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FY 1999: Turkmenistan |
CHAPTER VII: INVESTMENT CLIMATEOpenness to Foreign Investment
Turkmenistan is now in a stage of development where foreign investment is needed in all areas of activity. The government has introduced a number of laws to attract foreign investment. The Law on Foreign Investment, amended in 1993, provides a legal framework for foreign investment protection and promotion. Also, since 1993, Turkmenistan has introduced the concept of foreign concession in the Law on Foreign Concessions. According to this law, foreign concessions can be granted for onshore and offshore areas containing natural resources; separate fields with natural resources; industrial enterprises that explore, develop, extract and use natural resources. Concessions are given on a competitive basis for from 5 to 40 years. Since the March 1997 passage of a new Law on Hydrocarbon Resources, the government has been actively courting large energy multinationals to participate in the development of Turkmenistan's large oil and gas reserves (through production sharing agreements and as minority joint venture partners).
Turkmenistan is in the process of privatizing its agricultural sector and industrial enterprises. The minuscule service sector was privatized immediately after independence in 1991 but constant- ly changing regulations and tax laws restrict the ability of local entrepreneurs to expand their operations. While foreign investment, especially in the agriculture processing industry, is encouraged (primarily through joint ventures), the government has to date been unwilling to relinquish control of enterprises in that field. The government still controls all inputs, access to irrigation and equipment, pricing, transportation, and inter- national markets.
Turkmenistan tries to introduce competition in state contracts by announcing international tenders for some projects. However, the GOTX still lacks the technical and financial expertise to manage tenders. In most cases to date Turkish companies have either become advisors to a resulting joint venture or won the tenders. One notable exception is the Israeli company "Merhav", which has earned the GOTX's confidence and become a primary advisor on such large-scale projects as the Turkmenbashi oil refinery reconstruction and Seidi refinery upgrade. Sometimes, when the World Bank and/or EBRD were involved, the government hired international consultants to provide advice on project tendering.
Previously, trade contracts were granted for purely political reasons, with little regard for feasibility, economic viability, or the ability of the winning company to do the job. Competition remains an alien concept for many government officials who wish to retain control over all aspects of the economy. The President makes the final decision to award a contract, and some are still awarded for political rather than economic reasons. The Competent Body for Hydrocarbon Resources under the President has been authorized to conduct international tenders on the development of oil, natural gas, and mineral resources in Turkmenistan.
Turkmenistan and the U.S. have not negotiated either a bilateral investment treaty or a bilateral tax treaty. According to the profit tax law, foreign investors must pay a 25% profit tax; a 15% tax on income from dividends, interest, copyrights, licenses, leases, royalties, and other income earned in any sector of the economy; and a 6% tax on income from international cargo transport.
The Law on Foreign Investment states that investors who hold more than 30% of hard currency shares in an enterprise's capital fund are exempt from dividend tax. Enterprises are not required to pay the profit tax until the investors have received a full return on their original investment. Additionally, those who reinvest their profits are exempted from tax payments on the reinvestment capital. Customs duties are not charged on foreign investors' imported property if it is designated for production purposes or considered part of the enterprise's capital fund.
The Value Added Tax Law requires foreign and domestic enterprises to pay a 20% tax on the volume of goods and services sold. Investors in the oil and gas sector must pay a 25% profit tax plus a negotiable royalty sum.
Conversion and Transfer Policies
According to the Foreign Exchange Regulation Law, non-residents may freely convert the national currency, the manat, to hard currency without limitations or unreasonable delays provided the necessary amount is needed to pay for transactions made with Turkmen residents. The law also permits non-residents to repatriate capital goods previously imported into Turkmenistan provided such goods were declared to customs upon entry.
There are no license requirements for obtaining hard currency. A company may apply to a commercial bank to cover the amount of money to be converted with the following documents:
-- an application indicating the amount of hard currency to be purchased and the expected foreign exchange rate; -- a trade contract where payment terms envisage either payment for actual shipment of goods or letter of credit (contracts where prepayment terms are envisaged are not considered); -- a customs declaration confirming cargo availability; -- a banking document confirming currency availability in either local or foreign bank accounts.
