How realistic is Turkey’s pledge for free factories?

Its budget already gaping, the Turkish government plans to spend even more under an ambitious project to revive the economy in the conflict-hit, mainly Kurdish southeast.

al-monitor Turkey's Prime Minister Binali Yildirim addresses the media in Ankara, Turkey, June 27, 2016.  Photo by REUTERS/Umit Bektas.

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turkish-kurdish relations, investment, economic reform, economic growth, economic development, diyarbakir, binali yildirim, akp

Oct 12, 2016

Prime Minister Binali Yildirim last month unveiled an investment support package for the conflict-torn provinces in Turkey’s mainly Kurdish east and southeast, including a pledge perhaps unprecedented in the world. Speaking in Diyarbakir, the largest city of the region, Yildirim promised that the government would build dozens of turnkey factories and hand them over to entrepreneurs.

The package aims to prop up the region’s economy and stop the flight of investors who have been scared away by the fighting between the security forces and Kurdish militants, who have also been attacking construction sites, killing workers and burning down machinery. Along with incentives, tax facilities and infrastructure projects to rebuild cities devastated in the latest round of violence, Yildirim pledged the government would build 80 factories in the region each year and hand them over to entrepreneurs to operate.

Here are the key points of the plan, according to the prime minister’s statements: “Centers of attraction” will be created in 23 provinces, divided into five clusters. Van, for instance, will be the center of one cluster, which will include three other provinces. “The state will build factories and hand them over to those willing to make investments there,” Yildirim said, stressing the private sector would be relieved from the burden of fixed investments such as land and buildings. Every year, eight provinces will get 10 factories each, meaning 80 new facilities every year. The factories will provide 200 to 800 jobs each, meaning an average of 40,000 new jobs every year. Zero-interest loans will be available for machinery and equipment. Such incentives, including operational loans, will be available until 2027.

The government is also pledging a “purchase guarantee” for the products the factories will manufacture. In other words, the output will be free of marketing risks, with the state buying everything.

According to Development Minister Lutfu Elvan, similar incentives would be available for entrepreneurs who are willing to move existing factories in other regions to one of the 23 eastern and southeastern provinces. The government’s support will include a moving grant of 1 million Turkish liras ($320,000), as well as free land and buildings in the new locations.

Science, Industry and Technology Minister Faruk Ozlu, meanwhile, said that in addition to alleviating fixed investment burdens, the government would provide support in terms of operational capital as well. Accordingly, the government will take upon itself 8 percentage points from interests on loan repayments. For instance, this means that an investor who gets a loan with 15% interest will be repaying it as a loan with 7% interest.

Finance Minister Naci Agbal, for his part, announced the government would act as a partner in strategic and high-tech investments, providing 49% of the capital without interfering in the company’s management and operations. Once the enterprise becomes self-sustaining, the state will pull out, either by selling its 49% stake to the entrepreneur or offering it to the public.

While the “turnkey factory” project is expected to attract foreign interest as well, local investors are said to be already preparing to return to the southeast. Aspiring entrepreneurs have reportedly booked all available plots at Diyarbakir’s Organized Industrial Zone, and work is underway for a new land allocation. In remarks to the press earlier this month, Ahmet Sayar, the head of the Diyarbakir Commerce and Industry Chamber, spoke of great excitement among both local and foreign investors. “The state’s construction of factories, the guarantee of purchase and the extension of incentives to factories that move from elsewhere are all very big steps. And our optimism is equally big,” he said.

The enthusiasm sparked by the prospect of free “turnkey factories” is understandable, but the issue has another, not-so-bright side: the state of the real economy and the problem of financing.

Turkey today is a country with unemployment of 10.2%, a deteriorating income gap and investments grinding to a halt not only in the southeast but nationwide. Economic growth this year has been driven mainly by private consumption and a 50% increase in government spending, with public funds channeled overwhelmingly to military and anti-terror operations.

Last month, Moody’s Investor Service cut Turkey’s sovereign credit rating to noninvestment grade, meaning that Turkey’s difficulties in attracting much-needed foreign capital are likely to grow. With a higher risk premium, the country’s borrowing costs will also increase. In a further blow, Moody’s also downgraded the long-term debt and deposit ratings of 14 Turkish banks.

So, Ankara’s pledge to build 80 factories every year and hand them over to entrepreneurs free of charge may sound great, but how will the government come up with the funds to finance this ambitious project?

By widening the budget deficit, it seems. According to projections in the revised middle-term economic program, which Yildirim announced Oct. 4, the budget gap will reach 1.9% of gross domestic product in 2017, up from 1.6% this year and almost double the previous forecast of 1%. To finance a larger budget gap, the Turkish treasury will have to borrow more — and with higher interest rates. As a result, the country’s public debt of more than $262 billion will swell further, and inflation and interest rates will likely climb.

Erdogan Toprak, a lawmaker for the main opposition Republican People’s Party and a former businessman, believes that the government’s plan is fishy, beyond the problem of financing. “The government says it will build turnkey factories and hand them over to businesspeople and investors under the name of economic reform. If so, why did they privatize all those state-owned factories and enterprises, including those in the east and southeast, over the past 14 years?” he asked in a commentary on his personal website. According to Toprak, only businesspeople close to the ruling Justice and Development Party (AKP) will benefit from the project. “The government will make certain people factory owners and industrialists for free, using the nation’s money. [Public] wealth will be transferred to the AKP’s crony businessmen,” he said.

According to the ruling party’s website, the privatizations under the AKP in the 2003-2015 period were worth $61.8 billion. The government had pledged to channel those funds into new investments and facilities, but those have yet to materialize.

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