Turkey Infrastructure Report Q4 2009

Developments that started gathering momentum during the first and second quarters of 2009 showed signs of tangible progress during the end of the second and beginning of the third quarters. This is particularly in reference to the Izmir-Istanbul highway tender and the privatisation of three more power distribution networks. In addition, it was reported in late July that the tender for the third Bosporous Bridge will finally commence in September 2009. The challenges to all three ventures remain as pertinent as ever. However, the proliferation of activity in Turkey's infrastructure sector is a positive omen for the coming months.

In the utilities sector, from early indications of interest for the three distribution grids on offer, it seems that the worst-case scenario of no bids being submitted will not materialise. On the contrary, 52 companies submitted applications for pre-qualification. Though not all companies will go through to the next round, and pre-qualification will be followed by further eliminations and quite possibly withdrawals, the initial number is high enough to at least raise hopes - if not guarantee - that there will be interest in the assets. This development supports a more optimistic scenario that is more in line with our core view of the utilities sector being poised for growth, with domestic and foreign energy companies trying to take advantage of global trends of asset revaluations to attempt to acquire the grid networks at a better price.

Indeed, this is an option that the government will be likely to accept. The key factor here in support of this view rests with positive long-term energy fundamentals (namely demographic increase and economic expansion) that will sustain growth in Turkey's overall electricity demand. Moreover, the government has over the past year has taken steps to assuage private sector concerns over the low electricity tariffs by passing several price increases.

In the transport sector, after 15 years of planning the concession for the construction and operation of the Izmit Bay Crossing bridge and the highway between Istanbul and Izmir was awarded to an Astaldi-led consortium, following the international tender that took place in April 2009. The consortium now has to design, finance, build and operate the two assets, which have an estimated cost of EUR6bn (US$8.2bn).

This is the largest transport concession to be awarded in Turkey since the Marmaray crossing. It is estimated that the consortium could make a very lucrative return on the project, but it should also be noted that the challenges are formidable, starting with finding local and international financiers able and willing to finance the project.

No discussion of Turkey's infrastructure this quarter would be complete without mention of the intergovernmental agreement on the Nabucco natural gas pipeline. The agreement was signed with much fanfare on July 13, but the optimism came only from the political quarters, while industry figures pointed out the lack of gas purchase agreements with any of the potential suppliers. Mid-stream energy infrastructure is definitely a sector to watch in Turkey, as the country positions itself to become a key transit country in the region.

We maintain the same forecasts this quarter, but note that risks are to the upside. The full-year figure for 2008 came in worse than expected at YTL44.8bn; we were forecasting YTL46bn. The real growth rate according to the statistics institute was -7.6% for 2008 (probably due to the very high raw-material prices that eroded industry real value). In BMI's Q409 Turkey Infrastructure Report we maintain our forecast of industry value of YTL44bn for 2009; this represents a real growth decline of -9.4%. Our confidence about the viability of new investments in infrastructure, however, is evident from the anticipated robust recovery of the industry in 2010, when we forecast that the construction industry value will reach YTL47.6bn, or a real growth increase of 3.6%.

BMI's Project Finance Rating for Turkey is 37.8, which places it in last place in the Middle East region and third from last place in Europe. Notwithstanding a low position on both tables, mainly due to significant currency volatility risks, the presence of several international majors in the country's transport and utilities sector coupled with the government's willingness to create an environment conducive for the privatisation of transport and utilities assets are factors that are significantly in favour of the viability for project finance to develop in the country.