INVESTMENT ADVISORY COUNCIL INVESTMENT TÜRKÝYE PROGRESSREPORT

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2 INVESTMENT ADVISORY COUNCIL INVESTMENT TÜRKÝYE FOR TURKEY ADVISORY YATIRIM COUNCIL DANIÞMA FOR KONSEYÝ TURKEY ÝLERLEME PROGRESSREPORT RAPORU REPORT PROGRESS

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4 Contents 3 CONTENTS FOREWORD 9 INTRODUCTION 10 EXECUTIVE SUMMARY 13 Chapter 1 INVESTMENT ADVISORY COUNCIL FIFTH MEETING RECOMMENDATIONS 1. Improving education and training, particularly foreign language skills and technical education based on public-private cooperation, geared to private sector needs Enhancing dialogue between industry and universities to promote entrepreneurship, leadership and management skills Accelerating energy sector reforms, including automatic cost recovery pricing, diversification, deregulation and privatization Improving infrastructure, particularly transportation and information/communication technology as well as appropriate contractual and legal framework for PPP/BOT Moving forward with labor market reforms that further enhance flexibility while protecting workers Further strengthening the implementation of legislation on intellectual property rights in accordance with international standards Improving customs procedures Improving public administration practices by enhancing transparency, predictability and efficiency Strengthening measures to reduce informality, including fighting against tax evasion Encouraging the growth of SMEs to drive employment and expand their role in the formal economy Enacting and implementing the new Commercial Code to improve corporate governance and accounting standards 67 Chapter 2 OTHER IMPROVEMENTS IN THE INVESTMENT ENVIRONMENT OF TURKEY 1. Accelerating the reduction of administrative barriers Increasing the efficiency of judicial process Ensuring the proper functioning of the foreign exchange market and vigilant implementation of the inflation targeting regime Further progress in fiscal consolidation and strengthening efforts to restructure expenditures Deepening financial market development Supporting R&D and innovation activities Improving the image of the country Strengthening efforts in land planning and management Continuing with privatization and deregulation to improve competition Social Security Reform

5 4 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2009 TABLES Table 1: Applicants to the SAN-TEZ Program 29 Table 2: Distribution of Motorway Construction 36 Table 3: Motorways Planned to be Financed via BOT Model 37 Table 4: North-South Highway Corridors to be Improved Physically and Geometrically 39 Table 5: Number of Airports Managed by General Directorate of Airports Authority 42 Table 6: Air Passenger Traffic 42 Table 7: Investment Expenditures Table 8: Projects Generated by General Directorate of Airports Authority within BOT Model 43 Table 9: Number of Licensed Operators 46 Table 10: Market Size of Information and Telecommunication Technologies 48 Table 11: Number of Broadband Internet and Mobile Phone Subscribers 48 Table 12: The Number of Operations for Avoiding Piracy of Intellectual Property Rights and Total Materials Retrieved 53 Table 13: The Customs Clearance Registered Electronically 55 Table 14: Prevalence Rate of the EDI System and the Ratio of Customs Declaration Registered via EDI to the Total Declarations 55 Table 15: Risk Analysis Project Summary Results 61 Table 16: Comparison of the Payments Received by the Banks According to VEDOP 62 Table 17: KOSGEB Supports Allocated for SMEs 64 Table 18: New Support Instruments of KOSGEB 65 Table 19: KGF Guarantees and the Credit Volume 66 Table 20: Development Agencies Established in NUTS-2 Regions 70 Table 21: The CBRT s Net Foreign Exchange Purchases and Sales (USD million) 79 Table 22: The Inflation Targets and Realizations during the Implicit Inflation Targeting Period ( ) 80 Table 23: The Inflation Targets and Realizations during the Explicit Inflation Targeting Period ( ) 80 Table 24: Revised Inflation Targets for Table 25: Monetary Policy Committee Meetings and Policy Decisions in Table 26: Central Government Budget Targets and Realizations for Table 27: Budget Targets and Estimated Expenditures for Table 28: Gross and Net Debt Stock in Table 29: Public Sector Fixed Capital Investments in Turkey 87 Table 30: Total Fixed Capital Investments 88 Table 31: R & D Expenditures of Countries ( ) 95 Table 32: Shares of R&D Expenditures in GDP 95 Table 33: Full-Time R&D Human Resources 96 Table 34: Amount of Incentives Granted and Number of Subcribers for R&D Supports 97 Table 35: TUBITAK TRA Budget 97 Table 36: Funds Received by Turkish Partners in EU 7 th Framework Program 98 Table 37: TEYDEP Supports 99 Table 38: SAN-TEZ Program Project Applications Annually 100 Table 39: The Technology Development and Innovation Supports by KOSGEB 101 Table 40: Supports by TTGV ( ) 102 Table 41: Mid Media Campaigns 103 Table 42: Number of Leased Agricultural Enterprises by TIGEM 106 Table 43: Major Privatization Implementations in Table 44: Major Privatization Implementations in

