Wednesday, 19 February 2020

Feeding the Beast: "Kanal Istanbul" and Crony Capitalism in Turkey

Published in Articles

By Barış Soydan

February 19, 2020

Massive infrastructure projects have become the bedrock of the political economy of Turkey. With the projected building of a canal that would devastate Istanbul’s ecology, and which will vastly increase the budget deficit, the destructive consequences of the collusion of state power and business interests in Turkey risks reaching unprecedented levels. While Turkish crony capitalism requires new mega projects to survive, the Turkish political regime must keep feeding its cronies in order to retain its grip on the country. But the ultimate project of Turkish crony capitalism could spell the end of Istanbul.




BACKGROUND: In December 2019, Turkey’s president and the leader of the ruling Justice and Development Party (AKP) Recep Tayyip Erdoğan revived what he himself has dubbed his “crazy project,” the plan to dig a 45-kilometer (28-mile) long and 400-meter wide canal to the west of Istanbul. “Kanal Istanbul,” as it is named in Turkish, would be built west of the city center on the European side of Istanbul province and connect the Marmara Sea to the south and the Black Sea to the north with a Bosporus-like artificial canal, effectively turning European Istanbul into an island. 

The project has met with strong opposition from civil society in Istanbul, with thousands of concerned citizens filing petitions in protest, as well as from the mayor of Istanbul, Ekrem Imamoğlu, who represents the centrist Republican People’s Party (CHP), Turkey’s main opposition party. However President Erdoğan remains adamant: “Whether they want it or not, we will build Kanal Istanbul,” he said. 

Ostensibly, the Istanbul canal aims to reduce the amount of international cargo ships that regularly traverse the congested Bosporus. More than a 100 ships a day sail up and down the narrow straits. Erdoğan frequently refers to an accident over forty years ago when a Romanian oil tanker exploded after colliding with another vessel, killing dozens and leaking tons of oil. But that was the last time a major accident has occurred.

While President Erdoğan argues that the canal is needed to redirect shipping from the Bosporus, and to “save the environment”, the critics warn that its environmental consequences would be devastating. Environmental experts and activists warn that the canal would imperil Istanbul’s tenuous water supply. “This megaproject risks devastating the surrounding ecosystem, including the natural equilibrium of two seas”, warned the European Greens recently. Turkish geologist and earthquake expert Professor Naci Görür warns that the canal will exacerbate the damage that the city is likely to face from the next major earthquake that is expected within a few decades.

Also, the project would financially strain an ailing economy. Doubts remain about Turkey’s ability to finance it. Erdoğan said that he preferred the project would be realized in the build-operate-transfer (BOT) model. But it is not a secret that the financial environment is unfavorable. With the country recovering from its most recent economic crisis, financial prudence remains crucial for maintaining the already precarious health of the Turkish economy. 

The announced cost of Kanal Istanbul is $12.7 billion, but experts warn that the ultimate cost will by far exceed that estimate. Mahfi Eğilmez, a former undersecretary of the Treasury, warns that the financial cost – which, it should be noted, does not include the costs to the environment and their multi-faceted, ecological as well as economic consequences – will in fact double once the project gets underway. That brings the cost to $25 billion. China has spent the same amount building the biggest dam in the world, Three Gorges.

Considering that Turkey’s budget deficit has already jumped 70 percent, to 2.9 percent of its GDP, Kanal Istanbul has the potential to plunge the Turkish economy into a new crisis. The latest currency crisis that shook Turkey in 2018 resulted in many government projects, including new hospitals and new metro lines in Istanbul, being postponed or rescinded. 

Yet Erdoğan has vowed that the canal will be financed by government funding, saying that, if necessary “it will be realized from the state budget.” 

IMPLICATIONS: The determination to go ahead with a project with immense ecological consequences and which will seriously aggravate the budget deficit makes sense only in the context of Turkey’s crony capitalism that has grown dependent on mega-projects. The projected canal would be but the latest, albeit most devastating, expression of Turkey’s crony capitalist system. “We will establish two modern cities while making Kanal Istanbul,” Erdoğan has said. The new cities are planned to be built on approximately 453 million square meters and will be inhabited by half a million residents. 

The digging of the canal and the construction of the bridges and highways on and around, not to speak of the two new, prospected cities, will boost the fortunes of the companies that are awarded the enormously lucrative contracts, further enriching a business class that has already greatly benefited from its close relations with the AKP regime, prospering under state protection.

