INVESTING IN TURKEYINVESTING IN TURKEY

TUBA SÖZERİ

CORPORATE AFFAIRS COORDINATOR

YASED

INTERNATIONAL INVESTORS ASSOCIATION OF

TURKEY

21 APRIL 2006

WHO IS YASED

• A NGO

• A voluntary Organization

• A Non Profit Organization

• Members - Business professionals from TNCsoperating in Turkey

• Funding - Member fees• Founded in 1980 by 14 MNCs

(Fiat, Man, Mercedes Benz, Renault, Chrysler, Good Year,

Pirelli, Uniroyal, Ciba Geigy, Roche, Sandoz, M. Marelli,

Philips, Unilever)

• TODAY : 370 members representing 250 international companies85% of FDI in Turkey.

MISSION

• To promote proactively an environment for foreign direct investment which matches the best globalbusiness practices

• To support all structural reforms which help to improve the investment environment

• To improve the image of FDI in Turkey among all the stakeholders

• To foster better communication with the members

• To actively promote Turkey’s negotiation process with the EU for the realisation of its full membership

• To be committed in improving the ethical values and corporate governance principles

ACTIVITIES OF YASED

Government Policy and LegislationYASED acts as the representative of the international business

community at the Turkish government and within the public

Network and PartnershipYASED acts as a facilitator and clearing house for the

information and liaison needs of the foreign investment community

CommunicationYASED’s public relations and lobbying activities aim to cultivate

goodwill by keeping the Turkish government and media informed about the activities of foreign ventures and the foreign investment communityInternational relations of YASED

-The World Bank and FIAS-OECD -UNCTAD -UNDP --EUEU

Population Population : : 70.470.4 Million Million People People

Birth RateBirth Rate : 1.: 1.6666 %%CompositionComposition : : 67.767.7% % (between(between 15 15 -- 6464 years oldyears old))Literacy Rate: Literacy Rate: 86.586.5%%Urban Population: Urban Population: 7575%%GNP per Capita : $GNP per Capita : $ 5,0085,008 ((2002005)5)

GNP per Capita : $ GNP per Capita : $ 2222,,500 500 (İstanbul)(İstanbul)

TURKEY AT A GLANCE

One of the top ten big emerging markets, One of the top ten big emerging markets, strategically at the heart of a high potential regionstrategically at the heart of a high potential region

TURKEY AT CROSSROADS

Strategically at the heart of a high potential regionStrategically at the heart of a high potential region

Founding member of NATO (1952) Founding member of NATO (1952) &Council&Council of Europe (1949), member of UN of Europe (1949), member of UN (1946), OECD (1961), Turkey(1946), OECD (1961), Turkey--EEC EEC Association with Ankara Agreement (1963), Association with Ankara Agreement (1963), WTO (1995), EU customs union (1996)WTO (1995), EU customs union (1996)

Candidate for membership of the EUCandidate for membership of the EU““AAccessionccession negotiations negotiations havehave beenbeen startedstartedby by OctOct 3rd, 3rd, 2005”2005”

Potential gateway for Caspian oil & gasPotential gateway for Caspian oil & gas --Enormous volume of natural wealth of Enormous volume of natural wealth of resourcesresources

Close relations with the Turkic Republics Close relations with the Turkic Republics and Middle East countriesand Middle East countries

Supportive Environment for Business Activity

BUSINESS ENVIRONMENT

HHarmonisarmoniseded commercial regulations commercial regulations

with the EUwith the EU –– CustomsCustoms UnionUnion since 1996since 1996

Active financial sector Active financial sector

( Istanbul Stock Exchange)( Istanbul Stock Exchange)

2020thth biggest national economybiggest national economy in in thethe

worldworld (200(20055))

SuccessfulSuccessful economic program which is economic program which is

supported by IMFsupported by IMF –– improvementimprovement in in thetheeconomyeconomy

DynamicDynamic andand maturemature privateprivate sectorsector

ECONOMIC CLIMATE IN FIGURES

Turkish economy has been in a process of fast recovery

After the economical crisis 2001 and the following difficult year 2002, the Turkish economy has been in a process of fast recoverywith an economic program which is supported by IMF and finalized successfully in 2004. The new program for another 3 years, pre-accession economic program, is in progress.

Since 2002, Turkey has become the second fastest growing economy after China. The Turkish economy has continued to be one of the fastest growing economies among the members of OECD.

