State vigilance is a rising investor concern

When Turkey’s financeministry sent the Doganmedia group a bill forTL4.8bn ($3.2bn) in unpaidtaxes and penalties thisautumn, foreign investorswere dismayed – but notoverly nervous.

Ministers maintained thatthe fine, along with aTL900m penalty imposedearlier in the year, was theresult of routine inspec-tions, with no politicalinterference. But mostviewed it as personal – theculmination of a long and

public feud between primeminister Recep TayyipErdogan and Aydin Dogan,the billionaire whose news-papers and TV channelshad become increasinglycritical of his government.

However, evidence is nowmounting of a muchbroader enforcement driveby corporate tax inspectors– which economists andaccountants say is long-overdue, but must be car-ried out consistently tokeep investor confidence.

This month, Google’sTurkish operation becamethe latest target, receiving afine of around TL70m. InOctober, Turkcell, themobile phone operator, wasasked to provide collateralto meet a TL258.3m taxdemand. Earlier in the year,the oil company BP

received a TL474m finerelating to duty-free fuelsales. All three companiessay they have compliedwith tax rules and will seeklegal redress if necessary.

“Punitive taxation contin-ues, becoming a majoruncertainty for foreigndirect investment anddomestic fixed investment,”analysts for the consul-tancy Global Source wroteafter news of the Googlefine emerged.

The fines are the result ofchanges inside the taxadministration designed tostep up scrutiny of big com-panies – and raise cash forthe treasury.

“There have been moretax inspections in the lastthree months and, as withany government, it’sbecause it needs the

money,” says Alan Green-halgh at the accountancyfirm Kapital Karden.

Better enforcement isneeded. “Unfortunately,paying taxes is not verycommon in Turkey,” AliBabacan, economy minister,said in defence of the Doganfine. Statistics from theOrganisation for EconomicCo-operation and Develop-ment bear this out: taxes onincome, profits and capitalgains equalled 5.3 per centof gross domestic product in2006, against an OECD aver-age of 13 per cent.

Because of its narrow taxbase, Turkey has relied dis-proportionately on indirecttaxation, especially on aplethora of consumptiontaxes that are not alwayseconomically rational.

Reforms are being intro-

duced to broaden the taxbase, lower rates on sometaxes and improve collec-tion. But with the budgetdeficit set to rise to 6.6 percent of GDP, tax cuts are onhold and the temptation

will be to resort to blunterinstruments.

“I think the governmentis very keen to improve itsrevenues from those compa-nies that are profitable. Thebanking sector fears the

same . . . unjustified taxattempts by the authorities[as with Dogan],” says asenior banking executive inIstanbul.

Accountants complain taxinspectors’ zeal is notalways matched by compe-tence, or clear and predicta-ble legislation. “I’m nothappy with the way theyconduct investigations. Foryears, the best people havenot been choosing to workfor the government,” says apartner at a big account-ancy firm in Istanbul.

Ambiguities in the taxprocedural code mean toomany points are open tointerpretation, while seek-ing redress in the Turkishcourts could take years.

Despite the vagaries ofthe system, foreign inves-tors have in general

received pragmatic treat-ment from the current gov-ernment, often more favour-able than of locals.

One important induce-ment for foreign capital – azero rate of withholding taxon bonds – is now at riskafter a court ruled it wasinequitable given the 10 percent rate charged to Turk-ish investors.

Mr Babacan has promisedforeign investors an over-haul of corporate tax rulesto leave ”no room for greyareas” and ensure “foresee-able, predictable, fair imple-mentation”.

He is clearly keen to steerthe debate beyond the con-troversy over the Dogancase. But like it or not, thatrow may now be the yard-stick by which foreigninvestors judge the system.

CORPORATE TAX

Delphine Straussasks whether recentdemands mark anew strategy

’Unfortunately,paying taxes is notvery common inTurkey’

Ali Babacan,Economy Minister

TurkeyINVESTING INFINANCIAL TIMES SPECIAL REPORT | Thursday November 26 2009

InsideNeighbouringIraq is no longerseen as a pariahfor businessmenPage 3

www.ft.com/invest­turkey­2009

Chance toassert economicindependence

When financial lead-ers converged onIstanbul for theOc-tober meetings of

the International MonetaryFund and World Bank, Turkeytook pride in becoming the firstcountry to host the gatheringtwice. An even greater source ofpride was the fact that it hadfinally broken free from theIMF’s tutelage, after a half cen-tury as a serial recipient offunds and advice, lurching fromone bail-out to the next.

While the global recessiondrove many countries into theIMF’s embrace, for Turkey itbecame a chance to assert newindependence in economic man-agement. Ankara might yetagree a new loan on its ownterms but, as Recep TayyipErdogan, the prime minister,put it, there was no need to leanon an IMF “walking stick”.

Thanks to previous reforms,Turkey entered the downturnwith a solid banking system andstrong public finances, helpingit avoid a familiar pattern ofcapital flight, currency collapse,rampant inflation and spirallinginterest rates.

Instead, with a stable cur-rency, falling inflation, andbond yields near record lows,the central bank was able to cut

interest rates by more than 10percentage points in a year tomitigate a brutal contraction inthe real economy. Banking sec-tor profits for the year mayreach TL20bn ($13.5bn), 50 percent higher than in 2008.

Ratings agencies have sig-nalled they may upgrade Tur-key’s sovereign rating – a movelong priced into markets. Fitchcited its “relative resilience tothe severe stress test of the glo-bal financial crisis” and Moody’ssaid it was “better prepared …than would have seemed possi-ble, given its dependence onexternal financing.”

Yet Mr Erdogan’s ruling Jus-tice & Development (AK) partymust still convince outsiders itcan maintain stability withoutexternal anchors. Inflows of for-eign capital fuelled rapid gainsin prosperity in the years up to2007, largely because investorswere reassured by IMF over-sight, and by Turkey’s applica-tion for membership of theEuropean Union.

Now, Mr Erdogan is deter-mined not to let the IMF dictatefiscal policy, and the prospect ofEU accession is so distant thatit has ceased to interest inves-tors. Instead, the AKP is press-ing on with reforms to extendrights for Kurds and otherminorities that, while much-needed, have stirred politicaltensions. Paradoxically, somerisks may be increasing just asthe worst of the crisis passes.