The commercial banks licensed to deal in hard currency submit their applications for money convertibility to the Interbank Foreign Exchange (IFE). In September 1996, the Central Bank introduced certain criteria that are taken into consideration by the IFE when it provides hard currency for conversion into manats. These criteria establish priority preferences for con- vertibility when foreign exchange is needed for:
-- investment activity; -- the purchase of raw materials, equipment, spare parts, and other materials involved in production; -- debt payment on foreign credits and other commitments made on the basis of international agreements; -- contracts signed by the state commodity and raw materials exchange or other ministries and state organizations, provided the contracts are approved by the Cabinet of Ministers.
For legal entities and physical persons that are non-residents in Turkmenistan, the Central Bank also limits convertibility of manats deposited at bank accounts to the amount received from sale of goods imported into Turkmenistan.
Since 1996, the foreign exchange rate has remained relatively stable at 5.100-5.300 manats to the dollar and hard currency has been more freely available on the market. On April 13, 1998, the Central Bank announced the GOTX's decision to eliminate the dual exchange rate system, replacing it with a single, unified exchange rate. The single exchange rate is determined through a weekly interbank currency exchange auction. The rate changes depending on demand and supply.
Expropriation and Dispute Settlement
Turkmenistan's outstanding investment disputes have three common themes: non-payment of debts, non-delivery of goods or services, and contract renegotiations. Turkmenistan's unfamiliarity with international commercial norms means that contract terms and definitions must be spelled out in great detail. However, even taking these precautions has not prevented the government from reevaluating signed contracts and insisting on renegotiation of profits, management relationships and payment schedules. In the past, if the individual Minister or Deputy Chairman of the Cabinet of Ministers who signed the contract was replaced, all contracts signed by that individual were subject to reexamination. As yet, there is no track record for contracts approved by the State Agency for Foreign Investment (SAFI). To date, the govern- ment has not expropriated property.
There have been a number of disputes between U.S. investors or sellers and the government. All of these disputes are linked by the government's decision not to honor signed contracts as originally written. Almost all involve the Ministry of Agri- culture and the Ministry of Oil and Gas Industry and Mineral Resources.
Currently, there is no legal system in place to effectively enforce property and contractual rights. Therefore, disputes must be worked out directly between the Turkmen government and the investor.
Turkmenistan is not a member of the International Center for the Settlement of Investment Disputes or the New York Convention of 1958 on the recognition and enforcement of foreign arbitration awards. However, most contracts negotiated with the government do have an arbitration clause.
Performance Requirements/Incentives
There are no consistently applied performance requirements imposed on foreign investors as a condition for establishing, maintaining, or expanding investment, or for access to tax and investment incentives. The only requirement is that construction contracts with foreign companies must include provisions allo- cating 30% of the contract value to local contractors. The French company "Bouygues", involved in such large construction projects as the Presidential Palace and the Palace of Congresses in Ashgabat and mosque in Geoktepe, was exempt by the GOTX from this requirement. All contracts with foreign participation must be registered with the Chief Tax Inspectorate.
There is no requirement for local sourcing or exporting specific percentages of output. Each contract is different and depends on the sector and the political climate when the contract was negotiated. Thus far, primarily because there are few private enterprises in Turkmenistan, a government partner has been included in all joint ventures and joint stock companies.
Right to Private Ownership
The Law on Ownership adopted in 1993 states that the right to ownership of all forms is recognized and protected by the state. The law defines three categories of private ownership: by physical persons; by legal persons; and mixed private ownership based on incorporation of properties belonging to physical and legal persons. The law also addresses the right to ownership of joint ventures with participation of foreign citizens and the right of private ownership of foreign citizens and persons with- out any citizenship. Foreigners have the right to own any property except for land. The law passed in December 1996 re- garding distribution of land for private ownership allows foreign citizens to lease but not to own land. Turkmen citizens are eligible to own land but cannot sell, exchange, or transfer it.
