1. 1 1 BUSINESS ENVIRONMENT IN TURKEY İbrahim H. ÇANAKCI Undersecretary of Treasury Knowledge Economy Forum IV Istanbul March 22, 2005

2. 2 2 CONTENTCONTENT  TURKEY’S POTENTIALS AND KEY CHALLENGES  POLICY ACTIONS TO MEET THE CHALLENGES  GAINING GROUND & PROSPECTS  TURKEY’S POTENTIALS AND KEY CHALLENGES  POLICY ACTIONS TO MEET THE CHALLENGES  GAINING GROUND & PROSPECTS

3. 3 3 TURKEY’S POTENTIAL AND KEY CHALLENGES

4. 4 4 6,937 7,213 GDP Per Capita (PPP) Turkey’s Potential US $ Demographic Profile Economic Profile Increasingly Open Economy TURKEY USA ITALY BRAZIL POLAND RUSSIA 6.8 6.7 6.5 6.3 6.2 5.1 RANKING 9 17 26 39 42 71 SCALE 1-7 Capital Market Integration

5. 5 5 EUROPE GDP Population GDP Population 11,717 billion USD 576 million 11,717 billion USD 576 million RUSSIAN FEDERATION GDP Population GDP Population 433 billion USD 144 million 433 billion USD 144 million CENTRAL ASIAN AND CAUCASIAN COUNTRIES GDP Population GDP Population 44 billion USD 37 million 44 billion USD 37 million MIDDLE EAST AND NORTH AFRICA GDP Population GDP Population 690 billion USD 247 million 690 billion USD 247 million Turkey’s Trade Potential

6. 6 6 Despite this huge potential, an underperforming economy in 1990s... During 1990s......  Turkish economy was characterized by:  Boom and bust cycles in growth  High and chronic inflation  High public sector deficit  Turkish politics was charaterized by frequent elections During 1990s......  Turkish economy was characterized by:  Boom and bust cycles in growth  High and chronic inflation  High public sector deficit  Turkish politics was charaterized by frequent elections

7. 7 7 Foreign Direct Investment in Turkey Annual FDI Inflow (1980 – 2002)

8. 8 8 Key Challenges  Fully Utilize Turkey’s Potential For Sustainable High Growth  Enhance Competitiveness Of Turkish Economy In The Global Markets  Increase Investment And Bring FDI Inflows To The Level Of Peer Countries  Fully Utilize Turkey’s Potential For Sustainable High Growth  Enhance Competitiveness Of Turkish Economy In The Global Markets  Increase Investment And Bring FDI Inflows To The Level Of Peer Countries

9. 9 9 POLICY ACTIONS TO MEET THE CHALLENGES

10. 10 TURKEY’S PROGRAM FOR CREATING AN ENVIRONMENT MORE CONDUCIVE TO BUSINESS CONDUCIVE TO BUSINESS  RESTORING MACROECONOMIC STABILITY  IMPLEMENTATION OF WIDE RANGE OF STRUCTURAL REFORMS REFORMS  REMOVING ADMINISTRATIVE BARRIERS AND REDUCING RED TAPE TAPE

11. 11 (%) GNP Growth CPI (%) Program (bn $) Net Public Debt Stock / GNP (%) (*) Estimate Central Bank Gross Reserves Strong Growth Path Single-Digit Inflation Strong Reserve Position Declining Debt Macroeconomic Stability 39,4

12. 12 Rationalizing Public Sector Budget & Investment Code of Ethical Conduct for Civil Servants Law on Freedom of Information for Citizens Structural Reforms So Far... Public Sector Reform Financial Sector Reform Enhancing the Role of Private Sector Financial Management and Control Law Public Procurement Law Rationalizing Public Sector Employment Banking Regulation and Supervision in line with EU Standards Strengthening the Private Banks CAR-Capital Adequacy Ratio- Improvement Vulnerabilities Reduced Consolidation Encouraged State Bank Reform  Financial Restructuring  Operational Restructuring  Preparation for Privatization Improving the Resolution of Non-Viable Banks  Strengthened Institutional Capacity for Resolution  Accelerated Resolution of Intervened Banks  Faster Recovery of Assets Opening the Key Markets to Competition and Regulation by Independent Agencies  Energy Market  Tobacco Market  Telecommunication Market  Sugar Market Boost to Privatization  TUPRAS (Petroleum Company)  Several Small Companies and Assets  TEKEL (Monopoly of Alcoholic Beverages)  THY (Turkish Airlines) Reduced Administrative Barriers & Red Tape

