Turkey’s new government coalition is a shotgun wedding between two right-of-centre parties which are ideological twins. However, its success will depend not on ideology, but the personal chemistry between the leaders.
The history of rivalry and antagonism between the True Party Party’s (DYP) Tansu Ciller and the Motherland Party’s (ANAP) Mesut Yilmaz is not a good omen for the coalition’s durability. Although at grassroots level it is generally expected that the two parties will sooner or later merge, there is no indication that this is about to happen. On the contrary, the coalition kicked off with a major disagreement: who should fill the top three bureaucratic posts in the treasury, central bank and privatization office? All three posts have been vacant since last December when Ciller recruited the incumbent directors and sent them to parliament.
“It was agreed that no one who left the bureaucracy during Ciller’s term in office or was caused to leave should be appointed,” said one of Yilmaz’s aides. This narrowed the field to such an extent that for weeks the posts had to remain vacant. And Ciller is not easy to please. During her three years in office she worked with three central bank governors and as many secretary generals of the treasury.
Yilmaz will rule until the end of the year when Ciller will take over for two years. Then it will be Yilmaz’s turn again for another year. During the last year, 2000, a deputy from the DYP (not Ciller) will lead the country to elections. Ciller has not taken a seat in the Yilmaz’s cabinet, but is firmly in command.
The reason for the government’s rise to power was a general election in December last year when Ciller’s 1993 coalition with the left-of-centre Republican People’s Party (CHP) collapsed. As widely predicted (and even more widely feared) first place was won by professor Necmettin Erbakan’s pro-Islamic Welfare Party (RP). RP got some 21% of the vote and won 158 seats in the 550-member parliament. Ciller’s DYP and Yilmaz’s ANAP each got roughly 19%, with the latter winning a slighly higher percentage. The remaining 25% went to two left-wing parties, ex-prime minister Bulent Ecevit’s Democratic Left (DSP) and the CHP of outgoing deputy prime minister Deniz Baykal.
For a while it looked as if Yilmaz would join with Erbakan, but pressure from business circles, the media and the military was so intense that he had to drop the idea. This must have come as a particular relief to President Demirel whose personal coalition experiment with Erbakan must count among his unhappiest. The coalition was cut short when the army intervened in 1980, casting Demirel into political exile for six years. [Demirel later recalled that at cabinet meetings Erbakan was given to long monologues which were impossible to interrupt. One one occasion, Demirel told a Turkish journalist, Erbakan spoke for six hours. “By this time I had little hair left,” the president was quoted as saying. “After Erbakan’s speech, what hair I did have turned white.”]
The elections came at a bad time for the economy which was recovering swiftly from the currency crisis of the previous year. In 1995 Ciller’s savage austerity programme, supported by the IMF, successfully reduced the balance-of-payments pressures and rebuilt foreign exchange reserves. From a contraction of 6% in 1994 the economy recorded growth of some 7%. But the spending spree in the pre-election period upset all balances and cast fiscal and monetary discipline out of the window. Planned reforms were dropped. In January 1996w¤ inflation reached 10% as the money spent during the campaign started sweeping into the market.
The government must now introduce another austerity programme and enact a series of laws to enable structural reforms like privatization to proceed smoothly. But the coalition does not have a majority in parliament. It won a vote of confidence – thanks to Ecevit – so that a government could be formed which excluded Erbakan. But Ecevit has no further commitment to the coalition which, for all intents and purposes, remains a minority government. It is unlikely that Ecevit will support privatization, social security and agricutural reform or wage restraint which are pivotal to the economy’s long-term health.
Another weakness of the coalition is that the conduct of economic policy has been distributed among a team four ministers of state, three belonging to Ciller’s and one to Yilmaz’s party. No one knows who, if anyone, is in charge.
Yilmaz’s man is Rusdu Saracoglu, ex-governor of the central bank, who is widely respected in Turkey and abroad. Saracoglu was lured to Turkey from the IMF in Washington in 1984 by Turgut Ozal, the late Turkish leader, who liked giving top jobs to foreign-trained young Turks. Saracoglu, whose great grandfather was one of the top lieutenants of Ataturk (the revered founder of modern Turkey) became arguably the most successful appointee. After three three years of apprenticeship he became governor of the central bank in 1987. During his six-year tenure he established the interbank money markets and was the author of many other fiscal reforms.
