers.

Under the scheme introduced by the new TCC,directors may not be held liable for illegal acts thathave occurred outside of their control, and neitherthe obligation to supervise nor the duty of care maybe used as grounds for holding them liable. The ulti-mate liability system of the current TCC will bereduced to a level that is within the scope of humancontrol under the new TCC.FINANCIAL ASSISTANCE RESTRICTIONS: Accord-ing to the new TCC, it will not be permitted for share-holders to borrow from the company, except for sharecapital contribution undertakings, unless the debtarises from a transaction that is required by the com-pany’s scope of activity or the business of the share-holder’s enterprise, and unless the debt is made onterms similar to those applicable in comparable cas-es conducted at arm’s length.

A joint-stock corporation cannot be a party totransactions with third parties made to advancefunds, extend loans or provide security to have thecompany’s own shares acquired by a third party.Notably, this prohibition will not apply to transactions(i) executed with credit and finance institutions in

the normal course of their business, and (ii) effect-ed with a view to having the shares acquired by thecompany’s or its affiliates’ employees.SQUEEZE-OUT: The new TCC grants a squeeze-outright to shareholders who control, directly or indi-rectly, at least 90% of the share capital and at least90% of the voting rights in a joint stock corporation.Controlling shareholders are entitled to exercise thisright if the minority shareholders act to obstructthe operations of the company, act in bad faith, cre-ate a perceptible disruption in the company or actin a manner that is deemed reckless.

The new TCC also provides an exception to theprinciple of “continuity of the shareholding of ashareholder” and allows for the squeeze-out of minor-ity shareholders in the case of a merger. In a merg-er agreement, the entities involved in the merger maycompel the shareholders of the dissolving companyto sell their shares merely by providing compensa-tion through payment (without the shareholdersbeing offered a choice). In such a case, the minori-ty shareholders will not be entitled to obtain sharesin the surviving entity, but instead will only be paid“squeeze-out compensation”. However, the new TCClimits the scope of this squeeze-out procedure in that,if the minority shareholders of the merging entityare forced to exit and accept compensation pay-ment, shareholders holding 90% of the voting rightsof the dissolving entity will have to approve themerger agreement.ENFORCEABILITY OF RIGHTS & OPTIONS: The newTCC adopts a different approach to the enforceabil-ity of put/call options and tag-along/drag-alongrights as between joint-stock corporations and lim-ited liability partnerships. According to the new TCC,option rights and other ancillary obligations forshareholders cannot be included in the articles ofassociation of a joint-stock corporation, and thesewill not be binding on third parties.

However, the new TCC does not prohibit suchmechanisms from being implemented under privatecontractual arrangements between the sharehold-ers (i.e. under shareholders’ agreements). Thisapproach unfortunately will invite enforceability con-cerns. Notably, the new TCC will allow limited liabil-ity partnerships to freely include such limitations intheir articles of association.SHARE TRANSFER RESTRICTIONS: The new TCCmodifies the restrictions applicable to share trans-fers. Under the new TCC, registered shares that arenot fully paid-in can only be transferred upon theapproval of the company. The company may with-hold such approval if it has doubts regarding the sol-vency of the purchaser and the purchaser refusesto provide the requested security to the company.

Moreover, a company’s articles of association mayalso require the firm’s approval for share transfers.With regards to non-listed registered shares, thecompany is permitted to refuse approval on the basisof material reasons laid out in its articles of associ-ation, or it may choose to make an offer to transfer

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The government has been quite active in keeping the legal environment up-to-date



the shares at their actual value. With respect toshares that are listed and registered, the companymay only reject a transfer should such transfer exceedthe acquisition threshold set by the articles of asso-ciation in terms of the percentage of the share cap-ital that is changing hands.CONTRACTS LAW: A second pillar of the govern-ment’s efforts to modernise Turkish law will be thereplacement of the current Turkish Code of Obliga-tions (TCO) by the new TCO, which was enacted onJanuary 11, 2011 and will go into effect on July 1, 2012.

The new TCO provides a new set of rules for “stan-dard terms and conditions” (genel i"lem "artları ),which went unaddressed by the old TCO. With theseprovisions, the law aims to protect individuals fromabstract and one-sided agreements unilaterally draft-ed by companies specifically to not be negotiable.The new TCO provides a detailed definition for stan-dard terms and conditions, and regulates the valid-ity conditions of these agreements.

For parties who have not determined yearly contrac-tual or default interest rates under their agreement,the new TCO establishes the application of the validand relevant regulations for the accrual of interest.

The new TCO extends statutes of limitations forcompensation in both torts and unjust enrichmentclaims. A one-year time limit for both claims underthe old TCO is extended to two years under the newregime. The new TCO also provides certain new con-cepts regarding employment agreements:• Sexual harassment/mobbing: The concepts of

mobbing or sexual harassment do not exist in theold TCO or Labour Code. The legal gap, especiallyin case of mobbing, was filled by court rulings. Thenew TCO regulates both sexual harassment andmobbing through a specific article. Employers arenow obliged to take all necessary actions to pre-vent employees from exposure to such acts andminimise the damage for those who are alreadyexposed to such behaviour.

• Non-competition agreements: The old TCO didnot have a specific provision on the time limit ofnon-competition agreements for employees fol-lowing termination of employment, simply indicat-ing that such agreements would be applied onlyif they were effective for an “appropriate peri-od”. The new TCO provides an upper limit oftwo years for such agreements.

• Instructions: The new TCO also provides that employ-ers may have general regulations that cover jobperformance, and may give special instructions toemployees. Employees are obliged to follow suchinstructions to the extent that they are reasonable.

• Intermediation fees: There is also a new regulationregarding the payment of “intermediation fees” toemployees. If the employer and employee agree,the employee will be entitled to an intermediationfee to assist in establishing a commercial relation-ship between the employer and a third person.

• Vehicle: If the employer and the employee agreethat the employee may use his/her own vehicle for

the performance of the employer’s commercialactivities, the employer must pay the taxes, manda-tory liability insurance premiums and an appropri-ate compensation for depreciation of the vehicle.

• Notice periods for indefinite-term employmentagreements: The new TCO also amends the termina-tion notice periods for employment agreements ofindefinite duration based on the length of the employ-ment period. With this amendment, the actual ter-mination notice will be two weeks for employmentof at least one year. For employment of one to fiveyears, this will be four weeks, and for employmentof more than five years, the termination notice peri-od will be six weeks. This scheme is in line with thecorresponding provision in the Labour Code.

It is worth noting the provisions of the new TCO donot remove or repeal overlapping Labour Code pro-visions. The new regulations will only apply in circum-stances where the new TCO governs employment.

Finally, in accordance with the Electronic Signa-ture Law, the new TCO recognises an electronic sig-nature as an original signature in written agree-ments. With this rule, an electronic signature will besufficient to execute an agreement. Under the newlaw, documents that contain secure electronic sig-natures or documents that are sent via fax or oth-er transmission methods with confirmation may alsobe considered authentic writings.PROCEDURAL LAW: The old Civil Procedural Code,which was enacted in 1927 and contained outdat-ed and archaic methods, was replaced in 2011 by anew code that introduced many fresh concepts andmechanisms to Turkish law. Most notably, the newlaw addresses the most problematic aspects of civ-il litigation in Turkey, namely the unacceptably slowpace of legal proceedings, through a number ofmeans, the most notable of which are: • Advance for costs: Under the old code, parties were

able to avoid paying even the trivial court fees until specifically ordered by a judge at a hearing. This

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The new TCO protects workers from sexual harassment and mobbing


meant that one or two hearings would be wastedand resulted in a time-consuming procedure forpayment of required costs. However, with theenactment of the new code, plaintiffs are nowrequired to not only pay court fees but an esti-mated advance for costs as well.