6 Contents 5 GRAPHICS Graphic 1: Production of Energy in the Last Five Years 30 Graphic 2: Supply and Demand Structure of Electricity 32 Graphic 3: Electricity Production in Distribution by Source 32 Graphic 4: Length of Divided Highways 38 Graphic 5: The Distribution of Patent Applications and Registrations 51 Graphic 6: Distribution of Utility Model Applications and Registrations 52 Graphic 7: The Comparison of Patent Application and Registered Patents Statistics in Turkey with EPO Member Countries 52 Graphic 8: Custom Clearance via EDI 56 Graphic 9: The Ratio of Export-Import Registration via EVD-WEB 56 Graphic 10: Foreign Exchange Developments 77 Graphic 11: CPI and Core CPI (Annual Percentage Change) 81 Graphic 12: The Comparison of ISE with World Markets (August September 2009) 90 Graphic 13: Stock Market Traded Value Rank 91 Graphic 14: Turnover Ratio 91 Graphic 15: GDP and R&D Expenditures Annually 94 Graphic 16: R&D Expenditures by the Source of Finance 96 Graphic 17: Researchers Benefited from the Return Program to Europe 98 FIGURES Figure 1: PRODIS Flow Chart 73

7 6 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2009 ABBREVIATIONS ADÜAŞ Ankara Natural Electricity Production and Distribution Co. GNP Gross National Product BDC Business Development Centers IAC Investment Advisory Council BILGE Customs Automation System ICEX Spain Foreign Trade Institute BOT Build-Operate-Transfer ICTA BRSA BTC BTE CBRT Banking Regulation and Supervision Agency Baku-Tbilisi-Ceyhan Crude Oil Project The Baku-Tbilisi-Erzurum Natural Gas Pipeline Central Bank of the Republic of Turkey IDF ILO IPA CMB Capital Markets Board of Turkey ISPAT ISE Information and Communication Technologies Authority World Bank- Institutional Development Fund International Labor Organization Instrument for Pre-Accession Assistance Istanbul Stock Exchange Investment Support and Promotion Agency of Turkey CPI Consumer Price Index ISO Investment Support Office DHMI General Directorate of State Airports Authority ISKUR DMS Document Management System ITGI DTM Undersecretariat of Prime Ministry for Foreign Trade KADIM The Turkish Employment Agency Turkey-Greece-Italy Natural Gas Pipeline The Project of Fight Against the Unregistered Employment EDI Electronic Data Interchange KGF Credit Guarantee Fund EES European Employment Strategy KOSGEB Small and Medium Enterprises Development Organization EIA Environmental Impact Assessment LNG Liquefied Natural Gas EMRA Energy Market Regulatory Authority MCAP EP Environmental Programs MOLSS Modernization of Customs Administration Project Ministry of Labor and Social Security EPO European Patent Office MONE Ministry of National Education EPRFT Economic Policy Research Foundation of Turkey MPC EU European Union NABUCCO GAP South-Eastern Anatolia Project NVQI GDAA GDAE General Directorate of Airports Authority General Directorate of Agricultural Enterprises OECD OIZ Monetary Policy Committee Turkey-Bulgaria-Romania-Hungary- Austria Natural Gas Pipeline National Vocational Qualifications Institution Organisation for Economic Cooperation and Development Organized Industrial Zone GDH General Directorate of Highways PA Privatization Administration GDP Gross Domestic Product PCT Patent Cooperation Treaty

8 Abbreviations 7 ABBREVIATIONS PEMS Project Evaluation and Monitoring System TEKMER PETKİM Petrokimya Holding Corporation TEKNOGİRİŞİM PHC Privatization High Council TEYDEB PRA PRODIS Presidency of Revenue Administration Project Assessment and Monitoring System TKAD TLT R&D Research and Development TOE Technology Development Center Technology and Innovation- Oriented Initiatives Support Program The Presidency of Technology and Innovation Support Programs Project of Supporting the Quality Infrastructure of Turkey Trademark Law Treaty Term Transactions and Options Exchange San-Tez Industry Thesis TPC Turkey Petroleum Corporation SCST Supreme Council for Science and Technology TPI Turkish Patent Institute SEC Supreme Education Council TRA Turkish Research Area SII Social Insurance Institution TSI Turkish Standards Institution SMART Air Traffic Management Resources Systematic Modernization of Turkey TTGV SME Small and Medium Enterprises TUBITAK Technology Development Foundation of Turkey The Scientific and Technological Research Council of Turkey SOE State Owned Enterprises TURKAK Turkish Accreditation Agency SPO State Planning Organization TurkDEX Turkish Derivatives Exchange SSCS Small Scale Consulting Support TURKSTAT Turkish Statistical Institute SSI Social Security Institution TURKTELEKOM SVET TAKBIS TASB TBMM Strengthening Vocational Education and Training System Land Registry and Cadastre Information System Project Turkish Accounting Standards Board The Grand National Assembly of Turkey UOC UYAP VAT VEDOP TCDD Turkish State Railways VERIA TDZ Technology Development Zone WIPO TEDAŞ Turkey Electiricity Disribution A.Ş. YOIKK TEKEL Cigarette Industry Enterprise and Trade Corporation YOK Turkish Telecommunication Corporation Universitat Oberta de Catalonia The National Judiciary Network Project Value Added Tax Tax Authorities Automation Project Data Storage and Administration Project World Intellectual Property Organization Coordination Council for the Improvement of the Investment Environment Council of Higher Education

