The Turkish government has hit on a plan to leverage the country’s crown jewels to raise credit for grand infrastructure projects. But some critics see the scheme - involving the transfer of billions of euros’ worth of state-held shares in strategic companies into a sovereign wealth fund (SWF) - as little more than an accounting trick.

The Turkish SWF was created last August with an initial capital of just TRY50mn (€12.6mn). But the asset transfers have effectively turned the fund into Turkey’s largest holding company, boasting airline, bank, oil and telecoms, among others. The asset value of the company stakes now under the fund is some TRY167bn (€42bn), according to pro-government newspaper Yeni Safak.

The government’s intention is to use SWF assets as collateral to secure funding for major infrastructure projects, a senior official confirmed to Reuters. “It will be possible to secure credit at low rates for these projects by offering the shares in these companies as a guarantee,” the source said.

As part of his push to win an April referendum on whether Turkey should switch to an executive presidency with sweeping powers, President Recep Tayyip Erdogan wants to generate economic good news stories despite the ongoing economic problems. On January 26, for instance, Turkey announced it had received four bids to build one of its best known “mega projects”, the world’s longest suspension bridge - the Canakkale 1915 - over the Dardanelles Straits.

The opposition is convinced the SWF move is a sham. Selin Sayek Boke, spokesperson for the main opposition party, the Republican People’s Party (CHP), told Hurriyet Daily News on February 6 that the Turkish SWF could not be seen as a genuine sovereign wealth fund, but only as a state fund for borrowing.

“It is countries with valuable commodities such as oil, which thus have oil revenues, that have sovereign wealth funds. They transfer their surplus revenues from commodity trading into these funds. But Turkey doesn’t have such assets.”

Palace enterprise

The fund looks more like a family enterprise, or even a palace enterprise, added Sayek, with an allusion to Erdogan’s vast presidential complex which critics see as a symbol of the overarching powers the head of state enjoys already.

Sayek also voiced concern that the SWF is immune to any real public oversight. It operates like a joint stock company, with a five-member board composed entirely of Erdogan loyalists - Erdogan aide Yigit Bulut, academics Kerem Alkin and Oral Erdogan, Borsa Istanbul stock exchange chairman Himmet Karadag, and Mehmet Bostan, the privatisation board (OIB) head, who will serve as the SWF chairman - and reports to Prime Minister Binali Yildirim. It is therefore to be audited by an independent auditing firm, and not by the state’s High Court of Auditors.

State-held assets transferred into the SWF include a 100% stake in largest Turkish lender by asset size Ziraat Bank, 49.12% in flag carrier Turkish Airlines, 6.7% in telecom giant Turk Telekom and 73.6% in the Borsa Istanbul stock exchange. The state’s 51% in Halkbank and its holdings in oil pipeline firm BOTAS, oil exploration company TPOA, mining firm ETI Maden, and postal services company PTT will also be handed over.

Local media have detailed some further transferred assets, namely a TRY3bn (€757mn) facility held by the Defense Industry Support Fund and some 2.3mn square meters of valuable Treasury-owned land located amid popular tourist sites.

It is intended that the SWF will contribute an additional 1.5% to the rate of growth in Turkey annually over the next 10 years. The government has given assurances that the operations of the companies placed in the fund will not be affected and that they will retain their existing managements and strategies. “They will continue to collaborate with shareholders and international financial institutions,” the prime minister said in a statement.

Defending the SWF strategy, Deputy Prime Minister Nurettin Canikli said the fund was not created to sell off or privatise state assets. “Long-term funds will be raised through the fund to finance high-value added investments such as in defence and aerospace, as well as to build roads and hospitals. These are projects that will pay off and generate resources over the medium to long term,” Canikli tweeted on February 7.

Meanwhile, state-run news agency Anadolu reported on February 6 that Deputy Prime Minister Numan Kurtulmus informed reporters: “This is a fund to strengthen the Turkish economy against external interventions – it’s a guarantee so to speak.”

Turkey’s need for some economic ingenuity right now is not in question. The country’s economy has slowed markedly in the wake of the mid-July coup attempt last year. It contracted by 1.8% y/y in the third quarter of 2016 in what was the first quarterly decline recorded in seven years.

The World Bank earlier this month cut its 2017 GDP growth forecast for Turkey to 2.7%, while the IMF is projecting below-potential expansion in 2017. The fund expects Turkey’s economy to expand at 2.9% this year and at 3.3% in 2018.

Facing up to the weak outlook, the government is trying to revive economic activity partly through large-scale projects, such as rail links, road building, suspension bridges, tunnels under the Bosphorus, new airports and a shipping canal in Istanbul.

But the SWF approach to raising capital for such major investments leaves the government open to charges that it is deliberately making public finances opaque. “This fund has been established in a bid to detach some key budget revenues from the budget and away from public control. This will only lead to new financing opportunities for some pro-government businesses… mainly in big infrastructure projects,” Turgay Bozoglu, an economic advisor to CHP leader Kemal Kilicdaroglu, complained to Dogan News Agency.

Political masters

The concentrating of the assets in the wealth fund comes at a time of increasing political involvement in the economy, noted Wolfgango Piccoli at Teneo Intelligence.

Hundreds of firms have been seized by the state during the mass purges of tens of thousands of people that have followed the failed coup. Plenty of business executives have been detained along with state officials, police officers, army officers, business executives and academics, among others suspected of links to US-based exile Fethullah Gulen, the cleric that Erdogan says masterminded the attempt at toppling the government.

But Piccoli noted that the concentration of state assets in a single body has a poor record in Turkey. “It was tried in the mid-1990s, when a coalition government headed by the Welfare Party – one of the forerunners of Erdogan’s AKP [Justice and Development Party] – attempted to ‘pool’ the resources of state companies in the belief that the assets of the stronger ones could be utilised to support those that were weaker. It was abandoned when it became clear that the opposite was happening and that the weak companies were undermining the strong ones”, the analyst wrote.

Piccoli added: “Turkey’s fiscal position will suffer in the medium term, as the central government budget was benefiting from dividend transfers of the companies now controlled by the SWF, which will now receive these dividends.”

The government, however, is dismissive of such criticism. Finance Minister Naci Agbal pointed out that the wealth fund’s activities will be monitored by both parliament and independent auditors, while on February 8 he told Reuters in an interview that foreign banks and SWFs had expressed an interest in cooperating with the fund.

“Annual audit reports and another audit report prepared for the prime minister will be sent to parliament every year. The planning and budget commission will audit all the companies in the fund on an annual basis,” Hurriyet Daily News quoted Agbal as saying on February 7.

“The fund will be run in line with international standards. Every company has its own management board. The fund will never interfere with the strategies of these companies,” the minister insisted.