How Turkey’s ‘zombie’ companies keep afloat

Many indebted companies were already on the ropes before the pandemic because of the slump of the Turkish lira, which has meant a drastic increase in foreign-exchange prices — the key trigger of Turkey’s economic turmoil since 2018. Standing out among them are companies to which Ankara awarded “megaprojects,” including motorways, bridges, tunnels, hospitals and power plants. The companies used significant foreign loans for the projects, which were based on the PPP model. According to treasury data, the government has offered guarantees to $17.2 billion in loans in seven such projects. The burden of the debt, however, has grown dramatically because of the depreciation of the lira, which has lost more than 20% of its value this year alone. A dollar was worth 3 to 4 liras at the time the loans were acquired; now the price of the greenback is over 7.5 liras.

The pandemic’s devastating impact on travel dealt a further blow to the contractors. The airports, toll motorways and bridges they built rested on the assumption of annual economic growth of 5% and thus busy air and land traffic. Though the companies enjoy turnover guarantees from the government, such earnings are not enough to meet their liabilities.

According to data from the presidency’s budget department, the worth of contracts in the PPP category totals $156 billion. Airport projects represent $73 billion, with the contract for the Istanbul Airport alone worth $35 billion. The project to build and operate the airport was awarded to Kalyon, Limak, Cengiz, Mapa and Kolin, which has since handed its shares to Kalyon. The five companies dominate the PPP projects, with the worth of their contracts amounting to more than a half of the total. They have received significant shares also from the privatization of power distribution networks and do business with the government in various other sectors.

Ronesans Holding, which built a sprawling new palace for Erdogan in 2014, has emerged as one more favorite of the government, especially in the so-called “city hospital” projects — giant medical complexes, which the government uses in return for hefty rent and services payments.

The financial troubles of those companies have put major strains on the banking sector, especially public lenders. Business circles are often abuzz with talk of how public banks help the companies out at the behest of the government. 

Moreover, the companies continue to win tenders despite a downtick in public investments. The Cengiz Group, for instance, was awarded two new projects this summer. The first, involving road construction, is worth nearly 1 billion liras ($132 million), while the second, involving the construction of a logistical port, is worth 1.37 billion liras ($180.4 million).

Meanwhile, 11 city hospitals, five of which are operated by Ronesans, have received 5.2 billion liras ($685 million) in rent and services payments from the Health Ministry in the first eight months of the year. Along with other medical facilities such as physiotherapy clinics and judicial psychiatric hospitals, Ronesans’ operations have reached a total capacity of 9,500 beds. Earlier this year, it was awarded a project to build a 1,000-bed hospital on the land of the now disused Ataturk Airport in Istanbul.

The public funds mobilized to keep the “zombie” companies up contribute to Ankara’s growing budget deficit and public debt. Persisting favoritism in times of the pandemic is bound to only fuel frustration among a populace struggling for adequate education and health care services.