Turkey: Prioritising Healthcare Investment

Last Updated: 16 July 2014
Article by Zeynel Tunc and Cem Tahir

The growing popularity of the public private partnership (PPP) model on large-scale infrastructure projects has made an impact on Turkey's public procurement activities. Traditionally, the term PPP has also been used for procurement models, which enable private entities to provide public services, such as build-operate-transfer, transfer of operation rights, and concession agreements. However, this article focuses on the PPP model whereby the administration is heavily involved in the realisation of the project rather than leaving the operation and procurement of services entirely to the private sector. There are a number of reasons behind the rise of PPPs, but the most notable one is the increasing level of public debt in many jurisdictions. Due to a growing population and ageing health facilities, Turkey needs to invest heavily in healthcare. To match the needs of the country in a timely manner, Turkey has announced an ambitious PPP programme for the healthcare sector.

PPPs are generally defined as the contractual relationship between private sector entities and the government, where the latter engages in close cooperation with the former to provide efficient and quality services to the public. Therefore, the expertise and efficiency of the private sector are highly beneficial. The projects for which the PPP model is used include hospitals, schools, highways and prisons.

Originally, the PPP model emerged in the UK in the 1990s, where the implementation of infrastructure projects was carried out through a model called a private finance initiative (PFI). PFIs became the main vehicle for the construction and replacement of schools in the UK. The successful implementation of the PFI model for the construction and operation of other infrastructure projects for public services such as roads, highways and prisons has led to its integration into the legal systems of other European countries. As to the distinction between PFIs and PPPs: the PFI is the name of the investment method and the PPP is used to describe the partnership between the private sector and the government. Consequently, they are similar and the end result is usually the same.

A typical PPP model is realised through a series of linked contractual agreements among the parties. The project agreement between the special purpose vehicle company (SPV) and host government is the basic framework of the PPP model, and it outlines the responsibilities of the parties and risk allocation between them (it is important to note that SPVs are formed by the sponsors to design, build, operate and maintain the facility for a specific period of time). In addition to the project agreement, other major agreements in investments realised through the PPP model include the shareholder agreement among the sponsors as to the equity contribution into the SPV, loan agreements between the SPV and lenders as to the debt contribution into the SPV and the engineering, procurement and construction agreement between the SPV and a third party contractor. While the main purpose of such a structure is to balance the collaboration and risk allocation among the parties in the most cost-effective environment, it is also important to note that the financial and operational risks are substantially assumed by the SPV.

PPPs in Turkey

Turkey introduced the PPP model in 2005. Before 2005, most infrastructure investments were realised through other outsourcing models such as build-operate-transfer, transfer of operation rights, build-lease-transfer, and build-operate arrangements.

The PPP model was first introduced through the Additional Article 7 of the Health Services Fundamental Law for infrastructure projects in the healthcare sector (PPP Healthcare Projects), and the details of the model were provided under a separate regulation. Following challenges to the relevant regulation before the courts on the grounds that the allocation of treasury-owned lands for services are not directly related to the healthcare facilities, a new law, the Law Concerning the Construction of Facilities, Renovation of Existing Facilities and Purchasing Service by the Ministry of Health by Public Private Partnership Model (Healthcare PPP Law), was passed in March 2013. This new Healthcare PPP Law provides the regulatory framework for the construction and renovation of healthcare facilities and the procurement of services by way of public private partnerships based on a tendering process. The Healthcare PPP Law consolidates the previous legal regime under a single legislation and introduces certain  changes to the PPP Healthcare Projects. Its primary purpose is the determination of the procedures and principles for the construction and renovation of integrated health campuses through a tender mechanism.

In addition to ongoing PPP projects in Turkey under the Healthcare PPP Law, the government is expected to launch more PPP programmes in the future for the renovation of schools and prisons in Turkey.

Healthcare PPP Law envisages certain principles and procedures for the construction and renovation of integrated health campuses.

First, the land on which a facility will be built is to be transferred from the state to the SPV through an independent and continuous servitude right for a period up to 30 years, excluding the investment term set out in the project agreement. This servitude right is established with a servitude right agreement executed between the parties and its registration to the land registry. Servitude rights are regulated by the Turkish Civil Code and they are deemed to be continuous where their terms are at least 30 years. Further, servitude rights that are independent and continuous may be registered with the land registry as immovable property on which a mortgage right can be granted in favour of the lenders as a part of the security package.

As to the tender process, there are three tender methods; (i) open tender; (ii) tender among predetermined bidders; or (iii) the bargaining method. Under the open tender procedure, all bidders may submit their proposals, and the proposal that provides the maximum benefit with a minimum cost is awarded the project.