In March 1997, the government issued a presidential order and three presidential decrees allowing privatization of industrial enterprises through the auctioning of small- and medium-size enterprises, the creation of joint stock companies for large enterprises, and the investment tendering of those industrial enterprises requiring capital for reconstruction and moderni- zation. The order permits Turkmen and foreign companies and citizens to participate in privatization on an equal basis.
The GOTX auctions enterprises that have fewer than 100 workers and do not need significant investment. As of January 1, 1998, 1,869 small- and medium-size enterprises had been turned over to the private sector. About 81% of the firms were bought by labor collectives of these enterprises and 18% were purchased through auctions. According to official government statistics, about 68% of entities that have been privatized are small service firms, and 28% of entities are trade enterprises. Only 4% of entities are industrial, transportation, or construction enterprises.
Larger state enterprises with more than 100 workers and signifi- cant assets will be transformed into private joint stock companies. The process of creating joint stock companies is still in its infancy and requires the creation of investment funds, a stock exchange (perhaps), and other organizations to handle a securities market. Foreign investment could bolster this process. The World Bank, European Community, USAID, and the United Nations Development Program are among the organi- zations assisting the Turkmen government in carrying out this privatization effort. According to the State Property and Privatization Administration, so far, only one medium-size state enterprise, the Maksat-Deri firm engaged in leather production in Mary, has been transformed into joint stock company. About 0.1% of the company's shares were bought by the labor collective and 99.9% were put for sale to the public.
Another presidential decree dated January 14, 1998, authorized the SAFI to handle issues related to the transformation of 18 large industrial enterprises into open joint stock companies. Among these enterprises are enterprises under the Building Material Production Ministry, the Irrigation and Water Resources Ministry, the Textile Ministry, the Energy and Industry Ministry, and the State Food Production Association.
Since most of the enterprises that are being privatized require investment for production modernization, and state financing of private investment projects is not easily accessible or provided at high interest rates, the privatization rate has slowed down noticeably. Lack of financial resources is only one difficulty. Others include non-sustainable and underdeveloped legal basis for the development of entrepreneurship; shortage of skilled auditors, managers and consultants; and lack of leasing services.
Protection of Property Rights
The Law on Ownership provides guarantees and protection of the right of ownership. The Law on Foreign Investment states that foreign investments in Turkmenistan are not subject to nationali- zation and requisition and foreign properties may be confiscated only through referral to a court when illegal actions are under- taken by the foreign investor.
On September 30, 1993, the government adopted the Law Concerning the Protection of Scientific Research. In addition to this law, on October 1, 1993, the government passed a patent law that regulated copyrights for technical inventions, innovative pro- posals and trademarks in the industrial sector and, on June 25, 1993, established the Patent Agency under the Cabinet of Ministers. The Patent Agency provides state policy for protection of industrial property rights, establishes the single patent system, and issues protective documents for inventions, industrial samples, and trademarks.
There is no requirement to register with the patent agency, but there are some advantages to applying for a patent in Turkmenistan. A patent document issued in Turkmenistan gives a company exclusive rights to use a particular innovation, trademark, technology, etc., including the right to forbid another company from using it in Turkmenistan. Furthermore, according to the patent law, a company holding a patent in Turkmenistan is given favorable tax status provided that: an innovation is used in a company's own production; an innovation license was purchased by the patent holder; an innovation is used after a license has been purchased by the patent holder; and a new machine or piece of equipment was made based on a patent innovation. The Cabinet of Ministers deter- mines the form and size of the favorable tax treatment.
The Law on Foreign Investment guarantees the protection of intel- lectual property of foreign investors including literary, artistic and scientific works, software and data bases, patents and other copyrighting for inventions and industrial samples, technology, commercial secrets, and trademarks. Article 8 of the April 1993 most favored nation agreement between the U.S. and Turkmenistan provides for favorable treatment of copyrighted materials. The agreement envisages Turkmenistan's accession to the Bern Convention of 1971 for the protection of literary and artistic works and creation of a working group on intellectual property matters. To date, Turkmenistan has not joined the Bern Convention and the working group has not been established.
