APPENDIX 6
Memorandum submitted by Balfour Beatty
plc
This memorandum is in response to the announcement
of 4 July that your Committee intends to undertake an inquiry
into Trade and Industrial relations with Turkey.
It tries to set out how one large British construction
and engineering company, Balfour Beatty, sees the market prospects;
what its past experience has been; and how it will attack the
market in future. It is hoped that in this way it will give your
Committee, in practical terms, some helpful background as to the
opportunities and realities of an important part of the Turkish
market.
OUR ASSESSMENT
Turkey has a large (65 million) and rapidly
growing population. Officially its economy was growing fast at
a real rate of 3.8 per cent in 1999 and 8 per cent in 1998. These
figures need, however, to be treated with caution due both to
the difficulty of producing precise statistics which a background
of high inflation, and a large "grey economy" causes.
For practical purposes, it is sufficient to accept that the economy
is certainly growing strongly today, and at times in the past
has been doing better than official figures might suggest.
The economy still suffers from high inflation.
Like Brazil, however, business and industry, and the population
generally, seem to have learned how to live with this, albeit
in a somewhat unsatisfactory way. One reason inflation was not
tackled effectively in the past was political instability, or
more accurately perhaps Turkey's hyperactive political and parliamentary
process. The political scene now seems rather more stable and
certainly, with IMF support, inflation seems to be coming under
better control. Most important, it is now becoming accepted that
any idea of joining the EU is quite unrealistic unless this can
be done. Equally, although slowly, the entrenched nationalistic
attitude which has sometimes discouraged foreign investment is
being replaced by a more realistic outlook. The practical problems
caused by traditional nationalism have been reflected in such
examples as reluctance to accept outside arbitration of contracts,
and in another sphere that human rights issues are a strictly
internal Turkish matter rather than a legitimate international
concern. It will take time for such attitudes, which reflect the
history of modern Turkey, to change but they clearly are changing.
For companies like Balfour Beatty, the major
opportunity lies in the growth in the economy and population combined
with an inadequate infrastructure. Currently the Turkish construction
market is estimated by us to be of the order of US $12.5 billion
per annum. The main constraint on its growth is financing, but
there is no lack of attractive and essential potential projects.
These lie in the following areas:
(a) Power
This is a large potential market both for hydro-electric
and thermal power stations. Recent surveys show that industrial
growth will face a crippling bottleneck in power supply, unless
heavy investment is quickly made both in more power generation
and in a major upgrade in the transmission and distribution system.
(b) Rail
The new government is rightly putting heavy
emphasis on modernisation and upgrading the mainline system and
on the development of Mass Transit and Light Rail Municipal Schemes.
(c ) Airports
This is another priority and some of the need
is likely to be met by private sector investment (eg the new Istanbul
terminal built on a BOT basis).
(d) Water and Sewage
There is a huge unsatisfied demand for improved
supply and treatment facilities, driven not only by the rapid
growth of major cities but also by the needs of a growing tourist
industry. Fortunately, Turkey is the only country in the area
which actually has a water surplus available.
(e) Building
As a result of the recent earthquake there are
signs that a new culture of quality building may be emerging.
(f) Ports and Harbours
Represent another good opportunity driven by
a strong growth in container traffic and the development of oil
transhipment.
(g) Roads and Bridges
Much investment is required.
In conclusion, there are considerable opportunities
for UK business in many of these areas, which correspond to established
UK capabilities. The way we will ourselves attack these is set
out in the final part of this memorandum.
OUR PAST
INVOLVEMENT
Up until now, Balfour Beatty, although it has
been undertaking projects in Turkey on a fairly regular basis
since the late 1980s, has nevertheless had a somewhat ad hoc
approach to the market. Some typical examples of past work
are as follows:
(i) Together with a local partner we designed
and constructed a substantial part of the Ankara-Istanbul motorway
in a contract worth $250 million over five years.
(ii) We designed, supplied and installed
the overhead electrification system for 35km of the Istanbul Light
Rapid Transit rail system.