• Submission of claims, counterclaims and defenc-es: Under the old code, parties could also delay acase by waiting until the last minute to submittheir full cause together with documentary evi-dence. They would wait until the judge set a finaldeadline for submission, and this would againdelay the procedure. However, it is now mandato-ry to submit full claims, counterclaims and defencesat the outset, together with all documentary evi-dence available. A trial cannot be set in motionuntil written pleadings are completed. Followingthe completion of this step, the judge schedulesa preliminary examination hearing. Moreover,judges are specifically authorised to urge the par-ties to settle or resort to alternative dispute res-olution mechanisms as early as the pre-trial stage.

In addition, the new Civil Procedural Code addressesthe use of experts in the Turkish legal system. Eventhough it was technically prohibited under the oldcode, judges, because of their heavy workload, usual-ly assigned analysis of solely factual and legal issuesto experts, and utilised these experts’ review of thecase when delivering their judgements. The new codeprohibits the use of these “legal experts” by restrict-ing the use of experts to those listed in the expert list,posted by the Civil Law Justice Commissions. This meansthat judges will only be able to assign as experts per-sons that have technical and/or scientific expertise.ENERGY SECTOR: The Law on the Utilisation ofRenewable Energy Resources for Electricity Genera-tion (RES Law), enacted in 2005, fell short of satisfy-ing the needs of investors who have carried the bur-den of costly energy-sector investments. The initialform of the RES Law also had limited impact on the

market due to its modest and uncompetitive feed-intariff regime. To overcome the shortcomings of theRES Law, the government prepared a bill that includ-ed amendments to offer higher feed-in tariffs. Theseamendments were enacted on December 29, 2010,and they became effective on January 8, 2011. Whilethe effects of the amendments in the marketplaceare yet to be fully understood, they do introducenumerous investment and financial advantages thathave long been awaited by investors. These include:• Priority for system connection: Generation facili-

ties that use renewable energy resources will havepriority over other applications in the evaluationof the licence applications, with regards to thepreparation of the system connection opinion.

• Renewable Energy Support Scheme: Generationlicensees generating electricity from renewableenergy resources are eligible to receive a renew-able energy source certificate (RES certificate)from the Energy Market Regulatory Authority. Facil-ities holding a RES certificate are allowed to par-ticipate in the Renewable Energy Support Schemeaccording to the generation amount indicated ontheir RES certificate. Companies that supply elec-tricity are obliged to financially participate in thesupport scheme pro rata to the electricity amountsthat they have supplied. In other words, it is indi-rectly imposed upon these companies to purchaseelectricity that is generated from renewableresources. Generation licence holders have theright to receive these payments pro rata to the gen-eration amounts indicated on their RES certifi-cates. However, it is not mandatory, but optional,for generation facilities to enter into the supportscheme. The support scheme is organised annu-ally, and licensees that wish to benefit from it mustapply by October 31 to be eligible for the follow-ing year. The highest rates under the supportscheme are set for biomass and solar energy facili-ties, and facilities using domestically manufac-tured components are accorded comparativelyhigher feed-in rates.

• Electricity generation for self needs: Genera-tion facilities using renewable energy resourceswith an established capacity lower than 500 KWare allowed to deliver the electricity that theygenerate beyond their own needs to the distribu-tion system at the above-mentioned prices for 10years. In this case, the relevant distribution com-pany is obliged to purchase such electricity.

The country’s national strategy documents are proofof its desire for growth in the renewable energy mar-ket. Accordingly, Turkey is expected to establish10,000 MW wind and 300 MW geothermal energygeneration capacity by 2014. In addition, accordingto the Ministry of Energy and Natural Resources,Turkey’s solar energy potential is estimated to standat 380 TWh per year. With these figures as forecast-ed, Turkey hopes that the new legislative develop-ments will serve its aim of becoming a major playerin the renewable energy sector in the coming years.

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The country aims to have 10,000 MW of wind power capacity by 2014



CAPITAL MARKETS LAW: After obtaining commentsfrom public authorities, the Capital Markets Board(CMB) announced the draft law on capital marketson March 9, 2012 and requested comments and rec-ommendations on it from private parties. After theenactment of the new TCC, legislation of a new Cap-ital Markets Law was expected, and such a draft wasfinally made public in March 2012.

The draft Capital Markets Law aims to update Turk-ish capital markets jurisprudence in line with Euro-pean Union law and the design to be implementedby the new TCC. With this draft law, the CMB hasaimed to integrate into a coherent whole variousstrands of existing CMB jurisprudence, which hadbeen developed over time in discrete regulatorycommuniqués and so-called principle decisions.Another proclaimed goal of the CMB in this processhas been to keep the superstructure of the law asflexible as possible so that any changes in the futurecan be easily accommodated.

The bill introduces many innovations, but the mostremarkable of these concern the alignment of theCapital Markets Law with the new TCC. The draft Cap-ital Markets Law formally introduces the concepts ofthe right to exit and the squeeze-out mechanisminto capital markets law. The draft bill also introducesto Turkish capital markets jurisprudence the conceptof the undertaking for collective investment in trans-ferable securities. This gives collective investmentfunds recognisable legal personhood, and therebyallows them to take advantage of a greater varietyof investment opportunities, most notably real estate.

In addition to the new draft law, the CMB hasrecently been very active in refining the principlesof corporate governance that it will require publiccompanies to follow. The CMB initially published itsprinciples of corporate governance in 2003, butthese were only advisory at the time. Since then theCMB has steadily worked a number of these princi-ples into its regulations, albeit in piecemeal fashion.Finally, in October 2011 the parliament authorisedthe CMB to require companies under its watch thatmet certain thresholds regarding the dispersion ofshares, the frequency of trading, etc. to abide bythese principles in their entirety.

The CMB took a cautious first step in its initialcommuniqué implementing this directive, which itissued in October 2011. That communiqué’s manda-tory language was addressed only to the top 30 com-panies listed on the Istanbul Stock Exchange, and theaddressees were required to abide by only a limitedset of the CMB’s principles. One of the principles thatwas made mandatory at this time was that at leastone-third of the board of directors had to consist ofindependent directors. This initial communiqué wasfollowed by another one issued in late December2011, which expanded the mandate to follow theprinciples to all publicly traded companies.

The December communiqué also controversiallyinstalled the requirement that a majority of independ-ent board members must approve certain acts fun-

damentally changing the nature of the corporation,such as acquiring, transferring or encumbering asignificant portion of corporate assets or delistingwith a stock exchange. Under this communiqué,there was no way to circumvent the independentboard members: even submitting the measure tothe consideration of the general assembly of share-holders required their approval.

This scheme generated a significant amount ofbacklash from the industry: to many, this designseemed to wrest control of corporations away fromshareholders and give it to independent board mem-bers. As a result, in February 2012 the CMB issuedyet a third communiqué reversing itself on this par-ticular requirement. As it now stands, CMB regula-tions require acts that would fundamentally changethe nature of the company to be approved by amajority of the independent directors on the board;failing that, the general assembly of shareholders mayconsider and approve the measure, but it must firsttake under advisement the stated reasons for theindependent directors’ rejection of the measure.

