Prime Minister Recep Tayyip Erdoğan’s ambitious 2023 vision has investors flocking to exploit Turkey’s potential. IFLR1000’s Adam Majeed looks at the various project opportunities and considers the impact on legal market
Turkish ambition
The target is 2023, the year when Turkey will reach its 100th anniversary since the establishment of the Republic. The country is looking to become one of the 10 largest economies in the world and has planned $100 billion worth of infrastructure projects over the next five years. More than $50 billion will be spent in energy and there are plans for hospitals, airports and roads among other ambitious projects.
The 2023 vision is the government’s national development strategy that looks to steer the country’s significant recent economic growth into a tangible improvement in quality of life for its citizens.
Turkey’s attraction is obvious. While its European neighbours struggled in the aftermath of the financial crisis, Turkey’s economy continued to grow. In 2010 and 2011 its economy grew by an impressive 9%. Even though this slowed down to 2% GDP in 2012, the government is predicting growth of 2-3% this year, and this is despite the Gezi park protests – a symptom perhaps of its strong ambition – and the recent government corruption scandal. These social tremors have had a short-term impact on the financial markets; it is far too early to tell whether there will be any longer-term impact and as long as Turkish GDP increases, so will the appeal for law firms and their multinational clients.
“The Turkish legal market has been in drastic transformation in the last five years,” says Zeynep Çakmak, partner and project finance expert at Çakmak Attorneys. “I think it’s parallel to the increase of foreign investment into the country and that’s of course tied to Turkey’s energy and infrastructure sectors and other areas. It’s not only attractive for local players but also for international players because Turkey is a stable and reliable emerging market compared to other countries.”
Such ambition has seen targeted investment across the spectrum in healthcare, education, energy, environmental sustainability, transport infrastructure, tourism and sport. Foreign law firms - whether US or European headquartered - have been flocking to exploit Turkey’s potential and have found ways to negotiate cautious bar rules to establish a physical presence in the market.
Apart from being one of the rare growing European countries, Turkey is strategically located to tap into Europe and the Middle East market. English law is used in Turkish transactions and in the deals of Turkish players outside the country, but at the same time the country is ideally positioned as a regional hub for energy and infrastructure fuelled by Islamic finance.
Laying foundations
Of high priority are public projects that involve the improvement of Istanbul’s infrastructure problems, mostly focusing on the transportation sector.
“We have hardcore infrastructure projects where there are roadways, bridges and things of that nature,” says Ender Özeke, partner at Hergüner Bilgen Özeke. “You see the PPP (public-private partnership) model and the BOT (build-operate transfer) model in the health sector and in highways.”
On example is the Marmaray project, a rail transport project in Istanbul and already the first phase is up and running having opened up in October 2013. The project is made up of an undersea rail tunnel under the Bosphorus strait and the modernisation of existing suburban railway lines along the Sea of Marmara from Halkalı on the European side to Gebze on the Asian side.
The construction of a third bridge linking Europe and Asia across the Bosporus Strait is high on the Turkish government’s agenda. The construction of the Yavuz Sultan Selim Bridge is being carried out by a consortium of the Turkish company İçtaş and the Italian company Astaldi at the cost of $2.5 billion. The construction was originally expected to be completed in 36 months with the opening date scheduled for the end of 2015, but Erdoğan moved the expected date back to middle of the year. It will be one of the biggest build-operate-transfer (BOT) projects in Turkish history.
Designed to alleviate Istanbul’s traffic pressure, the Eurasia Tunnel project is a road tunnel under construction in Istanbul that crosses the Bospourous strait undersea. It is expected to be completed by October 2016. The joint venture Avrasya Tüneli İşletme İnşaat ve Yatırım was created by Yapı Merkezi from Turkey and SK E&C from South Korea. The Eurasia Tunnel also employs the BOT model and the financing package amounts to $1.2 billion, including players such as the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and the Export-Import Bank of Korea.
The plan to build a third airport in Istanbul to meet increasing demands is just as – if not more - important to Turkey’s overall ambition. With a 100 million annual passenger capacity, İstanbul Yeni Havalimanı is set to become the largest airport in the world. Excluding financing, the total project cost is expected to be €7 billion and the Turkish joint venture consortium of Cengiz-Kolin-Limak-Mapa-Kalyon won the tender for a 25-year lease to pay the government €26 billion starting from 2017.
The under-construction Gebze-Izmir Motorway is the largest ever infrastructure project in Turkey's history. The $6.5 billion road project’s prominent feature is the 3.3km Izmit Bay suspension bridge. With completion expected in 2018, the motorway project - linking Gebze to the city of Izmir - is being built through a PPP and is the first road project in Turkey to be procured under the BOT model.
