CO-PUBLISHED FDI SPECIAL FOCUS Foreign direct ...50 IFLR/November 2014 CO-PUBLISHED FDI SPECIAL...

www.iflr.com IFLR/November 2014 49

CO-PUBLISHED FDI SPECIAL FOCUS

Expert analysis 50Africa’s rising ambitionsLeapfrog’s Tom Brunner explains best practice for investing in

the continent’s growing financial service sectors, which risks are

overhyped, and how to best hedge against currency fluctuation

Expert analysis 52Calm seas ahead İlker Aycı, president of Turkey’s Investment Support and

Promotion Agency and the World Association of Investment

Promotion Agencies, discusses the reforms that continue to

improve the country’s FDI opportunities

Expert analysis 55A reversal of fortune An ambitious set of reforms could transform Mexico’s

investment environment. Former ambassador to the EU and

Nafta negotiator Jaime Zabludovsky explains what is needed to

capitalise on the changes

Expert analysis 57Big data, big opportunities The vast amount of information collected by technology

companies creates new investment possibilities. Megafon’s

Anna Serebryanikova explains why freedom of economic activity

in this new market must be balanced with privacy considerations

Indonesia 59Ripe for investmentTunggul Utomo and Eko Basyuni of Assegaf Hamzah & Partners

describe the confluence of factors that make Indonesia

a preferred spot for foreign investors

Macau 63The secret to FDI successRita Martins and Pedro Manero Lemos of DSL Lawyers look at

how Macau has cultivated, and continues to build on, its success

as a global investment hub

Thailand 67An investor toolkitWeerawong Chinnavat & Peangpanor’s Kudun Sukhumananda

answers key questions about the basics of investing in Thailand

Turkey 69Onwards and upwardsGokmen Baspinar and Ali Ceylan of Baspinar & Partners explain

what is helping Turkey become one of the world’s top 10

economies by 2023

Foreign directinvestmentspecialfocus

50 IFLR/November 2014 www.iflr.com

CO-PUBLISHED FDI SPECIAL FOCUS EXPERT ANALYSIS

Natural resources may have triggered Africa’s rise. But the continent’sexpanding middle class will ensure its growth story continues. Of thecanny investors to have capitalised on the increased demand for local

financial services, Leapfrog Investments is a pioneer.

The emerging market-focussed investment firm has been active in Africasince its inception in 2009. Reflecting on the last five years, Leapfrog’s generalcounsel Tom Brunner explains how the investment climate has changed, dis-pels some some common misconceptions, and clarifies which risks can andcan’t be mitigated.

In Africa, Leapfrog focuses its investments in the insurance, pensionand other financial industries. What are the particular opportunitiespresented by these sectors?What we have targeted is the emerging consumer. For the hundreds of millionsof people in Africa making their way out of poverty and beginning to establishthemselves, insurance and other financial services are incredibly important waysto secure and build upon their financial gains. This creates a tremendous marketopportunity for companies that are oriented towards that category of consumers.At the same time, insurance penetration is currently low in emerging markets.Insurance as a percentage of GDP in emerging markets is at an average of 2.9%and the percentage of people benefiting from life, health, accident and disabilityinsurance is typically less than five percent. This is in contrast to markedly higheraverages in developed markets. Consider that total life and non-life penetrationis 11.6% in the US, 13.4% in the UK and 8.3% in the EU. Given the market’spotential is almost unlimited in scale, it is a very exciting opportunity.

Based on Leapfrog’s experience, which countries’ financial servicessectors are the easiest to gain a foothold and operate in? The ones we have found to be relatively open and attractive are Ghana, Kenya,South Africa and Nigeria, the last of which may be a surprise to some. They arethe four countries we have been most involved with multiple times over theyears.

Why would Nigeria surprise people?There is a perception that because of Boko Haram, Nigeria is a dangerous place.Certainly this has created terrible problems, but our sense is that it’s an indicationof the difficulty of modernisation and rapid maturation. We still view it as anexciting place.

Leapfrog has been active in Africa since 2009. How have you seen theinvestment environment change over the last five years?We have certainly seen much more interest in investment from a variety ofsources. Major global players in financial services, and in particular private equityfirms, are certainly coming into Africa in a way they weren’t in 2009. Five yearsago, they weren’t remotely as interested. For us, this creates possibilities forinvestment competition, but also very attractive exit opportunities in years tocome. Given exit markets are less well established than in developed markets, weneed to be conscious of who are our realistic buyers.

We are also seeing bigger deals. In 2009, finding ways to deploy $10 mil-lion in African financial services would have been challenging. Today, we arelooking at opportunities that are many times that. I think that reflects thegrowing sophistication in some of the categories of investment we are lookingat, and also the level of ambition and scale that people are aspiring to.

For an investment firm focused on Africa, how impor-tant is it to have operations on the ground?It is very important to have your ears to the ground, and with real expertiserather than just a shallow understanding of the markets you are dealing with. But

Africa’s rising ambitionsLeapfrog’s Tom Brunner explains best practice forinvesting in the continent’s growing financial servicesectors, which risks are overhyped, and how to besthedge against currency fluctuation

“The biggest macro risk is foreign exchange


EXPERT ANALYSIS

I think it is less critical to have someone resident in, for example, Lagos asopposed to Johannesburg or London. We have operated in many of thesecountries drawing on people who have significant experience in these markets.That is more important than having people based in these cities.

From a legal perspective, what are the biggest challenges for a foreigninvestor in Africa?Certainly the biggest challenge is the potential for abrupt changes in legalregimes. These are still relatively new economies, with new governmentalstructures. So we would be apprehensive about the possibility of radical changein, for example, tax systems, throughout the course of an investment that altersour basic equation. I think that today that is more of a fear than expropriationor government seizure of assets.

Second, there is always a concern about corruption. We have a zero toler-ance policy in this regard – we will not ourselves participate in anything thatsmacks of corruption nor knowingly invest in a company that is in any waydependent on corruption. And we work very hard in due diligence to makesure we are confident of that. But the concern is that it could emerge furtherdown the road, and that companies would be pushed to the wall. That is some-thing that we are very much focussed on.

And for private equity firms, the third thing would be ensuring a path toexit that is realistic and practical. That is a central consideration from the veryfirst conversation when we are looking at a potential investment.

Regarding the risk of abrupt legal changes, is there any way to mitigatethis or is it something that must be accepted when making aninvestment? There are two levels to that question. First, it is important to really understandthe countries you are investing in and put a lot of effort in assessing whether thesituation is stable and is likely to be stable over an extended period. That issomething we pay a lot of attention to. But on a more technical level, it ispossible to take out insurance against certain kinds of regulatory risks. Politicalrisk or tax liability insurance, for example, from the London or New Yorkinsurance markets can help.

And what are the most important soft considerations to take intoaccount when investing in Africa?Number one is governance. The quality of governance in companies that weinvest in is absolutely critical in terms of our confidence in the integrity of theinvestment, and our ability to work with the management and exit the companyin time. We will only invest in companies where we think the governance isgood, and then we make a big effort to work collaboratively with managementto maintain and improve those levels.

Second is social alignment. We are an impact investment fund and are very

much concerned with the social progress that can result from the investmentsthat we are making. That complements, rather than clashes with, the financialgains. It is important that company’s management and other owners share thatalignment.

Finally, openness to genuine collaboration is important. Foreign investorsneed to be partners; they won’t come into companies with all of the answers,or think all the answers are necessarily importable from previous investments.But at the same time we need management that are open to working with us,and want to find imaginative ways to strengthen their products and services.

Which macro risks are the hardest to accept or mitigate? The biggest macro risk is foreign exchange. We can’t control it. And over theperiods of time we are invested – and given it is an equity investment – we can’treally hedge it. That is just part of the risk profile of these type of investments.

So it’s a risk that must just be accepted?What makes a difference for Leapfrog is that we don’t target just one or twocountries. We invest in a large number of markets which, in effect, creates a typeof de facto hedge. These countries’ currencies are not particularly synchronisedso if one appreciates, others are likely to be dropping. And over the five years wehave been in business, we have found that to work imperfectly but verysubstantially.

What about political risk? I wouldn’t put that at the top of the list. I would actually say that motivating andkeeping your key personnel on board is probably a bigger challenge in thesemarkets. For an investor coming in it is critical to give a lot of thought to whoare the people who are the key building blocks of the enterprise and how are theygoing to be retained and motivated. For a company that is well run, and in amarket with a skills shortage of people at that level, the top people can be offeredjobs. So that is a significant challenge which has nothing to do with the politicalenvironment.

So do you think the notion of political risk’s prevalence in Africa isoverhyped?I do. I’m not saying it isn’t there, but I think the notion that these are countriesthat investors have to be uniformly nervous about is overstated. While there arecountries that remain failed and minimally functional, I think others that areincreasingly attractive are sometimes tarred with the same brush.

What is your top piece of advice regarding investing in Africa?You cannot overestimate the importance of local expertise. It is not possible tocome in and invest in these countries without a genuine depth of understandingof how their economies operate, and of the political, regulatory and taxenvironment. It’s challenging as the number of people providing that expertiseis not huge, but getting it is not just invaluable, but a basic entrance requirement.

About the contributorTom Brunner is partner and general counsel at Leapfrog Investments,the world’s largest dedicated investor in emerging markets financialservices. With Leapfrog since 2009, Tom oversees the firm’s legal andcompliance functions and also plays a lead role on the South Asia team.He has been recognised as one of ‘America’s Leading Business Lawyers’(Chambers USA; Best Lawyers in America; Lawdragon; Who’s Who)and the ‘World’s Leading Insurance and Reinsurance Lawyers’ (LegalMedia Group; International Who’s Who of Business Lawyers). Tompreviously served as the founder and chair of Wiley Rein’s insurancepractice, representing American and international insurance carriers.Tom has been founding counsel for several industry groups and wasrecently awarded the Wiley A Branton Award for Civil Rights Advocacyin recognition of his commitment to the pro bono civil rights legalcommunity. He holds a JD from Yale and an AB cum laude fromColumbia University.

Tom BrunnerPartner and general counsel, LeapfrogInvestments

W: www.leapfroginvest.com


CO-PUBLISHED FDI SPECIAL FOCUS EXPERT ANALYSIS

Until this year, Turkey’s rise as an investor darling seemed unstop-pable. Its strong economic growth, large population and strategiclocation has made it a consistent inclusion in the growing num-

ber of emerging market acronyms.

Some believe that rating and policy developments over the past 12months have tested the country’s promise. But İlker Aycı says these arenon-issues. And he is in a position to know.

Aycı is president of the Investment Support and Promotion Agency ofTurkey (ISPAT), and the World Association of Investment PromotionAgencies (WAIPA) that is the umbrella organisation for 175 investmentpromotion agencies (IPA) from 130 countries.

Here he speaks with IFLR about the success of Turkey’s investmentreform agenda, and answers the country’s critics.

Over the past year have you seen foreign investor interest in Turkeyincrease or decrease, and which sectors have been the mostattractive?Turkey’s FDI performance in 2013 was strong, attracting $12.9 billion ofinbound investment and financing 20% of the current account deficitthrough FDI.

Germany was the largest investor last year, followed by the Netherlands,Russia, Azerbaijan and Austria. As regards the sectorial breakdown, themost attractive sector in 2013 was finance, with over $3.7 billion flowinginto the country. This was followed by energy ($2.5 billion) and manufac-turing ($2 billion).