In its February communiqué the CMB also had towalk back another aggressive move it had maderegarding independent board members: In its Decem-ber communiqué, the CMB had introduced a require-ment that the board of directors of any publiclyfloated company must at a minimum contain enoughindependent directors to proportionally representthe shares being publicly held. This move was also seenby the industry as unnecessarily diluting manage-ment control over the company. As a result, the CMBsoftened its stance on this question in the last incar-nation of its regulations, only requiring, as of now,that no less than one-third of the board be composedof independent directors, provided that there are no less than two independent directors in any event.

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The draft Capital Markets law aims to update Turkish capital markets jurisprudence in line with EU law

OBG would like to thank Hergüner Bilgen Özeke for compil-ing these articles for THE REPORT Turkey 2012

LEGAL FRAMEWORK VIEWPOINT

Ümit Hergüner, Managing Partner, Hergüner Bilgen Özeke

In corporate management, as in other aspects of life,the simplest way to promote responsible behaviour isto ensure accountability. The new TCC, in its overhaulof the commercial landscape, will initiate serious changestowards facilitating good corporate governance. It willintroduce a legal regime that will require clarity in theassignment of duties among corporate managementteams and align liability as exactly as possible withresponsibility. This will be accomplished through twomajor but related steps. First, the new TCC will explic-itly allow a company’s board of directors to delegateits duties, both to smaller groups within the board andto the management team. Second, the new TCC will movecorporate law from a regime of strict joint and sever-al liability to a regime of differentiated and several lia-bility for the board of directors.

On the delegation front, the new TCC will allow cor-porate boards to delegate management authority to asubgroup of the board of directors, an individual direc-tor, or to the management team, but only when the com-pany’s articles of association explicitly authorise it.Moreover, the law will require delegation to take placepursuant to a set of bylaws that the company enacts.These bylaws must state in detail the processes to befollowed in exercising management discretion as wellas the lines of reporting to be followed, and exactly withwhom the delegated responsibilities and duties will beplaced. Such an explicit allocation of duties and respon-sibilities will increase individual accountability. The com-pany will not have to publish or register these bylaws,but it will have to disclose them to any shareholders orcreditors who can demonstrate a protectable interestin the company. After July 1, 2013 this disclosure willalso have to be made online.

The new TCC will also rework the liability schemethat governs corporate decision-making. It will bringabout a two-part shift: initially, the board of directorswill no longer be held jointly and severally liable for theresults of board decisions, but rather liability will beassigned severally among board members. Next, with

regard to the outcomes of delegated duties, boardmembers will be shielded from liability for the decisionsof their delegates unless they are shown to have failedto exercise due care in selecting the parties to whomthey have delegated managerial authority.

These steps will assign responsibility within corpo-rate boards more accurately than the current system,and will get the most out of existing corporate direc-tors. The new liability scheme will also make it easierfor companies to recruit independent professionals asboard members. Under the new TCC, independentdirectors will not be subject to individual liability sole-ly by reason of holding the title of director. As long asthey have not taken on any responsibilities under thecompany’s bylaws, which would be stated clearly forall interested parties to see, and as long as they haveexercised due care in selecting the people to whom theyhave delegated managerial duties, independent direc-tors will not face liability for outcomes of corporate deci-sions that end up hurting the company’s interests. Thiswill encourage independent businesspeople to takepart in corporate boards more often, and share theirexpertise with industry participants from a position ofgreater familiarity with corporate affairs.

The idea of individual liability is a must for responsi-ble governance. The overhaul of the TCC will constitutea massive step towards achieving this goal in the Turk-ish corporate world. The changes outlined above willrequire private enterprises to undertake a huge amountof expense to bring their practices in line with therequirements of the new law, but this price is well worthpaying to achieve the increases in efficiency they willusher in. If anything, the parliament should double itsefforts to bring about further changes to encouragetransparency and anti-corruption in corporate gover-nance. Only when Turkey realises good governance inits public and private sectors will it realise its true poten-tial. I wholeheartedly applaud the bold initial step thathas been ushered in by the new TCC, and hope thatmore changes in this direction will soon be in the works.

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Bold stepÜmit Hergüner, Managing Partner, Hergüner Bilgen Özeke, on the newTurkish Commercial Code (TCC) and the liability of board members andmanagement in Turkish corporate governance


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The GuideGrowing prominence of arts and cultural eventsListings for some of the top places to stayContact details for state institutions and servicesUseful information for business and leisure visitors

THE GUIDE CULTURE

The country’s events have been attracting international attention

Over the course of the past decade, Turkey's econ-omy and society have undergone drastic changes:high GDP growth, the consolidation of civilian polit-ical control and the evolution of a more nuanced per-spective on the country’s role in the region. Thenation's growing prominence has led the internation-al community to increasingly value Turkish arts andculture. Public sector support for culture and the artsis quite limited in Turkey, which is why the privatesector is more and more choosing art as the focusof its social responsibility projects. CORPORATE SUPPORT: One sign of this is the grow-ing number of art institutions that have been estab-lished by large corporate groups in the past decade.Not only has private sector support enabled theseinstitutions to organise first-rate exhibitions on apar with the best worldwide, it has also helped toclarify and strengthen the valuation and exhibitionprocess in Turkey. Thus, in addition to the globalattention garnered by Turkish art, there has been adomestic movement to support arts and culture,which has received the support of Turkey's biggestnames in business such as Borusan, Elgiz, Koç, Korayand Sabancı, to name but a few. Many of the nation’slargest banks have also shown significant interestin art, opening up their own galleries.

The involvement of Turkish corporations in domes-tic arts and culture is not new to the country, butthe role of businesses is increasingly important.According to Bülent Eczac›ba#›, the chairman of theEczac›ba#› Group and one of Turkey's leading artsfoundations, the Istanbul Foundation for Culture andArts (Istanbul Kültür Sanat Vakfı, !KSV), one of the mostcommon ways that firms channel support to the artsis through foundations. “This model is very well estab-lished and is likely to remain for some time,” Eczac›ba#›told OBG. The foundation approach has helped buildlocal interest and engagement with the arts, as wellas develop the country’s artistic profile on the inter-national stage. Istanbul, in particular, has become

world-renowned for its events, and was named theEuropean Capital of Culture in 2010. UNDER THE HAMMER: The success of this and oth-er events has accelerated activity in Turkish art sales.Sotheby’s held auctions of Turkish contemporaryart in 2009 and 2010, and saw gross sales of £1.3mand £2.4m, respectively. The number of Turkish col-lectors travelling abroad is likewise growing. In 2010,for example, 200 Turkish art enthusiasts and collec-tors attended Art Basel in Miami, while their pres-ence at the event in 2011 was also high, gaining theattention of the organisers. Then, in April 2012, Turk-ish works were sold throughout Europe and the Mid-dle East. Bonhams in London hosted a general salethat included 16th- and 17th-century Iznik pottery,while Sotheby’s “Masterpiece” Orientalist sale movedsuch works as “The Scholar” (1878) by Osman Ham-di Bey and a collection of 17th-century weapons,including an Ottoman dagger of gold and jade, val-ued between £400,000 and £600,000. MODERN ART: The focus has not been exclusively onTurkey’s Ottoman offerings, however, and Sotheby’send-April auction featured contemporary works aswell. Prior to the sale, select pieces from the collec-tion were shared in Istanbul – including painting,embroidery, sculpture and photography. Meanwhile,Christie’s Modern and Contemporary Arab, Iranianand Turkish Art sale, held in Dubai, featured 17 Turk-ish pieces – with 85% of the purchases going to for-eign collectors. While the value of older Turkishpieces can be attributed to their history, contempo-rary art is becoming increasingly in demand as well,in part due to the support of the country’s privatefoundations. “Local collectors of contemporary arthave increased in recent years, and more collectorsare attending international contemporary art fairs,keeping abreast of exhibitions and gallery events, andinvesting in art,” Eczac›ba#› said.

