Pipelines fuel Tekfen's rapid growth

22 March 1996

ONE of the main questions facing its three founding partners when Turkey's Tekfen first started out in 1956 was whether the fledgling company could afford a secretary. Today it faces decisions over which international contracts to pursue, looking abroad to finance the kind of schemes for which it has become renowned.

'The driving force has been a resourceful and enterpreneurial spirit, not capital.:' says Murat Gigin, president and board member of Tekfen Insaat & Tesisat (Tekfen Construction & Installation). Aged 44 years, he first joined Tekfen in 1975, and has directed its contracting operations since 1988. The companys name itself derives from a merging of the Turkish words for technology and science.

Its growth from small beginnings in the construction of NATO bases exemplifies the natural process of diversification in a developing economy from a contracting core to an industrial conglomerate. With assets of around $1,000 million, Tekfen Holding now ranks amongst the five largest corporations in Turkey.

Construction still accounts for much of an annual group turnover from around 40 different companies valued at $1,500 million-2,000 million since the early 1990s. Though affected like other corporations by economic crisis and demand slumps in 1994, the group managed to post an operating profit for the year of $131 million on a turnover of $1,100 million.

With activities ranging from dairy products to foreign trade, shipping and tourism, the group includes the country's largest fertiliser producer, lamp maker and steel fabricator and is at the cutting edge of high technology. In 1990, it formed Thomson-Tekfen Radar in joint venture with France's Thomson-CSF. following the signing of a contract to produce three dimensional, longrange, mobile radars for the Turkish air force.

Survival of the fittest is the group's philosophy, according to Gigin. 'We do not tolerate soft bellies,' he stresses. For example, the group's small merchant institution, Tekfenbank, must compete on its own merit rather than depend on group business.

From work on pipelines and other energy supply facilities for the NATO bases. Tekfen progressed to the construction of Turkey's first refinery at Batman in the southeast. It has since participated in the erection of all of the country's five refineries, two petrochemical complexes and seven fertiliser plants,

acquiring expertise as it moved downstream, first in civils work, then as a subcontractor and finally as main contractor in its own right. In the 1990s. Tekfen has worked with Italy's Snamprogretti on the installation of complex hydrocrackers at the Izrnit and Aliaga refineries, in contracts valued at around $250 million-30() million each.

The construction companys speciality throughout has been pipeline contracting. Its notable crude oil projects include the completion in 1967 of the 465-kilometre Batman-Dortyol pipeline; in 1977 of the first Iraqi cxport pipeline across the south-east; in 1986 of the 447-kilometre, YumurtalikKirikkale oil pipeline; and in 1987 of the second Iraqi export pipeline.

Central Asian projects

In 1994 Kazfen, a 50-50 joint venture between Tefken Construction and the state Kazakh Pipeline Company received an exclusive mandate for the project management of a 900-kilometre. east-west pipeline in Kazakhstan valued at around $600 million. Massive projects elsewhere in Central Asia for the export of oil and gas are being keenly followed by the company, which also hopes to participate in any repair work needed for the reopening of the Iraqi expurt lines after closure for five years by UN sanctions, says Gigin.

The company has deployed its pipeline expertise elsewhere, notably for water supply in Saudi Arabia. It completed the Assir and AI-Jubail-Riyadh water transmission systems in 1988 and 1990 respectively and is at present low bidder for a $150 million water pipeline on the kingdom's east coast.

But Tekfen is by no means limited to pipeline work and process engineering. Completion is expected during 1997 of a $1,800 million motorway between Tarsus, Adana and Gaziantep in the southeast, representing the second largest civil engi neering contract ever undertaken in Turkey besides the giant Atarurk dam on the Euphrates. The building division is kept busy by one of the largest housing developments in Europe. a project in Istanbul aiming to construct about 28 million square metres of living space, equivalent to 30,000 apartments.

The company has been at the forefront of the Turkish overseas contracting effort, working as far afield as a refinery in Aruba offshore of Venezuela. At present, bids are outstanding in 23 different countries from Pakistan to Morocco, says Gigin.

Tekfen has a special association with infrastructure development in the region. A pioneer entrant to the booming Middle East market in the early 1970s, it was the first Turkish prime contractor in Saudi Arabia, Kuwait and Yemen. However, unlike other Turkish firms, the company has not yet worked in North Africa, considering markets like Libya to be too risky.

By 1990, backed by its substantial Middle East workload, Tekfen could pick and choose between a plethora of inquiries. But the Gulf crisis of 1990-91 exposed considerable contracts in Kuwait and Iraq, where it was repairing installations such as refineries damaged during the Iran-Iraq war. Soon afterwards, the collapse of the Soviet Union stalled four large contracts. 'So there we were in 199091, like a fish out of water, with a significant amount of our reserves deployed in staff and equipment,' Gigin says. Turkey was also hit economically by UN sanctions on Iraq. 'We realised we had put all our eggs in a basket of high risk or developing markets.' After a global search for a mature market to even the balance, Tekfen finally settled on Europe.

'We always felt Turkey was a part of Europe, and that Tekfen belonged to Europe,' says Gigin. On 1 January, Turkey entered a customs union with the EU.

Sales by the Treuhand privatisation agency in east Germany opened up an opportunity to obtain a market share in the former communist state's largest contractor, Hallesche Metteldeutsche Bau (HMB), with around 4,100 employees, which Tekfen bought wholesale in early 1993.

'We gave ourselves three years to restructure and reorganise the company and are hoping to break even in 1996,' Gigin says. Under Tekfen management since its purchase, HMB has been rationalised and downsized to around 1,000 staff, while Tekfen itself has invested over DM 100 million ($146 million). Where once HMB's workload was spread over around 700 sites and jobs valued at between DM 200,000300,000 ($290,000-440,000), now there are around 35 with contract values of about DM 10 million ($14 million) each.

Besides opening a European gateway for Tekfen, the acquisition of HMB also provides greater bidding flexibility elsewhere and access to German and EU project funding, Gigin says. For example, the two companies are now bidding jointly all over the CIS. Regional opportunities requiring cheaper management and labour are handled through Turkey.

Gigin does not expect the domestic construction market for major state-supported projects in Turkey to pick up until the second half of 1997. The sector probably faces another difficult year in 1996, following austerity after 1994's economic crisis, unless the government puts its house in order, he says.

The need to source foreign capital to overcome budgetary limitations at home will reinforce a growing trend towards privatisation, particularly through the buildoperate-transfer (HOT) model using private sector financing, Gigin adds. Among a number of applications to the Energy Ministry, Tekfen together with the US Cogen has proposed a HOT project to upgrade and double the capacity of an existing 600-MW, gas-fired plant at Hamitabat in Turkish Thrace.

At present, the state directly funds around 80-85 per cent of larger infrastructural development, with the exception of housing, but that will fall to around 50 per cent over the next few years. 'Private industry will start investing in its own energy and communications projects,' believes Gigin. 'So our clientele will change.'

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