Ali Babacan claimed credit atthe IMF meetings for becomingone of the first economy minis-ters to commit himself to an

exit from fiscal stimulus, with amedium-term plan to stabilisedebt in 2010 and cut the budgetdeficit from 6.6 per cent at theend of this year to 4 per cent bythe end of 2011. But economistssay reliance on higher tax reve-nues and a lack of detail on howfiscal rules will be formulated orspending controlled reduce theplan’s credibility.

The Treasury expects to rollover almost all domestic debtpayments next year, a ratio thatwould increase if there were anyfiscal slippage, external shockor mishap with privatisations.

Tevfik Aksoy, analyst at Mor-gan Stanley, says the recordlows in real interest rates havesapped enthusiasm in the bondmarket, with inflows of only$1.3bn from non-residentsbetween March and September.

If government debt issuanceproves higher than planned,domestic banks will be the mainbuyers, reducing their ability tolend to the privatesector and fuel recovery.

“The absence of an IMF dealwould not imply a funding crisisbut would likely imply a slowerrecovery in private sector creditgrowth,” says Christian Keller,economist at Barclays Capital.

Banks are in any caseunlikely to return to aggressivelending at a time when badloans are still rising and lowcentral bank interest rates willreduce their margins.

Economists expect grossdomestic product to contract bysome 5.5 per cent over 2009 as awhole, and grow by 3.5 per centin 2010 if there is no IMF sup-

port – a sluggish recovery byTurkish standards, and notenough to bring relief fromdouble-digit unemployment.

Fiscal pressure is also delay-ing some reforms the govern-ment thinks desirable. Mr Baba-can has said plans to promote

Istanbul as a financial centrecannot yet include tax cuts.Draft legislation on renewableenergy is also delayed becauseof doubts over the cost of priceguarantees for solar energy.

Yet the continued strains onpublic finances and corporate

cash flow may mean new activ-ity for M&A bankers and privateequity investors in 2010.

The need to raise revenues isprompting the government tore-launch long-delayed privatisa-tions of energy distributiongrids and lay plans to privatiseprofitable power stations.

Istanbul municipality wantsto sell the fleet of ferries plyingthe Bosphorus; there will be asecond attempt to auction offthe national lottery, and MrBabacan has signalled plans tostart the privatisation of state-owned Ziraat bank.

Suzan Sabanci Dincer, chair-woman of the lender Akbank,predicts there will also be awave of restructuring, as groupsweakened by the downturn seekscale to compete.

Ferruh Tunc, senior partnerat KPMG’s Istanbul office,thinks private equity buyers areclose to finding a new price

level for deals, after a year inwhich sellers’ expectations farexceeded what they were willingto offer.

In the last month, the UK firmBridgepoint has acquired astake in the vehicle inspectioncompany Tuvturk, while a pri-vate equity arm of HSBC isamong investors in the ground-handling company Havas after astake sale by TAV, an airportoperator that needed to cut debtto pursue rapid expansion.

As always, the biggest risks toall this activity are political. Atpresent, companies are benefit-ing from the AKP’s hyperactiveforeign policy, as it promotescloser trade ties with neigh-bours as a means of bolsteringregional stability.

Domestic politics, however,remain fraught. The AKP’s bigclashes with the military andjudiciary in 2007 and 2008 hadsubsided into lower-level rum-

blings. But tensions have risensharply in recent days after astring of anonymous lettersalleging military schemes to dis-credit the AK Party, and a rowabout government-authorisedwiretapping of secularist-minded judges and prosecutors.

A record tax fine against thebillionaire media owner AydinDogan is a sign that politicaltensions are spilling over intothe corporate arena.

“Turkey’s modernisation proc-ess is likely to be highly volatileand prone to intense powerstruggles between competinginterest groups,” writes AhmetAkarli at Goldman Sachs.

Without a “benevolent” powersuch as the EU to smooth theprocess, he adds, “it may provedifficult to avoid frequent politi-cal setbacks and, in theextreme, acute social conflict,leading to extended periods ofuncertainty.”

But without the IMF‘walking stick’, therecovery will be moresluggish, saysDelphine Strauss

InsideBanking As the country’sfinancial situation changes,so may investor attitudestowards risk, writesDelphine StraussPage 2

Energy David O’Byrnesays Moscow still holds allthe cards in decidingpipeline routes Page 2

Private equityBC Partners’ buyout ofMigros is breakingnew ground, writesMartin Arnold Page 3

Wine Political attitudesmake for a challenginginvestment climate, writesPelin Turgut Page 4

‘The modernisationprocess is likely to behighly volatile andprone to intensepower struggles’

Sculptures of a bull and a bear outside the Istanbul Stock Exchange: foreign capital inflows were encouraged by IMF oversight Bloomberg

2 ★ FINANCIAL TIMES THURSDAY NOVEMBER 26 2009

Success of oil pipeline depends on whims of Moscow

At 30km long but just 700mwide at its narrowest, Istan-bul’s Bosphorus strait isone of world’s mostcrowded and potentiallyhazardous waterways,where even with state-of-the-art radar monitoring,transiting ships are stillobliged to take on a pilot.

Fringed with forests andvillages on its upperreaches, and the palacesand mosques of Istanbul at

its lower end, it is also oneof the most beautiful.

It is no surprise then thatwith oil tanker trafficthrough the straits havingmore than doubled since1995 and expected to doubleagain in the next decade onthe back of fast-rising oilproduction in Russia andthe Caspian basin, Turkeyis keen to provide an alter-native export route.

“Traffic through thestrait already presents anunacceptable risk to thepopulation of Istanbul, andany oil pipeline that canrelieve the pressure will bewelcome,” says BurakOzugergin, spokesman forTurkey’s foreign ministry

which has long warned ofthe dangers posed by toomuch tanker traffic.

Turkey’s own proposedsolution is the Samsun-Ceyhan, or Trans Anatolianpipeline, planned to carryoil from Turkey’s Black Seacoast, 550km across thecountry to the Mediterra-nean coast, bypassing thecrowded Bosphorus.

Sponsored by a consor-tium of Turkey’s CalikEnerji and ENI of Italy it isdesigned to carry up to 1.5mbarrels per day.

