OBG talks to Ergil Ersü, Chairman, Gama Holding, and Orhan Paçacı, Member of the Executive Committee and Shareholder, Mesa Holding: Interview

Interview: Ergil Ersü & Orhan Paçacı

What are the factors you evaluate when determining whether or not to invest in a project abroad?

ERGIL ERSÜ: Construction is an inherently unpredictable business both in and outside of Turkey. Sometimes you can spend a lot of time preparing a bid and then lose or it gets cancelled. Other times you can exert very little effort during the planning stage and get rewarded with a very profitable project. In the past, we tried to balance our domestic and international work but in recent years we have been more focused on the latter because of intense competition within Turkey. Right now, around 70% of our overall business takes place overseas.

First, the type of international project matters. For our general contracting unit we look at a different set of factors than for our engineering, procurement and construction (EPC) arm. It is not logical for Turkish contractors to go to sub-Saharan Africa or South America for relatively simple undertakings like infrastructure developments, superstructures, general civil construction and certain types of industrial plants; the logistics required are too costly and complex. On the other hand, these costs are more justifiable for highly specialised EPC contracts with the potential for large profits, especially projects in the power and oil and gas spaces. Second, partnership considerations are very important. In markets where cooperation is needed, either with a local or international company, potential partners must bring some sort of value-added benefit to the project to make it worthwhile; for instance, they may possess a special expertise or provide access to local suppliers.

The size of the project is the third consideration. Given their high overhead costs, it is difficult for large companies to engage in too many small projects. It is equally hard for small companies to compete for big projects that require considerable expertise. In general, the construction industry has very thin margins so participating in the right project is essential.

The last thing that needs to be mentioned is the impact of political instability. Pre-uprising Libya was a very lucrative market for Turkish contractors for many years but is now much less of a focus. The world changes quickly, and promising markets can easily become less-so overnight, just as an average market today can turn into a hot market tomorrow. As we speak, our neighbours in the north are experiencing a crisis that may have a profound impact on the construction outlook across Russia and the countries of the former Commonwealth of Independent States.

ORHAN PAÇACI: While there are many factors that drive our investment decisions outside of Turkey, we tend to look at three key criteria when evaluating opportunities. We evaluate the genuine need and feasibility for a project first. For instance, infrastructure or housing projects in markets that are very underdeveloped, but growing, are attractive if the projects match our portfolio of expertise, and we have the financial and human resources to complete them. Then we tend to look at proximity. Given transport and material costs, it is very difficult for Turkish contractors to compete for projects very far away, like in the US and East Asia. Some construction firms are active in these areas, but Turkish companies are more competitive in regions like MENA and Central Asia. A final key element is the political and economic stability of the country where the project will take place.

Political stability has become a more important consideration, of late, especially given all of the significant changes that have swept the region in the past few years. Libya was a very profitable market for Turkish contractors before the Arab Spring and many firms are still looking to recover money from projects that stopped when the movement began. Unfortunately, it is very hard to recover these losses, as there are no political risk guarantees in place and the Turkish government has not been able to secure ample repayments from Libyan authorities. Judicial systems are also important. Disputes can last years in some places, like Russia, negatively affecting the attractiveness of doing business in those markets. All this is to say that there are significant opportunities abroad, but that they need to be well-researched before making any investment decisions.

In what markets do you foresee the most opportunities for Turkish contractors going forward?

PAÇACI: There are many opportunities both domestically and internationally. Starting with the latter, it is hard to say what countries or regions pose the greatest potential, as attractiveness is highly dependent on the project in question, as explained above. That said, there has been a general trend away from more traditional markets for Turkish contractors like Russia, Libya or Saudi Arabia to other, less-penetrated areas.

Specific countries in Eastern Europe, Central Asia and MENA all have potential; places like Poland, Bulgaria, Romania, Iraq, Qatar, Kuwait, Latvia, Kazakhstan, Azerbaijan and Turkmenistan all come to mind. Many of these countries are growing, have money and need industrial and transport infrastructure, as well as other structures like housing and hospitals. Even countries in sub-Saharan Africa, East Asia and Pakistan have begun to attract Turkish contractors. Again, however, any potential projects in these countries will need to be scrutinised to make sure that they are financially feasible, especially given the difficulty of attaining financing in some of these markets. Overall profitability also matters. For companies of a certain size it only makes economic sense to mobilise and enter a new market for a project worth more than $60m or $70m.

There is also a great deal of potential in the domestic market. Turkey and Istanbul, in particular, have been transformed markedly in the past decade, as new housing projects, commercial centres and large-scale infrastructure projects have sprouted up across previously uninhabited land. Right now, there are a number of multi-use developments worth billions of dollars being developed and constructed. While some commentators have expressed concern about the sustainability of such a building boom, given the country’s slowing economy and higher interest rates, especially in terms of residential real estate, there are still many areas where construction is needed. Hospitals, tourism-related facilities and high-tech industrial buildings remain in high demand. Office space is also needed in a number of areas. These sorts of projects, however, need to be approached in the same way international ones are examined, with rigorous attention to the specific needs and the overall economic feasibility of the undertaking. It is no longer sufficient to build haphazardly anywhere that there is space. It is necessary to think about the impact of a structure on the surrounding area.

ERSÜ: There are many attractive markets. Historically, Turkish contractors have been instrumental in meeting the infrastructure and housing needs of countries like Russia and Saudi Arabia. They have also been very active across North Africa and some of the countries of Central Asia. There are still many opportunities in these markets, but some are more challenging than others. Libya is rather unstable and will take time to recover.

Saudi Arabia, on the other hand, is very stable and continues to have significant potential, especially for oil and gas and power projects. It can be a difficult market to operate in, given the complexity of registration processes and strict qualification rules. In addition, competition in attractive markets is very high because financing is generally less of an issue in these countries and payments are usually made on time, which is a marked difference from some other fast-developing markets. For instance, Korean contractors are very strong in Saudi Arabia and compete for many of the same projects that Turkish companies are chasing.

Right now, Iraq is a huge market with significant potential, both in the north and south of the country. That said, recent political tensions throughout the region have made it a significantly more difficult to compete for projects there. North African countries like Algeria also may play more of a role going forward as a result of the amount of financing available in the region. In Algeria’s case, however, Turkish companies will need to make some adjustments to operate in the country, especially from a language perspective. Sub-Saharan Africa is also a largely unexplored market and is on the top of the lists of many Turkish contractors.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Turkey 2015

Construction & Real Estate chapter from The Report: Turkey 2015

The Report: Turkey 2015

The Report

This article is from the Construction & Real Estate chapter of The Report: Turkey 2015. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart