Efforts to ensure long-term economic growth in the republic will not succeed without substantial investments in transport infrastructure. This is well understood by the government, which nearly doubled public spending on the sector as a percentage of GDP between 2004 (1.06%) and 2010 (1.92%), according to figures from the World Bank. “Turkey’s strong growth performance over the past decade was supported by transport system upgrades, which greatly enhanced our industrial competitiveness,” Sami Alan, CEO of Atlasjet, told OBG.
Nonetheless, much more investment is necessary, not least because economic progress is creating new infrastructure needs. Take the road network, which expanded by around 8% between 2007 and 2011 (from 350,000 to 370,000 km), but had to cope with a 23% rise in the number of domestically registered motor vehicles (from 13m to 16m). This imbalance between transport supply and demand hurts productivity, especially in major cities such as Istanbul, which perennially ranks as one of the most-congested urban areas in the world.
Further, Turkey’s railway system is underdeveloped, privatisation projects in the sector have faced recurring delays, local businesses are reluctant to use (efficiency-enhancing) logistics services and many industry players told OBG that the Customs regime in place, though improving, still suffers from glaring inefficiencies (see analysis).
On the Road
These challenges are not lost on public officials, who, among other measures, are encouraging private sector investment in build-operate-transfer (BOT) projects to be implemented nationwide. For the road segment, which accounts for roughly 98% of inland transport, the General Directorate of Highways has announced plans to implement 24 such projects by 2023. Of these, the most noteworthy is the 414km North Marmara Highway, which would connect Istanbul to Izmir and include a third Bosphorus bridge near the Black Sea.
By extending the national network, ambitious BOT projects like the North Marmara Highway would further improve Turkey’s relatively high road density, which was 47km of road per 100 square km of land area as of 2010, according to the World Bank. By comparison, the average road density among Organisation for Economic Co-operation and Development member countries in 2010 was 44 km. Such projects would also help the state to achieve its target of extending the divided highway system to 36,500 km by 2023, up from 21,300 km in 2012.
Tender Spots
However, some question the government’s ability to deliver. After being tendered in January 2012, the North Marmara Highway project received expressions of interest from 18 companies from several countries, including Austria, Italy, Japan, Russia and Spain. Shortly thereafter, the authorities were forced to cancel the tender because they received no official bids. While some blamed the global credit crunch for the cancellation, at the time financial analysts told OBG that many of the project costs and conditions were unclear, which elevated risk perceptions among investors. Moreover, though the tender was relaunched in April 2012 and ultimately awarded to a Turkish-Italian consortium, the $4.5bn venture continues to generate negative publicity, with conservationists, politicians and even ministry officials expressing concerns to local press in early 2013 about the possible environmental impact.
Efforts to sell operating rights to the project have encountered stumbling blocks as well. After being postponed several times due to a lack of investment interest, the package for 25-year management rights to the 2000-km Edirne-Istanbul-Ankara motorway, the Istanbul Bosphorus bridge and the Istanbul Fatih Sultan Mehmet bridge was finally opened to tender in 2012. Bids were then submitted by five groups, with the $5.7bn contract awarded in December to a consortium consisting of Turkey’s Koç Holding (40% group stake) and Gözde Girişim (20%), and Malaysia’s UEM Group (40%). This sent share prices up for the consortium companies, and marked the second-largest privatisation in Turkish history after the $6.55bn sale of a stake in Türk Telekom to Saudi Arabia’s Oger Group in 2009.
However, shortly after the bid winner was announced, some in the local media questioned the government’s asking price for the package, which was regarded as excessively low given that the two existing bridges alone had generated an estimated $2.57bn in revenue between 2001 and 2011. After these sentiments were echoed by Prime Minister Recep Tayyip Erdoğan, who stated on a Turkish television programme that the state had “higher expectations” for the deal, the tender was cancelled in February 2013 by the Supreme Privatisation Board (OYK).
Supporters of the cancellation pointed out that the package will simply be retendered in the near future at a higher price, thereby ensuring that the state does not undersell assets of increasing value. This argument may have some merit. Given Turkey’s young demographic profile (more than half of the population is under the age of 25) and robust growth trajectory, as well as its rapidly increasing rate of automobile ownership, the motorways and bridges are likely to host more traffic in the coming years.
