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 21.2.2013.

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 Projects

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.

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