A commercial manifestation of this growing inter-est is that artists and galleries were able to sell about

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Art boomGreater importance is being placed on arts and culture


THE GUIDE CULTURE

75% of the work they exhibited at the ContemporaryIstanbul art fair in December 2011. In addition tothese personal investments in artwork, collectors arealso lending support to the production of art throughtheir sponsorship of NGOs involved in culture and thearts, and investments and programmes aimed at pro-moting collectors’ interest in art are on the rise. Whilethere is still progress to be made in this regard, “artin Turkey is steadily trending toward an asset class. Itwill simply take time until the support of foundationswill enable the cultural changes needed to see art morewidely regarded as an asset,” according to Eczac›ba#›,who added that “in recent years private banks inTurkey have begun to provide art consultancy serv-ices, while wealth management departments andfirms have started including art in their investmentportfolios or providing services in this area.” PROMOTING INVESTMENT: In 2004 Turkey intro-duced a law allowing expenditure on sponsorships ofart events and other similar activities to be deduct-ed from income and corporate taxes as part of a bidto promote cultural investment and initiatives. “Thisis a good start,” Eczac›ba#› told OBG. “But we believedeductions need to be extended to the purchase, saleand transport of artwork as well, if the market is todevelop further and attract new investors. We alsoneed to improve our legal framework for the market,as some regulations currently in place are open to inter-pretation. We expect all this to come under increas-ing scrutiny in the years ahead as corporations expandtheir support for the arts and investments in art.” EVENTS: While the development of regulatory changesinvolving art is still in the pipeline, there has been noshortage of events, particularly in Istanbul. The !stan-bul Biennial, put on by the !KSV, is one of Turkey’s lead-ing contemporary art events. Growing coverage of theevent by major international dailies, such as The NewYork Times, The Wall Street Journal and The FinancialTimes, has contributed to international awareness ofthe Biennial. Attendance went up to approximately110,000 people during the 12th Istanbul Biennial heldin 2011, from 101,000 in 2009.

The city’s busy arts and culture calendar drawsboth locals and visitors. Film enthusiasts have a busyspring, starting with !F, the Istanbul InternationalIndependent Film Festival, which takes place everyFebruary and March across venues in Ankara, Istan-bul and Izmir. The event has featured contemporarycinema from around the world since 2001, and, asof 2008, has been hosting a competition for inde-pendent filmmakers. The Istanbul Film Festival, organ-ised by the !KSV, follows in April. This event evolvedfrom a film week that was first sponsored by theEczac›ba#› Group in 1982. It features both nationaland international sections, but the focus of the eventis to support and encourage domestic filmmakers.

Other !KSV events that can be enjoyed through-out the year include the Istanbul Jazz Festival, heldevery May. The festival has attracted such renownedperformers as Wynton Marsalis, Bobby McFerrin,Eric Clapton, Joan Baez and Sting, in a programme

that features classical, modern jazz, Latin and Nordicjazz ensembles, among others. GALLERIES: For museum lovers, the city has a wealthof privately maintained venues that feature contem-porary art, including the Pera Museum, the Rahmi MKoç Museum, the Elgiz Museum of ContemporaryArt, the Sakıp Sabancı Museum and the Istanbul Mod-ern. In addition to the better-known foundation-sup-ported venues, Istanbul is also home to a number ofsmaller artistic projects that support the arts on agrassroots level. Eczac›ba#› explained that the criticalmass for support has seen a proliferation of smallerprojects. “Since 2004, the Istanbul Modern has addedto this momentum through its dynamic programme ofexhibitions and learning opportunities for the public,which have spurred the establishment of numerousnew contemporary art venues in Istanbul and facili-tated the participation of artists and galleries in inter-national exhibitions and fairs. Istanbul’s commercialart fairs have also achieved a significant internation-al dimension in terms of the number of internationalgalleries and guests attending these events.”

Among the new venues is Çıplak Ayak Stüdyosu(Naked Feet Studio), which supports a range of con-temporary performance artists, primarily dancers.Atılkunst, meanwhile is a feminist artist collective host-ing “culture jamming” performances aimed at usinglanguage, images and video, often taking a workshop-style approach. Another very active workshop space isSALT, founded by Garanti Bank to support new artists.Also on offer to visitors are events at up-and-comingcontemporary art gallery Protocinema. The galleryattempts to bridge artistic endeavours between Istan-bul and New York, with a particular focus on emergingartists. The SAHA foundation is also working to makemodern Turkish art more visible outside the country.

Although there is still more to be done to encour-age the country’s contemporary art scene, Istanbul iswell on its way towards achieving the internationalstatus in contemporary art that befits its rich history.

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Corporate support is enabling galleries to put on first-class exhibitions and is helping the arts to flourish

THE GUIDE CULTURE

Exports of Turkish soap operas brought in more than $60m in 2011

Beamed onto TV screens across the Middle East, theBalkans and beyond, modern Turkish culture – partic-ularly in the form of soap operas – has never been sopopular. Indeed, Turkish soaps have been held respon-sible by many for the rise of the country’s “soft pow-er” – and for surging tourism to Turkey, as fans cometo visit the haunts of their TV heroes.

The soap’s financials are far from soft, too. In 2011,Turkey earned $60m-plus from exporting over 100 tel-evision series to more than 20 countries. SILVER LINING: The soap phenomenon is widely cred-ited as starting with “Gümüfl” (“Silver” in English). Thissoap opera received a lukewarm reception in Turkey itselfand aired for only two years, between 2005 and 2007.

Yet Saudi media tycoon Sheik Waleed Al Ibrahim’sMBC, the Dubai-based, pan-Arab television network,clearly saw more promise in the drama’s plotlines. Thenetwork bought rebroadcast rights, renaming the series“Noor” in Arabic. The Arab world was thus introducedto, and got quickly hooked on, the series.

The soap portrays a modern Turkish lifestyle, with thedrama revolving around the title character, a self-reliantwoman who confidently runs a business, and her devot-ed and handsome husband, Muhannad. They are bothpious in observing Muslim traditions, such as Ramadan,yet also drink, the women generally do not wear head-scarves and sexual subjects are also portrayed.

Yet this does not seem to have put off Arab audiences.MBC began broadcasting “Noor” to the Arab world inearly 2008, with the final episode in August that yearattracting 85m viewers, from Morocco to Palestine,according to Variety magazine. One of the main rea-sons cited for the broad success of “Noor” among Arabaudiences is that, instead of dubbing the shows in clas-sical Arabic, as had been the norm for other foreign(mostly Latin American) soaps, MBC used a conversa-tional dialect of Syrian Arabic that is readily understoodby most Middle Eastern viewers. The resounding suc-cess of “Noor” then unleashed a tidal wave of Turkishmelodramas onto television screens across the region.

