A Butcher Can No Longer Invest in a Power Plant


Alarko Holding is one of the long-established groups in Turkey consisting of companies engaged in the fields of construction, energy, air conditioning, real estate development and tourism. Ayhan Yavrucu, Group CEO, answers the questions asked by Bloomberg Businessweek Turkey:

Can you tell us what Alarko Holding is up to?
We have now completed 1320 MW Karabiga thermal power plant which will meet the power requirement of around three million people, and commissioned it this year. The plant is equipped with the state-of-the-art technology, and no one can make any criticism of the plant in terms of environmental issues. All measurements are below the thresholds specified in the regulations. This is now quite a good facility, but power prices are highly low in Turkey. It seems they will decrease even further because of the increasing exchange rates. However coal prices are on the rise all over the world. There is no one today who can make money by generating power using natural gas or coal.

We have a high supply, right?
Yes, the supply is high. It is higher than demand. Lots of investments have been made.

Ok, but how could this much investment be made? Isn't it possible for everyone to act like a prudent merchant?
Let me tell you the investor businessman profile in Turkey. It has not changed for years. The investors in Turkey were once engaged in the textile industry. They never ever stop to say "I am an expert of this business, and this is the job I am good at". They never ever say "I have the required skills and experience in this field". Instead, they tend to say "If he did it, why can't I?". There were various investments in one single street. Most of them already went bankrupt and were closed down. Those that survived could continue their operations in a safe and sound manner, but they also lost a significant capital. Quite significant investments were lost. Then everyone shifted to tourism with the same mindset. Everyone and his uncle started building holiday resorts. Prices fell down to 20-30 Euro levels. Why? This is because it is the Turkish style. We never act on a feasibility study. He did that, they did that, so why can't I? I had read it in an interview held with Sakıp Sabancı. They had asked him "Why don't you invest in Kayseri?". "Why should I, bro?" he replied. "Whatever I do, five other businesses do the same. Not only my business collapses, but also theirs collapse". Most of the Turkish businessmen tend to depend on their observations, rather than scientific facts. Tourism is already over, and it is now followed by the energy industry. This is very interesting. You are asking "What are you doing in the energy industry?". Believe me, that's no exaggeration. They say: "We have a large butcher's shop. We also have a power plant." What does a butcher shop have to do with a power plant? "We thought we should try it". Believe me, they do not carry out any activities. I am just telling about the examples I have observed. "They have built a solar energy system plant somewhere. We thought we should build another 600 KW one next to that".

Then, what will happen? Their business will probably collapse.
The duty that falls onto the government at this point is to define the objectives, plan and program, and to inspect whether suitable investments are made. The government should prevent those that try to exceed a certain level. This is because this country does not have 30 different resources. A resource that goes to an area in an improper manner will lose its economic value soon after, causing financial distress. The government should perform such a function. It should introduce an order which will ensure that.

You are saying that it should provide guidance and perform supervision.
You are right. I do not agree with the opinion that the market automatically recovers itself in a free economy. This is not true. This is the story of 18th century. If the market can recover itself, then why did Fed intervene in the market to such an extent in the 2007-2008 crisis? It injected around 3 trillion dollars into the market. They could have let the market to recover itself. Why couldn't it just do it? Sometimes it is unavoidable to intervene in the market. The power market faces a great difficulty because of these prices.

What else are you doing?
We are conducting construction projects both in the country and abroad. We have changed our style of construction business abroad to an extent. Let me tell you what I mean by changing our style of construction business: I believe that the construction style which is about submitting an offer to a project directly will change form not in the long-term, but in the medium-term.

How can it change form?
A part of this business has turned into BOT (Build-Operate-Transfer) projects, while a part of it has turned into PPP (Public-Private Sector Partnership) projects. We will mainly focus on that. Otherwise, an unusual price competition arises and it is not even certain whether they can do the job or not. However, they are submitting offers that can only cover the cost of the materials and they get the job.

Is that the case also abroad?
Sure. It is necessary to keep the competition at a reasonable level and ensure that an order is ensured in the project to allow it to be conducted economically. The models I have mentioned above are the way to do that. We have now shifted to this method to a certain extent. We have acquired the highway project in Almaty, Kazakhstan most recently in line with these models. We will invest 735 million USD, we will operate it for 16 years and then transfer it. We are following up both projects like this and PP projects in Romania. We are following up some other similar projects in Romania. We are interested in some projects in Russia. This means that we tried to bring together our construction business with some investments. In other words, we will allocate capital for investments, we will build and operate.