13. 13 Strategy Based on Full Screening & Problem Diagnosis Strong Public and Private Sector Collaboration Pursuing Pragmatic & Solution-oriented Policies Relying on International Experience & Perspective Strong Political Ownership to Coordinate These Efforts under a Functioning Institutional Framework Key Features of Turkey’s Reform Program to Remove Administrative Barriers and Red Tape

14. 14 Coordination Council for Improvement of Investment Environment (YOİKK) Location of Investment Company Establishment Employment Customs and Standards Licensing Intellectual Property Rights Taxes and Incentives Foreign Direct Investment Legislation Investment Promotion SMEs Technical Working Groups IAC Institutional Framework For Investment Environment

15. 15 Major Achievements to Improve Investment Environment No Approval Requirement No Minimum Capital Requirement National Treatment Guarantee to Transfer Proceeds Key Expatriate Personnel Protection Against Expropriation Access to Real Estate International Dispute Settlement New FDI Regime

16. 16 Notarize the Articles of Association Pay the Registration Fee Fill the Company Establishment Form and Register with Trade Registry START BUSINESS New Procedures for Setting up Business: Simplified and Streamlined Major Achievements to Improve Investment Environment Starting a Business Indicators Turkey OECD Average Before the Reform After the Reform Number of procedures 1386 Time (days) 38925 Source: World Bank, Doing Business in 2004 AND 2005 Achievement has been registered internationally

17. 17   Remove red tape and bureaucracy, with a focus on procedures at the sectoral level... Progress in streamlining procedures for the mining and petroleum sector Progress in streamlining procedures for the mining and petroleum sector Time required to obtain Environmental Impact Assessment brought down Time required to obtain Environmental Impact Assessment brought down Draft Law to create “one-stop-shop” at provincial level prepared Draft Law to create “one-stop-shop” at provincial level prepared Inspections and permissions related agro-sector simplified Inspections and permissions related agro-sector simplified   Improve implementation of laws and dispute resolution mechanisms… A new Commercial Code being drafted A new Commercial Code being drafted Priorities of Corporate Law, Intellectual Property Rights, Industry Property Rights specified in National Program Priorities of Corporate Law, Intellectual Property Rights, Industry Property Rights specified in National Program National Justice Network Project aiming at electronic connection of service units Major Achievements to Improve Investment Environment Progress on the recommendations of IAC

18. 18   Develop a corporate tax regime and incentive structure comparable to those of competitor countries... Tax reform underway to fight informal economy and to bring a predictable Tax reform underway to fight informal economy and to bring a predictable taxation system New provisions in the Corporate Tax Law reduce the tax burden New provisions in the Corporate Tax Law reduce the tax burden Scope of Corporate tax exceptions expanded Scope of Corporate tax exceptions expanded   Increase efficiency of customs; particularly import procedures and licensing Technological infrastructure of Customs improved Technological infrastructure of Customs improved Comprehensive Amendment on the Customs Code drafted Comprehensive Amendment on the Customs Code drafted Significant improvements in reducing cargo dwell times and transaction costs Significant improvements in reducing cargo dwell times and transaction costs The automated BILGE system improved The automated BILGE system improved Improvement in Risk Analyses System Improvement in Risk Analyses System Other Initiatives... Major Achievements to Improve Investment Environment Progress on the recommendations of IAC

