Turkey: Healthcare PPP Projects: Payment Capacity Of The Ministry Of Health

Introduction

Introduction of the public-private partnership ("PPP") method in the healthcare sector in Turkey has already significantly affected growth of the healthcare sector in the last few years, and new wave of PPP projects over the next five years is expected to be the main driver of expansion in the healthcare services sector1. In healthcare PPP projects, the project companies undertake the implementation of the health campus PPP project by executing a private law implementation agreement (i.e., the project agreement) with the Ministry of Health ("MoH"), and the MoH agrees to make certain payments in return. Such payments are used for the repayment of the loans obtained for the project and expenditures of the projects. One of the attractive aspects of the PPP model in the healthcare sector for investors and funders is to know that the health campus PPP projects are backed by the MoH. As a consequence, the payment capacity of the MoH has become a critical factor to determine bankability of the PPP project. This Newsletter will mainly focus on MoH's payment capacity, its legal status as a contracting party, and its payment obligations under the project agreements and the budget allocated to the MoH for the year 2016.

MoH as the Counter Party

The legal status of the MoH is important to understand its role as counterparty. As per the Constitution of the Republic of Turkey2, the management policy of the administration is to carry on the organization and functions of the administration based on the principles of central management (merkezden yönetim) and local management (yerinden yönetim). The central management principle means the administration of the State would be carried on from the center. In this respect, the authorizations required for the services are enforced by the administration, which is the center of the State, and all decisions are made on behalf of the State. To that end, the expenditures and the revenues from the services are accounted for within the State budget. The Ministries of the Republic of Turkey are part of the administration and the central management, and do not have a separate legal existence from the State.

Accordingly, the MoH, as the contracting party of the project agreements in healthcare PPP projects, represents the State3. It should also be noted that the MoH does not have immunity from legal challenges initiated against it. On the other hand, since the assets of the MoH qualify as the assets of the State, such assets cannot be subject to attachment as per the Enforcement and Bankruptcy Law4.

Payment Obligations of the MoH under the Project Agreement

The main payment obligation of the MoH under the project agreement is the lease payment being the sum of the availability payments and service payments. Availability payment is the amount stipulated under the project agreement and periodically paid by the MoH to the project company for the utilization of the facilities; whereas, the service payment means the amount paid by the MoH to the project company for the maintenance of the facility and the equipment and operation of the services.

Payment of compensation in the event of termination of a project agreement is not mandatory under the PPP legislation. However, in practice, in order to enhance the credibility of the projects, the MoH may further undertake to pay compensation to the project company and/or to the funders of the project in the event of termination of the project agreement.

In addition to the payment obligation of the MoH, the Law on Construction and Renewal of and Obtaining Service for Facilities by Public-Private Partnership Model by the MoH and Amendments to Certain Laws and Decrees with the Force of Law5 ("PPP Law") enables debt assumption of the Undersecretariat of Treasury for the outstanding debts of the MoH. It is stated under the PPP Law that upon occurrence of certain conditions, the Undersecretariat of Treasury6 may undertake the outstanding debt of the project company of the healthcare PPP project, the investment and service amount of which is at least five hundred million Turkish Liras.

Payment Capacity of the MoH

As mentioned, the MoH, as the counter party of the project agreement, represents the State. Therefore, the abovementioned payments of the MoH under the project agreement also constitute the payment obligations of the State. The PPP Law requires the lease payments of the MoH to be made from the revolving capital budget allocated to the MoH and its affiliated institutions, and/or from the budget allocated to the central management. As per the Public Finances Management and Control Law7 ("Public Finances Management Law"), the budget allocated to the central management would comprise of the budgets of the institutions listed therein, which include, among others, the MoH. As per the Revolving Capital Law8, the revolving capital fund would be comprised of the revenues of the institutions, together with the donations and the supports of the third parties. The revolving capital can broadly be defined as the budget allocated to certain government institutions within the central management in order for such institution to carry out supplemental services related to the essential and perpetual public services that such institution undertakes to carry out.

In accordance with the Public Finances Management Law, if the budget is insufficient to fulfill the payment obligations of a public institution, such as the MoH, then the expenditures would be paid within the registration order of such expenditure into the accounts. However, certain payments, such as taxes, tolls, charges, premiums, fund deductions, or debts secured by court judgments and the payment obligations, the non-payment of which triggers additional penalties or interest, would have payment priority.

It should also be noted that as per the Public Finances Management Law, payments that are not requested in writing without a valid reason, or the documentation of which is not submitted, are subject to the statute of limitation of five years.