When Ciller became prime minister in 1993 Saracoglu was forced to quit because he came into conflict with her on the conduct of monetary policy. Not seeing eye-to-eye with Ciller can be dangerous, as Saracoglu’s successor found when the prime minister threw an ashtray at his head when he didn’t do what he was told. Although Saracoglu escaped without bodily harm Ciller dragged him through the courts for allegedly misusing central bank funds. Saracoglu, who is a keen amateur flier, was accused, among other things, of using the bank’s money to charter planes for his personal pleasure. He rejected the charges and continues to fight a protracted legal battle.
One of the main question marks hanging over the coalition is how Saracoglu and Ciller will get on when Ciller succeeds Yilmaz. Saracoglu is clearly Yilmaz’s top financial lieutenant. He is in charge of privatization and the state banks and will act as a sort of foreign minister for the economy. He is also a member of the supreme planning board and the money and credit coordination council which make economic policy.
The Ciller-Saracoglu question can be shelved for nine months until the change of guard at the prime minister’s office takes place. The more immediate question is the relationship between Saracoglu and the three DYP ministers of state who Ciller fielded in the new cabinet as her economic team. Particularly important is how Saracoglu will get on with Yaman Toruner, who succeeded the ashtray victim as central bank governor in 1994. The antagonism between the two goes back to Saracoglu’s days as governor when Toruner was one of his directors. It was through Toruner that Ciller brought the lawsuit against Saracoglu.
Toruner worked in the central bank for 18 years until 1990 when he was appointed director of the Istanbul Stock Exchange (ISE). In 1994, at the height of the currency crisis, Ciller sent him back to the central bank where he won praise from international bankers for his deft handling of the situation. He has a reputation for being a tough, pragmatic central banker, a man who is not afraid of taking risks. Toruner’s reputation has been blemished by press charges that he became rich by taking commissions during the construction of the new ISE building and passing on information to favoured banks. He denied the charges but could not give a satisfactory explanation about the origins of his wealth. Toruner recently returned to the headlines when his wife established a company allegedly to advise exporters. The question is why she waited until her husband became minister of state in charge of Turkey’s Eximbank and undersecretariat for foreign trade before opening shop.
Ufuk Soylemez is seemingly the top man in Ciller’s economic team. His rise has been little short of meteoric. In less than two years he went from being branch manager of a middle-sized bank in Ankara to head of the privatization office when he came to the notice of Ozer Ciller, the ex-prime minister’s husband. Today, He will look after the state planning organization, the treasury, and the capital markets board and has a seat in economic policy-making bodies. Those who know him well say that he is energetic and hardworking but lacks experience.
Ayfer Yilmaz (no relation to the prime minister) is the only woman on the economic team and the most junior. She has spent her entire career at the treasury where she became secretary general in 1994.
Not many people give the coalition more than two years. There are some who believe that when Ciller assumes the premiership at the end of this year and goes to parliament for a fresh vote of confidence Ecevit will withdraw his support. But Ciller has an ace up her sleeve in the form of the Republican People’s Party (CHP), her ex-coalition partner which wants to join the coalition. The CHP is not in the present coalition because Yilmaz did not want to appear as a mere appendage to the pre-election government. In all likelihood Ecevit will turn against the coalition even before the year is out, giving Ciller the chance to re-shape the coalition. With the CHP, the government would have solid backing and could well have a longer lifespan than its critics currently predict.
Headline: The transition from casino to bourse
Source: Euromoney
Date: April 1996
The Istanbul Stock Exchange is predominantly driven by local retail and foreign institutional investors. But more and more private-sector companies are recognizing the potential of the exchange as a means of raising funds.
On weekdays Mustafa Bayraktar’s routine rarely changes. At eight o’clock every morning, he leaves his flat in Kuzguncuk, a district of Istanbul, and makes his way down to the Dilim patisserie for breakfast: two steamy poaca– a cheesy Turkish savoury pastry – and a cup of tea fetched by a teaboy from the tiny tea house across the road. By this time the road in front of the patisserie is a solid mass of cars inching their way towards the nearby bridge across the Bosphorus Straits to Europe.
Before he became a full-time player on the Istanbul Stock Exchange (ISE), Bayraktar worked for seven years as a taxi driver in Kuzguncuk and knows the frustration of sitting in traffic jams. After breakfast Bayraktar crosses the road to catch the 8.45 am ferry to Eminonu on the European side for which there is never a traffic jam. There he catches a taxi to Deha, the stockbrokers. The rest of the day is spent in Deha’s spacious seans odasi, the public dealing room where customers buy and sell, and follow the market on large screens.
