1. INVESTING IN Inside Neighbouring Iraq is no longer seen as a pariah for businessmen Turkey FINANCIAL TIMES SPECIAL REPORT | Thursday November 26 2009 Page 3 www.ft.com/investturkey2009 Chance to assert economic independence But without the IMF interest rates by more than 10 exit from fiscal stimulus, with a percentage points in a year to medium-term plan to stabilise walking stick, the mitigate a brutal contraction in debt in 2010 and cut the budget recovery will be more the real economy. Banking sec- deficit from 6.6 per cent at the tor profits for the year may end of this year to 4 per cent by sluggish, says reach TL20bn ($13.5bn), 50 per the end of 2011. But economists Delphine Strauss cent higher than in 2008. say reliance on higher tax reve- Ratings agencies have sig- nues and a lack of detail on how nalled they may upgrade Tur- fiscal rules will be formulated or W hen financial lead- keys sovereign rating a move spending controlled reduce the ers converged on long priced into markets. Fitch plans credibility. Istanbul for theOc- cited its relative resilience to The Treasury expects to roll tober meetings of the severe stress test of the glo- over almost all domestic debt the International Monetary bal financial crisis and Moodys payments next year, a ratio that Fund and World Bank, Turkey said it was better prepared would increase if there were any took pride in becoming the first than would have seemed possi- fiscal slippage, external shock country to host the gathering ble, given its dependence on or mishap with privatisations. twice. An even greater source of external financing. Tevfik Aksoy, analyst at Mor- pride was the fact that it had Yet Mr Erdogans ruling Jus- gan Stanley, says the record Sculptures of a bull and a bear outside the Istanbul Stock Exchange: foreign capital inflows were encouraged by IMF oversight Bloomberg finally broken free from the tice & Development (AK) party lows in real interest rates have IMFs tutelage, after a half cen- must still convince outsiders it sapped enthusiasm in the bond port a sluggish recovery by cash flow may mean new activ- level for deals, after a year in blings. But tensions have risen tury as a serial recipient of can maintain stability without market, with inflows of only Turkish standards, and not ity for M&A bankers and private which sellers expectations far sharply in recent days after a funds and advice, lurching from external anchors. Inflows of for- $1.3bn from non-residents enough to bring relief from equity investors in 2010. exceeded what they were willing string of anonymous letters one bail-out to the next. eign capital fuelled rapid gains between March and September. double-digit unemployment. The need to raise revenues is to offer. alleging military schemes to dis- While the global recession in prosperity in the years up to If government debt issuance Fiscal pressure is also delay- prompting the government to In the last month, the UK firm credit the AK Party, and a row drove many countries into the 2007, largely because investors proves higher than planned, ing some reforms the govern- re-launch long-delayed privatisa- Bridgepoint has acquired a about government-authorised IMFs embrace, for Turkey it were reassured by IMF over- domestic banks will be the main ment thinks desirable. Mr Baba- tions of energy distribution stake in the vehicle inspection wiretapping of secularist- became a chance to assert new sight, and by Turkeys applica- buyers, reducing their ability to can has said plans to promote grids and lay plans to privatise company Tuvturk, while a pri- minded judges and prosecutors. independence in economic man- tion for membership of the lend to the private profitable power stations. vate equity arm of HSBC is A record tax fine against the agement. Ankara might yet European Union. sector and fuel recovery. Istanbul municipality wants among investors in the ground- billionaire media owner Aydin agree a new loan on its own Now, Mr Erdogan is deter- The absence of an IMF deal The modernisation to sell the fleet of ferries plying handling company Havas after a Dogan is a sign that political terms but, as Recep Tayyip mined not to let the IMF dictate would not imply a funding crisis process is likely to be the Bosphorus; there will be a stake sale by TAV, an airport tensions are spilling over into Erdogan, the prime minister, fiscal policy, and the prospect of but would likely imply a slower second attempt to auction off operator that needed to cut debt the corporate arena. put it, there was no need to lean EU accession is so distant that recovery in private sector credit highly volatile and the national lottery, and Mr to pursue rapid expansion. Turkeys modernisation proc- on an IMF walking stick. Thanks to previous reforms, it has ceased to interest inves- tors. Instead, the AKP is press- growth, says Christian Keller, economist at Barclays Capital. prone to intense Babacan has signalled plans to start the privatisation of state- As always, the biggest risks to all this activity are political. At ess is likely to be highly volatile and prone to intense power Turkey entered the downturn ing on with reforms to extend Banks are in any case power struggles owned Ziraat bank. present, companies are benefit- struggles between competing with a solid banking system and rights for Kurds and other unlikely to return to aggressive Suzan Sabanci Dincer, chair- ing from the AKPs hyperactive interest groups, writes Ahmet strong public finances, helping minorities that, while much- lending