Turkey’s $17.2 billion of hidden debt

The model for economic growth in Turkey, based on construction, has put a strain on the Treasury and threatens social welfare due to the cost of loan guarantees for the building of highways, bridges, airports and similar infrastructure, said economist and columnist Bahadır Özgür.

The Treasury guarantees for the projects mean Turkey is obliged to pay construction companies billions of dollars over the next 20 to 25 years, Özgür said.

The governing Justice and Development Party's (AKP) policies have turned the state into a contractor for the construction sector, with close to $200 billion of projects implemented since 2002, when the AKP came to power.

The AKP’s model, where construction companies are never affected by crises or economic issues due to the government’s unlimited laying out of public resources at their feet, is not sustainable, Özgür said, and the cost is left for the general public to bear.

The government’s favoured Treasury guaranteed projects were seen as a way for rapid development, but the rest of the world has since turned away from the model, he said.

The approach did spur economic growth, but at the cost of transferring huge amounts of resources from the public to the private sector. Resources allocated for the construction sector have led to an increase in public debt, resulting in some $17.2 billion of undisclosed debt, Özgür said.

Most of these secret financial dues are in the form of loans that the state has signed as a guarantor, he said.

“Today we discuss the city hospitals,” Özgür said, referring to large scale medical centres constructed on the fringes of cities under a private-public-partnership model. “One of the main reasons for the collapse of the healthcare systems in the United Kingdom, one of the first countries to implement this model, is these city hospitals.”

Özgür cited a 2016 report by the British Department of Health, which found that the PPP model resulted in extremely high hospital costs. The report found that Treasury guarantees increased the costs several-fold.

Turkey’s PPPs have turned into a symbol for the AKP government, Özgür said. “Mega projects, crazy projects have taken on a political significance. These projects became ways to transfer large sums of public resources to certain private entities fast.”

Treasury guarantees are often based on the euro or the dollar, further increasing the burden on the public sector and taxpayer, Özgür said.

When the Treasury signs the loans for the projects as a guarantor, information is not disclosed about whether contractors pay them off as agreed, he continued. “For instance, the companies that built the new Istanbul Airport had appealed for te restructuring of six billion euros of loans. Seventy percent of those loans belonged to public banks.”

Last year’s Court of Accounts report said information on the loans for the Treasury-guaranteed projects had not been provided to the state in full, Özgür said. The state did not know how much of the loans were guaranteed by the Treasury, or under which conditions, or whether the payments were being made. The Treasury maintained that such information amounted to “commercial secrets” that could not be disclosed.

“If those bridges and highways had been constructed by the state, the resources allocated to the Treasury guarantees would have paid for the costs,” Özgür continued. “This way, the burden will continue for the next two decades.”

What used to be considered corruption has virtually become ingrained in the process of construction, Özgür said, adding that there are a total of 400,000 contractors in Turkey today, most of whom started their businesses after the AKP took power.

“From public resources (the AKP) feeds both these companies and their cadres and close circles,” he said.

After Turkey abandoned the parliamentarian system for the current executive presidential system in 2018, the relationship between the regime and these mega-projects became an expression of the AKP’s relationship with the construction sector, Özgür said.

“The government made a connection between this type of activity and its political survival, this is the reason why those discussing the airport or (the third bridge on the Bosporus) are labeled traitors and enemies of the state,” he said.

“The companies that undertake the AKP’s megaprojects have only the government to convince as a client in order to take advantage of the public market, worth billions of dollars,” Özgür said.

There is now a cascade of companies from the few at the top whose names are publicly known, to the thousands of smaller ones under them. Some 25,000 to 30,000 companies enter public tenders.

“This is a sector that feeds thousands of companies, completely under the whim of the government,” he said.

The companies involved in the projects are virtually untouchable, as even during the coronavirus pandemic they were not investigated for mistreating their workers and disregarding pandemic measures, he said.

“The reason for such insolence is this intermingled relationship between the construction sector and the government. They don’t feel the need to take any responsibility towards the public.”

The mega projects do not increase welfare, or employment, or bring any benefit to the public, Özgür said, adding that the allocation of tax revenue to them leaves the budget at their mercy.

“This creates a double mechanism for impoverishment, which has a direct connection to construction,” he said. “Resources that need to be spent for the people end up given to others. Poverty is thus transferred to the next generation.”