In the event that the annual budget of the MoH is insufficient for the payment obligations of the MoH in respect of the healthcare PPP projects, then as per the Law on the Central Management Budget of 20169, the public institutions, such as MoH, are entitled to transfer 20% of the amounts within their own budget. In accordance with the Public Finances Management Law, the Ministry of Finance may be allocated with a reserve amount, which is 2% of the general budget allowances, to cover the deficiency of the payments by the central management. In order to allocate additional funds to the MoH, the Minister of Finance, upon occurrence of certain conditions but at his own discretion, is entitled to transfer such reserve amount to the MoH's budget. Finally, another alternative way to create an additional budget available to the MoH is through the Grand National Assembly of Turkey. The Grand National Assembly of Turkey may enact a law to transfer additional funds to the MoH's budget for its outstanding payment obligations.

The Minister of Finance is authorized to determine recording the outstanding debts of the respective year into the accounts of the following year as income and payment and to determine the procedures and the principles for the transactions to be conducted.

MoH's Budget for 2016

The lease payments of the MoH within a calendar year will be added to the allowance proposal ceilings to be submitted by the MoH for the yearly budget preparations. It is set out under the Revolving Capital Law that one billion Turkish Liras as a revolving capital fund is allocated for central and provincial organizations, and eight billion Turkish Liras, as revolving capital fund, is allocated for the Public Hospitals Institution of Turkey (Türkiye Kamu Hastaneleri Kurumu). Such amounts may be increased each year by the Council of Ministers depending on the necessity.

As per the Regulation on the Procedures and Principles of the Duties of the MoH and its Affiliated Institutions10, the affiliated institutions of the MoH will be comprised of the Institution of Public Hospitals of Turkey (Türkiye Kamu Hastaneleri Kurumu), the Public Health Institution of Turkey (Türkiye Halk Sağlığı Kurumu), the Medicine and Medical Device Institution of Turkey (Türkiye İlaç ve Tıbbî Cihaz Kurumu) and the General Directorate of Health for Borders and Coasts of Turkey (Türkiye Hudut ve Sahiller Sağlık Genel Müdürlüğü). The Medium-Term Financial Plan (2016-2018) provides the allowance proposal ceilings for the MoH and its affiliated institutions for the year 2016, which is comprised of the following amounts:

  1. approximately TRY 4 billion for the MoH,
  2. approximately TRY 11 billion for the Institution of Public Hospitals of Turkey,
  3. approximately TRY 9 billion for the Public Health Institution of Turkey,
  4. approximately TRY 117 million for the Medicine and Medical Device Institution of Turkey, and
  5. approximately TRY 140 million for the General Directorate of Health for Borders and Coasts of Turkey.

Conclusion

Since the MoH is a part of the central management of the administration, the payment obligation of the MoH (such as lease payments, compensation on termination of the project agreement, etc.) would also constitute the payment obligations of the State. Although the MoH is not immune from the legal challenges, due to the legal status of the assets of the MoH, such assets cannot be subject to attachment. The MoH shall make its payments from the revolving capital budget and/or from the budget allocated to the central management. If the budget of the MoH is insufficient to pay its debts, then such payments would be ranked based on their registration dates into the accounts. However, depending on the volume of the penalties and interest amounts arising from such non-payment, the payment obligation may have priority. The legislator also enables certain alternatives to allocate the MoH extra funds for its outstanding payments.

Footnotes

1 As per the official records of the General Directorate of Health Investments, as of today, the tender processes of eighteen (18) health campus PPP projects have been completed, five (5) health campus PPP projects are in contract phase and five (5) health campus PPP projects are in pre-qualification stage.

http://www.saglikyatirimlari.gov.tr/TabId/347/PID/1034/CategoryID/15/Default.aspx?CategoryName=T%C3%BCm-Projeler-30 (access date: August 22, 2016).

2 Constitution of the Republic of Turkey under law no. 2709 published in official gazette dated 7 November 1982 and numbered 17863.

3 Prof. Dr. A. Şeref Gözübüyük, Prof. Dr. Turgut Tan, Administrative Law, Volume 1, General Principles, 4th Edition, Ankara 2006, p. 161, 162.

4 Enforcement and Bankruptcy Law under law no. 2004 published in official gazette dated 19 June 1932 and numbered 2128.

5 Law on Construction and Renewal of and Obtaining Service for Facilities with Public-Private Partnership Model by the MoH and Amendments to Certain Laws and Decrees with the Force of Law under law no. 6428 published in official gazette dated 9 March 2013 and numbered 28582.

6 The Undersecretariat of Treasury has published a press release on 28 April 2014 and numbered 2014/70 and stated that the healthcare PPP projects that are already tendered will not be granted with the debt assumption.

7 Public Finances Management and Control Law under law no. 5018 published in official gazette dated 24 December 2003 and numbered 25326.

8 Law on Revolving Capital Allocated to the Healthcare Foundations and Rehabilitation Facilities under the Authority of the MoH under law no. 209 published in official gazette dated 9 January 1961 and numbered 10702.

9 Law on the Central Management Budget of 2016 under law no. 6682 published in official gazette dated 16 March 2016 and numbered 29655.

10 Regulation on the Procedures and Principles of the Duties of the MoH and its Affiliated Institutions published in official gazette dated 7 March 2012 and numbered 28226.

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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