It is also expected to helpkickstart a new petroleumrefining, petrochemicalsand manufacturing sectorat the Mediterranean port

of Ceyhan, which Turkeyhas long harboured ambi-tions of turning into amajor regional energy hub.

However despite presid-ing over a ground-breakingceremony at Ceyhan in2007, Calik and Eni havestruggled to secure suffi-cient commitments of oil toensure the line will be com-mercially viable.

Eni can supply oil fromthe giant Kashagan field inKazakhstan which it isdeveloping in partnershipwith Kazakh state oil com-pany KazMunaiGaz, but theline also needs oil from Rus-sian or Kazakh producers.

Support has been slow incoming, however, with Rus-

sia having long backed arival project to build a pipe-line through Bulgaria andGreece – a far shorter route,and Kazakhstan having

long declined to commit toany of the competingschemes.

That situation has nowchanged with a recentagreement between Turkey,

Italy and Russia commit-ting the three countries towork together on this andother regional energyprojects.

Russian prime ministerVladimir Putin alsoannounced that he hadsecured Kazakh support forthe project – a claim yet tobe confirmed by Almaty.

It is an important step,but there is still no definitecommitment of oil to theSamsun-Ceyhan line.

“Negotiations are stillcontinuing with both Rus-sia and Kazakhstan,” aspokesman for the Calik-Eni consortium told the FT.

It is also a step that con-firms that Moscow can

make or break the project.“Shipping oil by tanker

through the strait is alwaysgoing to be cheaper thanany pipeline,” says JohnRoberts, Caspian analyst atPlatts.

“Ultimately Russia con-trols the oil routes from theCaspian to the Black Sea,and only Russia can ensurethe line has enough oil tomake it viable.”

Such a move by Russiawould come at a price, hecautions, pointing out thatthe recently signed agree-ments make only one defi-nite commitment – for Tur-key to allow ENI and Rus-sia’s Gazprom to conduct afeasibility study for a by-

pass line of their own.They plan to construct

that line, the South Streamgas pipeline, across theBlack Sea to export Russiangas to Europe, by-passingUkraine which has previ-ously attempted to leverageits location on Russia’s gasexport route to obtaincheap gas.

Russia is also hoping toco-operate with Turkey onother pipelines, including asecond gas line across theBlack Sea and an extensionof an existing gas line southacross Turkey to Ceyhanand on to Israel that wouldalso allow for the develop-ment of gas-based indus-tries at Ceyhan.

Low interestrates call fornew strategy

“We were caught by the cri-sis with our seatbelts fas-tened,” says Suzan SabanciDincer, Akbank’s chair-woman, in a fair summaryof the ease with which Tur-key’s banking sector haswithstood the shocks of thepast two years.

Due to reforms enactedafter a previous bankingcrisis, Turkish banks –Akbank among them –entered the downturn withenviable capital cushions,no exposure to toxic deriva-tives and with the bulk oftheir funding coming froma stable deposit base.

In the year to September,net profit for the sector as awhole was 41 per centhigher than in the sameperiod of 2008, according tofigures from the bankingregulator. Banks continuedopening branches, althoughat a slower pace thanplanned, keeping staff num-bers broadly flat despitestringent cost-cutting.

But much of that wasthanks to the central bank’sdecision to counter therecession by cutting inter-est rates by more than 1000basis points in a year.

Because Turkish bankscan generally adjust theirown rates on deposits fasterthan on loans, a year ofmonetary easing hasboosted their margins andproduced windfall profits.

“The net interest marginis the most important deter-minant of profitability forTurkish banks and so far ithas been moving in theirfavour,” analysts at FitchRatings wrote recently.

Now, with the overnightborrowing rate at a historiclow of 6.5 per cent, the cen-tral bank appears to benearing the end of its eas-ing cycle. As their marginsnarrow, banks are likely tobe even more wary in lend-ing to companies and con-sumers struggling throughone of the deepest reces-sions in the region.

Tefvik Bilgin, head of thebanking regulator, haswarned banks are unlikelyto match 2009’s profits forsome years after. “The dam-age to the real economymakes us very cautious,”Ms Sabanci Dincer says.

Loans by Turkish banksgrew 30 per cent in 2008,but were roughly flat thisyear, and she expectsmuted growth of just 12 percent in 2009, as well astougher lending criteria.

The prospect of interestrates remaining low for anextended period, however,may demand a more funda-mental shift in behaviourfrom both lenders and sav-ers, who for decades havebeen accustomed to double-digit rates of return.

“This is something we’venever lived through,” saysNamik Aksel, chief execu-tive of HSBC Asset Manage-ment in Istanbul.

Turkey’s habitual crisesalways involved the liracrashing, high inflation andinterest rates, “so investorsare risk-averse,” he notes.

Now, Ms Sabanci Dincersays: “The banking modelin Turkey is changing.”

For high street banks, feeincome will become more

important, while their cli-ents may be tempted bymore adventurous optionsfor their investments thanshort-term cash deposits.

That will mean trainingbank branch staff in assetmanagement, she says.

“We have to educate ourclients – they have to knowwhere they’re investing.Until now, they go to seethe bank manager . . . theyhave coffee, bargain overthe interest rate, and it’sdone. Now, if you don’texplain different assetclasses, it’ll backfire, hewon’t be happy.”

If that shift does occur,the implications are big –one peculiarity of Turkishcapital markets is the near-absence of retail investors,especially in equities.

Although Turks caninvest in shares simply bywalking up to a cashpointand picking from a choiceof funds, most view thestock market as the pre-serve of speculators. Oneresult is that pension fundsremain puny next to emerg-ing market peers.

Mr Aksel says 75 per centof household savings go tocash deposits at present,with just 4 per centinvested in equities – andrich families buying stockin their own companiesaccount for most of that.

The total equity exposureof domestic institutionalinvestors was TL1.7bn($1.14bn) at the end of

August 2009 – just 2 percent of the Istanbul StockExchange’s free float.

Yet there have beeninflows in recent weeks toHSBC Turkey’s equityfunds – even if these arestill a very small proportionof the total under manage-ment, Mr Aksel says.

He has also seen shiftsfrom cash deposits intofixed-income funds, andsays HSBC is exploring newcommodity-based fundsafter trebling its gold fundin three months.