The geographical breakdown indicates that Turkey continues to diver-sify its FDI sources. India, Japan, Russia, Malaysia and the Gulf countries,as well as the US, are increasingly investing. The EU’s share of FDI inflows

dropped from 68% in 2012 to 52%, while Asia’s share soared to 31% upfrom 22%. However the economic recovery may see the EU increase itsshare in 2014 and 2015.

As is well known, the rise of globalisation means many countries are infierce competition to attract high value-added, technology-intensive andgreenfield investments. In terms of greenfield, Turkey is one of the top 20FDI recipients, drawing $9.5 billion worth of projects announced last year.

The country also enjoyed an eight percent increase in the area last year,making it the 19th most attractive investment destination for greenfieldinvestments.

Over the first half of this year, Turkey has maintained its strong per-formance. According to provisional data announced by the central bank,the country attracted $6.8 billion FDI in the first half of 2014, up 28% ascompared with the same period last year.

What are the strengths of Turkey’s foreign investment regime? First of all, it must be underlined that Turkey has one of the most liberalinvestment climates in the world. For foreign investors, there are nolimitations with regard to starting up a business and the duration of theirpresence in Turkey. Once a company has been established as a legal entity,it is deemed a Turkish company. The FDI law, enacted in 2003, offers all

Calm seas aheadİlker Aycı, president of Turkey’s Investment Support andPromotion Agency and the World Association of InvestmentPromotion Agencies, discusses the reforms that continue toimprove the country’s FDI opportunities

“We have taken exclusive

measures to provide a morebusiness-friendly environmentfor foreign investors in Turkey


EXPERT ANALYSIS

international companies national treatment and guarantees the rights ofinvestors. It means that investment procedures and processes for foreigninvestors in the vast majority of sectors are the same with those for localcompanies.

Being aware of its huge potential, Turkey has implemented a set ofstructural reforms to enhance the competitiveness of its economy, boostlabour market flexibility and eliminate vulnerabilities. The key area offocus is public finance reform. This gave the government the leverage forfiscal adjustment, price stability, and reforms in banking, social securityand healthcare.

To keep up with global economic developments and improve yourinvestment climate accordingly, reforms must never stop. Turkey is beenregarded as one of the most reformist countries in its region, even theworld, in terms of its investment environment, and we continue thesereforms to make the climate even more favourable.

What do you see as the major impediments to foreign investorsinterested in Turkey, and are there any initiatives underway toimprove in these areas?Long before the recent crises, Turkey had already put its house in orderthrough the reforms I described above. In addition to these structuralreforms, Turkey has commenced various initiatives in close cooperation withthe private sector to improve the investment climate. One of these initiativesis the Coordination Council for the Improvement of the InvestmentEnvironment (YOIKK). This is a key structure in which the private sectorcontributes to the process of improving the investment climate.International economic authorities have recognised this as a success story fora public-private platforms. The council has rationalised investmentregulations, developed policies that will enhance the competitiveness of theinvestment environment, and generated solutions to the administrativebarriers encountered by local and foreign investors in all phases of theinvestment process including the operating period. Moreover, we have takenexclusive measures to provide a more business-friendly environment forforeign investors in Turkey. In addition to YOIKK, the government hasestablished the Investment Advisory Council. This sees senior executivesfrom prominent multinational companies address the administrative barriersto investment, further improve Turkey’s image as an attractive investmentdestination, and provide a global perspective to the ongoing reform agenda.Since 2004, the Investment Advisory Council of Turkey has been meetingand making decisions under the auspices of the prime minister. Thesedecisions constitute the top items of the YOIKK reform agenda.

What are the most common questions and concerns of foreigninvestors that approach ISPAT? Turkey strongly supports foreign investors through its public institutions,and established the ISPAT in 2006. Since then, the agency has been assistingglobal investors before, during and after their entry into Turkey. Theagency’s free services include, but are not limited to providing marketinformation and analyses, site selection, business-to-business meetings,coordination with relevant governmental institutions, and the facilitation oflegal procedures and applications such as establishing business operations,

incentives applications, obtaining licences and work permits. Being attachedto the prime ministry and directly reporting to the prime minister providethe agency with operational freedom and flexibility.

The agency serves as a reference and point of contact for internationalinvestors by linking them with both the government and businesses inTurkey, and working on a fully confidential basis and functioning as a pri-vate venture. We consider investors as clients and client satisfaction is a toppriority for us.

Two years ago, the country’s Commercial Code was overhauled andbrought closer into line with EU standards. Do you believe this hasimproved the ease of doing business for foreign investors? The new Turkish commercial law that has been effective since July 2012 isa good example to Turkey’s ongoing reform agenda. This increasestransparency and accountability of enterprises, and helps them adoptinstitutional management principles. This new code has definitely improvedTurkey’s investment environment and will allow Turkey to rank higher inthe next World Bank’s ‘Doing Business’ reports.

Turkey was a part of the emerging market sell-off that followed theUS announcement that it would taper its quantitative easingprogramme. What were the key takeaways for Turkey’s capitalmarkets?

To begin with, it must be remembered that short-term financial shocksand any global financial policy changes such as the US Federal Reserve’s(Fed) tapering policy affect portfolio investments, rather than direct invest-ments. This type of investment, which is called hot money, respond moreaggressively to changes in exchange rates, interest rates or political con-juncture. Yet after the recent changes in the Fed’s policy, even foreign port-folio investors have not left Turkey.

Conversely, greenfield investments were on the rise in 2013 and areexpected to rise going forward. These investment levels always revealinvestors’ real perception of a country’s mid-term outlook. It follows thatthe increase in greenfield investments is a good indicator of high confi-dence in the Turkish economy’s future.

What impact do you think election of President Recep TayyipErdogan could have an impact on foreign investment?In August, Turkey passed the democracy test when it conducted thecountry’s first presidential election. Former Prime Minister Recep TayyipErdogan was elected as the president in the first-run.

The political and economic stability established over the last decade hasenhanced the country’s prosperity. And this year’s election indicates thatthe nation has enjoyed the stability over the last decade. Moreover, astronger and more stable Turkey will considerably contribute to the estab-lishment of stability and peace not only in the region but also across theglobe.

Turkey has set ambitious targets to achieve by 2023, ranging fromhealthcare to economy, defence to education, and energy to transportation.These include becoming one of the top 10 economies in the world with aGDP of $2 trillion, and increasing export revenues to $500 billion.Political stability and determination has made possible these long-termgoals and visions.

In August Fitch issued a statement about political risk in thecountry. Are rating agency warnings of political risks, and itspossible impact on capital inflows, valid? I do not think that these credit rating agencies base their evaluations ontechnical analysis. Turkey’s credit rating is lagging behind its potential and

“Turkey attracted $6.8 billionFDI in the first half of 2014, up 28% from the same periodlast year


EXPERT ANALYSIS

we expect these agencies to be more objective going forward. Short-terminvestors are more sensitive to sovereign credit ratings, but when it comesto FDI, such sensitivity is less noticeable. That’s why I believe Turkey willcontinue to be a safe harbour for international investors who are seekingfor economic dynamism.

What is your top piece of advice to foreign companies consideringinvesting in Turkey?Our motto is All-ways Turkey. This is a great time for the country, withGDP growing over the past decade at an average annual rate of around fivepercent. Experts agree that Turkey shows tremendous potential with ampleinvestment opportunities for global investors. Its strategic location, notablyits proximity to major markets and qualified labour pool, allows investorsto access 1.5 billion people and a combined GDP of $25 trillion in Europe,the Middle East, north Africa, the Caucasus and central Asia.

So my golden advice for investors is: do not be late for Turkey. Manyglobal investors that have already taken part in our fertile investment envi-ronment are now growing with the country.

Earlier this year you were elected as president of WAIPA. What doyou hope to achieve during your tenure?

In addition to ISPAT taking over the presidency of WAIPA, WAIPAmembers in May decided to relocate the organisation’s headquarters fromGeneva to Istanbul.

WAIPA’s main missions are to enhance cooperation between IPAs,organise experience sharing and training events, and contribute to activi-ties for improving investment environment in member countries. ISPATaims to make WAIPA a reference institution concerning FDI over the nextyears. To this end, WAIPA’s steering committee, led by ISPAT, is alreadydeveloping a new strategy and action plans.

About the contributorİlker Aycı graduated from the Bilkent University’s department ofpolitical science and public administration in 1994. He continued hisacademic studies as a researcher at the political science department ofthe UK’s University of Leeds in 1995, and completed his Master’sdegree in international relations at Marmara University in 1997. His career began in 1994, holding various positions at Kurtsan İlaçları,the Istanbul Metropolitan Municipality, and Universal Dış Ticaret.Aycı served as the general manager of insurer Başak Sigorta from 2005to 2006, and became the general manager at Güneş Sigorta, anotherinsurer in 2006. Aycı has served as chair or board member of various organisationsincluding the Association of the Insurance and Reinsurance Companiesof Turkey, the Foreign Economic Relations Board, the Turkish-Chinese Business Council, and Vakıf Emeklilik. He was appointed aboard member of Turkish Airlines on April 2014.Aycı was appointed president of Investment Support and PromotionAgency of Turkey (ISPAT) on January 2011. ISPAT is the officialinvestment Promotion Agency of Turkey and is attached to the primeministry. As president of ISPAT, he reports directly reports to theprime minister. In January 2014, he was appointed as the president of WAIPA.

İlker AycıPresident, Republic of Turkey PrimeMinistry InvestmentSupport and Promotion Agency President, World Association ofInvestment Promotion Agencies

W: www.invest.gov.trW: www2.waipa.org

T hings are looking up in Mexico. Inbound investment is surging,and its reformist government is busy implementing the 95reforms that comprise its economy-wide overhaul known as the

Pact for Mexico. Liberalisation of the state-owned energy sector has cre-ated the most excitement, but the package – as well as older reforms –has created a melting pot of opportunities for foreign investors.

Twenty years after he negotiated the North American Free TradeAgreement (Nafta), Jaime Zabludovsky speaks with IFLR about the legacyof Mexico’s first FTAs, teething problems under the Pact for Mexico, andhow foreign investors can help the country continue its growth story.

What is behind the surge in foreign investment into Mexico over thelast two years, and are these levels sustainable?I do think the levels are sustainable, and I think the level of recent activityis a combination of a few things. First, we are now reaping the benefits ofthe consistency and permanence achieved as a result of the very responsiblemacroeconomic policies that have been pursued for the past 20 years.Second, the country’s free trade agreements (FTA) and integration into theNorth American market has made Mexico a very important foreigninvestment destination. And last but not least, the recent reforms havesignificantly raised expectations about new opportunities in Mexico. So Ithink the investment we are seeing is the result of things we have been doingfor the last two decades, as well as more recent changes.

The breadth of reforms created by the Pact for Mexico is ambitious,to say the least. Does introducing so many reforms at once createthe possibility of difficulties or confusion?I’m not concerned about confusion, but I think it will be a very big challengefor the government to implement and administer so many reforms. Theproof is in the pudding, and while the reforms have been approved at thelegislative level, we still have to see the regulatory framework and put themto work. I hope this will be a smooth process, but it will be difficult.

Won’t there be complications in how the reforms interact?I don’t think that interaction is a problem. The main challenge is that manythings have to be done at the same time, and in some cases new authoritiesand regulatory boards will need to be established. There will be a learningcurve for everyone – the government, regulators and the private sector,which will be facing a completely new business environment. So it will takesome time for the reforms to be implemented and for everyone to learn tolive with them.