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10 Foreword 9 FOREWORD I have the honour to present the fifth volume of the Investment Advisory Council Progress Report. The report was prepared with the related institutions contribution to provide progress on each of the recommendations of the members of the Investment Advisory Council which was established in 2004 to bring an international perspective to investment climate reform studies. At the fifth meeting of the Investment Advisory Council, which was held on June 18, 2008 under the chair of the Prime Minister Mr. Recep Tayyip Erdoğan, the Council members expressed that record high level FDI inflows over the last couple of years were prominent success. They also highlighted that progressive reforms in R&D, social security, insurance and employment were noteworthy. Turkey became more resilient to the effects of global financial crisis as a result of her stability oriented macroeconomic policies and structural reforms. The prudent fiscal discipline, banking sector reform, the achievements in the privatization, deregulation of main sectors and floating exchange rate regime increased the flexibility and resilience of the economy. Global FDI flows shrinked by 14% in 2008 as a consequence of negative effects of the global financial crisis on developed countries. However, Turkey maintained to be 20 th in the globe and 9 th among developing countries in terms of attracting FDI with the inflows of USD 18.2 billion in The global financial crisis has underlined the importance of structural reforms. Our Government has been decisively continuing implementing the structural refoms on strengthening the functions of regulatory and supervisory bodies, facilitating R&D and innovation activities, improving transportation and energy network, which are also in line with the recommendations of the Council. It s a great pleasure for me to share this report on 2008 and 2009 s progress along with the Council recommendations that were closely monitored by YOIKK platform. I sincerely believe that the sixth Council meeting this year will give guidance to the works for strengthening Turkey s position as an attractive investment destination. Ali BABACAN Deputy Prime Minister

11 10 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2009 INTRODUCTION Under the chair of the Prime Minister Mr. Recep Tayyip Erdoğan, top level executives of 19 multinational companies, the managing directors of IMF, World Bank and the chairmen of four leading business associations along with the Cabinet members and related senior government officials, discussed Turkey s progress in the previous year at the fifth meeting of Investment Advisory Council meeting on June 18, The Council members emphasized the importance of 2008 s reforms in the areas of strengthening R&D, social security, regulating insurance sector and increasing the flexibility of labor market. Conforming the belief that alignment with the EU Acquis will provide a strong anchor for the investors, the members also stressed the need for going ahead with macroeconomic policies that will limit inflationary pressures and reduce current account deficit in the following term. In the Declaration of Outcomes document, which was publicized at the end of the fifth meeting, Council members summarized their recommendations under 12 main headings: Improve education and training, particularly foreign language skills and technical education based on public-private cooperation, geared to private sector needs Enhance dialogue between industry and universities to promote entrepreneurship, leadership and management skills Accelerate energy sector reforms, including automatic cost recovery pricing, diversification, deregulation and privatization Move forward with labor market reforms that further enhance flexibility while protecting workers Improve infrastructure, particularly transportation and information/communication technology as well as appropriate contractual and legal framework for PPP/BOT Further strengthen the implementation of legislation on intellectual property rights in accordance with international standards Reduce barriers to further penetration of broadband internet and PC adoption Improve customs procedures Improve public administration practices by enhancing transparency, predictability and efficiency Strengthen measures to reduce informality, including fighting against tax evasion Encourage the growth of SMEs to drive employment and expand their role in the formal economy Enact and implement the new commercial code to improve corporate governance and accounting standards The recommendations raised by the Council members since 2004 can be grouped under 21 main headings. Special priority is given to the Council recommendations by the institutions throughout their decision period on reform agenda regarding the improvement of investment climate. These recommendations are also considered in the process of formation of the YOIKK Technical Committee Action Plans.

12 Introduction 11 As a result of YOIKK studies, the image of Turkey as an attractive investment destination has improved in the major investment climate indices. Turkey ranked 41 st in the Best Countries to Do Business Index published by Forbes in both 2008 and 2009; whereas Turkey ranked 48 th in 2007 and 61 st in Also, in Economic Freedom Index, published by Heritage Foundation and the Wall Street Institution, measuring economic freedom level of the countries, Turkey ranked 75 th among 183 countries in In Global Competitiveness Report published by WEF in 2009, Turkey ranked 61 st among 133 countries. This Progress Report relies on the data compiled from 60 various institutions. The first section summarizes the progress achieved on the issues that were raised during the fifth meeting of the Investment Advisory Council in 2008 and 2009 specifically. The second section provides data on the progress achieved on the remaining recommendations of the previous meetings since 2004.

