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Bridging the gap: today’s Turkish construction industry is on a fast track
Being at the crossroads is a second nature for Turkey. A geographical as much as cultural meeting point between Asia and Europe, the country has built itself on this successful mix of East and West, secularism and Islam, modernity and long established tradition. Yet, today, the country is truly at a critical juncture, and is facing challenges that will be decisive for Turkey's near future. After years of modernisation and economic development, regularly interrupted by crippling economic meltdowns and political crises, Turkey has reached a level of maturity that has been rewarded by some of the best economic performances of the OECD.
After two serious economic crises, in 1999 and 2001, the country elected a conservative government that embarked on a reform programme aimed at taking it into its next stage, and put Turkey on the path to EU accession. Along with measures meant to strengthen the rule of law and the country's democracy, Turkey has enjoyed many reforms meant to keep public expenses under check, restore the confidence in the country's economy and continue both privatisation and structural adjustment under the control of the IMF. The policy has been bearing fruits, and the country has posted excellent economic results, while foreign direct investment was flocking back and GDP per capita was doubling over less than a decade. Meanwhile, challenges have also been numerous and the road somewhat rocky.
The path to EU accession has been mired with tensions with some EU members, difficulties over the Cyprus issue and questioning over the pace of reforms. Internally, the economic success of Prime Minister Erdogan's party, the AKP, who is benefiting from widespread support amongst the most modest components of the Turkish society, has also attracted the ire of the secularist component of Turkey, including the country's powerful army, for perceived attempts to change the country's secular nature. This year in particular, has seen a radicalisation of views and a perceptible tensing of the political life, as the country is electing a new president, and will go through general elections. The Iraq violence has also spilled over the borders and affected the country's south east, where the Kurdish guerillas are often clashing with the Turkish army.
Yet, throughout years of difficulties, the country has built pragmatism and a confidence in its ability to come back from the brink that constitute some of today's key strengths of the Turkish nation. Against all odds, the country has developed and nurtured a position that today commands respect in the region and beyond. Building on its unrivalled location and its tradition as a meeting point of civilisations, trading routes and religions, Turkey is poised to be one of the most predominant players of the Eurasian ensemble.
Unsurprisingly, the construction sector of Turkey is a true reflection of the country's evolution. First founding its development on the exponential urban population growth witnessed by Turkey from the 1960s to the mid-1980s, it has evolved into a multi-billion dollar industry, with levels of sophistication and know-how that allow it to rival with the best, at home and abroad. Today, the Turkish construction sector is a very large one, accounting in 2005 for 4.2% of the GDP and generating $15.5 billion of revenues*.
The late 1990's economic rollercoaster of Turkey took its toll. The serious tightening of the Turkish belts imposed by the IMF, and a severe crisis in the banking sector that led to a number of high profile closures added to an already shaky financial situation. Public expenditure plummeted and in the 1993-2003 decade, despite an overall economic growth rate of 23% (encompassing the serious downfalls of 1999 and 2001), the construction sector went down by 22%. Public orders decreased, infrastructure works were shelved or completion times lengthened, and the industry had to react or face near extinction.
Using the many energies unleashed by the liberal reformist agenda of late President Turgut Ozal, construction entrepreneurs looked for available markets then, and following the early lead of the sectors largest organisations, stepped up their drive to venture abroad. Following the demise of Soviet Union, Turkish companies were notably the forerunners in the re-development of infrastructure, the construction of public buildings, residential and office buildings and industrial refurbishment projects in Russia as well as the Caspian and Central Asian nations. This provided the Turkish construction sector with more than a respite and allowed middle-size players to increase their capabilities and their international exposure (See article: ‘Spreading the word: the Turkish construction sector makes a name abroad').
The many segments associated to the industry have followed the same rocky course of development, and some have thrived while others have had difficulties to adapt to the increasing international competition. Sectors like marble quarries, steel pipe makers and cement producers have been faring very well, while plastic pipe producers, electrical systems makers and steel producers could feel the sting of South East Asian and Central Eastern European competition, on their home turf and abroad. Yet, Turkey is still host to a wealth of suppliers that act as a soft base helping the industry to face slowdowns and difficulties (See article: ‘Feeding a wannabe giant: a look at some of Turkey's construction-associated industries').