What is there in the Turkish construction business?
There are two construction projects we have conducted so far in Turkey with the old method. One of them is Mahmutbey-Kabataş project, while the other is Pendik-Tuzla metro project. Tender has been held for two phases of 23 km. long Mahmutbey-Kabataş project. We are building the Mecidiyeköy-Kabataş line. The total value of the two phases is around 700-800 million Euros. The Mecidiyeköy-Kabataş phase we are building will be completed by the end of the year. The trial operation will be started. This may take several months, but the job will have been completed. Pendik-Tuzla metro project is a bit smaller. This project, which is 13 km. long, has a tender value of 1 billion 600 million TL. That project is also supposed to be completed by the end of 2020. Let me tell you something very frankly. One should not hurry up that much in this business. Why? For example, the Mahmutbey-Kabataş metro project would be completed in five years if it were conducted in Canada.

How long does it take in our country?
Three years.

How come? Do you work non-stop?
Sure. We work 7/24. Nobody ever realizes that, but honestly there is an incredibly hard work going on underground. Since they have no idea about what is happening all the time, they check up one day to see that the work is over. You get on the metro, and start travelling around. Investments like metro have numerous disadvantages. Citizens never have an idea about what is being done. They only notice that when the work is over. In fact, we should give due credit to the Istanbul Metropolitan Municipality. Istanbul Metropolitan Municipality allocates significant funds for this kind of infrastructure investments, and particularly transportation. When these metros are completed, the traffic problem of Istanbul will have been solved to a significant extent. Truly, the municipality spends great effort towards this goal. I do appreciate them. They are really not cutting down their budget in this respect. There will be a lot more projects to be conducted.

Do you think the Build-Operate-Transfer model won't work for metro projects?
No, it works. I had offered the Mahmutbey-Beşiktaş Project that we are conducting today to the then-officers of the municipality with the BOT method six or seven years ago. They had a positive attitude about the project. Then, they said "let's do this ourselves" as they found this line feasible and profitable. However, the government can't respond to every need today. In my opinion, it also doesn't have to do so. For example, Istanbul needs car parks. They can meet that need using the BOT method. There are numerous underground and under road areas. You will give these areas, and they will first build, and then operate and return the projects. This is not bad at all. This is very good.

Contracting business continues, in other words.
We are of course going on with the construction business. Construction is our main field of operation. We are going to Tanzania in Africa. Tanzania struggles very hard nowadays. Tanzania has road and railway projects, but they don't have any money. We are trying to find finance from major global banks, Asia and Europe.

There are too many Chinese in Africa. I happen to come across the Chinese wherever I go, but their job quality is highly poor.
The Chinese are just like you describe. The African complaints a lot about the Chinese even though they need various facilities. Their labor quality is incredibly low.

However, they have money.
They do have it. They have a 3 trillion USD surplus in their payments balance sheet. This fund has been invested in US Treasury securities. They are bringing the money from the US, but not only their labor is expensive, but their job quality is also poor. We should give due credit to the Turkish contracting business. It has developed significantly. Let me tell you this frankly. We can comfortably compete with American, French, English or German companies with respect to quality, price and term. The only problem we have is the lack of financing facilities. However, we should be aware that we are not a country which has a surplus on its payments balance sheet. The government should have a surplus on its payments balance sheet in order to provide support with loans. We are giving a deficit of 50-55 million USD every year. We have to find loans. Still, I should admit that Eximbank does a great job. It extends a loan of 100 million USD to some businesses, while it extends a loan of 50 million USD and 30 million USD to others according to its potential, and supports this kind of projects with its own resources and facilities.

What are you up to in Tanzania?
We are seeking business also in Uganda in addition to Tanzania. Africa is the market of future.

However, they have no money. How will you handle that?
They don't have money, but will have it. We will manage that because of this: A Gross National Product of nearly 70 trillion USD has been derived globally today. Countries all over the world have to allocate a particular resource for Africa. They should do that not only to increase the average quality of life of the people in Africa, but also to protect nature. There is no other way. Otherwise, you can't prevent those emigrations. You have to keep those people there, provide the resources to keep them in their permanent settlement and ensure that they find employment. You have to integrate them into the market. There is no other solution. Integrating the market is about building ports, railways and airports. You have to build them. We are now looking at these. No one used to speak about Africa six or seven years ago. Today, it is on the agenda. I am sure that Africa will be great 10 years later.

Ok. What else are you doing? You are engaged in tourism sector.
We have been allocated a large field in Cyprus for 49 years. We are now modifying the projects we have built before there. We are conducting a mix project comprising a hotel and a holiday resort. We will start it once we obtain the permissions and licenses. It is located in Yeni Erenköy. It is on the way to Karpaz from Nicosia. It is one of the most beautiful places of the Mediterranean, and has a great sea. It is an extra-ordinary beauty. We know tourism well, we have learned it. We have a staff which provides a very high level of service. This level has been improved not only in our company, but also in Turkey. Turkey could catch a certain level. Facilities are extraordinarily beautiful.

