Following its inception in 2016, Turkey's sovereign wealth fund, the Turkey Wealth Fund (TWF), rapidly gained momentum in 2019, announcing major projects and carrying out long-delayed works regarding strategic fields and companies placed in its portfolio. The TWF now aims to become the strategic equity investment for the country and will emphasize this role at the World Economic Forum (WEF) in Davos, TWF Managing Director and board member Zafer Sönmez told Daily Sabah.
It will be the TWF's second year at the WEF. The fund, along with the Presidency's Investment Office and Finance Office, aims to become one of the permanent participants of the WEF as part of their routine efforts to continue attracting investments to Turkey. The country returned to a path of economic recovery in the second half of 2019. Since the companies in the TWF's portfolio are closely linked with the general economic situation, the future looks bright for the TWF since the Turkish economy is on the path to recovery with an aim of 5% growth in 2020. "As an important cornerstone for the Turkish economy, the TWF is trying to make this positive trend continuous," Sönmez said.
Since its inception, the TWF has been a source of controversy, with various circles debating whether a wealth fund was necessary since the country does not produce a current account surplus or significant income from natural resources, such as oil. Sönmez pointed out there is confusion regarding the perception of assets and wealth in Turkey, and that the TWF is an asset-backed wealth fund based on the value of companies in its portfolio. "There are successful examples of this in the world," Sönmez said, citing Singapore's Temasek and Malaysia's Khazanah, where he worked for six years.
The TWF managing director noted the fund aims to bring a modern and focused style of management to state-run companies – which are currently run by the Treasury, an entity also managing other tasks and responsibilities. "There is a difference in running the Treasury and running a company, and state-run companies should now be transformed into commercial businesses with a social responsibility aspect attached," Sönmez said.
Sönmez explained that since 2008 when a global financial crisis occurred, there has been an increase in the number and size of wealth funds despite the reservations of private actors, who prefer to keep their assets in liquidity. States started injecting money into the system through quantitative easing policies and taking an active role in the investment side through wealth funds, he added. This trend brought the total portfolio value of some 100 wealth funds in the world to $80 trillion. "If you consider that China's current annual GDP ranges between $12 trillion and $13 trillion or that this number is larger than the total annual GDP of G20 nations, the importance of wealth funds becomes clear," Sönmez said, adding that there is a wealth fund in almost every country in the world, especially those around Turkey.
"The idea of establishing a wealth fund in Turkey is actually not new and in fact dates back 15 to 20 years. This move was in fact a little bit late, and it would have been better if we had established this 10, 20 or 30 years ago."
'TWF should start contributing to Treasury within 5 years'
Sönmez described the first two years of the TWF as an inception period, adding that the current management has established a goal and accepted the responsibility of seeing the fund mature to adulthood.
"We aim to transform the TWF into a structure that continuously pays dividends to the Treasury within a timeframe of five years through the right investments," Sönmez said, citing Temasek and GIC's roles in contributing 28% of the revenue to Singapore's treasury.
Sönmez explained that within a 15-month period, the TWF's mandate for authorization and road map were laid out, its 10-year strategic plan and consolidated financial statements were prepared and its independent audit was carried out by the KPMG. International credit rating agency Fitch will reveal its credit rating for the TWF by February as another step to increase transparency regarding the fund, he added.
"Our board (of directors), including our president, treasury and finance minister, has decided that the TWF will continue to grow as long as it is transparent. If we are not transparent when our subsidiaries are, it won't work."
In addition to independent external audits, the TWF is also subject to the Parliamenterian audit through Parliament's Planning and Budget Commission each year and Presidential audit conducted by the State Inspection Council (DDK).
According to the findings of the independent audit, as of Dec. 31, 2018, the total equity of the TWF stood at TL 177 billion, or $33.5 billion in recent currency rates. Total assets and equities of the TWF stand at TL 1.175 trillion. The consolidated surplus of TWF-run companies totals some TL 17 billion. Sönmez said the main findings of the audit will be publicly disclosed soon.
Regarding questions about the TWF not being subject to the public procurement law or competition law, Sönmez said a significant portion of TWF companies are not subject to public procurement law; though, he added, it does not necessarily mean a company not subject to public procurement law would be managed poorly, citing Turkish Airlines (THY) or public lenders as examples and pointing out there is no direct correlation. "To set the company's corporate governance, rules and procedures straight, you have to have them inspected well and get them to a transparent and accountable point."
