Turkey 2015

CONTENTS TURKEY 2015

Great expectationsPage 27

The government’s ambitious econom-

ic targets for 2023 are getting a boost

from a declining current account

deficit, thanks partly to lower oil

prices. However, substantial structur-

al reforms are likely to be necessary

in order to regain the country’s strong

growth trajectory, including achiev-

ing the political stability needed to

attract more investor interest in

the state’s recent privatisation efforts.

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Snapshot: Turkey in figures

COUNTRY PROFILE A new page: Significant developments have

occurred over the last decade

Forging a new path: The country has been

through several changes and is set to make

new economic and political gains in the years

ahead

Viewpoint: President Recep Tayyip Erdoğan

TRADE & INVESTMENTOnwards and upwards: The country has

significant potential to boost trade and foreign

investment

Maximising potential: Efforts to pursue further

trade agreements

Interview: Richard Moore, UK Ambassador to

Turkey

Viewpoint: Dr Jim Yong Kim, President, World

Bank Group

ECONOMYGreat expectations: Structural reforms key to

regaining the economy’s positive trajectory

Interview: Mehmet Şimşek, Minister of Finance

Interview: Mark Lewis, Former Senior Resident

Representative in Turkey, International

Monetary Fund

A private line: The government continues

liberalisation efforts

Interview: Ömer Cihad Vardan, President,

Foreign Economic Relations Board of Turkey

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BANKING Keeping a watchful eye: The prospects for

growth are excellent so long as risks are

heeded

Interview: Erdem Başçı, Governor, Central Bankof the Republic of Turkey Interview: Ali Fuat Taşkesenlioğlu, CEO, Halkbank Entries and exits: The international presence inthe sector is set to change markedly Interview: Suat İnce, Deputy Chief Executive,Türkiye İş Bankası Interview: Hikmet Ersek, President and CEO,

Western Union

Loan rangers: The main players are alert to the

risk of the level of bad debt rising

Rate and see: The agencies’ verdicts shine a

revealing light on the sector

CAPITAL MARKETS To the marketplace: With its bourse easing

after a recent surge, the country looks to

regulatory reforms and multi-tier platforms to

encourage new listings

Interview: Vahdettin Ertaş, Chairman, Capital

Markets Board

Interview: İbrahim Turhan, Former Chairman

and CEO, Borsa Istanbul

INSURANCEProviding and expanding coverage: The

country’s insurance sector continues to offer

new and better products to a growing

population

Pensions boom: Newly passed legislation

ushers in a new era for private pension

contributions

Interview: Mehmet Bostan, General Manager,

Vakıf Emeklilik

Interview: M Uğur Erkan, CEO, Anadolu Hayat

Emeklilik

Talking takaful: Sharia-compliant insurance is

poised to receive government support

ISBN 978-1-910068-32-8

Editor-in-Chief: Andrew Jeffreys

Managing Editor, Asia: Paulius

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Editorial Managers: Joshua Blair, Geoff

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Group Managing Editor: Alistair Taylor

Chief Sub-Editor: Barbara Isenberg

Deputy Chief Sub-Editor: Martin

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Sub-Editors: Usman Ahmedani,

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Contributing Sub-Editor: Miia

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Analysts: Paige Aarhus, Jon Gorvett,

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Senior Editorial Researcher: Susan

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Editorial Researchers: Sara Costa, Billy

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Creative Director: Yonca Ergin

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Onwards & upwardsPage 18

An advantageous geographical position

means Turkey offers a high potential for trade.

With the economy long hampered by a heavy

dependence on imports, the government has

taken many steps recently to diversify mar-

kets, as well as cut the trade and current

account deficits. This has also helped to trans-

form the investment environment, with FDI

reaching record levels over the past decade.

CONTENTS TURKEY 2015

www.oxfordbusinessgroup.com/country/turkey

4

Made in TurkeyPage 78

Despite a slowdown in overall industrial

growth, Turkey’s demographic fundamentals

are helping fuel expansion in many segments,

from jewellery to metals, with a strong long-

term outlook for domestic retail. While fur-

ther growth may depend on broader recov-

ery in the EU, the defence and auto industries

are boosting exports and drawing investment.

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INDUSTRY & RETAIL Made in Turkey: Although industrial growth is

slowing, exports are up and a number of

segments have scope for expansion

Interview: Bora Yalınay, CFO, Ülker

Interview: Sadettin Korkut, General Manager,

Petkim Petrokimya Holding

High performance: The defence sector is

thriving with a range of new equipment and

systems being produced locally

Interview: Muharrem Dörtkaşlı, CEO, Turkish

Aerospace Industries

Iron in the soul: Metals industry will benefit

from an expected rise in demand

More precious: Legislative changes to further

boost growth of the jewellery industry

A leading light: Automotive sector sees a rise

in investment, output and exports

A growth market: Formalisation is being driven

by a new retail law as local outfits seek new

opportunities abroad

Slower growth: Although consumer sentiment

is weakening, the outlook remains positive

ENERGY Opportunity knocks: Taking advantage of low

prices to increase hydrocarbons supply

Liberalising power: The privatisation of assets

and infrastructure in the country’s electricity

sector continues

Trans-Anatolian steps: Natural gas is poised to

traverse the country through a new pipeline

project connecting Azerbaijan to Europe

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Interview: Besim Şişman, CEO and Chairman of

the Board, Turkish Petroleum

Still searching: Drilling for hydrocarbons

resources continues

Splitting the atom: Nuclear ambitions

encounter unexpected delays

CONSTRUCTION & REAL ESTATE Full speed ahead: Several large projects are

under way or in planning stages, while Turkish

firms are also in demand overseas

Keeping up with demand: The construction

and mining machinery and equipment

segment benefits from the vast amount of

activity taking place

Dialogue: Ergil Ersü, Chairman, Gama Holding,

and Orhan Paçacı, Member of the Executive

Committee and Shareholder, Mesa Holding

Interview: Emin Sazak, CEO, Yüksel İnşaat, and

Former President, Turkish Contractors

Association

Efficiency upgrade: Demand for insulation

surges due to regulations and growing

awareness

Safe as houses: Population and income growth

as well as strong foreign interest drive sector

expansion

AGRICULTUREReap what you sow: With the country already a

major agricultural producer, the government is

looking to consolidate growth

Good enough to eat: Turkey has made

important strides in food safety to meet EU

regulations and expand export markets

TRANSPORTOn the road: A spate of new highways, trains,

airports and other infrastructure projects are

in the works

Interview: Turgut Erkeskin, President,

Association of International Forwarding and

Logistics Services Providers

Interview: Mümin Kahveci, General Manager,

Istanbul Electric Tramway and Tunnel

Establishments

Age of rail: New investments are set to

improve and expand both intercity and

national rail connections

Chairman: Michael Benson-Colpi

Director of Field Operations: Elizabeth

Boissevain

Managing Director, Africa: Karine

Loehman

Country Directors: Solene Pignet,

Clémentine Hazeran

Field Operations Executive: Meltem

Okur

Field Operations Assistant: Arda Özgen

Project Coordinator: Firdevs İrem

Güller

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www.oxfordbusinessgroup.com

CONTENTS TURKEY 2015 5

THE REPORT Turkey 2015

Full speed aheadPage 114

The construction sector has been one of

Turkey’s leading drivers of GDP growth over

the past few years, worth about €28.1bn

at current prices as of end-2014, up 14.5%

on a year earlier. With some $700bn in

infrastructure spending in the works and

about 1m permits issued for new projects

in 2014, up 21% on the previous year,

growth in the sector looks set to continue.

On the roadPage 136

State-backed mega-projects in Istanbul are

leading the way in the rapidly expanding

transport sector. The Marmaray tunnel and

metrobus corridor now link the city’s Asian

and European sides, while national airport

capacity has doubled since 2003. The gov-

ernment push for transport infrastructure

shows no signs of slowing, with high-speed

rail links, bridges and tunnels in the pipeline.

Reap what you sowPage 130

A top global producer of seven crops,

in the top five for 35 others, and with

a third of its landmass devoted to farm-

ing, the country’s agriculture sector is

strongly positioned to provide for both

domestic needs and export markets.

While the sector’s share of GDP has

declined from 12.1% in 1998 to 7.2% in

2013, its value has expanded each year.

Young and tech-savvyPage 146

A technologically adept population is

driving continued growth in the tele-

coms sector’s mobile voice and data

segments, which should only rise fur-

ther with the impending introduction of

4G. In the IT sector, fast-paced growth

in internet usage looks set to continue

with the roll-out of fibre-optic cables.

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TELECOMS & IT Young and tech-savvy: Demographic forces are

driving mobile up-take and expansion

Who you gonna call?: The take-off of business

process outsourcing

Next generation: The country rolls up its

sleeves to launch its 4G mobile network

Servers of joy: Mobile networks and fibre-optic

cables are expanding to meet demand

Interview: Mehmet Nalbantoğlu, CEO,

KoçSistem

HEALTHSmooth operators: Indicators are improving

under a far-reaching government programme

Interview: Hasan Ulusoy, Chairman, Nobel İlaç

EDUCATION & RESEARCH Walking the walk: The government is investing

heavily to achieve its education targets

Interview: Turgut Şenol, General Manager,

Teknopark İstanbul

Showing promise: Government incentives and

increased private sector participation are

helping to boost the sector

TOURISM Diverse appeal: An increasingly versatile tourist

offering is ensuring continued sector growth

Making room: Rising visitor numbers have

prompted a rush of international hoteliers to

the country

TAX Grant Thornton

Clarifications coming: A new income tax act is

in the making

Drawing down duties: A look at how tax law

deals with corporations

Attracting attention: Recommendations for

improving the investment climate

LEGAL FRAMEWORK Kılıç and Partners

Regulating for growth: Legal changes are

guiding and enabling foreign investment

across the board

Viewpoint: Harun Kılıç, Partner, Kılıç and

Partners

THE GUIDE What’s in a name?: A small tower with a big

history

Upon a time: History and viticulture beckon

visitors to a small treasure offshore

A good night’s rest: Some hotels to consider

for your stay

Listings: Useful phone numbers for local

services

Facts for visitors: Useful information for

first-time and returning visitors

SNAPSHOT 6


Turkey in figures

FDI, net inflows, 2004-14 ($ bn)

SO

UR

CE:

Wo

rld

Ban

k

0

5

10

15

20

25

1413121110090807060504

SO

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CE:

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me

nt

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pp

ort

& P

rom

oti

on

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en

cy, D

elo

itte

Net FDI in real estate, 2008-14 ($ bn)

0

1

2

3

4

5

2014201320122011201020092008

SO

UR

CE:

TU

IK

Tourism sector income, 2004-14 (bn $)

0

7

14

21

28

35

1413121110090807060504

SOURCE: TUIK

Manufacturing 15.8

Wholesale & retail trade 12

Transport & storage 12

Real estate activities 9.8

Agriculture, forestry & fishing 7.1

Construction 4.6

Public admin., defence & social security 4.2

Professional, scientific & technical activities 3.4

Financial & insurance activities 3

Contribution to GDP by economic sector, 2014 (%)

Production of selected crops, 2013-14 (m tonnes)

SO

UR

CE:

TU

IK

0

1

2

3

4

5Green teaHazelnutsOrangesOlivesApplesGrapes

20142013

SNAPSHOT 7


SO

UR

CE:

TU

IK

Fixed-line & mobile subscribers, 2004-14 (m)

0

16

32

48

64

80

No. of mobiletel. subscribers

No. of fixed tel. subscribers

1413121110090807060504

Amount raised via IPOs by industry, 2014 ($ m)

SO

UR

CE:

Pw

C

0

40

80

120

160

200

Financial services

Real estate Pharma & biotech

Food &beverage

Ind. goods & services

Insurance

SO

UR

CE:

BP

Sta

tist

ical

Re

vie

w o

f

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rld

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erg

y 2

01

4

Natural gas consumption, 2003-13 (bn cu metres)

0

10

20

30

40

50

1312111009080706050403

Construction GDP, 2004-14 (TL bn, current prices)

SO

UR

CE:

TU

IK

0

16

32

48

64

80

1413121110090807060504

SOURCE: IMF

2013 2014 2015 2016 2017

GDP, current prices (TL trn) 1.57 1.72 1.88 2.06 2.25

GDP per capita, current prices (TL) 20,708.57 22,448.41 24,262.19 26,210.20 28,314.31

Total investment (% GDP) 20.96 21.91 22.19 22.25 22.37

Inflation, avg. consumer prices 6.64 5.30 5.00 5.00 5.00

(% change)

Vol. of imports of goods & services 11.33 7.17 8.54 10.15 10.16

(% change)

Vol. of exports of goods & services 3.14 4.01 4.97 5.31 5.42

(% change)

Population (m) 75.81 76.71 77.60 78.48 79.34

General gov't revenue (TL bn) 559.27 610.38 659.24 721.23 790.44

General gov't revenue (% GDP) 35.62 35.45 35.01 35.06 35.19

Total gov't expenditure (TL bn) 593.21 649.33 701.92 768.17 839.32

Total gov't expenditure (% GDP) 37.79 37.71 37.28 37.35 37.36

Gov't net lending/borrowing (TL bn) 12.29 8.10 4.10 4.09 5.88

Gov't net lending/borrowing (% GDP) 0.78 0.47 0.22 0.20 0.26

Gov't gross debt (TL bn) 557.29 609.26 660.64 716.34 774.63

Gov't gross debt (% GDP) 35.50 35.38 35.09 34.83 34.48

Select economic indicators, 2013-17

Internet banking transactions, 2005-14 (TL bn)

SO

UR

CE:

TB

B

0

600

1200

1800

2400

3000

20142013201220102005

SO

UR

CE:

TU

IK

*2

01

0 =

10

0

Industrial production index, 2005-14*

0

30

60

90

120

150

2014201320122011201020092008200720062005

9

Renewed efforts to address economic challenges

Concerns remain regarding freedom of the press

Election cycle creating a bevy of new developments

Government is maintaining strong regional ties

Country Profile

COUNTRY PROFILE AT A GLANCE

The country aims to make significant economic gains by 2023

Many have hailed Turkey’s notable development per-

formance over the past decade, and for good rea-

son. The country averaged 5.4% growth between

2003 and 2013, one of the highest rates in the world.

This was accompanied by drops in joblessness and

poverty, as well as gains in school enrolment, home-

ownership and life expectancy.

Furthermore, in November 2012, the republic

received its first investment-grade rating since 1994

– a testament to the success that policymakers have

had in reducing sovereign debt and external imbal-

ances. As part of the statement, Fitch also cited the

country’s strong sovereign, bank and household bal-

ance sheets as influencing the upgrade decision.

INDICATORS: Due to weak economic conditions and

tight monetary policies adopted by the central bank,

the country’s GDP growth rate was 2.9% in 2014,

which was lower than the 3.3% predicted for the year

as borrowing costs curtailed domestic demand. More

worrying, perhaps, was the continuing drop in net

foreign direct investment (FDI) inflow, from $12.7bn

in 2013 to $12.14bn in 2014, and the highest unem-

ployment rate in five years at 11.3%, which cast a

shadow over hopes of generating growth.

Declines in the current account deficit notwith-

standing, the downtrend in FDI also means that

Turkey is still heavily dependent on foreign portfo-

lio inflows to meet its funding needs. Yet the gov-

ernment is taking the long view, confident that

progress will continue if the country can maintain

political stability and leverage its competitive advan-

tages. These include a large domestic market, young

population, resilient financial system and strategic

geographic location. Buoyed by these strengths,

Turkey aims to become one of the world’s 10 largest

economies by the year 2023, when the republic will

mark the centennial of its founding.

INFRASTRUCTURE & TECHNOLOGY: A key pillar of

Vision 2023, as the long-term national development

plan is called, is infrastructure development. Over the

last decade public expenditure on transportation

infrastructure as a percentage of GDP has nearly

doubled, allowing for the construction of new ports,

airports, tunnels, railway lines and divided highways

nationwide. This upward spending trajectory is set

to continue, with the 2015 budget estimated to be

TL473bn (€166.54bn) as various infrastructure proj-

ects are planned or under way. Much of this capital

will need to come from the private sector, which

means that the state must improve the tendering

process for public works.

The quality of Turkey’s information and commu-

nications technology infrastructure has improved

markedly in recent years, with the domestic fibre net-

work reaching roughly 245,000 km as of end-2014.

According to the Information and Communication

Technology Authority, total broadband subscribers

reached 40m in the third quarter of 2014, more than

tripling since 2008, when the total was only 6m.

Given Turkey’s young demographic profile, it is

perhaps not surprising that the country is a leader

in mobile phone, internet and social media use. Aver-

age per person mobile phone talking time was 370

minutes per month in the third quarter of 2014,

which was well above Europe’s average of 170.

EDUCATION: Continued socioeconomic progress

will also require meaningful education reforms. More

students are entering the system, but Turkey still

lags behind similarly developed nations in enrol-

ment. Further, Turkish pupils achieved relatively low

scores on the 2012 International Student Assessment

(PISA), which revealed performance gaps between

male and female test-takers, and between test-tak-

ers in urban and rural areas. Skills gaps are also an

issue, with many local employers reporting that col-

lege graduates are unqualified for entry-level jobs.

To address these and other challenges, education

officials made big changes to the sector in 2012,

when the ruling Justice and Development Party (AK

Party) introduced a new “4 + 4 + 4” educational mod-

10

A new pageSignificant developments have occurred over the last decade


COUNTRY PROFILE AT A GLANCE

el dividing the school system into three four-year seg-

ments: primary school, middle school and second-

ary school. Equally important, the model increased

the mandatory enrolment period from eight to 12

years. Though many welcomed this development,

especially the extension of the mandatory enrol-

ment period, others criticised the move as a dis-

guised attempt to increase student enrolment at

the religiously oriented imam hatip schools.

ENERGY: Another challenge is the country’s lack of

energy resources. Turkey ranks among the top 25

nations globally for energy consumption, and domes-

tic electricity demand is rising by 6% per year. Yet

Turkey produces only small amounts of oil and nat-

ural gas, which has led to severe import dependence.

The national energy import bill reached $56bn in

2014, and is expected to hit $64bn by 2017.

In response, the state is implementing an all-of-

the-above energy strategy calling for more on and

offshore drilling, greater use of coal, additional devel-

opment of renewable sources, and the construction

of the country’s first nuclear power facilities. Efforts

are also under way to further liberalise the gas mar-

ket, which is dominated by the loss-making state

operator, BOTAŞ. Yet many have questioned why lib-

eralisation is proceeding so slowly; whether foreign

partners can be found to assist in exploration; how

a nuclear programme will be funded; and if regula-

tors can create market conditions that attract gen-

uine renewable investments.

To achieve its goal of becoming an energy transit

state, Turkey also aims to build regional gas pipeline

projects. According to officials from Turkey and Azer-

baijan, the Trans-Anatolian Pipeline (TANAP), which

will deliver 16bn cu metres of gas per year from the

Shah Deniz II field, will be operational in 2017. Turkey

itself will receive 6bn of the gas volume, and collect

handsome transit fees.

GEOGRAPHIC IMPLICATIONS: Turkey’s favourable

geography – it is surrounded by four bodies of water

and sits at the intersection of the Middle East, Cen-

tral Asia and Europe – also makes it a trading hub.

From 2002 to 2014 the volume of Turkish exports

rose more than four-fold, jumping from $36bn to

$157.6bn. By 2023, Turkey aims to achieve an annu-

al export volume of $500bn. Reaching this target will

largely depend on the performance of the manufac-

turing sector, especially the automotive, chemicals,

textiles and metals industries.

Turkey’s central location, combined with its sun-

ny climate, plethora of famous historical sites and

welcoming culture, also makes it an attractive tourism

destination. The 2023 development target for the

tourism sector is 50m annual visitors, up from an esti-

mated 31.78m visitors in 2012. Some industry stake-

holders are concerned that the rapid growth in the

tourism sector is threatening the integrity of some

sensitive areas; however, tourism has had an unde-

niably positive impact on the economy through mul-

tiplier effects. In 2014 the sector contributed 580,000

jobs, which accounts for 2.2% of total employment.

GLOBAL IMAGE: As more foreigners come to Turkey,

more Turks are also leaving their footprint abroad.

The country now has the second-highest number of

major international contractors in the world, with

firms especially active in MENA, where infrastructure

demand is rising fast. While competing in nearby

states, Turkish contractors typically benefit from an

understanding of local market conditions and cul-

tural ties dating back to Ottoman times.

Indeed, Turkey’s history as the last seat of the

Islamic caliphate, along with its current status as a

secular Muslim democracy, gives it a unique role in

global affairs. It is the only country, for example, to

hold membership in both NATO and the Organisa-

tion of Islamic Cooperation (OIC). However, some

regard Turkey’s Islamic identity as a barrier in its EU

accession negotiations, which remain stalled.

When the AK Party came to power in 2002, then-

Foreign Minister Ahmet Davutoğlu, who is now prime

minister, signalled that the new administration would

adopt a “zero problems with neighbours” policy that

prioritised greater regional cooperation. To some, this

vision has been challenged by the outbreak of the

Arab Spring, and by the Syrian conflict in particular.

In light of the unrest, the AK Party, which has repeat-

edly called for Syrian President Bashar Al Assad to

step down, maintains that the “zero problems”

approach has simply been adjusted to account for

other considerations, including the need to protect

human rights and new regional conflicts.

Indeed, Turkey’s soft power may have grown under

a more principled foreign policy, especially in the

Arab world. The Turkish International Cooperation and

Development Agency, which is building hospitals

and schools in some of the most impoverished places

on earth, is also playing a key role in establishing and

enhancing the country's image internationally. Yet,

given the rising number of journalists in Turkish jail

cells, as well as restrictive legislation on publish-

ing, more progress could still be beneficial at home.

11


The country is among the top 25 economies in terms of energy usage, with demand rising 6% per year

COUNTRY PROFILE OVERVIEW

As of 2013 the country had a per capita income of $10,971

The country is now in the midst of a lengthy politi-

cal cycle, with the local elections in March 2014

being followed in August by the country’s first-ever,

direct presidential elections. 2015 will also see the

country’s 18th general election, currently sched-

uled for June 7. Thus, these are very much political

and busy times for Turkey, a characteristic given

some edge by the turbulence of 2013, when the

country saw a sharpening of disagreement over the

direction of Turkey’s development and the role of

its leaders and institutions.

Nonetheless, the resounding victory of the sitting

government in the March 2014 local elections –

which were accepted by all sides as a ballot on the

national government, too – demonstrated the wide-

spread and continuous support for the leadership

of Recep Tayyip Erdoğan. This 60-year old leader

from the poorer, Kasımpaşa neighbourhood of Istan-

bul has come to dominate and symbolise modern

Turkey more than any other politician of the recent

Republican era. He now leads a nation that has grown

greatly in confidence, wealth and international

stature since his party took power in 2002.

PLANS FOR THE FUTURE: Now, the government is

looking forward to 2023, the centenary of the foun-

dation of the Turkish Republic, as a target year for

the achievement of a string of developmental goals.

If these are reached, Turkey will be among the world’s

top 10 countries in terms of the size of its econo-

my, with its per capita income around twice what it

was in 2013 at $10,971 and the country’s GDP

planned to grow from $822.13bn in 2013 to $2trn.

In doing so, it will also have likely become a region-

al political leader, powerfully influential in capitals

that range from the western Chinese frontier to the

Aegean Sea, and from Europe to the Congo. Whether

such ambition will be achieved remains to be seen,

but for sure, there is a great spirit of dynamism in

Turkey today – and national pride in the country’s

achievements, both contemporary and historical.

LAND OF EMPIRES: Today’s Anatolian Turks trace

their ancestry back to a group of tribes in eastern

central Asia that began westwards migration from

the 6th century onwards. Bringing with them their

Turkic language – the modern versions of which are

still spoken over a geography ranging from Western

China to Azerbaijan – and converting to Islam, the

Seljuk Turks were the first to establish a permanent

presence in Anatolia, starting from the 11th centu-

ry. There, they clashed with the Byzantine Empire,

beginning a conflict that would last until 1453, when

the Seljuk’s successors, the Ottomans, captured Con-

stantinople, now Istanbul.

By then, the Ottoman Empire had expanded into

the Balkans as well. It added territories over the fol-

lowing decades until reaching a golden age under

Sultan Suleyman the Magnificent in the 16th cen-

tury. By that time, most of the Middle East was under

Ottoman rule, along with North Africa, the Cauca-

sus, the Crimea and South-eastern Europe as far

north as the gates of Vienna. A multi-ethnic empire,

Ottoman Turkish, Greek, Arab, Kurdish, Caucasian

and Balkan subjects dominated trade, culture, poli-

tics and warfare in the Mediterranean, Black and

Red Seas for decades, while also holding the west-

ern end of that great medieval bundle of overland

trade routes, the Silk Road.

The Ottoman Empire then began a protracted

decline, however, in the centuries that followed, as

the power of an industrialising Europe and resurgent

Russia gradually pushed the Ottomans out of the Cau-

casus, the Crimea and the Balkans, then, in the late

19th and early 20th centuries, out of North Africa

and the Middle East. The final denouement came with

the First World War, when the Ottoman Empire joined

the losing side and was subsequently partitioned

and shared between the victorious Allies.

Confined to Anatolia and a sliver of Thracian land,

a period of great turmoil then ensued out of which

modern Turkey was born. In this, Mustafa Kemal

The Turks can trace their

ancestry back to

confederations of tribes

from central Asia that

began migrating in the

6th century, before

settling in Anatolia

around the 11th century.

13


Anatolia was also the seat

of power for the Ottoman

Empire, which stretched

across most of the Middle

East and North Africa, as

well as part of

south-eastern Europe.

Forging a new pathThe country has been through several changes and is set to make neweconomic and political gains in the years ahead


Atatürk emerged as the leader of the resurgent Turk-

ish nationalists. Fighting off an invading Greek army

in western Anatolia and French occupation along

the country’s south-east coast, Atatürk also manoeu-

vred the British out of their occupation of Istanbul

and established the Turkish Republic in 1923, after

the last sultan had gone into exile. An unprecedent-

ed modernisation drive then began. The Latin alpha-

bet was adopted, in place of the Arabic, modes of

dress were changed, a command economy was insti-

tuted, and a national, rather than religious, interpre-

tation of history and the modern state was enforced.

A NEW ERA: Atatürk died in 1938, with İsmet İnönütaking over as president in what was largely an

authoritarian state, under a single political party –

the Republican People’s Party (CHP), founded by

Atatürk and the ancestor of the modern opposition

grouping. İnönü kept Turkey neutral during the Sec-

ond World War, while also allowing the first free

elections in 1950. However, the elections led to his

ouster by the Democratic Party of Ceylal Bayar and

Adnan Menderes, who then became prime minister.

Menderes was, however, overthrown in a military

coup in 1960 and subsequently executed. The mili-

tary restored civilian power soon after though, with

a succession of coalition governments following, led

once again by İnönü for a time, then SüleymanDemirel and Bülent Ecevit, who became major polit-

ical leaders of the 1970s, 1980s and 1990s.

Two more military coups followed, in 1971 and

1980, with the 1970s also seeing the Turkish mili-

tary’s intervention in Cyprus in 1974, which estab-

lished the current de facto division of the island. The

1980s premiership of Turgut Özal was also signifi-

cant, as his government launched a major liberali-

sation programme for the economy.

The post-Cold War period – Turkey has been a

member of NATO since 1952 and fought on the

Allied/UN side in the Korean War – saw the coun-

try’s first female prime minister, Tansu Çiller, and

the signing of a Customs Union with the EU. Turkey

has been pursuing membership of the EU and its

predecessors since the Ankara Agreement of 1963.

The 1990s were also a period of successive and

short-lived coalition governments, with Çiller going

into coalition with the Welfare Party in 1996. A “soft

coup” was subsequently unleashed by the military

in 1997 that saw this government ejected from

office. The coalitions that followed were also unsta-

ble, however, with major financial crises striking in

2000 and then again in 2001.

In 2002, general elections thus saw a resounding

victory for the Justice and Development Party (AK

Party), which had grown out of the Welfare Party, but

with a more politically and economically liberal agen-

da. Able to establish single party rule for the first time

since 1960, the AK Party won subsequent general

elections in 2007 and 2011. Its term of office has

also seen a major shift in power away from the mil-

itary – many members of which have since been

prosecuted for their role in the 1997 soft coup and

alleged role in other conspiracies. There has also

been a pronounced shift in power away from the old,

secularist, Kemalist elite that had dominated Turk-

ish politics since before the Second World War.

HEAD OF STATE: Under the current constitution, the

president is the head of state, with the power to

appoint the prime minister (usually the person able

to command a majority in parliament), the ministers

of government, (on the prime minister’s advice) the

Chief of the General Staff, the members of the Con-

stitutional Court and other top legal officials.

He or she also presides over the National Securi-

ty Council, at which the leading members of the gov-

ernment meet with the chiefs of the security forces,

and the Council of Ministers. He or she also appoints

rectors of universities and the members of a string

of key – and sometimes controversial– bodies, such

as the Higher Education Council. The president may

also issue decrees, although in most cases, these must

also be signed by the prime minister.

The president may also exercise a power of veto

over bills presented by the parliament, returning

them for further debate. If parliament continues to

approve the bill, however, the president is obliged

to sign the bill into law, or call a referendum. Until a

constitutional amendment was passed by just such

a referendum in 2007, the president was elected for

a single, seven-year term by parliament, rather than

by popular vote. The presidential election in August

2014 was the first time the head of state had been

elected by universal suffrage. The president can also

now run for a maximum of two, five-year terms.

EXECUTIVE POWER: Most political power lies cur-

rently with the prime minister, who is usually the

head of the largest party in parliament and who

appoints ministers and others to the cabinet. The

prime minister has considerable powers of appoint-

ment within state agencies, as well as being able to

dissolve parliament and call elections within the

five-year term of the assembly. The prime minister’s

14

�smet �nönü headed the Republican People’s Party and took over the presidency after Atatürk died in 1938

The Justice and

Development Party came to

power in 2002, and since

then the country has seen

a significant shift away

from military involvement

in political decisions.

The president is the head

of state and has the power

to appoint the prime

minister, government

ministers, the Chief of the

General Staff, members of

the Constitutional Court

and other top legal

officials, among others.



government drafts and submits laws to the parlia-

ment while also deciding policy for, and giving direc-

tion to, state ministries, departments and agencies.

LEGISLATIVE MATTERS: The full name of the sin-

gle-chamber parliament is the Grand National Assem-

bly of Turkey (TBMM). It is composed of 550 deputies,

elected for four-year terms under a proportional

representation, party-list system. Parties must also

get at least 10% of the national vote in order to qual-

ify for seats in the TBMM, a threshold which has

worked strongly against minority and regional par-

ties. Independents may stand without requirement

for the 10% threshold, however, with some region-

al and minority parties thus unofficially fielding can-

didates in this category. The 2011 elections pro-

duced a victory for the AK Party, which garnered

49.83% of the vote, and 327 deputies. Runners up

were the CHP, with 25.98% of the vote and 135

deputies, followed by the National Action Party, with

13.01% of the vote and 53 deputies. Some 6.57% of

the vote went to “independent” candidates, many

of who subsequently became Peace and Democra-

cy Party (BDP) deputies. The BDP was a pro-Kurdish

party, based mainly in the south-east. Some 12 oth-

er parties ran candidates, but all received less than

1.5% of the vote and failed to gain any deputies. Bills

must be debated and passed by the TBMM before

going to the president for final approval. In 2013-

14, faced with a large number of bills, the TBMM

began bundling these together in a manner that has

been controversial. The current speaker of the TBMM

is Cemil Çiçek of the AK Party.

LOCAL AUTHORITIES: Turkey is divided into 81

provinces, with these further divided into 892 dis-

tricts. Each district has its own municipality, while

cities and towns within a district may also have a

municipal authority – the larger ones have several

– while cities of more than 750,000 inhabitants also

have a greater metropolitan municipality. For this rea-

son there are around 2856 municipalities country-

wide, following a reduction in numbers after some

smaller units were amalgamated ahead of the 2009

local elections. Each municipality is headed by an

elected mayor, who presides over an elected coun-

cil. There are also village councils in rural areas, and

sub-district units in urban areas, known as mahalles,

headed by a muhtar, who is also subject to election.

Local government is a significant force in Turkish

politics, as well as in the local economy. In 2013

around 30% of all public investment in the country

was carried out by local government units, with

approximately 80% of these carried out by munici-

palities. They are active in local health care and edu-

cation provision, as well as investing in transport

and communications infrastructure, environmental

protection and even tourism.

THE LAW: The judicial system divides first into civil-

ian and military branches, with each of these in turn

dividing into administrative and ordinary. In the mil-

itary branch, the Military Court of Cassation is the

highest ordinary body, presiding over military courts

and beneath them, disciplinary courts. On the civil-

ian side, the Court of Cassation is the highest ordi-

nary court, with district courts of appeals, then

courts of civil law and courts of criminal law com-

ing under this. On the administrative side, the Coun-

cil of State is the highest judicial body, followed by

district administrative courts, then administrative

courts and lastly tax courts.

Over the whole hierarchy sits the Constitutional

Court, with the Court of Jurisdictional Disputes on

the same level, deciding on issues between judicial

bodies. The High Council of Judges and Prosecutors

(HSYK), established in 1982, makes decisions on

appointments and promotions of judges, with HSYK’s

powers expanded under 2010 constitutional reforms

from seven to 22 members. Police and gendarmerie

(the rural police force) are affiliated to the Ministry

of the Interior, while prisons and detention centres

are affiliated to the Ministry of Justice.

OUTLOOK: The 2015 period is likely to be dominat-

ed by electoral activity, as the rival parties vie for the

presidency, followed by general elections to decide

on the government itself. In August 2014, one of the

earliest results in the first of these critical ballots

was Erdoğan’s presidency. This is widely expected to

lead to a sharp change in the role and powers of the

position too, as he was elected by popular will, rather

than decided by parliamentary vote.

As Erdoğan’s presidency continues it is likely to

develop a more active, chief-executive character

than the position previously did, with one challenge

likely to be that of achieving greater consensus with

those that voted for other parties, while also forg-

ing ahead with the kind of development the presi-

dent wants. The presidency may also likely have a

significant effect on the vote in the 2015 general

elections. The long history of the country and the

lessons of its turbulent past will likely stand

Turkey in good stead though, as it moves through a

packed agenda towards the republic’s first centennial.

15


In urban areas, sub-districts are known as mahalles and each is headed by a local official, or muhtar

Turkey is divided into 81

provinces, with these

further divided into 892

districts. Each district has

its own municipality, while

cities and towns within a

district may also have a

municipal authority. Cities

of more than 750,000

inhabitants also have a

greater metropolitan

municipality.

The Constitutional Court

presides over the entire

judicial system, while the

High Council of Judges and

Prosecutors makes

decisions on the

appointment and

promotion of judges.

COUNTRY PROFILE VIEWPOINT

President Recep Tayyip Erdo€an

Since the establishment of the republic in 1923,

Turkey has been in a state of constant flux. Due to

domestic and global developments, the country was

marred by political and economic instability for

decades. The economy was hindered by political set-

backs, growth was underperforming and the coun-

try struggled with skyrocketing, chronic inflation.

By the end of 2002, however, Turkey had entered

a new era of stability, prosperity and economic devel-

opment under the stewardship of the Justice and

Development (AK) Party. Hand in hand with demo-

cratic reforms, the country has significantly improved

its investment environment. With a staunch belief

in the entrepreneurial spirit of the private sector, the

current administration has embarked on a compre-

hensive reform programme that over the years has

created a robust business climate in which the pri-

vate sector has flourished.

Turkey’s economic growth, led by the private sec-

tor, has yielded impressive results in many areas,

such as macroeconomic stability and socioeconom-

ic development. Over the past 11 years, the econo-

my has grown by an average of about 5% a year in

real terms. As a result, the size of the economy

reached $820bn by the end of 2013, up from $230bn

at the end of 2002. Inflation has meanwhile been

tamed down to the single digits, budget discipline

has been achieved and public debt has been reduced

from 74% of GDP in 2002 to 36% in 2013.

We have also made sure that our economic poli-

cies improve people’s socioeconomic conditions. In

this regard, per capita income has more than tripled,

reaching about $11,000, while poverty has been

drastically reduced. As an illustration of this, back in

2002 the portion of the population that was living

on less than $4.30 a day was more than 30%. With-

in a decade, this figure had been reduced to 2.9%,

and we remain determined to eradicate it complete-

ly. Alongside this decrease in poverty, a new middle

class has emerged and spurred economic growth.

Political and economic stability, together with a

favourable investment climate, have also acted as a

magnet for foreign investors. Attracting foreign

direct investment (FDI) has been one of the main pil-

lars of our economic development policy. To this

end, in 2003, we introduced a new FDI law granting

foreign investors equal treatment to local investors;

guaranteeing their rights and the transfer of prof-

its; allowing them to purchase real estate in Turkey;

and providing them with the mechanisms for set-

tling international disputes. Moreover, we reinforced

the legal framework with effective institutions, estab-

lishing, under the auspices of the prime ministry,

the Investment Support and Promotion Agency of

Turkey, which serves and assists inbound direct

investors and reports directly to the prime minister’s

office. These efforts have yielded concrete results.

Turkey has attracted more than $140bn of FDI since

2002, compared to a total of less than $15bn dur-

ing the preceding eight decades.

I believe that this trend will continue apace. We

have embarked on a new economic journey that will

create more and more opportunities in Turkey. We

have set specific targets to achieve by 2023, the

centennial of the republic, and after a decade of

impressive economic performance, we have not

become complacent. Our targets for 2023 include

making Turkey one of the top ten economies in the

world with a GDP of $2tn, increasing GDP per capi-

ta to $25,000 and boosting the country’s exports to

$500bn. Also counted among the 2023 targets are

important upgrades to Turkey’s education, health

care and energy infrastructure.

We have already launched many of the infrastruc-

ture projects that will pave the road to 2023, and I

am happy to see foreign investors contributing on

this journey. As the prime minister of the Republic

of Turkey, I invite foreign investors to invest here,

and I give them my assurance that we will support

and assist them at every stage of their engagement.

16

A new journeyPresident Recep Tayyip Erdo€an, on his country’s economic rise


17

Trade & InvestmentSeeking to cut the trade and current account deficits

Exports reached an all-time high in 2014

Decline in oil prices lowers energy import bill

Foreign direct investment levels returns to growth

TRADE & INVESTMENT OVERVIEW

Great strides have been made in diversifying Turkey’s markets

Turkey has spent the last decade trying to maximise

the potential of its geographical position and abili-

ty to expand its economy with export-led growth.

While this has been hampered by a heavy depend-

ence on imports and a bulging current account

deficit, the country has made great strides in grow-

ing trade and diversifying markets.

With strong domestic growth and a sense of eco-

nomic stability following the difficulties of the 1990s

and the 2001 banking crisis, the country has been

able to radically transform the investment environ-

ment, garnering record numbers for foreign direct

investment in the last 10 years.

TRADE DEFICIT: In many respects 2014 was typical

of Turkey’s recent trade performance. The country

ran a significant trade deficit as it has in successive

years since the global financial crisis. In 2014 exports

grew by 3.9% to $157.6bn, while imports totalled

$242.2bn, a drop of 3.7%. As such the republic is run-

ning a trade deficit of $84.5bn, or around 10% of GDP.

This is the result of a multitude of factors. Even in

the pre-crisis years when Turkish exports were grow-

ing in double digits, the country was running a large

trade deficit. In 2007, for example, exports grew by

25.4% to $107.3bn, but the deficit was still a size-

able $62.8bn. This is indicative of the structural lim-

itations of the economy, with export and domestic

growth and production highly reliant on imports.

Indeed, according to the World Economic Forum’s

“Global Enabling Trade Report 2014”, intermediate

goods accounted for 61.3% of total imports in 2012,

with industrial supplies (primary and processed)

accounting for 45.5% and parts and accessories

accounting for 10.8%. In such circumstances, the

country has to run a large foreign trade deficit and

current account deficit to achieve strong growth.

Indeed, since 2006 the external trade deficit has

only been below 9% of GDP once, in 2009, when the

economy contracted by 4.8%. Similarly, the current

account deficit has only been below 5% of GDP once

in the last seven years, again in 2009. The structur-

al problems of the economy are also exacerbated

by Turkey’s dependency on energy imports.

In 2012, for example, net energy imports account-

ed for 73% of energy use in Turkey, according to the

World Bank. Turkey’s energy import bill stood at

$55.9bn in 2012, or 23.6% of the total value of

imports. This has been a chronic problem for the

country and a significant contributing factor to its

balance of payments problem.

ENERGY IMPORTS: As the government targets

becoming one of the top-10 largest economies by

2023, the demand for energy is likely to increase. The

government is adopting a range of measures to

lessen the country’s energy dependence and cut

the import bill. The primary policy is to boost domes-

tic energy production through the roll out of a nuclear

energy programme. The government plans to bring

the private sector on board to build three nuclear

plants in the next decade, cutting some $7.2bn from

the annual natural gas bill.

The government has already signed contracts with

a Russian firm, Rosatom, and a Japanese-French con-

sortium of Mitsubishi Heavy Industries, Itochu Cor-

poration and GDF Suez for the construction of the

first two nuclear plants on the Mediterranean and

Black Sea coasts, respectively.

The construction of the country’s first nuclear

plant near Mersin on the Mediterranean coast start-

ed in April 2015. Initially expected to begin genera-

tion in 2019, the Akkuyu plant is now likely to start

operations by 2020, while the second facility in Sinop

is expected to be operational by 2023.

However, the current account deficit is narrow-

ing: the 2014 deficit decreased to $45.8bn from

$65bn in 2013, according to the Turkish Central

Bank. In its “World Economic Outlook April 2015”

report, the IMF estimates Turkey’s ratio of current

account deficit to GDP to narrow to 4.2% of GDP in

2015 from 5.7% of GDP in 2014 thanks to a substan-

As the government aims to

become one of the

top-10 largest economies

by 2023, the demand for

energy is likely to increase.

The government is thus

adopting a range of

measures to lessen the

country’s energy

dependence and cut the

import bill.

18

Onwards and upwardsThe country has significant potential to boost trade and foreign investment



tial fall in the cost of energy imports. As an energy

importer, lower oil prices have benefitted Turkey and

are positively impacting the current account. The

price of Brent crude was at $45.25 per barrel in April

2015 – its lowest level since March 2009.

GOLD TRADE: In addition to energy imports, the

other major distorting factor for Turkey’s trade bal-

ance has been gold. In 2012 net gold trade record-

ed a surplus of almost $6bn on the back of a deal to

send gold to Iran as payment for natural gas and oil

imports. However, as the US closed a loophole in its

sanctions regime against Iran in the second half of

2013, these exports declined. Indeed, in 2013, Turkey

recorded a net gold trade deficit of almost $12bn,

as it replenished gold stocks while taking advantage

of cheaper prices in the international market.

In 2013 gold imports reached some 302.3 tonnes,

more than double the level one year earlier when

imports totalled 120.8 tonnes. This massive fluctu-

ation in gold trade had a substantial impact on the

country’s trade deficit for 2013. Indeed, excluding

the gold trade, exports grew faster than imports in

2013. Furthermore, excluding energy and gold

imports, Turkey’s current account deficit looked

much more healthy, standing at less than 1% of GDP.

In 2014 gold imports declined sharply, totalling 130.9

tonnes, according to data from Borsa Istanbul.

TARGET MARKETS: The prospects for foreign trade

and the current account in 2015 look promising.

The IMF says Turkey’s economic growth is likely to

increase to 3.1% in 2015, up from 2.9% in 2014, as

consumption will be boosted by lower energy prices.

Turkish exports have also become more competitive

as a consequence of a depreciating lira in 2013-15.

The country’s export growth is likely to be helped

by the recovery of its leading target markets. The slow

but steady recovery of the eurozone bodes well for

Turkish exports. Although the government has looked

to diversify Turkey’s export markets, the EU as a

whole remains a critical part of the republic’s trade

performance, accounting for 41.5% of total exports

in 2013 (down from close to 60% a decade earlier)

and 43.5% in 2014. The eurozone is showing clear

signs of recovery, growing 0.3% in the fourth quar-

ter of 2014 as a whole, while its largest economy,

Germany, expanded by 0.7%. The European Commis-

sion is forecasting growth in 2015 of 1.3%, which

would be the area’s best outcome since 2011 when

it grew by 1.6%. Meanwhile, the European Central

Bank has raised its GDP forecasts for 2015 and 2016

and projected 2.1% growth in 2017, the first time in

a decade that it has forecasted growth above 2%.

This augurs well for Turkey, especially considering

the impact the fallout from the Arab Spring has had

on its other main export market. Turkish exports to

the Near and Middle East declined by 16.1% to

$35.6bn in 2013 and to $35.4bn in 2014. As such,

the region’s share in Turkish exports fell from 27.8%

in 2013 to 22.5%. Excluding this unstable region,

Turkey is well placed to grow exports across all

regions. The country’s leading exports are automo-

tives, textiles and chemicals. One potential growth

market could be Iran. Given the loosening of the US

sanctions regime, Turkey’s neighbour could realise

its potential as a destination for Turkish goods. His-

torically, Turkish exports to Iraq and Iran have large-

ly run in parallel. However, since the introduction of

sanctions, their paths have diverged. Iraq is now

Turkey’s second-biggest export market after Ger-

many, with exports reaching some $10.9bn in 2014,

while Iran ranks tenth with around $3.9bn worth of

exports, according to TurkStat.

FOREIGN INVESTMENT: Beyond the general trade

environment, the government is also looking to bol-

ster foreign direct investment (FDI) to fund the cur-

rent account deficit. An uptick in FDI could help the

country to reduce its dependence on intermediate

imports and thus reduce the trade deficit in the

manufacturing and industrial sectors. It can also

help the country to develop higher-value products

and transfer knowledge to the local economy.

Turkey has certainly improved its ability to attract

foreign investment in the last decade. Put simply,

19


Top 10 countries by import, 2014 (bn $)

SOU

RCE:

TU

IK

0

6

12

18

24

30

SpainIndiaSouthAfrica

FranceIranItalyUSGermanyChinaRussia

Lower oil prices have reduced the cost of energy imports

The country’s export

growth is also likely to be

helped by the recovery of

its leading export markets,

such as the EU, which

accounted for 43.5% of

total exports in 2014.


between 2004 and 2014, the country attracted 8.5

times more FDI ($123.7bn) than it did in the whole

of the previous 80 years. And yet since a peak of

$22bn in 2007, Turkey’s FDI performance has been

stuttering. In 2013 the country received $12.4bn in

FDI, a decrease of 6% on the previous year, accord-

ing to the central bank. However, 2014 saw a slight

improvement to $12.5bn. The country’s sluggish per-

formance is the result, to some extent, of a weak

export environment. This is particularly true in the

automotive sector, a significant recipient of FDI, and

an industry that exports the majority of its products.

With Europe gradually recovering from its long

recession, the opportunities for export-led FDI growth

in Turkey are improving. Indeed, for the first time,

Turkey was ranked as one of the most promising

economies for FDI between 2013 and 2015 on the

UN Conference on Trade and Development “World

Investment Report 2013”. The government has cer-

tainly taken great strides to attract more FDI. In April

2012, for example, then-Prime Minister Recep Tayyip

Erdoğan (now the president) announced a package

of measures to incentivise investment including

export tax exemptions, value-added tax exemptions

and refunds, employment insurance support and

interest rate support.

Turkey has also been growing its base of special

economic zones with 59 technology development

zones (40 of which are currently operational) aimed

at bolstering research and development innovation

across the country, 289 organised industrial zones

(212 of which are operational) and 20 free zones

(of which 19 are operational). All of these zones

offer investors a range of exemptions and incentives

to support investment.

OBSTACLES: However, challenges remain to boost

FDI in the country. The corporate tax rate has been

brought down to 20% from 35% and foreign investors

are subject to exactly the same regulations, levies

and laws as domestic companies, however, taxation

remains a major concern for investors. According to

EY’s Turkey Attractiveness Survey 2013, corporate

tax remains an issue for potential investors.

Turkey ranks 56th out of 189 economies for pay-

ing taxes in the “World Bank Doing Business 2015”

Report. The bureaucracy surrounding tax payment,

as well as payment rates, is preventing the country

from a higher ranking. In August 2013 the Revenue

Administration altered its interpretation of build-

operate-transfer (BOT) agreements, effectively mean-

ing that investments made in a BOT project could

now be subject to taxation.

Fırat Yalçın, a partner at Pekin & Pekin, an Istan-

bul-based law firm, told OBG that the tax ruling is a

significant change in the taxation of BOT. “The rul-

ing is likely to significantly increase the tax burden

of investments made through BOT, and although the

tax burden may not have any major effect on the gov-

ernment budget, considering that investors will

include such cost items when bidding for public-

private projects, it will impact the cost of invest-

ment to the government,” he said.

Higher interest rates since January 2014 may also

have a negative effect on FDI given that it increas-

es the cost of money. While this is unlikely to deter

investors, coupled with the general economic envi-

ronment, it may lead to a wait-and-see attitude.

Indeed, the interest rate environment is likely to have

an impact on large-scale infrastructure projects in

the country, financed by private and foreign capital

predominantly on a BOT basis.

OUTLOOK: However, there is substantial potential

for FDI in the country. Turkey’s location, population

and longer-term growth potential make it an attrac-

tive option. In the short term, the weaker lira will also

offer opportunities, in terms of establishment costs

and export potential for foreign investors.

Indeed, the coming year is likely to see Turkey’s

trade deficit shrink as a number of factors converge

to boost exports. The return of growth to Europe,

the growth potential of the Iranian market, a weak-

er lira and weaker domestic demand all point to an

upsurge in exports, while imports are likely to decline.

20

FDI, net inflows, 2004-14 ($ bn)

SOU

RCE:

Wor

ld B

ank

0

5

10

15

20

25

20142013201220112010200920082007200620052004

In 2014 foreign direct investment reached $12.5bn

Turkey has been expanding

its number of special

economic zones, with 40

technology development

zones, 212 organised

industrial zones and 19

free zones currently

operational. All the zones

offer a range of

exemptions and incentives

to support investment.


TRADE & INVESTMENT ANALYSIS

The country scores relatively well for trade and investment freedom

Turkey’s trade record over the last few years has been

relatively impressive. Exports have risen substantially,

if erratically. In 2006, exports stood at $85.5bn. By 2014,

the figure reached a record high of $157.6bn. Howev-

er, imports have also grown rapidly, reaching $242.2bn

in 2014. This trade deficit, which reached 10% of GDP

in 2014, has been a perennial problem for the coun-

try. The country is looking to change this balance and

has placed better export performance at the heart of

its growth strategy up to 2023, the centenary of the

Turkish Republic. The government is targeting exports

of $500bn by that date as part of a plan to reach an

annual GDP figure of $2trn (up from around $800bn

in 2014) and a per capita income of $25,000 (up from

$10,400 in 2014). The country is certainly well placed

to bolster its trade volumes, both for import, export

and re-export. Turkey’s geographic location gives it

proximity to the markets of Eurasia, Africa and the Mid-

dle East. Some 56 countries lie within a four-hour flight

of Turkey, a swathe of countries with around 1.5bn

people and export potential of up to $10bn, according

to EY. The republic has also developed the infrastruc-

ture to maximise this trade potential.

FREER TRADE: The country scores relatively well on

the Heritage Foundation’s Index of Economic Freedom

2015 for trade freedom and investment freedom.

Turkey’s overall score of 63.2 ranks it 70th globally.

However, it scores 84.6 on trade freedom and 75 on

investment freedom (with a score above 70 denoting

that a country is mostly free and a score above 80 sig-

nifying that it is free). Turkey also scores well in the World

Economic Forum’s “Global Enabling Trade 2014” report,

ranking 46th overall, 34th for domestic market access

and 26th for its transport infrastructure. According to

the report, Turkey also has a maximum score, along with

34 other countries, on Customs transparency. But this

generally liberal trade regime will only get Turkey so far.

The government has also been pushing hard to con-

clude comprehensive and limited free trade agree-

ments (FTAs) with several partners to bolster trade.

The republic has 17 FTAs in force, is in negotiations

for a further 13 and has begun preliminary discussions

to commence negotiations on a further 10 with coun-

tries or country blocks including the US and Canada.

These FTAs have benefitted Turkey. In the years from

2000 to 2012, trade with FTA partners outperformed

the country’s overall trade. According to a November

2013 article by Ceren Savaser at Herdem Attorneys on

Mondaq.com, total exports in this period increased by

446%, while Turkish exports to FTA partners rose by

551%. By 2012 Turkey’s exports to FTA partners had

reached $14.5bn, compared to overall exports of

$152.5bn. In the same period, total imports to Turkey

increased by 340%, whereas imports from FTA partners

increased by 280%. By 2012 they had reached $10.7bn,

or 4.5% of the total. As the statistics suggest, Turkey’s

FTA trade, while relatively small, has outshone the coun-

try’s general trade performance. Moreover, it has ben-

efitted disproportionately from its FTAs compared to

its partners. These countries have a 4.5% share in

Turkey’s imports, but a much more impressive 9.5%

share in its exports. Out of Turkey’s 17 FTAs, seven part-

ners ranked in the top-40 export destinations in 2012

(Egypt, Israel, Georgia, Lebanon, Morocco, Switzerland

and Tunisia). While the government has struggled in

general terms to boost exports without a concomitant

increase in imports, the country has had no problems

in remaining competitive with its FTA partners. Turkey’s

general trade deficit stood at $84.1bn, or 10.7% of GDP,

in 2012. However, with FTA partners, the country was

running a $3.9bn trade surplus.

NEGOTIATIONS: It is hardly surprising that the govern-

ment is keen to conclude more FTAs. In April 2014 the

country signed an agreement with Malaysia; negotia-

tions with Singapore and Peru are progressing rapidly.

The Turkey-Malaysia FTA is targeted to boost bilateral

trade to $5bn by 2018 from around $1.1bn currently.

The two countries will also abolish visa requirements

for their citizens, and Malaysia has agreed to invest

$1.5bn in the Turkish economy across several sectors

In 2014 Turkey concluded

an agreement with

Malaysia, with the aim to

boost bilateral trade to

$5bn by 2018, while

negotiations with

Singapore and Peru are

progressing rapidly.

21


The country is looking to

change its trade balance

and has placed better

export performance at the

heart of its growth strategy

up to 2023, the centenary

of the Turkish Republic. The

government is targeting

exports of $500bn by

that year.

Maximising potentialFurther trade agreements are in the works

TRADE & INVESTMENT ANALYSIS

from transport infrastructure to health care. The gov-

ernment also began a second round of FTA negotia-

tions with Peru in January 2014. According to Peru’s min-

ister of foreign trade and tourism, Magali Silva, while

negotiations could take up to four years, the ministry

is hopeful they will be concluded sooner. Turkey’s FTA

negotiations with Singapore began in 2014. One of the

sticking points in the negotiations has been Singa-

pore’s services sector and the potential impact it could

have on the local economy. Indeed, while Turkey has

benefitted from such agreements in the past decade,

the government is trying to remain vigilant about the

potential damage that agreements with highly compet-

itive nations could have on the local economy.

ACROSS THE ATLANTIC: One of the main concerns

for Turkey’s trade policy currently is the potential Transat-

lantic Trade and Investment Partnership (TTIP), or FTA

between the US and the EU. Under the terms of the

Customs union between Turkey and the EU, established

in 1996, Turkey is obliged to apply the same tariffs as

the EU does to industrial products and processed agri-

culture products imported from third-party countries.

As such, if TTIP were signed, US products would get pref-

erential access to the Turkish market, while Turkish

products would gain no reciprocal benefit when enter-

ing the US market. The agreement could therefore have

a deleterious effect on bilateral trade with the US.

The trade balance between the two countries is

already in the US’s favour. In 2014 US exports to Turkey

were worth $12.7bn, while Turkish exports to the US

reached $6.3bn. Nonetheless, exports to the US are

growing rapidly. In 2012, they grew at 22%, almost

twice the rate of exports to the rest of the world, and

in 2014 they were up 12.4% year-on-year. Companies

exporting automotive parts, machinery parts, and iron

and steel have all gained a substantial foothold in the

US market. In order for exports to the US to continue

growing, Turkey is likely to look for a bilateral FTA with

its North Atlantic counterpart. Discussions have been

held regarding the commencement of FTA negotia-

tions, but there are impediments to the talks that go

beyond technicalities on the free movement of goods.

In any negotiations, the US is likely to raise concerns

about areas like freedom of press and the lack of trans-

parency in public procurement.

CHALLENGES: Among the steep challenges that still

need to be met to boost trade and investment, one of

the biggest is the issue of intellectual property and

counterfeit goods, which hampers both foreign invest-

ment and progress on FTAs. Turkey remained on the

watch list of the Office of the US Trade Representative

(USTR) in 2014. In a report from that year, the USTR

noted that several successful enforcement initiatives

led to the prosecution of individuals selling counter-

feit medicines online and the seizure of printing press-

es and materials used to counterfeit pharmaceutical

packaging, as well as the seizure of pirated books, fake

food products and counterfeit cancer treatments.

Nonetheless, the report said, “US rights holders con-

tinue to raise serious concerns regarding the export

from, and trans-shipment through, Turkey of counter-

feit and pirated products. In particular, industry has

expressed concern about the manufacture of counter-

feited luxury goods, digital media and textiles.” Enhance-

ment of Turkey’s copyright and intellectual property leg-

islation could thus give a sizable boost to trade.

Another issue whose resolution could have large

benefits for investment is the elimination of visa require-

ments for Turkish citizens visiting Europe’s Schengen

area. This took a step forward in May 2015, when the

EU trade commissioner and Turkish interior minister

announced a decision to revise the framework and

expand the scope of the EU Customs union, including

eventual visa liberalisation. Turkey has gained much

from the Customs union in terms of attracting foreign

investors. Its proximity to both the EU and the Middle

East, as well as its liberalised trade environment with

many of the countries in its hinterland, make it a desir-

able location for production and export – a case illus-

trated by high FDI levels in its automotive industry. If

Turkey is to get its external financing on a surer foot-

ing and meet its 2023 targets, FTA negotiations with

a host of countries will be crucial in the coming years.

22

Top 10 countries by export, 2014 (bn $)

SOU

RCE:

TU

IK

0

4

8

12

16

20

IranUAESpainRussiaUSFranceItalyUKIraqGermany

Exports reached a record high of $157.6bn in 2014

The growth in free-trade

agreements is likely to be

beneficial for the country’s

FDI stock. Indeed, Turkey

has already been able to

benefit from its Customs

union with the EU as a

means of attracting

foreign investors.


TRADE & INVESTMENT INTERVIEW

Richard Moore, UK Ambassador to Turkey

From an economic standpoint, how does the UK view

the importance of its relationship with Turkey?

MOORE: The relationship between our two countries

goes back a long way and has been rooted in econom-

ic and trading issues from the day the first English

ambassador arrived in Turkey in 1583. As Europe, and

the UK in particular, has reoriented itself towards more

export-led growth over the past few years, there has

been a real focus on building better trading relation-

ships with emerging markets. Turkey is right on Europe’s

doorstep and, as such, is a country on which European

nations should focus. In 2010 the UK and Turkey agreed

on an ambitious plan to double trade by 2015 based

on 2009 figures, and I can happily say we are current-

ly on track to meet this goal.

What industries pose the greatest potential in terms

of foreign involvement in the Turkish economy?

MOORE: UK companies are active in Turkey across a

wide range of fields. Some 2400 UK companies oper-

ate here, including household names such as BP, Shell,

Vodafone, Compass, HSBC, Tesco, B&Q and Harvey

Nichols. We focus our efforts where we can bring

expertise and experience to Turkey. The City of London

is working to support Istanbul’s plans to become a

major financial centre. We are also currently focusing

on three other high-value areas.

One is nuclear energy, where there are real oppor-

tunities for British and other European firms to help

Turkey develop capacity. The plans for three nuclear pow-

er plants have created demand for the expertise of all

types of companies, for example, engineering consul-

tancy firms. Another area of focus for us is healthcare,

in which the current Turkish government has invested

heavily since taking office. The construction of the third

Istanbul airport will also provide significant opportu-

nities for international companies. The sheer scope of

the project necessitates the involvement of many dif-

ferent specialty companies, such as design firms, high-

tech engineering consultancies and specialists in the

public-private partnership model. Overall, we look very

favourably on the various infrastructure improvements

upon which Turkey is currently embarking, and our

companies are committed to sharing their expertise in

order to help the country reach the ambitious devel-

opment goals of its 2023 vision. UK companies are also

increasingly partnering with Turkish companies in the

engineering and construction sectors to work togeth-

er in third country markets.

What more can the government of Turkey do to

attract increased foreign investment?

MOORE: Turkey has come a long way economically,

especially in the last decade or so of the AKP govern-

ment’s tenure. Overall the Turkish government is very

open to foreign investment and keen to encourage it.

The country has made great strides in this area since

opening up to increased international involvement in

the late 1980s under Turgut Özal. That said, when it

comes to various ease of doing business indices, Turkey’s

ranking is not commensurate with its importance to the

global economy, as the 16th largest economy in the

world. There seems to be a general consensus among

policymakers that they need to deliver new measures

to drive foreign direct investment, such as reducing bar-

riers to entry and encouraging further deregulation,

as well as implementing key supply side structural

reforms (e.g. in education) if the Turkish economy is to

develop its higher-value added export capacity.

Foreign investors want political stability allied to the

rule of law, as well as transparency and consistency in

the implementation of legislation. The EU accession

process, in its active phases, has been a very signifi-

cant driver of these types of reforms. That is one of the

reasons the UK is so strong an advocate of Turkey’s EU

vocation. I am confident that progress will continue to

be made over the coming years and that Jim (“BRICS”)

O’Neill, the British economist, was right to put the “T”

into MINTS – the countries with the best chance

of providing the new economic giants of the 2050s.

23


Open doorsOBG talks to Richard Moore, UK Ambassador to Turkey

TRADE & INVESTMENT VIEWPOINT

Dr Jim Yong Kim, President, World Bank Group

The founding father of the Turkish Republic, Mustafa

Kemal Atatürk, said, “Economic development forms the

backbone of the ideal of Turkey, which is free, independ-

ent, ever stronger and more prosperous”. Turkey has

made great strides in the realisation of this ideal, thanks

to a solid track record of macroeconomic management

and structural reforms. It is thus fitting that the gov-

ernment, led by Prime Minister Recep Tayyip Erdoğan,

has set ambitious targets for 2023, the centennial of

the foundation of the Republic.

At the World Bank, we are also setting some ambi-

tious goals: to end extreme poverty by 2030 and boost

shared prosperity for the bottom 40% in developing

countries. We will therefore need the support of all mem-

ber countries of the World Bank, as well as the private

sector, civil society and private foundations.

Turkey, given the significant progress it has made in

its own development, will play a key role. The country’s

economic achievements are an inspiration to many

developing nations. Indeed, we have started a project

with the government to share its development lessons

with policymakers throughout the world. Already, our

teams are bringing delegations from various countries

to Turkey for knowledge exchanges: Malaysia and Koso-

vo were interested in the health sector; Iraq in the social

security system; and Mauritania in the use of informa-

tion technology. Let me share just three of the many

lessons Turkey can offer the development community.

First, an example that is particularly close to my heart,

as someone who has worked in public health for many

years, is that Turkey took less than a decade to achieve

universal health coverage. The introduction of the

Health Transformation Programme in 2003 initiated a

root and branch reform of the health system. Since

1990, infant mortality has fallen by two-thirds and

maternal mortality by 80%, while average life expectan-

cy has risen by 10 years.

Countries can learn much from Turkey’s policies, as

well as the sequencing of reforms to create quick wins

for the population and overcome the resistance of

vested interests. In our flagship training course on

health reform, we highlight the country as a case study

of success in achieving universal health coverage.

Second, Turkey’s energy sector stands out among

many emerging market economies for the strength of

its regulatory framework, as well as its ability to attract

significant private investment. It is also notable for its

focus on renewable energy as a key element of a green-

er growth path. The country has largely eliminated

energy subsidies, which are fiscally costly and discour-

age much-needed investments in energy efficiency. As

a result, energy prices reflect market costs.

Third, lessons have been learnt from the devastat-

ing effects of the 1999 Marmara Earthquake and an

improved capacity to anticipate, mitigate and respond

to the risks of natural disasters. The Istanbul Seismic

Risk Mitigation and Emergency Preparedness Project

is a great example of a city-wide effort to improve

resilience to shocks that are likely to strike along the

North Anatolian fault line. In our “2014 World Devel-

opment Report: Risk and Opportunity – Managing Risk

for Development”, Turkey is featured prominently for

its work in this area. I could also mention progress in

the country’s banking system and fiscal consolidation.

Of course, Turkey’s own development agenda is not

complete. Many challenges remain: from boosting the

participation of women in the labour force to increas-

ing the skill levels of a young and growing labour pool;

from raising domestic savings to attracting more for-

eign direct investment to make growth less depend-

ent on short-term capital from abroad.

In addition, we have seen around the world how

important it is for citizens to feel they have a voice and

a stake in their country’s development. To be sustain-

able, economic prosperity has to provide opportunities

for all. This is an objective I know we share with Turkey’s

citizens and policymakers.

The World Bank is grateful for our partnership with

Turkey because it is based on mutual learning and

on a shared quest for the best development solutions.

24

Valuable lessons Dr Jim Yong Kim, President, World Bank Group, on the development lessons Turkey can share with the world


25

EconomyAmbitious growth targets on the horizon for 2023

Current account deficit in decline due to lower oil prices

Structural reforms needed to strengthen the economy

Privatisation efforts continue despite some challenges

ECONOMY OVERVIEW

Turkey has tripled its national income in the decade to 2013

Throughout 2014 Turkey had to shoulder its fair

share of international financial turbulence, espe-

cially in terms of currency volatility. However, despite

investor concerns, the country has largely retained

its appeal as a success story in the region with rel-

atively sound long-term growth potential, provided

the appropriate structural reforms are enacted.

The past decade has seen the economy thrive as

Turkey took significant steps forward in its develop-

ment. A young and growing population in a strate-

gically important location have marked Turkey as a

potential economic heavyweight. However, concerns

remain over renewed political uncertainty and the

private sector’s exposure to external debt.

FULL SPEED AHEAD: The government has set an

ambitious target of becoming one of the top-10

economies in the world by 2023, to coincide with

the centenary of the founding of the Republic of

Turkey. However, the optimism that gave birth to

this goal has dimmed somewhat, as external factors

have placed significant stress on the economy in

recent months. While it is better positioned than a

decade ago, the economy has also become more vul-

nerable and investors are beginning to question

whether Turkey can keep pace with the growth trends

of the past decade given its structural imbalances.

Since 1999 Turkey has recorded average annual

growth of 3.9%, making it one of the best perform-

ing emerging markets. Growth fell below 3% in 2014,

but there is potential for an uptick in 2015, with

support coming from domestic investment and the

prospect of modest growth in the eurozone.

GROWTH BY NUMBERS: While construction has

been a leading source of growth in recent years,

recording double-digit growth in constant prices in

2010 and 2011, this slowed to 2.2% in 2014. Accord-

ing to the Turkish Statistical Institute (TurkStat), the

largest contributors to the economy in 2014 were

manufacturing, with a 15.8% share of GDP in cur-

rent prices; wholesale and retail trade, with 12%;

transport and storage, at 12%; and real estate activ-

ities, with 9.8%. As a whole, services accounted for

58.4% of GDP in constant prices in 2014, while indus-

try contributed 28.7% and agriculture brought in the

remaining 12.9%, TurkStat figures show.

DEMOGRAPHIC DIVIDEND: Turkey’s fundamentals

bode well for strong economic growth. With a mar-

ket of 77.7m people as of the end of 2014, nearly

half of which are under the age of 30, there is room

for rapid expansion. As the country faces a falling

dependency ratio, which stood at around 50% in

2013, there will be less pressure on recurring gov-

ernment expenditure and a growing workforce to

generate government revenues. Government poli-

cies on labour and education are likely to have a

large impact on whether this potential is realised.

Additionally, Turkey’s strategic trade location, with-

in four hours’ flying distance of 1.5bn consumers,

presents opportunities for export-led expansion and

an attractive incentive for foreign direct investment.

TRACKING PROGRESS: Over the course of the last

decade, these factors have worked in the country’s

favour, as evidenced by a long run of sustained eco-

nomic growth. Between 2003 and 2013 Turkey’s

economy grew by a compound annual growth rate

of 4.4%, according to data from TurkStat, making it

one of the top performers in the G20. In 2010 and

2011 alone the country recorded 9.2% and 8.8%

year-on-year (y-o-y) growth. Indeed, Turkey has expe-

rienced a decade of heady growth and development

following the uncertainty of the 1990s, which were

marked by coalition governments, an insurgent war

in the east and the 2001 banking crisis.

STATE MEASURES: The ruling Justice and Develop-

ment Party (AK Party) has not been shy about laud-

ing its own achievements. In a November 2013

speech, Ali Babacan, deputy prime minister respon-

sible for the economy, reported that Turkey had

tripled its national income in the decade to 2013,

surpassing $17,000 in per capita national income at

27


Between 2003 and 2013

Turkey’s economy grew by

a compound annual

growth rate of 4.4%,

making it one of the top

performers in the G20. In

2010 and 2011 alone the

country recorded 9.2% and

8.8% year-on-year growth.

Great expectationsStructural reforms are key to regaining the economy’s positive trajectory

ECONOMY OVERVIEW

purchasing power parity. In real terms, GDP rose by

over 60%, while GDP per capita was up 40%.

The government has also been keen to stress its

stewardship of public finances. During the height of

the euro crisis at the end of 2011, for example,

Turkey’s performance compared favourably with that

of its European neighbours. Turkey’s budget deficit

at the time stood at 2.5% of GDP, within the EU

benchmark of 3% and well below that of its troubled

European neighbour, Greece, at close to 10%. A

decade of single party governments has also brought

public debt under control. At nearly 80% of GDP in

2001, it fell to 36% by 2013, substantially below

Greece (142.8%), Italy (119%) and Portugal (93%).

By 2016, the World Bank predicts it will reach 33%.

MAKING THE GRADE: The country was rewarded for

its course correction in 2013, when Moody’s Investors

Service raised Turkey’s sovereign bond rating to

investment grade, bumping it up from “Ba1” to “Baa3”,

with a stable outlook. This gave Turkey the same

credit rating as India, Spain and Columbia, bolster-

ing hopes it would attract a wider investor base.

However, by April 2014 Moody’s revised the coun-

try’s outlook from stable to negative, citing greater

external financing vulnerability due to lower global

liquidity and domestic political uncertainty, as well

as less optimistic near- and medium-term growth

forecasts. Moody’s most recently upheld this posi-

tion in April 2015. In terms of the banking sector, in

March 2015 Moody’s also reaffirmed its negative out-

look for the second year running, after putting 10

of its banks on notice for downgrades in early 2014

and lowering various ratings of 11 banks that June.

Standard and Poor’s (S&P) has been similarly bear-

ish. As the only one of the big three credit ratings

agencies not to grant Turkey investment-grade sta-

tus, S&P has maintained a “BB+” rating with a neg-

ative outlook, the highest junk status. However,

according to statements from Nihat Zeybekci, min-

ister of economic affairs, the outcome of the June

elections could have a positive impact on ratings.

BIG PLANS: Turkey’s track record over the last

decade has encouraged the government to set high-

ly ambitious growth targets for the country’s econ-

omy. Between 2014 and 2023 the government is

working to boost GDP from around $800bn to $2trn;

GDP per capita from $10,400 to $25,000; and total

exports from $157.6bn to $500bn.

For some time analysts have warned that it will be

difficult to replicate the performance of the past

decade, and that such ambitious growth figures can-

not be sustained with a burgeoning current account

deficit (CAD) and the structural problems that cre-

ated it. In January 2014 Sinan Ülgen, the director of

the Istanbul-based, Centre for Economics and For-

eign Policy Studies, told the press that Turkey’s

growth model based on low global interest rates and

large capital inflows was outdated. “For years, it has

been clear that this model would come to an end

the moment central banks, like the [US Federal

Reserve], started raising interest rates again.”

UP & AWAY: Much of Turkey’s growth since 2008

has been based on domestic consumption, rapid

credit expansion, and the construction and servic-

es sectors. This has led to rising energy and inter-

mediate imports to fuel manufacturing and exports.

While the loan-to-deposit ratio of the banking sec-

tor stood at 40% in 2003, from 2010 to end-2013 it

grew from 88% to 114%, according to Moody’s.

Although the sector’s 13.4% core tier-1 capital ade-

quacy ratio insulates it from a certain degree of risk,

banks are still exposed to market turbulence, espe-

cially with leverage rising from 8x to 9x since 2010.

Consumer debt has also increased, from 4.3% of

household disposable income in 2002 to 55% by the

end of 2013. Credit card debt alone rose by 22% in

2013 on the back of a 31% rise in 2012. Such con-

sumer-led growth is unsustainable in the long run.

STRUCTURAL CONCERNS: To achieve this kind of

persistent growth again, Turkey needs to do more to

tackle the problems of low-value production and

28

Credit card debt rose by 31% in 2012 and 22% in 2013

Between 2014 and 2023

the government is working

to boost GDP from around

$800bn to $2trn; GDP per

capita from $10,400 to

$25,000; and total exports

from $157.6bn to $500bn.


SOURCE: IMF

2014 2015 2016

GDP, current prices (TL trn) 1.72 1.88 2.06

GDP per capita, current prices (TL) 22,448.41 24,262.19 26,210.20

Total investment (% GDP) 21.91 22.19 22.25

Inflation, avg. consumer prices (% change) 5.30 5.00 5.00

Vol. of imports of goods & services (% change) 7.17 8.54 10.15

Vol. of exports of goods & services (% change) 4.01 4.97 5.31

Population (m) 76.71 77.60 78.48

General gov't revenue (TL bn) 610.38 659.24 721.23

General gov't revenue (% GDP) 35.45 35.01 35.06

Total gov't expenditure (TL bn) 649.33 701.92 768.17

Total gov't expenditure (% GDP) 37.71 37.28 37.35

Gov't net lending/borrowing (TL bn) 8.10 4.10 4.09

Gov't net lending/borrowing (% GDP) 0.47 0.22 0.20

Gov't gross debt (TL bn) 609.26 660.64 716.34

Gov't gross debt (% GDP) 35.38 35.09 34.83

Select economic indicators, 2014-16

ECONOMY OVERVIEW

pursue supply-side reforms that will lead to greater

labour productivity and larger domestic savings.

According to a report released by the Bahçeşehir Uni-

versity Centre for Economic and Social Research in

August 2013, the country runs the near-term risk of

falling into the middle income trap, as it continues

to face a lack of sufficient labour productivity and

a consequent inability to push up per capita income.

The events of 2014 highlighted the structural chal-

lenges and risks faced by the Turkish economy. Per-

ceptions of political uncertainty have discouraged

risk-averse investors and led to a flight to foreign

exchange for domestic deposits. At the same time,

external conditions, such as the US Federal Reserve’s

decision to pull back on quantitative easing, coupled

with the structural problems of Turkey’s chronic CAD,

are putting substantial pressure on the country’s

economy. The consequences of these trends – most

notably a falling lira and creeping inflation – pres-

ent a challenge to the strategy of growth at all costs.

Inflation concerns have been stoked by consecu-

tive interest rate cuts in January and February 2015,

on political pressure to boost domestic growth.

Although inflation remains above the 5% target set

by the Central Bank of the Republic of Turkey (TCMB),

as of April 2015 the consumer price index had risen

7.91% y-o-y, compared to 9.38% one year prior. While

lower oil prices are helping compensate for the infla-

tionary pressure of the rate cuts, continuing depre-

ciation of the lira is limiting this effect.

MORE NEEDED: The central crux for the country is

that annual growth of 4% may not be enough to

keep pace with population growth. “Turkey has a

young population and it is growing, so a fast growth

rate is crucial. If we grow 4-5% on average, it will not

generate unemployment,” Uğur Küçük, senior econ-

omist at Garanti Bank, told OBG. “This is an assump-

tion that is largely shared across the board, as well

as by the central bank.”

However, with GDP growth of 2.9% in 2014, accord-

ing to the IMF, the country’s unemployment rate

increased from 9.6% at the end of 2013 to 11.3% as

of January 2015. To both regain and sustain econom-

ic momentum, restructuring will need to be priori-

tised. In its medium term outlook, the government

has conceded that a 5% growth rate in 2014 will not

be possible. Instead, it is emphasising growth of 4%,

a lower CAD and greater productivity.

The government is aware that it is in a difficult eco-

nomic period, with US monetary policy and the EU’s

halting recovery continuing to have an impact. Back

in August 2013 Babacan told local press that, in light

of Federal Reserve tapering, “It should not be sur-

prising for Turkey to revise its growth rate below

4%… We set our annual exports target at $158m, but

it looks difficult to reach this target as well.”

STRONG CURRENT: The most significant obstacle

to the long-term health of the economy is Turkey’s

persistent CAD. Indeed, in the seven years to 2014,

the CAD registered below 5% of GDP just once, in

2009. Although the figure decreased by nearly 30%

in 2014, from $65bn in 2013 to $45.8bn, according

to figures from the TCMB, this was primarily due to

lower oil prices, which drove down the cost of ener-

gy imports. Weaker oil prices are expected to foster

further improvements in the current account in 2015

(see Energy chapter). In relative terms, the IMF

expects Turkey’s CAD to fall from 7.9% and 5.7% of

GDP in 2013 and 2014, respectively, to 4.2% in 2015.

However, as economic growth picks up to an esti-

mated 3.9% in 2016, the CAD could increase to 4.8%.

GROWING PAINS: The high CAD in 2013, up 34.2%

over 2012, was indicative of strong economic expan-

sion that year, at 4.1%, compared to sluggish growth

in 2012, when GDP rose by 2.1%, according to the

IMF. While a higher CAD can signify growth, its per-

sistence in Turkey underscores the need for restruc-

turing. IMF staff estimates put the medium-term

CAD at 5.5-6% of GDP based on current policies.

Turkey’s current account is particularly vulnera-

ble as GDP grows, with the deficit swelling as the

economy expands. Indeed, Turkey has become stuck

in what the IMF terms “boom and bust cycles”, with

31


Inflation has largely remained above the central bank’s target of 5%

Thanks to lower oil prices,

the IMF expects the

current account deficit to

fall from 7.9% and 5.7% of

GDP in 2013 and 2014,

respectively, to 4.2% in

2015.

SOU

RCE:

TU

IK

Number of people in the labour force, 2005-14 (m persons)

0

6

12

18

24

30

2014201320122011201020092008200720062005

ECONOMY OVERVIEW

growth being fuelled by imports and short-term cap-

ital flows. According to the IMF roughly 75% of the

downward adjustment in the current account in

2012 came from a cyclical drop in imports and unusu-

ally large net exports of gold. It was also the result

of a decline in investment rather than an increase

in savings. The fund’s annual staff report on Turkey

from 2014 notes, “The current account deficit

remains 2.5-5% of GDP higher than warranted by

fundamentals and optimal policy settings.”

Turkey’s reliance on imported energy is one of the

main factors behind the deficit. Indeed, the coun-

try’s net energy import bill reached $55bn in 2014,

with net energy imports accounting for 74% of ener-

gy use and 59% of electricity generation.

TAPER TANTRUM: Given the size of the CAD, the

country is particularly vulnerable to any external

shocks that could halt capital inflows, which are cur-

rently financing Turkey’s deficit. In the event of an

abrupt and pronounced reversal of inflows, the econ-

omy would almost certainly face a rough and rapid

adjustment leading to negative growth. Although

analysts have warned of this scenario for years, a vari-

ety of internal and external factors gained pace in

2013, lending greater credence to risk assessments.

In May 2013 the US Federal Reserve announced

that it might begin to wind down its large-scale asset

purchases. The programme, enacted in response to

the global financial crisis, has spurred lower US inter-

est rates, bringing greater liquidity to emerging mar-

kets offering higher returns. The tapering, which

began in December 2013, signals an eventual US

interest rate hike, which is likely to have a negative

impact on portfolio investment in emerging mar-

kets. However, weaker than expected job and infla-

tion figures in March 2015 have fuelled expectations

that the increase will not happen before September.

A reversal in investment flows is particularly trou-

blesome for a country like Turkey, which has become

so highly dependent on short-term capital inflows.

However, according the IMF, low interest rates in the

EU and Turkey’s investment-grade status could help

to mitigate this effect, creating more of a “mixed”

environment for capital flows. The Foreign Econom-

ic Relations Board (DEİK), having been restructured

in September 2014, is focused on reaching the Vision

2023 targets of boosting exports to $500bn and

the volume of foreign trade to $1trn. To this end, DEİKworks with international organisations to bolster

ties with the global business community and increase

opportunities for domestic firms (see interview).

EXTERNAL EXPOSURE: The more pressing concern

for Turkey at present is the amount of foreign debt

held that is set to mature in the near term. The short-

term external debt stock on a remaining maturity

basis, meaning debt that is set to mature within one

year, stood at $164.9bn as of end-February 2015, up

26% since the end of 2011. The vast majority – over

85% – of this debt is held by the private sector, with

more than two-thirds accounted for by banks. While

this increases economic vulnerability and presents

a long-term challenge to sustainable growth, the

banking sector has had “no difficulty in rolling over

its external borrowings and has adequate buffers

against any [foreign exchange] liquidity shocks that

may emanate from abroad”, according to the TCMB’s

most recent Financial Stability Report from Novem-

ber 2014. Moody’s has echoed this view, noting that

the country’s banks, corporates and public institu-

tions alike have historically been able to roll over

maturing debt even during times of crisis.

CURRENCY WOES: The currency composition of

Turkey’s short-term external debt stock is also note-

worthy, particularly in light of recent depreciations

in the lira. According to the TCMB, as of the end of

February 2015, just 12.1% of all short-term external

debt was denominated in lira, while more than half

was in US dollars and nearly one-third was in euros.

The CAD, fed by high imports, a substantial trade

deficit and newly vulnerable to capital outflows, has

had a sizable impact on the strength of the lira. The

currency depreciated 28% against the dollar between

May 2013 and the end of 2014, before falling by

another 15% through to the end of April 2015.

The depreciation of the lira has also been exacer-

bated by risk-averse local actors. According to Ozer

Balkız, the director of economic research at the Inde-

32

Just 12.1% of short-term external debt was denominated in lira as of the end of February 2015

According the IMF, low

interest rates in the EU

and Turkey’s

investment-grade status

could help to mitigate the

effect of a US interest rate

hike on capital flows.

The short-term external

debt stock on a remaining

maturity basis stood at

$164.9bn as of the end of

February 2015, up 26%

since the end of 2011.


SOURCE: TUIK

Manufacturing 15.8

Wholesale & retail trade 12

Transport & storage 12

Real estate activities 9.8

Agriculture, forestry & fishing 7.1

Construction 4.6

Public admin., defence & social security 4.2

Professional, scientific & technical activities 3.4

Financial & insurance activities 3

Other 28.1

Contribution to GDP by economic sector, 2014 (%)

ECONOMY OVERVIEW

pendent Industrialists and Businessmen’s Associa-

tion, “Turkey is a dollarised economy. When some-

thing bad happens, not only corporates, but also

consumers go into foreign exchange.” Since mid-

2013 many Turkish residents have been transferring

their bank deposits into foreign currencies – name-

ly euros, dollars and sterling – in an attempt to pro-

tect themselves from further currency volatility.