Do you plan to engage in other business segments in future, or will you continue to operate in the same fields?
We are dealing with PPP hospitals in the meantime, but we still could not acquire one yet. The prices are extraordinary, and competition is fierce. We could not acquire one, but there will be new ones. We are following up on them. I hope we will succeed for one of them. We have our own understanding of feasibility and profitability. We cannot offer a price higher than that. Let me tell you what I mean. I am saying that we can pay maximum 500 million USD for this good, then all of a sudden the price increases to 700-800 million USD. I do not want to say that feasibility is correct or incorrect. This is the value of the goods in our opinion. Unfortunately I have to admit that the prices in most of the facilities indicate that our prices are right. There is a kind of race environment at tenders. This is not a race to win, a horse race or a sports competition so that you can beat others and rank first.

Then, in the middle of the race, they just quit and go, and they are asking you to pay a certain amount of money.
You only have to give the right price, and not get excited because of the environment. In market terms, you have to set your stop loss. When the price gets there, you should quit. This is that simple. You don't have to buy everything. This is not my own culture, this is the company culture. This culture has been established by Üzeyir Garih and İshak Alaton at the company. They shall rest in peace. Üzeyir Garih always used to say something, which was quite right. This is also my motto in life, and the main principle I always mention during any argument held with friends: Non-profitability does not cause a business to collapse in the short-term, but a poor cash flow will cause that. This liquidity issue is not well-understood. We have won much money in the 94 crisis since we had cash available. I am ashamed to say that we have charged an interest of eight thousand percent to banks. The cash held by businesses is like blood for human body. There is a correlation between your body weight and blood weight. When that correlation is disrupted, human body will be open to any kind of disease, God forbid. The immune system collapses, and the health deteriorates. That blood should not be lessened.

You do not have such a problem, do you?
Thank God, we don't. What I am trying to say is that you just can't be involved in every project just because it is profitable. The project might be profitable, but that project may cause a great challenge if the cash requirement is much more than the cash it generates. It also becomes too difficult to reverse that. Therefore, we always look at the cash flow of a particular project. Then, you look at what profit it derives, whether it returns the investment or not, and then you make your calculations to determine whether you will incur losses or derive profit if you invest in alternative investment areas. Unfortunately, I observe that importance is not attached to cash flow calculations most of the time. There are businesses which are quite good at it, however most of them get involved in a tender and increase and increase their prices as if this is a sports competition that must be won.

This means that you will go on like this.
Nothing has changed. The principles of this company have already been set. We will go on with construction business. We will go on with energy business. Of course, we have slowed down a bit at the moment. We have invested in a 50-51 MW solar power plant. We will grow that business, we have to do that. However, we are now somewhat relieved thanks to these energy prices. If we stated that we would invest in energy, then that should be realistic. We will look around a little bit more with these energy prices to find out about "what is happening now and what will be the developments". Then we will determine our position accordingly.
We attach importance to Cyprus in the tourism sector. We will improve it. We are looking for jobs in the construction sector both in the country and abroad. Our heating, cooling and air conditioning activities continue in the industry. We have a good place in the market, as well as a good management staff. We have no inventories available in land development and Build-Sell business. Recently we had five villas, but we sold them at the end of the last year. We have zero inventories at the moment.

What happened to Bilezikçi Farm?
We still have it. We also have Riva. They are the projects of the upcoming years. We have a land of 1,800 decares in Büyükçekmece. Now, we should see them as the projects of the years to come. They are very large projects. The real estate industry will also go up some time later.

How did you close the first half? There is not much to complain, but the exchange rates are far higher than our expectations. Honestly, we had not anticipated that. We have completed Karakuz dam right at the north of Adana in Toros mountains, as well as the HEPP project. This is an investment of 100-120 million USD. We have completed Karabiga thermal power plant, and we had invested 1 billion 150 million USD in that. We have installed a capacity of 50 MW solar energy. We have invested around 50 million USD in other projects. We are investing around 300 million Liras every year for MEDAŞ distribution in Konya region, and the amount varies according to the inflation.
We must have reached 2 billion liras of investment in the 5-year period. The investments are ongoing. Turkey is a dynamic country. Interesting job opportunities happen to arise. We are catching up with them. Exchange rates affect us for sure. How is it possible for them not to affect us? I believe that all these things will find a balance somewhere. Anyway, this is the same case with market economies all over the world. A certain level of accumulation is reached in a period of around six or seven years just like the way energy accumulates. Some diversions occur in the prices. Then the market corrects these price diversions.

It either reduces or increases them.
I am not saying that the market does it on its own. This is done by government intervention. It should correct the prices on its own. Here, the government intervenes by means of costs, funds and taxation policy, and corrects the prices. This is what is always happening. It does happen everywhere all around the world.

A Butcher Can No Longer Invest in a Power Plant

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