Infrastructure to Turkey (Rail and PPP)
(Last updated: 27 Sep 2013)
Trends and opportunities
The market
Turkey is one of the key countries in the Middle East region when it comes to infrastructure projects. According to Goldman Sachs, Turkey will become the world’s 9th largest economy by 2050 (Source: Sabah Newspaper, Goldman Sachs, Turkiye 2050’de dunyada dokuzuncu buyuk olur). Turkey saw a rapid decline in its economy during the global financial crisis, but has recovered quickly.
Turkey commands a unique position bridging Europe and Asia, and its construction sector has grown rapidly. It has done this by not only exploiting opportunities from the development of the local economy, but by successfully penetrating opportunities in the Middle East, Central Asia and Russia. Collaboration with Turkish contractors or consultants can simplify market entry into challenging but potentially lucrative markets in the Middle East, North Africa and the Central Asian Republics.
Turkey is a candidate country to become a full member of the European Union (EU). Turkey is already a member of the Customs Union in the EU and discussions to align laws and regulations to the EU standards have been very successful. The EU has already allocated pre-accession funding to Turkey, which is mainly bound for the building and refurbishment of highways, railways and ports. In addition to the EU, the World Bank is also active in this space. This will create opportunities for Australian companies with experience in similar projects in other developing markets.
Concession contracts, including very large transportation and PPP projects are continuing to present opportunities for those providing technical and legal services to lending banks and project consortia. These major projects may provide opportunities for Australian companies that supply niche design services, materials or products to form part of the supply chain. Contracts for such projects are often formed by consortia of Turkish and foreign contractors.
While Turkey has its own strong construction consultancy sector, there are opportunities for Australian companies in the commercial and retail sectors where institutional investors are involved. Tourism projects remain a growth area, with plans for further resorts and marinas built to international standards, and a growing interest in heritage tourism. Regeneration of city centres is a growing area of interest as well. In Istanbul, competition for the master planning for parts of the run-down areas of the city has already commenced.
Increased energy costs and concerns over security of supply are beginning to drive a commitment to greater sustainability and energy efficiency in buildings, and there appears to be limited local expertise in this area. Project management and construction management services do not appear to be well developed, and there are indications that even larger contractors are recognising a skills shortage that is beginning to impact on performance and profitability.
The building and construction sector
Istanbul is one of the five largest cities in Europe by population, with an estimated 16 million inhabitants. The 2008 OECD Territorial Report for Istanbul reports that over the preceding three years, there was progress towards a more open, integrated and decentralised system of urban planning in the city. The OECD report acknowledges that moving towards more sustainable development is probably one of the greatest challenges for Istanbul and that environmental and sustainability issues are only now moving properly onto the agenda.
The Metropolitan Planning and Urban Design Centre (IMP) has been established to drive forward coordinated urban planning for the city. There is a recognised need for urban regeneration with consideration for the environment, seismic risks and urban transportation. These considerations are not necessarily being translated into reality due to the large number of diverse stakeholders involved in progressing redevelopment.
Another problem has been the high level of illegal and uncontrolled development that has taken place over recent years as the city has expanded. There is a complex web of political and commercial interests in regeneration.
Rail
Railways are enjoying a period of significant and sustained investment in Turkey, with major investment in high-speed lines, rail-led solutions to freight and distribution, and urban transportation in major cities across the country. A commitment to invest A$42 billion has been made (A$21.9 billion before 2023), in a program of expansion up until 2035. The detail of this expansion program is:
- 2,622km of high-speed track by 2013
- A further 6,792km of high-speed track by 2023
- 4,707km of new conventional track by 2023
- An additional 2,960km of high-speed track and 956km of conventional track in the period from 2023 to 2035
A number of major cities have urban rail systems, Light Rapid Transit systems (LRT), trams or a metro of some kind. Extensions or new lines are much in demand and being planned. In Istanbul alone, there are plans to provide 118km of new lines by 2018 and a further 276km by 2023.
Rail is seen as the preferred solution for freight, with new freight hubs planned around the country that will use the high-speed lines and the Marmaray Crossing to carry freight overnight. The environmental issues associated with freight are well recognised in Turkey. Road congestion is an issue, especially at border crossings, with as much as 95 per cent of freight currently on the roads. There is an interest in growing railway freight in the market for domestic and international routes. Turkey is keen to capitalise on its strategic geographical location (Turkey has borders with eight countries).