The term ‘crony capitalism’ describes the blending of commercial interests with political power. The Cambridge Dictionary defines crony capitalism as “an economic system in which family members and friends of government officials and business leaders are given unfair advantages in the form of jobs, loans, etc.” The AKP regime did not invent crony capitalism in Turkey; in fact, its roots stretch back to the Ottoman Empire. 

To replace the Ottoman Christian business class – which posed a particular political challenge to the Ottoman state that was being undermined by ethnic and religious secessionism – the Committee of Union and Progress (CUP), the nationalist party that governed the Ottoman Empire during its last decade, launched a set of measures to create a politically reliable and subservient “Muslim bourgeoisie.” The Muslim merchants, protected by the CUP regime, were allowed to make obscenely big profits during the First World War, while the fortunes of the Ottoman Christian bourgeoisie were transferred to them. The republic that replaced the Ottoman state continued to nurse the business class, ensuring that crony capitalism, built on public sector tenders, has remained the defining feature of the Turkish political economy for the last century. Government contracts have invariably been assigned to cronies according to their affinity with the parties in government.

Many Turkish businessmen have made fortunes as government contractors, subsequently investing in other areas. A typical example is the rise of the conglomerate Doğuş Holding, which today is active in the automotive sector and in the media. Ayhan Şahenk, founder of Doğuş Holding, was a construction contractor who made his initial fortune as a crony of the conservative Prime Minister Süleyman Demirel in 1970s, and who reportedly lent money to relatives of Demirel in return for government favors. Later, his son, Ferit Şahenk, scaled down the scope of construction business of Doğuş Holding and went into the finance sector (Garanti Bank), media (NTV), and the automotive industry. (Doğuş Auto is the distributor of Volkswagen in Turkey.) 

Even though crony capitalism is not an AKP invention, it has nonetheless acquired a whole new scale, thanks to the sheer size of the public mega projects, during the AKP era. The AKP governments have consistently used public procurement as a tool to ensure electoral success, to create their own elites and to finance the ruling party. Public procurement for rent creation and distribution has been particularly widespread in the construction and services sector. 

A study of 49,355 high value public procurement contracts awarded between 2004 and 2011 revealed evidence of systematic favoritism in the public procurement process. Also, AKP governments have enacted legal amendments – the Public Procurement Law has been amended more than one hundred and fifty times by successive AKP governments – that have opened for an increased use of less competitive procurement methods and discretion in awarding contracts, favoring government-linked companies.

Several of the mega projects during the last decade have been offered according to the article 21/b of the Public Procurement Law, which gives the government the license to decide the participants of the tender. These mega projects include the third airport in Istanbul ($24.3 billion), the third Bosporus Bridge ($3 billion), the Osmangazi Bridge ($1.3 billion), the Presidential Palace ($1 billion), the first phase of the Istanbul Finance Center ($2.5 billion), North Marmara Highway ($2.3 billion), Ankara Bilkent and Etlik city hospitals ($3 billion), Istanbul city hospital ($2 billion) and Bursa and Mersin city hospitals ($800 million). Between 2013 and 2019, eighteen companies were accorded government contracts whose worth ranged from close to two billion US dollars to two hundred million dollars. 

CONCLUSIONS: Massive infrastructure projects have become the bedrock of the political economy of Turkey. As was most strikingly the case with Istanbul’s new airport, these mega projects are undertaken with total disregard for their environmental consequences; meanwhile, state funds are squandered as competitive procurement methods are set aside in awarding contracts. With the projected building of a canal that would devastate Istanbul’s ecology, and which will vastly increase the budget deficit, the destructive consequences of the collusion of state power and business interests in Turkey risks reaching unprecedented levels.

While Turkish crony capitalism requires new mega projects to survive, the Turkish political regime must keep feeding its cronies, its base, in order to retain its grip on the country. But the ultimate project of Turkish crony capitalism could very well spell the end of Istanbul.


Barış Soydan is a columnist for the Turkish news site t24. 

Image Source: Jorge Franganillo via Flickr 2.19.2020

Read 8445 times Last modified on Wednesday, 19 February 2020

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The Turkey Analyst is a publication of the Central Asia-Caucasus Institute & Silk Road Studies Joint Center, designed to bring authoritative analysis and news on the rapidly developing domestic and foreign policy issues in Turkey. It includes topical analysis, as well as a summary of the Turkish media debate.


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