BBC Newsnight’s Joe Lynham was abuzz* with talk of the third airport for Istanbul, procurement of which was launched just a couple of weeks ago by the Turkish government. He’s not the only one; everywhere from Deutsche Welle to yesterday’s Sydney Morning Herald, everyone’s talking about what’s projected to be the world’s biggest airport (six runways, initial capacity of 90 million rising to 150 million). The government clearly wants it to become a hub airport, beating other hubs like Dubai, Schiphol and Heathrow – whose current runway capacity it will dwarf when it first opens.
And the airport will be built, I’ve no doubt, and it will be filled (the economy is booming and traffic at Istanbul Ataturk airport has quadrupled in the last decade) and it will look good for infrastructure-loving Prime Minister Erdoğan. But by 2018? Even just the first phase? I doubt it. Heathrow’s bosses can breathe a while longer. Here’s why:
1) It costs a lot and there’s a queue for the money. Transport minister Binali Yıldırım estimates the cost at about €7 billion (US$9.55bn), so for a start we know it’ll cost more. Governments routinely underestimate the cost of these projects, not necessarily out of incompetence but because they overlook the costs associated with delivering projects like this with private finance. Ankara previously estimated that the Gebze-Izmir highway and bridge would cost US$6.5 billion; it’s actually looking more like US$8 billion (and it’s only that low because it’s now VAT-exempt; previously it looked like a cool US$10 billion). It’s true that Yıldırım says they’ll have to start construction before the bank loans are in, funding from equity; but this doesn’t remove the problem entirely, it merely delays it, plus that creates an additional risk for the equity sponsors and impacts the risk profile of the project by thinning the equity buffer before the loans are signed. Which means more haggling.
Raising this kind of money is going to severely tax banks, especially as the kind of banks who do business in Turkey are already struggling to find more liquidity to fund existing infrastructure projects, such as the aforementioned bridge and road (dubbed a “monster” by one banker).
The Gebze-Izmir project was awarded to a winning bidder in June 2009, and the financing still hasn’t been arranged – the size of the debt funding requirement is one reason. More recently, a tender for the third Bosphorus bridge received no bids by the January 2012 deadline, because of scarce finance. It had to be re-bid.
2) Their biggest privately financed airport in Turkey by a long shot. Not only does the cost of this project dwarf the cost of the private-finance projects for Istanbul Ataturk Airport (signed 2005) and Istanbul Sabiha Gokcen (signed 2008), but it’s a new airport from scratch. Those deals were delivered on time, but they were in the order of hundreds of millions of dollars, not several billion.
3) No existing airport. That means no instant cash generation; not the case with the two above mentioned deals or the latest Turkish airport deal, the expansion of Izmir Airport. That means more money will have to be raised proportionate to the size of the project, and also it creates more “ramp-up” risk, the issue of whether passenger traffic grows as quickly as it’s forecast to. (On the other hand, traffic is growing strongly at Ataturk airport and it is bursting at the seams.)
4) Loads of arguing. When you have a massive project like this, and the abovementioned risks, you have the contractors, the banks, their respective legal advisers and the government all trying to get their own way. And the bigger the project, the more of them there are (expect this airport to swallow up at least 18 banks). The Turkish government’s tendency not to employ external financial or legal advisers makes it harder to explain finer points of financing to them.
5) Over-optimism. We’ve been here before with Turkey: launch a huge project, set an ambitious date to complete it, then watch that date recede into the distance. This is the case with Gebze-Izmir, with the Eurasia Tunnel and with the third Bosphorus bridge. Smaller projects like the expansion of Ataturk Airport have been done on time.
6) Inadequate financing terms. Once those 20 or so banks have their kick-off meeting, they will start objecting to the package on offer. DHMI, the Directorate General of State Airports Authority which is in charge of the tender, does not allow lenders to an airport project to take it over or “cure” the project if the airport can’t pay its bills or otherwise goes wrong. Turkish banks will have less of a problem with this but it’s highly unpalatable to European, East Asian or Australian banks, some or all of whom will be needed for a project of this size.
What’s more, the government is refusing to assume the debt in the event of contract termination. On the other hand, they are offering a revenue guarantee, or rather a volume guarantee in case passenger traffic isn’t as big as forecast in the first 12 years. That partly mitigates 3) above.
7) Sources of liquidity. Ooh I know, why don’t they go all Nick Clegg and get some Australian/Canadian/Chinese/South Korean/wherever pension fund to lend to the project? Well, because you’d need to do a bond financing and Turkey isn’t investment grade, that’s why not. They need low risk investments which means a strong sovereign counterparty.
8) Bank stress. European banks aren’t in the rudest of health right now. Apart from the Eurozone upheavals, Basel III is exerting an ever-tightening grip on their liquidity, making long-term investments in infrastructure expensive. Turkish banks have less of a liquidity problem, but they do have a debt pricing problem; they refinance themselves with loans from the Eurozone. This will make financing this project all the more fraught.
9) Legal and environmental objections. According to this report, there’s some controversy over the environmental impact of the project; its effect on the local ecosystem and on Istanbul’s water supply. Turkey is just as prone to legal challenges to planning applications as anywhere else, and it seems likely for a project of this size. In addition, Aeroports de Paris may launch a legal action if it doesn’t get compensated for its interest in Istanbul’s existing airports. AdP owns a 38 per cent stake in TAV Airports who own the concession for Ataturk Airport, which Yıldırım says will have to close when the new airport opens. Ataturk’s concession, however, runs out in January 2021, and if I’m right, the new airport might not be open by then.
I finish with the words of Şule Kiliç, managing director in UniCredit’s Turkish project finance and financial advisory unit, quoted by Reuters on the above abortive Bosphorus bridge tender last year:
“Investors have to think twice in the face of such high-cost projects… It will take around two years to complete the financing of such a big-scale project, plus there are technical details to be clarified on this particular project.”
And that project was half the size of this one…
*There’s a mistake in his article: the airport will eventually have six runways, not five. He also says all the phases will be done by 2018. The first phase needs to be ready by 2017 according to the government; I’m not sure if that means all phases can be finished (and capacity raised by another 60 million just one year later as he says) Turkish news reports aren’t clear.