Sönmez also underlined the fact that though the TWF lacks competition, it does not mean the fund will compete with the private sector or use the lack of competition to its advantage, adding that it helps them move faster in strategic fields and they will act with the conscience and responsibility of a public actor and keep all relevant institutions informed. "The TWF has no intention to compete with the private sector and indeed will play a complementary role to the private sector," he said.
Strategic investments main focus of TFW
There are three main structural problems for the Turkish economy, namely low savings, the current account deficit and problems in attracting foreign investment, Sönmez said. "You can count on the TWF to aid in methods that will facilitate solutions for structural problems in Turkey."
The $10 billion petrochemical investment recently announced by the TWF is indeed aimed at resolving structural problems since Turkey imports 90% of the petrochemical products it uses mainly from Asian countries that actually don't have oil but are refining it. The project includes establishing a new refinery and petrochemical complex in the Ceyhan district of southern Adana province. The Mediterranean town located at the tip of the Gulf of İskenderun is the perfect spot for such a project as it is the western terminus of the Baku-Tbilisi-Ceyhan and Kirkuk-Ceyhan pipelines, carrying Azerbaijani and Iraqi oil to world markets. A planned extension for the Kırıkkale-Ceyhan pipeline further north to the Black Sea port city of Samsun for possibly carrying Russian and Kazakh oil would further strengthen Ceyhan's status as a major petroleum hub, and the TWF wants to tap into that potential.
Sönmez said this a long-term project spanning six or seven years and work is currently ongoing through advisers, starting with the expropriation of a 10-million-square-meter parcel of land for planned facilities.
"Plans for this project have been ongoing since the 1980s; its master plans were laid out and there is an accumulation of oil industry there, but an actual realization has not occurred. This is where we step in. It is not that we are necessarily doing it. We are trying to attract foreign investment. We also want Turkish players to be involved, and we will not have 100% control of it but our observation is that it would not be realized if we are not involved. The government should be the intermediary in such investments" he said.
"To answer the question of whether Turkey needs such petrochemicals accumulation or an investment, the answer is 100% yes," Sönmez said, likening the project to former state economic enterprises iron-steel producer Erdemir and refiners Tüpraş and Petkim, all inaugurated in the 1960s as part of a planned heavy industry drive and now household names in industry.
"If these countries selling petrochemical products want to partner with us, we would welcome them with open arms, but this investment needs to be in Turkey. Had the private sector felt they could carry out a $10 billion investment, we could have been much less involved."
Amid Turkey's strategic goal to make better use of its domestic energy resources, the TWF is also undertaking the construction of the C segment of Afşin-Elbistan Thermal Power Plant in southern Kahramanmaraş province, fueled by large coal reserves located in the area.
"Our problem is that Turkey has not carried out investments as other countries did 60-70 years ago, and there is an idle reserve of coal in our country. If we can reduce the consumption of imported coal and natural gas through investments, why shouldn't we? Turkey needs to maintain energy security and in that sense, we look at this from a strategic perspective," Sönmez said. "The low-calorie nature of coal in Afşin-Elbistan and the volume of the reserve and project drives away the private sector. This is why the TWF steps in to fill the void."
Sönmez then uninterruptedly explained that the new investment will employ the highest environmental standards, using the latest technology for filtering as part of their social responsibility efforts. Earlier in December, a bill adopted in Parliament foreseeing a two-and-a-half-year extension for 15 coal-powered plants running with inadequate filtering systems prompted public outcry, with President Recep Tayyip Erdoğan using his veto power for the first time during his tenure. The plants, including Afşin-Elbistan's privately-owned A and public-owned B segments, were shut down until they implement required filter upgrades. Saying that the government is also closely following the issue, Sönmez emphasized that they place importance on implementing proper filters that include the latest technology and aim to contribute socially to the people of the region. The tender for the project is aimed to be completed by mid-2020 with construction to start by the end of the year.
Sönmez also pointed out the idle mining sites owned by the government that could not be operated due to lack of proper investments and technology and that the TWF aims to extract and utilize these resources.
Increasing savings, supporting finance sector TWF's top priorities
The TWF recently announced the merger of public-owned insurance companies, namely Ziraat Sigorta, Halk Sigorta and Güneş Sigorta, subsidiaries of public lenders Ziraat Bank, Halkbank and Vakıfbank. "We made this move because Turkey's savings base is low. In order to increase savings, you have to enlarge a nonbank player in the finance sector. We have to consolidate this growth in the public sector and expand it," Sönmez said, adding that this move is expected to be one of the largest mergers and acquisitions in 2020 and expected to be finished by March.
