Cold Turkey

The cancellation of Turkey’s $5.7bn highways sale after a lengthy and nuanced procurement process should serve as a reminder that the country is still very much an emerging infrastructure market.

It was the perfect end-of-year home-run: after having its credit rating upgraded to investment grade by ratings agency Fitch in early November, the Turkish project finance market went through a spectacular burst of activity in December, securing more than $1.2 billion of bank debt. 

With Christmas just around the corner came the icing on the cake: the long-delayed privatisation of close to 2,000 kilometres of roads – including Istanbul’s two suspension bridges – was awarded by Turkey’s Privatisation Administration to a Turkish-Malaysian consortium of Koc Holdings and UEM Group. 

For growth-starved European infrastructure investors, Turkey’s late 2012 star performance seemed to augur a bright 2013. And then the fallout came. 

It began earlier this year when Turkish Prime Minister Recep Tayyip Erdogan voiced his displeasure at the purchase price for the roads package, which he deemed too low. At that point, as one local market source put it, “we knew it was just a matter of time before the privatisation got cancelled”. 

Before jumping to any hasty conclusions, it’s important to bear in mind that the Turkish government was well within its rights to cancel the privatisation process. As the short-lived winner acknowledged in a statement, “all tenders awarded by the Privatisation Administration of Turkey are subject to the final approval of the Privatisation High Council”. The latter is headed by Erdogan. 

Having said that, it’s unlikely the cancellation will be perceived by the investment community as anything other than a bitter reminder of the perils of doing business in emerging markets. 

First mooted in 2008, the roads package sale kicked-off in earnest in August 2011. It then went through a series of delays and negotiations that included – depending on who you talk to – either the removal or the significant scaling back of an $800 million greenfield portion, which was proving unpopular with investors intent on just gaining access to a package of well-known brownfield assets. 

In other words, the $5.7 billion bid accepted by Turkey’s Privatisation Administration in late December was the result of a long and arduous negotiation process that saw the public and private sectors trash out the details of the roads package to make it as attractive as possible to both parties. 

To throw all that hard work away in early 2013 because, all of a sudden, the government realised the sale price was too low is nothing less than a slap in the face. 

After all, the winning consortium seemed to have it all: a strong local partner in the form of Turkey’s biggest industrial and services group, Koc Holding; the highest bid, which would have led to Turkey’s second-largest privatisation; and months of due diligence behind it. All it needed was the final approval of the Privatisation High Council – which one would expect to be a mere formality. 

What went wrong? It’s hard to tell, easy to speculate, and, frankly, it doesn’t really matter. 

In the end, the Turkish government decided $5.7 billion wasn’t a high enough bid for its road assets, cancelled the tender, and is now airing vague proposals about a potential initial public offer for a re-configured package, in the hopes of getting more money for the assets. 

That’s all well and good. But future bidders will keep in mind that the ‘wrong’ price – even if it initially seemed ‘right’ – may be met with the same ruthless volte-face.

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