In the scheme of Mexican reforms over the past 50 years, howsignificant is the liberalisation of the energy sector?Very significant. This might be one of the most important reforms overthe last 50 years. It will change the environment for doing business inMexico, opening up a sector that had been completely reserved for thegovernment creates a whole new frontier of business opportunities.Perhaps most importantly, it could allow the country’s economy tobecome energy integrated into North America. Energy prices in the USand Canada have been falling very dramatically, which has raised thesector’s competitiveness. If Mexico moves towards those prices, it willbe possible for the country to return to energy intensive activities. So Ido think this could be a game changer – for Mexico’s economy but alsofor the regional economy as a whole. Energy restrictions were one ofthe things to prevent the full integration of Mexico, Canada and theUS under Nafta. But if we eliminate barriers to importing and

A reversal of fortuneAn ambitious set of reforms could transform Mexico’sinvestment environment. Former ambassador to theEU and Nafta negotiator Jaime Zabludovsky explainswhat is needed to capitalise on the changes

“The liberalisation of the

energy sector might be one of the most important

reforms over the last 50 years


EXPERT ANALYSIS CO-PUBLISHED FDI SPECIAL FOCUS


EXPERT ANALYSIS

exporting energy between the countries and have the same set of pricesacross North America, Mexico could be fully integrated into theregion.

What will be the major challenges for the first foreign investorswanting to take advantage of these energy reforms?For some, simply identifying the opportunities and understanding thenew regulatory environment will be a learning experience. So manysectors will be opened at the same time – offshore, onshore, shale gas,electricity, gas stations – the full spectrum of upstream anddownstream. So being able to discriminate between the possibilities,and learning the new rules of the game, could be their main challenge.

What other aspects of the Pact for Mexico do you see as important? Competition reforms regarding the telecommunications sector aresignificant, and it’s prompted some rapid changes. Carlos Slim has alreadyannounced his intention to divest some of his assets in the sector, whichwill allow for new participants to enter very quickly.

Today, what is the biggest risk for foreign companies looking toinvest in Mexico?There is the challenge of so many reforms being implemented at once. ButI wouldn’t call that a risk. Obviously we still have some security issues inparts of the country, and some of the new energy investment possibilities areconcentrated in areas that have some safety problems, so that will bechallenging

Is there any way to mitigate against that, or must investors simplyaccept those security risks? I don’t think this is the responsibility of the investor. The Mexicangovernment and society must make the necessary changes and targetorganised crime. That is something we have been doing over the last coupleof years, but it will take us some time to win that fight. And it might posea challenge or risk for some investments into the country

And the most common pitfalls?Large companies that have been in the country for many years will alreadybe comfortable with doing business and understand the Mexican climate.But small and medium-sized enterprises, especially those entering themarket for the first time, really need to learn their way. Dealing with thegovernment – particularly state and municipal authorities – andunderstanding the Mexican consumer can be difficult. Having a localpartner that is willing to participate in the new opportunity with you willhelp the foreign investor navigate the domestic matters which are onlyunderstandable once you’ve been active in the country for many years.

More than 20 years has passed since Nafta took effect. How do youthink it has helped improve investment and trade with Mexico? I think it has been instrumental in making Mexico an open economy anda relevant global player. It locked in the country’s liberalised trade andinvestment regime, giving stability and permanence to the opening ofMexico’s economy in the late 1980s. It allowed Mexico to become an exportplatform, and made the country relevant to all trading partners – not justthe US and Canada. Giving favourable treatment to Canada and the USmade Mexico relevant to other countries. This led to its FTA with the EUand Japan, and the overall strategic positioning of Mexico’s economy.

Do you believe Mexico-EU investment potential is being fullycapitalised on?It’s difficult to know if the full potential has been realised, but I do believethe EU-Mexico FTA was instrumental in putting European companies onthe same footing as US and Canadian companies under Nafta. Thatagreement has allowed for duty free imports from European countries,which is why we are seeing investment from the likes of BMW, Volkswagenand even Audi. They are taking advantage of the import and exportopportunities created by the interaction of Nafta and the EU-Mexico FTA.But I do believe the new reforms, particularly those in energy and telecoms,will likely lead to an increase in investment from European as well as NorthAmerican companies. So in that sense, the full potential may not yet havebeen realised.

What do you think will be the biggest challenge for Mexico’s privatesector over the next five years?Taking advantage of these reforms such that they live up to expectations.Really participating in the activities that these changes now make possiblewill require experience that many of them will not possess. So one of theirchallenges might be finding partners or strategic allies that allow them toparticipate in the energy sector, for example, as well as competing with theforeign investors which will no doubt be targeting it as well.

About the contributorFrom 1998 to 2001 Jaime Zabludovsky served as ambassador of Mexicoto the EU and chief negotiator of the FTA between Mexico and the EU.A founding partner of Solutions Strategic, since 2001 he has advisedgovernments, international and Mexican companies, and transnationalleaders on business related to international trade and competitiveness inLatin America. He is also vice president of IQOM InteligenciaComercial, the Mexican Council on Foreign Relations (COMEXI),Digital Information VERTICE and Cala de Ulloa. Since February 2007he has been president of the Mexican Council Industry ConsumerProducts (CONMEXICO), an association of the leading companiesproducing food, beverage and other consumer goods.

Jaime ZabludovskyNegotiator of Nafta and Mexico-EU FTA

W: http://conmexico.com.mx/

“This could be a game changer– for Mexico’s economy butalso the regional economy as a whole

M ost modern companies that deal with consumers via infor-mation technologies are able to collect unstructured infor-mation about users’ activities. Amazon, Google, Facebook

and telecommunication operators all have endless possibilities regardingthe processing of consumers’ interests, social status, and location – oth-erwise known as big data.

The information and unique technologies used to process massiveamounts of this information challenge long-held beliefs about publicsafety, privacy, ethics and legal relations between individuals, businessand government. As big data gains in value, leading IT and telecomcompanies understand its significance in growing businesses andincreasing revenues. Nevertheless, just a few companies are innovatingand developing new technologies to process big data. These companiesare becoming increasingly attractive to investors, as they have betterknowledge of who their customers are.

Extensive use of big data could, in the near future, lead to anunprecedented level of transparency of our lives, actions and even inten-tions. Big data is regarded as a new concept and an economic boost tocompanies, but lawyers have not yet been able to develop a unifiedapproach towards its potential risks. The possibility for privacy breach-es and related problems need to be solved to prevent big data creatingnegative impacts.

Is regulation needed?The first question is whether big data should be protected by governmentregulation, similar to the treatment of personal data. Different countriesprotect personal data in different ways. But the most common approachis that usage of depersonalised data (being personal data separated fromits owner) is legal. Big data is always depersonalised, so the concept ofpersonal data is not applicable to unstructured information.

Processing big data is not regarded as a violation of personal dataregimes. Information about someone moving around the city is protected,as it concerns someone’s private life and so is deemed sensitive. In contrast,information about the movements of an anonymous mass of people is notprotected by personal data regulation and may be processed. Moreover,information about a person (so long as they are not a popstar) is not inter-esting to third parties. Vice versa, big data may be useful and commercial-ly interesting for urban planners, retailers and restaurateurs.

The general view is that anonymous big data cannot be processed with-out the preliminary consent of the individuals involved. Telecom operatorsand social media companies, which have almost unlimited access tounstructured data, should not abuse their customers’ rights. SeveralEuropean courts have made important rulings regarding these responsibil-ities of social media.

According to a Berlin district court ruling in 2012, Facebook is notliable for the commercial distribution of information concerning its usersso long as it ensures that the information is depersonalised. In contrast,other German courts have ruled that Facebook’s unsolicited use of users’email contacts to send invites to join the social network is illegal. As thedistrict court noted in its decision, during the Facebook registrationprocess, customers can choose to permit Facebook to use their personalemail address book to search for potential friends on Facebook. The social

Big data, big opportunities The vast amount of information collected by technology companies createsnew investment possibilities. Megafon’s legal and government relations officer Anna Serebryanikova explains why freedom of economic activity inthis new market must be balanced with privacy considerations

“Information about consumers’activities is of fundamentalvalue in a digital economy


EXPERT ANALYSIS CO-PUBLISHED FDI SPECIAL FOCUS


EXPERT ANALYSIS

network was also using its users’ email contacts to invite non-users to joinFacebook. The court declared such practices by Facebook illegal. The courtstated that the social network was not entitled to process and use for itspurposes the contacts from email address books. This was because it didnot receive any preliminary consent from not only its customers, but alsoindividuals from the customers’ address books, and the customers were notinformed that this practice may be regarded as targeted advertising.

Therefore, unlimited and uncontrolled use of personal data byinternet companies may violate the privacy of third parties. Onlylawyers can define a balance between privacy and freedom ofeconomic activity.

Internet companies that process big data should not misuse their rightsand manipulate public opinion. In this respect, they should also thinkabout the legal ramifications of social experiments and similar practices.For example, an experiment conducted last year that tested how Facebookinfluenced the moods of its users was not illegal under American law. Butthe ethical issues and social consequences of such experiments raise ques-tions about the legal admissibility of such activities of internet companies.

What is big data’s worth?The second important question concerns big data’s commercial value andtransferability. Modern internet companies gain profit not only from theselling and advertising goods and services, but also from processing anddistributing big data. Such processing and distribution is demanded by allmarket participants; starting with retailers that receive information aboutwhat is popular, and ending with telecom operators that receive informationthat helps them plan the allocation of communication networks. Forexample, Amazon is able to monitor the preferences of millions of its

consumers. This enormous amount of customer information constitutessignificant commercial value and may be of considerable help in building abusiness model right for vendors and other market participants. Informationabout consumers’ activities is of fundamental value in a digital economy.

Companies that process big data must invest in technologies that cananalyse, manage and keep a large amount of unstructured information.Telecom companies use this information to plan their networks, researchmovements and locate their subscribers. Initially, such information wasonly valuable for owner-operators. But today various market players fromdifferent market segments realise the value of such information andapproach telecom operators to obtain big data. For any newcomer to alocal market – be it street retail, taxis, food, social media, internet-basedservices, and so on – their first key business partner will be a telecom oper-ator with a significant amount of depersonalised information about mil-lions of its subscribers.

Initially, big data is used by large IT companies and online retailers toanalyse the interests of their consumers and subscribers, to build properbusiness and marketing strategies. After a while, third parties come tounderstand that they may use such information for their own purposes.

A third party that acquires big data collected by a telecom, IT or socialmedia company becomes more economically attractive. As structured datamay be monetised, it helps different companies solve their business issuesand build better models and strategies.

The enormous commercial value of big data, and the fact that the bulkof this information has been accumulated by several large internet compa-nies, gives rise to antitrust issues. If the largest market players are able tocontrol and process the vast majority of big data available in the worldtoday, there may be unfair competition in the internet market. To enablethe antitrust regulation of the big data market, the right to ownership ofsuch data should be recognised.

Big data brings us new possibilities. Processing and analysing unstruc-tured information about individuals has become a source of business devel-opment in the information age. The law should not restrict usage of bigdata like it does personal data. But companies that deal with this informa-tion should not abuse their rights and should be regulated by antitrust leg-islation.

About the contributorAnna Serebryanikova graduated with distinction from the legal faculty ofMoscow State University in 1998, and was awarded a master’s degree in lawby the University of Manchester in 2000. She joined Megafon as corporatesecretary in 2007 and was appointed as the company’s legal affairs directorin September 2008.