Growing trend in the GNP and improvement in all economic indicators. Growth rate in 2004is 9.8% and declared to be 7.4% in 2005. Record increases in exports & imports.Lowest inflation level of the last 30 years.

YearGNP in bill.$

Growth GNP %

1999 187,3 -6,12000 201,1 6,32001 144,0 -9,52002 180,8 7,92003 239,3 8,42004 300.01 9,8

2005 360,9 7,4

FDI INFLOWS TO TURKEY

YEARS BILLIONS

1990 0.61992 0.81994 0.61999 0.72000 0.92001 3.22002 1.02003 1.72004 2.72005 9.7

----------------------------------------------------------

TOTAL STOCKS 32.4

PROBLEMS WITH ATTRACTING FDI

Political and economic instability for long years.Political and economic instability for long years.

Complexity of legislation, breucracy and redpaper.Complexity of legislation, breucracy and redpaper.

The competition violations generated from unregistered The competition violations generated from unregistered economy.economy.

The amount of tax rates and complexity of the system.The amount of tax rates and complexity of the system.

No advancement can be reached in terms of the application of No advancement can be reached in terms of the application of privitaziton for long years.privitaziton for long years.

Non tarrif bariers in customs specifically standards regulationsNon tarrif bariers in customs specifically standards regulations..

No enough protection for the intellectual property rightsNo enough protection for the intellectual property rights

Tax and incentives regime was unable to compete Tax and incentives regime was unable to compete internationally.internationally.

IMPROVEMENT OF THE INVESTMENT ENVIRONMENT REFORM PROGRAM

SUPERVISORY BOARD - Improvement of the Investment Environment Coordination Board, chaired by Minister of Economyand Chief EU negotiator, Mr. Ali Babacan

STEERING COMMITTEE

COMMITTEES

1. Company Establishment 2. Employment3. Sectoral Licences4. Investment Location 5. Taxes and Incentives 6. Customs and Standards 7. Intellectual Property Rights 8. Investment Legislation 9. Investment Promotion

10. SMEs11. Corporate Governance

In 2002, an initiative has been started through launching a reform program to make Turkey a more attractive location for FDI

WHAT HAS BEEN IMPROVED?

As a result of these positive developments in Turkish economy, the obstacles standing before theFD investors have been abolished

POLITICAL STABILITY

One party government since November 2003 composing 65% of ,the parliament. The government party increased its votes significantly in local elections 2004

INFLATION RATE DOWN TO 8%

The inflation declined to its lowest level (8.0%) in more than 3 decades and matches the government target.

WHAT HAS BEEN IMPROVED?

As a result of these positive developments in Turkish economy, the obstacles standing before theFDI has been abolished

REFORM ON TAX SYSTEM

Significant changes in Tax legislation introducing set of measures to simplify tax structure and to increase efficiency while reducing the tax rates.

Effective from 2004, major changes have been implemented through the introduction of inflation accounting into tax legislation, its lack was one of the main obstacles to foreign investment.

No differentiation between local and foreign companies in terms of taxation.

Current corporate tax rate is 30%. The government reducescorporate tax by 10% starting from 2006.

WHAT HAS BEEN IMPROVED?

As a result of these positive developments in Turkish economy, the obstacles standing before the FDI has been abolishedRESTRUCTURING THE FINANCIAL SYSTEM

Banking Sector Restructuring Program was started in 2001 basedon the following main pillars:

1.Restructuring of state banks 2.Liquidation of the banks in difficulty 3.Strengthening of private banks4.Strengthening the regulatory and supervisory framework.

As a result, in the banking sector ;- a consolidation process took place, - financial risks have been reduced to manageable levels, -the capital structure has been strengthened.

The sector has re-entered a growth period and the profitability of thebanks has improved.

WHAT HAS BEEN IMPROVED?

As a result of these positive developments in Turkish economy the obstacles standing before theFDI has been abolished

OTHER REFORMS

Due to the principle of non-discrimination and equal treatment, foreign investors have the same status with local companies.

The company establishment procedures have been extensivelysimplified through shifting from screening system to monitoring system and through eliminating the unnecessary procedures to set up a business (1-2 days)

Turkish competition law has been fully harmonized with EU regulations.

Significant progress has been achieved with the legislation on intellectual property rights and has been amended aiming the harmonization with EU regulations.

