7 February 2011 | By James Swift
The last time The Lawyer covered the Turkish market in its Special Reports (8 February 2010), the country was rebounding, very promisingly, off the back of a torrid few years.
Optimism pervaded the market and rumours abounded that the country’s potential was not going unnoticed by international firms.
“It’s going to be a very interesting year for Turkey,” said Ismen managing partner Tolga Ismen at the time. “There’s a lot of interest from international firms; a lot of senior partners are spending a lot of time here talking to clients and lawyers.
“My colleague says that, if he put a penny aside every time he heard about a European firm wanting to come to Turkey, he’d have a house by now.”
That might have been an exaggeration. In fact, saying that he would have had enough money for a stamp would probably have been an embellishment - but the sentiment behind it proved accurate, and in 2010 four international law firms opened offices in Turkey.
And so it begins…
DLA Piperwas the first to establish a presence. Last February it tied up with 45-lawyer Istanbul firm Yüksel Karkin Küçük (YKK) after hiring the former US ambassador to Turkey Marc Grossman as a senior adviser. The country’s bar rules still prohibit foreign firms from opening directly and foreign lawyers from appearing in court, so outsiders must form alliances with local firms and work on a consultancy basis.
DLA Piper, which has already been involved in the Turkish market for some time, is advising the Turkish Ministry of Health on the $250m (£157.45m) Kayseri Integrated Health Campus PPP. Its association firm, YKK, was formed in 2006 after partners from some of Turkey’s top firms - Birsel Law Offices, Hergüner Bulgen Özeke, and Pekin & Bayar - left to start a new practice.
Next came Kinstellar. The firm entered the market in June last year through the creation of local firm CCAO. The new firm is registered as a separate entity but is financed by Kinstellar and will work out of the same office as the Linklatersspin-off, collaborating on local law matters.
CCAO was founded by Halide Cetinkaya and Gamze Cigdemtekin. Cetinkaya was head of project finance at Paksoyand Cigdemtekin a partner in White & Case’s Istanbul office.
“To operate a law firm in Turkey there’s a number of regulatory hoops to jump through, but these are no more onerous than in a number of other countries where we operate,” says Charles Dunn, managing partner of Kinstellar’s Istanbul office. “More fundamentally, we’re confident that the future of the Turkish economy’s bright, and having an office in Istanbul suits our strategy.”
Schoenherrformalised its relationship with Turkoglu & Celepci in September 2010. The Austrian firm, which has offices across Central and Eastern Europe (CEE), had been working with Turkoglu, which was established in 2005 and focuses on corporate, finance and litigation work, since 2007.
“Many of our existing clients decided to go to Turkey and simply want to take the knowhow our lawyers have about their business and industry with them, and working on a referral basis simply doesn’t ensure this sufficiently,” says Markus Piuk, head of Schoenherr’s Turkey office. “Additionally, some of our Turkish clients, such as Turkcell and Hedef Alliance, told us a while ago that having firms with regional coverage of CEE also present in Turkey would be highly appreciated by them and many of their peers. So we made the move and apparently many of our competitors in the region felt the same way.”
Finally, in November 2010, Clifford Chance announced its intention to launch in Turkey in cooperation with Yegin Legal Consultancy (YLC). In doing so it became the first magic circle firm on the ground there.
Clifford Chance had been working with YLC since 2009. Head of YLC Mete Yegin established the firm in July 2009, before which he was a lawyer at Pekin & Pekin, one of Turkey’s most established practices.
“We felt the time was right to open in Turkey because our clients were telling us to do it,” says Simon Williams, the Clifford Chance finance partner who heads the Turkey office. “We’d already been doing a significant amount of work in the country through our partners in Germany, London and Paris, but clients were saying, ’What about the Turkish law side?’ So we brought in some good people, and we’ve launched in the country hand-in-hand with our Turkish associate firm.
“Also, Turkey has a growing economy and stable political environment, and we’re seeing encouraging signs from the capital markets too. There’s a huge amount of interest in infrastructure projects and how to get them finance, and this all combines to make an interesting offer.”
