Middle East grows in importance for Turkish contractors

Turkish construction firms are continuing to win work across the region. Published in MEED, 27 October 2014

Political relations between Turkey and some Middle East governments may be rather tense these days, given their different attitudes towards the Muslim Brotherhood and what should be done to try to end the Syrian civil war, but economic ties are increasingly important for both sides.

According to the Ministry of Economy in Ankara, bilateral trade between Turkey and the Middle East grew sevenfold between 2003 and 2012, from $9.5bn to $65bn.

Hydrocarbons account for the majority of goods that Turkey buys from the region. The trade in the other direction is more diverse, including precious metals, iron and steel, electrical equipment, vehicles, and heavy machinery. Alongside the trade in these physical goods, services are also important, particularly when it comes to the construction industry, with Turkish contractors often playing a key role on some of the biggest construction sites across the region.

Major projects that Turkish contractors are working on include the Doha Metro in Qatar, where Yuksel Construction, Map Merkezi, and STFA are working on the tunnelling; King Khalid University in Abha, Saudi Arabia, which is being built by Baytur Construction & Contracting; and the Midfield Terminal at Abu Dhabi International airport, being constructed by TAV Construction.

The prominent role of Turkish firms in the region is partly a reflection of the size of their home economy, which means companies have plenty of room to grow and gain experience before reaching out to other markets. Turkey’s GDP in 2013 was $827.2bn, according to the Washington-based IMF’s estimates, which is appreciably larger than that of the biggest Middle East economy, Saudi Arabia, which had a GDP of $745bn last year.

According to the Turkish Contractors Association, or TMB (the acronym is derived from the Turkish language name), the construction industry accounts for 5.9 per cent of Turkey’s GDP and employs some 1.8 million people. However, the sector has tended to swing from feast to famine. The Construction Turnover Index produced by the Turkish Statistical Institute (TurkStat) rose by 9 per cent in 2008 to an average of 121.7 points for the year, but then fell by 14 per cent the following year to 104.9 per cent and by a further 5 per cent the following year. Since then, the market has improved and last year, the index averaged 127.1 points, after three straight years of growth.

The swings that the sector has experienced have tended to be more volatile than the economy as a whole. In that context, having an international presence can be very useful, helping companies to ride out the ups and downs of their domestic market. So it is unsurprising that Turkish contractors are often global in outlook. Between 1972 and mid-2014, they were involved in almost 7,500 projects in 103 countries, with a total value of some $285bn.

Over that period, the Middle East and North Africa (Mena) region has been the most important, accounting for close to 43 per cent of all activity by project value. Turkish companies have been active in every country in the region, with almost 2,600 schemes across 21 markets. The other key regions are Europe and Asia, while the rest of Africa and the Americas have been largely ignored.

Although the Middle East has accounted for the biggest single proportion of international work, its importance to Turkish companies has, however, varied a lot over the years. In the 1970s, when many Turkish companies were venturing abroad for the first time, it provided an attractive market relatively close to home. Between 1972 and 1979, some 72.5 per cent of their international work was in Libya, followed by Saudi Arabia at 15.5 per cent, Iraq at 7.3 per cent and Kuwait at 4.7 per cent, according to the TMB.

Istanbul-based STFA Construction Group was often a pioneer in these markets. It was the first Turkish contractor in Libya when it entered that market in 1972, for example, and was also the first Turkish entrant into Saudi Arabia in 1978.

The same markets were also to the fore in the 1980s, when Libya accounted for 55.2 per cent of all international work for Turkish contractors, followed by Saudi Arabia at 23.4 per cent and Iraq at 11.5 per cent. Some smaller markets also started to make their presence felt during this period. Yemen accounted for 1.5 per cent of total international work during that decade, while Jordan brought in 1.4 per cent. Beyond the Middle East, few other markets featured heavily, the exception being Russia, which accounted for 3.8 per cent of overseas contracts.

The 1990s saw greater diversity, in large measure because of political events that meant Libya and Iraq became no-go zones for international contractors. The UN imposed sanctions on Iraq soon after the invasion of Kuwait in 1990, and on Libya in 1992 as a result of the investigation of the bombing of Pam Am Flight 103 over the Scottish town of Lockerbie in the late 1980s. As a result, work in Iraq all but dried up and contracts in Libya accounted for just 13.7 per cent of all international work in the 1990s.

Rather than turn elsewhere in the Mena region, Turkish companies began to focus their attention on projects in Russia and other countries that emerged from the break-up of the USSR, including Kazakhstan, Uzbekistan and Azerbaijan. In light of that, some of the other Middle East markets also diminished in importance. Saudi Arabia accounted for only 3.1 per cent of international work over the course of the 1990s and Kuwait just 2 per cent.

The first decade of the current century saw a continuation of this shift towards a more diverse geographic spread. From 2000 to 2009, the top five markets accounted for 52.5 per cent of all international contracts, compared with 69.3 per cent in the previous 10-year period. The two most important Middle East markets became Libya, with a 12.4 per cent share of international contracts, and Iraq, with 6 per cent, as the markets reopened to business. Alongside them was Russia, with 15.5 per cent, Turkmenistan with 11.4 per cent and Kazakhstan with 7.2 per cent.

More recently, there have been some further notable shifts. From 2010 to 2013, Iraq overtook Libya in importance within the Middle East and became the third-most important overseas market for Turkish contractors, after Turkmenistan and Russia. Iraq’s share of total project activity during this period rose to 11.6 per cent, while Libya accounted for just 3.6 per cent – perhaps unsurprising given the violence that has bedevilled the country in recent years. Among other Middle East markets, Saudi Arabia accounted for 5.2 per cent of international contracts, Iran was at 2.9 per cent and Qatar at 2.5 per cent.

Despite its relative decline in recent years, Libya has still been the third-largest market for Turkish contractors in the period since 1972, with 565 projects worth a total $28.8bn, accounting for just over 10 per cent of all overseas projects. Other Middle East markets take up five positions in the top 10, led by Iraq with 7.3 per cent, followed by Qatar at 5.3 per cent, Saudi Arabia at 4.8 per cent, Algeria at 3.5 per cent and the UAE at 3.2 per cent.

If the GCC is taken as a single market, it would outshine any individual country in the region, with 502 projects worth a total of $45bn over the entire period. That gives it a market share of 15.9 per cent of all overseas work by Turkish contractors, second only to Russia which accounts for 17.4 per cent.

What has also been noticeable in recent years is how much more lucrative international work is becoming for Turkish contractors. In 2001, the total project value of their overseas contracts was $2.4bn, but that had climbed to $24bn by 2006 and close to $32bn by 2013.

The figure for the first half of 2014 of $10bn suggests the total may fall this year. Notwithstanding that, the evidence is that Turkish contractors are continuing to win work across a wide range of Middle East countries.

In the first six months of this year, their three most significant markets were Qatar, with a total project value of $2.7bn; Algeria, with $2bn; and Iraq at $900m. It is the first time in many years that the Middle East has been so important for Turkish contractors – in each of the previous three years, the top two spots were taken by Russia and Turkmenistan.