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14 Executive Summary 13 EXECUTIVE SUMMARY I. INVESTMENT ADVISORY COUNCIL FIFTH MEETING RECOMMENDATIONS Improving education and training, particularly foreign language skills and technical education based on public-private cooperation, geared to private sector needs The number of students attending vocational and technical secondary education within the whole secondary education increased in compared to the previous school year. Vocational and Technical Education Action Plan, which aims to promote, encourage, disseminate and increase the quality of vocational and technical education, came into effect in July The execution of the Human Resources Development Through Vocational Education Project, which is carried out in partnership with the European Union and the Ministry of Education, has been launched. Furthermore, within the context of the Human Resources Development Operational Program, which has been conducted under the Instrument for Pre-Accession Assistance provided by the European Union, Operational Program Concerning the Improvement of the Context and the Qualification of Vocational Education, in which the Ministry of Education is the beneficiary institution, will be enforced. Active labor programs, job and profession consultancy services and training activities which are carried out by the Turkish Employment Agency have continued to increase. Works on secondary legislation that will ensure effective operation of the National Vocational Qualifications Institution were completed. Enhancing dialogue between industry and universities to promote entrepreneurship, leadership and management skills Program on Supporting Business Enterprises Focused on Technology and Innovation has been initiated by The Scientific and Technological Research Council of Turkey to promote entrepreneurship in business initiatives and to convert scientific knowledge into value added products. Under the coordination of State Planning Organization, measures to enrich human capital, encourage entrepreneurship, fasten local employment and capital accumulation will be taken in low developed regions. ISKUR leads education programs on teaching labor force, developing job searching strategies, prompting entrepreneurship, heading profession, vocational training, adaptation to working life, technical consultancy and employment guaranteed guidance within the context of active labor force policies.

15 14 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2009 Accelerating energy sector reforms, including automatic cost recovery pricing, diversification, deregulation and privatization In November October 2009, 186 licences, 60 of which were distribution licences, were granted by the Energy Market Regulatory Authority regarding the natural gas market activities. The intergovernmental agreement for the project of Turkey-Bulgaria-Romania-Hungary- Austria Natural Gas Pipeline aiming to transport Middle East and Caspian natural gas reserves to Europe was signed on July 13, The State Owned Enterprises in the energy sector have been implementing automatic cost recovery pricing since July 1, Improving infrastructure especially in transportation and information technologies with an appropriate agreement and legal infrastructure for public and private partnership/build-operate-transfer projects; reducing the burdens on increasing the rate of broadband internet and personal computer use Improving transportation infrastructure Highway Transportation Total length of highways reached 64,253 km as of November 15, 2009; 17,222 km of which are divided ways. The tender for Istanbul Strait Highway Passage Tunnel which was due to connect Asia and Europe continents by land and planned to be financed by BOT Model was held on June 30, Railway Transportation Ankara-Eskisehir part of the Ankara-İstanbul High Speed Train Project which aims to increase the share of railways in passenger transportation from 10% to 78% by reducing the travel duration to 3 hours from 6 hours has been completed. Construction phase of the part to be built by Turkey within Turkey-Georgia-Azerbaijan Railway (Kars-Ahılkelek-Tbilisi-Baku) Project which was developed to connect Europe to Caucasus and Central Asian Republics over Turkey began in July Maritime Transportation Tenders for Transportation Coastal Buildings Master Plan Study and Tourism Coastal Buildings Master Plan Study were finalized in January These studies aim to determine infrastructural facilities and additional capacities to be constructed in coastal regions effectively, while increasing the efficiency of location and time planning. Within the works conducted to provide the necessary infrastructure for maritime transportation and yacht tourism through private sector dynamics and BOT model, Didim Yacht Port was opened and construction works of Çeşme, Sığacık, Kaş, Alanya, Yalova and Mersin Yacht Ports are ongoing.

16 Executive Summary 15 Air Transportation The number of airports managed by the General Directorate of Airports Authority, 27 of which are in international status, has reached 40. In 2008, international flights passenger traffic reached 43 million, a 13% increase; domestic flights passenger traffic reached 35.8 million, a 12% increase and total passenger traffic reached 79.4 million, a 12.6% increase. Improving infrastructure in information technologies and reducing the burdens on increasing the rate of broadband internet and personal computer use The Electronic Communication Law on simplification and streamlining of the necessity, cost and timing of permits and licences on information and communication technologies was enacted in November Regulatory amendment regarding fixed phone lines which aimed to liberalize local calls was enacted in May The number of broadband internet subscribers has reached 5.9 million, as of June 2009 from the level of 122,559 subscribers in The number of mobile phone subscribers which was 28 million in 2003 has increased to 64 million as of August Moving forward with labor market reforms that further enhance flexibility while protecting workers Within the scope of the Law on Social Insurances and General Health Insurance, those working on part-time basis or on-call or in domestic service for less than 30 days in a month were also included under insurance coverage. With the introduction of the Employment Package, the measures enhancing the flexibility of the labor market came into effect. The conditions for eligibility to benefit from short-term employment were facilitated. Within the context of the Human Resources Development Operational Program ; Women s Employment Support Operation, Youth Employment Support Operation and Social Integration and Development of Employability of the Disadvantaged Operation are conducted by the Turkish Employment Agency under the administration of the Ministry of Labor and Social Security. Further strengthen the implementation of legislation on intellectual property rights in accordance with international standards The patent applications and utility model applications have increased by 519% and 144% respectively since 2003, while the registered patents and registered utility models have increased by 312% and 159% respectively in the same period. The negotiation on Intellectual Property Law Chapter within the context of EU membership process was started in According to the National Action Plan for Turkey, which was finalized as of January 2008, 6 projects with the financial size of Euro 1.71 million will be implemented in with collaboration of European Patent Office.