In the way that others go to an office every day, Bayraktar goes to Deha’s to manage his portfolio for which he is investor, broker and market analyst. There are many individual investors like him in Turkey – although few, like Bayraktar, make it their full-time business.
There are very few domestic institutional investors in Turkey. ING-Baring’s country manager, Atif Cezayirli, estimates that 90% of domestic buying is generated by individuals. “If you discount foreign institutional buying, the market is primarily driven by individual investors,” he says. “The market is predominantly retail.”
The chain of events which transformed Bayraktar into an investor started at the end of 1993 when Bayraktar sold his taxi licence for TL90 million. He had been buying shares from vendors in front of the old stock exchange in Karakoy since 1989 and decided to put all of his money into shares, but the owner of Deha advised him to buy dollars. “When people give me advice, I take it,” he says. At the time of conversion, the exchange rate was TL14,365 to the dollar. Three months later the lira collapsed, the index plummeted and there was a huge devaluation. Bayraktar sold his dollars for TL34,000 to the dollar and invested them in shares. “The index was 12,000 when I started,” he says. “The Turks had all left the market. It was just me and the foreign institutions. When the index hit 19,200 [a few months later] I sold. I reconverted my capital to dollars at TL30,000 to the dollar and with the rest, I bought more shares.”
At 10:00 am, the Istanbul Stock Exchange opens for the first of its twice daily two-hour sessions. Bayraktar perches on the arm of a leather couch and stares at a large screen where green, yellow and red figures and arrows chart the chaotic movement of Turkish shares. There are about a dozen other investors in the large room overlooking the port of Istanbul. A stockbroker takes their buy and sell orders and answers their questions after consulting a colleague on the stockmarket floor.
In his faded blue jeans and black leather jacket, Bayraktar looks more like a tea-room gambler than an investor but, then, as Ali Ihsan Karacan, chairman of the Capital Markets Board, puts it: “The ISE still has a long way to go to graduate from a casino to a bourse.”
The Istanbul Stock Exchange has grown by leaps and bounds since 1986 when it first opened its doors. From very modest beginnings, market capitalization grew to an equivalent of $3,840 million by January this year. The number of shares traded in the same month was a record $4,383 million. Initially, most companies floated shares to benefit from tax breaks but “going public is a growing trend among closely-held private-sector companies and groups which recognize it as an efficient way of raising funds,” according to a Turkiye Ekonomi Bankasi (TEB) report. As of June last year, 103 of the 500 largest industrial corporations, five of the largest 20 commercial banks and six of the 20 largest insurance companies were listed on the ISE. Market capitalization was 36% of GNP. In the beginning the exchange was housed in a decrepit building in Karakoy, but now it occupies spacious new premises overlooking the Bosphorus and is equipped with the most advanced computers.
But it still remains a market dominated by manipulators and, consequently, turnover is rapid. According to one calculation, 90% of the daily business volume consists of shares bought and sold on the same day. Manipulation is possible because many shares are “shallow”, or so limited in numbers that their prices can be pushed up and down by people with lots of ready cash or “dry money”, in Turkish jargon. The Capital Markets Board has imposed a legal range of 20% within which a share can rise or fall in any given trading day. Had this not been imposed, it is impossible to guess how much shares would have fluctuated.
There are some 150 brokerage firms operating in the market: about one-third of them are owned by or are part of a commercial bank. Most of them are small – some are so small that they manage only their owners’ investments. Undercapitalizaton is the norm. A mere six houses traded over TL100,000 billion worth of shares in 1995, accounting for about one-fifth of the total trading volume. By far the biggest was Global, a privately-owned firm with trading volume of TL279,000 billion. Ata, owned by a construction firm, traded shares worth TL166,000 billion and Garanti Yatirim, belonging to a prime Turkish bank, TL158,000 billion. These were trailed by Karon, Polen and Tacirler, each of which traded more than TL100,000 billion worth of shares. Bayraktar’s Deha traded over TL30,000 billion worth of shares.
Many brokers undertake proprietary trading, buying and selling extensively and aggressively on their own behalf. Many more are themselves speculators and manipulators. This is both a strength and weakness of the Turkish system, and is not unusual with such nascent exchanges and emerging markets. “Speculation is a factor for increased liquidity,” says Cezayirli. Both the ISE and the capital markets board cooperate to stamp out speculation by continually introducing new regulations but they are unlikely to have significant success until the market gains more depth.
