Proceedings of the Standing Senate Committee on
Foreign Affairs and International Trade
Issue 22 - Evidence - Meeting of February 27, 2013
OTTAWA, Wednesday, February 27, 2013
The Standing Senate Committee on Foreign Affairs and International Trade met this day at 5:15 p.m. to study economic and political developments in the Republic of Turkey, their regional and global influences, the implications for Canadian interests and opportunities, and other related matters.
Senator A. Raynell Andreychuk (Chair) in the chair.
[English]
The Chair: Honourable senators, this is the Standing Senate Committee on Foreign Affairs and International Trade, and we are continuing our examination of economic and political developments in the republic of Turkey, their regional and global influences, the implications for Canadian interests and opportunities and other related matters.
We are very pleased to welcome our witness by video conference this afternoon. Appearing is Mr. Ozan Isinak, who is Chief Executive Officer of Emerging Markets Capital Advisory Inc., EMCA, as well as President of the Keiretsu Forum of Toronto.
Mr. Isinak, we are pleased that you have come before us, and we are prepared to hear from you. I will advise you that senators like to ask questions. If you can make your introductory remarks, we will then go to questions and answers.
Ozan Isinak, CEO, EMCA — Emerging Markets Capital Advisory Inc.: First and foremost, thank you very much, Madam Chair, honourable senators, for having me here. I come from an unknown organization, so I would like to take about 20 seconds to give you a background of who I am.
I am obviously Turkish Canadian. I have had the good fortune of living across Canada — Calgary, St. John's, Newfoundland, Ottawa, and I am an Ashbury College graduate from way back when — and across the world from California to Istanbul. My background is obviously, as you can see, alternative investments, angel investing and venture capital and bits of private equity, so I deal a lot with the start-up communities both in the developed world and the emerging markets such as Turkey.
I have had the chance to review some of your past sessions, and it seems like you are covering a very wide spectrum. You have been given a lot of statistics, so I will try to refrain from giving you more statistics and make my presentation based on my background and what I know, which is alternative investment, and how it may affect or impact Canada as well as Turkey.
At this point, we all know that Canada should engage in some form or fashion with Turkey, both on a political platform as well as a business platform. That goes the same way with Turkey as well. Turkey right now is looking to expand its political as well as its economic reach, not just across the region but really across the world. The question we need to ask is what does that mean? What does positioning mean and how will that affect both countries? We need to seek out what we need to do to benefit both countries.
Let us take Canada, for example. One of the critical things we need to do in Canada in terms of our business is to diversify our industries, diversify from natural resources and energy into new health care, into new technologies, innovation and commercialization of our R & D. We as Canadians need to do a little more work to promote ourselves across the globe. Having a good position in Turkey will give us that opportunity to really expand throughout the region.
If we take Turkey, for example, they do not have the natural resources. They are surrounded by countries that have natural resources, but they do not, so they rely solely on their population. They have a huge inventory of labour. The Turkish government has a pretty aggressive agenda of being in the top 10 GDP countries in the world by 2023. It is very aggressive. In order to pull that together, they realized over the past 5 to 10 years that they need to also invest in R & D and in the commercialization process and building companies that will scale throughout the world.
Both Canada and Turkey have the same objective, and I think that is where we may want to start in positioning ourselves so that we could help both countries achieve what they need to do.
Having said that, how does that happen? I guess that falls on the hands of organizations such as the MaRS development district over here and a lot of different techno parks to engage directly with their Turkish counterparts. I know for a fact in Turkey they are opening up dozens of these MaRS development district-type areas. They are very hungry for new talent and new technologies. The whole concept of IP, intellectual property, is relatively new. They have a brand new commercial law that has just been passed. It represents quite a bit of opportunity for Canadians and Canadian businesses to take advantage of the region.
Obviously another point is that is the ground floor we are looking at, commercialization of this R & D work and building start-ups. I believe that will be able to provide sustainable growth, and it will provide a sustainable partnership for Canada, not just in Turkey but also throughout the region. Given my background, that is what I would like to focus on and that is where I see an opportunity for Canada to really take a step forward.
With your permission, I am open for questions.
The Chair: Thank you, sir. I think that is an excellent opening statement.
Senator Finley: Thank you for your remarks. I know from the bio I have here that you have a wide range of experience internationally. Thank you for bringing that expertise to us.
You made a number of comments. I am not trying to be negative here, but they would seem to be kind of open- ended or perhaps a little risky.