In 2012, she restructured the company’s legal governance, spinninggovernment relations off into a separate division, and then became directorof legal affairs and government relations. During 2013 and 2014 she led theintegration of Scartel/Yota (change management). Her most importantprojects this year include developing: a system aimed at curtailing SMS-spam; approaches and ideology for implementing MNP in Russia; a systemfor monitoring the quality of operators’ mobile coverage; and a simplifiedprocedure for siting mobile infrastructure on plots of lands and makingchanges to the Russian Federation Land Code.

From 1995 to 1997, Serebryanikova worked as a contract specialist atArthur Andersen. Between 1998 and 2004 she was senior legal consultantand department head at the Non-Profit Foundation for EnterpriseRestructuring at the Russian Finance Ministry. From 2004 to 2006, she wasa consultant for the International Bank for Reconstruction andDevelopment on the implementation of IMF projects in Russia.

Anna SerebryanikovaMegafonLegal and government relations officer

W: ir.megafon.com

“Companies that deal with bigdata should not abuse theirrights and should beregulated by antitrustlegislation

I ndonesia’s inward foreign direct investment (FDI) hit a new recordof $12.9 billion in the first half of 2014, the highest level the coun-try has ever managed to achieve in a six-month period. Singapore-

based companies accounted for $3.4 billion (although many of theseinvestors are Singapore-based subsidiaries of domestic Indonesian con-glomerates or Singapore-incorporated special purpose vehicles of foreigncorporations). After Singapore came Japan ($1.5 billion), Malaysia ($700million), USA ($500 million) and South Korea ($700 million). In 2013,Indonesia came fourth out of the top five countries or territories thatreceived the most FDI in east and southeast Asia, bested only by China,Hong Kong and Singapore.

The 2014 first-half results were particularly encouraging, given that theycame against the backdrop of a turbocharged political environment in therun-up to the national legislative and presidential elections, which had dom-inated the political scene since at least mid-2013.

Despite buoyant investment figures from the first half of the year, there isno room for complacency. The figures were significantly boosted by the strictenforcement of the Government’s in-country mineral processing policy,which has seen a boom in the construction of mineral ore smelters acrossIndonesia. As a result, the mining sector accounted for $2.8 billion of the firsthalf of the year’s FDI, followed by the food processing sector with $2.1 bil-lion, and the transportation, warehouse and telecommunications sector with$1.6 billion. The reality is that competition for FDI is heating up across theregion, and Indonesia will have to work hard to maintain its position as a pre-ferred investment location following the launch of the Association of South-East Asian Nations (Asean) Economic Community (AEC) at the end of2015.

Nevertheless, there is little doubt that the country will continue to be a pre-eminent investment destination in Southeast Asia – hardly surprising givingthat it is Southeast Asia’s largest economy (worth an estimated $1.3 trillion),not to mention the fourth most populous nation on earth with 252.8 millionpeople. Geographically, Indonesia is a truly vast archipelagic nation, consist-ing of an estimated 17,508 islands that stretch like an emerald necklace 5,120kilometres east to west along the equator and 1,760 kilometres north to south.The country’s total territory (land and sea) extends to some 7.9 million squarekilometers. Other positives include a stable economy that has enjoyed annu-al growth rates in the region of six to seven percent for the last decade or more,a rapid rise in a consumerist middle class, enormous natural wealth andfavourable demographics.

Apart from the traditional extractive and resources industries, a number ofsectors offer particularly attractive opportunities to foreign investors. Take, forexample, infrastructure and health. For the former, for a country at its stageof economic development, Indonesia’s infrastructure is woefully deficient. Inthe transportation arena, there are only a few hundred kilometers of express-way in the entire archipelago, the bulk of the rail network is single track, air-port and seaport capacity is grossly inadequate, piped water and sewage facil-ities are only available to around 20% of city dwellers – the list goes on. In the

electricity sector, there is a serious generating capacity deficit and blackouts area daily occurrence in most parts of the country outside the capital.

Similarly, the country’s health sector is in urgent need of foreign invest-ment. In line with the rapid expansion of Indonesia’s middleclass, the healthsector is already the fastest growing in the region. For example, the pharma-ceutical market alone is expected to grow from $5 billion last year to $9.9 bil-lion by 2020 on the back of higher healthcare spending via new government-sponsored healthcare schemes and longer life expectancy.

However, the sector faces significant problems. To put things into per-spective, the World Health Organization says that the country only has sixhospital beds per 10,000 people, compared to some 30 in the US and 42 inChina. It also only has around three doctors per 10,000 people, comparedwith 14 in China and 24 in the US. There are also recurring complaints ofpoor quality services and medical malpractice.

While the healthcare professions and existing providers are anxious to per-petuate the protections they enjoy, there is nevertheless strong public demandfor better quality and services – a reality that provides significant investmentopportunities for overseas healthcare providers, especially in light of the hun-dreds of thousands of Indonesians who travel to neighbouring countries suchas Singapore and Malaysia for medical treatment every year.

Other booming sectors include consumer goods, retail, telecommunica-tions, and automotive. While commodities has lost some of its shine in recentyears, the palm oil sector is set to continue expanding, albeit at a significant-ly slower pace than in recent years. In the manufacturing sector, most busi-ness lines are open to 100% foreign ownership.

BKPM and the negative listInbound FDI in Indonesia is managed by the Investment Coordinating Board(known by its Indonesian abbreviation as the BKPM), a government body thatwas originally established in 1973 but which now operates under theInvestment Act 2007. For a rookie investor intending to enter Indonesia for thefirst time, it will need to establish an Indonesia-domiciled FDI company(known by its Indonesian abbreviation as a PMA) based on the rules andprocedures set out in the investment legislation and established by the BKPM.Where 100% foreign ownership is not permitted, the PMA must be establishedin partnership with a domestic investor (normally as a joint venture), with theforeign investor permitted to own between 30% and 95% of the PMA (risingto 100% in the case of certain types of public private partnerships – PPPs),depending on the industry and sector. Obviously, the selection of a suitableand reliable local partner will be of the utmost importance to the ultimatesuccess of the investment.

There are no restrictions on the maximum size of investments, financingsources, whether products may be sold on the domestic or export market, oron repatriation of earnings. However, the BKPM pursues a policy of restrict-ing FDI projects to those that are worth at least $1 million, consisting of$300,000 in paid-up capital and the rest in the form of additional capital

Ripe for investmentTunggul Utomo and Eko Basyuni of Assegaf Hamzah & Partners describe the confluence offactors that make Indonesia a preferred spot for foreign investors

www.ahp.co.id


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INDONESIA

injections or loans. In addition, the negative investment list (NIL) requires thefulfillment of certain conditions for investments in particular sectors, such asthe requirement to collaborate or form partnerships with small to mediumenterprises and the need for special licences or recommendations from the rel-evant line ministries, among other things. Foreign investors also have to com-ply with statutory provisions and regulations on various other issues, such asenvironmental protection, manpower, and zoning.

Investments in the oil and gas and financial services industries are outsidethe purview of the BKPM, while the principal licences in the forestry andmining sectors are issued by the Ministry of Forestry and the Ministry ofEnergy and Mineral Resources, respectively.

Restrictions on foreign ownership are set out on a sector-by-sector basis inthe NIL, the latest version of which came into effect on April 24. As with itsprevious incarnations, the new NIL stipulates that certain sectors are fullyclosed to FDI, while others are partly or conditionally open based on a sys-tem of permitted ownership limits, reserved sectors and licensing require-ments. Significantly, the new NIL expressly provides that any sector not stat-ed to be closed or partly closed will in fact be 100% open to FDI (NIL, arti-cle 3). While this needs to be taken with a pinch of salt, it is nevertheless animportant step forward as this question has been the subject of much debateand uncertainty.

The business sectors set out in the NIL are based on the comprehensiveclassification of sectors listed in the 2009 Indonesian Business SectorClassification (KBLI), drawn up by the Central Statistics Bureau. However,the classifications are very general in nature, with no definitions given. Thisleaves the BKPM with significant discretion in determining what exactly iscovered by each of the designated business sectors. Therefore, even where aparticular business line is not specifically mentioned in the NIL (which, withregard to article 3, would lead one to believe that it is 100% open to foreigninvestment), the BKPM may still decide that that the business in questioncomes within the ambit of another business line. For example, engineering,procurement and construction (EPC) services were regulated in the previousNIL but are not mentioned in the current one, and should therefore, at firstsight, be 100% open to FDI. However this is not necessarily the case as theBKPM has the discretion to decide that such EPC services should fall underother business sectors, for example, construction services (67% FDI cap) orconstruction consultancy services (55% FDI cap). Therefore, potentialinvestors always need to test the waters first by consulting with qualified legaladvisors and the BKPM before taking the plunge.

In line with the treaties on the AEC, the new NIL relaxes the FDI caps ona number of sectors for Asean investors. However, these are primarily con-fined to the tourism, cultural and media and healthcare arenas. For example,motion picture advertising (including the production of such things asposters, stills, and banners) was previously closed to FDI, but is now 51%open if the investor is a natural or legal person from another Asean country.While there are rules in place for determining what exactly constitutes anAsean investor, the question inevitably arises as to precisely how far theBKPM will, or even has to capacity to, enquire into the bona fides of Aseanownership.

As with the previous NIL, the latest version recognises Indonesia’s chronicinfrastructure deficit by allowing up to 95% foreign ownership in certain keyinfrastructure sectors, such as power generation (more than 10 MW), trans-mission and distribution. In a further positive move, the ownership restric-tions have now been abolished for PPP schemes. However, if the investorwishes to maintain an interest after the end of the PPP period, it will be sub-ject to the normal ownership caps.

In an effort to improve the country’s port infrastructure (wharfs, port

buildings, container terminals, bulk terminals, dry bulk terminals and Ro-Roterminals), the foreign ownership limit has been raised to 95% for PPP proj-ects in this sector, compared with 49% for non-PPP projects.

In the health sector, for non-Asean investors the only change under thenew NIL is that the ownership limits for both drug raw materials manufac-turing and drug manufacturing have been increased from 75% to 85%. This

relaxation would appear inadequate to significantly boost FDI in the phar-maceutical industry, as the lack of 100% ownership means that foreign drugcompanies will continue to have to share their trade secrets, something that isof particular concern in an industry where research and development costs areof such importance.

However, in the case of Asean investors, restrictions in other business lineshave been eased (although not radically) as part of the Government’s drive toencourage investment in the less-developed eastern Indonesia region. One sig-nificant overall change is that it is no longer necessary for a hospital estab-lished under the FDI framework to have a minimum of 200 beds.

While a number of sectors have been liberalised, the new NIL also con-tains some regressive moves, including the imposition of a 30% cap in the dis-tribution and warehousing sector, which was previously generally open to100% foreign ownership. Similarly, investment in the cold storage industry –previously unregulated—is now subject to a 33% FDI cap in Sumatra, Javaand Bali, and 67% in other provinces, despite the fact that modern cold stor-age facilities are essential if Indonesia’s maritime potential is to be able todevelop. The rapidly expanding online retail sector has also attracted theattention of the protectionists in government, and has moved from being100% FDI open to now being 100% closed.

The reaction of business leaders to the revised NIL, as reported in themedia, pretty much sums up the situation – Indonesian business leadersresponded favourably, while those from the multinational sector reacted lessfavourably. In other words, the new NIL continues to provide the protectiondemanded by Indonesian firms in their home market against the perceivedthreats to their interests posed by FDI. As would be expected, the new NILcame as a disappointment to many foreign investors and potential investorsas it had been widely expected that it would do more to boost FDI inflows soas to shield the economy against existing economic headwinds. That thesehopes were in vain would seem to indicate that once again the pressure fromdomestic business outweighed macroeconomic interests, at least this timearound.