Today, Turkey, despite the current turmoil, has discovered the virtues of political stability, while its social standards started rising steadily and the accession process to the EU, although rocky, has given a renewed sense of direction to the nation. The last two years in particular have witnessed the display of impressive growth rates, and Turkish people's concerns seem to have shifted into new grounds. With an ageing and insufficient housing stock, new builds are a priority. Turks have also learned to look at the future with longer term expectations and horizons than in the past. These factors have fuelled a demand for new housing ensembles that has made the days of the industry in the last two years. Yet, some are wondering whether this movement has got solid enough foundations (See article ‘Building on shaky grounds? A look at the Turkish housing construction boom').
Based on these uncertainties, the sector might be heading for a major reshuffle in the years ahead, as many medium-size players have placed their bets on the development of the housing market, and might find themselves trapped should the market fail to deliver its promises.
The sector numbers over 200,000 construction contractors, out of which just short of 150 have international capabilities, while a very large number of these companies are small, family-controlled players, with strictly local operations. The industry at large employs over 1.3 million people, or 5.8% of the country's total employment. Its role as a pillar of Turkey's economy should be reaffirmed as the needs for construction activities inside Turkey are immense: investment in transport infrastructure, in particular railways and highways, in energy and education are to fuel the local needs for many years to come. Turkey has an underdeveloped railway network, insufficient both in terms of lines and performances.
The Turkish ministry of transportation, alongside with the Turkish State Railways (TCDD) have put together an ambitious plan of high-speed connections that should help the country reduce its reliance on road transportation and compete with airlines. Already, a number of essential projects are attracting the attention of construction companies and train equipment makers alike: the Istanbul-Ankara high-speed train is, for instance, widely expected by many in Turkey.
An actor of the railway industry asked about the market potential to be unlocked in Turkey reckons that ‘the railway transportation and mass transit systems market of the next five years in this country will be close to US $6 billion, and will be one of the most hotly disputed cake of the region. Other high-profile projects are on the table, some amongst the most spectacular projects of the decade. See for instance the Marmaray project, an Istanbul urban railway project that will connect the European side of the city to the Asian side via an immersed tunnel, at 56m under the tumultuous and busy waters of the Bosporus strait (See article ‘A walk under the sea: how Turkey is playing host to one of the largest construction engineering challenge of the decade').
In the energy sector, privatisation and the privileged geopolitical standing of Turkey will continue to fuel the need for new infrastructure, in power generation, transmission line pipelines or gas storage facilities. The path has been cleared with the reforms allowing the use of BOO schemes and the privatisation, despite many difficulties on the way of state-refiner Tupras while the restructuring and sale of state pipeline monopoly Botas and petrochemical company Petkim are forthcoming.
Meanwhile, Turkey's positioning as a transportation corridor for Russian and Caspian hydrocarbons has been reinforced with the recent openings of major infrastructural works of art: the Baku-Tbilisi-Ceyhan (BTC) pipeline is now transporting crude oil from Azerbaijan all the way to the Turkish Mediterranean port of Ceyhan, where it sails off for western markets and beyond. The project has involved some of the largest Turkish construction companies, like Tekfen, one of the top three players of the country.
The Caspian Pipeline Consortium, (CPC), although not geographically located on the Turkish territory has increased the crude oil tankers traffic through the Bosporus, as the pipeline carries crude from Kazakhstan through to Novorossiysk, on the Russian coast of the Black Sea, offering therefore only one exit route to the precious cargoes, through the Turkish straits. The Blue Stream project, completed and put in service in 2005, brings Russian gas to Turkey, and could well become the bridge head for further distribution branches in the region. Meanwhile, pipelines from Iraq and Iran could also be extended, and strengthen the position of the country as a global energy hub. This in turn, will provide many opportunities for construction companies to expand their activities.
With additional work opportunities provided by forthcoming investments financed by EU funds and the will to work on overseas projects, the future of the Turkish construction industry could be very bright. It is today attracting attention, and the Gulf and Middle East regions in particular have benefited from the experience, and relatively lower costs of Turkish companies. It now remains to be seen if the sector can make the jump from regional, to truly global player and expend its skills set. Already, benefiting from a much diversified supply base, a solid workforce pool and an ideal geographical location, the construction industry has got all the tools in hand to churn out a success.
But Turks know better, and are always wary of the turns destiny can take. Strengthening the sector's international dimension, alliances and experience will be a way to limit exposure to the internal risks, and to expand steadily. Whether the industry has the will to continue in the direction of globalisation is anybody's guess. One thing is for sure though: the Turkish construction sector has got what it takes to be a key global player, as it isn't adverse to risk-taking.
*Source: YEM, Construction Industry Center, Turkish Construction Sector Report, 2006
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