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Soap powerThe sweeping success of Turkish television series


These feature conspiracy thrillers and crime dramassuch as “Kurtlar Vadisi” (“Valley of the Wolves”), “AsmalıKonak” (“The Mansion with Vines”) and “Yaprak Dökümü”(“The Fall of the Leaves”). Indeed, Turkish televisionstars such as Murat Yıldırım and Tuba Büyüküstün, theleading characters of “Asi” (“Rebellious”), an adaptionof Jane Austen’s Pride and Prejudice, have reachedinstant celebrity status in the Arab world. BALKAN SUCCESS: Turkish soaps have also takenBalkan audiences by storm. The Balkan craze for Turk-ish soap operas arguably started in 2010, when the tel-evision series “Binbir Gece” (“A Thousand and OneNights”) became a primetime hit in Bosnia, Montene-gro and Macedonia, as well as in Romania, Albania andGreece. Following on this success, in 2011, Bulgariabought 27 Turkish soap operas, according to Bulgari-an National Radio. To date, Turkey has sold 70 soapoperas to 39 countries in the Balkans, the Caucasusregion and the Middle East. At 42, Kazakhstan is thebiggest buyer of Turkish soaps, followed by Bulgaria with27, Azerbaijan with 23 and Macedonia with 17.

In Turkey itself, recent top-rated series include edgi-er fare such as the steamy “A#k-› Memnu” (“ForbiddenLove”) and the period drama “Muhte#em Yüzyıl” (“TheMagnificent Century”). Based on the life of the 16th-century Suleiman the Magnificent, “Muhte#em Yüzyıl”has been credited with increasing Turkish interest inOttoman history, while also attracting the eye of inter-national channels – it is set to be distributed in 40countries, 22 of which are in the Middle East.

Turkish soaps have also attracted a degree of con-troversy, sparking debate among Arab viewers. MBC’sairing of “Cry of a Stone” (“Sarkhet Hajar” in Arabic),for example, depicts the daily life of Palestinians underIsraeli occupation – while including a love story betweenan Israeli Shin Bet officer and a young Palestinian.

The soaps have sparked a swift and dramatic surgein Arab and Balkan tourism to Turkey. These days, indeed,fans can even charter a boat to catch a glimpse of the waterfront villa where the series “Noor” was filmed.

THE GUIDE HISTORY

The site pre-dates the Great Pyramid by some 7000 years

An unassuming, 20-metre hill, some 15 km north-eastof "anl›urfa in South-east Turkey, seems a rather unusu-al place to be sending the archaeological world into aspin. Yet Göbekli Tepe, located at the northern end ofwhat the ancients called the Fertile Crescent, is cur-rently doing just that.

In the process, it is also raising important questionsabout the development of civilisation itself – an impres-sive achievement for a site that was once dismissed asnothing more than a medieval cemetery. OLDER THAN THE PYRAMIDS: Since a more recentexcavation of the site, starting in 1995, archaeologistshave come to the conclusion that Göbekli Tepe datesback long before the Middle Ages. This is most likelythe world’s oldest known human-built ceremonial site,trumping the Egyptian pyramids and Wall of Jericho inboth significance and age. The assemblage of circularstanding stones that makes up the site, which means“pot-belly hill” in Turkish, was built during what archae-ologists call the Pre-Pottery Neolithic era, some 11,600years ago. That was seven millennia before the GreatPyramid of Giza. “In 10 or 15 years, Göbekli Tepe willbe more famous than Stonehenge,” Klaus Schmidt, theGerman archaeologist who is excavating the site in col-laboration with the German Archaeological Institute andthe "anl›urfa Museum, told National Geographic inJune 2011. “And for good reason,” he added. MANY CIRCLES: The layout of each of the circles is sim-ilar: two T-shaped megalithic limestone pillars areenclosed by smaller, inward-facing stones and giantspikes. Geomagnetic surveys have revealed that the sitecomprises about 20 of these rings, with the tallest pil-lars reaching three to six metres in height and weigh-ing up to 40 tonnes. The excavation has revealed thatevery few decades the pillars were buried and newstones erected, creating a second, and sometimes evena third ring inside the first. The whole grouping wouldeventually be filled with debris and a new circle erect-ed nearby. This burying and rebuilding continued for centuries, but seems to have ended by 8200 BC.

The tallest T-shaped pillars are carved with humanarms and hands. Other surfaces are decorated with scor-pions, snakes, gazelles, lions and vultures in high- andbas-relief. The vulture carvings in particular could offera clue to one of the site’s purposes. Some belief sys-tems, such as those of the Zoroastrians – who still existin small pockets in nearby Iraq and Iran – practise skyburial, in which the deceased are placed on a raisedopen-air platform. Carrion birds such as vultures arebelieved to transport the flesh of these dead up to theheavens. Archaeologists speculate this may have beenone of the functions of Göbekli Tepe.REVOLUTION: Archaeological theory has long heldthat the Neolithic Revolution, which heralded the begin-ning of agricultural cultivation and settled human com-munities, was driven by a gradual warming as the IceAge ended. This allowed prehistoric humans to begincultivating crops and herding animals, and in time tobuild places of worship. But evidence uncovered atGöbekli Tepe could turn this theory on its head. Somebelieve that it was not human settlements that herald-ed civilisation, but the innate human drive to worship.

If researchers are right, and hunter-gatherers con-structed Göbekli Tepe, then this represents a sea changefor archaeologists. This is because such foragers havetraditionally been depicted as small groups constant-ly on the move to follow their food resources – wildanimals and seasonally available plants.

With such a peripatetic life, the theory goes, theywould have lacked the time and the resources to con-struct large, permanent structures, as well as to sus-tain a distinct caste of craft workers and clergy. But atGöbekli Tepe, this is exactly what some believe happened.

So far, the site has revealed no sign of habitation,which points to it being purely used as a ceremonialcentre. The question remains though: how and why didthese hunter-gatherers build such a massive monu-ment? With less than 5% of the site excavated so far,the answer may still lie out there, buried beneath thecrumbling soil and rock to the north-east of "anl›urfa.

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Rewriting pre-historyExcavations at Göbekli Tepe have unearthed some spectacular finds

THE GUIDE HOTELS

ISTANBUL

ARMADA HOTELAhırkapı Sk. No. 24 Sultanahmet 34122T: (+90) 212 455 44 55F: (+90) 212 455 44 [email protected]

Rooms: 108 standard, superior and deluxe rooms,including 16 interconnected rooms and 2 rooms fordisabled guests.Business & Conference Facilities: 5 meeting roomsequipped with sound system and video equipment.Guest Services: Guest relations, private airport trans-fer, garage, 24-hour room service, dry cleaning, laun-dry, free Wi-Fi, luggage room and doctor on call.Wining & Dining: Armada Terrace Restaurant (indoorand outdoor dining), Armada Salon and Radio Bar.

AVANTGARDE HOTEL ISTANBULBüyükdere Cad. No. 161Levent 34394T: (+90) 212 337 04 44F: (+90) 212 347 33 [email protected]

Rooms: 63 deluxe, 4 superior deluxe, 14 grand deluxeand 3 residential suites.Business & Conference Facilities: Ballroom and 4meeting rooms.Health & Leisure Facilities: 1000-sq-metre day spa,indoor swimming pool, 2 saunas and 2 Turkish baths,a fitness centre, a Pilates/yoga studio and 5 thera-py rooms.Guest Services: Wi-Fi, 24-hour concierge, laundry anddry cleaning, airport transfer, valet parking andexpress check-in and check-out for residential suites.

Wining & Dining: The Buffet Restaurant (breakfast),Ace Restaurant, lounge (local and international cui-sine), Turkish and international cuisine, and El CieloTerrace Lounge (cocktail bar).