Despite certain sectors or business lines being restricted to FDI, there con-tinue to be ways in which investors can successfully harness the country’s richpotential in these sectors. In the past, one of the most common ways for thisto be achieved was the use of nominee arrangements. However, such arrange-ments are expressly prohibited by the Investment Act 2007, meaning thatthey are now liable to be struck down by the courts. Nevertheless, they con-tinue to be used, albeit to a lesser degree than in the past. In addition, foreigninvestors can also avail themselves of complex financing structures so as togain control of companies operating in restricted areas, although the legalityof all such structures would need to be carefully assessed on a case-by-casebasis.

“Competition for FDI is heating up across the region


INDONESIA

It should also be pointed out that the NIL does not apply to portfolioinvestments. That is, equity investments in Indonesian public companies.While there was some uncertainty about this issue in the past, according tothe BPKM, the position now is that a foreign investor that purchases a major-ity stake in a local public company that operates in a sector that is restrictedto FDI does not come within the ambit of the NIL. Nevertheless, it is notclear how big a stake may be acquired by the foreign investor, and there isalways the danger that the BKPM may change its position in the future orthat more restrictive government regulations may be introduced.

Endemic corruption and backward policymakingWhile Indonesia offers outstanding opportunities to foreign investors in a widerange of sectors, it must nevertheless be kept in mind that constraints continueto exist. Corruption remains endemic, although great strides have been madeto contain it by the country’s highly respected Corruption EradicationCommission (known by its Indonesian abbreviation as the KPK). Further, theBKPM is generally regarded as being clean and forward-looking.

Another significant constraint takes the form of policy inconsistencies andU-turns, things that were particular apparent in 2013 and the first part of thisyear as the political climate heated up ahead of the legislative and presidentialelections. However, these issues may get ironed out after the political temper-ature cools down. In the legal sphere, dubious judicial decisions continue tocrop up from time to time in the lower courts, but these are generally reversedon appeal.

A major difficulty that faces foreign investors is unclear division of author-ity between central and local government. Indonesia adopted a policy of free-wheeling decentralisation in the early 2000s as a backlash against decades ofrigid centralisation. Although the worst excesses of the original decentralisa-tion scheme were later rolled back, foreign investors sometimes still findthemselves dealing with provincial and local governments that are more inter-ested in short-term financial gain from investors rather than long-term localeconomic development.

On a broader level, there are also strong protectionist and nationalistic ten-dencies in Indonesian society, as is the case in many other emerging nationsaround the world. Such tendencies have increased over the last decade as thecountry bounced back from the effects of the Asian economic crisis of the late1990s, when the IMF made economic liberalisation and privatisation of stateenterprises key components of its rescue package. Economic nationalism,which can be traced back to the domination of the economy by foreign inter-ests during colonial times, is increasingly tending to find its way into new leg-islation, with perhaps the best known example being the in-country process-ing requirement for mineral ores that was incorporated in the Mining Act2009. For many years, the government did nothing to enforce this until a raftof regulations was abruptly issued in 2013. Those miners unwilling to devel-op their own smelters, or collaborate with other miners to do so, faced theprospect of having their ore exports halted. While this policy was initiallygreeted with dismay by the mining sector, most miners have now come toterms with the new requirements. In reality, one suspects that much of the dis-may was more feigned than real as the in-country processing requirement wason the statute books ever since the Mining Act was passed in 2009.

Despite developments in the mining sector, a number of recent examplesclearly show that the Government is willing and able to stand firm againstexcessive protectionist and nationalistic sentiment in parliament. For exam-ple, the original draft of the new Plantation Act, as initiated by Parliament,contained a retroactive statutory cap of 30% on foreign ownership in theplantation sector (as opposed to 95% under the NIL). However, after objec-tions from the Government, the House relented and delegated the authorityto set FDI caps in the plantation industry to the Government. Precisely thesame thing happened in the case of the recently passed Insurance Act. Thesetwo examples demonstrate an awareness at the highest level in Governmentand the Civil Service of the need to combine the legitimate protection ofdomestic industry with commercial commonsense, something that bodes wellfor the continued attractiveness of Indonesia as a key Southeast Asian invest-ment destination.

About the authorTunggul Utomo is a partner and key member of the firm’s generalcorporate practice group. He focuses on FDI, M&A and projectfinance, and has advised on a long list of inbound investment projectsincluding major deals in the power, manufacturing, health and retailsectors. A 2001 graduate in law from the University of Indonesia,Tunggul was awarded an LLM in commercial law in 2011 by ErasmusUniversity, Rotterdam. He is also a licensed advocate.

Tunggul UtomoPartner, Assegaf Hamzah & Partners

Jakarta, IndonesiaT: +62 21 2555 7800F: +62 21 2555 7899E: [email protected]: www.ahp.co.id

About the authorEko Basyuni is a partner in Assegaf Hamzah & Partners’ generalcorporate practice, where his focus extends across corporate, capitalmarkets, banking and finance, and FDI. He advises clients in a widerange of sectors including mining and energy, information andcommunications technology, plantations, banking, oil and gas, retail,broadcasting, telecommunications, and infrastructure.

He commenced his legal career in 1999 after graduating from theUniversity of Indonesia with an LLB, before going on to earn an LLMin banking and financial law from Boston University School of Law in2004. Prior to that, he served as legal counsel with the Indonesian BankRestructuring Agency during a tumultuous period that saw the agencyrebuild the country’s decimated financial services sector from the ruinsof the 1997/98 Asian financial crisis.

Eko BasyuniPartner, Assegaf Hamzah & Partners

Jakarta, IndonesiaT: +62 21 2555 7800F: +62 21 2555 7899E: [email protected]: www.ahp.co.id

D espite the uncertainty that surrounds every investment decision,there are places in the world where continuous development offerspositive opportunities for investors to expand their potential.

Macau is a free-market economy in compliance with the principle ‘onecountry, two systems’. It is a special administrative region (SAR) of the People’sRepublic of China (PRC) autonomously governed (the Chief Executive wasreelected last August for another five years’ mandate), with a political systembased on the separation of powers.

Macau is located 60 km from Hong Kong, borders the special economiczone (SEZ) of Zhuhai, and is very close to other Chinese SEZs, such asShenzhen and Shantou. With a population of 607,500, it is a place where casi-nos flourish and new tourism facilities and infrastructure projects continue tobe developed, such as the Macau Light Rapid Transit System (MLRTS), thenew Taipa ferry terminal and the Macau International Airport CapacityUpgrade. The construction of new infrastructure in the region as part of theplan for the reform and development of the Pearl River Delta, aims at estab-lishing a metropolitan sphere comprising Guangdong, Hong Kong and Macauas a so-called quality living sphere. Further, a gigantic bridge (50 km in lengthand with expected costs of $10.7 billion) between Hong Kong, Zhuhai andMacau is an ongoing construction project due to be ready in 2016.

The so-called Las Vegas of the Orient ranks 29th on the global economicfreedom index. Between 2002 and 2014, its annual GDP growth rate was onaverage 13.6%. It is a booming tourism destination as one of the most visitedcities in 2013, with around 29.3 million visitors. Its gaming industry is themost successful in the world, with revenues of $45.3 billion in 2013 (at leastfive times that of Las Vegas).

In addition to its low standard tax rate for general businesses, Macau alsohas an offshore legal regime which provides an almost tax-free basis for certaincommercial or financial activities. With a free port policy and market econo-my system, the entry and exit of merchandise, capital and people can be freelycarried out. Procedures for investment and company formations are fairly sim-ple and there are no restrictions on overseas capital investment.

As a Portuguese colony until 1999, Macau’s relations with Portugal andother Portuguese speaking countries (PSC) such as Brazil, Angola andMozambique are also privileged. Macau is an excellent point of contact forinvestors of PSCs investing in China and vice versa, as well as for internation-al investors in China and PSCs.

Macau is quickly becoming a regional platform for trade and economicservices, especially in the promotion of the economic and trade cooperationbetween enterprises in mainland China (Macau’s Trade and InvestmentPromotion Institute – IPIM – has liaison offices in Chengdu, Hangzhou,Fuzhou, Jieyang and Shenyang), PSCs and overseas Chinese entrepreneurs.

The gaming industry and the Cotai stripMacau is considered a continuous game zone, where casinos must operate alldays of the year (save for very exceptional cases where suspension of services can

be permitted). The contribution of the gaming industry to the region’s financialstability is undeniable: a debt-free government enjoying significant budgetaverage surpluses of 15.4% GDP from 2003 to 2012. In the context of aworldwide financial crisis, the market outpaced other Asian regions andaccumulated fiscal reserves of $30 billion in 2013.

Six months into 2013 and the gaming operators were seeing an Ebitda[earnings before interest, taxes, depreciation, and amortisation] of $2.2 billionon the Cotai strip, representing 54.2% share of the market, and $1.9 billion or42.9% on the Macau Peninsula. In 2013, casinos transcended market expec-tations, with gross gaming revenues of $45.1 billion, an 18.6% increase from2012.

Casinos did not pay off as expected in the latest months of 2014, mainlydue to junket crackdowns, restrictions on the use of CUP [China Union Pay]cards in the gaming industry, a slowdown of China’s economy and visa restric-tions to mainlanders.

The setback in this year’s revenue growth of the main casino operators,however, does not discourage analysts from growth predictions for the future.This is due to the new ongoing construction developments on the Cotai Stripand the continuing growth of mass-market, which will maintain the confi-dence of foreign investors.

As commented by the IMF in July 2014, Macau is now the world’s largestgaming centre and has one of the highest levels of GDP per capita in the world,benefiting from financial stability and a strong external position, where growthshould stay strong over the next few years.

Grown from the junction of the two islands of Coloane and Taipa, Cotai isa bustling area, with new entertainment and lifestyle projects. To date, morethan 120,000 square metres of meeting, incentive, convention and exhibition(MICE) space and most of Macau’s multi-billion gaming industry have theirgrounds in Cotai, a narrow but quite impressive strip of land. The second waveof construction, known as Cotai 2.0, will extend existing casino properties andresorts for at least the so-called Big Six gaming enterprises by 2017.

Land concessions (government leaseholds) are granted provisionally by theMacau Government for the development of approved projects, becomingdefinitive for a period of 25 years after full payment of the premium, when theconcluded project is licensed by the Public Works Department. The MacauLand Law (Law 10/2013) further allows for the automatic renewal of thedefinitive government leasehold for successive extensions of 10 years each.

Other economic sectors Tourism is at the core of Macau’s economy. Other than gaming facilities, thecasinos’ properties also comprise other business operations, such as world-classhotels and resorts, food and beverage establishments, spas, high-end brands andgeneral retail.

The banking system has been further strengthened, with the capital ade-quacy ratio raising to nearly 15% and the non-performing loan ratio falling

The secret to FDI successRita Martins and Pedro Manero Lemos of DSL Lawyers look at how Macau has cultivated, andcontinues to build on, its success as a global investment hub


MACAU CO-PUBLISHED FDI SPECIAL FOCUS

www.dsl-lawyers.com


MACAU

dramatically, a sign that investors continue to find in Macau the conditions todevelop their projects and leverage their investments. Banking and financeindustries have seen an increase in dimension and solidity due not only to theexponential growth of casinos and hotels, but also to property developmentinduced by the continuous increase in the number of expatriates and migrantworkers.