The instability of the lira has left the banking and

business sector exposed to substantial risk, given the

private sector’s share of foreign currency debt.

According to Emre Sezan, head of equity research

at İş Investment, private sector foreign currency net

debt stands at 22% of GDP, and depreciation of the

lira will necessarily increase the cost of servicing

these loans. According to the TCMB’s November

2014 report, currency risk is comparably higher

amongst electricity producing firms and real estate

investment companies, as they generate less revenue

in foreign currencies. However, non-performing loans

have been stable thus far, at 2.6-2.7% since 2011.

The depreciation of the euro against the dollar has

also had an effect on the corporate segment, with

45% of the country’s exports invoiced in euros,

according to the World Bank. This in turn has made

it more difficult for firms to finance dollar-denom-

inated imports, though the impact on the wider

economy has been negligible.

DOMESTIC DEMAND: In general terms, the new

regulations regarding consumer credit introduced

in early 2014 could have a negative effect on domes-

tic demand, though they are also likely to improve

the consumer loan portfolios of banks. Domestic

uncertainty ahead of the June 2015 general elec-

tions is also depressing demand. According to the

World Bank’s April 2015 Regular Economic Note,

consumer confidence is at its lowest level since

March 2009, when the global economy was in the

throes of the financial crisis. While major spending

decisions by households and corporates are being

put off until after the elections, the World Bank’s

3% GDP growth forecast for 2015 assumes that

domestic demand will recover shortly thereafter.

COURTING CONFIDENCE: In the short term,

Moody’s outlook downgrade in April 2014, which it

reaffirmed most recently in April 2015, is unlikely to

have a dramatic impact. However, if Turkey were

downgraded further, losing its investment grade sta-

tus, the country could witness more serious capital

outflows. According to Moody’s, while the country’s

sovereign rating is unlikely to see any improvements

in the near term, a move backwards in terms of pub-

lic finances, heightened political instability or a dete-

rioration in its external finances are all possible alert

signals for a ratings downgrade.

Fortunately, the government has had few problems

with its external financing needs. In April 2015 Turkey

issued a $1.5bn dollar-denominated bond with a

yield of 4.4% – some 250 basis points over compa-

rable US Treasury bills, according to the Turkish Treas-

ury. Combined with another $1.5bn issue in January,

this sale marks $3bn out of the $4.5bn in planned

issues for 2015. Oversubscribed by five times, the

April sale signals continued interest in the country’s

sovereign debt from international investors. Indeed,

just 15% of the bonds were sold to domestic investors.

MEASURED PROGRESS: Further improvements to

Turkey’s external position could be in the offing. As

of February 2015 the CAD was down by nearly 9%

from $46.9bn in September 2014 to $42.8bn, driv-

en by a $3.1bn drop in the energy deficit and a $2.1bn

adjustment on higher gold exports. This represents

a drop from 5.8% of GDP to 5.4% over the period.

Looking ahead, the depreciation of the lira should

also have a positive impact on exports and the cur-

rent account. Balkız told OBG, “We do not want the

lira to go to 2 [against the dollar] again, because it

kills the competitiveness of Turkish exports. We see

the effect of exports increasing. As developed coun-

tries show better performances, this is good for us.

Also, it will be positive for the CAD.” Indeed, most pre-

dictions are for a further contraction of the CAD in

2015. According to the World Bank, weak oil prices

could help cut it to 4.4% of GDP, which should help

to reduce the country’s external financing burden

from $220bn in 2014 to $200bn in 2015.

OUTLOOK: While a reduction in external vulnerabil-

ities is welcome in the short term, it belies persist-

ent structural concerns. As it stands, the country

remains reliant on domestic demand and a large

CAD to reach its growth targets, generate sufficient

employment or boost per capita income. In the long

run, the country needs to address supply-side reforms

such as labour market regulations and education.

While Turkey has recorded impressive growth in

the past decade, it may have reached its limit with-

out substantial structural overhauls of the econo-

my. If the country can overcome the current investor

uncertainty and improve productivity through much-

needed reforms, the ambitious growth targets

set by the government could eventually be reached.

34

Since mid-2013 many Turkish residents have been transferring their bank deposits into foreign currencies

Turkey issued a $1.5bn

dollar-denominated bond

in April 2015, its second of

the year. The sale, which

was oversubscribed by five

times, is indicative of

continued interest in the

country’s sovereign debt.

As of February 2015 the

current account deficit

was down by nearly 9%

from $46.9bn in

September 2014 to

$42.8bn. This represents a

drop from 5.8% of GDP to

5.4% over the period.


ECONOMY INTERVIEW

Mehmet Şimşek, Minister of Finance

Should the US Federal Reserve raise interest rates,

we may see a reversal in capital flows back to the

US. What impact would this have on Turkey?

ŞİMŞEK: The Federal Reserve’s potential interest rate

hike is a downside risk for emerging markets, but it is

manageable. We do not expect a globally synchronised

monetary tightening, as the European Central Bank

(ECB) and the Bank of Japan’s (BoJ’s) expansionary

monetary policy will mitigate the potential impact of

the Federal Reserve’s rate hike. Lower petrol prices will

also put downward pressure on inflation rates and help

to defer the Federal Reserve’s rate hike, as well as

encourage both the ECB and BoJ to pursue monetary

easing policies more aggressively. The economic recov-

ery in the US should support the global economy

through trade and investments. As far as Turkey is con-

cerned, domestic policies will greatly impact Turkey’s

growth. While the country has political stability, it also

has sound macro-economic fundamentals.

What impact is regional instability having on the

economy, and how difficult is it to plan a budget

with events seeming so precarious in the region?

ŞİMŞEK: We have significant fiscal space to respond

to external shocks. We have reduced the general gov-

ernment-deficit-to-GDP ratio from 10.8% in 2002 to 0.7%

in 2014. This is less than one-fifth of the Organisation

for Economic Cooperation and Development (OECD)

average and one-quarter of the Maastricht criteria.

Similarly, public sector debt has fallen from 74% in 2002

to 33.5% of GDP in 2014. In 2014 Turkey’s debt ratio

was less than one-third the OECD average.

We have also strengthened the regional dimension

of the incentives system and improved the attractive-

ness of the 6th Region – a grouping of low-income

provinces in the east and south-east – making this area

more resilient. We believe that in the long run, border

tensions will turn into a promising Middle East that

embraces stability and democracy, and Turkey, with

its high democratic standards, will benefit the most.

To what extent is it possible to quantify the cost of

the Syrian refugee crisis?

ŞİMŞEK:The Syrian migration is the largest refugee flow

of the century. The total number of Syrian refugees in

Turkey has reached almost 2m people, and over the last

three years 22 camps have been built in 10 cities. Asy-

lum seekers have been provided with health care, edu-

cation and food assistance. Turkey alone has spent

$4.6bn on the crisis. With this being said, it is difficult

to quantify the impact of the refugee crisis on the

economy, though there is evidence of food shortages

and housing prices increasing in border provinces.

Where does participation banking stand in Turkey

in terms of becoming a major financial centre?

ŞİMŞEK: Islamic finance is an area that dates back 30

years in Turkey and 50 years around the world. The

World Bank’s Global Islamic Finance Development Cen-

tre was established on Borsa Istanbul’s premises. The

centre is the World Bank’s only representative office

for Islamic finance in the international arena. We are

also planning to increase the share of Islamic banking,

which is currently around 6% of the banking sector in

Turkey today, to 15% by 2023.

With falling oil prices, the current account deficit

(CAD) is expected to dip below 5.5% of GDP in 2015.

What other measures have been put in place to

shrink the deficit should oil prices rise again?

ŞİMŞEK:On a 12-month rolling basis, CAD declined from

$65bn at year-end 2013 to $45.9bn at end-2014. Like-

wise, the current account balance, excluding gold and

energy, saw a $6.3bn surplus at end-2014, up from a

$4.1bn deficit in 2013. The CAD-to-GDP ratio declined

from 7.9% in 2013 to 5.7% in 2014. We had projected

the CAD-to-GDP ratio would be 5.4% in 2015 and 5.2%

in 2017; however, these number were based on oil

prices staying at $101.90. On the condition that oil

prices per barrel remain at around $60, these

figures will be lower by about two percentage points.

35


A new pathOBG talks to Mehmet Şimşek, Minister of Finance

ECONOMY INTERVIEW

Mark Lewis, Former Senior Resident Representative in Turkey,International Monetary Fund

What are the Turkish economy’s key strengths?

LEWIS: In addition to the obvious factors, like demo-

graphics and geography, Turkey’s private sector is very

dynamic and has demonstrated an ability to quickly

adapt to changes in the global economy through adjust-

ments to products, target markets and size. In addition,

the country’s balance sheets are generally strong, espe-

cially with respect to the public and banking sectors.

This strength provides resilience to shocks and is one

of the reasons Turkey was able to ride through the

recent economic crisis relatively unscathed.

However, there are potential weaknesses, notably

for corporations and households that are more exposed

to financial risks than the two sectors above. Foreign

exchange (FX) risk has grown over the past few years

as more firms have turned to foreign-denominated

debt to fund business. While some entities are hedged,

others are not, making many companies vulnerable to

exchange rate depreciation. Corporations also have

some interest rate risk and rollover risk, as a result of

short maturities. While these risks are not that high,

they have been growing and need to be closely moni-

tored. Households are generally in a better position, as

a group. There is very little FX risk, and interest rate and

rollover risks are much lower than for corporations.

Aggregate household financial assets are solid – 20%

higher than liabilities. That said, those with the assets

are not necessarily the same that hold the liabilities,

creating pockets of vulnerability among certain seg-

ments. Some middle- and lower-income households may

be overextended, resulting in high levels of consumer

debt. While the government’s consumer lending and

credit card regulations have been reasonably effective

at containing excesses, more may be needed.

To what extent does the sizeable current account

deficit (CAD) pose a risk to economic stability?

LEWIS: For 2014 we are forecasting a decline in the

CAD to 6.3% of GDP from 7.9% in 2013, due primarily

to an expected slowdown in overall GDP growth. Despite

this decrease, Turkey’s deficit remains considerably

higher than those in many other emerging markets. The

size of a CAD is less important than the ability of a

country to finance it. Over the past few years, emerg-

ing markets have benefitted from high global liquidity

because of loose monetary policies in the West. As a

result, they have been able to easily finance their deficits.

In Turkey’s case, this has been financed with short-

term foreign debt. However, as the US has begun to

move towards a normalisation of its financial conditions,

global capital inflows have slowed. For a country like

Turkey, where inflows fuel a large amount of domestic

consumption and investment, an abrupt decline in

international funding would result in a sharp slowdown

in the economy. While the country has not yet experi-

enced any significant problems attracting these income

sources, it will remain vulnerable to capital flow volatil-

ity as long as the CAD remains at its present level.

How can Turkey work to overcome its CAD risks?

LEWIS: One way to deal with this risk is by boosting the

country’s domestic savings rate, which at about 12%

of GDP is lower than in comparable markets. Increas-

ing this figure by 4% to 5% over the long term would

allow Turkey to finance more of its growth with its own

savings, as opposed to those of foreign countries. This

would reduce Turkey’s exposure to foreign capital flows

and, by allowing a larger amount of investment, would

lead to higher growth. The government’s overhaul of

the pension system was one step in the right direction.

Interest rates also play a role in encouraging savings,

especially when they are at a level enticing to savers,

but not too stimulative of consumption. And, while

public sector finances have seen steady improvement

over the past few years, their continued strengthen-

ing would help to raise the country’s overall savings rate.

The other major solution lies with improving Turkey’s

overall competitiveness. If its exports were more com-

petitive globally and its domestic goods were more

competitive with imports, this would reduce the CAD.

36

Tackling challengesOBG talks to Mark Lewis, Former Senior Resident Representative inTurkey, International Monetary Fund


ECONOMY ANALYSIS

The Turkish stock market is slated for partial privatisation by end-2015

Following the global financial crisis and the slowdown

in international financing, Turkey struggled to garner

interest in its privatisation programme and nearly a

decade of successful liberalisation slowed dramati-

cally. In 2011 privatisation revenues were $1.4bn,

down from a peak of $8.1bn in 2006. However, the

programme came roaring back in 2012. While some

obstacles had begun to emerge in 2015, several sig-

nificant sales have taken place in the past two years.

THE RIGHT TIME TO BUY?: Privatisation proceeds

reached a record high in 2013, amounting to $12.4bn,

and while figures were unavailable for full-year 2015

at time of print, as of October 2014 the government

had generated $10bn from the sale of state assets.

As a result, expectations for 2015 were high at the

end of 2014. Minister of Finance Mehmet Şimşek told

the press in January 2015 that the government was

planning to raise TL8.7bn (€3bn) from asset sales for

the year and TL6.8bn (€2.4) in 2016. The tenders for

the privatisation of the life insurance and pension

provider, Halk Hayat ve Emeklilik, and the non-life

insurer, Halk Sigorta, have been announced with a

deadline of September 2015, and five thermic and 49

hydroelectric power plants are slated for privatisation

in the next two years. In October 2014 comments to

the press, Şimşek noted that highways and bridges,

seaports, the venues for the Erzurum Winter Univer-

siade, 25 sugar factories, the Güllük Marina and state

real estate would also be up for sale in this period.

TOUCHY SUBJECT: In the past, privatisation efforts

have been a contentious political issue – with critics

from domestic labour groups and Turkish courts assert-

ing that the sales of state-owned assets were taking

place for less than their market value. For example,

then-Prime Minister Recep Tayyip Erdoğan raised con-

cerns about the value achieved during the 2013 sale

of the struggling Başkentgaz, Turkey’s largest natu-

ral gas grid serving Ankara. The company was sold

to the Torunlar Food Company for $1.16bn after

three previous tenders failed to find a qualified buyer.

Despite the critics, the privatisation programme

has helped to reduce the government’s balance sheet

obligations and created a revenue stream to support

its fiscal position. In 2012, for example, privatisation

payments far exceeded the $2.2bn target in revenue

from asset sales that the government had set at the

beginning of the year. This had a positive impact on

the country’s budget deficit, which fell to 1.2% of

GDP in 2013, below forecasts and the 2012 deficit of

2% of GDP. The deficit rose only slightly in 2014 to 1.3%

of GDP. The primary surplus also began rising in 2012,

from 1.2% of GDP to 1.6% in 2014. Budget revenues

increased by 17.1% to TL389.4bn (€137.1bn). Of this,

non-tax revenues accounted for 16.3% of the total.

TAKING IT SLOW: Recently, the optimism of late 2014

has been tempered by volatility in the lira and the

uncertain political environment preceding the June

2015 parliamentary elections. According to Bloomberg,

borrowing costs have risen dramatically, with the yield

on Turkey’s benchmark two-year up 2.38 percentage

points in early 2015 to a one-year high of 10.4%, in

late April. Meanwhile, the lira had fallen to a near-all-

time low against the dollar ($1:TL2.71) as of April

2015, a decline of 13% from the beginning of 2015

and 33% since 2013. The combination of high costs

and lira volatility has dissuaded investors, and the

government has delayed tenders. The tender for con-

struction of highways connecting Kinalı-Odayeri and

Kurtköy-Akyazı were moved to July 7 and June 30,

2015, respectively, from their original May 6 launch.

Meanwhile, the $2.76bn privatisation tender for

the national lottery to Net Holding and Hitay Invest-

ment Holding also fell through, when the consortium

failed to complete the deal by its April deadline,

although the government completed the sale to ERG-

Ahlatci, the second-highest bidder, for $2.75bn. In

spite of these challenges, Borsa Istanbul, the Turkish

stock market, announced a partial privatisation in

March 2015. The world’s 29th-largest exchange will

list up to 43% of its shares in a sale set for end-2015.

Privatisation proceeds

reached a record high in

2013, totalling $12.4bn,

and as of October 2014 the

state had generated $10bn

from asset sales.

37


The government is

expected to conduct sales

of highways and bridges,

seaports, sports venues,

sugar factories, a marina

and state real estate

property in the coming two

years.

A private lineThe government continues liberalisation efforts

ECONOMY INTERVIEW

Omer Cihad Vardan, Foreign Economic Relations Board of Turkey

How will DE�K’s new role aid efforts to attract for-

eign direct investment (FDI) and cultivate business?

VARDAN: In September 2014 the Grand National

Assembly voted to restructure DE�K, which will contin-

ue to support the integration of Turkish industry through

trade and investment relations. Operations were stream-

lined within the organisation. The offices of the pres-

ident and the prime minister provide increased support,

and our priority is to increase the capacity and effec-

tiveness of foreign trade relations. We want to see

Turkey emerge as a transcontinental business destina-

tion for multinational corporations. To help us in that

direction we are concentrating on exporting services,

as well as goods. We will also establish new business

councils and launch business development projects.

We are revamping our investment promotion strat-

egy with a two-pronged approach. First, we are setting

sector-specific investment targets. Attracting foreign

capital is an increasingly competitive endeavour, so we

need to send a clear message to investors and show

them that Turkey is ready for higher levels of invest-

ment. While we are shifting our focus to new sectors,

we will not stray too far from the industrial manufac-

turing base, where we have created attractive incen-

tives. Second, we are diversifying the global spectrum

of our foreign investors. Currently, 70% of FDI comes

from the EU. This needs to be balanced across other

parts of the globe to protect Turkey from economic

shocks from the EU. Thus far, we have not been suc-

cessful at attracting investment from new and emerg-

ing markets like the GCC, China and Latin America, but

we believe we can raise investment from these regions.

To what extent will the US Federal Reserve’s tighter

monetary policy pose a risk to investment in Turkey?

VARDAN: Tapering is a process which has been affect-

ing not only Turkey but a number of countries around

the world, particularly the developing ones. On the oth-

er hand, it is important to underline that Turkey’s main

focus in terms of capital flows in the following years

will be FDI, rather than short-term inflows. This kind of

long-term investment looks for two main properties in

a candidate economy: stability and growth potential.

Turkey, with its ongoing macroeconomic and political

stability – and its demographic and geopolitical advan-

tages for growth – will therefore still be an attractive

destination for global investors.

At this point, the economic restructuring package

recently announced by the government should also be

emphasised as the path to the transformation of the

Turkish economy. In that regard, one of the central

goals of economic and industrial restructuring is to see

Turkey become a technology-exporting country and,

generally, export higher-value-added goods in addi-

tion to services. In light of this, the importance of the

Transatlantic Trade and Investment Partnership (TTIP)

should be noted. When completed, the TTIP will see an

astonishing one-third of global trade volumes fall under

its umbrella. The benefits of this cannot be stressed

enough. Though not part of the EU, Turkey is a mem-

ber of the Customs union, and will surely be a partici-

pant in the partnership, whether through the insertion

of a set of special clauses, or separate free-trade agree-

ments with the US. In any case, the economic benefits

expected to come Turkey’s way are significant.

To what extent is foreign capital inflow important

for fuelling Turkey’s GDP growth?

VARDAN: The new norm of the global economy is mod-

erate growth. In such a world, where external adversi-

ties are reflected on its economic performance, Turkey

still manages to grow at a pace of 3-4%. What it needs

in the years to come will be a sustainable, quality growth

pattern supported by investment. So capital inflows will

matter not only for acceleration through investment

and trade, but also for further technological develop-

ment. Foreign capital inflows will also help finance the

current account deficit, which has been in a down-

ward trend and is expected to be reduced to more rea-

sonable levels through certain structural improvements.

38

Renewed purposeOBG talks to Ömer Cihad Vardan, President, Foreign EconomicRelations Board of Turkey (DEİK)


39

BankingAttractive demographics contribute to sector potential

Moves to trim loan growth help guard against risk

Buffers against potential shocks remains ample

Major international players continue to arrive

Slowing profitability likely to prompt consolidation

BANKING OVERVIEW

The sector has proved its resilience in recent years

Turkey’s banking sector has proved resilient to both

the global economic crisis and more recent fluctu-

ations in the country’s economy. Loan growth remains

fairly high by developed-market standards but has

trimmed in recent years, reflecting the market’s

increasing maturity as well as regulatory moves to

contain credit expansion with an eye on risk profiles.

In the medium to long term, the market should ben-

efit from the large population, the scope for growth

in a country with moderate levels of banking pene-

tration, and the expansion of a diversified economy.

However, recent events have shown that risks exist

from foreign currency exposure, concentration risk

in the construction sector, and the impact of eco-

nomic and political events on the incomes of cor-

porate and household borrowers.

TAKING THE PULSE: In February 2015, Deloitte, the

global professional services company, issued a report

which highlighted the industry’s strong growth over

the past few years, and the opportunities for future

expansion. Between 2007 and 2014, Turkey’s finan-

cial assets as a proportion of GDP rose from 146%

to 202%, according to Deloitte, which noted a fore-

cast rise to 247% by 2018. Despite rapid growth,

financial assets remain well below global averages

and even those for “economies in transition”: 813%

and 242%, respectively in 2014, forecast to rise to

854% and 320%, respectively, in 2018.

Turkey’s private sector loans-to-GDP ratio jumped

from just 33% in 2007 to 54% in 2014, although it

is still less than half the global average of 115%.

Loan growth in US dollar terms grew at a compound

annual growth rate of 12% between 2007 and 2014,

and is expected to clock up a similar rate up to 2018,

with the ratio of private sector loans to GDP fore-

cast to reach 66% in 2018. This compares favourably

to a global average of 6% and a G7 rate of 2%, and

is slightly above the average for economies in tran-

sition (11%). Meanwhile, deposit growth is forecast

to pick up from 6% in 2007-14 to 11% in 2014-18.

As the market has matured, and competition on

an already competitive market intensified, the net

interest margin has narrowed, from 4.5% in 2007 to

3.2% in 2014. Further compression is likely, to 2.8%

in 2018, just below the economies in transition aver-

age of 2.9% but still above the global level of 1.6%.

The message is that the sector has had a period

of strong growth and will maintain positive forward

momentum, while stabilising and moving towards

global norms. In the long term the scope for growth

is excellent, even in a competitive environment.

RECENT PERFORMANCE: In the early months of

2015 the sector’s performance picked up, despite

concern over Turkey’s political future with an elec-

tion looming, and the weakening of the lira.

Assets in lira increased by 4% to the end of Feb-

ruary from the end of 2014, while net profit jumped

8.6% from February 2014, with the sector as a whole

posting net profits of TL3.46bn (€1.22bn). Loan

growth in the first two months of the year was 3.8%,

reaching a total of TL1.29trn (€453bn).

However, in US dollar terms, assets fell due to the

decline in the lira. In April 2015 Intesa Sanpaolo’s

executive vice-chairman, Marcello Sala, announc-

ing his bank’s launch in Turkey, said that the four main

risks to the system are high levels of private debt,

the current account deficit, the lira’s depreciation

against the US dollar and high inflation.

STRENGTHS & WEAKNESSES: The IMF issued a

detailed staff report on Turkey in December 2014

as part of its “Article IV consultation” with the coun-

try. Under the fund’s Article IV, the IMF holds bilat-

eral consultations with its members, usually once a

year, with its representatives meeting a range of

officials, including those from the government and

from the Central Bank of Turkey (TCMB).

The report highlights the sector’s strengths and

weaknesses, noting its relative current stability, but

also the considerable risks that could arise, as well

as suggesting means by which the authorities could

In the medium to long

term, the market should

benefit from the large

population and the scope

for growth in a country

with moderate levels of

banking penetration.

As the market has matured

and competition has

intensified, the net interest

margin has narrowed, from

4.5% in 2007 to 3.2% in

2014. Further compression

to 2.8% in 2018 is likely.

40

Keeping a watchful eyeThe prospects for growth are excellent so long as risks are heeded


BANKING OVERVIEW

enhance the system’s operations and improve its

insulation from these risks.

HOLDING FIRM: As the report noted, Turkey’s banks

are fairly well-capitalised, with non-performing loans

(NPLs) relatively low, at just 2.8%. The fall in the lira

and rising interest rates had not, at the time of the

IMF’s consultations, substantially increased the NPL

ratio. Loan growth has helped offset a rise in bad

assets, keeping the NPL ratio in check.

Banks have been able to pass interest rate hikes

on to borrowers, maintaining the net interest mar-

gin at around 2%. Some analysts had expected a

tightening of margins, but this did not occur. Banks’

on balance sheet short FX position also bolstered

margins in the wake of the lira’s fall. However, the

rising rates (as well as factors such as lower econom-

ic growth and a higher risk perception) did trim cred-

it growth somewhat, putting downward pressure on

return on equity, which stood at 126%.

Banks’ buffers to shocks remain ample, with cap-

ital adequacy standing at 16%, well above the min-

imum demanded by regulators, and most capital is

Tier 1. Liquidity adequacy ratios (at maturities of

one week or one month total or foreign currency only)

are also ample, with liquid assets covering more than

100% of short-term liabilities – and this despite

rather conservative assumptions on the proportion

of deposits that are vulnerable to capital flight. Stress

tests have also shown that the system is well pre-

pared for even significant shocks.

FOREX EXPOSURE: One of the biggest risks to the

banking sector – and to the Turkish economy as a

whole – is over-reliance on foreign exchange financ-

ing. In recent years, banks have relied on cheap

wholesale financing to fund lira-denominated loans.

Given the lira’s historic vulnerability and its recent

depreciation, this has become a concern for the sec-

tor and the authorities overseeing it.

At the end of 2014 the sector had an overall loan-

to-deposit (LTD) ratio of 114%. In other emerging

markets, including in Turkey’s neighbours in Central

and Eastern Europe, with which the country is some-

times bracketed by financial institutions, there have

been efforts to reduce the LTD to 100% or below in

the wake of the global financial crisis. There is a

sense that banks need to rely more on deposits to

finance loans, in order to reduce risk. Turkish banks’

foreign currency LTD ratio remains below that, at 84%,

while local currency LTD is at 131%.

According to the IMF, wholesale external funding

denominated in foreign currency is helping drive the

expansion of lira-denominated lending. Naturally,

this exposes banks to risk of their external obliga-

tions rising in value relative to the debt that they can

call on from their own customers. According to the

IMF, foreign exchange liabilities now outstrip deposits

by TL397bn (€140bn), or 21% of total assets.

The fund says that foreign exchange exposure

through this mechanism more than doubled to

€103bn by early 2014, from €46bn in 2009. Banks

are aware of the risk, and hedge it off balance sheet,

so the sector’s net open foreign exchange position

is only around 0.1% of GDP.

However, the IMF has warned that in the event of

market sentiment turning negative, the rollover risk

(refinancing risk) – and thus foreign exchange liq-

uidity risk from gross forex exposure – is significant.

The fund suggests that banks’ required reserve

deposits with the central bank could be used to sup-

port foreign exchange liquidity.

Banks also have indirect exposure to exchange

rate risk via foreign currency lending to non-finan-

cial corporates. These types of loans have increased

more than three-fold in less than a decade, reach-

ing some €114bn in July 2014, up from less than

€30bn in 2008, partly as a result of tax and pruden-

tial policies that encouraged the shifting of foreign

currency lending onshore.

MITIGATION: Risk is somewhat mitigated by pruden-

tial regulations that restrict foreign currency lend-

ing, limiting them to those with export receipts,

and those with better ability to hedge financially

and access foreign currency denominated assets.

41


Internet banking transactions, 2005-14 (TL bn)

SOU

RCE:

TBB

0

600

1200

1800

2400

3000

20142013201220102005

Banks have been able to pass interest rate hikes on to borrowers

At the end of 2014 the

sector had a

loan-to-deposit ratio of

114%. In the wake of the

global financial crisis there

have been efforts to

reduce this ratio to 100%

or below.

BANKING OVERVIEW

A recent TCMB study suggested that export

receipts help hedge a net open position. However,

the IMF calculates that around €20bn in foreign

exchange-indexed loans is not covered by these pru-

dential regulations, despite similar risks.

One blessing for the sector is that foreign curren-

cy lending to households is forbidden. This has helped

prevent the soaring NPLs seen in parts of Central and

Eastern Europe, where banks lent freely in euros and

Swiss francs to households during the boom years

of the last decade, only to see households unable to

service the debt when the economy turned down-

wards and currencies fell in value. Hungary and

Romania have been particularly affected.

PROFITABILITY EASING: Sector profitability as a

whole has declined in recent years, dragged down-

wards largely by lower net interest income and less

efficiency. Despite a doubling in loan volume and a

50% increase in equity since 2010, profits have

scarcely risen, according to the IMF.

Between 2005 and 2010, return on average equi-

ty (ROAE) averaged 23% and return on average assets

3%, but these have now fallen to 13-15% and 1.5-

2%, respectively. Since 2010 ROAE has slipped by an

average 9.5 percentage points, with approximately

80% of the reduction due to falling net interest

income, and most of the remainder caused by a

decline in net non-interest income.

Net interest income has fallen due to a drop in cred-

it extended to the government, without a corre-

sponding fall in interest expenses. Interest income

dropped by 17.4 percentage points after a 1.8 per-

centage point fall in loan book profitability, but large-

ly driven by a 13.5 percentage point fall in interest

derived from securities after a decline in the pro-

portion of government securities in banks’ portfo-

lios. Government securities accounted for 38% of

total assets in 2010, falling to 16% in 2014.

CONSOLIDATION: Falling profits and rising risk may

catalyse consolidation, or at least efforts to improve

efficiency in the sector. As the IMF notes, “over the

medium term, banks will need to bring loan growth,

equity and profits back into line, with a focus on

enhancing margins”. Banks can boost efficiency by

better pricing, cost efficiencies (which in some cas-

es slipped during the years of strong growth, due to

a lack of incentive), improved risk management and

increasing revenues earned from fees.

The IMF has praised the TCMB for its efforts to slow

consumer credit growth and improve its stress-test-

ing procedures. In 2013 credit card limits were tight-

ened and provisioning rates were increased, and in

February 2014 the central bank tightened limits on

instalment purchases. These measures caused a rap-

id deceleration in credit growth from 40% to 18% in

the year to August 2014, based on an annualised 13-

week moving average. “The heightened scrutiny for

credit cards and consumer loans that the regulations

introduced were needed, especially the strict rules

for fees, loan sizes and settlement periods,” Cem

Mengi, the former deputy CEO of ING Bank, told OBG.

The IMF noted that further macroprudiential meas-

ures to target banks’ wholesale foreign currency

financing would be worthwhile, to trim foreign

exchange leverage in the banking system. Measures

it suggested included reducing inducements for the

non-financial corporate sector to take on foreign

currency risk, for example increasing capital charges

or greater provisioning for foreign exchange loans

to unhedged corporates, and matching the pruden-

tial regulation of foreign exchange-indexed lending

with direct foreign exchange lending.

“Consideration should also be given to complemen-

tary non-price measures,” the fund said. “For instance,

a ceiling on the use of derivatives for FX hedging pur-

poses while keeping the current net open position

limits, or on the non-core to core foreign exchange

liabilities ratio would have the obvious impact of

containing wholesale FX funding.”

The IMF said that these measures would indirect-

ly affect domestic demand, but would not stand in

place of a tighter macroeconomic strategy as a whole

from the government. Furthermore, such measures

would have to be implemented carefully, taking into

account the extent to which banks can pass

costs on to customers, whether creditors or debtors.

42

SOURCE: TBB

Name Type Assets ($ bn)

Türkiye Cumhuriyeti Ziraat Bankası A.Ş. State-owned deposit bank 104.67

Türkiye İş Bankası A.Ş. Privately-owned deposit bank 101.44

Türkiye Garanti Bankası A.Ş. Privately-owned deposit bank 94.37

Akbank T.A.Ş. Privately-owned deposit bank 88.73

Yapı ve Kredi Bankası A.Ş. Privately-owned deposit bank 74.09

Türkiye Halk Bankası A.Ş. State-owned deposit bank 65.79

Türkiye Vakıflar Bankası T.A.O. State-owned deposit bank 64.67

Finans Bank A.Ş. Foreign bank 32.74

Denizbank A.Ş. Foreign bank 30.82

Türk Ekonomi Bankası A.Ş. Privately-owned deposit bank 26.98

Top 10 banks by assets, Sept. 2014

Falling profits and rising risk may prompt consolidation in the sector

Tightened credit card

limits, increased

provisioning rates and

stricter limits on instalment

purchases caused a rapid

deceleration in credit

growth, from 40% to 18%,

in the year to August 2014.


BANKING OVERVIEW

AML & CFT: In another area of regulation, Turkey

has made significant progress: tackling money laun-

dering and financing of terrorism. This is particular-

ly significant for Turkey, which has historically had

issues with corruption and has suffered from terror-

ist attacks, and has been seen as a conduit to the

wars in the Middle East. In October 2014 Turkey was

removed from the Financial Action Task Force list of

countries with “strategic deficiencies” in their anti-

money laundering and combating financing of ter-

rorism frameworks, having made steps to tighten

rules criminalising financing of terrorist organisations

and setting up procedures to identify, freeze, and con-

fiscate assets linked to terrorism.

PLAYERS: As of the end of the third quarter of 2014

there were 46 banks in Turkey, with total assets of

€604bn, employing close to 200,000 people. The

market is dominated by seven institutions, though

there are a range of other players as well as devel-

opment banks, investment banks and banks focus-

ing on specific market niches.

The biggest bank in terms of assets is the state-

owned Ziraat Bank, established in 1863, with assets

of €78.8bn as of the end of the third quarter of

2014. The other banks in the top five are all private-

ly owned: İşbank, with assets of €76.4bn; Garanti Bank

(€71.1bn); Akbank (€66.8bn); and YapıKredi

(€55.8bn). They are followed by two state-owned

banks, Halkbank (with assets totalling €49.6bn) and

Vakif Bank (€48.7bn), two foreign-owned institu-

tions – Finansbank (owned by the National Bank of

Greece), with assets of €24.7bn; and DenizBank,

acquired by Sberbank in 2012, with €23.2bn. Com-

pleting the top 10 is Ekonomi Bank, with assets of

€20.3bn. Other major international banks present

on the market include HSBC, Citibank, ING and RBS.

PERFORMANCE: The major banks’ key performance

figures differ considerably, reflecting differences in

their management and strategies. As of the first

quarter of 2014 – the last year for which figures were

available at time of press – net interest margin ranged

from 3.9% for Vakıfbank to 5.1% for Finansbank,

according to a report by investment bank JP Mor-

gan. Akbank stood at 4.4%, İşbank at 4.2%, Garanti

at 4%, Halkbank at 4.6% and YapıKredi at 4.1%.

Garanti had the highest return on equity, at 15.3%,

with Halkbank at 15.2%, İşbank at 12.8%, Akbank at

12.1%, Vakıfbank at 10.9%, YapıKredi at 9.4% and

Finansbank with 7.1%. Loan impairment charges as

a proportion of average loans varied from 2% for

Finansbank to 0.9% for Halkbank.

Despite the variations in performance, in its report

JP Morgan said that it continued to see Turkey’s

biggest systemic banks as a “generally homogenous

asset class, with the broadly similar credit metrics

and the same assumptions of systemic importance”.

However, it did highlight potentially slightly weaker

performance from Finansbank and YapıKredi due to

their stronger focus on consumer lending. Consumer

confidence has dipped in late 2014 and early 2015

due to lower economic growth, rising inflation and

a new degree of political uncertainty.

COMING & GOING: Thanks to its size and growth

potential, the Turkish banking market continues to

attract international institutions looking to establish

or expand their presence in the country. This is

despite the cooling of market sentiment and the

growing appreciation of risks from loan growth, the

depreciating lira, and the slowing economy – indeed,

for some investors, this is the time to capitalise on

more attractive capital values.

In November 2014, Spain’s Banco Bilbao Vizcaya

Argentaria (BBVA) raised its stake in Garanti from

24.9% to 40% for an additional €2bn, giving it con-

trol of the bank’s board, with seven of 10 members.

BBVA had acquired its stake in Garanti for €4.4bn in

2011, with a view to expanding its holding and tak-

ing board control in 2016; in the end, it moved ear-

lier to capitalise on market conditions.

Jaime Saénz de Tejada, BBVA’s chief financial offi-

cer, told the press that his bank had achieved a “very

45


There are 46 banks in Turkey, employing almost 200,000 people and with total assets of €604bn

Consumer confidence dipped in late 2014 and early 2015

In 2014 Turkey was

removed from the Financial

Action Task Force list of

countries with “strategic

deficiencies” in their

anti-money laundering and

combating financing of

terrorism frameworks.

BANKING OVERVIEW

good price”, and expressed confidence in long-term

growth. The Spanish lender brings its expertise in

mortgage lending and small and medium enterprise

(SME) finance in particular to Turkey – two current-

ly under-banked segments. “Many Turkish banks are

looking into ways to increase services to SMEs,” Ümit

Leblebici, general manager at TEB, told OBG. “Given

their large share of total companies and relatively

limited use of financial services, they offer a huge

opportunity to banks that are willing to become their

partners and to help them grow”.

SME lending is also an area of focus for Italian bank

Intesa Sanpaolo, which in April 2015 announced

plans to expand further in Turkey, having opened a

branch in Istanbul in June 2014. Intesa will also look

to serve the 1200 or more Italian-owned companies

present in Turkey, as well as new entrants from its

home country, bank officials said.

The BBVA and Intesa announcements followed

one of the biggest deals in recent years, the €2.92bn

acquisition of a 99.85% stake in DenizBank by Rus-

sia’s state-owned Sberbank from Belgium’s Dexia in

June 2012. The deal reflects both growing interest

in Turkey from emerging market banks, and the real-

ity of exits by Western institutions under pressure

after the financial crisis. Dexia’s sale was forced by

the French and Belgian governments as part of a

restructuring plan, and it achieved only 1.33 times

Garanti’s book value, having made the acquisition

at a ratio of 4.62 times book value.

Both HSBC and Citigroup, two major internation-

al institutions, have also announced plans to down-

size in or exit the Turkish market, with HSBC look-

ing to shed its retail division, which has 300 branches

and assets of around €3bn.

RATINGS: International ratings agencies keep a close

eye on the sector, and ratings movements can affect

the borrowing costs of Turkish financial institutions.

With Turkish banks having taken on substantial for-

eign debt, ratings can be a gauge of the borrowing

costs they are set to bear. In April 2015 Moody’s

Investors Service said it would be maintaining a neg-

ative outlook for Turkey, and a Baa3 rating, with low-

er economic growth and currency volatility drivers

behind its decision, and that both would lead to the

continuation of a negative outlook for the banking

sector. Fitch reached similar conclusions.

Pressure on the TCMB from President Recep Tayyip

Erdoğan also had an impact on the ratings, calling

into question the bank’s independence from politi-

cal interference and shaking economic confidence.

With parliamentary elections due in June 2015,

Erdoğan has been keen to boost flagging growth,

while the TCMB has tried to stick to its official man-

date of price control, trimming rising inflation. In

early 2015 senior government representatives

mounted a campaign to convince investors that the

central bank remains independent (see analysis).

OUTLOOK: As of mid-2015, a consensus has formed

on the Turkish banking sector: it is secure, has a pos-

itive growth outlook, and is well-capitalised enough

to deal with rising risks from foreign exchange expo-

sure and investor sentiment. However, these risks

should not be discounted, and further depreciation

of the lira could make the going tougher for exposed

banks. The environment is already more difficult, as

economic growth has fallen, inflation has risen and

political uncertainty has emerged. In this context,

moves in 2013 to trim loan growth seem prescient.

Despite a more becalmed market in 2015, the out-

look for the longer term is still very positive. “The

demographics offer considerable opportunities for

banks looking to enter the market. Where else can

a new player service more than 100,000 customers

in its first year?”, Hüseyin Özkaya, a board member

and general manager at Odeabank, told OBG. Turkey

has one of the world’s largest emerging economies,

a large and growing population, and a diversified eco-

nomic base. The continued entry of new players

to the market is indicative of the sector’s potential.

46

Banks are looking to increase the range of services they offer to small and medium-sized enterprises

The sector is sufficiently well capitalised to cope with rising risks

In April 2015 one major

ratings agency reported

that it would be

maintaining a negative

outlook for Turkey, and a

Baa3 rating, with lower

economic growth and

currency volatility key

drivers behind its decision.


BANKING INTERVIEW

Erdem Başçı, Governor, Central Bank of the Republic of Turkey (TCMB)

How will tapering of the US Federal Reserve’s

quantitative easing programme affect Turkey’s

economy? What is being done to prepare for this?

BAŞÇI: The Fed’s signals on tapering quantitative eas-

ing since May 2013 have increased volatility in the

global appetite for risk and caused capital to flow

out of emerging economies. As of the first quarter

of 2014, capital flows to emerging markets, partic-

ularly in portfolio investment, remain weak. Most

emerging-market currencies fell against the dollar,

especially in the early days after the Fed signalled

its exit strategy. At first, depreciation in the Turkish

lira was somewhat limited relative to currencies in

similar emerging markets. However, due to the rise

in domestic uncertainty towards the end of 2013,

the lira fell further against the dollar, and Turkey’s

risk relative to its economic peers increased. In

response, the TCMB boosted its sales of foreign

exchange reserves and implemented a direct cur-

rency intervention followed by a strong front-loaded

monetary tightening in an interim meeting on Jan-

uary 28. Under current circumstances, tight mone-

tary policy will not only contribute to price stability

but will also support macroeconomic stability by

reducing exchange rate uncertainty and risk per-

ceptions. All told, the Turkish lira performed relative-

ly well after the tightening delivered in January.

How prepared is the Turkish banking system for

the possibility of future macroeconomic shocks?

BAŞÇI: As part of the economic programme adopt-

ed following the 2001 economic crisis, the Turkish

banking system underwent major structural reform.

This was a key factor that helped the Turkish econ-

omy recover from the global financial crisis of 2009

relatively quickly. Since then, the Turkish banking

sector has maintained a sound structure in terms of

asset quality and capital adequacy. The share of non-

performing out of the total is actually relatively low,

at about 2.9%. The sector’s capital adequacy ratio,

at approximately 15%, is well above both the legal

minimum of 8% and the regulator’s minimum of 12%.

The ratio of equity to total assets, i.e. the leverage

ratio, is well above the 3% minimum set by the Basel

III regulations and is on a stable course.

Stress tests also confirm that the system has strong

capital buffers that would contain the effects of

possible adverse shocks to exchange rates, asset

prices, interest rates and non-performing loans.

Though the sector’s foreign liabilities have increased

considerably in the post-crisis period, banks do not

have difficulty maintaining external funding, even in

times of tightened global liquidity, as shown by the

sector’s relatively high roll-over ratios.

What is the outlook for inflation and how is the

TCMB preparing to help stabilise prices?

BAŞÇI: As of March 2014, consumer price inflation

stands at 8.4% year-on-year and is expected to remain

high due to the unfavourable course of food prices

and the lagged effects of the recent currency depre-

ciation. The TCMB, expecting that the factors driv-

ing inflation will keep it considerably above the 5%

target for a while, has opted for monetary tighten-

ing to prevent deterioration in inflation expecta-

tions and pricing behaviour. The combination of a

tight monetary policy stance and weak portfolio

flows have begun to be reflected in the growth rates

for loans and private domestic demand. Data for the

first quarter of 2014 indicate that there has been

some deceleration in private domestic demand, which

will support disinflation in the forthcoming period.

Meanwhile, the contribution of net exports to

economic growth is expected to increase, as exter-

nal demand for Turkish goods recovers. This, in turn,

should bring about a significant improvement in the

nation’s current account deficit in 2014. Thanks to

the recent deceleration of consumer loans, disinfla-

tion will resume from June 2013 onwards. Infla-

tion is expected to reach the 5% target by mid-2015.

47


Curbing volatilityOBG talks to Erdem Başçı, Governor, Central Bank of the Republic of Turkey(TCMB)

BANKING INTERVIEW

Ali Fuat Taşkesenlioğlu, CEO, Halkbank

How did recent changes in the global macroeco-

nomic landscape affect Turkish banks?

TAŞKESENLİOĞLU: In 2014 the global economy con-

tinued on a path to normalisation, with the US econo-

my signaling a strong recovery and the EU displaying

stable growth figures. Tapering by the Fed and easing

of concerns about a possible drop in liquidity abundance

in emerging countries gave way to relief after the Euro-

pean Central Bank initiated monetary expansion. These

developments led to lower global economic growth

figures compared to previous years, but the Turkish

economy continued to perform soundly during this

period, thanks to the resilience acquired as a result of

consistent economic policies over the last decade.

Global economic developments affected the bank-

ing industry’s profitability between the end of 2013 and

the first quarter of 2014. However, we project gener-

al economic recovery to bring a turn for the better and

lead to improved profit margins. We expect positive prof-

itability results in the Turkish banking industry in 2015.

With its continued growth performance, we are con-

fident that the Turkish banking sector will continue to

maintain its influence on the international markets.

Can Turkish banks handle further external shocks?

TAŞKESENLİOĞLU: The Turkish economy is pushing for-

ward with successful growth figures and, as a result, it

has become a major global actor. Turkey has gone

through an economic restructuring, after its economy

and banking sector received a serious blow in the 2001

crisis. Following restructuring, Turkey achieved stable

results and escaped the global economic crisis of 2008

unscathed. We believe that thanks to sound balance

sheet management, Turkish banks will continue oper-

ating, with nominal impact from global fluctuations.

How are banks diversifying their loan portfolios to

lend to small and medium-sized enterprises (SMEs)?

TAŞKESENLİOĞLU: We focus our solutions on the

main product categories designed to facilitate trade,

guarantee collections, improve productivity, cut costs,

encourage capacity increases and new investments, and

provide assurance for entrepreneurs who cannot secure

collateral, and we also offer loans to new establishments.

Our support is not limited to our own resources: we pro-

vide SMEs with funding from abroad, through proto-

cols signed with international finance institutions, such

as the European Investment Bank and the World Bank.

Creating platforms to support the growth of the SME

segment has been an industry priority. Developing a

strong, well-rounded and diversified SME segment will

benefit Turkey in the long-run, as being over-reliant on

any single or even a few industries is risky, especially in

times of uncertainty. Concrete steps have been taken

which affirms the industry’s efforts in harmonising

lending portfolios among the retail, corporate and SME

segments. Accordingly, banks have begun to renovate

service platforms, most notably online, with SMEs in

mind. Online advancements have made it easier for

customers to apply for SME products and services.

Another area of improvement is direct consultation,

where there is a dedicated SME support team offering

advice on matters including business operations, legal

issues, taxes and more. Numerous deposit and invest-

ment products are also available to increase deposit

rates and encourage account holders to invest their sav-

ings in banks. We believe that it is critical for consumers

to analyse their risk profiles when determining the

most suitable savings instrument.

How are banks becoming more sophisticated and

diversified, and where are they investing?

TAŞKESENLİOĞLU: There is a transformation taking

place in every industry and it is crucial to stay dynam-

ic to achieve success, and banking is no different. Tech-

nology offers new opportunities with each passing day.

Today, the industry is flourishing as it focuses on tech-

nological innovations. Accordingly, banks are investing

in technology, and alternative distribution channels are

currently taking the lion’s share of banks’ investments.

48

Technological shiftOBG talks to Ali Fuat Taşkesenlioğlu, CEO, Halkbank


BANKING ANALYSIS

New arrivals are attracted by the dynamic and expanding market

The foreign presence in the Turkish banking market

is currently undergoing a shake up, with new entrants

arriving looking to expand their presence in a large

and dynamic emerging market, while others are look-

ing to pull out due to external pressures.

RAISING THE STAKES: In 2011 Spain’s Banco Bil-

bao Vizcaya Argentaria (BBVA) bought 24.9% of

Garanti Bank for €4.4bn. In November 2014 it raised

this stake to 40% for an additional €2bn, giving it

control of the bank’s board (with seven of 10 mem-

bers) and reflecting its confidence in the Turkish

market’s outlook, despite the economic slowdown

and a dip in profitability, as well as political tensions.

“We believe that Turkey is a very exciting market

where we can achieve strong long-term growth,”

Jaime Saénz de Tejada, BBVA’s chief financial offi-

cer, told the press. “We are maximising economic

exposure to Garanti at a very good price.”

BBVA bought the 14.89% stake from Turkey’s DoğuşHolding, which will retain a 10% share in Garanti.

The deal allowed BBVA to take control of the board

and increase its holding in Garanti before the March

2016 date stipulated in its investment deal, reflect-

ing its keenness to expand its Turkish presence even

at a time when the banking sector faces a degree

of uncertainty. BBVA is under no obligation to buy

out the bank’s remaining shareholders.

BBVA asserts that Garanti benefits from the moth-

er bank’s experience in mortgage and small and

medium-sized enterprise (SME) lending in particu-

lar. Both segments are gaining traction as new cus-

tomers engage with banking services, and have been

underserved by developed economy standards.

NEWCOMERS: Another of the biggest deals in recent

years was the €2.92bn acquisition of a 99.85% stake

in DenizBank by Russia’s state-owned Sberbank from

Belgium’s Dexia in June 2012. Sberbank also acquired

Austrain and Russian units of DenizBank in the deal.

German Gref, Sberbank’s CEO and chairman, said

that banking penetration was low in Turkey, giving

“great potential for growth”, and that it had the most

attractive market outlook in Europe over the next

15 years. Sberbank has also been expanding in Cen-

tral and Eastern Europe as Western lenders have

backed away following the global financial crisis.

Dexia’s sale of DenizBank is indicative of this process,

with the Belgian bank selling its Turkish subsidiary

for 1.3 times its book value, having acquired it for

4.6 times its book value in 2006. It withdrew from

Turkey under obligation from the French and Belgian

governments under a state-led restructuring plan.

Sberbank’s strategy for expansion in Turkey is

organic growth, and it has invested strongly in mar-

keting to support this. However, DenizBank has not

been unaffected by sanctions imposed by the US and

the EU. In October 2014, international press report-

ed that DenizBank was seeing routine transactions

with Western counterparts blocked due to sanc-

tions. While the US waived sanctions on DenizBank

itself, software has been unable to distinguish some

legal transactions from the Turkish bank from sanc-

tioned movements by the mother company.

NEW OPPORTUNITIES: In April 2015, Italian bank

Intesa Sanpaolo announced plans to expand in Turkey,

having opened a branch in Istanbul in June 2014. Inte-

sa is the second Italian bank in the country, follow-

ing UniCredit, Italy’s largest bank and a big player in

Central and Eastern Europe. In partnership with KoçHolding, a major Turkish company, UniCredit is a

major shareholder in YapıKredi.Intesa’s Istanbul branch opened with initial share

capital of €226m, the minimum required for open-

ing a bank in Turkey. Intesa’s executive vice-chair-

man, Marcello Sala, said that it would probably focus

on corporate lending in Turkey, particularly for the

1200-plus Italian-owned companies present in the

country. This is a common model for banks launch-

ing in emerging markets with a corporate focus, sup-

porting clients from the home country. The bank

aims to support Italian firms in sectors including

Mortgages and small and

medium-sized enterprise

lending are gaining traction

as new customers engage

with banking services. Both

have been underserved in

Turkey by developed

economy standards.

49


Entries and exitsThe international presence in the sector is set to change markedly

BANKING ANALYSIS

infrastructure, textiles, energy and manufacturing,

which are looking to enter the Turkish market and

take advantage of investment incentives. However,

Sala also said that the bank saw potential in the SME

segment, comparing Turkey’s thriving but under-

banked SMEs to those of Italy, where they account

for nearly 70% of all companies.

Intesa had previously expressed interest in acquir-

ing a stake in Garanti and Finansbank, but in the end

opted to acquire its own banking licence in 2012.

For the time being, Intesa’s strategy remains organ-

ic growth, rather than acquisitions. Expansion in

Turkey fits with Intesa’s international policy of expan-

sion in emerging markets; the bank already has a pres-

ence in Brazil, China, Russia and Poland. Sala said he

was aware of the risks to the Turkish banking sys-

tem, including levels of private debt, the current

account deficit, inflation, and the lira’s depreciation.

In April 2014 Göksenin Karagöz, a banking ana-

lyst at Standard and Poor’s, said that Turkey’s bank-

ing sector was likely to attract more investments

from foreign institutions, particularly Gulf banks

seeking to tap into high profits and excellent growth

potential. Most Gulf markets, while affluent, are

rather small and fairly heavily banked, and thus the

large and relatively low-penetration Turkish market

represents an interesting opportunity. Karagöz cit-

ed Commercial Bank of Qatar, Kuwait’s Burgan and

Saudi National Commercial Bank as institutions which

have entered Turkey in recent years.

LEAVING THE SCENE: While international players

are entering Turkey, and more may join in the com-

ing years, others have decided that the increasing-

ly competitive market is not for them. In April 2015

HSBC, Europe’s largest bank, announced that it was

accelerating plans to pull out of emerging markets,

with a withdrawal from retail banking in Turkey top-

ping the list. The bank has come under pressure,

partly due to losses in some of its emerging market

operations. In Turkey, the bank earned revenue of

€596m in 2014 but still posted a net loss of €117m.

The bank is reportedly already scoping out poten-

tial buyers for its 300-branch Turkish network.

In April 2015 it was reported that HSBC had start-

ed the process of selling its branches in Turkey. How-

ever, interest in buying its branch network could be

muted in the current banking environment, given the

weakening growth outlook and softening investor

sentiment. The bank’s Turkish network – the 13th-

largest on the market – is an awkward size, not big

enough to provide a potential new entrant with the

scale to gain a strong foothold in the market, yet

extensive enough to prove costly for smaller local

players looking to step up.

Larger players present on the market already have

extensive branch networks, making the acquisition

less appealing for them. Nonetheless, Citibank ana-

lysts said that HSBC’s retail business in Turkey, with

approximately €3bn of assets, could be sold for

around book value, allowing the British institution

to exit without a loss, though also without a profit.

Reports suggest that HSBC may be encouraged

to sell its Turkish investment and corporate banking

divisions with its retail business to secure a sale, with

potential buyers coming from China or the Gulf,

where banks are more cash-rich and enthusiastic

about expansion than in the West. Yet the size and

growth potential of the Turkish market will make

HSBC reluctant to offload these valuable assets.

EQUITY EXIT: In March 2015 Citigroup announced

that it had sold its remaining 9.9% stake in Akbank,

the second-largest bank by market value, for €866m,

with a €603m loss. Citi acquired a 20% stake in

Akbank 2007 and exited via sales to SabancıHold-

ing, Akbank’s main shareholder. The US-based bank

will continue to service corporate clients, it said.

The bank’s operations have been hit by the inter-

national financial crisis, bringing down its capital

values, and analysts said that the sale reflected

concerns relating to the outlook of Turkish banks’

future equity values in the context of the declining lira.

50

Turkey’s banking sector is likely to attract further investments from foreign institutions

Some players are looking to pull out due to external pressures

Most Gulf markets, while

affluent, are rather small

and heavily banked, so the

large, relatively

low-penetration Turkish

market is an interesting

opportunity for Gulf banks.


BANKING INTERVIEW

Suat ‹nce, Deputy Chief Executive, Türkiye İfl Bankası

How important is foreign investment to the Turk-

ish economy? Why should multinationals consider

Turkey an attractive market in which to invest?

İNCE: Over the past decade, foreign direct investment

(FDI) in the Turkish economy has risen considerably. As

one of the fastest-growing economies in the OECD,

Turkey has attracted more than $120bn of foreign cap-

ital in the last 10 years. Indeed, Turkey was the 13th

most attractive FDI destination in 2012, received

$12.7bn of FDI in 2013 and, as of December 2013, had

about 37,000 foreign firms operating in the country.

Given Turkey’s reliance on foreign capital to finance

its sizeable current account deficit, the government has

made it a major goal to attract larger amounts of FDI.

It sees this as more sustainable than portfolio inflows,

which are subject to sudden swings of volatility.

Besides being a gateway between Europe, Asia, the

Middle East and Africa, Turkey has many attractive qual-

ities for foreign investors: a large and growing domes-

tic market, a liberal and secure investment environment,

a mature and dynamic private sector, a high-quality

and cost-effective labour force, the Customs union it

shares with the EU, developed infrastructure, an insti-

tutionalised economy and a competitive tax system.

When investing in the Turkish market, what spe-

cialised banking needs do multinationals have?

İNCE: Most Turkish Banks have large national networks

with commercial branches across the country, experi-

enced field teams, customer relationship managers

and customer representatives. Through these networks,

Turkish banks are able to serve their clients effective-

ly from the incorporation phase, helping to identify

their needs and facilitating growth. While the banking

system in Turkey is very mature, similar to those in

Europe and other more developed markets, there are

slight differences between the systems that may be con-

fusing to foreign investors – especially what types of

financial products and services are most suitable to the

Turkish market. Turkey’s strong local banks, with their

significant clout in certain industries, can help foreign

entrants navigate the market. For example, as a part

of İşbanks’ strategy of being a customer-oriented bank,

a new and unprecedented unit was established in 2012

that is dedicated to meeting the needs of multination-

al companies that have operations in Turkey.

Another common issue with multinationals that have

started their operations recently is finding domestic

sources of financing for their investments. Turkey-

based branches of many of these foreign firms are

young, relatively small and do not have strong credit

histories, making it hard for them to attract loans. To

remedy this, it is important to take into account the glob-

al operations and growth plans of the mother compa-

ny when evaluating loan prospects, making it easier for

local subsidiaries to leverage their parent companies’

balance sheets to acquire funding and receive high-qual-

ity services regardless of size. This approach is only

possible with a team experienced and specialised in pro-

viding banking services for new foreign companies in

their growing phase. This innovation, plus other solu-

tions being devised for companies backed by foreign

capital, will help multinationals investing the country.

Which sectors hold the best opportunities for FDI?

İNCE: If you look at the breakdown of FDI by sector, three

stand out as attracting the most foreign capital in the

last five years: finance (30%), manufacturing (27%) and

energy (19%). Banks and insurance companies have

been the main beneficiaries of this inflow, but we expect

other fields in the finance sector to attract more inter-

est in the future, such as leasing, factoring and asset

management. As for energy, the ongoing liberalisation

process has created a more vibrant and competitive mar-

ket, which has already seen large foreign investments

and is likely to see more in the near future. There are

also considerable opportunities across energy sub-sec-

tors in each link of the value chain. Industry is anoth-

er area with high potential: for example, machinery

manufacturing has seen a 64% rise in FDI since 2005.

51


Attracting investmentOBG talks to Suat İnce, Deputy Chief Executive, Türkiye İfl Bankası

BANKING INTERVIEW

Hikmet Ersek, President and CEO, Western Union

How is Turkey seen by global financial firms look-

ing to expand their operations in the region?

ERSEK: Half the population in Turkey is under 30,

and they are very tech-savvy – the country ranks 18th

in the world by number of internet users, and 66m

people have mobile phones out of a population of

77m. Banks and other financial institutions in Turkey

and around the world are looking for innovative ways

to attract new customers and retain current ones.

Many are introducing services like mobile banking

and remittances to attract these new customers.

Some are partnering with money transfer firms like

Western Union to offer services like cross-border

money transfer. Western Union has partnerships

with a number of banks in Turkey, including Garan-

ti Bank and Akbank, to allow customers to receive

money transfers at ATMs throughout the country and

to manage their money transfers online. We also

offer online banking with TEB and Şekerbank.

What opportunities for innovation do expat and

migrant communities in Turkey present banks?

ERSEK: According to the Ministry of Foreign Affairs,

around 5m Turks live outside of Turkey in countries

like Germany, France, Russia, the UK, the Nether-

lands, Belgium and the US. Many of these expats send

money home to their loved ones: in 2013 they remit-

ted nearly $1bn. In addition, migrants from around

the world are moving to Turkey, especially from East-

ern Europe and the Commonwealth of Independent

States, and they send money from Turkey to their

home countries. Banks in Turkey and worldwide have

a unique opportunity to serve these customers, with

a range of services that allow them to manage their

money how, when and where they want.

How can large payments companies aid global

efforts against money laundering and fraud?

ERSEK: One of the most important things these

companies can do is simply to uphold the highest

standards of integrity, which to me means investing

in compliance. Compliance and consumer protection

are not just departments or sets of rules to follow;

they are at the heart of what it means to be a respon-

sible company. At Western Union, we are strength-

ening our programmes, hiring more people and

implementing more measures in the increasingly

complex, demanding and fast-changing global reg-

ulatory environment. We believe the steps we are

taking are the right ones for the company, and the

hope is that these investments will help us differ-

entiate and improve our position. Together, every-

one in the financial services industry must work

harder than ever to protect the money transfer sys-

tem from misuse and to educate customers about

fraud and money laundering. They should do this not

only because it is required, but because it is the right

thing to do for business and for the millions of peo-

ple around the globe who depend on us.

In what ways can technology help small and medi-

um-sized enterprises (SMEs) in emerging mar-

kets meet the challenges of expanding abroad?

ERSEK: Technology can help SMEs in many ways. In

more developed countries like the US, SMEs often

import goods and thus need to make payments in

several different currencies. They need access to a

variety of tools to help them pay online, track their

payments and manage foreign-exchange risk. SMEs

in emerging countries are often on the receiving

end of cross-border transactions. They need access

to technology that allows them to receive payment

in whatever currency they want, and also trans-

parency in transactions so that they can be sure

they receive the amount they are supposed to. Not

just SMEs can benefit from these services; so can

entities like NGOs – for example, Mercy Corps, which

needs to get funds to rural areas after a disaster. Tech-

nology can help them do that – delivering funds in

minutes from around the globe for payout in cash.

52

Outside looking inOBG talks to Hikmet Ersek, President and CEO, Western Union


BANKING ANALYSIS

The non-performing loan ratio is currently relatively low

As the IMF and others have noted, the Turkish bank-

ing system’s non-performing loan (NPL) ratio is rela-

tively low, despite the recent economic slowdown and

foreign exchange risk. The ratio varies across the sec-

tor, however, with some banks more susceptible than

others. While NPLs are not high by regional standards

– and even by those of some eurozone members – and

are well-provisioned, analysts and sector players have

become increasingly aware of the risks of a rising ratio

to balance sheets. After several years of rapid credit

growth, a number of factors could drive NPLs upwards,

including slowing economic growth, the fall in the lira,

and cooling investor sentiment.

UNDER CONTROL: As of late April 2015, the system-

wide NPL ratio stood at 2.8%, down slightly from 2.82%

at the end of 2014, according to the Turkish Banking

Regulation and Supervision Agency. The ratio has been

fairly steady in recent years, standing at 2.7% at the

end of 2013 and 2.84% at the end of 2012.

NPLs have been brought down since the turn of the

millennium, from as high as 17.5% in 2002, and remain

at levels below those seen just before the internation-

al financial crisis. System-wide NPLs rose from 3.04%

in March 2008 to 5.41% in October 2009 as the econ-

omy slipped into recession, before falling back below

3% by June 2011. The ratio rose to 3.01% in November

2014, then once again dropped.

While Turkey’s NPL ratio is impressive, it has been

reduced partly by the sale of bad loans to manage-

ment companies by banks. In December 2014, for

example, Akbank sold its NPL portfolio, which totalled

TL250.5m (€88.2m), to Efes Asset Management for

TL41m (€14.4m). The month before, ING Bank Turkey

had sold TL47.86m (€16.9m) in NPLs for TL7.25m

(€2.55m) to an unnamed buyer.

INTERNATIONAL COMPARISON: The NPL ratio com-

pares very favourably to many European countries. In

Central and Eastern Europe, a region in which Turkey

is sometimes included by financial institutions, NPLs

have reached as high as 20% in the wake of the crisis.

As of April 2015, the NPL ratio stood at 5.6% in Russia

and 8% in Poland; Turkey has also been compared to

these two other sizeable emerging markets.

As of 2014, NPLs in the eurozone stood at 7.8%,

according to professional services firm EY, reaching

14.6% for Italy and 13.3% for Spain. Turkey’s ratio was

comparable to that of Germany – a historically debt-

averse society – where the ratio was 3%. NPLs across

emerging markets are more variable – in China, for

example, the ratio stood at 1.2% in 2014, according to

the IMF, while in India it was 4.3% and in Pakistan it

was 12.3%. In some countries, authorities have acted

to write off or restructure NPLs, keeping the level

down. In some – and to an extent this applies to Turkey

in recent years – the rapid growth of loan books has

helped “dilute” NPLs, which are rising in value terms.

In Turkey, credit growth averaged over 25% per year

between 2010 and 2013, according to Bloomberg.

Though it has been trimmed since regulatory meas-

ures were introduced in 2013, the expectation is for

double-digit growth up to 2018. With Turkey’s econ-

omy cooling, this has increased the risk of NPLs.

RISK RISING: In November 2014 Garanti Bank warned

that bad loans would grow “across the board” in the

Turkish banking sector, as Bloomberg said that NPLs

posed the greatest risk to banks’ profitability for over

a decade. The same month, DenizBank’s general man-

ager, Hakan Ateş, said that tackling NPLs would have

to be a priority for the sector in 2015.

This followed Halkbank’s announcement that it had

cut its end-2014 profit forecast by 15%, saying that it

was facing NPLs totalling TL1.08bn (€380m). The over-

all sector’s profit in the first nine months of 2014 was

TL18.8bn (€6.62bn), down from TL19.8bn (€6.97bn)

a year previously. Bad consumer debts grew by 41% in

the 12 months to September 2014, the highest rate

since 2010, when Turkey was still absorbing the impact

of the global credit crunch and subsequent recession.

Analysts expect NPLs to rise in the coming years,

weighing on earnings at a time when buffers have

Various factors could drive

non-performing loans

upwards, including slowing

economic growth, the

falling lira and cooling

investor sentiment.

53


Credit growth averaged

more than 25% a year

between 2010 and 2013.

While it has slowed

considerably since

regulatory measures were

introduced in 2013,

double-digit growth to

2018 is expected.

Loan rangersThe main players are alert to the risk of the level of bad debt rising

BANKING ANALYSIS

been reduced. Sensitive to inflation and unemployment,

the consumer segment is particularly susceptible to

NPL growth. A rise in NPLs can occur despite the slow-

down in credit growth, as there is invariably a lag

between lending and the build up of bad debt.

In April 2015 the World Bank cut its 2015 GDP

growth forecast from 3.5% to 3%, due to domestic

uncertainty, an unexpected inventory build-up and the

strength of the dollar. This followed growth of 2.9% in

2014, below the government’s 3.3% target and down

from 4.2% in 2013. The bank raised its forecast of infla-

tion – which erodes spending power and consumer

confidence – to 7% from a previous projection of 6.7%.

BUILDING BLOCKS: Risks may also arise from expo-

sure to the construction industry. Loans to the sector

account for some 66% of GDP, and rose rapidly in 2014.

The IMF noted in December 2014 that a substantial

drop in construction employment might signal a down-

turn, but that there had not been a significant rise in

NPLs in the sector. Many loans in the sector are for-

eign currency denominated, increasing risk.

As the IMF pointed out, construction – particularly

residential property construction – does not always

have a foreign currency hedge. Even with rents and

purchase prices denominated in euros or dollars,

incomes remain in lira: most end-users earn in local

currency, leading to exchange rate risk for developers

and those that lend to them. Furthermore, the fund

warned that the flow of lending to construction may

be depriving more productive sectors of capital.

DIFFERING VIEWS: However, in April 2015, Deutsche

Bank said that the risks to Turkish banks should not

be overstated, noting that the top five banks’ NPL

ratios had not risen noticeably. This followed warnings

that the lira’s depreciation would make it harder for

Turkish companies to repay loans, despite regulations

limiting foreign currency lending to businesses.

Kubilay Öztürk, an economist at Deutsche Bank, said

that only an event similar to the 2007 collapse of

Lehman Brothers would create a “serious problem”

for Turkish banks. Reports noted that Turkish banks’

profitability in the first quarter of 2015 had beaten

expectations. Deutsche’s note may not fully take into

account the longer term outlook, with the effect of

the depreciating lira still fully to feed through to the

broader economy. Furthermore, with an election in

June, investor uncertainty could push down the cur-

rency further, or trim growth with negative effects on

employment and wages. However, banks should be

able to cope with NPLs in any case.

VARIATIONS: A 2014 report by international invest-

ment bank JP Morgan revealed the variation in NPL

ratios between different Turkish financial institutions.

Finansbank posted an NPL ratio of 6.5% in the first quar-

ter of 2014, higher than the average, while Akbank’s

was just 1.5%. İşbank’s stood at 1.8%, Garanti’s at 2.8%,

Halkbank’s at 2.7%, Vakıfbank’s at 4% and YapıKredi’s

at 3.5%. Perhaps due to regulatory imperatives, Tier 1

capital adequacy ratios (CARs) showed a tighter range,

from 11.3% for YapıKredi and Vakıfbank to 13.5% for

Akbank. Finansbank and İşbank’s Tier 1 CAR stood at

12.3%, Halkbank’s at 12.5% and Garanti’s at 12.3%.

The Turkish Banks Association has highlighted the

risk to state-owned banks in particular. In January 2015,

it noted that the volume of NPLs in the segment had

grown by 131% between 2009 and 2014, compared

to an increase of 62% in the private sector.

The total volume of NPLs on public banks’ balance

sheets hit TL10.22bn (€3.6bn) in the third quarter of

2014, almost double the TL5.48bn (€1.93bn) five years

before. Of the TL12.34bn (€4.34bn) increase in sec-

tor-wide NPLs in 2009-14, the state segment account-

ed for TL5.8bn (€2.04bn), despite having only 30% of

overall sector assets. Ziraat Bank was particularly

affected, seeing its NPL volume rise 224% over five years,

while Halkbank’s rose 131% and Vakif’s 93%. Howev-

er, Ziraat’s rise came from a lower base: by Septem-

ber 2014, the bank’s bad loan book totalled TL2.64bn

(€930m), compared to TL3.67bn (€1.29bn) for Halk-

bank and TL3.91bn (€1.38bn) for VakifBank.

The rise can partly be attributed to the structure of

public tenders. Ramazan Taş, professor at and chair

of Turgut Özal University’s department of economics,

told local press that the NPL ratio of state banks had

been driven up by lending to firms executing public

projects, some of which have struggled to repay loans.

Restructuring of loans before they reach maturity has

helped government-owned institutions in bringing

down NPL ratios, if not necessarily improving their

balance sheets. The NPL ratio did not rise as expect-

ed in the first few months of 2015 – indeed, it dropped

very slightly – reinforcing the argument that bad debt

remains under control, and that currency risk and the

effects of political uncertainty to the banking sector

should not be exaggerated. Public banks may be more

exposed, but they also enjoy exchequer backing.

Regulatory changes have helped reduce credit risk,

and banks look well-positioned to absorb shock in all

but a severe crisis. However, banks are aware of the

growth in NPL volumes after years of rapid credit

expansion, and are right to look to address the issue.

54

Turkish banks’ profitability in the first quarter of 2015 surpassed most expectations

The volume of

non-performing loans in

the state-owned banking

segment grew by 131%

between 2009 and 2014,

compared to an increase of

62% in the private sector.


BANKING ANALYSIS

Ratings movements can affect financial institutions’ borrowing costs

International ratings agencies keep a close eye on

Turkey’s banking sector, given its size and importance,

and the penetration of major foreign investors. Ratings

movements can affect the borrowing costs of Turkish

financial institutions and, at a time when Turkish banks

have taken on substantial foreign debt, can be a gauge

of the borrowing costs they are likely to bear.

POLITICAL RISK: In April 2015, Moody’s Investors Serv-

ice reported that it would be maintaining a negative

outlook for Turkey and a Baa3 rating. It said that low-

er economic growth and currency volatility were the

key drivers behind its decision, and that both would lead

to a continued negative outlook for the banking sec-

tor specifically. Days previously, Fitch Ratings had reached

similar conclusions in its report on Turkey.

Pressure on the Central Bank of Turkey (TCMB) from

President Recep Tayyip Erdoğan also had an impact on

the ratings, calling into question the bank’s independ-

ence from political interference and helping drive down

the lira, as well as shaking broader economic confidence.

With parliamentary elections due in June 2015, Erdoğan

has been keen to boost flagging growth, while the

TCMB has tried to stick to its official mandate of price

control, trimming rising inflation. In March and April,

senior government representatives – including the

prime minister, Ahmet Davutoğlu – mounted a campaign

to convince investors that the central bank remains inde-

pendent, travelling to the US with this message.

FITCH: In December 2014, Fitch forecast “a tough oper-

ating environment for Turkish banks in 2015”, while not-

ing its fairly stable outlook thanks to risk buffers. The

agency said that banks would find the going harder due

to slower economic growth, a degree of asset quality

deterioration and competition for deposits (which tends

to narrow interest rate spreads and thus margins).

Fitch said that it expected GDP growth in the medi-

um term to remain below the highs of recent years. The

agency said that rising reliance on short-term foreign

currency financing was the biggest risk to the sector

outlook, but that while interest rates and exchange

rates would remain volatile, it expected that volatility

to be manageable. It said that international financing

would remain accessible.

Asset quality erosion would be driven by the matu-

rity of loan portfolios, a rise in consumer debt and the

declining lira, which could make it harder for foreign

currency borrowers to service their debts. High inter-

est rates and competition for deposits would drive up

funding costs, but pressure on margins would proba-

bly only be moderate, with Turkish banks likely to reprice

loans as they have done in the past.

Like most analysts, Fitch highlighted the risk from the

rapid rise in foreign-currency liabilities, with banks’ for-

eign currency debt trebling since 2008, with shorter

maturities. This leaves them vulnerable to shocks and

a reversal in investor sentiment cutting off market

access, but Fitch asserts that foreign currency liquidi-

ty remains ample enough to deal with most scenarios.

S&P: Standard and Poor’s (S&P) issed a more upbeat

assessment in November 2014, saying that Turkey’s

banks remained resilient despite tough conditions,

thanks partly to regulatory moves to trim lending and

credit card expenditure.

S&P said that lower credit growth would be positive

for the sector. The agency noted some margin contrac-

tion, but from a relatively high level, and a non-perform-

ing loan (NPL) ratio of below 5%, though this is vulner-

able to external and internal shocks.

Banks have also benefitted from ample global liquid-

ity, with the European Central Bank embarking upon

quantitative easing, and it and other central banks

maintaining low interest rates.

In February 2015 S&P said that the seizure of Bank

Asya by the Banking Regulation and Supervision Agency

did not represent a systemic risk to Turkey’s banks. It

added that it was not a sign of a “determined politici-

sation of Turkey’s regulatory institutions”.

One reason that contagion from Asya’s seizure

does not present a system risk is the bank’s small

size; the bank holds just 0.1% of Turkey’s banking assets.

Pressure on the Central

Bank of Turkey from the

president has had an

impact on ratings, calling

into question the bank’s

independence from

political interference and

helping drive down the lira,

as well as shaking broader

economic confidence.

57


Banks have benefitted from

ample global liquidity, with

the European Central Bank

embarking upon

quantitative easing and

many major central banks

setting low interest rates.

Rate and seeThe agencies’ verdicts shine a revealing light on the sector

BANKING ANALYSIS

BREAKDOWN: One of the most thorough recent

reviews of the outlook for individual banks was con-

ducted in June 2014 by Moody’s Investors Services.

The agency lowered its rating on Akbank, saying that

pressures from the operating environment and the

expectation of loan growth outstripping capital gen-

eration would weaken its credit profile. However,

Moody’s said that the bank had a stable outlook, reflect-

ing its resilience due to its strong franchise, core cap-

ital and granular deposit funding profile which means

only moderate reliance on market financing.

Moody’s was also sceptical of the outlook for

DenizBank, saying that its strategy of increasing com-

mercial lending via new products and high loan book

growth were potential risks. It noted that DenizBank’s

Tier 1 capital ratio of 8% gives it a limited loss buffer,

and that the bank’s expansion plans are reliant on cash

injections from mother company Sberbank, which faces

sanctions in the EU and US, and is suffering from the

drop in the Russian rouble. The downgrade of Şeker-

bank’s rating and its negative outlook reflect its weak-

er capital position, the erosion of asset quality and its

more vulnerable loan composition. Furthermore, as a

result of higher operational and credit costs, the bank’s

bottom line profitability somewhat underperforms the

system average, despite its strong margins.

For market leader Ziraat, Moody’s noted the weight

of a negative outlook on sovereign Turkish bonds on

the state-owned bank, but also its strong nationwide

network, its granular core deposit funding stance, which

gives it relatively low reliance on market financing, and

its moderate asset quality. However, it saw negatives in

Ziraat’s changing risk-management stemming from its

rising commercial lending and high loan growth.

Moody’s said Türk Ekonomi Bank was at a disadvan-

tage against higher-rated peers due to its leaner Tier

1 capital, moderate market share and efficiency, and

weaker bottom line. Yet it said that operation efficien-

cy was improving and resilience should stop its credit

profile from deteriorating. Ekonomi is also restrained

by the sovereign bond outlook, as is Garanti.

The agency said that it expected Garanti’s credit pro-

file to decline, with loan growth outstripping internal

capital generation. Nonetheless, the bank’s strong fran-

chise, core capital and granular deposit base are all

upsides. Similar upsides and downsides apply to the large

Halkbank, İşbank and Vakıfbank. Vakıfbank, however, has

a particularly strong asset base with low levels of restruc-

tured loans and those under monitoring – though it

also has higher costs of capital than most in the sys-

tem, with equity and subordinated debt components.

BALANCE: The agencies have thus taken a balanced

approach to Turkey’s banks, noting both considerable

strengths – high levels of capitalisation and, in the case

of most big banks, diversified asset bases – and risks

arising from the economic environment and high loan

growth. A degree of caution is justified, but most banks

are now well positioned to weather potential shocks.

58

The agencies have taken a

balanced approach to

Turkey’s banks, noting both

their considerable

strengths and the risks

arising from the economic

environment and high loan

growth.

59

Capital MarketsMain bourse eases after a bumper year in 2014

A substantial share of foreign ownership maintained

Legal reforms in 2012 merged several exchanges

Multi-tier system encourages a variety of listings

A clutch of IPOs launched in 2014, with others pending

CAPITAL MARKETS OVERVIEW

The country’s stock exchange was the fifth most profitable in 2014

Turkey’s stock exchange, the Borsa Istanbul (BIST),

had a bumper year in 2014. It was ranked as the fifth

most profitable exchange globally, with the BIST 100

index rising by 26% and closing at a record year-end

high. While the early months of 2015 were more

muted for the BIST, the appeal of the exchange and

many of its listed stocks to investors is still strong.

CORE FEATURES: As of the end of 2014, there were

217 companies listed on the main National Market,

with a total market capitalisation of $248bn, while

the Second National Market, which focuses more on

small and medium-sized enterprises (SMEs), had 94

companies with a $10bn market capitalisation,

according to the 2015 handbook published by the

Turkish Capital Markets Association (TCMA). Includ-

ing the “collective products” market and the “watch

list” of companies in specific situations, there were

401 companies listed on the equity market, with a

total market capitalisation of $268.5bn.

A substantial share of foreign ownership is a char-

acteristic of the Turkish system, with foreign investors

accounting for “a large but steady” 61% to 73% since

2006, according to JP Morgan Cazenove, an invest-

ment bank. The growth of Turkey’s pensions sector,

reinvigorated by reforms in 2013, has also boosted

the market, with assets under management dou-

bling to $15bn since then, though this remains low

by international standards, indicating scope for con-

siderable growth as the population starts to age.

CHIEF REGULATOR: The Turkish financial system is

overseen by a range of organisations and has a num-

ber of different stakeholders, including industry

associations which represent different groups.

The main regulator of the country’s capital mar-

kets is the Capital Markets Board of Turkey (CMB),

a supervisory authority overseeing securities mar-

kets and institutions. It sets the operational princi-

ples of the market and is responsible for protecting

the rights and interests of investors. The CMB reg-

ulates and supervises public and listed companies;

investment companies; exchanges; mutual, closed-

end and pension funds; and leveraged transactions

on foreign exchange and precious metals – includ-

ing gold, an important commodity in the Turkish

market. It also oversees capital markets institutions

including the Settlement and Custody Bank (Takas-

bank), the TCMA, the Investor Compensation Cen-

tre, the Central Registry Agency, and many other

companies and bodies working in capital markets,

including ratings agencies, independent audit com-

panies, asset leasing companies, market operators,

appraisal firms, and trade repositories.

MARKET AUTHORITIES: The TCMA is a self-regula-

tory institution to which all investment companies,

banks authorised for capital market activities, port-

folio management companies and investment trusts

are obliged to belong. The association’s remit is to

set rules for professional operation on the capital

markets and monitor members to ensure “a fair and

disciplined” market. It is thus responsible for enforc-

ing regulations enshrined in the country’s legisla-

tion or in the decisions of the CMB.

The Banking Regulation and Supervision Agency

(BRSA) is the top regulatory authority for the entire

banking sector, and thus has significant overlap into

capital markets, as well as an important impact on

banks, which are among Turkey’s bigger listed com-

panies. The BRSA regulates deposit banks, Islamic

banks and development and investment banks

(including Takasbank), as well as foreign branches

operating in Turkey, audit firms, ratings agencies,

financial holding companies, and firms involved in

leasing, consumer finance and factoring.

The Central Bank of the Republic of Turkey is the

regulator of money and foreign exchange markets,

with a remit to promote both price and financial sta-

bility. Besides its core banking regulatory responsi-

bilities, the central bank is also responsible for the

secure operation of payment, settlement and secu-

rity transfer systems. Other notable institutions

The 217 companies listed

on the BIST’s main National

Market have a total market

capitalisation of $248bn,

while the SME-focused

Second National Market

had 94 companies with a

$10bn market

capitalisation.

The growth of the pensions

sector, reinvigorated by

reforms in 2013, has

boosted Turkey’s capital

markets, with assets under

management doubling to

$15bn since then.

60

To the marketplaceWith its bourse easing after a recent surge, the country looks to regulatory reforms and multi-tier platforms to encourage new listings



include the Capital Markets Licensing and Training

Agency, responsible for organising licensing exams

and training market professionals; the Banks Asso-

ciation of Turkey, a self-regulatory body for all banks

except the “participation banks” working in Islamic

or sharia-compliant finance, which fall under the

Participation Banks Association of Turkey; and the

Association of Financial Institutions.

LEGAL REFORMS: In December 2012, the govern-

ment passed a Capital Markets Law that saw Turkey’s

exchanges restructured. This law created the BIST

by essentially renaming the Istanbul Stock Exchange,

merging it with the Istanbul Gold Exchange and

transforming it into a for-profit company. In 2013

another exchange was merged into the BIST – Izmir-

based TurkDex, which was the second-biggest in

Turkey, specialising in derivatives and one of dozens

of commodities exchanges spread around the coun-

try, most of which are of very modest size.

The 2012 reforms were intended to broaden and

deepen Turkey’s capital markets by encouraging

more companies to list, offering a wider range of

financial instruments, promoting international mar-

ket integration, and increasing visibility, accessibili-

ty and transparency. The new law was also aimed at

improving investor protection.

The longer-term aim is to prepare the BIST for pri-

vatisation. International counterparts have long

expressed interest in potentially taking a stake in

the company. For now, the BIST is 48.9% owned by

the government, which has indicated an intent to

sell its stake in an initial public offering (IPO) planned

for early 2016. The 36% stake currently held by the

BIST management company itself may go on the

block first as the firm looks for financial institutions

to act as “anchors” prior to the IPO. Other sharehold-

ers include OMX Technology (5%), the TCMA (1.3%),

and various investment firms and banks.

The Capital Markets Law replaced the previous

law, first enacted in 1981 and leading to the foun-

dation of the Istanbul Stock Exchange in 1985. The

new legislation follows EU standards – namely, the

acquis communautaire, the body of EU law to which

states theoretically must adhere prior to member-

ship. Joint stock companies with more than 500

shareholders, or those which have public offerings,

are subject to the law. Its disclosure requirements

also apply to securities issued by state-owned enter-

prises (including those lined up for privatisation),

municipalities and related institutions. Overall, the

series of reforms to Turkey’s capital markets have

greatly increased their value, marketability and vis-

ibility, while enhancing their operations.