CROWNE PLAZA ISTANBULDolapdere Cad. No. 163 Harbiye, "i#li 34375 T: (+90) 212 291 60 80 F: (+90) 212 291 91 [email protected]

Rooms: 12 suites, 1 king suite, 38 club rooms, 44 stan-dard, 148 deluxe, 40 superior and 2 rooms for handi-capped guests.Business & Conference Facilities: 19 meeting rooms,rooftop ballroom, private meeting space and 4 guestrooms on the same floor, on-hand events planners.Health & Leisure Facilities: Health centre, heated swim-ming pool, hammam, massage and beauty services,hairdresser, sauna and steam bath. Guest Services: Courier, free Wi-Fi, dry cleaning, laun-dry, babysitter and in-room safe. Wining & Dining: Ege Restaurant (à la carte break-fast and dining), Palm Court Mediterranean Restau-rant, lobby lodge, club lounge, and Onyx Lobby Barand Patisserie.

DEDEMAN HOTELYıldız Posta Cad. No. 50 Esentepe 34340 T: (+90) 212 337 45 00F: (+90) 212 275 11 [email protected]

Rooms: 81 superior, 182 deluxe, 28 executive superi-or, 24 executive deluxe rooms, 5 junior, 2 deluxe, 2presidential suites and 4 rooms for disabled people.

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Finding a place to stay

The Ritz Carlton Istanbul

Dedeman Hotel


Armada Hotel

THE GUIDE HOTELS

Business & Conference Facilities: 17 conference roomsequipped with audio-visual equipment, 470-sq-metreballroom, and executive floor and lounge.Health & Leisure Facilities: Health club, swimming pool, jacuzzi, spa, resting room and gym. Guest Services: Free Wi-Fi, dry cleaning, laundry, hair-dresser, car hire, doctor, currency exchange, indoorparking and luggage storage. Wining & Dining: Turkuaz Restaurant (Turkish and inter-national cuisine), Lobby Lounge (buffet and cocktail bar)and Roof Bar (rooftop bar with live music).

ELITE WORLD ISTANBUL"ehit Muhtar Cad. No. 42 Taksim 34435 T: (+90) 212 313 83 83 F: (+90) 212 313 83 93 www.eliteworldhotel.com.tr [email protected]

Rooms: 232 deluxe rooms, 3 suites, 1 king suite, 7connected rooms and 2 rooms for disabled persons.Business & Conference Facilities: 9 meeting roomsand 250-capacity ballroom.Health & Leisure Facilities: Children’s swimming pool,heated indoor pool, Turkish bath, Finnish bath, sauna,massage service and fitness centre.Guest Services: Direct dial telephone, minibar, safetybox, Wi-Fi, air conditioning, hairdresser, laundry, iron-ing, dry cleaning, safe at reception, market, 24-hourroom service, doctor and babysitter.Wining & Dining: Breakfast lounge, jazz bar, lobbylounge, à la carte restaurant, indoor restaurant (inter-national, Ottoman and Turkish cuisine).

FOUR SEASONS HOTEL SULTANAHMETTevkifhane Sk. No. 1 Sultanahmet 34110T: (+90) 212 402 30 00F: (+90) 212 402 30 10www.fourseasons.com/istanbul

Rooms: 65 rooms, including 11 suites.Business & Conference Facilities: 347-sq-metre ball-room and pre-function area, suitable for small tomid-sized events, boardroom and meeting room. Health & Leisure Facilities: Fitness centre, sauna andmassage treatments (Balinese and aromatherapy).Wining & Dining: Seasons Restaurant (Mediterraneanand Turkish cuisine), the Lounge and the Blue Room.

HILTON GARDEN INN ISTANBUL GOLDEN HORNImrahor Cad. Dutluk Sk. Sütlüce 34445 T: (+90) 212 314 50 00F: (+90) 212 314 50 50www.hiltongardeninn.hilton.com.

Rooms: 114 single rooms, 89 double/twin rooms, 4suites and 3 rooms for persons with disabilities.

Business & Conference Facilities: 7 meeting rooms,ballroom, audio-visual equipment for hire and plentyof sunlight.Health & Leisure Facilities: 24-hour fitness centre.Guest Services: Safety deposit box, free Wi-Fi, laundry,currency exchange, valet parking and 24-hour PavilionPantry Market.Wining & Dining: Sumac Grill Restaurant (Turkish andinternational cuisine).

ISTANBUL MARRIOTT HOTEL ASIAKayı#da!ı Cad. No. 1/1 Ata#ehir 34750T: (+ 90) 216 570 00 00F: (+ 90) 216 469 29 35www.marriott.com

Rooms: 168 deluxe and 51 executive rooms, 18suites and 1 presidential suite.Business & Conference Facilities: 12 meeting rooms,2 business centres, executive boardrooms and tech-nical assistance.Health & Leisure Facilities: Fitness centre and spa,1 indoor and 2 outdoor pools, children’s fitness club.Guest Services: Wi-Fi, valet parking, babysitter, cur-rency exchange, limousine service and dry cleaning.Wining & Dining: Orange Southern MediterraneanRestaurant (all-day dining), 49 East Lounge and poolbar (summer only).

LE MERIDIENCengiz Topel Cad. No. 39 Etiler 34337 T: (+90) 212 384 00 00F: (+90) 212 384 00 [email protected]

Rooms: 259, including 97 deluxe rooms, 68 Bospho-rus room, 32 executive rooms, 18 junior suites, 18residential suites, 10 creative rooms, 9 executivesuites, 6 duplex suites and 1 presidential suite. Business & Conference Facilities: 7 meeting rooms,2 VIP boardrooms with audio-visual equipment anda 766-sq-metre ballroom divisible into two parts.Health & Leisure Facilities: Explore Spa and FitnessCentre, steam room, sauna, jacuzzi, Turkish hammamand indoor and outdoor heated pools.Guest Services: In-room laptop safe, individual cli-mate control, Wi-Fi, babysitter, currency exchangeand valet parking.Wining & Dining: La Torre Restaurant, Latitude Bar,Boaz Bar, Club Lounge, Pool Bar.

MÖVENPICK HOTEL ISTANBULBüyükdere Cad. 4. Levent 34330 T: (+90) 212 319 29 29 F: (+90) 212 319 29 [email protected]/istanbul

239


Mövenpick Hotel Istanbul

Istanbul Marriott Hotel Asia

Le Meridien

Elite World Istanbul

Four Seasons Hotel Sultanahmet

THE GUIDE HOTELS

Rooms: 249 rooms including 71 executive rooms, 21suites, 1 presidential suite and 2 rooms for physicallychallenged guests.Business & Conference Facilities: 520-sq-metre ball-room, 9 break-out rooms, 11 meeting rooms includingstate-of-the-art technology. Health & Leisure Facilities: Fitness centre, indoor pool,sauna, jacuzzi and massage services. Guest Services: Laundry, dry cleaning, in-room safe, 24-hour room service, Wi-Fi, safety deposit box at recep-tion, power generator, hairdresser, executive lounge,business centre, doctor, babysitter and free parking.Wining & Dining: AzzuR Restaurant (Mediterraneancuisine), BarAdoX (bar and lounge), GourmeT (choco-lates, cakes and pastries).

OTTOMAN HOTEL IMPERIALCaferiye Sk. No. 6/1 Sultanahmet 34400 T: (+90) 212 513 61 51 F: (+90) 212 512 76 [email protected]

Rooms: 16 premium sultan rooms and junior suites, 13premium vezir rooms and junior suites, and 20 superi-or rooms. Guest Services: Guest relations, doctor on call, lug-gage room, airport shuttle, free Wi-Fi, babysitter, 24-hour room service, laundry and dry cleaning, power gen-erator, free parking, car hire, currency exchange,fax/photocopying, ironing service, ticket and tour desk.Wining & Dining: Matbah Restaurant (Ottoman cui-sine) and Saltanat Bar.

