State guarantee on loans for high-cost mega-projects sparks controversy

ANKARA

Istanbul’s third bridge and third airport could be included among projects benefiting from the State Treasury's insurance. AA Photo

The State Treasury will guarantee a return on the costs of companies assuming mega-projects worth up to 3 billion Turkish Liras in build-operate-transfer tenders, due to a new regulation published in the Official Gazette on April 19. The move, however, has stirred anger that it could end transparency in public tenders and leave the state on the hook if projects fail.

According to the new arrangement, the Turkish state will reimburse 85 percent of loans to the companies involved in project tenders if the deal is canceled due to company-related faults. The Treasury will reimburse the total amount of loans if the tender is annulled for any other cause.

Only projects worth over 1 billion liras will benefit from the Treasury insurance – apart from Health and Education Ministry projects, including public hospitals and universities, for which a minimum amount of 500 million liras is required. The ceiling amount can also be doubled to 6 billion liras following a ministerial Cabinet decision.

Change also affects Istanbul ‘trilogies’

The regulation also stipulates in a temporary article that any bid concluded in a tender announced after Dec. 1, 2012, can benefit from the new arrangement.

According to daily Hürriyet, the provision also foresees that those particular projects will not be subject to the 6 billion-lira ceiling. This will effectively mean that the consortiums that won the tenders for mega-projects such as Istanbul’s third bridge and third airport could be included among projects, thus retroactively benefiting from the new regulation. The controversial Istanbul Canal project is also among the mega-projects for which construction rights will soon be put up for auction.

The bridge being built over İzmit Gulf as part of the Istanbul-İzmir highway Project, expected to cost around $6 billion, will also enjoy state guarantees. In addition, the winners of the tenders for 15 city hospitals and eight hospital campuses, with a total cost estimation of 20 billion liras, will be covered by the new regulation. The city hospitals project is known to have difficulties in financing.

Questions have recently been raised over possible failure to fund such ambitious projects, and the new regulation appears to be an attempt by the government to sweeten deals and attract firms.

The 1990s experience

Turkey had state guarantee for public tenders in the 1990s. One project, the building of Yuvacık Dam in İzmit, especially made the system famous when the contractor abandoned the project, and despite the flaws in the tender, the construction was completed with state funds at a loss of billions of dollars to Turkey.

Removing the state guarantee for public tenders was one of the first things done in the period of economic restructuring following the 2001 crisis.

Economy Minister Nihay Zeybekçi dismissed the criticism against the regulation.

“Treasury guarantee for strategic and mega investments is necessary for our national interests,” Zeybeki told reporters yesterday. “Ninety-five percent of the projects will still not be under guarantee, such as nuclear power plant and highway projects. It is not about saving failed projects; Treasury guaranteed tenders will be closely followed. The contractors of such projects will be able to receive loans with better conditions with the guarantee. So state guarantees on strategic projects is a must.”

However, the regulation has been harshly criticized by ex-senior Treasury civil servant Hakan Özyıldız for removing any transparency regarding state financing in public tenders.

Özyıldız claimed that the arrangement would mean a return to the era before the massive economic crisis of 2001, lifting financial discipline requirements from firms engaged in multi-billion lira projects.