“We felt it was an opportunity to develop more business than we’d get by operating outside Turkey,” reveals Nicholas Wong, a finance partner based in Clifford Chance’s Paris office. “By being on the ground in Brazil we’ve managed to get work we’d never have been able to get if we weren’t there. It’s the same for Turkey.”
Clifford Chance’s move is probably the one launch that is likely to have a ripple effect among the domestic firms. According to one local partner, a few of the country’s top players previously enjoyed a healthy stream of referrals in banking from the magic circle firm.
But the consensus from local lawyers is that the entrance of four new firms has not affected them. There is plenty of work to go around for everyone, they argue, and the presence of Denton Wilde Sapte, Gide Loyrette Nouel, Salans and White & Case, which have all been in Turkey for a number of years, has not been too disastrous for them. And a few more foreign players will not change that situation.
The continuing trend for younger lawyers to spin off from the established firms is far more disruptive, they say.
“We’re seeing more and more young people leaving law firms either to form their own firm or join an international firm such as Kinstellar,” says Umut Kolcuoglu, managing partner at Kolcuoglu Demirkan. “For instance, the largest law firms in Turkey are still the largest, but whereas in 2007 they would have had more than 100 lawyers, now they have around 70. The market’s balancing out and I think we’ll see more spin-offs.”
“As a firm we’ve been in the Turkish legal market for 46 years and what I can see now is that there’s a growing number of law firms here,” says Fadlullah Cerrahoglu, founding partner of Cerrahoglu Law Firm. “There’s a growing interest from international law firms to have some kind of presence here, which is linked to the growing economy. But also there’s been a lot of spin-offs from law firms, with younger lawyers opening new law firms.
“It’s happened in the past too, but not as frequently as it does today. It could be related to the lack of partnership opportunities at established firms, but the other reason is that younger lawyers want to be independent. And what we feel [at the established domestic firms] is that growing tendency for competing with the fees. But my colleagues in Germany and France say that, more or less, the same thing happened in their countries 15 years ago.”
The pace of change in Turkey is quickening. Its economy grew by around 8 per cent in 2010, and the turbulence among lawyers and law firms is a consequence of a vibrant market.
Full steam ahead
“Despite the slowing effect of the coming elections, we’re expecting a busy year in 2011,” says Mehtap Yildirim Öztürk, a partner at Ankara-based White & Case associate firm Çakmak Avukatlik Bürosu. “Especially in privatisation and PPP projects. The financing market’s becoming more active too. Last year the Turkish economy was one of the best performers in the world and it’ll grow more.”
The interest of international firms in Turkey is a reflection of the interest in the country generally from investors. Such is the demand from foreign investors that the Central Bank of Turkey has had to take the step of cutting interest rates to reduce yields and stem the flow of ’hot money’ (cash intended only as a short-term investment) into the country. It is feared this flow of cash could have a destabilising effect on the economy.
“People are looking for greater returns and are going to the emerging markets,” says Kinstellar’s Dunn. “This raises the question of whether it leads to rising price levels and the creation of bubbles that could burst. And the authorities want to stop that - they want to grow steadily and not blow up.”
In spite of the country having to take preventative measures to curb the amount of short-term investment, some believe Turkey could still do more to maximise its attraction for foreign investors.
Jose Fernandez, US assistant secretary for economic, energy and business affairs, said at a lunch on 26 January organised by the Turkish Confederation of Businessmen and Industrialists that Turkey had turned into a “crucial financial actor”.
Fernandez added that investment from US companies could grow if the country improved its legislation. “Turkey should focus on improving legislation regarding starting a business, closing a business and incentives for attracting foreign investments,” he argued.
It already is. On 14 January 2010 the Grand National Assembly of Turkey adopted the draft Commercial Code, which will enter into force on 1 July 2012 and which is designed to make the country more appealing to foreign investors. The code will replace a statute that has been in effect since 1957. A new Code of Obligations has also been passed to regulate contracts.
