Turkey: Yet To Fulfil Its Ambition

On Sunday, June 12, Turkey’s Justice and Development Party (AKP) managed to retain its position as the country’s ruling party, and also increase its share of the vote to just under 50%. Not bad for a party that had been in power for over eight years. Things, therefore, appear bright for Recep Tayyip Erdogan, Turkey’s Prime Minister. He even has an ambitious infrastructure plan in place that includes building a USD30bn (EUR20.5) 50km canal linking the Black Sea and Marmara Sea, a new Judicial Palace, two hospitals, a new 40,000-seater stadium, a zoo, a botanical park and new rail links.

It will not be plain sailing, however. Many of these schemes could well just become pipe dreams. None, so far, have got off the ground and doing so may well prove difficult, particularly as in last week’s elections the AKP did not obtain sufficient votes to allow it to establish a new constitution by itself. It will have to bring its three opposition parties into the constitutional discussions to get the charter through parliament.

The other problem Erdogan faces is that finding the money for the country’s current $15bn (EUR10.25bn) portfolio of planned projects - the bulk of which are in the process of being procured - may well give Erdogan a few sleepless nights.

“Infrastructure projects have suffered from a number of false starts,” says Alexander Jan, associate director at Arup, which is acting for the Istanbul Metropolitan Municipality on the privatization of the Istanbul Seabuses and Fast Ferries (IDO). “Not only have deals been around for quite a while but there are questions about whether Turkey – and the Turkish banks – can absorb the financing and risks requirements of the current programme of deals without foreign banks’ involvement.”

The USD861m (EUR590.7m) IDO sale (awarded to a Tepe-Akfen-Souter-Sera joint venture in April) is one such deal awaiting financial close. Other projects include the $3bn Northern Marmara Highway Project (in tender), the $5bn privatisation of the Turkish toll roads (due to tender this year), the $7bn Gebze-Izmır road (awarded to Astaldi), the privatisation of the Port of Iskenderun (awarded to Limak) and the $1.3bn Bosphorus Tunnel (awarded to SKEC).

“It is all very well and good drawing up these plans for major projects but the amount of finance need is immense,” said one banker. “The biggest challenge is actually getting these projects financed.”

Finding Funds
The 5.4km Bosphorus Tunnel, as an example, has been in development for over a decade. The tender opened in 2004 and a team led by SKEC was awarded the concession in 2008. Over two years down the line, the sponsor and financial adviser, UniCredit, has yet to reach financial close. The key, it seems, is less about tendering and awarding projects and more about commercial banks’ appetite to fund a crowded and expensive projects pipeline.

“The real problem is less political and more logistical in terms of the sheer size of the debt needed to get these projects financed,” the local banker said.

Such a logjam will likely mean just one of two of the projects being financed in the short-term. Ender Özeke, a partner with Hergüner Bilgen Özeke, a law firm, believes that Turkish banks must play a “bigger role” because they have more liquidity than international banks.

“Turkish banks are getting more and more comfortable with non-recourse debt, which has been deployed before in the power sector but less so for the infrastructure market.” he added.
However, infrastructure assets, like roads and ports, operate on a different model to power projects. The core problem for the present projects is that the length of the concession contracts does not match the tenors that Turkish banks are comfortable with.

“Previous infrastructure assets were financed by 10 to 12-year loans but since the concessions periods for the big projects are longer than 15 years, usually around 25 years, the major infrastructure investors are all looking for tenors of 18 to 20 years,” the banker explained. “Turkish banks do not like such long tenors.”

This puts more emphasis on the sponsor to increase equity contributions and find mezzanine tranches to attract financing. Alternatively, they can base their feasibility studies on pricier 15-year loans. Either way, this makes project financing less favourable for sponsors as the risk is placed mainly on them.

Jan claims that one solution would be for sponsors to take on refinancing risk. “Once the project is operational and all sides are comfortable, a refinancing would be a good option but there are no guarantees,” he says.

Sponsors, however, seem resultant to expose themselves to such a model. Shorter tenors mean that the terms of negotiating a refinancing though would also be less favourable to borrowers.

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