19. 19   Create an investment promotion capacity Capacity improvement of General Directorate of Foreign Investment Capacity improvement of General Directorate of Foreign Investment   Improve infrastructure Priority infrastructure needs identified Priority infrastructure needs identified   Invest in education and training Share of education expenses in the budget increased Share of education expenses in the budget increased   Secure the availability of land for investment Land allocation to the investment sites improved Land allocation to the investment sites improved Legislation amended to increase the effectiveness of the Industry Zones Legislation amended to increase the effectiveness of the Industry Zones   Protect intellectual property rights more effectively Measures taken to protect the intellectual property rights Measures taken to protect the intellectual property rights Other Initiatives... Major Achievements to Improve Investment Environment Progress on the recommendations of IAC

20. 20   Strengthen research and development base of country To encourage R&D, expenses to be deducted from the tax base To encourage R&D, expenses to be deducted from the tax base Incentives to operate in the Technology Development zones increased Incentives to operate in the Technology Development zones increased   Harmonize standards and regulations with the European Union Standards prepared by State Institute of Standards harmonized with EU Standards prepared by State Institute of Standards harmonized with EU   Strengthen the role of SMEs in the economy SME access to finance improved SME access to finance improved KOSGEB (Small and Medium Industry Development Organization) KOSGEB (Small and Medium Industry Development Organization) restructured restructured   Accelerate the privatization program Tenders planned for the first half of 2004 realized Tenders planned for the first half of 2004 realized Other Initiatives... Major Achievements to Improve Investment Environment Progress on the recommendations of IAC

21. 21 GAINING GROUND AND PROSPECTS

22. 22 Robust Private Sector Activities Net FDI Performance Sources of GrowthProductivity in Private Sector Man. Industry Number of Foriegn Participated Firms cumulative

23. 23 New Medium-Term Economic Program Key Features Strong Ownership Strong Ownership Social Consensus Social Consensus EU Convergence (EU Pre-accession Economic Program) EU Convergence (EU Pre-accession Economic Program) Basis for a New Stand-By Arrangement Basis for a New Stand-By Arrangement Macroeconomic Objectives Sustainable High Growth Sustainable High Growth Price Stability and Single Digit Inflation Price Stability and Single Digit Inflation Debt Reduction Debt Reduction Macroeconomic Policies Continuation of Prudent Fiscal Policies Continuation of Prudent Fiscal Policies A Monetary Framework focused on Price Stability A Monetary Framework focused on Price Stability Floating FX regime Floating FX regime

24. 24 Growth (%) 5 5 5 Inflation (CPI %) 8 5 4 General Gov’t Deficit (% of GDP) 4.4 2.1 0.5 General Gov’t Gross Debt (% of GDP) 75.3 72.2 68.3 New Medium Term Macroeconomic Framework 2005 2006 2007

25. 25 Creating a Self Sustaining Social Security System Creating a Self Sustaining Social Security System Structural Reform Agenda Reforming the Tax System Strong Financial Sector: Engine of Growth Further Developing the Infrastructure For A Competitive Market Economy  Tax administration reform to combat the informal economy and to improve compliance and efficiency of tax collection  Simplification and streamlining of the tax system  Rationalization of financial transaction taxes  Tax administration reform to combat the informal economy and to improve compliance and efficiency of tax collection  Simplification and streamlining of the tax system  Rationalization of financial transaction taxes  Unification of three social security institutions  Establishment of universal health insurance with a view to minimize cost to government  Transfer of social assistance functions to one institution  Unification of three social security institutions  Establishment of universal health insurance with a view to minimize cost to government  Transfer of social assistance functions to one institution  Improved regulatory and supervisory framework  A new road-map for restructuring and privatization of state banks  A strengthened institutional capacity and a new strategy for asset resolution  Transfer of non-bank financial institutions to the BRSA  Improved regulatory and supervisory framework  A new road-map for restructuring and privatization of state banks  A strengthened institutional capacity and a new strategy for asset resolution  Transfer of non-bank financial institutions to the BRSA  Competitive Real Sector  Competitive Financial Sector  Privatization of Major Companies  Continue to Enhance the Business Friendly Environment  Competitive Real Sector  Competitive Financial Sector  Privatization of Major Companies  Continue to Enhance the Business Friendly Environment

26. 26 Ongoing Initiatives and Forthcoming Events   E-transformation Turkey Project   Investment Climate Assessment Survey   Second Investment Advisory Council Meeting