Critics responded that the cancellation sent negative signals about the country’s political risk climate to prospective investors, on whom the government is counting to fund major projects across every sector of the economy. To achieve its development goals, Turkey aims to attract $80bn in annual foreign direct investment by 2023, up more than fivefold from $15.9bn in 2011.
Full Steam Ahead
Regardless, investors in search of yield still regard Turkey as an attractive destination – one reason why the government is moving full steam ahead with its transport privatisation plans. This was made clear in March 2013, when a draft bill was presented to the Turkish parliament that would allow private companies to operate trains on the national network and build railway infrastructure. Given that the country’s railway system only accounts for 2.2% of domestic passenger transport, many have welcomed this development.
Similar reforms have been proposed before. In 2005, the state monopoly Turkish State Railways (TCDD) issued regulations providing operating rights to third parties; however, the ruling was struck down in 2007 by the Council of State. However, some argue this time is different, given the losses at TCDD, which totalled TL866m (€374m) in 2010.
Along with granting 49-year operating rights to third parties appointed by the Ministry of Transport, Maritime Affairs and Communications, the 2013 draft bill, which was awaiting approval from the Grand National Assembly at the time of writing, calls for the restructuring of TCDD into a corporate entity that would maintain regulatory powers. This is intended to create a more efficient organisational model for the TCDD, which has low staff productivity rates compared to the EU average. Further, restructuring will help the company to create a transparent playing field for private competitors. This task may prove difficult, given the challenges European railway regulators have faced in attempting to achieve similar results over the past 20 years.
To lay the groundwork for private sector participation, the TCDD also plans to spend $11.1bn between 2013 and 2015 on railway system rehabilitation projects. As of early 2013, these projects had also received TL900m (€388m) from four international financial institutions: the European Investment Bank, China Eximbank, the Islamic Development Bank and the World Bank.
Connections
While railway officials are pinning their hopes on liberalisation, they can already point to some success in the development of the country’s high-speed rail (HSR) system, which received €1.83bn in public funds between 2005 and 2010. By 2023, the authorities plan to add 10,000 km to the current HSR network, which totalled 888 km in 2012. As of early 2013, one HSR route was already operational – the 212-km Ankara-Konya line – and several more were partially open or in the planning stages. These include lines that will link four of the nation’s major cities (Ankara, Istanbul, Izmir and Bursa), and reach 15 destinations in total by 2016. The Ankara-Istanbul line is perhaps the most eagerly anticipated of these, given that it is expected to carry 17m passengers per year and offer one-way travel times between the two cities of no more than three hours, compared to the six hours this journey currently takes by road.
Indeed, reducing travel times to cut transport costs for citizens and businesses is one of the key benefits that HSR development would bring to Turkey. According to ministry officials, the HSR lines connecting the four major cities will not only carry more than 30m passengers per year but also generate over $800m in annual savings. These savings, it is argued, would come through fewer traffic accidents and reduced motor vehicle fuel consumption. Given Turkey’s severe dependence on fossil fuel imports, the latter benefit could improve the country’s current account deficit, which is a persistent worry for investors and policy makers.
Linking Partners
Further upgrades would also strengthen Turkey’s connections to regional trading partners. Although the country achieved $151bn in exports in 2012, an all-time national high, less than 1% of these exports were transported by rail. In response, transport officials have prioritised the development of transnational networks that would link Turkey to fast-growing markets across Eurasia.
One notable example is the Baku-Tbilisi-Kars (BTK) railway, which will link Turkey to Georgia and Azerbaijan once it is fully commissioned in 2013. Construction on the $600m venture began in 2007, following an intergovernmental agreement inked in 2005. Although the BTK was scheduled for completion in 2010, the breakout of the conflict in Ossetia caused delays. But the project is back on track, with Turkish officials indicating that 92% of the 76-km Turkey-based line had been finalised by the end of 2012. According to project officials, the BTK line will carry 6.5m tonnes of cargo and one million passengers per year upon its completion. By 2030, the line is expected to transport up to 17m tonnes of cargo and 3m passengers a year.
Another transnational project on the drawing board in 2012 is the Kars-Edirne HSR line, which would cut the current overland transit times by an estimated two-thirds, as well as connect the country to the Trans-Eurasia Rail Bridge being developed by China. The proposal to link up to these networks gained traction in 2010, when China offered Turkey a total of $30bn in construction loans, and progressed further in April 2012 when Prime Minister Recep Tayyip Erdoğan reportedly discussed the matter with Chinese officials in Beijing during a state visit. Most analysts regard the proposed project as a win-win, given that it would help both nations to develop stronger overland foreign trade linkages.