You talk about a huge inventory of labour, but my understanding is that the skill level of labour is relatively weak. It lags behind countries like Malaysia, Korea and Brazil, according to international statistics. What steps is the Turkish government taking to address the skill level of what is obviously a very large labour force or potential labour force?
Secondly, you used the phrase, ``They want to invest.'' Who is it that wants to invest from a Turkish point of view?
While Turkey may want to be the rising star in GDP in 2023, are their ambitions realistic when one looks at a significant slowdown in GDP growth over the last few years?
I realize it is a broad range of questions, but I think they would be a good place to start. Could you address those?
Mr. Isinak: Of course. Your first question was the education level. You are correct. There is a big gap. It is not like Canada where pretty much everybody goes into university and everybody graduates. There is a big gap. However, in my statistics, there are 171 universities right now in Turkey, of which 103 are state — 5 are technical and 2 are institutional — as well as 72 private universities. The government is putting a lot of emphasis on private universities, and a lot of private universities are opening up. If you ever go to Istanbul specifically, there are dozens of new niche universities. Within most of those universities, we were seeing that they are forming small techno parks, real technical universities to make sure that the education that the students get can be applied to the techno parks that are being formed on campus of these universities. A lot of small businesses are being nurtured and there is a lot of R & D.
One thing that Canada has to offer is the technical skill set. That is what Canada can bring to the table if it wants to position itself when it wants to partner with Turkey. I think that would be very valuable for the Turks.
The second question is investments and who is investing. I come from the angel investing world. The angel investing world in Turkey is relatively new. We need to take into consideration what an angel investor is. There are a lot of angel investors that just do not know that they are angel investors. In Turkey, we have a chapter in Istanbul as well of the Keiretsu Forum, and we are finding that the angel investing, investing into small start-up companies, does exist quite a bit. I remember seeing a report from I think the World Bank in the previous session that said financing was very difficult. When you come down to the start-up level, there are a lot of individual investors, and you can syndicate a certain company to grow $3 million, $4 million, $5 million or so. We are finding there is that type of financing. There is a huge push right now throughout Turkey to finance the smaller start-up companies through the angel investment platforms. If you go to Turkey, there are three or four very well established platforms right now to access that type of financing.
Aside from that, the government has a lot of tax incentives. Aside from giving real money, the government has taken the path of giving a lot of tax incentives to these companies. When you are in a techno park, you do not have to pay income tax, social security, et cetera. You are really exempt for multiple years, which will give you enough time to meet your milestones and grow those companies.
Your third question was: Is 2023 realistic? That is a good question. Like I said, it is an incredibly aggressive timeline. From what I see on the ground in Turkey, if they cannot meet that target by 2023, I can see that they will meet that target sometime in the near future, but it looks like they are going in the right direction.
Now, they obviously come from a pretty tough neighbourhood as there is a lot of volatility in Syria, Iraq, et cetera. However, Turkish entrepreneurs and businesses have been doing business in the area for a very long time. They have good relationships with them. In fact, they almost share a similar culture, to some effect. They have always been there and will continue to be there, and they are really pushing this.
If you ever go into Northern Iraq, for instance, a lot of the products that the Northern Iraqi Kurdistan people use are Turkish: products, restaurants, hotels, appliances, et cetera. The market access is already there for the Turks.
What they really need to look at is expanding that — not in their relative neighbourhood, but across the world, like in Africa, Uzbekistan, Turkmenistan, et cetera. Those are the areas.
[Translation]
Senator De Bané: Sir, could you tell me what the strengths and weaknesses of Turkey's economy are?
Mr. Isinak: Thank you very much for your question. I will answer in English because it is easier for me.
[English]
Senator De Bané: Please do.
Mr. Isinak: I will start with the weakness. The weakness of the Turkish economy right now is its current account deficit. The majority of the current account deficit is comprised of energy imports. Like I said, all of our neighbours have energy except for Turkey, so that is a big risk. The Turkish government has realized that the only way to cover that gap is through industry, businesses, the economy, et cetera. That is why they are doing an incredible push on that end.
In terms of its strength, it has relationships in a region that still needs to develop, and it has a head start within that region. Georgia, Azerbaijan, Turkmenistan, even Iraq, Syria — when it comes back to its feet — Egypt and Africa are all countries and areas that will look at Turkey at some point in time because we have relationships based in those countries. That is one of the strengths. That is where I think the Canadian businesses can really take advantage because they can leverage those relationships throughout the region. Many companies actually do that in Turkey; many companies set up shop and then jump throughout the region.
However, it is important and sustainable for Canadian companies to get on the ground level. Instead of putting three business development people there, actually do some research and product development. That is the real value.
