One of the best-selling English-language books on Turkish politics is Turkey Unveiled by Nicola and Hugh Pope. Any updates may make them question the title. On February 9, Meclis (the Turkish parliament) voted through constitutional changes lifting the ban on wearing headscarves in public universities by 411 votes in the 550-seat house. To get the required two-thirds majority, the ruling Justice and Development Party (AKP) controversially depended on the support of the ultranationalist National Action Party (MHP), the third largest group in parliament. What was in it for the MHP has not yet been revealed.

While opinion polls say the move is supported by more than 60% of the electorate, the headscarf has been a point of bitter contention between Islamists of all stripes, and ardent secularists, who include the influential army and the largest opposition party, the Republican People’s Party (CHP), which traces its lineage back to Ataturk. For those in favor of lifting it, the ban was an elitist law which prevented the devout from going to public universities, entrenching the social and economic divisions that have been an (often unspoken) reality for much of Turkey’s modern history. For those that support the ban, there is an array of anxieties. Some fear that girls who prefer not to wear the headscarf will be subject to peer pressure to do so. Others worry that it may be a step down the road to blurring the absolute separation of mosque and state. There are even some who view it as the harbinger of restrictions on other behavior, such as drinking alcohol.

The headscarf ban is seen by many as a guarantor of the secularism of Turkey’s educational system.  Furthermore, the symbolism of headgear in Turkish history should not be underestimated. Founding father Kemal Ataturk famously banned the fez because of its Oriental connotations (giving European milliners the perfect chance to offload their unfashionable, unsold homburgs). Ironically, the fez had been introduced to Turkey to replace the turban by the modernizing Sultan Mahmud II.

Security is not threatened

However, the more ardent secularists may prefer not to mention the fact that the constitutional articles just repealed were not laid down by Ataturk at all, but by a military junta in 1982.

The day the vote to lift the ban passed there were no security incidence — and certainly none of the “chaos” predicted by a headline in Turkey’s best-selling newspaper, Hurriyet. Protests were vocal — but small — compared to the demonstrations held by secularists last year, when Prime Minister Recep Tayyip Erdogan was reported to be considering contesting the presidency.

As Erdogan pointed out, with oblique reference to Hurriyet’s headline, while tensions are running high over the headscarf issue, compared to other moments in the republic’s history, the law has passed largely without disturbance.

Prophecies of a return to the street warfare and political killings that bedevilled periods of the 1970s were unlikely, given that the two groups involved this time — moderate and conservative Islamists on one side and secular, social-democratic middle-classes on the other — are less prone to violence than the far-right “Grey Wolves” and student radicals of 30 years ago.

Erdogan has repeatedly stressed the AKP’s commitment to secularism and pluralism. “Nobody will force anybody to cover [her head] in this country,” he said on February 17, 2008. “If such things happen, we will fight against this with all of our institutions.”

The somewhat muffled response to the actual passing of the amendments may indicate that the opposition has largely conceded defeat. The AKP’s economic record has robbed the CHP and others of the opportunity to attack its competence. The timing of the headscarf issue was no accident. More than that, and given public support for lifting the ban, the opposition risked looking more and more like an out-of-touch elite from the big Western cities. It must now look for other battles to fight, perhaps looking at where the AKP has had more limited success, such as in eliminating pockets of poverty in some areas, and moving forward on EU accession.

Even before its crushing defeat at the polls, there was a consensus forming that the CHP’s leader since 1992, Deniz Baykal, very briefly (four months) deputy prime minister and minister of foreign affairs in the mid-1990s, should step aside. Some new blood (and new arguments) in the CHP could help it regain its pre-eminence, and recent events may hasten even the limpet-like Baykal’s departure.

Meanwhile the alliance over February’s Meclis vote and the recent military incursion into Iraq has taken the wind from the sails of the ultranationalists of the MHP, though the party will want its pound of flesh for supporting the AKP. The government, for the meanwhile, looks stronger.

Another reform — or change, depending on how it is viewed — the AKP is keen to push through is an overhaul of Turkey’s system of local government. Currently, the country is divided into 81 provinces, which are then subdivided into municipalities and city municipalities. The government proposes increasing the minimum size of a municipality, and giving more independence to provinces. The government would devolve control of education, healthcare and religious affairs to provincial level.

Istanbul’s administrative reform

Istanbul currently contains more than 70 local administrative units, making a complex mosaic, which, some say, leads to a somewhat inefficient method of government in a country which has only recently thrown off the slight that it is ungovernable. Thus the national government has drawn up plans to consolidate some of the districts, particularly those in which the population has changed considerably in recent years. While these plans appear to make administrative and democratic sense, some allege that they are designed to gerrymander Istanbul’s electoral districts in favor of the AKP in the run-up to the local elections.