Meanwhile, the Macau Government continues to set the conditions to con-solidate other sectors and reduce the region’s economic activity reliance on itsgaming industry.

Besides a low tax environment (for example, professional tax rates ofbetween seven percent and 12% and income tax between three percent and12%), Macau SAR provides investors with several incentives for their invest-ment and for the development of their interests in the territory, and an offshorelegal regime encouraging certain businesses.

The tax incentives for projects promoting economic diversification, addingvalue within the company’s activity value chain or contributing to technologi-cal modernisation, can take the form of a total exemption of property tax forreal estate purchased exclusively for industrial purposes. It can also take the formof a partial exemption for a period of up to five years (in Macau) or 10 years(on Taipa and Coloane), for new real estate rented for industrial purposes.

In terms of industrial tax (company tax) a total exemption is available anda 50% reduction may be granted for businesses located on the islands (exceptfor offshore banking operations). A 50% reduction of complementary (profit)tax is also possible. Fuel, if supplied to industrial units, is tax free.

Other than these exemptions, which are subject to application and approvalby the Government, motor vehicles tax is not levied if the vehicles are intend-ed for use in Macau’s public services, tourism sector or public transport.

There are financial incentives in place aiming to encourage private enter-prises to increase their investments and business operations in Macau, provid-ed that they contribute to the promotion and diversification of the economy,strengthen environmental protection, or promote innovation and restructur-ing of the company’s technology. Beneficiary enterprises are entitled to a year-ly interest rate subsidy of four percent on their loans in Macau, with a maxi-mum period of four years from the date of the first installment’s payment.

Subsidies for investment projects may be granted for new products manu-facturing involving high economic risk if justified by: technical innovation;development of projects of an industrial nature that will benefit Macau; or,anti-pollution equipment or energy maximisation systems that may be benefi-cial to Macau.

The financial incentives and subsidies are granted on a case-by-case basiswith a fully documented application addressed to the Macau’s Chief Executive.

Macau’s offshore sector comprises different economic activities benefitingfrom the tax-free scheme. There are offshore financial activities to be licensedwith the Monetary Authority of Macau (AMCM) and IPIM’s supervised com-mercial activities in overseas sales, hardware consultancy, software consultancy,

data processing, database related activities, research and development, tests andtechnical analysis, management and administration of ships and aircraft.

On proof of being directly generated or related to the offshore business, off-shore entities are exempt from income tax, industrial tax, stamp duty on prop-erty transfer, insurance policies, donations, bank transactions and incorpora-tions of offshore institutions and increases of share capital. The scope of thisscheme also applies to non-Macau residents working as managers or specialisedtechnicians in offshore entities who are exempt from professional tax for thefirst three years of employment.

Residency application is also an important benefit to be considered byinvestors with qualified relevant investment projects for Macau, as well as high-ly qualified professionals with a prospective employer, who are also eligible.

Economic integration between Macau and south ChinaWith the intention of diversifying economic activity in Macau and thedevelopment of economic relations between Macau and the GuangdongProvince since the reform and implementation plan of the Pearl River Delta,ongoing since 2008, and the Closer Economic Partnership Arrangementbetween Mainland China and Macau (CEPA), Guangdong Province andMacau SAR entered into a new Special Cooperation Agreement in 2011. Thisis aimed at fostering growth in the region until 2020, particularly focusing onthe Hengqin Island Overall Development Plan.

Hengqin IslandSignificant to Macau for its adjacent location to Taipa and Coloane, andconnected to the Cotai strip by a bridge, Hengqin Island is located on theGuangdong Province in China, south of Zhuhai. In 2009, Xi Jinping, at thetime vice-President of the PRC, announced that the central government haddecided to develop Hengqin Island.

In 2011, the formal agreement was signed to develop cooperation betweenboth regions; coordination of their industries’ development; maximisation ofopportunities in Hengqin; and, research into social and public services’ sharingfeasibility, to facilitate integrated development of the economy, society, cultureand lifestyle. The overarching aim was to develop the most dynamic and inter-nationally competitive megalopolis in the Asia-Pacific region, creating a newworld-class economic area, to ultimately expedite regional economic integra-tion.

This strategy encompassed the diversification of Macau’s economy, the pro-motion of Macau as a tourism and leisure worldwide centre, the promotion ofits commercial services role and the attraction of high-end business resourceswithin and outside China, Hong Kong and Macau.

Hengqin Island emerged as an important land extension and a strategicsolution for the development of creative industries, scientific research andadvanced technology, within the prospects of the synergetic agreementbetween Macau and Guangdong.

Zhuhai Hengqin Investment Company is the PRC state-owned firm (SOE)responsible for the development of the future megalopolis. Set up in 2009, ithas been in charge of attracting and hosting investment, managing propertyand building infrastructure. After applying to the Hong Kong Stock Exchange,the company publicly announced its interest in welcoming financial compa-nies in Hengqin, be it investment funds, leasing or venture capital firms.

Following the 2011 Special Cooperation Agreement, Macau’s Governmentset up the Commission for the Evaluation of Investment Projects in Macau forthe Development of Hengqin in 2013, with IPIM in charge of receivinginvestor applications for the five square kilometres of the Guangdong-MacauIndustrial Cooperation Park.

“Macau is considered acontinuous game zone, where casinos must operate all days of the year


MACAU


MACAU

In 2014, there were 33 projects approved for the island’s structural devel-opment. Of these, 30% are related to tourism and cultural activities, with com-mercial and business support activities representing 24.2%, scientific and edu-cational investigation at nine percent, and healthcare and new technologies atthree percent. These latter two are deemed to be a new pole of attraction forinternational qualified professionals.

It is expected that by 2015 the cross-border infrastructure network will becompleted, with a noticeable development of the urban area and preliminaryresults of the planned diversification of the economy.

By 2020 Hengqin is hoped to be globally acknowledged as one of the bestleisure and travel destinations. The development plan envisages three resortand tourism districts in the south, one residential area with accessory services,two high-tech and scientific districts and a cultural and creative district.

Two of its largest projects are already fully functional: the new University ofMacau campus, officially opened in July 2013 as an extension of Macau juris-diction, and Ocean Kingdom (Chimelong Group), the world’s largest marinetheme park covering 132 hectares. Once completed, it will agglomerate 10theme parks, 12 hotels, three golf courses, two yacht clubs, shops and conven-tion facilities.

However, resort revenues in Macau are already shifting. Analysts are observ-ing that leisure infrastructures, business options and entertainment besidesgaming are receiving more and more attention from visitors. This shift makesMacau an increasingly mature gaming destination, now shaping itself tobecome one of the world’s centre of tourism and entertainment.

The Macau and Guangdong Governments are prioritising the promotionof service trade liberalisation by strengthening financial cooperation betweenregions and within the cultural and creative sector and in the MICE industry,as well as the exploitation of tourism. By offsetting several disadvantages of thetravel distance between Macau-Zhuhai-Hong-Kong, the bridge to be opened

by 2016 will cut travel time by half, and facilitate the access and migration ofgoods and persons, on a regional and international scope. As well as the bridgedevelopment, the Macau Light Rapid Transit, which is under construction,and the Macau International Airport Capacity Upgrade (which will double theexisting airport capacity to 12 million people per year) are other projects whichwill decrease car traffic and attract visitors to Macau.

Other concerns centre on environmental and health care measures, such asair quality monitoring stations and the development of an environmental pro-tection industry.

The future of Macau’s economyMacau’s economic horizon reveals eight new multi-billion dollar integratedresorts and casinos to be opened in Cotai by 2017, resulting in twice as muchaccommodation and gaming tables. As per CLSA’s recent forecasts, the numbersare also expected to increase, with the new international pole of entertainmentreaching $90 billion in gaming revenues in 2018, the amount currently receivedby the industry worldwide.

The liberalisation of gaming in other Asian regions may affect Macau, butthe region will by then have become resilient and will have accommodated dif-ferent entertainment areas to be able to defend its market share in Asia. Theeconomic diversification associated with some relaxation of policies related tothe granting of work permits for overseas workers (addressing some labourshortage difficulties) will also bolster the economy’s strength in the long term.

According to Guangdong’s authorities, a fully developed Hengqin Islandwith more than 280,000 inhabitants is expected by 2020, and a GDP per capi-ta of approximately $31,340, quadrupling the region’s current earnings.

Macau has become a must-go destination for investors. The region is at thestart of a new era of economic diversification and integration with southernChina, with continued opportunities for new businesses and investments.

About the authorRita Martins joined DSL Lawyers in 2007 as a partner, to lead thebanking and financial practice, with a focus on project and corporatefinance. She advises major financial institutions on regulatory approvalsfor launching new financial products in Macau, and was activelyinvolved in the listing with the Hong Kong Stock Exchange of twomajor Macau gaming companies, among others. Her practice handlesthe licensing procedures with the local regulator (AMCM) for financialinstitutions planning to start operations in Macau, and she advisesinternational clients on how to adapt to Macau employment laws andrequirements.

Rita obtained a degree in law from the University of Lisbon, Portugal in1994 and a post-graduate diploma in corporate consulting in 1996. Sheis a member of the Portuguese Bar Association, the Lawyers Associationof Macau and an associate member with the Chartered Institute ofArbitrators (CIArb).

Rita MartinsPartner, DSL Lawyers

MacauT: +853 8590 0708F: +853 2872 5588E: [email protected]: www.dsl-lawyers.com

About the authorPedro Manero Lemos has extensive experience in litigation andarbitration, assisting clients on pre-litigation and dispute resolutionstages. He advises and assists developers and investors in all phases oftheir transactions.

Pedro is a registered lawyer at the Portuguese Bar Association and isundergoing training for full admission with the Lawyers Association ofMacau. In Portugal, he worked as a trainee lawyer for two years, andpreviously as a legal consultant with Sal & Caldeira Advogados inMozambique. He has Masters in law from the University of Coimbraand two post-graduate diplomas in banking and stock market andinsurance law (University of Coimbra) and in intellectual property(University of Lisbon).

Pedro Manero LemosAssociate, DSL Lawyers

MacauT: +853 8590 0703F: +853 2872 5588E: [email protected]: www.dsl-lawyers.com

T hai companies are becoming well-known for their outwards-facing M&A transactions. Most notably last year tycoonChaoren Sirivadhanabhakdi won control of Singapore-listed

Fraser & Neave following a heated takeover battle against Indonesia’sRiady family.

But Thailand also remains an important destination for foreign directinvestment (FDI) in Southeast Asia. Although it has dealt with politicalissues – most recently a coup d’etat this May – its investment and legalframework have remained consistent.

Foreign investors must, however, navigate local regulations. While theregulations surrounding foreign investment remain consistent, they mustfamiliarise themselves with restrictions on shareholding and with the twogovernment bodies that regulate FDI. Here, Kudun Sukhumananda out-lines some of the most important points that foreign investors must con-sider when investing in Thailand

What countries are the principal sources of FDI in Thailand, andwhat are the key sectors that the government is hoping to attract? The country from which we see the most investment is Japan. Right nowthere are no incentives in terms of specific structures to invest, although thegovernment is considering reducing taxes to bring Thailand in line withother countries.

Which government and regional bodies are responsible for drivingFDI in Thailand? There are two bodies responsible for this. The Ministry of Commerceenforces laws involving foreign investment, while the Board of Investmentof Thailand (BOI) office promotes FDI and gives incentives to investors.

