Thread by @canokar

Turkey is planning to allow individual investors to buy shares in large-scale infrastructure projects, presumably like the Kanal Istanbul, bridges, airports etc.

Two questions:

1) Just how broke is Turkey?
2) Does everyone realise how terrible an idea that is?

Let me explain.

The closest analogy to individual shareholding in infrastructure that I can think of are REITs or Real Estate Investment Trusts. These are investment vehicles that have been around for 50 years and which allow you to buy shares in real estate and benefit from their income.

There are of course good and bad REITs so let’s consider what makes an investable REIT:

1) A low interest environment which minimizes finance costs and maximises income
2) A diversified portfolio which reduces risk
3) Real estate in sectors with strong, future-proof fundamentals

It doesn’t take a genius to see that none of those conditions applies to investing in massive infrastructure projects in Turkey.

We have high interest, you can’t diversify a multi-billion-dollar canal and no infrastructure project in Turkey makes a profit. Far from it.

But that isn’t even the main reason why using infrastructure as an individual investment vehicle is such a bad idea. Here are the big ones:

1) As taxpayers, we already own infrastructure projects
2) Who gets paid first? Shareholders or banks?
3) How do you calculate profit?

Now as taxpayers, Turks are on the hook for infrastructure projects in a number of ways. They “own” the public banks which provide below-market-value credit. Once its finished, they pay to use the infrastructure.

And they pay even if they don’t use it due to usage guarantees.

That last one is a kicker. Companies which build these infrastructure projects bear almost zero risk. The credit is cheap and underwritten by the state. And then even if no-one uses say, a bridge, they get guaranteed income from the taxpayer as though millions had used it anyway.

So why exactly should some taxpayers pay for the additional profit taken by other taxpayers who’ve potentially paid up less in total tax but added a few thousand lira for a 0.0000001% stake in a road or a bridge or a canal?

That simply doesn’t pass the fairness test.

Then you have the complexity of who gets paid first from income. The banks will reasonably argue that their repayment (with interest) takes priority.

But as a shareholder, I’m getting no interim payment (this isn’t a bond after all). Do I have to wait for debt to be paid off?

In a battle between small investors with miniscule shareholdings and massive state-owned banks, I know which side I’d want to be on.

It isn’t the side which has invested a sizeable proportion of their life-savings to support what they're told is a national and local duty.

And that brings us to the crux of the matter when it comes to public infrastructure projects: how are we defining profit? When exactly can you say Kanal Istanbul is profitable?

Which accountants will deliver transparent calculations of P&L? Who oversees this impartially?

It isn't just about profit of course. It's also about growth because that defines how this vehicle competes against other investment options. So how do you ensure growth with these one-off infrastructure projects which historically we know they replace to keep the cycle going?

And then of course, say your investment magically does grow. You can't expect any kind of exit here because the underlying asset is completely illiquid.

There would have to be a secondary market for the shares themselves and valuing that would be an absolute nightmare.

Why? Because the time horizons are so ridiculously long, the financing arrangements so exceedingly complex, the balance of power in the shareholder relationship so skewed, and the laws governing shareholder rights so unwritten that this looks like a recipe for disaster.

PPP can work for public infrastructure, with many caveats that are often not met in Turkey. REITs can work for individuals with caveats that are not met by this proposal for all the reasons above.

In short, what are they thinking? This seems like a horrible, bad, desperate idea.

Here’s a link in Turkish outlining the plans. Google translate seems to do a good job of explaining in rough terms what is on the table.

I think I've made my views fairly (abundantly?) clear but do have a look and make up your own mind: dunya.com/ekonomi/dev-pr…