Turkish contractors face bankruptcy, but pro-govt magnates continue to thrive

In the last 48 hours four Turkish construction giants with decades – in one case a half-century – of history have filed for bankruptcy protection. These were Palet Construction, a firm founded 52 years ago, Ceylan and Nuhoğlu, each more than 30 years in the business, and Nafia.

Ninety percent of Palet’s tenders are for public projects, worth a combined total of 660 million Turkish lira ($107 million).

Ali Babacan, the ruling Justice and Development Party (AKP)’s longest-serving deputy prime minister for economic and financial affairs, gave the plainest description of the problematic period faced by the construction sector in a searing piece of self-criticism in 2014, before leaving the party.

“Without producing anything ourselves, without earning it, we are using credit secured from abroad for luxury construction projects, shopping malls, luxury accommodation ... before long this is going to land Turkey in trouble,” said Babacan.

In fact, the gurus behind Turkish President Recep Tayyip Erdoğan and the AKP governments’ economic model based on construction, tenders and rent-seeking were found at none other than McKinsey, the U.S. consultancy firm employed amid much criticism last week to oversee Turkey’s economy.

McKinsey published an economic strategy report on Turkey in 2003 titled “Making the productivity and growth breakthrough,” and Erdoğan’s government began to implement its recommendations from March that year. Growth rose by 8.5 percent over the next decade, national income doubled, and jobs were created for more than 6 million people.

The construction sector was the backbone of McKinsey’s strategy, which recommended a rapid increase of funds for construction, infrastructure and particularly the housing market, the creation of a market for long-term mortgages and the establishment of an independent national body to regulate them.

It also advised the government to establish the necessary mechanisms for this system in the banking sector, to develop suitable plots of land for the coming construction, to provide government support to encourage new projects, and to remove legal obstructions preventing the construction of shopping malls.

The AKP has followed this plan to the letter, to the extent that even Erdoğan has been forced to admit that the rampant construction has barely left any green space in Istanbul besides cemeteries.

Public works, including what even the president calls “crazy” infrastructure projects, have been put out to tender under models that allow the contractor that builds the work to also manage it for a set period, during which time the government guarantees a certain level of income, often far higher than that generated by the project on its own.

The large incentives offered by the government to construction firms that won tenders for public works under these models means the Treasury is obliged to pay $35.5 billion to these firms over the next 20 to 30 years.

The fact that construction giants are now queuing up to file for bankruptcy protection is the clearest sign that the McKinsey model held to since 2003 has collapsed.

Turkey’s troubles have proven contagious even for foreign firms, such as the Italian construction company Astaldi, a firm active in Turkish public projects that was forced to seek bankruptcy protection due to Turkey’s economic maelstrom this year.

Astaldi had attempted to sell its 33 percent stake in the Yavuz Sultan Selim bridge in Istanbul, but, unable to do so, had to return to Rome to seek comprehensive credit protection to cover its global debt, worth $2.3 billion.

Together with its Turkish partners İçtaş, Astaldi has been guaranteed a daily income by the Turkish Treasury for 10 years for the bridge, equal to the value of fares – set at $3 plus tax – for 135,000 vehicles.

When the bridge opened in 2016, the lira rate was 2.95 to the dollar, and with tax that made 9.90 lira. Since then the lira has fallen to around 6 to the dollar.

When it made its application for bankruptcy protection, Astaldi told the court in Rome it was unable to find a buyer for its share in the bridge, which it had planned to sell to cover its debts, due to Turkey’s economic crisis and the lira’s loss in value.

In the end Goldman Sachs bought the Italian firm’s $2.3 billion debt. A plan will be prepared, aiming to begin debt repayments in 2020. And the Turkish Treasury, thanks to its deal with the crippled firm, will still have to pay hundreds of millions of dollars over the next 10 years.

Bear in mind that Astaldi is part of several other consortiums that owe Turkish banks worth billions of lira in debt incurred during the construction of bridges, motorways and the 1.1 billion lira Ankara Etlik City Hospital, another project guaranteed an income from the Turkish Treasury.

Even if a procession of firms like Astaldi collapse, Erdoğan’s administration will have to keep paying billions of euros and dollars from Turkey’s Treasury for decades, thanks to deals that have saddled the country with debt to construction firms for generations.

While the rest of the construction sector undergoes a severe crisis and case after case of bankruptcy, only a small handful of companies enjoy the protection of “privileged” projects worth more $35 billion that run according to the AKP’s public-private partnership and tender operation models guaranteeing a long-term income.

Companies like Cengiz Construction, Limak, Kolin and Kalyon, with close ties to Erdoğan, have become spectacularly rich thanks to this model, having worked on lucrative high-profile public projects including the third airport in Istanbul.

A handful of other construction companies including Rönesans, YDA, Akfen and Türkerler have been handed dozens of city hospital construction projects worth billions.

In other words these companies are sitting pretty with these projects, the debts for which are guaranteed by the Treasury. The motorways, hospitals, airports and other projects they will run after constructing them are guaranteed an income in dollars or euros for 20 to 30 years.

While a great many Turkish construction companies are being forced to seek bankruptcy protection as the lira slides, inflation soars and prices of cement and steel double or triple, the money flowing to firms with government contracts guaranteeing foreign currency income rises day by day, and is virtually clearing out the Treasury.

And while Erdoğan put out legislation in September prohibiting contracts in foreign currencies, the government has ignored the opposition’s calls for this to be extended to the contractors close to the president that are making a killing thanks to the guaranteed income.

This is why the government’s favoured business magnates such as Murat Ülker, Ferit Şahenk and Ali Sabancı can afford to lead spectacularly wealthy lifestyles, swapping their older private jets for the latest model, all backed up by the Turkish Treasury.

Meanwhile, as the Turkish Contractors’ Union leader Mithat Yenigün said in comments to Ahval, the rest of the country’s construction sector is forced to face the pain.

Contractors had been expecting the government to take action to ease the sector’s problems, particularly related to price differences caused by the weakened lira. They have been hoping for more than a year for a “liquidation decree”, which would save companies that do business with the government from bankruptcy, but no such moves have materialised. In fact, many have been unable to claim their payments due for public projects.

“Our members who have carried out public works in Turkey have not been able to collect payment for a long time. The state and public institutions have halted payments ... The problem is growing from two sides. We are taking serious losses due to the loss of value of the lira and its effect on prices, and at the same time we aren’t receiving payment for our work,” said Yenigün.

Thanks to Turkey’s 25 percent interest rates, among the world’s highest, it is unfeasible for struggling businesses to take out credit to keep themselves afloat, he said.

Turkey’s foreign policy and the regional instability and diplomatic crises that have marked recent years have also taken their toll on the sector.

Turkey’s income from overseas contracts swiftly rose from $2 billion in 2004 to around $30 billion in 2015, but thanks to Turkey’s downing of a Russian jet that year, combined with the loss of income due to conflict and instability in Libya, Iraq and Syria, much of that income was lost, said Yenigün.

Despite the resumption of friendly relations with Russia, that figure is not likely to exceed $20 billion this year, and Turkey’s attempts to find replacement markets in sub-Saharan Africa are hampered by financing problems and stiff competition with China, he said.