In parallel with the drastic changes in the Turkish economy, Turkish government initiated a comprehensive privatization program in 1980's. Since then, privatization has always been in the agenda of Turkish governments.
The legal basis of privatization originates from the Turkish Constitution. Further, Turkey's Privatization Act No.4046 (the Privatization Act) is the main law introducing principles and rules regarding privatization.
Being a strong financial and political tool in Turkish practice, privatization has been subjected to strict scrutiny by the judicial system. In certain cases, (e.g. privatization of sugar factories and Galataport), such scrutiny has been strongly criticized on the basis that it slows down privatization efforts and the financial and sociological restructuring in Turkey accordingly. Yet, the Turkish government's commitment to proceed with privatization is an ongoing one and underlines its legal basis.
Below, we set out our comments on privatization under Turkish law.
I. Privatization under the Turkish Constitution
Privatization was not openly mentioned in the Turkish Constitution until the 1999 amendment. However, even before the 1999 amendment, Turkey's Constitutional Court was recognizing privatization as a legitimate financial tool at the disposal of the government as long as it was subjected to detailed legislative statutes. Therefore, when Article 47 of the Constitution was amended in 1999 to include "privatization", what had already been recognized by the judiciary was cemented.
Article 47 does not include any criteria as to which public services fall within the legal scope of privatization and which do not. Some Turkish scholars argue that certain articles of the Constitution assigning certain public services (e.g. education, social security) to "the State" or "the Administration" cannot be privatized. This has so far been a "theoretical debate" since there is no judicial precedent declaring any legislative statute "unconstitutional" on the basis that it opens up areas and services to privatization that are not allowed by the Constitution.
II. The definition of privatization under Turkish Law
In principle, privatization's major objective is to convert "public" assets into "private" ones by transferring their "ownership" to private entities. However, the Privatization Act does not limit the exercise of privatization to ownership transfer and for example, labels the "grant of operational rights" as privatization too. When, for instance, a highway's "operational rights" are "privatized" under the Privatization Act, this would not include the transfer of the highway's ownership. The highway itself would remain as "public domain", but the holder of operational rights would be entitled to take initiative as if it were the "owner" under the supervision of the relevant authority (i.e. the Ministry of Transportation and the General Directorate of Highways). Accordingly, at the end of the authorization period, the private entity (i.e. holder of operational rights) would be required to "return" the highway both physically and legally without receiving any payment from the Government.1
III. Privatization step-by-step
Below, we set out the privatization methods step-by-step.
The making of the privatization decision - The Privatization High Council (the PHC), a decision-making body positioned within the central administration of Turkey is chaired by the Prime Minister. The PHC has four other minister members of the Prime Minister's choice. The PHC decides which public services should be privatized-meaning they should be added to the privatization program carried out by the Privatization Administration (the PA). Once the PHC decides, the relevant public agency is required to start the procurement process under the supervision of the PA as determined by the PHC.
Procurement starts - The relevant public agency (e.g. the General Directorate of Highways) forms a "procurement commission" (the Commission) to execute the PHC's specific privatization decision. The procurement process starts with an official announcement inviting the potential bidders to the tender.
Privatization methods – The Privatization Act lists a number of privatization methods:
- grant of operational rights;
- establishment of property rights other than ownership; and
- profit sharing model.
Candidates compete – The Privatization Act contains various tender methods such as:
- closed bidding,
- public auction,
- closed bidding among designated bidders.
On the methods other than sales –including the grant of operational rights- the relevant public agency's discretion is limited. The agency may either choose the "bargaining" or "public auction method", by considering the attributes and properties of the organization in the scope of privatization, characteristics of the services offered and structure and legal status thereof.2
The winner is announced - At the end of the procurement process, the Commission announces its decision as to which bid is chosen. This decision does not become effective unless approved by the PHC.
The Contract is signed - After receiving the PHC's approval, the agency invites the winning bidder to sign the contract including all the details of the relevant privatization (the Contract). Signing of the Contract officially ends the procurement phase and according to the timeframe stated in the procurement announcement, the winner becomes entitled to take over the management of the facility, or the ownership of certain properties, etc., depending on the substance of the procurement.