Senator De Bané: Can you name the five largest export markets for Turkey? What are those important markets at the moment, if you had to rank the first five, which countries?
Mr. Isinak: I do not know specifically which countries. However, I can tell you that Europe has always been one, but the proportion of how important Europe is has been declining. It has been declining not necessarily because Europe is going through a financial crisis; it is because Turkey is opening up new markets all around. The proportion is changing.
There is a tremendous amount of export trade being done into Iraq, for example, and Russia is another one. They are really pushing towards the eastern markets. They see that there is a lot of potential in African markets, as well, and that is one of the reasons all these embassies and consulates are being opened up there. They all have a business mandate.
Senator De Bané: What are the most promising sectors at the moment in Turkey?
Mr. Isinak: I would guess the most promising sectors would be health care, education and telecommunications. Those are the three areas where there is a lot of focus. Aside from that, there is infrastructure because they do require a lot of infrastructure, especially towards Anatolia and the east.
[Translation]
Senator Fortin-Duplessis: I will ask my questions in French. First of all, Mr. Isinak, I was very impressed by your wonderful article in the newspaper. I cannot remember if it was in the Ottawa Citizen, the Globe and Mail or the Toronto Star, but I was certainly impressed.
My first question deals with the relationships you have established between Canadian and Turkish companies. Have you seen foreign investors run into problems when they want to invest in Turkey?
[English]
Mr. Isinak: With foreign investors, are you talking about companies that are trying to go into Turkey and set up shop? Okay.
One of the challenges is culture. You really do need a partner or a joint venture on the ground. That will help secure the right distribution channels, not just in Turkey but eventually across the region. Turkey has an incredibly well- developed logistics sector, so you need access to that. I think the only way to really get access to that — or the most efficient way to get access to that — is through a local joint-venture partner.
The other one was commercial law, which recently was completely overhauled. At this point, there is a lot more transparency, and shareholder protection has been added to the commercial law. Although the judicial system is slow if you have a problem, eventually it will get there. It is not as efficient as Canada, obviously, but eventually your problems will be solved.
[Translation]
Senator Fortin-Duplessis: My second question is on a different topic. Since 2009, negotiations have been pursued, meaning that there have been attempts to try to reach a free trade agreement between our two countries. Of course, an agreement has not been reached yet. But could you tell me with which other countries has Turkey negotiated or is negotiating free trade agreements? Do you know if Turkey has free trade agreements with other countries?
[English]
Mr. Isinak: I know that free trade agreements are being discussed. Unfortunately, I do not know specifically with which countries.
Another thing that I can tell you is that Turkey is trying to have entry visas lifted by a majority of countries. I think over 60 countries now around the world do not require visas for businesspeople to come in and out of Turkey. That is one of the things they are trying to facilitate, specifically with Turkish Airlines growing the way it is.
In terms of the free trade agreement with a specific country, unfortunately I do not know.
Senator Wallace: Mr. Isinak, I think you touched on this in your opening comments and in response to a question. I will refer to it again. It is about this new commercial law that you say has developed in Turkey recently. When you said that, it made me think of the fact that you are involved with bringing Canadian and Turkish business interests together. Canadians have an experience and understanding of how Canadian commercial law works and the kinds of protections both investors and lenders of funds for business purposes have.
Are there significant differences that Canadian companies would experience when doing business in Turkey as far as commercial law is concerned? Would the protection they expect and get in Canada be available to them in Turkey?
Mr. Isinak: The Turkish government has given a mandate to all the different sectors to align themselves with EU law. Whether we will get into the EU is a completely different question, but they realize that an alignment of laws with the EU is beneficial for Turkey.
The commercial law that was recently passed has a lot of the characteristics of the EU law. As well, they are passing a law that will finally define an accredited investor. That is based directly on what the U.S. has, which is incidentally what Canada is basing the accredited investor criteria on as well.
They are trying to internationalize or normalize their laws with that of the EU and North America.
Senator Wallace: I take it from what you say that it is still evolving. For Canadian business investors today who would look to an opportunity in Turkey, in your experience are there significant gaps that cause them uncertainty or might make them reticent to invest in Turkey, or has it evolved to the point that there are, generally speaking, sufficient protections?
Mr. Isinak: I think it is still evolving. A whole new set of laws passed, but they need to be applied. If a Canadian company goes into Turkey and they have the right accounting firm or they hire the right legal representation, they should be relatively safe.
