BACKGROUND: In late February 2013, Prime Minister Erdoğan decided to cancel a privatization tender. The package of eight roads and two bridges, which included the Bosporus and Fatih Sultan Mehmet bridges and the Edirne-İstanbul-Ankara motorway, had been offered for a 25-year term. The Ministry of Finance announced that the High Board of Privatization, chaired by Erdoğan, had canceled the sale. This has caused concern among international investors who have spent the last few years becoming increasingly bullish on Turkey’s long-term prospects, as political stability and rapid economic growth combined to make it one of the most attractive of the major emerging economies.
Turkey’s impressive economic performance of the last two years has been marked by Fitch Rating’s late 2012 rating upgrade, and increased international recognition of the Central Bank of Turkey’s deployment of ‘unconventional’ policy measures aimed at cooling down the economy. All of which has meant a continuous tidal wave of international money (mainly in the form of portfolio flows) has poured into Turkey since the country’s rapid recovery from the international financial crisis. Meanwhile, markets Ankara might benchmark itself against, like Brazil, have had difficulties in handling the new ‘normal’ of extraordinary levels of global liquidity brought on by loose international monetary policy. As one looks at the world in early 2013, the Turkish economy looks increasingly attractive for a variety of exogenous and endogenous reasons.
The February 22 tender cancellation may be seen as indicative of the government’s increasing economic confidence. The initially victorious bid of $5.7 billion, the second largest in the history of Turkish privatizations, was viewed as too low. Authorities assessed the ‘true’ value of the asset to be in the magnitude of at least $7 billion. The bidder for the tender was a consortium made of Koç Holdings AS (40 percent); UEM Group Berhad, a wholly-owned subsidiary of Khazanah Nasional Berhad, an investment arm of the Government of Malaysia (40 percent); and, the Turkish based private equity firm, and subsidiary of Yıldız Holding, Gözde Girişim Sermayesi Yatırım Ortaklığı (20 percent). It is worth emphasizing that at the point of the Prime Minister’s intervention, the sale had not been finalized and the asset remained in state hands.
Despite an encouraging macro-picture, there are still some kinks which may need to be ironed out of system. Turkey relies on international capital flows to finance investment. The raising of domestic capital will remain problematic as long as Turkey continues to suffer from low domestic saving levels. World Bank data indicate that domestic saving declined from an average of 23.5 percent of gross national income in the 1990s to 17 percent between 2000 and 2008, and then fell again to 12.7 percent in 2010. This was matched by an increase in the current account deficit, as foreign financing was used to support investment. The catch-22 is that this financing tends to be short-term and volatile in nature. While the government seeks to redress this balance in the long-run, interim measures will be necessary – which will require continued focus on maximizing revenues in a variety of areas.
From its genesis, the main aims of Turkey’s privatization program have been to work towards minimizing the activity of the state in industrial and commercial areas of the economy; providing a legal and structural environment for the further development of free enterprise; reducing the cost of the country’s many State Economic Enterprises to the national budget; transferring privatization revenues to key infrastructure projects; expanding the country’s capital markets (and encouraging alternative investments) by promoting broader and more popular ownership of shares and stocks; and, supporting an increasingly efficient allocation of resources across the economy.
IMPLICATIONS: As the Turkish government looks to its ambitious ‘2023’ goals, which include being one of the ten largest economies in the world and a GDP per capita of $25,000, many of these aims remain constants – not least those of reducing the government’s balance sheet obligations and building more powerful and diverse capital markets. With the creation of the Istanbul Financial Center continuing apace, the need for these reforms seems likely to continue to grow.
The privatization program has its roots in the economic reforms of the 1980s. The late prime minister and president Turgut Özal, a former head of the State Planning Organization (now the Ministry of Development) led the initial charge in 1984, as he and the Motherland Party began to attempt to move the economy away from its traditional import substitution industrialization (ISI) leanings. As well as working on the liberalization of the financial sector, which vitally included the freeing-up of capital inflows and outflows, he focused on infrastructure as a key area for development. Developments were mainly focused in the west of the country – where revenue sharing certificates were issued as the government sought to encourage investment for the building of Istanbul’s Fatih Sultan Mehmet Bridge. From 1986, following the enactment of the Privatization Law, Özal’s government sped up moves to offload some of the country’s state-owned assets, with support from the World Bank and international financiers.