Foreign institutional investors are active in Turkey, but there are no figures on overall market share. “This is not a market where very big money can make big money,” says Zeki Mertcan, Deha’s chief market analyst. According to Cenk Alpsoy, a broker at Global, foreign business accounts for 16% of the company’s trade volume. ING Baring’s Cezayirli estimates that between 15% and 25% of its portfolios are held by foreign institutions.
Because brokerage houses indulge in proprietary trading, it can be tricky for foreign institutions to conduct business through them. “Sometimes when you give them a buy order, they make more money than you do,” says one foreign investor. This is because the knowledge of a buy or sell order by a foreign institution, independent of all other factors, is often sufficient to move the market.
When choosing a broker, it is wise to ask the following questions, says Cezayirli: “Is the company strong enough capital-wise? Is it capable of carrying out execution smoothly? Can it support business with proper research? Does it engage in front-running?”
ING Baring’s representative office in Istanbul, which opened in February 1995, focuses on research only. Business is conducted from Baring’s London office which, according to Cezayirli, is number one in handling non-Turkish institutional investor business.
The only foreign brokerage firm currently active in Turkey is operated by Citibank and opened its doors early this year. Citibank, which also went into retail banking this year, is the most active foreign bank in Turkey and its entry into brokerage is bound to take away a lot of foreign business from Turkish firms. Its broking strategy is to deal only with institutions and stay completely out of proprietary trading. The company will also offer IPO (initial public offering) services.
“We want to become a dominant player in this field,” says Anjum Iqbal, Citibank’s country manager. “We are selling reputation and service, transparency and reliability. I expect our volume of business to grow rapidly.”
Bayraktar returns to Kuzguncuk before nightfall and stops for a final cup of tea with his friends. In three years, he has trebled his capital and considers himself a lucky man. But he will not be commuting to Deha forever. “What I need is $1 million. When I make that I’ll buy a small freighter and I’ll be off.” He waves his hand as if saying farewell to Istanbul forever. “Sooner or later I will get there.”
Istanbul Stock Exchange
Composite index (blue line)
Trade value, right scale (TL m)
Source: Korfezbank
Headline: An uphill struggle
Source: Euromoney
Date: April 1996
Despite Turkey’s early adoption of the privatization model, progress has been slow. But the new prime minister Mesut Yilmaz, aims to change all that
Turkey’s privatization experience has been one of slow progress. In more than a decade little has been achieved.
But why has Turkey struggled with privatization? The state companies to be sold (KITs) are one reason. KITs were (and are) are by and large poorly-managed, overstaffed, highly-politicized and costly to sell. The 1996 budged stipulates TL50,000 billion for KIT support. In all likelihood actual expenditure will be double this.
Privatization has also been hindered by lack of legislation; and by shabby legislation. Numerous times the constitutional court has ruled various clauses unconstitutional. The planned privatization of Turk Telekom was the latest casualty.
In 1994 disagreements between the two partners in the coalition delayed passage of the necessary legislation until the end of that year. But little was privatized even after the legal framework was put into place. Initially 20 privatizations were envisaged for 1995, which were forecast to raise $5 billion. By the end of the year only $500 million was raised. And in 10 years Turkey has spent more to sell than it has raised: $3.1 billion as opposed to $2.8 billion.
One company which benefitted from the government’s pre-privatization munificence was Karabuk, a moth-eaten iron and steel plant. The government wanted to close it. But under pressure from local politicians it pumped in some $200 million and eventually sold it to the employees and local big-wigs for one kurus, one hundredth of a Turkish lira. Unsurprisingly, experts say that Karabak is too inefficient to survive and when the state grant runs out it will probably grind to a halt.
The same fate nearly befell the Istanbul dockyards. The privatization administration agreed to give the dockworkers’ union a 49-year lease, provided half the workers formed a company. But all hell broke loose when workers claimed that the union bosses had retained most of the shares. The deal was dropped and the docks remain unprivatized.
The privatization of Cukurova Elektrik, one of the largest companies listed on the Istanbul Stock Exchange, was also bungled. Cukurova became private in 1992 when state-held shares were sold to the Istanbul-based Uzan family. After privatization the Uzans took TL7.6 trillion out of the company and distributed little or no profit to minority shareholders. In November 1995 the government seized the control of the company and turned it over to directors appointed by the Turkish capital markets board. For a while it looked as if the government would chastise the Uzans and others who trampled on minority rights, but this was not to be. In January the politicians struck a secret deal with the Uzans (there are claims that money changed hands) and the family re-took possession of Cukurova. The capital markets board was not consulted and none of the problems has been dealt with.
