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Turkeys without wealth fund a tangle of problems




Jan 13, 2021

Controversies surrounding Turkey’s sovereign wealth fund have only grown since its inception four years ago amid swirling questions about its confused legal status, questionable goals and exemption from public audit.

The fund – hastily created in 2016 – was back in the spotlight in the early days of 2021 as 75 million lira (roughly $ 10 million) in New Year’s lottery prizes, won by unsold tickets, were transferred to the fund, which holds the licensing rights of the national lottery. The transfer sparked a social media campaign, backed by celebrities and opposition leaders, urging Ankara to use the money for the ultra-expensive treatment of infants with fatal neuromuscular disease. President Recep Tayyip Erdogan, who chairs the fund, reacted angrily, slamming the countryside as “immoral” for describing the government’s health measures as insufficient.

Just weeks earlier, the fund was criticized for selling 10% of the stock market of Borsa Istanbul, a company in its portfolio, to its Qatari counterpart in a series of deals with the wealthy Gulf emirate, the first regional ally of Erdogan. And the exemption from the public audit fund remains a hot topic in parliament.

The fund’s portfolio includes 20 public companies, some licenses and a range of public real estate properties. But in reality, he hardly has any wealth. Most of the entities in its portfolio remain attached to the Ministry of Treasury and Finance or other ministries, and all the revenues they generate go to the central government budget. Likewise, the capital reductions or losses they incur are covered by the same budget. Even more intriguing, the fund, which has corporate status, exceeds the supervisory authority of the Court of Auditors, Turkey’s main public auditor, unlike the companies and banks whose shares it owns.

Turkey’s wealth fund is only similar in name to sovereign wealth funds typically created by oil-rich countries to turn their current surpluses into investments. Turkey has a chronic current account deficit and its economy depends on foreign capital for development.

The fund is based on a flawed institutional conception, which lawyers describe as a legal bizarre. Besides the legal confusions it creates, the fund and its questionable operations fueled various conspiracy theories and futile debates, creating one problem after another.

State-owned companies transferred to the fund, including pipeline operator BOTAS, oil exploration company TPAO, Turkish Maritime Organization and mining company Eti Maden, have a special legal framework, which prevents the fund from taking decisions about their management and operations. Their budgets, for example, are set by the Ministry of Treasury and Finance, where their profits also go.

According to his establishment status, the fund aims to finance itself through licensing, profits and rental income from the assets it owns, and to provide capital support to “visionary projects” in Turkey. However, the revenues of these companies go to the central government budget and not to the fund. In the first nine months of 2020, for example, 2.3 billion lire (approximately $ 309 million) in revenue from public enterprises went to the budget rather than the fund. Likewise, it is the treasure that injected capital to the public Ziraat Bank and Halkbank when they needed support in April 2019.

In addition, many companies in the fund’s portfolio, including Borsa Istanbul, PTT postal service, TURKSAT satellite operator, Ziraat Bank and Halkbank, have their own legal statutes, which is another reason that prevents them from become the “wealth” of the fund. Each entity is attached to a ministry. The law regulating Ziraat Bank and Halkbank, for example, stipulates that their public stocks are represented and managed by the relevant minister. In other words, the fund cannot use any shareholder rights vis-à-vis the banks.

Given all of these limitations, critics accused the fund of actually being an alternative borrowing tool for the government. Back in 2017, Selin Sayek Boke, professor of economics and prominent member of the main opposition party, the Republican People’s Party, argued that the fund, in its current form, “could only take back public property and put it as collateral to borrow.” – and with little responsibility. It cannot afford to “convert resources into investment,” she said, calling it “a loan fund rather than a wealth fund.”

Indeed, the fund has used public assets as collateral to borrow, but all it has managed to secure so far is a loan of 1 billion euros ($ 1.2 billion), guaranteed by the Treasury. The loan, issued in 2019 by a consortium led by Citibank NA / London and ICBC in China, was used to rescue ailing construction companies, as Al-Monitor reported at the time. The fund paid some $ 300 million for a stake, including ongoing pledges, in the Istanbul Financial Center, a sprawling project where construction stalled amid financial difficulties. The companies saved through the purchase were Agaoglu Insaat – one of Turkey’s largest construction companies which reached its peak under Erdogan’s government – and Intas and YDA.

One of the most controversial aspects of the body is the lack of public control of the fund, even though it uses public assets for some transactions. Critics say it has become a tool of irresponsible governance and cronyism. Boke criticized the fund as an “uncontrolled parallel treasury,” while Axes MeralLeader of the Opposition Good Party called it a “very dangerous parallel treasure” that should be abolished.

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