Is investment approval required when investing in Thailand? If so,which regulator manages the review process, and what does itconsider when making decisions? The Ministry of Commerce and BOI office look at the investment fromdifferent angles. The Ministry of Commerce considers the structure of boththe investment and the foreign ownership, as well as whether the licencemeets legal requirements. The BOI licence is effectively equal to anexemption from the normal law, so it is based on what foreign investors cancontribute to the country. The BOI will consider how much capital orknow-how the investor will bring in. The criteria for receiving licences fromthe two offices are different.

Are investment caps or other legislative restrictions present for anysectors? There are quite a number of foreign investment restrictions. For example,in the real-estate sector, entities incorporated outside of Thailand cannotown land. Companies incorporated in Thailand with the majority of sharesheld by foreigners are also prohibited from owning land. Another exampleis the telecommunications sector. The permitted foreign shareholdingpercentage is more limited than that of the law governing the sector. But ingeneral, if foreign investors need exemptions from these caps, they can applyfor a BOI licence. That licence may include the extension of foreigninvestment caps to permit investment to a certain level.

Are there any local content or local participation requirementsrelevant to foreign investors? It depends on the shareholding. If foreign investors are investing in themajority of shares in the company, the investment must be held by a Thaiindividual. At the board level, more than half the board must have residencein Thailand; having residence is defined as living in the country more than180 days a year. Foreign employees and executives must also receive workpermits; the company can get a certain number of work permits based ontheir capitalisation. If the company receives a BOI licence, it may receiveexemptions on work permit restrictions; it’s possible to obtain work permitsfor foreigners with a BOI licence even if a company has minimal sharecapital.

How does competition clearance work in Thailand? Even though the competition law has been in place for a number of yearsnow, technically the governmental bodies must issue the details so thatinvestors and other market participants can comply. They have been waitingfor those details for quite some time. Without regulations, that law has notbeen implemented.

Are there any tax structures or favourable intermediary taxjurisdictions that are particularly useful for FDI into the country? The basic tax rate in Thailand is 20%. That applies generally, including forcompanies with foreign investment. But if a foreign investor is able to obtaina BOI licence, the tax rate may drop below 20%, and that may last for fiveto eight years. Not only does the BOI licence benefit the basic taxes, it canalso provide changes to the excise tax required in Thailand when importingmachinery and equipment, as long as that equipment is being used forinvestment activity in the country.

What is the most common governing law of contracts, and what isthe local business language?Most contracts are in the Thai language. Foreign businesses and companieswill likely use the English language, and for the Thai market – including thestock exchange – they’d also use English. Most foreign investors enteringinto an agreement allow that agreement to be governed by Thai law and aninternational arbitration process.

An investor toolkitWeerawong Chinnavat & Peangpanor’s Kudun Sukhumananda answers key questions aboutthe basics of investing in Thailand


THAILAND CO-PUBLISHED FDI SPECIAL FOCUS

“There are quite a number offoreign investment restrictions

www.weerawongcp.com


THAILAND

What foreign currency or exchange restrictions should foreigninvestors be aware of? For now, there are no foreign currency or exchange restrictions.

What challenges do investors have in getting certainty around locallaw and regulations? The most common issue would be shareholding structures. Most of thetime, foreign investors would prefer to invest in Thai companies withmajority control. But due to ownership restrictions, they cannot havemajority ownership in the company. If they insist upon majority ownership,the company would need a licence from the Ministry of Commerce, whichwould involve cutting through red tape. Instead, they apply preference sharestructures so that foreign investors can have majority control in thecompany. Other companies implement a general shareholders agreement.

Which dispute resolution mechanism is typically included incontracts? Are local courts reliable, or do investors typically rely onlocal enforcement of arbitration awards? Most foreign investors choose to have arbitration clauses. Although contractsare governed by Thai law, arbitration can take place in Hong Kong andSingapore, where foreign investors are most comfortable submitting cases.Awards are enforced by Thai courts under Thai arbitration law.

How has political risk affected M&A deal flow in Thailand? Howhave investors dealt with political risk in their deal documentation?After the 2006 coup d’etat, most foreigners have been more careful withdrafting and negotiating provisions so that they can exit investments if apolitical event occurs. Those clauses aren’t linked only to coups directly, butalso political unrest and incidents in the country’s south.

I rarely see break fees, however, and most contracts instead permit investorsto exit the transaction before closing. But if political events happen afterclosing, investors have no exit.

“I rarely see break fees

About the contributorKudun Sukhumananda has extensive experience advising local andforeign clients on international and domestic share and debentureofferings, M&A and other investments, corporate and debtrestructuring, and joint ventures. He also works on property funds forpublic offerings, real-estate investment trusts (Reits) and infrastructurefunds.

Kudun is a guest lecturer on partnership and company law, bankruptcyand insolvency law, and the law of investment at several Thaiuniversities. He has been recognised as a leading lawyer by internationallegal publications.

He obtained his LLB (Honours) from Chulalongkorn University, andan LLM from Columbia University School of Law, in the US.

Kudun SukhumanandaPartner, Weerawong, Chinnavat &Peangpanor

Bangkok, ThailandT: +66 2 264 8000F: +66 2 657 2222E: [email protected]: www.weerawongcp.com

T he Republic of Turkey has been one of the world’s shining stars foreconomic development for more than a decade. This is reflectedin its economic growth, political stability and ability to attract for-

eign direct investment (FDI). The Turkish economy grew at an average offive percent per annum between 2002 and 2012. The OECD has forecast5.2% annual growth until 2017.

The Turkish economy was severely tested over the last decade of growth.It’s shown its ability to remain stable and thwart issues that have plaguedEurope and other emerging economies. When President Erdogan was primeminister, he predicted that the global financial crisis of 2008 to 2009 wouldonly “touch and pass” the Turkish economy, and that no one should be wor-ried about the troubles shaking the European and US economies. Mostexperts, however, still had grave concerns. President Erdogan said that theTurkish economy was stronger and would weather the storm. After achievinga 6.8% average growth between 2002 and 2007, Turkey achieved 0.7%growth in 2008, and -4.8% in 2009. These growth rates were not good, butalso not bad compared to the eurozone. Then there was a jump to 9.2% and8.8% growth rates in 2010 and 2011, respectively. Such rates were muchhigher than the US, eurozone, Japan and other emerging markets. The suc-cess story was still in play. President Erdogan had been proven right.

Later, when the 2012 eurozone crisis knocked on Turkey’s door, the coun-try’s population remembered President Erdogan’s “touch and pass” quote.Would it be different this time? Turkey’s trade volume with the US, whichoriginated the 2008 crisis, was increasing constantly, but was not accountingfor a big share of the economy despite alliances to the US in other fields. TheUS has never been one of Turkey’s major trading partners, whereas Europe isby far the country’s number one trading partner. When Europe had negativegrowth rates in 2012 and 2013, Turkey still managed 2.1% and four percentgrowth, respectively. Some interpreted this as a success, whereas others took itas a failure, comparing these rates with the average growth of other emergingmarkets (five percent in 2012 and 4.7% in 2013). At the end, whichever viewpeople would like to take, no one can deny Turkey’s five percent averagegrowth since 2002.

Based on these figures, the question should be: what did Turkey do right?

As most would know, Turkey suffered a severe economic crisis in 2001 –referred to as Black Wednesday – which ended with the bankruptcy and col-lapse of 22 banks. Savings Deposits Insurance Fund (SDIF), the relevant gov-ernment authority, took control of these banks, liquidated some and restruc-tured and sold the rest back into the public market. The cost of these banksto the economy was more than $39 billion. On the 10th anniversary of the2001 crisis, finance minister Ali Babacan shared the total cost of the crisis withthe Turkish public. He noted that there were different ways of calculating thecost of the 2001 financial crisis, but according to their calculations, itamounted to TL 252 billion ($112 billion). At that time, he said:

“In order to pay this huge debt the government had to become indebted to moneymarkets. If there had been no 2001 crisis and if we did not have to pay this debt,the treasury’s [Turkey’s] total debt would have been TL 381.88 billion lower.”

This amount corresponds to almost 25% of Turkey’s GDP today – $820billion. The 2001 crisis was a nightmare for Turkey. The lira lost 40% in onenight, and the US exchange rate doubled in one year. Between 2000 and 2001,the stock market shrank almost nine times. These facts are important becausethe effects of the 2001 crisis have shaped Turkey’s economy today – and this iswithout even mentioning what happened to interest and unemployment rates.

The 2001 crisis was because of banks. It was the financial market. WhatTurkey did was reform its financial market as a priority. Today, Turkish banksare considered strong and profitable. Foreign investors’ interest in the stockmarket for Turkish banks’ stocks reflects this.

As a result of the social impact of the crisis, the AKP (Justice andDevelopment Party) came into power as a one party government. The Turkishelectorate seemed to have tired of coalition governments, which were seen asone of the main reasons behind the economy hitting rock bottom. The AKPgovernment stopped populist policies, made serious reforms and even jump-started the EU accession negotiations in 2004.

Considering that Turkey applied for EU accession back in 1959, startingnegotiations was another boost for the country. AKP has won nine electionssince 2002 including parliament and municipality elections, and constitu-tional referendums. The Turkish population expressed through their vote theview that economic stability requires political stability. So the next questionto answer would be how this has affected FDI into Turkey.

As shown in the chart above, Turkey attracted more than $136 billion FDIover 10 years. It also attracted $6.76 billion FDI in the first half of 2014,with a 28% increase compared to 2013. Sixty-eight percent of this camefrom the EU.

Onwards and upwardsGokmen Baspinar and Ali Ceylan of Baspinar & Partners explain what is helping Turkeybecome one of the world’s top 10 economies by 2023

0

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llions

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TURKEY CO-PUBLISHED FDI SPECIAL FOCUS

www.baspinar.av.tr


TURKEY

Turkey offers great potential to foreign investors. Its many advantagesinclude a young population, qualified labour force, large domestic market,investment incentives, liberalised regulations, and its strategic location.

There are so many fields that present big opportunities for foreigninvestors. It is worth touching on some of those that offer the greatestpotential.

EnergyTurkey is an energy corridor between the eastern and western markets, andhas abundant renewable energy resources. Almost 20% of FDI in 2013 wasin the energy field. Its rapidly growing economy makes Turkey one of thefastest growing energy markets in the world. It’s expanding population anddevelopment has caused a rapid increase in Turkey’s energy needs. Thereforethe government enacted new energy regulations, had the energy marketliberalised and the regulations harmonised with the EU.

Turkey plans to have two nuclear plants start operations in the early2020s. The government signed an agreement with Russia to have one ofthe plants built in Akkuyu, Mersin on Turkey’s Mediterranean coast. It alsohas an agreement with Japan to have the other nuclear plant built in Sinop,on the Black Sea.

Besides having two nuclear plants, the government has also focused onthe renewable energy incentives to utilise the country’s high level ofresources. Turkey is located in the Mediterranean sun belt and its solarradiation values are similar to Portugal and Spain. Despite this high poten-tial, Turkey is using solar energy mainly for water heating and has no solarthermal plant. Considering the government’s goal to reach at least 3000MW solar energy capacity by 2023, and the incentives given to energyinvestments, solar energy is one of the main areas offering investmentopportunities for foreigners.

Among the renewable sources, Turkey also has very high wind energypotential. According to the OECD, the country has 166 TWh a year ofwind potential. Turkey’s economically feasible potential is considered to bearound 20 GW. However the installed wind power capacity is approxi-mately 14% of total economical wind potential, meaning there is no doubtthat wind energy is another area for foreign investors.

