Turkey: Turkish Railway Sector, Quiet But Not Quiescent

Privatization of existing highways and construction of new roads, bridges and tunnels, massive PPP projects in the healthcare sector, and the tender for the 3rd Bosporus Bridge spiced up the PPP and privatization activities in 2011. Although privatization of the railways or any other type PPP projects in the railway sector is not officially scheduled for the near future, when the pieces are put together, it appears that PPP activity in this sector is highly likely in 2012.

Railways in Turkey

According to the Decree-Law regarding Organization and Duties of the Ministry of Transportation, Maritime Affairs and Communications (the "Ministry") that entered into force in the last quarter of 20111 (the "Decree-Law"), the General Directorate of Infrastructure Investments2 is responsible for the planning, design and construction of railway infrastructure and transfer of these to the relevant authorities for operation. On the other hand, operation, maintenance and renewal, inter alia, of railways is a duty assumed by the Turkish State Railways3 (the "TCDD") that is organized as a public economic enterprise pursuant to the Decree- Law dated 8 April 1984 and numbered 233 on Public Economic Enterprises4 ("Decree No. 233"). Accordingly, the TCDD has its own legal personality as well as articles of association and separate capital and, notwithstanding certain exceptions, it is subject to private law instead of administrative law in its activities.

As per the statistics published in 2010 by the TCDD, the total length of Turkish railways is 11,940 km, composed of 888 km of high-speed train lines and 11,052 km of conventional lines. Around 85 million passengers were transported by train in 20105. When the capacities of road and air transport are taken into account, the share of rail transportation is 4% for passenger carriage and 7% for freight carriage in the overall transportation pie6. Thus, railways made a rather insignificant contribution to solving Turkey's transportation problems. The TCDD's balance sheet for the 2010 fiscal year confirms that state subsidies constitute a considerable portion of its income. While in recent years, the TCDD focused on investments in high-speed train lines and sought to finance them through privatization of six (6) ports owned and operated by the TCDD, its capital needs are still immense. In this sense, establishing partnerships with private investors under the PPP model is now being articulated by the TCDD alongside many other authorities.

Developments in Foreign Railways

Examples from around the globe demonstrate that especially in countries where railways' contribution to transportation is relatively low, private companies' involvement increases productivity and resource allocation efficiencies.

Privatization methods differ depending on the political and financial landscapes of the countries in which private companies assume railway activities. For example, in the UK, in order to privatize British Railways, rolling stock assets were transferred to private companies through lease agreements, whereby rail track maintenance and renovation activities were left to regional rail infrastructure companies, and the operation of passenger carriage services were franchised to operating companies.

Unlike the UK example in which operations, maintenance and infrastructure investment activities were assumed by different private sector participants, in some African countries, private companies were engaged in railways under concession methods and were responsible both for the rolling stock operations and maintenance of the infrastructure.

Where European and African countries tend to engage private companies in railways through the privatization of existing infrastructure and rolling stocks or by concessions, new projects implemented in the Middle East pursue the PPP model. As a recent example, the 1,080 km railway projected implemented in Jordan will be completed under the build-transfer-operate model foreseeing the project to be funded by a state-owned company, built by private investors and transferred to the government, and then operated by private investors in return for infrastructure usage fees.

Developments in Turkish Railways

In 2005, the TCDD introduced a restructuring program and as a part of this program, a regulation for allowing private investors to engage in railway carriage activities was adopted in the same year. According to the Regulation on Operations of Rolling Stock owned by Third Parties on Railways of TCDD7 (the "TCDD Regulation of 2005") both Turkish and foreign private entities were allowed to operate passenger and cargo trains within the TCDD's infrastructure under operation agreements. By permitting the private sector to engage in railway operations activities, the TCDD Regulation of 2005 has been perceived as a quasi-privatization of rolling activities without any tender or competition from amongst the interested parties.

The Council of State, by its decision of 27 February 2007, stated that in order for privatization of TCDD's services, the procedure provided for under Law No. 4046 on Privatization Procedures8 (the "Privatization Law") should have been followed and the mere enactment of the TCDD Regulation of 2005 is, by no means, the legal basis for private parties to assume rolling activities. It thereby cancelled the TCDD Regulation of 2005. Nevertheless, limited private sector activities still continue under various pieces of TCDD regulations and the powers of TCDD under its articles of association.