“The structural case forequities remains strong aslong as real rates stay inmid single-digit levels overthe next few years,” AliRiza Incekara, analyst atBGC Partners wrote in arecent strategy note.

“Mutual funds and pen-sion funds are likely to bethe primary vehicles fordomestic retail investors inshifting their portfolio,” headds.

“Before the 2001 crisis,interest rates were ‘low’ at30 per cent and people weregoing into equities – retailinvestors were the last in.People got hurt very badlyand never wanted to goback,” Mr Aksel says.

“This time, we feel it’sgoing to be different.”

New terminal lands on time and budget

Two weeks before opening,workmen were knee-deep inwet concrete outside themain entrance, tenantswere assembling shops, andlines of red suitcases werepassing through tests ofbaggage handling systems.

But when the new inter-national terminal at Istan-bul’s Sabiha Gökçen airportopened its doors thismonth, its operators couldcelebrate completing it ayear ahead of schedule –with a 20m passengercapacity bigger thanrequired by contract.

While airlines around theworld suffer mountinglosses and falling passengernumbers, Turkish aviationis thriving. Turkish Airlinesclaims it will this year bethe only European flag car-rier to grow, largely due to

its success in turning Istan-bul’s Ataturk airport into ahub between Europe andthe Middle East.

The bold expansion atSabiha Gökçen reflectschanges closer to home: therapid development of Istan-bul’s Asian shore, the risingaspirations of Turkey’s mid-dle classes, and the appealof the city itself to bothtourists and businessmen.

The wavy silhouette of itsroof – meant to suggest theseven hills on which thecity was founded – is themark of an architect chosenby the Turkish military,which owns the airport. Butthe consortium that builtthe terminal, after bidding€1.92bn for 20-year operat-ing rights, is a collaborationbetween a Turkish con-glomerate, Limak, andIndia’s GMR Infrastructure.Their joint venture holds an80 per cent stake in theoperation, with 20 per centowned by the Malaysian air-port operator MAHB.

Limak has local knowl-edge and expertise in con-struction, but GMR added

experience in equipmentpurchases, says Cenk Alp-soy, GMR International’sregional head. It also flewin IT experts from Hydera-bad and Delhi to helpswitch operations from theold to the new terminal.

GMR comes fresh frombuilding Hyderabad’s newairport but Sabiha Gökçenis its first foray overseas.Mr Alpsoy says the groupchose Turkey for its firstventure because of thepotential for other projectsin its core areas of energyand road-building.

Other Turkish groups areeyeing the opportunities forairport expansion in Turkeyand beyond. Celebi, aground handling company,has just won contracts atDelhi’s international airportand in Brussels . TAV,which runs Istanbul’s mainAtaturk airport, has justformed a joint venture withSaudi Arabia’s Al-RajhiHolding to bid for projects.

Profits under the BOT(build, operate and transfer)contracts that predominateare highly sensitive to

trends in passenger num-bers. At Sabiha Gökçen, thecontract unusually includesground handling, cargo andrefuelling, as well as reve-nues from passenger taxes,duty free sales, car parkingand an airport hotel.

But the consortium mustrecover its €450m invest-ment as well as meetingpayments to the govern-ment. It is counting on pas-

senger numbers rising fromsome 6m this year to 10mby 2010 and double that by2020.

“Our target is that every-one in Turkey will fly,”says Gökhan Bugday, theairport’s chief executive –echoing prime ministerRecep Tayyip Erdogan, whosees air travel as a symbolof progress and prosperity.

He argues airlines can be

lured from the bigger Atat-urk airport not just by lowprices, but with shorter taxitimes and a faster turn-round at peak times.

But Sabiha Gökçen hashad problems at peak hoursin the old terminal trying tomeet airlines’ demands forflight connections with ashorter gap than it canphysically manage, leadingto chaotic scenes at depar-ture. Shedding a low-costimage looks challenging.Pegasus, which uses SabihaGökçen as its main base, isa fast-expanding no-frillscarrier. Most airlines listedon the airport’s website alsofit that category.

Sabiha Gökçen’s manage-ment says Turkish Airlines’presence will be crucial toattract other flag carriers:they delayed the terminal’sopening to coincide withthe launch of new THYroutes. But Temel Kotil,THY’s chief executive, isless enthusiastic about theterminal, saying: “We don’thave great plans for it.”

Ebru Özdemir, a boardmember of Limak, sees the

airport’s fortunes risingwith those of the city – andin particular its less devel-oped Asian side.

She rattles off the namesof companies due to moveto the more residentialshore of the Bosphorus –including state-ownedbanks set to relocate fromAnkara – and of multina-tionals such as Unileverand Procter & Gamblealready installed.

Istanbul’s attractions gobeyond its romantic sky-line, she suggests, sayingthe consortium haddeclined an offer from a pri-vate hospital to set up adiagnostic centre in the oldterminal building – ready toreceive medical touristsfrom Russia or formerSoviet Union countries.

In a more glamorousanecdote, she says thedirector of the new AbuDhabi Guggenheimmuseum chose to holdmeetings in Turkey so bothUS and Middle Eastern visi-tors could get visas. “Istan-bul is becoming more of amagnet,” she says.

SABIHA GÖKÇEN

Istanbul’s secondairport aims forgrowth, writesDelphine Strauss

Change indrug pricespromptsheartache

Amidst the debate overIslamism, a key driverbehind the landslide re-election won by Turkey’s

government in 2007 went unno-ticed: healthcare reform.

Starting in 2005, the Justice andDevelopment Party (AKP) enacteda series of IMF-sought changes torein in a sprawling social securitysystem, broaden access to qualityhealthcare and improve the regu-latory environment for manufac-turers.

“Newspapers no longer runthose tragic pictures of peoplewaiting in line in front of publichospitals because those queues nolonger exist,” says Serkan Tar-mur, a partner in PwC Turkeyand co-author of a recent sectoralsurvey. “Anybody can now gettreatment, even in private hospi-tals and the state will reimbursethe hospital for it. This has been aradical, successful reform and itwas an important factor in thegovernment’s re-election.”