But privatization is back on the agenda as the cornerstone of the new government’s structural adjustment efforts. Prime minister Mesut Yilmaz has announced that priority will be given to legislation. Indeed the first piece of legislation to be submitted to parliament after the recent 1996 budget was the Turk Telekom privatization bill, appeasing the constitutional court by putting the government in control of the privatization, rather than the capital markets board.
This bill will be the first test of the coalition’s parliamentary power. But it is far from certain that the bill will be passed or passed intact. The coalition has no majority and relies on the goodwill of Bulent Ecevit’s nationalist left-wing Democratic Left Party (DSP). Ecevit feels that his obligation towards the coalition came to an end when he abstained to allow Yilmaz to win a vote of confidence. Henceforth, he said, he will judge each piece of legislation on its merits. And privatization is not one of Ecevit’s preferred subjects. DSP is also home to one of the most virulent and efficient foes of privatization: Mumtaz Soysal. Twice, Soysal led anti-privatization deputies to successfully petition the constitutional court and is likely to continue with his campaign.
The foes of privatization are not only in the opposition. Many deputies from both left and right are opposed to privatization because it will dismantle of one of the world’s most efficient sources of political patronage. There is also tremendous resistance from the management of the KITs themselves and the workers who stand to lose their jobs. In addition, frequent changes at the highest echelons of the privatization administration continue to hinder the buildup of expertise.
But Yilmaz has signalled the seriousness of his intentions by appointing the respected Rusdu Saracoglu as minister in charge of privatization. Saracoglu’s portfolio includes the state banks which, Yilmaz said, will all come up for auction within six months.
Apart from Turkish Telekom, the companies under offer include some of country’s most highly-valued companies like Erdemir (iron and steel), Petkim (petro chemicals) Tupras (petroleum refining) and Poas (petroleum refining and marketing).
Headline: Turkish debt begins to look attractive again
Source: Euromoney
Date: April 1996
Despite the continued hangover from the 1994 financial crisis, the market for Turkish debt looks ready to recover, driven by quality, first-tier issuers. But, consequently, the number of borrowers is expected to fall
Turkish borrowing is still under the influence of the 1994 crisis when the currency collapsed and three banks went bankrupt owing nearly $200 million to foreign banks. The following year the country came in from the cold, but the government collapsed in September, and confidence once more faltered. In November, Standard & Poor’s revised Turkey’s outlook from positive to stable, voicing “uncertainty about the course of economic policy”. Borrowing was reduced to a trickle and remained so until the new government was formed last month.
Anjum Iqbal, country manager of Citibank Turkey, says: “They [the foreign banks] have just been holding back. I can say that for now the banks are again comfortable with Turkey.” John McCarthy, general manager of ING Barings Turkey agrees: “The window is open again. There is an adequate supply of credit. The market is gaining more depth. There is good discipline and good activity.” He believes that this is a reflection of the general political and economic situation which is now seen to be good for debt issuance by investors.
The outlook for this year is that government issuance will remain more or less the same as last year (about $1.3 billion) and that there will be no lengthening of maturities. Maturities last year were invariably one year or less. This year there may be some with a final maturity of two years, but they will be subject to a put option that can be exercised by the lenders.
“Longer tenors will depend on structural reforms,” says Iqbal, referring to privatization, reform of the social security and agricutural support systems and improved fiscal performance. “For the time being a question mark hangs over them,” McCarthy says. “We will not see a lengthening of maturities. The market’s preference is to stay short term.”
The market, in any case, carefully distinguishes between first-tier and second-tier banks. First-tier banks are the prime borrowers. These include Garanti Bankwhich has emerged as the heaviest borrower since July last year syndicating three loans totalling $460 million. Garanti’s last deal, for $110 million, was a self-arranged club loan with 11 participants from Japan, the US, UK, and France, each of whom put up $10 million. The book runner was the Dai-Ichi Kangyo Bank of Japan.
And borrowing costs for first-tier issuers are falling. Garanti’s all-in cost declined from between 1% and 1.2% over Libor in July last year, to 0.8%, according to unofficial tallies. The all-in cost of Garanti’s latest borrowing is expected to be the benchmark for first-tier banks, which includes Is Bank and Turkiye Ekonomi Bankasi (TEB). Akbank, owned by the Sabanci family, is the only institution in Turkey, public or private, which can borrow at margins close to Libor. Akbank is in a class of its own, being a lender rather than a borrower. The bank is by far the most profitable and liquid; “money is coming out of their ears”, is how one Japanese banker puts it.