TIERS & MARKETS: The BIST has several tiers and

a number of separate markets, giving investors access

to a broad range of companies and instruments. The

first tier is the National Market for companies that

fulfil listing and liquidity criteria, including all those

on the BIST 100, the main capital markets index.

Those not fulfilling criteria of the National Market

are transferred to the Second National Market, tem-

porarily or otherwise. The Second National Market,

with 94 firms as of end-2014, is largely intended for

SMEs. There is also a National Market index, a track-

er for the main market that is broader than the BIST

100. A third tier is the Watch List Companies Mar-

ket, into which companies are transferred while

under investigation or special regulatory surveil-

lance. This might include unusual trades; incomplete,

inconsistent or delayed disclosure of information; or

breach of rules and regulations. As of the end of 2014,

there were 29 such watch-listed companies.

OTHER PLATFORMS: In November 2009, the BIST

launched the Collective Products Market, offering

trading of certificates from a range of listed finan-

cial instruments, which as of end-2014 included nine

investment trusts, 31 real estate investment trusts,

six venture capital trusts and 15 exchange-traded

funds. The market also allows trading of covered

warrants and turbo certificates.

In May 2012, trading commenced on the BIST’s

new Free Trade Platform, which offers trading of

unlisted public companies. The idea behind this new

61


Amount raised via IPOs by industry, 2014 ($ m)

SOU

RCE:

Pw

C

0

40

80

120

160

200

Financialservices

Real estate Pharma& biotech

Food &beverage

Ind. goods& services

Insurance

Reforms passed in 2012 merged several exchanges into one body

Alternatives to the

country’s two main markets

include the Collective

Products Market, which

offers trading of

certificates from a range of

listed financial instruments

such as real estate

investment trusts and

exchange-traded funds.


market is to provide a platform for companies to

raise capital and raise their profile vis-a-vis investors,

with the hope that, over the longer term, many will

move on to launch IPOs on one of the main markets.

The Emerging Companies Market (ECM) was

launched in October 2010 following the passage of

regulations the previous year. The first listing came

in January 2011, and as of end-2014 there were 22

companies listed with a total market capitalisation

of $403m. The ECM is for companies that have high

growth potential but do not meet the criteria for list-

ing on the National Market – strictly speaking, the

companies are not listed, but rather are included in

the ECM Directory. Companies are expected to meet

some criteria, but do not have to meet quantitative

criteria on market capitalisation, profitability, paid-

in capital, company age or size of offering. As with

the Free Trade Platform, the hope is that these firms

will find new access to capital, grow and move

towards full listing on the National Market.

SENTIMENT MODERATES: In the early months of

2015, Turkey’s capital markets went through a dif-

ficult period, reflecting the reality of lower econom-

ic growth, uncertainty surrounding the June 2015

parliamentary elections, and rising inflation. In April

2015, the IMF cut Turkey's growth forecast from

3.4% to 3.1% for the full year. Headwinds came espe-

cially from the rising dollar, but also from political

uncertainty, growing caution among both banks and

consumers, and questions over monetary policy.

Weakening sentiment towards Turkey pushed the

lira down 13% against the dollar in the year to late

April, while the BIST 30 fell more than 15%, against

a benchmark emerging markets index of more than

10% growth, according to Bloomberg. Nonetheless,

a return to the instability of the 1990s is unlikely –

Turkey is on a much sounder footing now, even if it

can be buffeted more than developed markets. More-

over, it is a large and youthful market with substan-

tial long-term growth potential, both in terms of its

broader economy and its capital markets.

QUANTITATIVE EASING: Short-term factors should

also help buoy the market somewhat. As JP Morgan

Cazenove noted in its CEEMEA Year Ahead 2015

report, Turkey stands out as one of the countries best-

placed to benefit from the new quantitative easing

programme of the European Central Bank (ECB),

begun in March 2015. The ECB’s action is expected

to boost bank lending, thus benefitting Turkey’s pri-

vate sector, which borrows heavily from the euro-

zone. Turkey is also well-placed to benefit from the

expansionary effect on the eurozone economy, its

major trading and investment partner. Earlier in the

year, JP Morgan stated that it remained positive on

Turkish equities, drawing attention in particular to

conglomerates like Koç and Sabancı, which offer a

well-diversified exposure to equities. It also com-

mended Akbank’s market-beating return on equity.

62

The new quantitative

easing by the ECB stands to

benefit Turkey’s private

sector, which borrows

heavily from the eurozone,

as well as Turkey generally,

for which the eurozone

economy is its main trading

and investment partner.


INITIAL PUBLIC OFFERINGS: In 2014, the BIST saw

13 IPOs that raised $306m, compared to 11 raising

$727m in 2013. Much of the most significant activ-

ity was concentrated in the final quarter of the year.

By far the biggest IPO was that of insurance com-

pany AvivaSA, which raised $146m, or 45% of the total

proceeds. Ranking second was Ulusoy Elektrik, rais-

ing $75m. According to a report by PwC, “IPO Watch:

Turkey Focus 2014”, out of the 13 IPOs, nine were

on the main National Market and four on the ECM.

As of February 2015, there were eight pending appli-

cations for listing on the BIST, two for the main mar-

ket and six for the ECM, indicating the growing

momentum behind the emerging-companies mar-

ket. The more muted IPO market in Turkey to an

extent reflected concerns about investor sentiment

towards the country, and contrasted with what was

the best global IPO haul since 2010, and an 80%

increase in proceeds from European IPOs.

FORWARD PROSPECTS: Turkey’s IPO market may

be somewhat subdued again in 2015, as investors

await the outcome of the June parliamentary elec-

tions and shy away from a country which has seen

a degree of volatility over the past year and a half,

following several years of admirable stability. But

sound fundamentals that could underpin a bright

future for Turkey’s capital markets should draw more

IPOs in the longer term. Past years have seen strong

growth from SMEs in particular; more of these can

be brought to market, allowing investors to capi-

talise on that growth and the companies themselves

to raise capital for further expansion.

As across the world, private equity funds are

increasingly looking to exit their investments through

IPOs. In January 2015, for example, Global Yatırım

Holding AS, a Turkish investment and financial serv-

ices company, announced that it had hired interna-

tional and local advisors to manage the planned IPO

of its port operator unit, Global Liman. This sub-

sidiary runs ports in the Turkish cities of Antalya,

Kuşadası and Bodrum, as well as in Lisbon and

Barcelona in partnership with other players. Global

Yatırım expects to raise capital of between $250m

and $500m in the IPO of Global Liman, which it fore-

casts will earn total revenues of $85m in 2015

before interest, taxes, depreciation and amortisation.

BOND MARKET: Turkey has been one of the biggest

issuers of sovereign emerging-market bonds in recent

years. Its domestic corporate bond segment, how-

ever, did not take off until reforms introduced in

2010 slashed the red tape that had held back devel-

opment. The government had good reason to ease

regulations, as the effective non-existence of a

domestic corporate bond market had pushed Turk-

ish firms – including banks, which are major issuers

– to borrow from abroad, thus increasing foreign

exchange risk. The government’s own stance at the

time had been to shy away from bond issues to an

extent, which pushed investors towards corporate

bonds as the perceived next-safest option.

The stock market’s volatility and high interest rates

(which tend to draw investors towards time deposits

rather than equities) have led to suggestions that

the bond market may be a better bet than Turkish

stocks. This is questionable: higher interest rates

erode bond prices. But generous yields on Turkish

bonds may yet draw in cash – as of May 2015, yields

on 10-year lira-denominated sovereign bonds stood

at just over 9%, compared to 2.3% for US Treasuries.

In May 2015 ratings agency Standard and Poor’s

warned of a one-in-three chance of a ratings down-

grade for Turkey within 6-12 months, largely due to

the lira’s depreciation. The outlook for sovereign

bonds is somewhat uncertain, hinging on regained

economic momentum and, in the shorter term, the

June election and the make-up of the government

formed thereafter. But in an environment which has

seen equities lose some of the ground gained in

2014, bonds may seem safer to some investors.

CORPORATE BOND ISSUES: A number of major cor-

porates issued bonds in the early months of 2015,

including $500m issues by Akbank, Halkbank and

Vakifbank, a second $500m offer by Akbank, and

$328m from Turkish Airlines, which it will use to pur-

chase new aircraft. These issues – and upcoming

floats by the likes of Türkiye İş Bankası and Ziraat

63


SOURCE: Cbonds

Value

Mercedes-Benz Finansman Turk, 2018 €50m

Turkiye Sinai Kalkinma Bankasi, 2020 $350m

Mercedes-Benz Finansman Turk, 2017 €50m

Turkey, 2026 $1.5bn

Akbank, 2025 $500m

Turkish Airlines, 2027 $328m

Halkbank, 2021 $500m

AK Finansal Kiralama, 2016 CZK350m

Vakifbank, 2025 $500m

Akbank, 2020 $500m

Major bond issues, Jan-May 2015

Eight applications to list on the BIST were pending in February 2015

The BIST saw 13 IPOs in

2014 that raised $306m,

compared to the 11 that

raised $727m in 2013, with

much of the most

significant activity

concentrated in the final

quarter of the year.

The yields on domestic

10-year lira-denominated

sovereign bonds stood at

just over 9% as of May

2015, compared to 2.3%

for US Treasuries.


Bankası – indicate that the bond market remains

liquid despite macro concerns, but somewhat dom-

inated by banks and a few large corporates.

FUTURE SALE: In January 2015 the CEO of BIST,

�brahim Turhan, announced that the exchange’s

management company was looking to sell its 36%

stake to strategic foreign and domestic “anchor

investors” in the run-up to a full IPO in early 2016.

The IPO would reduce the government’s stake in the

exchange. According to a Bloomberg report from

early 2015, the offering would value the company

at around $1bn; by decree of the Council of Minis-

ters, it cannot exceed 42.75% of the company.

INTERNATIONAL PARTNERSHIPS: Such an IPO

would be the latest step in the restructuring and

growth of Turkey’s capital markets, which has involved

a growing range of international partnerships, some

bringing capital and expertise to Turkey, and some

allowing BIST to take its own capital and expertise

to new markets. In January 2015, the BIST signed a

partnership agreement with the London Stock

Exchange, which enables the latter’s global clients

to trade and clear Turkish futures and options on

international markets. The LSE Derivatives Market

offers trading in futures and options on the BIST 30

Index and on leading Turkish stocks. In 2013, the US-

based exchange company Nasdaq bought a 5% stake

in the BIST, a deal that led to BIST adopting Nasdaq

systems – an upgrade on the technology it was pre-

viously using. Nasdaq also pledged to support the

BIST’s efforts to establish itself as a regional finan-

cial centre. In January 2015, the BIST raised its stake

in the Sarajevo Stock Exchange (SASE), the main

bourse in Bosnia and Herzegovina, to 10%. The pre-

vious month, it had started trading index futures of

the top 10 SASE-listed companies.

FINANCIAL CENTRE: The development of the BIST

fits with the government’s vision of making Istanbul

into a global financial centre. The main target mar-

kets that backers of the strategy hope it will serve

are those with geographical, linguistic, cultural or his-

toric links to Turkey: the MENA region, Central Asia,

and Central and Eastern Europe. Naturally, it has

strong competitors as a financial capital for such a

varied range of countries, particularly Dubai, Moscow,

Vienna and, most recently, Warsaw. Nonetheless,

supporters assert that Turkey has a number of com-

petitive advantages, not least its being a large, dynam-

ic emerging market in its own right.

In this vein, a new financial district known as the

Istanbul International Financial Centre (IFC) is tak-

ing shape on the Asian side of the city, drawing many

financial institutions from the traditional business

districts such as Levent and Maslak. The plan is also

to relocate institutions like the central bank, the

CMB, the BRSA and the headquarters of some state

banks from Ankara to Istanbul.

The development of the IFC is very much a work

in progress. Geographical issues are one challenge:

many financial institutions are well-established on

the city’s European side, and relocating to Asia has

limited appeal, especially given issues with traffic

across the Bosporus and around bottlenecks on each

side. Another hurdle is human resources – Turkey has

a budding group of young fund managers and traders,

but many still move abroad to pursue their careers,

and others who remain are still quite young and

need to develop years of experience, particularly at

international level. Other more experienced profes-

sionals may be reluctant to relocate from cities seen

as the world leaders in finance (London, New York,

Frankfurt) or those with more appealing tax and res-

idency regimes (Dubai, Singapore, Hong Kong).

Realistically, the process will be an incremental

one – speaking of Istanbul as a rival to London and

New York or even Dubai would be somewhat pre-

mature. Nonetheless, the size and strength of the

Turkish market and the expansion of Istanbul as a

business centre serving a diverse range of regions,

as well as the government’s vocal support of the proj-

ect, are building momentum behind the IFC.

OUTLOOK: Turkey’s equity and bond markets felt the

impact of cooling investor sentiment and the relat-

ed fall in the lira in the first few months of 2015. A

degree of uncertainty over the fiscal and monetary

policy outlook with an election looming – also not

unrelated – had an effect as well. However, the

reforms of the past few years have left the coun-

try’s capital markets larger, more liquid, more acces-

sible to foreign capital and altogether better-off.

One indication of this is the particularly strong per-

formance of the BIST in 2014, a year of subdued eco-

nomic growth. In sectors such as financial services,

consumer goods and manufacturing, the country

offers a number of large, high-quality companies,

while lower tiers of the market are preparing small-

er players for senior listing. Tough as some periods

may be, the market’s future is founded on that of its

economy, and in this regard Turkey’s large, young pop-

ulace, diverse services and status as a major busi-

ness centre all point to a bright long-term outlook.

64

The country’s main stock exchange was renamed in 2012 and merged with a number of other exchanges

The BIST’s management

company is looking to sell

its 36% stake to strategic

foreign and domestic

“anchor investors” in the

run-up to a full IPO in early

2016, which would value it

at around $1bn.


CAPITAL MARKETS INTERVIEW

Vahdettin Ertafl, Chairman, Capital Markets Board (CMB)

Are there any new initiatives to further develop

Turkey’s financial services sector?

ERTAŞ: Our new capital markets legislation provides

market infrastructure in harmony with current EU prac-

tices, especially the Markets in Financial Instruments

Directive. This is important, as it integrates Turkey’s

capital markets into the global financial system. The new

Capital Markets Law and our new regulations have

begun returning successful results. The introduction of

new incentives for issuers, such as easing of CMB pro-

cedures and the lowering of registration fees, aims to

make the issuance process more user-friendly.

While all market numbers progressed positively, two

markets stand out. Over the course of the past two years,

the issuance limit assigned by the CMB in the fixed-

income market has nearly tripled, from TL78bn (€29bn)

in 2012 to TL216bn (€80bn) by the end of 2014. Also,

the issuance limit in the sukuk market has jumped from

TL2.9bn (€1.02bn) in 2013 to TL10.8bn (€3.8bn) in

2014. Despite the structural changes that our market

participants had to undergo, alongside geopolitical

challenges and global financial turmoil, Borsa Istanbul

was one of the top-five global performers in 2014.

We do not feel our achievements are sufficient to

reach our 2023 target of making Istanbul a prominent

global financial centre, so our work continues. One of

the latest developments is the establishment of the

Istanbul Arbitration Centre, which will start function-

ing in 2015. The centre will serve the needs of global

investors in dispute resolution and play a crucial role

as Istanbul becomes a global financial centre.

The government has introduced two transformation

programmes: the Istanbul Finance Centre programme,

which will enhance physical, technological and legal

infrastructure, as well as intellectual capacity; and the

new financial literacy action plan which aims to help

increasing domestic savings. These accompany tax

reforms and incentives to promote equity financ-

ing and initial public offerings. Our goal is to make

Turkish capital markets a sound financial centre by 2023.

What efforts are under way to increase liquidity on

the secondary market for financial products?

ERTAŞ: Increasing liquidity is the key to growing capi-

tal markets in Turkey. The CMB is working in collabora-

tion with market participants to develop more robust

secondary markets for specific products. The latest

development in this regard has been the establishment

of the Turkey Electronic Fund Distribution Platform, a

fund supermarket to ease investor access to mutual

funds via a single investment account.

Improvements in trading infrastructure combined

with the growing size of the fund industry should result

in a boost in market liquidity. The latter trend is corre-

lated to growth in the private pension system follow-

ing reform designed to promote savings and deepen

our capital markets. In 2014 the private pension sys-

tem attracted 1m new members and the assets under

management rose from TL25bn (€9.3bn) to TL35bn

(€13bn). We expect to see the same pattern as investors

become more comfortable with and aware of the new

scheme. We are also working with Borsa Istanbul to

develop more robust secondary markets for corporate

bonds and sukuks. For example, the Islamic Develop-

ment Bank’s $6bn sukuk offering was admitted to Bor-

sa Istanbul in November 2014, so we are attracting

new players to the organised market.

Do more sophisticated instruments pose challenges

to securities regulators in Turkey?

ERTAŞ: The use of sophisticated products is not at the

desired level. Turkish firms are not very active in this

space, and the ones which are tend to be large and pri-

marily transact for hedging purposes. On the exchange

trading side, Borsa Istanbul has signed a cooperation

agreement with the London Stock Exchange to increase

liquidity in the derivatives market. We are also work-

ing on over-the-counter regulations so more investment

firms can participate in this market and we can attain

greater transparency. The current challenge is to get

more market participants to use these varied products.

65


Working towards the centreOBG talks to Vahdettin Ertafl, Chairman, Capital Markets Board (CMB)

CAPITAL MARKETS INTERVIEW

�brahim Turhan, Former Chairman and CEO, Borsa Istanbul

Given recent macroeconomic volatility, why should

international investors remain confident in the

growth prospects of the Turkish equities market?

TURHAN: In 2014 Turkey was rated as the 14th most

attractive foreign direct investment (FDI) destination

in the world. Assessing the conditions in any market by

looking at just short-term movements will lead to wrong

conclusions. Emerging markets are affected by the

monetary policy of international central banks and

experience some volatility, but it is temporary.

Turkey’s economic fundamentals are strong. The

economy has grown by an average of 5% since 2003.

Fiscal discipline is maintained, as shown by the EU-

defined government debt stock-to-GDP ratio, which is

36%. Turkey has received two upgrades to its invest-

ment grade, the latter of which came in May 2013 just

before the US Federal Reserve’s announcement which

caused the volatility in emerging markets. Since then,

nothing has changed that will affect economic funda-

mentals in Turkey. The recent drops in oil prices actu-

ally work in Turkey’s favour and improve the outlook

on the inflation and external balance fronts.

The attractiveness of Turkey as an investment des-

tination is also reflected in FDI statistics. While FDI

amounted to only $9.6bn between 1995 and 2002, it

totalled around $146bn between 2003 and 2014. More-

over, the number of companies with international cap-

ital in Turkey rose to 43,700 by September 2014.

To what do you attribute the recent fall in the num-

ber of initial public offerings (IPOs)?

TURHAN: There are 422 companies currently listed, and

109 IPOs were realised between 2008 and 2014, yet

the market capitalisation-to-GDP ratio reached only

32% at the end of 2013. As one of the most liquid stock

exchanges in the world, we have the potential to sup-

port a higher market capitalisation. Borsa Istanbul has

stepped up its efforts through organised events, on-

site visits and media campaigns, and a new project,

“Listing Istanbul”, has been initiated to attract foreign

companies to list on our platforms. Increasing the mar-

ket capitalisation-to-GDP ratio to 70-80% is also one

of our major targets. The recent slowdown in IPO activ-

ity is mainly due to the increased volatility of the last

two years in emerging markets, including Turkey. It

should also be noted that companies do not just access

funding through IPOs at Borsa Istanbul. In the last four

years corporate issues also have been used actively by

Turkish firms. The amount of issuances rose to $30.3bn

in 2014, from almost nothing in 2010. As a result, the

overall public offering is on the rise.

Has the flare-up in regional instability affected con-

fidence? Where are corporates looking to expand?

TURHAN: Thanks to its young population and strong

domestic demand, companies continue to expand their

operations through mergers and acquisitions in Turkey,

especially in energy, finance and the service industry.

In terms of number of transactions, IT, energy and man-

ufacturing were the top three industries in 2014, while

in terms of value of transactions, energy, transport and

financial services were the top three segments.

How can private equity increase its portfolio of

small and medium-sized enterprises (SMEs)?

TURHAN: SMEs account for 95% of all enterprises in

emerging markets, employing 60% of the workforce.

Companies in this category have limited access to funds

in organised markets, as they do not have the neces-

sary resources and capacity to go public or realise cor-

porate issuances. Private equity can play a critical role

in facilitating investment into those companies while

benefitting from the opportunities offered by them. Pri-

vate equity should use better channels to connect with

SMEs. For example, Borsa Istanbul started Private Mar-

ket, where private equity firms, angel investors or oth-

er qualified investors can meet start-up companies.

The creation of such platforms is crucial, as both par-

ties can develop a more sound relationship based on

trust thanks to the organised nature of these markets.

66

Market moversOBG talks to �brahim Turhan, Former Chairman and CEO, Borsa Istanbul


67

InsurancePopulation growth a key driver of sector expansion

Stalled savings get a boost from the government

Mergers and acquisitions have been high among insurers

Sharia-compliant segment continues to expand

INSURANCE OVERVIEW

Turkey’s young and mobile population has driven insurance growth

Whereas the global insurance industry saw growth

slow over the course of 2013 and 2014, Turkey’s insur-

ance sector displayed resilience, making it an attrac-

tive industry for investment and expansion opportu-

nities. Despite fluctuations in other sectors and a

depreciation of the local currency, in real terms Turkey’s

insurance sector experienced significant expansion

in both life and non-life segments.

CONSOLIDATION: One of the key drivers of growth

in the sector has been the rise in mergers and acqui-

sitions (M&A) in the country in recent years. In 2013

Turkey’s insurance segment saw more M&A activity

than any other part of the country’s financial sector.

Indeed, in value terms, some 70% of all M&As in finance

were to do with insurance companies, with a record

€874m in deals struck, according to a 2014 report by

global consultancy PwC. The trend is illustrative of the

recent strength of the sector, as well as of its ability

to attract foreign investors – the largest M&A trans-

action was Allianz SE’s €684m purchase of a 94%

stake in Yapı Kredi Sigorta. In 2014 the financial serv-

ices sector was the second most active sector for

M&A activity, with the vast majority of deals, includ-

ing foreign investment, in banking and insurance.

International giants are thus looking at Turkey as a

growth market, with the potential for significant

expansion in life, pensions and more specialised non-

life products. The implications for the wider financial

sector in Turkey are significant, as the recent growth

of the private pensions segment has given a welcome

boost to the country’s asset management industry.

Yet challenges remain. Sustaining recent growth

may prove demanding, while taking to the next level

the number of Turks willing to pay in to non-compul-

sory insurance schemes will test companies’ resolve

and ingenuity. Political uncertainties over the next

year may also create greater caution, with consumers

less likely to try out new products in consequence.

Nonetheless, with growth rates that most European

insurers would envy, along with some sound econom-

ic fundamentals, the insurance market is widely seen

as a good pick for the years ahead.

FACTS & FIGURES: According to data from the Insur-

ance Association of Turkey (TSB), non-life by far

exceeds life in terms of premiums. In January 2015

the split was 89.3% non-life, 10.7% life. Amongst the

former segment, the biggest share of premiums was

held by sickness/health, with 23.3%; followed by motor

vehicle liability, with 17.7%; land vehicles, with 17.6%;

then fire and applied perils, with 17.4%; and miscel-

laneous losses at 11.9%. After that, accident took

3.4%, general liability took 3%, and all the other lines

of business took shares of less than 1%.

Based on a month-to-month comparison of the

market shares recorded in January 2014, non-life

slightly increased its share over the year – back then

the split had been 88% to 12% – and the ranking

spread by market segment saw sickness/health over-

come motor vehicle liability. Over the course of 2014,

sector premiums grew 10.7%, with non-life up some

12.4% and life down some 1.4%.

This was quite a different picture, however, from pre-

vious years, when the market shares held by the dif-

ferent lines of business maintained the same ranking

– with motor vehicle liability in the lead – and both

life and non-life also experiencing real growth. The

TSB figures for 2012 and 2013, the latest years for

which full-year data are available, show total premi-

ums at TL19.8bn (€7bn) in 2012 and TL24.2bn

(€8.5bn) in 2013 – growth of some 22.21% in mon-

etary terms, or 13.79% if an inflation rate of 7.4% is

factored in. Non-life grew 13.34% in real terms over

those two years, from TL17.1bn (€6bn) to TL20.8bn

(€7.3bn), while life grew 16.62% in real terms, from

TL2.7bn (€954.2m) to TL3.4bn (€1.2bn).

This growth had come on top of overall growth in

the 2011-12 period as well. The TSB figures indicate

that total premiums for the first 11 months of 2011

of TL17.2bn (€6bn), compared to TL19.8bn (€7bn) for

the first 11 months of 2012, or 8.8% real growth, with

The insurance segment has

been seeing significant

consolidation activity in

recent years. In 2013, some

70% of financial sector

M&As involved an insurer.

In terms of premiums,

non-life is the leading

segment, with 89.3% of the

total. The biggest share of

premiums was held by

sickness/health, with

23.3%, and motor vehicle

liability, with 17.7%.

68

Providing and expanding coverageThe insurance sector continues to offer new and improved products toa growing population


INSURANCE OVERVIEW

an inflation rate 6.16%. Non-life grew even faster over

the period, at 11.35% in real terms, while life shrank,

by 4.92%. The figures thus show robust growth for the

past three years, although they also demonstrate a

fragility in the life sector in particular. The reasons for

continued growth in non-life and volatility in life lie

in some of the fundamentals of the Turkish market.

POPULATION BOOM: One of the main growth fac-

tors is the country’s demographic composition. The

Turkish Statistical Institute (TurkStat) declared that

Turkey’s population stood at 77.7m at year-end 2014,

up by nearly 1.3m over 2013 and indicating an annu-

al growth rate of 1.7%. While in certain areas of the

country the population regularly grows faster than the

national average. Turkey’s largest city, Istanbul, is at

the epicentre of this demographic trend. According

to TurkStat, Istanbul saw population growth of 1.5%

between 2013 and 2014 to reach 14.4m people. The

city is home to 18.5% of Turkey’s total population.

The country is also young. TurkStat figures show a

median age of 30.7 in 2014, slightly up from 30.4 in

2013. In 2008 the median was 28.5 years. Thus, the

population is ageing, yet almost half of the people in

Turkey are still under the age of 30. This implies a

strong organic growth in the market, alongside

increased future need for insurance products of all

kinds, particularly in the currently non-compulsory

vehicle, home, life, health and pensions areas. At the

same time, Turks increasingly have the means to meet

those needs. The Turkish economy has been growing,

with a concomitant increase in per capita incomes and

an expansion of the middle class.

Between 2010 and 2013, real GDP grew by some

24%, with 2010 seeing 9.2% and 2011, 8.8% growth,

according to World Bank figures. While the economy

has slowed since – 2013 saw GDP growth of around

4%, falling to 2.9% in 2014 – the long-term trend is a

positive one. The World Bank’s data figures show per

capita GDP rise from $8626 in 2009 to $10,660 in 2012,

with TurkStat figures showing that rising again, to

$10,822, in 2013. A recent BBVA report predicted

that by 2020, Turkey’s affluent and medium-upper mid-

dle class will account for some 45% of the population

– up from 27% in 2010. The insurance market thus

looks set to grow robustly over the next few years, as

the target market, especially for non-compulsory

insurance, expands and more awareness of the insur-

ance of insurance products grows.

GOVERNMENT SUPPORT: At the same time, the Turk-

ish government has been eager to support the sec-

tor, with older compulsory insurance regulations

recently complemented with some major incentives.

Currently, only two major lines of insurance are com-

pulsory in Turkey – motor and earthquake. For vehi-

cles, motor third party liability (MTPL) is compulsory,

along with bus seat personal accident insurance and

passenger transport liability insurance. Earthquake

insurance came in after the devastating 1999 quake,

which hit just south of Istanbul. Many of Turkey’s

urban centres lie on or near fault lines, with this also

spurring a major urban renewal programme that has

seen building codes tightened and widespread dem-

olition and replacement of substandard housing –

both with insurance implications.

There are also compulsory insurance regulations

covering dangerous cargoes and their handling, stor-

age and transportation, as well as workers’ compen-

sation insurance. The latter is compulsory for all

employees, but can only be handled by the state,

although an employer may add on private insurance

coverage for employees.

MOTORING ON: Compulsory motor insurance has

been a mainstay of the non-life sector since it was

instated in 1983, and the above figures for market

share demonstrate its significance. The motor segment

also had a better year in 2013 due to an increase in

average premiums. For some time, companies in the

motor segment had raised concerns about the low

level of premiums allowed, particularly in a segment

that often incurs high losses. For example, in 2012

the MTPL segment, which is required and regulated

by the Traffic Law, recorded a TL1.3bn (€454m) tech-

nical loss, while motor vehicles liability recorded a

technical loss of TL1.1bn (€387m). These losses were

far higher than any other line of business.

After the premium increase, however, these losses

were considerably reduced. The price increase, com-

bined with general growth in the market fired by

demographic and per capita income factors, led to a

near doubling of premiums collected. The TSB figures

show total net written premiums for 2012 stood at

TL2.6bn (€919m) for MTPL, rising to TL4.1bn (€1.4bn)

in 2013. For 2013 overall, MTPL recorded a TL654.4m

(€230m) loss, while motor vehicle liability saw loss-

es of TL479.8m (€169m). Motor vehicle physical dam-

age also went from a loss of TL61.12m (€21.5m) in

2012 to a profit of TL702m (€247.2m) in 2013.

Another potential downside for the motor sector

in particular is the devaluation of the Turkish lira,

which slid 34% against the dollar between May 2013

and May 2015. With many spare parts imported, this

69


Real GDP experienced significant growth in the 2010-13 period, expanding by approximately 24%

There are currently only

two major lines of

compulsory insurance in

Turkey: motor vehicle

coverage and earthquake

insurance, with the former

a mainstay of the sector

since 1983.

INSURANCE OVERVIEW

will likely impact costs. A similar effect is expected in

areas such as aviation and marine.

Pressure thus remains for further hikes in premi-

ums in the year ahead and for further changes in the

way the motor segment is regulated. A standardisa-

tion in the way claims are dealt with is also strongly

advocated by the TSB, which works to end perceived

inconsistencies in court judgements and has pro-

posed amendment drafts to the Traffic Law. The year

2013 also saw the establishment of Turkey’s first

MTPL club, with six firms joining. This should have an

important impact on car valuations in particular, by

helping to standardise procedures surrounding them.

GOLDEN YEARS: Recently, the life segment – more

specifically, pensions – was given a major boost thanks

to government-led reforms. Private pensions are both

a new industry in Turkey and, historically, a small one.

In 2001 parliament approved the establishment of a

private pensions sector, with this selling its first prod-

ucts in 2003. Six companies began offering these

products, and by end-2013 there were 18 such firms.

In 2012 the government, anxious to counter a signif-

icant decline in savings rates (World Bank data showed

this rate had fallen from around 17% of national out-

put during the 2002-08 period to just 12% in 2010),

introduced a major new measure to support private

pensions. This was to offer a direct matching contri-

bution of 25% from the government on all contribu-

tions up to the national minimum wage.

The new rules also offered employers a tax deduc-

tion on pension contributions up to 15% of employ-

ee income, with a cap equal to the national minimum

wage. The tax on distributions at retirement was also

cut, from 3.75% of the total account value to just

3.75% of the investment income portion of the

account. The new rules also allowed for transfers from

defined benefit to defined contribution plans with-

out any tax liability being imposed.

The package was considered by many to be a major

success. According to Reuters, during the first month

of implementation – January 2013 – 120,000 people

joined private pension plans. This reached 1m by the

end of 2013, a twofold increase over 2012. Industry

figures show that 18 firms took advantage of the rise,

investing €9.95bn for some 4.53m pension savers

and boosting assets in the segment 29% in that year.

By end-2014, the total number of contributors grew

to 5.1m, with €12.21m in investments.

SECTOR PLAYERS: In 2013 the top three outfits in the

life sector were Ziraat Hayat ve Emeklilik, Anadolu

Hayat Emeklilik, and Garanti Emeklilik, which demon-

strated gross written premium (GWP) market shares

of 23.4%, 11.6% and 8.8%, respectively. Fourth place

was held by Halk Hayat ve Emeklilik with 8.2% market

share, and in fifth place stood the newly formed Allianz

Yaşam ve Emeklilik at 7.1%, following Allianz’s pur-

chase of Yapı Kredi Sigorta in early 2013. The top 10

companies in life held 84.8% of the total market

between them. In non-life, the top three by market

share of GWP in 2013 were Axa, with 15.2%; Anadolu

Sigorta with 13.2%; and Allianz at 9.3%. The top 10

non-life firms had some 73.9% of the market between

them, illustrating the more fragmented structure of

the non-life business. Fourth and fifth place were tak-

en by Ak Sigorta at 7.3% and Mapfre Genel, which rose

two places from 2012 to a 6.5% market share.

All insurance and reinsurance companies working

in Turkey are members of the TSB. The association has

40 companies in its non-life section, 26 in its life and

pensions section, and two in its reinsurance section

– Artı Reasurans and Milli Reasurans. According to TSB,

some 18,137 people were employed, either full or

part time, at these companies’ head offices at year-

end 2013, up from 16,568 in 2010.

Recent times have also seen some major M&A activ-

ity in the sector. The largest of these deals was Allianz

SE’s €684m purchase of a 94% stake in Yapı Kredi Sig-

orta in the first quarter of 2013, which included the

Turkish company’s life and pensions arm, Yapı Kredi

Emeklilik. After a subsequent mandatory tender offer,

Allianz’s stake increased to 99.78%. Other insurance

deals included Malaysia’s Avicennia Capital purchas-

ing a 90% stake in health and life insurance provider

Acibadem Sağlik ve Hayat Sigorta for $252m in Novem-

ber 2013, and the Lebanese/UAE Hariri family’s pur-

chase of a 90% stake in Demir Sigorta.

In terms of distribution channels, there is great vari-

ation between life and non-life. TSB figures for the

first two months of 2014 illustrate a pattern that has

been in place for some years; in non-life, the bulk of

written premiums were through agencies, capturing

TL2.5bn (€880.25m) out of a TL4bn (€1.4bn) total,

or 62.13%. Brokers wrote TL596.8m (€210m), or

14.87%, banks TL532.5m (€187.5m), or 13.27%, and

direct channels accounted for TL390.1m (€137.4m),

or 9.72%. In life, however, banks took the lion’s share,

with 78.39% of all premiums written, or TL424.23m

(€149.4m). Direct sales accounted for 10.98%, or

TL59.4m (€21m), agencies for 9.17%, or TL49.6m

(€17.5m), and brokers for 1.47%, or TL7.9m (€2.8m).

This is partly because each Turkish bank branch is also

70

With employers supporting savings, about 1m people opened private pension plans during 2013

Turkey currently has 40

insurance companies in the

non-life segment, 26

working in life and

pensions, and two

reinsurance firms.

Employers receive tax

deductions on pension

contributions up to 15%,

and employees can have

their savings matched by

the government.


INSURANCE OVERVIEW

considered an insurance agent, once it receives its

license. The result is that the country’s four largest

banks – Akbank, Yapı Kredi Bank, Garanti Bank and IşBank – have long been active in bancassurance, with

the major insurers all having banking affiliates.

In terms of regulation, the sector is covered by the

2007 Insurance Law, along with a range of laws gov-

erning brokers, loss adjusters and others working in

the sector. The Turkish Commercial Code covers insur-

ance contracts and was updated in 2012, with stronger

provisions for consumer protection and the categori-

sation of insurance classes. A Code of Obligations was

also enacted in 2012, relating to the obligations

between legal and natural persons, with this also hav-

ing clauses pertaining to the insurance sector.

The General Directorate of Insurance (GDI) regu-

lates the sector, while also issuing permits for insur-

ance firms. These can be either Turkish joint stock com-

panies or cooperatives, or Turkish branches of foreign

insurance and reinsurance outfits. The GDI itself comes

under the Undersecretary of the Treasury and also has

the task of harmonising Turkish insurance legislation

with that of the relevant EU acquis.

A number of new regulations were introduced into

the Turkish insurance section in 2014, and a number

of important amendments were signed as well. In

April 2014 the new Insurance Agencies Regulation

replaced the former regulation, with the aim of clar-

ifying insurance agency activities and providing pro-

tective provisions for both insurers and the insured

by institutionalising agency systems. Following the

enactment of the new regulation, the Treasury also

released a new circular in May 2014 known as the

Implementation of the Insurance Agencies Regulation

to regulate the implementation rules.

The law helps clarify the relationship between both

parties in an insurance agreement, and reifies the

scope of permissible insurance activities and obliga-

tions. Additional changes include a raise in minimum

paid-in capital for incorporating an insurance agency

to TL50,000 (€17,605); new mandatory provisions for

agency agreements; new requirements on technical

personnel; and the requirement that leasing, factor-

ing and financing companies now form as separate

firms to provide insurance services.

PROFIT & LOSS: While premiums are up and the mar-

ket fundamentals look healthy, many sector players

have found profitability more of a challenge. Partly this

is due to the high level of competition, particularly as

companies seek to secure market share by charging

lower premiums. In addition, the number of people

taking up non-compulsory insurance policies remains

low as a percentage of the population. “Turkey has a

young and active population,” Tarık Serpil, executive

director at Marsh, Turkey’s largest insurance broker,

told OBG. “But there are perhaps only 2m willing

clients. Turks are not buying insurance partly because

the sector has not been providing policies that Turks

want to buy.” That is now changing. In terms of per-

suading young Turks that insurance is something they

should consider, companies have been moving more

into the online world. All the main issuers have

launched internet sites, while exclusive, online-only

deals are also being offered as an incentive. Online

advertising by insurers is also becoming a more fre-

quently used channel. This all ties well into the young

profile of Turkey’s potential insurance buyers.

Comparing premiums growth between 2012 and

2013 shows that non-compulsory areas benefitted

from these strategies. Accident saw a technical prof-

it of TL147.9m (€52m) in 2012 grow to TL241.5m

(€85m) in 2013; fire and natural forces was up from

TL47.5m (€16.7m) to TL218.8m (€77m) in the same

period. Indeed, non-life overall went from a 2012 loss

of TL658m (€231.7m) to a 2013 profit of TL768m

(€270.4m) – though some losses were due to Axa

strengthening its reserves, with a TL600m (€211.3m)

loss reported. In the life segment, meanwhile, tech-

nical profits grew from TL246.7m (€87m) in 2012 to

TL428.3m (€150.8m) in 2013. Life thus had annual

average profit growth of 13% in the 2008-13 period.

OUTLOOK: Overall, the expectation is of continued

premium growth in 2014-15, with companies also

taking greater control of their technical results, boost-

ing profitability. Pensions will likely continue seeing

positive growth as well, although political uncertain-

ties may impact consumers negatively in the period

up to elections in 2015. With major international

expertise increasingly widespread in the sector, com-

bined with experienced local firms and employees, the

standard and diversity of products is set to expand.

71


Companies are using online campaigns and bank partners to incentivise Turks to buy insurance products

New legislation passed in

2014 has helped

institutionalise

components of the

insurance industry and

improve protections for

companies and customers.SOURCE: Insurance Association of Turkey

2009 2010 2011 2012 2013

Non-life 36 38 39 39 40

Life 9 11 9 8 8

Pension 13 13 16 17 18

Reinsurance 2 2 2 2 2

Total 60 64 66 66 68

Number of insurance companies, 2009-13

INSURANCE ANALYSIS

The government matches 25% of individual pension contributions

Private pensions showed significant growth in Turkey

over the course of 2013 and 2014, following implemen-

tation of a new law that introduced government match-

ing of contributions for private pension. With the new

law, designed as an incentive scheme to encourage

more contributions into the system, as of January 1, 2013

the government matches 25% of individual contribu-

tions to the pension system. Over the course of 2013

alone, 1m individuals signed on to the new pensions

scheme, with over 5.1m pension savers registered by

the end of 2014. The new rise in the market is a trend

that is expected to continue, with a product now firm-

ly established after a decade of slow but steady growth.

At the same time, going forwards, companies offer-

ing private pensions will likely have to think of new

ways to develop the product, widening its appeal to

Turkey’s expanding middle class. Maintaining profitabil-

ity will also be a challenge. Nonetheless, with assets

under management in pensions more than tripling in

the last five years – to some €12.2m at end-2014

according to Turkey’s Pension Monitoring Centre – pri-

vate pensions continue to be a major draw for investors

looking at the Turkish market. The scheme also has

positive implications for the nation’s savings rate, as well

as for the development of its capital markets.

THREE PILLARS: Turkey has had a state social securi-

ty system in place since the early post-second world

war period. This has provided a first pillar, PAYG, defined

benefit mandatory contribution schemes to cover

retirement and other social security benefits. This

underwent major reorganisations in 1999 and in 2006,

when three existing state schemes were brought togeth-

er under one roof, the General Directorate of Pensions

Services at the Social Security Institution (SGK). At the

same time, retirement ages and the minimum number

of years of contribution were extended. The official

retirement ages were set at 58 for women and 60 for

men, with these being raised in stages to equalise at

65 in the year 2048. The motivation for the reforms

was a common one – a rising level of the system’s

deficit, with a shrinking premium base paying for sev-

eral discretionary rises in the level of pension payments.

There is also a second pillar of voluntary occupational

pensions schemes, mainly among larger firms. These

operate as either defined benefit or defined contribu-

tion schemes, or sometimes both, and are managed

by the General Directorate for Non-profit Organisa-

tions, as they are run by non-profit foundations.

SAVINGS INCENTIVES: A key to the segment’s growth

has been government action. Turkey had a domestic

savings rate of just 14% of GDP at year-end 2013, with

the third-lowest assets in pensions in the OECD the year

before, at just 1.4% of GDP. The risks inherent in this

have motivated the government’s efforts to switch

from the previous system of giving a 15-35% tax deduc-

tion on gross income or minimum wage to private pen-

sions, to matching 25% of individual contributions up

to the minimum annual wage of TL14,850 (€5228).

Participants have access to the government contri-

butions at an accelerating rate – 15% after the first three

years, 35% after six years, 60% after 10 years and 100%

at retirement age. At the same time, the tax taken at

exit is levied on net investment returns, rather than on

the total amount accumulated. The effect has been clear.

In the first quarter of 2013, the number of participants

in private pension schemes went up 9.8% over 2012,

with 306,000 new contributors. By the end of the first

year 1m new people had signed up for private pensions.

“These were big incentives,” Sezgi Biçe Özener, sen-

ior research analyst at Yapı Kredi Yatırım Equity Research,

told OBG. “The private pension became the best method

to save. In the future, it will continue to be attractive

for participants and for insurance companies, with

some of the latter now migrating into the private pen-

sions business.” One drawback is that the government

also imposed a cap on the fees companies can charge

for providing private pension services, reducing them

from 3.6% to 1.9%. Nevertheless, private pensions are

among the most attractive aspects of the Turkish insur-

ance market and may total TL240bn (€84.5bn) by 2023.

The current retirement age

for women is 58 and 60 for

men, but these will be

steadily raised until 2048 to

be equalised at 65. This is

reducing the burden on the

public pension system.

72

Pensions boomNew legislation ushers in a new era for private pension contributions


INSURANCE INTERVIEW

Mehmet Bostan, General Manager, Vakıf Emeklilik

Since its implementation in early 2013, how has

the government’s matching scheme affected

growth of the private pensions industry?

BOSTAN: We can confidently say that the govern-

ment’s matching scheme in early 2013 affected the

private pension industry in a very positive way. The pri-

vate pension system started to make a huge impact

on the Turkish economy, especially after 2013. Since

the government introduced a 25% contribution to

each pension plan at the beginning of 2013, pension

fund assets grew 85% in only two years, according to

the Pension Monitoring Centre. We expect this growth

will continue in 2015. By 2023 we project that the num-

ber of contributors will be roughly 12m and that total

funds will reach approximately TL400bn (€140.8bn).

What is the importance of the new rules?

BOSTAN: In my opinion, 2013 was a groundbreaking

year for the Turkish pension system. Before 2013,

when we lacked the government’s 25% contribution,

the general public was not aware of the significance

of the pension system and its critical effect on the econ-

omy. The new pension fund landscape has changed

this mentality among people and the media, in par-

ticular, and this new understanding has started to

transform investment habits in the country. Before

2013 people used to invest in gold, real estate and

deposits, but after the new legislation people have

started to notice the benefits and viability of the pen-

sion system. In my opinion, this is the most important

change brought about by the new rules.

In addition to this main benefit, the new regulations

have also opened up the industry to the masses. After

2013, with the government’s 25% contribution, every-

one now has a motivation to save and people can

start saving with a relatively small amount. The new

system also introduced new saving options for infor-

mal workers such as homemakers, students and sen-

ior citizens. Since the new system began, more than

62% of people in the pool of potential contributors,

i.e. 5m individuals, have entered the system. From my

point of view, this is a significant achievement for the

industry. Between 2003 and 2013, 3m people joined

the pension system in Turkey. After 2013, with the

government’s 25% contribution, there was a sharp

increase and 2m new people were added to the total

in only two years, and the system has reached over

5m people today. Finally, in my opinion, the last impor-

tant benefit is reflected in the saving rate. The saving

rate has reached its highest point since 2008, at 14.6%

in the third quarter of 2014. These improvements are

very important for the future well-being of the Turk-

ish economy and people.

What reforms can help the industry grow further?

BOSTAN: In high-income countries, corporations play

a significant role in the pension industry by matching

their employees’ contributions. In contrast, Turkish

corporations provide only around 6.42% of total con-

tributions. The government has started to encourage

corporate contributions with some tax advantages

and revisions to the vesting process. These incentives

are not yet sufficient and this is currently the weak-

est point in the pension system.

However, the Turkish government has recently pro-

posed a solution to this problem by introducing a tri-

al period for auto-enrolment in 2014. Under this new

trial period, employers will be required to enrol their

employees in the pension system automatically. Peo-

ple currently do not save adequately in Turkey so auto-

enrolment will be an effective incentive to help them

save for their retirement. We expect that this auto-

enrolment process will be finalised by the end of 2015.

As a leading player in the pension fund industry, we

also believe that the current pension fund system in

Turkey will be much stronger and larger with the imple-

mentation of these new strategies, meaning both the

government and corporate contributions. And con-

sequently, an increased savings rate will provide

a boost to the Turkish economy in the coming years.

73


Savings on the riseOBG talks to Mehmet Bostan, General Manager, Vakıf Emeklilik

INSURANCE INTERVIEW

M Uğur Erkan, CEO, Anadolu Hayat Emeklilik

What effect have multinational insurance firms had

on the growth prospects of domestic players?

ERKAN: Turkey’s positive economic growth, favourable

demographics and low penetration rates have drawn

the attention of local and multinational players to the

Turkish insurance sector. International companies, in

particular, are increasingly looking to take advantage

of these factors. In fact, the foreign share of total paid-

in capital in the life and pension business grew to 69%

in 2013, up from 52% in 2008; quite a significant uptick

in growth. At the same time international firms account-

ed for some 45% of total premiums in 2013, compared

to about 53% in 2008, which is primarily due to the fact

that individual life insurance premiums have grown

substantially in recent years.

So, yes, there have been more foreign players in the

market, but there is still considerable room for growth

by local firms. In addition, banks are still the most impor-

tant distribution channel in Turkey for insurance prod-

ucts, giving domestic companies an advantage when

it comes to reaching customers.

That said, I believe that they have a positive impact

on the development of the insurance sector overall, not

only in terms of customers who gain access to a wider

range of products and services, but also in terms of

domestic companies that are incentivised to innovate

and become more efficient as a result of the increased

competition. A healthy level of competition is good for

all of the parties involved.

What efforts are being made to extend life insur-

ance coverage to underinsured segments?

ERKAN: The level of life insurance penetration in Turkey

is quite low compared to countries with a similar level

of development, and Turkey lags far behind developed

nations. While there has been some improvement in

this regard over the past few years, there is still signif-

icant untapped potential, especially given the country’s

young population. In my opinion, the situation is pri-

marily due to economic and socio-cultural factors, such

as an unfamiliarity with insurance products and reluc-

tance to invest in them.

One thing that we have observed is that loan cus-

tomers often buy insurance when it is easily understand-

able and offered with reasonable premium levels. In this

line of business it is very important to match customer

needs with products offered, so creating positive cus-

tomer experiences through high service standards,

during both the sales and post-sales phases, will help

the long-term development of Turkey’s life insurance

segment. Thus, it is important that companies, associ-

ations and agents work to increase insurance appreci-

ation among the populace. This effort should not only

be taken by local players, but by foreign entrants as well.

Many firms have been working to increase trust and

awareness in collaboration with the Insurance Associ-

ation of Turkey, which is empowered to develop insur-

ance businesses and services. These activities have had

a very positive development on the life market.

How are employers being incentivised to contribute

to employees’ private pension accounts?

ERKAN: According to the data provided by Pension

Monitoring Centre, as of December 2014, the individ-

ual participation rate is higher than the corporate par-

ticipation rate. Only 27% of contracts are group con-

tracts, and 24% of these group contracts are

non-contributory group contracts. Our country has

strong potential, in terms of increasing the number of

participants and growing fund resources, but the ratio

of group contracts in the system has not reached the

desired level. Legislation in 2013 extended advantages

to employers. The vesting period was increased to sev-

en years and a more flexible structure was introduced

for corporate contracts to improve employee loyalty.

Tax relief was also revised so employers could claim a

tax deduction on pension contributions of up to 15%

of employee income with a cap on contributions that

equates to the national minimum wage. Thus, I antici-

pate a significant increase in corporate participation.

74

Getting involvedOBG talks to M Uğur Erkan, CEO, Anadolu Hayat Emeklilik


INSURANCE ANALYSIS

Some 38% of Turks surveyed expressed interest in takaful insurance

Sharia-compliant insurance, or takaful, is set to grow

in Turkey, with its predominantly Muslim population

showing increasing interest in Islamic finance prod-

ucts and the government keen to support their growth.

Insurance of any kind can be a hard sell in Turkey, with

the population generally averse to insurance cover and

penetration levels as low as 1.4%, according to some

estimates. Takaful also has a minimal profile in the Turk-

ish market at present. The two firms that offer Islam-

ic insurance products, Neova Sigorta and Asya Emeklilik,

account for less than 0.5% of the insurance sector’s

assets, which stood at an overall TL24.2bn (€8.5bn) in

2013, according to official data. However, the increas-

ing success of Islamic banks could point to a market

opening for takaful underwriters.

Turkey’s four functioning Islamic banks, known as “par-

ticipation banks”, have posted strong asset growth

since 2005, with their holdings now accounting for

around 5% of the $811bn of sector assets in August

2014 and consultancy firm EY has identified Turkey as

a new market for sharia-compliant insurance. In the

“Global Takaful Insights 2014” report, released in Sep-

tember 2014 the market dynamics of Turkey’s takaful

segment were noted as gaining traction thanks to the

establishment of new participation banks.

GOVERNMENT SUPPORT: With the government

announcing plans to launch three state-owned Islam-

ic banks as subsidiaries of the state-run conventional

banks, Ziraat Bank, Halkbank and VakıfBank, by the end

of 2015, it is expected that greater depth will be added

to Islamic finance. This, in turn, may encourage new

entrants and broaden the product base to include taka-

ful options. The EY report explained that the state is

poised to offer long-term help. “The Turkish govern-

ment’s aim to triple the share of Islamic banking assets

in the country by 2023 with the help of state-owned

participation banks and incoming players will help sup-

port the gradual growth of Turkey’s takaful industry.”

SLOW TAKE-OFF: Even though Turkey’s large and rel-

atively young population offers a potentially lucrative

market for takaful underwriters, EY suggests a num-

ber of hurdles have to be removed before such prod-

ucts could take off, with supply side constraints and a

limited legal infrastructure for Islamic finance current-

ly hindering growth. Challenges for Turkey’s takaful

market also include a fragmented market which lacks

the pricing power and tough competition among insur-

ers at the lower end of the market,” EY noted.

Another study prepared by the General Council for

Islamic Banks and Financial Institutions (CIBFI) and

Thomson Reuters, agreed on Turkey’s developing poten-

tial as a takaful market. In its survey, up to 38% of

respondents expressed some interest in participation

banking, with 10% saying they would definitely be inter-

ested. The study, “Turkey Participation Finance Report

2014”, said while 10% was a low figure it nonetheless

indicated market potential for takaful service providers.

“The government and industry are working to cre-

ate more universal standards, but this is not easy to

accomplish and will take time,” Reşat Karabıyık, the gen-

eral manager of BMD Securities, told OBG. “That said,

the recent establishment of the Global Center for Islam-

ic Finance by the World Bank and IFC is a step in the

right direction. Two state banks are also expected to

enter the space sometime in 2015, which will help to

focus the efforts on creating more standardised rules.”

PERSONNEL GAP: Specialist training for staff is an

area highlighted by the CIBFI report as necessary for

the development of a strong Islamic financial market

in Turkey, which requires the establishment of dedicat-

ed study programmes at universities. This personnel gap

could be bridged through proposals such as the estab-

lishment of an Islamic university. The government

announced plans in October 2014 to develop Istanbul’s

May 29 University into an international Islamic univer-

sity. Advanced courses in Islamic finance could help

deepen knowledge and understanding on subjects

such as takaful insurance. Another boost may come if

the government includes takaful options in compulso-

ry schemes like automotive or catastrophe insurance.

Currently, the two

companies offering Islamic

insurance products

account for about 0.5% of

the insurance sector’s total

assets.

75


With state financial

institutions poised to enter

the Islamic financial

segment, it is expected

that takaful insurance

could see greater uptake.

Talking takafulSharia-complaint insurance is poised for state support

77

Industry & RetailDefence equipment manufacturers boosting exports

Automotives industry aims for more value added

Jewellery and precious metals exports are rising rapidly

Good prospects for long-term retail sector expansion

The first law governing retail enacted in January 2015

INDUSTRY OVERVIEW

Industrial products accounted for almost 80% of exports in 2014

Turkey’s industry includes a wide variety of manufac-

turers, primary producers and traders, responsible

between them for a major share of the country’s GDP.

Indeed, in 2014, exports by the entire automotive

industry (including components) alone reached

$22.27bn – more than the entire GDP of Iceland.

Steel, chemicals, pharmaceuticals, electrical and

electronic equipment, building materials, cars, jew-

ellery and clothing are all major export earners – and

major magnets for international investors. All have

benefitted from – and, indeed, driven – much of the

country’s recent economic growth, with “Made in

Turkey” now more prevalent than ever as a label on all

manner of products sold in world markets.

INDEXES & EXPORTS: Figures from the Turkish Sta-

tistical Institute (TurkStat) show that at constant 1998

prices, the manufacturing sector contributed 24.2%

of the country’s GDP in 2014. This compares to 8.8%

from agriculture, hunting and forestry; 13.2% from the

financial sector; and 12.6% from the wholesale and retail

trade sector. The manufacturing and retail sectors are

also growing – they were up 3.78% and 1.4%, respec-

tively, in 2014, year-on-year (y-o-y) – although this

has been slowing in recent years; the 2000-14 peak

was in 2010, when manufacturing growth hit 13.8%,

followed by 10% growth in 2011.

TurkStat also produces an industrial production

index (IPI), which measures gross activity against a

2010 base line of 100 points. In 2014 the unadjusted

IPI average increased by 3.6% to 120.5, while season-

ally adjusted IPI rose by 3.6% to 120.8. The annual aver-

age for 2013 for industry was 116.3, up from 112.9 in

2012 and just 86.1 in 2005.

Into the first quarter of 2015, and in January 2015

seasonally and calendar adjusted IPI decreased by 1.4%

compared with the previous month. Industrial produc-

tion declined by 2.2% in January 2015 y-o-y, with the

biggest drop recorded in the mining output, which fell

by 11.5% y-o-y. This was followed by manufacturing at

-2.4%. However, electricity, gas, steam and air condi-

tioning supply rose 2.8% y-o-y. The decline in exports

to Iraq and Russia, as well as the overall growth slow-

down in the European continent, hampered Turkey’s

industrial productivity. TurkStat figures also show that

the seasonally and calendar-adjusted industrial

turnover index stood at 167.3 in January 2015, down

4.9% compared to the previous month.

In 2014 the less-than-friendly environmental fac-

tors included a major rise in interest rates. In January

2014, the Central Bank hiked overnight rates from

7.75% to 12% and the weekly repo from 4.5% to 10%.

However, rates were cut several times during the year

starting in May, and as of March 2015 the upper

overnight lending rate stood at 10.75% and the bench-

mark weekly repo rate at 7.5%.

The year 2014 also saw a major fall in value by the

Turkish lira, which depreciated around 15% against the

US dollar during the year, a slide that continued in

2015. A third factor to contend with too has been

political uncertainty and domestic turbulence. Busi-

ness and consumer confidence have taken something

of a hit during these events.

LABOUR: Industry also accounts for a large share of

employment. According to TurkStat’s figures, in Decem-

ber 2014, out of a total labour force of 28.8m (all

those over 15 years of age), 25.6m were employed, of

which 20.5% worked in industry. This was less than

services – the largest employer, with 52.8%, and agri-

culture, with 19.5%. Given the 24.2% contribution to

GDP of the sector, however, industry emerges as one

of Turkey’s most productive activities.

Using the same 2010, 100-point base line, the num-

ber of people employed in industry has also been

increasing. Calendar-adjusted industrial employment

was up by 2.7% in 2014 compared with the previous

year. The annual average for 2014 was 118.8, an

increase from 115.6 in 2013.

The hours worked have also gone up – from 110.4

in 2012 and 112.8 in 2013 to 114.7 in 2014, and so

have the wages – the gross wages and salaries index

Turkey’s industrial

production index, which

measures gross activity

against a 2010 base line of

100 points, shows steady

growth, with the annual

average for 2014 at

around 120, up from 116

in 2013, 113 in 2012 and

86 in 2005.

78

Made in TurkeyAlthough industrial growth is slowing, exports are up and a number ofsegments have scope for expansion


INDUSTRY OVERVIEW

for the sector rose from 153.1 in 2013 to 176.8 in 2014.

Productivity, it would seem, has been rewarded.

THE TIGER’S ROAR: Turkey’s industrial and manufac-

turing heartland has long been the north-west – the

region stretching from the Greek and Bulgarian bor-

ders through Istanbul and south to Izmit, Bursa, Eskişe-

hir and around the Marmara region.

This is still the area with the highest concentration

of industry, although other important clusters exist

around the capital, Ankara, the Aegean city of Izmir,

and, increasingly, out across Anatolia, with cities such

as Konya, Şanlıurfa, Adana and Kayseri also seeing

industrial growth in recent times. This has led to them

being dubbed the “Anatolian Tigers”.

Yet while these businesses may have started out in

Anatolia, many now have a quite global reach. Indeed,

research by the Turkish business magazine Ekonomist

in early 2014 showed that the top 500 Anatolian Tigers

now account for around 10-11% of Turkey’s total

exports and around 10% of the country’s GDP.

This has led in recent times to a blurring of the dis-

tinctions between the traditional, mainly Istanbul and

north-western-based industries – often members of

the Turkish Industry and Business Association (TÜSİ-AD), – and the Anatolians, often previously concen-

trated in organisations such as the Association of Inde-

pendent Industrialists and Businessmen (MÜSİAD). In

recent times, some of the most prominent Anatolian

Tigers have found a place in TÜSİAD, which represents

around 600 leading businesses, representing around

half the country’s workforce. Indeed, several senior posi-

tions in TÜSİAD are now held by the Tigers.

TÜSİAD and MÜSİAD are thus the two largest and

most influential professional organisations in Turkey’s

industrial world. The private sector is also represent-

ed by the Union of Chambers and Commodity

Exchanges of Turkey (TOBB), whose 365 members are

all representatives of local chambers of commerce,

industry and commodity exchanges.

On the governmental side, the Ministry of Science,

Industry and Technology has been the lead body since

2011, when the previous, Ministry of Industry and

Trade was reorganised and renamed.

In addition, there are several other ministries that

are also crucial for the sector, including the Ministry

of Economy, the Ministry for EU Affairs, the Ministry

of Environment and Urbanisation, and the Ministry of

Energy and Natural Resources.

IMPORTANCE OF SMES: While Turkey has many large

enterprises of domestic origin in its industrial sector,

small and medium-sized enterprises (SMEs) still con-

stitute a key part of the sector.

Indeed, according to Turkish Treasury figures, SMEs

account for 99% of all enterprises in the country, at

1.9m, along with around 78% of all employment, 62%

of exports and 57% of total value-added.

The sector receives support too from both the gov-

ernment and from international organisations such

as the European Investment Bank, which gives assis-

tance via Akbank, bolstering its financing of SMEs. The

SME Development Organisation is also there to assist

in training, technology development and innovation,

export orientation and quality improvement.

The Turkish Credit Guarantee Fund (KGF) also works

as an intermediary to help SMEs gain bank credit, with

an emphasis on helping new SMEs in the high-tech field

and those located in the regions. Post 2007/08 crisis,

the KGF provided counter guarantees of around TL1bn

(€352.1m), enabling SMEs to access some TL10bn

(€3.5bn) in credit and helping fuel the rapid econom-

ic turnaround of the 2010-11 period.

Several other bodies are important players in the

SME world, including the SME Venture Capital Invest-

ment Trust and the Istanbul Venture Capital Initiative.

The former is a risk capital intermediary in the finan-

cial markets, the latter Turkey’s first fund of funds and

co-investment programme.

A third important force now is the Anatolian Ven-

ture Capital Fund, which is being supported by EU pre-

accession funding and will see some €16m of invest-

ments in SMEs in targeted Anatolian regions. The fund

is investing in companies in the 43 most disadvan-

taged regions of Turkey, where there is considerable

79


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SMEs account for 99% of all enterprises in the country

Small and medium-sized

enterprises (SMEs)

constitute a key part of the

industrial sector. The SME

sector receives support

from the government,

international organisations

and several bodies

providing funding.

INDUSTRY OVERVIEW

growth potential. A minimum of 50% of the fund will

be invested in provinces in the south-eastern Anato-

lia region, for example.

Government legislation was also enacted in early

2014 allowing for licensed angel investors to deduct

from their annual tax base 75% of the capital they

invest in certain, targeted SMEs, with this rising to

100% if the investment is in research and development

(R&D). The legislation introduces for the first time a

formal licensing procedure for angel investors and an

accreditation process for angel investor networks.

When looking at Turkey’s exports, several sub-sec-

tors stand out as major performers. In 2014 accord-

ing to statistics from the Turkish Exporters Assembly,

of a total $157.7bn in exports, industrial products

accounted for 78.8%. Within this, the automotive sec-

tor was the most valuable (see analysis) at $22.27bn,

followed by the textiles sector at $18.7bn. The chem-

icals sector came in third at $17.8bn.

CHEMICALS: The Turkish Chemical Industry Assem-

bly, which is under the umbrella of the TOBB, contains

all the leading sector bodies, including professional

organisations such as the Turkish Chemical Manufac-

turers’ Association (TKSD) and the Istanbul Chemical

Exporters’ Union, and representatives of the major

companies and government agencies.

Turkey’s chemical companies have been losing out

in the Arab Spring, as previously attractive North African

markets have become volatile. Nonetheless, expecta-

tions are for continued growth in exports, although

at a lower level than in previous years.

As with automotives, the chemicals sector had been

heavily dependent on European trade, but since the

2007/08 crisis, manufacturers have been looking

increasingly to new markets in Latin America, Africa,

the Middle East and Asia. Exports to the EU, which had

averaged around 60% before the crisis, were at around

39% in 2013. Consumer goods such as cosmetics,

soaps, glues and adhesives are one area where Turk-

ish companies have done well in the new markets of

Latin America and Africa, though sector insiders expect

tough competition, going forwards, in these areas.

This is because South-east Asian countries – particu-

larly Malaysia and Indonesia – have direct access to

raw materials such as palm oil. One consequence of

this has been that some Turkish companies, such as

Evyap, have purchased plantations in Indonesia in order

to secure their supply chains.

One recurrent challenge for the subsector is its

heavy dependence on imported intermediary goods.

These account for approximately 40% of all imports

for the sector, according to the TKSD, which with a

depreciating Turkish lira in 2014 and 2015 has further

squeezed company bottom lines. The TKSD is there-

fore pushing government to back plans to build more

integrated chemical ports in Turkey, along the lines of

the Port of Tarragona in Spain.

The idea is to import raw materials and then man-

ufacture more of the intermediary products on Turk-

ish soil, before re-exporting the higher value-added

finished products. In 2014 the TKSD was carrying out

pre-feasibility studies on approximately 10 potential

sites for such ports.

The plan does face some opposition, however, with

the “chemports” having to be located on the coast with

good access to existing industrial areas. Largely, this

means the Aegean coast and other coastal areas – all

places where there is strong competition for land with

tourism and real estate. The TKSD sees this as a bot-

tleneck for foreign investment, however, which in

recent years has concentrated on consumer products

such as paints, soaps, detergents and cosmetics for

the fast-growing Turkish market. In terms of base

chemical investments, there have been only three

major ones in the past five years – an acrylic fibre joint

venture between Dow Chemicals and AKSA, and a

polypropylene plant launched by Bayagen Group and

Saudi Arabia’s Advanced Petrochemical Company –

plus the largest petrochemical investment in recent

years, the Azeri state energy company Socar’s Star

refinery investment (see Energy chapter). In the mean-

time, Turkey continues to manufacture low or middle-

priced products, with the TKSD estimating an average

81


The chemicals segment’s exports were worth $17.8bn in 2014

The chemicals segment was

heavily dependent on

European trade, but since

the economic crisis,

manufacturers have been

looking increasingly to new

markets in Latin America,

Africa, the Middle East

and Asia.

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INDUSTRY OVERVIEW

cost per tonne of sector products at just $1.70. Rais-

ing this requires major investment in value-adding

technologies and R&D, to secure intellectual proper-

ty rights on future products. The sector will likely be

pushing for the government to take a more active

stance on this too in the years to come.

“In general, the Turkish chemical sector is dominat-

ed by small companies, many of which are family-

owned. Future development should move the sector

further up the value chain, and it would also require

consolidation and the formation of partnership in the

sector,” Volker Hammes, CEO of BASF Turkey, told OBG.

KNITTING IT TOGETHER: Turkey has long been famous

for its textiles – images of Turkish carpets reach back

to early medieval times – while in recent years, its

ready-to-wear industry has also been making great

strides internationally. According to the Ministry of

Economy, taken together, in 2013 – the latest year for

which figures were available – textiles and clothing

accounted for around 7% of Turkey’s GDP, plus an

18.3% share of Turkey’s total exports.

Around 1m people work in the textile, ready-to-wear

and leather industries too, in some 58,000 compa-

nies, according to the Social Security Institution. Fur-

ther 2013 data shows that the Turkish clothing indus-

try is the world’s seventh-largest supplier in the world,

and the second-largest supplier in the EU. It regularly

ranks in the global top 10 of textile exporters.

Traditionally, while raw materials were produced in

Anatolia – Turkey ranked eighth in the world in terms

of cotton production in 2013– they were then

processed in Istanbul and other major north-western

urban centres, such as Bursa.

The industry was based in distinct quarters of the

cities, where factories would produce usually low-

priced, low value-added products for domestic sales

and exports. Turkey was thus seen largely by interna-

tional companies as an outsourcing destination.

This model has changed drastically in the last decade,

as cheaper commodities and labour, mainly in Asia, have

undercut Turkey. The response of local companies has

been to shift up-market, with Turkish textile and cloth-

ing companies now producing much higher-quality

products, often now the result of world-class design.

In recent years too, the factories have shifted out

of Istanbul into Anatolia, with Adana and Kahraman-

maraş currently major production centres.

Meanwhile, some of the more successful companies,

such as Koton and İpekyol, have become boutique

houses, opening their own stores in Europe and the

Middle East, as well as supplying goods to existing

international chains. Now too, Turkish companies are

doing the outsourcing, having basic materials manu-

factured in Asia and elsewhere.

The Ministry of Economy figures also show that the

sector exports around 65% of its production, with

some 80% of this cotton clothing. Knitted clothing and

accessories accounted for 61.8% of the total, woven

clothing the rest, with T-shirts and pullovers the most

popular among the former group. Turkey is also the

world’s second-largest manufacturer of hosiery, with

this alone responsible for some $1.2bn in exports in

2013. Overall, 2013 saw sector expansion, too. In terms

of knitted or crocheted exports, these were up 9.9%

on 2012, while woven exports went up 5.2%. Both out-

performed overall GDP growth of 4% and the overall

export figures, which largely flat-lined.

What obstacles there are to further growth in 2015

are those that apply to the economy as a whole: a

slowdown in domestic growth, political uncertainty

and the slow pace of recovery in key markets such as

Europe. At the same time too, the government has been

trying to control credit growth. The lira depreciation

has also hit those reliant on imported materials, with

costs rising due to foreign exchange issues. This has

undoubtedly put considerable pressure on some bot-

tom lines, as Turkish consumers remain highly cost-

conscious, with companies thus reluctant to pass on

costs to customers. Even so, expectations are high

that exports will remain on a solid growth path. Cheap-

er Turkish products have also made major inroads into

markets such as Russia, Ukraine, and the other former

Soviet countries, as well as the Middle East.

OUTLOOK: Although industrial growth has slowed,

strong fundamentals, such as a growing population and

geographical location, as well as good trade relations

with key markets now in recovery, such as the EU, will

stand the country in good stead.

Challenges do remain. Global concerns form part of

these, while perceptions of political uncertainty domes-

tically may also put new investments on hold. The high

targets set by the government for 2023 (see Econo-

my chapter) may also be difficult to achieve without

a major surge in the European economy, in particular.

For all these challenges, however, Turkey remains a

strong economy, with its industries at the forefront of

growth. With experience of and connections with both

the Western world and the Middle East and Asia, the

country’s industrialists and business leaders remain

in an advantageous position to leverage Turkey’s

unique status into future profits and investor rewards.

82

The north-west region has the highest concentration of industry in the country

With competition mainly

from Asia undercutting

local textiles firms, Turkish

companies have shifted

up-market and now

produce high-quality

products. Some companies

have opened their own

stores in Europe and the

Middle East and supply

goods to existing

international chains.


INDUSTRY & RETAIL INTERVIEW

Bora Yalınay, CFO, Ülker

What does Ülker’s $550m syndication loan,

secured in November 2014, indicate for the

potential of the industry and retail sector in par-

ticular and for Turkey as a whole?

YALINAY: First, it is important to mention that the

size and attention of this syndication was unprece-

dented in Turkey before this. A total of 26 banks

comprising more than 10 new lending relationships

from Europe, the US and Asia committed to the deal.

The syndication loan was the largest and most diverse

syndicate of banks for any Turkish corporate, exclud-

ing banks, in the past 10 years.

Banks from Asia, including those from China, Tai-

wan and Japan that had not taken part in any loan

agreements in Turkey previously, participated in the

syndication loan. The diversity of the participating

banks resulted in the largest transaction seen in

Turkey in the last 10 years.

Indeed, we have been observing an increasing

demand from international banks towards a wide

range of blue chip Turkish companies in the last

three years, as these companies have become

sounder and more secure in the global financial are-

na and are increasingly looking abroad to expand.

What does Yıldız Holding’s recent acquisition of

UK-based United Biscuits mean for the sector, and

do you believe more acquisitions will come from

the Turkish side in the future?

YALINAY: If you happened to look at this deal from

a confectionery company’s point of view, this type

of transaction, i.e., the acquisition of United Biscuits,

does not occur frequently. This type of deal tends

to be rare and when it does occur, it boosts compa-

nies’ brand strength and recognition, widens their

geographical presence, and develops their distribu-

tion capabilities in their operating countries, which

is essential to doing business.

Not only are Turkish firms becoming more active

in foreign markets, but their brands are also gain-

ing more recognition from non-Turkish customers

around the world. Thus, it is fair to expect addition-

al similar moves from Turkish companies that are also

aiming to expand into international markets to

strengthen and improve their operations.

How has the recent rise in the price of cocoa

impacted the processed food industry, and to

what degree does this necessitate price hikes?

YALINAY: The volatility in the commodity market, par-

ticularly as it pertains to cocoa, which is one of the

major raw materials for our business, has been a

critical issue for almost a decade. There are several

concerns as regards the global supply-demand imbal-

ance of cocoa, including the fact that global demand

increases by an average of 2% per year. Despite this,

great parts of Asia, mainly China, consume very low

levels of chocolate. Other challenges include farm-

ers often having limited knowledge of modern farm-

ing techniques and often confronting structural

problems such as ageing of trees, decline in soil fer-

tility, and pests and disease that attack cocoa trees,

all of which drive the price of cocoa up. Price volatil-

ity certainly has an impact on operations in a way

that the increase in the commodity costs should

partly be reflected to our end prices.

What is the general growth outlook for the food

products industry in 2015?

YALINAY: In 2015 consumer demand in Turkey is

expected to recover along with the country’s macro-

economic indicators. Many will recall that 2014 was

a year with high commodity costs mainly in cocoa,

nuts, pistachio and wheat. However, as the prices for

these products have since softened and visibility has

increased, we are expecting higher domestic con-

sumption of these products in 2015.

Under these circumstances and expectations, we

believe that the confectionery market is poised

to outgrow the rate of the wider Turkish economy.

83


Front and centreOBG talks to Bora Yalınay, CFO, Ülker


Sadettin Korkut, General Manager, Petkim Petrokimya Holding

What do you believe are the primary factors driv-

ing growth in the Turkish petrochemicals industry?

KORKUT: The petrochemicals industry provides raw

materials to numerous sectors. Globally, it has assumed

a level of importance on par with the iron and steel sec-

tor, as one of the primary forces in the development

of a country’s industrial base. In Turkey, demand for

petrochemical goods outpaces GDP growth by a fac-

tor of two. In fact, Turkey is one of the fastest growing

markets for thermoplastics after China.

Given Turkey’s lack of domestic hydrocarbons, what

keeps the chemicals industry competitive?

KORKUT: Although Turkey relies on imports for the vast

majority of its natural gas and petroleum needs, it does

have other advantages. The chemicals industry is a

capital-intensive sector requiring advanced informa-

tion and technology. Turkey is able to leverage its flex-

ible manufacturing model, highly-productive human

resources, and its proximity to sources of hydrocar-

bons and to potential export markets. In addition, the

government provides special subsidies for local produc-

tion that also add to the country’s competitiveness.

When you look at some of the most successful coun-

tries in the sector, such as Germany, France and South

Korea, you see that many of them possess relatively few

hydrocarbon resources themselves.

What is the role of the petrochemicals industry in

helping Turkey to reach its 2023 targets and the goal

of having $50bn in chemical exports in particular?

KORKUT: Turkey is currently a net importer in the chem-

icals sector, unlike the EU countries mentioned above.

In 2014, the trade deficit for the chemicals sector,

excluding mineral oils, stood at $20.47bn. Turkey is the

19th largest economy in the world, but ranks 29th in

chemical product sales and 32nd in ethylene produc-

tion. Given the considerable trade deficit facing the

country, it is important that it develops its export capac-

ity across all industries, including chemicals, which is

why the government has set these goals. Over the past

few years, the global chemicals industry has suffered

as a result of the lingering effects of the financial cri-

sis. The petrochemicals segment was growing at an

annual rate of 6-8% before 2008 but has experienced

annual growth of 4-4.5% since then. That said, some

regions have fared better than others. While many new

projects have been cancelled in Europe, the resource-

rich countries of the Middle East and North America

continue to attract investment; for example, by 2018,

10m tonnes of new ethylene capacity is expected to

come into play in North America and 7.5m tonnes is

expected to be added in the Middle East.

To reach its ambitious 2023 export goals, the Turk-

ish chemicals sector will need to grow at an average

annual rate of 12%. Developing the petrochemicals

segment is essential, as all other segments within the

sector rely on the raw materials that it provides for their

own manufacturing needs. In order to ensure that our

chemical exports are competitive, we also need to keep

costs down and finances under control. Aggregation

of production facilities will play a very important role

in addressing both of these needs. Plans for an inte-

grated refinery, petrochemicals, energy and logistics hub

are currently being developed for the Petkim Peninsu-

la with the help of SOCAR, the Azeri state-owned oil

company. By bringing together these disparate inputs,

we believe that there are large gains to be had in terms

of the development of the country’s chemical manu-

facturing industry as a whole.

How successful has the sector been in moving

towards the production of higher value-added prod-

ucts and reducing imports of intermediate goods?

KORKUT: In 2014, high-technology goods accounted

for 5-6% of Turkey’s $157bn of exports. In order for

this proportion to reach the target of 20%, there needs

to be a long-term plan for the sector. Additionally, Turkey

needs to decrease its reliance on imported intermedi-

ate goods, which currently account for 70% of imports.

84

Growth chemistry OBG talks to Sadettin Korkut, General Manager, Petkim Petrokimya Holding


INDUSTRY ANALYSIS

Turkey has numerous manufacturers of defence equipment

Turkey has seen a transformation in its defence indus-

try in recent years, with a noticeable shift from arms

procurement to arms manufacture and sales. Turkish-

made defence equipment has been attracting buyers

from around the world, building on growing confidence

and skill in a string of related domestic sectors, from

automotives to shipbuilding and aerospace. The over-

all aim of the country’s defence producers is an ambi-

tious one: the goal is to boost exports to $25bn by

2023, from around $1.6bn in 2014. Indeed, they have

been rising rapidly, as the defence and aviation sector’s

exports were up by 18.7% in 2014.

According to the IHS Jane’s Annual Defence Budg-

ets Report, in 2014 Turkey was ranked 15th in the world

with a defence budget of $17.2bn, while the Defence

Ministry reported that the country’s defence spend-

ing totalled TL29.4bn (€10.4bn) in 2014. Two Turkish

companies are listed among the world’s top-100 defence

companies too – Turkish Aerospace Industries (TAI)

and Aselsan, a military electronics specialist.

TURKISH MADE: In terms of soldiers, Turkey has the

second-largest army in NATO, after the US, at 290,000,

according to a 2014 Turkish Land Forces statement. The

Turkish army has a fleet of ageing US M48 and M60

tanks, with some of the latter modernised with Israeli

cooperation into M60 Sabras, and it also has German

Leopard I and IIs. This fleet will be modernised with the

addition of a main battle tank (MBT) built in Turkey –

the Altay. In partnership with South Korea, 200-250 of

these will be produced. This deal is a good example of

the transformation taking place, as until recently, South

Korea had been a major arms exporter to Turkey. The

expectation was that Turkey would also buy the Kore-

ans’ XK2 MBT – but instead, this now forms the basis

of the Altay being designed and built in Turkey. In the

deal will be a revamp of Otokar, a subsidiary of Koç

Holding, which is a producer of light military vehicles,

including the Cobra armoured car, which has been suc-

cessfully exported. The army also draws on Turkish firms

for small arms. The Mechanical and Chemical Industry

Corporation produces assault rifles, explosives, rock-

ets and other munitions, while also holding a stake in

Roketsan, which produces missiles, mortar and other

types of shells, along with rockets. Turkey is also expand-

ing its navy, signing an important contract for a land-

ing platform dock programme in early 2014 with Sedef

Shipyard, in partnership with Spain’s Navantia.

TOP FIRMS: TAI became the coproducer with Gener-

al Dynamics/Lockheed Martin of F-16 fighter jets for

the Turkish Air Force in 1984. Over 30 years later, it has

been in the news as the producer of Turkey’s first

indigenous un-manned aerial vehicle, or drone, known

as the Anka. Serial production of this is due to start in

2016, with the drone marking a serious advancement

in the technological level and sophistication of the

Turkish defence industry. The Turkish Armed Forces

(TAF) owns 55% of TAI’s shares, with the Under-secre-

tariat of Defence Industries at the Ministry of Defence

holding the rest. TAI earned $1bn in exports in 2013,

with the business split roughly 50:50 between military

and civilian uses. Aselsan, meanwhile, was set up in

1975, with the task of supplying the TAF with its com-

munications equipment. It has since branched out into

electronic warfare, radar, guidance systems, microelec-

tronics and other defence-related electronic and dig-

ital applications. By 2014 it placed 67th in the world

among defence companies in terms of total sales on

US-based Defence News’ top 100 list.

Also in 2014, the company signed memoranda of

understanding with Rolls-Royce to work on engine con-

trol systems, and it signed a framework agreement with

Airbus outlining future cooperation on satellites, civil

and military avionics, laser systems and secure telecom-

munications. Havelsan is a Turkish military electronics

systems manufacturer, producing reconnaissance and

surveillance systems, intelligence suites and flight sim-

ulators. Thus the Turkish defence sector has a growing

portfolio of products and list of internationally

minded partners. State backing for technological

advances is also being translated into high performance.

In the past few years the

country has shifted from

arms procurement to arms

manufacture and sales. Two

Turkish companies are now

listed among the world’s

top-100 defence

companies.

85


High performanceThe defence sector is thriving with a range of new equipment and systems being produced locally


Muharrem Dörtkaşlı, CEO, Turkish Aerospace Industries

What is the strategic importance of developing the

Turkish aerospace and defence industries?

DÖRTKAŞLI: The aerospace and defence industry pro-

motes the development of different segments of the

economy such as aeronautics, software, sensor systems

and information technologies, as well as the country’s

industrial base. Between 2006 and 2014, the annual

revenue of Turkey’s aerospace and defence industry

increased by 220%, and exports rose by 240%. By 2014

the industry’s revenues reached $5.5bn, with exports

of $1.65bn. From its beginning 30 years ago, the indus-

try continues to grow as more finances are allocated

to research and development (R&D) activities, driving

greater innovations in products and technologies.

To meet the future needs of the Turkish Armed Forces,

the industry is working on the next generation of fight-

er aircraft, light utility helicopters (LUH) and unmanned

air vehicle (UAV) systems. These projects offer an oppor-

tunity to collaborate in technical fields with allied

nations. Other projects involving tanks, frigates and air

defence systems provide similar opportunities for joint

working. Technologies developed as part of these mil-

itary programmes also help drive future commercial

developments, with the LUH and regional airliner pro-

grammes two key examples. Further, the Ministry of

Transportation, Maritime Affairs and Communications

is encouraging the aerospace industry to build a nation-

al regional passenger aircraft by 2023.

In what way is the government working to increase

R&D spending in the sector?

DÖRTKAŞLI: For industries to achieve long-term sus-

tainability and stay competitive globally, they must

invest in R&D activities to produce new technologies

and processes. However, individual businesses, espe-

cially those in competitive and high-tech fields, require

government support. Similarly, universities and small

and medium-sized enterprises need to be encouraged

by state incentives to participate. With this in mind, the

government and the domestic aerospace and defence

industry are taking a number of different steps. Indi-

vidual businesses, for example, have invested in tech-

nology development zones such as the Middle East

Technical University Technopolis. Not only do the busi-

nesses benefit from physical proximity to university

research centres, but universities are also exposed to

a business-oriented approach. The government is con-

tinuing to help incentivise such investments.

Government development programmes are also

important drivers of innovation, with individual com-

panies taking on the technical and financial risks, as

well as being able to operate as an original equipment

manufacturer (OEM) if they are successful. Products

developed this way include the UAV platform and

advanced trainer aircrafts. The same approach was tak-

en for the LUH development programme and we expect

the fighter/trainer aircraft development programme to

follow the same model. In addition, EU R&D programmes

such as Horizon 2020, the Clean Sky Joint Technology

Initiative, the Single European Sky ATM Research Joint

Undertaking and the Seventh Framework Programme

are also key initiatives taking place.