Another striking development on the railways front is the draft law prepared in mid-2008 regarding the restructuring of the TCDD and the establishment of a new subsidiary for railway operations activities. In harmony with the relevant EU legislation aiming to unbundle railway infrastructure and carriage activities, the TCDD issued the first draft of the Law on Restructuring the General Directorate of the TCDD and on Establishment of Türkiye Demiryolu Taşımacılığı A.Ş9 (the "Draft TCDD Restructuring Law"). According to the Draft TCDD Restructuring Law, the TCDD will be responsible for, inter alia, the construction and maintenance of railways and operations of train stations and traffic management, whereas Türkiye Demiryolu Taşımacılığı A.Ş. ("DETAŞ") will engage in passenger and freight carriage and other supplementary activities. Moreover, in its general preamble, the TCDD states that private companies will also be allowed to engage in railway carriage activities.

The Draft TCDD Restructuring Law also establishes procedures in connection with privatizations under the leasing and/or the transfer-of-operation-rights method. Accordingly, the board of directors of the TCDD will be authorized to adopt privatization decisions and to submit tenders for the leasing and/ or transfer of operation rights in accordance with Law No. 4046 for a period of no longer than 49 years.

Aside from these legislative drafts, inclusion of the private sector into the railway industry is cited also in recent strategy documents and development plans. For instance, the 9th Development Plan10 relating to the period between 2007 and 2013 foresees partnerships with private companies for the construction of new railway infrastructure and, in particular, construction of new high-speed train lines. Moreover, following general elections in 12 July 2011, the program issued by the 61st Government has also reiterated Turkey's need for new railway infrastructure and stated that new PPP projects will be implemented for construction of new transportation infrastructure. At his recent speech last December, the Turkish Minister for Transportation, Maritime Affairs and Communications announced that in order to enable private sector participation in the railway sector, the Ministry commenced studies for creating the necessary background.

In addition to these efforts, the Decree-Law also foresees establishment of the General Directorate of Railway Regulation11, another public authority under the auspices of the Ministry that will be responsible, inter alia, for determining the working principles and financial capability thresholds for railway infrastructure operators, rolling stock operators, and for determining the minimum and maximum rates for infrastructure usage fees and supervising the infrastructure operators and rolling stock operators. It is expected that this will encourage involvement of private sector participants in the railway sector.

Future of Railway Activities in Turkey

Considering the legislative developments, the need for new infrastructure and the government's tendency to establish partnerships with private companies, it will be of no surprise that private entities will be introduced into the Turkish railway sector in the coming years. In light of the government's statements, it may be assumed that rather than privatization, involvement of private entities in the sector will most likely be realized through PPP projects.

When the population of Turkey and the potential for transportation is taken into account, it is obvious that if managed efficiently, Turkish railways will be a profitable investment for private entities as well. As per the current picture, interested parties must await the enactment of the Draft TCDD Restructuring Law; however, once the long-awaited draft PPPspecific law that will clarify several key points of the PPP projects, such as risk-sharing, direct agreements, etc. enters into effect, possibly within 2012, these activities are likely to boom in Turkey.

Footnotes

1 Published in the Offi cial Gazette dated 1 November 2011 and numbered 28192

2 "Altyapı Yatırımları Genel Müdürlüğü" in Turkish

3 "Türkiye Cumhuriyeti Devlet Demir Yolları" in Turkish

4 Published in the Offi cial Gazette dated 18 June 1984 and numbered 18435

5 Source: TCDD

6 Source: General Directorate of Railways Harbors, and Airports Construction (DLH)

7 Published in the Offi cial Gazette dated 19 April 2005 and numbered 25791

8 Published in the Offi cial Gazette dated 27 November 1994 and numbered 22124

9 "Turkish Railway Carriage Joint Stock Corporation" in English

10 Published in the Offi cial Gazette dated 1 July 2006 and numbered 26215

11 "Demiryolu Düzenleme Genel Müdürlüğü" in Turkish

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