Capacity
Finally, the country has been placing greater emphasis on the development of rail vehicles and technologies, some of which may themselves be exported in the coming years. In 2008, General Electric (GE), a multinational conglomerate based in the US, and Turkey’s Türkiye Lokomotif ve Motor Sanayii A.Ş. (TULOMSAS) formed a partnership to manufacture GE PowerHaul locomotives at a plant in the north-western city of Eskişehir.
In January 2013, the two companies announced that the plant was ready to begin production, and that they intended to manufacture 50 locomotives by 2015, and between 50 and 100 per year thereafter. While some of these will be sold on the local market, it is expected that the majority of production will be exported to Europe and the Middle East-North Africa region, generating approximately $1.5bn in revenue for every 70 units shipped overseas. In addition, TULOMSAS officials have argued that the facility will help position Eski şehir as a major locomotive manufacturing hub.
The growing industrial capacity of Turkey’s rail sector was underscored in 2012 when representatives from TCDD, the Scientific Technological Research Council of Turkey and Istanbul Technical University announced that they had jointly produced the country’s first domestically-made railway signalisation system. The system, which was developed with an investment cost of only TL4.6m (€2m), is expected to generate an estimated TL2bn (€863m) in cost savings once fully installed nationwide. What is more, the government plans to eventually export the signalisation technology to countries throughout Central Asia and the Middle East.
High Seas
Despite these advances in rail transit, Turkey’s foreign trade potential will depend on its maritime facilities for the foreseeable future. From January to September 2012, Turkey’s exports via sea totalled $57.1bn, according to figures provided by the Turkish Bureau of Statistics. By comparison, over the same time exports via road were $37.3bn, while those by rail only amounted to $752.9m. Moreover, while road and rail exports fell by 0.1% and 19% during the first nine months of 2012, respectively, exports via sea rose by 5.3%. This was no small feat, given the weak economic performance of Turkey’s main trading partners in Europe.
The growth of Turkey’s sea-based trade network is the result of many factors, one of which is fleet expansion. From 2003 to 2011, the number of Turkish-flagged vessels increased by 27%, while Turkish-owned vessels more than doubled. In addition, the total deadweight tonnage of Turkish-owned fleet increased twofold from 2002 to 2010.
The domestic shipbuilding industry has also prospered, with Turkey ranking third globally in yacht construction, and fifth in received shipbuilding orders. Turkey also ranks among the top five worldwide in ship recycling (and first in Europe), and runs a lucrative vessel repair and maintenance business that has attracted many international operators. In turn, these activities have created jobs: between 2003 and 2012, the number of jobs created by Turkish shipyards and its sub-industries rose from 56,000 to 88,000, according to figures from the General Directorate of Shipyards and Coastal Structures. That being said, shipbuilding employment in Turkey has not returned to the highs reached before the 2008-09 global financial crisis, when the business employed well over 100,000 personnel.
Ports
The crisis has had no lasting impact on Turkey’s ports. As indicated by statistics from the Undersecretary of Maritime Affairs, container handling at local port facilities fell to 4.4m twenty-foot equivalent units (TEUs) in 2009, down sharply from 5.5m TEUs in 2008. In 2010, however, Turkish ports rebounded to handle 5.7m TEUs, followed by 6.6m TEUs in 2011. Indeed, the long-term trend becomes even clearer when one considers that Turkish ports only handled 1.95m TEUs back in 2002.
As of late 2012, Turkey had 175 ports, about 90% of which were in private hands. Port privatisation gained steam in the late 1990s, when the Turkish Maritime Corporation and TCDD began signing 30-year transfer of operating rights agreements. Turkey’s two largest ports – Ambarlı and Mersin – are privately operated, but the third-largest (Izmir) is still managed by TCDD. In 2010 Ambarlı and Mersin handled 42% and 17% of Turkey’s total container volume, respectively, while Izmir handled 12%. To some, these performance differences point to the efficacy of private management, especially amid intensifying competition in the global ports business. Whereas Ambarlı and Mersin have increased their TEU handling since 2008, Izmir has experienced a steady decline. Others argue that the decline is attributable to more basic issues: “Izmir Port is inherently ill-equipped for containers and large ships given its shallow draught and lack of road and rail connections,” Tom Grønnegaard Knudsen, Black Sea Cluster managing director for Maersk, told OBG. “The answer is to redesign the facility so that it can focus exclusively on passengers and tourists.”