17 16 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2009 The Technology Transfer Office, which was established at Gazi University within the scope of the pilot project of Establishing Technology Transfer Offices at the Universities directed by European Patent Office, started its activities in October Improving customs procedures The ratio of the customs clearance procedure registered electronically and via Electronic Data Interchange was 99.9% and 87.4% respectively in Since 2008, a clearance has been able to be filed via internet from offices of investors who do not have required software. In the second half of 2009, the new general rates of red line which define the control of the documents together with physical examination of goods in the BILGE System were reduced to at most 25% and 8% for import and export respectively. Improving public administration practices by enhancing transparency, predictability and efficiency The Law on The Right to Information has been enacted in 2003 to facilitate a democratic and transparent administration enabling citizens to reach the information gathered and produced by the public institutions. The Council of Ethics of Public Servants has been established in order to identify the attitude principles of public servants such as respecting public safety. The Law on the allocation of public resources to the public services having priority, providing the effective and economic usage of these resources and increasing the authorizations of public administrations during the budgeting periods came into force. Strategic Paper of Information Society and Action Plan ( ) came into force in the context of e-transformation Project of Turkey. e-state Gate ( has been launched to facilitate the common presentation of all public services from one single point and provide fast and secure access to electronic information by citizens. Strengthening measures to reduce informality, including fighting against tax evasion The Action Plan of the Strategy on Fighting Against the Informal Economy ( ) came into force on July 1, 2008 in order to execute a decisive fight. The Project of Risk Analysis and Control executed by the Tax Revenue Administration serves for the fight against the informal economy. Upon the Law enforced in February 2009, the authority of unifying the withholding tax return (given to the Tax Revenue Administration) and insurance premium report (given to the Social Security Institution) is given to Ministry of Finance in order to strengthen the formal economy. The Project on Fighting Against the Unregistered Employment (KADİM), which was started by the Ministry of Labor, was completed in September 2008.

18 Executive Summary 17 Encourage the growth of SMEs to drive employment and expand their role in the formal economy 38,826 SMEs have benefited from the supports of TL 256 million provided by KOSGEB in the last five years. TL million was allocated to 56,052 SMEs through the new 5 SME support instruments of KOSGEB which was started to be implemented in 2008 and Legislative works initiated in 2007 to enlarge the scope of KOSGEB supports in order to cover different sectors besides manufacturing, were completed in After this amendment KOSGEB is now able to reach 3 million SMEs, 10 times of the previous target level. Enacting and implementing the new Commercial Code to improve corporate governance and accounting standards The draft Turkish Commercial Law is expected to bring important measures to strenghten corporate governance in Turkey. II. OTHER IMPROVEMENTS IN THE INVESTMENT ENVIRONMENT OF TURKEY Accelerating the reduction of administrative barriers Licensing requirements In 2010, new investment support offices are planned to be opened within the provinces of the 24 development agencies which were established in 2008 and In order to solve the problems of investors with public institutions and agencies at the local level, One Step Investment Offices were established within the governorships in June The secondary legislation aiming to submit only one application for environmental permits electronically, was adopted on April 29, R&D approval process With the application of Project Assessment and Monitoring System, only online submission of all project applications for Industrial R&D Projects Support Program, SME R&D Start-up Support Program and International Industrial R&D Projects Support Program were started on July 1, Due to amendment entered into force on April 1, 2009, the implementation of electronic signature and online numeric information transfer were regulated.