It was almost too successful. ByOctober, the Health Ministry hadalready spent the TL12.5bn($8.3bn) allocated for pharmaceu-tical expenditures in 2009, jeop-ardising budgetary targets in atight fiscal year. The prescriptiondrug market grew nearly 10 percent last year to $9.4bn and isexpected to maintain that growthrate to become one of the world’stop 10 largest markets in the nextdecade. “Even in a year of finan-cial crisis such as this, healthcarecosts have increased becauseaccess has become easier andstate insurance coverage iswider,” says Mr Tarmur.

To stem rising costs, the gov-ernment issued an overnightdecree in September that wouldchange pricing and has multina-

tional manufacturers up in arms.Under the present system, the

Ministry of Health sets the retailprice of medicine as well as therates by which pharmaceuticalcompanies can increase theirprices. Since 2004, the price for anoriginal pharmaceutical has beenbased on the lowest ex-factoryprice found in five reference coun-tries – France, Greece, Italy, Por-tugal and Spain. The prices oforiginal and generic productswere then capped at 100 per centand 80 per cent of the referenceprice, respectively.

The September decree changedthat dramatically. Prices on bothoriginal and generic drugs cannow be no higher than 60 per centof the reference price. “All of asudden, the rules have changed,”says Engin Guner, deputy head ofthe Association for Research-based Pharmaceutical Companies(AIFD).

“Business and investment plansfor 2009 and 2010 were madebefore this new price decree. Ifthis regulation takes effect as is,it will be very hard for the sectorto fulfill its investment potential.”Drug expenditure in Turkey at$136 per person is already lowcompared with the OECD aver-age, he said, estimating that 75per cent of proposed cost-cuttingwould be from original pharma-ceutical manufacturers. In arecent survey, 84 per cent of AIFDmembers said the proposedchange would stop new capital orproduction investments, whilemore than half said at least 20 percent of jobs would be cut.

The state is a key force in morethan one respect. More than 80per cent of all drug purchases arereimbursed by the social securityinstitution, with the remainingnearly 20 per cent of public sectoremployees similarly state-reim-bursed through the Finance Min-istry. Private health insurance isnegligible, accounting for 1.2mpeople out of a 75m populationlast year.

The pressure to keep healthcarecosts down is likely to boost the

generic drugs market. “There is amove towards generics on thepart of the government as animportant cost-saving measure,”says Mr Tarmur. Turkey has a

strong generics manufacturingtradition, accounting for 53 percent of unit sales last year. Thereare several large, well-establishedcompanies and they are beingcourted by foreign investors. In

July, Pfizer was rumoured to beinterested in the takeover ofgenerics market leader Abdi Ibra-him.

Local industry also has supportin the form of the vocal TurkishPharmacists Union, who recentlyran a successful campaign to buygeneric that resulted in severalmultinational companies increas-ing discounts on their brands. (Allpharmacies in Turkey are individ-ually owned, there are no chains.)

Opportunities for new invest-ment are also helped by the frag-mented structure of the local mar-ket – the top 10 companiestogether account for less thanhalf of sales. “The large multina-tional generics manufacturershaven’t yet come to Turkeymainly because of the financial

crisis, with the exception of Zen-tiva [which bought 75 per cent ofEczacibasi’s generic pharmaceuti-cals business in 2007]. But talkswith various companies are ongo-ing. They will wait for the marketto settle after this price changeand then act,” says Mr Tarmur. Ina recent PwC survey of pharma-ceutical manufacturers and pri-vate equity investors, more than40 per cent cited regulatory uncer-tainty as the main barrier toinvestment.

For its part, the governmentdelayed enactment of the pricechange to December, suggestingthere may be revisions. But it isunlikely to be annulled alto-gether, signalling that a period ofrestructuring for pharmaceuticalmanufacturers is yet to come.

PHARMACEUTICALS

Pelin Turgut examinesthe effects ofelectorally popularhealthcare changes

Local support: small pharmacists have run a campaign to encourage people to buy generic drugs Alamy

Multinational genericsmanufacturers have notyet come to Turkeymainly because of thefinancial crisis

BANKING

Delphine Strausssays that this year’swindfall profits areunlikely to bematched over thenext few years

ENERGY

Government wantsto ease traffic onthe Bosphorus, saysDavid O’Byrne ‘Shipping oil by

tanker throughthe strait willalways be cheaperthan any pipeline’

Turkish Airlines’presence will becrucial to attractother flag carriers

Investing in Turkey

Until now, [clients]go to see the bankmanager . . . theyhave coffee,bargain over theinterest rate, andit’s done.’

Suzan Sabanci Dincer,Akbank chairwoman

FINANCIAL TIMES THURSDAY NOVEMBER 26 2009 ★ 3

Investing in Turkey

BC deal tests waterfor private equity

As a Greek dealmaker whooversaw Turkey’s biggestprivate equity acquisition,Nikos Stathopoulos is usedto breaking new ground.

Now the managing part-ner at BC Partners hopes toset more precedents atMigros, Turkey’s biggestsupermarket group, whichwas bought by a BC-led con-sortium in a $3.15bn deallast year.

Mr Stathopoulos says the1,300-store chain is growingstrongly and bucking thetrend of falling sales andprofits that has hit manyprivate equity-owned com-panies since last year’s col-lapse of Lehman Brothers.

Mr Stathopoulos, who ledthe Migros acquisition, saysit has proved resilient to afierce recession in Turkey’seconomy, which is expectedto contract by about 6-7 percent this year. “That ismostly due to the defensivecharacteristics of foodretail, as people still have toeat,” he says.

The BC executive saysthat since Migros wasbought by a consortium ofBC, Turkven, and Italy’sDeA Capital, it has beentaking market share fromits rivals, thanks to its fullrange of store formats, suchas 5M hypermarkets,Migros supermarkets, andSok discount stores.

As customers haveshifted away from the moreupmarket supermarkets,such as Macrocenter, theyhave spent more in dis-count stores, such as Sok,says Mr Stathopoulos.

“As we have five brandsin different formats, wehave experienced growth inall formats and can addressconsumer needs from differ-ent directions,” he says.“Sok is performing particu-larly strongly as people aretrading down in times ofrecession.”

In addition, organisedretailers, such as Migrosand its smaller rivals Carre-four and Tesco, haveincreased their share ofTurkey’s food retail marketfrom traditional Bakkal“mom and pop” stores.