INVESTMENT PROMOTION AGENCY

toto determinedetermine thethe nationalnational investmentinvestment promotionpromotion strategystrategy in in coordinationcoordination withwith developmentdevelopment agenciesagencies andand relatedrelatedinstitutionsinstitutions. . toto promotepromote andand coordinatecoordinate allall activitiesactivities of of publicpublic entitiesentities, , developmentdevelopment agenciesagencies andand privateprivate entitiesentities regardingregardinginvestmentinvestment promotionpromotion, , internationallyinternationally. . toto provideprovide informationinformation andand directingdirecting serviceservice forfor investorsinvestors. . toto follow and concludefollow and conclude thethe permissionpermission andand certificationcertificationproceduresprocedures of of investmentsinvestments beforebefore relatedrelated institutionsinstitutions andanddevelopmentdevelopment agenciesagencies in in orderorder to concludeto conclude effectivelyeffectively. . (Determined(Determined withwith respectrespect toto typetype, , locationlocation, , capitalcapital volumevolume ororemployementemployement capacitycapacity of of thethe investmentinvestment beforebefore councilcouncil of of ministers)ministers)toto ascertainascertain obstaclesobstacles whichwhich investorsinvestors mightmight encounterencounter andandinvolveinvolve in in activitiesactivities toto resolveresolve thethe issueissue. . toto contributecontribute in in thethe reform reform processprocess forfor thethe improvementimprovement of of investmentinvestment climateclimate in in TurkeyTurkey thoughthough a set of a set of publicationspublicationsbothboth in in TurkishTurkish andand foreignforeign languageslanguages. .

MISSIONMISSION

FURTHER IMPROVEMENTS FORBETTER INVESTMENT ENVIRONMENT

Reform process is timely, but not enough.Reform process is timely, but not enough.The rule of law and effective governance must The rule of law and effective governance must be set.be set.

Foreign/domestic discrimination should be Foreign/domestic discrimination should be demolished in terms of implementation.demolished in terms of implementation.Tax reform must put into effect. High taxes should not Tax reform must put into effect. High taxes should not create barrier before investment.create barrier before investment.Investment Promotion Agency should be founded.Investment Promotion Agency should be founded.In the middle and long run technologyIn the middle and long run technology--concentrated concentrated new investments should be targetednew investments should be targetedSectoral priorities should be taken into consideration Sectoral priorities should be taken into consideration in the determination of FDI strategy in the determination of FDI strategy

Removing Red Tape and BureucracyImproving the Implementation of Laws and Dispute Resolution MechanismsIncreasing Efficiency of CustomsSecuring the Availability of Land for InvestmentsProtecting IPR and Enforcement of the LawHarmonizing Standards and Regulations with the EUStrengthening SME’s in the Overall Supply Chain of the EconomyStrengthening R & D Base of the CountryImproving the Countries InfrastructureInvesting Further in Education and Training

FURTHER IMPROVEMENTS FORBETTER INVESTMENT ENVIRONMENT

GLOBAL FDI MOVEMENTS

1990s: increase in FDI movements on annual basis 1990s: increase in FDI movements on annual basis for 10 yearsfor 10 years

2000: A record standing2000: A record standing $1$1.4 .4 trtrillion<FDI illion<FDI movementsmovements

2001: Econoomic recession FDI dropped sharply. 2001: Econoomic recession FDI dropped sharply.

2003: $600 billion 2003: $600 billion

2004: FDI started to grow2004: FDI started to grow FDI inflows=$648billion. FDI inflows=$648billion. GROWTHGROWTH 2%in comparison to year before.2%in comparison to year before.

2005:FDI numbers increased 29% and reached to 2005:FDI numbers increased 29% and reached to $897 billion.$897 billion.