On January 19, 1995, Turkmenistan signed the World Intellectual Property Organization's (WIPO's) 1883 Paris Convention on the Protection of Industrial Property rights and the Treaty on Patent Cooperation. Turkmenistan has also joined the Eurasian Patent Organization that was created as part of the WIPO for the CIS countries.
The new Civil Code puts into legal effect the main concepts of a market economy including protection of property rights and copy- rights. The concept of a mortgage has been also fixed in the new code but the mortgage system does not yet exist in practice. A part of the code addressing copyrights protects interests of copyright holders. However, there is no Copyright Agency controlling the law enforcement and, presently, such articles as videos, cassette tapes and literature have been freely copied and sold. That said, some observers have noted a recent decline in the availability of pirated video tapes. Given the small size of Turkmenistan's market, losses to U.S. IPR interests remain low.
Transparency of the Regulatory System
Having no expertise to judge competing bids fairly and accurately and desiring to maintain strict control over all economic tran- sactions, the government sometimes creates impediments to investment. Personal relations with government officials often play a decisive role in winning a bid or running a successful business in Turkmenistan.
The Law Concerning Hydrocarbon Resources has shown some signs of creating a more transparent policy in the oil and gas sector. This law provides a detailed legal framework for conducting oil and gas business in Turkmenistan. Under this law, three types of licenses can be issued on the basis of tender results or direct negotiations: an exploration license, an extraction license, and a single exploration and extraction license. Two types of agreements can be signed for oil production: a production sharing agreement and a joint venture agreement. A few foreign companies had already begun operations by signing production sharing agreements in the oil and gas sector. The government expects more foreign oil and gas companies to come to Turkmenistan in the near future. For this purpose, a new program on licensing projects on oil and gas exploration and production for 1998-1999 was approved by the President on July 23, 1998. The program addresses formation of the transparent investment environment for foreign investors interested in development of hydrocarbon resources in Turkmenistan.
The 1997 privatization order and decrees are the government's attempt to outline the basic principles of Turkmenistan's privatization process and procedures and to make them publicly accessible. Although no one can predict the true impact of these laws and presidential decrees, they appear transparent and attractive.
Efficient Capital Markets and Portfolio Investments
There is no private capital market in Turkmenistan. There are several state investment funds created to accumulate and reinvest hard currency for the oil and gas industry and mineral resources, agriculture, telecommunications and transportation, and healthcare and medical industry sectors. None of these funds is permitted to issue securities for public distribution. These investment funds work closely with the SAFI and Vnesheconombank, the primary fiscal agent of the government for foreign investment and import/export projects.
There are 300 joint stock companies in Turkmenistan which, in practice, cannot fully benefit from the right to issue stock. In 1993, the Law on Securities and Stock Exchanges was adopted. According to that law, securities must be registered with the Ministry of Economics and Finance and can be bought or sold through the State Commodity and Raw Materials Exchange (SCRME). However, although the Central Bank and some commercial banks have attempted to issue government and commercial bonds, the low buying power of the population and the distrust of local banks have made such transactions unpopular and not commercial- ly lucrative. So far, about 120 issues of securities and bonds amounting to more than 1 trillion manats (about $200 million) have been registered in Turkmenistan. State bonds and securities can be obtained from authorized commercial banks such as Turkmenvnesheconombank, bank "Turkmenistan," Investbank, bank "Rossiysky Kredit," bank "Bereketly," and Sberbank (saving bank). Currently, the legal and accounting systems which date from Soviet times are not transparent or consistent with international standards.
Development of the securities market will depend on the success of the privatization process. The presidential decrees regarding the creation of joint stock companies on the basis of state industrial enterprises and the sale by auction of small- and medium-size enterprises has determined rules for and a range of entities that are subject to privatization. Foreign and Turkmen investors may become shareholders in these companies provided that the Cabinet of Ministers approves the percentage of their shares in the companies' foundation capitals.