To what extent are Turkish aerospace and defence

products in demand at a global level?

DÖRTKAŞLI: Over the past decade there has been a

steady rise in international demand for Turkish-pro-

duced defence solutions. Between 2005 and 2014 the

compound annual growth rate (CAGR) of total exports

was 8.8%, and the CAGR for defence exports was 19.3%.

In 2014 Turkey’s total export volume was $157.6bn,

with $1.65bn in defence and aerospace. Most interest

is currently concentrated in the Middle East, North

Africa and Asia, though sub-Saharan Africa and South

America are expected to play a key role going forward.

Western OEMs comprise a share of the market for Turk-

ish component and sub-system manufacturing. The

government has assisted private companies in helping

to develop these relationships and is focused on fur-

ther strengthening the sector’s global export market.

86

Incentivising growthOBG talks to Muharrem Dörtkaşlı, CEO, Turkish Aerospace Industries


INDUSTRY ANALYSIS

Turkey’s steel production capacity increased to 50.2m tonnes in 2014

While Turkey’s metals industry may not be globally

renowned, its products are a major export and source

of revenue. Indeed, a “Made in Turkey” stamp can now

be found on everything from the copper wires in NASA

spacecraft to the steel pots and pans in many of the

world’s kitchens. The sector faces some important chal-

lenges, however, in its future development. Sourcing

raw materials is one of the chief ones, with moves afoot

to boost domestic exploration, as well as to free up sup-

ply beyond the current warehouse system.

Meanwhile, exports fell in 2014, with metals manu-

facturers looking to expand their reach to untapped mar-

kets in Africa, South America and beyond. Low demand

in the global flat steel export markets such as the EU

and the entrance of some exporters to Turkey’s tradi-

tional markets with low-priced steel products are some

of the challenges faced by Turkish steel producers.

DOMESTIC CAPACITY: In terms of steel, Turkey’s pro-

duction capacity increased from 49.04m tonnes in 2012

to 49.6m tonnes in 2013, reaching a level some 35%

higher than in 2007, the last year before the global down-

turn. In 2014 production capacity climbed to 50.2m

tonnes, according to the Turkish Iron and Steel Produc-

ers’ Association. Some 77% of production in 2014 was

done by electric arc furnaces (EAFs), with the most

common product steel billets. Some 24.6m tonnes of

these were produced, down 6.4% on 2013, while slab

production stood at 9.42m tonnes, up 12.7% on the pre-

vious year. According to the World Steel Association,

the world’s capacity utilisation rate for crude steel pro-

duction fell to 70.8% in 2014 from 72.4 % in 2013. In

line with the global trend, capacity utilisation of Turkey’s

steel industry dropped from 70% in 2013 to 68% in 2014.

The dominance of EAFs, rather than blast furnaces,

indicates that Turkish steel is primarily reliant on scrap

metal – much of it imported – as a raw material. Sourc-

ing this though has been proving increasingly difficult,

as countries with their own EAFs have begun limiting

their exports of scrap. The EU has also debated intro-

ducing limits. Sourcing raw materials is also a growing

concern for the aluminium sector. As with steel, the

domestic construction boom has added to demand for

this material, which was already benefitting from growth

in the automotive sector and other aluminium-using

industries. The most recent available figures put pri-

mary production at around 65,000 tonnes per annum,

with Eti Aluminium the sole primary producer. Second-

ary production does take place, again using scrap. While

Turkey has extensive reserves of bauxite, raw materi-

als such as alumina have to be imported, with sector

participants concerned that the prices of such mate-

rials include too high a premium due to control of the

supply chain at the warehouse level by an internation-

al monopoly. Istanbul Minerals and Metals Exporters

Association (IMMIB) says that its members claim two-

thirds of the price of their products is made up of raw

material costs. Another challenge is electricity. Electric-

ity, which is a staple of aluminium and copper produc-

tion and of EAF steel production, is pricey, and its unre-

liable availability can be a limitation on expansion.

CHANGING TACK: One way the sector has respond-

ed to these difficulties is by boosting the import of ingots

manufactured in countries where electricity is cheap-

er, then using these to make finished or semi-finished

products for domestic consumption or export. At the

same time, there is increasing interest in exploration

within Turkey to try and source more local raw materi-

als. Another response has been to go up-market, pro-

ducing higher-quality aluminium and steel products

for specialist sectors, such as aerospace. These strate-

gies appear to be having an effect. In 2014, according

to the IMMIB, aluminium exports were up 7.6%. The

expectation is that recovery in Europe and the devel-

oped markets will keep business buoyant, with metals

exports to the EU accounting for 50% of the total.

Turkey has also gained a good reputation in competi-

tion against the world’s largest metals producer, Chi-

na. Turkish metals are known for being better quality,

and, while more expensive than China’s metal, they are

cheaper than those produced in developed economies.

Turkey’s steel production

capacity increased from

49.04m tonnes in 2012 to

49.6m tonnes in 2013,

reaching a level some 35%

higher than in 2007, the

last year before the global

downturn. In 2014

production capacity

climbed to 50.2m tonnes.

87


Iron in the soulMetals industry will benefit from an expected rise in demand

INDUSTRY ANALYSIS

Jewellery exports have recorded significant growth in recent years

Turkey is one of the world’s top gold and jewellery

exporters, sending manufactured pieces and fine pre-

cious metals and stones to many regional countries as

well as further afield. The country imports a great deal

of these valuable commodities and products, while its

domestic market is a robust one – for both the buying

and selling of gold, diamonds and jewellery. There is a

large and developed domestic production industry for

jewellery, with a growing international reputation. Leg-

islative moves taken in 2014 could also see the indus-

try expand further, with the 20% special consumption

tax (SCT) on polished diamond imports abolished in

2014, further liberalising an already liberalised sector.

In the meantime, gold and jewellery continue to be in

great demand as stores of value in uncertain times and

as items of high artistic and decorative quality.

SURGING EXPORTS: According to figures from the

Jewellery Exporters Association (JTR), in 2012, Turkey

exported 100,852.36 kg of gold jewellery – a figure

which includes both plain gold and diamond pieces. This

was worth some $1.66bn. For 2013, the numbers rose

to 108,480.66 kg and $2.01bn – the value jumping fur-

ther than the quantity due to fluctuations in interna-

tional prices. According to the JRT, jewellery exports

recorded substantial growth in 2014 too, rising to

around $4.5bn. The latest available data shows that in

terms of silver jewellery, the totals for 2012 were

113,430.2 kg, worth $108.3m, and for 2013, 120,401.8

kg and $108.4m – illustrating weak silver prices during

the year. Jewellery composed of both gold and dia-

monds worth $44.8m was exported in 2012, with this

rising to $54.68m in 2013. Silver and diamond jew-

ellery showed even more spectacular gains, with the

value of these pieces exported rising from $820,970

to $2.25m. Pearls and pearl jewellery are another mar-

ket segment in Turkey, with these seeing exports of

$2.13m in 2012 rise to $2.35m in 2013. The top five

destinations for these exports have remained roughly

the same for the last few years: the UAE is usually num-

ber one, followed by Iraq, then Russia, Germany and

the US. Iraq is largely northern Iraq, as Erbil has estab-

lished itself as the centre for gold and jewellery trad-

ing throughout the rest of the country.

The Arab market is a key one for Turkey, with demand

for precious metals, stones and jewellery as a store of

value high there, while cultural values, such as require-

ments for gold as a wedding gift, also boost demand.

SHIFTING SANDS: Turkey’s modern jewellery business

took off following the liberalisation of the gold trade

in the 1980s. Restrictions on the import and export of

gold were gradually lifted, and by the 1990s, the trade

was established enough to set up the Istanbul Gold

Exchange in 1995. Production techniques improved,

along with designs, which often achieved a fine, east-

west synthesis. From 2004 onwards, however, when

global gold prices began to march upwards, demand

started shifting towards diamonds. This shift is the main

reason organisations such as the JTI pushed the gov-

ernment for new legislation. Unlike gold, or finished dia-

mond products, imports of pure diamonds used to be

subject to the SCT of 20%. In addition to the removal

of the SCT for polished diamond imports, the 18% val-

ue-added tax for diamond trading for members of the

Borsa Istanbul was lifted in 2014, enabling registered

diamond transactions. On October 1, 2014, Borsa Istan-

bul began diamond trading in an effort to capture a

share of the $10bn market that is currently dominat-

ed by Israel, Belgium and Dubai.

Meanwhile, Istanbul Diamond Exchange, which has

already been officially registered and has 200 members,

has yet to start trading. Insiders suggest that with the

20% SCT now abolished, the exchange is expected be

a great success, with many traders from Tel Aviv to

Mumbai waiting to come in. In March 2015 it was

reported that Turkish and Israeli industry leaders are

working together to open the exchange, with the plan

including a 150,000-sq-metre diamond compound in

Istanbul. At the same time, sector stakeholders are

making efforts to widen registration of traders and

businesses, further regularising the growing sector.

89


Recent legislative changes

expected include

abolishing the 20% special

consumption tax on

polished diamond imports

and lifting the 18%

value-added tax for

diamond trading for

members of the Borsa

Istanbul.

More preciousLegislative changes to further boost growth of the jewellery industry

INDUSTRY ANALYSIS

The development of more value-added segments remains a priority

While the economic downturn in neighbouring Europe

affected Turkey’s automotive industry negatively in the

years after 2008 – as its largest export market shrank

– 2013 saw some signs of a recovery north of the bor-

der, with a concomitant boost to European sales. Euro-

pean car sales grew in 2014 and early 2015, with the

vast majority of Turkey’s automotive exports destined

for the EU. Now, the sector faces the challenge of build-

ing on that while also keeping its interests to the fore

in the increasingly important trade talks now under

way between the EU and the US. At the same time, the

development of more value-added segments of the

industry remains a priority, as efforts to boost more local-

ly produced content in Turkish-assembled vehicles con-

tinue. Despite these challenges, Turkey’s automotive sec-

tor remains one of the largest in the region and the

world, with a raft of associated industries, investments

and jobs also dependent upon it.

FACTS & FIGURES: The first major automotive plant

in Turkey was established in 1956, when Otosan was

licensed to produce Ford vehicles. Import substitution

polices were often favoured back then, with the Devrim

sedan the first locally designed and manufactured car.

By 1963, the total number of units produced was only

3000 though, although in 1968, Fiat came in, via TOFAŞ,

and in 1969, Renault entered, via Oyak-Renault. By

1976, output had reached 110,000 units. Since then,

Toyota, Opel, Mercedes, Hyundai, Isuzu and MAN have

all started producing vehicles in Turkey, with output

reaching 421,000 units in 1993, then 431,000 in 2000

and 1.23m in 2011, according to the Automotive Man-

ufacturers’ Association (OSD).

There are now 14 original equipment manufactur-

ers (OEMs) in Turkey, with a total capacity in 2014 of

1.73m units between them. The largest capacities are

Ford Otosan, with 410,200 units; TOFAŞ, with 400,000

units; Oyak Renault, with 360,000; Hyundai Assan, with

200,000 units; and Toyota, with 150,000 units. In 2013

some $1.2bn of realised investments were made in

the sector, bringing the total since 2009 to $4.28bn.

Most production is based in the north-west of Turkey,

with Kocaeli the location for Honda Türkiye, Hyundai

Assan, Ford Otosan (who are also in Eskişehir) and

Anadolu Isuzu (AIOS). Toyota is in neighbouring Sakarya,

along with Otokar, and Temsa Global (who are also in

Adana). Bursa is home for Karsan and Oyak Renault.

In 2013, OSD figures show that 42,330 people were

employed by the OEMs, down from 44,655 in 2012 and

44,896 in 2011. In addition to the OEMs though, there

are 4000 other manufacturers operating in and around

the sector, employing 200,000 people in associated

trades such as wheel and radiator production, electri-

cal equipment, springs and batteries. The plastics,

leather and glass industries, as well as the steel and

aluminium sectors, are also heavily involved in automo-

tives, alongside the chemical industry, which provides

paints, coatings and a range of other materials.

OUTPUT & EXPORTS: The total output for 2014 was

1.22m – up from 1.17m in 2013. Oyak Renault produced

the most units in 2014, at 318,246 units, ahead of Ford

Otosan, with 244,682, and TOFAŞ, with 222,807. In the

2006-14 period, capacity utilisation rates (CURs) have

thus hovered between 60% and 80%, depending on the

unit type, with the average CUR across all varieties in

2013 standing at 69.11%, according to the OSD.

In 2014 too, Turkey exported approximately 902,194

units – or around 74% of its total production, accord-

ing to OSD. This export total was worth some $13.3bn,

up on the $12.5bn the industry earned Turkey in 2013.

The number of units exported was also up on the pre-

vious year’s total of 843,467.

The two main types of units exported have long been

passenger cars (PCs) – in 2014, these made up 581,993

units – and pick-ups, which accounted for 269,995

units. In terms of value, buses are also a significant

export – in 2014, although only 4629 buses were

exported, these were worth some $985m.

Yet for all its export success, a feature of the Turk-

ish market is that it is also a large automotive importer.

In 2014, indeed, the OSD figures show a total of 429,982

In 2014 Turkey exported

approximately 902,194

units – or around 74% of its

total production. This

export total was worth

some $13.3bn, up on the

$12.5bn the industry

earned in 2013.

90

A leading lightAutomotive sector sees a rise in investment, output and exports


INDUSTRY ANALYSIS

PCs imported. However, imports dropped substantial-

ly in 2014 – a total of 517,527 PCs were imported the

previous year.

THE RISE OF CAR OWNERSHIP: With per capita GDP

in Turkey rising to $10,404 in 2014 from $4565 in 2003,

according to TurkStat, domestic sales have also risen

over recent years. In 2009, OSD figures show, 575,869

units were sold domestically, rising to 910,867 in 2011.

In 2012, sales were down, to 817,620, but picked up to

893,125 in 2013. In 2014 sales dropped again, to

807,486, with the increase in interest rates in early

2014 and a slowdown in economic growth impacting

the market. The majority of these sales were PCs, which

were down 11.6% year-on-year (y-o-y) with 563,456 of

the total vehicles sold. By early 2015 retail sales were

picking up again. New car sales recorded their fifth

consecutive month of y-o-y gains at +57% in February

2015. The first two months of 2015 recorded a 32.9%

jump in sales compared to the same period in 2014.

In 2014, some 73.2% of all PCs sold in Turkey were

imported. The leading manufacturer in these sales was

Volkswagen, followed by Opel and Ford.

Light commercial vehicles (LCVs) have also been

popular domestically, as their dual functionality – busi-

ness and family – tend to make them an entry vehicle

to car ownership. LCVs are also subject to lower taxes

than passenger cars. As most LCVs cost less than

TL50,000 (€17,605), they also benefit from a lower

minimum down-payment rate of 15% – after TL50,000,

the rate rises to 50%. Special consumption tax is also

being raised incrementally on vehicles, further widen-

ing the gap between passenger car and LCV prices.

In 2013 and 2014, however, LCV sales were down by

14.8% and 1.4%, respectively. Commercial vehicle sales

domestically dropped as a whole in 2014, by 15.1%,

according to the OSD, with heavy commercial vehicles

(HCVs) also shrinking, by 14.8%. Also impacting sales

here has been a passing on of the cost of lira devalu-

ation in 2013 – many companies kept prices low into

the new year, while many consumers also anticipated

a future price rise and brought their vehicle purchas-

es forwards. The 2014 hike in interest rates also made

the cost of car loans more expensive. The year 2015 is

likely to see higher demand than in 2014, given the surge

in sales seen in the first two months of the year. Con-

sumer confidence, however, has shown persistent

decline, with the consumer confidence index falling to

64.4 in March 2015 – the lowest level since 2009.

A GLOBAL PLAYER: The downturn in the EU economies

following the 2007-08 crisis was felt sharply by the

Turkish automotive sector – the loss of demand was

around 30% in the years 2008-13, according to the

OSD. Since then, the sector has been looking to increase

exports to other countries, with some success. While

exports to the Middle East, Africa and Central Asia had

been less than 5% in the past, they had grown to around

15% by early 2014. At the same time though, the domes-

tic market, while growing, is also not expanding fast

enough for many manufacturers. The OSD points at high

taxes on domestic sales as crimping development, while

also hindering investment; with demand based large-

ly on exports – and thus the vagaries of other economies

– it is more difficult for investors to plan future increas-

es in capacity. The government, however, is trying to

cut the country’s current account deficit by restrain-

ing consumption.

IMPACT OF INTERNATIONAL TRADE DEALS: Thus,

the EU market remains crucial for Turkey, which bene-

fits greatly from a Customs Union (CU) with the Euro-

peans, enabling duty-free exports. Now, however, a

concern in the sector is the progress of talks on a Trans-

Atlantic Trade and Investment Partnership (TTIP)

between the EU and the US. These negotiations may

have a profound effect on Turkey, due to its CU with

the EU, yet, as a non-EU member, Turkey has no direct

influence on the negotiations. The TTIP may also dove-

tail with free trade agreements throughout the Amer-

icas and across the Pacific, creating a concern that

Turkey may get left behind. While US goods would be

able to enter the EU – and thus Turkey, via the CU –

duty-free, there would be no obligation on the US to

accept Turkish goods under the same terms.

In March 2014, the US declared that it was in favour

of Turkey being brought into the TTIP, preferably as an

EU member. The likelihood of this being achieved under

current circumstances, however, seems remote, leav-

ing an edge of uncertainty.

Nonetheless, for now, with the EU economies grad-

ually improving, the medium-term picture may see ben-

efits for those manufacturers ready to hit the European

market once again. After closing its factory in Southamp-

ton in the UK in 2013, Ford Otosan has shifted produc-

tion to Turkey, opening a new $511m plant in Yeniköy

in the north-western province of Kocaeli in May 2014.

The new plant produces minivans and LCVs which could

bolster the company’s role as a leading exporter. TOFAŞtoo is expected to see a new PC roll off the assembly

lines in 2015, while credit restrictions have been eased

with interest rate cuts in the run up to presidential bal-

lot in 2014 and general elections in 2015. Plenty still

to aim for then in Turkey’s dynamic automotive sector.

91


There are 14 original equipment manufacturers in Turkey, with a total capacity in 2014 of 1.731m units

Although in 2014 domestic

car sales declined on the

back of an increase in

interest rates and a

slowdown in economic

growth, by early 2015 retail

sales were picking up again.

The first two months of

2015 saw a 32.9% surge in

sales compared to the

same period in 2014.

RETAIL OVERVIEW

The fundamentals of the market support long-term retail growth

With the size of the market widely expected to double

over the next decade, Turkey represents a major oppor-

tunity for retailers. Yet with recent years seeing big

internationals pulling out or downsizing their partici-

pations, and as the pace of economic growth slows,

consumer confidence is weakening and some chal-

lenges do remain. At the same time though, local groups

have thrived, with this applying not just to modern

retail, but to traditional outlets as well. Turkish retail

therefore demonstrates that while strong GDP and

population growth can provide some good fundamen-

tals, flexible management, good organisation and a

deep understanding of local market and habits are also

invaluable in determining which retailers will thrive.

FACTS & FIGURES: The fundamentals of the Turkish

market support long-term growth of the retail market,

although economic growth has slowed down in recent

years – the GDP expanded 2.9% in 2014, according to

data from the Turkish Statistical Institute (TurkStat).

The mean annual GDP growth rate over the 2003-13

period was 5% though, despite the global economic

downturn. Per capita GDP has risen from $4565 in 2003

to $10,404 in 2014. Population expansion has also driv-

en this growth. TurkStat data show Turkey’s population

at 77.7m at the end of 2014, giving an annual growth

rate of 1.3% – down from 1.37% in 2013. The median

age in 2014 was 30.7, while in 2008 the median was

28.5 years. Thus, while the population is ageing, almost

half of all citizens are under the age of 30. According

to a report by Banco Bilbao Vizcaya Argentaria, by 2020

Turkey’s affluent and medium-upper middle class will

account for some 45% of the population – up from 27%

in 2010. Much of the country’s growth has been con-

sumption-driven, too. Household consumption was up

4.6% year-on-year in 2013, and 1.3% in 2014.

Due to recent changes in TurkStat’s statistical meth-

ods, however, comparing retail market data directly

between 2013 and other years has become more prob-

lematic. The figures in any case have long been inex-

act due to the size of the grey economy, with many small,

corner-shop retailers operating in an only semi-regis-

tered fashion. The government is making efforts to

bring these traders into the system, however. One major

thrust in this in recent times has been that of increas-

ing the usage of electronic data exchanges. When even

small local stores have electronic card readers, for

example, it is more straightforward for the tax author-

ities to bring that store into the system. The available

data on the retail market is impacted by the relative

effectiveness of these measures over time, though.

Nonetheless, according to the Trade Council of Shop-

ping Centres and Retailers, on the basis of household

expenditure, total retail turnover for 2013 was $285bn

– an increase from $171bn in 2010. Of this, around

$100bn, or 35%, was in modern retailing, up from $75bn

in 2010 (see analysis). Thus, the numbers would tend

to indicate growth in the modern and traditional retail

sectors has been high over recent years, although pro-

portionately, the modern sector has been growing

faster. This is especially so in food, where the share of

supermarkets in the total consumable goods market,

excluding cigarettes, rose 57% in the last 10 years,

according to a November 2014 US Department of Agri-

culture (USDA) report. The expected decisive shift to

modern at the expense of traditional has been likely

offset to some extent though by an important charac-

teristic of the Turkish market. Many prefer to shop for

groceries in a local bakkal (a corner shop that is often

family run) rather than the local supermarket, due to

strong local loyalties and communal and familial links.

A NEW LAW: The government seeks to protect small-

and medium-sized enterprises from larger chains via a

long-awaited new retail law – the Law on Regulation

of Retail Trade enacted in January 2015. The law limits

the ‘days payable’ limits for organised retailers, which

may oblige them to hike prices. This is because many

of the larger retailers sell in cash, but pay in terms;

shortening the days payable will force them to gener-

ate more short-term operating income. This would

negate the competitive advantage large stores are able

Economic and population

growth as well as a rise in

per capita income have

been major factors

contributing to sector

growth in recent years.

Expansion in both the

modern and traditional

retail sectors has been

high, although

proportionately, the

modern segment has been

growing faster.

92

A growth marketFormalisation is being driven by a new retail law as local outfits seeknew opportunities abroad


RETAIL OVERVIEW

to leverage due to economies of scale – an advantage

that has historically tended to offset the benefit the

traditional stores gain from operating sometimes out-

side the tax system.

The first set of regulations to govern the sector, the

new law regulates the establishment, operation and

auditing of shopping malls, retail dealers, department

stores, chain stores, artisans and craftsmen, giving

retailers one year and, in some instances, up to two years,

to bring their operations into compliance. The regula-

tion aims to facilitate the opening and operation of retail

businesses, establish an efficient and sustainable com-

petitive environment, protect the consumer, achieve

balanced growth of stores and organise the opera-

tional relationship of stores among each other, with the

consumer and with suppliers. A retail information sys-

tem and a sector database will also be formed. The law

also states that space for artisans and craftsmen must

be allocated in shopping malls and at least 1% of shelf

space shall be reserved for local products.

MARKET SEGMENTATION: TurkStat’s retail sales vol-

ume index shows steady improvement over the years

since its 100-point base line in 2010 – hiking to 125 in

February 2015 on a calendar- and seasonal-adjusted

basis in constant prices, having increased 2.9% com-

pared with February 2014. The biggest hike has occurred

in the non-food segment (except automotive fuel),

with the index on this rising from 100 in 2010 to 129.1

in February 2015. Food, drinks and tobacco, meanwhile,

climbed to 118.4 over the same period. Within the non-

food segment, the top three growth areas in retail over

the last few years have been internet and mail order

retail, which stood at 217 in February 2015; second,

textiles, clothing and footwear – rising from 100 to 155.7;

and then computers, books and telecommunications

equipment, with these rising from 100 to 124.9. E-com-

merce was a highly marginal activity only a few years

ago, which illustrates the changing tastes and patterns

of behaviour of Turkish consumers, as they become

wealthier and more technologically connected.

DISCOUNT STORE SUCCESS: The Turkish consumer

remains highly price-conscious, though. This is reflect-

ed in particular in the food segment – which is still the

largest retail area, with some 62% of all stores – and

with the remarkable success of discount supermarket

chains. There were 149 chains (those with more than

10 outlets) of supermarkets of all kinds as of October

2014, according to a USDA report, with the top-three

national discount chains operating around half the

total number of 18,960 supermarkets. The largest dis-

count store in terms of branch numbers, BIM, saw 20%

year-on-year revenue growth between FY12 and FY13,

along with 25% net profit growth. In 2014 the chain’s

net sales rose by 22% and net profit fell 4.3%, while it

had 4452 stores across the country as of October, up

from just 21 when it started in 1995. It also now oper-

ates in Morocco and Egypt. The chain has been a pio-

neer in Turkey for the no-frills, hard-discount model.

93

The new retail law

regulates the

establishment, operation

and auditing of all retail

entities, while a retail

information system

and a sector database will

also be set up.

RETAIL OVERVIEW

mainly Ankara-based chain Beğendik. Meanwhile, nego-

tiations started in 2013 over the sale of the UK firm

Tesco’s Kipa subsidiary in Turkey ended in May 2014.

Tesco had been talking with potential partners to sell

its loss-making subsidiary. The company said it would

accelerate plans to “focus the business on its heart-

lands” at its profitable stores around the Aegean and

Izmir, which would suggest the group is likely to close

stores in the east of the country where the brand has

not taken off, as the company said it wanted to min-

imise capital spend and improve profitability.

The reasons for these withdrawals are partly inter-

nal to the particular companies, but also to do with the

peculiarities of the Turkish market. In a city such as Istan-

bul, where traffic and transport are major issues, few

consumers are attracted by the idea of visiting a large,

out-of-town hypermarket.

One other result of local success has been expan-

sion abroad by Turkish retailers. Özdilek Group, a home

textiles company, opened a store in London’s Westfield

Shopping Centre in 2011, while Turkish bagel store

Simit Sarayı and café chain Kahve Dünyası opened a

store each in London in 2014. Fashion brands Koton

and LC Waikiki are also reportedly looking for Euro-

pean and Middle Eastern outlets. Some 84 Turkish

brands have 1951 outlets in 90 countries, as reported

by the United Brands Association

MARCH OF THE MALLS: Meanwhile, the number of

dedicated retail locations is expanding exponentially,

with some 76 new malls in the pipeline as of 2014,

nationwide, according to Jones Lang LaSalle research.

In 2014 total supply in the shopping centre segment

reached 9.9m sq metres in 350 malls, with 635,000 sq

metres of space added during the year, according to

real estate firm Cushman & Wakefield. New supply

growth slowed down in 2014, as close to 1m sq metres

were added the previous year, however, another 2.3m

sq metres of retail space are expected within the next

three years. One of the recent trends with shopping

centres has been the spread of these to secondary

cities – 2013 saw two complete in Gaziantep, for exam-

ple, along with new centres in Şanlıurfa, Kahraman-

maraş and Samsun. The second trend is towards more

exclusive outlets in the more developed market of Istan-

bul. The Zorlu Centre, for example, which was also com-

pleted in 2013, now houses a variety of luxury outlets,

initiating a new wave of exclusive, high-end retail malls.

OUTLOOK: With much new retail space coming on

stream, Turkey’s retail market remains buoyant. The

slowdown in economic growth in 2014-15 will likely

impact this, however, as might political uncertainties

in the run up to general elections. Traditional retailers

too may see their share of the market continue to

decline. For foreign investors, the lesson of recent times

would appear to be that retail businesses still need a

good dose of local knowledge, even in these times of

globally integrated business chains. Good geographi-

cal positioning and strong local partnerships may there-

fore be the way forward. At the same time, Turkish

retailers are increasingly on the lookout abroad

for opportunities – and additional global partnerships.

94

SO

UR

CE:

TU

IK

*2

01

0 =

10

0

Retail sales volume index & percentage changes, 2014*

0

30

60

90

120

150

DecNovOctSeptAugJulyJuneMayAprMarFebJan

The number of retail

locations is expanding, with

some 76 new malls in the

pipeline as of 2014. Some

2.3m sq metres of retail

space are also expected

within the few three years.


The second-largest discount chain is A101 Yeni

Mağazacılık. Founded in 2008, this has expanded aggres-

sively since, with 3427 stores as of October 2014.

Turnover in 2013 was TL3.2bn (€1.1bn). The firm saw

one of its shareholders, Bank Asya, exit in April 2014,

as part of a capital raising exercise by the bank.

Third on the list of discount chains is Şok Marketler,

which also started business in 1995. This had 2216

stores as of October 2014. Şok is owned by Yıldız Hold-

ing, which, as Yıldız-Şok, bought out DiaSA in 2013, a

joint venture between Spanish supermarket chain Dia

and Turkey’s Sabancı Holding, for some $177.8m. DiaSA’s

stores were rebranded as Şok stores.

The success of the three big discount stores has also

attracted other outfits. In 2013 Ekonomi and UCZ

entered the market, hoping for a slice of the pie. As of

October 2014 Ekonomi had 1060 stores and UCZ 1430.

Yet while the big three discounters crowd the top end

of the food business, a non-discount business remains

number two in terms of turnover: Migros. Originally a

Swiss entry in 1954 – and the first foreign supermar-

ket in Turkey – the Koç Group took a majority stake in

it in 1975. In 2008 Koç sold the chain to the UK-based

BC Partners private equity fund. Migros had run Şok too,

selling it to Yıldız in 2011. The chain’s turnover in 2013

reached TL7.1bn (€2.5bn). In early 2015, it was con-

firmed that Turkish Anadolu Group is buying a 40.25%

stake in the firm from BC Partners. Although Migros had

international ownership, its management has been

entirely Turkish. This is a point often stressed by ana-

lysts as explaining why the chain has been so success-

ful, while other international chains have not done so

well. Indeed, 2013 saw not only Dia exit the market, but

the UK’s Dixon’s – an electronics and electrical (E&E)

goods retail chain – also announced it was selling its

loss-making Turkish interest, ElectroWorld, to Turkey’s

Bimeks – which also purchased French E&E Darty’s

Turkish operations – during the same year.

In 2013 French multinational retailer Carrefour also

reduced its holding in its Turkish operation to 46.2%,

selling 12% of its shares to partner Sabancı Holding for

€60m, giving the local conglomerate control of the

chain, while Germany’s food retailer, Real, sold up to

RETAIL ANALYSIS

Retail turnover increased to $285bn in 2013 from $171bn in 2010

Consumer sentiment in Turkey is weakening as the pace

of economic growth slows and consumers tighten their

purse strings, potentially slowing the retail sector’s stel-

lar performance in recent years. Turkish retail has been

one of the most appealing sectors for investors and con-

sumers thanks to a rapidly expanding economy and a

surge in per capita disposable income.

On the basis of household expenditure, total retail

turnover for 2013 was around $285bn – up from $171bn

in 2010, according to the Turkish Council of Shopping

Centres and Retailers (AMPD). Of this, around $100bn,

or 35%, was in modern retailing – the shopping cen-

tres and retail parks whose operators are usually mem-

bers of the AMPD. This was up from some $75bn in 2010,

with the council predicting a total retail market of about

$400bn plus by 2023 – the centennial of the founding

of the Turkish Republic and a target date for many gov-

ernment development plans. However, consumer sen-

timent fell in 2014, with the TurkStat confidence index

dropping from 72.4 in January to 67.7 in December. The

index rose slightly to 68.1 in February 2015 and

decreased again in March by 5.4% compared to the pre-

vious month. The general economic expectations index

fell 10.5% from a positive 102.1 points in September

2014 to 86.3 points in March 2015.

SLOWER GROWTH: Borrowing trends also indicate

slackening consumer activity. Data from the Banking

Regulation and Supervision Agency (BDDK) showed an

8.1% increase in household debt in the 12 months to

September 2014. However, with the impact of infla-

tion included, debt stock has eased in real value terms.

This suggests that Turkish consumers have been tak-

ing a more cautious approach to spending. A steep

jump in interest rates imposed in January 2014, and

tighter credit measures put in place by the authorities,

including limiting repayment terms on a range of cred-

it card purchases, have reduced the appetite for bor-

rowing. Demand may remain muted for some time to

come. At 7.61% in March 2015, inflation remains above

the central bank’s target of 5%, due to high food costs

and a weakening currency. The likelihood of interest rates

being cut to any great degree in the short term is small,

despite government pressure to lower rates to boost

growth before a general election in June 2015.

A report issued in November 2014 by ratings agency

Moody’s noted that the Turkish economy is likely to come

under increased pressure, with external vulnerabilities

weighing on the credit profile of the government as

well as those of its banks and corporates. Turkish com-

panies will be hit by slower growth while a reduction

of capital inflows may diminish their access to fund-

ing, as inflation and geopolitical risks dampen con-

sumer and investor sentiment.

Over the past four years Turkey’s economic growth

had been driven by externally financed domestic

demand. With borrowing costs set to climb due to fac-

tors such as the end of the US Federal Reserve’s bond

buying programme − which will see capital flow back

to the US economy − further steam will be taken out

of Turkish spending, impacting the retail sector.

RETAILER OPTIMISM: Though data appears muted for

the consumer outlook, the retail sector itself is less cau-

tious in its outlook. According TurkStat, sentiment

among retailers is well above that of its clients, at 101.8

points on the seasonally adjusted scale as of April 2015.

Results for the retail industry are in marked contrast

to the construction sector, which slipped further into

negative territory in April, while the services sector

remained just above the 100 mark. And there is some

cause for optimism. Estimates from Deloitte show that

the sector is earmarked for a compound annual growth

rate of 7% between 2014 and 2018 after the number

of shopping malls has more than quadrupled in the past

decade, topping 330 by the end of 2013 in over 54 cities.

Still, with a number of big internationals pulling out

or downsizing their presence, the market also poses

some challenges (see overview). Analysts point to a frag-

mented market, which is dominated by thriving local

businesses, while global supermarket chains find it

difficult to differentiate themselves from local players.

Turkish retail has been one

of the most attractive

sectors for both investors

and consumers thanks to

the rapidly expanding

economy and a jump in per

capita disposable income.

95


Slower growthAlthough consumer sentiment is weakening, the outlook remains positive

97

EnergyEnergy import bill reaches $55bn in 2014

Delays in tendering remain a concern for investors

Working to keep up with domestic energy demands

Lower oil prices help to close account deficit

Privatising the energy sector to keep up with demand

ENERGY OVERVIEW

The country buys some 18.5m tonnes of oil from overseas

Given the country's reliance on energy imports and the

recent economic slow-down, Turkey has benefitted

from the collapse of oil prices in late 2014. It has boost-

ed energy supplies to support future growth, while

seeking to reduce its energy dependence. In addition,

a long-running dream to become a global energy hub

is starting to become a reality, bolstered by efforts like

the EU-Turkey high-level energy dialogue and strate-

gic energy cooperation process, launched in early 2015.

ENERGY SECURITY: One of Turkey’s top strategic con-

cerns is energy security. Largely deprived of hydrocar-

bons reserves, Turkey buys some 18.5m tonnes of its

oil from overseas – 92% of consumption – and imports

98% of its natural gas, which fires almost half of its pow-

er plants. It has coal but most of it is cooler-burning

lignite, and so it imports most of the coal needed to

generate power. This weighs heavily on Turkey’s balance

of payments and leaves it vulnerable to supply disrup-

tions abroad. The country's 12-month rolling external

energy shortfall has hovered between 6% and 6.8% of

GDP since January 2012, according to the World Bank,

and as of 2014 the nation’s energy shortfall amount-

ed to 58% of the trade deficit. Thus, lower oil prices

have helped Turkey close its trade deficit, but it has not

changed its dependence on foreign energy sources.

Turkey’s annual energy import bill was $56bn in 2013,

accounting for the bulk of a current account deficit

(CAD) that swelled to $65bn that year. From the end of

2013 through January 2015, Turkey’s CAD fell roughly

30% as a result of lower oil prices. The 2014 energy

import bill was approximately $55bn, while the total CAD

was $45.84bn for the year. The imbalance has histori-

cally been the weakest point of an economy that was

among Europe’s fastest growing in the past five years.

Energy import dependency was 74%, including 59%

for its electricity generation, according to environmen-

talists at Greenpeace. Rapid economic expansion has

translated into greater demand for energy, rising

about 5% annually. Since 1990 energy demand has

jumped 270% –the most among any country in the OECD.

The trend is likely to continue. The government

expects electricity consumption to more than double

by 2023 to about 500bn KWh and therefore needs to

lift capacity by 50% to 100,000 MW. The Ministry of Ener-

gy and Natural Resources (MENR) has ambitious plans

to bring domestic coal-fired and hydroelectric power

production to 130bn KWh, raise wind-power capacity

to 20,000 MW and lift geothermal capacity to 600 MW.

Nuclear power is planned to account for 5% of power

production in 2023, the centenary of the republic, after

Turkey launches its first nuclear plant, built by Russian

and Japanese firms, in 2015.

The government also wants to wean Turkey off nat-

ural gas and oil imports, and instead explore Black Sea

territorial waters and cooperate with oil- and gas-pro-

ducing partners in Iran, Iraq, Azerbaijan, Russia and

Turkmenistan to explore and develop resources in those

countries. In the meantime, it is chasing new suppliers

to diversify its sources. Achieving these goals will require

between $5bn and $10bn of investment each year in

the energy sector, MENR estimates.

POWER HUNGRY: Turkey is the world’s 20th-largest

consumer of electricity. According to MENR, installed

capacity was 69,520 MW in 2014, up 5.3% from 66,000

in 2013, following a jump of 13% over the previous

year. Natural gas was the main resource firing electric

plants (48%), followed by coal (29%), hydroelectric

(16%) and wind (3%), according to MENR. Consump-

tion during 2014 saw a modest gain of 4.1% year-on-

year, up from a 2013 increase of just 1.3%. Demand is

still expected to hit 450bn KWh by 2023, and in order

to fulfil the requisite capacity, investment of some

$100bn is required, according to the World Nuclear

Association. The minister of energy and natural

resources, Taner Yıldız, told local press in April 2015 that

the government expected to add 4000 MW to its sup-

ply over the course of the year.

To fuel this growing demand, domestic coal sources

are attracting renewed interest, as the Anatolian plateau

is richer in coal than in any other carbon-based fuel

The government expects

electricity consumption to

more than double by 2023

to about 500bn KWh. To

meet this demand, it needs

to lift capacity by 50% to

100,000 MW.

To fuel growing electricity

demand, the nation's

domestic coal sources have

attracted renewed interest,

as the Anatolian plateau is

richer in coal than in any

other carbon-based fuel

source.

98

Opportunity knocksTaking advantage of low prices to increase hydrocarbons supply


ENERGY OVERVIEW

source. The European Association for Coal and Lignite

estimates Turkish reserves at 13bn tonnes. Proven

reserves are 500m tonnes of hard coal and 9.8bn tonnes

of lignite, or brown coal, which has low calorific value,

contains more sulphur, produces energy less efficient-

ly and pollutes more heavily than hard coal. According

to the US Energy Information Association, approximate-

ly 75-90% of Turkish coal is lignite.

Plants using coal accounted for 21% of electricity

capacity in 2014, with some 25,925 tonnes of coal

mined that year. The push to raise domestic coal pro-

duction has posed serious risks. In May 2014 in the west-

ern town of Soma, a fire in an underground coalmine

created conditions that led to the deaths of at least

301 miners. It was Turkey’s worst industrial accident in

history. Necdet Pamir, an instructor in energy policy at

Bilkent University and former vice-president of TP, the

state oil company, said mining engineers had warned

about the dangers, particularly high levels of methane,

at Soma but there is a rush to extract local resources.

“The truth is that coal is an important resource to

reduce our country’s energy dependence and to secure

employment. But it has to be produced while meeting

the highest standards of workplace safety,” he said.

BIG COAL: Turkey is ranked 14th in world coal consump-

tion and possesses the 17th-largest coal reserves,

according to MENR. Large discoveries continue: the

ministry recently found 1.8bn tonnes of lignite reserves

near Konya in central Turkey. At present, just 37% of

Turkish coal sources are tapped, but the government

wants to boost capacity to 30,000 MW, or 30% of the

overall mix, in 2023 from about 20,000 MW in 2014.

About half of all coal is imported, costing Turkey $4.5bn

a year, according to Pamir.

“The recent focus on coal production in Turkey is not

necessarily a negative development. Given new tech-

nologies available, coal is a much cleaner source of

energy than it used to be,” Mete Maltepe, GE Energy

Turkey’s general manager, told OBG. “That said, the

government and the market need to make sure that

they carefully balance the benefits with the costs, with

specific emphasis on managing the environmental

impact of higher coal usage.”

Lignite deposits are scattered across Turkey, with

the Afşin-Elbistan field accounting for 40% or more of

the national total. China is interested in a $12bn deal

to develop the field after Abu Dhabi National Energy

Company effectively pulled out of the project in 2013,

Reuters reported in May 2014. The project includes the

construction of an 8000-MW coal-fired electricity plant.

GREATER INDEPENDENCE: “If lignite and renewable

forms of energy are developed sufficiently over the

next 5-10 years, Turkey could meet around 50% of its

energy needs on its own, compared to 30% currently.

If developed properly, lignite could account for 30-

35%,” said Adil Tekin, Turkey’s country president for

French energy and transport giant Alstom.

At present, power imports help cover a shortfall.

According to Istanbul-based brokerage Oyak Securities,

Turkey is a net importer of electricity, buying about 2%

of its power from overseas suppliers. In 2013 net imports

were 4.6bn KWh at a cost of $335m, Turkish daily Mil-

liyet reported in May 2014. More than half – 2.5bn KWh

– came from Bulgaria. Greece and Iran provided a fur-

ther 1.2bn and 845m, respectively.

Imports are expected to rise, after Yıldız said in April

2014 that Turkey might purchase power from Iran,

Georgia and Bulgaria to offset the impact of drought-

like conditions that have halved capacity at national

reservoirs. Greece’s state-run Public Power Corporation

set up a company in Istanbul to begin selling power to

the Turkish market and is in talks with authorities over

licensing, Milliyet newspaper reported.

Some of the $900m GE is investing in Turkey includes

power plants. So far, GE has supplied turbines for a 35-

MW wind farm and gas turbines for an 840-MW pow-

er plant that will be run by its Turkish partner, Gama

Energy. GE and Gama are also building Istanbul-based

Akenerji’s $930m, combined-cycle, natural-gas power

plant project in Erzin in southern Hatay Province. The

plant has 904 MW of installed capacity and can gen-

erate an annual 6.7bn KWh on average, meeting 2.6%

99


SOU

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BP

Stat

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2014

Natural gas consumption, 2003-13 (bn cu metres)

0

10

20

30

40

50

20132012201120102009200820072006200520042003

The energy import bill decreased to about $55bn in 2014

Energy imports are

expected to rise, after the

minister of energy and

natural resources said in

April 2014 that Turkey

might purchase power

from Iran, Georgia and

Bulgaria to offset the

impact of drought-like

conditions that have halved

capacity at national

reservoirs.

ENERGY OVERVIEW

of Turkey’s total energy needs. The plant began oper-

ations in the third quarter of 2014.

RENEWABLES: Turkey could also boost supply more

sustainably. Greenpeace says rehabilitating ageing infra-

structure would save 16% of electricity wasted in trans-

mission. Environmentalists also point to sunlight, wind,

biomass and rivers as sources of relief. Green energy

is only now being tapped, accounting for just 25% of

the energy mix (nearly all from hydroelectricity), accord-

ing to the state Electricity Generation Company.

Published at the end of 2014, the National Renew-

able Energy Action Plan outlines the country’s approach

for developing renewable sources of energy. By 2023

Turkey wants to exploit all viable hydroelectric resources,

up from the current 50%. The country has 1% of the

world’s hydropower potential, and 16% of Europe’s.

That could produce about 128bn KWh, according to

state estimates. But hydropower rouses mixed feel-

ings. Although it generates almost no carbon emis-

sions, the damming of rivers harms biodiversity and local

populations’ ways of life. The government appears to

have taken a step back from its previous unbridled sup-

port for smaller hydropower projects, especially run-

of-river dams. In late 2013 the Environment and Urban

Planning Ministry said it would no longer back hydro

projects with capacity below 10 MW. Environmental-

ists fear this may prompt the government to resume

mega-dam projects, like the Ilısu Dam in south-eastern

Turkey, which threatens to submerge the ancient city

of Hasankeyf. A court in 2013 blocked its construction;

however, activists report that work quietly continues,

such as resettling residents, despite the injunction.

WIND-BLOWN: Turkey ranks 16th in wind-energy capac-

ity worldwide, with installed capacity of 3.7 GW and

another 11 GW in the pipeline. Its wind potential rivals

that of Spain, according to MENR. “Wind energy is

becoming increasingly important in Turkey. In the past,

connection capacity limited the amount of wind licences

that could be awarded, but now improvements in trans-

mission and grid technology should result in an increase

in the number of available licences,” said Serdar Nişli,

chief executive at Aksa Energy, one of Turkey’s biggest

power producers. “Improved wind-capturing technol-

ogy has also resulted in higher capacity utilisation rates,

making the economics of certain sites more viable.”

The Energy Market Regulatory Authority (EPDK)

received over 1500 applications for 600-MW wind

licences that were being tendered in 2014, according

to local media. “Growth potential in the Turkish wind

sector is higher than in Europe, as there are better

wind sites available. That said, many of the best sites

have already been developed, and lower-wind sites are

harder to make economically viable. Turkey needs to

concentrate on investing in developing better wind-cap-

ture technology,” said Maltepe. Wind turbines designed

to capture more energy are needed for such lesser-rat-

ed sites. Turkey has a manufacturing base for blades

and towers, but no turbine production; therefore oper-

ators must import key components. Better education

is needed as some developers are using technology that

is incompatible with their licensed site, Nişli told OBG.

NEW COSTS & DELAYS: Changes to regulations gov-

erning forestry land could steeply raise rental costs for

wind-farm operators on state-owned properties and ban

certain regions outright that the Forestry Ministry wants

to protect. Some €1.5bn of wind-energy projects are

on hold, according to Mustafa Serdar Ataseven, chair-

man of the Turkish Wind Energy Association.

“Projects approved in the last quarter of 2011 were

first hampered by problems with radar. After that was

resolved, permission was suddenly required from the

National Intelligence Organisation, which was also

resolved, but then nationalisation from the prime min-

ister’s office has slowed because of a backlog there.

Trouble stemming from permission [to build] in forest-

land has been under way for a year,” Ataseven told

trade magazine GreenPower in March 2014. Industry

insiders say another 800 MW of wind power could

become available if the forestry dispute is resolved.

SUN-KISSED: Turkey’s raw solar potential rivals that

of Europe’s sunniest nations, including Spain and Italy.

It ranks 27th in the world for solar capacity. The aim is

to lift capacity to 3000 MW by 2023, according to the

Renewable Energy Law, ratified in 2011. Currently,

expensive large-scale projects are mainly in the hands

of state bodies, like the solar photovoltaic array cover-

ing 10,000 sq metres near the city of Izmir on the

Aegean coast. It was expected to come online in mid-

2014 and produce 493 KW to power three municipal

facilities, Radikal newspaper reported, but at the time

of writing had yet to begin production.

The EPDK held a second round of bidding for 2 GW

worth of solar licences in January 2015, and as OBG

went to press, the winners were awaiting confirmation

of their award for the 5-MW and 8-MW projects in the

Erzurum and Elazığ regions, respectively. There will be

additional tenders for 302 MW of new solar photovolta-

ic capacity at the end of April 2015, according to the

Turkish Electricity Transmission Company (TEİAŞ). Additional market developments include the entrance

of Germany’s energy firm Conergy, and a joint venture

involving the UK's Belectric, which tendered success-

fully to TEİAŞ for two large-scale, ground-mounted solar

energy projects. The two projects have a combined

101


SOU

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BP

Stat

istic

al R

evie

w o

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orld

Ene

rgy

2014

Coal production, 2003-13 (m toe)

0

4

8

12

16

20

20132012201120102009200820072006200520042003

Green energy is only now

being tapped and accounts

for just 25% of the energy

mix, and almost all of that

is from hydroelectricity,

according to figures from

the state Electricity

Generation Company.

ENERGY OVERVIEW

alternating current connection capacity of 32.4 MW,

14% of the tendered capacity.

Despite the larger-scale efforts, small individual instal-

ments may promise the greatest potential in the solar

segment. As the market matures, a shift from large-scale,

government projects to smaller, individual-driven util-

isation has been occurring. “Solar has considerable

potential in Turkey, especially on the unlicensed side,"

Arda Beştaş, deputy general manager of marketing and

sales at Enerya, told OBG, "As a licence is not neces-

sary for a project of up to 1 MW, there are unlimited

projects available within the 1-MW scope.”

Still, regulations of unlicensed panels could be loos-

ened further. “The 1-MW ceiling for unlicensed solar

panels is likely to be increased in the near future and

could possibly reach 5 MW. Such a development would

lead to significant growth of smaller-scale solar ener-

gy in Turkey, such as rooftop panels,” Evren Evcit, the

CEO of Anel Enerji, told OBG.

HEAT FROM WITHIN: Turkey ranks seventh in the world

and first in Europe for geothermal resources, the ener-

gy derived from the heat in the earth’s interior, accord-

ing to the state Mineral Research and Exploration

Agency. It has installed capacity of 250 MW, the world’s

12th biggest, and direct use potential is estimated at

31.5 GW. Recent ventures into geothermal include Sun

Group of Turkey and Japanese-owned Italian turbine

manufacturer Turboden agreeing in January 2014 to

develop two geothermal plants in Çanakkale and Man-

isa. The deal covers planning, investment and technol-

ogy transfer for two, 100-MW sites costing a total of

€300m. Yeni Başak Enerji, a Sun Group company, has

three geothermal drilling licences.

Many foreign investors remain on the sidelines amid

questions about local partners’ strategic planning.

“While Turkey has a very dynamic market for renew-

ables, it is not necessarily the most compatible for for-

eign institutional investors. Many Turkish companies

involved in the sector do not have long-term plans and

cannot guarantee steady returns. That said, the upside

potential for investors remains considerably higher

than in many other markets, and high feed-in tariffs

for wind mean that large amounts of money can be

made in the area,” David DeLaire, a managing partner

at DD Energy Services, told OBG. According to Nişli,

renewables in Turkey should be profitable for the next

decade or so given the current feed-in tariff regime,

even if natural gas prices remain low. “That said, renew-

able sources will never be able to compete with gas or

coal in terms of providing a dependable base load, so

there will always also be demand for the latter,” he said.

GAS GUZZLING: Indeed, Turkey’s love affair with nat-

ural gas continues, even as the government seeks to

reduce gas-fired power generation to below 30%. It is

the only major European market that has shown strong

growth in gas demand since 2009, with consumption

reaching approximately 52bn cu metres in 2014 – put-

ting it on par with France, according to a February 2014

report from the Oxford Institute for Energy Studies.

Turkey is the world’s 20th-largest consumer of gas,

and with domestic production meeting just 2% of

requirements, Turkey is a major importer. It pipes in half

of its gas from Russia, or about 20bn cu metres, on two

links, according to natural gas purchase agreements

posted on state pipeline operator Botaş’ website. Iran

sells 10bn cu metres and Azerbaijan sends 6.6bn cu

metres annually. As for liquefied natural gas (LNG),

Algeria and Nigeria have contracts to ship 4.4bn cu

metres and 1.2bn cu metres, respectively.

Political instability in 2014 and 2015 between Rus-

sia and Ukraine has yet to impact flows to Turkey. Since

the last Ukraine-Russia gas dispute in 2009, Turkey has

done virtually nothing to mitigate potential stoppages

from Russia. At the time, all it did was temporarily

increase supply volumes through Blue Stream and buy

a few spot LNG cargoes from Algeria and Oman. Mean-

while, countries in Europe have built new routes and

increased LNG terminal construction and cargoes.

Turkey, by contrast, still only operates the same two LNG

terminals and has not increased storage capacity above

3bn cu metres. Turkey has expressed support for the

controversial Gazprom-led South Stream pipeline,

including granting access for the link if Moscow wants

to use Turkish territory. The South Stream pipeline

would transport gas to Europe beneath the Black Sea.

The $32bn South Stream is a rival to the Trans-Anato-

lian Natural Gas Pipeline Project (TANAP), though there

are few signs of it moving off the drawing board, and

there were discussions that it could be rerouted to

Turkey and linked to TANAP as of December 2014.

IRANIAN SUPPLIES: Turkey takes about 90% of Iran’s

gas exports, according to the US Energy Information

Administration. Although Western sanctions against

Iran for its nuclear programme do not apply to these

gas exports, conducting business with Tehran still car-

ries political risk for Turkey.

A 1996 take-or-pay contract with Iran expires in 2015,

and the neighbours are negotiating how much and at

what price Turkey will buy. In the meantime, Turkey has

sought international mediation to force Iran to lower

its prices under the existing deal. While Europe pays

an average of $400 per 1000 cu metres of gas, Turkey

pays Iran $492, Al Jazeera Turk reported in February 2014.

Iran, which holds the world’s largest natural-gas reserves,

102

Crude oil supply mix, 2012 (%)

SOU

RCE:

EIA

0

7

14

21

28

35

OtherDomesticproduction

AfricaKazakhstanRussiaSaudiArabia

IraqIran

Turkey ranks seventh in the

world and first in Europe

for geothermal resources.

It has installed capacity of

250 MW, the world’s 12th

biggest, and direct use

potential is estimated at

31.5 GW.


ENERGY OVERVIEW

may slash its prices if Turkey agrees to double the

imports, according to Turkish media. That would, how-

ever, exceed consumption, so Turkey would likely resell

the fuel, probably to Europe, if sanctions allow.

This, in turn, could spark a price war between Azeri

and Iranian gas, and threaten the viability of TANAP, which

aims to ship Azeri gas to Europe and is a major plank

of Turkey’s campaign to become a transit hub, Olgu Oku-

muş, a lecturer in energy diplomacy at Sciences Po in

Paris and the director of strategy development at LEO

Advisors, wrote in Al Monitor.

Haldun Yavaş, secretary-general of the Istanbul-based

think tank Caspian Strategy Institute, shrugged off the

idea that greater Iranian supplies to Europe via Turkey

could harm TANAP’s prospects. “TANAP is a commer-

cially and economically well-studied project and its fea-

sibility is proven. The project is not in any kind of com-

petition with other potential suppliers to join the market,”

he told OBG. “There may be other projects envisioned,

but TANAP is the only one on the way to being realised

with agreements and finances committed.”

EASTERN MEDITERRANEAN: Iranian gas is not the

only fuel on offer. US exploration company Noble Ener-

gy made a big splash in the global offshore gas busi-

ness in 2010 when it announced the discovery of a

potential 540bn cu metres of gas from its Leviathan-1

well 130 km off the coast of Israel. The discovery has

the potential to turn Israel into a regional energy pow-

er. Only 35 km west of Leviathan is the Aphrodite gas

field in southern Cypriot waters, where Noble is again

the operator. An exploratory well could contain 141bn

cu metres of natural gas, it estimates. This string of dis-

coveries has rattled Turkey, which, in turn, rattled its

sabre at its arch foe Cyprus in response. Most recent-

ly, in February 2014, a Turkish naval vessel harried a Nor-

wegian seismic ship operating in Cypriot waters. With

such large reserves a stone’s throw from the Turkish

maritime border, it was a given that Turkey would go

looking for reserves of its own.

If Turkey can resolve its political differences with

both Cyprus and Israel, it could offer both countries the

most stable and viable export route for their gas. Turkey

is itself a hungry customer. But strained ties over North-

ern Cyprus, where Turkey has kept 30,000 troops since

1974, and frosty diplomatic links with Israel since a

diplomatic spat in 2010 are major obstacles to the

monetisation of Eastern Mediterranean gas.

A NEW FRIEND: Iraqi Kurdish oil is already transiting

Turkey to world markets, despite a dispute with the

central government in Baghdad, which argues such

trade amounts to oil smuggling. In May 2014 more than

1m barrels of piped oil from fields controlled by the Kur-

distan Regional Government (KRG) were loaded for

the first time onto tankers at Turkey’s Ceyhan port on

the Mediterranean. Turkey had stored the crude for

months at Ceyhan, but reversed itself on a pledge to

await an agreement between Baghdad and Irbil.

An infuriated Baghdad immediately sought an inter-

national injunction against Turkey to stop the flow of

Kurdish oil, warning that Ankara was pushing Northern

Iraq towards greater independence and undermining

Iraqi territorial unity. However, Ankara has maintained

its relationship with KRG authorities and as of early 2015,

some 550,000 barrels of oil a day were flowing into Cey-

han from the Kurdish region and Kirkuk. Some in Turkey

warn that Ankara is not only testing ties with an impor-

tant neighbour; stoking greater Kurdish autonomy in

Iraq could kindle the same aspirations with its far greater

population of Kurds, they say. “The plentitude of North-

ern Iraq’s hydrocarbons and the low costs of develop-

ing its fields are indisputable. But political stability is

just as important. The central government is supposed

to be Turkey’s interlocutor, not the regional adminis-

tration in the north,” said Pamir.

Iraq supplies 17% of Turkish oil requirements, sec-

ond only to Iran at 35%. Saudi Arabia covers 13% and

Russia supplies 10%. Turkey is the world’s 26th-biggest

consumer of oil, and consumption at the pump is ris-

ing. As of the end of 2014, oil production in Turkey was

17.1m barrels, 12.1m barrels of which was produced

by the Turkish Petroleum Corporation. Domestic con-

sumption was about 157.17m barrels. Approximately

60% of the total oil demand is imported as crude oil

and then refined in Turkey. Foreign investment in the

oil sector includes the planned $5.5bn Star Refinery,

to be built on Turkey’s Aegean coast by Socar, Azerbai-

jan’s state oil company. Yıldız has said the plant will

reduce Turkey’s current-account deficit by $2.5bn.

OUTLOOK: A willingness to undertake the delicate bal-

ancing act with Iraq and the KRG shows how resolute

Turkey is in diversifying supplies as demand continues

to rise relentlessly. Significant investment from the pri-

vate sector and boosting renewables in its power-gen-

eration mix can help the government meet ever-rising

demand for power. Procuring new sources of oil and

gas, including from its own territory, while expanding

its burgeoning role as an energy transit hub, remain cen-

tral to its energy strategy. Whether it is Turkey’s own

rapidly growing market or its ever-greater function in

facilitating global energy trade, long-running aspirations

to become an energy corridor are now within its grasp.

103


Turkey’s offshore exploration efforts have thus far focused on the Black Sea

Iraq supplies 17% of Turkish

oil requirements, second

only to Iran at 35%. Saudi

Arabia covers 13% and

Russia supplies 10%. Turkey

is the world’s 26th-biggest

consumer of oil, and

consumption at the pump

is rising.

As of the end of 2014, oil

production in Turkey was

17.1m barrels;

approximately 60% of the

country’s total oil demand

is imported as crude oil and

then refined in-country.

ENERGY ANALYSIS

Turkey is the world’s 20th-largest consumer of electricity

Turkey wants to raise the private sector’s share in the

electricity market to 75% to raise government rev-

enue, boost investment to keep up with demand and

reduce the role of the state in the economy. Under leg-

islation that existed until the start of 2013, this would

have been difficult. However, the Electricity Market Law

6446, enacted in March 2013, sought to open up the

sector to private investors who can now independent-

ly generate, distribute, export and import electricity

on a wholesale and retail basis, alongside existing state

companies. The law aims to improve market trans-

parency, establish a regulator, create an energy-trad-

ing exchange and, crucially, increase private sector

investment in ageing infrastructure.

Among the main sales in 2014 were those of the

transmission lines of the national gas company, BOTAŞ,

and a 49% stake of the public Turkish Electricity Dis-

tribution Company (TEDAŞ). In 2014 six thermoelec-

tric plants and 10 hydroelectric plants were privatised,

sold primarily to local investors, and as of the end of

that year the share of energy produced by the private

sector had reached 72%, up from 57% in 2003.

UNDERINVESTED: Economic instability and high pub-

lic debt plagued Turkey for decades, making investment

in the electricity sector a low priority. However, rapid

economic growth over the past decade has sparked

greater energy consumption, exposing the electricity

networks’ shortcomings. Overloads and blackouts were

common, and still are, and there are leakages across

much of the network. An average of 16% of transmit-

ted electricity is lost, reaching as high as 70% in impov-

erished south-eastern areas.

To keep up with demand that has risen only second

to China, analysts argue that Turkey must invest $5bn-

10bn a year over the next decade. A revamp of the

legal underpinnings of the electricity sector was

required to attract private monies to distribution and

generation. For the former, the tender of the grids

Anadolu Yakası Elektrik Dağıtım, Dicle Elektrik Dağıtım,

Toroslar Elektrik Dağıtım and Vangölü Elektrik Dağıtım

in March 2013 earned the government $3.5bn, with

nearly $3bn of that figure coming from Enerjisa, Sabancı

Group and Germany’s E.ON’s joint-owned energy group,

which won the two largest grids. Already, Turkey has

increased the private sector’s role in the power mar-

ket to 61% from 38% a decade ago.

OLD LAW & NEW: The foundation for the privatisa-

tion of Turkey’s energy market began in 2001, with the

enactment of Law 4628, which enabled participation

by foreign and domestic private investors while reduc-

ing the state’s role. The law established the independ-

ent Energy Markets Regulatory Authority (EPDK) to

smooth the transition to a fully liberalised market. But

the transition was not especially smooth, and many

assets were still in state hands at the beginning of this

decade. Uncertainties lingered over the stipulations

of the law until the new legislation was enacted in 2013.

This situation is typified by the failed attempt to sell

off generation assets belonging to the state-owned

electricity company Elektrik Üretim AŞ (EÜAŞ) and the

failed bid by the MMEKA consortium to buy Istanbul’s

two transmission companies in 2011.

Under the old legislation, distribution companies

could carry out distribution, generation and retail

under the umbrella of the same legal entity. An amend-

ment in 2008 meant these activities had to be unbun-

dled by January 1, 2013. The now-repealed Law 4628

also stipulated that foreign players could not wholly,

jointly or indirectly have control of electricity gener-

ation, transmission or retail sectors. Market control had

rested with three state entities: EÜAŞ, the monopoly

Turkish Electricity Transmission Corporation (TEİAŞ),

which is unlikely to be privatised, and the Turkish Elec-

tricity Trading and Contracting Company (TETAŞ), which

still has a 40% share of the market.

INCENTIVES: The new legislation makes substantial

changes to the licensing and approval system, includ-

ing to the types of licences available. It has brought in

a pre-licensing process and extended the cut-off dates

for some incentives, such as stamp-duty exemption

The Electricity Market Law

6446, enacted in March

2013, sought to open up

the sector to private

investors who can now

independently generate,

distribute, export and

import electricity on a

wholesale and retail basis,

alongside existing state

companies.

105


In 2014 six thermoelectric

plants and 10 hydroelectric

plants were privatised, sold

primarily to local investors,

and as of the end of that

year the share of energy

produced by the private

sector had reached 72%, up

from 57% in 2003.

Liberalising powerThe privatisation of power infrastructure continues

ENERGY ANALYSIS

for generation companies, the price-equalisation mech-

anism for tariffs (until the end of 2015) and an exten-

sion for tax exemptions for unbundling.

The new framework also allows for the establish-

ment of an energy exchange, the Energy Markets Oper-

ating Corporation, or EPIAS. Previously, companies

were able to trade derivative contracts at a fixed price.

Now reference prices will be the target, providing more

transparency and competition, and helping to lower

power prices. The exchange also reduces the role of

TETAŞ to regulation, developing the national grid and

improving interconnection with neighbouring coun-

tries’ grids. The law reduces the government’s stake

in EPIAS to 30%, and European energy exchanges ICE

Endex and EEX have expressed interest in Turkey’s

energy trading market, Reuters reported in 2013.

TYPES OF FIRMS: There are five types of operators in

the market. EÜAŞ and its subsidiaries comprise more

than two-fifths of the market. This is followed by build-

operate-transfer and build-operate-own companies

with rights to build and operate thermal plants that

were developed before the previous electricity mar-

ket law. Then there are companies operating under

transfer of operational rights agreements, independ-

ent power producers and companies licensed to pro-

duce only for their own needs.

Turkey completed its sale of all 18 state-run power

distributors in 21 regions by late 2013, adding $12.7bn

to state coffers. With full privatisation, TEDAŞ no longer

distributes power. However, it continues to own assets

and permit privateers to use them under a transfer of

operation rights model. Distribution companies must

make connection agreements with TEİAŞ for trans-

mission services, connection and system-utilisation

agreements, approved by the EPDK.

Supply was provided by state and private whole-

salers, and retailers were regulated by the repealed Elec-

tricity Market Law as two activities. The new law com-

bines them under one supply licence without subjecting

firms to any regional restrictions for eligible consumers.

Public utilities still dominate the electricity genera-

tion and wholesale sectors. Trading agreements are

generally between a generation company or a whole-

sale company and a distribution company or an end

user. Their form and terms are subject to negotiation

between parties. As yet, the EPDK has no supervisory

power over the terms of agreements signed by private

sector wholesalers. Bilateral energy-sale agreements

with TETAŞ are subject to EPDK approval but agree-

ments signed by private wholesalers are not.

LICENCES: The EPDK has issued some 1500 genera-

tion licences, of which 87 are held by EÜAŞ and 1377

by independent power producers. The build-operate-

transfer and build-operate companies operate based

on contracts with the Ministry of Energy and Natural

Resources, which acts as a second regulator, without

a generation licence issued by the EPDK.

Any direct or indirect transfer of 10% or more of a

licence holder’s shares is subject to approval by the

EPDK. This rate is 5% for publicly held companies. The

market share of a private sector generation company

cannot exceed 20% of the total installed electricity gen-

eration capacity in Turkey in the previous year.

One aspect of the legislation encourages uptake of

renewable energy. In line with the government’s tar-

get of 30% of electricity generated by renewable

sources by 2023, each supply licence holder must buy

power from the country’s two nuclear plants after

they become operational in 10 years. This amount is

equal to a determined percentage that the supply

licence holder sold in the previous year. TETAŞ is obli-

gated to buy electricity generated by nuclear and coal-

fired plants exceeding 1 GW of installed capacity.

The government is eyeing another $13bn it says it

can raise by privatising assets generating 16,000 MW

of installed capacity now held by EÜAŞ. In April 2014

operating rights to lignite-fired plants at Yeniköy, with

capacity of 420 MW, and the 630-MW Kemerköy plant

were sold to builder IC İçtas for $2.67bn. Also in April,

Demir Madencilik, a Zonguldak, Turkey-based mining

concern, placed the highest bid of $351m for the 300-

MW Catalgazi lignite power plant.

The Privatisation Administration will also privatise

Yatağan, a lignite-fired giant with capacity of 630 MW.

Yatağan, located in the southern Mugla Province, for

decades made headlines for creating excess waste, and

locals have said it spews pollutants near tourism resorts,

leading to health problems. Raising environmental

standards is also required under the new electricity law,

although investors are given a grace period until 2018

in which their licences cannot be cancelled and no sanc-

tions can be applied while they seek to make their

newly acquired plants compliant with environmental

protection statutes.

Non-state companies have already added an extra

22,000 MW to their installed capacities through pri-

vatisation and new investments in the last decade. A

total of approximately 32,000 MW are held in private

hands, leaving roughly 25,000 MW with EÜAŞ, which

includes 28 hydro-electric and 16 thermal power

plants, or a total of 16,200 MW, that are slated for sale.

106

The government is aiming for 30% of electricity to be generated by renewable sources by 2023

The sale of all 18 state-run

power distributors in 21

regions was completed by

late 2013, adding $12.7bn

to state coffers. With full

privatisation, TEDAŞ no

longer distributes power.


ENERGY ANALYSIS

TANAP will help Turkey realise its goal of being an energy transit hub

The country’s demand for energy is rising and new sup-

ply sources for natural gas are needed to generate

electricity, heat homes and cook. Due to scarce domes-

tic supplies and a lack of sufficient liquefied natural

gas infrastructure, those supplies will mostly come via

pipeline. Turkey has trained its eyes on tapping the

planned link from the Shah Deniz II gas development

in Azerbaijan to markets in the EU.

Over the past decade, several plans for gas pipelines

along the “southern corridor” have been mooted. This

initiative by the European Commission seeks to pro-

cure fuel from the Caspian Sea and Middle East via

Turkey to reduce its reliance on Russian gas, which

accounts for nearly a third of Europe’s supply. With polit-

ical relations strained over Russia’s interference in

Ukraine in 2014-15, the EU is more eager than ever to

diversify supplies and avoid potential disruptions.

Among the many schemes that have failed to leave

the drawing board, the biggest flop has been the

Nabucco project. The $10bn project, initiated in 2002,

aimed to carry 31bn cu metres of gas annually from

the Caspian Sea along a 3300-km route, but fell afoul

of its unfeasible budget, low returns, lack of consen-

sus among its partners and a failure to procure sup-

plies. But the death knell for Nabucco most likely came

in June 2013, when the Shah Deniz consortium, formed

by British energy giant BP and the state oil company

of Azerbaijan, Socar, decided on the Trans-Anatolian

Pipeline (TANAP) to transport Azeri gas west.

What differentiates TANAP from Nabucco is that

the former has committed supplies, financial backing

and customers, Haldun Yavaş, head of the Istanbul-

based think tank Caspian Strategy Institute, told OBG.

“TANAP is an important undertaking in the sense that

it brings additional and diversified supply to both

Europe and Turkey,” he said. “The significance of the

project is that it opens a fourth supply corridor for

Europe: the Southern Gas Corridor.”

ROUTE: The 1850-km, $10bn TANAP will start in Azer-

baijan, transit Georgia, then traverse Turkey to the

Greek border. TANAP will be the second-largest such

project in the world in technical terms, said Socar rep-

resentative Vusal Mammadov at a conference in Istan-

bul in March 2014. Georgia is a key component of the

transit route from Azerbaijan. The Georgians are expect-

ed to stump up $2bn for the section crossing its ter-

ritory and will include two compressor stations as well

as the pipe. The project is jointly owned by Socar (58%),

BOTAŞ (30%) and BP (12%).

Annual designed capacity is 16bn cu metres, but

TANAP is meant to be scalable, with its capacity increas-

ing with the additions of parallel loops and compres-

sor power as production increases upstream. The pro-

ject’s second phase would raise capacity to 23bn cu

metres by 2023, then 31bn cu metres by 2026 and 60bn

cu metres by 2060. Initially, Turkey will receive 6bn cu

metres per year and the rest will go to Europe via the

connecting Trans-Adriatic Pipeline (TAP), which will

span the sea from Greece to Italy. TANAP will also have

two exit/entry points in Turkey, in Eskişehir and in

Thrace, allowing gas to be sold domestically.

TAP will have an initial capacity of 10bn cu metres,

scalable to 20bn cu metres per year. The sharehold-

ers in TAP are BP Socar and Norway’s Statoil, which

each control 20%. Belgium-based Fluxys raised its stake

in 2014 to 19%, while the Spanish energy company Ena-

gas bought a 16% stake. The Swiss energy firm Axpo

has 5% of the project's shares. Turkey does not cur-

rently plan to partner in TAP, the energy minister, Tan-

er Yıldız, told Reuters in May 2014, though TANAP will

link to the line at Kipoi on the Greek-Turkish border.

PROGRESS: “The implementation of the TANAP proj-

ect is underway and is proceeding in a timely manner,”

Yavaş said. As of December 2014, the builders of the

project had been selected by shareholders, with Fer-

nas Construction, the Sicim-Yüksel-Akkord consortium

and Tekfen Construction slated to build the line. Initial

gas flow is expected sometime in 2020. A project the

size of TANAP will finally help Turkey realise its long-

sustained dream of becoming an energy transit hub.

TANAP’s annual designed

capacity is 16bn cu metres,

but the project is meant to

be scalable, with its

capacity increasing with

the additions of parallel

loops and compressor

power as production

increases upstream.

107


The 1850-km, $10bn TANAP

will start in Azerbaijan,

transit Georgia, then

traverse Turkey to the

Greek border, and will be

the second-largest such

project in the world in

technical terms.

Trans-Anatolian stepsNatural gas is poised to traverse the country

ENERGY INTERVIEW

Besim Şişman, CEO and Chairman of the Board, Turkish PetroleumCorporation (TP)

How can Turkey work towards decreasing its

dependence on costly energy imports?

ŞİŞMAN:Turkey is a major consumer of energy, account-

ing for about 1% of global primary energy consump-

tion, or 120m tonnes of oil equivalents per year. This

figure will continue to rise as the country works to

become one of the world’s top 10 economies by 2023.

Unlike some of its neighbours, Turkey is not a hydro-

carbon-rich country and has to purchase resources

abroad to cover around 70% of its energy consump-

tion, importing 90% of its oil and 98% of its natural gas.

Having to import so much from abroad puts significant

strains on the country’s finances: in 2013 alone, ener-

gy made up the largest portion of Turkey’s $65bn cur-

rent account deficit. TP is the primary exploration and

production entity in the country and works to develop

Turkey’s domestic oil and gas supplies. The firm is also

investing in production abroad to help reduce expen-

ditures and meet Turkey’s energy needs.

What role is domestic production playing in meet-

ing Turkey’s energy needs?

ŞİŞMAN: In terms of domestic petroleum production,

around 50,000 barrels per day are produced in Turkey,

of which TP produces 40,000. Unfortunately, this puts

only a small dent in overall daily consumption, which

stands at 700,000 barrels. While Turkey will never be a

major producer of oil and gas, some areas, like shale

gas, present opportunities. According to a report by the

International Energy Agency, Turkey has a production

potential of 20trn cu ft of shale gas and oil.

As such, we are currently working on two shale proj-

ects. One, near Diyarbakır, is being developed in part-

nership with Shell. Drilling has finished and the well is

being fractured. Once this process is complete we will

have a better idea of the basin’s potential.

There is a similar project in Thrace on which TP and

ExxonMobil are collaborating. We signed a memoran-

dum of understanding with ExxonMobil and Hallibur-

ton in September 2014 to assess Thrace’s potential for

unconventional hydrocarbons. Hopefully, in 2016 we

should have a better idea of the production potential

of the nation’s shale reservoirs.

Another area of opportunity is the Black Sea, where

we have engaged in seismic mapping operations to

identify promising areas. In general, it appears that the

eastern portion of the sea can produce oil, while there

is more gas on the western side. Given the expense of

deepwater wells – $250m-300m each – TP has part-

nered with international players like ExxonMobil, Petro-

bras and Chevron to develop six wells. We are hoping

to drill more wells in the area in 2015. In addition, new

exploration and production activities are going on in

the Mediterranean, off Antalya and İskenderun.

Where is there the most potential for Turkish explo-

ration and production abroad?

ŞİŞMAN: The easiest places in which to operate are the

ones close to Turkey, such as Azerbaijan, which shares

cultural and historical links with the country. Turkey is

already involved in projects in Azerbaijan, such as the

Shah Deniz fields, and we are hoping to work with them

more in the future. We are also active in places like Iraq

and Afghanistan, which are very attractive from a pro-

duction standpoint, though political issues sometimes

overshadow investments in the Middle East.

Africa also has significant potential. While most peo-

ple know that North Africa is rich in oil and gas, many

overlook nations in the continent’s interior. Countries

like Somalia, Sudan, Angola and Mozambique, while

somewhat risky from an economic and political stand-

point, will likely be important oil-producing countries

going forward. Where there is risk, there is return; so,

we are currently focused on this part of the world. In

addition, if Turkey’s relationship with Israel and Greece

were to improve, places like the Levantine Basin in the

Eastern Mediterranean and the areas around Cyprus

could also yield resources. Given the costs associated

with exploration and production, it is more realistic

for TP to be an operator in countries close to Turkey.

108

Seeking potentialOBG talks to Besim Şişman, CEO and Chairman of the Board, TurkishPetroleum Corporation (TP)


ENERGY ANALYSIS

Conventional explorers continue the search for oil onshore

While Turkey may be at the crossroads of civilisations,

it is in a hydrocarbons cul-de-sac. The country is sur-

rounded on all sides by significant oil and gas deposits

that all stop short of Turkish frontiers. The bounti-

ful Zagros fold and thrust belt, which extends from

the Arabian Peninsula up through Mesopotamia, ends

at the Turkish-Iraqi border. A few hundred miles away

is the super giant Kirkuk oil field.

To Turkey’s east are Azerbaijan’s massive oil and

gas fields. To the west, in the Aegean and Ionian

Seas, are an estimated 26bn barrels of oil in Greek

waters. To the south, large gas deposits have been

found offshore in Cyprus, Lebanon and Israel. In the

north, Black Sea neighbours have had some prom-

ising results, but the search has failed to yield com-

mercial hydrocarbons in Turkish territorial waters.

This is despite the best efforts of international oil

companies such as BP and Brazil’s deepwater experts

Petrobras. To date, the cost of exploration activities

has reached $4bn and is rising.

DOMESTIC INTEREST: State-run Turkish Petroleum

Corporation (TP) has not abandoned all hope in the

Black Sea. In early 2014 the company was reported-

ly in talks with US major ExxonMobil, Bulgaria’s Mag-

yar Olaj and Vienna-based OMV on continued explo-

ration efforts, Besim Şişman, CEO and chairman of

the board of TP, told Reuters. ExxonMobil and Chevron

already have existing exploration agreements with

TP. “In terms of Turkey’s oil and natural gas poten-

tial, the areas to be most hopeful about are offshore,

primarily in the Black Sea and the Mediterranean, and

it is possible to include the Aegean as well,” Necdet

Pamir, an instructor in energy policy at Bilkent Uni-

versity and former vice-president of TP, the state oil

company, told OBG.

“When comparing the Black Sea to the Mediter-

ranean and the Aegean, an important factor is the

resolution of the question of ‘exclusive economic

zones’ among littoral states, which is important

because it indicates that there are no disputes over

sovereignty, meaning less political risk for companies

considering investing in our country,” he said.

The discovery of associate gas, albeit modest

amounts, offshore from the Black Sea town of Akçako-

ca is a concrete indicator of the presence of hydro-

carbons, Pamir said. “However, we have to accept that

conditions like the deepwater environment and high

sulphur content increase the costs of investment.”

PRODUCTION & RESERVES: Turkish hydrocarbons

production is less than 700,000 barrels of oil equiv-

alent per day, and proven reserves are 270m barrels

of oil and 218bn cu feet of natural gas. Convention-

al explorers continue the search on dry land. In Octo-

ber 2013 Turkish energy company Arp Petrol was

awarded a four-year licence to search for oil near the

Syrian border. Arp’s thinking is that there is poten-

tial for oil migration or an extension from nearby

Syrian formations just over the border, where there

are many producing wells.

In addition to a seismic campaign, Arp says it is also

looking at 30 plugged and abandoned wells that,

although were claimed to be dry, were undeveloped

most likely due to the now dormant armed conflict

with the Kurdistan Workers Party that has taken more

than 40,000 lives since erupting in 1984.

TP also made a discovery at its Çalışkan-1 well in

Şirnak province. The company hit oil at 2800 metres

that it says is the same gravity as Kurdish oil across

the border. This lends credence to Arp’s theory that

there may be similar formations on the Turkish side.

Turkish Petroleum Overseas Company (TPOC), a TP

subsidiary, has been exploring in Libya since 2000.

The company’s drilling campaign scored a strike rate

of seven out of 11 wells, but operations have been

low-key since political upheaval there in 2011. TPOC

is currently prequalifying service companies for an

exploration drilling campaign in the Murzuq Basin

onshore block.

In Iraq, TP was awarded a contract to develop the

Barda field in a consortium with Gazprom and Korea

While Turkey may be at the

crossroads of civilisations,

it is in a hydrocarbons

cul-de-sac. The country is

surrounded on all sides by

significant oil and gas

deposits that all stop short

of Turkish frontiers.

109


Turkish hydrocarbons

production is less than

700,000 barrels of oil

equivalent per day, and

proven reserves are 270m

barrels of oil and 218bn cu

feet of natural gas.

Still searching Drilling for hydrocarbons resources continues

ENERGY ANALYSIS

Gas Corporation, has an 11.25% stake in the Missan

oilfield development project, a 40% share in the Siba

gas field development project with Kuwait Energy and

a 50% operator share in the Mansuriya gas field

development project with Kuwait Energy.

Other overseas operations include a limited and

controversial seismic survey of Turkish territorial

waters around Cyprus in November 2014 in an

attempt to bag some of the large gas reserves found

off the southern part of the island. TP began onshore

drilling in Cyprus’ Turkish-held north in 2012 amid a

row with Greek Cypriots, who had made vast discov-

eries offshore. But newspapers later reported the

search had been abandoned after the 3000-metre-

deep Türkyurdu-1 yielded no results.

SHALE GAS: Enter shale, the game-changing, uncon-

ventional oil-and-gas formation that has turned

around the energy fortunes of the US and other

unlikely places across the globe where substantial

conventional resources are absent. In Turkey shale

gas, which is found trapped in sedimentary rock for-

mations, could finally make six decades of oil and gas

exploration bear substantial fruit, perhaps enough

to partly mitigate the 18.5m tonnes of oil and 47bn

cu metres of gas that Turkey imports every year, the

main culprits behind an annual energy import bill that

totalled $55bn for 2014.

Large shale gas deposits have been discovered in

Turkey’s north-west Thrace Basin and in the south-

east of the county. At the end of 2013 Royal Dutch

Shell and TP spudded their first shale gas well in

Turkey at the Sanbuğday-1 gas field formation near

Diyarbakır in the south-east, estimated to contain up

to 6bn cu metres of gas.

Shell is also contracted to drill five wells in the

nearby Dadaş shale formation. When combined with

the Hamitabat shale formation in Thrace and a few

deposits in Central Anatolia, these finds could mean

Turkey has shale gas deposits of 13trn cu metres, of

which 1.8trn are technically recoverable, Ismail Bahtı-

yar, chairman of the Turkish Association of Petrole-

um Geologists, told Bloomberg.

This would be enough to meet Turkey’s gas sup-

ply needs for 14 years and help offset the massive

gas import bill form Iran and Russia, according to the

government’s Investment Support and Promotion

Agency. ExxonMobil has also expressed interest in

the south-east region. This all bodes well after a

number of conventional oil wells drilled in the south-

east region came up dry in 2013.

LEGAL FRAMEWORK: Turkey’s new Petroleum Law

came into force in June 2013 and could be the key

to unlocking potential reserves by the private sec-

tor. The legislation replaced a law enacted in 1954

before concerted exploration activities began. Its

objectives are to attract foreign investment into a

sector that has been dominated by the state monop-

oly, TP, by doing away with the company’s preferen-

tial rights to exploration and production.

TP will no longer be defined as the de facto nation-

al oil company in charge of exploring and drilling for

reserves. It will not be automatically awarded licences

when terms expire, without putting them up for auc-

tion. The new law simplifies the licensing process,

restricts the application process to 60 days and

reduces the country into just two geographical licens-

ing areas – onshore and offshore.

The new law brings Turkey in closer step with EU

regulations as part of a drawn-out accession process.