19 18 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2009 Increasing the efficiency of judicial process Amendments in the Law on Functions of Court of Conflicts and Law on Supreme Board of Judges and Prosecutors became effective in August The construction of the district courts of justice for Ankara, Erzurum and Diyarbakır was completed in All the transactions throughout the country can be currently performed by UYAP that has been initiated in order to conclude cases in the cheapest and shortest way via communication and information technology. Ensuring the proper functioning of the foreign exchange market and vigilant implementation of the inflation targeting regime The amount bought through foreign exchange buying and selling auctions totaled a net of USD 7.48 billion in 2008 and USD 1.49 billion as of October 20, The Central Bank of the Republic of Turkey (CBRT) has taken some policy measures to cushion the stability of the financial system in Turkey in 2008 and in the first half of The monetary policy has been implemented in accordance with the inflation targeting regime and the operational framework of the policy has been maintained in 2008 and In June 2008, CBRT revised its inflation forecasts for upwards, as a result of the supply shocks and the fluctuations in global markets which have been observed in the economy since In 2008, CBRT pursued a cautious and tight monetary policy; however the policy interest rates were cut in the last quarter of 2008 and basis points decrease has been issued on the policy interest rates in the first 10 months of Further progress in fiscal consolidation and strengthening efforts to restructure expenditures Significant improvements have been observed in recent years in terms of fiscal consolidation. The central government debt stock to gross domestic product (GDP) ratio, which was 69.2% at the end of 2002, declined to 40% by the end of Also, the public net debt stock/gdp ratio declined to 28.2% in 2008 from 61.4% in The central government budget deficit, based on EU definition, to GDP ratio was 2.2% in 2008, below the Maastricht criteria of 3%. As a result of the policies for reducing the liquidity risk, the average maturity of domestic borrowing was increased from 9 months to 34 months in 2002-September For the same term, the exchange rate risk of debt stock was reduced by the decline on the share of foreign currency denominated debt from 58% to 30%. On the other hand, the share of fixed rate debt in domestic debt stock has increased from 36% to 47%, reducing the interest rate risk of domestic debt stock. 2,759 public investment projects with a total value of TL 219 billion were implemented in 2008; while 2,332 public investment projects with a total value of TL billion were implemented in In 2010, public sector and private sector fixed capital investments are expected to increase by 10.3% and 7% respectively, as a result of the expected economic recovery.

20 Executive Summary 19 Deepening financial market development In line with the shrinking global financial economies, a partial decline was observed in Istanbul Stock Exchanges (ISE) in However as a result of the recovery started to be observed in global economies in 2009, the stock exchanges market has started to show an upward trend from the trough level in March In the first 9 months of 2009, 81.32% increase was observed in ISE, not only more than the increases in the developing countries but even more than the increases in the developed countries and ISE has been the third among whole stock exchanges markets by this increase. ISE has also been the sixth among whole stock exchanges markets by the 6.6% decline, in August 1, 2007-September The scope of venture capital companies was extended and the resource transfer procedures to these firms were facilitated by a new legislation. As a result of these developments the venture capital system in Turkey is expected to become prevalent. Turkish Derivatives Exchange (TurkDEX) moved 10 steps upwards in the first 50 derivatives exchanges of the world ranking of Futures Industry Association in 2008 and has been 22 th by moving 6 more steps in the first 6 months of Turkish banking sector has remained strong in 2008 and 2009 especially when compared to global financial situation. The volume of total loans in the banking sector reached TL billion as of October 2009, a 4.6% increase compared to The volume of total loans to GDP ratio has reached 42.1% in the first half of 2009 from 36.1% level by the end of Supporting R&D and innovation activities With regard to the increasing rate in the R&D expenditures in , Turkey was the second in the world ranking with a 119% increase, after China. According to the ranking of the countries regarding their share of R&D expenditures in GDP, Turkey has been 35 th with 0.71% in 2007, while she was 38 th with 0.53% in Considering the increasing rate of the share of the R&D expenditures, Turkey was 4 th in the world ranking. Both in 2007 and 2008, the share of the private sector has left behind the public share in R&D expenditure based on source of finance, for the first time. In , Turkey was second after Mexico according to the rate of increase in the number of full-time R&D personnel assigned only for this job. The number of Technology Development Centers (TEKMER) - the application centers for receiving KOSGEB supports for R&D projects - reached 20 in The actualization rate in the total budget assigned to TEKMER s is 57%. As of 2008, the number of projects supported is 292. The Project on the Innovation and Industrial R&D Portal has been started by the Ministry of Industry and Trade in order to create an electronic center to follow up all industrial R&D supports, keep records on statistical data and receive electronic applications. Improving the image of the country The steps to be taken to make Istanbul firstly regional, then global financial center, have been determined via Istanbul Financial Center Strategy and Action Plan which was approved on September 29, Special activities on the national and international front are being organized to promote Istanbul in the context of Istanbul 2010: European Capital of Culture.

21 20 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2009 Strengthening efforts in land planning and management In the context of privatization of state owned agricultural lands by Directorate of Agricultural Enterprises (TIGEM), 14 enterprises were leased for 30 years. By the end of 2008, TL 158 million of investment committments of TL 176 million was completed and employment opportunities were generated for 1,500. In the framework of Organized Industrial Zones (OIZ) implementation of Ministry of Industry and Trade since 1962, 259 OIZs became operational across Turkey. Continuing with privatization and deregulation to improve competition USD 2,292 million was generated from the privatizations held by the Privatization High Council in The revenue generated from privatization was USD 5,704 million in and USD 30.6 billion in 2003-November Social Security Reform With the enactment of the Law on Amending The Law on Social Insurances and General Health Insurance Law and other relevant legislation in May 2008, the Social Security Reform has been substantially activated. There is an ongoing work on the draft Law on Social Benefits and Non-Contributory Payments. The secondary legislation aiming for the effective implementation of the Social Security Reform and the Social Security Institution has been mostly completed.