Turkey is developing rapidly and has become a manufacturing force in Europe. This will further drive the demand for rail freight between Asia and Europe. The future may see an end to the monopoly of Turkish State Railways’ (TCDD) operations, with cross-border freight and passenger ‘open access’ operators being allowed access to track. To facilitate change and to comply with EU directorates, TCDD is undergoing reform and is separating infrastructure, passenger and freight operations in a far-reaching program of modernisation. TCDD is currently a vertically-integrated railway, also owning in-house manufacturing facilities for rolling stock and track materials, as well as maintenance units. Ports and a rail ferry have been part of the portfolio but the former are now being privatised, and the latter upgraded to include a ferry terminal with Russian gauge to accommodate cross-border traffic.
Historically, TCDD has owned a great deal of the maintenance and supply chain market. Many of these facilities have been acquired in partnership, with technology transferred in-house, for example, for track components, locomotives, wagons and passenger cars and their components. Australian companies may see this as an opportunity.
The market is ready to work with international partners and there is desire to diversify these links. France and Germany are traditional players in the Turkish rail market, with more recent involvement from Chinese, Japanese and Korean companies.
Public Private Partnerships (PPP)
Due to Turkey’s goal of high, sustainable and permanent growth, and continually increasing population, demand for infrastructure (such as hospitals, schools and universities, motorways, airports, marinas, energy production projects) is also increasing. There are not adequate public resources available, requiring the implementation of alternative financing and PPP models.
Key sectors have been identified by Turkish Government for PPP:
- Social/municipal infrastructure
- Healthcare
- Transport networks (rail, road and sea ports)
- Waste management
- Financing capability (banks)
Turkey is pioneering the use of PPPs in social infrastructure projects. Continued interest from consortia consisting of major European players is a positive trend that will provide opportunities for those looking to capitalise upon growth in Turkey’s relatively buoyant social infrastructure sphere. However, there is risk presented by Turkey’s relatively embryonic PPP model and deteriorating domestic credit system.
(Source: Business Monitor International, View June 2012)
Raising long-term financing for large infrastructure projects can be challenging in emerging markets like Turkey therefore foreign banks (including Australian ones) will have essential role to play in Turkey’s project finance market.
Opportunities
Pre-project studies and technical assistance
EU funding will increase as Turkey progresses towards EU membership. This will create opportunities for Australian consultancies to participate in project identification and feasibility, capacity building of local institutions, technical assistance and project supervision. Current areas of opportunity include the new highway and rail projects. The Nabucco pipeline project, a proposed natural gas pipeline from Erzurum in Turkey to Baumgarten an der March in Austria, may also present opportunities through the pipeline itself, the associated environmental issues and the related infrastructure improvements that will be required.
New projects
Tourism is a growth area requiring continuing investment in many areas. The development of international hotels, holiday villages and resorts, marinas and other facilities present opportunities for international designers since the facilities have to compete in quality and concept on the world stage.
The concept of regeneration is now developing in Turkey although this appears to be focused on the generation of land value rather than a balance between this and community needs. As the process develops and matures, there is likely to be the opportunity for those with experience of urban regeneration to provide services to the private and public sectors. Within Istanbul, there will be continuing interest in this sector driven in part by the recognition of the risk of further serious earthquakes.
The concept of sustainability is beginning to be addressed in Turkey as energy costs rise and public perceptions change. These ideas are relatively new to Turkey, and there are opportunities for those with experience of sustainable design for both domestic and commercial development to raise awareness and take market share.
Services to Turkish contractors
Turkish contractors have been very successful at securing projects in Turkey and also in developing countries at competitive prices and with a rapid mobilisation. A market is developing to sell specialist services in cost, project, and construction management to Turkish contractors in both their home markets and overseas in order to improve their performance and drive down costs. A number of Australian companies (eg. Ausenco and Aconex) already have strong relations with Turkish contractors and have worked in projects in the Gulf Cooperation Council (GCC) and Commonwealth of Independent States (CIS) countries.
Major projects pipeline
World's biggest airport awarded: The Turkish government announced in May 2013 the winning bidders for Istanbul's third airport. Dependent on demand dynamics, if fully realised the airport will be able to handle 150 million passengers annually and have six runways. The total construction cost of the project has been increased to an estimated A$9.6 billion, making it the largest PPP in Turkish history. The winning consortium was headed up by Limak Holding of Turkey. The winning bid came in at EUR22 billion (A$32.1 billion) for the 25 year concession to build and operate the airport.
Road privatisation to continue: The long delayed road privatisation package encompassing 2,000km of roads, together with Istanbul's two suspension bridges, suffered a setback when a previously successful bid was cancelled in February 2013. The government cited that the A$6.3 billion bid from a Turkish-Malaysian consortium (Koc Holding, UEM Group, Gozde Girisim) was too low. Finance Minister Mehmet Simsek announced in July 2013 that the road package will be re-tendered in 2014, which should align with improving economic conditions.