The new legal framework provides companies with

tax breaks and incentives on earnings and equip-

ment imports, which will increase the level of tech-

nology used to develop fields. It also eases existing

restrictions on hiring foreign workers, permits licence

mergers with adjacent operators, allows for the con-

struction of pipelines, extends licence periods from

four to five years for onshore and from eight to nine

years in territorial waters, and, importantly, lifts

restrictions on the repatriation of capital.

The legislation also aims to solve a problem seen

across Turkey’s energy industry, namely the trading

of operating licences as commodities by companies

that have no intention of developing the resource.

“The new law seeks to prevent companies acquiring

licences solely for the potential to sell on without mak-

ing an investment in exploration activities,” accord-

ing to international law firm King & Spalding.

Applicants must hold collateral bonds worth 1% for

offshore and 2% for onshore of the financial invest-

ment outlined in their bids, it said. The intention is

to restrict applicants to only those with the finan-

cial and technical capability to develop blocks.

The upshot of the new petroleum law is to finally

throw the market open to participation by foreign

as well as domestic entities to search for oil and gas

in Turkey while the state retains sovereign rights over

the land and resources themselves. Operators no

longer have to partner with TP for every offshore

licence, meaning international majors may return.

With Turkey’s growing demand for energy, every bar-

rel of oil discovered is a step in the right direction.

110

A new legal framework provides companies with tax incentives on earnings and equipment imports

In Turkey shale gas could

finally make six decades of

oil and gas exploration

bear substantial fruit,

perhaps enough to partly

mitigate the 18.5m tonnes

of oil and 47bn cu metres

of gas that is imported

every year.

Turkey’s new Petroleum

Law came into force in June

2013 and could be the key

to unlocking potential

reserves by the private

sector. The legislation

replaced a law enacted in

1954 before concerted

exploration activities

began.


ENERGY ANALYSIS

Nuclear power is expected to provide 15 GW, or 5%, of electricity

In an effort to join the club of nuclear nations, Turkey

has announced plans to build 12 nuclear reactors by

2030, with the intention that 20% of power genera-

tion capacity will be provided from this source. How-

ever, while eight projects have been approved, delays

have already befallen the initial build-own-operate

(BOO) project, Akkuyu 1, pushing the commencement

of its operations to 2022 from the previously announced

2020, and numerous other obstacles remain. Chief

among these are economic conditions, the environment

and the fact that some 64% of Turks oppose atomic

power, according to environmental group Greenpeace.

LONG-HELD DREAM: Turkey’s nuclear aspirations

harken to the 1970s, but gained renewed momentum

in 2006 when President Recep Tayyip Erdoğan, who was

prime minister at the time, announced plans for atom-

ic power stations to be up and running in time for the

republic's centennial in 2023. The new industry will

contribute to another anniversary goal: to have at least

30% of electricity generated via renewable resources.

The target looks attainable, but much of this capacity

is expected to come from wind farms, solar parks, geot-

hermal plants and hydroelectric dams. Nuclear power

would provide 15 GW, or 5% of overall electricity, the

European Energy Markets Observatory notes.

Progress on building the plants has been slow. Reuters

reported in January 2014 that work on the country’s

first nuclear power plant, at an expected cost of $20bn,

on the Mediterranean coast near the town of Akkuyu

was behind schedule, and the original 2019 comple-

tion date was delayed. Construction of the first of four

1.2-GW pressurised-water reactors by Russian state

atomic engineering company Rosatom was delayed

until later in 2015, awaiting the approval of an envi-

ronmental impact assessment, pushing back the start

date to 2020. Following the collapse of oil prices in late

2014 and new regulatory challenges, further delays

were expected to hamper activation until 2022.

Akkuyu’s lead contractor, Atomstroyexport, Russia’s

atomic-power equipment provider, cited difficulty in

awarding construction subcontracts due to regulato-

ry issues. Furthermore, Russia's financial position fol-

lowing the decline in oil prices is impeding funding of

the project. During a meeting with Turkish energy min-

ister, Taner Yıldız, in March 2014, Rosatom’s chief exec-

utive, Sergei Kirienko, said Akkuyu could provide $5bn

in contracts for Turkish companies.

Another challenge has involved a tender for the

inspection company that will review Rosatom’s design

specifications. As of early 2015 the tender had been

cancelled three times because bidders had not met the

government’s pre-qualification criteria. Yıldız had said

the tendering process would not affect progress on the

plant and analysts have suggested the delay may be

due to both sides continuing to bargain over other

aspects of a broader energy deal. However, it is clear

the 2023 deadline is becoming more of a challenge.

FLICK THE SWITCH: Once up and running, Akkuyu will

be operated by Rosatom and its subsidiaries on a BOO

basis. The International Atomic Energy Agency (IAEA)

noted this was the first time a BOO approach had been

applied to a nuclear plant. “The BOO model has been

successfully implemented in other energy projects. The

model allows newcomer countries to benefit from the

human resource capacity of the technology providing

country in the short term and may save time in devel-

oping its nuclear capacity in the long term,” Necati

Yamaç, head of the nuclear energy project at the Min-

istry of Energy and Natural Resources, told the IAEA.

“The BOO model may help in ascending the steep

learning curve that a newcomer country faces when

implementing its first nuclear power project: the future

workforce in embarking countries comes from either

a nuclear research group, which has to quickly learn the

challenges of implementing a big industrial project, or

from an existing utility that would be faced with the

challenges of such a project. The financial risk is left to

the project company, which enters into contracts with

its own shareholders for the design, construction,

operation and maintenance of the plant,” Yamaç added.

Turkey has announced

plans to build 12 nuclear

reactors by 2030, with the

intention that 20% of

power generation capacity

will be provided from this

source.

111


Work on the country’s first

nuclear power plant, at an

expected cost of $20bn, on

the Mediterranean coast

near the town of Akkuyu is

behind schedule, and the

original 2019 completion

date has been delayed.

Splitting the atomNuclear ambitions encounter unexpected delays

ENERGY ANALYSIS

Electricity from Akkuyu will be sold to the transmis-

sion network operator Turkish Electricity Trading and

Contracting Company at a guaranteed power-purchase

agreement price of $12.35 per KWh – a 30% premium

over the average wholesale price – for 70% of the out-

put of two of the reactors and 30% of the other two

for the initial 15 years of operation. Rosatom will sell

the remaining electricity itself on the open market.

Rosatom has also agreed to pay 20% of its profits back

to the Turkish state after 15 years and will provide fuel

rods and arrange for their disposal for the plant’s oper-

ating lifetime, which is between 60 and 80 years.

DEPENDENCY: Sceptics object to the deal because it

will do little to reduce Turkey’s energy imports. “From

construction to operating this power station, from

procuring its fuel supply to managing nuclear waste –

it is apparent that at every stage everything is under

the Russian Federation’s control,” said Necdet Pamir,

chairman of the opposition Republican People's Party

energy commission. “With these conditions, saying that

the power station will reduce our country’s energy

dependence is, to put it lightly, a frivolous approach.”

Turkey’s second planned reactor along a wooded,

windswept patch of the Black Sea coast is further from

reality. Following a nation-wide power outage, the Turk-

ish Parliament approved a bill in April 2015 allowing a

consortium of Japanese and French engineering com-

panies to build a plant near the town of Sinop, which

is expected to cost $22bn. Mitsubishi Heavy Industries,

the Itochu Corporation and GDF Suez have agreed to

build and operate the facility. Erdoğan and the Japan-

ese prime minister, Shinzo Abe, inked the agreement

in 2013. At the time, it was the first Japanese nuclear

deal to follow the Fukushima disaster in 2011.

The contract is for a 4.8-GW battery of four third-

generation, pressurised-water reactors developed by

Atmea, a joint venture between Mitsubishi and French

industrial conglomerate Areva. The Turkish Electricity

Generation Corporation is set to take a 25% stake,

according to World Nuclear News. The power plant is

expected to come online in phases: the first is set for

2023 and the fourth for 2028.

The IAEA conducted a review of Turkish preparations

for nuclear power. “The report concludes that Turkey

has made important progress in its development of

nuclear infrastructure for a nuclear power programme

and that strong government support for the project is

evident,” the IAEA said in February 2014. However, it

also noted that Turkey needed a national policy on

nuclear energy, a firm regulatory body and a national

plan for human-resource development. Turkish Ministry

of Energy and Natural Resources officials pledged to

address all of the IAEA recommendations.

Despite the challenges with the first two planned facil-

ities, Yıldız has conveyed Erdoğan’s desire for yet anoth-

er plant. “Hopefully, we will build the third nuclear plant

under the management of Turkish engineers. This will

be an important test, and I think we will be ready for

the task after 2023,” he told local media. The proposed

site in Turkey's Kırklareli Province near the Greek bor-

der is near one of the last floodplain forests in Europe.

Neighbours like Greece could raise geostrategic red

flags, worried that a nuclearised Turkey could upset the

region’s security balances and prompt other Middle East-

ern states – already wary about atomic-armed Israel

and, potentially, Iran – to go nuclear. Terrorism is anoth-

er risk, whether to the plant itself or in the manage-

ment and transportation of nuclear waste, Turkey’s

Centre for Economics and Foreign Policy Studies said.

NUCLEAR THREAT: But the main concerns are envi-

ronmental. Seismologists say both Sinop and Akkuyu

are in earthquake-prone areas in a country crisscrossed

by geological fault lines, increasing the risk of a melt-

down. Since Akkuyu’s nuclear waste will be reclaimed

by Russia, it must be transported through Istanbul’s sen-

sitive Bosporus Strait, on the banks of which some 15m

people reside. Rare Mediterranean species like the

indigenous seal and the caretta caretta turtle could face

further endangerment from higher water tempera-

tures caused by Akkuyu using seawater to cool its reac-

tors, according to Greenpeace.

“In the event of an accident, all of Turkey and its

neighbours would be affected by radiation fallout,”

Greenpeace said, arguing that the launch of an indus-

try as costly as nuclear is unnecessary when Turkey’s

projected green-energy potential of nearly 36 GW by

2018 would more than cover demand.

Memories persist of the 1986 disaster at Chernobyl,

built by Rosatom, in Soviet-era Ukraine, with some

experts linking the rate of cancer deaths in parts of

northern Turkey – more than double that of the rest

of the country – to the catastrophe across the Black

Sea. The more recent triple meltdown at Fukushima in

2011 has convinced others that atomic power is still

too risky. That the government has chosen Russia and

Japan, whose plants were behind the worst disasters

in recent history, worries many. “Until the issues of high

costs, operational security, disposing waste and the

risks that terrorists could get their hands on the waste

are resolved in a reasonable and satisfying way, we

need to stay away from atomic power,” Pamir added.

112

Electricity consumption in 2014 saw an increase of 4.1% year-on-year, up from a 2013 increase of 1.3%

Following a nation-wide

power outage, the Turkish

Parliament approved a bill

in April 2015 allowing a

consortium of Japanese

and French engineering

companies to build a plant

near the town of Sinop,

which is expected to cost

$22bn.


113

Construction & Real EstateConstruction sector plays a key role in the economy

Turkish companies are active in many overseas markets

Manufacture of construction machinery poised to expand

Regulations and awareness boost insulation demand

Strong fundamentals drive real estate sector expansion

Legal change has made it easier for foreigners to buy

CONSTRUCTION OVERVIEW

The sector has grown at double-digit rates in the past two years

Directly responsible for a significant share of GDP and

with its contractors active right across the globe, Turkey’s

construction sector has been at the forefront of the

country’s recent economic development. Over the last

decade, the sector has transformed the skyline of Istan-

bul and other cities, renewed and extended Turkey’s

transport infrastructure, and built new communities and

facilities from the Aegean to the Caucasus. Construc-

tion employs tens of thousands directly and has also

established a range of related industries – such as con-

struction machinery (see analysis), building materials,

engineering and architecture – as major sub-sectors

of the nation’s domestic and export trade.

Despite recent signs of an economic slowdown –

Turkey’s GDP growth came in at 2.9% for 2014, down

from 4.4% in 2013, according to TurkStat, the state sta-

tistics agency, and the IMF forecasts expansion of 3.1%

in 2015 – construction looks set to continue to play a

significant role in the economy as the country embarks

on an ambitious programme of urban renewal and a

string of large-scale projects, while also seeking to

accommodate the needs of a growing and increasing-

ly prosperous population. According to Ali Babacan,

deputy prime minister for economic and financial affairs,

Turkey will need to spend $700bn on infrastructure in

the years to 2023 if it is to meet the government’s goal

of boosting GDP to $2trn by then.

FACTS & FIGURES: According to TurkStat data, at the

end of 2014 the construction sector was worth around

TL79.7bn (€28.1bn) at current prices, up from TL69.6bn

(€24.5bn) a year earlier. That represented 4.6% of GDP,

though if a constant price formula is used, with 1998

as the baseline, the figure rises to 5.9%. A report from

the European construction sector body, European Inter-

national Contractors (EIC), argues, however, that when

the sector’s impact on other parts of the economy is

taken into account, the share of GDP attributable to it

could be as high as 30%, with some 10% of the work-

ing population employed in and around the sector. At

current prices, meanwhile, the sector has shown con-

sistent growth every year since the global economic

downturn hit Turkey hard in 2009. That year, the sec-

tor shrank 18.1%, but it rebounded quickly, growing by

24.9% in 2010 and 26.5% in 2011. In the following three

years, growth was more moderate, coming in at 7.6%,

11.9% and 14.6%. TurkStat’s Construction Turnover and

Production Index, which takes 2010 as a 100-point

baseline, also shows growth in that period, with the cal-

endar-adjusted index rising to 111.4 in 2011, 112.3 in

2012, 120.9 in 2013 and 124.6 in 2014. Quarterly year-

on-year figures for 2014, however, showed growth

slowing, falling from 6.3% in the first quarter to 4.5% in

the second, 2.6% in the third and -0.8% in the fourth.

A reflection of these growth trends – as well as a bell-

wether for the near term – may be seen in TurkStat’s

records for building permits. In the whole of 2014,

some 1m permits were issued, up 21.2% from around

837,000 the year before and well above the roughly

650,000 issued in 2011. In terms of floor area, the fig-

ure was even stronger, growing at 24.3%, indicating a

shift towards projects of a larger size.

PLAYERS: Of the world’s top 250 construction com-

panies by overseas operations, 42 were Turkish outfits

in 2014, according to rankings by the magazine Engi-

neering News-Record (ENR). This was the second-largest

group from one country in the list, after China.

The top Turkish firm in the list was Enka Construc-

tion and Industry at 52nd place, with headquarters in

Istanbul and $2.4bn in international revenues, just one

place ahead of Ankara-based Rönesans Construction,

with $2.39bn. Third largest was TAV Construction (83rd

place globally with $1.27bn in overseas revenue), fol-

lowed by Polimeks İnşaat Taahhüt ve Sanayi (86th with

$1.25bn) and Tekfen Construction and Installation

(101st with $906m). In 2013, ENR gave TAV the title of

second-largest airport construction company in the

world (based on the projects it undertook in 2012), after

US-based giant Bechtel. The rankings are also signifi-

cant in that 11 years earlier, only eight Turkish compa-

nies made the list. Growth in the last decade has thus

Of the world’s top 250

construction firms by

overseas operations, a total

of 42 were Turkish outfits

in 2014, according to one

ranking.

Despite recent signs of an

economic slowdown, the

construction sector is set

to continue to play a major

role in the economy as the

country embarks on an

ambitious programme of

urban renewal and a string

of large-scale projects.

114

Full speed aheadSeveral large projects are under way or in planning stages, while Turkishfirms are also in demand overseas



been exponential. From 1972 to March 2015, Turkish

construction firms carried out some 7735 projects in

104 foreign countries. All of the above companies are

also active domestically, as are key companies such as

Çalık Holding’s Gap İnşaat, busy everywhere from Istan-

bul’s Tarlabaşı Redevelopment Project to a string of hos-

pitals in Turkmenistan; Tepe İnşaat, which constructed

the now-iconic İş Bank complex in Istanbul; and Cen-

giz İnşaat, part of the consortium building the new

Istanbul airport, along with four other Turkish contrac-

tors, Kolin, Limak, Mapa and Kalyon.

RISING DEMAND: Domestic construction has benefit-

ted from strong economic growth in recent years, boost-

ing demand for projects. Indeed, since emerging from

a major financial crisis in 2001-02, Turkey has seen

continuous GDP expansion – albeit with a shrinkage in

2008-09. In the 10 years to 2013, the country’s GDP

grew by an average of 5% a year, although it slowed to

2.9% in 2014. Per capita GDP, meanwhile, rose from

$4565 in 2003 to $10,404 in 2014, TurkStat figures show.

At the same time, foreign direct investment in Turkey

has grown, adding to demand for new factories, offices

and facilities. These two factors – economic and pop-

ulation growth – have boosted demand for a sector

which was already well established, able to draw on expe-

rience in many overseas markets too, particularly Ger-

many. The country had also experienced an earlier

boom, in the 1980s, following the first steps towards

liberalising the economy. This built up a useful skills base

among workers in the sector. The 1980s saw major

housing developments, with the establishment of the

Turkish Housing Development Authority (TOKİ), large

transport projects – including around 2000 km of

motorways – and construction activity in energy, with

the South-east Anatolian Project seeing a string of

dams built. The decade also ended with a surge over-

seas into the former Soviet states (Commonwealth of

Independent States, CIS), particularly those with Tur-

kic populations in the Caucasus and Central Asia.

WORK ABROAD: Turkey’s construction firms have for

decades been increasing their footprint outside the

country’s borders. Libya, Saudi Arabia and Iraq have been

key markets, between them accounting for around

55.2% of all overseas business by the end of the 1980s.

The MENA region has long been a crucial area for Turk-

ish construction. In recent years though, companies have

learned to balance this with activity in the CIS, as polit-

ical instability has rocked the Middle East. This has

stood the sector in good stead, particularly with the

recent conflicts in Iraq, Libya and Syria. When these con-

flicts come to an end too, Turkey will likely be one of

the first helping in the reconstruction. “There are sig-

nificant opportunities abroad for Turkish contractors,

especially in the Middle East, North Africa and sub-

Saharan Africa. Countries like Iraq, Jordan, Libya, Alge-

ria and Ghana have considerable potential,” Eyüp Yiğit,chairman of Beta Tek, told OBG. “Africa, in particular, is

becoming increasingly important and will be even more

so in five years time as its economy continues to grow.”

The countries of the Gulf region, meanwhile, saw a

major construction boom start in the 2000s, with the

rise in oil and gas prices fuelling the development of

whole new city developments in the UAE, Qatar and

Saudi Arabia, in particular. Turkish companies were well

positioned to take up much of this work, leveraging their

domestic experience, lower costs than Western out-

fits and reputation for good quality. A recent strong

example of this is the Doha Metro in Qatar, with Turk-

ish contractors Yapı Merkezi and STFA among the con-

sortium of contractors that won the $4.4bn contract

there to deliver the Gold Line. Reconstruction in Iraq

has also resulted in contracts for Turkey, while eco-

nomic growth in Northern Iraq, driven by oil revenues

and relative stability, has been a source of work as well.

The CIS region, meanwhile, has grown in importance,

especially Russia, although Russia’s economic troubles

are likely to dampen prospects in the near term. By

2014 Rönesans Holding had established itself as the

largest foreign contractor in Russia, with $2bn of proj-

ects in its portfolio there. These days too, Turkish firms

are busy in new markets in Africa and Asia – a move

given impetus by the economic downturn in more devel-

oped countries and the political turbulence in MENA.

115


Construction sector GDP, 2004-14 (TL bn, current prices)

SOU

RCE:

TU

IK

0

16

32

48

64

80

20142013201220112010200920082007200620052004

Economic growth has boosted demand for many types of projects

Turkish construction

companies have for

decades been increasing

their footprint outside the

country’s borders. From

1972 to March 2015,

Turkish construction firms

carried out some 7735

projects in 104 foreign

countries.


FUTURE GROWTH: Back home, a rash of public and

private investment in buildings and infrastructure has

also taken place in recent years, with much more in the

pipeline. Again, the main focus for giant projects is

Istanbul, which President Recep Tayyip Erdoğan has

taken a particular interest in. He announced a string

of major works for the city during his three terms as

prime minister, with these likely to continue to be the

focus of much political attention in the years ahead.

THIRDS: Already under way is the construction of a third

Bosphorus bridge, further north than the existing two.

This requires a new road network as well, with one of

these linking to the site of another grand project, Istan-

bul’s third airport. The $2.5bn bridge, to be named the

Yavuz Sultan Selim Bridge, will carry both road and rail,

with the road part of the planned 260-km Northern

Marmara Motorway, a major bypass highway for the

city. The bridge is being constructed by Turkey’s İçtaşİnşaat and Italy’s Astaldi, with an initial completion date

of May 29, 2015. However, as of April 2015 the proj-

ect was expected to be completed by the end of the

year. When finished, it will become the world’s longest

combined road and rail bridge.

The third airport, meanwhile, is being constructed

to the north of the city’s European side, in a largely forest-

ed area towards the Black Sea coast. Construction thus

involves the clearing of 7569 ha of land, with the four-

stage project seeing runway and terminal space grad-

ually expanded. By completion of the fourth phase, in

2025, the airport will have a capacity of 150m passen-

gers per year, six runways, 1.4m sq metres of indoor

space and four terminal buildings, along with a range

of associated facilities. The five-company consortium

that won the tender for construction bid some €22.2bn,

and was granted a 25-year operating lease.

A MAN, A PLAN, A CANAL: The government also has

plans to construct an even larger project in the years

ahead – a canal linking the Black Sea and Marmara Sea.

Known as Kanal Istanbul, this would cut across the

European outskirts of the city, running for 43 km with

a reported depth of 25 metres, allowing the passage

of the new generation of supertankers and even sub-

marines. The cost was first announced in 2011 as

around $10bn, although it is widely expected to be

much higher and feasibility studies are still ongoing.

While the canal – as with the airport and the third

bridge – has proven controversial, attracting a great

deal of criticism on environmental grounds, its construc-

tion would likely provide a major boost for the sector.

It is also intended to shift Istanbul’s real estate focus

to the north, with plans for new communities mooted

along its course. Then-Prime Minister Erdoğan

announced he would like to see its completion coin-

cide with the 100th anniversary of the Turkish Repub-

lic’s founding, in 2023, although there are doubts that

this will be achieved. As of early 2015, the project had

not yet moved forward, but Erdoğan had reiterated his

support and called for it to be expedited.

URBAN RENEWAL: On another level, the government

has also begun a major urban renewal programme,

aimed at readying Istanbul and other cities for future

earthquakes. The North Anatolian Fault runs across the

north of the country, passing south of Istanbul. In 1999,

a giant earthquake struck, centred on the north-west-

ern industrial cities of Izmit and Adapazarı, causing

great devastation and loss of life. Much of this could

have been averted with better building quality, with the

urban renewal programme aiming to either demolish

or strengthen at-risk structures. The programme is set

to roll out over a 20-year period and cost $400bn, with

some 6.5m housing units affected. TOKİ is spearhead-

ing the programme, which is already under way.

ROADS & HOSPITALS: Turkey is also carrying out a

major motorway expansion project, with the 2200-km

network of 2013 set to expand to 9680 km by 2035,

according to the General Directorate of Highways.

Another key project is the City Hospitals initiative, a

€12bn programme to build or expand around 60 hos-

pitals across the country in collaboration with the pri-

vate sector. As of the end of the first quarter of 2014,

contracts for 17 hospital public-private partnership

(PPP) projects across Turkey had been signed, with

three of these already under construction. A new law

117


SOU

RCE:

TU

IK

*2

010=

100

Construction sector production index, 2005-14*

0

30

60

90

120

150

2014201320122011201020092008200720062005

Turkey’s urban renewal programme is set to cost around $400bn

Large-scale projects in the

works include Istanbul’s

third airport, a third

Bosphorus bridge, a canal

linking the Black Sea and

Marmara Sea, a major

urban renewal programme,

a vast motorway expansion

project and the City

Hospitals initiative.


on PPPs in the health sector supports this effort, with

the hospitals built and run by private sector compa-

nies on the basis of 25-year leases.

PIPELINE & POWER: Another large project in the

works is the 1850-km Trans Anatolian Natural Gas

Pipeline (Tanap), which began construction in April

2015. When completed in 2019 at an estimated cost

of $10bn, it will carry gas all the way across Turkey from

Kars in the north-east, where it will tie into the exist-

ing South Caucasus pipeline carrying gas from the Shah

Deniz field in Azerbaijan, to its border with the EU in

Eastern Thrace, where it will tie into the planned Trans-

Adriatic Pipeline running through Greece and Albania

to Italy. Jointly owned by Azerbaijan’s state oil compa-

ny Socar (58%), Turkey’s state-owned oil and gas pipeline

operator Botaş (30%), and BP (12%), Tanap forms the

key link in a major plan by the EU – the 3500-km South-

ern Gas Corridor – to reduce its dependence on Russ-

ian gas and diversify export routes for supplies from

the Caspian Sea region. As of March 2015, $3.4bn in

contracts had been signed, with more on the way for

building stations, compression units and offshore oper-

ations, according to Saltuk Düzyol, Tanap’s general man-

ager, who said the project will create 5000 Turkish jobs.

Two large nuclear power projects are also planned.

As of April 2015, bidding was under way for a contract

to design and build the first hydraulic structures for the

Akkuyu nuclear power plant, the country’s first, to be

built in the south-central province of Mersin at a cost

of $20bn. Consisting of four Russian-designed units of

1200 MW each, the plant will eventually produce a

total of 35bn KWh a year. Also in April the Turkish par-

liament approved a law creating the legal framework

to start construction on a 4800-MW plant in the Black

Sea town of Sinop. It will be built jointly by France’s GDF

Suez and Japanese firms Mitsubishi Heavy Industries

and Itochu Corporation at an estimated cost of $22bn.

Construction was expected to begin after approval is

granted by domestic and international regulatory bod-

ies, with a target of bringing the facility on-line by 2023.

BUILDING BLOCKS: With many of these projects, Turkey

has the advantage of having developed its own PPP mod-

el in the 1990s, with a proven track record for build-

operate-transfer agreements with the private sector.

Such major works have also helped develop a signifi-

cant domestic construction materials sector in Turkey.

Iron and steel have long been manufactured in the

country, but both have undergone a major expansion

on the back of growing demand for rebar, girders, steel

pipes and pipe fittings for construction. Turkey’s crude

steel production capacity reached 50.2m tonnes in

2014, up slightly from 49.25m in 2013, according to

the Turkish Steel Producers Association. The country

also produces aluminium, with Eti Aluminyum a global

player and Turkey’s sole liquid aluminium producer.

According to a Ministry of Economy (MoE) report from

2014, Turkey has 67 cement plants, divided between

19 grinding units and 48 integrated units. Much of the

output of these plants is also exported. Total produc-

tion in 2014 was 71.2m tonnes, with 63.2m tonnes

sold domestically and 7.7m tonnes exported.

Turkey also has around one-third of the world’s total

marble deposits. The MoE states there are some 5.1bn

sq metres of probable reserves in the country, with

around 4m tonnes of marble, worth around $2.2bn

exported in 2013, according to the Turkish Natural

Stone, Marble and Machinery Manufacturers’ Associ-

ation. The Istanbul Mineral Exporters’ Association esti-

mates that total natural stone exports were worth

$2.2bn in 2013 and $2.13bn in 2014.

The country also has major ceramic tiles and ceram-

ic sanitary ware industries. MoE figures place total pro-

duction capacity of wall and floor tiles at around 2.37bn

sq feet, with 1.12bn of these exported. The MoE also

ranks Turkey as Europe’s largest producer and exporter

of ceramic sanitary ware, with production of 112,200

tonnes in 2012. Glass production is also extensive –

with one group of companies, Şişecam, producing

around 90% of Turkey’s total output in this field. The

MoE ranks the company sixth in Europe and 13th in

the world in terms of glass production capacity. Turkey

has a significant building plastics subsector as well,

with around 5000 firms operating in this field. There is

also a thriving domestic paints and coatings segment,

which – as with plastics – has developed expertise and

grown in tandem with Turkey’s automotive sector.

OUTLOOK: With the domestic market providing a strong

base, and with Turkish contractors having successful-

ly diversified their markets and projects in recent years,

the construction sector is well positioned to continue

growing, though Turkey’s reliance on foreign capital

inflows to fund its high current account deficit makes

it vulnerable to external shocks and constitutes a chief

concern in the medium term, according to the IMF. The

sector’s fortunes globally are closely linked to econom-

ic growth in general. In this regard, the recovery in

developed markets is a plus, although the decline in oil

prices and ongoing turmoil in some areas will no doubt

impact the key MENA and CIS markets. That the sec-

tor has managed such strong growth in difficult times

is a tribute to its continued resilience and foresight.

118

Around 10% of Turkey’s working population is employed in and around the construction sector

The country’s first nuclear

power plant will be built in

Akkuyu in the province of

Mersin at a cost of $20bn,

consisting of four units of

1200 MW each. The Turkish

parliament has also

approved a law to start

construction of a 4800-MW

nuclear facility in the Black

Sea town of Sinop.

Construction of the

1850-km Trans Anatolian

Natural Gas Pipeline began

in April 2015, and it will

carry gas across Turkey,

forming the key link in a

major plan by the EU

– the 3500-km Southern

Gas Corridor – to reduce its

dependence on

Russian gas.


CONSTRUCTION ANALYSIS

CMME accounts for 16% of Turkey’s total machinery production value

As Turkey’s economy and population have expanded,

growth in its construction sector has benefitted from

the existence of a vibrant domestic industry for man-

ufacturing machinery. According to 2013 data from

the Turkish Construction Equipment Manufacturers

and Distributors Association (IMDER), the construc-

tion and mining machinery and equipment (CMME)

sub-sector posted the second-fastest growth in the

world between 2005 and 2013, after China. Turkey’s

CMME industry is the ninth largest in the world.

EXPORTS: According to a 2014 report on the industry

by the Ministry of Economy (MoE), CMME accounts for

around 16% of Turkey’s machinery production value.

The CMME sub-sector also exported $1.6bn worth of

equipment in 2013, with Germany, Romania, Iraq, the

UK and Iran the main markets. Since 2002, all Turkish

exported machinery has also borne the “CE” label, iden-

tifying it as meeting EU standards for quality.

Broken down by type and value, spare parts came in

first among exports within the CMME subsector in

2013, responsible for $553m, followed by machinery

for sorting, separating, screening, washing, crushing and

grinding minerals, with $407m. Other important export

items included bulldozers, angle dozers, grazers and

excavators, at $162.2m, and lifting, handling, loading

and unloading machinery, at $156.6m. Growth in these

export figures has been impressive. The total stood at

$927.5m in 2009, showing growth of $668m, or 72%

over five years, at current prices.

The MoE numbers further show that some 500 com-

panies are engaged in the manufacture of CMME,

nationwide. Around 60% of all of these firms are in the

Marmara and Aegean regions, located close to the sites

of major work and good transportation links. Further

supporting the sector are several related industries.

Automotives has long been a major part of the Turk-

ish economy, with many international companies active

in the country via joint ventures with locals (see Indus-

try chapter). At the same time, the steel and non-fer-

rous metals industries are long established, providing

locally sourced materials for CMME manufacture. Plas-

tics too are a local industry, as are glass and synthetic

rubber. There is also a pool of experienced and quali-

fied staff, with CMME manufacturing, which tends to

require a much higher technical and research and devel-

opment capacity than many other kinds of manufac-

turing, able to count on good-quality local hires. In addi-

tion, Turkey offers 21 free zones with a range of tax

exemptions for industrial and manufacturing compa-

nies. All this has facilitated CMME growth.

DEMAND UP: Yet the scale of the boom in the domes-

tic construction sector, with giant projects such as the

third Bosphorus bridge and the new Istanbul airport,

has meant that the domestic CMME subsector has

been unable to keep up with demand. The latest fig-

ures available, for 2012, show that there was a demand

for around $2bn of CMME domestically that year, with

a 37% annual hike in demand since 2009. In conse-

quence, imports of CMME have begun to increase, with

around half of all new demand since 2009 being met

by these. A major opportunity exists too for the devel-

opment and manufacture of small-sized construction

equipment, given that a lot of the domestic demand is

for projects in existing areas. The government’s urban

regeneration project, which seeks to demolish and

rebuild or upgrade 6.5m housing units over a 20-year

period, creates a huge demand for such equipment.

Much of the expertise for the manufacture of small-

scale CMME has already been developed, with the sub-

sector looking for investment to boost capacity and

reach. Such investments also have lower capital require-

ments than those for the manufacture of larger units.

The industry, therefore, faces some of the same chal-

lenges and opportunities as the Turkish market as a

whole: there is solid domestic demand and a strong need

for foreign investment to meet that demand in a sus-

tainable fashion. In the meantime, however, this sub-

sector is set to continue to expand, with many of

the cranes towering over the world’s construction

hotspots already bearing the “Made in Turkey” trademark.

Approximately 500

companies are engaged in

the manufacture of

construction and mining

machinery and equipment

across Turkey. Exports

totalled around $1.6bn in

2013, with Germany,

Romania, Iraq, the UK and

Iran the main markets.

119


Keeping up with demandThe construction and mining machinery and equipment segment isbenefitting from renewed activity

CONSTRUCTION DIALOGUE

Ergil Ersü, Chairman, Gama Holding

What are the factors you evaluate when determin-

ing whether or not to invest in a project abroad?

ERSÜ: Construction is an inherently unpredictable busi-

ness both in and outside of Turkey. Sometimes you can

spend a lot of time preparing a bid and then lose or it

gets cancelled. Other times you can exert very little effort

during the planning stage and get rewarded with a

very profitable project. In the past, we tried to balance

our domestic and international work but in recent years

we have been more focused on the latter because of

intense competition within Turkey. Right now, around

70% of our overall business takes place overseas.

First, the type of international project matters. For

our general contracting unit we look at a different set

of factors than for our engineering, procurement and

construction (EPC) arm. It is not logical for Turkish con-

tractors to go to sub-Saharan Africa or South America

for relatively simple undertakings like infrastructure

developments, superstructures, general civil construc-

tion and certain types of industrial plants; the logistics

required are too costly and complex. On the other hand,

these costs are more justifiable for highly specialised

EPC contracts with the potential for large profits, espe-

cially projects in the power and oil and gas spaces. Sec-

ond, partnership considerations are very important. In

markets where cooperation is needed, either with a local

or international company, potential partners must bring

some sort of value-added benefit to the project to

make it worthwhile; for instance, they may possess a

special expertise or provide access to local suppliers.

The size of the project is the third consideration. Giv-

en their high overhead costs, it is difficult for large

companies to engage in too many small projects. It is

equally hard for small companies to compete for big

projects that require considerable expertise. In gener-

al, the construction industry has very thin margins so

participating in the right project is essential.

The last thing that needs to be mentioned is the

impact of political instability. Pre-uprising Libya was a

very lucrative market for Turkish contractors for many

years but is now much less of a focus. The world changes

quickly, and promising markets can easily become less-

so overnight, just as an average market today can turn

into a hot market tomorrow. As we speak, our neigh-

bours in the north are experiencing a crisis that may

have a profound impact on the construction outlook

across Russia and the countries of the former Common-

wealth of Independent States.

PAÇACI: While there are many factors that drive our

investment decisions outside of Turkey, we tend to look

at three key criteria when evaluating opportunities. We

evaluate the genuine need and feasibility for a project

first. For instance, infrastructure or housing projects in

markets that are very underdeveloped, but growing, are

attractive if the projects match our portfolio of expert-

ise, and we have the financial and human resources to

complete them. Then we tend to look at proximity. Giv-

en transport and material costs, it is very difficult for

Turkish contractors to compete for projects very far away,

like in the US and East Asia. Some construction firms

are active in these areas, but Turkish companies are more

competitive in regions like MENA and Central Asia. A

final key element is the political and economic stabili-

ty of the country where the project will take place.

Political stability has become a more important con-

sideration, of late, especially given all of the significant

changes that have swept the region in the past few years.

Libya was a very profitable market for Turkish contrac-

tors before the Arab Spring and many firms are still look-

ing to recover money from projects that stopped when

the movement began. Unfortunately, it is very hard to

recover these losses, as there are no political risk guar-

antees in place and the Turkish government has not

been able to secure ample repayments from Libyan

authorities. Judicial systems are also important. Dis-

putes can last years in some places, like Russia, nega-

tively affecting the attractiveness of doing business in

those markets. All this is to say that there are signifi-

cant opportunities abroad, but that they need to be well-

researched before making any investment decisions.

120

Trending marketsOBG talks to Ergil Ersü, Chairman, Gama Holding, and Orhan Paçacı,Member of the Executive Committee and Shareholder, Mesa Holding


Orhan Paçacı, Member of the Executive Committee and Shareholder,Mesa Holding

CONSTRUCTION DIALOGUE

In what markets do you foresee the most opportu-

nities for Turkish contractors going forward?

PAÇACI: There are many opportunities both domesti-

cally and internationally. Starting with the latter, it is

hard to say what countries or regions pose the great-

est potential, as attractiveness is highly dependent on

the project in question, as explained above. That said,

there has been a general trend away from more tradi-

tional markets for Turkish contractors like Russia, Libya

or Saudi Arabia to other, less-penetrated areas.

Specific countries in Eastern Europe, Central Asia

and MENA all have potential; places like Poland, Bul-

garia, Romania, Iraq, Qatar, Kuwait, Latvia, Kazakhstan,

Azerbaijan and Turkmenistan all come to mind. Many

of these countries are growing, have money and need

industrial and transport infrastructure, as well as oth-

er structures like housing and hospitals. Even countries

in sub-Saharan Africa, East Asia and Pakistan have

begun to attract Turkish contractors. Again, however,

any potential projects in these countries will need to

be scrutinised to make sure that they are financially fea-

sible, especially given the difficulty of attaining financ-

ing in some of these markets. Overall profitability also

matters. For companies of a certain size it only makes

economic sense to mobilise and enter a new market

for a project worth more than $60m or $70m.

There is also a great deal of potential in the domes-

tic market. Turkey and Istanbul, in particular, have been

transformed markedly in the past decade, as new hous-

ing projects, commercial centres and large-scale infra-

structure projects have sprouted up across previously

uninhabited land. Right now, there are a number of mul-

ti-use developments worth billions of dollars being

developed and constructed. While some commenta-

tors have expressed concern about the sustainability

of such a building boom, given the country’s slowing

economy and higher interest rates, especially in terms

of residential real estate, there are still many areas

where construction is needed. Hospitals, tourism-relat-

ed facilities and high-tech industrial buildings remain

in high demand. Office space is also needed in a num-

ber of areas. These sorts of projects, however, need to

be approached in the same way international ones are

examined, with rigorous attention to the specific needs

and the overall economic feasibility of the undertak-

ing. It is no longer sufficient to build haphazardly any-

where that there is space. It is necessary to think about

the impact of a structure on the surrounding area.

ERSÜ: There are many attractive markets. Historically,

Turkish contractors have been instrumental in meet-

ing the infrastructure and housing needs of countries

like Russia and Saudi Arabia. They have also been very

active across North Africa and some of the countries

of Central Asia. There are still many opportunities in these

markets, but some are more challenging than others.

Libya is rather unstable and will take time to recover.

Saudi Arabia, on the other hand, is very stable and

continues to have significant potential, especially for

oil and gas and power projects. It can be a difficult mar-

ket to operate in, given the complexity of registration

processes and strict qualification rules. In addition,

competition in attractive markets is very high because

financing is generally less of an issue in these coun-

tries and payments are usually made on time, which is

a marked difference from some other fast-developing

markets. For instance, Korean contractors are very

strong in Saudi Arabia and compete for many of the

same projects that Turkish companies are chasing.

Right now, Iraq is a huge market with significant

potential, both in the north and south of the country.

That said, recent political tensions throughout the

region have made it a significantly more difficult to

compete for projects there. North African countries like

Algeria also may play more of a role going forward as

a result of the amount of financing available in the

region. In Algeria’s case, however, Turkish companies

will need to make some adjustments to operate in the

country, especially from a language perspective. Sub-

Saharan Africa is also a largely unexplored market and

is on the top of the lists of many Turkish contractors.

121


CONSTRUCTION INTERVIEW

Emin Sazak, CEO, Yüksel İnşaat, and Former President, TurkishContractors Association

In what way have local construction firms con-

tributed to the development of the sector in Turkey?

SAZAK: Construction accounts for about 3.5% of

Turkey’s GDP, but, when related industries are includ-

ed in the calculation, this contribution is closer to 30%

of economic activity. Segments such as building mate-

rials and logistics have seen considerable growth as a

result of the increasing size and strength of the local

construction industry. The sector also employs 1.8m to

2m people, and this number is much higher when you

take into account indirect employment. This is why gov-

ernments in general try to stimulate construction when

they want to speed up the economy, as it encompass-

es various sectors, businesses and job opportunities.

How will the recent rate increase and slowdown in

domestic growth impact the Turkish construction

sector at home and internationally?

SAZAK: Over the past decade the sector has vacillat-

ed between very high levels of growth and more lean

times, but the overall trend is a positive one. This sus-

tained rise has been driven by two main factors, major

government spending on large-scale infrastructure

projects and increased private investment in real estate

developments. Higher interest rates will have a nega-

tive impact on both areas. The most immediate effects

will likely be felt on the private side, as less people will

be able take out loans to invest in property and real

estate developers will have a far more difficult time

financing new projects. While a lot of government infra-

structure projects, especially public-private partner-

ship projects, have been lined up and tendered in the

past few years, many of them are still in the process of

financial closure and will become more expensive as a

result of the increase. It is expected that 2014 will be

a more difficult year for the industry than 2013, which

saw solid growth of around 6.8%. That said, a lower rate

has more to do with macroeconomic and political fac-

tors than any issues with the industry itself. The sector

will continue to expand at a faster pace than the over-

all economy in the coming year. In any case, many Turk-

ish contractors are doing more business abroad than

domestically, thus allowing for other sources of revenue

less dependent on the performance of the economy.

What countries or regions offer the greatest oppor-

tunities for Turkish contractors abroad?

SAZAK: The majority of work done by Turkish contrac-

tors abroad is concentrated in the Middle East, North

Africa, Russia and Central Asia. Markets such as Qatar,

Saudi Arabia and the UAE have been very lucrative for

the sector, and this will continue going forward owing

to significant planned construction for upcoming events,

namely the 2022 FIFA World Cup in Qatar and Expo 2020

in Dubai. Since the 1990s, Russia and Central Asia have

also proven attractive markets, and still have major

potential, especially as hydrocarbons-rich countries

such as Kazakhstan embark on massive infrastructure-

building campaigns. In recent years, following the Arab

Spring, Turkish contractors have begun moving away

from their traditional markets, particularly in North

Africa. Turkey was second only to China on the Engi-

neering News-Record’s “Top 250 International Con-

tractors List” in 2013, with a total of 38 companies.

One area of focus is Sub-Saharan Africa. Indeed, Turk-

ish contractors are pursuing opportunities in Angola,

Ghana, Mozambique, Tanzania, Ethiopia, Kenya, Niger

and Cameroon, among other markets. They are being

aided by the spread of Turkish institutions across the

continent, including Turkish Airlines and the Foreign Min-

istry, which has opened more than 20 new embassies

and consulates in the region over the past few years.

Having said this, Africa is still a very tough market and

it will take time for Turkish contractors to make major

inroads. While many of these countries do benefit from

natural resources, they are not yet in a position to ful-

ly exploit them and direct the proceeds into infrastruc-

ture projects. Moreover, competition from China and

easier access to cheap financing for Chinese compa-

nies than for their Turkish counterparts is another issue.

122

Global horizonsOBG talks to Emin Sazak, CEO, Yüksel İnşaat, and Former President,Turkish Contractors Association


CONSTRUCTION ANALYSIS

The vast majority of the country’s housing units lack insulation

With Turkey undergoing a major construction drive

during the last few years, many associated trades have

seen solid growth. One segment showing particularly

impressive expansion has been insulation, which has

averaged higher growth than construction as a whole,

on the back of the insulation of both existing buildings

and new ones. There is also still much room for further

growth, as Turkey aims to achieve similar levels and stan-

dards in insulation as its EU neighbours.

GROWING AWARENESS: According to the Association

of Thermal Insulation, Waterproofing, Sound Insula-

tion and Fireproofing Material Producers, Suppliers and

Applicators (İZODER), the sector had an annual aver-

age growth rate of 25-30% from 2011 to 2013, and has

grown tenfold in as many years. By 2012, the sector

had a turnover of €4bn, up from just €300m in 2004,

with İZODER expecting €5.1bn in turnover in 2013.

In terms of raw volume, according to the Istanbul

Chamber of Industry, the sector sold 14.2m cu metres

of heat insulation material in 2012, the latest year for

which figures were available, up from 11.7m a year ear-

lier and just 6.1m as recently as 2006. The forecast for

2013 was 16.4m cu metres, representing growth of 15%.

The sector employs 80,000 people among 200 com-

panies, according to İZODER, with 20 key local players,

of which the top five are Kalekim, Ode, Eryapı, Izober

and Grofen. Foreign firms also have stakes in the indus-

try – mostly from Germany, Austria, France and the US

– and have been increasing their shares through a wave

of mergers and acquisitions in the past half-decade.

It is estimated that some 85% of the 19m houses in

the country lack insulation. Indeed, the government has

set a deadline of 2017 for the completion of a nation-

al insulation programme. The energy loss due to the

lack of insulation is huge. Around 75% of Turkey’s ener-

gy is imported, with some $60bn spent on Turkey’s cur-

rent 115.3m tonnes of oil equivalent (toe) of energy

consumption, according to İZODER data. Some 36.8m

toe of this is consumed by buildings. The association

estimates that energy worth some $11.5bn is thus lost

each year due to lack of building insulation. At the same

time, this energy loss causes significant carbon emis-

sions. This makes plans to insulate every building in

Turkey both enormous in scope and potential savings.

CHALLENGES: İZODER and its supporters would like

to see the value-added tax on insulation materials

reduced and for banks to receive tax incentives on

financing insulation materials and loans for projects

related to energy efficiency, while investors could also

get subventions on interest for these. İZODER would

also like estate taxes to be reduced for buildings with

higher-grade energy efficiency – from January 2011,

new buildings are required to get an energy certificate,

passing with a minimum C grade, while all existing build-

ings have to acquire one by 2017. Awareness is grow-

ing, although more could be done. Insulation schemes

tend to pay for themselves in the medium to long term,

but economic uncertainties and low incomes can mean

homeowners postpone upgrades. To overcome this

obstacle, public education campaigns are vital to mak-

ing owners aware of the benefits of insulation.

One move in this direction was the summit on ther-

mal insulation held in September 2014 by İZODER and

the Istanbul Directorate of Environmental and Urban

Planning, attended by industry stakeholders and intend-

ed to raise awareness. Though themes ranged from

proper thickness, quality and inspection for insulation

systems, one of the hottest topics was unfair compe-

tition. Some domestic firms produce below-standard

insulation materials, undercutting competitors, but

construction firms install them all the same – a prob-

lem only exacerbated by lack of proper inspection.

Water insulation, too, is vital in a city such as Istan-

bul, where research after the 1999 earthquake showed

that 64% of the buildings that collapsed did so because

of rusting rebar in their concrete supports – often

because no water-proofing system had been installed.

For insulation companies, the hope is that the Turkish

government will soon bring in a package of incentives

that will help address what remains a pressing issue.

The insulation segment has

shown tremendous growth,

registering an annual

average growth rate of

25-30% from 2011 to 2013.

There is also much room for

further growth, as the

country aims to achieve

similar levels and standards

in insulation as its EU

neighbours.

123


Effective as of January

2011, all new buildings

have been required to get

an energy certificate,

passing with a minimum

C grade, while all existing

buildings have to acquire

one by 2017.

Efficiency upgradeDemand for insulation surges due to regulations and growing awareness

REAL ESTATE OVERVIEW

Foreign investment in real estate has risen steadily in recent years

From residential to retail property, the Turkish real estate

market has flourished in the last few years. Buoyed by

economic and demographic growth, rising incomes,

market liberalisation and a major urban renewal pro-

gramme, the sector has also been attracting strong

international interest which has spread beyond tradi-

tional buyers in Europe and the Gulf, and beyond the

traditional locations of the Aegean and Mediterranean

coasts and Istanbul. There is optimism in the sector, too,

that despite the recent economic slowdown, this robust

growth will continue in 2015 and beyond.

IN NUMBERS: Indeed, the Turkish economy has seen

substantial expansion in recent years, with a rapid

recovery from the global financial crisis. For 2013, GDP

grew 4%, with a mean annual GDP growth rate over the

2003-13 period of 5%, according to TurkStat, the offi-

cial statistics agency, though the IMF forecasts growth

of 3.1% in 2015 and 3.6% in 2016, in part due to the

weakness of the Turkish lira and a slow shift in foreign

capital out of the country ahead of an expected rise in

global interest rates. This has given Turks a lot more dis-

posable income than they had in the past – per capi-

ta GDP has risen from $4565 in 2003 to $10,404 in 2014.

At the same time, the country has undergone sig-

nificant demographic changes. TurkStat figures put

the total population at 77.7m at the end of 2014, with

an annual growth rate of 1.6%, up from 1.37% in 2013.

Around half of all citizens are under the age of 30. Sig-

nificant here, too, are changes in the size of households.

With the growth of the middle class – which is expect-

ed to expand from around 27% of the population in 2010

to 45% by 2020 – has come a rise in demand for home

ownership, along with a rise in the number of nuclear

families, breaking way from traditional, extended fam-

ily structures. This is particularly prevalent in urban

centres, such as Istanbul, Ankara, Antalya and Izmir. A

2012 survey by TurkStat showed 19.8m households in

the country, with an average size of 3.7 members –

although the spread across country was wide, from 7.9

in Şırnak to 2.8 in Çanakkale. In addition, the rate of

urbanisation has meant that today, 71% of the popu-

lation lives in urban areas, with the north-west in par-

ticular a major population centre. Economic growth

and demographic changes have provided some funda-

mental growth drivers for Turkey. Economic growth has

also increased demand for office, commercial and

industrial real estate, with this further heightened by

the rise in foreign investment. Istanbul’s geostrategic

location has boosted its standing as a regional and

international headquarters. In April 2015, for example,

the UN Development Programme opened the Istanbul

Regional Hub to support its projects in Europe and the

Commonwealth of Independent States.

NON-RECIPROCITY: Foreign purchases of real estate

were boosted by a change in the law in 2012 that

expanded the number of nationalities permitted to buy

from 89 to 183. Previously, only nationals of countries

that had reciprocal arrangements with Turkey were

allowed to own property. The Real Estate Reciprocity

Law was amended to include countries that do not

have such arrangements. This meant citizens of Mid-

dle Eastern and former Soviet states became eligible,

along with China and many Asian nations. Some limits

do, however, remain. Foreign citizens cannot own more

than 30 ha each, countrywide, for example.

GLOBAL FLOWS: Recent economic developments have

had mixed results for Turkey’s real estate sector. A gen-

eral retreat of foreign capital from emerging markets

has impacted FDI: according to central bank figures, total

FDI inflows declined from $16.1bn in 2011 to $12.4bn

in 2013, though these were up slightly in 2014 to

$12.5bn. Yet, the central bank data show that FDI specif-

ically into real estate has been rising steadily over the

same period: net real estate FDI was $2.01bn in 2011,

$2.64bn in 2012, $3bn in 2013 and $4.32bn in 2014

– an average annual rise of 29.5%. Moves towards taper-

ing of the quantitative easing programme by the US Fed-

eral Reserve in 2013 and 2014, along with measures

to restrict the current account deficit – a long-term bug-

bear of the Turkish economy – have also recently

Foreign purchases were

boosted by a 2012 change

in the law that increased

the number of nationalities

permitted to buy real

estate, meaning that

citizens of Middle Eastern

and former Soviet states

became eligible, along with

China and many Asian

nations.

124

Safe as housesPopulation and income growth, as well as strong foreign interest, aredriving sector expansion



depressed consumer spending, while political turbu-

lence has also dented consumer confidence.

The underlying trend in Turkey remains that of sig-

nificantly higher rates of growth than in neighbouring

Europe though, coupled with much greater political

and economic stability than in the Middle East and

Central Asia – despite recent turbulence.

Overall then, in spite of the deceleration of econom-

ic activity generally, the real estate sector has contin-

ued expanding. According to TurkStat, the number of

construction permits issued in 2014 passed the 1m

mark, up 21.2% from roughly 837,000 in 2013 and cov-

ering a floor area of nearly 218m sq metres, up 24.3%

on 2013. Occupancy permit issuance also rose – 6.2%

by number of units and 9.4% by floor area, reaching

around 767,000 and 151m sq metres, respectively.

House sales, meanwhile, held steady, with the 2014

figure of 1.17m units just surpassing that of 2013. With

economic growth and stability has also come an increase

in housing loans. Total housing loans were around

TL110bn (€38.73bn) as of September 2014, up from

TL20bn (€7bn) in the first quarter of 2007. The sur-

prise interest rate hike at the start of 2014 may have

slowed the rate of expansion somewhat, but with pres-

sure on the central bank to cut rates in the run-up to

parliamentary elections in early June 2015, the historic

trend is still clearly upwards.

RESIDENTIAL: Adding to the demand growth caused

by the above economic and social factors is a major

programme of urban renewal now under way in Istan-

bul that is transforming neighbourhoods across the

city. The motivation for the programme is safety: Istan-

bul lies close to a major fault line, with poor building

standards responsible for much of the damage inflict-

ed by the 1999 Marmara earthquake, which hit near-

by Izmit and Adapazarı, among other locations. Given

the sheer quantity of substandard housing, the pro-

gramme is a giant one, set to roll out over a 20-year

period and cost some $400bn. Of Turkey’s total of

around 18.5m housing units, the programme aims to

regenerate some 6.5m of them.

Spearheaded by the Housing Development Admin-

istration of Turkey (TOKİ), the programme is not with-

out its critics – the protests in Istanbul that began in

May 2013 were motivated in part by perceived gentri-

fication and lack of consultation in the execution of

the programme. Nonetheless, regeneration is moving

forward and has seen major residential developments

in areas such as Tarlabaşı and Sarıgazi, among others.

Underscoring the programme is the 2012 Regener-

ation of Regions Under Disaster Risk Law. This states

that if two-thirds of the tenants of a building agree,

their at-risk building may be demolished, with tax incen-

tives to sell up – value-added tax (VAT) is cut from 19%

to 1%, while apartments sold under the scheme are

excluded from stamp duty and title deed tax. Accord-

ing to the Ministry of Environment and Urbanisation,

around 100,000 housing units had applied for the

incentives during 2013, and 79,000 in 2014. The usu-

al arrangement is for the old building to be demolished

and replaced by a private developer, via a unit-sharing

agreement with the owners and tenants. New units are

built for those tenants wishing to stay, with extra units

going to the developer. Since the programme began,

much private investment has gone into urban regen-

eration, rather than greenfield development, a move

also incentivised by changes to VAT on all greenfield

units. Previously, those under 150 sq metres had paid

just 1%, but under the new rules, if the value of the unit

is between TL500 and 1000 (€176-352) per sq metre,

the VAT is 8%, rising to 18% for those valued higher.

Recent years have also seen the house price index

climb steadily. The central bank’s index for Turkey as a

whole rose in the 2010-14 period to 172.2 points, giv-

ing a compound annual growth rate of 12.2% – healthy

growth and an important indicator that today’s resi-

dential market is far from just an Istanbul concern.

OFFICE: Once again, Istanbul is the focus for the office

market, with its increasing importance globally serv-

ing to boost demand from international companies for

prime office space, while economic growth domesti-

cally has also led to demand for better accommoda-

tion and upgrades to existing establishments. This high

demand has helped keep rental rates stable, as more

high-quality office space has come on-line. After peak-

ing at about €40 per sq metre in 2008 – when supply

was tight – prime rent levels for office have stabilised

at around €35 per sq metre, according to research by

Jones Lang LaSalle (JLL). Rental prices at the high end

are often set in euros or dollars, a practice which, giv-

en the depreciation of the lira in 2013-15, has put sig-

nificant pressure on some tenants. Many landlords

have come to arrangements with tenants to fix a nom-

inal exchange rate that is lower than the real one in

order to maintain occupancy levels. A similar practice

is common in the retail segment as well.

Prime yields have been stable in recent years, with

peaks of around 8% in 2009-10 declining to a level of

around 7% since the fourth quarter of 2011.

As the transport infrastructure of the city has devel-

oped in recent years – 2013 saw the first metro trains

pass under the Bosphorus, and in 2014 Istanbul’s main

metro line was extended across the Golden Horn to

Aksaray – so too have new commercial and financial

125


SOU

RCE:

Inv

estm

ent S

uppo

rt &

Pro

mot

ion

Agen

cy, D

eloi

tte

Net FDI in real estate, 2008-14 ($ bn)

0

1

2

3

4

5

2014201320122011201020092008

Despite the deceleration of

economic activity, the real

estate sector has

continued to expand, with

the number of

construction permits and

occupancy permits issued

in 2014 growing by 21.2%

and 6.2%, respectively,

according to TurkStat.


centres, spreading demand for office space around

the city. While traditionally, the central business district

(CBD) around Levent and Maslak on the European side

and the commercial and trading district around the

airport have seen the most demand for high-quality

office space, the Asian-side districts of Umraniye and

Kozyatağı have also developed in recent years.

According to figures from JLL, Istanbul, which accounts

for around 80% of the country’s high-quality modern

office stock, had a total of 4.1m sq metres of grade-A

office supply as of 2014, up 680,000 sq metres from

2013. Around 380,000 sq metres of this new supply was

in the CBD, but despite this, rental rates remained sta-

ble during 2014 at around €35 per sq metre per month,

unchanged from end-2012. The vacancy rate in the

CBD was 16.5% in 2014, according to JLL, and the dis-

trict accounted for the majority of new take-up, at 59%.

Istanbul’s total grade-A office supply is forecast to reach

6.5m sq metres by the end of 2017.

RETAIL: The last few years have seen increased inter-

est in the Turkish retail market from international chains,

particularly in the non-food, higher-end segment. As

more shopping centres have opened, demand for space

in prime malls has risen. In recent years Brooks Broth-

ers, Galeries Lafayette and Industrie Denim in retail

and Hard Rock Café, Tom’s Kitchen and Jamie’s Italian

in restaurants have all come in, amongst others, tar-

geting higher-end malls. In the food retail end, howev-

er, recent times have been more marked by departures,

as Real and Dia exited, while Tesco’s Kipa sought a new

formula and Carrefour handed over management to

locals (see Retail chapter). One major challenge over

the past few years has been the depreciation of the

lira, which led many mall owners and managers to offer

discounted exchange rates for rents, which are usual-

ly set in dollars or euros. This was done in an effort to

prevent stores from leaving, as empty shops can have

a magnified negative effect on those that remain.

Nonetheless, for prime retail in shopping centres,

average rents still increased during the year, according

to the most recent data from JLL. At the end of 2014,

average rents were €90 per sq metre per month, up

from €85 per sq metre the previous year.

Shopping centres have evolved, often forming part

of mixed-use complexes, offering office and residen-

tial space, with Istanbul’s Zorlu Centre cited as a strong

example. Offering luxury apartments as well as offices

and retail, this has been the destination for many of

the high-end international brands coming in. In the

pipeline here too is the Emaar Square project, a mixed-

use development in Çamlıca incorporating residences,

a mall, a hotel, offices and entertainment venues.

Total gross leasable area (GLA) for shopping centres

in Turkey stood at 10m sq metres at end-2014, up 5.5%

on the previous year, according to JLL. Nationally, the

number of malls is forecast to increase from 344 in 2014

to 415 in 2017, with total GLA rising to 12.5m sq metres

in the latter year. An additional five malls of over 50,000

sq metres are due to be completed by the end of 2015,

including the 52,000-sq-metre Forum Diyarbakır and

the 71,100-sq-metre Podium in Ankara.

Turkey’s average retail density increased from 126

sq metres per 1000 inhabitants in 2013 to 129 sq

metres in 2014, although this is still well below the

European average of 198 sq metres, suggesting there

is significant room for expansion going forward. Ankara

had the highest retail density at the end of 2014, with

270 sq metres per 1000 inhabitants, against Istanbul’s

268, although the latter is forecast to overtake the for-

mer by end-2017 with 317 versus 296 sq metres.

In terms of high street retail, prime space has long

been limited in Turkey, and even within Istanbul. In the

city, Bağdat Caddesi on the Asian side and Istiklal Cad-

desi on the European are the main shopping areas,

with Nişantaşı a recent focus for food and beverages.

Gaziosmanpaşa Boulevard is also a prime destination

in Ankara. Prime rents for Bağdat and Istiklal were

around €240 per sq metre per month at end-2014, up

from €225 per sq metre one year earlier.

With the development of e-commerce, a further

segment that is expected to do well is logistics real

estate. Again, Istanbul is the centre for this, with rentals

for prime logistics space near communications and

transport corridors picking up from $6.50 per sq metre

per month in 2010 to $7 in 2014. Total logistics sup-

ply is forecast to reach 8.5m sq metres of GLA by end-

2017, and another 2.6m sq metres is planned.

OUTLOOK: With strong fundamentals in terms of pop-

ulation and income growth, the market looks set to main-

tain its expansion in the years ahead. The move out from

Istanbul in terms of higher-grade residential, office and

retail space is primed to continue, and Turkey’s growth

as a tourism destination will likely spread demand to

the coastal regions in particular. However, the broad-

er economic slowdown, combined with attempts to

control credit growth and consumer spending, may

have an impact on local demand. While all of these fac-

tors are likely to affect the market going forward, in the

medium to long term the fundamentals will likely reassert

themselves, and real estate is expected to remain one

of the most appealing sectors for international investors.

126

Economic and population growth have significantly boosted demand for residential real estate

Istanbul, which accounts

for around 80% of the

country’s high-quality

modern office stock, had a

total of 4.1m sq metres of

grade-A office supply as of

2014, up 680,000 sq

metres from 2013.

Total GLA for shopping

centres stood at 10m sq

metres at the end of 2014,

up 5.5% on the previous

year. Nationally, the

number of shopping

centres is forecast to

increase from 344 in 2014

to 415 in 2017, with total

GLA rising to 12.5m sq

metres in the latter year.


129

AgricultureImproved conditions expected to lead to export growth

Growing potential for produce and food processing

Enhanced safety standards creating new opportunities

Greater emphasis on consumer rights and transparency

AGRICULTURE OVERVIEW

The sector is gradually recovering from a brief drought in 2013-14

Substantial winter and spring rainfalls, coupled with

heavy snow in many regions, broke the drought that

blighted Turkey’s agriculture sector in 2013-14, with

farmers looking forward to improved yields and high-

er earnings, rebounding from a lean year that saw one

of the region’s leading agricultural producers having

to import grain and other foodstuffs.

One of Europe’s largest grain producers, Turkey was

forced to import wheat in 2014, and the drought also

restricted its ability to take advantage of a number of

export opportunities that presented themselves. Rus-

sia’s banning of many EU produce imports, a response

to the bloc’s sanctions over Moscow’s actions in the

Crimea and Ukraine, opened a door for increased Turk-

ish exports to its Black Sea neighbour. Shortfalls in fruit

and vegetable production, however, along with the

weakening of the Russian currency, meant the Turk-

ish agriculture sector accrued only limited benefits

from the opening left in the market by the closing out

of the EU. Similarly, Turkey was not able to boost out-

put to meet increased demand for foodstuffs from

other Mediterranean countries that had their own

farming production dried up by the drought.

DOWN THE LINE: It was not just export earnings that

were hit by the extended dry spell. The high price of

many basic foodstuffs, particularly vegetables, was

cited by the central bank as one of the factors behind

rising inflation in 2014 and early into the next year.

With better prospects for the agriculture sector in

2015 – combined with lower fuel costs that will help

farmers – food’s input into inflation can be expected

to ease once the harvest season begins in summer.

Despite short-term events such as the 2013-14

drought and the longer-term shift away from rural

production towards industrialisation and the services

sector, agriculture makes an important contribution

to the economy. Though having eased from account-

ing for 12.1% of GDP in 1998 to just 7.2% in 2013, the

last year for which full data was available, agriculture’s

value input has expanded annually in an economy that

has grown strongly over that period. In the fourth

quarter of 2014, agriculture’s value added grew by

8.1% year-on-year (y-o-y), reaching TL125.18bn

($44.07bn) at current prices, according to the state

statistics agency TurkStat.

For a country still trying to rein in unemployment,

agriculture provides jobs for around a quarter of the

national workforce, a figure that rises further when

the value-added component of processing and agri-

business is factored in. Self-sufficient in many prod-

ucts, Turkey is also a major agricultural powerhouse

internationally. Turkey is ranked first in Europe in terms

of agriculture output and seventh globally. According

to the Ministry of Food, Agriculture and Livestock

(MFAL), Turkey is the top producer of seven crops and

is in the top five for 35 others. Nearly 24m ha of farm-

land blanket Turkey, or 30% of its landmass.

FRAGMENTATION: Yet obstacles to investment per-

sist, primarily Turkey’s fragmented landholding struc-

ture. As Turkey’s rural population grows, agricultural

land is split successively into smaller farms. The aver-

age parcel in Turkey is 5.9 ha, compared with 12 ha in

the EU and 180 ha in the US. All together, Turkey has

3m agricultural land holdings, and the average farm

size is just under 6 ha, according to the MFAL.

Small farms are more difficult to irrigate and mech-

anise; only half of Turkish farms have access to irriga-

tion and transport networks, according to the World

Bank. Economies of scale are increasingly coming into

play, with many smallholdings becoming only margin-

ally viable. This has promoted successive governments

to encourage consolidation, a process that began in

the 1980s. In 2005 a law set minimum parcel sizes,

empowering the government to merge holdings.

Between 2002 and 2011, 1.3m ha of land was merged,

with another 1.8m ha under way. Turkey seeks to con-

solidate another 8m ha of land by 2020.

GOVERNMENT SUPPORT: The plight of the small land-

holder means the government must provide financial

aid. Support for the sector amounted to TL9.7bn

While agriculture’s

contribution to GDP fell

from 12.1% in 1998 to 7.2%

in 2013, the sector’s value

has expanded, reaching

$44.07bn in the fourth

quarter of 2014.

The average parcel size in

Turkey is 5.9 ha, compared

to 12 ha in the EU and 180

ha in the US. As the rural

population grows, farms

are becoming increasingly

fragmented, which makes it

difficult to properly irrigate

and mechanise holdings.

130

Reap what you sowWith the country already a major agricultural producer, the governmentis looking to consolidate growth



($3.41bn) in 2014, according to MFAL data. Direct

income support and subsidised fuel and fertiliser are

the main sources of assistance, but the state also

offers premiums for crops deemed low in supply, help

for livestock and feed production, low-interest loans

and irrigation equipment.

The private sector has also stepped in to lend to farm-

ers. İş Bankası, Turkey’s biggest non-state bank, loaned

farmers almost TL2bn ($704.2m) in 2013, with small

operators alone borrowing TL850m ($299.28m),

according to a statement from the bank. Other major

non-state lenders with large agricultural credit in their

portfolios are Şekerbank and TEB. However, the 2013-

14 drought and poor returns for the sector are expect-

ed to have increased the ratio of non-performing loans,

with lending to agricultural enterprises already account-

ing for 3.6% of all inactive loans on banks’ books as of

early 2014, according to the OECD.

EXPORTS: Turkey exports 1663 different agricultural

products to 188 nations. Exports jumped from $4bn

in 2002 to $17.7bn in 2013, according to the MFAL.

Exports have picked up in part because of Turkish

efforts to meet EU criteria, such as food safety, to sup-

ply one of its biggest markets. The EU lifted testing

requirements for some Turkish produce in 2013, in

particular for tomatoes, as a result of improved food

safety standards and a marked reduction in the inci-

dence of pesticide residue.

FRUIT & VEG: The country is among the world’s top

producers of figs, apricots, cherries and hazelnuts,

the latter of which accounts for nearly two-thirds of

global production. It is among the top five producers

for leeks, watermelons, peanuts, cucumbers, peppers,

apples, walnuts, tea and aubergines, according to the

MFAL’s General Directorate of Vegetative Production.

Turkey is also a leading producer of tomatoes, devot-

ing a total of 328,000 ha to tomato growing, with

industrial-scale production dating back to the early

1980s. Today Turkey raises about 11m tonnes of the

fruit each year, triple what Mediterranean rival Spain

does, according to UN Food and Agriculture Organi-

sation data. A third of the crop goes to European mar-

kets, and tomatoes are the biggest organically raised

crop in Turkey, according to the Scientific and Tech-

nological Research Council of Turkey.

Organic farming more than doubled between 2009

and 2014, and organic food now accounts for about

1% of the total food market in Turkey. Exports are

worth an estimated $400m, according to Ekonomist

magazine, with total output of more than 1.6m tonnes

from more than 200 different crops under cultivation.

The MFAL is also stepping up efforts to encourage

organic farming, and is mid-way through a five-year

plan to expand the segment. State-provided assis-

tance for organic growers includes low-interest loans,

fuel and fertiliser subsidies, and training programmes.

FOOD PROCESSING: Though flooding in some regions

in early 2015 may impact plantings and harvests for

some crops, Turkey is still among the top 10 global pro-

ducers of fruit and vegetables, which gives it a com-

petitive advantage for processed foods. Tomato sauce

and paste, fruit juices, and frozen and canned vegeta-

bles and fruit are the leading sub-sectors. Fruit juice

consumption has risen rapidly over the past decade

from around 2 litres per capita in 2002 to around 13

litres, and while only half that of the EU average, it is

likely to rise, offering increased opportunities.

Though much of Turkey’s landmass is still devoted

to agriculture, plantings of some key crops have

decreased over the past two decades. In 2004, 9.3m

ha of land were planted for wheat, 1.4m ha more than

in 2014, when it fell to 7.9m ha, while the total cover-

age for all grain crops was 15.7m ha in 2014, down

from 17.96m ha 10 years ago. Despite the reduction

in area under production, wheat production has

remained constant at around 20m tonnes annually –

though the total output from 2014 was well below this

as poor rainfall led to output dropping 13.8% y-o-y.

Turkey produces some 1m tonnes of pulses, half of

its production of 2m tonnes 20 years ago, yet it remains

the world’s third-largest producer of lentils. Produc-

tion of millet, oats, spelt and barley is also down over

the past decade. Rice paddy production hovers at

131


Production of selected crops, 2013-14 (m tonnes)

SO

UR

CE:

TU

IK

0

1

2

3

4

5

Green teaHazelnutsOrangesOlivesApplesGrapes

20142013

The country is among the top exporters for several kinds of produce

Organic farming more than

doubled between 2009 and

2014, and organic food

now accounts for about 1%

of the total food market in

Turkey. Exports are worth

an estimated $400m, with

total output of more than

1.6m tonnes from more

than 200 different crops

under cultivation.


850,000 tonnes, which comes to about 500,000 tonnes

of rice. Since Turkish consumption averages just under

600,000 tonnes, it must import rice each year to cov-

er the gap. Turkey mainly imports rice from the US and

Italy and, to a lesser degree, from India and Thailand.

Although Turkish annual paddy rice production has

jumped 130% in the last decade to cover domestic

demand, the lower costs of these major internation-

al producers acts as a disincentive for local growers,

as it can be difficult to compete with cheaper imports.

FEED & LIVESTOCK: Turkey is a major feed producer,

ranking ninth worldwide and accounting for almost 2%

of global production. It exports a half million tonnes

of animal feed and its top buyer is neighbouring Iraq,

though this market has been dented by the upsurge

in violence in the region.

According to data from the state statistics office,

there was a sharp decline in the number of beef cat-

tle on Turkish farms, with the 2014 year-end total of

14.24m, down some 288,000 heads from the figure

for 2013. The fall was in part due to higher fodder costs,

along with rising meat prices, which promoted some

farmers to sell off stock. Offsetting the drop in cattle

numbers was a rise in both sheep and goat herds, with

sheep up from 29.28m in 2013 to 31.11m in 2014 and

goat numbers climbing from 9.22m to 10.35m over the

same period. Despite the reduction in cattle, milk pro-

duction edged up to 18.5m tonnes in 2014 from 18.2m

tonnes in 2013. The government has also eased restric-

tions on cattle for breeding purposes, though high

costs and the requirement that farmers maintain at

least 60% domestically raised stock may limit efforts

to boost production in the medium term and bring

down meat prices in Turkey.

FISHERIES & FORESTS: Fisheries and forest products

account for 7% of agricultural output. One out of four

fish consumed in Europe is Turkish, according to the

Fishery and Animal Products Exporters’ Assembly. In

2013 fisheries output, which takes into account salt-

water catches, aquaculture and freshwater production,

was just over 600,000 tonnes, with aquaculture mak-

ing an increasingly large contribution, accounting for

a third of the total, up from less than 10% in 2002.

Some 28% of the country, or nearly 22m ha, is cov-

ered in forest, most of it close to or along coastal

areas, according to the Ministry of Forestry and Water

Affairs. Turkey aims to increase its forestland to 30%

by 2023. As part of its strategy to deal with climate

change, the government has said it wants to expand

agricultural activities in forests. An example of a for-

est product is honey, which rose 7.9% to 102,486 tonnes

y-o-y in 2014, TurkStat reported.

But degradation poses a constant risk. Turkey’s

Mediterranean region and other areas are mostly under

semi-arid climatic conditions. Over-utilisation, poor

forest management, land ownership problems, con-

verting forestland to farms or housing developments

are the main culprits, as are perennial forest fires.

Some 60% of forests are at risk of wildfires each sum-

mer, with about 12.5m ha located in high-risk areas,

primarily the Aegean, Mediterranean and Marmara

coastal regions, according to government data.

MACHINERY: Turkey produces 130 different types of

agricultural machinery and parts, exporting to 120

countries for a total value of $734.15m, according to

the Turkish Association of Agricultural Machinery and

Equipment Manufacturers. Of that, tractors account-

ed for $434.24m, while equipment was $299.91m.

According to the association, output of tractors rose

by 14.07% in 2014, from 56,407 in 2013 to 64,342.

OUTLOOK: Further automation will increase agricul-

tural productivity, which has lagged behind most oth-

er sectors in the economy. But for that to occur, land

consolidation must also take place. The government

has said it wants to unify the rest of Turkey’s frag-

mented farms and bring water to all irrigable areas by

2020. This will help the country meet its 2023 target

of gross harvests worth $150bn. It will also lure invest-

ment to an already attractive destination situated

between Europe and the Middle East. The risks posed

again in 2014 by adverse weather conditions, such as

drought, flood and frost, is a reminder that Turkey

needs strategic policies to maintain food security.

132

One out of every four fish consumed in Europe is from Turkey

Turkey has nearly 22m ha of

forested land, which is 28%

of the country’s area, and

the government aims to

increase this to 30% by

2023 and increase

agricultural output from

forested areas, such as

honey production.


SO

UR

CE:

TU

IK

Organic crop production, 2005-13 (m tonnes)

0.0

0.4

0.8

1.2

1.6

2.0

201320122011201020092008200720062005

AGRICULTURE ANALYSIS

The government aims to reach $40bn in agricultural exports by 2023

Few treats are as simple and pleasing to the palette

as a fresh tomato from a Turkish summer market. But

in 2010, worries about pesticide contamination brought

strict curbs on exports to the EU, hitting local tomato

farmers, among the world’s top five producers of the

Mediterranean staple. However, the EU has now abol-

ished the more stringent inspection requirements on

tomatoes, satisfied with Turkish efforts to meet safe-

ty standards. That success followed a vote by the UN’s

Food and Agriculture Organisation in June 2013 to

make Turkey a member of its council, the hunger-fight-

ing body’s most important executive mechanism. A

statement from the Ministry of Foreign Affairs in Ankara

hailed the decision as “the manifestation of Turkey’s

international role and its efforts carried out in the

fields of food security, sustainable development, agri-

culture, hunger prevention and rural development.”

This manifestation was given further substance by

the most recent report from the European Food Safe-

ty Authority, issued in December 2014. In the report,

it found that under 1% of Turkish tomatoes randomly

tested for pesticide residue equalled or exceeded EU

limits. This compared with an overall 1.4% rate for total

residue testing of food products within EU member

states and 7.5% for produce imported into the bloc.

These endorsements from international institutions

are a clear sign of the Turkish agriculture’s reputation

in world markets, essential if the nation is to meet its

target of $40bn of agricultural exports by 2023. At the

heart of these efforts to secure international trust lies

food safety, and discipline surrounding the handling,

preparation, storage and transport of produce to pre-

vent illness. Food safety centres on hygienic produc-

tion, for both plants and animals, to help consumers

avoid contaminated food.

EU STANDARDS: The EU’s food safety strategy, with

which Turkey seeks to comply as it aspires to full mem-

bership in the bloc, ensures food is traceable as it

moves from the farm to the table, even when cross-

ing borders. Food safety is the Turkish Ministry of Food,

Agriculture and Livestock’s (MFAL) highest stated pri-

ority, and improving it is among its strategic goals for

2023, the centenary of the Turkish Republic.

In October 2013 the EU finally ended the require-

ment of increased screening of Turkish imports of

tomatoes, satisfied with test results showing the coun-

try’s produce was clean. The regulations had required

that 10% of products be inspected for contamination,

adding costs and delays to exports. To pass inspection,

farmers were required to pay for a risk analysis of their

goods before and after export, which cost about $1000

per truck transporting tomatoes, undermining pro-

duction with sales of about $400m a year, according

to Turkish newspaper Zaman.

Though the checks are still required for Turkish cour-

gettes, pears and sweet peppers, abolishing the inspec-

tion for tomatoes, for which the biggest market is the

EU, bodes well for other fruits and vegetables. Most

Turkish goods enjoy free trade privileges with the EU,

thanks to the 1996 Customs Union. But that pact

excludes all non-processed agricultural products.

Instead, bilateral trade concessions apply, and Euro-

pean quotas limit the amount of Turkish fruit and veg-

etables that can be imported.

OPENING DOORS: The change in the inspection pol-

icy also means that Turkish food safety standards are

now closer to the criteria for membership in the EU,

bringing Turkey one small step closer to membership

and fully free trade. The European Commission noted

in its 2014 progress report on the pace of Turkish

reforms regarding food safety that legislative alignment

and implementation have advanced on a number of

issues; however, the report added that more needed

to be done to bring Turkey’s standards into line with

the acquis requirements.

In 2010 Turkey began negotiations on Chapter 12

of the EU acquis, which pertains to food safety, vet-

erinary and phytosanitary policy. The chapter covers

government regulations on hygiene to protect and

inform consumers, such as inspections and other

Despite a temporary ban

on Turkish tomatoes in the

EU, the bloc has now lifted

restrictions, and by late

2014 only 1% of the fruit

was found to equal or

exceed pesticide limits,

which is lower than the EU

average of 1.4%.

133


Changes in food safety

standards have brought the

country closer to EU

standards and full

membership in the bloc,

with negotiations on food

safety beginning in 2010.

Good enough to eatTurkey has made important strides in food safety to meet EU regulations and expand export markets

AGRICULTURE ANALYSIS

mechanisms to govern food security. Samim Saner,

chairman of the Turkish Food Safety Association, told

OBG that Turkish laws and regulations are about 90%

in harmony with the EU’s food safety rules, but imple-

mentation remains an issue.

CONSUMER RIGHTS: More and more Turks are insist-

ing on hygienic food as income and education levels

increase. Consumer rights have expanded, and retail-

ers know their liabilities. Supermarket chains are now

involved in testing at the factory level to ensure cus-

tomers are protected. Where Turkey especially excels

is food processing, a sector that is one of the world’s

10 largest. The relatively young industry means it has

the latest technology and a large number of experts.

“Because Turkey has such a large agricultural sector

that is so critical to its economy, its food safety per-

formance surpasses many EU nations, especially in the

food processing business,” Saner said.

In July 2013 the MFAL also updated its regulatory

framework to introduce stricter rules for food preser-

vatives, banning flavour and colour additives for meat

and meat products. That followed new guidance for

breadmakers to include less salt and more bran. Con-

cerns still persist over the use of additives in Turkish

olives, bread and tomato paste, but Saner said it is

important not to single out any one food but rather

regulate against the misuse of additives in all foods.

“When used properly, additives should not be feared.

At home, we all use salt or baking soda in our cakes;

those are additives, too. The issue is using the right

material in the correct way,” he said.

The biggest threat to food safety is posed by unla-

belled or unpackaged foods as it lacks oversight, said

Saner. In Turkey, the only truly safe harbour is pack-

aged food with the MFAL’s stamp of approval. “A key

issue is communicating risk, because there is a great

deal of disinformation out there, such as unpackaged

milk being preferable or that all industrial products are

harmful. This confuses consumers. So the authorities

need to be more proactive on this front,” said Saner.

OUT IN THE FIELD: However, safety begins in the field,

and Turkey’s fragmented farm structure makes it hard

for small-scale operators to set aside the funds nec-

essary to ensure safety or for expertise to develop. “We

need more organised farming in the field, which will

allow for tighter official controls,” Saner said.

The latest EU progress report did reflect lingering

dissatisfaction with food safety standards dealing with

livestock and animal products. While noting work on

identification and registration of bovines had expand-

ed, and mass vaccination with strict movement on

controls between Thrace and Anatolia had continued,

the 2014 study said further progress was required to

meet acquis standards. “Significant work is needed

for the adaptation of the animal by-products sector

to the new rules and the full implementation of these.

Inspection funding arrangements have not yet been

aligned with the EU system” the report said.

Sinan Öğün, head of the Middle East Sustainable Live-

stock Production, Biotechnology and Agro-Ecology

Research and Development Centre at Zirve Universi-

ty in Gaziantep, said Turkey still has a long way to go

in improving safety in the meat business. “Food safe-

ty in the meat sector could best be described as poor.

The slaughter and the post-handling process is often

unsanitary and inadequate, resulting in a shortened

shelf life for meat products,” Öğün told OBG. “One

major supermarket chain has told me that their annu-

al discarded meat products amount to TL5.5m ($1.94m),

which, obviously, is also reflected in the price. Identi-

fication and traceability are also very inadequate and

unreliable in the livestock sector, making the fight to

improve animal health also very difficult.”

IMPROVED REPUTATION: Still, perceptions of Turkey’s

food industry have improved vastly as the industry

matures. The EU’s clean bill of health for tomatoes will

yield knock-on effects. For one, it promotes other prod-

ucts Turkey ships to the EU. Besides tomatoes, other

main fresh produce Turkey sells to the bloc are hazel-

nuts, cherries, sweet peppers and cucumbers. And it

raises confidence in other, non-EU markets, such as

Russia, Ukraine and Moldova, which have become

major recipients of Turkish tomatoes in recent years.

134

Consumers are increasingly informed about food safety standards

The government is planning

to improve the structure of

the sector by consolidating

holdings and improving

controls on the ground,

which will be particularly

key to improving hygiene

standards for animals and

animal by-products.


SOU

RCE:

TU

IK

Tomato production, 2004-14 (m tonnes)

0.0

2.4

4.8

7.2

9.6

12.0

20142013201220112010200920082007200620052004

135

TransportMajor works under way to connect Europe and Anatolia

Road developments extend highways across the country

New airport to accommodate 150m passengers annually

Logistics upgrades raise Turkey’s share of global trade

Investments in railways see high-speed inter-city links

TRANSPORT OVERVIEW

Some €222.5m was budgeted for infrastructure improvements in 2014

The Marmaray tunnel, a rail link beneath the sea con-

necting Istanbul’s European and Asian districts, was a

panacea for beleaguered commuters when it opened

in October 2013. Plans to connect the two shores via

an underwater tunnel date back to at least 1891 dur-

ing the glory days of Ottoman rail, when a French engi-

neer proposed to Sultan Abdülhamit II to build an under-

water steel tunnel. However, linking the Üsküdar

neighbourhood in Asia and the Seraglio Point in Europe

has remained on the drawing board until now.

