Turkey: A Glimpse On PPP In The Turkish Health Sector

Last Updated: 4 May 2011

Throughout the 1990's, the growing population of Turkey and its efforts to become an EU member exacerbated the need for diverse and quality public services. Offering these services could have been possible only by realising large investments, in particular, infrastructure projects. However, Turkey was not able to finance these large investments in a short period of time. Further, the Turkish government did not have the relevant expertise to realise these projects. As a remedy, the Turkish government focused on public-private sector partnerships and emphasized build-operate-transfer and build-operate models. As time goes by, however, it became clear that particulars of large investments in a variety of sectors require further PPP models. This led the Turkish government to continue its search for efficient tools to realize the necessary investments.

As a result of the search for alternative PPP models, the Turkish government introduced health sector-specific models in 2005. The Turkish parliament enacted the Law No. 5396 (the Amending Law) amending the Principal Health Services Law No. 3359. The Amending Law introduced alternative PPP models which aimed to facilitate the public and private sector cooperation in major investments in the health sector. The Amending Law set forth the principles on construction and renovation of health facilities under the PPP model. Subsequent to the Amending Law, the Regulation on the Health Facilities to be Constructed in Return for Lease and Renovation of Health Facilities in Return for Operation of the Services and Areas Other than the Medical Service Areas (the Regulation) came into force in 2006. The Regulation provides further details on construction, renovation, furnishing, supply, maintenance and operation (other than medical services) of health facilities within the framework of the PPP models.

Below, is a summary of the major aspects of the Amending Law and the Regulation (the Legislation).

I. The scope of the Legislation

The Legislation is aiming to have "health facilities"1 constructed or renovated via the private contractors who win public tenders and qualify to sign contracts with the Ministry. Unlike the PPP models introduced before, this time it is clear that the contract between the administration and the contractors will be subject to private law. This feature makes investments in the health sector more attractive for private parties which were reluctant to base their investments on administrative law contracts. This is mainly because the administration is generally favoured from the perspective of administrative law.

Under the proposed structure in the Legislation, the private contractors will be entitled to rentals or service fees, respectively for the construction or renovation of health facilities.

Pursuant to the Legislation, a project will be triggered either when:

  • the High Planning Board2 (the Board) approves the construction of new health facilities upon the proposal of the Ministry ; or
  • the Ministry of Health (the Ministry) decides on the renovation of health facilities.

II. Construction of health facilities

In order for health facilities to be constructed, first, the Board must decide on a project among the projects proposed by the Ministry. Subsequently, the Ministry can have the relevant health facility constructed via a private contractor (the Contractor) in return for rentals for a period of maximum 49 years. The Contractor will be awarded via a public tender.

The Contractor must construct the health facility in accordance with the preliminary project, feasibility report and principal standards document and the tender documents prepared by the Ministry. In addition to the construction, the Contractor may be contracted to supply the relevant medical equipment and furnishings. Also, the Contractor may be awarded with the right to operate some or all of the "areas other than medical service units"3 and "the services other than medical services4.

The health facilities may be constructed either on a public or a private property depending on the particulars of the project (i.e. whether there is an available public land in the relevant area). If there is a public property available for the purpose of constructing the health facility, the Ministry of Finance grants right of construction on the property, in favour of the contractor. Such right will be granted free of charge and for a period up to 49 years. A restriction on the property will be registered with the land registry for the purpose of strengthening the administration's position. The restriction will state that the property will not be used for any purposes other than the health facility and that the property will not be transferred to a third party without the consent of the Ministry of Finance and the Ministry. In the event of an available public property, the Ministry will be responsible for obtaining the relevant licences and preparing the reports on the property as per the legislation.

The Ministry may determine the contract term, which is -by law- maximum 49 years, by considering the particulars of the health facility. The contract term includes both the investment (including preparation of the relevant projects/plans and the construction) and the operation terms. Other than the integrated health campuses, construction term cannot exceed four years.