PARK HYATT ISTANBULBronz Sk. No. 4 Tesvikiye, "i#li 34367T: (+90) 212 315 12 34F: (+90) 212 315 12 35 [email protected]

Rooms: 90 rooms, including 4 king suites, 1 execu-tive, 1 presidential and 1 diplomatic suite.Business & Conference Facilities: 2 meeting roomsfor up to 20 people.Health & Leisure Facilities: Outdoor pool, fitnesscentre, 3 treatment rooms and sauna.Guest Services: 24-hour room service, currencyexchange, parking, Wi-Fi and safety deposit box.Wining & Dining: The Prime Restaurant, The Terrace(summer only) wine bar and lounge area.

THE RITZ CARLTON ISTANBULSüzer Plaza, Elmada! Cad. No. 9 "i#li 34367 T: (+90) 212 334 44 44F: (+90) 212 334 44 55 www.ritzcarlton.com/[email protected]

Rooms: 244 rooms including 57 club rooms, 21 exec-utive suites, 1 presidential suite and the RC suite.Business & Conference Facilities: 1695-sq-metre ball-room, 9 meeting rooms and 2 executive boardrooms.Health & Leisure Facilities: Indoor pool, 24-hour fit-ness centre, Turkish bath, sauna, steam room, whirlpool,9 massage rooms and outdoor spa (summer only). Guest Services: Wi-Fi, concierge, valet parking, safe-ty deposit box, hairdresser, babysitting, laundry anddry cleaning.Wining & Dining: Çintemani Restaurant (all-day din-ing and à la carte dinner), lobby lounge (light mealsand afternoon tea), RC Bar, Bleu Lounge, club lounge.

ANKARA

MÖVENPICK HOTEL ANKARAYa#am Cad. No. 1Sö!ütözü 06520 T: (+90) 312 258 58 00F: (+90) 312 258 58 [email protected]/ankara

Rooms: 176 rooms, including 25 executive rooms,10 suites and 1 room for physically challenged guests.Business & Conference Facilities: 390-sq-metre ball-room and 9 meeting rooms for 8 to 450, all equippedwith state-of-the-art audio-visual technology. Health & Leisure Facilities: Fitness centre, indoorswimming pool, Turkish bath, sauna, steam bath,whirlpool and 4 massage rooms.Guest Services: Executive club lounge, business cen-tre, laundry, dry cleaning, 24-hour room service, Wi-Fi,safety deposit box at reception, hairdresser, babysitter,doctor, free parking and in-room electronic safe.Wining & Dining: Plus Restaurant (international andTurkish cuisine), lobby lounge and bar.

IZMIR

MÖVENPICK HOTEL IZMIRCumhuriyet Blv. No. 138Pasaport 35210 T: (+90) 232 488 14 14F: (+90) 232 484 80 [email protected]/izmir

Rooms: 185 rooms, including 36 executive rooms and17 junior suites and 1 king suite.Business & Conference Facilities: 10 modular ban-quet and conference rooms for 20 to 300 people.Health & Leisure Facilities: Pool, sauna, steam bath,gym, massage services, yoga/Pilates classes.Guest Services: Executive lounge, business centre,laundry, dry cleaning, 24-hour room service, Wi-Fi,safety deposit box at reception and hairdresser.Wining & Dining: Margaux Restaurant (internation-al cuisine), Mistral Bar (rooftop bar), Breeze Bar (lob-by bar), Swiss Cake (chocolates, cakes and pastries).

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Mövenpick Hotel Izmir

Mövenpick Hotel Ankara


Ottoman Hotel Imperial

Park Hyatt Istanbul

THE GUIDE LISTINGS

The Istanbul-Ankara rail line is being upgraded to ahigh-speed line and will be closed until the end of2013. However, there are many affordable flights link-ing all major cities in the country to both Istanbul and Ankara. Buses and taxies are also readily available.

242

While English is spoken by many Turkish businesspeo-ple, confirming whether a translator is needed forbusiness meetings is usually recommended. To get togrips with everyday Turkish phrases, there are manylanguage schools in major cities offering courses.

GOVERNMENTMINISTRIESOffice of thePresident 0312 470 10 00 Prime Ministry 0312 413 70 00Agriculture 0312 287 33 60 Defence0 312 402 61 00Energy0312 212 64 20 Foreign Affairs 0312 292 10 00Finance &Customs 0312 415 29 00 Education 0312 419 14 10 Industry & Trade0312-219 67 41Interior 0312 422 40 00 Ministry of Nutrition, Agriculture and Stockbreeding0312 287 33 60 Ministry of Family andSocial Politics0312 422 55 00 Ministry of Science, Technology and Industry. 0312 201 50 00 Ministry of EU 0312 218 1300 Ministry of Youth and Sports 0312 408 20 15

STATEINSTITUTIONSParliament0312 420 50 00 Chief of General Staff0312 402 61 00Southern Anatolia Project (GAP)0312 442 23 24 Supreme Administration Court0312 425 99 14 State Institute ofStatistics (DIE) 0312 417 64 40 State PlanningOrganisation (DPT) 0312 294 50 00 Foreign Trade (DTM) 0312 215 70 16 Press & Information 312 583 60 00Privatisation Administration (OB) 0312 430 45 60

ASSOCIATIONSABROADThe American-TurkishCouncil (+01) 202 783 04 83 US-TurkishIndustrialists andBusinessmen’sAssociation(+01) 202 776 77 70 The EU-Turkish Industrialists’ and

Businessmen’sAssociation(+32) 2 736 40 47

EMBASSIES(ANKARA)Australia 0312 459 95 00 Belgium0312 446 82 47 Bulgaria0312 467 20 71 Canada0312 409 27 00 France0312 455 45 45 Germany0312 426 54 65 Greece0312 448 06 47 Iran0312 427 43 20 Ireland0312 446 61 72 Israel0312 446 36 05 Italy0312 426 54 60 Japan0312 446 05 00 The Netherlands0312 446 04 70 Romania0312 427 12 43 Russia0312 439 21 22 Spain0312 440 17 96 Sweden0312 455 41 00

Syria0312 440 96 57 Ukraine0312 439 99 73 United Kingdom0312 455 33 44 United States0312 455 55 55

CONSULATESAustralia0212 262 93 15 Belgium0212 243 33 00 Bulgaria0212 281 01 15 Canada0212 251 98 38 China0212 299 26 34 Egypt0212 324 21 60 France0212 334 87 30 Germany0212 334 61 00 Greece0212 393 82 90 Iran0212 513 82 30 Ireland0212 482 18 62 Israel0212 317 65 00 Italy0212 243 10 24 Japan0212 317 46 00 The Netherlands0212 393 21 21

Romania0212 292 41 25 Russia0212 292 51 01Spain0212 270 74 10 Sweden0212 334 06 00Switzerland0212 283 12 82 Syria0212 232 67 21 Ukraine0212 663 26 73 UAE0212 279 63 48United Kingdom0212 334 64 00 United States0212 335 90 00

CONSULTANCY &ACCOUNTANCYSERVICESDeloitte0212 366 60 00 Yapı Kredi Yatırım0212 280 10 30

LEGAL SERVICESHergüner Bilgen Özeke0212 310 18 00 Güner Law Office0212 284 60 91

CREDIT CARDSAmerican Express/Garanti Bank444 0 333


THE GUIDE LISTINGS 243


Tea plays a big part in Turkish culture and is almostalways served at casual and formal meetings. To polite-ly decline an offer of food or drink, one may have torefuse a second time, as offering something twice isconsidered a sign of a person’s willingness to share.

