Erdogan’s mega-projects promise mega-burdens for coming generations

The build-operate-transfer (BOT) and build-lease-transfer (BLT) models seem to best suit Turkey’s needs in financing ambitious projects that cost a fortune at a time when problems in the global economy are making liquidity scarcity a prominent issue, but today’s dream may turn into a nightmare in the next decade with accumulating costs, experts warn.

The Justice and Development Party (AK Party) government has been hailed for its mega-projects, mostly in the fields of construction and energy, which are meant to boost welfare and create huge numbers of jobs. Nuclear energy power plants in Mersin and Sinop, 15 city hospitals in 14 provinces, a new airport in Istanbul with a capacity to serve 150 million passengers annually, a third bridge over the Bosporus, the “crazy project” of Kanal Istanbul to connect the Black Sea and the Marmara Sea and alleviate the dense and dangerous traffic on the Bosporus are only a few of these mega-projects. Their combined price tag is a hefty $150 billion. No money will be paid in advance for most of these projects, but the long-term costs will likely surge well beyond their total estimates for construction and operation, laying huge amounts of debt at the feet of the coming generations, experts say.

The nuclear reactor in Mersin’s Akkuyu district will be the first of its kind in Turkey to satisfy the country’s ever-growing hunger for energy. The estimated cost of the power plant is $20 billion, all to be met by the Russian-owned NGS Elektrik Üretim A.Ş. But the purchase guarantee by the government mars this extremely strategic investment. Turkey has pledged to purchase the electricity to be generated by this power plant for 15 years at a price of 12.35 US cents per kilowatt-hour (kWh), which equals $4.57 billion per year considering the plant’s planned capacity of 4.8 billion megawatts. This adds up to $68.54 billion to be paid by Turkey to the NGS, which means the amount to be paid out of the state coffers is more or less $48.5 billion.

The deal drew criticisms from many in the energy business, who largely drew attention to the price tag for the purchase guarantee, 12.35 cents per kWh. Yet nobody was sure whether the market price of electricity will be higher or lower by the end of the purchase guarantee term.

The same concerns also apply to the second nuclear power plant, to be built on Sinop’s İnceburun peninsula. This one has a price tag of $22 billion for construction, the largest single investment in Turkey’s history. It will be built by a Japanese company and they will be responsible for funding the construction. The government provided a similar purchase guarantee for the Sinop Nuclear Power Plant, 11.80 US cents per kWh, slightly less than it promised for the Akkuyu plant.

‘At any cost’

Ahmet Bayülken, a prominent nuclear energy expert, believes that nuclear energy is strategically important and that Turkey needs this technology, since there seems to be no alternative — not even renewables, due to their limited potential and high initial costs. However, he said, building nuclear power plants simply to have them is not wise. Instead, the country must take a practical approach to nuclear power plants, which requires diligently analyzing every single detail of the construction, from technical issues to cost-related factors.

Bayülken, who has taken an active part in the preparatory phases of nuclear energy tenders in the past, recalled a minister telling him that “we will do this at any cost, even if we end up taking great losses.” He said he was positive about nuclear power, but still, jumping into it blindfolded is not a good idea and comprehensive analyses are imperative. A solution may be to include an obligation for the winning company to dismantle the power plants after their operating cycles are over, perhaps after 50 years, since the dismantling of nuclear facilities is extremely costly.

A golden road

The Istanbul-İzmir Highway Project, aiming to reduce the travel time between the two cities by half, is part of the wider North Marmara Project — the largest BOT scheme in Turkey to date — which involves the construction of a third bridge over the Bosporus Strait.

The project’s cost was estimated at slightly over $10 billion. The duration of the construction and operation of the road was stipulated in the contract as 22 years and four months. The government promised the winning consortium “traffic guarantees” in four major intersections along the road. The guaranteed number of cars is 40,000 per day for the Gebze-Orhangazi stretch, 35,000 per day between Orhangazi and Bursa, 17,000 automobiles per day between Bursa (Karacabey intersection) and the Balıkesir/Edremit fork and 23,000 automobiles per day between the Balıkesir-Edremit fork and İzmir.