at a time when bad woman of the lender Akbank, foreign policy, as it promotes Akarli at Goldman Sachs. it avoid a familiar pattern of needed, have stirred political loans are still rising and low Istanbul as a financial centre predicts there will also be a closer trade ties with neigh- Without a benevolent power capital flight, currency collapse, tensions. Paradoxically, some central bank interest rates will cannot yet include tax cuts. wave of restructuring, as groups bours as a means of bolstering such as the EU to smooth the rampant inflation and spiralling risks may be increasing just as reduce their margins. Draft legislation on renewable weakened by the downturn seek regional stability. process, he adds, it may prove interest rates. the worst of the crisis passes. Economists expect gross energy is also delayed because scale to compete. Domestic politics, however, difficult to avoid frequent politi- Instead, with a stable cur- Ali Babacan claimed credit at domestic product to contract by of doubts over the cost of price Ferruh Tunc, senior partner remain fraught. The AKPs big cal setbacks and, in the rency, falling inflation, and the IMF meetings for becoming some 5.5 per cent over 2009 as a guarantees for solar energy. at KPMGs Istanbul office, clashes with the military and extreme, acute social conflict, bond yields near record lows, one of the first economy minis- whole, and grow by 3.5 per cent Yet the continued strains on thinks private equity buyers are judiciary in 2007 and 2008 had leading to extended periods of the central bank was able to cut ters to commit himself to an in 2010 if there is no IMF sup- public finances and corporate close to finding a new price subsided into lower-level rum- uncertainty. State vigilance is a rising investor concern CORPORATE TAX public feud between prime received a TL474m fine money, says Alan Green- duced to broaden the tax same . . . unjustified tax received pragmatic treat- minister Recep Tayyip relating to duty-free fuel halgh at the accountancy base, lower rates on some attempts by the authorities ment from the current gov- Delphine Strauss Erdogan and Aydin Dogan, sales. All three companies firm Kapital Karden. taxes and improve collec- [as with Dogan], says a ernment, often more favour- Inside asks whether recent the billionaire whose news- say they have complied Better enforcement is tion. But with the budget senior banking executive in able than of locals. Banking As the countrys papers and TV channels with tax rules and will seek needed. Unfortunately, deficit set to rise to 6.6 per Istanbul. One important induce- financial situation changes, demands mark a had become increasingly legal redress if necessary. paying taxes is not very cent of GDP, tax cuts are on Accountants complain tax ment for foreign capital a so may investor attitudes towards risk, writes new strategy critical of his government. However, evidence is now Punitive taxation contin- ues, becoming a major common in Turkey, Ali Babacan, economy minister, hold and the temptation inspectors zeal is not always matched by compe- zero rate of withholding tax on bonds is now at risk Delphine Strauss mounting of a much uncertainty for foreign said in defence of the Dogan tence, or clear and predicta- after a court ruled it was Page 2 When Turkeys finance broader enforcement drive direct investment and fine. Statistics from the Unfortunately, ble legislation. Im not inequitable given the 10 per Energy David OByrne ministry sent the Dogan by corporate tax inspectors domestic fixed investment, Organisation for Economic paying taxes is not happy with the way they cent rate charged to Turk- media group a bill for which economists and analysts for the consul- Co-operation and Develop- conduct investigations. For ish investors. says Moscow still holds all TL4.8bn ($3.2bn) in unpaid accountants say is long- tancy Global Source wrote ment bear this out: taxes on very common in years, the best people have Mr Babacan has promised the cards in deciding pipeline routes Page 2 taxes and penalties this autumn, foreign investors overdue, but must be car- ried out consistently to after news of the Google fine emerged. income, profits and capital gains equalled 5.3 per cent Turkey not been choosing to work for the government, says a foreign investors an over- haul of corporate tax rules Private equity were dismayed but not keep investor confidence. The fines are the result of of gross domestic product in Ali Babacan, partner at a big account- to leave no room for grey BC Partners buyout of overly nervous. This month, Googles changes inside the tax 2006, against an OECD aver- Economy Minister ancy firm in Istanbul. areas and ensure foresee- Migros is breaking Ministers maintained that Turkish operation became administration designed to age of 13 per cent. Ambiguities in the tax able, predictable, fair imple- new ground, writes the fine, along with a the latest target, receiving a step up scrutiny of big com- Because of its narrow tax procedural code mean too mentation. Martin Arnold Page 3 TL900m penalty imposed fine of around TL70m. In panies and raise cash for base, Turkey has relied dis- will be to resort to blunter many points are open to He is clearly keen to steer earlier in the year, was the October, Turkcell, the the treasury. proportionately on indirect instruments. interpretation, while seek- the debate beyond the con- Wine Political attitudes result of routine inspec- mobile phone operator, was There have been more taxation, especially on a I think