According to the New Regulation on Undertaking of Liabilities by
the Undersecretariat of Treasury ("Regulation"), which
has entered into force on 19.04.2014, the Treasury may provide
guaranty for public private partnership ("PPP") projects
over the limits that have been determined by the Regulation. This
Regulation is based on the Law on the Regulation of Public
Financing and Debt Management which sets the terms and conditions
of Treasury's guaranty for public private partnership projects
and enactment of a concerning regulation. Accordingly, the build -
operate and transfer projects of the administrations with a minimum
amount of TL 1,0 billion and the build - lease and transfer
projects of the Ministry of Health and Ministry of Education with a
minimum amount of TL 500,0 million may be guaranteed by assumption
of debt in the event that the agreements regarding these projects
are terminated before their expiration date and the facilities are
taken over by the related administration. The maximum percentage of
this guaranty is 85% of foreign debts which transfer the credit
risk to government for public private partnership projects.
The procedures of debt assumption have been stated in the
Regulation. Accordingly, the guaranties may be provided after
submission of applications of administrations in writing to the
Undersecretariat of Treasury. The upper limit of debt assumption is
determined with a Budget Law and this limit may be increased by the
Council of Ministers. $USD 3 billion upper limit is determined for
2014. This limits will not be applicable to the projects the
tenders of which have been announced after the provision of the Law
on the Regulation of Public Financing and Debt Management
concerning the Treasury's guaranty had entered into force on
The fundamental target of this new regulation is continuity on
undertaking projects with succeeding completion and universal
reputation for potential multi-jurisdictional projects. A positive
impact for financial statement will be substantiated by requirement
that subjected companies shall hold 20% shareholders' equity of
the project value on their balance sheet that will mitigate the
insolvency risk of the companies on large scale projects.
A Hot Debate: Transparency or Confidentiality ?
Undertaking of liabilities agreement implies very confidential
information related to terms and conditions between public and
private companies which is mainly based on technical details.
However, build operate transfer model based tenders shall be very
transparent. In line with this principle, Undersecretariat of
Treasury guarantees that all the bidder companies are acquainted
with relevant information as to whether any company applies for
treasury guaranty. Turkish government took into account the risk of
public disclosure for oncoming negotiations and decided not to
publish details of the agreements on official gazette.
Notwithstanding this confidentiality, the transparency will be an
essential pitfall for undertaking of liabilities agreement
particularly on taxpayers. Another remarkable point is this new
regulation will be valid for retrospective tenders that means
unfair competition may reveal on condition that these companies bid
higher prices by force of being already informed about these
amendments on law.
Another High Potential Risk: Derivatives Transactions on PPP
Apart from debt guaranty, Undersecretariat of Treasury will also
ensure warrant for derivatives market transactions up to 10% of
principal debt for companies. By means of this protection,
companies will be able to operate in options market with object of
mitigating currency risk. Pertinent companies to PPP projects will
potentially proceed leasing operations for equipment purchase which
may carry high risk when uncertainty on exchange rates comes into
existence. Hence, in case par of exchange increases, derivative
market operations will be applied for hedging the risk. On the
other hand, if exchange rates decrease these companies may face
with major loss. In this regard, treasury will be obliged to redeem
the debt including interest for default. This is a major pitfall of
new regulation in case there is an insolvency risk after
derivatives' transactions, treasury guarantee will cause issues
on deficit payments for government. Due to this reason, a new
limitation on derivatives market operations shall be drawn up in
the near future.
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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