The U.S. EXIM Bank may now consider short- and medium-term coverage for projects in Turkmenistan without a sovereign guarantee. A number of American companies have used EXIM Bank funds or guarantees to finance their export or investment pro- jects in Turkmenistan. Local firms, in theory, have access to credits from local commercial banks, but to date these banks have made few loans to private businesses. The Central Asian- American Enterprise Fund (CAAEF) and the European Bank for Reconstruction and Development (EBRD) have both opened credit lines for Turkmen private enterprises.
Political Violence
Turkmenistan is politically stable. There have been no inci- dents of politically motivated damage to projects or in- stallations. There is no organized political opposition and there are no nascent insurrections. Turkmenistan maintains friendly relations with all of its neighbors (including Iran and all parties in Afghanistan). It is unlikely that civil disturbances will occur in the near term.
Corruption
Turkmenistan does not have laws, regulations or penalties to combat corruption effectively. High-ranking government officials have been replaced ostensibly because of corruption but most have never been formally charged with a crime. Violent criminal organizations, found in other NIS countries, are not operating in Turkmenistan, but organized drug distribution and prostitution are becoming increasingly pervasive.
U.S. firms have identified widespread government corruption, usually in the form of bribe requests, as an obstacle to investment and business throughout all economic sectors and regions.
Bilateral Investment Agreements/OPIC Programs
Governments of Turkmenistan and the U.S. began negotiations on a bilateral investment treaty, but talks were suspended in early 1994. In early 1998, the GOTX expressed its interest in renewing the talks, but preparations for commencing negotiations are only at the very initial stage. Turkmenistan has also expressed interest in signing a double taxation treaty with the U.S., but to date no discussions have taken place.
Turkmenistan has signed an agreement with the U.S. Overseas Private Investment Corporation (OPIC). However, due to the very slow development of the private sector in Turkmenistan, the OPIC program has yet been used.
Labor
As of January 1, 1998, Turkmenistan's population was 4.7 million. There are 2.325 million people of working age, 81% of whom are able to work. in 1997, 44.2% of the working population was employed in state enterprises and organizations, 25.5% in peasant amalga- mations (former kolhozes and sovhozes), 3.2% in dayhan farms (family-owned private farms), 3.8% in private enterprises and cooperatives, 0.3% in public organizations, 0.3% in joint ventures, 18.9% in subsidiary small-holding, and 3.8% self- employed.
Turkmenistan has Soviet style professional unions; their role is very limited. The government is concerned about unemployment and underemployment. To avoid unemployment while beginning mass privatization, the government has retained the right to control employment in privatized enterprises. The provision on degovern- mentization and privatization of state industrial enterprises states that the Ministry of Economics and Finance is authorized to mandate minimum quantities of workers that must be maintained by new owners of privatized enterprises for a specified period of time.
The Law on the Legal Status of Foreign Citizens in Turkmenistan permits foreigners to reside permanently in Turkmenistan if they have government permission and a residence permit issued by the police. Unless otherwise specified by law, foreigners can be employed based on the same rules and regulations governing Turkmen citizens' employment in the country.
A 1997 presidential decree created "labor exchanges" or employment offices. The labor exchanges are designed to operate as self- sustaining entities under khakimliks (mayors' or governors' offices in each city, district, or region). The labor exchanges maintain a data bank on vacancies available in various state organizations and enterprises and register people looking for jobs. Ministries and organizations should hire from the list of those who have registered at a local labor exchange. As of January 1, 1998, there were 34,145 people registered with labor exchanges in Turkmenistan.
The normal workday in Turkmenistan is eight hours and the standard work week is 40 hours. The minimum age for employment of children is 16; in a few heavy industries it is 18. Labor law prohibits youths aged 16 through 18 from working more than 6 hours a day and then only with the permission of the trade union and parents. During the cotton harvesting season, teenagers often work in the fields. Turkmenistan joined the International Labor Organi- zation in 1993.
