Interview: Başar Arioğlu

What conditions led to a slowdown in the construction business in 2012, and what is your outlook for the sector in 2013 and beyond?

BASAR ARIOĞLU: The construction sector in Turkey has three main business segments: real estate, government tenders, and the market for public-private partnerships (PPPs). The real estate industry declined sharply in 2012 due to oversupply, which made it difficult for housing projects to sell enough units. For 2013, I anticipate that this ongoing challenge will be offset by more positive trends. These include stronger GDP growth and a decline in interest rates, making home financing easier.

Societal changes are also influencing the real estate market. In particular, one-plus-one units have proliferated alongside rising divorce rates, which have produced more single-person households. Further, young students and the elderly are now living alone more frequently, something that was unimaginable a few decades ago. As a result of these shifts, property developers have altered their building plans accordingly.

How would you assess the current market for government tenders and PPPs in Turkey?

ARIOĞLU: There are a huge number of government tenders on offer, especially in the transport sector – bidding processes are under way for the development of bridges, roads, tunnels, canals, airports and railway networks. Over the last several years, small contractors have become quite adept at winning bids for these types of public works, and have begun outmanoeuvring the larger construction groups. That is why the larger Turkish contractors are going to foreign markets and only following larger projects domestically. With all of these projects planned, it is questionable whether the government will be able to mobilise sufficient project financing. Turkey’s public works budget is rising gradually alongside economic growth, but not dramatically so. This means that a bigger proportion of project funding will have to come from other sources like private contractors, investors and financial institutions.

In addition, there is a sense in the construction community that the state is moving too quickly with many projects, without first ensuring their viability. One example is the proposed Istanbul canal, which is too big for the international appetite. I believe that the government should ensure the bankability of the project and communicate this adequately to the financial markets.

The government has high hopes for the public-private partnership (PPP) model, especially with regards to the construction of new hospitals and integrated health campuses. However, the authorities need to take more advice from private law firms and consultancies in structuring these agreements, because they can become overly complex and confusing in the absence of expert advisory services. As it stands, many potential investors are turning away from PPPs in Turkey because the terms, returns and risks are difficult to ascertain. What is more, legal and tax conditions in the local business environment are always changing, making due diligence difficult and heightening investor uncertainty. In many cases construction companies work on thin margins, so even small changes in cost-benefit calculations can have big implications.

To what extent has the success of construction firms abroad benefitted the domestic economy?

ARIOĞLU: Local construction and engineering firms have left their imprint all over the globe. Our competitive advantage has been our expertise, and our ability to source labour and engineering that is highly skilled and inexpensive. Turkish construction ventures in foreign countries have generated significant profits that were reinvested back home. Also, overseas projects executed by local firms often utilise inputs sourced from Turkey, which benefits our industry. Moreover, our projects abroad have created tens of thousands of jobs for Turkish citizens sent to work on them. Indeed, the construction sector will play a crucial role in the government’s effort to reduce unemployment to 5% by 2023, in time to mark the republic’s 100th anniversary.