Barring unforeseen political events, spreads for the first-tier banks are likely to come down even further this year, as there is intense competition among investors for such deals. For the second-tier banks – such as Demirbank and Finansbank – the spread is likely to be between 1.50% and 1.75% over Libor, according to international bankers. Observers believe that spreads will continue their downward trend, but will remain high by western European standards. “This is the market’s way of extracting a price for instability,” says Iqbal.
Turk Sakura Bank’s Levent Yurukoglu, senior marketing manager, says that banks which are considered solid will have no problem borrowing. In his opinion even the volume borrowed could increase. “We will continue to see the number of banks becoming borrowers shrinking,” he says. “The situation which existed before 1993, when all banks could borrow will not be repeated.”
Sibel Sanus, foreign relations manager of the newly-established Bank Kapital, thinks that there will be an increase in borrowing volume this year. “I can feel a lot of appetite in banks,” she says. “Many banks which have not seen Turkish profits on their balance sheets in the past two years want to return to the market-place.”
In March, following aggressive bidding by international banks, there were five trade finance deals in the $30 million to $100 million range, mainly with one-year maturities. The most active players were banks in the US, Germany, Japan and, to a lesser extent, the Middle East.
Private bank borrowing was slowed last year by a 6% tax imposed by the government to cool overheating of the economy. It was lifted for export pre-financing, but will probably remain in place for banks which wish to build up their open positions. This will allow the treasury to separate real borrowers from speculators.
On the public-sector side, the treasury is engaged in its own battle to return to pre-crisis rates and levels of borrowing. Since the foreign exchange crisis, Turkey has successfully reduced its balance-of-payments pressures and rebuilt its foreign exchange reserves to $24 billion as of last month. “We have an unwritten rule to borrow as much as the principal of the debt we have to repay in any given year,” says Aydin Karaoz, general manager of the treasury’s foreign relations department.
Karaoz says that this year Turkey plans to raise about $2.5 billion through Eurobond issues mainly in yen, Deutschmarks and US dollars. Foreign bankers also expect the treasury to seek about $500 million in syndications, simply to stay in the market. For the first time, says Karaoz, the treasury is also planning to tap the pound, lire, Swiss franc, and Ecu markets – “provided the borrowing conditions are good”.
According to Karaoz the present aim of Turkey’s foreign financing strategy is to diversify the borrowing sources and instruments, enlarge the investor base, borrow less than what is due in a particular year (to be a net repayer), and define flexible, annual, external borrowing plans in line with prevailing market conditions.
“We want to keep the appetite of the market alive,” says Karaoz. “We also don’t want to give the appearance of being too keen. Basically, we don’t want to raise our levels of debt stock.” It is also becoming more prudent to refinance, as he calculates that average spreads have come down from Libor plus 3.5%, to between 2.5% and 2.6%.
In February, the treasury did a Dm500 million Eurobond issue with a maturity of five years. This month, ¥50 billion of five-year bonds will be marketed bearing a 5.5% coupon. This includes a spread of 2.8% over the average available in the Tokyo market and is expected to be a major selling point, according to Yurukoglu at Turk Sakura.
Upgrading Turkey’s long-term foreign currency rating (lowered to BBB- by Standard & Poor’s in January 1994) is crucial for borrowing, particularly in relation to the yankee bond market and smaller sovereign issuers. But this is not likely to happen very quickly, as Karaoz admits: “Upgrading is never as fast as downgrading.”
But the treasury is not happy with Turkey’s grades and believes that these take into account only conventional items while disregarding “Turkey’s hidden strength”- the half of the Turkish economy that is in the form of $6 billion in unrecorded exports to ex-communist countries. It was thanks to these “hidden strengths” that Turkey was able to recover with miraculous speed from the 1994 crisis without the help of foreign creditors.