Supermarkets and otherorganised retailers still con-trol only 40 per cent of Tur-key’s food market, com-pared with about 80-90 percent in most western Euro-pean countries, so there ismore room to grow, arguesMr Stathopoulos.

Another driver of growthat Migros is Turkey’s

healthy demographicgrowth, which contributedto a 1.3 per cent rise in itspopulation last year to71.5m people, more thanhalf aged under 30.

In the six months to June,Migros revenues rose by 13per cent to TL2.68bn($1.8bn), while its earningsbefore interest, tax, depreci-ation and amortisationincreased 8 per cent toTL192.4m.

Mr Stathopoulos saysMigros has opened 250stores in the first ninemonths of this year andaims to reach 3,000 outletsby the end of BC’s five-yearplan.

The second way that BChopes Migros will be a pio-neering deal is by becomingTurkey’s first private equi-ty-owned company to bene-fit from the tax-deductibil-ity of its interest payments,although it is unclear if thiscan be achieved.

This benefit, which gener-ates tax-savings for private

equity-owned companies, isa common feature of lever-aged buy-outs in the US andEurope, but has not beentested in Turkey before.

In preparation for the pos-sible move, the $1.5bn ofdebt used to finance the ini-tial buy-out of Migros hasbeen transferred from theacquisition vehicle to theoperating company.

The final way that the BCboss hopes the Migros dealwill break new ground inTurkey is to become one ofthe first companies to bene-fit from a proposed law toallow squeeze-outs ofminority shareholders.

BC owns 98 per cent ofMigros shares, but has beenprevented from taking itprivate by the lack of asqueeze-out law, forcing itto keep publishing fullquarterly results.

“Turkey is modernisingand coming in line with therest of Europe,” says MrStathopoulos. “This shouldboost mergers and acquisi-tions by private equity andinward investment in Tur-key.”

Other big private equitygroups that have investedin Turkey recently will bewatching closely to see howBC fares in its push toimprove the rules for pri-vate equity in the country.

Big private equity dealsin Turkey have includedTPG’s acquisition of a con-trolling stake in Mey Icki,Turkey’s biggest producerof spirits including Raki,the country’s most famoustipple, in a deal worthabout $810m in February2006.

Kohlberg Kravis Robertsannounced its first privateequity deal in Turkey inOctober 2007 with the acqui-sition of UN Ro-Ro, a cargoshipper that ferries trucksbetween Istanbul and Italy,in a transaction put at€910m.

In the media sector, Prov-idence Equity boughtalmost 50 per cent of Dig-iturk, the country’s largestdigital television broad-caster, three years ago.

The credit crisis hasslowed buy-out activity inTurkey – like much of theworld – with only two pri-vate equity deals so far thisyear, compared with six lastyear, according to Dealogic.

But there are signs thatprivate equity is regainingits appetite for Turkishdeals as Bridgepoint lastmonth offered to acquire a33 per cent stake in Tüv-turk, a vehicle inspectioncompany.

The credit crisis couldthrow up opportunities, asrich families, such as theKoç family (which soldMigros) and the Dogan fam-ily (which faces a $3.3bn taxfine), are forced to sellassets to raise capital.

“Some of these families orcorporates are overlever-aged, may have debt matur-ing soon that needs repay-ing, or may want toimprove their capital struc-ture, so I expect there willbe some potential disposalscoming out of them,” saysMr Stathopoulos.

MIGROS

Martin Arnold saysdebt­fundedacquisitions arebecoming attractive

Links growing beyond aid and smuggling

Pass a big constructionsite in Erbil, Sulei-maniya or Dohuk – thebooming cities of Iraqi

Kurdistan – and it is most likelythat the workers will be toilingaway for a Turkish company.

In good times and bad, mer-chants from Turkey have beatena path over the long, mountain-ous and disputed border withIraq, looking to sell their waresor tap the region’s great andlargely unrealised commercialpotential.

From oil to construction,Turkish entrepreneurs haveamassed some of the politicalclout and business hardinessnecessary to cope with theKurdish region’s rocky regula-tory terrain – turning them intovalued partners for others.

When European or US compa-nies are contemplating a moveinto Iraqi Kurdistan, their firstport of call is often Istanbul. “Itis simple logic for everybody toturn to Turkey for support,”says Ercüment Aksoy, head ofthe Turkish-Iraqi business coun-cil. “We are the pioneers.”

It marks the maturing of across-border business relation-ship that has long survived inspite of politics, from theoppression of Saddam Husseinto the peaks of Kurdish separa-tist violence in Turkey.

For many years, the flowacross the border mainlyamounted to food (often aid),

Turkish troops, units of therebel Kurdish Workers Partyinsurgents and hidden loads of“mazout” – illegal smuggledfuel.

Now Turkey is preparing toopen two more border gates anda consulate in Erbil – anunthinkable political step fiveor 10 years ago. International oilcompanies are working in tan-dem with Turkish groups tolegitimately pump oil across theborder. There is even talk ofreviving the great Ottomandream of a railway linkingBaghdad and Berlin via Istan-bul.

Ahmet Davutoglu sealed this

diplomatic progress in Octoberby making the first ever visit bya Turkish foreign minister tothe Kurdish region, flanked bydozens of businessmen. MrAksoy says the visit was“important for business”.

“To have a consulate and thepresence of the government willmake it easier in all our areas ofwork,” he says. “Diplomatically,rather than standing back toback, we’re now hand in hand.This is a great opportunity.”

To date construction has beenthe dominant business area. Bigpublic infrastructure contracts –from airports and universities toroads and new housing develop-

ments – have invariably gone toTurkish groups able to draw ona skilled, often ethnically Kurd-ish workforce that are willing totolerate a tough and sometimesdangerous working environ-ment. A further $180m road-building contract was awardedto Yüksel Insaat last month, agroup with experience in con-struction projects from Kabul toQatar.

But those seeking their for-tune in Northern Iraq tend to befirmly focused on the region’sabundance of oil. Developmentis still severely hampered by thelack of export routes, legaluncertainty and wrangling

between Erbil and Baghdad oversharing oil revenue.