2006 : the growth is expected to continue2006 : the growth is expected to continue

FDI FIGURES IN 2005

226 331 385478

693

1092

1396

826716

638

695

897

0

200

400

600

800

1000

1200

1400

199419951996199719981999200020012002200320042005

Billion DollarsBillion Dollars

2,72,7TURKEYTURKEY353518,218,2BRAZILBRAZIL101018,418,4SPAINSPAIN9924,324,3FRANCEFRANCE8834,034,0HONG KONGHONG KONG7734,134,1BELGIUMBELGIUM6642,642,6AUSTRALIAAUSTRALIA5557,057,0LUXEMBURGLUXEMBURG4460,660,6CHINACHINA3378,478,4BRATINBRATIN2295,995,9USAUSA11

TOP 10 COUNTRIES ATRACTING FDI IN 2004

BRIC & EMERGING 7 COUNTRIES

BRASILBRASILRUSSIARUSSIAINDIAINDIACHINACHINAINDONESIAINDONESIAMEXICOMEXICOTURKEYTURKEY

HOW? INTEGRATION TO GLOBAL ECONOMY

•STRUCTURAL REFORM PROCESS

•QUALIFIED AND/OR QUANTIFIED LABOUR FORCE

THESE COUNTRIES EMERGED TO BE THE 25 TO 75 %PERCENT LARGER THAN CURRENT G8 BY 2050

FDI PERFORMANCE OF TURKEY

2004

TURKEY: FDI STOCK / GNP 10%

POLAND: FDI STOCK / GNP 26%

CZECH REP.: FDI STOCK / GNP 53%

HUNGARY: FDI STOCK / GNP 60%

FDI Stock / GNP

0

10

20

30

40

50

60

70

1990 1993 1996 1999 2002(%

)

Poland

Czech Rep

Hungary

Turkey

FDI (billion $) FDI/GNP (%)

1991-97 1998-2004 1991-97 1998-2004

Turkey 759 1,615 0.52 1.05Czech Rep. 989 5,088 2.85 7.94Hungary 2,669 3,252 6.65 7.58Poland 2,518 6,176 2.01 4.10

In the case of EU acesion negotions has started and successful FDI strategy implamentation

IMPACT OF FDI INFLOWS ON TURKISH ECONOMY

FDI inflow 10 billion USD in 2005-09

FDI inflow 15 billion USD in 2010-14

Annual GNP growth rate reaches 7%

17062776

14000

1046

12500

9650

-1000

1000

3000

5000

7000

9000

11000

13000

15000

1992-2002 2003 2004 2005 2006(*) 2007(*)

FDI IN TURKEY

FDI INFLOWS(MILLION $)

NUMBER OF FOREIGN COMPANIES(Cumulative)

9605

11986

6275

0

2000

4000

6000

8000

10000

12000

2002 2004 2005

(*) Expected

1270,001270,0025,18%25,18%Free LoatFree LoatTurkish GovermentTurkish GovermentVakifbankVakifbankIPOIPONovember November 18,200518,2005

1495,001495,0057,42%57,42%Koc Finansal Koc Finansal Hizmetler (Turkey)Hizmetler (Turkey)

Cukurova HoldingCukurova HoldingYapi ve Kredi Yapi ve Kredi BankasiBankasi

AcquisitionAcquisitionMay 09,2005May 09,2005

1556,001556,0025,5%25,5%General Electric General Electric Consumer Finance Consumer Finance (US)(US)

Dogus HoldingDogus HoldingGaranti BankasiGaranti BankasiAcquisitionAcquisitionAugust 29,2005August 29,2005

2770,002770,0046,12%46,12%OYAK Group (Turkey)OYAK Group (Turkey)Privatisation Privatisation Administation (Turkey)Administation (Turkey)

ErdemirErdemirPrivatisationPrivatisationOctober 05,2005October 05,2005

3000,003000,00100%100%Tepe Vie Akfen Tepe Vie Akfen Ortakligi (Turkey)Ortakligi (Turkey)

Devlet Hava Devlet Hava Meydanlari Isletmesi Meydanlari Isletmesi (DHMI)(DHMI)

Ataturk AirportAtaturk AirportPrivatisationPrivatisationJune 10,2005June 10,2005

3300,003300,0013,22%13,22%Alfa Group (Russia)Alfa Group (Russia)Cukurova HoldingCukurova HoldingTurkcellTurkcellAcquisitionAcquisitionJune 23,2005June 23,2005

4100,004100,0051%51%Koc Holding (Turkey)Koc Holding (Turkey)Privatisation Privatisation Administation (Turkey)Administation (Turkey)

Tupras*Tupras*PrivatisationPrivatisationSeptember September 12,200512,2005

4300,004300,00100%100%Royal Carribbean Royal Carribbean Cruises (Israel) Cruises (Israel) Global ConsortiumGlobal Consortium