BLT: angel or devil

Mehmet Günal, a deputy from the Nationalist Movement Party (MHP), points to possible perils of the BLT model if its boundaries are not delineated neatly. “The exploitation of this model may be reasonable for large-scale infrastructure projects, but their frameworks must be set up clearly. What will the term of operation be, under which conditions will the facility be transferred at the end of its term of operation, what will the conditions be when this company hands over the facility to the state, etc., must all be determined in full detail,” Günal told Sunday’s Zaman in a phone interview.

He doesn’t believe, however, that the government adhered to these very basic principles in its BLT tenders. When exorbitant costs are involved, it is quite normal to look for misconduct and possible felonies in the conduct of such tenders, said the deputy, adding that prohibitive costs have been incurred in BLT projects. Günal said the health sector — the city hospitals project — provided an especially relevant example.

The city hospitals project is one of the most ambitious projects the government is touting. It aims to build large hospitals in 15 cities across Turkey, equipped with state-of-art technology and advanced diagnosis and treatment systems. Although the project sounds ideal, it has drawn harsh criticism ever since its inception as the construction and operation of these facilities were based on the BLT model. Günal reiterates these criticisms. He has his doubts about this model, citing studies done in countries like Ireland, Australia, Britain and Canada. In one of these studies, he said, it was found that the BLT model ends up on average 87 percent more costly than a normal tender, so these countries, which once used the BLT model, are no longer using it for public projects, he said.

Hospital or mint

As part of the city hospitals project, the Ministry of Health intends to establish 15 new hospital campuses in 14 provinces by 2015 to provide a partial remedy to problems in the current health-care system. They are being built by contractors that won public tenders. These companies will start operating these facilities after construction for periods specified in the tender, usually 25 years, and in the meantime the contractors will receive lease payments from the government. They will also be able to rake in further revenues from the secondary facilities inside the hospitals, such as cafes, restaurants, pharmacies, etc.

This whole project is a public-private partnership. But this project has amassed huge criticism from experts in the field and politicians. General Secretary of the Turkish Medical Association (TTB) Bayazıt İlhan argues that one of the most critical problems concerning the city hospitals is the extreme burdens they will put on public funds.

İlhan also notes that the new hospitals are not actually increasing the number of hospital beds in the cities where they are being built because they require the existing state-owned hospitals in their provinces to close down.

İlhan said that although government is avoiding disclosing and sharing any information with the public about the financing of this project, the TTB was able to get some of the numbers in court cases they had opened against them. It even issues reports to keep society informed about the progress in the projects while trying to raise awareness in public about the burdens the city hospitals will “unfairly” place on the shoulders of the taxpayers.

In one of these reports, then TTB calculated numbers to demonstrate the possible losses these hospitals will cause. The TTB was able to get information about the annual lease payments promised by the government for 10 of the hospitals. Of them, the association succeeded in collecting data on the fixed investment amounts of only eight hospitals. According to TTB, the state will pay TL 1.47 billion in leases to the operators of the hospitals, which in 25 years amounts to TL 36.79 billion. The sum of the provisional fixed capital investments sought in the project costs for the eight hospitals is TL 3.88 billion. Aside from these, the TTB calculates that the money that the government will pay to the operators of these eight hospitals will be TL 26.5 billion in 25 years. Besides, the government will also procure services at these hospitals, which implies further payments from the state coffers. The state will have no share in the money earned in the secondary facilities of these hospitals.

“This is not merely a construction project,” İlhan said. “They are [the government] trying to sell them as construction projects but they are actually privatizations. I mean, the public hospitals are being transferred to the companies winning the tenders,” he added.

What adds insult to injury is the exemption of these projects, like all others carried out through the public-private partnership model, from auditing. “Without identifying an auditing mechanism first, how can you spend public resources in such large amounts,” he said. “I don’t believe they are doing all this out of goodwill,” he said.

Günal also bitterly criticized the lack of transparency in the project. He even believes this model is being deliberately used by the government to provide “political and commercial rents” to certain groups.