the government ing redress in the Turkish troversy over the Dogan make for a challenging tions, with no political asked to provide collateral tax inspections in the last plethora of consumption is very keen to improve its courts could take years. case. But like it or not, that investment climate, writes interference. But most to meet a TL258.3m tax three months and, as with taxes that are not always revenues from those compa- Despite the vagaries of row may now be the yard- Pelin Turgut Page 4 viewed it as personal the demand. Earlier in the year, any government, its economically rational. nies that are profitable. The the system, foreign inves- stick by which foreign culmination of a long and the oil company BP because it needs the Reforms are being intro- banking sector fears the tors have in general investors judge the system.

2. 2 FINANCIAL TIMES THURSDAY NOVEMBER 26 2009 Investing in Turkey New terminal lands on time and budget Low interest SABIHA GKEN Istanbuls second rates call for its success in turning Istan- buls Ataturk airport into a hub between Europe and experience in equipment purchases, says Cenk Alp- soy, GMR Internationals trends in passenger num- bers. At Sabiha Gken, the contract unusually includes lured from the bigger Atat- urk airport not just by low prices, but with shorter taxi airports fortunes rising with those of the city and in particular its less devel- airport aims for new strategy the Middle East. regional head. It also flew ground handling, cargo and times and a faster turn- oped Asian side. The bold expansion at in IT experts from Hydera- refuelling, as well as reve- round at peak times. She rattles off the names growth, writes Sabiha Gken reflects bad and Delhi to help nues from passenger taxes, But Sabiha Gken has of companies due to move Delphine Strauss changes closer to home: the rapid development of Istan- switch operations from the old to the new terminal. duty free sales, car parking and an airport hotel. had problems at peak hours in the old terminal trying to to the more residential shore of the Bosphorus buls Asian shore, the rising GMR comes fresh from But the consortium must meet airlines demands for including state-owned Two weeks before opening, aspirations of Turkeys mid- building Hyderabads new recover its 450m invest- flight connections with a banks set to relocate from BANKING important, while their cli- workmen were knee-deep in dle classes, and the appeal airport but Sabiha Gken ment as well as meeting shorter gap than it can Ankara and of multina- ents may be tempted by wet concrete outside the of the city itself to both is its first foray overseas. payments to the govern- physically manage, leading tionals such as Unilever Delphine Strauss more adventurous options main entrance, tenants were assembling shops, and tourists and businessmen. The wavy silhouette of its Mr Alpsoy says the group chose Turkey for its first ment. It is counting on pas- to chaotic scenes at depar- ture. Shedding a low-cost and Procter & Gamble already installed. says that this years for their investments than short-term cash deposits. lines of red suitcases were roof meant to suggest the venture because of the image looks challenging. Istanbuls attractions go windfall profits are That will mean training Turkish Airlines passing through tests of seven hills on which the potential for other projects Pegasus, which uses Sabiha beyond its romantic sky- unlikely to be bank branch staff in asset baggage handling systems. city was founded is the in its core areas of energy presence will be Gken as its main base, is line, she suggests, saying matched over the management, she says. But when the new inter- mark of an architect chosen and road-building. a fast-expanding no-frills the consortium had We have to educate our national terminal at Istan- by the Turkish military, Other Turkish groups are crucial to attract carrier. Most airlines listed declined an offer from a pri- next few years clients they have to know buls Sabiha Gken airport opened its doors this which owns the airport. But the consortium that built eyeing the opportunities for airport expansion in Turkey other flag carriers on the airports website also fit that category. vate hospital to set up a diagnostic centre in the old where theyre investing. Until now, they go to see month, its operators could the terminal, after bidding and beyond. Celebi, a Sabiha Gkens manage- terminal building ready to We were caught by the cri- the bank manager . . . they celebrate completing it a 1.92bn for 20-year operat- ground handling company, senger numbers rising from ment says Turkish Airlines receive medical tourists sis with our seatbelts fas- have coffee, bargain over year ahead of schedule ing rights, is a collaboration has just won contracts at some 6m this year to 10m presence will be crucial to from Russia or former tened, says Suzan Sabanci the interest rate, and its with a 20m passenger between a Turkish con- Delhis international airport by 2010 and double that by attract other flag carriers: Soviet Union countries. Dincer, Akbanks chair- done. Now, if you dont capacity bigger than glomerate, Limak, and and in Brussels. TAV, 2020. they delayed the terminals In a more glamorous woman, in a fair summary explain different asset required by contract. Indias GMR Infrastructure. which runs Istanbuls main Our target is that every- opening to coincide with anecdote, she says the of the ease with which Tur- classes, itll backfire, he While airlines around the Their joint venture holds