I have written about the move among certain developing states to transform the sovereign wealth fund into a mechanism for development and for cross border investment deals. See here, here here and generally here). It is increasingly common to speak of "strategic development sovereign wealth funds" as a contextually relevant mechanism for national development within international investment and project markets. And SWFs are becoming more important actors in development finance (see e.g., Javier Santiso, Sovereign Development Funds: Key financial actors of the shifting wealth of nations (OECD 2008)).
Recently Turkey announced a new wrinkle on the model. Turkey is now using its sovereign wealth fund to aggregate assets that can be used as collateral for investment and development projects at home and abroad. The story and my brief comments follow.
Turkey transfers stakes worth billions in major public companies to wealth fund
Hurriyet Daily News
February 6, 2017
Turkey has transferred stakes worth billions of dollars in Ziraat Bank, the Borsa Istanbul stock exchange, Turkish Airlines and state-owned pipeline operator BOTAŞ, among others, to a new sovereign wealth fund, in a bid to help finance giant infrastructure projects.
The transfers were announced in two separate statements on Feb. 5 and 6, stirring strong criticism from various opposition deputies and economists, mainly due to its audit-free structure and a complicated financing structure, along with the treasury and the finance ministry, which may pave the way for destruction to the country’s fiscal discipline.
The state’s 49.1 percent stake in flag carrier Turkish Airlines - worth roughly $1 billion - and its 51.1 percent of lender Halkbank - worth some $2 billion - have been transferred to the fund, a statement from the government’s privatization administration said on Feb. 6.
Stakes in state-owned Ziraat Bank, the country’s biggest lender, the Borsa Istanbul stock exchange and state-owned pipeline operator BOTAŞ have also been transferred, according to an announcement on the Official Gazette on Feb. 5.
Other assets that were moved to the fund include stakes in fixed-line operator Türk Telekom, oil company TPAO, the PTT post office, satellite communications company TÜRKSAT, Eti Maden mining company and tea producer ÇAYKUR.
Some 3 billion liras of funds under the control of the defense industry support fund will also be transferred, according to the Official Gazette. Some 2.3 million square meters of land, owned by the treasury and located in tourism sites, have also been transferred to the fund.
The value of the transferred assets is estimated at over 31 billion Turkish Liras ($8 billion).
The government aims to generate additional annual growth of 1.5 percent over the next decade through the fund, which was recently launched with an initial paid-in capital of 50 million Turkish Liras ($16 million). Ankara wants the fund to manage $200 billion in assets as soon as possible.
Collateral to secure funding for big projects
The sovereign wealth fund will be able to use the stakes as collateral to secure funding for major infrastructure projects, a senior official told Reuters.
“There will be a search for credit abroad to implement very big projects in the period ahead,” the official said, as quoted by Reuters.
“Turkey’s most important companies have been transferred to the sovereign wealth fund. It will be possible to secure credit at low rates for these projects by offering the shares in these companies as a guarantee,” the official added.
The official did not specify which type of projects the wealth fund may help finance.
Deputy Prime Minister Numan Kurtulmuş said the cabinet took the step to run the companies “more effectively.”
“We also aim to raise the financial resources in the hands of the state through this move,” he said in a press meeting on Feb. 6 following the cabinet meeting.
No audit on fund
The fund will, however, not be subject to review by the court of auditors, according to critics.
While sovereign wealth funds are often associated with oil-rich countries such as Norway or Gulf states, Turkey imports almost all of its energy needs. Some economists have said Ankara could better spend the money by paying down a national debt that runs at roughly 30 percent of economic output.
The fund is headed by Mehmet Bostan, a former finance sector executive who was appointed head of the Privatization Administration (ÖİB) board last year. A top adviser to President Recep Tayyip Erdoğan, Yiğit Bulut, Borsa Istanbul Chair and Chief Executive Officer Himmet Karadağ, and academics Kerem Alkin and Oral Erdoğan have been appointed to the board of the wealth fund, according to the trade registry.
9. It is not clear where the Turkish experiment will lead. It has all the elements for great success or for dismal failure. It is not clear that a Turkish need for collateral required the reorganization of its SOEs. Direct collateralization might have been as easily effected. The value added of the reorganization is unclear. Perhaps it is that the Turkish state means to direct all operating profit of the SOEs as well to or through its SWF to generate further financial resources for stabilization or other projects. Perhaps consolidation would produce changes in the regulatory environment. None of this is clear yet. The dangers and the temptations are quite clear however. And it is that lack of transparency ad into that ought to cause the greatest worry as Turkey experiments with potentially useful new forms of economic engagement.
10. More interesting still, my colleague Dini Sejko of the Chinese University of Hong Kong pointed out the military ramifications of the move, specially where the SWF becomes the repository for economic activity that advances military aims. IHS Jane's 360 reported that:
The Turkish government has transferred stakes worth billions of dollars in major companies as well as a portion of the national Defence Industry Support Fund (DISF) to a recently established sovereign wealth fund (SWF) that is intended to help finance large infrastructure projects.The news is interesting for its implications. Here we enter the world of 5th generation warfare, of the deep embedding on conflict management and networked systems within webs and clouds (and here). One is not speaking here of the operationalization fo war but of the embedding of factors within webs that can then affect or manage the conduct or access to resources of potential opponents. The theory is new and evolving, but the entry of a military apparatus within the hybrid SWF-SOE mechanism ought to make those into whose states these mechanisms seek to enter perhaps somewhat more leery.
A total of TRY3 billion (USD811 million) was transferred from the Defence Industry Support Fund; a fund managed by the Undersecretariat of Defence Industries (SSM) used to supplement armament programmes, and which draws income from sources including military-owned defence ventures.
The transfer - announced in the government's Official Gazette on 6 February - is for a three-month period. (Kerry Herschelman, Turkey transfers defence procurement funds to a new sovereign wealth fund (9 Feb. 2017).