Turkey: Turkey Introduces Sovereign Wealth Fund

Last Updated: 6 September 2016
Article by Şahin Ardiyok and Müfit Arapoğlu

Legislation providing for the establishment of a Turkish Sovereign Wealth Fund (SWF) is approved and promulgated in the Official Gazette (the Law)1. Starting from the late 1990s many countries adopted the SWF Model. According to the Sovereign Wealth Fund Institute, United States, Japan, Norway, China, United Arab Emirates and Kuwait are some of the countries with the highest ranking SWFs today2. Turkey was previously known for being the only G-20 country without a SWF.

SWFs are funds that operate under state control and aim to increase revenue by investing in various financial assets. These funds mainly rely on budgetary surplus as resources. In case a certain country has a surplus in the budget, the country is accepted to have four different options for the allocation of such amount. It can increase expenses, lower the tax load, subject its debt to early payment or establish a wealth fund and transfer the surplus amount to the fund. It can purchase national or foreign financial assets via this fund and provide prosperity for the future generation.

There are two ways in which a SWF can be established. The fund can either be established within the body of the Central Bank or as a separate corporation. Following the first path can seem more favorable as Central Banks are inherently experienced in managing their own reserves. In addition, Central Bank being an independent body, gives the assurance that activities of such fund will be executed isolated from any political concern. Moreover, a separate company may encounter criticism until it achieves tangible success.

According to the Law, the Turkish Wealth Fund (Fund) is to be launched and managed by a corporation named Turkish Sovereign Wealth Fund Management Incorporation (Company) which will be operating under the Prime Ministry. The company was registered by the Trade Registry Office following the entry of the Law into force. The company will be operating within a wide field of activity and is expected to take into consideration the objectives set forth in the strategic investment plan and preferences of liquidity, investment, risk and yield. In this context the company will be conducting the purchase and sale of the shares of domestic and foreign companies, shares and debt instruments owned by issuers established both in Turkey and abroad, capital market instruments, fund shares and derivative instruments, lease certificates, real estate certificates, specially designed foreign investment instruments and other instruments. The company will also execute all kinds of money market transactions; utilize real estate, rights based on real estate and any incorporeal rights. The company is also responsible for project development, generating project based resources, developing external project loans and performing all kinds of commercial and financial activities. These activities are to be conducted in the national and international primary and secondary markets. The company is also entitled to establish and manage subsidiary funds in case deemed necessary.

Capital and resources of the Company

The Company's initial capital is TL 50 million (around 17 million USD) which is covered by the Privatization Fund. The company is now publicly funded but is expected to generate resources of its own in time. Resources of the company include: Institutions and assets within the scope of the privatization plan and cash surplus of the Privatization Fund to be transferred to the Fund by the High Board of Privatization; income surplus and resources of state institutions and organizations to be transferred to the Fund by the Cabinet; funding and resources procured from domestic and foreign capital and money markets by the Fund. The Fund will also be utilizing resources obtained by methods outside of the capital and money markets. Additionally, while providing financing to the Fund warranty, pledge, surety and mortgage may be established over the assets (portfolio) of the Fund. However, the assets of the Fund cannot be provided as guarantee or pledged, seized, subject to interim injunction, included in the bankruptcy estate, except for works and transactions regarding the operations to which the Fund and sub-funds are authorized.

Auditing procedure

The auditing procedure will be conducted within the scope of the Capital Market Law. The company, other companies to be established by the Company, the Fund and other subsidiary funds will be audited by an independent auditor rather than the Court of Accounts. Financial statements and activities of the Company, Fund and the subsidiary funds will also be audited by at least three central auditing specialists to be appointed by the Prime Minister. The report will then be submitted to the Cabinet by the end of every June.

Exemptions

The Company, the Fund and the subsidiary funds to be established are exempt from income and corporation taxes as well as tax deductions and any down payment liabilities. Companies and funds established within the scope of this legislation are also not subject to regulations and restrictions regarding institutions, organizations and partnerships whose majority capital is publicly owned or is established by special legislation.

Objectives of the Turkish Sovereign Wealth Fund

SWFs are investment funds enabling various public assets to be managed in line with certain corporate governance compliance rules. These funds serve as a pool in which state resources are collected under state control. Likely, the Company to be established by the new legislation is by all means subject to the Turkish Commercial Code. However it is a public corporation which holds a special status and is exempt from many liabilities. This special structure is needed for the Company to realize its economic objectives.

The Fund aims to consolidate many resources enabling them to be transferred to the real sector as long term investments. One of the main objectives of the Fund is to eliminate possible financing issues that may be faced regarding megaprojects - such as Canal İstanbul, Third Bridge and Airport, Nuclear Power Plant - and contribute to the development of the capital markets which will ultimately eradicate the dominancy of the banking system. The Fund is ultimately expected to contribute an extra 1.5% to the rate of growth within the next ten years. Utilization of Islamic finance entities is also intended by the establishment of the Fund.

The Fund is also expected to act as a stabilizing factor where there is extreme economic fluctuation caused by increasing financial risks and decreasing liquidity in the markets. The existence of the Fund will increase Turkey's credibility and visibility on the international stage by establishing an environment of trust. Consequently, domestic firms will attain the opportunity to turn into global players in technology intensive fields such as defense, software and aviation.

Footnotes

1. Official Gazette No. 29813, 26.08.2016.

2. http://www.swfinstitute.org/fund-rankings/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Şahin Ardiyok
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