an Ataturk airport, has just one in Turkey will fly, the launch of new THY director of the new Abu keys banking sector has wont be happy. world suffer mounting 80 per cent stake in the formed a joint venture with says Gkhan Bugday, the routes. But Temel Kotil, Dhabi Guggenheim withstood the shocks of the If that shift does occur, losses and falling passenger operation, with 20 per cent Saudi Arabias Al-Rajhi airports chief executive THYs chief executive, is museum chose to hold past two years. the implications are big numbers, Turkish aviation owned by the Malaysian air- Holding to bid for projects. echoing prime minister less enthusiastic about the meetings in Turkey so both Due to reforms enacted one peculiarity of Turkish is thriving. Turkish Airlines port operator MAHB. Profits under the BOT Recep Tayyip Erdogan, who terminal, saying: We dont US and Middle Eastern visi- after a previous banking capital markets is the near- claims it will this year be Limak has local knowl- (build, operate and transfer) sees air travel as a symbol have great plans for it. tors could get visas. Istan- crisis, Turkish banks absence of retail investors, the only European flag car- edge and expertise in con- contracts that predominate of progress and prosperity. Ebru zdemir, a board bul is becoming more of a Akbank among them especially in equities. rier to grow, largely due to struction, but GMR added are highly sensitive to He argues airlines can be member of Limak, sees the magnet, she says. entered the downturn with Although Turks can enviable capital cushions, invest in shares simply by no exposure to toxic deriva- walking up to a cashpoint tives and with the bulk of and picking from a choice their funding coming from of funds, most view the Change in a stable deposit base. stock market as the pre- In the year to September, serve of speculators. One net profit for the sector as a result is that pension funds whole was 41 per cent remain puny next to emerg- higher than in the same ing market peers. period of 2008, according to Mr Aksel says 75 per cent drug prices figures from the banking of household savings go to regulator. Banks continued cash deposits at present, opening branches, although with just 4 per cent at a slower pace than invested in equities and planned, keeping staff num- rich families buying stock bers broadly flat despite in their own companies prompts stringent cost-cutting. account for most of that. But much of that was The total equity exposure thanks to the central banks of domestic institutional decision to counter the investors was TL1.7bn recession by cutting inter- ($1.14bn) at the end of est rates by more than 1000 heartache basis points in a year. Because Turkish banks can generally adjust their own rates on deposits faster than on loans, a year of monetary easing has boosted their margins and PHARMACEUTICALS tional manufacturers up in arms. produced windfall profits. Under the present system, the The net interest margin Pelin Turgut examines Ministry of Health sets the retail is the most important deter- the effects of price of medicine as well as the rates by which pharmaceutical minant of profitability for Turkish banks and so far it Until now, [clients] electorally popular companies can increase their has been moving in their go to see the bank healthcare changes prices. Since 2004, the price for an original pharmaceutical has been favour, analysts at Fitch Ratings wrote recently. manager . . . they based on the lowest ex-factory Now, with the overnight have coffee, A midst the debate over price found in five reference coun- borrowing rate at a historic Islamism, a key driver tries France, Greece, Italy, Por- low of 6.5 per cent, the cen- bargain over the behind the landslide re- tugal and Spain. The prices of tral bank appears to be election won by Turkeys original and generic products nearing the end of its eas- interest rate, and government in 2007 went unno- were then capped at 100 per cent ing cycle. As their margins its done. ticed: healthcare reform. and 80 per cent of the reference narrow, banks are likely to Suzan Sabanci Dincer, Starting in 2005, the Justice and price, respectively. be even more wary in lend- Akbank chairwoman Development Party (AKP) enacted The September decree changed ing to companies and con- a series of IMF-sought changes to that dramatically. Prices on both sumers struggling through rein in a sprawling social security original and generic drugs can one of the deepest reces- August 2009 just 2 per system, broaden access to quality now be no higher than 60 per cent sions in the region. cent of the Istanbul Stock healthcare and improve the regu- of the reference price. All of a Tefvik Bilgin, head of the Exchanges free float. latory environment for manufac- sudden, the rules have changed, banking regulator, has Yet there have been turers. says Engin Guner, deputy head of warned banks are unlikely inflows in recent weeks to Newspapers no longer run the Association for Research- to match 2009s profits for HSBC Turkeys equity those tragic pictures of people based Pharmaceutical Companies some years after. The dam- funds even if these are waiting in line in front of public (AIFD). age to the real economy still a very small proportion hospitals because those queues no Business and investment plans makes us very cautious, of the total under manage- longer exist, says Serkan Tar- for 2009 and 2010 were made Ms Sabanci Dincer says. ment, Mr Aksel says. mur, a partner in PwC Turkey before this new price decree. If