New Ports
Given the inability of Izmir Port to handle third-generation vessels and rising container volume growth in the Mediterranean, several private projects are filling the gap. In March 2013, APM Terminals (a subsidiary of AP Moeller-Maersk) and Petkim (a subsidiary of the State Oil Company of Azerbaijan) began finalising a deal to develop a container facility at Petkim Port, which is in the town of Aliağa 50 km north of Izmir. The new facility, Aegean Gateway Terminal (AGT), will require an initial investment of some $400m, and have an initial capacity of 1.5m TEUs, which is 50% higher than the capacity of Izmir Port. APM Terminals has garnered rights to operate AGT for 28 years.
A more ambitious venture planned to serve the Izmir region and beyond is Çandarlı Port, which is projected to have an annual container handling capacity of 12m TEUs once completed in 2013. Construction of the facility is being led by Kolin Inşaat and Limak Holding, and is expected to cost over $4.5bn. The optimistic view is that Çandarlı will become a key facilitator of sea-borne trade between Europe and Asia, and help Turkey’s maritime sector achieve economies of scale. “The government is encouraging the development of large, efficient ports like Çandarlı that can attract international shipping lines, and does not want to have a large number of small facilities,” Saygin Narin, CEO of Global Ports Holding, told OBG.
But some are concerned about the supply and demand balance in the Mediterranean, which already has 42 ports (and 98 container terminals) holding an annual TEU capacity of 70m, according to Dynamar, a Netherlands-based maritime consultancy.
Further, given the port development projects currently under way across the region, Dynamar projects that this capacity will rise further to 114m TEUs by 2030. “Çanarlı, which would be one of the world’s 10 largest ports, is simply too big for projected market needs,” cautioned Knudsen.
Port liberalisation and expansion have thus been met with both great interest and scepticism – sentiments likely to continue given the government’s plan to privatise an additional 13 ports nationwide. Public-private partnerships have also inspired mixed reactions. Galataport, a 49-year BOT project for the development of a cruise terminal and entertainment complex in Istanbul’s Karaköy district, finally won approval from OYK in late 2012. Although the project is once again drawing interest from investors, it is also recalling memories of 2005, when Royal Caribbean Cruises won the first tender only to see the sale cancelled after lawsuits were filed by the National Port and Land Stevedores Union.
Clear Skies
The picture is much clearer in the aviation industry, which has recorded remarkable growth rates over the last decade due to sector deregulation and domestic economic expansion abetted by rising foreign trade and tourism. In 2012, Turkish airports handled a total of 130m passengers, up nearly fourfold from the 33m recorded in 2003. This made the local aviation market the sixth-largest in Europe (after France, Germany, Italy, Spain and the UK), with some analysts projecting that Turkey will overtake Spain for the fifth spot during 2013. The planned addition of a major third airport in Istanbul, at an estimated cost of around $9bn, could boost these impressive figures even further by adding capacity for another 150m passengers per year (see analysis).
Turkey’s airborne exports rose threefold during the first nine months of 2012 over the same period in 2011, from $5.9bn to $16.7bn. Given that air transport is typically used for transporting high-margin goods, this bodes well for the nation’s long-term goal of developing an economy based on value-added product manufacturing.
Further, according to a recent study published by Oxford Economics, Turkey’s aviation sector created (directly and indirectly) 204,000 jobs in 2010, and supported thousands more in the tourism sector through multiplier effects. This has helped reduce the national unemployment rate, which fell to 8.2% in May 2012, the lowest level in a decade, and enlarge the country’s middle class.
As noted by Atlasjet’s Alan, the benefits of aviation growth are almost too numerous to count. “Turkey’s airline business has been the driving force behind the country’s rapid development,” Alan said. “As a result of our industry’s success, we have seen gains in everything from industrial productivity to social mobility to state tax collection.”