The inauguration of the Marmaray, which coincided

with the 90th anniversary of the founding of the mod-

ern Turkish Republic in October 2013, was followed a

year later by the opening of Istanbul’s Taksim-Hacıos-

man metro line extension to Yenikapı, connecting it

with the Marmaray and Aksaray-Airport routes. Presi-

dent Recep Tayyip Erdoğan, during his time as prime

minister, told local press, “Today we are realising the

dreams of 150 years ago, uniting the two continents

and the people of these two continents.” The €3.27bn

Marmaray is just one of Erdoğan’s “mega projects”:

dozens of construction plans, most of them in the

transport sector, will cost an estimated €188.33bn.

Among them are high-speed rail links, bridges, motor-

ways, the world’s largest airport and a 50-km channel

that will transform half of Istanbul into an island.

EXTREME ENGINEERING: Istanbul’s most attractive

feature – the 30-km Bosphorus Strait – is also its most

challenging, thwarting engineers and creating a trans-

port black spot in Europe’s biggest city. Indeed, the

Marmaray’s €4.14m tunnel section proved to be one

of the world’s most technically complex railway proj-

ects, consisting of a submerged tube some 60 metres

below sea level, rather than a bored-out tunnel. It skirts

a major tectonic fault line, and its construction

unearthed a Byzantine port and other archaeological

finds dating back eight millennia.

The Japanese-Turkish-built tunnel has capacity to

take 75,000 passengers per hour to and from either

side of the city in little more than four minutes. The Mar-

maray is expected to carry 1.5m passengers per day by

the end of 2015 and 1.7m by 2025. As of October 2014

the line was estimated to have transported 50m com-

muters over the course of its first year of operations.

The project has not been without controversy. Istan-

bul University is suing the Ministry of Transportation,

Maritime Affairs and Corporation (MTMAC), the munic-

ipality and the contractors for damage to its Cerrah-

paşa medical faculty. Historians fear much of the Theo-

dosian harbour that was discovered has been destroyed.

However, the Marmaray has been deemed a landmark

in Istanbul’s transport history: “In 20 years we will look

back at the Marmaray as a milestone that changed the

course of Istanbul’s development,” said Murat Güvenç,

director of the Urban Studies Research Centre at Istan-

bul Şehir University. “It dramatically shrinks the city,

bringing distant geographical positions, such as Kadıköy

in Asia and Taksim Square, into close coordinates. Near-

by rents will increase dramatically, driving out current

residents and business owners and encouraging fur-

ther development of the historical peninsula.”

BIG BUDGET: Turkey’s 2014 budget allocated TL47.5bn

(€16.72bn) to transport, of which TL5.8bn (€2.04bn)

was earmarked for rail, almost double that going to the

road network. At TL9.3bn (€3.27bn), the Marmaray

project topped the list of spending in 2014, as more

stations were opened on the line and rolling stock was

acquired. The line extends beyond the subsea section

in both directions and will link with existing suburban

commuter trains, extending from Halkali in Thrace to

Gebze in Anatolia along 77 km of track passing through

37 new and refurbished stations. The line is expected

to be completed by the end of 2015. Rolling stock of

440 new cars are being built by Korea’s Hyundai.

After the Marmaray, the biggest rail investments

were TL850m (€299.3m) for track renewal, TL640m

(€225.3m) more on the Istanbul-Ankara high-speed link

and a combined TL632m (€222.5m) for new rolling

stock and infrastructure improvements. The Istanbul-

Ankara high-speed train began running trips in August

Dozens of construction

plans are expected to cost

an estimated €188.33bn.

Among them are

high-speed rail links,

bridges, motorways, the

world’s largest airport and

a 50-km channel that will

transform half of Istanbul

into an island.

The 2014 budget allocated

€16.72bn to transport, of

which €2.04bn was

earmarked for rail, almost

double that going to the

road network. At €3.27bn,

the Marmaray project

topped the list of spending

in 2014.

136

On the roadA spate of new highways, trains, airports and massive infrastructureprojects are in the works


TRANSPORT OVERVIEW

2014, and the government announced in late 2014 that

the following year would see a call for tenders for a

new line between the cities that would reduce travel

time even further, from the current three hours and 45

minutes to around one hour.

ROAD TUNNEL: The Marmaray’s twin is the Eurasia

Tunnel, known in Turkish as the Avrasya Tüneli, a 14.6-

km road tunnel that includes a 5.4-km double-deck

portion running below the Bosphorus. Located a kilo-

metre south of the Marmaray, the tunnel will sit 25

metres below the seabed and is designed to withstand

an earthquake of a magnitude of 7.5 on the Richter scale.

Construction began in April 2014. The $1.25bn proj-

ect, financed with loans from the European Bank of

Reconstruction and Development (EBRD) and private

banks, is being constructed by a Korean-Turkish con-

sortium under a build-operate-transfer (BOT) model. It

will serve 120,000 cars and other light motor vehicles

each day. In addition to the underwater portion of the

Eurasia Tunnel, the project consists of 9.2 km of access

roads, transit tunnels and bridges.

Turkey would become the fourth country in the world

with undersea vehicular tunnels, after the US, France

and Malaysia. The Eurasia Tunnel is expected to signif-

icantly cut down travel times between the city’s busiest

centres, as well as reduce traffic congestion on the Fatih

Sultan Mehmet Bridge and E-5 highway. The high-

speed inter-city train will be able to accommodate 1.5m

passengers daily, bringing the total capacity of Istan-

bul’s metro lines to 6.5m passengers per day. The tun-

nel is expected to be completed and open by 2020.

The engineering design for the tunnel has been chal-

lenging, and a tunnel-boring machine was designed

exclusively for the project. Prime Minister Ahmet Davu-

toğlu said the Eurasia Tunnel’s most important contri-

bution will be the integration of existing transport infra-

structure, from major expressways to the city’s metro

and train lines. The project design has also taken into

account the region’s susceptibility to earthquakes and

the need to cut down on greenhouse gases, with CO2emissions and fuel oil expected to be lowered by 175,000

tonnes and 54m litres annually, respectively.

THIRD BRIDGE: Since 60% of workplaces are located

on the European side, the majority of the city’s dwellers

in Asia are forced to travel across the water every day,

said Ela Babalık-Sutcliffe, a public-transport expert at

Ankara’s Middle East Technical University (METU). “The

Istanbul municipality is aware of this issue in their lat-

est metropolitan plan. They are proposing new town

and employment centres on the Asian side to make the

current central business districts of Beyoğlu, Şişli, Lev-

ent and Maslak less of a trip attractor.”

But the government is also racing to build more

roads. Another jumbo-sized transport project is a third

bridge across the Bosphorus, which broke ground in

May 2013. The Yavuz Sultan Selim Bridge, named after

the 16th century Ottoman sultan, will be the world’s

widest and longest bridge for rail and motor vehicles

and the eighth-longest suspension bridge when it

opens at the end of 2015. Construction of the two

320-metre high towers at the northern end of the

strait were completed in mid-2014, and in early 2015

work began on mounting the deck.

Part of the planned Northern Marmara Motorway that

will bypass Istanbul’s urban areas, the $3bn bridge is

being built by Rome-based builder Astaldi, Turkey’s IC

İçtaş and Hyundai of Korea. The crossing aims to ease

congestion in a city with 3m cars, with that number

expected to reach 4.4m in a decade. That said, the ring

road and the bridge are primarily expected to serve

freight-carrying vehicles, which make up just 3% of

Istanbul traffic, experts say.

ENVIRONMENTAL CONCERNS: Environmentalists have

raised red flags over developing Istanbul’s northern

forests, which provide the city of nearly 15m people

with much of its freshwater supply. The woodlands also

contain natural preserves, sand dunes, endemic plants,

animals and historical ruins. Construction of the bridge

alone will fell almost 400,000 trees, according to the

Forestry Ministry. “The northern forests provide Istan-

bul with its air and its drinking water,” said filmmaker

İmre Azem, whose acclaimed 2012 documentary Eku-

menopolis tracks the relentless expansion of Europe’s

largest city. “The importance of the forests was always

clear, which is why until now all city plans have ruled

out building north. The existing plan still calls for Istan-

bul’s growth along the Sea of Marmara, along an east-

west axis, and not to the north.” Historians are also

alarmed. Although the government has exempted the

bridge from an environmental impact report, the com-

panies building the bridge still need such an assess-

ment to secure financing, and so in May 2014 they dis-

patched archaeologists along the site who discovered

a treasure trove of sarcophagi, pottery, coins and Byzan-

tine and Paleolithic ruins in a two-day survey.

SOCIAL STRAINS: So much construction has also cre-

ated social upheaval, and Turkey’s biggest anti-govern-

ment protests in decades that erupted in 2013 cen-

tred around plans to destroy the historic Gezi Park in

Taksim Square to build a shopping mall. The govern-

ment managed to build a tunnel for road traffic to

bypass the square before a court ordered it to halt the

development. “More roads will not ease congestion as

cars continue to fill them,” said Azem. “When you build

137


SOU

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Total number of vehicles, 2005-15 (m)

0

4

8

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The Eurasia Tunnel

connecting busy centres in

Istanbul’s European and

Asian sides would make

Turkey the fourth country

in the world with an

undersea vehicular tunnel.

TRANSPORT OVERVIEW

roads, their environs fill, creating even more traffic,” he

said, adding that some 8m people dwell along the Trans-

European Motorway in Istanbul. “The same will happen

with the third bridge, regardless of what is being said

now about it serving as a transit for freight.”

ROAD TO IZMIR: Another link set to open by the end

of 2015 is the Izmit Bay Bridge at the eastern end of

the Sea of Marmara. Rome-based Astaldi is part of the

consortium behind the $1bn BOT project, which fore-

sees traffic of 35,000 vehicles per week. The bridge,

which will be the world’s fourth-longest suspension

bridge, is part of an TL11bn (€3.87bn) road project span-

ning 433 km between the Istanbul suburb of Gebze and

Izmir, Turkey’s third-biggest city, reducing travel time

to 3.5 hours from the current 8.5-hour drive. By March

2014, a third of the project was finished, the General

Directorate of Highways said, with the bridge expect-

ed to be open by the end of 2015.

Turkey certainly has been on a road-building mission

in the last decade. Total highway mileage today is 65,382

km, of which 12,573 km are part of the international

highway network, according to government figures.

Dual carriageways span a total 21,277 kilometres, com-

pared with 6101 km in 2003, the MTMAC has said, esti-

mating that has led to a fuel savings of $9.3bn. The min-

istry targets 37,000 km by 2023. Even as air and rail travel

has risen sharply, roads are the main means of trans-

port between Turkish cities. In the first two months of

2015, bridges and toll roads earned TL151m (€53.2m)

from 68.79m vehicles, according to the General Direc-

torate of Highways. In all of 2014, revenue was TL1.04bn

(€366.2m) and 399.49m cars and trucks paid tolls. At

Istanbul’s two extant bridges, which see traffic of 1m

vehicles a day, revenue was TL296.37m (€104.4m) in

2014 and $4.88bn in the last decade.

Turkey is now looking to privatise some of those

roads. In February 2014 parliament passed legislation

to create a company and initial public offering (IPO) for

Istanbul’s two bridges, along with certain highways.

This followed the cancellation of a 2012 tender by the

Privatisation Administration for operating rights for 25

years, won by Koç Holding, Turkey’s biggest company,

with a top bid of $5.72bn.

Erdoğan later said the rights were worth at least

$7bn, and the tender result was subsequently rescind-

ed. By November 2014 the government was preparing

to revive plans for the tender, with a new process

expected to start in the first half of 2015. Reuters

reported that banking sources said a designated advis-

er will determine the method of privatisation, with IPOs,

transfer of operating rights, and regrouping and sell-

ing of roads and bridges all options.

CARS & BUSES: Some 200m passengers each year

take buses operated by more than 500 licensed bus com-

panies; another 140 firms carry passengers internation-

ally, according to the MTMAC. In 2013 there were almost

220,000 buses on Turkish roads, according to the Turk-

ish Statistical Institute. “While bus passenger numbers

in Turkey have declined as more and more people are

able to afford air travel, around 85% of travel in the coun-

try is still via busses and trains,” said Imran Okumuş, gen-

eral manager of Ulusoy and Varan Bus Group.

Turkey has the lowest car-density in Europe and the

average vehicle age is 12 years old, according to the

Global Fuel Economy Initiative (GFEI). Some of the

world’s highest fuel prices and stiff taxes have curbed

demand for automobiles, keeping ownership at 110

vehicles per 1000 people, the World Bank said. But the

low rate of ownership means Turkey has Europe’s biggest

growth potential after Russia, GFEI noted, and estimat-

ed that ownership would double by 2020.

GlobalSource Partners analyst Atilla Yeşilada said

that Istanbul’s traffic problem cannot be solved by

building more roads. “We need to incentivise business-

es to move to the Asian side. We need to focus on cre-

ating communities where people commute less, and

we need to develop our public transport systems,” he

said. “Building more roads simply increases the incen-

tive for everyone to buy a car.”

PUBLIC TRANSPORT: Everyday 7m passengers use

Istanbul’s buses, metrobuses, railways and ferryboats,

according to the city’s bus authority, IETT. A major suc-

cess story is the metrobus, a 50-km bus rapid transit

route spanning Istanbul’s ring road from western dis-

tricts across the Bosphorus Bridge to Asia that opened

in 2007. It has a daily ridership of 800,000, according

to IETT. “Based on its passenger numbers, the metrobus

is the world’s most successful bus-based mass transit

system,” said METU’s Babalık-Sutcliffe.

Although officials and citizens alike tend to prefer

rail systems, these are large investments that make lit-

tle sense for areas with low demand. “What the

metrobus showed us was that with a far smaller invest-

ment and in a short time, you can have a system that

is on par with an underground metro in terms of qual-

ity and capacity. The operational speed of Istanbul’s

metrobus is faster than the underground metro and

created a public transport service in that corridor,”

Babalık-Sutcliffe said. Problems still persist like over-

crowding in peak hours, inadequate capacity at stations

and a lack of other routes on a network, she added.

138

Turkey has one of the lowest car densities in Europe, and public transportation usage is high

Istanbul’s public

transportation system

serves 7m people daily via a

variety of methods,

including buses, the

rapid-transport metrobus

system and ferryboats.


TRANSPORT OVERVIEW

TAKE TO THE SKIES: Air travel has increased to 166.2m

flyers in 2014, according to the MTMAC’s General Direc-

torate of State Airport’s Authority (GDSAA). In that year

alone, commercial traffic grew 9.5%. Domestic flights

carried 85.4m people, a 12.17% increase in the last

decade, according to the GDSAA. International flights

rose 9.5% to 80.3m. Further, the GDSAA estimated that

passenger numbers would increase by 12.6% in 2015

to reach 187.13m by the end of the year. By end-2017

the authority said this figure would grow by 35% to

223.7m, largely due to an increase in domestic travellers.

“The growth of the Turkish airline industry over the

past few years has been very impressive. As tickets

become more affordable, more and more Turkish peo-

ple are getting used to traveling abroad, which is good

for the economy as a whole,” said Varan’s Okumuş.Turkey’s proximity to Europe, the Middle East and

Africa has made it a natural transit hub and helped flag

carrier Turkish Airlines become one of the world’s

fastest-growing airlines. “Turkey is directly between

the production and consumption centres of the world

and is especially well-placed for trade between the Far

East and Africa,” said Sedat Özkazanç, managing direc-

tor at Istanbul-based cargo carrier MNG Airlines. “In fact,

a considerable number of the world’s high-growth

economies are within a six-hour flight of the country.”

The government has doubled the number of air-

ports from 26 in 2003 to 52, of which 21 are interna-

tional and 31 are domestic. On the drafting board is a

plan for a third airport for Istanbul that targets 150m

passengers a year by 2018. A consortium of Turkish com-

panies – Cengiz, Kolin, Limak, Mapa and Kalyon – won

a tender to build the airport in 2013, promising to pay

the state €22bn, plus taxes, to operate the facility for

25 years from 2017. It will boast six runways, although

experts have said its location to the north of Istanbul

makes that difficult. Questions have emerged about

financing for the project, but Limak Holding, which

controls a 40% stake in Istanbul’s Sabiha Gökçen Air-

port and 20% of the planned airport, has said the con-

sortium has not faced problems raising funds.

The airport will occupy an area of 7700 ha and will

require that almost 700,000 trees be cut down and more

than 1.9m trees be moved, according to the govern-

ment. There is also concern it will have an environmen-

tal impact on Istanbul’s drinking water, since it is being

built near one of the main reservoirs supplying the city.

Non-governmental groups have sued to stop the proj-

ect, and a court suspended construction, but Erdoğan

broke ground at a ceremony in June 2014, describing

the $30bn facility as a “monument to victory”.

Istanbul’s two airports, Atatürk on the European side

and Sabiha Gökçen on the Asian side, serve 37m and

13m people per year, respectively. The number of pas-

sengers at Ataturk rose 11% to 12.4m people in the first

quarter of 2014, making it Europe’s third-busiest air-

port, surpassing Frankfurt and Amsterdam’s airports.

Atatürk now trails only London’s Heathrow and Charles

de Gaulle in Paris. By 2034, commercial traffic at Istan-

bul’s airports is expected to exceed 1m planes, with

118m people passing through the facilities, METU esti-

mates. “While Turkey is expanding its air facilities, the

addition of the third airport on its own is not sufficient

to meet the country’s long-term transportation needs.

More investment is needed,” said Sedat Gümüşoğlu,

chief executive of UN Ro-Ro, a Turkish roll-on, roll-off

ferry operator owned by US private-equity firm KKR.

LOGISTICAL DREAM: Turkey has easy and direct access

by road, sea and, to a lesser extent, rail to markets with

1.5bn people with a combined GDP of $25trn. In 2012

1.2% of global trade was carried out by Turkey; this is

expected to exceed 1.5% by 2025. The country is a

regional hub for more than $2trn worth of freight,

according to Invest In Turkey, a state trade promotion

agency. The current size of Turkey’s logistics sector is

estimated at $80bn to $100bn and this could reach

$140bn by 2017, the agency said. Investment over the

last 10 years in transport and logistics infrastructure is

set to continue. “To take advantage of its location,

Turkey must invest in infrastructure so goods can be

stored here before being forwarded to places like Africa,”

said Özkazanç. “Infrastructure investment is essential

if Turkey wants to reach its 2023 export target. It will

need six times more air capacity to meet this goal,

including aircraft, land, warehouses, parking places and

people to handle the increased volume.”

Currently, 18 public sector and 19 private logistics

centres are being built in Turkey. The hubs offer multi-

ple transportation options and some will participate in

the EU’s Intraregio logistical integration project. The state

railway authority TCDD has set aside TL514.9m

(€181.3m) of which it has spent TL111.4m (€39.2m)

since 2006. By 2023 estimated total freight through-

put value in these centres will reach $500bn. The hubs

offer benefits like consolidated warehousing and dis-

tribution of products to domestic and international

markets through connections with industrial areas.

Additional services include on-site packaging, savings

on storage and easy transportation throughout Turkey.

The Great Anatolian Logistics Organisation Project,

known as BALO, is a TL50m (€17.6m) logistics scheme

139


Air travel is rapidly increasing, reaching 166.2m flyers in 2014 and growing 9.5% in that year alone

Turkey has easy and direct

access by road, sea and, to

a lesser extent, rail to

markets with 1.5bn people

with a combined GDP of

$25trn. In 2012, 1.2% of

global trade was carried

out by Turkey; this is

expected to exceed 1.5%

by 2025.

TRANSPORT OVERVIEW

initiated by the Union of Commodity Exchanges, the

Association of International Freight Forwarding and

Logistics Services Providers and 90 other private enter-

prises. Bringing goods from the Turkish mainland at the

Marmara port of Bandırma, it ships goods to Tekirdağacross the water and aims to join logistics centres by

rail for easy exports access Europe. It has already slashed

transport costs by 30% and journey times to four days.

MORE COMPETITIVE: The market is set to become

more competitive but may squeeze out smaller play-

ers. “There are not many professional logistics compa-

nies in Turkey. Most are smaller, family owned firms

that cannot compete on the world stage because they

lack the necessary resources and infrastructure. It is dif-

ficult for all but the largest businesses in the sector to

carry out trade with sophisticated European clients,”

said Çiçek Boydaş, joint venture coordinator at Arkas

Holding, which operates shipping lines and ports.

Several international firms have entered the logis-

tics field, mainly centred in Istanbul, the country’s com-

mercial capital, and the large port cities of Izmit and

Tekirdağ. They include DHL, CEVA Logistics, Kühne Nagel

and Gergo. The news is not all good for international

companies trying to break through, however. Weakness-

es exist in sector standards. “The biggest challenge is

the lack of standards across the sector, especially for

domestic versus global players, including Turkish firms

that also operate abroad. The latter must follow very

strict regulations, whereas the former do not always

comply with the rules, making it difficult for the inter-

national players to effectively compete,” said Boydaş.TWO IF BY SEA: Turkey has almost 90 commercial

ports, terminals and piers along more than 8000 km

of coastline. The four seas encircling almost the entire

country handle more than 6m twenty-foot-equivalent

units (TEU) of containers, as well as millions of passen-

gers and vehicles per year. “If Turkey is to reach its 2023

export goals, it must plan and execute improvements

to port infrastructure in a more effective and speedy

manner,” said UN Ro-Ro’s Gümüşoğlu. “Turkey’s ports

can currently handle 7m-8m TEUs but need to be able

to handle 30m TEUs in order to meet the targets.”

Boydaşof Arkas also noted the low capacity of ports.

“Around 3.9m TEUs are currently traded in Turkish ports,

which is a relatively small amount, given the size of the

Turkish population and economy. In more developed

countries, the ratio is around 1m TEUs per 10m in pop-

ulation, suggesting that there is still significant room

for growth in the Turkish shipping space,” she said.

Around 90% of Turkey’s foreign trade is transported

by sea, with 40% of all cargo handled by state-controlled

ports, and the flow of goods is mostly outgoing. “The

uptick in economic growth since 2012 has positively

impacted Turkey’s shipping industry. For every five con-

tainers imported, most of which are commodities from

China used for manufacturing electronics, Turkey is

exporting around 25 containers to other countries,

particularly white goods to Europe, which have seen a

rebound of late,” said Tom Gronnegaard Knudsen, a

Maersk Line managing director for the Black Sea region.

CRAZY CANAL: One way Turkey hopes to attract more

of the international shipping business is with Erdoğan’s

so-called “crazy project”: a €6.6bn canal stretching

from the Black Sea to the Marmara. The 43-km, 400-

metre-wide channel would rival the engineering feats

at Suez and Panama, slicing through the western, Euro-

pean side of Istanbul in a bid to force dangerous car-

go on supertankers of up to 300,000 deadweight tonnes

to bypass the overcrowded Bosphorus Strait.

Critics warn the cost to the environment is too high.

Scientists have also pointed out major flaws in the plan,

claiming that higher salinity of the water from the Black

Sea will destroy the ecosystem of the Marmara, which

has already been plagued over the decades by indus-

trial pollution and is only just recovering. They also

argue that freshwater aquifers underneath what will

become the isle of Istanbul will fill with saltwater. The

municipality already struggles to supply the 2.65m litres

per day of potable water that Istanbul requires.

Turkey’s Mediterranean and Black Sea neighbours may

strongly object as their territorial waters could be neg-

atively affected, and the canal may contravene treaties

that dictate Turkey cannot control or profit from sea

traffic through international waterways. The Montreux

Convention of 1936 granted control to Turkey of the

Bosphorus and the Dardenelles Strait at the other end

of the Sea of Marmara, but bars it from charging fees

or hindering free passage during peacetime. The canal

may make transit traffic faster, but may find it difficult

to compete with the Bosphorus, which is cost-free.

OUTLOOK: Realising so many grand plans will prove

costly, and inevitably some will be scaled back or

scrapped all together, said GlobalSource Partners’ Yeşi-lada. If 75% of costs are borrowed, as is typical, all of

the projects would add $180bn to Turkey’s foreign debt

stock. That revenue from the projects would almost

entirely be in lira and would also hit Turkey’s balance

of payments, he added. Judging by what Turkey has

accomplished so far, it looks likely that many of the proj-

ects can still be fulfilled. Either way, there is still a lot

of money on the table for contractors well into the future.

140

With almost 90 commercial ports, nearly 90% of Turkey’s foreign trade is transported by sea

Turkey’s four surrounding

seas make it easily

accessible and allow the

country to handle some

7m-8m TEUs of container

traffic per year, but this will

need to grow to 30m TUEs

by 2023 in order to meet

export goals.


TRANSPORT INTERVIEW

Turgut Erkeskin, President, Association of International Forwardingand Logistics Service Providers

What factors are driving logistics demand in Turkey?

ERKESKİN: The Turkish economy has made significant

strides over the past 15 years and has grown into one

of the largest and most dynamic in the region. Rising

production and consumption, a growing population

and heightened income levels have resulted in a sub-

stantial increase in the amount of goods circulating

domestically, posing considerable opportunities to

providers of logistics services. Furthermore, the coun-

try’s large surface area requires the continued devel-

opment of an extensive infrastructure network.

Demand for logistics services, however, is not just a

function of domestic forces. It is also affected by inter-

national trade. Turkey has long been a centre for imports

and exports, and its role as a transit state looks only to

be increasing, especially given its advantageous geo-

graphic location between the major production areas

of the East and the major consumer economies in the

West. As the US and Europe recover and the Chinese

economy shifts towards consumption, Turkey stands to

benefit from increases in the global flow of goods. Fur-

thermore, the country is a natural production and dis-

tribution hub for multinational firms looking to tap the

markets of the region, especially Northern Iraq, Africa

and the Commonwealth of Independent States.

While there are not good statistics on the industry,

and this is one area that is in need of improvement,

growth has been considerable in the past few years.

Demand for logistics services in 2013 grew between

22% and 25%, spurred on by strong private and public

investment – over 32% of government investments

were in logistics-related projects. This growth has also

manifested itself in the amount of people entering the

industry; there are around 60 different high school and

university programmes dedicated to the profession.

What infrastructure improvements are needed to

sustain growth in this sector?

ERKESKİN: First, I believe that the plan for a third air-

port is a major step in the right direction. Turkey is a

centre for air transport – 67% of goods transported by

Turkish Airlines are transit goods. If the country can

develop its infrastructure properly, it can be the cen-

tre of a global trade network from China to Brazil.

Already, more and more European companies are fly-

ing through Turkey to ship goods to Africa via Turkish

Airlines. Second, the composition of international trade

has shifted over the past few years and requires extra

investment in more advanced infrastructure. The mix

of products and countries has changed from low-lev-

el goods being traded with neighbouring countries, to

higher-value-added products being transported all over

the world, requiring more advanced, high-tech facili-

ties such as cold storage warehouses. Third, Turkey’s

rail infrastructure is in serious need of investment. Only

1% of goods are transported on the country’s rail lines.

Upcoming projects include improvements to a line from

Izmir to Germany, via south-eastern Europe, and the

establishment of alternative rail links between China

and Western Europe. In general, rail is much faster than

sea transport and less prone to interruption. Following

the completion of the Marmaray tunnel under the

Bosphorus, Turkey is well-placed to serve as a link

between regions. Finally, Turkish logistics firms must also

start to think about constructing infrastructure in tar-

get export markets, such as Russia, Northern Iraq and

Africa, where there is a lack of quality warehouses and

packaging facilities. For example, Turkish produce often

goes bad during storage in Russia, because there are

not sufficient cold storage facilities.

How is the current Customs regime affecting the

development of the sector?

ERKESKİN: European Customs controls, including quo-

tas, additional charges at borders and visa issues for

drivers, make shipping Turkish goods to European coun-

tries extremely difficult and expensive. Ultimately, the

European consumer is the one the most hurt by

these measures, as costs are passed on through price

increases. It is essential that these barriers be lowered.

141


Build it and they will comeOBG talks to Turgut Erkeskin, President, Association of InternationalForwarding and Logistics Service Providers (UT�KAD)

TRANSPORT INTERVIEW

Mümin Kahveci, General Manager, Istanbul Electric Tramway andTunnel Establishments

How can further investment and cooperation

between the public and private sectors help improve

urban transport infrastructure?

KAHVECİ: The public transportation needs of Istanbul

are rising in line with population growth. Congestion

in Istanbul has become an enormous challenge; in the

past decade we have seen the number of cars on the

streets increase drastically. The scale of inner urban traf-

fic does not match the Ottoman structure of the city’s

core and its self-contained neighbourhoods, which

have narrow streets and few parking spaces.

The public transportation system has difficulties

keeping pace with rapid growth and the changing urban

structure. That said, it must be noted that the govern-

ment has been proactive in introducing new infrastruc-

ture projects to alleviate congestion, including the third

bridge, a third airport, the Marmaray train and the Eura-

sia Tunnel high-speed rail system.

One of IETT’s major goals is to decrease depend-

ence on what is called “rubber-wheeled traffic”, or pas-

senger cars, through public and private partnership

projects like the expansion of bus and metrobus routes.

Privately owned mini-bus firms already operate in part-

nership with IETT and play a key role in areas that are

not covered by other means of public transportation.

IETT is active in promoting greater regulation for pri-

vate buses and we work closely with the Istanbul Met-

ropolitan Municipality to increase rail links, metro links

and bus links with privately owned bus companies

What is the IETT doing to address Istanbul’s con-

gested roads and promote the shift from individ-

ual vehicle usage to mass urban transport?

KAHVECİ: The IETT recently announced a partnership

with the Scientific and Technological Research Coun-

cil of Turkey to increase capacity on the metrobus sys-

tem. The partnership will have two phases; the first

phase will consist of an analysis of the metrobus sys-

tem and provide recommendations for improvements

that can increase the number of buses on the line. In

the second stage, bus stops will be examined for pas-

senger and vehicle details, with the aim of achieving a

more efficient and comfortable transport method. Our

aim is to study every passenger line that is active in Istan-

bul. This will help us improve the system, increase effi-

ciency and optimise our routes.

The IETT is working toward a more integrated pub-

lic transportation network, with rail, metro, taxis and

private buses. We are adding new routes and recent

examples include a new connection to the Marmaray.

We are also investing into new and efficient technol-

ogy, with GPS/GPRS tracking systems that can provide

us with data to minimise or even avoid congestion.

What new and eco-friendly technologies do you

intend to deploy in upcoming years?

KAHVECİ: The IETT is planning to ensure that by 2019

25% of the transport fleet will be using electricity and

30% will be using compressed natural gas (CNG). We

have already started renewing our fleet, with 1800

new vehicles, while about 3000 public buses and oth-

er public transportation vehicles have been renewed.

Some 360 vehicles currently in operation use CNG and

these vehicles consume less fuel, are more environmen-

tally friendly and produce less noise. However, the

bridges of Istanbul are a problem, as it is not possible

to establish an electric vehicle system using the bridges’

catenaries, so we are seeking multinational partners

to transfer technology that fit Istanbul’s conditions.

How can transportation be made more affordable?

KAHVECİ: Fares are supervised and regulated by munic-

ipal and state authorities. There are several discount

initiatives in place to help students, retirees and peo-

ple with disabilities. However, an integrated transport

system between metrobuses, taxis, rail and metro will

improve cost efficiency. There is stronger demand for

infrastructure that can help reduce fuel consumption

and eco-friendly solutions and infrastructure will reduce

transport costs and be sustainable for the long term.

142

Extending the reachOBG talks to Mümin Kahveci, General Manager, Istanbul ElectricTramway and Tunnel Establishments (IETT)


TRANSPORT ANALYSIS

Since 2003 Turkey has seen major investment in its rail network

Taking the train to Ankara from Istanbul used to be a

leisurely affair. After a snack at Gar Lokantası, the

blue-tiled restaurant inside Haydarpaşa station that

was built by German engineers in 1872 and once

served as the terminus for the Baghdad-Istanbul Rail-

way, travellers boarded the train as the sun set. A clat-

tering eight hours later, the train crawled into the

capital’s main station. Now a high-speed link changes

it all. Turkey has become Europe’s ninth country and

the world’s 14th to operate a high-speed train net-

work. The Turkish State Railways’ (TCDD) project

slashed the journey time to three hours and 45 min-

utes as speeds reached 250 km per hour, making rail

a viable rival to flying and the popular, inexpensive bus-

es that now dominate inter-city travel. The govern-

ment expects 78% of people traveling between Turkey’s

two biggest cities to opt for rail from the current 10%.

As suitable as railway between Turkey’s political

capital and cultural capital may seem, the path to link-

ing them has been marked with challenges. Moun-

tainous terrain – which required erecting 33 bridges

and viaducts and boring 39 tunnels – added to costs

and construction time. The current incarnation fol-

lowed a fatal false start in 2004, when a fast train

between Istanbul and Ankara using the decades-old

existing tracks derailed, killing 41 people.

NEW TRACKS: Since then, the railway has been over-

hauled and high-speed-appropriate tracks have been

laid after construction began in October 2008. A sec-

tion of track between Ankara and the north-west city

of Eskişehir opened in 2009, while a line has been in

operation between Ankara and Konya to the south

since 2011. These routes saw almost 4.5m passengers

in 2013. The rolling stock includes 11 trains made by

Spain’s CAF and an additional seven Siemens’ Velaro

trains. In August 2014, following a series of delays due

to technical issues, the Ankara-Istanbul high-speed line

began operations. It was originally scheduled to open

at the same time as the cross-continental Marmaray

rail link in Istanbul in October 2013. Eventually, it will

connect with the Marmaray, which is currently serv-

ing metro travellers, providing an unbroken rail link

between Europe and Asia Minor for the first time. The

government also announced in late 2014 that the

following year would see a call for tenders for a new

line between the two cities that would reduce travel

time even further, from the current three hours and

45 minutes to around one hour.

Although Turkey was an integral part of a route

stretching from Europe to the Middle East, its railways

have suffered from underinvestment since the 1950s.

The US promoted imports of American cars and road-

building as part of the Marshall Plan, a major aid pro-

gramme to Turkey after the Second World War. But

Europe’s influence is now more apparent in the

renewed interest in rail. In 2003 authorities began

implementing a plan to modernise the TCDD and

ensure Turkish laws on rail transport complied with

EU standards, part of the country’s broader project

to join the bloc. The EU offered several loans in recent

years for railway projects, including nearly €1bn worth

of facilities for the Ankara-Istanbul high-speed line.

Overall, Turkey will invest $45bn in its rail network

by the 100th anniversary of the republic in 2023, Lüt-

fi Elvan, the transport minister, has said. The invest-

ment will include 10,000 km of high-speed track and

another 4000 km of conventional track, connecting

15 cities that include Afyon, Izmir, Bursa, Erzincan

and Sivas. The length of track will increase to 26,000

km from the current 10,984 km, including 10,000 km

of high-speed and 4000 km of conventional track.

Improved rail links will have a knock-on effect for the

rest of the economy, especially for eastern regions.

“Better rail connections will open up areas in eastern

Turkey to increased trade, as rail freight from the area

is much more cost effective than road transport giv-

en very high petrol rates in Turkey,” said Ozan Önder,

managing director at global logistics firm DSV Turkey.

LIBERALISATION: Turkey has recently opened the

state-controlled rail industry to private operators to

A high-speed rail that

connects Istanbul and

Ankara reduces travel time

between the two cities

from eight hours to just

under four hours and

travels at speeds of up to

250 km per hour.

143


By the 100th anniversary of

the Turkish Republic in

2023, it is expected that

some $45bn will be

invested in the country’s

rail network.

Age of railNew investments are set to improve and expand both inter-city andnational rail connections

TRANSPORT ANALYSIS

help it meet targets for rail expansion and upgrades.

The Rail System Liberalisation Law, passed by parlia-

ment in 2013, overhauls the network by splitting the

state operator into two firms and opening the sector

to private operators. The law adheres to the British

model, keeping control of the tracks with the TCDD,

while granting access rights to privateers for up to 49

years. A new operating company, Turktren, will han-

dle passenger and freight services. A rail regulator was

set up in 2012. Liberalisation will increase competi-

tion and service quality, Cavit Uğur, head of the Asso-

ciation of International Forwarding and Logistics Serv-

ice Providers, told trade magazine Railway Pro.

Initially, private firms will only be allowed to oper-

ate freight services, with passenger services permit-

ted by 2018. Public and private entities can receive

licences to build their own railway infrastructures for

which they could become operators of both the infra-

structure and transport services, according to the

legislation. Industry watchers expect private opera-

tors will be allowed to operate on the Ankara-Eskişe-

hir and Ankara-Konya lines. Major European rail engi-

neers and operators, like Germany’s Deutsche Bahn,

SNCF and Thales from France, European group Thalys,

Japan’s Mitsubishi and Hyundai Rotem from Korea

have set sights to Turkey. “There is much room for

increased development of the rail transport sector.

Less than 1% of cargo is currently transported by rail

compared to a 20%-40% average in other countries.

The recent privatisation of the sector is a step in the

right direction,” Tom Gronnegaard Knudsen, a region-

al managing director for MAERSK Line, told OBG.

INTERNATIONAL LINKS: Rail links with neighbour-

ing countries are essential for boosting trade ties.

The TCDD has said reviving Turkey’s historic trade

route between Asia and Europe with railroads would

boost trade by $75bn a year. “Train transport is improv-

ing but has not kept pace with demand; the popula-

tion is rising and more investment is needed. Turkey

should try to collaborate with other countries in the

sector, like Russia,” said Imran Okumuş, general man-

ager of Ulusoy and Varan Bus Group.

A railway connection between the north-eastern city

of Kars and Azerbaijani capital of Baku via Georgia’s

Tbilisi will open in 2015. The expected annual volume

on the $600m line is 50,000 containers. The link will

offer Caucasian and Central Asian nations an east-west

corridor free of Russian control for the first time. Oth-

er international projects include an agreement

between Lithuanian Railways and the TCDD. Inter-

modal trains traveling through Belarus and Ukraine

will arrive at Ukraine’s Odessa port. There, containers

will be shipped to Turkish marine ports where the

TCDD will distribute to Turkey and the Middle East,

according to the journal Rail Turkey.

IN THE CITY: Rail is playing a bigger role in the lives

of urban commuters, most of whom rely on public

transport due to low car ownership rates. In Ankara

and Istanbul, about 60% of residents use some form

of public transport, according to Ela Babalık-Sutcliffe,

a professor at the Department of City and Regional

Planning at Ankara’s Middle East Technical Universi-

ty. In 2013 the government announced plans to expand

Istanbul’s underground, increasing the length of routes

to 400 km from 141 km and annual capacity to 7m

passengers in 2016, then 11m by 2019. The Yenikapı

extension of the metro, which opened in January 2014,

is the first step in that direction. The second branch

of the M1 line opened in June 2013, connecting Esen-

ler. Above ground, Istanbul’s tram and rail lines trans-

ported an average of 1.6m people per day in 2014.

In the capital Ankara, the long-awaited 15-km

Batıkent-Sincan metro line opened in December 2013,

finishing 13 years after it was started. The Kızılay-

Çayyolu line, under construction since 2002, was com-

pleted in March 2014. 2015 should also see the open-

ing of Tandoğan-Keçiören line, which has taken two

decades to complete. The slow pace of building these

lines coincided with major investments in road infra-

structure, contributing to a sharp jump in car-usage

rate, which Babalık-Sutcliffe said is 35% today, com-

pared to less than 20% in 1997.

In Bursa, Turkey’s fourth-largest city, a 6.5-km tram

line opened in October 2013. Spanish company COM-

SA designed, built and electrified the circular line for

€8m. Its 12 stops include two interchanges with the

city’s light metro, with a fleet of 14 trains built by

Turkish coach builder Durmaray and a bogey con-

structed by Siemens. COMSA was chosen again by the

Gaziantep municipality in south-eastern Turkey for a

€20m tram line, which included infrastructure, tracks,

signals and power supply for a 6.5-km double track

with eight stops. “Turkey still has major potential in

terms of sustainable urban transport, because car

ownership and usage are still relatively low in the

cities. Public transportation use is high, due to the num-

ber of ‘captive riders’ who don’t have other vehicles,”

Babalik-Sutcliffe told OBG. “But the lack of quality in

public transport and local policymakers making cars

the priority has created a serious risk for the trend.

Already the use of public transport is on the decline.”

144

Low rates of car ownership make for high dependence on public transportation in urban settings

Investing in railway links

with neighbouring

countries like Georgia and

Azerbaijan could help

boost Turkey’s trade by

$75bn per year.


145

Telecoms & ITA young and tech-savvy populace drives internet uptake

Voice services the biggest telecoms revenue generator

Data usage still low but smartphone growth bodes well

Business process outsourcing a key source of jobs

Tenders announced for 4G mobile data networks

TELECOMS OVERVIEW

The country’s providers are investing heavily in new infrastructure

The telecoms sector in Turkey has long been viewed

as a rising star, with a young, digitally adept popula-

tion and rising personal incomes driving demand in

the mobile voice and data segments. In recent years,

the industry has been affected by less-strong macro-

economic fundamentals, including a weaker lira, as

well as some restrictive regulatory changes. Even so,

Turks spent more than TL35.5bn (€12.5bn) on tele-

coms in 2014, compared to TL32.2bn (€11.34bn) in

2013, according to Turkey’s Information and Com-

munication Technologies Authority (ICTA).

Fixed-line services continued a decade-long trend

of dwindling subscribership and revenues, although

value-added services and new promotional packages

will keep the segment stable in the medium term.

While heavy tax burdens and fierce competition have

hampered growth prospects, comparatively high voice

usage and a growing base of mobile internet sub-

scribers will help the market maintain an upward tra-

jectory in 2015. The country’s four major telecoms

providers – Türk Telekom, Turkcell, Vodafone and Avea

– are investing heavily in new infrastructure and serv-

ices, with mobile operators turning to domestic smart-

phone production as a result of customer demand,

creating an increasingly consumer-friendly environ-

ment that should see smartphone purchases, mobile

subscribership and data usage increase in 2015.

BACKGROUND: Turkey’s telecoms sector underwent

modernising reforms in 1995, when the post, telegraph

and telephone monopoly was split into two divisions.

Türk Telekom became the first service provider in the

country in that year, and today holds a majority of the

fixed-line market. Mobile telecoms followed in April

1998, when the Ministry of Transport, Maritime and

Communication signed a $500m, 25-year Global Sys-

tem for Mobile Communications (GSM) licensing

agreement with Turkcell and Telsim, the country’s first

two mobile providers.

The economic crisis of 2000-01 spelled the end of

Türk Telekom’s monopoly, when the government moved

to liberalise the telecoms sector and reform it through

legislation similar to that of the EU. In 2000 the gov-

ernment created the ICTA to act as sector regulator

and oversee private development, in partnership with

the Ministry of Transport.

Market liberalisation kicked off with the ICTA’s cre-

ation in 2000, and the corresponding 2004 deadline

to begin privatising the fixed-line sector. In 2005 these

plans came to fruition as Saudi Arabia’s Oger group

bought a 55% majority stake in Türk Telekom, setting

a precedent for foreign investment in Turkish telecom-

munications. Today the Turkish government main-

tains a 30% share of Türk Telekom, while 15% was

publicly listed in 2008. Plans for a secondary public

offering of 6.67% of the government’s share were put

on hold indefinitely in March 2013, as the lira’s depre-

ciation rendered the deal disadvantageous.

Recent regulatory changes are aimed at improving

the consumer environment and making the sector

more competitive. In July 2013, the ICTA enacted new

regulations to set minimum on-net voice and SMS tar-

iffs, a move meant to improve operating conditions

for non-incumbent operators, as well as reduce mobile

termination rates (MTR) – the charge levied when a

call or SMS ends on a different network – by 20% for

voice services and 75% for SMS. For example, an Avea

subscriber texting a Vodafone subscriber used to pay

an MTR of TL1.87 (€0.66), but now only pays TL0.43

(€0.15). Although the mandatory MTR cuts have kept

tariffs low, they have curbed operator revenues.

FIXED LINE: With the advent of mobile technology,

Turkey’s fixed-line services have been in steady decline

for the past 10 years. Fixed-line subscribership stood

at 18.98m in 2005, but has since dropped to 12.74m

as of the third quarter of 2014, according to ICTA

data, down 6.3% on 13.6m in 2013. Fixed-line pene-

tration is now 16.6%, although the ICTA notes that,

with an average household size of 3.7, these services

likely reach a majority of the population. “As far as tele-

coms infrastructure is concerned, Turkey is one of the

Despite a weaker lira,

less strong macroeconomic

fundamentals and

restrictive regulatory

changes, Turks spent more

than €12.5bn on telecoms

in 2014, compared to

€11.34bn in 2013.

Liberalisation of the

telecoms market kicked off

with the establishment of a

new sector regulator in

2000, and the

corresponding 2004

deadline to begin

privatising the fixed-line

sector.

146

Young and tech-savvyDemographic forces are driving mobile up-take and expansion


TELECOMS OVERVIEW

top countries in the world,” Barış Öney, managing

partner at Globalturk Capital, told OBG. “Some 99%

of the population is covered for fixed-line and mobile

services, and it is getting closer to 100%.”

As the country’s first and long its largest operator,

Türk Telekom commands the majority of the fixed-line

market, serving 85.6% of local calls, 67.2% of nation-

al calls and 59.3% of international calls. Of its 2014

revenues – which reached TL13.6bn (€4.79bn), up 3.7%

on 2013 – some 71.7% came from fixed-line servic-

es. As home usage declines – average minutes used

per month for fixed-line subscribers fell from 98.7 to

88.9 in the year to end-2014 – the company has adopt-

ed new strategies to maintain its non-mobile seg-

ment. “Fixed-line voice is a declining business, but we

approach the problem differently than other opera-

tors,” Onur Öz, the firm’s investment relations direc-

tor, told OBG. “We’re hoping to keep as many customers

as possible during the transition from fixed-line voice

to broadband and mobile products. Keeping the line

in the house is critical because we can build on that;

there are services like naked broadband and IPTV

packages that make the fixed segment an important

cash generator.” With this in mind, Türk Telekom has

launched several initiatives to hold on to these cus-

tomers, including an agreement with Alliance Insur-

ance to provide free home insurance for those with

fixed-line contracts, and a new home smartphone

called the TT-E4, an Android device that acts as a

smartphone but is tied to a customer’s home line.

MOBILE: A young, engaged and dynamic population

makes Turkey the ideal market for growth in the mobile

segment. The median age of Turkey’s 75m residents

is 29, compared to 40 in the UK and 37 in the US, with

nearly 25% of the population under 14 years old.

With such a high proportion of “digital natives” –

those born roughly after 1980 who have thus grown

up with the internet – plus strong domestic demand

for new products and services, mobile operators are

in a good position to capitalise on growth in the Turk-

ish market. Although the industry is facing several

challenges, such as the world’s highest mobile taxes

and fierce competition among major operators, high

voice usage, increasing subscribership and a growing

data segment will help drive the market forward in

the next decade or so.

Turkey’s mobile market has grown significantly since

2001, leaping from 19.5m users to some 65.8m in

2008 before declining due to the twin effects of the

global financial crisis and the advent of mobile num-

ber portability, which allows customers to keep their

phone numbers when switching providers. Since then,

however, recovery and new growth have brought

mobile subscribership above and beyond pre-crisis lev-

els. Mobile subscribership climbed to an all-time high

of 71.9m in the third quarter of 2014, compared to

68.9m four quarters earlier. Moreover, the overall

mobile penetration rate now stands at 93.8%, a fig-

ure that rises above 100% if you exclude 0-9-year-olds.

SECTOR PLAYERS: The mobile market is dominat-

ed by three providers: Turkcell, Vodafone and Avea.

Turkcell was formed in 1994 and become one of the

country’s two initial mobile operators in 1998 along-

side Telsim, which rebranded as Vodafone following

a $4.55bn (€3.43bn) acquisition in 2006. Avea entered

the market in 2004 after Türk Telekom’s GSM opera-

tor, Aycell, merged with Is-TiM, which was owned by

Türkiye İş Bankası Group and Italian operator TIM. Türk

Telekom held a 89.99% stake in Avea as of April 2015,

when it offered to buy the remainder from İş Bankası,

citing a “nominal value” of TL820m (€288.7m).

Turkcell held the largest market share as of the

third quarter of 2014, at 48.3% – a slight decline from

50.77% in 2013 but still enough to retain the title of

incumbent operator. The company reported 34.6m

subscribers in 2014, down from 35.2m in 2013.

Although Turkcell’s market share has dropped as new

players entered the market, income and revenues

grew in 2014. Turkcell added 75,000 subscribers in

2013, with monthly blended average revenue per user

(ARPU) climbing 3.8% to reach TL21.7 (€7.60). MTR

cuts excluded, the company reported TL12bn

(€4.23bn) in revenues, compared to TL11.64bn

147


SOU

RCE:

TU

IK

Number of fixed-line & mobile subscribers, 2004-14 (m)

0

16

32

48

64

80

No. of mobiletelephone subscribers

No. of fixed-line telephone subscribers

20142013201220112010200920082007200620052004

Turkey has a high number of “digital natives” who grew up on the web

The country’s largest

operator commands the

majority of the fixed-line

market, serving 85.6% of

local calls, 67.2% of

national calls and 59.3% of

international calls.

TELECOMS OVERVIEW

(€4.1bn) in 2013. However, net income fell from

TL2.33bn (€820m) in 2013 to TL1.87m (€658m) in

2014. Voice revenues fell by 1%, although mobile

broadband revenues grew by 34%, with strong demand

for data. For 2015 the company has projected rev-

enues in the range of TL12.8bn-13.1bn (€4.51bn-

4.61bn), with growth driven especially by its mobile

and fibre broadband segments.

The second-largest operator in the Turkish market,

Vodafone, commanded a 29.13% market share in the

third quarter of 2014, a slight improvement over

28.75% in 2013. The company announced revenues

between April and September 2014 of £998m, down

from £1064m during the same period in 2013. It also

reported 20.6m mobile subscribers at the end of Sep-

tember 2014, up from 19.6m a year earlier.

Avea has seen considerable success since entering

the market in 2004. As of the third quarter of 2014,

the company had a market share of 22.57%, up from

20.48% in 2013, and saw substantial growth in sub-

scribership in 2014, reaching 16.23m from 14.12m a

year earlier. In its 2014 annual report, Avea’s majori-

ty stakeholder, Türk Telekom, announced that the

company’s revenues had risen by 3.4% on the previ-

ous year to TL13.6bn (€4.79bn), owing largely to

growth in the mobile segment. Avea’s ARPU stood at

TL22.87 (€8.05) as of the third quarter of 2014.

VOICE VS DATA: Voice service usage is the leading

revenue generator in the mobile sector: the ICTA

reported that Turkish mobile subscribers’ average

minutes used per month stood at 370 as of the third

quarter of 2014, which was well above the European

average of 170. Voice services provide 62.17% of Turk-

cell’s revenues, 52.26% of Avea’s and 61.67% of Voda-

fone’s, according to the ICTA.

“Voice is still king in Turkey,” Zehra Öney, president

of Turkey’s Mobile Marketing Association, told OBG.

“Voice and SMS are huge, whereas data has a lot of

room to grow.” In Turkey, as globally, voice revenues

have been declining as data usage grows. In 2011

voice services accounted for 76.99% of overall mobile

revenues, but this dropped to 68.81% in 2012 and

65.60% in 2013. SMS services showed a similar decline,

dropping from 11.61% to 9.78% between 2011 and

2013, while data services nearly tripled, from 7.31%

of revenues to 19.03% during the same period.

SMARTPHONES: High taxes and prices have not

quelled strong demand for smartphones in Turkey. The

rapid expansion of 3G infrastructure and services

since 2008 has boosted smartphone popularity enor-

mously. 3G subscribership hit 56.8m in the third quar-

ter of 2014, according to ICTA data, a 13.2% increase

over 49.3m in 2013. Of these, some 29.8m used 3G

services from their mobile phones.

According to data released by ICTA in March 2015,

smartphone penetration stood at 93.8% as of the end

of 2014, a dramatic increase from February 2013,

when a Google report found that smartphone pene-

tration in Turkey stood at 29.6%, with research firm

Euromonitor International predicting in July 2013 that

smartphone adoption will increase 124.4% between

2012 and 2017. In January 2014, consultancy firm

Mediacells ranked Turkey 11th worldwide in terms of

expected smartphone uptake, predicting that Turks

will purchase 11.6m new smartphones in 2014. Turk-

cell in particular is pushing smartphone expansion:

the company added 3.1m smartphones to its cus-

tomer base in 2014, and now has 12.7m smartphone

subscribers on its network, representing a penetra-

tion rate of 40%, up from 19% in 2012.

However, growth in smartphone ownership has

brought with it new fears about rising debt, particu-

larly after a rise in non-performing loans (NPLs) in the

banking sector, and given the relatively high cost of

imported devices. “The government is actually trying

to slow demand for smartphones,” Bora Tezgüler, an

analyst at Ak Investment, told OBG. “They’ve just intro-

duced the mobile phone credit card cap, so smart-

phones can no longer be financed when purchased.

One of the reasons for this is that they’re concerned

about the rise in NPLs, and the other is to control the

current account deficit.”

In addition to financing plans, mobile operators are

looking to new research and development (R&D) activ-

ities to improve the affordability of smartphones.

Turkcell launched Turkey’s first domestically designed

smartphones, using Qualcomm technology, in Septem-

ber 2013. The T-series phones offer all the standard

features of an iPhone or Android for an average price

of $232 (€175) per unit, about half the average price

of other smartphones on the market. The Turkcell

T50, Turkey’s first operator-branded smartphone with

4G capability, was launched in 2014, and was the

country’s best-selling smartphone in the third quar-

ter of the year. “Every 1m phones that will be sold will

create TL500m (€176.1m) against the deficit. This

money will remain in Turkey,” Koray Öztürkler, Turkcell’s

chief corporate affairs officer, told local media.

Avea also has a line of in-house, low-cost smart-

phones called inTouch, developed in partnership with

the ZTE Corporation, which costs TL399 (€140) and

148

Voice services are still the leading revenue generator for operators in the country’s mobile sector

Turkish mobile subscribers’

average minutes used per

month stood at 370 as of

the third quarter of 2014,

well above the European

average of 170.


TELECOMS OVERVIEW

offers mobile music, navigation and social media appli-

cations. The company launched the inTouch2, with

upgraded features and a price tag of TL449 (€158)

in May 2013. Vodafone, for its part, announced in

November 2013 that it plans to develop locally pro-

duced smartphones in partnership with Turkish elec-

tronics maker Vestel, which will carry a lower price

tag than imported models. Design and assembly would

take place in Manisa, and Vestel plans to make many

components locally, including batteries.

According to ICTA, mobile phone imports decreased

by 7.5% in 2014, with 14.6m mobile devices import-

ed that year, mainly from South Korea, Taiwan, China

and Vietnam, compared to 15.8m in 2013.

INVESTMENT: In addition to smartphones, new

demand for 3G mobile and fibre-optic internet has

led operators to invest heavily in infrastructure and

network maintenance to retain and attract subscribers,

with investment slowly increasing in recent years.

Türk Telekom leads in capital expenditures, with a

total of TL2.17bn (€764,000) invested in 2014, down

slightly from TL2.21bn (€778,000) in 2013, largely in

fixed-line maintenance and fibre infrastructure. The

company is currently undergoing significant network

expansions involving millions in loans from China,

Europe and North America; in December 2012, Türk

Telekom obtained $600m (€452m) in financing from

the China Development Bank (CDB) and $172m

(€129.6m) from Export Development Canada, fol-

lowed by another $300m (€226m) loan from the CBD

and a $138m (€104m) from the European Invest-

ment Bank in October 2013.

Turkcell has seen investments of TL2.14bn

(€754,900) in capital expenditures for 2014, up from

TL1.82bn (€641,500) in 2013. Moreover, the compa-

ny announced plans in February 2014 to increase

investment in mobile and fibre-optic infrastructure,

after investing TL1.8bn (€633.8m) to improve its

mobile and fibre networks in 2013. Vodafone, mean-

while, has invested over TL11bn (€3.87bn) since enter-

ing the market in 2006, and budgeted an additional

TL300m (€105.6m) in 2014 to extend its fibre-optic

internet network (see IT overview) and TL40m

(€14.1m) to build a new call centre in the south (see

analysis). Vodafone investments reached TL463.14m

(€163.1m) as of the third quarter of 2013, compared

to TL588.5m (€207.2m) in 2012.

CHALLENGES: Turkey’s mobile sector boasts the

dubious honour of having the highest industry tax bur-

den in the world, which many analysts say is the indus-

try’s biggest obstacle to growth. The special commu-

nications tax (SCT), which charges a 25% levy on “all

types of installation, transfer, and telecommunica-

tions services given by mobile phone operators”, was

imposed as an emergency measure following a dev-

astating earthquake in 1999 and never abolished.

When added to the 18% value-added tax applied on

all mobile services, the SCT imposes an effective tax

rate of 43% on mobile companies and customers. The

government reduced the SCT to 5% for data usage in

2009, but this reduction has not had a significant

impact for operators. “Data is still a very small por-

tion of overall revenues,” said Tezgüler. “However, if

this reform sets a precedent for further reductions,

it could be quite positive.”

Other fees include a special consumption tax of 25%

on the cost (including insurance and freight) of hand-

sets, a 6% tax paid to the Turkish Radio Television

Foundation, an initial subscription charge and a wire-

less license fee, paid by consumers when a new con-

nection is purchased. Providers also pay standard cor-

porate and numbering fees to the ICTA, as well as a

Telecommunications Regulation Authority Share, cal-

culated to 0.35% of net sales per year. Operators have

taken particular issue with a mobile-specific treasury

share premium, applied to all mobile providers and

amounting to 15% of turnover before taxes.

A 2012 report commissioned by the Global System

for Mobile Communications Association, an interna-

tional lobby organisation, found that mobile opera-

tors in Turkey provide a direct contribution of TL11.3bn

(€4bn) to the country’s economy. “Despite the eco-

nomic contribution, mobile consumers and operators

in Turkey suffer a taxation regime which is specific to

this industry and more severe than that faced by con-

sumers in European countries,” read the report. Indeed,

local producers have urged the government to impose

emergency import tariffs on mobile phones to boost

local production further, adding to already strict con-

trols on mobiles being brought into the country.

OUTLOOK: The sector is expected to expand in 2015

on the back of smartphone up-take, growth in data

usage and growing subscribership. The fixed-line seg-

ment is likely to continue its gradual decline, but high

demand for smartphones has bolstered the mobile

segment and created a fledgling domestic industry

that could help boost mobile subscribership and user

revenues substantially. Taxes and competition remain

prohibitive to growth, but a young, tech-savvy popu-

lation and high domestic demand have kept prospects

bright for all telecoms operators in the medium term.

149


New demand for fibre-optic internet has led operators to invest heavily in infrastructure in recent years

Local producers have urged

the government to impose

emergency import tariffs

on mobile phones to boost

local production, adding to

already strict controls on

mobiles being brought into

the country.

TELECOMS ANALYSIS

Some 65% of employees at call centres in Turkey are female

As the private sector increasingly focuses on customer

service as a way to retain business, Turkey’s call centre

and business process outsourcing (BPO) sector has

gained considerable traction in recent years. Already

home to thousands of BPO centres covering operations

for telecoms operators, airlines and financial institu-

tions, the industry will continue expanding in 2015,

fed by a young and educated workforce, strategic geo-

graphic positioning and government incentives aiming

to increase growth in underdeveloped regions.

RECENT GROWTH: Since opening its first call centres

in the 1990s, Turkey’s BPO sector has seen enormous

growth. The Investment Support and Promotion Agency

of Turkey reports that the industry hit an annual growth

rate of 20% in 2010, with 1000 companies, 40,000

employees and a worth of TL1.2bn (€422.5m). Accord-

ing to a 2014 report by the Turkish Call Centres Asso-

ciation (ÇMD), the industry was worth $1.6bn (€1.2bn)

and employed 80,000 people, up from 2013 figures of

$1.4bn (€1.1bn) and 70,200 employees at some 1100

centres. “A lot of companies are outsourcing their busi-

ness, and it is not limited to call centres,” Barış Öney,

managing partner at Globalturk Capital, told OBG. “BPO

activities in Turkey also include telesales and customer

upselling, and banks are increasingly outsourcing some

services to specialised BPO centres.”

The chief focus of these centres is customer service

and technical support, especially in telecoms, retail,

finance, health care, IT and transport. Major compa-

nies with BPO units in Turkey include Turkcell, Türk

Telekom, Vodafone, Lufthansa, ING Bank and DHL, and

recent developments indicate sustained medium-term

demand: in May 2013, London-based data centre firm

TelecityGroup bought Turkish BPO operator SadeceHost-

ing for an undisclosed sum, while Vodafone announced

plans in November 2013 to invest TL40m (€14.1m) in

a new call centre in Anatolia, adding to the TL20m

(€7m) facility it opened in Elazığ in 2011.

SKILL SETS: These centres are also a source of employ-

ment for thousands of young, educated Turks. The ÇMD

estimates that half of call-centre employees are high

school graduates and half are post-secondary gradu-

ates. Most of them are 24-26 years old, and many are

struggling to enter an increasingly tight workforce while

developing professional skillsets. Women in particular

have flocked to these positions as they seek to build

careers or boost household income: the ÇMD estimates

that 65% of them are female. “Call centres provide great

entry-level employment opportunities for youngsters,”

said Öney. “It’s like going into the military: you learn the

basic skills for professional life that you can adapt to

any workplace. You’re trying to sell something or solve

someone’s problem over the phone, which is quite dif-

ficult, thus you are able to build skills enormously. Call

centres are great developers of human capital.”

REGIONS: They are also critical economic drivers for

the less-developed regions of Turkey’s south and east.

Though most of the country’s call centres are in Istan-

bul (58.6%), followed by Ankara (9.5%) and Izmir (3.6%),

the remaining 28.3% are scattered across the country

in cities like Antalya, Diyarbakır, Erzurum, Erzincan,

Gümüşhane, Malatya, Sivas, Uşak, Kayseri, Bursa, Düzce,

Afyon, Eskişehir and Yalova. ÇMD aims to see at least

one call centre open in each province over the next sev-

eral years, according to its president, Metin Tarakçı.

State incentives like tax breaks and land grants make

Anatolia an especially attractive option. Teleperfor-

mance Turkey, a firm with call centres in Istanbul and

Uşak, recorded cumulative growth of 120% in the 2009-

14 period, according to its general manager, Engin

Utkan. In January 2013, Globalturk Capital partnered

with Japanese conglomerate Mitsui to invest in Tempo,

a locally owned BPO firm with 1500 employees in Istan-

bul, Urfa and Afyon, and plans to expand further. Öney

said he expects continuous demand in the sector over

the long term. As Tarakçı told OBG, “Companies are

looking into their internal cost structures, and while BPO

is not a cheap solution, if you can outsource some of

your non-core services to someone else’s core servic-

es, it will help grow your business in the long term.”

The BPO industry in 2014

was worth €1.2bn and

employed 80,000 people,

up from 2013 figures of

€1.1bn and 70,200

employees at some 1100

centres.

Though most of the

country’s call centres are in

Istanbul (58.6%), followed

by Ankara (9.5%) and Izmir

(3.6%), the remaining

28.3% are scattered across

the country in cities like

Antalya, Diyarbakır and

Erzurum.

150

Who you gonna call? The take-off of business process outsourcing in Turkey


TELECOMS ANALYSIS

The door will be opened for a fourth mobile network operator

New spectrum allocations and a fourth mobile licence

offering are expected to provide a fillip for Turkey's

telecoms sector, which in recent years has benefitted

from rising mobile and internet penetration, driven by

its young, tech-savvy population. In March 2015 the

transport and communications minister, Lütfi Elvan,

announced a tender for 4G mobile data services, which

is expected to end in August. Bids were sought in band-

widths of 800, 900, 1800, 2100 and 2600 MHz, with

an initial roll-out planned by the end of 2015. The gov-

ernment aims to extend 4G services to at least 90% of

the population within six years, Elvan said.

ECONOMIC BOOST: Turkey will also be opening the door

to a fourth operator, which will be able to bid for the

2600-MHz bandwidth. Despite strong demand for serv-

ices and the rapid development of 3G in recent years,

a new operator will face tough competition. The three

existing ones, Turkcell, Vodafone and Avea, have their

network backbones in place, and the two larger play-

ers − Turkcell and Vodafone – are already testing 4G.

These players are looking to advanced networks to pro-

vide next-generation mobile web services, hoping to

boost revenues in a fiercely competitive market.

Service providers will also need deep pockets to fund

the roll-out. The government has set a minimum price

for the spectrum allocations of $2.44bn (€1.84bn),

well above previous market expectations of around

$1.6bn (€1.21bn). In addition to direct revenue from

the spectrum auction, the government expects 4G

services to provide a significant boost for the econo-

my. The Ministry of Transportation, Maritime Affairs

and Communication has estimated that the 4G roll-out

– based on the assumption of a 10% increase in band-

width − may add 1% to Turkey’s GDP growth.

To further boost sector growth, the government is

implementing measures as part of the Ministry of Devel-

opment’s 2015-18 Information Society Strategy and

Action Plan. Under the scheme, announced in March

2015, families will receive free internet access, with a

particular focus on families with students. Another

measure will make it compulsory for new buildings to

have adequate infrastructure for internet services.

BROADBAND DEMAND: Though the telecoms sector

is hindered by high taxes, an increasing number of

young Turks are embracing new technologies and mobile

broadband services. These developments are in line with

the government’s Vision 2023 plan, which seeks expo-

nential growth in the telecoms sector over the next

decade. The number of mobile subscribers in Turkey

stood at 71.9m at the end of 2014, corresponding to

a 92.5% penetration rate, according to the Information

and Communication Technologies Authority.

Mobile and internet penetration is high in Turkey

and rates are still climbing. In its most recent survey of

household ICT usage, published in August 2014, state

statistics agency Turkstat found that internet access

in homes had spiked, with nearly two-thirds of house-

holds able to access internet at home as of April 2014,

up from less than half as of a year earlier. In the first

quarter of 2014, 44.9% of those aged 16-74 used the

internet at least once a week, up from 39.5% a year ear-

lier. There was also a strong rise in the number of sub-

scribers using mobile or portable platforms: mobile

phones made up 58% of all web connections, while

portable computers contributed 28.5%, compared to

41.1% and 17.1%, respectively, a year earlier.

PENETRATION & SPEED: Up-take by businesses was

also strong: 89.9% of companies with at least 10 staff

had internet access in 2014, rising to 98.7% for firms

with at least 250 employees, according to a separate

report by Turkstat released in November 2014. Though

this is close to saturation, the need for faster, more capa-

ble ICT services will help drive sales of new devices and

4G subscriptions. The second Turkstat report also found

that while most companies had broadband access,

more than half subscribed to the slowest service avail-

able – with download speeds below 10 Mbps – while

just 15.2% of enterprises had download speeds of above

100 Mbps. As services become available at higher

speeds, many businesses are likely to opt for an upgrade.

Public tenders for 4G

mobile data services were

announced in March 2015,

seeking bids in a range of

bandwidths, and with an

initial roll-out planned by

the end of 2015.

151


Business up-take of

internet was strong in

2014, reaching 89.9% of

companies with at least 10

staff, rising to 98.7% for

firms with at least 250

employees, as of

November.

Next generationThe country rolls up its sleeves to launch its 4G mobile network

IT OVERVIEW

Fibre-optic services are the fastest-growing internet segment

Turkey’s IT sector is in the midst of a busy and prosper-

ous period marked by rapid, widespread development

in internet services, infrastructure investment and e-

commerce activity. Internet growth is being driven by

extensive fibre-optic expansion, increased adoption of

3G mobile internet and planned nationwide 4G net-

work services that will require heavy investment from

both the public and private sectors.

The youthful, tech-savvy population in Turkey has

led its IT industry to become one of the fastest-grow-

ing in the country. As new innovation and infrastruc-

ture creates faster, high-quality internet access and

personal incomes continue to rise, online shopping will

be a major IT driver in the coming years. Piracy, coun-

terfeiting and opposition to controversial new legisla-

tion on web censorship have shaken the industry, but

these troubles are unlikely to significantly diminish the

sector’s long-term growth prospects.

BACKGROUND: The Turkish IT sector is governed by

the Ministry of Science, Industry and Technology, which

had been the Ministry of Industry and Trade from 1971

until June 2011. Decree Law No. 635 changed the min-

istry’s name to reflect its role of pushing development

in the IT sector, in line with the goals of Vision 2023,

the country’s development plan. Among these goals

are reaching 30m broadband subscribers (attained in

2012), supplying 50% of the ICT sector with domestic

products and services, raising the ICT sector’s econom-

ic contribution to 8% of GDP, becoming one of the top

10 countries in e-transformation, providing all public

services electronically by 2019 and achieving comput-

er literacy for 80% of the population. The High Coun-

cil for Telecommunications (TIB) acts as internet reg-

ulator and monitors online activity in the country. The

TIB has seen its role come under international scruti-

ny following the passage of laws in 2014 that gave it

tighter control over website censorship and resulted

in domestic protests and international condemnation.

Internet access was first introduced in 1993 when

Türk Telekom, the country’s first telecoms company

and today its leading internet service provider (ISP),

introduced dial-up connections for its customers. Cable

internet began a nationwide expansion in 1998, and

fibre-optic services, the fastest-growing internet seg-

ment today, were first introduced in 2007 by Tellcom,

a firm later acquired by Turkcell Superonline, now the

country’s second-largest ISP. In 2008 mobile 3G serv-

ices were introduced, while 4G-LTE services began tri-

al runs in 2012 and are forecast to be offered to con-

sumers by the end of 2015.

GROWTH: Despite Turkey’s phenomenal expansion in

internet services and subscribership over the past

decade, there is still plenty of room for growth. Between

2002 and 2014, internet users in the country jumped

from 11.4% to 53.8%, according to the World Bank.

Turkstat, the official statistics agency, reported in its

2014 ICT usage survey that 44.9% of those aged 16-

74 use the internet regularly (at least once a week), up

from 39.5% in 2013, while 58% of users accessed the

internet using a smartphone. Moreover, 60.2% of house-

holds had internet access, up from 49.1% in 2013.

The country’s strategic location and demographics

are driving internet development and drawing inter-

national acclaim. In April 2013 the Internet Corpora-

tion for Assigned Names and Numbers (ICANN) – the

global organisation responsible for coordinating domain

names, IP addresses and autonomous system numbers

– announced it will open its first hub office in Istanbul.

ICANN’s president and CEO, Fadi Chehadé, said Istan-

bul was chosen for its quality infrastructure, growing

ICT sector, business-friendly environment and close

cultural and geographic proximity to Europe, the Mid-

dle East and Africa. ICANN also held a forum on Turkey’s

Domain Name System in Istanbul in November 2014

as part of efforts to build a stronger domain name

industry in Turkey. This came two months after ICANN

signed a protocol with the Istanbul municipality to reg-

ister .ist and .istanbul as domain extensions.

The government has also announced plans to devel-

op a technology centre in Gebze, about 50 km east of

Vision 2023 includes plans

to increase the ICT sector’s

economic contribution to

8% of GDP and see it

supply 50% of the sector

with domestic products

and services.

Between 2002 and 2014,

the percentage of internet

users in the country

jumped from 11.4% to

53.8%. Moreover, 60.2% of

households had internet

access in 2014, up from

49.1% in 2013.

152

Servers of joyMobile networks and fibre-optic cables are expanding to meet demand


IT OVERVIEW

Istanbul. Inspired by Silicon Valley, Turkey’s “Informat-

ics Valley” will take up 3m sq metres of land and focus

on creating a regional centre for research and devel-

opment. According to the Minister of Science, Indus-

try and Technology, Fikri Işık, in March 2015 infrastruc-

ture work had neared completion, while superstructure

work was due to start in April 2015. “Looking at the

five- and 10-year trends, we see the ICT sector was grow-

ing between 10-12% each year in dollar terms, except

during crisis periods,” Levent Kızıltan, vice chairman of

the Informatics Industry Association (TUBISAD), told

OBG. “We expect this to continue for the years to come

due to large government projects and uptake in 3G, 4G,

fibre, and machine-to-machine services.”

Over the past several years, Turkey has consistently

logged double-digit annual growth in internet sub-

scribership. The country’s Information and Communi-

cation Technology Authority (ICTA) puts Turkey’s broad-

band internet subscribership (including fixed, modem,

cable modem, and fibre) at 40m as of the third quar-

ter of 2014, a dramatic increase from just 6m in 2008.

The ICTA reported at the same time that Turkey’s annu-

al growth in internet subscribers stood at 28.2%.

PROVIDERS: Although the ICTA lists 237 ISPs operat-

ing in Turkey, most internet connections in Turkey are

made by the country’s dominant telecoms company,

Türk Telekom, through its subsidiary TTNet, followed by

Turkcell’s internet subsidiary, Turkcell Superonline. TTNet

commands a 77.53% market share, followed by Super-

online (14.16%), Doğan TV Digital (4.49%) and Voda-

fone Net (0.95%), with the remainder split among small-

er operators. TTNet’s xDSL is the most widely-used

internet service in Turkey, accounting for 65% of total

fixed broadband subscribers. According to the ICTA, 53%

of fixed broadband subscribers in Turkey prefer offers

providing speeds of 4-8 Mbps, with 81% of those users

connecting to mobile internet via computer having

data usage of 100 Mbps and above, and 15% of sub-

scribers within the 0-50 Mbps interval. While these

speeds are on par with much of Europe and North

America, new fibre growth could see internet speeds

increase exponentially within the next several years.

FIBRE-OPTIC: Offering speeds up to 1000 Mbps, more

than 10 times that of traditional broadband and cable,

fibre-optic services have experienced phenomenal

growth, and are easily the fastest-growing segment in

Turkey’s internet sector, having soared in 2013, with net-

work roll-outs leading Turkey to become Europe’s fifth

fastest-growing fibre-optic market. In January 2014

the OECD revealed that Turkey has one of the highest

fibre-optic growth rates in the world, with fibre sub-

scriptions growing by 54.6% between June 2013 and

June 2014, the eighth-highest rate out of 40 OECD

countries and fourth-highest in Europe, ahead of Japan

(5.9%), the US (14.9%), Germany (31.6%) and Switzer-

land (44.4%), and well above the OECD average of 12.4%.

According to the ICTA, growth rates for other internet

segments in the year to the second quarter of 2014

were 41.36% for mobile internet from handsets, 0.88%

for xDSL and 6.61% for cable internet services. Sub-

scribership, though low, is also growing fast: the ICTA

reports 1.39m fibre subscribers as of the third quar-

ter of 2014, a 43.7% rise on a year earlier.

INFRASTRUCTURE: Turkey currently boasts roughly

245,000 km of fibre-optic cables laid, with nearly

182,000 km belonging to Türk Telekom and 33,000 km

to Turkcell. Türk Telekom is aggressively pushing devel-

opments in fibre to the home and fibre to the building,

offering speeds of 100-1000 Mbps, as well as fibre to

the curb, which makes it easier to deliver fibre servic-

es to a cluster of customers, rather than building expen-

sive direct fibre lines to each individual household.

These developments will make a profound impact on

the country’s internet landscape, owing to the sub-

stantial speed and quality improvements fibre servic-

es offer customers. “With fibre services, we don’t charge

people any extra to make the switch,” Onur Öz, the

firm’s investor relations director, told OBG. “We want

to get people from limited plans to unlimited plans, and

switching to fibre helps us up-sell. We triple their inter-

net speed, and triple their usage, with the expectation

that they will pay more for better service.”

In January 2013 Türk Telekom announced it plans to

extend its fibre network nationwide by 2015, and would

allocate a significant portion of its planned TL2.1bn

(€739.4m) in 2014 investments to this end. These

developments could see speeds jump even higher than

1000 Mbps: in November 2013 the company announced

it had successfully completed a 2-terabyte-per-second

(Tbps) field trial of a “wavelength division multiplexing

optical transport system” capable of delivering a total

of 40 Tbps on its existing fibre-optic network.

More promising developments came in December

2013, when Vodafone announced it would pay TL128m

(€45.1m) to use part of the state power transmission

company’s fibre network for the next 15 years. As a result

of the deal, Vodafone will more than double its fibre

network to 16,000 km, adding lines from Ankara’s Teias

and investing TL300m (€105m) in overall network

expansion, in addition to the original access fee. Voda-

fone’s network will eventually link to Syria, Georgia, Iraq,

and India, according to its CEO, Gökhan Öğüt.

TurkNet, a smaller player commanding just 0.87% of

the internet market, is a fast-growing company whose

153


Fibre subscriptions in

Turkey grew by 54.6% in the

year to June 2014, the

eighth-highest rate out of

40 OECD countries and

fourth-highest in Europe.

Number of internet subscribers, 2004-14 (m)

SOU

RCE:

TU

IK

0

10

20

30

40

50

20142013201220112010200920082007200620052004

IT OVERVIEW

success is indicative of the potential for new invest-

ment in the fibre market. In May 2013, the European

Bank for Reconstruction and Development announced

a €9.5m loan to TurkNet, to be used on capital expen-

diture to extend fibre-optic coverage across Istanbul,

Izmir, Izmit and Bursa. Dubai-based Gulf Capital fol-

lowed suit in July 2013 when it announced $15m

(€11.3m) in funding to TurkNet to be used for infra-

structure upgrades and expansion. “SMEs comprise

the majority of Turkish companies, and we anticipate

that, as productivity and competition are becoming a

major concern, SME activities will drive the IT sector in

the years to come,” said Kızıltan at TUBISAD.

MOBILE NETWORKS: Outside of fibre-optic services,

the highest growth potential in Turkey’s internet mar-

ket lies in 3G and 4G-LTE services. The country’s “big

three” mobile operators – Turkcell, Vodafone and Avea,

a Türk Telekom subsidiary – each received government

licences to develop 3G networks in 2008. 3G services

were rolled out commercially in July 2009, when Turk-

cell and Vodafone launched services nationwide, with

Avea launching in 16 provincial centres the same month.

Turkey has seen a substantial uptick in 3G adoption since

its market entrance, with subscribership growing from

49.3m in 2013 to 58.3m by the end of 2014, an increase

of 18.3%, according to the ICTA.

4G-LTE services, which offer significant potential to

operators, investors and consumers alike given their

faster speeds and smoother delivery, are currently in

nascent stages. In March 2015 the transport and com-

munications minister, Lütfi Elvan, announced a tender

for 4G mobile data services, which was recently delayed

to August 26, 2015. Bids will be sought in a range of

bandwidths, with an initial roll-out planned by the end

of 2015 (see analysis). Turkcell, Vodafone and Avea are

all expected to participate in the tenders.

In terms of 5G, which has yet to reach many of the

most advanced Western markets, Avea took the first

step in Turkey by joining an international consortium

creating roadmaps for 5G networks through the Mobile

Opportunistic Traffic Offloading Project, funded by the

EU Framework Programmes in November 2012. More-

over, in July 2014 Türk Telekom decided to deploy new

Alcatel-Lucent routers in three locations across Istan-

bul, as well as consolidate its existing ones, so as to keep

up with the growing bandwidth demands of its resi-

dential and business customers.

E-COMMERCE: With internet usage and connection

speeds rapidly increasing, e-commerce activities hold

significant untapped potential for the Turkish IT sec-

tor. TurkStat found that 30.8% of internet users aged

16-74 purchased goods or services on the internet in

2014, compared to 24.1% in 2013. Electronics and

apparel are the most popular online products: accord-

ing to TurkStat, 51.9% of web shoppers buy clothing

and sporting goods, 24.9% buy electronic equipment,

27% buy household items and 26.8% travel products.

E-commerce is poised for huge expansion in the next

few years. Tech website Ecommerce Europe found that

in 2012, total business-to-consumer (B2C) e-sales

reached $7.42bn (€5.59bn) in Turkey, an increase of over

50% on 2011, while a March 2013 report commis-

sioned from Google by Boston Consulting Group esti-

mated that the country’s internet economy would grow

by 19% a year to 2017, on the back of technological

developments, a young population and a rise in online

shopping, reaching 2.6% of GDP, or TL64.3bn (€22.64bn).

Research website yStats.com reports that private

shopping clubs Markafoni.com and Trendyol.com rank

among the top local e-commerce companies in Turkey,

while the largest player on the Turkish B2C e-com-

merce market was online mall Hepsiburada.com (Turk-

ish for “everything is here”), which reported sales growth

of 50% y-o-y in 2013 and total sales of TL1bn (€352.1m)

in 2014. Other notable players include electronics retail-

er TeknoSA and local online food delivery company

Yemeksepeti (“food basket”), which was purchased by

Berlin-based Delivery Hero for $589m in April 2015.

Turkey’s most-visited e-commerce websites in 2013

were automotive marketplace Sahibinden.com and

auction website Gittigidiyor.com, followed by Trendy-

ol, Markafoni, Hepsiburada, and Amazon-style retailers

Limango.com and Morhipo.com.

PIRACY & COUNTERFEITING: Turkey’s technology

retailers are also poised to see significant growth in the

next few years, with Turkey’s Investment Support and

Promotion Agency reporting that spending on hard-

ware, software, IT services and telecoms services in

Turkey is expected to reach $25bn by 2016. ICT spend-

ing is projected to grow at 7.4% a year between 2012

and 2017, higher than the world average, due to its large

domestic market and under-tapped potential. Tech-

nology multinationals like Xerox, Microsoft, Foxconn and

Huawei are opening regional offices and investing heav-

ily in research and development within the IT sector (see

Education & Research chapter).

However, online piracy and product counterfeiting

are major problems in Turkey’s IT sector. According to

the Business Association to Stop Counterfeiting and Pira-

cy, Turkey is the second-largest counterfeit product

market in the world after China, with 58% of Turkish

154

Call centres are a source of employment for thousands of young Turks in an increasingly tight workforce

In 2014 some 30.8% of

internet users in Turkey

aged 16-74 purchased

goods or services on the

internet, compared to

24.1% in 2013.


IT OVERVIEW

consumers admitting to regularly purchasing pirated

products. The Business Software Alliance estimates

piracy costs the economy $526m each year.

Counterfeiting activities harm IT retail suppliers espe-

cially in the printing and imaging segment, with as

much as half of revenues from A4 printing machines

lost to counterfeiting activities every year. Police have

responded with recent crackdowns – in January 2014,

for example, raids of several warehouses in Istanbul

seized over 2000 counterfeit Xerox products. “Coun-

terfeiting is hurting us a lot, because a significant por-

tion of our income comes from back-end sales,” Burak

Özer, general manager at Xerox Turkey, told OBG. “Secu-

rity-wise, police have been very cooperative, but until

strong legislation is passed, it is hard to successfully pros-

ecute counterfeiters, and to prevent recidivism.”

INTELLECTUAL PROPERTY: After a 2012 report by the

International Intellectual Property Alliance (IIPA) placed

Turkey on an international watch list for the third year,

the government moved to enact new regulations pro-

tecting intellectual property. In July 2012, the Directorate

General of Copyright announced new revisions to the

Law for Intellectual Property and Artworks, making

sharing and downloading copyrighted materials a crim-

inal offense, with the government planning to target

the IP addresses of computers found to be breaching

the law. When pirated content is detected, the ISPs are

issued warnings, and if the material is not removed, fines

of up to TL50,000 ($17,605) can be imposed. Although

no official draft copyright bill has yet been published,

the government has consulted with local stakeholders,

creating a draft proposal in September 2013 that has

raised hopes among stakeholders.