Building bridges: The re-launched tender for the North Marmara Highway project (including a third bridge across the Bosphorus) worth A$2.7 billion was awarded in May 2013 to Italian developer Astaldi, together with Turkish construction firm Ictas. The construction of the bridge has been subcontracted to Hyundai E&C and its partner SK Engineering and Construction in a contract worth A$463 million.
New silk railway: Turkey's railways sector is set for massive investment in light of its impending privatisation. At the top of the list of major projects is the Chinese funded new high-speed railway link across Turkey (Edirne-Kars) at a cost of A$38 billion. If completed, it would be the country's largest railway project. The Turkish government has also announced that it plans to invest TRY20 billion (A$12.1 billion) in expanding Turkey's rail network over the next three years. The country's third high-speed line opened in March 2013, between the central cities of Eskisehir and Konya.
Residential/non-residential potential: After a tough 2012, the residential and non-residential sector is expected to benefit from greater housing demand and continued healthcare privatisation efforts in 2013. In healthcare, a case in point is the Kayseri hospital which is said to be close to a A$624 million deal with Turkish company YDA and Italian company Inso. Also, The Eskisehir City Hospital had 12 bids progress through to the next round in April 2013. Elsewhere in the non-residential sector, government efforts to turn Istanbul into an international financial hub will also see a major construction project to create the Istanbul International Financial Centre, which is being undertaken at an estimated cost of A$3 billion.
In the residential sector, providing long-term growth will be Turkey's Urban Transformation Project, which aims to replace large swathes of housing stock in the country's earthquake prone provinces with new buildings. Estimated to be worth A$553 billion over the next decade, the plan has recently attracted its first foreign investor. In a deal worth A$332 million Stern Immobilien and Turkish builder Vartas Yapi announced they would build a 3,000 unit housing block in Istanbul, to be equally financed by both partners.
(Source: Business Monitor International, Infrastructure Report)
Tariffs, Regulations and Customs
Regulations
Legislative Framework
The government is authorised under the constitution to enter into contracts with the private sector to carry out certain public services, and is subject to a number of laws applying to different types of PPP projects. As a result (similar to in other countries), a number of laws and secondary legislation potentially apply to any PPP project.
Three principal structures have been used in recently tendered PPP projects:
- The build-operate-transfer model has been generally used in greenfield PPP projects
- A structure involving the transfer of the rights to operate a project has been most commonly followed in the privatisation of brownfield PPP projects. These projects have effectively involved the transfer of the rights to operate a project for a fixed period of time.
- Greenfield healthcare PPP projects are being developed under the build-lease-transfer model. Under this structure, healthcare facilities and certain ancillary facilities are developed by the private sector, and then leased to the government. Renewal of existing healthcare facilities may also be tendered out to the private sector: in these cases the project company can also undertake non-medical services or the operation of non-medical facilities.
A draft law has been prepared by the Ministry of Development (formerly the State Planning Organisation) that would provide a general framework for the PPP regime by consolidating the existing PPP legislation. However, it is not widely expected that it will pass in the near future.
Award process
The main methods for tendering PPP projects are sealed and open bids (among all or certain prequalified bidders) and negotiated procedures.
Contractual structure
PPP projects will have an implementation agreement setting out the obligations and the financial contractual terms.
The private sector concession over a PPP project may be up to 49 years, however, in practice it is often considerably shorter. For example, the concession periods for the greenfield build-operate-transfer projects for Istanbul Atatürk Airport and Antalya Airport were five-and-a-half and nine years, respectively. Under the transfer of operating rights model, the concession period is generally much longer, for example the operation of Zonguldak Airport and Gazipaşa Airport in Antalya was awarded for 25 years. Under the build-lease-transfer model, the first contract granted for the Kayseri Integrated Health Campus has an investment period of three years and a lease period of 25 years.
At the end of the term, the PPP project must be transferred back to the government in good working condition, at nil cost and without any encumbrances. However, if the land is owned by the project company (which can be the case for healthcare facilities developed under the build-lease-transfer model), a sale price needs to be agreed.
Turkish law governs implementation agreements. The dispute resolution mechanism can be either arbitration (which, other than for healthcare PPP projects, can be international arbitration if there is a foreign element – foreign arbitration awards are recognised in Turkey) or the courts.
