Turkey’s Treasury guarantee costs for infrastructure projects skyrocket with dollar hike

The Turkish lira’s continued devaluation against the U.S. dollar has increased the Treasury’s costs to cover guarantees for several infrastructure megaprojects in Turkey, finance expert Kerim Rota said on Saturday.

On Friday, the dollar dropped to a record low of 7.37 lira, slightly recovering to 7.15 lira later in the day. However, the downward trend is expected to continue, which in turn will increase the Treasury’s costs.

In recent years, the Justice and Development Party (AKP) employed a public-private partnership model for many infrastructure megaprojects – including hospitals, highways and bridges.

Contracting firms were handed tenders that allow them to operate the public infrastructure projects they construct, earning guaranteed income – in dollars or euros – in many cases for decades before turning them over to the state. As part of the agreement, the firms are guaranteed an income paid by the state if they do not achieve their customer quotas.

“An exchange-rate increase of 5 percent will create some 35 billion liras ($4.79 billion) extra in costs (for the Treasury),” Rota told Turkish newspaper BirGün.

Turkey has 11 operational city hospitals, centralising medical care in areas outside of city centres in modern campus-style buildings. One of the hospitals was completed during the COVID-19 pandemic in Istanbul’s conservative Başakşehir district and currently serves to treat coronavirus cases, alongside other establishments built specifically for this purpose.

The Treasury has provided the land for these hospitals under the PPP model. However, the Health Ministry decided to scrap the model in 2019 due to high fiscal costs. By 2021, Turkey is expected to transfer 57.48 billion liras ($7.88 billion) in hospital rent and operational costs to the private sector.

“Between March 2019 and June 2020, the central bank sold $94 billion to markets to try and control and lower foreign currencies, although it was not successful,” Rota said in a livestream on Friday. “For this cause, the central bank’s reserves, accumulated since the founding of the republic, were squandered.”

Turkey’s central bank has spent tens of billions of dollars of its foreign currency reserves defending the lira in recent months.

The hike in the dollar is particularly significant regarding the Osmangazi and Yavuz Sultan Selim bridges, which are located in Turkey’s northwestern Izmit province and on the Bosporus respectively, since both projects include a minimum-use guarantee.

Otoyol Inc., a consortium made up of Nurol, Özaltın, Makyol, Astaldi, Yüksel and Göçay holdings, will operate the Osmangazi Bridge for the next 22 years and is guaranteed to receive a $35 minimum total fee for each crossing vehicle and a quota for 14.6 million vehicles. The 118-lira toll corresponds with an increasingly reduced dollar amount – $16.16 at the time this article was published.

Both bridges remained closed during Turkey’s several lockdowns to combat the coronavirus, further incurring costs as no revenue was generated.

The drop in travel under lockdown measures also affected Istanbul’s new airport, which has a Treasury guarantee set at 333.8 million euros ($393.5 million) for 2020.

“With the PPP projects, Turkey has undertaken a foreign currency debt 1.5 times larger than all the public foreign debt generated in the history of the republic,” said Rota, who is also a founding member of the AKP breakaway Future Party, which is led by former Prime Minister Ahmet Davutoğlu. The Treasury’s total commitment for the PPP projects is $75 billion.

When most of the projects started between 2010 and 2013, Turkey’s GDP per capita was around $12,000, and projections pointed to $25,000 by 2020, the economist said. “With where we are at today, these projects place a heavy burden on an economy that has a GDP of $8,000 per capita.”

Out of the $75-billion worth of guarantees, $23.58 billion is intended towards investment costs for PPP-model highways, followed by 19.08 billion dollars for airports and 11.59 billion dollars for healthcare providers, according to data announced by the Presidential Directorate of Strategy and Budget.

“We are living through a week where the façade crumbles over economy policies that were devised in the last two years, after the executive presidential system was implemented,” Rota said.

“The reason it has crumbled so fast is this: An economic mind that thought it could resolve the foreign currency (crisis) by selling the central bank’s currency reserves and (the Turkish government) ordering the central bank and private banks to increase interest rates – as if in a command chain – has ravaged (Turkey) for the last two years. It is now time to pay the price of the harms that have been done.”

Emine Gülizar Emecan, a deputy of the main political opposition Republican People’s Party (CHP), told Evrensel newspaper in an interview published on Saturday: “Wrong economy policies that constantly push interest rates lower have eroded our central bank reserves and led to foreign capital leaving Turkey.”

The losses incurred by the Treasury will be paid with tax money, which will “all reflect back on the people harder in the form of lowered production, rising unemployment and poverty”, Emecan said.

The current crisis “started long before the pandemic and became deeper with it”, she said.