Two Turkish companies –Genel Enerji and Petoil – wereagain among the first to attemptto overcome these obstacles,taking poll positions in key con-cessions. Both are also nowexamples of Turkish groups act-ing as a bridgehead for interna-tional investors – a rough modelof co-operation that could applyto many other sectors as theregion’s economy develops.

Genel Enerji, owned by thepowerful Cukurova group, is inpartnership with Heritage Oil ofthe UK and has plans to merge,should the deal be given a green

light by regulators and theKurdish authorities. MeanwhilePetoil, which secured licenceagreements in Northern Iraq afew months before the US inva-sion, is now working with PrimeNatural Resources of the US andOil Search of Australia todevelop fields.

Yet the problems faced bythese energy groups underlinehow difficult and unpredictablebusiness can be in northernIraq. Genel in recent monthshas been forced to halt produc-tion from its Taq Taq field fol-lowing a dispute between theKurds and Baghdad over pay-ment mechanisms, dealing a

serious blow to its cashflow.There is evidence of similar

problems in areas such as con-struction. Ilnur Çevik, a formernewspaper proprietor and busi-nessmen who worked in north-ern Iraq, says the risks of work-ing in such a fledgling economyare often unbearable.

“There was no proper plan-ning, no proper supervision,everything was arbitrary, andyou have to deal with corrup-tion,” he said. “On paper itlooks very nice. But the realityis sometimes very different.”

But Joost Hilterman of theInternational Crisis Groupargues such cases are theexpected commercial casualtiesof a tricky working environ-ment. “Business and Turkishinvestment is booming. Thereare of course cases where therelationship has soured on anindividual basis,” he says “TheKurdish region does not have abanking system or a regulatorysystem. Investors are not themajors [international compa-nies], they are smaller compa-nies that are the big risk-takers.Considering that, the situationis not bad at all.”

Meanwhile Kurdish authori-ties are looking to court moreestablished companies, meetingwith dozens of big hitters inTurkey’s business community.

Safeen Dizayee, spokesmanfor the Kurdish DemocraticParty, says the relationshipmust move beyond “floodingour markets with Turkishgoods” and building infrastruc-ture to more inward investmentand outward exports. “We hadlots of cowboys coming in, notfinishing projects, disappearingwith advance payments. Nowwe’re looking more at seriouscompanies,” he says.

IRAQ

Alex Barker says thecountry’s long­termrelationship with itswar­torn neighbour isan opportunity

The Taq Taq oil field in Iraq’s self­ruled Kurdish region: Turkish companies have been forced to halt production following a dispute between the Kurds and Baghdad AFP

ContributorsDelphine StraussTurkey Correspondent

Martin ArnoldPrivate EquityCorrespondent

Alex BarkerPolitical Correspondent

David O’ByrnePelin TurgutFT Contributors

Tom GriggsCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising details,contact:Regina GillPhone +49 69 156 85 16Email : regina.gill@ft.com

The credit crisiscould throw upmore opportunities,as Turkey’s richfamilies are forcedto sell assets toraise capital

4 ★ FINANCIAL TIMES THURSDAY NOVEMBER 26 2009

Investing in Turkey

Government wary of temptations of Bacchus

Volumes rise,spending falls

Eight and a half tons of fire-works; enough caviar to filla private jet; and a guestlist ranging from SharonStone and Tom Jones to theprime minister of Uzbeki-stan: last May’s launchparty opening the MardanPalace hotel in Antalya wasnothing if not lavish.

The hotel, complete withgold-plated bathrooms anda five acre swimming pool,is the creation of theAzerbaijani billionaire Tel-man Ismailov, the latest oli-garch drawn to the Mediter-ranean province alreadypopular with high-spendingRussians.

Its vast premises are typi-cal of a trend in Turkey’scoastal resorts towardshotel complexes that canaccommodate tourists onall-inclusive packages.

Less typical is its extrava-gance: local businesseshave long complained thatpackage deals drive downprices and quality, attract-ing only the most impecuni-ous holidaymakers.

“Small shopkeepers aredying because of the all-

inclusive hotels. Peopledon’t eat outside, they don’tbuy outside. Shops are clos-ing in Side,” says TuncayTuksal, who once ownedseven shops selling vividcarpets in the beach resort.

He now owns only two,both inside five star hotels,and earns money throughexports.

Yet Turkey’s image as alow-cost, short-haul destina-tion has served it well thisyear, as crisis-consciousEuropeans seek to cut holi-day spending.

Foreign visitor numbersfrom January to Septemberwere 1.5 per cent higherthan in the same period of2008, which is striking,given sharp falls elsewherearound the Mediterranean.

The latest data suggestTurkey has benefited inparticular from Britishtourists opting to holidayoutside the eurozonebecause of the weak pound,a trend confirmed by book-ings at tour companies suchas Thomas Cook and TUITravel.

But the flow of visitors islittle consolation to busi-nesses losing money astourists shorten their stayand scrimp on extras suchas tours or seafront dining.

Revenues from foreignvisitors, $16bn in 2008, fell8.4 per cent year-on-year inthe first nine months of2009. Measured in Turkish

lira, the drop is milder, butindustry associations expectthe trend to continue to theend of 2009.

Tour companies say Tur-key is popular not justbecause it is cheap, butbecause of the price-qualityratio, modern accommoda-tion and range of activities.

Official data show that,although aggregate tourismrevenues rose steadily up to2008, foreigners’ averageexpenditure has been fall-ing for years, peaking at$706 in 2003 and declining to$635 by 2008. It has aver-aged $573 so far this year.

The decline could bepartly due to shorter stays,as Istanbul becomes a popu-lar weekend destination.

But Faruk Boyaci, aboard member at the indus-try association Turob, says:“Tourism on the coast islosing... This year the all-inclusive system has helpedTurkey overcome the eco-nomic crisis, but we have tolook to the long term.”

“It’s a big problem forus,” says Cumhur GuvenTasbasi, a senior official atthe ministry of culture andtourism. He says the minis-try is working on new regu-lations that will imposetough supervision even onbig, top-end hotels offeringall-in deals. “We may evenban them for smallerhotels,” he adds.

But he gave no details ofhow such a ban could beimplemented, and said well-run packages protectedtourists from grubby eater-ies and shopkeepers’ sharppractices. Rather than abol-ishing the system, the gov-ernment may focus onincentives to drive coastaltourism upmarket anddevelop niches such assports or spa holidays.