22 Improving Education and Training 21 Chapter 1 INVESTMENT ADVISORY COUNCIL FIFTH MEETING RECOMMENDATIONS 1. Improving Education and Training, Particularly Foreign Language Skills and Technical Education Based on Public-Private Cooperation, Geared to Private Sector Needs Improvement of education, particularly vocational and technical education, to a degree that will meet the demands of the labor market, is one of the topics that the Council members focus on. Within this context, important steps have been taken in the last five years to make vocational and technical education as well as training more widespread and effective: The number of students attending vocational and technical secondary education was 1,428,985 in the school year of , 46% more than the school year of The share of vocational and technical secondary education within the whole secondary education increased to 45% in , from 32% in During the same period, 595 new vocational and technical education schools were opened. Furthermore, 5,402 new educational areas and 11,357 new educational branches were introduced for implementation in these schools. Within the scope of the Strengthening the Vocational Education and Training System (SVET) Project carried out in partnership with the European Union (EU), a modular structure was adopted in vocational and technical education, and the new curriculum formulated within this framework was started to be implemented as of the school year of For the purpose of making vocational and technical education more effective and widespread, many projects have been carried out by the Ministry of National Education (MONE) in cooperation with social partners, such as SVET, Modernization of Vocational Education and Training in Turkey, Capacity Building Support for the MONE, Support to Basic Education Program and the Project to Identify Educational Needs in Vocational and Technical Education. In order to ensure rational identification and measurement of the demand for labor and labor skills, the Turkish Employment Agency (ISKUR) has started to conduct regular labor market analyses on annual basis since It is foreseen that the results of these analyses will be used in formulating the national education policy. In order to establish and operate a national vocational qualifications system, the National Vocational Qualifications Institution (NVQI) was set up in 2006 and became operational by the enforcement of the relevant secondary legislation in 2007 and In the fifth meeting of the Investment Advisory Council (IAC), the members pointed at the necessity to develop education and training, mainly with regard to foreign language skills as well as vocational and technical education, in conformity with the demands of the labor market and emphasized that public-private partnership methodologies could be used to this end. In this context; In 2008, the number of students attending vocational and technical secondary education increased by around 22% compared to the previous year and its share within the whole secondary education increased by around 3%. The number of students attending vocational and technical secondary education increased by 46% in the last 5 years.

23 22 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2009 Vocational and Technical Education Action Plan came into effect in July The application of the Human Resources Development Operational Programme has been launched in cooperation with the EU. To ensure an effective education-employment relation, 34 cooperation protocols on vocational education and training programs were signed between the MONE and public and private sector institutions in 2008 and 2009, while the durations of 6 protocols that had expired were extended. Hence, in the last five years, 172 cooperation protocols have been signed by 109 institutions. Within the scope of these protocols, the studies on; Developing vocational programs, Training workshop and laboratory instructors, Providing students with hands-on vocational training at enterprises and Equipping vocational and technical secondary education institutions with new technologies. have been carried out. In the 60 th Government Program-Action Plan, the schooling rate of vocational and technical secondary education within the whole secondary education is aimed to increase from 38% to 50% by In this framework, the year 2008 was declared as the Vocational Education Year and the MONE, with the participation of social stakeholders, prepared the Vocational and Technical Education Action Plan. The Action Plan came into effect in July Within the scope of the Plan, 22 separate actions were identified to promote, encourage, disseminate and increase the quality of vocational and technical education, as well as legal, administrative and structural measures oriented to surmount the relevant problems. The Human Resources Development Through Vocational Education Project was launched to ensure an employment-centered unity between the labor market and vocational education and to modernize and increase the quality of the vocational training via the lifelong learning approach. Within the scope of the Project which is carried out in partnership with the EU and the MONE and which is covering 8 provinces 1 in the Eastern and Southeastern Anatolia, vocational education and training curriculum development and vocational equipment purchasing activities will be conducted in the identified pilot sectors 2. Furthermore, public relations and promotional activities will be carried out. The Project, which was started in August 2008, is foreseen to be completed in June The Employment Package 3 that came into effect in 2008 has conglomerated the Provincial Employment and Provincial Vocational Education and Training Councils, which previously operated separately on provincial basis, under one name: Provincial Employment and Vocational Education and Training Councils. These Councils are the decisive bodies of the active labor force training programs which are performed by ISKUR at the provincial level. With this arrangement, the membership structure, number of the members, duties, organs, working procedures and financial resources of the Councils were redesigned. In this new framework, the Provincial Employment and Vocational Education and Training Councils work on; Formulation of employment and vocational education policies, Determination of measures to protect and develop employment, prevent unemployment, Identification of the active labor programs to be implemented, Monitoring and assessment of employment activities and vocational education implementations. 1 Diyarbakır, Elazığ, Erzurum, Gaziantep, Kahramanmaraş, Malatya, Şanlıurfa, Van. 2 Information technologies, electrics-electronics, food, mechanics and machinery, metalwork, automotive, textile and tourism. 3 Law no on Amendment of the Labor Law and Some Other Laws (Official Gazette /26887).