The natural biomass potential of the country is estimated to be 372TWh. The energy resource includes various agricultural residues such asgrain dust, wheat straw, hazelnut and different wastes. About 53% of thenatural potential, about 198 TWh, is suitable for electricity production,whereas only 0.45 TWh were used as of 2010.

Research and developmentTurkey encourages investors to have their research and development (R&D)centres in Turkey. All R&D and innovation expenditures are deductiblefrom companies’ taxable profits, provided that the companies making theseexpenditures are located in an R&D centre and employ at least 50 R&Dpersonnel. Further, 100% of R&D expenditures incurred for eligibleprojects – being those which are oriented to new technology and knowledgeresearch – are deductible provided that the number of researchers exceeds

500. An extra allowance at half portion of the increase in R&D andinnovation expenditures compared to the previous year’s expenditures isprovided to these taxpayers. There are also other incentives for social securitypremiums, employees’ income tax and stamp duty as well. Multinationalcompanies considering Turkey as an operating centre due to its geographiclocation may enjoy great benefits in setting up their R&D centres in Turkey.There are also incentives for technology development and free trade zones.

PharmaceuticalsTurkey is the 16th largest pharmaceutical market in the world. Worth $8billion today, it is reported to expand to $23 billion by 2023, and exportfigures to reach $8.1 billion. As a sign that investors see this opportunity isthat leading pharmaceutical firms Amgen, Recordati and Deva, which hopeto reach markets in the Middle East, the Caucasus and North Africa, haveincreased their investments in Turkey. GlaxoSmithKline has also moved itsregional headquarters to Turkey.

HealthcareWith its population of 77 million, Turkey has a huge domestic market forhealthcare. After the reforms Turkey implemented in the healthcare sector,the country became very attractive to foreign investors. Investing in thissector became much easier following the recent enactment of a law thatemphasises public-private partnerships in proving healthcare services.Investment funds and private equity funds have increasingly invested inhospital chains as well as subsectors such as dentistry, optometry and homehealthcare services. The demand for partnerships and acquisitions in thehealthcare sector is booming. As a note, one of the biggest single majortransactions in Turkey was the sale of Acıbadem Hospital chain to theMalaysian state fund, Integrated Healthcare Holdings. The acquirer paid$1.24 billion for 75% of Acıbadem’s shares. Finally, according to theInvestment Support and Promotion Agency of Turkey, healthcare tourismis also playing a key role in attracting foreign investment. Turkish hospitalswelcomed 130,000 foreign nationals seeking medical care last year, creatinga turnover of about $400 million. The figure is expected to double in 2016as the government plans tax-free healthcare zones specifically tailored forforeign patients.

Capital marketsTurkey is the 13th largest emerging capital market in the world and hashuge potential for foreign and domestic investors. The corporate bondmarket recorded swift growth to $46 billion in 2014, up from just $3 billionin 2005, a nominal dollar compound annual growth rate (CAGR) of 35%.

Credit Suisse published a report Emerging Capital Markets: Road to2030 in July 2014 which includes very interesting points about the futureof the capital markets in the emerging markets. It would not be exaggerat-ing to state that the forecast about Turkey is more than interesting.

Credit Suisse referred to the Annual World Economic Forum GlobalCompetitiveness Report which charts the progress of financial marketdevelopment across 148 nations by surveying domestic participants oneight separate concerns. Fifteen of the 20 largest emerging markets haveseen their scores for the aggregate financial market development pillar risein the eight years between the 2006/7 survey and the latest 2013/4 edition.The most significant improvement was observed in China followed byTurkey, the Philippines, South Africa and Saudi Arabia.

According to the report, Turkey had the swiftest equity market capital-isation nominal dollar CAGR between 2014 and 2030 (16.5%). Thisgrowth rate includes both the impact of dollar price returns and that of netissuance and inclusions. The Turkish equity market capitalisation is estimated to reach $3 trillion by 2030, making it the world’s 10th largestmarket.

“The OECD has forecast 5.2%annual growth until 2017

Other potential sources of equity deals (initial public offerings and sec-ondary offerings) are expected to reach $218 billion between 2014 and2030. Other markets of note, based on the analysis, are India ($375 bil-lion), Saudi Arabia ($258 billion) and Brazil ($250 billion). Collectively,these four markets plus China are expected to account for an estimated79% (or $ 4,734 billion) of the total emerging market potential deal valuebetween 2014 and 2030 (or 41% of the global total). It is noteworthy thatCredit Suisse states that Saudi Arabia (representing a 4.3% share) andTurkey (3.6% share) displace Korea and Russia in the top six countryopportunities by total equity capital market deal value.

Recent investmentsThe Investment Support and Promotion Agency of Turkey recently sharedcertain foreign investments with public. 3M is investing $500 million inTurkey, which will incorporate sophisticated technology and create highly-qualified employment.

India-based Aditya Birla Group is investing $510 million in Turkey’sAdana region for the production of viscose staple fibre, a material thattoday is not produced in Turkey.

Dow Chemicals formed a joint venture with Turkish conglomerate AkraAkrilik Kimya Sanayii, part of the Akkök Group. This investment isexpected to offer integrated carbon fibre composite solutions to the grow-ing global energy, transportation and infrastructure markets. The totalamount of investment in the project, including third-party investments, isexpected to reach $1 billion in five years and create employment opportu-nities.

Sumitomo Rubber Industries, the first local tyre producer in Japan,formed a joint venture with Abdülkadir Özcan Automotive Tyres investingaround $500 million in the Central Anatolian province of Çankırı.

Italy’s Recordati, a leading name in the European pharmaceuticalsindustry with a wide range of medicinal products, announced a manufac-turing investment of $50 million in Turkey. The plant, to be built inCerkezkoy Organised Industrial Zone in the Tekirdag Province in north-western Turkey, will supply drugs for various therapeutic uses, at a rate of80 million packs a year.

Problems and the futureAlthough Turkey has much strength in its economy, there are still certainissues that need to be dealt with by the government. The foreign trade deficitis one of the main downsides of the Turkish economy. The government tookvarious measures to reduce the foreign deficit, and as a result it has seen ageneral decrease. One important note to keep in mind is that oil prices aregoing down and analysts are of the opinion that this trend will continue.The good news for Turkey is that each $10 decrease in the oil prices bringsdown the deficit by $4 billion. The other issue is the inflation rate, whichreached nine percent this year. One of the other goals of the government isto increase the share of industrial production which is relatively low, 15.3%of GDP.

These downsides are not only known to economists but also to the gov-ernment. Economy is a science and such issues and problems can be sci-

entifically determined and solutions can be worked out. However, Turkeytoday is dealing with other issues related to its southern border. Thesedevelopments are a concern for the entire region, but compared to the restof the world, they may have a stronger impact on Turkey and its economy.When the OECD announced its growth forecast in June 2012, the ArabSpring was already going on and Syria’s civil war had started. Despite thesecircumstances, the OECD still had a positive opinion on the Turkish econ-omy. What no one foresaw at that time was the emergence of the IslamicState or Isis [Islamic State of Iraq and Syria] or as some including USPresident Obama call it, Isil (Islamic State of Iraq and Levant).

This is a concern for everyone who has an interest in Turkey. The situ-ation creates uncertainty and obscurity for those who consider investing inthe country. But, first of all, it should be remembered that Isis is not aproblem just for Turkey, but to the whole world and the region. The regionto which Turkey belongs has not lived in perpetual peace during the histo-ry of mankind. In other words, Turkey’s five percent annual rate growthduring the last decade occurred despite the Iraq war, Arab Spring andSyrian civil war taking place. At the same time, Turkey was dealing withdomestic issues – the PKK problem. Further, the issues with Israel, Egypt,and Armenia could not also stop Turkey’s growth.

Today, Turkey is a country integrated into the global economy. Since2002 it has become more and more international, with thousands of for-eigners having jobs and happily living in Turkey. Multinational companiesare opening or moving their regional headquarters here. Foreigners arebuying their summerhouses in Bodrum, Marmaris, Fethiye, Antalya ratherthan Mikonos or Ibiza. Billions of dollars of foreign investment are flow-ing into the country. There is no way back from the path Turkey has beenfollowing. The prevailing and future governments that do not understandthis are condemned to step down. There may be times when developmentslows or remains static. But eventually, one way or another, Turkey has toreach its goal. The people of Turkey are not alone or outcast in the worldanymore. They are world citizens. No one should be surprised whenTurkey becomes one of the 10 largest economies in the world by 2023. Thecountry has the potential and ability to catch up from the bad times, justas it did in 2010 and 2011.

Turkey will have parliamentary elections within the next eight months.Even if the people of Turkey change the captain of Turkey’s ship, the for-ward trajectory of the country will not change. Will there be some bumpsalong the road? Most probably, but the direction is only upwards. “Solar energy is one of the

main areas offering investmentopportunities for foreigners


TURKEY


TURKEY

About the authorAfter having worked for the Turkish Savings Deposit Insurance Fund ofTurkey, Ali Ceylan moved to private practice. During his time with thegovernment, he dealt with the recovery of bankrupt Turkish banks’losses and chased the assets outside Turkey and led international casesrelated to such assets.

Ceylan advises foreign clients on their acquisitions and corporatematters. He has a wide range of clientele, advising retailers in food andgarment sectors, banks, real-estate developers, advertising companies,hotels and factories in different industries. He works on internationalarbitration cases and is advising various cases before ICSID and theInternational Chamber of Commerce. In this respect, he has closerelations with litigation investors and brokers.

A graduate of Istanbul University Law School, class of 2001, he has anLLM from the International Business Law from the AmericanUniversity, Washington College of Law. Ceylan has been selectedamong the best lawyers in the IFN Poll 2012 under the Corporate &Commercial category. Ali is a recommended lawyer by Legal500.

Ali CeylanPartner, Baspinar & Partners

Istanbul, TurkeyT: +90 (212) 465 66 99F: +90 (212) 465 36 99E: [email protected] W: www.baspinar.av.tr

About the authorGokmen Baspinar started his career with a marine company andspecialised in protection and indemnity insurance matters. He is one ofTurkey’s leading lawyers in litigation and real-estate law, and has beeninvolved in all types of real-estate deals. He represents financialinvestors, developers, end customers and contractors. He also combinedhis experience in litigation with real estate and today represents a Dutchinvestor against Turkey before International Centre for Settlement ofInvestment Disputes (ICSID).

Gokmen is known for structuring deals related to distressed assets and iscurrently litigating one of the biggest bankruptcy cases in Turkey. Hehas extensive experience in privatisation deals. He was the lead counselto the Privatisation Authority at the privatisation of PetkimPetrochemicals, 51% of which was privatised for $2.04 billion. Herecently advised a foreign client on the privatisation of the TurkishNational Lottery games.

He is a graduate of Ankara University Law School, class of 1998. Hereceived his LLM from the Marmara University Law School, andworked at the European Court of Human Rights in Strasbourg between1999 and 2001. After working as a partner at one of the biggest lawfirms in Turkey, in 2010 he decided to set up his own firm with hispartners.

Gokmen BaspinarPartner, Baspinar & Partners

Istanbul, TurkeyT: +90 (212) 465 66 99F: +90 (212) 465 36 99E: [email protected]: www.baspinar.av.tr

CO-PUBLISHED FDI SPECIAL FOCUS Foreign direct ...50 IFLR/November 2014 CO-PUBLISHED FDI SPECIAL...

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