“There’s a new Commercial Code and Code of Obligations in Turkey and it changes everything,” says Yildirim Öztürk. “Among the changes the new legislation will promote the use of electronic communication by companies, further transparency and corporate governance. The law’s based largely on the German model, but also includes bits and pieces from other jurisdictions.”
“I think the government’s very sensitive and understands very well the importance of foreign investors,” says Metin Somay, a principal lawyer at Somay Hukuk Bürosu. “We have an agency that purely focuses on foreign investment in Turkey and the prime minister’s always told them, ’If there’s any problems, you can always knock on my door’.”
Once the Commercial Code is in effect public companies will be required to have websites and include information such as financial tables, audit reports and board reports. Company directors can be punished with up to six months in jail if information, which must be published under the new code, is missing.
Also, joint stock companies will be able to have just a single shareholder, meaning that foreign companies will no longer have to enter mandatory partnerships.
The Turkish parliament has also approved an amendment to its energy laws, introducing feed-in tariffs, and has guaranteed prices and incentives for renewable energy projects. It is a sector that so far has only contributed a small amount to the country’s voracious consumption, but is also one that is expected to grow as the government tries to wean itself from its dependence on foreign oil and gas. The country’s energy minister Taner Yildiz has said the act could prompt as much as $30bn of investment into wind-powered projects.
Foot on the gas
“There are a lot of [renewable energy] projects being planned,” says Yildirim Öztürk. “I was reading a 10-year forecast for Turkey’s energy market and even in the best-case scenarios, after 2015 we’re expecting a shortfall of between 5 and 7.5 per cent in energy between demand and supply. Even if the projects being planned are all completed we still expect this shortfall. So we’re expecting a lot more work in this area.”
The amendment to Turkey’s energy law was first sent to parliament almost two years ago, but at best has received a lukewarm reception. On the one hand, the certainty that comes with the feed-in tariffs will certainly be a welcome change for foreign investors, but the rates are not as high as some would have liked.
“The new energy law was published at the beginning of the year,” says Yildirim Öztürk. “But the incentives offered in the act weren’t satisfactory to investors. This law was the subject of discussion for over a year. What it does is bring in new incentives with respect to renewable energy projects and provides guarantees on prices for projects to be completed by the end of 2015. So we’re expecting a boost in the market.
“Another incentive in the law gives further developers a better price if electro-mechanical, or other parts used to build power stations, are produced in Turkey. I think this will lead to more production in the country.”
The new law became effective on 8 January 2011 and replaces a flat-rate tariff of between 5 euro cents (3p) and 5.5 euro cents per kilowatt hour (KWh), with rates of 7.3 dollar cents per KWh for hydroelectricity and wind projects, 10.5 dollar cents per KWh for geothermal, 13.3 dollar cents for biomass and biogas and 13.3 dollar cents for solar power.
“It’s safe to say that the changes have been met with a disappointing reaction because the market was expecting higher prices,” says Pekin & Pekin senior associate Ceren Su.
Not everyone believes that the new tariff rates are a disaster, however.
“That’s only a floor price, and developers can elect to go into that scheme or sell into the balancing market or the day-ahead market, which they’re piloting in April,” says Wong at Clifford Chance. “So these are floor prices that don’t necessarily cap your profit.
“Is it disincentivising investment? I can’t help think that it will limit solar projects. But if you look at hydroelectricity and wind, I can’t see it limiting investment.”
And there’s more…
For both international and domestic firms, however, the renewable energy market is only a small part of the work.
M&A in Turkey is alive and well, so much so that according to one Turkish lawyer “foreign investors don’t even want to hear about the risks on deals - they’re just anxious to do the transactions, and I’ve seen people concede things in negotiations I would never have before”.
And once Turkey’s general election is over in June, privatisations and PPP projects should pick up too. Not to mention the Turkish companies, mostly in construction, that are going abroad.
By all accounts, most expect a banner year from Turkey this year. Fortunately, then, it looks as if Ismen’s colleague will be able to supplement the collection of pennies he puts aside every time he hears of a new international firm coming to the market with something more substantial.