24 Improving Education and Training 23 The Regulation on the working procedures and principles of the Councils came into effect in The Employment Package also introduced the provision that workers who have not received vocational education and training regarding the job in which they work can not be employed in heavy and dangerous works 5. With this provision, it is aimed to ensure that, those working in heavy and dangerous jobs have the necessary qualifications sought by employers, through receiving the appropriate training, taking into consideration the serious consequences that might otherwise arise both for the employee and the employer. In this framework, the Provincial Directorates of ISKUR are authorized to conduct programs aiming at training and certifying this group of workers. The Communique regulating the relevant procedures and principles was put into effect in In order to ensure a more effective and widespread vocational and technical secondary education following its re-structuralization under a modular program basis, extensive changes were made in the Vocational and Technical Education and Training Regulation that came into force in The Secondary Education Project was launched in 2006 in partnership with the World Bank for the purpose of: restructuring the general, vocational and technical secondary education system in Turkey, increasing its quality, developing its programs, training secondary education teachers in line with the redesigned programs and equipping the educational environments. Within the scope of this project, education programs for 50 areas and 224 branches were developed in 2008 and came into effect after approved by the MONE. The Project also ensured the development of 96 textbooks and educational tools on gradual basis for 25 educational programs. In 2008, the MONE prepared bilateral vocational education and training framework programs in 12 areas and 75 branches and works are continuing on developing bilateral vocational education and training framework programs in further 8 areas. In line with the demands of the sector, vocational English courses were started in the Area/Branch Courses Block at Anatolian Technical High Schools and Anatolian Vocational High Schools in Furthermore, taking into consideration the rapid developments and expectations in trade and tourism sectors with China and Russia, the MONE decided to teach Russian and Chinese in addition to the existing foreign languages in trade and tourism schools. The application has been launched in 20 pilot schools. In parallel to this, Chinese Educational Program has been put into effect for the 9 th and 10 th grades within the context of the Secondary Education Project. 4 Regulation on the Working Procedures and Principles of Provincial Employment and Vocational Education and Training Councils (Official Gazette /27031). 5 Law no on Amendment of the Labor law and Some Other Laws, art.5 (Official Gazette /26887). 6 The Communique Concerning the Vocational Training of Workers in Heavy and Dangerous Works (Official Gazette /27244). 7 Regulation on Amendment of the Vocational and Technical Education and Training Regulation (Official Gazette /27003).

25 24 INVESTMENT ADVISORY COUNCIL FOR TURKEY PROGRESS REPORT 2009 Employing the Graduates of the Tourism Training Centers and Training of the Tourism Sector Employees Project, which is developed by the Turkish Union of Travel Agents, Turkish Hotels Federation and the MONE collectively, has become operational. Within the context of the Project, it is aimed to employ 2,000 tourism training centers graduates for training 10,000 tourism sector employees. In this framework, 2,000 employees have been trained and certified while 531 graduates have been employed in 2008 and In line with the technological developments taking place in the areas developed under SVET, revisions were carried out in 7 areas and the new curriculum was put into implementation as of the school year of In order to be implemented in these programs, 6,902 types of modules have been developed as of Among these modules; 3,411 modules have been published on the internet. There is an ongoing work to edit the content of 1,781 modules. The studies on 327 modules are continuing. The studies on 1,383 modules will be started, soon. Furthermore, in parallel to the modular programs prepared in the vocational area and branches within the context of SVET, 712 certificate programs have been developed in 30 areas. These programs have become operational since the beginning of the school year of The studies on the programs in other vocational branches are continuing. With the introduction of the modular vocational training structure, a competency based system; taking into consideration the technological developments, the needs of the labor market, socio-economic requirements, vocational standards and lifelong learning principles; enabling a wide based area and branch education; flexible and compatible to rapid changes, has been established. The system in question comprises 57 areas and 223 branches as of the education year. Moreover, the assessment studies concerning the implementation of the mentioned areas and branches are continuing. The updating work on the framework education programs will be maintained within the context of the technological developments, new vocational standards and formal education. The vocational and technical programs in higher education will be harmonized with this modular system. In this context, the continuity and integrity of the programs between the vocational tertiary and secondary schools will be ensured. Furthermore, inter-service training programs will be enhanced in order to facilitate the adaptation of the teachers to the renewed modules 8. Works continued in 2008 and 2009 to develop education programs for the industrial glass-working branch in the area of ceramics and glass technologies and in the areas of harbour agency, industrial shoe technologies, fire-fighting and fire safety, meat and meat products branch in the area of food technologies and the civil aviation branch. The works on the framework educational program in the fire-fighting and fire safety areas have been completed. Within the scope of the Instrument for Pre-Accession Assistance (IPA) provided by the EU to contribute in human resource development efforts in Turkey, a Human Resources Development Operational Program, has been conducted by the Ministry of Labor and Social Security (MOLSS). Within this Program, the Operation Concerning the Improvement of the Context and the Qualification of the Vocational Education in which the MONE is Annual Program (Official Gazette /27379), p. 186.