Perhaps most controversial is the proposed division of the municipality of Kadikoy on the Asian side of the Bosphorus. Kadikoy is a bastion of the opposition Republican People’s Party (CHP), the second largest party in parliament, and renowned for its staunch secularism. It also has a large population of members of the Alevi sect of Islam. Alevis as a whole have been staunch opponents of the AKP, accusing the party of Sunni chauvinism and attempts to co-opt them into neutered community organizations.

Opponents of the Kadikoy split say that the government is trying to dilute the CHP’s effective vote by dividing it between AKP-dominated areas. Furthermore, there are fears about the proposed move of the central bank headquarters to the district from Ankara, which critics say will lead to the establishment of a financial district overwhelming the residential area. An unspoken concern for the CHP may also be that AKP voting bankers will move to Kadikoy and the surrounding suburbs. The proposed local government reforms have been almost drowned out of the news agenda by the headscarf issue, which is indicative of the symbolic importance of the latter in Turkish politics.

Another area that could be affected by these events is Turkey’s application to join the European Union. In 2007, progress slowed considerably. One of the main issues was the suspension of several “chapters” of negotiation over accession by the EU due to Turkey’s refusal to open its ports to ships registered in the Republic of Cyprus; the opposition of France’s President Nicolas Sarkozy, amongst others, has been another blow. There has also — indeed, consequently — been a significant weakening in the Turkish electorate’s support for accession; a majority are now opposed, according to most polls.

EU membership

Partly perhaps due to the symbolism of the headscarf question, the government has vocally restated its commitment to EU membership, with President Abdullah Gul declaring 2008 “the year of Europe,” a call echoed by some of the Cabinet.  “Turkey cannot turn back from the point we have reached in regard to civilization, modernization and Westernization,” said Meclis speaker Koksal Toptan, the second ranking official in Turkey’s state hierarchy and an AKP moderate. “There will be no change here. Turkey cannot give up on its target of membership of the European Union, which is part of its Westernization and modernization process,” he added.

There may be AKP internal politics at play here. There are rumors that Erdogan is losing enthusiasm for the European project. Gul, on the other hand, though previously seen by some as Erdogan-lite, is portrayed as staunchly pro-accession. Whether this is a sign of factions developing in the previously impressively united and disciplined AKP, or a case of “good cop, bad cop” is uncertain. But despite enthusiasm from Toptal and EU chief negotiator Ali Babacan, traction on European accession will be minimal without movement on Cyprus. Greek Cypriot voters unceremoniously turfed out the hardline President Tassos Papdopoulos in the first round of the presidential elections. That could have paved the way for a thaw in the iceberg dividing the two parts of the island. The accession to the Greek Cypriot post of the Communist Demetris Christofias after the second round of polls on February 24 could have eased the way to some progress, though he could scarcely be described as enthusiastic for reunification, despite his most recent words. Not wholly negative is perhaps a more fitting description. In any case, Erdogan may well have made the concept academic. Lifting the headscarf ban and under suspicion of trying to fix local administrative reform in his favor will hardly endear him to opponents of Turkish entry into the EU. The Turkish prime minister appears to have bigger domestic fish to fry and observers could be forgiven for thinking that his own enthusiasm for accession has sunk to the same level as that of the European Turkosceptics.

PETER GRIMSDITCH is editorial director at the Oxford Business Group.

With private finance still in its infancy in Syria, private equity has yet to get up and running, but the foundations are being laid for a sector that could be as hot as elsewhere in the region.

Spearheading the direction private equity could take in Syria are holding companies, which were introduced to the market over a decade ago by the likes of former Lebanese prime minister and businessman Rafik Hariri.

But it has only been in the past few years that holding companies have started coming into their own, spurred on by the economic reforms implemented since the death of Hafez al-Assad.

The de-regulation of the finance and banking sectors has been the most crucial change, creating a more competitive financial environment as well as prompting businesses to pull up their socks and adapt to the new climate.

“Holding Companies are a new concept entering the terminology here,” said Dr. Nabil Sukkar, managing director of the Syrian Consulting Bureau for Development and Investment. “Businessmen are thinking of setting up holdings, but don’t know the benefits and what it’s all about.”

New Company Law

Indeed, holding companies were not mentioned in Syrian law until 2000, in Law No. 7, which allowed for special tax treatment, and the recently enacted New Company Law has a section on holding companies.

Two Syrian holding companies are at the forefront of this fledgling sector. Souria Holding was established by 24 investors in early 2007, with a capital of $80 million, and is behind the entry of international supermarket chain Spinneys into Syria.

