Jan. 6 (Bloomberg) -- A tiny fishing village called Garipce holds a clue to understanding the largest corruption scandal in Turkish history.
An hour’s drive north of Istanbul, two giant concrete towers straddle the Bosporus, one foot in Asia, the other in Europe. By 2015, a $2.5 billion suspension bridge will hang between the 322 meter (1,056 feet)-high towers. Nearby, a swath of forest the size of Manhattan is being readied for a $14 billion airport.
The projects -- the biggest of their kind in the world -- epitomize a decade-long, $200 billion construction plan undertaken by Prime Minister Recep Tayyip Erdogan that has projected Turkey’s ambitions as a regional power and enriched his allies in the process. After a wave of arrests that targeted those new elites, the building sites now risk becoming emblems of the corruption and largesse that prosecutors say has permeated Erdogan’s designs for a new Turkey.
Executives from companies building the bridge and airport are among the 100 people who’ve been arrested, questioned or sought by prosecutors since news of a 15-month secret investigation broke on Dec. 17.
Also ensnared were the sons of three of Erdogan’s cabinet ministers, the chief executive of a state-run bank and a construction magnate who’s become one of Turkey’s richest men during the Erdogan decade. The three ministers have resigned.
There’s no formal indictment, though at least a dozen suspects remain in custody on charges ranging from taking bribes to rigging tenders. Many of the allegations target the massive public works program that helped Erdogan prop up the economy and bolster an Islamic business class kept loyal from the profits of audacious infrastructure projects.
“The growth miracle of Turkey was largely due to construction,” said Atilla Yesilada, an Istanbul-based analyst at Global Source Partners Inc., a New York economic advisory firm. “If these allegations have a single grain of truth to them, then it turns out that Turkey’s development model is not only skewed, but also corrupt. It’s really disturbing.”
Erdogan has said that the probe is an attempt to derail his transformation of the country.
Behind the probe, according to Erdogan and his allies, is Fethullah Gulen, a 75-year-old diabetic cleric based in Pennsylvania’s Poconos. From there, he runs an Islamist network that wields influence in Turkey’s police and judiciary, and collaborated with Erdogan in the past.
Their falling-out has scarred the premier’s third term, the one he promised would be his “master phase,” establishing a new and vibrant Turkey as one of the world’s top economies. Instead, Erdogan is fighting off accusations that growth on his watch was rooted in graft and favoritism, especially in the construction industry.
“The operations that started under the guise of corruption are an obstacle to building a new Turkey,” the prime minister told supporters in Sakarya, east of Istanbul, on Dec. 28 in one of six political rallies he held that weekend.
Gulen doesn’t have the “slightest involvement in or knowledge about” the graft inquiry, his lawyer Orhan Erdemli said last month. The cleric’s health problems mean he’s not able to discuss the issue, affiliated organizations, including the Journalists and Writers Foundation and the Alliance for Shared Values, said in response to e-mailed questions.
Favored companies of Erdogan’s new Turkey include Calik Holding AS, run until the New Year by Erdogan’s son-in-law Berat Albayrak, which has energy and construction interests from Kosovo to Iraq. Calik hasn’t been named in the probe. Cengiz Insaat is run by Mehmet Cengiz, who sits with Erdogan’s son on the board of a charity at a university named after Erdogan, and was helping build the new airport. The company says it has a $7 billion order book of contracts.
Cengiz’s name showed up on a list of people wanted for questioning in a second wave of arrests that was foiled when police officers refused to carry out orders from the prosecutors, Radikal newspaper reported on Dec. 27, publishing what it said was a copy of the list. Cengiz did not reply to a call or text message.
These companies exemplify a new business class, mostly from Turkey’s heartland of Anatolia and supportive of Erdogan’s Islamist values. It has emerged under the government of his Justice and Development Party, or AKP, to challenge the old secular elite of Istanbul.
Some members have also become media moguls, and local coverage of the graft scandal is itself a portrait of a riven nation. Newspapers and television stations owned by Calik, like Sabah, have staunchly defended Erdogan since news of the probe broke. Meanwhile, in the absence of formal indictments, the allegations have dribbled out in leaks to anti-Erdogan newspapers, many of which are run by supporters of Gulen.