Senator Wallace: You mentioned that Turkey is very interested in intellectual property and businesses involved in technology. Protecting those IP interests is obviously a concern of any company. Are there any concerns that Canadian companies could have about having their IP taken to Turkey?
Mr. Isinak: I believe that the first patent institute in Turkey was established in 1994, so it is a relatively new concept. However, most of the free trade zones and techno parks that I am talking about have put quite a bit of emphasis on IP. Companies, especially large conglomerates, are almost in a race to register new IP.
This is an emerging market and it brings with it emerging market risks. It would be wrong for a Canadian company to assume that they will get the same type of treatment as they do in Canada or the same type of protection. However, that law is, as you said, evolving, and as people know the value of the IP, it is being enforced more and more.
Senator Lang: I would like to turn to trading partners with Turkey. You said earlier that they were diversifying their trade relations by going to Russia and Iraq and to some degree away from the European Union. At the same time, we read from time to time about the negotiations going on with Turkey and the European Union. Would you like to comment on that and what you see for the future?
Mr. Isinak: In my opinion, Turkey has a long way to go to be accepted into the EU. The sentiment on the street for that is very low. Not many people really want the EU anymore. To that end, the government is searching for different markets.
We must realize that looking to the East does not mean looking away from the West. Europe will always remain an important and critical market, but being part of the EU may not be a realistic objective anymore. However, the fact that we are aligning all of the laws and regulations to EU law says that we are actually normalizing with them, so we will get a tremendous amount of value.
Yes, the EU is a driving force in Turkey, and has always been, to push through the reforms. As the middle class grows, they realize the value of normalizing their laws, regulations, et cetera, to international standards.
Senator Lang: With regard to Turkey's judicial system and their bureaucracy, could a Canadian company wanting to do business in Turkey expect to be fairly treated and duly protected in business on a day-to-day basis?
Mr. Isinak: Yes, I believe so. There are thousands of foreign companies — European and American — thriving in Turkey. Turks are very familiar with foreign companies doing business. There are some very established conglomerates as well as some small start-ups.
Bombardier, which has the required resources, can go on their own, but smaller firms should have a trusted partner to ensure that they are treated fairly and there are not any incredible surprises. Remember, it is an emerging market and brings with it emerging market risks, like the BRIC countries. I would say that it would be even more risky to go into Russia.
Senator Wells: Thank you for your informative comments, Mr. Isinak. I have a question about currency stability.
Companies that look to enter a market would like to know if there is currency stability and not high fluctuations. I know that the fundamentals in Turkey are good and that the unemployment rate is reasonable. Can you talk a little bit about the stability of the Turkish lira?
Mr. Isinak: As you know, Turkey has gone through a 70 per cent inflation rate and incredible devaluations. Up until about 2001 they had a massive, almost Greek-style crisis. Since then, one of the mandates of the central bank of Turkey is to keep a stable currency, and they have been doing pretty well. I think the rate is about US$1.78 to the lira, and it has been around that range for some time. As the economy grows, obviously the importance of currency stability grows as well.
In Turkey, businesses, especially foreign ones, do larger business transactions in U.S. dollars and euros, but we do not see that in everyday life. They do that to protect themselves against some of the fluctuations. Overall, one of the central bank's mandates is to keep inflation and the currency levels in check, especially because it is such an export- oriented economy.
Senator Wells: Do you see instances where Canadian companies are missing the boat because there is not an agreement in place?
Mr. Isinak: Do you mean a free trade agreement?
Senator Wells: Yes.
Mr. Isinak: Regardless of a free trade agreement, Canadian companies should engage with their counterparts in Turkey. Obviously a free trade agreement will facilitate a little more trade, but we need to be on that boat. Many Middle Eastern, European and American businesses have already gone to Turkey and become established. Canada should take advantage of that.
Senator Finley: I read that Ford, Mazda and Chrysler are planning to build plants in Turkey. Would the level of subcontracting for these plants, particularly automotive plants, be similar to what we see in Canada where there is a huge network of subcontractors and suppliers? Will Ford, Chrysler and others keep that together? There are 70 million people in Turkey, which is a huge internal driver for retail trade. Could you tell us about the consumer culture in Turkey?
Mr. Isinak: First, I will respond to the automotive question and subcontractors. There are a lot of subcontractors for a lot of different parts. The automotive sector is very vibrant around the Istanbul area and Ankara on the Mediterranean, and they all use subcontractors. I believe it is almost on a par with the Canadian automotive sector. I am not sure what the actual figures are, but it is a significant sector. Over the past year or two, Turkey's prime minister has been pushing some of the industrialists to create a brand for Turkey. There is a significant push to establish their own brand of car, especially on the electric side.