The tender among predetermined bidders, which has been used for all tenders launched thus far, is held by inviting qualifying potential bidders (following a preliminary qualification assessment). The qualified tender participants submit a sealed bid relating to the project and the price. Then, the administration evaluates the bids, and lists the compliant bids according to technical quality and price competitiveness. The administration will then further develop the project with the participation of a certain number of tender participants that offer the most advantageous bids in order to determine the scope of the project. Following the determination of the project: (i) the short-listed tender participants submit their sealed bids; (ii) the sealed bids are opened before the tender participants; and, subsequently, (iii) a reverse auction is held. As a result of the reverse auction, the administration initiates final negotiations with the tender participant who places the lowest bid (the first tender participant) according to feasibility of the administration. If the first tender participant's bid is deemed sufficient, the tender is awarded to them. If it is not found to be sufficient, the administration continues final negotiations with the tender participant who placed the second most advantageous bid (the second tender participant). As a result of the negotiations, if the second tender participant's final price is lower than that of the first tender participant, that lower price will be counter-offered to the first tender participant. If the first tender participant accepts this counter-offer, it will be awarded the tender; otherwise, the second tender participant will be the tender winner.

Please note that the bargaining method is used only in specific cases determined by law.

Under the Healthcare PPP Law, the SPV is responsible for the: (i) project design of the facility; (ii) financing of the construction of the facility and commercial areas; (iii) maintenance and repair of the facility; (iv) performance of the services set out in the project agreement; (v) management of the commercial services areas; and (vi) delivery of the facility to the administration free from all debts and in good condition at the end of the term of the project agreement, which cannot exceed 30 years. Finally, it should also be borne in mind that the project agreement is subject to private law, which allows the SPV more entitlements than in administrative law.

On a separate note, the SPV is permitted to transfer all of its rights and obligations to another private law person under the same conditions, provided that the consent of the administration is obtained.

Further, the criteria that should be taken into consideration for the determination of the contract price are also regulated under the Healthcare PPP Law. Such criteria are: (i) the nature of the investment and project; (ii) whether the equipment and medical devices will be provided by the SPV; (iii) the profit of the SPV; and (iv) whether the facility, services and commercial service areas will be operated by the contractor. The contract price may be amended after the execution of the project agreement in case it is determined that the works may not be completed in accordance with the conditions set out in the project agreement due to: (i) a force majeure; (ii) unusual circumstances; or (iii) causes which are not attributable to the SPV.

Likewise, an amendment of the project agreement after its execution is also allowed and it may be amended upon the occurrence of: (i) a force majeure; (ii) unusual circumstances; (iii) any situation that has impact on the implementation of the project agreement and its schedules; or (iv) conflict between the provisions of the project agreement and its schedules.

As to dispute resolution, the general rule requires that parties should resolve any dispute arising from the execution of the project agreement before the courts of the Republic of Turkey. However, they are also entitled to choose resolution of any dispute under Arbitration Law 4686, provided that the governing law is Turkish and the seat of arbitration is in Turkey.

Financing PPPs

From a financing perspective, the equity amount of the financing obtained by the SPV should be at least 20% of the total fixed investment costs of the specific PPP Healthcare Project. Such equity is calculated over the periodic investment costs, which will be determined under the project agreement.

As to debt contribution, most of the same sources of project financing are also used in PPP projects. These sources include local and foreign commercial banks, multi-lateral agencies and development banks. Generally, the primary factors they take into consideration when determining the debt amount to be contributed through loan agreements are the financial viability of the project, environmental, social, health and safety issues surrounding the project, the investment climate of the host country from a legal, economic and political perspective, and the results of due diligence carried out by professional advisers. Additionally, lenders have a monitoring role by having tight control over any amendments of a project agreement and the general behaviours of all of the parties.

Moreover, in case of an unremedied default by the SPV, the lenders have the right to step in to remedy the default. The circumstances under which lenders may step in are set out in the direct agreement between the lenders, SPV and host government. Thus, the concept of default should be well defined in the project agreement.

Treasury's debt assumption

The debt assumption mechanism is another critical issue for lenders. In case of early  termination of the project agreement and the transfer of the facility to the administration, the under-secretariat of the Treasury (the Treasury) may assume the outstanding foreign debt and the amount arising from its derivative transactions. There is a separate law with respect to the debt assumption mechanism, namely Law 4749 on Regulating Public Finance and Debt Management, which is applicable to PPP healthcare projects. This debt assumption  mechanism is subject to the Council of Ministers Decree, and it is enforceable in PPP healthcare projects, provided that the project agreement envisages the debt assumption mechanism and the minimum investment amount is TL500 million ($234 million). The Treasury's affirmative opinion before the execution of the project agreement is also required. However, this debt assumption mechanism has not yet been use in current PPP healthcare projects.

The article was first published in IFLR.

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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