A normal working week is Monday to Friday, usuallyfrom 9.00am until 6.00pm. However, in the summerand during the month-long religious holiday ofRamadan, office working hours may be different,with some places starting later and finishing earlier.

COURIER SERVICESAras Cargo0216 538 55 55Yurtiçi Kargo0212 365 23 65

CHAMBERS OFCOMMERCE &INDUSTRYTurkish Union ofChambers and Exchanges (TOBB) 0312 413 80 00 Istanbul Chamber ofCommerce (ITO) 0212 455 60 00 Aegean RegionChamber of Industry (EBSO) 0232 484 80 46 Ankara Chamberof Industry 0312 417 12 00 Ankara Chamber of Commerce (ATO) 0312 285 79 50 Adana Chamber of Commerce 0322 351 55 06 Adana Chamber of Industry0322 436 63 63

BUSINESSASSOCIATIONSForeign EconomicRelations Board (DEIK) 0212 339 50 00

InternationalInvestors Association 0212 272 50 94 Turkish Industrialistsand Businessmen’sAssociation (TUSIAD) 0212 249 19 29 Association ofIndependentBusinessmen andIndustrialists(MUSIAD) 0212 222 04 06

TRAVEL AGENCIESParagon0212 227 35 00 Sultan Tourism0212 241 31 78 Plan Tours0212 230 22 72 Barefoot Travel 0212 517 02 69

TOURISM INFOIstanbul Sultanahmet Square0212 518 18 02

TRAVEL – AIRAtatürk InternationalAirport0212 465 30 00 Air France0212 310 19 19 British Airways0212 465 56 88

KLM0212 310 19 00 Lufthansa0212 315 34 34 Turkish Airlines0212 463 63 63 Emirates Airlines0212 465 58 14

CAR HIRESun Rent a Car 0216 318 90 40

EMERGENCY Ambulance112Police155Fire110Directory11811

PRIVATE HOSPITALSAcıbadem0216 544 44 44 Anadolu Sa!lık Merkezi 444 42 76Dünya Göz Hastanesi(eye clinic) 0212 413 75 75 American Hospital0212 311 20 00 Florence NightingaleHospital0212 224 49 50 German Hospital0212 293 21 50 International Hospital0212 663 30 00

JFK Hospital0212 441 41 42 Hisar IntercontinentalHospital0216 524 13 00

CLINICSEuromed0216 414 62 82 Intermed Medical Centre0212 225 06 60ME – DI 0212 296 82 68

FOREIGNNEWSPAPERS/FOREIGNNEWS AGENCIESFinancial Times0312 438 27 35 Associated Press0312 428 24 41Reuters0212 350 70 00

LOCAL NEWSPAPERSHürriyet0212 677 00 00 Milliyet0212 505 61 11 Radikal0212 505 61 11 Referans0212 677 00 00 Sabah0212 354 30 00

TurkishDaily News0212 251 65 80 Today’s Zaman0212 639 34 50

TURKISH LESSONSBo!aziçi University 0212 257 50 39 Taksim Dilmer0212 292 96 96 Tömer0312 435 97 81 Akademi Dil Centre 0212 852 99 03

WEB SITES www.tcmb.gov.trwww.cmb.gov.trwww.mit.gov.trwww.mkutup.gov.trwww.ttk.gov.trwww.tubitak.gov.trwww.tse.org.trwww.tuba.gov.trwww.yok.gov.tr

TOURISMwww.bookinturkey.comwww.goturkey.com

LIFE INISTANBULwww.iksv.orgwww.istanbul.com www.timeoutistanbul.comwww.mymerhaba.com

THE GUIDE

SOCIETY & ETIQUETTE: Tea drinking is ubiquitous inTurkey and it is a common feature of both casualexchanges and business meetings. Offering once isconsidered incomplete, so to politely refuse any offer-ing of food or drink one may have to decline twice. Inthe same way, Turks will often politely refuse an offer-ing of food or drink on the first offer, but politely insist-ing a second time is regarded as a sincere sign of one’swillingness to share, at which point they may accept.Typical conversation openers should focus on the per-son’s origins, not on work. Showing interest in some-one’s health, family or other close relationships is alsopolite. Turkey is fairly cosmopolitan so it is generallyacceptable to behave in a manner typical to Europe.Women are generally safe walking alone; however, thismay be anomalous in eastern and rural parts of the coun-try, where a more conservative culture pervades.LANGUAGE: Turkish remains dominant throughoutthe country, and while many businesspeople speakEnglish, the rapid success of a large number of Ana-tolian businesses has seen the ratio of English speak-ers among Turkish businesspeople decline comparedto a decade ago. It is wise to confirm in advance whethera translator will be needed for a business meeting.English speakers are less prevalent in the servicesindustry (outside of hotels and tourist centres). Speak-ing some basic Turkish phrases is helpful in daily lifeand illustrates a degree of interest in Turkey that manybusinesspeople find valuable. Most major cities haveforeign language centres that offer Turkish courses. HEALTH: Turkey is a fairly developed country with a mod-erate climate, so chronic health problems are increas-ingly more challenging than acute diseases. Turkishfood is generally very healthy, fresh and enjoyable, andtypical of Mediterranean cuisine. Water, however, is aproblem and it is wise to drink only bottled water. Citiesgenerally have a selection of private international andlocal public hospitals, although private care will beexpensive without insurance. Contact your local embassyor ask your hotel for a recommendation if necessary.

BUSINESS HOURS: The working week in Turkey runsfrom Monday to Friday. Most corporate offices openat 9.00am and close at 6.00pm. Banks and govern-ment offices generally close at 4.00pm or 5.00pm.During the summer months, as well as the religiousmonth of Ramadan, it is possible that some officesmay start later and finish earlier. ELECTRICITY: Electricity comes in at 220 V and fol-lows the European standard, round two-pin plugs.Adapters are available at airports and neighbourhoodelectrical shops. It is also advisable to use a protec-tor for laptops, as there are frequent power surgesVISAS: Visas are required for citizens of most coun-tries, but are easily obtained upon arrival at anyinternational airport. Prior to entering passport con-trol, a visa should be purchased from a separate win-dow. Visas may also be purchased at the Turkishembassy of your country of residence before depar-ture. Visas for most European countries, the US,Canada and Australia are $20 or !15, and a multi-ple-entry visa lasts for three months.TIPPING: Many high-end restaurants will include a 10-15% gratuity charge listed as servis on the bill. It is nottypical to leave a tip at smaller establishments, thoughit is becoming more common to leave 5-10%. It is notcommon to tip a taxi driver unless it is deserved; how-ever, it is normal to round taxi fees to the nearest lira.TRANSPORTATION: Traffic in Istanbul, and less so inother large cities, is among the most costly challengesTurkey faces. While public transportation is expand-ing, it is best to avoid travelling during peak hours andplan in advance. Ankara, Izmir and Istanbul maintainfairly efficient tram and metro lines; however, thesesystems are not as extensive as those typically foundin Europe. The Istanbul-Ankara rail line is closed untilend-2013, as it is being upgraded to a high-speedline. Air travel to most Turkish cities is readily availablefrom either Istanbul or Ankara, and is quite afford-able. Taxis fares are calculated the same, day or night,and the meter runs even if the taxi is not moving.

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Facts for visitorsUseful information for new arrivals


THE REPORT Turkey 2012 ECONOMY ENERGY COUNTRY PROFILE BANKING TOURISM CAPITAL MARKETS INSURANCE REAL ESTATE CONSTRUCTION INDUSTRY TELECOMS & IT INTERVIEWS

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