Last week, Turkey’s government appointed the head of the Privatization Administration, Mehmet Bostan, as director general and board chairman of a newly established public company, the Turkish Sovereign Wealth Fund, moving a step closer to the creation of a sovereign wealth fund. The plan was first brought up in late July and hastily passed through parliament the following month.
The world's largest sovereign wealth funds include Norway’s Government Pension Fund, the United Arab Emirates’ Abu Dhabi Investment Authority, the China Investment Corporation, the Kuwait Investment Authority and the Saudi Arabian Monetary Agency’s holdings. Generally, their revenues come from budgetary surpluses. In other words, sovereign wealth funds are created by countries that have current account surpluses and possess some natural riches, mostly oil and natural gas.
What about Turkey’s? Other than its name, the Turkish fund has little in common with the conventional ones, for Turkey is not a country with current account and budgetary surpluses. Rather, as Ankara’s medium-term economic program indicates, domestic savings amount to only 14% of gross domestic product (GDP), meaning that Turkey relies heavily on external financing.
Growing economic, political and geopolitical risks have curbed the flow of foreign capital to Turkey, resulting in a slowdown in economic growth. Ankara’s growth target for 2016 was 4%, but earlier this month the International Monetary Fund (IMF) projected the year-end rate would be 2.9%, stressing that external financing needs “remain large and limit fiscal space.” All this is another confirmation that the Turkish economy is going through a period of financial bottlenecks.
In such times, public finances play the role of a firefighter against economic blazes. Hence, the central government budget deficit for 2017 was extended to 1.9% of GDP, meaning that public finances would be used more in intervening against possible contractions. In other words, measures such as lavish public spending, tax reductions and loan supports would be applied to prop up troubled sectors at the expense of a bigger budget deficit. That’s how Turkey had weathered the 2008-2009 financial crisis, extending the budget deficit-to-GDP ratio to up to 5%. Today, Ankara is adding a second firefighting instrument to its toolbox — the wealth fund.
The Turkish Sovereign Wealth Fund was created as a company with 50 million Turkish liras ($15.6 million) in startup capital, financed from the Privatization Administration. Hence, the Privatization Administration’s chairman became its chief manager. The company will now draft an internal statute for a Turkish Sovereign Wealth Fund and eventually create the fund. It would be entitled to create various sub-funds as well.
And where will the fund’s revenues come from? The related law lists the Privatization Administration in first place, describing “entities and assets in the scope and program of privatization that the Higher Privatization Board decides to hand over to the wealth fund and the cash surplus to be transferred from the Privatization Fund to the Turkish Sovereign Wealth Fund.” And what does this mean in numbers?
Essentially, most of Turkey’s sellable public assets have been already privatized, most of them in the past decade under the rule of the Justice and Development Party. According to Privatization Administration data, 267 public entities have been the subject of some sort of privatization, including 257 in which no public share is left. From 1986 to July 2016, Turkey generated $68 billion from privatization. The money transferred from the Privatization Fund to the Treasury from 1995 to July 2016 amounts to $45.1 billion.
The medium-term economic program states that the flow of privatization revenues to the budget has declined in recent years. The figure, which stood at $4.3 billion in 2015, is estimated to be $3.5 billion this year. The target for 2017 is more ambitious — $5.3 billion. But then, if privatization revenues are funneled to the wealth fund, this would mean less revenues for the central government budget.
Here, the Unemployment Insurance Fund emerges as the main target of revenue-generation for the wealth fund. Half of the revenues of the Unemployment Insurance Fund comes from monthly reducations from salaries, met jointly by the employer, the employee and the state, while the other half comes from the yields of bank deposits and treasury bonds in which the fund invests. As of September, the fund had accumulated assets of more than 100 billion Turkish liras ($33 billion).
In the wealth fund law, another source of revenue is described as “the redundant revenues, resources and assets at the disposal of public institutions and entities, which the Council of Ministers decides to transfer to the Turkey Wealth Fund or put under the management of the company.” What those assets will be remains to be seen.
A major point of criticism is the wealth fund’s exemption from the auditing of the Court of Accounts despite being a public entity using public funds. Instead, the fund and any future sub-funds will be subject to independent auditing under the Capital Market Law. The fund, the fund management company and any sub-funds and companies to be created in the future will enjoy also a series of tax exemptions.
The giant construction projects, which the government has launched with much fanfare in recent years, figure among the investments in which the wealth fund will put money. The so-called megaprojects, based on the public-private partnership model, have emerged as a “black hole” risk for the Turkish economy. In the preamble of the wealth fund bill, the government described one of the objectives as “securing financing for large infrastructure projects, such as motorways, Canal Istanbul, the third bridge [over the Bosporus], the third airport [in Istanbul] and the nuclear plant, without increasing public debt.” The preamble spoke also of developing the defense industry sector, which suggests the Defense Industry Support Fund might be also placed into the wealth fund’s scope.
Marked by obscurities and dubious practices, funds and budgets outside the central budget and the scope of public auditing have long been an issue of concern — both for domestic critics and international institutions such as the IMF and credit-rating agencies. History is full of bitter lessons on how the mismanagement of public finances might end, including Turkey’s financial crisis in 2001 and, more recently, the grave debt crisis in neighboring Greece. Will anyone remember?