Loans by Turkish banks He has also seen shifts and co-author of a recent sectoral this regulation takes effect as is, grew 30 per cent in 2008, from cash deposits into survey. Anybody can now get it will be very hard for the sector but were roughly flat this fixed-income funds, and treatment, even in private hospi- to fulfill its investment potential. year, and she expects says HSBC is exploring new tals and the state will reimburse Drug expenditure in Turkey at muted growth of just 12 per commodity-based funds the hospital for it. This has been a $136 per person is already low cent in 2009, as well as after trebling its gold fund radical, successful reform and it compared with the OECD aver- tougher lending criteria. in three months. was an important factor in the age, he said, estimating that 75 Local support: small pharmacists have run a campaign to encourage people to buy generic drugs Alamy The prospect of interest The structural case for governments re-election. per cent of proposed cost-cutting rates remaining low for an equities remains strong as It was almost too successful. By would be from original pharma- generic drugs market. There is a July, Pfizer was rumoured to be crisis, with the exception of Zen- extended period, however, long as real rates stay in October, the Health Ministry had ceutical manufacturers. In a move towards generics on the interested in the takeover of tiva [which bought 75 per cent of may demand a more funda- mid single-digit levels over already spent the TL12.5bn recent survey, 84 per cent of AIFD part of the government as an generics market leader Abdi Ibra- Eczacibasis generic pharmaceuti- mental shift in behaviour the next few years, Ali ($8.3bn) allocated for pharmaceu- members said the proposed important cost-saving measure, him. cals business in 2007]. But talks from both lenders and sav- Riza Incekara, analyst at tical expenditures in 2009, jeop- change would stop new capital or says Mr Tarmur. Turkey has a Local industry also has support with various companies are ongo- ers, who for decades have BGC Partners wrote in a ardising budgetary targets in a production investments, while in the form of the vocal Turkish ing. They will wait for the market been accustomed to double- recent strategy note. tight fiscal year. The prescription more than half said at least 20 per Pharmacists Union, who recently to settle after this price change digit rates of return. Mutual funds and pen- drug market grew nearly 10 per cent of jobs would be cut. Multinational generics ran a successful campaign to buy and then act, says Mr Tarmur. In This is something weve sion funds are likely to be cent last year to $9.4bn and is The state is a key force in more manufacturers have not generic that resulted in several a recent PwC survey of pharma- never lived through, says the primary vehicles for expected to maintain that growth than one respect. More than 80 multinational companies increas- ceutical manufacturers and pri- Namik Aksel, chief execu- domestic retail investors in rate to become one of the worlds per cent of all drug purchases are yet come to Turkey ing discounts on their brands. (All vate equity investors, more than tive of HSBC Asset Manage- shifting their portfolio, he top 10 largest markets in the next decade. Even in a year of finan- reimbursed by the social security institution, with the remaining mainly because of the pharmacies in Turkey are individ- ually owned, there are no chains.) 40 per cent cited regulatory uncer- tainty as the main barrier to ment in Istanbul. Turkeys habitual crises adds. Before the 2001 crisis, cial crisis such as this, healthcare nearly 20 per cent of public sector financial crisis Opportunities for new invest- investment. always involved the lira interest rates were low at costs have increased because employees similarly state-reim- ment are also helped by the frag- For its part, the government crashing, high inflation and 30 per cent and people were access has become easier and bursed through the Finance Min- mented structure of the local mar- delayed enactment of the price interest rates, so investors going into equities retail state insurance coverage is istry. Private health insurance is strong generics manufacturing ket the top 10 companies change to December, suggesting are risk-averse, he notes. investors were the last in. wider, says Mr Tarmur. negligible, accounting for 1.2m tradition, accounting for 53 per together account for less than there may be revisions. But it is Now, Ms Sabanci Dincer People got hurt very badly To stem rising costs, the gov- people out of a 75m population cent of unit sales last year. There half of sales. The large multina- unlikely to be annulled alto- says: The banking model and never wanted to go ernment issued an overnight last year. are several large, well-established tional generics manufacturers gether, signalling that a period of in Turkey is changing. back, Mr Aksel says. decree in September that would The pressure to keep healthcare companies and they are being havent yet come to Turkey restructuring for pharmaceutical For high street banks, fee This time, we feel its change pricing and has multina- costs down is likely to boost the courted by foreign investors. In mainly because of the financial manufacturers is yet to come. income will become more going to be different. Success of oil pipeline depends on whims of Moscow ENERGY its lower end, it is also one which has long warned of of Ceyhan, which Turkey sia having long backed a Italy and Russia