The biggest venture, Cham Holding, was established with a starting capital of $360 million by 70 Syrian investors, with business moguls Nabil Kuzbari the president and Rami Makhlouf the vice-president. (How last month’s decision by the US Treasury Department to freeze Makhlouf’s assets in US financial institutions, as well as prohibiting US citizens and firms from engaging in any business contacts will impact on Cham Holding remains to be seen.)

With the management largely consisting of repatriated Syrians who have had professional experience in the Gulf and the West, the company’s mantra is to “lead the private sector into the new era,” said Bahaa Issa, British-Syrian head of communications.

Part of this involves — as always — the creation of a brand identity to put Syria back on the international business map.

“Our vision is to be at the head of the train of the new economy, and we want to position ourselves as the opportune delivery system for the Syrian economy,” said Issa.

Cham Holding is focusing on six industries, including: BENA, for hospitality and property development; the Cham Capital Group, for finance and banking, capital finance and insurance; SANA for energy and power generation; health and education; and a new private airline Cham was recently granted a license to operate, Pearl Airlines.

According to Issa, Cham Holding plans to “create 50,000 jobs in the next five years, which would indirectly create 600,000 job opportunities.”

Since its launch in 2006, Cham has entered into a raft of strategic partnerships and joint-ventures. In December, it inked a $5 million partnership with British-US company Gulfsands Petroleum, which works in the US, Syria and Iraq. Cham has a 65% controlling stake, with the aim of acquiring high-value energy projects in Syria, and possibly Iraq.

In addition, Cham has entered into a joint-venture with three Kuwaiti firms to tender for large utilities and other infrastructure contracts in Syria, and is reportedly in discussions with Siemens to establish a ‘clean-coal’ power station. Encompassing projects valued at over $1 billion, Cham is also behind the Hejaz Railway station shopping mall, which has yet to get off the ground despite the foundations being dug more than two years ago, reportedly due to resistance from heritage groups.

More than greenbacks

Cham is bringing more than greenbacks to Syria, acting as consultants to the government and striving to introduce corporate governance and regulatory compliance through its own example.

“Compared to Dubai the challenges are tremendous,” said Mohanad Moussly, chief Risk and Compliance Officer. “Here the government is working with the mindset that the public sector is the best provider of services to the public, and to go into critical areas of industry. This mindset is changing, but public sector employees are hesitant about change.”

Holding companies as well as private foreign banks in Syria are hopeful that the upcoming Damascus Stock Market — which was slated to open in the first quarter but looks more likely to start later in the year or early 2009 — will spur on greater de-regulation and attract further capital to Syria. That will also include the entry of private equity firms.

Currently, there are few firms capitalizing on the opening of Syria’s economy. The UAE’s SHUAA Partners, a private equity arm of SHUAA Capital, has however invested $100 million in Syria, to enter the mobile telecom sector.

“We want to invest more in Syria. We have $100 million to deploy in equity and more than just equity when you factor in leverage. We want to go into three markets in Syria:  telecoms, financial services, and real estate/hospitality,” said Jamil Brair, SHUAA Partner’s senior vice president.

For the time being, Syria has further to go before there is a more profound entry of venture capitalists, private equity firms and the like, but holding companies are giving an idea of the direction a more capitalist Syria will resemble.

Fitting in to what appears to be the private sector’s modus operandi when investing in Syria in the wake of economic reform, private airlines are only this year taking to the skies, three years after the law had been amended. In 2005, Damascus allowed private investment in air transport for the first time in 60 years, during which the national carrier, Syrian Arab Airlines (SAA), enjoyed a monopoly.

But it has only been in the past six months that the private sector has started to capitalize on the liberalization of the market, with Damascus granting licenses to three private Syrian airlines, of which Sham Wings is the first to get underway with a charter flight to Sharm el-Sheikh in early February of this year.

This seemingly cautious approach to investing in Syria reflects the banking sector’s trajectory into the market, only setting up shop years after private banks were formally allowed into this formerly socialist economy. But the recent flurry of activity in aviation is indicative of the changes the economic reforms in Syria have brought about, with the time lag between the liberalization of the sector on paper and actual developments on the ground creating the conditions for a more viable aviation industry.

Rising tourism numbers

“The main reason for us to set up was the rise in tourists and Iraqis in Syria,” said Salim al-Sawda, technical director of Sham Wings Airlines, which was established by Iraqi and Syrian private investors.

In the past three years, investment in the tourism sector has surged from $400 million in 2004 to $2 billion in 2006, while the number of tourists visiting Syria has spiked from 2.5 million in 2005 to 3.1 million in 2006, according to the Central Bureau of Statistics. And if Iraqis and Lebanese were to be included in the figures, the number of visitors would stand at 4.4 million in 2006, versus 3.4 million in 2005, a rise of 29%.