There is still room for improvement. In its 2014 report,

the IIPA once again advised that Turkey be kept on the

international watch list, arguing that “incremental but

uneven progress” had been made in addressing pira-

cy. While noting that enforcement against unauthorised

software usage had improved – the industry brought

80 civil and criminal actions in 2013, up from 60 in 2012

– the IIPA said the software piracy rate remained high

at 62%, compared to a global average of 42%.

CENSORSHIP: Türk Telecom, the country’s largest (and

partly state-owned) operator, holds significant influ-

ence over the country’s internet access. All internet traf-

fic in Turkey passes through its infrastructure, giving it

central control over online content. As Turkey moves

closer towards EU accession, censorship has become

a point of contention in recent years.

Online censorship was introduced in 2007 under

Law No. 5651 on the “Regulation of Publications on

the Internet and Suppression of Crimes Committed by

Means of Such Publications”. The law lists eight areas

in which content can be censored: child pornography,

obscenity, suicide, gambling, drugs, prostitution, dan-

gerous goods and any material seen as disparaging

Turkey’s founding father, Atatürk. The TIB, ICTA and pri-

vate individuals can sue to block or shut down a site if

there is sufficient evidence that it violates the law.

Following this legislation, international media report-

ed that as many as 20,000 websites had been blocked

by 2011. That year, the government proposed new reg-

ulations requiring ISPs to make state-supported cen-

sorship software available to consumers, prompting

civil protests that led the government to back down.

However, censorship intensified in 2014. In the run-

up to the country’s March municipal elections, the

administration of President Recep Tayyip Erdoğan

blocked Twitter and YouTube, prompting public protests

and international criticism. Although a constitutional

court lifted the Twitter ban in April on grounds of free-

dom of speech, YouTube remained blocked until June.

Erdoğan later announced plans to prosecute Twitter for

tax evasion. As a result, according the Economic Poli-

cy Research Foundation of Turkey, the country now

ranks second after China for internet censorship.

Further to this, in February 2014 the government

passed legislation giving the TIB the right to block web-

sites accused of “privacy violations” without a court

order, again sparking political controversy. The tensions

between the government’s hostile actions towards

leading tech companies and Turkey’s attractiveness as

a destination for foreign investment were further high-

lighted when Istanbul hosted the UN-backed Internet

Governance Forum in September 2014, an annual dis-

cussion of internet policy, at the same time as more

than two dozen Twitter users were on trial for tweets

considered critical of the government.

OUTLOOK: While internet censorship and online pira-

cy remain two major challenges to IT investment, the

sector’s recent history of tremendous growth have

helped it retain its attractiveness and long-term poten-

tial. As operators rush to adopt the latest fibre-optic,

3G and 4G-LTE services, internet speeds are increas-

ing and Turks are embracing the latest offerings in

record numbers. Infrastructure investment by both

domestic and foreign firms is on the rise, buoyed by

demand from a young and tech-savvy population.

Recent growth in e-commerce and online shopping

also demonstrates the IT sector’s high potential and

should continue to drive demand into 2015 and beyond.

155


Turkey has been on the international watch list for intellectual property rights for several years running

As many as 20,000

websites had been blocked

by the TIB in the four years

following the 2007 passage

of legislation on internet

censorship. Turkey also

blocked Twitter and

YouTube in 2014, though

this was later overruled by

a constitutional court.

IT INTERVIEW

Mehmet Nalbantoğlu, CEO, KoçSistem

What factors are driving demand for IT services and

infrastructure in the Turkish market?

NALBANTOĞLU: Today Turkish companies, like their

international counterparts, face several challenges

such as rising competition, elevated productivity expec-

tations and a heightened focus on customer service.

First of all, there has been an overall change in the way

IT is perceived among businesses. Instead of being seen

as a costly one-time expenditure, IT is now seen as an

investment in an evolving business tool. Second, the

number of companies engaging IT services providers

to help them harness the power of trending technolo-

gies, such as the cloud, mobile platforms, big data and

social media is growing. Third, complex internal IT sys-

tems are being transformed into more standard ones

that can be outsourced to specialists, freeing up more

resources for core operations. Fourth, there has been

an increase in demand for customisable, more value-

added services from IT service providers.

Lastly, acceleration in e-service projects in the pub-

lic sector and the need for compliance with new reg-

ulations has helped drive market growth in Turkey.

Here, I would like to add some notes about the Turk-

ish IT market, which had a 10% growth rate in the

2013/14 fiscal year. Market research predicts that in

2015, IT will continue its growth with an increasing

acceleration through enhancements in data, cloud

computing and value-added services. Services and

devices capable of meeting customer demand in these

areas will also gain importance.

How would consolidation benefit IT providers?

NALBANTOĞLU: Consolidation would have positive

effects: it would help to augment the diversification of

services offered by IT service providers, leading to more

customised solutions to meet diverse customer expec-

tations and needs. The resulting skills specialisation

would allow providers to meet customer demand in a

more efficient and rapid manner. Consolidation would

also help to develop consultancy and solution delivery

processes, increase the number of projects in systems

integration and help providers improve their compe-

tence in developing end-to-end solutions.

What steps have IT service providers taken to

address customer concerns over data security?

NALBANTOĞLU: They have enhanced their compe-

tence to attain certifications, abide by all government

regulations in this space and focus on implementing

global standards into their business processes. In addi-

tion, providers have broadened their knowledge of the

increasing number of security threats, have informed

their customers about possible attack areas and have

increased their portfolio of security solutions and tech-

nologies to combat the risks. Furthermore, they have

developed different business models for effectively

managing and offering security as a service.

What sectors stand to gain the most from the

increased adoption of IT solutions?

NALBANTOĞLU: Despite the fact that the financial

services industry is the largest consumer of IT servic-

es, telecoms and the public sector are among the indus-

tries to gain the most from increased adoption of IT

solutions. Due to the challenging competitive structure,

financial corporations tend to differentiate their com-

munication and service channels by utilising technol-

ogy to meet competitive goals. Data centre operations

necessitate continuous modernisation, posing sub-

stantial opportunities for IT providers. Big data analyt-

ics, data mining, business intelligence and risk analysis

tools are now being used extensively, and the financial

sector is leading other industries in this. The telecoms

industry is also undergoing a big transformation.

They are in need of support from IT companies in devel-

oping and sustaining the demand to expand their

current telecommunication services, while also invest-

ing in cloud-based services and applications. The

public sector is actively engaged in e-service projects

and initiatives, providing opportunities for IT providers.

156

Intelligent solutionsOBG talks to Mehmet Nalbantoğlu, CEO, KoçSistem


157

HealthHealth Transformation Programme drives improvements

Ban on smoking helping to reduce tobacco usage

Private health groups continue to enter the market

Government support behind growth in medical tourism

HEALTH OVERVIEW

The ratio of hospital beds to patients is low by European standards

Great strides have been made in Turkey’s health care

sector since 2003, when the government launched

its far-reaching Health Transformation Programme

(HTP). The HTP eventually led to the establishment of

universal health insurance, while opening services

and private hospitals to the majority of Turks. Improve-

ments in patient satisfaction and health indicators have

been steady, with infant and maternal mortality declin-

ing while life expectancy rises.

Ratios of hospital beds, doctors and nurses to

patients remain low by European standards. There are

also concerns that the national health insurance sys-

tem lacks the necessary support for long-term sus-

tainability, as the import-dependent pharmaceuticals

market has shown tremendous growth in recent years,

while patient numbers and hospital visits continue to

rise. The private sector offers some solutions: public-

private partnerships will see the number of doctors

and hospital beds rise, and patient care improve, while

rapid expansion in medical tourism will bolster rev-

enues and help the sector mature. As Turkey builds

more facilities, 2015 should see a continuation of the

positive trends that have already brought investors,

professionals and new patients flocking.

STRATEGY: The Ministry of Health (MoH) oversees all

health policy, implementation of national strategies

and direct provision of health care services in the

country. It is also the sole provider of preventative

health care services through a network of facilities,

providing primary, secondary and specialised in- and

out-patient services. The Strategic Plan of the MoH,

which covered the period from 2010 to 2014, was

reformulated under the legislative changes made in

line with the HTP, and the new Strategic Plan, running

from 2013 to 2017, features tenets of Health 2020,

the new European health policy, and also reflects prin-

ciples outlined in the Tallinn Charter.

HEALTH TRANSFORMATION PROGRAMME: In 2003

the government embarked on a major reform initia-

tive, the HTP, which rapidly expanded health insurance

coverage and access to health care services for all cit-

izens, particularly the low-income segment. It also

led to the establishment of a family physician scheme

and, most importantly, a universal health insurance

system, Genel Sağlık Sigortası (GSS), which combined

several social security systems under one umbrella,

the Social Security Institute (SSI). In December 2014

the number of those insured under the GSS scheme

stood at 11.4m, up from 9.3m in 2008.

The programme has also led to quantifiable health

care improvements, with increases in services, staff

and facilities leading to greater patient satisfaction.

Similarly to EU member countries, emergency health

care services are also now being coordinated by 112

emergency call centres in major metropolitan areas,

with plans to expand to villages and rural areas, bring-

ing Turkey closer to European levels of health care serv-

ices. “Turkey has lifted its health sector remarkably in

just 10 years. As a public citizen I can say it has been

a 100% improvement,” Hayati Odabaşı, general man-

ager of Türkiye Hastanesi, in Istanbul, told OBG.

CHALLENGES: Under HTP reforms access to health

care greatly increased, with an improvement in out-

comes across all population segments, most notably

in child and maternal health. Yet the sector still has

plenty of room for improvement. A 2013 report from

the OECD highlighted several challenges, recommend-

ing Turkey develop robust systems to standardise and

monitor the quality of care, encourage continuous

professional development, incorporate patient views,

loosen the governance structure to allow flexible,

localised health response and raise staff numbers.

Recent years have seen substantial expansion in gov-

ernment spending, although the proportion of health

care spending to GDP remains low. According to the

Turkish Statistical Institute (TurkStat), health expen-

diture reached TL68.6bn (€24.2bn) in 2011, growing

to TL74.2bn (€26.1bn) in 2012 and TL84.4bn

(€29.7bn) in 2013. The proportion of total health

expenditure to GDP was 5.6% in 2010, 5.3% 2011,

The strategic plan for the

sector, running from 2013

to 2017, features tenets of

Health 2020, the new

European health policy, and

reflects principles outlined

in the Tallinn Charter.

158

Smooth operatorsIndicators are improving under a far-reaching government programme


HEALTH OVERVIEW

5.2% in 2012 and 5.4% in 2013. While this is still below

the 2012 OECD average of 9.3%, it is a positive step

in the government’s plan to bring Turkey’s health care

system onto a par with other OECD nations. As of

2012 public funding comprised 77% of all health care

expenditure, according to TurkStat.

SSI: Prior to the HTP, Turkey’s health care system was

financed through five separate health insurance

schemes, which were brought under one umbrella

with the creation of the SSI in 2007.

The SSI now acts as a monopsony on the purchas-

ing side of health care services, with employees and

employers making payments to the system, and

patients receiving free hospital treatment and gov-

ernment reimbursement for health care costs. Annu-

al public health expenditure per capita grew by 281%

between 2002 and 2012, reaching $435 per person,

up from $114 in 2002, according to MoH data.

Financial risk protection has also improved signifi-

cantly; the share of households with catastrophic

health expenditure was cut in half between 2000 and

2008, in part due to the expansion of health insur-

ance coverage, which grew from 69.7% in 2002 to

99.5% in 2011. The percentage of people paying for

medicine and therapy out-of-pocket decreased to

11% in 2011, from 32% in 2003, with significant dis-

counts in medicine and hospital costs improving access

and equity across the country. As a result, the MoH

reported an increase in general satisfaction with the

health sector, which grew from 40% in 2003 to 75%

in 2012. However, some stakeholders are concerned

about the system’s long-term viability. “Sustainabili-

ty is the key. The government has reduced payments

for pharmaceutical products and not raised the price

for service provision in recent years, and these chal-

lenges must be addressed. Complementary private

health insurance, for example, is much cheaper than

current private health care policies,” Hasan Kuş, the

secretary-general at Acıbadem University, told OBG.

INDICATORS: Health indicators in Turkey have shown

considerable improvement since the implementation

of the HTP, with life expectancy reaching 75 in 2012

according to the World Bank, compared to 71 in 2002,

a year before the programme’s launch.

Other significant health indicators are now on a par

with many European nations. Infant mortality stood

at 7 per 1000 live births in 2012, down from 32 in

2002, while maternal mortality dropped from 64 per

100,000 live births to 15. Rising immunisation rates

and expansion of immunisation programmes con-

tributed to this decline, according to the World Health

Organisation (WHO), with the rate of full vaccination

coverage increasing from 78% in 2002 to 97% in 2011.

While basic health indicators have shown improve-

ment, Turkey, like many other nations, has seen an

increase in the incidence of lifestyle-related diseases,

including cardiovascular and tobacco-related dis-

eases, diabetes and hypertension. TurkStat reported

that circulatory diseases and malignant neoplasms,

including many heart diseases, accounted for 59% of

all deaths in Turkey in 2012, with 38% caused by cir-

culatory diseases and 21% by malignant neoplasms,

while the MoH reported that the prevalence of hyper-

tension, diabetes, cancer and cardiovascular disease

stood at 13.2%, 6.8%, 0.6% and 4.4%, respectively.

SMOKING BAN: Tobacco use has been of particular

concern. In 2012 the Ministry of Labour and Social

Security announced that the annual cost of smoking

to Turkey’s economy was TL2.8bn (€986m), while

additional expenses of TL7bn (€2.46bn) were attrib-

uted to tobacco-related diseases.

The current government has worked to reduce

tobacco usage, extending a ban on smoking in pub-

lic places to shopping malls, indoor cafés and bars in

2009. In January 2013 the government made it ille-

gal to use hookahs in cafés, bars or restaurants, and

in November 2013 announced plans to introduce

smoking areas at outdoor cafés, as well as bans on

smoking in public and private sector service vehicles.

These programmes have seen considerable suc-

cess; according to the Tobacco and Alcohol Market

Regulatory Authority, the number of cigarettes con-

sumed in Turkey dropped from 107.8bn in 2008 to

159


SOU

RCE:

TU

IK

Total health expenditure, 2003-13 (TL bn)

0

20

40

60

80

100

20132012201120102009200820072006200520042003

Access to health care has greatly increased over the past decade

While basic health

indicators have improved,

Turkey has seen a rise in

the incidence of

lifestyle-related diseases,

including cardiovascular

and tobacco-related

diseases, diabetes and

hypertension.

HEALTH OVERVIEW

91.7bn in 2013, a 15% decline. Tobacco use among

adults dropped to 27.1% in 2012, compared to 31.3%

in 2008, according to the MoH. The government is also

working to reduce and prevent chronic diseases, estab-

lishing programmes including the Cardiovascular Dis-

eases Prevention and Control Programme, and the

Diabetes Prevention and Control Programme.

MENTAL HEALTH: Mental health facilities have his-

torically been underdeveloped in Turkey. Under the

HTP, new policies and programmes have been intro-

duced to mental health, and in 2011 a community-

based model was implemented to replace psychiatric

hospitals, with the MoH announcing plans to increase

the number of community mental health centres

across Turkey to 240 by 2015, up from 50 in 2011.

However, 4% of Turks over 15 years old suffered from

severe depression and other mental illness as of 2012,

according to MoH data. With the World Bank report-

ing that 67% of the population – or about 50m peo-

ple – are between 15 and 64 years old, the number

of citizens suffering from mental illness stands at a

minimum of 2m, meaning there is much room for

expansion of mental health services.

PUBLIC HOSPITALS: The HTP has led to a rise in the

number of hospital beds in Turkey. The MoH report-

ed that the total number stood at 202,031 in 2013,

up from 165,465 a decade earlier. The sector has also

drastically expanded in terms of staff numbers, with

the HTP introducing a new financing system for pub-

lic hospitals in 2004 that has increased the number

of medical professionals in public hospitals.

Public hospitals are financed from two sources: a

line-item budget allocated by the Ministry of Finance,

used mainly for base staff salaries and comprising

under 20% of funding; and revolving funds financed

by the SSI, which account for the remainder. Before

the HTP was implemented, all budget execution deci-

sions of public hospitals had to be approved by the

MoH, with a high degree of centralisation restricting

the use of revolving SSI funds for operating costs.

After the advent of the HTP, the MoH’s role focused

more on stewardship, with a performance-based sup-

plementary payment system (P4P) introduced in 2004

to provide public hospitals with increased freedom over

revolving fund management. Under the P4P scheme,

40% of SSI revenues can be distributed as supple-

mentary payments to hospital staff. The scheme is

intended to help hospitals address staff shortages by

boosting physicians’ wages, with doctors now paid

bonuses according to points they collect throughout

the month from outpatient physical exams, inpatient

procedures, tests and diagnoses. This has contributed

to a rise in staffing levels: the number of health pro-

fessionals in Turkey – including physicians, midwives,

pharmacists and dentists – reached 735,159 in 2013,

up from 409,371 in 2003. The number of nurses rose

to 139,544 in 2013, up from 74,483 a decade earlier,

and the number of physicians increased to 133,775,

up from 94,466, according to TurkStat.

Despite these gains, Turkey still has some of the low-

est ratios of doctors, nurses and hospital beds per capi-

ta among OECD countries. It had 1.7 physicians per

1000 people in 2012, compared to the 2011 OECD

average of 3.2. Similarly, there were only 2.49 nurses

and midwives per 1000 people in 2012, much lower

than the average figure among OECD countries of

8.7. There were 2.64 hospital beds per 1000 people

in 2013, a little over half the OECD average of 4.8, and

well below the WHO European region average of 6.

PRIVATE HOSPITALS: Private hospitals are also

expanding to meet demand. Regulations passed in the

2000s capped medical fees and physician numbers

at private facilities, and introduced strict licensing

requirements, but the sector has grown nonetheless.

Large private health groups – including Universal Hos-

pitals Group, Acibadem Healthcare Group, Medicana

Health Group and Medical Park – have entered the

market in recent years, expanding outside Istanbul.

The number of private hospitals in Turkey increased

by nearly 100% between 2002 and 2012 to 541. Pri-

vate hospitals comprised 36% of all hospitals in 2012,

compared to 23% in 2002. The proportion of private

hospital beds has shown similarly dramatic growth,

increasing from 12,387 beds, or just 8% of the total,

to 35,767, or 18% of the total, in 2012.

The government has been working with the private

sector to expand the public health offering, and in 2013

announced that it had awarded contracts worth a

total of TL15.7bn (€5.5bn) for the construction of 15

hospitals and a health centre. Firms including Turkey’s

Akfen, Rönesans Inşaat, Gama Holding, Kayı Inşaat, Dia,

Emsas, Yıldızlar, Turkerler and YDA, along with Italy’s

Astaldi, have benefitted, with Emsas awarded a TL2.2bn

(€775m) project for a new hospital in Istanbul, Dia

awarded a TL1.9bn (€669m) contract for a hospital

in Ankara, and a consortium including Astaldi and

Turkerler awarded a contract worth TL1.8bn (€634m).

PHARMACEUTICALS: Turkey is one of the world’s

fastest-growing pharmaceuticals markets. Domestic

demand drives the industry. The Pharmaceuticals and

Medical Devices Institution of Turkey reports that

160

The performance-based supplementary payment system has helped raise staffing levels in recent years

The Health Transformation

Programme has led to a rise

in the number of hospital

beds. The total stood at

202,031 in 2013, up from

165,465 a decade earlier.

The sector has also

drastically expanded in

terms of staff numbers.


HEALTH OVERVIEW

consumption of pharmaceuticals increased from

1.48bn boxes in 2007 to 1.89bn boxes in 2012, and

Deloitte’s 2014 Global Life Sciences Outlook report-

ed that pharmaceutical sales are set to grow by 8.8%

between 2013 and 2017, to reach a total volume of

around $19bn. However, the industry is heavily depend-

ent on imports. Pharmaceutical imports accounted

for 10% of Turkey’s 2012 account deficit. The domes-

tic industry exported just $600m worth of medicine

in 2012, with its total value rising at $4.1bn in 2012.

According to MoH statistics, generic drugs account-

ed for 36% of all pharmaceutical expenditures in 2012,

up from 32% in 2007, with 53% of pharmaceuticals

consumed in Turkey falling under the generic label.

The country’s generic drug industry holds great poten-

tial, with the SSI often choosing to reimburse gener-

ic drugs over costlier brand-name products. Yet even

in the generics industry, stakeholders have cited low

government expenditures as the biggest growth

inhibitor. “Price legislation is a difficult challenge.

Some companies have withdrawn products because

it is too expensive to import,” Dr. Tuanna Unay, med-

ical director at Pensa Pharma, told OBG.

The majority of pharmaceuticals in Turkey are

imported, and purchased in euros. The SSI reimburs-

es pharmaceuticals using a euro rate that has been

pegged at 1.95 to the lira for four years, but the lira’s

recent depreciation has left the exchange rate at

€1:TL2.9 as of April 2015. Under the government’s

set rate, drug firms are losing up to 20% of revenues

to currency fluctuation, according to the Pharmaceu-

ticals Manufacturers Association of Turkey.

MEDICAL TOURISM: Turkey is aggressively expand-

ing and promoting its offering as a worldwide med-

ical tourism destination, with significant growth seen

in the segment in recent years. The country is run-

ning a multi-pronged health tourism strategy designed

to attract more foreign visitors to a variety of segments,

including medical, spa, and health care for elderly and

disabled people. Foreigners come to the country for

medical care in dentistry, optometry, orthopedics,

plastic surgery and hair restoration, and with Turkey

having more than 1600 thermal springs, alternative

medical tourism is also gaining popularity.

In 2014, 496,000 foreigners received treatment in

Turkish hospitals, according to Invest in Turkey, a 570%

rise from 74,000 patients in 2008. The Turkish Health-

care Tourism Development Council announced that

foreign visitors spent $4.6bn on health care in Turkey

in 2013, drawn by high-quality facilities and services,

multilingual staff, and its position at the crossroads

of Europe, Asia and the Middle East. The country’s rap-

id growth in medical tourism led Deloitte to list it as

one of the top 10 global health care destinations in

its 2014 Global Life Sciences Outlook report.

In 2012 the government introduced several leg-

islative changes, including tax legislation offering a

50% deduction for health institutions serving foreign

patients, in an effort to increase investment in new

private facilities. It also announced in June 2013 that

it will subsidise advertising activities of health insti-

tutions abroad, and plans to introduce tax-free health

care zones specifically tailored for foreign patients,

with the MoH aiming to increase the number of med-

ical tourists to 2m by 2023.

OUTLOOK: There is no doubt that the HTP has been

a great success, with macroeconomic indicators –

including infant and maternal mortality, tobacco usage,

and numbers of nurses, physicians and hospital beds

– improving across the board. Rapidly rising demand

for pharmaceuticals, and increasing patient numbers

and hospital visits, have raised questions about the

sustainability of the GSS scheme. Yet the government

has demonstrated its commitment to overcoming

these obstacles through increased spending, public-

private partnerships in the hospital segment and the

expansion of medical tourism. These activities will

continue to bolster revenues and drive growth in 2015

and beyond, with foreign and domestic patients

alike set to benefit from Turkey’s increasingly

sophisticated, efficient and effective health care system.

161


In 2014, 496,000 foreigners

received treatment in

Turkish hospitals, a 570%

rise from 74,000 in 2008.

Visitors spent $4.6bn on

health care, attracted by

high-quality facilities and

multilingual staff.

Insurance coverage has widened in recent years under the umbrella of the Social Security Institute

Pharmaceutical sales are set to grow to $19bn by 2017

HEALTH INTERVIEW

Hasan Ulusoy, Chairman, Nobel �laç

What can be done to enhance the performance of

Turkey’s pharmaceuticals industry both domestical-

ly and in the wider region?

ULUSOY: I would like to answer this question with an

evaluation of the past 10 years. With the launch of the

health care transformation programme a decade ago,

medical services became more effective at reaching our

population. Publicly owned treatment institutions are

providing more efficient services under one roof, and

patients are more easily accessing health care facili-

ties and receiving services faster. Patients with access

to the Social Security Institution, which covers almost

half of the population, can easily obtain medications

from commercial pharmacies. Although there may be

inconveniences, the family practitioner system is work-

ing. In 2003 the average was two visits to health care

institutions per person, whereas in 2013 this number

exceeded the OECD average and quadrupled to eight.

These are great accomplishments for our country.

However, since resources have not been available to

keep up with the sector’s financial growth, there have

been troublesome consequences for pharmaceuticals

suppliers. Today the prices of most pharmaceuticals are

lower than they were 10 years ago. It is almost impos-

sible to draw up a healthy budget as it is unknown when

and by how much prices will drop. The discount for pub-

lic purchases is another problem. One of the hottest

topics for debate is the euro exchange rate, which is

the basis for our prices. The same parity has been

utilised to determine prices for the past five years, and

the governing exchange rate is stabilised at 1.9595,

whereas it should have been updated four years ago

pursuant to the relevant regulations. Today if what is

necessary is done, prices should rise by almost 50%.

What is the state of research and development

(R&D) in Turkey, and what else can be done to

increase support for R&D on pharmaceuticals?

ULUSOY: Due to the previously mentioned reasons, it

is becoming more and more difficult to allocate

resources to R&D that is essential for the continued

success of pharmaceutical companies. This sector suf-

fered a great loss in 2014. This makes it more difficult

for companies to make plans for the future. Despite

these challenges, there are serious improvements tak-

ing place, as well as a shift in the government’s per-

spective on R&D over the past year.

In January 2015 Prime Minister Ahmet Davutoğluannounced an economic transformation programme

in which two out of nine targets are related to health

and allocating support for local pharmaceuticals pro-

ducers. Regardless of the inconvenience, we are allo-

cating approximately 5% of our turnover to R&D every

year. Nowadays, we are aiming to develop biotechno-

logical products for the first time in our country in col-

laboration with government research institutes. I am

looking forward to announcing good news on our coun-

try’s first biosimilar product in the near future.

What is your outlook for the sector in 2015, and what

challenges do think the pharmaceuticals and wider

health care sector will have to overcome?

ULUSOY: I am concerned as to whether there will be

solutions to the existing challenges in the industry. In

order to keep the sector running, we need to export

more of our products. We need to build capacity to devel-

op and market products with added value, and this can

only be done through increasing the number of R&D

initiatives. There are many examples from around the

world on which we can model when brainstorming new

strategies to boost the sector.

We know that in other countries consistent support

and incentives come mostly from the government. In

this regard, we appreciate that our own government

has prioritised the pharmaceuticals industry, albeit a

bit late. The importance of pharmaceuticals and R&D

in the segment has finally been acknowledged. Encour-

aged by this recent process, I hope 2015 will be a turn-

ing point for the industry as a whole and that the focus

will remain uninterrupted under Turkey’s 2023 vision.

162

Feeling fitOBG talks to Hasan Ulusoy, Chairman, Nobel �laç


163

Education & ResearchMajor government investment in new incentives

Target of 100,000 foreign students enrolled by 2023

School attainment lags behind OECD average

National education budget up by $2.4bn in 2015

University enrolment for maths and sciences declining

EDUCATION OVERVIEW

The government introduced a new schooling system in 2012/13

Driven by government reforms, increased private sec-

tor investment, and one of the largest young popula-

tions in Europe, Turkey’s education sector has grown

and matured impressively over the past decade. As the

country moves forward on a host of education targets,

including Vision 2023’s goal to reduce unemployment

to 5%, macroeconomic fundamentals including litera-

cy and enrolment have shown improvement. Howev-

er, stakeholders have highlighted challenges to further

improvement, including low enrolment across the sec-

ondary and tertiary levels, gender and regional dispar-

ities at the primary and secondary levels, and serious

capacity constraints in the post-secondary segment.

The government has taken note, successively increas-

ing its annual education budget each year and launch-

ing ambitious new projects aimed at increasing research

and development (R&D) at post-secondary institutions.

As the country focuses on creating the best education

opportunities for its backbone demographic, Turkey’s

vast young population is poised to capitalise on a grow-

ing and increasingly inclusive education system that will

improve employability and employment.

SECTOR OVERVIEW: Education in Turkey is highly cen-

tralised and overseen by the Ministry of National Edu-

cation (MoNE) at the primary and secondary levels,

and the Council of Higher Education (YÖK) at the ter-

tiary level. Central and provincial governments are

responsible for staff and financial management, and

education is largely publicly funded, although schools

are permitted receive contributions from parents

through school-parent associations.

The government has enacted several sweeping

reforms in partnership with international institutions

over the past decade. The Basic Education Programme

of 1997 and the Secondary Project 2006-11, were both

launched in partnership with the World Bank, and the

Master Implementation Plan, which ran from 2001 to

2005, included UN Children’s Fund projects. The ruling

Justice and Development Party’s (AK Party) education-

al reform programme was a key component of the

2007-13 National Development Plan. It set two key pri-

orities for education modernisation and reform: increas-

ing the responsiveness of education to demand, and

enhancing quality. Progress has been steady: literacy

rates increased from 91% in 2010 to 95.3% in 2013,

and schooling ratios have increased at all levels of edu-

cation, particularly at the post-secondary level. Today

education in Turkey is steered by two key documents:

the 10th Development Plan running from 2014 to 2018,

which targets improvements to primary education, and

the Lifelong Learning Strategy Paper, which was pub-

lished in 2009 and is geared toward the implementa-

tion of the European Employment Strategy.

The Vision 2023 economic development plan also

aims to increase cooperation between the public and

private sector in education, reduce unemployment to

5%, build up Turkey’s R&D capabilities, and expand the

ICT sector, which will require substantial upgrades to

the current education system, including more partici-

pation from the private sector.

Increased spending in education demonstrates the

government’s commitment to improving the sector. In

its 2015 budget, the government allocated $38bn to

national education, an increase of $2.4bn on the 2014

total. However, challenges and shortfalls persist, most

notably in regional disparities and gender inequality at

the primary and secondary levels, and participation,

attainment and employment in higher education. Turkey

still falls short of several key Organisation for Econom-

ic Cooperation and Development (OECD) indicators,

according to the organisation’s 2015 “Education Poli-

cy Outlook” report, but new reforms and increased pri-

vate sector participation will help address these issues.

PRIMARY & SECONDARY: In the 2012/13 school year

the government introduced a new 4+4+4 schooling

system in an effort to improve learning outcomes. Five-

year-olds begin school in September, with children

enrolled in primary, junior high and secondary school

for 12 years, compared to eight years previously. Pre-

primary education for children three-to-five years of

In its 2015 budget, the

government allocated

$38bn to national

education, an increase of

$2.4bn on the previous

year’s total.

The government has

enacted several sweeping

education reforms in

partnership with

international institutions

over the past decade.

164

Walking the walkThe government is investing heavily to achieve its education targets


EDUCATION OVERVIEW

age is voluntary in Turkey. Government spending and

reforms have made an impact on primary education.

With the increase in the educational term, there has

been a rise in the number of enrolments, with more

than 16.2m students listed as attending primary, jun-

ior secondary, secondary or vocational and technical

secondary schools in 2015.

The MoNE listed 26,972 pre-primary, 27,544 primary,

16,969 junior high and 9061 secondary institutions

operating in Turkey as of the 2014/15 school year, for

a total of 80,546 recognised institutions in the K-12 seg-

ment. Primary school enrolment reached 96.3% in

2014/15, with 96.04% of boys and 96.57% of girls

enrolled in primary school, according to MoNE data.

However, at the secondary level these numbers drop

to 79.37%, with 79.46% of boys and 79.26% of girls

enrolled in upper secondary education. While this rep-

resents a falling off from lower education enrolment

levels, secondary education enrolment and retention

rates have climbed strongly in recent years, up from

70.06%, 70.77% and 69.31% for overall, male and female

students, respectively, in the 2012/13 academic year.

Enrolment in upper secondary education is much

higher in the western, central and northern provinces,

including Ankara, than in the eastern and south-east-

ern provinces, indicating challenges for outlying regions

in the distribution of resources and human capital.

In its 2014 progress report on Turkey’s EU accession,

the European Commission noted the general increase

in enrolment rates, especially in secondary education,

though it said drop-out rates could not be monitored

systematically. “Continued work is needed to increase

attendance at all levels, especially for girls, as despite

improvements, 61% of the working age population in

2013 only had lower secondary education (eight years

of schooling),” read the report. “The gender disparity

remains considerable in some regions while the gen-

der gap in secondary education continues to decrease.”

Absenteeism and school drop-out rates are not pub-

lished officially, but local NGOs have reported high lev-

els of both, according to the European Commission,

which recommended in its report that Turkey contin-

ues strengthening its monitoring of school attendance

and drop-out rates. The OECD reported in 2013 that

only 43% of 25-34 year-olds had obtained a high school

diploma, much lower than the OECD average of 82%.

PRIVATE SCHOOLS: Private schools could be one way

to enhance educational offerings and create space in

the public system. Private international educational

institutions operate in Turkey under Article 5 of Law

No. 625, and have seen numbers and enrolment rise in

recent years. “The private education sector right now

is where the private health care sector was in 2002.

Today less than 4% of K-12 students are enrolled in pri-

vate schools. We anticipate the government will con-

tinue its reforms in supporting private involvement in

education and this will lead the sector to expand and

mature significantly as a result,” Övünç Okyay, senior

associate at the Carlyle Group, told OBG.

As of the 2014/15 educational year, there were 3490

formal private primary and secondary institutions in

Turkey: 1205 primary schools, 1111 junior high schools

and 1174 secondary schools, employing a total of

144,917 teaching staff. Private schools at all levels have

become increasingly popular, with enrolment rising

from just 239,988 in the 2008/09 school year to 675,977

in 2014/15, according to MoNE statistics.

CONTROVERSY: Praised for their international curric-

ula, foreign-language teaching and high learning out-

comes, private schools are nonetheless controversial

in Turkey. Tuition fees can rise as high as $15,000 annu-

ally, and although they have proven enormously pop-

ular with wealthier Turks, critics have argued that

income disparity prevents equality of opportunity in a

public-private model, and that some private schools are

teaching conservative religious curricula that risk politi-

cising the education system.

However, the government is increasingly embracing

private school expansion: in a 2011 MoNE report pre-

pared for the EU, Turkey established an official target

to boost the proportion of students attending private

schools (at all levels of schooling) from 2.75% as of 2011

to 5%. However, while keen to expand the role of the

private sector in education, this enthusiasm is not

spread evenly across all segments.

PREP SCHOOLS: Though there has been an increase

in the number of formal private schools in recent years,

by far the largest contribution to Turkey’s educational

sector are dershanes, preparatory schools that provide

supplementary education to students studying for the

Level Determination Examinations (SBS), a standard-

ised test taken before entering high school, and the for-

mal University Entrance Exam.

A recent report by the Union of Chamber and Com-

modity Exchanges of Turkey found that there were

4055 firms offering private tutoring services in Turkey,

and more than 1.2m students attending private tutor-

ing courses in 2012. In 2000 there were only 1730

such schools tutoring 174,496 students. It is estimat-

ed that there are more than 4000 firms operating pri-

vate tutoring courses, with more than 1.2m students

165


Tuition fees at private primary and secondary schools can be as high as $15,000 annually

The MoNE listed 26,972

pre-primary, 27,544

primary, 16,969 junior high

and 9061 secondary

institutions operating in

Turkey as of the 2014/15

school year, for a total of

80,546 recognised

institutions in the K-12

segment.

EDUCATION OVERVIEW

undertaking studies to help prepare them for univer-

sity entrance examinations.

These exams had traditionally driven growth in the

prep school segment; however, the AK Party recently

eliminated the SBS system, with high school admis-

sions now determined by grade point averages.

The government passed a bill seeking to close der-

shanes in October 2013, with the prime minister at the

time, Recep Tayyip Erdoğan, reaffirming the govern-

ment’s intention to convert dershanes into private

schools. The government argued that dershanes pro-

vide unfair advantages to wealthier families, and are

not overseen by the MoNE, leading to poor-quality

instruction and outcomes at some institutions, while

other stakeholders argue these schools are complemen-

tary, supportive and necessary.

According to government plans, all dershanes will be

closed as of the beginning of the 2015/16 academic

year in September 2015, with owners either having the

option of converting their establishments to full-serv-

ice private schools or shutting their doors.

POST-SECONDARY: Turkey’s post-secondary sector

has shown enormous growth over the past decade and

offers untapped potential for private investment,

although there is much room for improvement. While

schools and enrolment have shown promising growth,

capacity constraints are limiting expansion across the

board, and addressing these challenges will be critical

to sustainable long-term development.

There were 103 state-funded universities as of 2015,

according to YÖK, with 82 foundation or private non-

profit colleges and universities. Notable among these

are Boğaziçi University, the only university to make it

to the top 200 of Times Higher Education’s “World Uni-

versity Rankings 2014-15” (at 199th place); the Istan-

bul Technical University, the only in the country with its

own nuclear research reactor; and the Middle East

Technical University, a public institution in Ankara with

more than 46,000 students.

A little over a third of 15-29-year-olds in Turkey con-

tinued their studies after completing lower-secondary

education in 2011/12, in contrast with the OECD aver-

age of 68%, and although tertiary attainment levels have

shown a strong increase in recent years, they are still

low compared to other OECD countries. The MoNE

reported that 38.5% of the eligible population was

enrolled in tertiary education during the 2012/13

school year, with the OECD reporting that tertiary attain-

ment is 19% for 25-34-year-olds in post-secondary

degrees and diplomas, compared to the OECD average

of 39%. Enrolment rates for 15-19-year-olds more than

doubled from 2001 to 2011, from 30% to 64%, though

this too sits below the OECD average of 84%.

Capacity constraints are one of the biggest chal-

lenges facing post-secondary expansion. Roughly 2m

high school students sat the first round of university

admission exams in early 2015, with just over 70%

achieving a pass mark at the initial stage. While not all

of them will move on to university, or be offered places,

the rising numbers of students seeking a place at ter-

tiary institutions will put pressure on the public system.

Private or foundation universities and colleges are

the most obvious solution to capacity problems. They

were prohibited in Turkey until a constitutional amend-

ment in 1981 opened the door to private institutions,

provided they were non-profit, adequately endowed and

that the standard of teaching and research was no low-

er than that of public universities.

Private universities will be critical for post-second-

ary growth in Turkey. According to a British Council

report, 96% of the 4186 students polled across 81

provinces think overseas education will help them

secure professional jobs, while 86% of students surveyed

cited cost as the biggest impediment to studying abroad.

Tuition fees at Turkey’s private universities are often high-

er than those of Western and North American univer-

sities, according to the report. Retaining these fees will

be important for long-term post-secondary growth.

EMPLOYMENT: Employment is another challenge fac-

ing post-secondary students and graduates. Turkey has

experienced a serious school-industry mismatch in stu-

dents’ training and skills, with many tertiary graduates

remaining out of the job market, according to a 2012

167


There were 103 state-funded universities as of 2015

According to government

plans, all prep schools will

be closed as of the

beginning of the 2015/16

academic year, with owners

having the option of either

converting their

establishments to

full-service private schools

or shutting their doors.

SOU

RCE:

Tur

ksat

Net secondary enrolment, 2007-15 (%)

0

16

32

48

64

80

2014/152013/142012/132011/122010/112009/102008/092007/08

EDUCATION OVERVIEW

report titled “Education as an Investment in Turkey’s

Human Capital: A Work in Progress”, published by the

Eurasian Journal of Business and Economics.

Although employment rates for people with second-

ary and tertiary levels of education are lower than the

OECD average, at 62% and 76%, compared to 74% and

83%, respectively, they are similar for those who have

not attained secondary education: 51% compared to

the OECD average of 55%. Nonetheless, tertiary edu-

cation still increases the likelihood of employment, with

the OECD reporting that the employment rate among

25-64 year-olds with tertiary qualification was 14%

higher than for those with only an upper-secondary edu-

cation. A tertiary education also makes a significant dif-

ference to an individual’s wages: adults aged 25-64 with

a tertiary education earn 49% more than those with

only secondary education, and those without a post-

secondary education earn an average of 31% less than

their peers with secondary and post-secondary non-

tertiary qualifications.

GOVERNMENT FUNDING: Increased funding for R&D

activities is a government priority under Vision 2023,

and Turkey’s post-secondary institutions have benefit-

ted as a result. The government provides support in the

form of grants and loans for post-secondary students,

as well as the Industrial Thesis programme, which pro-

vides funding for up to 3.5 years for theses involving

technology and environmental adaptation, in partner-

ship with local universities. As of November 2012,

280,460 undergraduate, 1316 masters and 274 PhD

students had received YÖK grants, with an additional

463,965 having received loans from the council.

Technology will play an increasingly important role

in Turkish education as the government ramps up efforts

to expand R&D and grows its ICT sector. In 2010 the

government launched the Movement to Increase Oppor-

tunities and Technology (FATİH), one of the largest edu-

cation projects in Turkey’s history, which aims to bring

tablet computers and liquid-crystal display smart-

boards to some 40,000 schools and 570,000 classrooms.

FATİH is designed to help students pursue technol-

ogy-based careers, and is expected to create an $8bn

market for IT firms over the next three years. In 2012

the government allocated TL803m (€282.7m) to the

FATİH project, with an additional TL1.4bn (€492.9m)

earmarked for 2013. As of mid-2014, 732,000 tablet

computers had been distributed at schools across

Turkey, with plans to distribute an additional 350,000

interactive boards by mid-2015.

FOREIGN STUDENTS: Although facing serious capac-

ity constraints across the post-secondary sector, Turkey

is nonetheless moving to mature and internationalise

its university landscape by capturing a larger share of

the global higher education market.

Turkey’s Student Selection and Placement Centre

reported a substantial increase in the number of inter-

national students in recent years, hitting 43,251 in the

2012/13 academic year, a 38% increase over 31,170

in 2011/12. International student numbers have grown

by 179.4% in less than 10 years, with just 15,481 inter-

national students reported in the 2005/06 academic

year. The government hopes to bump this number to

100,000 by 2023, making Turkey one of the largest

global exporters of higher education.

“Internationalisation is a critical and vital aspect for

the development of the education sector in Turkey. It

extends beyond recruiting international students, how-

ever. In fact, international student recruitment is the

first step in the much larger plan to turn Turkey into a

global hub for education,” Yasemin Kilit Aklar, the inter-

national relations coordinator at Istanbul Şehir Univer-

sity (ŞEHİR), told OBG. ŞEHİR has seen its number of

international students, currently totalling more than 400,

double each year since the university opened in 2010

with just 26 international students.

However, Hande Baltci, ŞEHİR’s international rela-

tions office manager, points to a YÖK cap on foreign

student numbers as one challenge facing growth.

According to the current YÖK bylaw, the number of inter-

national students at a university in Turkey cannot exceed

50% of the number of Turkish students. “This is a sig-

nificant limitation for the university, and will become

more of an issue as time progresses,” Baltci said.

OUTLOOK: While the government has shown strong

commitment to advancing economic development

through education reforms, much work remains to be

done. Turkey still lags behind its OECD counterparts

across a number of significant education indicators, with

stakeholders complaining that regional disparities and

gender inequality are impeding primary- and second-

ary-level achievement in the country. While the post-

secondary education landscape has shown significant

growth over the previous decade, capacity constraints

and post-graduate employment continue to pose prob-

lems for Turkish students.

However, increased government investment and

strong growth in private sector activities will help meet

demand, with international students and ambitious

technology projects propelling the sector to become

a regional leader and global producer of both educa-

tion services and educated professionals in Turkey.

168

The government hopes to increase the number of international university students to 100,000 in 2015

In 2010 the government

launched FATİH, which aims

to bring tablet computers

and liquid-crystal display

smartboards to 40,000

schools and 570,000

classrooms.

According to the current

YÖK bylaw, the number of

international students at a

university in Turkey cannot

exceed 50% of the number

of Turkish students.


RESEARCH INTERVIEW

Turgut Şenol, General Manager, Teknopark �stanbul

How do current incentives for companies located

in technoparks foster innovation, and what addi-

tional incentives are needed?

ŞENOL: There are a number of incentives for compa-

nies located in technoparks. They do not have to pay

income taxes, all research-based production is exempt

from corporate taxes and, finally, software companies

do not have to pay value-added tax. This third condi-

tion is very important, but somewhat dangerous. While

software firms are an integral part of the economy,

there is a tendency, because of this last incentive, to

fill parks with them at the expense of other types of

businesses. In fact, software companies currently

account for 80% of firms in technoparks. Operators

need to work towards diversifying this mix.

That said, it is misleading to think that incentives are

the only ingredients needed in creating effective and

successful technoparks. In my opinion, there are already

enough incentives. Instead, we should be thinking about

how to create the best possible environment for col-

laboration and innovation so that companies can get

the maximum value-added results from participating.

How do you do this? You become very precise with

respect to the types of companies that you admit. For

instance, you must look to attract different industries

that may benefit from increased contact with each

other, or try to find specific sectors that may gain knowl-

edge from the park’s academic partnerships. Above all,

the companies must be able to conduct research, be

interested in innovative practices and products, and

know how to collaborate with other businesses.

Turkey’s technoparks also need to focus on creating

links with parks abroad so that domestic synergies can

turn into international ones. Parks across East Asia,

specifically China, have shown interest in working with

Turkish institutions. All this is to say that, while incen-

tives are important and can open up opportunities for

companies, good technoparks should not rely solely on

providing more incentives. The primary goal should be

to create the necessary environment for collaboration.

What is the importance of increasing research and

development (R&D) for the Turkish economy?

ŞENOL: R&D spending as a percentage of GDP is around

0.8%. This is much lower than in many EU countries; for

example, Germany spends almost 3% of its GDP on

innovation-related activities. If Turkey wants to move

out of the middle-income set of countries, it must

increase its R&D spending. Our goal is to reach 3% of

GDP by 2023, which is still too low. In 10 years, the bar

will have been raised significantly and the more devel-

oped countries will not be waiting for us to catch up.

While increasing this percent is important for many

reasons, the primary one is that the Turkish economy

needs to move up the value chain. We are a country of

more than 75m people with the potential to develop

world-class industries. Unfortunately, however, many of

the sectors in which we could have a competitive advan-

tage are far less developed than in our Western Euro-

pean neighbours, such as Germany. For instance, our

automotive manufacturing industry is highly devel-

oped, but we still do not have a brand of our own. If we

were to invest in R&D and develop the capacity to build

a Turkish car, we would have immediate and preferen-

tial access to a huge consumer population.

The white goods sector is another one in which we

are very strong, but need to make improvements. Our

star brands are leaders abroad, but we must import a

substantial amount of intermediate goods from low-

er-income countries. If Turkey were to focus on the sup-

ply chains of these companies, more of the income from

the sales of final products would stay in-country.

These are not the only industries that would gain from

more R&D spending. Turkey needs to develop indus-

tries across the board, from aerospace and engineer-

ing to life sciences and energy. We need to develop our

own industrial capabilities, changing the nature of pro-

duction to favour higher-margin products and real,

exportable Turkish brands. This will have a positive

impact on the balance of trade and will help the coun-

try to move into the high-income bracket of countries.

169


Setting sights on valueOBG talks to Turgut Şenol, General Manager, Teknopark �stanbul

RESEARCH OVERVIEW

The government aims to increase employment in the research sector

As Turkey tackles its Vision 2023 research and devel-

opment (R&D) goals, the time is right for private firms

and entrepreneurs to expand activities in a burgeon-

ing research sector that will expand considerably over

the next eight years. Although R&D activities still com-

prise a minor share of total GDP, growth in the sector

is poised to soar in 2015 as the government invests

heavily in new incentive programmes, higher education

funding and partnerships with the private sector.

The country’s increasingly sophisticated post-second-

ary segment has expanded research output as private

universities begin to access state and private sector

funding for R&D activities, while a host of foreign multi-

nationals have recently entered the Turkish market,

lured by a highly incentivised business environment

and far-reaching government support for new research

activities. As the private sector ramps up its involve-

ment in higher education and IT activities, the research

sector is expected to show promising returns in 2015.

OVERVIEW & GROWTH: The Turkish research system

is centralised and led by the Supreme Council for Sci-

ence and Technology (BTYK), under the auspices of the

Ministry of Science, Industry and Technology. The Sci-

entific and Technological Research Council of Turkey

(TÜB�TAK) is responsible for improving the research

environment, providing scientific advice to the gov-

ernment and acting as the BTYK’s secretariat. TÜB�TAK

also maintains the National Researcher Information

System database. Research policy imperatives are out-

lined in the government’s National Science, Technolo-

gy and Innovation Strategy 2011-16. The strategy aims

to create more output from existing research capaci-

ty, enhance the country’s needs-oriented research

capacity, and increase employment in the sector.

MIDDLE-INCOME TRAP: Turkey’s R&D targets under

the Vision 2023 national development plan, as agreed

to by the BTYK in 2011, are to increase the number of

full-time equivalent (FTE) researchers to 300,000,

increase the number of private sector FTE researchers

to 180,000, and increase R&D expenditure to 3% of

GDP, or $60bn, of which two-thirds will be supplied by

the private sector. As a rapidly expanding emerging

economy, Turkey is at risk of falling into the middle-

income trap, in which high growth over a short period

ends with years, or even decades, of economic stag-

nation. Heavy spending in R&D has historically helped

countries avoid falling into the middle-income trap.

EXPENDITURE: According to the results of the “R&D

Activities Survey 2013”, published in November 2014

by the Turkish Statistical Institute (TurkStat), gross

domestic expenditure on R&D (GERD) increased by

13.4% compared to 2012, reaching $14.8bn. The share

of GERD in GDP was 0.95% in 2013, up from 0.92% in

2012, and nearly double the 0.48% in 2002, indicating

Turkey is making progress on Vision 2023’s 3% target.

The country is also moving towards more private sec-

tor involvement: 48.9% of R&D expenditure was financed

by the private sector in 2013, up from 46.8% in 2012.

There was a slight decline in state funding, with the gov-

ernment’s share down from 28.2% in 2012 to 26.6%,

according to TurkStat. National sources and interna-

tional funding comprised 3.3% and 0.8%, respectively.

The total number of FTE R&D personnel reached

112,969 in 2013, well up on the 2012 total of 105,000.

Of the personnel employed in 2013, more than half were

engaged by the private sector, around 36% in higher

education, and just under 11% by the government.

Regional disparities have long plagued education and

research in Turkey, but R&D activities have increased

dramatically in Turkey’s historically under-represented

southern region, indicating that government incentive

programmes for these regions have been successful.

According to TurkStat, R&D expenditure in 2013 was

the highest in West Anatolia at 27.5%, followed by East

Marmara at 21.3%, and Istanbul at 20.3%.

Deloitte’s “Researcher’s Report 2014: Turkey” found

that Turkish research and innovation is benefitting from

EU funding, the main instrument being the EU’s Sev-

enth Framework Programme for Research and Devel-

opment. The total number of Turkish participants in the

One of Turkey’s R&D targets

under the Vision 2023

national development plan

is to increase R&D

expenditure to 3% of GDP,

or $60bn, of which

two-thirds will be supplied

by the private sector.

As the private sector ramps

up its involvement in higher

education and IT activities,

the research sector is

expected to show

promising returns in 2015.

170

Showing promiseGovernment incentives and increased private sector participation arehelping to boost the sector


RESEARCH OVERVIEW

programme is 879, out of 5982 applicants, with Turkey’s

participants receiving more than €145.1m. There has

also been a steady flow of patent applications, indicat-

ing continued end-product activity in R&D, with the

state-run Turkish Patent Institute reporting in 2014

that 4529 domestic patent applications were lodged

in 2013, almost exactly the same number as in 2012.

Unfortunately, Turkey still falls below many EU coun-

tries for R&D activities. On its Innovation Union score-

board for 2014, the European Commission (EC)

described Turkey as a modest innovator, though one

that was improving at a steady rate. The EC ranked

Turkey 32nd out of 34 European countries for innova-

tion performance, assessed under three main cate-

gories: open, excellent and active research systems;

finance and support; and human resources.

A WAY TO GO: With R&D GDP intensity growing by an

average of 5.9% annually between 2000 and 2012, the

country’s R&D expenditures are projected to hit 1.48%

of GDP by 2020, according to Deloitte, although this

will still sit below the projected EU intensity in 2020,

and means the country will likely fall short of its 3% tar-

get in 2023, with the report stating that a significant

catch-up is required if Turkey is to achieve the objec-

tives set for the coming eight years.

Turkey ranked 54th on the Global Innovation Index

2014, a composite indicator that ranks countries in

terms of their innovation outputs and environment, ris-

ing 14 rungs on the ladder from 2013. Although it fared

better than other rapid-growth markets such as Indone-

sia (87th), the Philippines (100th) and Egypt (99th), it

was behind China (29th) and Russia (49th). However,

it managed to leapfrog both Brazil (61st) and India

(76th), which it had trailed just one year before.

INCENTIVES: Government incentives and spending

are acting as one of the biggest growth drivers in the

research sector. Turkey’s R&D law provides special incen-

tives for R&D activities in private companies, on the stip-

ulation that a minimum of 50 personnel be employed

in the company’s R&D arm. The incentives within the

law, which will be in effect until 2024, also include a

100% deduction of R&D expenditure from the tax base

if the number of researchers exceeds 500.

Other incentives include income tax exemption for

R&D employees, a 50% exemption from social securi-

ty premiums over five years, stamp duty exemption for

applicable documents, tax deductions for certain funds

granted by public and international bodies, and tech-

no-initiative capital for scientists, to a maximum of

TL100,000 (€35,210) per project.

TÜB�TAK and the Turkish Technology Development

Foundation (TTGV) compensate or fund R&D-related

expenses as well as capital loans for R&D projects in

Turkey. Eligible projects include concept development,

technological and feasibility research, laboratory stud-

ies, design and sketching studies, prototype production,

construction of pilot facilities, test production, patent

and licence studies, and activities concerning the

removal of post-sale problems from product design.

In addition, the TTGV offers long-term, interest-free

loans for technology development, renewable energy

production, energy efficiency improvement and envi-

ronmental impact-reduction projects. The TTGV cov-

ers a maximum of 50% of project costs with maximum

budgets of $1m, with companies given four years,

including a one-year grace period, to pay back the loan.

In early April 2015 the prime minister, Ahmet Davu-

toğlu, announced plans to provide funding support to

R&D-based industrial investments through the Turkish

Development Bank. The plan was part of a broader

economic support package aimed at encouraging invest-

ment and what Davutoğlu described as “high-technol-

ogy, intensive production and employment”.

The new package also envisions tax incentives for

companies making investments in advanced technolo-

gies, which would support firms involved in many R&D

fields, with higher levels of tax breaks being offered for

investors operating in areas away from the main pop-

ulation and business hubs.

HIGHER EDUCATION: The contribution of post-sec-

ondary institutes to the R&D sector has been signifi-

cant. According to a 2013 joint research evaluation

event with Elsevier and Hacettepe University, Turkey

171


R&D expenditures are projected to hit 1.48% of GDP by 2020

Turkey ranked 54th on the

Global Innovation Index

2014, a composite

indicator that ranks

countries in terms of their

innovation environment

and outputs, rising 14

rungs on the ladder from

2013.

Total R&D expenditure, 2001-13 (TL bn)

SOU

RCE:

Tur

ksat

0

3

6

9

12

15

2013201220112010200920082007200620052004200320022001

RESEARCH OVERVIEW

ranked 18th out of the world’s top-20 countries for

research output, and has already established itself as

a global competitor in research.

STRONG SUIT: Turkey has been identified as being par-

ticularly strong in chemistry, engineering and medical

research, with the country becoming increasingly inter-

disciplinary in the scientific sector. However, accord-

ing to a 2012 Atilim University report titled “A look at

the Turkish higher education system from the institu-

tional economics point of view”, “The emergence of mul-

tidisciplinary fields such as biotechnology, molecular

biology and technology studies, has created an urgent

need for reorganisation of departments in universities,

and a move towards ‘problem-based learning’ ”, rather

than independent innovation.

Perhaps of more concern for the future of R&D in

some of these fields is data from the Higher Board of

Education released in March 2015 showing a steep fall

in the number of students opting to undertake sci-

ence-based courses at university. From 2010 to 2014

there was a decline in the levels of enrolment in math-

ematics, biology, chemistry and physics.

NEW FUNDING: The government has been moving to

enhance its support of R&D activities at universities in

recent years. In 2011 TÜB�TAK launched a promising

funding programme called the Technology Transfer

Offices Support Programme, targeting R&D develop-

ment at post-secondary institutions. Under the pro-

gramme, various institutions, both public and private,

are eligible to receive TL1m (€352,100) annually for

five- and 10-year periods, to be used for long-term sci-

ence and technology research projects and programmes.

Private universities, which are eligible to receive up

to 50% of operating costs from the government, but

seldom get more than 1-3%, have benefitted from the

technology transfer programme. Boğaziçi University,

Istanbul Şehir University (ŞEHİR) and Middle East Tech-

nical University have each received TÜBİTAK funding in

recent years. ŞEHİR was among two private institutions

selected to receive technology transfer funding in 2013,

and is also one of only two that have been granted state

support twice within three years.

“These developments are promising, but we see a

need for the government to synchronise services.

Increasing R&D activities is one of the most important

agendas we have, but the industry is still young and more

cooperation is necessary,” Yasemin Kilit Aklar, interna-

tional relations coordinator at ŞEHİR, told OBG.

PRIVATE SPENDING: While government support is

important, increased collaboration between universi-

ties and the private sector will be a crucial component

of R&D expansion. Indeed, increased private sector

partnerships are a key target in the government’s plans

to expand R&D activities at the post-secondary level.

The Public Research Grant Committee was created

to increase the number of scientists and researchers

working in Turkey, while the Engineering Research Grant

Committee funds national scientists working on engi-

neering and architecture projects. The Technology and

Innovation Funding Programmes Directorate helps

industry and academia collaborate in technology devel-

opment and innovation activities across five sectors:

manufacturing, electronics, metallurgy and chemistry,

biotechnology, and information technology.

The past five years have also seen foreign multina-

tionals increase their participation in post-secondary

R&D activities. In February 2015 South Korean electron-

ics firm Samsung announced that it had established

an R&D centre in Turkey in cooperation with local tech

company Semper-Tech. The centre, located at Teknopark

Istanbul, will carry out research and development of

next-generation wireless technologies, with a partic-

ular focus on health care and educational software.

TECHNOPARKS: Often located near universities, tech-

nology development zones (TDZs), commonly termed

technoparks, have been set up to attract investment

in high-technology fields while increasing collaboration

between private firms and university research depart-

ments. There are currently 59 TDZs in Turkey, of which

40 are operational and a further 19 are under construc-

tion. These parks host 2500 companies, while 148

domestic and international companies have active R&D

centres in Turkey. The concentration of TDZs in Istan-

bul and Ankara has made these cities preferred desti-

nations for ICT investment, with a significant part of

foreign direct investment initiated by European and

North American companies.

Teknopark Istanbul, the largest in Turkey, opened its

first phase in August 2013 on the Asian side of Istan-

bul. The $4bn technopark will house the R&D labs of

about 1000 local and foreign companies from technol-

ogy-intensive sectors. The first phase opened with 100

companies, 10 of them international, across a 650,000-

sq-metre space that will eventually accommodate

30,000 employees engaged in R&D projects for strate-

gic sectors including defence, ICT, electronics, energy,

biotechnology, aviation and aerospace. Teknopark Istan-

bul is expected to generate $5bn-7bn of annual income

when it becomes fully operational in 2023.

Within its TDZ network the Turkish government offers

a number of incentives to attract new investment.

172

Of the R&D personnel employed in 2013, more than half were engaged in the private sector

Under TÜBİTAK’sTechnology Transfer Offices

Support Programme,

various institutions, both

public and private, are

eligible to receive

€352,100 annually for

five- and 10-year periods,

to be used for long-term

science and technology

research.

There are currently 59

technology development

zones in Turkey, of which

40 are operational and a

further 19 are under

construction. The

concentration of zones in

Istanbul and Ankara has

made these cities preferred

destinations for ICT

investment.


RESEARCH OVERVIEW

Offices come ready to rent, with infrastructure facili-

ties already provided, while profits derived from soft-

ware development and R&D activities are exempt from

corporate tax until 2024.

Deliveries of application software produced exclu-

sively in TDZs are exempt from value-added tax, and

wages for researchers in TDZs are exempt from income

tax over the same period. The government will also pay

50% of the employer’s share of social security premi-

ums for five years, according to Invest in Turkey.

DEFENCE: Turkey’s push to enhance defence self-suf-

ficiency will also serve to boost R&D activity and invest-

ments. At present, Turkey is able to meet roughly 60%

of its own defence equipment and technology needs,

a figure that rises to 90% if co-production or technol-

ogy transfer agreements or projects undertaken as

part of international consortiums are factored in.

According to the Undersecretariat for Defence Indus-

tries, Turkey now only directly imports 10% of its defence

equipment requirements. The Turkish government has

said it wants to be completely self-reliant for its defence

technology needs by 2023, the centenary of the found-

ing of the Turkish Republic.

However, much of the stock in Turkey’s defence

inventory is ageing, with new technology required to

maintain the military’s cutting edge. Turkey is in the

process of developing its first indigenous main battle

tanks and unmanned aircraft, and is also aiming to pro-

duce its own front-line fighter aircraft. All of these proj-

ects will require further investment in R&D capacity,

In mid-March 2015 electronics specialist Aselsan,

Turkey’s largest defence company, inaugurated a $157m

facility in Gölbaşı outside of Ankara, specialising in

radars and electronic warfare suites for land, air, naval,

space and unmanned platforms. Aselsan accounts for

one-third of all defence-based R&D activity in Turkey.

Both the government and TÜBİTAK are expanding

their investments in defence research, funding a series

of projects in the defence industry and space sector,

with much of this development taking place outside of

Ankara, which is fast becoming a hub for military-

focused R&D activities. Also in March 2015, the gov-

ernment announced plans to establish a qualified

defence-industry site in Kazan, close to Ankara, to house

hundreds of local and foreign defence and aviation

companies. Construction on the $6bn project will begin

later in 2015, with an estimated 30,000 people expect-

ed to be employed across a 3m-sq-metre site when the

facility opens for business.

TELECOMS: Years of intense competition in an increas-

ingly challenging market have led Turkey’s mobile oper-

ators to make major investments in R&D activities.

Today the country’s big three mobile operators – Turk-

cell, Vodafone and Avea – have each established their

own R&D centres in Turkey, developing in-house tech-

nology to improve smartphone affordability, as well as

increasingly fast internet technologies in the 4G and

fibre-optic internet segments.

Turkcell’s R&D arm, Turkcell Teknoloji, was established

in 2006, later launching Turkey’s first domestically

designed smartphone in September 2013. Turkcell’s

T-series phones offer all the standard features of an

imported smartphone at half the price of foreign mod-

els. Vodafone’s mobile wallet money transfer service

launched in October 2012, and major financial institu-

tions including Garanti Bank, Akbank and Yapı Kredi

are among those that have adopted the service.

Avea opened the country’s first government-certi-

fied R&D facility in 2010, aiming to increase its com-

petitiveness through new in-house technologies.

AveaLabs Customer Experience Centre opened to the

public in February 2012, showcasing projects in e-serv-

ices, digital publishing and health care apps, amongst

other services. The centre is currently working on nine

projects with companies including Linxa, Intellica,

Havooz, Bayt and Crenno, and produced its first batch

of graduates in 2013. Avea also has a line of in-house,

low-cost smartphones called inTouch.

Oksijen, Vodafone Turkey’s R&D arm, was acquired

in 2000, and is currently involved in software design

for both export and domestic consumption, with the

goal of eventually exporting Turkish technology to Sil-

icon Valley. In February 2015 Vodafone announced that

its Silicon Valley incubator, Vodafone Zon, would be

cooperating with Oksijen for the mutual transfer of

technology and know-how. With the planned rollout

of 4G mobile phone services in the latter part of 2015,

it is likely that R&D activity and investments in the

telecommunications and ICT segments will gain further

momentum that year and beyond.

OUTLOOK: Although there is much work to be done in

bringing Turkey up to EU standards in terms of R&D

spending and outputs, the country’s R&D sector is

nonetheless showing promising growth, with Turkey

hoping to avoid the middle-income trap by increasing

its research expenditure and innovation. Led by strong

post-secondary output, government incentives and

funding, and increased private sector participation,

Turkey’s fledgling R&D ecosystem will continue to devel-

op human capital, enhance education and bolster over-

all economic development well into 2015 and beyond.

173


Far-reaching government support for new research activities is attracting multinational companies

Turkey is able to meet

roughly 60% of its own

defence equipment and

technology needs, a figure

that rises to 90% if

co-production or

technology transfer

agreements or projects

undertaken as part of

international consortiums

are factored in.

With the planned rollout of

4G mobile phone services

in the latter part of 2015, it

is likely that R&D activity

and investments in the

telecommunications and

ICT segments will gain

further momentum that

year and beyond.

175

TourismGrowth slows but record visitor numbers continue

Government initiatives keep pace to meet 2023 goals

Istanbul New Airport set to further boost capacity

MICE and halal segments diversify tourist offering

International hoteliers invest in high-profile openings

TOURISM OVERVIEW

Turkey’s 7200 km of coastline includes 352 Blue Flag beaches

With a selection of archaeological ruins to rival Italy and

Greece, 7200 km of scenic coastline, Istanbul’s unique

blend of rich heritage and cosmopolitan culture and

an advantageous location at the crux of three conti-

nents, Turkey’s diverse visitor offerings have seen its

popularity grow rapidly over the past decade in the

process of becoming a world-leading tourist hotspot.

In the past 10 years the number of visitors to Turkey

has grown 115.7%, going from 17.08m in 2004 to 2014

in 36.84m. The country ranks as the world’s sixth most

popular tourist destination, after France, the US, Spain,

China and Italy: it is within striking distance of achiev-

ing its Vision 2023 goal to rise to fifth place worldwide.

In terms of source markets Germany remains the num-

ber one tourist market for Turkey, recording 5.2m vis-

itors in 2014. Germany is closely followed by Russia, with

4.48m visitors, and the UK with 2.6m visitors.

While visitor arrival numbers continue to grow year-

on-year, 2014 saw a slight dip in the rate of growth. A

record 36.84m foreign arrivals were recorded in 2014.

While an increase of 5.52% on the 34.91m arrivals in

2013, this marked a slight slowdown on the 9.84%

increase between 2012 and 2013. Even still, the coun-

try is set to meet many of its Vision 2023 tourism goals,

including welcoming 50m visitors annually. With new

hotel and transport infrastructure, as well as increased

government promotion of various tourism sub-seg-

ments, the sector is expected to remain healthy.

Challenges persist, however. Visitor spending has

remained flat in recent years, still recovering from a dip

in 2012. Furthermore, Istanbul’s diminished occupan-

cy rates during low season have some hoteliers con-

cerned about a flood of new rooms over-saturating the

market. But with a new airport set to greatly expand

capacity, anticipated growth in meetings, incentives,

conferences and exhibitions (MICE) tourism, and rap-

idly expanding medical, halal and cruise ship segments,

the sector appears to have a promising future.

BY THE NUMBERS: The tourism industry’s governing

body, the Ministry of Culture and Tourism (MoCT), has

played an increasingly proactive role in the sector’s

development since President Recep Tayyip Erdoğan –

then prime minister – launched the Vision 2023 eco-

nomic development plan in 2007. Among the targets

set out for achievement before its 2023 centenary,

Turkey aims to attract 50m visitors annually, become

the fifth-largest tourist destination worldwide and gen-

erate $50bn in annual revenue.

Visitor arrivals have more than doubled in the past

decade, with expansion driven by increased government

initiatives to grow the industry, a rush of foreign invest-

ment and international brands entering the market

and a well-developed flight network located at the

crossroads of three continents. A comprehensive range

of market sub-segments is represented within the coun-

try: from the traditional sun, sand and sea segment to

medical to MICE, halal and cruise ship tourism.

Turkey’s tourism sector has much to offer, including

11 UNESCO World Heritage sites, 352 Blue Flag beach-

es, 19 Blue Flag marinas and 20 international-stan-

dard golf courses. Tourism revenues have been rising

steadily as a result of increased international attention

and a sizeable domestic tourist base.

While Istanbul is still the most popular port of entry

to the country, the southern region has seen an enor-

mous uptake in visitor arrivals since 2011. In 2013

Erdoğan announced that the government had invest-

ed TL13bn (€4.58bn) in Antalya’s development since

2002, and data from the MoCT found that Antalya was

the most popular city for tourist arrivals in 2012 and

2013, and a close second behind Istanbul in 2014. The

city reported 11.50m arrivals in 2014, just behind Istan-

bul’s 11.82m. The south-western city of Muğla ranked

third, with 3m visitors recorded in 2014.

PROGRESS: Given its progress in attracting tourists,

Turkey’s goal of attaining 50m tourists annually by 2023

is certainly feasible: in fact, the World Tourism and Trav-

el Council (WTTC) projects that by 2023, the country

will attract 50.77m visitors annually. Turkey’s Tourism

Investor’s Association (TYD) gave an even brighter

The number of visitors to

Turkey has more than

doubled in the past 10

years, with 2014 witnessing

a record 36.84m foreign

arrivals. As part of its Vision

2023 development plan,

the government aims to

attract 50m visitors

annually by 2023.

While Istanbul was the

country’s most popular

entry point in 2014,

welcoming 11.82m visitors,

the city of Antalya was a

close second with 11.50m

visitors.

176

Diverse appealAn increasingly versatile tourist offering is ensuring continued sector growth


TOURISM OVERVIEW

forecast, predicting that the country will reach 60m vis-

itor arrivals by 2023. “50m visitors is something we

could achieve before 2023,” Kerem Demircan, general

manager at Midtown Hotel, told OBG. “With a growing

supply of hotel rooms and the construction of the new

Istanbul airport, there is no doubt we can achieve and

even surpass these figures by 2023.”

INCOME: Tourism income has grown impressively in

recent years. The WTTC expects tourism spending will

grow by 4.6% annually to reach TL131.8bn (€46.4bn),

or 4.7% of GDP, by 2025. WTTC figures include income

generated from hotels, travel agents, airlines and oth-

er passenger transportation services, as well as restau-

rant and leisure industries supported by tourists.

Visitors in the leisure segment dominate tourism,

with Turkey offering a diverse array of historical and

archaeological sites, as well as ample variety in climate

and culture. The WTTC found that leisure travel spend-

ing generated 84.4% of direct travel and tourism GDP

in 2014, compared to 15.6% for business travel spend-

ing. WTTC projects 2015’s figures to increase by 2.7%

for leisure, and 1.4% for business, reaching TL129bn

(€45.4bn) and TL23.6bn (€8.3bn), respectively.

Turkey’s domestic segment is also growing; Turk-

Stat’s figures for the first three quarters of 2014 showed

a 25% increase in total expenditure by domestic tourists,

compared to the same period in 2013. The WTTC proj-

ects domestic travel spending to grow by 1.7% in 2015

to reach TL68.3bn (€24.1bn), and rise by 4.2% annu-

ally to reach TL103.1bn (€36.3bn) in 2025.

Despite good overall growth, operators have high-

lighted low visitor spend as a challenge for the indus-

try. Foreign visitors accounted for 80.97% of foreign

tourism revenues in 2014, with Turkish citizens living

abroad comprising the remainder. However, while vis-

iting Turkish citizens spent an average of $1130 per capi-

ta, foreign visitor spend averaged just $775.

“The problem is that expenditures per person for

foreigners have not risen in several years, and are not

expected to increase soon, which we as an industry need

to work on,” Tugrul Temel, development director at

Hilton Worldwide’s Istanbul office, told OBG.

However, the industry’s contribution to employment

is increasing; the WTTC reports that travel and tourism

generated 580,000 jobs directly in 2014 (2.2% of total

employment); and the number of jobs generated is

expected to rise by 5.9% in 2015. By 2025, the WTTC

expects tourism to generate 915,000 jobs in Turkey.

HOTELS: Turkey’s hotel capacity is set to grow substan-

tially. Invest in Turkey reported in 2013 that licensed

hotel facilities increased 48% between 2005 and 2012,

with the country now offering guests 715,692 beds.

The TYD projects the country will need to add an addi-

tional 1.5m hotel rooms by 2023 to meet demand.

According to the Istanbul Convention & Visitors

Bureau (ICVB), Istanbul offers 94,000 hotel beds and

over 170 four- and five-star hotels. Significant poten-

tial exists outside of Istanbul; while the city is often

viewed as the largest tourism city in Turkey, its hotel

numbers fall short of Antalya, which offers over 400,000

guest beds and 260 five-star hotels, according to the

International Congress and Convention Association

(ICCA). Izmir, with just 29,000 beds, is hoping to expand

its offerings via increased foreign hotelier investment,

according to Invest in Turkey. There is some concern

from Istanbul’s operators, however, that with low sea-

son occupancy rates averaging 25-35%, an influx of new

hotel rooms in the city will over-saturate the market.

“During the high season there is probably space for

more hotels, but with Istanbul Atatürk Airport already

at full capacity, supply is the same for many more hotel

rooms. You’re spreading the same amount of butter over

a larger piece of toast. High season premium is need-

ed to compensate for the low season, when we’re all

fighting over the same slice,” Massimilliano Zanardi,

general manager of the Ritz-Carlton Istanbul, told OBG.

Resorts are becoming increasingly popular; while

ownership of summer residences is common for domes-

tic tourists, a rise in disposable income domestically is

leading families to choose large, all-inclusive resorts for

summer holidays, signalling significant investment

potential. The example of Bodrum, where Swissôtel

Resort and Nikki Beach Resort are opening shortly (in

June 2015 and spring 2016, respectively), demonstrates

the market potential for international investors.

Turkey’s hotel offerings include 165 chains, 15% of

which are international brands, according to Invest in

Turkey. Hotel beds are expected to greatly increase on

the back of new foreign investment, especially in Istan-

bul, where new offerings from Hilton, Mondrian and

Sheraton are opening in 2015. Internationally brand-

ed hotels are in shorter supply outside of Istanbul and

Ankara, signifying further investment opportunities for

international operators (See analysis).

MICE: Business tourism holds significant potential in

Turkey, and Istanbul is becoming a high-profile MICE

tourism destination, with national carrier Turkish Air-

lines offering over 239 direct destination flights between

Istanbul and five continents, and an additional 300

international airlines serving two major airports on the

European and Asian sides of the city. Along with every

other segment, MICE activities are expected to expand

even further with the opening of the Istanbul New Air-

port, which will be the world’s largest and offer an

177


SOU

RCE:

TU

IK

Tourism sector income, 2004-14 (bn $)

0

7

14

21

28

35

20142013201220112010200920082007200620052004

Overall income from

tourism has grown

impressively in recent

years, and is expected to

reach €46.4bn by 2025.

Nonetheless, concerns

remain about the declining

expenditure rates of

foreign visitors, who have

consistently spent less than

domestic tourists in recent

years.

TOURISM OVERVIEW

annual capacity of 90m passengers when it opens in

2017. Capacity is eventually expected to rise to 150m.

“MICE is a rising star, and the most productive area

of tourism at the moment. There is tremendous poten-

tial in the MICE segment, as evidenced by recent con-

struction of exhibition halls and conference centres in

Istanbul and elsewhere,” said Demircan.

In a 2014 report by the ICCA, Istanbul was the eighth-

most popular conference destination worldwide, host-

ing 146 international meetings in 2013. The city can

accommodate events of up to 30,000 people, accord-

ing to the Istanbul CVB, with offerings including seven

purpose-built convention centres, three exhibition cen-

tres, and a large selection of palaces, waterfront ven-

ues, and convention hotels.

Outside of Istanbul, MICE tourism has room for growth,

and an increasing number of first- and second-tier

cities are seeing new construction and renovation proj-

ects catering to the MICE segment.

Antalya is one such city. In November 2014, when

Antalya hosted the 53rd ICCA Congress, ICCA President

Arnaldo Nadone noted in his programme notes that

“21st century Antalya is reinventing itself as a top qual-

ity, modern and international conference destination,

building on its tremendous success over recent years

in the leisure tourism industry.”

Izmir is also making strides in increasing its MICE

activities, jumping more than 100 places in ICCA’s inter-

national convention cities ranking. The new Izmir Fair

Exhibition Centre opened in 2014, featuring 80,000 sq

metres of space, with the existing exhibition centre set

to be converted into a smaller 24,000-sq-metre con-

ference centre and mixed-use development. The Izmir

International Fair, Turkey’s oldest trade show, is set to

celebrate its 85th anniversary in 2016, and attracts 3m

visitors annually, including 40,000 foreign visitors.

At nearby Kuşadası, the 43,000-sq-metre Ephesus

Convention Centre opened in August 2013. Business

travellers have the added touristic draw of the ruins of

Ephesus, currently under consideration to become

Turkey’s 12th UNESCO World Heritage site. Other

UNESCO sites in Turkey include the archaeological site

of Troy, Göreme National Park, the rock sites of Cap-

padocia and the Neolithic site of Çatalhöyük, with evi-

dence of human activity dating back to 7200 BC.

HALAL: Halal tourism is a rapidly expanding segment

worldwide, with the industry expected to reach a val-

ue of $160bn by 2017. Designed for Muslim families

and business travellers who abide by sharia rules, the

segment offers hotels with separate swimming pools

and beaches for women and men, halal-certified food

and kitchens, and non-alcoholic beverages. Muslim

tour operators may also provide pork- and alcohol-free

flight options, facilities with prayer announcements

and religious broadcast TV options.

Turkey’s touristic offerings, adaptable hospitality

industry, and proximity to Arab countries have made it

a significant player in the halal tourism market; in March

2015, Turkey took second place in the MasterCard-

CrescentRating Global Muslim Travel Index. Evaluated

on attentiveness to the needs of Muslim travellers,

including the presence and accessibility of halal restau-

rants and the provision of prayer rooms in airports,

malls, and hotels, the survey ranked Turkey ahead of

the UAE, Qatar, Saudi Arabia, Singapore and Morocco.

A 2014 survey by the Mediterranean Union of Hotel

Owners reported that there were 75 halal-friendly

hotels currently operating in Turkey. Muslim-friendly

offerings include the Caprice Thermal Palace, the Adenya

Beach Resort & Hotel, the Karya Hotel and the Şah Inn

Paradise, and are mainly located in the southern, Aegean,

north-western and Black Sea regions.

HEALTH: With a highly skilled, multilingual workforce

and relatively low equipment and HR costs, Turkey’s med-

ical tourism segment holds formidable potential for

the industry. In 2014, 496,000 foreigners received treat-

ment in Turkish hospitals, according to Invest in Turkey.

The Ministry of Health (MoH) expects health-related

tourism to grow to $20bn by 2023, serving 2m inter-

national patients. The government has been working

hard to promote investment in the sector, offering

incentives to providers and launching a worldwide mar-

keting campaign to attract more patients.

In 2013 the MoH began investing in state-run research

hospitals, focusing on core areas that are expected to

rise in international popularity over the next decade.

In 2014 the ministry also launched a campaign enti-

tled “Turkey: Right Choice for your Life,” promoting the

most popular segments of Turkey’s medical tourism

industry abroad: cosmetic surgery, orthopaedics, car-

diology and ophthalmology.

Booklets in a variety of languages, including English,

French, Spanish and Arabic will be distributed to air-

line passengers, espousing the benefits of medical

tourism in Turkey, as well as offering information on

accredited health institutions and the services they

provide. The MoH also plans to launch as many as 20

new websites to promote medical tourism, according

to Invest in Turkey. The campaign aims to increase

Turkey’s health tourism target of $5.6bn to $10bn by

2018, and to compete with other leading medical

179


The Ministry of Health is pursuing a promotion campaign to grow medical tourism to $20bn by 2023

The meetings, incentives,

conferences and exhibitions

segment is thriving thanks

to new venue openings in

Istanbul, Kuşadaşı and

Izmir. The 2014

International Congress and

Convention Association

ranked Turkey as the eighth

most popular destination

for conferences and

conventions worldwide.

Turkey is well placed to

profit from the growing

halal tourism segment.

Evaluated on factors such

as the presence and

accessibility of halal

restaurants and the

provision of prayer rooms in

airports, malls and hotels,

the country took second

place in a 2015 Muslim

travel index.

TOURISM OVERVIEW

tourism destinations, including Dubai, Thailand, India

and Singapore (See Health chapter).

CRUISE SHIPS: Cruise ship tourism holds significant

potential for Turkey, and increasing activities in the sea

tourism segment has been listed as a priority in the Vision

2023 tourism master plan.

The Mediterranean region is ranked as the second-

largest cruise market globally after the Caribbean. A July

2013 report by the International Association of Mar-

itime Economists (IAME) found that cruise operators

deploy 25% of their vessels with a capacity of 29.5m

bed-days to the Mediterranean region, with activities

expected to increase in the coming years.

The Izmir Chamber of Trade (IZTO) moved to create

a Union of Turkish Cruise Ship Ports in 2012, identify-

ing 13 port cities that hold significant potential for

cruise ship growth. Ports in Istanbul, Kuşadası, Izmir

and Marmaris are the most popular cruise destinations

in Turkey, with Kuşadası, Bodrum, and Marmaris all host-

ing specifically designated cruise ship terminals.

In 2012 the Anatolia News Agency reported that

passenger numbers in Turkey grew by 276% between

2002 and 2011. The industry has grown by 10% annu-

ally, with 1623 ships carrying 2.2m passengers in Turkey

in 2011. Long-term demand is expected to grow, espe-

cially with a growing segment of Turkish tourists choos-

ing cruise ship holidays departing domestically.

The Port of Istanbul is the largest cruise port in Turkey

in terms of traffic. Ideally located on the Bosphorous

strait – the only sea passage into Black Sea countries

– Istanbul is in an advantageous position to increase

its role as a regional hub, with cruise line operators

increasingly looking to Romania, Bulgaria, Russia and

Georgia for future market expansion. However, cruise

ship growth in Istanbul is slightly lower than the region-

al average of 13%, according to the IAME report, which

suggested Istanbul could increase its current market

share if it improved port congestion and capacity issues.

Kuşadası is also poised to see cruise activities expand.

The MoT reported Kuşadası welcomed 563,817 passen-

gers in 2012, many drawn by the ancient ruins of Eph-

esus nearby. Royal Caribbean Cruise Lines owns a 27.5%

stake in the port, and the line planned 44 cruise ships

for Kuşadası in 2014, with the port receiving over

700,000 cruise ship passengers.

OUTLOOK: Tourism growth remained strong in 2014,

with rising visitor arrivals in Antalya, Istanbul, and region-

al cities expected to drive hotel and operator expan-

sion well into 2023. Although visitor spending and

capacity issues pertaining to the new airport and ris-

ing influx of hotel rooms remain, the government is lob-

bying hard to increase foreign investment, grow the

industry nationwide, and increase visitor spending.

With all major sub-segments – especially MICE, med-

ical, halal, and cruise ship tourism – forecast to rise sub-

stantially in the coming years, Turkish tourism’s inter-

national standing and contribution to its domestic

economy will improve significantly in the years to come.

180

Following national sector

trends, the cruise ship

segment has witnessed

substantial growth. The

segment has grown by 10%

annually since 2002, with

1623 ships carrying 2.2m

passengers in 2011.