commit- make or break the project. pass line of their own. of the most beautiful. the dangers posed by too has long harboured ambi- rival project to build a pipe- ting the three countries to Shipping oil by tanker They plan to construct Government wants It is no surprise then that much tanker traffic. tions of turning into a line through Bulgaria and work together on this and through the strait is always that line, the South Stream to ease traffic on with oil tanker traffic Turkeys own proposed major regional energy hub. Greece a far shorter route, other regional energy going to be cheaper than gas pipeline, across the through the straits having solution is the Samsun- However despite presid- and Kazakhstan having projects. any pipeline, says John Black Sea to export Russian the Bosphorus, says more than doubled since Ceyhan, or Trans Anatolian ing over a ground-breaking Russian prime minister Roberts, Caspian analyst at gas to Europe, by-passing David OByrne 1995 and expected to double pipeline, planned to carry ceremony at Ceyhan in Shipping oil by Vladimir Putin also Platts. Ukraine which has previ- again in the next decade on oil from Turkeys Black Sea 2007, Calik and Eni have announced that he had Ultimately Russia con- ously attempted to leverage At 30km long but just 700m the back of fast-rising oil coast, 550km across the struggled to secure suffi- tanker through secured Kazakh support for trols the oil routes from the its location on Russias gas wide at its narrowest, Istan- production in Russia and country to the Mediterra- cient commitments of oil to the project a claim yet to Caspian to the Black Sea, export route to obtain buls Bosphorus strait is the Caspian basin, Turkey nean coast, bypassing the ensure the line will be com- the strait will be confirmed by Almaty. and only Russia can ensure cheap gas. one of worlds crowded and potentially most is keen to provide an alter- native export route. crowded Bosphorus. Sponsored by a consor- mercially viable. Eni can supply oil from always be cheaper It is an important step, but there is still no definite the line has enough oil to make it viable. Russia is also hoping to co-operate with Turkey on hazardous waterways, Traffic through the tium of Turkeys Calik the giant Kashagan field in than any pipeline commitment of oil to the Such a move by Russia other pipelines, including a where even with state-of- strait already presents an Enerji and ENI of Italy it is Kazakhstan which it is Samsun-Ceyhan line. would come at a price, he second gas line across the the-art radar monitoring, unacceptable risk to the designed to carry up to 1.5m developing in partnership Negotiations are still cautions, pointing out that Black Sea and an extension transiting ships are still population of Istanbul, and barrels per day. with Kazakh state oil com- long declined to commit to continuing with both Rus- the recently signed agree- of an existing gas line south obliged to take on a pilot. any oil pipeline that can It is also expected to help pany KazMunaiGaz, but the any of the competing sia and Kazakhstan, a ments make only one defi- across Turkey to Ceyhan Fringed with forests and relieve the pressure will be kickstart a new petroleum line also needs oil from Rus- schemes. spokesman for the Calik- nite commitment for Tur- and on to Israel that would villages on its upper welcome, says Burak refining, petrochemicals sian or Kazakh producers. That situation has now Eni consortium told the FT. key to allow ENI and Rus- also allow for the develop- reaches, and the palaces Ozugergin, spokesman for and manufacturing sector Support has been slow in changed with a recent It is also a step that con- sias Gazprom to conduct a ment of gas-based indus- and mosques of Istanbul at Turkeys foreign ministry at the Mediterranean port coming, however, with Rus- agreement between Turkey, firms that Moscow can feasibility study for a by- tries at Ceyhan.

3. FINANCIAL TIMES THURSDAY NOVEMBER 26 2009 3 Investing in Turkey Links growing beyond aid and smuggling IRAQ serious blow to its cashflow. There is evidence of similar Alex Barker says the problems in areas such as con- countrys longterm struction. Ilnur evik, a former newspaper proprietor and busi- relationship with its nessmen who worked in north- wartorn neighbour is ern Iraq, says the risks of work- ing in such a fledgling economy an opportunity are often unbearable. There was no proper plan- P ass a big construction ning, no proper supervision, site in Erbil, Sulei- everything was arbitrary, and maniya or Dohuk the you have to deal with corrup- booming cities of Iraqi tion, he said. On paper it Kurdistan and it is most likely looks very nice. But the reality that the workers will be toiling is sometimes very different. away for a Turkish company. But Joost Hilterman of the In good times and bad, mer- International Crisis Group chants from Turkey have beaten argues such cases are the a path over the long, mountain- expected commercial casualties ous and disputed border with of a tricky working environ- Iraq, looking to sell their wares ment. Business and Turkish or tap the regions great and investment is booming. There largely unrealised commercial are of course cases where the potential. relationship has soured on an From oil to construction, individual basis, he says The Turkish entrepreneurs have Kurdish region does not have a amassed some of the political banking system or a regulatory clout and business hardiness system. Investors are not the necessary to cope with the majors [international compa- Kurdish regions rocky regula- nies], they are smaller compa- tory terrain turning them into The Taq Taq oil field in Iraqs selfruled Kurdish region: Turkish companies have been forced to halt production following a dispute between the Kurds and Baghdad AFP nies that are the big risk-takers. valued partners for others. Considering that, the situation When European or US compa- Turkish troops, units of the diplomatic progress in October ments have invariably gone to between Erbil and Baghdad over light by regulators and the is not bad at all. nies are contemplating a move rebel Kurdish Workers Party by making the first ever visit by Turkish groups able to draw on sharing oil revenue. Kurdish authorities. Meanwhile Meanwhile Kurdish authori- into Iraqi Kurdistan, their first insurgents and hidden loads of a Turkish foreign minister to a skilled, often ethnically Kurd- Two Turkish companies Petoil, which secured licence ties are looking to court more port of call is often Istanbul. It mazout illegal smuggled the Kurdish region, flanked by ish workforce that are willing to Genel Enerji and Petoil were agreements in Northern Iraq a established companies, meeting is simple logic for everybody to fuel. dozens of businessmen. Mr tolerate a tough and sometimes again among the first to attempt few months before the US inva- with dozens of big hitters in turn to Turkey for support, Now Turkey is preparing to Aksoy says the visit was dangerous working environ- to overcome these obstacles, sion, is now working with Prime Turkeys business community. says Ercment Aksoy, head of open two more border gates and important for business. ment. A further $180m road- taking poll positions in key con- Natural Resources of the US and Safeen Dizayee, spokesman the Turkish-Iraqi business coun- a consulate in Erbil an To have a consulate and the building contract was awarded cessions. Both are also now Oil Search of Australia to for the Kurdish Democratic cil. We are the pioneers. unthinkable political step five presence of the government will to Yksel Insaat last month, a examples of Turkish groups act- develop fields. Party, says the relationship It marks the maturing of a or 10 years ago. International oil make it easier in all our areas of group with experience in con- ing as a bridgehead for interna- Yet the problems faced by must move beyond flooding cross-border business relation- companies are working in tan- work, he says. Diplomatically, struction projects from Kabul to tional investors a rough model these energy groups underline our markets with Turkish ship that has long survived in dem with Turkish groups to rather than standing back to Qatar. of co-operation that could apply how difficult and unpredictable goods and building infrastruc- spite of politics, from the legitimately pump oil across the back, were now hand in hand. But those seeking their for- to many other sectors as the business can be in northern ture to more inward investment oppression of Saddam Hussein border. There is even talk of This is a great opportunity. tune in Northern Iraq tend to be regions economy develops. Iraq. Genel in recent months and outward exports. We had to the peaks of Kurdish separa- reviving the great Ottoman To date construction has been firmly focused on the regions Genel Enerji, owned by the has been forced to halt produc- lots of cowboys coming in, not tist violence in Turkey. dream of a railway linking the dominant business area. Big abundance of oil. Development powerful Cukurova group, is in tion from its Taq Taq field fol- finishing projects, disappearing For many years, the flow Baghdad and Berlin via Istan- public infrastructure contracts is still severely hampered by the partnership with Heritage Oil of lowing a dispute between the with advance payments. Now across the border mainly bul. from airports and universities to lack of export routes, legal the UK and has plans to merge, Kurds and Baghdad over pay- were looking more at serious amounted to food (often aid), Ahmet Davutoglu sealed this roads and new housing develop- uncertainty and wrangling should the deal be given a green ment mechanisms, dealing a companies, he says. BC deal tests water for private equity MIGROS healthy demographic Big private equity deals growth, which contributed in Turkey have included Martin Arnold says to a 1.3 per cent rise in its TPGs acquisition of a con- debtfunded population last year to 71.5m people, more than trolling stake in Mey Icki, Turkeys biggest producer acquisitions are half aged under 30. of spirits including Raki, becoming attractive In the six months to June, Migros revenues rose by 13 the countrys most famous tipple, in a deal worth per cent to TL2.68bn about $810m in February As a Greek dealmaker who ($1.8bn), while its earnings 2006. oversaw Turkeys biggest before interest, tax, depreci- Kohlberg Kravis Roberts private equity acquisition, ation and amortisation announced its first private Nikos Stathopoulos is used increased 8 per cent to equity deal in Turkey in to breaking new ground. TL192.4m. October 2007 with the acqui- Now the managing part- Mr Stathopoulos says sition of UN Ro-Ro, a cargo ner at BC Partners hopes to Migros has opened 250 shipper that ferries trucks set more precedents at stores in the first nine between Istanbul and Italy, Migros, Turkeys biggest months of this year and in a transaction put at supermarket group, which aims to reach 3,000 outlets 910m. was bought by a BC-led con- by the end of BCs five-year In the media