Newspapers Taraf and Zaman printed what they said were excerpts from surveillance video and text messages provided to them that purportedly showed economy minister Zafer Caglayan receiving a Patek Phillipe 5101G wrist watch, that retails for $380,000, from an Iranian businessman. Twitter lit up with pictures of the minister wearing the watch at public functions.
He said in a Dec. 17 statement that he had resigned to “spoil this ugly game” and “to allow the facts to come out.”
After the newspaper Radikal reported that shoeboxes stuffed with $4.5 million were found in a bank executive’s home, protesters started leaving empty shoeboxes on the bank’s automatic teller machines.
Turkiye Halk Bankasi AS Chief Executive Officer Suleyman Aslan, who was detained during the probe, said the money found in his house was to be donated to build Islamic schools in Macedonia, according to Hurriyet newspaper. A court in Istanbul on Jan. 2 ordered that Aslan should be kept in custody pending trial.
Other companies in Turkey’s construction industry, whose biggest players include some of Erdogan’s main allies, have been drawn into the probe.
The Agaoglu Group, whose website lists more than 20 real-estate projects in the Istanbul area, said on Dec. 17 that Chairman Ali Agaoglu had been called in for questioning as part of a “wide-ranging investigation regarding public services.”
The publicly traded arm of the state housing authority, TOKI, said two of its board members had been questioned. TOKI allocates land -- a precious resource in 15 million-strong Istanbul -- and reports directly to the prime minister’s office. Calls to TOKI’s headquarters weren’t answered.
Muammer Akkas, the prosecutor who headed the probe, said Dec. 26 that he had been removed from the case by the government, which was obstructing the investigation.
“As Turkey grew to be a regional power, these mega projects were a sign of the new self-confidence and status symbols, and these are politically dominated building projects, with higher corruption,” said Lutz Roehmeyer, who manages $1 billion at Berlin-based Landesbank Berlin Investment, including $30 million in Turkish stocks and bonds. “Political shocks are always unwelcome, but when you invest in emerging markets, you have to expect something like this every day.”
The investigation has prompted a selloff in Turkish stocks. Since Dec. 17, the benchmark Borsa Istanbul 100 Index has dropped 12 percent. As foreigners sold liras, the currency has lost almost 8 percent against the dollar since the investigation began, reaching a record low.
Even Erdogan acknowledges the audacity of some of his building plans. He routinely refers to one proposed effort, to cleave a $12 billion canal to connect the Black Sea to the Sea of Marmara to the south, as his “crazy project.”
The building continued even as Turkey’s economy cooled. At least $102 billion of projects is under way, calculates Zeyno Ustun, a researcher at the New School for Social Research in New York. Ustun worked with an Istanbul-based collective called the Networks of Dispossession, which used publicly available information from company and government websites.
Much of the work is being done by companies that have prospered since the 2002 election and support Erdogan’s Islamic values, including allowing headscarves in the workplace, an incendiary issue in Turkey.
Cengiz Insaat is in the consortium that won the bid to build and operate Istanbul’s third airport for 25 years, then transfer it to the government. Mehmet Cengiz comes from Rize, the same Black Sea town as Erdogan, and was a founding member of a charity foundation at Recep Tayyip Erdogan University in that city, along with Erdogan’s son, Necmettin Bilal Erdogan.
Calik Holding expanded from a small textile firm in 1981 to post revenues of $2.9 billion in 2011, the last period available. It holds interests in construction, finance, media and telecommunications. In 2008, it bought Sabah newspaper, and a television channel, ATV, for $1.25 billion with $375 million in loans from two state-run lenders, including Halkbank.
“The relationship between the construction industry and the AKP is straightforward: They get the big government contracts,” said Oghuzan Dincer, a Turkish economist at Illinois State University in the town of Normal who studies corruption, via e-mail. “What is more important is their presence in Turkish media. These firms own the majority of the radio and television stations, and the AKP and Erdogan use these as propaganda machines.”
Sabah and other pro-government media call the probes politically motivated, rejecting any implications of corruption. Opinion pieces in the pro-Erdogan press don’t refute the allegations of corruption, arguing instead that these projects were awarded to speed up infrastructure investments, said Global Source’s Yesilada.
“This last point is so important that we feel the need to rephrase,” he wrote in a Dec. 29 note to clients. “The pro-AKP press does not deny the charges, but refuses to define them as ‘crimes.’”