Financial terms
Payments to the government for being awarded a PPP project may be up-front, periodic, or a combination of the two. In addition, for brownfield PPP projects, the project company has an obligation to offer existing services at controlled tariff rates for specified periods. There may also be covenants encouraging cost separation in order to ensure fair and competitive pricing.
If expropriation of privately owned land is necessary for the development of a PPP project, costs relating to such expropriation will need to be factored into the project company’s costs. Government subsidies, if any, to be provided to a project company may take the form of a demand guarantee (providing the project company with a limited guarantee as to the level of its revenue) or a guarantee of the debts owed to the PPP project’s lenders. There have not been debt guarantees in recently or currently tendered PPP projects, but there have been demand guarantees, such as a certain number of guaranteed passengers for airport PPP projects and a traffic guarantee in the upcoming third Bosphorus bridge PPP project.
There are statutory exemptions from value added tax for greenfield and brownfield PPP projects. Further, the actual deal documents are exempt from stamp duty and fees. Double taxation agreements and bilateral investment treaties to which Turkey is party provide certain additional limited protection to foreign sponsors and lenders. The project company will need to provide a bid bond of one to three per cent of the total investment required to undertake a greenfield PPP project when the implementation agreement is signed. The equity part of the financing that the project company obtains should be at least 20 per cent of the expected fixed costs of the PPP project.
Regulatory issues
When undertaking a PPP project, depending on the model used and the specific sector, various permits, clearances and/or opinions from governmental bodies will be required, such as planning permissions, environmental and antitrust clearances. Further, PPP projects may trigger other regulatory issues not addressed under the PPP legislative framework. Handling of these issues can be time-consuming and open to challenges, possibly causing delays in the investment and/or operation phases. For example, obtaining planning permission requires the zoning plan are approved by the relevant municipality or ministry, certain maritime activities are reserved for Turkish persons under the Cabotage Law, and approval from the General Staff of the Turkish Military is required for the development of airport PPP projects.
PPP projects, for which an environmental impact assessment is required, may only proceed if the Ministry of Environment and Urbanization issues an ‘environmental impact assessment affirmative’ decision. Other PPP projects may be subject to a less detailed assessment, at the end of which an environmental impact assessment may not be required. Transfer of operating rights of brownfield PPP projects are subject to the Council of State’s (the highest administrative court) opinion.
(Source: Project Finance International European Report, September 2012)
Marketing your products and services
Market entry
Turkey, with its growing project portfolio and import propensity presents significant opportunities for Australian businesses in the infrastructure, building and construction industry. However, the relative challenges in qualifying partners or customers and different business culture makes it difficult for Australian companies to identify the most suitable contacts and secure appointments.
Austrade's experienced Business Development Managers are members of relevant building sector business groups. They are well connected with key business people and able to open doors on behalf of Australian companies. Austrade arranges appointment programs for companies making individual visits.
There is a big difference between the commercial laws in Turkey and Australia, which if not understood by Australian companies, can result in decisions which impede the growth of business. It is very important to understand the legal context. Austrade provides information about agency/distribution and legal regulations and the different types of commercial entities open to Australian companies.
Links and industry contacts
Association of Turkish Building Material Producers – www.imsad.org
Association of Turkish Consultants and Architects – www.atcea.org.tr
The Building Information Centre – www.yem.net
The Chamber of the Architects of Turkey – www.mo.org.tr
Doing Business – guidance on various business issues – www.doingbusiness.org
European Bank for Reconstruction and Development – www.ebrd.org
European Investment Bank – www.eib.com
European Union – www.europa.eu
General Directorate of Highways – www.kgm.gov.tr
Greater Municipality of Ankara – www.ankara-bel.gov.tr
Investment Promotion and Support Agency – www.invest.gov.tr
Istanbul Metropolitan Municipality – www.ibb.gov.tr
The Marmary Project Istanbul – www.marmaray.com
Ministry of Tourism and Culture – www.kultur.gov.tr
Turkish Contractors Association – www.tmb.org.tr
Turkish Electricity – www.turkey-electricity.com
Turkish State Railways – www.tcdd.gov.tr
Urban Age, Istanbul – www.urban-age.arkitera.net
The World Bank – www.worldbank.org
Contact details
The Australian Trade Commission – Austrade – is the Australian Government’s trade, investment and education promotion agency.
Through a global network of offices, Austrade assists Australian companies to grow their international business, attracts productive foreign direct investment into Australia and promotes Australia’s education sector internationally.
For more information on how Austrade can assist you, contact us on:
Australia ph: 13 28 78 | Email: info@austrade.gov.au
A list of Austrade offices (in alphabetical order of country) is also available.