Perhaps the country’s most ambitious project is Kanal İstanbul, the Turkish project name of an artificial sea-level waterway. The target is 2023 and the project aims to minimise shipping traffic in the Istanbul strait. With a projected cost – purely from domestic sources – of $10 billion, it is planned that Kanal İstanbul will bisect the current European side of Istanbul and form an island between the continents of Asia and Europe - the new waterway would sidestep the current Bosphorus. In April 2013 the first stage of the project - which includes the construction of network bridges and highways - began. The idea of a canal linking the Black Sea with the Sea of Marmara is historically rooted and carries symbolic weight - it has been proposed at least seven times in history. In fact, the first proposal for this project was made by the Ottoman sultan, Suleiman the Great.
While transport infrastructure has been producing a range of ambitious projects, the country has been investing into the social and municipal infrastructure sectors for quite some time. In Turkey PPP’s have long been utilised as a way for the government to transfer risk to the private sector. The 1980s and 1990s brought in new methods – such as BOT, build-operate (BO) and transfer of operating rights (TOR) - of delegation as alternatives to the inflexible concession method. In 2007 the government set up a specialised PPP unit marking its preference for the service, and the legislation – which is very much work in progress – is being harmonised to reflect that.
“PPP is the main tool for the government to realise the 2023 investment programme,” says Türker Yöndem, partner and project finance expert at Esin Attorney Partnership. “Turkey has been dealing with PPPs since 1990 and has had around 165 medium to large PPP projects valued at over $50 billion.”
The heathcare industry is by far the most interesting industry when it comes to Turkish PPPs. In March 2013, the government passed a PPP law to boost the number of healthcare projects undertaken by this method.
Reducing dependence
Turkey is highly dependent on external energy sources and imports over 70% of its energy for domestic needs. Turkish dependence on foreign sources amounts to 98% for natural gas and 92% for petrol.
“Because of the shortcomings of the country and the booming of the economy, there will always be a number of projects in the energy sector,” says Özeke. This is a pressing matter for the country as policies supporting the construction of new highways, bridges, and private vehicle ownership only promote petrol consumption.
Also while Turkey is trying to decrease its use of natural gas to create power and promote the use of imported coal and nuclear energy, the use of natural gas in private households is widespread and insufficient insulation in newly constructed housing only fuels demand. But the state is also looking to exploit the entire potential of domestic coal to power the economy by 2023, considering that 44% of domestic brown coal pits are already in use.
Due to its advantageous location – being close to Europe, Central Asia, the Caucasus and the Middle East - Turkey is ideally located for the transit of energy sources between Europe, Asia and the Middle East. In fact since the outbreak of the political crisis in Ukraine, the country’s stature has increased in European eyes when it comes to importing oil and gas. State control is on the decline and the market has opened up to Turkish and international companies. The floodgates may well have opened and large European energy companies such as EON and RWE have shown interest.
One exciting project on the horizon is the $7 billion Trans-Anatolian gas pipeline (TANAP), a planned natural gas pipeline from Azerbaijan through Turkey to Europe with construction set to start in 2014. TANAP is expected to pull 16 billion cubic meters of gas from the Azerbaijani Shah Deniz II gas field and 10 billion cubic meters would flow to the European market.
Turkey presently has no nuclear power plants, but two are planned to come online by 2023 with a further three planned for 2030. Turkey plans to be 20% more energy efficient by 2023 and scale up renewable energy to meet 30% of its energy needs. Hydroelectricity in Turkey is the largest renewable source of electricity and the state is looking to wholly exploit its hydroelectric potential, increase wind power capacity to 20,000MW and take full advantage of its 600MW geothermal electricity generation potential. Solar power in the south looks likely to increase rapidly and wind power in Turkey is mainly in the west.
Changing the legal landscape
There is no doubt that Turkish ambition in energy and infrastructure is changing the country’s landscape. It’s no surprise either that such profound change has transformed the legal environment drastically in the last few years.
The Turkish legal market is fragmented and fluid. There are spin-offs and international firms – Clifford Chance, Baker & McKenzie, Allen & Overy and Dentons to name a few - are coming in droves. “This year we hired 16 new trainees and we interviewed 450 graduates in order to get them, and they told us how they see the legal market,” says Özeke. “The young generation see the market divided into three categories: the international firms, the family run firms, and the third category are the independent firms with the aim of become institutionalised.”
All this is not about to settle any time soon and the market is tough and competitive.There is definitely price pressure in the market as the abundance of work coupled with fragmentation lowers legal fees. Moreover, international firms with loyal clients paying high fees complicate matters and will be a strain on local firms, especially new spin-offs. “Consolidation will be a future development because competition is becoming fiercer and smaller players won’t be able to handle it,” says Yöndem. “International firms will make the local market consolidate.”
Even though the Turkish market is attracting investors and law firms looking to branch out of an economically fragile Europe, fragmentation in the Turkish legal market cannot continue forever. At some point in time we’re likely to see the market’s long desired consolidation, particularly among local firms.
Balcioğlu Selçuk Akman Keki’s recent acquisition of the local competition firm Actecon is an early sign of an emerging trend. The legal market is caught in a vicious circle where there is a lot of pricing pressure and this may not be sustainable and will likely diminish quality output. While law firms flock around energy and infrastructure like moths to a flame, the market has to be on its guard so that it doesn’t get burned.