IV. Judicial review and arbitration
Turkey has a separate body of "administrative courts" independent of "the courts of general jurisdiction". Administrative courts deal with "administrative decisions and actions" stemming from bureaucracy. Administrative decisions are "unilateral" which explains their fundamental difference compared to contracts. Every dispute which is "administrative" in nature falls within the jurisdiction of the administrative courts. (Courts of general jurisdiction, on the other hand, deal with civil law and criminal cases.)
The privatization process is completely "administrative", meaning that starting with the decision of the PHC to privatize a certain public corporate body or a public service activity, all decisions granted by the PA and the relevant agency may be taken to the administrative courts in the form of an "annulment lawsuit". The contract is also"administrative" regarding the privatization of existing highways limited to the granting of operational rights. The Act on the Establishment and Duties of the General Directorate of Highways No.6001 describes these types of contracts as "concession", which is openly stated in Article 155 of the Constitution laying down the foundations of the administrative judiciary. Therefore, any disputes arising from a "concession contract" will have to be taken to an administrative court.
On the other hand, Act No.45013 and Act No.46864 permit the administration to recognize the arbitration right as the sole judicial review condition in the Contract. Although not mandatory and perfectly within the discretion of the PHC, privatization projects with considerable financial value usually force the Government to recognize "international arbitration" and waive national administrative courts' jurisdiction in order to make the contract "attractive" to foreign investors. International arbitrators' approach to these contracts is to treat them as a "relationship among equals" unlike Turkish administrative courts putting the administration to a superior position. Thus, concession contracts' administrative "label" does not have any significant legal impact in favour of the administration on the outcome of an arbitration case.
1. Turkish law makes an important distinction between the "operating" of already-existing highways and the "building and operating" of new ones. Transferring the existing highways' operational rights to private parties is subjected to the privatization process. Building and operating new highways has a different legal procedure authorizing the Ministry of Transportation and the General Directorate of Highways to make administrative decisions not dependent on the approval of the PA. The latter also authorizes the administration to follow the "Build-Operate-Transfer" procedure which subjects the contract to be signed by the administration and the private party to "private law" once the procurement phase is completed.
2. The Bargaining Method: The procurement process may be commenced by inviting more than one bidder to submit their proposals in enclosed envelopes. More than one bargaining session may be held with the bidders and these are conducted separately with each bidder. At any stage of the bargaining, the Commission may decide to hold joint bargaining with the bidders. During the bargaining process, in response to new conditions emerged, the Commission may stipulate new principles provided they do not cause any unfair competition, do not contradict the basic principles of the invitation to bidders and/or procurement specifications and are applied to all bidders on equal treatment basis. If deemed necessary by the Commission, the procurement may be finalized by the public auction method upon participation of the bidders involved in the bargaining. This is pre-announced in the invitation to the bidders and/or the procurement specifications. The proceedings are taken under memorandum by the Commission, which is later endorsed by the commission members and the bidders.
"The Public Auction Method": Only bidders having submitted the required temporary bid bond and pre-qualified by the Commission which regard to the conditions of eligibility as announced in the invitation to bidders may participate in the public auction. The initial value and the minimum increments at each stage of the public auction shall be determined by the Commission. The duration of the public auction shall be determined by the Commission and conveyed to the bidders before the auction. This duration may be extended once only, and only on the condition that it does not exceed half the previous duration time if the Commission deems fit. All proceedings and bidding orders shall be recorded by the Commission in the presence of the bidders. The public auction shall continue if proposals received are at the same level or are higher than the initial proposed value. The bidders shall submit their new proposals in order to go over the previous offer. If, in consequence, no new proposals are submitted, the chairman of the Commission shall announce three times that the procurement is to be concluded on the last proposal received. If there are no new proposals submitted notwithstanding the announcement, the public auction shall be concluded. The auction proceedings are recorded in a memorandum endorsed by the Commission members and the bidders.
3. Act on Principles to be Followed in the Event that Arbitration is Resorted Regarding the Disputes Arising from Concession Agreements on Public Services No.4501.
4. Act on International Arbitration No.4686.
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.