Turkey: Healthcare PPP Projects: Funders' Direct Agreements


Funders' Direct Agreements ("FDAs") are gaining greater recognition, especially with the introduction of public-private partnership ("PPP") models in healthcare projects in Turkey. In PPP projects, FDAs are significant as they are the only agreement wherein both the third party, which is the Ministry of Finance of Turkey ("Administration" or "MoH") for the purpose of this Newsletter and the lenders are counterparties. Lenders would obtain more protection from the Administration, and would, therefore, be able to overcome certain obstacles through certain mechanisms incorporated under FDAs.

In this article, we will analyze the background and significance of FDAs, the nature of FDAs under Turkish legislation, and the structure and content of the provisions of FDAs. We will also discuss certain provisions of the FDAs, such as step in rights.

Background and Significance of FDAs

The framework of the healthcare PPP projects in Turkey originates from the structure of the private finance initiative method in United Kingdom. Through the introduction of the PPP model in the Turkish healthcare sector, the Administration aim to bring private sector techniques and skills into public services. Such models are structured under project agreements so as to attract lenders, and to provide the opportunity to the project company to obtain financing.

FDA, which is also referred to as lender's direct agreement, is a tripartite agreement to be entered into by and between (i) the project company, which is the special purpose vehicle incorporated by the successful bidder of the tender for the healthcare PPP project in Turkey, (ii) the lender(s), who will be providing financing for the PPP project, or the agent of the lenders of a syndicated loan, and (iii) the MoH as the administration in healthcare PPP projects in Turkey.

The main reason to execute an FDA in a PPP project is to protect the lenders from their losses, when the project company fails to fulfill its key obligations under the project, or when the termination of the project agreement is threatened. It could be ascertained from the reasoning of the Law on Construction and Renewal of and Obtaining Service for Facilities by Public-Private Partnership Models by the MoH and Amendments to Certain Laws and Decrees with the Force of Law1 ("PPP Law") that it is one of the intentions of the PPP Law to improve the bankability of PPP projects.

In Turkish healthcare PPP projects, the project company grants a full security pack, which particularly comprises mortgage over the usufruct right, transfer of receivables as a security, account pledge, share pledge, etc., to the lenders of the project. As a matter of Turkish law, there exist certain arguments and discussions amongst scholars regarding the effectiveness of certain securities that have not yet been tested before the courts. Therefore, FDAs gain greater standing in the eyes of the lenders as a more substantial security as compared to those granted within the security pack under the project.

Nature of the FDAs under Turkish Legislation

With respect to the healthcare PPP projects, although there is no explicit reference to the execution or the nature of FDAs under the PPP Law, it is set forth under the PPP Law that the Administration and the lenders may agree to change the shareholding structure of the project company under certain conditions once the project company defaults. In this sense, the legislator enables execution of an agreement between the Administration and the lenders of the healthcare PPP project and further opens the door for the lenders to agree on step-in rights. In addition to the above, the legislator adopts a similar approach in energy market. Both the Electricity Market Licensing Regulation2 and Natural Gas Market Licensing Regulation3 incorporate similar provisions that enable the lenders to appoint a suitable substitute investor upon occurrence of certain conditions under the legislation.

Since the PPP Law is silent in terms of the nature of the FDA, the contractual provisions between the parties should be considered in order to determine the nature of the FDAs. The intention of the parties of the FDAs is keep the FDA as an independent and separate agreement apart from the project agreement. As such, the parties tend to achieve that the fate of the validity of the FDA is not dependent on the validity or termination of the project agreement. It should be noted that as of the date of this Newsletter, the independent nature of FDAs have not yet been tested before the courts of Turkey.

The Provisions of FDAs

FDAs, in Turkish healthcare projects, incorporate typical provisions of direct agreements used in other project finance deals. Among the customary provisions of agreements, such as definitions, interpretations of the agreement, severability, confidentiality, notices, governing law, etc., certain provisions deserve mention are as follows in a nutshell:

Consent for the Security

As mentioned above, the project company grants certain securities, which particularly include, among others, a mortgage over the usufruct right granted to the project company by the Administration, transfer of receivables by way of security, etc., to the lenders of the project.

As a matter of Turkish law, as long as the laws, or an agreement, or the nature of the business, do not prevent, then the transfer receivables is, in principle, perfected without obtaining consent of the debtor. However, serving notification to the debtor, as well as the receipt of an acknowledgement from the debtor would, in practice, serve as evidence and prevent any good faith claims of the debtors. Where a project company assigns/transfers its receivables (such as lease payments of the Administration to the project company) from the Administration under the project agreement to the lenders as security for the obligations of the project company under the financing, the consent of the Administration may be obtained under the FDAs.

Notification Requirement

In the event of occurrence of default by the project company, the lenders would require to be notified by the Administration for informational purposes before the Administration terminates the project agreement. The details of such notification would be included by the parties under the FDAs.

Step in Rights

If the lenders would like to have the opportunity to step in upon default of the project company, then lenders would request to insert step in provisions into the FDAs. If the parties would agree granting step in right to the lenders, the lenders would appoint a representative upon occurrence of the default of the project company. In such a case, the appointed representative would jointly undertake, together with the project company, all of the rights and obligations under the project documents, and the Administration would be in contact with the appointed representative instead of the project company. The terms regarding the termination of the project agreement during the term of the step in, and the scope of the liability of the lenders for stepping in, and step out rights would also be agreed upon under the FDAs.

In addition to the above, upon occurrence of certain events (i.e., acceleration of the loan or continuance of the default of the project company during the term of the step in period) the lenders would propose to transfer the rights and the obligations of the project company or the shares of the project company to the proposed new investor. The Administration would decide whether or not the proposed new investor is a suitable substitute investor. If so, the Administration would execute another FDA with the suitable substitute investor and its funders under similar terms and provisions.


FDAs are significant for lenders since (i) they are the only agreements wherein the lenders and the Administration are counterparties, (ii) the lenders are protected for their losses, if the project company fails to fulfill its key obligations under the project, or if termination of the project agreement is threatened, and (iii) FDAs provide substantial securities for lenders as compared to those granted within the security pack under the project. The allegations regarding the stand alone nature of FDAs from the legal fate of the project agreement, and the provisions of the FDAs regulated, accordingly, have not yet been tested by the Turkish courts. The parties may agree under an FDA, among others, the consents of the Administration for the security, step in and step out rights of the lenders and suitable substitute investor provisions.


1 The Law on Construction and Renewal of and Obtaining Service for Facilities with Public-Private Partnership Model by the Administration and Amendments to Certain Laws and Decrees with the Force of Law under Law No. 6428 published in the Official Gazette dated 9 March 2013 and numbered 28582.

2  Electricity Market Licensing Regulation published in the Official Gazette dated 2 November 2013 and numbered 28809.

3  Natural Gas Market Licensing Regulation published in the Official Gazette dated 7 September 2002 and numbered 24869.

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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