Ertugrul Gunay, cultureminister, is consideringcuts in sales and consump-tion taxes on tourism, Turk-ish media reported lastweek.

In August, Recep TayyipErdogan, the prime minis-ter, promised tax breaks foryacht owners flying theTurkish flag, as he opened amarina at the Aegean portof Didim.

Investors, though, may beturning their attentionaway from Turkey’s coast.The Limak group, whichowns popular beach resorthotels, is building a com-plex in northern Cyprus,whose casinos attract Turk-ish, Israeli and Greek Cyp-riot tourists. In Turkey, it isnow focusing on four-starcity hotels, a market itthinks under-served.

Even the Mardan Palaceis not immune to the tougheconomic climate. Soonafter the launch party, avast market owned by MrIsmailov in Moscow wasshut down by police citinghealth regulations.

Russian commentatorsspeculated that the ill-timed display of wealth inAntalya had angered theauthorities.

The hotel is now offeringcut-price rooms for the nextpublic holiday, and Turkishmedia report its staff havesought help from unionsover unpaid salaries.

TOURISM

Delphine Straussasks if all­inclusivehotels are goodfor the health ofthe industry

Although home to one of theworld’s earliest wine-producingregions – dating back 4,000 years– Turkey’s wine offerings werelow on variety and uninspiringuntil just a few years ago.

A state-run alcohol monopolyand two companies – Kavakli-dere and Doluca, founded at thesame time as the republic in the1920s – dominated a lacklustremarket. Then there were ahandful of lesser brands, knowncolloquially as “dog-killers”.Vintage year or grape varietywere little-known details andhardly mattered.

Those days are receding. Acombination of industry liberali-sation, a slew of wealthy execu-tives investing in boutique vine-yards and innovation by the US-educated scions of establishedwine-makers is helping to revi-talise an ancient tradition.

Turks can now count anumber of homegrown grapevarieties, such as the dark, tan-nic Bogazkere, fruity red Kal-

ecik Karasi or delicate Narince,technology has improved andinternational buyers are takingnote. “What I saw in vineyardsand cellars suggests it will notbe long before Turkey producessomething truly exceptional,”said well-known wine critic Jan-cis Robinson, who writes for theFT, after a recent visit.

After all, the Turkish wineindustry would appear to havehuge potential: the country isthe world’s fourth-largest grapegrower, it has favourable cli-mate and soil conditions, nearly1,000 indigenous grape varietiesand a large, youthful population– more than half of 70m areunder the age of 35 – with rap-idly urbanising palates. Alcoholsales rose by 19.5 per cent tomore than 1.1bn litres last year.

Yet businesses are faltering.Wine producers accuse the gov-ernment of failing to supportthe nascent industry, chieflythrough a tax levied since 2002,which is among the steepest inthe world when measuredagainst per capita income.

Wine taxes now amount to€0.80 per litre, compared with aEuropean average of €0.48 perlitre. “The tax has made winevery expensive, which hasreduced consumption andbrought the 12-15 per cent

annual sectoral growth we sawin the early 2000s to a stand-still,” says Sibel Kutman, amember of the board at Doluca.

More recently, an advertisingban took effect in July makingit illegal to promote alcohol inassociation with food, Turkishcultural or historic values, or –in vague wording – in a waythat might appeal to youth.

“The government has adoptedan attitude of passive resist-ance,” says Resit Soley, a promi-

nent architect-turned-vintnerwho owns the up-market Corvuslabel. “It doesn’t kill you, but itsaps your strength. It is anexhausting constant struggle.”

Due to Muslim prohibition,under Ottoman rule,wine-making was traditionallythe province of the empire’sChristian Greek and Armeniansubjects. When the Empirecollapsed in the 1920s, most ofits non-Muslim minorities left,

taking their expertise withthem.

It was the plight of abandonedvineyards on the Aegean islandof Bozcaada that prompted MrSoley to turn to wine-making.“I’ve had a house on the islandfor 20 years,” he says. “I couldsee a tradition dying out and Iwanted to save it.” His Corvuslabel produces about 300,000 bot-tles a year, several of whichhave won international awards.He began exporting last year tocounter a slowdown in domesticsales he attributes to high taxes.“My goal now is to sell nine outof 10 bottles abroad,” he says.“That’s the only way to circum-vent the tax dilemma here.”

The republic’s westernisingfounder Mustafa Kemal Ataturkfamously enjoyed a tipple andkept a wine cellar. But some 80years later, his successor, PrimeMinister Recep Tayyip Erdogan,a devout Muslim, abstains, as domost members of his cabinet.AKP mayors in various munici-palities have tried periodicallyto ban alcohol sales.

“The official attitude is lessthan friendly,” says Mr Kutman.“For a country on the road toEU membership, there is nodesire to officially promoteTurkish wine or to see wine as anational product.”

The market was liberalised in2001 when a state monopoly onalcoholic beverages was liftedand private sector wine importsfreed up. A market watchdog,TAPDK, was established in 2002to regulate the industry. A pri-vate consumption tax was intro-duced the same year, at a rate of48.7 per cent on fresh grapewine. Over the next three years,it was raised to 63.3 per cent.Imports are taxed further – 50per cent on European products,70 per cent for other countries.

About half the sector’s reve-nues are paid out in tax – morethan TL3bn ($1.9bn) last year.

“All I’m asking for is fair-ness,” says Mr Soley. “As itstands, I have to pay tax on myproduct two weeks after I’veinvoiced it. But I get paid bysupermarkets and suppliersweeks, even months after theyreceive an order.”

As Turkish wines make theirmark abroad, foreign investorssuch as Piero Antinori and Fres-cobaldi have visited to look intovineyards. “On one level it is agreat market,” says Mr Kutman.“Both in terms of its vineyardopportunities and a large,youthful consumer population.

“But there is a big questionmark over the political attitude.That makes investors wary.”

WINE

Political attitudesmake for a challenginginvestment climate,says Pelin Turgut

‘It is a great market,both in terms of itsvineyards and a large,youthful consumerpopulation’

Rising quality: men carrying grapes to market in Murefte Getty

‘The all­inclusiveshave helped Turkeyovercome theeconomic crisis butwe have to look tothe long term’