Successive governments have sought to continue the process – framing an argument for international investment opportunities around the scale and ambitions of their privatization program. There has been an additional motivation, of course – as Margaret Thatcher discovered, the privatization process can prove to be a significant source of government funding. However, last few years have not been overly easy for the process, partly caused by the serious slowdown in international financing caused by the 2008-9 global financial crisis. By 2011, privatization revenues had fallen to $1.4 billion, down from a peak of $8.1 billion in 2006. The difficulties of the period problems were symbolized by a failed auction in 2010 when a set of electricity distribution companies were nominally sold, only for the buyers to back out as they failed to find sufficient financing to make good on their bids.
Since then, Turkey’s economy has had a good few years. 2012’s ‘soft-landing’, Fitch’s ratings upgrade, and relatively strong (at any rate, Eurozone beating) GDP growth projections for the next half decade mean that the attractiveness of the Turkish economy has returned with a bang. With it, privatization activity has increased, with a notable mixture of domestic and international investors active in the market. 2010’s position has been turned on its head – as it is no longer the private sector backing out of deals, but the government which feels sufficiently confident to seek what it views as optimal prices for its assets.
February’s incident, while showing the authorities’ strength, caused some ripples among international investors. The case made was that of protecting government revenue. It is reported that the General Directorate of Highways estimated that the bridges and roads raised $412.4 million in revenue in the first 11 months of 2012, raising what are possibly understandable concerns about the total value to its new owners of the asset over a 25 year period. The government’s solution is to attempt to raise more funds by taking the asset public, using an initial public offering as the tool to maximize the revenue raised.
The Minister of Finance, Mehmet Şimşek has since announced that the authorities will set up a company to control the bridges and toll roads. It is thought that the Privatization Administration and the Ministry of Transport will place the 2,000 kilometers of toll roads and two Bosporus bridges under the auspices of a new legal entity. This would act as a vehicle in preparation for a possible IPO – and would eventually apply to the Capital Markets Board for permission to list on the Istanbul Stock Exchange.
The press has reported Minister Şimşek’s emphasis on the importance of the program to the government’s bottom line, arguing that the withdrawal of the asset from sale, for the time being, shouldn’t affect 2013’s budget as the government had already exceeded its target of $2.2 billion in revenue from asset sales. With a revenue stream seemingly secure, and the executive power of the prime minister over the privatization process emphasized, the position of the authorities seems clear. It is said that both Erdoğan and Şimşek have underlined this in discussions on Torunlar Gıda’s $1.16 billion bid for Başkent Gaz Dağıtım, the gas-grid operator. Both politicians have indicated that they are considering whether the auction may be cancelled, again due to insufficient revenue having been raised.
CONCLUSIONS: Fallout from the February tender cancellation, insofar as cooling the ardor of Turkey’s investors cum suitors, has been limited at the time of writing. Extending its recent renewed success in selling off infrastructure, Turkey raised $3.46 billion on March 15 as it sold its final four electricity grids – which completed the privatization of the electricity distribution sector. This underlines the profound change in conditions since 2010’s failed auction. It also shows the depth of international interest in Turkey’s privatization process with Enerjisa, a joint venture between E.ON (the German electricity utility provider) and the major Turkish holding company Sabancı purchasing two of the grids.
While concerns have been expressed over the precise handling of the situation, due to the unpredictable nature of the intervention, Turkey remains a popular venue for international investors seeking high-yielding infrastructure purchases. With more positive news in the first quarter of 2013 reflecting declines in the current account deficit, reasonable projected growth over the next few years, and the demographics pointing in the right direction, the stage is set for continued interest in the Turkish privatization market.
Ben Welch is an independent consultant, having formerly worked for the World Bank.
© Central Asia-Caucasus Institute & Silk Road Studies Program Joint Center, 2012. This article may be reprinted provided that the following sentence be included: "This article was first published in the Turkey Analyst (www.turkeyanalyst.org), a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program Joint Center"