Turkish Airlines
Leading the way is Turkish Airlines (THY). The fast-growing national carrier recorded a net profit of TL1.13bn (€487m) in 2012, an increase of 19% over the previous year. In addition, from 2011 to 2012 THY’s sales volume rose 26% to TL14.9bn (€6.3bn), while its net profit margin jumped from 0.2% to 7.6%. In 2012 passenger numbers for THY totalled 39m, up 20% over 2011, and the carrier had an occupancy rate of 77.7%. The company also inked a landmark agreement with Airbus in March of 2013 to purchase up to 117 new aircraft at a cost of nearly $9.3bn. Perhaps most importantly, THY became a leading exporter; according to THY CEO Temel Kotil, if service sector companies in Turkey were classified as exporters, THY would rank first in this category, ahead of the current export leader, TÜPRAŞ (the oil refining company).
Key to this success has been international expansion – as reflected in the fact that a mere 16% of THY’s yearly turnover comes from the domestic market, according to company representatives. At the time of writing, THY served 90 countries and 204 destinations, giving it one of the largest flight networks globally. In particular, the carrier has targeted emerging markets in Africa, where it currently serves 33 destinations, and where Turkey has recently developed several new trade and investment relationships (see economy chapter).
In March 2013, Foreign Minister Ahmet Davutoğlu told a gathering of business leaders hosted by the Foreign Economic Relations Board that THY’s expanding global network had played a key role in enhancing Turkey’s “economic geography”, and its role in world affairs. Atlasjet’s Alan agrees: “Success in the airline business has given Turkey more leverage in international business diplomacy,” he told OBG. “Moreover, the country is using its expertise in the field to support developing countries – from Iraq to Sudan to Kyrgyzstan – in their efforts to build indigenous aviation capacity.”
Low-Cost Players
THY is not the only game in town. Other domestic carriers serving local and international destinations include Pegasus, Onur Air and Atlasjet, all of which operate on a low-cost model. Pegasus, the leading private airline, made headlines in December 2012 when it announced plans to buy 100 Airbus aircraft for $7.5bn in what Chairman Ali Sabancı called “one of the biggest orders in the history of Turkish civil aviation” at the time.
This was followed in March 2013 by the announcement that the carrier had applied to the Istanbul Stock Exchange for an initial public offering (IPO) with support from Barclays and I ş Yatırım. The company is projected to sell a 34.5% stake; the majority of shares (70%) are to be sold to foreign investors, while the remaining 30% will be portioned out to various domestic investors. Pegasus has set a price range of TL17-20.40 (€7.30-8.80) According to local press, the IPO would boost the airline’s capital by $75m, thereby supporting its expansion plans. As of early 2013, Pegasus served 24 domestic and 39 international destinations.
The battle for third place in domestic market share is being waged between Atlasjet (7.1% share as of February 2013) and Onur Air (6.6%). In January 2013 Atlas Jet continued to expand its local flights and frequencies from Atatürk Airport and Sabiha Gökçen Airport – adding flights to Adana, Gaziantep, Kars, Kayseri and Van – and announced plans to establish private airline firms in Northern Iraq and South Sudan. In late 2012, Onur Air, which flies to 12 domestic and 80 international destinations, was reportedly looking to sell a majority stake in the airline to investors from Lebanon and Qatar.
Outlook
History shows that transport system investments can generate positive multiplier effects across the economy. This is why the state is calling for heavy spending on all kinds of public projects from bridges to ports to railways. In 2013, it is estimated that local transport projects will cost $60bn. Between 2013 and 2023, infrastructure expenditure ( including on energy projects) will total $250bn, according to official figures.
Much of this funding will have to come from the private sector; therefore improvements to the tendering process are critical. Although the global search for yield makes Turkey an attractive proposition, foreign investors will stay on the sidelines if project conditions are unclear. Indeed, this is one reason why many of the government’s major tenders have generated limited results in the past.
Moreover, given the high cost and long life span of transport infrastructure, a careful investment approach based on solid economic reasoning is essential. Turkey has growing market and an advantageous geographic location, so big spending plans can bring big benefits; however, they can also become a counterproductive drain on resources in the absence of clearly defined goals.
Ultimately, creating a multimodal network that can enhance trade, productivity and supply chain performance will require a unified vision, along with the capital to make it a reality. Success in transport planning would help ensure long-term growth, as well as bring strong returns to investors. Most importantly, sound planning would bring greater economic mobility and opportunity to the people of Turkey.
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