III. Rentals

In return for constructing the health facilities, the Contractor will be entitled to rentals. While determining the rentals, the Ministry will consider the following:

  • whether the relevant land is a public land or privately owned property;
  • total amount of fixed investment;
  • whether any medical equipment and furnishings to be provided by the Contractor;
  • term of the contract;
  • whether areas other than medical service units and services other than medical services to be allocated to the Contractor; and
  • the Contractor's potential profit.

The tender documents and the Contract will clarify the potential adjustments in rentals.

IV. Renovation of health facilities

The Ministry may have the health facilities renovated by the Contractor to be awarded through a public tender. In return for renovating the health facilities, the Contractor will be granted the right to provide services other than medical services and to operate some or all of the areas other than medical service units. In this case, the Contractor is paid a service fee (but not any rentals).

Similar to the case of construction, the term of the Contract can be maximum 49 years (including the renovation period). However, unlike the construction of health facilities, projects based on renovation of health facilities is not subject to the approval of the Board.

V. Tender procedures

The Regulation provides detailed tender procedures including announcement, requirements for bidders, specific tender methods (i.e. open tender method, tender among certain bidders, negotiation method) and assessment of the tender. The competitive dialogue method which is commonly followed in PPP projects worldwide, however, is not mentioned in the Regulation. In our view, the administration would have been granted another efficient tool, if this method had also been mentioned among the others.

If the particulars of the project require subcontracting, the Ministry may require the bidders to provide the list of works to be subcontracted at the stage of tender. Further, the winning bidder must provide the Ministry with a list of the relevant subcontractors for the Ministry's approval. Involvement of subcontractors, however, will not eliminate the liability of the bidders/contractors.

The Ministry is entitled to have multiple health facilities constructed or renovated through a single tender.

VI. The Contract

The Regulation sets out certain issues that should be addressed in the contract to be signed between the Ministry and the winning bidder (the Contract).

The Contract will be subject to private law (not to administrative law). Therefore, the parties' rights will be relatively balanced compared to administrative law contracts where the administrative authority possesses superior powers.

Under the Legislation, the Contract will include exhaustive provisions on numerous issues. This feature will provide comfort to the parties as the Contract will be a good reference and therefore leaves little room for potential conflicts between the parties.

The Contract will cover various issues including the lease term and the prospective adjustments in the rentals throughout such term. The Contract will also include the rules to be followed in calculating the service fees which will be applicable in the cases of renovation of health facilities.

In principle, the Contract will be in the Turkish language. If, however, the Ministry approves the request of the Contractor, the Contract may be signed in two languages namely, English and Turkish. In the event of inconsistency between the two versions, the Turkish version will prevail.

VII. Financing, government guarantees and stamp duty exemption

The Contractor must provide the entire financing required for the construction or the renovation. Further, the equity to be invested by the Contractor may not be less than 20% of the total fixed investment amount designated in the Contract.

To make the investments in the health sector more attractive for the private sector, the Regulation states that the Contract will include penalty clauses which will be triggered if the Ministry fails to pay rentals on time.

Any transaction to be carried out and any document to be prepared by/between the Ministry and the Contractor regarding the investments to be made within the scope of the Regulation are exempt from the stamp duty under Stamp Duty Law No. 488 as well as the charges under Charges Law No. 492. Such exemption will remain valid for a maximum period of 36 months and the construction and renovation periods specified in the Contract.

VIII. End of the contractual term and transfer of the facilities

Upon the expiry of the contract term, the lands on which the right of construction is established in favour of the Contractor together with the health facilities constructed thereon will be transferred back to the Turkish Treasury. In parallel with this, the relevant areas other than medical service units and the services other than medical services will also be transferred back to the Ministry. Further, the right of construction in the land registry will be removed accordingly. The facilities transferred to the Treasury must be operating well and in good condition and free of any encumbrances. At the time of transfer, a commission will be established to determine whether the concerned facilities fulfill the transfer requirements.

In projects where the lands of private parties are concerned, the terms on transfer of the health facilities are to be specified in the Contract.

IX. Judicial review and arbitration

Turkey has a separate body of "administrative courts" independent of "the courts of general jurisdiction". Administrative courts deal with "administrative decisions and actions" stemming from bureaucracy. Administrative decisions are "unilateral" which explains their fundamental difference compared to contracts. Every dispute which is "administrative" in nature falls within the jurisdiction of the administrative courts. (Courts of general jurisdiction, on the other hand, deal with civil law and criminal cases.)

The tender process is completely "administrative", meaning that starting with the decision of the Board or the Ministry respectively; to construct or to renovate health facilities, all decisions granted by the administration may be taken to the administrative courts in the form of an "annulment lawsuit". However, the Contract will be subject to private law. Therefore, any disputes arising from the Contract will have to be taken to a court of general jurisdiction.

The Contract will be governed by Turkish law and Turkish courts of general jurisdiction will have jurisdiction to resolve disputes arising from the Contract. However, parties may alternatively choose arbitration, provided that the arbitration takes place in Turkey and is subject to Turkish law. Even though the governing law must be Turkish law and the seat of arbitration must be in Turkey, reference to arbitration as a potential dispute method may be somewhat encouraging for potential investors in Turkey.

X. Conclusion

In our view, introduction of the Legislation has been a significant and positive development to support public-private sector partnership and also draw more investments into the health sector. Construction of integrated health campuses in various cities (i.e. Istanbul, Ankara, Bursa, Konya, Kayseri, Elazig, Manisa, Mersin and Yozgat) are on the government's agenda. In fact, some progress has been made and the winning bidder for the integrated health campus in Kayseri has recently been announced by the administration.

Having said that it has been a positive development, the Legislation lacks certain issues such as the step-in arrangements and requirement for bankable documents in the Contract. Also the Legislation contains inconsistency on the complementary legislation to govern. The Amending Law states that the works falling within its scope would not be subject to the State Tender Law No.2886 and Public Tender Law No.4734 which could provide complementary provisions. Yet on the other hand, the Regulation states that the provisions of these laws will apply by comparison.

In light of the above explanations on the public-private sector partnership in health sector, in addition to the sector-specific laws, there is a need for a legal framework which would combine all these laws and provide a more investor-friendly environment in Turkey. In parallel with this analysis, the government is currently preparing a framework PPP law. However, enactment of such law may take a while as the general elections in Turkey stand on the way.

Footnotes

1. Pursuant to the Regulation, "health facilities" for which the Ministry is responsible to construct or to have constructed include (but not limited to) integrated health campus, training and research hospital, state hospital, special hospital, outpatient hospital, clinic, clinic hotel, rehabilitation center, cancer research center, vaccination training center, vaccine production center, vaccine research and development center, mother and child health and family planning center, public health center, organ and tissue bank, regional blood center, blood-based products production facility, oral and dental health center, 112 emergency service control center (including the entire land, air and sea equipment), any support units as well as all the other health-related buildings (including the supplementary ones).

2. The Board is entitled to assist the Council of Ministers in respect of economic, social and cultural development. The Board is chaired by the Prime Minister. Other members of the Board are the Undersecretary of the State Planning Agency and the ministers to be appointed by the Prime Minister.

3. Pursuant to the Regulation, "areas other than the medical service units" include the areas which are identified by the preliminary project and the tender documents and compatible with the concept of health facility such as a parking lot, hotel, bank office, restaurant, cafeteria, conference and cultural center, internet and communications center, rest home for seniors, baby nursery, personnel shuttle, taxi service and similar transportation services, slimming and diet center.

Pursuant to the Regulation "services other than the medical services" include the medical support services and data processing, patient consulting, sterilizing, laundry, cleaning, security, cafeteria operating, archiving and similar services and also maintenance, repair and operation of the buildings including lighting, elevator, heating, cooling, ventilation, supplying medical gas, water and power and removing of wastes and waste water and maintenance of parks and gardens and land, sea and air ambulance services and funeral unit services.

4. The lands which are owned by the Ministry (or the Treasury) and transferred to the contractor for the contractual period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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