(iii) We designed and supplied the trackwork
for 39km of the Ankara Rapid Transit system.
(iv) We constructed the £75 million
wastewater treatment plant for Adapazari. It was near the centre
of the 1999 severe earthquake, but withstood it with minimal damage.
The project site was a base for rescue teams.
(v) After the earthquake we led an initiative
of the UK construction industry to provide technical assistance
to the earthquake-hit area. With financial assistance from DETR
this has led to the formation of the British Earthquake Consortium
for Turkey.
In addition, the Committee will be aware, from
the past appearance of our Chief Executive before it, of our involvement
as chosen lead civil contractor for the Ilisu Dam. We have not
thought it appropriate to comment specifically in a general paper
like this on the important issues this particular project raises,
and of which you are well aware. We would only remark that if
the UK Government were to instruct ECGD to take a harder line
than other countries and their ECAs are inclined to do, it would
certainly cause an unfavourable reaction in Turkish Government
circles towards working with UK companies generally.
Finally, we would add that we are currently
undertaking a major highway project in Kazakhstan in partnership
with a Turkish firm.
OUR FUTURE
STRATEGY
The local contracting industry in Turkey has
developed considerably in recent years and has several companies
of considerable size, some of which are energetic, competent and
resourceful to the point that they do not limit themselves to
the local market but also undertake work in neighbouring countries.
Although Turkish contractors may lack the full
capability which a company like Balfour Beatty has in more sophisticated
engineering and technology, large scale project management, project
finance and the like, nevertheless the industry has developed
past the point where more complex projects can only be undertaken
by expatriate companies using local labour contractors.
It is therefore now both feasible and attractive
to undertake many projects in Turkey through a local organisation,
with external specialist support when needed. We have therefore
now become joint owners (with a large Turkish private sector group)
of their existing construction operation and will develop it as
our vehicle for the market and improve its capability. It should
be made clear, however, that this is unlikely to have an adverse
effect on the amount of services and equipment we have traditionally
sourced from UK suppliers, mainly in the SME sector. Indeed, if
we can grow the business in Turkey it should benefit our suppliers,
so long as they remain competitive, as they need to do in any
case. Logically, if a UK company can become a leading Turkish
contractor, as is our ambition, it cannot be other than a favourable
development for UK business generally in Turkey. Moreover, if
we have a strong presence there on the ground in construction,
other parts of our own business, such as railway systems, rail
electrification, and power transmission, should be much better
placed to win contracts in Turkey with all the potential benefit
to our UK suppliers which that implies.
Local investment of this kind is doubtless also
becoming more appropriate for UK companies in other sectors.
We would add that we would also use our Turkish
business as our arm for attacking opportunities in Bulgaria, Romania
and neighbouring former CIS states.
CONCLUSION
Turkey is a market of considerable potential
for most UK exporters, and those who carry out overseas contracts.
It has much more potential than Greece, for example.
We hope that the conclusions of your own inquiry
will not only support this view, but that you will also urge HMG
to do everything it can to help develop business there. If we
do not do this, the Germans and others most certainly will.
One specific measure might be to consider giving
direct support to the Turkish British Business Council, in the
same way that support is given to the China Britain Business Council
(who have therefore been able to set up local offices in China).
Equally in assessing the state of the Turkish
economy, and therefore in setting premium rates and the amount
of credit, ECGD should take care in judging official figures for
the economy. To those familiar with the country, the economy is
very often doing better than the figures suggest, due to the large
grey economy, and ECGD's judgement should reflect this reality.
For some businesses, Turkey is not only important
in its own right, but is a useful staging post for some neighbouring
countries.
In its general dealings with Turkey, HMG needs
to tread carefully in the face of the strong inbuilt national
pride and sensitivity. Failure to do this will impact unfavourably
on trade relations.
Finally, the Committee should note that we are
very well represented by our Embassy who are highly informed and
most helpful commercially.
6 October 2000
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