TOURISM ANALYSIS

A spate of high-end hotel offerings will enter the market in 2015-16

New infrastructure and investment will be critical to

reaching tourism targets as Turkey barrels towards its

Vision 2023 goals, including welcoming 50m visitors

and earning $50bn in tourism revenues annually. Hote-

liers in Istanbul, the country’s largest city, are invest-

ing heavily in new offerings, with thousands of new

rooms set to enter the market in 2015. More signifi-

cantly, the government is moving to increase its trans-

portation capacity through a series of infrastructure

upgrades, including construction of the Istanbul New

Airport, which will be the world’s largest commercial

air transport hub and offer capacity for 150m trav-

ellers when all stages of construction are complete.

But the largest potential for infrastructure invest-

ment actually exists outside of Istanbul, on the nation’s

coastlines, where hoteliers and resort operators are

rushing to set up shop along the Aegean Sea to the

west, the Black Sea to the north and the Mediterranean

Sea in the south, as well as in second-tier urban cen-

tres. With government incentive and promotion activ-

ities at an all-time high, the future looks bright for the

Turkey’s tourism infrastructure.

REBOUND: Although negatively impacted by the

2008 economic crisis, Turkey’s tourism sector has

rebounded in recent years, with the number of hotel

facilities growing by 48% between 2007 and 2012,

according to the Investment Support and Promotion

Agency (Invest in Turkey). Today the country offers vis-

itors 715,692 beds and 2800 hotels.

The majority of these are located in the southern

city of Antalya, a longstanding tourism hotspot offer-

ing over 400,000 beds and 260 five-star hotels. Istan-

bul offers 94,000 beds across 1320 establishments,

while Muğla and Izmir hold 90,000 and 29,000 beds,

respectively. Turkey’s Tourism Investors Association

(TYD) projects visitor numbers to rise to 60m annu-

ally by 2023, well surpassing Vision 2023’s target. The

TYD anticipates that the sector will require at least

1.5m new hotel beds, $24bn in private investment, and

$15bn in government support to reach this target.

Within Turkey there are 165 chain hotels, with inter-

nationally branded facilities comprising 15% of the

total. Hilton International’s portfolio is the largest in

the segment, offering 22 facilities spread across 15

cities, with a further 23 under development. Hilton

International are followed by Intercontinental Group

with 16 hotels, Anemon Hotels (16), Best Western

International (15), Dedeman Hotels (14), and Crystal

Hotels Resorts and Spa (11). Others, including Accor

Hotels Turkey, Rixos Hotels, Wydham Hotels and Mar-

riott, also have a presence in Turkey.

“Within the last decade, the government has recog-

nised Turkey’s potential to attract tourism investment,

and has been quite proactive in developing the indus-

try,” Tugrul Temel, development director at Hilton

International in Istanbul, told OBG. “We continue to

hear positive sentiment from the market.”

GOVERNMENT INCENTIVES: There are a number of

government support and incentive schemes for

tourism operators in Turkey. The main legislation cov-

ering incentives for the tourism industry is Law No.

2634, offering a host of benefits to investors, includ-

ing loans, public land allocation, provision of commu-

nication facilities, reduced utilities rates and funding

for up to 15% of investments over 20 years, supplied

by the Tourism Development Fund. Law No. 1319 pro-

vides income and corporate tax exemptions for tourism

entities within their first five years of operation, while

private institutions such as EXIM Bank provide loans

to tourism promotion and travel agencies in Turkey.

The Ministry of Culture and Tourism (MoCT) has

allocated significant funds to tourism investment,

reporting that infrastructure funding to provinces

and municipalities for tourism development increased

by 425% between 2002 and 2012 to reach TL129m

(€45.42) in 2012. According to the data gathered by

Mediterranean Tourist Hoteliers Association (AKTOB),

107 new tourism projects received government incen-

tives worth more than TL1.4bn (€492.94m) in the

first three months of 2013 alone. Of these, 38% are

Spurred by the ongoing

development of the

Istanbul New Airport,

Istanbul’s hotel capacity

will continue to increase.

However, the largest

potential exists outside of

Istanbul, where

government incentives are

driving touristic growth in

the Aegean, Mediterranean

and Black Sea regions.

181


It is anticipated that 1.5m

new hotel beds, $24bn in

private investment and

$15bn in government

support are required to

meet Turkey’s Vision 2023

tourism targets.

Making roomRising visitor numbers have prompted a rush of international hoteliers

TOURISM ANALYSIS

three-star, 36% four-star, and 13% five-star hotels,

with 38% located in Antalya and 12% in Istanbul.

In addition to physical infrastructure, e-government

offerings are also aimed at improving tourism serv-

ices. In January 2015 the government implemented

the e-visa system, in which visitors should apply for a

tourist visa online for $20 before arriving in Turkey,

as a means to eliminating the waiting times to get a

visa on arrival. Applications for a new e-visa can be

made from up to three months before departure until

24 hours before travel, and cruise ship passengers stay-

ing less than 72 hours will not need a visa.

ISTANBUL: Istanbul is set to benefit most from

upcoming infrastructure upgrades. The city has 20,000

hotel rooms entering the market by the end of 2015,

according to the International Congress and Conven-

tion Association (ICCA). Hotel openings for 2015 are

off to a luxurious start: SoHo House opened its doors

in March, with 87 rooms in total, including 17 mez-

zanines and one apartment, followed by the St. Reg-

is Hotel in the high-end Nişantaşı neighbourhood,

with 118 rooms and suites. Raffles Istanbul opened

in the fall of 2014 at the Zorlu Centre, boasting 181

rooms and suites in a mixed-use development.

Hilton in particular has shown aggressive investment

in Istanbul’s hotel industry over the past several years.

The Hilton Bomonti, the city’s largest hotel, opened

in January 2014 in the Şişli neighbourhood and offers

829 rooms and 12,000 sq metres of event space. The

Hilton Istanbul Kozyatağı Conference Centre and Spa,

offering 320 rooms, opened in late 2014. “We regard

Istanbul as a city with many opportunities, and with

offerings across all segments of the tourism sector –

from mid-market to luxury,” said Temel.

The Hilton Garden Inn Istanbul opened in January

2015, with 126 guest rooms within a mixed-use retail

space, and the Hampton by Hilton Dolapdere, open-

ing in 2016, will offer a further 170 rooms in central

Istanbul. In Izmir, Doubletree by Hilton Izmir-Alsancak

involves a $1m refurbishment of the existing Yıldızhan

Hotel, bringing total room numbers to 115, while the

Hilton Garden Inn Izmir Bayraklı will offer 182 rooms

and eight suites when it opens in 2016. Other proj-

ects in the pipeline include a Park Inn by Ataturk Air-

port, and a Fairmont, due to open in 2016.

THIRD AIRPORT: Ongoing infrastructure develop-

ment and government investment will help Istanbul’s

operators increase their activities. Building for the

much anticipated third Istanbul airport is underway,

with an ultimate capacity of 150m travellers, which

would make it the largest airport in the world. The new

airport’s first phase is scheduled to be complete in

2017, with an initial capacity of 90m.

The airport will be near the Black Sea coast on

Istanbul’s European side, gradually replacing the exist-

ing Atatürk Airport and providing much-needed extra

capacity for national carrier Turkish Airlines. Consult-

ing firm Arup is currently overseeing a master plan

with the Turkish consortium of Cengiz, Mapa, Limak,

Kolin and Kalyon, who won a concession to build and

operate the airport for 25 years in May 2013.

OUTSIDE ISTANBUL: With the majority of arrivals

and visitors flocking to destinations outside of Istan-

bul, coastal regions in the south hold significant poten-

tial for infrastructure investment.

In its Vision 2023 tourism master plan, the MoCT

identified the Mediterranean and Aegean regions as

a focal area for increased government investment in

infrastructure. The Mediterranean-Aegean Tourism

Infrastructure Coastal Management Project was cre-

ated as a result, with plans to implement a number

of infrastructure projects aimed at improving potable

water, sewage, waste treatment, and disposal facili-

ties along 2000 km of coastline between the cities of

Antalya and Içel by 2023. The region also falls within

the government’s “high incentive” zone, with increased

tax exemptions, government land allocations, and

other benefits on offer to developers in the area.

The private sector has taken note, with Top Hotel

Projects reporting that 16 new resorts offering 6000

new beds opened along the Mediterranean coast dur-

ing 2014, including the 501-room Nirvana Lagoon

Villas and Suites in Kemer, and the 533-room Regnum

Carya Golf & Spa Resort in Belek.

On the Aegean Coast, Bodrum’s recently added

offerings include the Swissôtel Resort Bodrum Beach,

a 66-room beachfront property opening in Turgutreis

in June 2015, while its Bodrum Hill urban resort will

open in 2016 with 65 rooms and 35 private resi-

dences. Nikki Beach’s Bodrum development will span

40,000 sq metres and offer 57 private suites and vil-

las when it opens in the spring of 2016.

Further north, Hilton is set to open the 147-room

Hampton by Hilton in Kocaeli, one of the country’s most

affluent cities, in 2016. Temel said the chain intends

to continue to expand beyond Istanbul in the coming

years. “We believe there is further potential in the Turk-

ish market. Every year Turkey attracts record numbers

of visitor arrivals, and we see this trend continuing

into the future,” he said. “The country has many

resources and tools underpinning its momentum.”

182

With a spate of hotel openings imminent, Istanbul is expected to continue to grow as a tourist attraction

The 2000 km of coastline

between Antalya and Içel

has been targeted as a

“high incentive” zone, with

increased tax exemptions

and government land

allocations. In 2014 the

private sector responded

with 16 new resorts

offering 6000 new beds,

and further high-profile

openings are scheduled for

2015-16.


183

TaxIncome tax rate calculated on a progressive basis

Better coordination needed for policy implementation

Efforts under way to boost voluntary tax compliance

Taxes on employment could harm investment prospects

TAX OVERVIEW

Efforts are being made to encourage voluntary compliance

Tax systems have a high level of impact on econom-

ic development. One of the topics criticised in Turkey

is the failure to use tax to serve development to the

desired level. Therefore, the authorities need to be

aware of how tax policies can be used as an effective

tool in rapid, fair and balanced development attempts,

and introduce the necessary regulations to that effect.

Laws in the Turkish taxation system can be com-

plex, and may cause conflicts between the fiscal

administration and taxpayer. To create a more confi-

dent environment, regulators should ensure that tax

rules are as stable and predictable as possible to allow

investors to plan for the future, and keep any increas-

es in costs for businesses to a minimum.

Moreover, the administration should be committed

to providing a high-quality service to taxpayers, includ-

ing a commitment to voluntary compliance by taxpay-

ers and enabling the collection of tax revenue with

the aid of IT platforms and services.

TAX PROCEDURE ACT: The Tax Procedure Bill draft-

ed by the Tax Council as a result of efforts to renew-

ing tax laws was made public on September 30, 2011.

However, no changes have been made so far.

INCOME TAX ACT: The Income Tax Bill was present-

ed to the Turkish Grand National Assembly on June

12, 2013, and remains pending as a bill. If enacted,

the provisions of the Income Tax Act and Corporation

Tax Act will be combined under the rubric of the

Income Tax Act. This piece of legislation aims to encour-

age voluntary compliance while increasing the amount

of revenue generated from direct taxes. Items sched-

uled to be changed by the bill are as follows:

• Encouraging investments, production, employment

and savings;

• Enhancing voluntary compliance with taxation;

• Broadening the tax base;

• Reinforcing tax security;

• Introducing regulations in compliance with social

and environmental policies; and

• Enhancing flexibility and efficiency in enforcement.

BRINGING CLARITY: The bill deals with various tax

exemptions, immunity and other taxation matters

concerning each income element in the same chap-

ter. As a result, it aims to bring clarity to existing laws.

Changes to withholding provisions:

• Sections concerning tax deductions are covered in

a single section;

• Two withholding rates of 15% and 25 % are stipu-

lated depending on the type of income; and

• Broad authority is granted to the Council of Minis-

ters for resetting withholding rates as is the case

in existing regulations. It is expected that existing

rates will apply until the Council of Ministers adopts

a new decision.

Changes to the tax return period:

• The fourth period provisional tax return has been

eliminated; and

• The temporary tax will be at the rate implemented

on the first income tranche of the schedule in para-

graph one of Section 77 for natural person taxpay-

ers (15%) and at the rate stipulated in paragraph

four of the same section for corporations (20%).

Changes planned to the Free Trade Zone Act: Stud-

ies on a bill for changes on the Free Trade Zones Act

are ongoing and no bill has been drafted so far. The

planned changes will be as follows:

• Plot changes to fit the needs of the investors;

• Clustering and setting up of zones with infrastruc-

ture and all supporting elements for projects; and

• The provision of an efficient service for the project

owner, including the minimisation of bureaucracy

and an emphasis on promoting and marketing.

Regarding applications for permission to operate in

free trade zones under the Free Trade Zones Act, the

bill will particularly encourage the production of high-

value-added goods services production that con-

tributes to research and development. This can be done

by considering the added value that would be creat-

ed by the investment in addition to the nature and

size of the project and its contribution to employment.

184

Clarifications comingA new income tax act is in the making


TAX ANALYSIS

Regulations for corporations must be drawn from various acts

At present there is no definitive definition for cor-

porations under the law and there are no defined

criteria. However, it is possible to draw some con-

clusions making use of applicable provisions from the

Turkish Commercial Code No. 6102 and various oth-

er regulations as outlined below.

COMMERCIAL CODE: As stated in Section 40 of the

Commercial Code, the location of the company head-

quarters can determine whether a business is con-

sidered to be local or foreign. Under Section 40 of

the Commercial Code, “The branch offices of busi-

nesses with headquarters in Turkey will also be reg-

istered and promulgated in the Trade Registry of the

jurisdiction they are in.” However, “branch offices in

Turkey of businesses with headquarters outside

Turkey will be registered as local businesses without

prejudice to the provisions of the laws of their own

countries in connection with business title.”

BANKING ACT REGULATIONS: The Banking Act out-

lines the distinctive features of companies estab-

lished in Turkey and outside Turkey. Section 6 of the

Banking Act deals with obtaining permission for

opening a branch office or representation office in

Turkey. It states that the “establishment of a bank in

Turkey or opening of the first branch in Turkey of a

bank established outside the country will be permit-

ted, provided the requirements set in this law are met.”

The opening of representations office in Turkey

by banks established outside the country is dealt with

as follows in paragraph four of Section 6, “Banks

established outside the country may open repre-

sentation offices in Turkey with the permission of

the Council of Ministers, provided they do not accept

deposits or participation funds and operate in line

with rules to be set by the council”.

FOREIGN INVESTMENT REGULATIONS: Corpora-

tions regulated by the Direct Foreign Investments Act

No. 4875 designates businesses established under

the laws of other countries as foreign investors. Sec-

tion 2 of the act defines foreign investors as:

• Natural persons who are citizens of foreign coun-

tries and Turkish citizens domiciled abroad; and

• Legal entities and international organisations

established under laws of foreign countries.

In light of the above, it is possible to find regulations

to assist in the identification of legal entities in the

Commercial Code, the Banking Act, and the Direct

Foreign Investments Act, as well as the Mining Act.

However, there is presently no definition in Turkish

laws dealing with the nationality of corporations.

An assessment of applicable legislation shows

that the predominant opinion in Turkish law is that

companies established in Turkey under the rules of

Turkish law will have Turkish nationality.

TAXES: The major forms of taxation in Turkey are:

• Income tax;

• Corporation tax;

• Taxation on consumption;

• Value-added tax (VAT);

• Special consumption tax;

• Customs tax;

• Banking and insurance transactions tax;

• Stamp duty;

• Valuable papers duty;

• Fees duties on wealth;

• Motor vehicles tax;

• Property tax; and

• Inheritance and transfer tax.

INCOME TAX: This tax is collected on the earnings

of natural persons. Income tax in Turkey is calculat-

ed on a progressive basis and contains various

allowances, exemptions and exceptions. Income tax-

payers must meet the following criteria:

• Income must belong to a natural person. Under

the Civil Code, a natural person is a person who

can be a rightful owner under provisions of the

Civil Code and can incur a liability;

• The income must be income derived in a calendar

year. The taxation period for the purposes of

income tax is a past calendar year;

185


Drawing down dutiesA look at how tax law deals with corporations

TAX ANALYSIS

• Income can be defined as the sum of any earn-

ings and revenues. The sum of all earnings, claims

and earned income for the year is subject to income

tax. This is the case even if it has not come into

possession directly; and

• Income is the net total of all earnings and revenues.

Any expenses incurred and to be incurred in deriv-

ing the income are deducted and the remaining

portion becomes subject to taxation. In calcula-

tions of net earnings and revenue, expenses that

are specified in law will therefore be deducted

from the gross income.

There are two types of taxpayers, full-fledged tax-

payers and foreign-based taxpayers. Natural per-

sons residing in Turkey who are taxed in Turkey on

all income derived within and outside the country’s

borders are treated as full-fledged taxpayers.

Conversely, natural persons not residing in Turkey

are defined as foreign-based taxpayers and are taxed

solely on income obtained in Turkey. Income derived

by such taxpayers as a result of their operations

abroad are excluded from income tax.

CORPORATION TAX: Corporation tax is levied on cor-

porate earnings. The same elements deemed to be

income under income tax regulations also apply to

corporation tax. Regardless of which elements a

corporation has obtained an income from, these

continue to be classified as corporate earnings.

In short, the income elements are the same for

both income tax and corporation tax. As a result, the

income must be annual, real, net, overall and accrued.

Income that is not covered by income tax will not

be considered under corporation tax either.

Corporation Tax Act No. 5520 has been put into

effect and was published in the Official Gazette of

June 21, 2006, No. 22205, as a result revoking the

Corporation Tax Act of June 3, 2005, No. 5422. The

current rate for corporation tax is at 20%. The earn-

ings of the various types of corporations listed below

are subject to corporation tax:

• Share capital companies;

• Cooperatives;

• Economic state enterprises;

• Economic enterprises of associations or founda-

tions; and

• Business partnerships.

Corporation tax is calculated on corporate income

derived by taxpayers and specified in the first sec-

tion of the act during a given accounting period.

Taxes that are imposed on spending can be cate-

gorised into three main groups:

• Taxes on consumption items;

• Taxes on transactions; and

• Taxes on value-added goods.

VAT was introduced into the taxation system by an

act of October 20, 1984, No. 3065, and was put into

effect as of January 1, 1985. The tax covers the fol-

lowing subjects:

• Deliveries and services as part of commercial,

industrial and agricultural operations;

• Imports of any goods and services; and

• Deliveries and services arising from operations

that are required to be covered by the tax but are

not included among these specified lines of busi-

ness which has special taxation characteristics.

VAT payers may be listed as follows:

• In the delivery of goods and rendering of servic-

es, those who deliver such goods or render such

services;

• In importing of goods and services, those import-

ing the good or services; and

• In leasing deemed to be property leasing under

the Income Tax Act, those leasing out such goods

and rights.

In terms of an event that leads to VAT, the concepts

of the delivery of goods and the rendering of serv-

ices are extremely important and must be clarified.

Delivery is the transfer of the right of disposition on

a good by the owner or his agent to the purchaser

or his agent. Services, on the other hand, may take

place by doing, processing, creating, manufactur-

ing, repairing, cleaning or safekeeping something

or pledging not to do something.

STAMP DUTY: This is a tax collected on documents

showing the validity of legal transactions between

individuals and corporations. The payer of the stamp

duty is the person who signs the instruments sub-

ject to the stamp duty.

If one of the signatories is exempt or a govern-

ment office, the taxpayer of the stamp duty will be

the non-exempt person. If the provisions of the

instrument executed abroad are implemented and

inured from benefitting domestically, such transac-

tions will be subject to the payment of stamp duty.

CREATING AN EFFECTIVE STRUCTURE: Taxation

systems must adapt to the broader changes occur-

ring in economic and social life. This dynamic struc-

ture enables a tax system to become more rational

and able to balance the competing demands of fair-

ness and efficiency that drive a modern economy.

Tax reform consists of the redistribution of the

national tax load among various social segments.

Objectives of tax reform should be the following:

• To ensure tax justice;

• To enlarge the tax base;

• To prevent the growth of an informal economy;

• To make tax legislation simple to understand and

easily implementable; and

• To employ the fairness function in income distri-

bution of taxes most effectively.

A skewed income distribution weakens the middle

segments of society even as the number of signifi-

cantly rich individuals continues to grow. That there

are fewer wealthy individuals in Japan, one of the most

developed economies of the world, than in Turkey,

illustrates the extent of the disparity in wealth.

To resolve this situation, we propose that individ-

uals should be asked to declare the sources of

their wealth. To this end, the authority included in

section 30/7 of Tax Procedure Act revoked by Act

No. 4783 regarding questioning the source of expens-

es and savings should be re-issued to audit agents.

186


TAX ANALYSIS

Foreign investment can have an important multiplier effect

Countries around the world have been making sig-

nificant attempts to further direct foreign capital

investment. In a globalised economy, the degree of

foreign investment that a country attracts can have

a significant multiplier effect, contributing to tech-

nological advances, employment opportunities and

the ability to invest more in welfare.

Keeping the state’s taxation system up to date as

economies become more integrated on the global

stage is especially important for emerging markets

such as Turkey in their quest to attract direct for-

eign capital investments into the country.

Direct foreign capital investments have grown rap-

idly in size on the international level since the 1980s.

The relatively cautious view of foreign capital that

emerged at the end of the Second World War was

replaced by an embrace of a globalised economy from

the 1980s onwards. In the aftermath of the war eco-

nomic discussion was dominated by the concern of

how best to limit and control foreign capital flows

and nurture a national economy. In recent decades,

however, the question at the forefront of policy-

making has been how to attract foreign capital.

Therefore, the globalisation of capital has driven

countries to employ various instruments to attract

external investment. One of the most important

tools in this regard is tax incentives.

TAX INCENTIVE POLICIES: The success of any incen-

tives policy will ultimately be determined by its effec-

tiveness as it is implemented in practice. In terms of

taxation, we can define effectiveness as the system

having the sufficient power to channel investments

into targeted fields and sectors. Moreover, this should

be done at rates that are desirable and feasible.

However, evaluations of tax incentives implement-

ed in Turkey have suggested that economic changes

since the 1980s have eroded the effectiveness of

this policy. The government opted for investment

allowance exemptions as the most effective tool

with which to encourage investment, while the tax

advantage afforded to corporations decreased by a

third. Even in the case of an investment allowance

of 100%, the maximum incentive, the investor was

only able to get back 25% of the total investment

amount, which can be attributed in part to the preva-

lence of rent-seeking, as well as the ever-expand-

ing amount of government regulations with which

businesses have to contend.

The incentives in the tax system have a dual struc-

ture. On the one hand, tax incentives have been

implemented by way of changes made to provisions

regarding exemptions and exceptions. On the oth-

er hand, there has been a concerted attempt to

reduce the tax load of the rent-receiving segment,

including interest, dividend and rent, by way of low

rate and withholding at source taxation directed by

Council of Ministers decrees.

FOREIGN CAPITAL INVESTMENTS: The importance

of taxation policy and incentives in terms of direct

foreign capital investments have both increased. For

example, the impact of tax rates on investment deci-

sions tends to be greater for multinational compa-

nies oriented towards exports.

Therefore, the executives of such firms pay close

attention to the development of government poli-

cy on taxation, given its direct and significant impact

on investment decisions.

TAX RATES: Taxation policy, while not necessarily

determining the decision of whether or not to invest

abroad, can exert a significant influence over the

choice of one investment destination over another.

The taxation in the host country has a varied

impact depending on whether the investment is ori-

ented to the marketplace or funds. In a situation

where all other conditions are equal, it may be an

advantage to invest in countries with low tax rates.

So as to keep up with the frantic pace of global

economic competition, countries are today increas-

ingly engaged in simplifying their tax systems and

reducing their tax rates to attract investors. The rate

187


Attracting attentionRecommendations for improving the investment climate

TAX ANALYSIS

of corporation tax, which affects the profitability of

multinationals and so is very pertinent to foreign

investors, has been a particular focus.

In Turkey, corporation tax rates have decreased so

that both local and also foreign capital could ben-

efit in terms of tax. The corporation tax rate was set

as 20% as of 2007 as per Act No. 5520. Considering

the tax rates of Turkey’s potential rivals, this has

helped the country attract foreign investors.

INDIRECT TAXATION: An important factor influ-

encing the decision of whether to invest in a for-

eign country is the impact of indirect taxes in the

host country on input costs. Presently, for firms oper-

ating in the industrial segment, taxes on energy,

which is the most basic input for firms, are at a high

level compared to other countries.

The most expensive electricity in OECD member

countries is found in in Italy, Japan and Turkey. Approx-

imately one half of electricity consumed in Turkey is

used in industry. The tax rate on electricity used in

production is directly linked to production costs.

Countries with the highest ratio of the tax calculat-

ed on the cost of electricity used in industry to its

price are Italy, Norway and Turkey.

HIGH EMPLOYMENT TAXES: The following calcu-

lation has been made for the present state of employ-

ment taxes in Turkey: in 2007, out of every 100 liras

that was paid by an employer to employ a worker,

only 71 could make their way to the pocket of a

worker. In 2008 the amount going into the pocket

of the average worker dropped further to 70 liras.

However, by 2009, 79 liras out of each 100 lira paid

by the employer could go to the pocket of the work-

er. This can be attributed to the implementation of

a policy ensuring a minimum subsistence allowance.

According to OECD data, Turkey has the highest

weight of employment taxes among the 30 OECD

countries. An examination of OECD data shows that

in top-ranking Turkey, 42.7% of the average labour

cost is allocated to employment taxes. This rate is

26.6% across the OECD as a whole and as low as 16.4%

in the US and 5.9% in Ireland.

ARBITRARY AUDITS: Circumstances that cause con-

tinuing concern for investors in terms of legal com-

pliance include the following:

• The failure to handle tax laws under an overall

government investment strategy;

• The existence of certain superfluous restrictions

on specific grounds and concerns;

• The introduction of additional conditions by reg-

ulatory and explanatory texts sometimes going

beyond the requirements laid down by the law;

• The subsequent cancellation of such texts by judi-

cial bodies;

• The determination of judicial cases in an oppos-

ing way by different judicial bodies at the same

level;

• The issuing of contradictory opinions; and

• The perception among auditors of tax audits as a

system introduced for the purposes of collecting

taxes, fines and interest.

OFF-THE-BOOKS ECONOMY: The continued exis-

tence and growth of the informal economy remains

a fundamental problem for potential investors in

Turkey. Businesses are unable to compete with a

rival that does not pay taxes or insurance premiums

because of off-the-books employment in the same

industry, or that fails to pay value-added tax (VAT),

corporation tax or income tax on off-the-books sales.

Foreign investors do not want to compete with a

strong informal economy as there is no living space

for formal foreign capital. Indeed, even local capital

moves to countries with more favourable invest-

ment climates in these conditions.

INVESTMENT ALLOWANCE EXCEPTION: The invest-

ment allowance was introduced into the tax system

to encourage private investment and to raise capi-

tal accumulation in the economy to further devel-

opment. Investment allowances increase both the

after-tax profitability of private enterprises and also

their liquidity. However, the authorities revoked Sec-

188

Turkey’s low rate of corporate tax relative to alternative destinations has helped attract investment

Turkey has the highest weight of employment tax among OECD states


TAX ANALYSIS

tion 19 of Income Tax Act No. 193 entitled “Invest-

ment Allowance Exception in Commercial and Agri-

cultural Earnings”, terminating the investment

allowance exception as of January 1, 2006.

The preamble of the act stated that the practice

of this exception was abandoned because the invest-

ment allowance exception was starting to be used

for tax planning and incentives for unproductive

investments in contrast to its purpose of introduc-

tion. The revoking of the investment allowance led

to criticism, as it was regarded by many as an increase

on the tax load for potential foreign investors.

EXEMPTIONS & EXCEPTIONS: Customs exemption

is an incentives tool implemented by the state by

abandoning Customs revenue. The investor is exempt

from the duty payable upon the import of the machin-

ery and equipment needed for the investment, lead-

ing to a decrease in the cost of investment. This

incentives tool is an effective one especially for

encouraging investments with high external input

requirements to realise the investment.

Of the 4179 investment incentive certificates

issued for foreign firms between 1980 and 2006,

2501 include the Customs exemption. The share

among the total is 60% by quantity. As a result, the

Customs exemption is one of the incentive tools

utilised most frequently by foreign investors in Turkey.

VAT SUPPORT: Another important tax incentive in

our country is the VAT support. It is implemented as

a VAT exemption for imported and domestic machin-

ery and equipment covered by the investment incen-

tive certificate in recent periods.

The exemptions of VAT that exist for capital goods,

machinery and equipment have made an important

contribution to reducing the financing costs of firms

in the phases of investment.

According to Section 13/d of the VAT Act, the

deliveries of machinery and equipment to investment

incentive certificate holders under the certificate are

exempt from VAT. Therefore, it has also sought to

encourage domestic machinery manufacturers. With

this incentive, investments have been encouraged

through the elimination of financial load correspon-

ding to VAT on investment.

TAX, DUTY & FEE EXCEPTION: The tax, duty and

fee exception has been implemented since 1985. Tax,

duty and fee exception is applied to project loans

obtained for investment projects with export pledges

and certain rates for five years following the com-

pletion of incentive certificate investments. The tax,

duty and fee exception is not an incentive made

available on their investments. In contrast to other

incentives, the tax, duty and fee exception, also

encourages a growth in exports.

FREE TRADE ZONE PRACTICES IN TURKEY: Turkey

has introduced a range of regulations to attract a

great degree of international capital, among which

is those relating to the free trade zones providing

advantages to foreign capital investments.

Zero taxes often apply in free trade zones, and in

addition to financial advantages such as these, they

also provide opportunities for enterprises to be set

up using foreign capital as they eliminate the rela-

tions that exist between foreign capital and the tax

authority, aiding the investment climate.

CONCLUSIONS: Based on these regulations, some

conclusions can be drawn about the state of Turkey’s

taxation system, as well as some further recommen-

dations for its future evolution:

• Under the present investment incentive system,

there is no incentive with a scope that could be

expected to affect the quantity, timing, region or

sector of investments;

• In Turkey, incentives and support provided by the

state are commonly regarded as the raison d’être

for a job, rather than as an auxiliary element that

is able to support a job. This can lead to a fund

transfer by excluding investments which can cre-

ate additional value to the country’s economy;

• In Turkey, in addition to main taxes, transition tax-

es are imposed in the form of funds, duties and

fees that businesses encounter during the invest-

ment process. Given the absence of sound data

regarding the amount of the same, no calculation

can be made on their contribution to the incen-

tive rates;

• At a time when fierce competition for incentives

has brought about increased costs for many coun-

tries, there remains insufficient data on investment

amounts and incentives;

• There are institutional conflicts, lack of coordina-

tion and ambiguity in incentives legislation. Tax

administration and investment incentive system

are conducted by several public authorities and

organisations with most of the time overlapping

and often conflicting pieces of legislation and

authorities;

• Government support must be selective when ori-

enting investment projects by industry;

• Retroactive tax regulations can create an inse-

cure investment environment for foreign investors;

189


The Customs exemption is frequently used by foreign investors

TAX ANALYSIS

• The informal economy can have an adverse effect

on the decisions of investors in addition to the

injustice in taxation it creates;

• Ambiguous and frequently changing tax regula-

tions, as well as delayed or unimplemented rebates,

are the other most pressing problems relating to

taxation concerning investors. These factors can

create an unpredictable environment regarding

business plans, especially for investors who are in

the process of drawing up feasibility studies; and

• Taxes on employment and indirect taxation can also

hurt the investment environment;

The following are some recommendations relating

to the taxation system for bringing more direct for-

eign capital investments to Turkey. They could have

a positive effect on the investment environment:

• Models of best practices and countries achieving

serious success regarding foreign investments

include enterprising investment strategies and

the targeting approach of this strategy;

• The country could better attract direct foreign

investment if it adopted a more systematic and

selective incentive policy that targeted a set of pri-

orities and put industries, products, regions and

firms at the centre of its focus;

• When rearranging the incentives system, it must

be ensured that the incentives like in EU countries

are based on innovation, technology and employ-

ment. The burden on the employer that creates

additional employment from the state must be

reduced. Certain incentive mechanisms oriented

to training manpower must be introduced;

• Greater incentives must be provided for produc-

tion in targeted industry, research and develop-

ment, ICT. Long-term fiscal tax policies must be

planned with strategic targets selected, and appro-

priate regulations implemented;

• The tax holiday is the most popular tax incentive

used by developing countries and transitional

economies to attract direct foreign investments;

• The concept of a “tax holiday” should be adopt-

ed and inserted into legal regulations;

• The country’s economic rivals must be monitored

closely;

• The lifting of the investment allowance, common-

ly regarded as the most important tax incentive,

has not been received favourably by a wide range

of investors. It would be more beneficial to arrange

this incentive under the same norms as EU incen-

tives. This would help to raise the competitive-

ness of local investors and succeed in attracting

more foreign investment to the country; and

• The rates of direct and indirect taxes should be

lowered to a level that can attract greater levels

of investment. To that end, a comprehensive reform

programme must be prepared, obtaining the agree-

ment of all relevant parties.

The basic criteria considered by businesses as they

select an investment location include the following

factors, and should be considered by policymakers:

• Overall economic performance;

• Legal infrastructure;

• Economic and political stability;

• The level of transparency;

• Market size;

• Availability of a skilled workforce;

• Conditions of competition;

• The level of advancement in the stock market;

• The trade and foreign currency regime;

• Tax rates;

• Physical infrastructure;

• Raw material supply;

• Strategic products; and

• Investment costs;

Indeed, the level of taxation and incentives, are just

some of the elements determining the choice of

investment destination, albeit significant ones. The

taxation system must therefore continue to evolve.

190

The presence of an informal economy can have an adverse effect on the decisions made by investors

The size of the market is an important consideration for investors

OBG would like to thank Grant Thornton for its

contribution to THE REPORT Turkey 2015


191

Legal FrameworkRegulation push to make Istanbul a global financial hub

Financial sector reforms to align with EU standards

Government moves to increase workplace safety

Incentives invite private investment in infrastructure

LEGAL FRAMEWORK OVERVIEW

New capital market regulations aim to grow Istanbul as a financial hub

With the primary goal of establishing a leading global

financial centre in Istanbul, the Turkish government con-

tinues to create a legal framework that will encourage

and accommodate this goal. The foundation was laid

with the recent Capital Markets Law (CML) No. 6362.

The Capital Markets Board (CMB) continues to align

Turkey’s legal basis to comply with EU regulations. The

following enactments and communiqués have been

declared by the CMB to ensure the functionality and

development of Turkey’s capital markets through the

establishment of a secure, transparent, and competi-

tive environment for investors.

NEW CATEGORISATION SYSTEM FOR BROKERS:Communique No III-37.1 No 39 & No V-134 introduced

a categorisation system for intermediaries based on

their activities, imposing a minimum capital for these

companies by July 2015. It rescinds the former license-

based approach and states the minimum capital require-

ments as: “Introducing Brokers”: TL2m (€704,200);

“Execution Brokers”: TL10m (€3.5m) and “Market Mak-

ers”: TL25m (€8.8m).

This legal change will inevitably result in mergers or

acquisitions of existing investment firms in order to meet

the minimum capital requirements.

CMB REGULATES SQUEEZE-OUT & SELL-OUT: The

procedure to determine the total expulsion price of

minor shareholders in a squeeze-out procedure has

been regulated by the Communiqué No. II-27.2, pub-

lished in November 2014. Based on Article 27 of the

CML, the Communiqué regulates for the first time the

rules and principles of a squeeze-out and sell-out. A

(group of) shareholder(s) who wishes to exercise their

squeeze-out right, shall use that right within a period

of three months, starting from the day the amount of

their shares reached 98% in total.

The shareholder is required to provide the CMB with

the relevant documents, along with a formal applica-

tion. Upon approval of the CMB, the controlling share-

holder(s) shall deposit the total purchase amount to

the company’s bank account. Other shareholders have

the right to object to the price within 30 days from the

expulsion decision date. Shareholders are entitled to

sell their shares to exercise their squeeze-out right to

the controlling shareholder after the expiry of the

three-month period.

The shareholder shall request the company to noti-

fy the controlling shareholder in writing to exercise its

sell-out right. The procedure foresees a set deadline

of six business days for filing required reports to the

CMB and being paid for the shares by the company.

DIVIDEND PROTECTION: The Communiqué No. II-19.1,

published in January 2014, strengthened the protec-

tion of dividends. It sets out the principles and proce-

dures for the payment of dividends in accordance with

Articles 19 and 20 of the CML. Corporations will now

have to distribute their dividends equally (pro rata) to

all existing shares at the date of distribution, regard-

less of their dates of issuance and acquisition. Dividend-

privilege related rights are, however, reserved. The deci-

sion to pay dividends in (x number of) instalments lies

upon the corporation’s general meeting of sharehold-

ers. Carrying dividends forward to the following year

or distributing dividends to interested parties, direc-

tors, employees or other non-shareholders is not per-

mitted unless and until the dividend determined for

shareholders is fully paid in cash.

INTRODUCTION OF THE ELECTRONIC FUND DISTRI-BUTION PLATFORM (TEFAS): Within the CML, TEFAS

came into effect on January 9, 2015. The platform

allows investors to buy mutual funds (incorporated by

permission of CMB) through a single investment

account. TEFAS is open to all foreign, local, individual

and institutional investors. TEFAS can be described as

a fund supermarket, creating an environment that

enables simple access to mutual funds.

STIMULATING THE VENTURE CAPITAL MARKET: The

CMB announced in March 2015 its plan to change the

financial regulations initiatives towards attracting clients

to banks and intermediary companies. Currently the

promotional benefits are based only on a share of the

192

Regulating for growthLegal changes are guiding and enabling investment across the board



revenue achieved by the venture capital market com-

pany through the gain of the customer. Promotions are

only permitted when clients are won through telemar-

keting. The CMB wants to allow promotions benefits

for attracting customers by any means, where not only

the person winning the client, but the client themself

shall benefit from promotional campaigns.

FISCAL INCENTIVES CONTINUE FOR ANGELINVESTORS: Realising that it is crucial but difficult for

small and medium-sized enterprises and start-ups to

receive adequate funding, the government enacted

fiscal incentives for investing in small businesses.

Business angels are entitled to substantial tax ben-

efits upon investment, under the Law Regarding

Amendments to the Private Pension Savings and Invest-

ment System Law No. 6327, its subsequent Regulation

on Individual Capital Participation and the Income Tax

Law No. 193.

In December 2014, an amendment to the regula-

tion increased income tax relief for angel investors to

100% when investing in enterprises active in research,

development, and innovation, up to a maximum amount

of TL1m (€352,100) annually.

GROWING BANKING SECTOR CONTINUES TO ALIGNWITH INTERNATIONAL STANDARDS: The Banking

Regulation and Supervision Agency (Bankacılık Düzen-

leme ve Denetleme Kurumu, BDDK) stated in February

2015 that the total assets of the banking sector had

increased by 15% and the primary funding source, the

deposits, have gained 11.3% in comparison to 2013.

The biggest assets are loans (18.5%) and securities

(5.4%). Therefore, the industry’s net profit for 2014

amounted to TL24.67bn (€8.69bn).

Starting with the enactment of the International

Convergence of Capital Measurement and Capital Stan-

dards, the government began applying the recommen-

dations of Basel II in July 2012. Continuing the process,

the BDDK issued the Communiqué on Calculation of

Amount Subject to Credit Risk with Approaches Based

on Internal Rating, and the Communiqué on Calcula-

tion of Amount Subject to Operational Risk with

Advanced Measurement Approach, both of which

became effective January 1, 2015. Thereunder, capital

adequacy calculations are subject to BDDK’s permis-

sion. Thus, the agency issued two draft guidelines that

determine the application process, rules and practices

to which banks must comply.

NEW PLAYERS IN ISLAMIC BANKING: The Islamic

banking sector, commonly referred to as “participation

banking”, has witnessed growing interest due to increas-

ing demand among Turkish citizens and investments

from the Middle East. The BDDK approved three more

Islamic bank applications in the first quarter of 2015.

NEW REGULATION PLACES RESTRICTIONS ON THELEASING, FACTORING AND FINANCING SECTOR:Enacted in December 2014, the Leasing, Factoring,

and Financing Companies Law No. 6361 imposed a

minimum capitalisation value of TL20m (€7.04m) for

companies doing business in this sector. However, busi-

nesses that were founded prior to the law have a grace

period of three years in order to meet this requirement.

Thus, this legal obligation is likely to result in mergers

and acquisitions in the sector during 2015.

ENERGY SELF-SUFFICIENCY: As an emerging mar-

ket, Turkey has experienced a significant increase in

the demand for electricity, and consequently, the nec-

essary amount of investment and finance to meet this

demand is up to $5bn annually.

It is projected that the total energy investment

required up until 2023 may surpass $120bn. Thus, the

market requires capital from private companies. The

government is aiding investments through tenders for

privatisation and building or allowing new power plants

within the next decade.

The World Bank’s December 2014 “Focus Note”

states that “energy imports contribute significantly to

Turkey’s external imbalances”. Considering that Turkey

imports 60% of its energy, reducing this percentage is

essential. Thus, the government has an active liberal-

isation policy for the domestic energy market.

CREATING A COMPETITIVE MARKET: Reforms in the

energy market are intended to achieve liberalisation

by allowing more competition. The Turkish Competi-

tion Authority has published a report with the aim of

guiding the sector towards a competitive market struc-

ture. The report emphasises the period 2018-19, that

being when most power purchase agreements and

guarantees will expire.

Furthermore, the ongoing privatisation process of

the state-owned power companies will be concluded

by 2019. These developments will undoubtedly lead to

a more competitive market.

TAKING ACTION ON RENEWABLE ENERGY: Turkey

enacted its first National Renewable Energy Action

Plan in December 2014 with the support of the Euro-

pean Bank for Reconstruction and Development (EBRD).

This plan is based on the EU Directive 2009/28/EC

regarding the promotion of energy use from renew-

able sources. Turkey has agreed to meet 30% of its ener-

gy needs from renewable sources by 2023. Turkey aims

to add 35 GW of hydropower, 20 GW of wind power,

193


Growth in the banking sector continues to be strong, with 2014 seeing a 15% increase in total assets


5 GW of solar energy, 1 GW of geothermal and 1 GW

of biomass. As well as the $70m provided by the EBRD,

the World Bank approved another $300m for use in

renewable energy projects in Turkey.

The Energy Market Regulatory Authority (EMRA) ini-

tiated the first pre-license tenders according to the Elec-

tricity Market Licensing Regulation (EMLR) while cap-

ping the application ceiling at 600 MW. The awarded

bidders received two licenses for an 8 MW solar park

in Elazığ and a 5 MW project in Erzurum in May 2014.

These projects have created clear procedures and obli-

gations for future bidders as the EMLR has since award-

ed 228 MW of PV projects in January 2015. However

the 600-MW capping will be amended in 2015.

Under the EMLR, recipients of a pre-license have to

complete their power plant within 24 months. In the

event of compelling reasons, the enterprise may request

an extension period for an additional 12 months. The

EMRA will decide on the extension petition by evalu-

ating the type of energy source and capacity.

AN INCREASING SUPPLY OF NUCLEAR POWER: The

Akkuyu Nuclear Power Plant and the Sinop Nuclear

Power Plant have paved the way for a third. Turkey’s

Electricity Generation Company, China’s State Nuclear

Power Technology Corporation, and Westinghouse

Electric Company entered into an agreement in Novem-

ber 2014 to commence negotiations for the construc-

tion of a new four-unit nuclear power plant.

A MORE LIBERAL GAS MARKET: The Natural Gas

Market Law will be amended to divide the current ver-

tically integrated and state-owned Petroleum Pipeline

Corporation (BOTAŞ) into three divisions for transmis-

sion, storage and other activities. This amendment will

abolish the dominant position of BOTAŞ and establish

a competitive, investment-friendly oil and gas market.

The draft law also includes the privatisation of the

Istanbul Gas Distribution Company, subject to the

approval of the Istanbul Municipality .

SWIFT RESPONSE TO MINING MARKET NEEDS: The

Turkish Mining Law No. 3213, was amended on Febru-

ary 18, 2015, with significant provisions in terms of

workplace health and safety and also royalty agreements

with third parties. Excluding underground coal mine

licenses granted by public authorities, no licence hold-

er shall enter into royalty agreements with subcontrac-

tors for the operation of the coal mine. However, exe-

cuted royalty agreements shall be subject to the

approval of the Ministry of Energy.

CREATING A COMPETITIVE TELECOMMUNICATIONSMARKET: The Information Communications Technolo-

gies Authority (ICTA) has recently identified potential

growth in the telecommunications sector. According

to the ICTA report for the third quarter of 2014, the

number of operators in the electronic communica-

tions sector is 654 and the number of authorisations

granted to those operators is 1094.

In the third quarter of 2014, the amount of total

mobile traffic was 53.1bn minutes and 3.3bn minutes

for fixed traffic. These numbers constitute an increase

of approximately 1.9% in mobile traffic and a decrease

of 11.1% in fixed-line traffic when compared to the fig-

ures for the second quarter of 2014.

The report outlines that in the mobile industry only

three companies have significant market power. Thus,

the Turkish government is eager to open this market

to an additional mobile service provider when the 4G

network is introduced in 2015, particularly when the

licences for frequency bands 800, 900, 1800, 2100

and 2700 MHz come up for public tender. The report

also outlined the need to create the technical and legal

basis to introduce and operate 4G services.

BIG CHANGES FOR FIXED-LINE PROVIDERS: In

December 2014 the ICTA amended the Authorisation

Regulation in the Electronic Communications Sector.

Pursuant to this amendment, operators shall only be

formed as a joint stock or limited liability company with

a minimum capital of TL1m (€352,100). The compa-

nies will have to apply for fixed-line services authori-

sation to the ICTA. In case of failure to provide the min-

imum capital amount, the authorisation of the operator

will be cancelled.

Furthermore, Türk Telekom (TT) has been designat-

ed as an enterprise with significant market power on

call termination in fixed telephone networks. Thus, TT

will be subject to certain requirements, such as pro-

viding access, non-discrimination, transparency, pub-

lication of reference offer, tariff control, accounting sep-

aration and cost accounting.

E-COMMERCE RULES TIGHTENED: Enacted in Novem-

ber 2014, the Law on the Regulation of Electronic

Commerce comes into force on May 1, 2015. All com-

merce by means of an electronic medium without the

requirement of personal communication is subject to

the regulations of the new law.

In general, the law will regulate and define the trade

relations, the obligations and liabilities of online serv-

ice providers, the form and content of agreements

executed for electronic devices, information duties

and penalties for violations of the regulations.

Most notably, the law requires legal provisions of

online service providers. Under the law, they have to

194

The government is responding to rising demand for electricity by incentivising domestic energy investment



provide the consumer with clear, accessible and detailed

information regarding the terms and conditions of

agreements before they are entered into. These regu-

lations also include technical possibilities to correct a

fault that might have occurred in the process of enter-

ing into agreements by means of e-commerce.

PROTECTION FOR CONSUMERS: The Consumer Pro-

tection Law came into force in May 2014. The law’s

primary purpose is to grant the consumer the right to

receive all relevant information relating to the contract

and its terms before concluding legal transactions.

Thus, the law imposes on the merchant partner an

obligation to inform the consumer before or during the

conclusion of a contract.

If the consumer has not sufficiently been informed

on certain matters, he shall benefit from the rights to

the detriment of the party who has drafted the con-

tract. Furthermore, the law regulates the state prohi-

bition of, and subsequent sanctions against, mislead-

ing advertisements.

REAL ESTATE & PROPERTY LAW: An important fac-

tor in the Turkish construction market has been the

government introducing the Law on the Transforma-

tion of Disaster Risk Areas (LTDRA) in 2012, triggering

an urban regeneration revolution in all the main cities.

Within this regeneration process, 6.5m residential

homes will be demolished and reconstructed, and it is

estimated $400bn will be spent over the next 20 years.

LTDRA and its subsequent regulations implemented sev-

eral incentives to support urban regeneration. These

include providing financial support, giving buyers low-

interest mortgages and exempting the real estate pur-

chase from several public charges.

The government will also enact laws and regulations

to create demand for investments and enable an invest-

ment-friendly legal environment in the realm of con-

struction.

PURCHASE OF REAL ESTATE BY FOREIGNERS: The

Land Registry Law was amended by Law No. 6302,

which simplified the process of purchasing real estate

and extended the reciprocity list of countries whose

nationals may acquire property in Turkey from 53 to

129. The law also outlines 52 countries whose citizens

may acquire property but with certain restrictions.

COMMERCIAL CORPORATIONS: Commercial corpo-

rations may purchase real estate and limited in rem prop-

erty rights in accordance with special laws such as the

Petroleum Law, the Law for the Encouragement of

Tourism, and the Organised Industrial Zones Law. If a

business duly established under the Turkish Commer-

cial Code No. 6103 and the foreign investors either indi-

vidually or collectively hold 50% or more shares, the

company may freely purchase up to 30 ha of proper-

ty in Turkey and acquire limited in rem rights.

Under the Commercial Code, there are no legal lim-

its on real estate purchase for companies in the case

of foreign investors who hold less than 50% of the

company’s shares. These incentives introduced by

the government will benefit both companies and

ndividuals alike and create more opportunities for

foreign investors to enter the Turkish real estate market.

It appears that the Turkish government with its cur-

rent agenda will provide more incentives for the prop-

erty sector.

TIGHTER REGULATION: In response to recent tragic

workplace accidents causing the deaths of many work-

ers, the Turkish government plans to enact stricter

regulations on upholding the Occupational Health and

Safety Law No. 6331, which introduces a system of work-

place accident-recording for each employer. This sys-

tem will reward companies that have a record of no

workplace accidents with tax benefits and impose

sanctions on those employers who fail to comply or

have a record of continuous workplace accidents.

FEWER RESTRICTIONS ON FOREIGN WORKERS: With

the Law on Foreigners and International Protection

No. 6458, Turkey tries to coordinate the legal and

bureaucratic prerequisites in response to an increas-

ing demand for foreign employees within Turkey. The

law regulates and simplifies the conditions for obtain-

ing a residence permit, and Article 6 of the Law on Work

Permit for Foreigners No. 4817 has been modified and

now allows foreign nationals to receive permanent

work permission after a lawful stay of eight years.

Many questions still remain with regards to the real-

time implications of both laws. The situation is that nei-

ther law is comprehensive and both leave unnecessary

space for interpretation: for example, whether the

documents provided by the foreigner for a residence

permit meet the criteria of the law and its listed doc-

uments, in light of this ultimately being decided dif-

ferently by each local authority.

Being in a different district within the same city may

cause various bureaucratic obstacles and expenses. The

government has said it plans to enact regulations and

internal instructions in order to unify the application

procedure and to train each authority adequately.

These regulations are expected to be passed in 2015.

195


The 2012 Law on the Transformation of Disaster Risk Areas is triggering massive urban renewal

OBG would like to thank Kılıç and Partners for its

contribution to THE REPORT Turkey 2015

LEGAL FRAMEWORK VIEWPOINT

Harun Kılıç, Partner, Kılıç and Partners

Turkey seeks to become a top-10 economic power by

2023. The most important step in reaching this tar-

get will be the provision of the necessary finance

needed for business and investment opportunities.

The country will have to triple GDP within the next

eight years to achieve this target. It is apparent that

to do this Turkey will require substantial foreign direct

investment. Reforms and amendments to current law

and regulation will only serve as part of what is required

to attract investors. Confidence and trust in the sys-

tem and a clear legal framework is the key to achiev-

ing more private investment and some industry sec-

tors are clearly benefitting from recent changes.

Infrastructure investment is the key to Turkey’s

future economic growth. A number of legal reforms

have been made in the area of public-private part-

nerships (PPPs). This has created major foreign invest-

ment with the assistance of the European Bank for

Reconstruction and Development (EBRD) and the

World Bank, investing in such mega projects as the

Dalaman Airport Concession, with a loan of €175m

provided in February 2015. Significant financing is

also available in the health sector, with a PPP pro-

gramme launched by the Turkish government to build

new hospitals. The effectiveness of applicable law

plays an important role for these organisations and

private investors, who provide finance for PPP proj-

ects. It is to Turkey’s credit that within the EBRD assess-

ment framework for PPP legislation and effective-

ness, it achieved a 70% effectiveness level for the

“Definitions and Scope of the Law” category, and 90%

effectiveness in the “Settlement of Disputes and Appli-

cable Laws” category, which gives the power to obtain

a proper remedy for any breach through internation-

al arbitration and the enforcement of arbitral awards.

Reforms create new opportunities for investors:

changes in the finance sector and initiatives to attract

foreign investors are set to expand Turkey’s foreign

investment inflow in the financial markets. Through

the recent introduction of new regulation, Turkey con-

tinues to align its legal basis in financial transactions

with the EU. Furthermore, there is stricter regulation

on brokers, banks and corporate governance, as well

as the introduction of an electronic fund distribution

platform (TEFAS) and tax-saving incentives for angel

investors. The amendments made to current legisla-

tion provide a stronger and more robust financial sys-

tem and strengthen investor protection.

Another important industry is the energy sector. The

generation, sale and distribution of both electricity

and gas has been opened up to competition and pri-

vate investment. Due to a high demand for electric-

ity, the sector has needed significant infrastructural

investment, which has increasingly been provided by

private companies via privatisation and investments.

In 2003 the private investment contribution in the elec-

tricity sector was 38%; by 2013 this had increased to

61%, by virtue of new legislation and in line with the

government’s target. It is expected that the ongoing

liberalisation of the energy sector will continue to

attract more private companies willing to invest.

Energy and finance are not the only sectors being

targeted by foreign investors and companies. The

reforms in the telecommunications and e-commerce

sectors are a hot topic for foreign investment. These

priority sectors were targeted for reform during the

first quarter of 2015, with moves to open up compe-

tition and restrict the monopolisation of the market

through amendments to supplier regulation and

restrictions on some of the biggest providers in both

mobile and fixed-line services. With the recent intro-

duction and development of 4G mobile technology,

the aim is to open up the market by introducing a fourth

mobile licence to the sector in order to create more

competition and to allow for the private investment

in infrastructure required by a 4G network.

While we do also believe amendments are made to

Turkish law far too frequently, they are nonetheless

necessary to creating a better business environment

for our international investors and business clients.

196

Opening the doorHarun Kılıç, Partner, Kılıç and Partners, on reforms inspiring investor trust


197

The GuideThe country’s islands host a vibrant grape culture

Myth mixes with history at a famous Istanbul tower

Descriptions of several major hotels

Phone listings for local services and foreign missions

Tips and tricks for new arrivals

GUIDE HISTORY

The current tower sits upon the ruins of older defensive structures

While the Hagia Sophia and the Blue Mosque often get

top billing in the tourism circuit, the Maiden's Tower,

or “Kız Kulesi” in Turkish, is a popular spot that has a

much deeper history than is widely known. The use of

the site of the current tower began in roughly the 5th

century BCE. Its history spans both empire and repub-

lic, and the tower – on a small islet in the Marmara Sea

– has a storied past that runs the gamut from light-

house to love nest. It was even featured in two James

Bond films. While the myths that inspired its name typ-

ically get the most attention, the tower’s historical

record is a microcosm of the city itself.

STUFF OF LEGENDS: According to one legend, the

tower takes its name from the daughter of Emperor

Constantine, who was made to live on the island after

an oracle foretold of her death by snakebite at the age

of 18. After many lonely years in the tower, the princess

was visited by her father on her 18th birthday, to cel-

ebrate having outwitted the fates. However, hidden

inside his gift – a basket of fruit or bouquet of flowers,

depending on whom you ask – was a snake, which bit

and killed the girl, just as the oracle had predicted.

LOVE ON THE ROCKS: Over the course of its lifetime,

the tower has also been referred to as Leander's Tow-

er, erroneously named after the Greek myth of Hero

and Leander. A Romeo and Juliet story of sorts, Hero –

another emperor's daughter and a priestess of

Aphrodite, the Greek goddess of love and beauty – fell

in love with Leander, a commoner. Disapproving of the

match, Hero's father imprisoned her on the island to

keep them apart. Yet, with an athletic fortitude fuelled

by true love, Leander would swim to the tower each

night, guided by Hero's lantern. However, one night a

storm raged so fiercely that Heros' flame was extin-

guished and Leander, unable to find his way, drowned.

Upon finding her beloved's remains, Hero plunged her-

self into the sea, never to be seen again.

EMPIRE STRIKES BACK: While these legends add an

air of mystery and romance to the tower, its historical

record is no less intriguing. A structure of some kind

was constructed on the island around 410 or 408 BCE

by the Athenian general Alcibiades, likely serving as a

survey station and Customs checkpoint for ships enter-

ing the Bosporous straight. Given the location’s unob-

structed view of the Marmara Sea, the small island was

ideally positioned in terms of defence.

It was to this end that in 1110 AD Byzantine emper-

or Alexius Comnenus constructed a small fortress on

the islet. Accounts even detail the use of chains slung

through the waters to the shoreline to prevent traffic

from freely sailing through the straight. This structure

would eventually serve as a prison for exiles before

being used as a Byzantine garrison during the Ottoman

conquest of the city in 1453.

TURK WORK: Under the Ottomans the tower contin-

ued to serve as a lookout and garrison, and was used

by the Janissary forces for patriotic demonstrations

and war games until it was damaged by an earthquake

that struck the city in 1509. After being rebuilt, the struc-

ture was repurposed as a lighthouse and outfitted with

a tower, castle and cistern. However, tragedy struck

again in 1719, when the lighthouse caught fire. Repairs

were made by the head architect of Istanbul on orders

from Sultan Ahmet III, this time in a more baroque fash-

ion. Adorned with a glass chalet, the tower stood for

another century before being repurposed in the 1830s

to stem a cholera epidemic in the city, sufferers were

quarantined on the island and the tower was turned

into a makeshift hospital. It continued to serve this

purpose in 1836-37, when an outbreak of plague was

reported to have killed tens of thousands in the city.

ISTANBUL, NOT CONSTANTINOPOLE: Over the years,

the Maiden's Tower has tracked the development of

the city itself – from a beacon of trade, to a garrison

of empires, to tourism destination. Its place in the Turk-

ish zeitgeist even saw it featured on the 10-lira bill until

the 1980s. In 1995 the tower was privatised and con-

verted into a restaurant, offering an unparalleled view

of the city. Today, in a twist on its tragic and fabled his-

tory, the islet has become a popular wedding venue.

198

What’s in a name?A small tower with a big history


GUIDE TOURISM

Approximately 80% of Bozcaada’s farmland is covered in vineyards

In the eastern Aegean, just a few hours’ sail from the

mouth of the Dardanelles, lies a small, wedge-shaped

island that echoes with chords of history. In Vergil’s

Aeneid, the epic tale by Rome’s greatest poet, it is said

to be where a sly Greek army hid their fleet after leav-

ing their legendary equine gift at the shores of ancient

Troy. In the First World War, the British built an airstrip

there, using it as an outpost during the Allies’ abortive

Gallipoli campaign. After Turkey’s war of independ-

ence, it was handed back to the Turks.

Today Bozcaada is known for its warm, dry climate,

steady sea breeze and wine, as grapes have flourished

there since antiquity. One-third of the island’s 40 sq km

– and 80% of its farmland – is now covered in vineyards.

Alongside the three main varietals of Karasakız, Altın-

başand Karalahna, farmers now plant European grapes

like Merlot and Cabernet Sauvignon, and its wines are

slowly drawing international attention, as travellers and

connoisseurs visit and write up their experiences.

OFF THE MAINLAND: The island’s second asset is its

sand. In the summer months, its population of less than

3000 swells to 10,000 as foreign tourists – mainly Ger-

man, British, French and Dutch – arrive to enjoy the qui-

et splendor of its beaches, sip local wine, lounge in the

sun or explore the island’s historical sites. Most stay in

small guest houses rather than large hotels, in keep-

ing with the island’s hushed and intimate character.

Another feature visitors tend to notice is a constant,

gentle wind blowing from the north. “The island is nev-

er still; you feel like you are sailing,” Deniz Barlas, a local

painter, told the New York Times. In fact, this air stream

– called the Etesians in Greek and flowing from the Black

Sea to the Mediterranean – made the island important

prior to the advent of windward sailing, as ships pow-

ered by rowers could not sail north through the Turk-

ish straits and waited favourable winds at Bozcaada.

Today, these same winds make the island a comfort-

able respite from the intense heat of Turkey’s more

well-known tourist haunts like Bodrum, Didyma and

Antalya. The average temperature is 14°C and during

the summer it is typically a few degrees cooler than

the mainland. It is also closer to Istanbul – a seven-hour

trip by car and ferry that is an increasingly popular hol-

iday spot for Turks. Since 2012 direct flights by sea-

plane run from Istanbul’s harbour in the Golden Horn.

EMPIRES & CONQUEST: For those with a taste for his-

tory, there is much to see on Bozcaada. The island’s choke

point location has made it a strategic spot since ancient

times. In the fourth and fifth centuries BCE, at the

height of Greek power, Athens kept a naval base there.

It was overrun by the Persians in 493 BCE, then the Spar-

tans in 389 BCE, only for Athens to regain it two years

later. En route to conquests in the east, Alexander the

Great sent one of his generals to seize it, who returned

with a new alliance and 3000 mercenaries.

Over the next 15 centuries, it was controlled in turn

by the Romans, Byzantines, Venetians, Genoese and

Ottomans. Which group first built the majestic Bozcaa-

da castle is disputed, but Mehmet II had it rebuilt after

taking the island after his conquest of Constantinople

in 1453. Visitors arriving by ferry today pass this citadel

on the eastern shoreline, fringed with ramparts and a

250-metre-long moat to the south – all telling symbols

of the island’s most desperate need: defence.

ON THE GRAPE: Though records of viticulture before

1923 are rare, it is certain the island has an ancient wine

culture. Coins unearthed there dating to the Hellenic

era depict bunches of grapes – a symbol of the cult of

Dionysus, the god of wine in Greek mythology. In the

16th century the Ottoman traveller Evliya Çelebi spoke

of Bozcaada’s wines and by the 1800s the island was

exporting 800,000 barrels a year, with its vintages

known throughout the Eastern Mediterranean. Wine

was less successful in the early decades of the Turkish

Republic, but the industry received state support to mod-

ernise in 1998 and has been making a comeback. There

are now six wineries on the island, including Turkey’s

largest wine-maker, Corvus. Many smaller boutique

producers have also sprung up in recent years, so sur-

prises thus await Bozcaada’s more adventurous visitors.

199


Upon a timeHistory and viticulture beckon visitors to a small treasure offshore

THE GUIDE HOTELS

ISTANBUL

CROWNE PLAZA ISTANBULDolapdere Cad. No. 161

Harbiye, Şişli 34375

T: (+90) 212 291 60 80

F: (+90) 212 291 91 01

[email protected]

www.cpistanbulharbiye.com

Rooms: 12 suites, 38 club rooms, 44 standard, 148

deluxe, 40 superior, 2 with facilities for the disabled.

Business & Conference Facilities: 19 meeting rooms,

rooftop ballroom, private meeting space for 8 persons

and 4 guest rooms on the same floor, professional plan-

ners on-hand to assist with all your arrangements for

meetings or social functions, and wireless internet.

Health & Leisure Facilities: Health centre, heated pool,

hammam, massage and skin care units, hairdresser,

sauna and steam bath for men and women.

Wining & Dining: Ege Restaurant, Palm Court Mediter-

ranean Restaurant, Lobby Lodge, the Club Lounge, and

Onyx Lobby Bar and Patisserie.

DIVAN ISTANBULAsker Ocağı Cad. No. 1

Şişli 343670

T: (+90) 212 315 55 00

F: (+90) 212 315 55 15

[email protected]

www.divan.com.tr

Rooms: 41 standard rooms, 108 deluxe rooms, 40

junior suites, 2 presidential suites.

Health & Leisure Facilities: Puri Spa, fitness centre,

hammam, sauna, steam room, jacuzzi and indoor pool,

Guest Services: Concierge, 24-hour room service, air-

port and limousine service upon request, business

centre, Wi-Fi, babysitting and doctor upon request,

valet parking, helipad, laundry and drycleaning.

Wining & Dining: Divan Lokanta (Mediterranean and

Turkish cuisine), Divan Pub (international cuisine),

Maromi (Japanese Cuisine), Divan Bar and Patisserie.

DIVAN ISTANBUL ASIACemal Gürsel Sok. No. 209

Üst Kaynarca, Pendik 34899

T: (+90) 216 625 00 00

F: (+90) 216 625 01 01

[email protected]

www.divan.com.tr

Rooms: 56 superior twin rooms, 56 deluxe twin rooms,

28 deluxe king rooms, 56 corner deluxe king rooms,

12 executive superior rooms, 11 executive deluxe

rooms, 4 executive corner deluxe rooms and 7 suites.

Health & Leisure Facilities: Spa and fitness centre

featuring indoor and outdoor pools, hammam, rain

room, jacuzzi and steam bath.

Guest Services: Concierge, business centre, Wi-Fi, for-

eign exchange, 24-hour room service, airport trans-

fer and limousine service upon request, laundry and

drycleaning, housekeeping and evening “turndown”

service, DVD rental, babysitting and doctor on request.

Wining & Dining: Brasserie (Turkish and internation-

al cuisine), Turku Bar and Restaurant, Lobby Bar.

DIVAN ISTANBUL CITYBüyükdere Cad. No. 84

Gayrettepe 34398

T: (+90) 212 337 49 00

F: (+90) 212 337 49 49

[email protected]

www.divan.com.tr

Rooms: 144 rooms, including 98 deluxe and 19 stan-

dard guestrooms, and 27 junior and senior suites.

Guest Services: Concierge, business centre, Wi-Fi, lim-

ousine and VIP transfers, safety deposit boxes at front

desk, foreign exchange, laundry and drycleaning, room

200

A good night’s rest

Crowne Plaza Istanbul

Divan Istanbul Asia

Divan Istanbul City

Divan Istanbul


THE GUIDE HOTELS

service, babysitting and doctor on request, Puri Spa

and Score Fitness and Pilates.

Wining & Dining: Divan Pub (Turkish and internation-

al cuisine), Overtime Bar.

THE EDITION ISTANBULBüyükdere Cad. No. 136

Levent 34330

T: (+90) 212 317 77 00

F: (+90) 212 317 77 10

[email protected]

www.editionhotels.com

Rooms: 1 penthouse, 8 lofts with terrace, 12 lofts, 44

deluxe rooms and 13 superior rooms.

Guest Services: Custom light fixtures suitable for

working and entertaining, oversized five-fixture bath-

rooms with showers and rain showerheads, 42-inch

flat screen LCD TV with full cable access and movies

on-demand, iPods (available upon request) with dock-

ing station, complimentary high-speed, wireless inter-

net, data-port connections for modem/fax hook-ups,

portable computers, mobile phones and fax machines.

Wining & Dining: Cipriani Restaurant (Italian), Gold Bar.

ARMADA ISTANBUL OLD CITY HOTEL Cankurtaran Mah., Ahırkapı Sok. No: 24,

Sultanahmet 34122

T: (+90) 0212 455 44 55

F: (+90) 0212 455 44 99

www.armadahotel.com.tr

[email protected]

Rooms: 108 rooms, including 40 superior and 8 deluxe

rooms.

Business & Conference Facilities: Express mail, fax, 5

meeting rooms, free wireless internet, computer and

printer, photocopying and printing, 1 multi-function-

al event room, audio-visual equipment.

Guest Services: Room service, baggage storage, cur-

rency exchange, free parking service, laundry, safe

deposit boxes and facilities for guests to book tours.

Wining & Dining: Armada Terrace A la Carte Restau-

rant

GEZI HOTEL BOSPHORUSMete Cad. No.34

Taksim 34437

T: (+90) 212 393 27 00

F: (+90) 212 393 27 48

[email protected]

www.gezibosphorus.com

Rooms: 67 rooms including 11 concept suites.

Business & Conference Facilities: 4 meeting rooms

for up to 48 people.

Health & Leisure Facilities: Spa, fitness centre, sauna,

steam room, hammam and ice fountain.

Guest Services: Free Wi-Fi, concierge, valet parking,

laundry and drycleaning and 24-hour room service.

Wining & Dining: Fiamma Restaurant and Bar (Italian).

HILTON GARDEN INNImrahor Cad. Dutluk Sok.

Beyoğlu 34445

T: (+90) 212 314 5000

F: (+90) 212 314 5050

www.hiltongardeninn.hilton.com

Rooms: 114 single rooms, 89 double/twin rooms, 4

suites and 3 rooms with disabled facilities.

Business & Conference Facilities: A total of 7 meet-

ing rooms and 1 ballroom, equipped with the latest

technology and access to plenty of sunlight.

Health & Leisure Facilities: 24-hour fitness centre.

Wining & Dining: Sumac Grill Hilton Garden Inn Restau-

rant (Turkish and international cuisines).

THE HOUSE HOTEL BOSPHORUSSalhane Sok. No. 1

Ortaköy 34347

T: (+90) 212 327 77 87

F: (+90) 212 244 75 77

[email protected]

Rooms: The hotel consists of two buildings: the first

comprising 23 rooms, while nearby "The Mansion"

offers 3 rooms

Guest Services: Bar/lounge, business centre, fitness

centre, free breakfast and internet access, room serv-

ice and concierge services.

Wining & Dining: Lounge Bar and Restaurant

THE HOUSE HOTEL NIŞANTAŞIAbdi Ipekçi Cad. No. 34

Nişantaşı 34367

T: (+90) 212 224 59 99

F: (+90) 212 224 59 74

[email protected]

Rooms: 44 rooms including 4 terrace suites, 8 junior

suites, 9 superior king rooms, 5 deluxe king rooms, 4

classic twin rooms, 14 classic king rooms.

Guest Services: Doctor on-call, luggage room, airport

shuttle, free Wi-Fi, babysitting, laundry and dryclean-

ing, currency exchange, fax/photocopying, ironing

service, ticket service and concierge services.

Wining & Dining: Lounge Bar and Restaurant.

MARTI ISTANBUL HOTELAbdülhak Hamit Cad. No. 25/B

Taksim 34435

T: (+90) 212 987 40 00

F: (+90) 212 987 40 11

[email protected]

www.martiistanbulhotel.com

Rooms: 91 classic rooms, 54 superior rooms, 94 deluxe

rooms, 18 corner suites, 9 premium suites, 3 one-

bedroom suites and 1 regal suite.

Guest Services: Doctor on-call, luggage room, airport

limo service with fee, free Wi-Fi in room and public

areas, babysitting, 24-hour room service and car hire.

201


The Edition Istanbul

Gezi Hotel Bosphorus

Hilton Garden Inn

The House Hotel Nisantasi

Armada Istanbul Old City Hotel

THE GUIDE HOTELS

Wining & Dining: Quad Restaurant and Bar (Turkish

cuisine), BRASS Restaurant and Bar (French and Asian).

MÖVENPICK HOTEL ISTANBULBüyükdere Cad. No. 4

Levent 34330

T: (+90) 212 319 29 29

F: (+90) 212 319 29 00

[email protected]

www.moevenpick-hotels.com/istanbul

Rooms: 249 rooms including 21 suites, 1 presidential

suite, 45 executive rooms and 2 for the disabled.

Business & Conference Facilities: 520-sq-metre ball-

room, 9 break-out rooms, a total of 11 meeting rooms

for up to 550 people, with up-to-date technology.

Health & Leisure Facilities: Fitness centre, indoor pool,

sauna, jacuzzi, steam room and massage services.

Guest Services: In-room safe, 24-hour room service,

Wi-Fi, hairdresser, executive lounge, business centre,

doctor and babysitter on call.

Wining & Dining: AzzuR Restaurant (Mediterranean

cuisine), BarAdoX (bar and lounge), Skyline Club

Lounge (rooftop lounge), Gourmet (pastries).

THE RITZ CARLTON, ISTANBULSüzer Plaza, Elmadağ Cad. No. 9

Şişli 34367

T: (+90) 212 334 4444

F: (+90) 212 334 4455

www.ritzcarlton.com/istanbul

Rooms: 244 rooms including 57 club rooms, 21 exec-

utive suites, presidential suite and Ritz-Carlton suite.

Business & Conference Facilities: 695-sq-metre ball-

room, 9 individual meeting rooms, document centre,

courier services and two executive boardrooms.

Health & Leisure Facilities: Spa, indoor pool, 24-hour

gym, hammam, sauna, steam room, whirlpool and 9

massage rooms, as well as open-air spa in summer.

Guest Services: Free Wi-Fi for all guests rooms and

restaurants, gift shops, concierge services, valet park-

ing, shoeshine, barber shop, babysitting and laundry.

Wining & Dining: Bleu Lounge and Grill (modern din-

ing all day and live music at night), Çintemani Restau-

rant (“back to flavours” cuisine and casual dining),

Lobby Lounge, Living Lounge (billiard tables, a mar-

tini bar and internet connectivity).

ISTANBUL AIRPORT

NOVOTEL ISTANBULKennedy Cad. No. 56

Zeytinburnu 34025

T: (+90) 212 414 3600

F: (+90) 212 414 3636

[email protected]

www.novotel.com

Rooms: 208 sea view rooms, including 6 suites and 2

reduced mobility rooms.

Business & Conference Facilities: 7 meeting rooms

with high-speed internet, photocopying and printing,

secretarial services and audio-visual equipment.

Health & Leisure Facilities: Fitness center, massage

rooms, steam room and sauna, pool (seasonal).

Guest Services: Shuttle services, safe deposit boxes,

babysitting upon request, children’s corner, baggage

storage, 24-hour concierge, currency exchange, gift

shop, valet, laundry, high-speed internet and parking.

Wining & Dining: 24-hour Room service, Nov’ist

Restraurant (local and international cuisine), Nov’ist

Bar, terrace seating (seasonal)

ANKARA

MÖVENPICK HOTEL ANKARABeştepeler Mah. Yaşam Cad. No. 1

Söğütözü, 06520

T: (+90) 312 258 58 00

F: (+90) 312 258 58 99

[email protected]

www.moevenpick-hotels.com/ankara

Rooms: 176 rooms including 18 deluxe rooms, 10

suites and 1 room for physically challenged guests.

Business & Conference Facilities: 390-sq-metre ball

room and 9 meeting rooms with capacity for 6 to 400

persons, all equipped with audio-visual technology.

Health & Leisure Facilities: Fitness centre, indoor pool,

Turkish bath, sauna, steam bath and massage rooms.

Guest Services: Laundry and dry cleaning, 24-hour

room service, Wi-Fi, hairdresser, babysitting and doc-

tor on demand, in-room electronic safe, television

with satellite channels and media hub.

Wining & Dining: Plus Restaurant (international and

Turkish cuisine), Lobby Lounge and Bar.

IZMIR

MÖVENPICK HOTEL IZMIRCumhuriyet Blv. No. 138

Pasaport, 35210

T: (+90) 232 488 1414

F: (+90) 232 484 8070

[email protected]

www.moevenpick-hotels.com/izmir

Rooms: 185 rooms including 36 executive rooms and

17 junior suites and a king suite.

Business & Conference Facilities: A total of 10 mod-

ular banquet and conference rooms for 10 to 350 peo-

ple, suitable for events of all kinds.

Health & Leisure Facilities: Indoor pool, sauna, steam

bath, fitness centre and massage services.

Guest Services: Executive lounge, business centre,

laundry and dry cleaning, 24-hour room service, Wi-

Fi, safety deposit box at reception, hairdresser, doc-

tor on demand, babysitter on request.

Wining & Dining: Margaux Restaurant (international

cuisine), Mistral Bar (rooftop bar), Breeze Bar (lobby

bar), Swiss Cake (chocolates, cakes and pastries).

202

Marti Istanbul Hotel

The Ritz Carlton, Istanbul

Novotel Istanbul

Mõvenpick Hotel Ankara

Mõvenpick Hotel Istanbul


THE GUIDE LISTINGS 203


English is widely spoken in the business community; how-

ever, it is advisable to confirm whether a translator will

be needed for meetings. Learning a few Turkish phras-

es will facilitate everyday interactions and is greatly

appreciated by locals, who admire the effort.

Turkish society blends cosmopolitanism and conser-

vatism. Cities like Istanbul, Ankara or Izmir are gener-

ally liberal, while the eastern and rural provinces of the

country are traditional. Turkish commonly offer tea at

meetings and converse casually before doing business.

GOVERNMENT MINISTRIESOffice of the President

0312 470 23 08

Prime Ministry

0312 422 10 00

Culture and Tourism

0312 309 08 50

Defence

0312 402 61 00

Energy and Natural

Resources

0312 212 64 20

Environment and

Urbanisation

0312 410 10 00

EU Affairs

0312 218 13 00

Food, Agriculture and

Livestock

0312 287 33 60

Foreign Affairs

0312 292 10 00

Finance

0312 415 29 00

Health

0312 585 10 00

Justice

0312 417 77 70

Labour and

Social Security

0312 296 60 00

National Education

0312 419 14 10

Science, Industry and

Technology

0312 201 50 00

Transport, Maritime Affairs

and Communications

0312 203 11 16

STATEINSTITUTIONSParliament

0312 420 57 52

Supreme

Administration Court

0312 425 99 14

Turkish Statistical

Institute

0312 410 04 10

State Planning

Organisation

0312 294 50 00

Press and Information

0312 583 60 00

Privatisation

Administration

0312 585 80 00

ASSOCIATIONSABROADThe American-Turkish

Council

01 202 783 04 83

US-Turkish

Industrialists

and Businessmen’s

Association

01 202 776 77 70

The EU-Turkish

Industrialists’ and

Businessmen’s

Association

32 2 736 40 47

CONSULTANCY &ACCOUNTANCYSERVICESGrant Thornton

0212 373 0048

Deloitte

0212 366 60 00

Yapı Kredi Yatırım

0212 280 10 30

LEGAL SERVICESHergüner Bilgen Özeke

0212 310 18 00

Kılıç and Partners

0212 277 4111

COURIER SERVICESAras Cargo

0216 538 55 00

Yurtiçi Kargo

0212 365 23 65

CHAMBERS OFCOMMERCE &INDUSTRYTurkish Union of

Chambers and

Exchanges

0312 218 2000

Istanbul Chamber of

Commerce

0212 455 60 00

Aegean Region

Chamber of

Industry

0232 455 29 00

Ankara Chamber

of Industry

0312 417 12 00

Ankara Chamber

of Commerce

0312 201 81 00

Adana Chamber

of Commerce

0322 351 55 06

Adana Chamber

of Industry

0322 351 76 57

BUSINESSASSOCIATIONSAmerican Business

Forum in Turkey

0212 243 35 11

Foreign Economic

Relations Board

0212 339 50 00

International Investors

Association

0212 272 50 94

Turkish Industrialists

and Businessmen’s

Association (TÜS�AD)

0212 249 19 29

Association of Independent

Businessmen and

Industrialists (MÜS�AD)

0212 222 04 06

EMERGENCY Ambulance

112

Police

155

Fire

110

PRIVATE HOSPITALSAcıbadem

0216 544 44 44

Anadolu Sağlık Merkezi

0444 42 76

Dünya Göz Hastanesi

0212 413 75 75

American Hospital

0212 311 20 00

Florence Nightingale

Hospital

0212 224 49 50

German Hospital

0212 293 21 50

International Hospital

0212 468 44 44

JFK Hospital

0212 441 41 42

Hisar Intercontinental

Hospital

0216 524 13 00

CLINICSEuromed

0216 414 62 82

Intermed

Medical Centre

0212 225 06 60

LOCAL NEWSPAPERSHürriyet

0212 677 00 00

Milliyet

0212 505 61 11

Radikal

0212 505 61 11

Referans

0212 677 00 00

Hürriyet Daily News

0212 251 65 80

WEB SITES www.tcmb.gov.tr

www.cmb.gov.tr

www.ttk.gov.tr

www.tubitak.gov.tr

GUIDE

SOCIETY & ETIQUETTE: Turkish society is a unique

mix of cosmopolitanism and conservatism, with large

cities like Istanbul, Ankara or Izmir generally being fair-

ly liberal, while the eastern and rural provinces of the

country tend to be more traditional. It is very common

to be offered tea at business meetings, which is fol-

lowed by a casual discussion. Initial topics of conver-

sation should focus on personal, rather than work-

related matters: inquiring about someone’s health,

family and origins is generally a good way to break the

ice and make everyone comfortable. Turks often find

Westerners who skip the personal discussion rude.

LANGUAGE: English is commonly spoken by members

of the business community; however, it is advisable to

confirm whether a translator will be needed ahead of

a meeting. Learning a few Turkish phrases will facilitate

everyday interactions and is appreciated; interpretive

gestures will also do wonders. All major cities have for-

eign language centres that offer Turkish courses.

PUBLIC HOLIDAYS: There are several official holidays

during which time banks, offices and businesses are

closed. Holidays often see increased delays in travel as

well as traffic congestion. Dates to remember are

National Sovereignty and Children’s Day on April 23,

Atatürk Commemoration and Youth & Sports Holiday

on May 19, Victory Day on August 30, and Republic Day

on October 29. Religious holidays are also respected;

but dates vary according to Islam’s lunar calendar.

TIPPING: Many restaurants will include a 10-15% gra-

tuity charge on the bill, listed as a servis. Smaller estab-

lishments will sometimes expect a voluntary 5-10%

contribution, although this is not a rule. It is not gen-

erally common to tip taxi drivers, as they often round

service fees up to the nearest lira.

INTERNET & PHONE:There are internet cafes in all cities

and most hotels offer Wi-Fi. There are three main oper-

ators offering mobile services, including 3G technolo-

gy. For extended stays, it is necessary to register mobile

phones that were purchased abroad, as the country has

restricted unregistered phone usage to one month.

VISAS: Tourist visas may be obtained online prior to

arrival, or at the airport, and are required for most

nationalities. If getting a visa at the airport, it must be

purchased before going through passport control at a

separate window. Other visas may be requested at the

Turkish embassy or any Turkish consulate in your coun-

try of residence before departure. Most citizens from

the EU as well as citizens from Canada and the US can

get a multiple-entry, three-month visa for €16 to €47.

HEALTH: Acceptable hygiene standards are enforced

throughout the country; however it is prudent to drink

only bottled water. Turkish food is mostly healthy, fresh

and enjoyable, with many options available for all types

of diets. Along the coasts, the “Mediterranean” diet is

common, while the interior relies heavily on red meat

and vegetables. Pharmacies (eczane) are plentiful and

run a rota system for night-time and Sunday service.

Large cities have a selection of health care facilities,

including public and private hospitals, though private

health care tends to be expensive. If in doubt, contact

your insurance provider or embassy. Receptionists and

nurses may not speak English, most doctors do.

TRANSPORT: Negotiating traffic during peak hours

may prove quite challenging in Istanbul, and to a less-

er extent in other major cities. Public transport has

improved considerably over the past decade and most

big cities maintain efficient bus or tram lines.

Istanbul also has an underground metro system that,

while less extensive than those typically found in oth-

er European cities, is the most efficient transport

method during peak hours. Taxis are plentiful, metered

and relatively inexpensive, but local driving habits may

seem eccentric. Other modes of transport in Istanbul

include ferries, minibuses and shared vans known as

dolmufl. Tokens or travel cards are available in most shops

and convenience stores, as well as metro stations.

ELECTRICITY: Electricity is 220V and follows the stan-

dard, round two-pin plugs. Power adapters are avail-

able in airports and specialised shops. Power surges may

damage laptops, thus it is advisable to use a protector.

204

Facts for visitorsUseful information for first-time and returning visitors


Documents

Turkey 2015