Indeed, with an estimated 1.4 million Iraqi refugees in Syria there is a ready market for air links between Damascus and Baghdad, which until February had been dominated by Iraqi Airways (IA). Now Sham Wings offers flights, directly competing with IA at $567 return (due to high insurance costs at the Iraqi end).

Sham Wings, the country’s first charter airline, has started with one aircraft, a 147-seater McDonnell Douglas MD-83 leased on an ACME basis from an Egyptian company, that way getting around the US ban on the Syrian aviation sector.

The airline plans to buy aircraft “one by one,” said Sawda, and is currently in discussions to by a European-made Folker-100 jet. “We have already increased our timetable, not only to Iraq, but also Sharm el-Sheikh and Alexandria, and we will open a new line to Istanbul, as well as to Ukraine and Belarus. Our destinations will be ones not covered by Syrian Airways.”

The airline, which plans to be profitable within the next two years, is to be joined this year by Syrian al-Nisr Airlines (The Eagle), established by Syrian private investors Al-Harith al-Assad and Mayyar Arnous, and by Pearl Airlines, which is backed by Syria’s Cham Holding. Both airlines have been granted international licenses but have made no statements on intended destinations.

Other licenses are also pending, for cargo, charter and non-charter airlines, said Flight Commander General Hazim al-Khadra, director general of the Syrian Civil Aviation Authority.

“The policy of Syria now is to open the market in the field of aviation. But there is no Open Skies Agreement, only to Bassil al-Assad Airport in Lattakia, as we cannot do it at Damascus International Airport (DIA) since we must have more than one national carrier that can compete with other airlines, let alone the capacity of the airport itself,” he said.

Airport expansion

With the number of tourists visiting Syria increasing by 20% in the past year, and foreign investment flooding in, the country’s airports are witnessing a turnaround, with a 10.5% increase in passengers to 3.485 million last year.

According to al-Khadra, “This is a result of the action plan drawn by our leader, Bashar al-Assad, towards the development and rehabilitation of modernizing Syria.”

As part of the country’s second five-year plan for the 2006-2010 period, some $3.75 billion is forecast for infrastructure developments in the transport sector. Much of this is earmarked for port and road development, but aviation is also getting a much needed boost.

In January, Malaysia’s Mahibbah Engineering won a $59 million construction contract at the DIA to rehabilitate and upgrade the passenger terminal building, roads, car parks and parking apron.

This is just the start of major projects to expand the ageing airport, said al-Khadra, with plans on the drawing board to increase DIA’s current capacity from 1.5 million to 3.5 million passengers a year. “With the next fifth action plan there will be another terminal, catering to 7-8 million passengers, maybe in the next five years.”

The number of international airports is also to be increased, from the current five — Damascus, Lattakia, Aleppo, Deir al-Zor and Qamishle — to eight, with Homs, Tadmur (Palmyra) and Al-Raqqa to get airports of their own.

Al-Khadra said bids and tenders to build and upgrade facilities would be open to international bidders, and there was potential for ground services at the airports to be privatized, pointing out that “This all depends on the development of the economic situation in Syria. Nowadays, Syria values investment from everywhere.”

The number of airlines operating out of Syria could also increase from the current 40 that fly out of Damascus, but that is all “related to the political situation in the region,” according to him. “For instance, European and American airlines are not allowed to operate out of Syria. This is a consequence of the US ban against Syria.”

The US ban on Syrian aviation is one of the biggest hurdles the sector faces, not only in terms of increasing flight destinations and enticing operators, but in particular for the national carrier. Under the 2003 Syrian Accountability and Lebanese Sovereignty Restoration Act (SALSA), Washington placed a ban on all US exports to Syria, a ban on US investment in the country, and a ban on Syrian flights to the US, among other regulations. Under such sanctions Syrian Airlines is unable to upgrade its ageing fleet of Boeing and Airbus aircraft, last added to over a decade ago when in 1996 the US granted a special waiver to the airline to purchase used Boeing aircraft from Kuwait and two Airbus A320s in 1998.

“It is a big problem because US aviation interferes with the aviation industry, the spare parts for commercial airlines in particular, which maintain the safety of passengers. And these passengers aren’t only Syrians, but also Europeans, Americans, Asians and so on,” said al-Khadra. “Even Airbus is included in this ban as they cannot sell Syria any Airbus aircraft or spare parts because the Americans are between 10-15% shareholders in these companies.”

The other option for SAA is to buy Russian aircraft, but he said they lacked the American-made Airborne Collision Avoidance System (ACAS), which is essential for air safety and a requirement for commercial aircraft by the International Civil Aviation Organization.

Diversifying Syria’s air sector may therefore be the only way to get around the crippling US bans, for unless SAA gets spare parts, the airline could be permanently grounded — if planes don’t actually fall from the sky — as private Syrian airlines take to the skies.