However, such unconventional elements of economic reality do not concern the rating agencies. Standard & Poor’s, country manager for Turkey, Cem Karacadag says that the mood is one of wait and see. “The government programme is full of the right things,” he notes. “But we cannot act on promises. We need concrete evidence that the structural problems are being addressed.”
| Bonds and bills market data | |||||
| January 1996 | ($ m) | ||||
| Outright purchases/sales | 99.09 | ||||
| Repo market | 716.14 | ||||
| Debt securities indices (December 25-29 1995 = 100) | |||||
| Price index ($) | Performance index ($) | ||||
| 30 days | 100.53 | 109.15 | |||
| 91 days | 101.93 | 111.74 | |||
| 182 days | 104.34 | 114.11 | |||
| General | 101.72 | – | |||
| Source: Istanbul Stock Exchange | |||||
Secondary market yield curve
8 March (red)
15 March (blue)
Days to maturity.
Source: Korfezbank Headline: The public and private method of project finance
Source: Euromoney
Date: April 1996
Build-operate-transfer (BOT) schemes have been given new impetus by Turkey’s coalition government as a way of financing public-sector projects. While the schemes offer the government access to much-needed finance, they may not offer the best solution for the tax-payer or the consumer.
After a barren 10 years, Turkey’s build-operate-transfer (BOT) schemes have, in quick succession, yielded two large-scale deals for a hydroelectric power plant and a drinking water supply system totalling more than $2.5 billion. International syndications for both deals are oversubscribed.
The deals – coinciding with a period when the domestic political outlook is forcing the Turkish treasury to retreat yet again from the international borrowing markets – have underlined the high value of BOT projects to international banks, suppliers and contractors. They have arrived at a time when Turkey could, feasibly, become one of the world’s richest markets for large infrastucture projects such as electric power stations.
Enver Guney ,head of the treasury’s foreign investment department expects BOT to become the country’s principal source of foreign investment. And, in London, a member of the Chase Investment Bank BOT team, Becky Lancashire, says: “The Turkish government is keen to complete these projects because they know they will open the floodgates to other schemes.”
According to Aydin Karaoz, head of the treasury’s foreign relations department, there are about 30 projects, one-third of which are now close to completion. The schemes – special financing models for infrastructure projects requiring advanced technology and high capital investment – have been developed within the private sector, but with treasury guarantees to secure the financing. The government guarantees to buy BOT services and products at a certain price over a certain period – which, under present legislation, is a maximum of 49 years.
The BOT model can be used to finance most infrastructure projects – bridges, tunnels, motorways, airports – but is particularly welcome in the energy sector where large investments are required to maintain the electricity supply.
The first deal, signed last November, is for a 672-megawatt hydroelectric power plant and dam located at Birecik on the Euphrates river. Financed to the tune of about Dm2.3 billion, it is the largest-ever single finance package arranged for a project in Turkey, and has set a market precedent for the country.
The second deal, signed in December, with financing of about $942 million, is for completion of a drinking water dam at Yuvacik and other water supply projects on the outskirts of Izmit.
Both of these deals have involved Chase Investment Bank of London, which worked as financial adviser and arranged the syndication, and Gama, a large Turkish contractor.
The Birecik project, conceived 10 years ago, is financed with Dm1.9 billion of senior debt, Dm300 million of equity and Dm100 million of start-up revenues. The senior debt includes Export Credit Agency (ECA) tranches guaranteed by Hermes of Germany, Ducroire of Belgium, OKB of Austria and COFACE of France, and a commercial tranche of entirely Turkish debt. The debt has been syndicated in a package of ECA and commercial Turkish debt at a ratio of 3:1 – which made the deals attractive to commercial banks because of the diversification of the Turkish risk.
John McCarthy, general manager of of ING Barings Turkey, says: “The Turkish risk is not so big, particularly if you spread it among a syndicate of 20 or more banks. And the return on the overall asset, blending in the export credit, is very attractive. The reward is very good and the risk is ameliorated by the export credit side.”
Apart from Gama, project sponsors include Philipp Holzmann of Germany, members of the Alcatel group in France and Belgium, Strabag of Austria, and Sulzer Hydro of Germany.
For the Yuvacik project, planned six years ago, the $942 million deal is made up of about $803 million of senior debt and $139 million of equity. The senior debt includes ECA tranches guaranteed by ECGD of the UK, COFACE of France, MITI of Japan, with additional financing from Japan Eximbank, and a commercial loan tranche of $167 million in Turkish risk. The ratio of ECA to commercial Turkish debt in the Yuvacik project is 2.8:2. Project sponsors include Thames Water of the UK, Guris of Turkey, the pipe subcontractor Klöckner of Germany and INI of France. Mitsui and Sumitomo and the municipality of Izmit will be equity investors in the project company.
