TURKEY’S construction sector was already suffering from mounting payments arrears for public works before it was hit by the government’s 5 April austerity package. Along with price hikes for basic inputs such as fuel, the package set in motion a treasury review calling for spending cuts of 20 per cent, including new investment.
The government’s budgetary plight had already led to slowdowns – if not work stoppages – on most big infrastructure schemes. In the past eight months, arrears to contractors have climbed to $145 million for the motorway construction programme started in the mid-1980s, for example. Around 50,000 construction workers have been laid off, according to the trades union confederation DISK.
Under the treasury review, the government will concentrate on projects due to be completed this year or in 1995, and priority will be given to externally-financed work. The treasury axe has fallen on several new projects. The Bursa metro was cancelled only days before the municipality was to announce an award after evaluating two competing low bids at around $290 million.
Also reportedly in abeyance is the $200 million first phase of an integrated telecommunications network for the military. Treasury officials admit that the government’s inability to meet payments in itself represents a de facto spending cut.
The government says it has prepared a decree to help contractors by indexing the unit costs of payments to inflation. Yet this additional expense, averaging around 10 per cent, will be covered only by slowing down yet more projects.
However, the treasury has raised hopes in the power sector by negotiating terms for the commercial element of the financing package for a $505 million contract awarded in November to expand the Cayirhan thermal power plant. The interest on the DM 400 million-450 million ($260 million-290 million) deal of 1.75 per cent over the London interbank offered rate (Libor) is considered by bankers to be competitive, though expensive compared with the average of Libor plus 1.25 per cent for Turkish projects prior to the crisis (MEED 1:7:94).
Contractors hope this project will open the way for a number of other contracts in a series already awarded or tendered by the Turkish Electricity Board for the expansion of lignite-fuelled stations together with the installation of flue gas desulphurisation units.
The government has also approved sending invitations to consultants for two large water supply schemes for Istanbul costing a combined $1,670 million. Both already have assured foreign funding, the $1,400 million Greater Melen River scheme from Japan’s Overseas Economic Co-operation Fund, and the Yesilcay scheme from the Kuwait Fund for Arab Economic Development (MEED 24:6:94).
In Istanbul itself, budgetary shortfalls have been compounded for almost a year by the near paralysis of the Istanbul Water & Sewerage Administration (ISKI) following the arrest and subsequent imprisonment of its former head, Ergun Goknel, on corruption charges.
Work is at a standstill on most ISKI projects, and in the wake of the scandal, the future of the key $700 million Riva wastewater plant is in serious doubt. The new municipality of the Islamic conservative Welfare Party (RP) is unravelling the financial mess, but says it will concentrate on finishing the existing workload.
Although tenders had been returned for the Riva project before the corruption came to light, contracting sources say the scheme is not favoured by either the new RP administration or the World Bank, which has so far funded much of the Greater Istanbul Sewerage Project.
The government also says it will promote build-operate-transfer (BOT) projects in future. BOT schemes in theory place no direct financial drain on the exchequer as they are private-sector franchises to finance, build and then operate major utilities before returning them to the government.
The passage of basic BOT legislation in June has cleared the way for projects to proceed, notably by lifting BOT projects out of the realm of concessions, which in Turkey can only be arbitrated in case of dispute before Turkish courts. Contractors can now appeal to international courts for settlement of claims arising out of the complex structure of BOT schemes.
In the third week of June, prequalification applications were invited for the construction of the Izmit bay crossing, a 50-kilometre combination of motorways and bridge spans that will cost an estimated $700 million. Several large BOT deals are also at an advanced stage of negotiations, including the $1,200 million, 672-MW Birecik dam project on the Euphrates river in the south-east, and the $720 million Izmit water supply scheme.
However, like sovereign lenders, international project financiers have grown wary for the time being of fresh Turkish risk. The international markets may not be receptive to BOT syndications until the autumn at the earliest, according to banking sources.
Nevertheless, the BOT venture proposing to build a 500-MW gas fired station at Ereglisi on the Sea of Marmara says it has worked out a unique structure for the deal. The $51.8 million commercial element of the $535 million financing package is a standby facility for cost and working capital overruns, and is small by comparison with the proposed syndications for other BOT deals.
The outlook for contractors for 1994 and beyond is poor, but in the medium to long term the prospects for the Turkish project sector are resilient.