One of the key moves by the TWF to support Turkey's economic recovery in 2019 and a possible return to growth in 2020 was to inject 3.7 billion euros into public lenders, who in turn supported the market with low-interest rate mortgages.
The TWF also secured a 1 billion-euro syndication loan involving the participation of 10 international banks. Sönmez explained that the aim of this loan was primarily to establish bank relations, provide liquidity and reduce the weighted average cost of capital.
At the same time, the TWF is looking for cooperation alternatives with other wealth funds. A memorandum of understanding (MoU) was signed with the Russian Direct Investment Fund (RDIF) in April to establish a joint 200 million-euro fund.
TWF steps in to realize Istanbul Finance Center
In September, the TWF also acquired one-third of the International Istanbul Finance Center (IIFC) project for TL 1.67 billion, which attributes great importance to transforming Turkey and its largest city into a major financial hub in the region. Sönmez noted that the TWF has a more comprehensive approach for the IIFC rather than a mere real estate development project, but construction should be finished first to implement other phases, which are regulations concerning the IIFC and the project's own ecosystem.
"The TWF has actually stepped in as an investor to realize the project since it is a strategic one. If you list all the major financial hubs in Turkey's region, whether London, Moscow, Dubai, Frankfurt, Astana, Amsterdam, Jeddah or Vienna, most alternatives to Istanbul are actually two to four hours away. So, there is potential here in the region, where we have a geographical advantage and historical ties. President Erdoğan saw this potential back in 2007 very clearly, saying it is a strategic obligation for Turkey to launch a financial center project," Sönmez said.
Some 1,500 to 2,000 people are currently on the field and at the height of construction, this number is expected to increase to 10,000. The IIFC is aimed to be finished by the end of 2021 and inaugurated by 2022.
BIST public offering, horse racing tender on agenda
Recently on Dec. 31, the TWF bought the European Bank for Reconstruction and Development's (EBRD) 10% share in the country's benchmark stock exchange Borsa Istanbul (BIST), increasing the fund's share to 90.6%. Sönmez said it was a commercial move since they expect the BIST's value to increase greatly within the next two years when a public offering could be considered. "The BIST's Articles of Association foresees that TWF's shares should not be lower than 51%, but it can gradually decrease their shares in the future," he added. "There is an ongoing business plan, and we might move this public offering forward within the next two years. We can do this if it reaches the right value and investors. We stated earlier at the BIST General Assembly that 2021 is not the year for public offerings, but it could happen in 2022 and onward."
One of the latest actions the TWF took regarding its portfolio was the transfer of the operating rights of the National Lottery (MP), which had been under the scope of privatization since 2008 with three canceled tenders. The MP's license was transferred to the TWF back in 2017 for a 49-year period. The tender in August saw MP's operating rights taken over by a Turkish-Italian joint venture for a 10-year period with a minimum TL 9.32 billion annual turnover guarantee, nearly three times higher than the MP's 2018 revenues. Sönmez said the TWF is now looking to activate its license in horse racing, and they will act on this in the first half of the year.
TWF weighing role in further logistics investments
The TWF already holds significant weight in Turkey's logistics and transportation sectors as it is the owner of national postal and logistics company PTT, the primary shareholder of flag-carrier Turkish Airlines (THY) and the Turkish Maritime Organization (TDİ). The fund also worked with the Ministry of Transportation and Infrastructure during the creation of the Transportation Master Plan, which aims to facilitate Turkey's east-west and north-south transport axis more effectively and increase logistics investments in the country, Sönmez said, adding the TWF will also be a part of the Logistics Executive Board this year. "If investors primarily look for our support in significant projects, we cannot say no since attracting foreign investment is among our key priorities" he added.
The license for the Izmir Alsancak Port, one of the biggest ports in the Aegean and often cited among Turkey's main export gateways, is included in the TWF's portfolio. Two tenders for the port's privatization have been canceled since 2007, and Sönmez said they are in no rush since they want to take sound steps. He added that the TWF believes in the potential of the Izmir Alsancak Port as one of the most important termini of China's Belt and Road Initiative, in which Turkey also plays a significant part.