Chase, and an army of lawyers, have been involved in creating a legal framework to guide investment by foreign banks and companies. “These are immensely complicated projects,” says Chase Investment’s Lancashire. “There are 54 separate documents in Birecik alone. It took nine years to negotiate.”
With each BOT scheme, companies selected by the government to undertake a project are responsible for the construction, commissioning, operation and maintenance of the plant during the “authorized period” – which, in the case of Birecik and Yuvacik is 15 years from the end of the construction period. The treasury guarantees that the agreed amount of production will be bought at an agreed price on a buy-or-pay basis. In the case of default, the treasury repays the debt.
“As a rule of thumb, 50:50 is a good estimate of the way the spread and other costs are divided,” says one banker. “Put another way, interest and other yields are double the amounts listed in the official documents. Since the project is profitable, the contractor is quite happy to give some of the profit to the bankers.”
Another banker says: “These deals happen because the contractors are prepared to gross up the yield on the commercial proportion to the amount required by the banks. The contractors and suppliers build this into their margin – and the deal gets done.”
Some bankers say that although the cost of a BOT structure is arguably high, there are benefits all round.”This is a win/win situation,” says one. “The Turkish public sector is broke, so BOT is a way of making a public-sector investment with private sector money. The public sector likes the deal because it is the only way it can raise money at the moment. The private sector likes the deal because the return on its investment is excellent.”
If there is any criticism it is likely to come from the public – when details of the deals emerge. So far, it seems, virtually no information on Birecik and Yuvacik about interest payments, payback periods and unit sale prices of electricity and water, has been made public. Negotiations have been conducted in secret; the Yuvacik deal was signed quietly in London a few days before Christmas. There were no press releases and the treasury refused to comment. All this, say critics, is presumably because had the details come to light, there could have been a public outcry and possibly the end of the the agreement.
The Yuvacik dam project accounts for the second biggest loan in the republic’s history after Birecik. And there is some evidence to support the claim of undue costliness. The dam was tendered to Gama for the equivalent of $15 million in 1987. Construction stopped because of lack of funds but only after almost half of the work on the dam had been completed according to the state Water Authority DSI. Under the new agreement, funds allocated to the dam have risen $60 million which, some contractors say, “is an astronomic amount for a dam that is half completed”. Gama maintains the price is not inflated.
Similarly, the first proposal for Birecik by Gama and its partners, in June 1987, called for a total investment cost of Dm1,310 million, including interest during construction and excluding price escalation (to be based on German inflation indices). During this time Ata, another large Turkish construction firm, also made a bid for Birecik. Ata’s bid, which was substantially lower than Gama’s, was found to be too costly and the company was asked to revise it. Ata complied, but for reasons which are unclear, the ministry of energy decided to reject Ata’s bids and – undoubtedly with encouragement from the late president Turgut Ozal – proceed with Gama.
Yuksel Onaran, general manager of the Birecik consortium, attributes the increase in the cost of financing from Dm1.3 billion to Dm2.3 billion to the “changes in the technical, legal and financial aspects (of the project) that have taken place over the past eight years”.
Informed sources in Ankara say there was strong political pressure from former prime minister, Tansu Ciller, and her husband (who acted as her informal adviser) to get the agreements signed before the general election on December 24.
“The bureaucracy is not happy about these deals,” says one ex-director of the treasury. “Prices have been dictated by the banks and the firms – who rushed to the prime minister and other ministers as soon as anything got stuck. Things have been resolved behind close doors and under tables while everything should have been transparent.”
But prime minister Mesut Yilmaz is keen to continue supporting BOT schemes. He recently announced top priority for BOT financing. And, a new legal framework will be drawn up to replace the one which was partly annulled by the constitutional court last year.
“As the model becomes standardized the number of projects will increase tremendously in the near future,” says Aydin Karaoz, general director of the treasury’s foreign relations department. Of the 30 projects currently in various stages of completion, most are in the energy sector. And 15 of these, with total investment of $8.3 billion, have already applied to the treasury for guaranteees.
Yilmaz on BOT
In a recent interview with Euromoney,prime minister Mesut Yilmaz described his expectations of the BOT scheme:”We want to make maximum use of the BOT model in Turkey’s development. I want all sectors to benefit from this model, but particular encouragement will be given to joint investments by Turkish and foreign capital in energy, transport and telecommunications. We have more than 100 proposals, and I have given instructions that each be examined individually. The coordination council has already started working on these proposals. Those which are approved will be put into implementation right away.