In terms of retail, the Turkish consumer is surprisingly similar to the American consumer with a high consumption rate. As people's incomes rise, we see huge levels of spending, and that creates another potential risk: low savings rates per consumer in Turkey. Turks are very technology oriented, accustomed to change and used to adopting new ways of doing things in terms of retail. There is a great logistics sector in Turkey, so companies that start off in Istanbul or Ankara are able to expand very fast throughout the country. The whole franchise sector is growing as well.
Senator Downe: With the world rushing to Turkey because of the booming economy, large population and geographic location, where is Canada positioned? We have heard from other people that there are irritants in the relationship. In your opinion, where does Canada rank compared to her competitors? What is the reception for Canadians and Canadian companies?
Mr. Isinak: A Canadian CEO does not wake up one morning and say he needs to get into the Turkish market. Interestingly enough, the Turkish CEO does not wake up and say he needs to get into the Canadian market. There needs to be education. It is not for lack of a free trade agreement; it is simply because there is a lack of education on both sides.
Turks view Canadian companies as technologically developed with a lot of engineering and technical expertise that they can bring to their country. That is usually the Turkish view of Canadian companies. That is what they are looking for as well.
Many Turkish companies want to access the Canadian capital markets — the TSX Venture Exchange, et cetera — but once again the formal process is not there.
The Chair: Turkey continues to say that it is the gateway to the East, the South, the North, and everywhere. We hear that from other countries. When Canada tries to engage on the eastern or southern flank of Europe, competitiveness comes into play — the cost of doing business from this distance is often an inhibitor. Unless you have something value- added or unique, it is not where Canadian business can thrive. How do you overcome that competitiveness with those who are nearer to Turkey and can better position themselves?
Mr. Isinak: It is through the joint ventures that you can lower the cost of doing business in Turkey and mitigate a lot of the risks as well, rather than put all your eggs into your own operation. That is what many companies are doing.
Another way to go into Turkey is through a venture capital firm, a private equity firm, or an angel investment firm. Those people are able to connect Canadian companies directly with the right partners or with the right investor. A venture capital firm would be able help a Canadian company acquire the right company at the right valuation. For example, a retailer does not need to open up a brand new franchise with high marketing costs, et cetera, to get into Turkey. There are different ways of entering into this country, and my recommendation is through partnerships for smaller businesses.
The Chair: On the commercial side, is Turkey looking into dispute-resolving formats for business? Increasingly around the world, companies are not waiting for the courts and are agreeing that should a dispute arise, they would go to a commercial forum to resolve their disputes. Is Turkey into that?
Mr. Isinak: Unfortunately, I do not know. It would be a guesstimate if I answered.
The Chair: That is fine.
[Translation]
Senator Fortin-Duplessis. Mr. Isinak, according to a report by the Economist Intelligence Unit from November 2012, the Turkish economy seems to be on track to return to a sustainable growth rate. The forecasts made by the Fitch credit rating agency seem to agree. However, Moody's and Standard & Poor's do not share the same analysis.
Since you have the opportunity to travel to Turkey often, what are the signs that Turkey will reach a sustainable economic growth rate?
[English]
Mr. Isinak: I think Moody's and some of the other credit agencies are looking at the immediate neighbourhood and you are right — the immediate neighbourhood is very volatile. The Arab Spring will not be the Arab summer for some time, for at least another 10 or 15 years. I think that is more where the credit agencies are focusing their attention on.
Where Turkey will be able to get sustainable growth is outside of those markets. That is one of the reasons they are pushing into Africa. That is one of the reasons they are pushing into the Stans — Turkmenistan, Kazakhstan, et cetera. Those are the markets that they hope will be able to counterbalance their immediate volatile neighbourhood. Unfortunately, Europe will be stagnant, so Turkey needs to find new markets — markets that they have not really been into — in order to counterbalance everything. If they can achieve that, they will be able to achieve sustainable growth.
The Chair: Mr. Isinak, you have certainly covered a lot of our questions. We were particularly interested in the Turkish market and Canadian opportunities, and you have covered that for us.
Thank you very much for taking the time to be with us. I trust that you will follow our deliberations and will be available should we need you, but also that you might look at our report in a favourable light when it comes out and that we have in fact taken into account some of the things that you have shared with us today.
Senators, we are adjourned until tomorrow when we will be commencing our study on Bill S-14 and the minister and the department officials will be presenting.
(The committee adjourned.)