Erdogan’s AKP also calls the investigation a plot to deny Turkey its destiny.
“Is it a coincidence that the businessmen who were building, or going to be building, the third airport and bridge were requested to be taken in?” asked party spokesman Huseyin Celik on his Twitter account. “Maybe the real goal could be sabotage? Because these ‘crazy projects’ in Istanbul have turned some circles inside and outside crazy.” He didn’t respond to a text message.
Erogan’s spokesman, Lutfullah Goktas, directed questions to Minister for European Union Affairs Mevlut Cavusoglu, whose staff said he wasn’t able to respond immediately.
Erdogan has overseen economic growth of more than 5 percent a year since 2002, while reducing inflation from more than 70 percent to 7.4 percent. In a New Year address to the nation on Dec. 31 he reiterated a goal of taking Turkey, currently the world’s 17th-biggest economy, into the top 10 by 2023.
The economy hasn’t moved upward in global rankings when measured by per-capita GDP, though. In the 10 years through 2013, Turkey remained 67th in the world by that measure, according to IMF data.
Erdogan wasn’t always a fan of mega projects. In 1995, as the mayor of Istanbul, he decried the plan to build a third bridge as “murder for Istanbul.”
“It is nothing but massacring the remaining green areas in the city’s north,” he said. “I hope the government will change without this murder being committed.”
The government did change. So did Erdogan’s mind. By the time he assumed power in an election in 2002, a year after he established the AKP, Turkey was opening up its economy. A financial crisis in 2001 led to reforms that boosted capital inflows, which Erdogan decided to use for infrastructure projects, said Mustafa Sonmez, a writer and economist who is the author of “Media, Culture, Money and Power in Istanbul.”
Sonmez estimates that in the last 11 years, $583 billion has been spent in building and construction, citing data from the Turkish Statistical Institute. About $200 billion of that was generated from state-run projects, he calculated.
The results have transformed Istanbul, which generates 27 percent of the country’s GDP and a fourth of its tax revenues. Skyscrapers, malls and luxury apartments sprouted outside the historic city center. Nationwide, construction approvals by land area rose almost fivefold between 2002 and 2010.
“These mega projects, there are bottlenecks, and an opportunity for corruption in areas such as building permits,” said Sonmez. “And of course, if you are a friend of Erdogan, or a relative, there are some advantages. That’s where these investigations start from.”
A planned second round of arrests was to include Erdogan-allied business people involved in the airport project and the bridge that’s under construction at Garipce, party spokesman Celik said in his Dec. 28 tweet. It didn’t occur after Erdogan fired and replaced hundreds of police chiefs.
Bidding for the airport, which will be one of the world’s largest, was switched from an open-bid model, where competitors and the public can see the entire tender, to a closed envelope model in the week before the May 2013 announcement, said Aykut Erdogdu. He is an opposition member of parliament who has worked as the chief comptroller for the Treasury, and overseen audits of state enterprises.
The government had already revised the Public Tender Act 17 times, according to Global Source Partners, the advisory firm. In addition, more than 100 minor adjustments were added allowing ministries and municipalities more discretion in choosing winners and reducing transparency, Erdogdu said.
In April 2011, as Erdogan announced the Istanbul Canal, he joked in a televised press conference that Agaoglu of the Agaoglu Group might want a piece of the project.
Agaoglu already had his hands full. He was building the $2.6 billion Istanbul International Financial Center, fulfilling contracts for TOKI and sitting on the boards of at least 24 companies. Agaoglu, whose net worth is $2 billion according to data compiled by Bloomberg, hails from Of, a town on the Black Sea that is also home to former Urban and Environment Minister Erdogan Bayraktar. He had overseen government construction projects as head of TOKI.
The media relations department at the Agaoglu Group didn’t return a phone call.
A transcript of a telephone call printed by Radikal newspaper on Dec. 23 says Agaoglu referred to Prime Minister Erdogan as “the big boss” when discussing a land deal.
On Dec. 17, he was among the first to be detained in the pre-dawn raids that kicked off the scandal. He was released on Dec. 21 and placed under a foreign-travel ban.
“Erdogan has always wanted to build new companies, a new elite, and to funnel public resources to these companies, and these building projects provide an opportunity to do that,” said parliament member Erdogdu. “This is just the tip of a very large iceberg. We maybe know 1 percent of what has happened.”
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