Foreign Trade Zones/Free Ports
There are ten free economic zones in Turkmenistan including: Mary-Bayramali, Okarem-Cheleken, Chardjou-Seidi, Bakharden- Kizylarvat, Dashkhowuz Airport, Ashgabat-Annau, Ashgabat- Bezmein, Ashgabat International Airport, Serakhs, and "Guneshli Turkmenistan" near Annau. The first seven zones were created in 1992, and the Serakhs zone was established in 1996 after construction of the Serakhs-Meshed railway. two more zones, the international airport zone in Ashgabat and the "Guneshli Turkmenistan" zone near Annau, were created in 1997.
The current Law Concerning Free Economic Zones in Turkmenistan was adopted in 1993 and amended in 1994. The law determines the legal regime for conducting business in these zones. It guarantees the rights of both foreign and domestic investors, forbids nationalization of enterprises and discrimination against foreign investors, and provides guarantees to foreign investors for repatriating after-tax profits and exporting production. There is no limit on profits a company may earn. Enterprises are permitted to set prices freely for all goods and services in the free economic zones. All enterprises are exempt from profit taxes for the first three years of profitable operation. Enterprises with foreign investment greater than 30% will be charged a 50% profit tax during the next three years and 30% during the next 10 years. Profits reinvested in export-oriented and technically advanced enter- prises are exempt from taxation.
However, so far the free economic zones are not fully operational. A lack of government financial support, under- developed infrastructure, and an embryonic private sector have resulted in very slow movement in commercial and business activity in all free economic zones with the exception of the Ashgabat Airport zone. This zone has a modern airport facility that allows it to develop transit cargo deliveries, trade, and services.
Foreign Direct Investment Statistics
Among the major foreign traders and investors doing business in Turkmenistan, Turkish construction firms rank as the most active. According to the Turkmen press, in 1998, more than 150 construction projects estimated at $3.6 billion are being carried out in the country. The largest projects (70% of the total) are in the oil and gas, textile, and food production industries. Out of the $3.6 billion, 10.9% is foreign direct investment. The Mayor's office in Ashgabat also coordinates numerous projects for reconstruction of the Turkmen capital. French and Turkish companies have undertaken the major con- struction projects in the city.
To date, investment from the U.S. has for the most part been limited to the energy sector. According to the "Neutral Turkmenistan" newspaper, the joint venture of Monument Oil (UK) and Mobil Oil (USA) has invested more than $40 million in developing the Burun oil field. Another U.S. company (American Communications Consultants, Inc.) has invested $8.1 million in a soap production factory in Chardjou.
Turkmenistan's official 1997 statistics on construction pro- jects with foreign investment reported the following projects: -- Norsel (Turkey) invested about $40 million in construction of a cotton knitting factory in Khalach, a textile complex in Kipchak, and a weaving factory in Bakharden; -- Ahmet Chalik Group (Turkey) invested $53.8 million in con- struction of a textile plant in Ashgabat; -- Engin Group (Turkey) invested $6.9 million in a textile plant in Mary region; -- Gap-Turkmen (Turkey) invested $41.5 million in a textile complex in Ashgabat district; -- Agip Swissital (Italy) invested $30.7 million in construction of a sock production mini-plant in the village of Tagta, yarn production and dying shops in Chardjou, and a soda production plant in Gaurdak; -- Siemens (Germany) invested $12.4 million in upgrading the South Kamyshldja oil and gas field; -- Nikisi (Iran) invested $152 million in construction of the Korpedje-Kurt Kui gas pipeline.
Among the successful foreign companies working in Turkmenistan, Turkmen newspapers list such companies as the German "Mannesman", "Siemens" and "Alcatel;" the French "Centrocommerce International" and "Bouygues;" the Israeli "Merhav;" the Turkish "Alarko," "Mensel" and "Emperyal;" the British "John Laing" and "Monument Oil;" the Malaysian "Petronas;" the American "Unocal," "Mobil," "Western Atlas," "John Deere" and "J.I. Case;" and the Japanese "Chiodo" and "Nichimen."
Note: Turkmen officials generally blur the line between trade and investment. Few of these companies are "investors" in the sense of having an equity share in a local enterprise.
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