In defence of Turkey

By bne IntelliNews December 9, 2011

Patrick Wrigley in Istanbul -

Kurtkoy, on the Asian periphery of Istanbul, is a disjointed, unnerving suburb - a location that Istanbullus drive past but very rarely visit. A semi-rural building site, situated on barren hills sprouting brightly-painted residential tower blocks, it is the sort of place that would leave the uninitiated wondering whether this is a development newly deserted or one yet to be finished.

An overspill for Istanbul's rapid population growth, the area near Istanbul's second airport, Sabiha Gokcen, is the location for a new technology park centred on the defence industry, which the government hopes will create 30,000 jobs, generate $5bn in annual revenues and fill up these middle-income apartment blocks that currently sit half-empty.

Teknopark Istanbul, whose construction began with much fanfare earlier in November, is being touted in the local press as the future "silicon valley of Turkey". While this is enough to set alarm bells ringing and to dismiss the project as another over-hyped headline in the hinterland of Istanbul, the project has the full force of the government and military establishment behind it.

Founded by the Undersecretariat for Defense (SSM), Istanbul Chamber of Commerce and Istanbul Commerce University, the tax-exempt zone could come to stand as a symbol of government attempts to place the defence industry at the heart of Turkey's economic growth over the next decade.

During the last election campaign in May and June of this year, Prime Minister Recep Tayyip Erdogan, whose Justice and Development Party (AKP) won a third term at the ballot box, made three high-profile speeches on the defence industry. Unusual in itself, Erdogan's claims that the country would have full self-sufficiency in defence technology by 2023 raised many eyebrows. As election campaigns are often seen as the silly season in Turkey, when politicians offer promises they know they can never fulfil, it was not hard to dismiss this as posturing, an attempt by Erdogan to shore up his nationalist and military credentials.

However, many analysts believe that this is indeed an honest ambition. "I don't think it [defence] plays a large role in Turkish national politics - I don't think people care if Turkey builds its own drones or jet fighter," says Cenk Sidar, managing director of the consultancy and advisory firm Sidar Global Advisors and the former director of defence services at the American Turkish Council. "I think it is a smart move of developing coherent integrated industries from IT and software to manufacturing. I think it's smart to put it at the centre of Turkish economic development to see how to benefit other sectors."

Recent trends do suggest that the defence industry is becoming an increasingly important component of Turkey's economy. Total revenues in the sector have been increasing continuously, jumping from $1.72bn in 2006 to $2.73bn in 2010, according to the Defense Industry Manufacturers Association. Exports have also been moving upwards with SSM expecting them to reach $1.5bn in 2011.

The focus on bolstering local production in the defence industry is certainly in keeping with the AKP's policy of championing local projects and national products. In the auto-manufacturing sector, for example, there are also plans to move from simple assembly to the production of Turkey's first locally designed and manufactured automobile, by the Bursa-based company Karsan.

The government has been pushing self-sufficiency in the defence industry for some time, and in 2004 the government-owned Turkish Aerospace Industries (TAI) signed an agreement with SSM to begin work on a domestically designed and produced Unmanned Aerial Vehicle (UAV), or drone, known as the Anka. The technology is considered key in the government's fight against the outlawed Kurdistan Workers' Party (PKK), which has been waging a war against the state in the south-east of the country since 1984.

Recent tensions with Israel have made this investment even more crucial, given that its former ally used to be Turkey's main supplier of the drone technology. According to Sidar, "Israel was important for technology transfer. It was very difficult to purchase specific technology from the US because of congressional approval and Israel was an easy solution for Turkey. The technologies Turkey wasn't able to get from the US were being dealt through Israel with US support."

The domestic drone programme will, therefore, be crucial in the longer term to bridge this shortfall.

Shooting for more money

The most pressing question is how Turkey will achieve this eagerly sought-after self-sufficiency, given the limitations of financing and home-grown capacity and expertise in the sector. External aid for the defence industry has declined precipitously. For example, between 1982 and 1992, the US granted Turkey $3.3bn in military aid, in 2011 this figure is expected to be less than $6m.

For a country with the second largest army in Nato, the question of funding is going to remain crucial. While the government budget for defence increased by 7.6% in 2011 to $11.3bn, representing 1.4% of GDP and 5.4% of the total government budget, according to the Turkish defence ministry, Yakup Evirgen, a retired army colonel and independent defence consultant, believes that there is increasing pressure on military and defence spending. "During the AKP's rule, the national income of the country has increased so the total budget to the defence industry has increased, but the rate of increase compared to the other sectors has decreased," he says.

Indeed, military spending in Turkey as a percentage of GDP has declined from a high of 5.4% in 1999, according to figures from the Stockholm International Peace Research Institute (SIPRI).

However, it is clear the government believes that it can bolster state-owned companies such as TAI and ASELSAN, a government-owned company specialising in electronics and communications, to meet the military's future requirements. According to Sidar: "The main companies are state companies owned by the military, so it is also a strategic move by the government. I'm sure they will be transferring funds to these companies for growth."

According to Evirgen, this is the only possible option. "The Turkish government has to support these projects because they won't be supported by the private sector, because investing in these projects is very costly requiring high capital input and delayed payments. They are not really feasible areas for investment," he says.

Government support to the sector will, therefore, be important, but it won't necessarily equate to success in meeting targets. "There are good steps towards self-sufficiency in areas such as artificial intelligence and software systems - more than just putting pieces together," says Sidar. "But I think self-sufficiency will be very difficult, not only for Turkey but for any developing country."

As such, while projects like Teknopark Istanbul could one day lie at the heart of a hi-tech Turkish defence industry, it is likely to be some time before Kurtkoy is talked about in the same breath as Palo Alto.

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