Special report on Turkey: Bridge to the future

Turkey’s $5bn-plus highway and bridge privatisation package may represent a unique opportunity for investors wanting to offset their exposure to Europe’s slower-growing territories, writes Bruno Alves.

“Timing is everything” may be an oft-repeated cliché, but repetition does not dilute its essential truth. Take, for example, Turkey’s re-launched privatisation of its major bridges and highways.

First due to come to market in mid-2008, the $5 billion package was, in the wake of the global financial crisis, deemed too big for cash-strapped European banks and their developer clients to digest comfortably.

Seeing foreign suitors pack up and leave, the Turkish government wisely decided to shelve the road privatisations and await better days. Approaching three years later, the wind is blowing in Turkey’s favour as it gears up to privatise several of its major highways and Istanbul’s two suspension bridges – the bridges said to comprise up to 80 percent of the deal’s total value – in one neat package.

So why is the time right now? A regional powerhouse, Turkey was expected to grow by between 6 percent and 8 percent in 2010, with a 4 percent growth rate forecast for this year. In fact, Turkey has been one of the fastest-growing emerging economies, averaging 4.3 percent annual growth from 2002 to 2009. This compares with an average growth of 3.6 percent for Brazil and 1.7 percent for Mexico, two other appetising infrastructure markets, over the same period.

Compare that with the European Union’s paltry 1.0 percent and 1.8 percent growth rates for 2010 and 2011 respectively, and it’s easy to understand why transport infrastructure companies such as Portugal’s Brisa, Spain’s Abertis, Italy’s Astaldi and France’s Egis are all eyeing Turkey to help diversify portfolios mostly exposed to highly indebted European countries with sluggish growth expectations for the foreseeable future.

While European toll road operators are still reeling from the financial crisis’s impact on traffic, Turkey’s economic growth, combined with its more than 70 million inhabitants (and counting), virtually guarantees that more vehicles will be circulating on its roads in the coming years.

Its motorisation rate – standing at 152 vehicles per 1,000 people – falls behind other emerging economies like Brazil (198/1,000) and Russia (228/1,000) and has a long way to go until it catches up with developed economies like the Netherlands (645/1,000) and the US (820/1,000). It doesn’t hurt that Turkish traffic has been growing steadily by 8 percent over recent years.

Astaldi provided a glimpse of how profitable the Turkish transportation sector can be when it signed a build-operate-transfer (BOT) contract late last year to build a 421-kilometre highway linking Izmir to Gebze, near Istanbul. The expected revenue over the concession’s 22 years and four months is $23 billion to offset a $6.5 billion investment.

All or nothing

But while Turkey is sure to keep offering more greenfield opportunities in the transportation sector, the upcoming privatisation package provides investors with a unique opportunity:  to establish a strong foothold in the Turkish market via the concession to operate and manage some 2,000 kilometres of brownfield highways, including Istanbul’s two suspension bridges – easily the package’s standout assets.

Little wonder, then, that Luis D’Eça Pinheiro, head of investor relations at Brisa, refers to the upcoming privatisation package as an “all or nothing” deal. “This is going to be a big operation. And since it’s going to be tendered as a single package, we [Brisa] either win it, and enter the Turkish market, or we don’t,” he says.

Brisa is excited about Turkey, D’Eça Pinheiro points out, and, from a macro-economic perspective, likens it to Brazil in the early 2000s when the company acquired a stake in Brazilian toll road operator CCR, which it recently sold for a tidy profit. “Turkish GDP is growing and we see currency risk diminishing over time. We also believe regulatory risk to be manageable and think Turkey has a strong judiciary system,” he adds.

Importantly for a toll road developer entering a new market, the motorways and bridges to be privatised are known quantities, with established traffic histories, and tolls already being charged on some of the assets. In 2009, for example, more than 310 million vehicles circulated across the assets, generating a net income of close to $320 million.

“The biggest challenge for us,” concludes D’Eça Pinheiro, “is the package’s size and we are working hard on putting together a consortium, together with local partners, which will allow us to bid for it.” While D’Eça Pinheiro does not provide confirmation, Brisa is rumoured to be partnering with local infrastructure group Akfen, which owns a stake in TAV, the Turkish airports operator.

Traffic’s yin and yang

But while a known traffic record may assuage some investors, it can prove to be a source of concern for others.

“This package is going to require banks to take on full traffic risk. After the financial crisis, international banks have been reluctant to take on traffic risk,” stresses Sule Kiliç, head of financial advisory at Unicredit Turkey’s investment banking division.  “The positive factor about the project is its long traffic history, which supports stable traffic numbers, even during times of crisis,” she adds.

Still, traffic risk might be a problem because the size of the privatisation package is too big to be financed solely by Turkish banks, Kiliç points out. Turkish banks, although well capitalised, are reluctant to provide financing for longer than 10 to 12 years, the banker explains. “Therefore, it is important that the financing structure to be put in place mitigates the limitations raised by different financing groups,” Kiliç adds.

In addition, traffic exposure comes with a twist for foreign banks: the currency risk associated with matching lira-denominated tolls with euro- or dollar-denominated bank loans. Fortunately, the government is aware of this issue, says Francesco Ferrari, legal director at DLA Piper’s recently opened Turkish office.

“Currency risk is, of course, a big question with international banks. But while the government is not willing, in general, to take on currency risk, it is not averse to help mitigate it on a case-by-case basis,” he says.

In fact, one of the rumours circulating in the Turkish infrastructure market is that the authorities are helping to hedge currency risk for Astaldi’s Gebze-to-Izmir BOT motorway.

Regarding the privatisation package, Kiliç says the government is very committed to it and is studying several solutions, within the legal boundaries allowed for the concession, to secure its bankability.

One possibility to appease foreign funders, according to market sources that wished to remain anonymous, could be to index tariffs to the consumer price index (CPI), a common inflationary indicator, with a correction mechanism that would see the government step in if the devaluation of the Turkish lira were to fall below CPI.

However, the final structure of any such provisions will only be known once the tender documents are published. These were due imminently at the time of going to press.

Growing pains

There are other obstacles of a less technical nature that interested investors can expect to encounter, a source working on the ground points out.

“It’s true that everybody is talking about Turkey now but, when it comes to actually participating in a tender, there may be some disappointments. Turkey is not an easy market and it’s sometimes hard to deal with the Turkish public sector. It takes time, there are a lot of questions and a lot of back and forth,” the source says.

He continues: “It’s also not a mature market and the PPP legislation is still not fully in place. So there are quite a few issues that can dampen the general enthusiasm.”

What is undeniable, though, is that enthusiasm for Turkey, despite the potential obstacles, has never been higher than at the present moment.