Public-private partnership model nets Turkish government-linked firms billions

Key economic policies of Turkey’s ruling Justice and Development Party (AKP) are likely to leave the country burdened with debt for decades to come, figures disclosed in a report by the Turkish Presidency’s Department of Strategy and Budget (CSBB) reveal.

The CSBB data cover on several investment models that have been a defining feature of the AKP’s 17-year rule - hundreds of infrastructure and other showpiece projects – and include the Public-Private Partnership (PPP) model, models that allow private companies to build and then operate infrastructure permanently or temporarily, and a “transfer of operating rights” model.

Even though these models account for just 1 percent of direct public investment in Turkey, many include guaranteed income for investors for periods of up to 25 years. Since this income is fixed to foreign currency rates and paid by the Treasury, the country could well face a grave situation for the next quarter of a century.

Take Victory Airport in Kütahya, western Turkey. The airport was built under the Build-Operate-Transfer model, with terms that set out high projected passenger quotas considering the province’s population. The Treasury is required to pay IC İçtaş, the contractor operating the airport, for every passenger under the quota until the tender runs out in 2044.

For the first five years of the tender, the passenger numbers fell 95 percent short of the quota, netting IC İçtaş 20 million euros from the Treasury.

The same model has been used for projects all over Turkey, including rail, energy, hospitals, and public infrastructure.

The CSBB data deals with the period from 2003, the year the first PPP project was introduced and the year that President Recep Tayyip Erdogan came to power, to the first half of 2018, and is based on a rate of 5.28 lira to the dollar, considerably below the current rate, which is closer to 6 lira to the dollar.

Since 2003, the number of these projects, many of which are worth more than $1 billion, has rapidly increased. In 2010 there were 27 PPP projects up for tender, in 2013 that figure rose to 79.

In total, contracting companies with links to the AKP government have undertaken 238 projects in the models described, all with government guarantees.

While the total amount of investment in these projects has reached more than $63.6 billion, the value of the contracts, taking into account the government’s guarantee, is more than $139.7 billion.

In other words, the government will pay AKP-linked contractors around $76 billion in Treasury guarantees more than it would have spent on these projects if it had undertaken them itself with public funds, or set open tenders for them.

Erdoğan promised that “not five cents” of public money would be spent on the projects, four-fifths of which were for transport and infrastructure. In fact, the Treasury, and thus the taxpayer, will pay more than half of the $140 billion investment to close business associates of the AKP.

At the same time, Turkish citizens will also have to continue paying these companies directly in fares, electricity and gas bills, hospital bills, and transport tolls until the end of their contracts.

Among the projects, many of which were presented to companies thanks to changes to tender law or given to them without going to tender at all, are 89 for energy production and distribution. There were 42 projects to build highways, 22 to build ports, 21 to build hospitals and 19 airports.

The guarantees for these projects are given in U.S. dollars or euros, meaning that the weakening lira has increased the damaged to the budget with each passing year.

So, while 6 billion liras was set aside for guarantees for this type of project in 2018, that amount rose by 40 percent in the 2019 budget to 9.6 billion liras. It is already clear, given the lira slide this year, that that amount will not suffice to cover the bills this year.

In the first four months of the year, the deficit figures came to 54.5 billion lira, an amount already close to the 80.6 billion-lira target set in the budget for the whole year. The guarantee payments have clearly paid a significant role in that.

With the preliminary memorandum for the 2020 budget due on July 1, it is already widely expected that the amount set aside for the guarantees will exceed 20 billion lira.

With Turkey embroiled in a diplomatic crisis with the United States over Ankara’s purchase of Russian S-400 missile defence systems, and the possibility that U.S. sanctions will drive the lira further down after a year of heavy fluctuations, there is a fair chance that the guarantee payments could double or even triple next year.

Turkey’s economy is stuck with the heavy burden of these payments for decades, and since it seems there is no way to avoid them, coming generations will be left to deal with the huge debts this government has accrued.

The lira’s slide has already had such an impact on Turkey’s economy that even contractors that have reaped the benefits of the PPP system are now looking for ways out of the Treasury-guaranteed projects. The Italian firm Astaldi is looking to sell its shares in the new Yavuz Sultan Selim bridge in Istanbul, while the AKP-linked contractor Kolin is trying to turn over its shares in the new Istanbul Airport project.  

The airport, which fully opened in April, is proving to be a millstone around the necks of all involved. The latest word from economic circles is that the consortium of companies that built the airport is finding it difficult to pay the annual 1 billion euros rent thanks to the lira’s slide, and has asked the government to delay payment for the first two years until the end of the 25-year operating period.

The AKP-linked companies are now seeking to delay payment of rent for the projects they have undertaken. In the case of an economic crisis, the same companies could well announce that they are unable to pay their creditors, leaving the Treasury, which has guaranteed the loans taken to complete the projects, with yet more of a burden.

If so, the state will be forced to nationalise the airports, bridges, hospitals and power stations built under the PPP model. At that point, the person asking who was responsible for a system that has seen $140 billion spent on projects that could have been completed with $63.4 billion will be the judge in a court of law.

© Ahval English

The views expressed in this column are the author’s and do not necessarily reflect those of Ahval.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.