sector, Prov- sortium in a $3.15bn deal plan. idence Equity bought last year. The second way that BC almost 50 per cent of Dig- Mr Stathopoulos says the hopes Migros will be a pio- iturk, the countrys largest 1,300-store chain is growing neering deal is by becoming digital television broad- strongly and bucking the Turkeys first private equi- caster, three years ago. trend of falling sales and ty-owned company to bene- The credit crisis has profits that has hit many fit from the tax-deductibil- slowed buy-out activity in private equity-owned com- ity of its interest payments, Turkey like much of the panies since last years col- although it is unclear if this world with only two pri- lapse of Lehman Brothers. can be achieved. vate equity deals so far this Mr Stathopoulos, who led This benefit, which gener- year, compared with six last the Migros acquisition, says ates tax-savings for private year, according to Dealogic. it has proved resilient to a But there are signs that fierce recession in Turkeys private equity is regaining economy, which is expected The credit crisis its appetite for Turkish to contract by about 6-7 per could throw up deals as Bridgepoint last cent this year. That is month offered to acquire a mostly due to the defensive more opportunities, 33 per cent stake in Tv- characteristics of food retail, as people still have to as Turkeys rich turk, a vehicle inspection company. eat, he says. families are forced The credit crisis could The BC executive says throw up opportunities, as that since Migros was to sell assets to rich families, such as the bought by a consortium of raise capital Ko family (which sold BC, Turkven, and Italys Migros) and the Dogan fam- DeA Capital, it has been ily (which faces a $3.3bn tax taking market share from equity-owned companies, is fine), are forced to sell its rivals, thanks to its full a common feature of lever- assets to raise capital. range of store formats, such aged buy-outs in the US and Some of these families or as 5M hypermarkets, Europe, but has not been corporates are overlever- Migros supermarkets, and tested in Turkey before. aged, may have debt matur- Sok discount stores. In preparation for the pos- ing soon that needs repay- As customers have sible move, the $1.5bn of ing, or may want to shifted away from the more debt used to finance the ini- improve their capital struc- upmarket supermarkets, tial buy-out of Migros has ture, so I expect there will such as Macrocenter, they been transferred from the be some potential disposals have spent more in dis- acquisition vehicle to the coming out of them, says count stores, such as Sok, operating company. Mr Stathopoulos. says Mr Stathopoulos. The final way that the BC As we have five brands boss hopes the Migros deal in different formats, we will break new ground in Contributors have experienced growth in Turkey is to become one of Delphine Strauss all formats and can address the first companies to bene- Turkey Correspondent consumer needs from differ- fit from a proposed law to ent directions, he says. allow squeeze-outs of Martin Arnold Private Equity Sok is performing particu- minority shareholders. Correspondent larly strongly as people are BC owns 98 per cent of trading down in times of Migros shares, but has been Alex Barker recession. prevented from taking it Political Correspondent In addition, organised private by the lack of a retailers, such as Migros squeeze-out law, forcing it David OByrne and its smaller rivals Carre- to keep publishing full Pelin Turgut four and Tesco, have quarterly results. FT Contributors increased their share of Turkey is modernising Tom Griggs Turkeys food retail market and coming in line with the Commissioning Editor from traditional Bakkal rest of Europe, says Mr mom and pop stores. Stathopoulos. This should Steven Bird Supermarkets and other boost mergers and acquisi- Designer organised retailers still con- tions by private equity and trol only 40 per cent of Tur- inward investment in Tur- Andy Mears keys food market, com- key. Picture Editor pared with about 80-90 per Other big private equity cent in most western Euro- groups that have invested For advertising details, pean countries, so there is in Turkey recently will be contact: more room to grow, argues watching closely to see how Regina Gill Mr Stathopoulos. BC fares in its push to Phone +49 69 156 85 16 Another driver of growth improve the rules for pri- Email : regina.gill@ft.com at Migros is Turkeys vate equity in the country.

4. 4 FINANCIAL TIMES THURSDAY NOVEMBER 26 2009 Investing in Turkey Government wary of temptations of Bacchus WINE ecik Karasi or delicate Narince, annual sectoral growth we saw taking their expertise with The market was liberalised in technology has improved and in the early 2000s to a stand- them. 2001 when a state monopoly on Political attitudes international buyers are taking still, says Sibel Kutman, a It was the plight of abandoned alcoholic beverages was lifted make for a challenging note. What I saw in vineyards and cellars suggests it will not member of the board at Doluca. More recently, an advertising vineyards on the Aegean island of Bozcaada that prompted Mr and private sector wine imports freed up. A market watchdog, investment climate, be long before Turkey produces ban took effect in July making Soley to turn to wine-making. TAPDK, was established in 2002 says Pelin Turgut something truly exceptional, said well-known wine critic Jan- it illegal to promote alcohol in association with food, Turkish Ive had a house on the island