Privatisation AdPrivatisation AdAminiAmini

station (Turkey)station (Turkey)

Galataport*Galataport*PrivatisationPrivatisationSeptember September 16,2005

4550,004550,00100%100%Vodafone (UK)Vodafone (UK)Saving Deposit and Saving Deposit and Insurance Fund Insurance Fund (SDIF)(SDIF)

TelsimTelsimPrivatisationDecember 13,2005

6550,006550,0055%55%Oger Telecom (Saudi Oger Telecom (Saudi Arabia)Arabia)

Privatisation Privatisation Administation (Turkey)Administation (Turkey)

Turk TelekomTurk TelekomPrivatisationSeptember 24,2005

USD(mn)Stake Inv.Ived

BuyerSellerTarget Company

Deal TypeDate

THE LARGEST 10 DEALS IN 2005

WHAT SHOULD BE DONE

Fight against unregistered economyFight against unregistered economy

Effective implementation of Legislation and the Effective implementation of Legislation and the enforcement of lawenforcement of law

Determination of areas of investmentDetermination of areas of investment

Use of mechanisms to attract foreign investment such Use of mechanisms to attract foreign investment such as tax incentives and improve their applicationas tax incentives and improve their application

NonNon--tarif barriers should be eliminatedtarif barriers should be eliminated

Reduce income taxes and social security premiums Reduce income taxes and social security premiums which affects labor costswhich affects labor costs

ADVANTAGES OF TURKEY

Growing domestic marketGrowing domestic marketA population of 70 million and %50 of this population is A population of 70 million and %50 of this population is under age of 25under age of 25

Dynamic and mature private sectorDynamic and mature private sectorRegional model and leaderRegional model and leaderPotential gateway for Potential gateway for both Caspian and Middle East energy both Caspian and Middle East energy resources.resources.

Close relations with the Turkic Republics and Close relations with the Turkic Republics and Liberal and reformist investment climateLiberal and reformist investment climateThe working of YOİKK has under process since 2001 with The working of YOİKK has under process since 2001 with the participation of private and public entities.the participation of private and public entities.

Qualified and costQualified and cost--effective labor force.effective labor force.Customs Union with the EU and the start of the accession Customs Union with the EU and the start of the accession negotions.negotions.Institutionalized economy.Institutionalized economy.

2020thth biggest national economybiggest national economy in the world (2005)in the world (2005)Strong and effective governmentStrong and effective government economic and political economic and political stabilitystabilityDeveloped infrastructureDeveloped infrastructure

SOME MULTINATIONALCORPORATIONS IN TURKEY

3M CARREFOUR GENERAL ELECTRIC MCKINSEY RENAULTSABB HOLDING CHEVRON GILETTE MERCK SHARP DOHME REUTERSABN AMRO CITIBANK GLAXOSMITHKLINE MERLONI ROCHEAC NIELSEN ZET CNN GOODYEAR METRO SERVIERACCENTURE COCA COLA HENKEL MICROSOFT SIEMENSAEG COLGATE PALMOLIVE HEWLETT PACKARD MITSUBISHI SOCIETE GENERALEALCATEL CREDIT LYONNAIS HSBC MOBIL OIL SODEXHOALLIANZ CREDIT AGRICOLE HYUNDAI CORPORATION NESTLE SONY AMERICAN EXPRESS CROWN CORK IBM NIKE TETRA PAKARIA DAIMLER CHRYSLER INTERGEN NISSHO IWAI THAMES WATERAVENTIS PHARMA DANONE ITOCHU CORP. NORTEL NETWORKS THE SHELL COMPANYAXA DEUTSCHE BANK JOHNSON&JOHNSON NOVARTIS TNTBANCA DI ROMA DHL JP MORGAN CHASE ORACLE TOTALBARCLAYS BANK DUPONT JTI PARS MCCANN TOYOTABASF ERICSSON LAFARGE PEPSI COLA UNILEVERBAT FIAT LEVIS PERFETTI VOLKSWAGENBOSCH FMC LILLY PFIZER XEROXBP FORD LOCKHEED-MARTIN PHILIP MORRIS YAZAKIBRIDGESTONE FOSTER WHEELER MAN PHILIPSBRISTOL MYERS SQUIBB FOUR SEASONS KRAFT JACOBS PIRELLICARGILL FRITO LAY MCDONALDS PROCTER&GAMBLE