Public-Private-Partnership (PPP)

Understanding Recent Developments and Unifying Widespread PPP Legislation

PPPs

 A public–private partnership (PPP) is a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. They are also referred to as PPP, P3 or P3 .

 PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project

 Types may be various such as Built-Operate-Transfer(BOT), Build-Own-Operate (BOO or BO), Build-Lease-Transfer(BLT), Transfer of Operating Rights(TOR), Long Term Lease(LTL).

 Two main drivers for PPPs:

i- enabling the public sector to harness the expertise and efficiency that the private sector can bring to the services and facilities that are traditionally delivered by the public sector;

ii- it is an “off-balance sheet” method of financing of new or refurbished public sector assets.

SUITABLE ENVIRONMENT

For a better environment of PPP projects, the State’s provision of a favourable investment climate in the following areas is essential:
 Legal
 Economic
 Political
These three are also considered as risk factors for potential private sector investors.

TURKISH LEGAL FRAMEWORK

 It is key to any investment, partnership and contractual relationship to asses the legal framework of a country which such investment, relationship and contract will be subject to.

 Turkey’s history of enactment of PPPs goes back in even the Ottoman times despite its initial forms which stands in the first line of the below table,i.e., The Law Concessions for the Public Benefit dated 1910 (Menafii Umumiyeye Müteallik İmtiyazat Hakkında Kanun)

CONSTITUTIONAL BASIS

 A little legal history:

Prior to 1999 change in the Constitution:

- Concessionary nature of the contracts

- Council of State’s(High Administrative Court)(Danıştay)
role: Approval

- Dispute resolution: Danıştay/ Administrative courts

No commerical courts – arbitration.

CONSTITUTIONAL BASIS

 To ensure that certain contracts of concessionary nature to become private law contract 1999 change in the Constitution provided and added a paragraph to Article
47 titled “Nationalisation and Privatisation” which reads

“Those investments and services carried out by the State, State economic enterprises and other public entities which could be performed by or delegated to real persons or legal entities through private law
contracts are determined by law.”

CONSTITUTIONAL BASIS

 The Constitution states in the added paragraph the principle of legality.

 Again Article 7 of the Constitution lays down that

“The authority to legislate belongs to the Grand National Assembly of Turkey on behalf of Turkish nation. This authority cannot be transferred.”

Therefore, it is imperative that any such authorisation to regulate the matter should emanate from a “Law” as defined by the Constitution.

CONSTITUTIONAL BASIS

Hierarchy of Norms

1. Constitution (“Anayasa”)

2. Law (“Yasa”)/Decree Having the Force of Law (“KHK”)

3. Regulation (“Tüzük”)

4. By Law (“Yönetmelik”)

5. Others

PPP in Healthcare Sector

Previous Healthcare PPP Law

•The law (additional Article 7) was enacted on 14.07.2005 and the implementing By Law promulgated on 22.07.2006 which regulates PPP in Healthcare Services in a greater detail.

•It provided a broad authority to the Ministry of Health to determine all
details of PPP projects.

•As the Ministry of Health has no authority to legislate a law it regulated these details through by laws instead of a law passed by the Parliament.

•Turkish Association of Medical Doctors brought an action against the Ministry of Health and the Primeministry relating to the three PPP Projectsand demanded:

i- the annulment and suspension of the execution of the Bid and the core provisions of the By law on the legal basis that these issues can only be determined in a law by the Parliament not by Ministry of Health pursuant to Article 47 of the Constitution;

ii- the Council of State (Danıştay) apply to the Constitutional Court for the annulment of the Additional Article 7.

• Council of State (“Danistay”) ruled that:

i- apply to the Constitutional Court for the annulment of the Additional Article 7 of the Law considering it is against the Constitution;

ii- the bid contained a provision, i.e., transfer of the premises that are not connected to healthcare premise for non-medical commerical services. This is against the law and thus the execution of the bid be suspended.

• This decision of suspension of Danıştay was given for the first three projects(Kayseri, Bilkent and Elazığ).

PPP in Healthcare Sector

•While the cases were pending, the Turkish Parliament has adopted the new law to boost Healtcare PPP Projects before the judgement of the Constitutional Court.

•The law numbered 6428, called “The Law on Construction and Renewal of Facilities and Provision of Healthcare Services through Public Private Partnership Model” has been enacted.

•Following the enactment of the new PPP Law, the Constitutional Court on
6 June 2013 ruled that since the subject matter of the provision claimed to
be unconstitutional has been reenacted by the New PPP Law, there remains
no subject to be decided upon. The suspension of the execution of the
previous Law was refused on the same ground.

New PPP Law numbered 6428

Entry into Force

• The law was promulgated/published on 9 March 2013 and entered into force on this date;

• As for the debt assumption by the Treasury in PPP projects under the Healthcare Services Law and Education Law for investments, the minimum amount should be 500 million Turkish Liras. (The former limit was 1 billion Turkish Liras dated 13 June 2012)The application of this limit for a possible debt assumption shall be in force as of 1 January 2014.

• Other provisions of debt assumption except the minimum investment limit that are brought by this Law (in Article 13) shall be applicable as from 1 December 2012.

Health PPP Law

Transition Provisions

 The Bids that have already been initiated as per the earlier law (Additional Article 7) prior to the entry date 9 March 2013 of the New Law will be completed as per their bid provisions. However, the bid procedure (namely the one currently is used the Dutch auction) as set down in Article
3/7 shall also be applicable to the those bids that are pending in reference to their bid stage).

 The provisions in the tender documentation that allows leaving the premises outside the Healthcare campus to be used as commercial premises shall not be applicable for the bids pending and completed. Any contracts that are signed with such provisions shall be valid without those provisions.

 Any reference made to the previous law shall be deemed to have made to this new Law.

 Since the By Law is not annulled it is still in force and applicable until the new By Law is published by the Council of Ministers. However, any provision against the new PPP Law will be inapplicable.

Ownership Status of the Lands

• The site/land of health PPP projects will be in the full property and ownership of the administration.

• There will not be any transfer of the ownership rights of the lands to the project company. However, a servitude right may be established and registered to the Register of Title Deeds Office in favour of the Project Company for a maximum term of 30 years excluding the fixed investment term, free of charge.

Tender Procedure:

Three tender types are possible:

i- open bidding;

ii- bid among pre-qualified selected bidders ending with Dutch auction &

iii- bargaining.

The price proposal with the least cost and with maximum benefit shall be deemed the most economically advantageous proposal.

Requirement for Domestic Products:

• 20% of all medical equipments which will be used at health PPP projects shall be the products of Turkey. The Details be determined in the tender documentation.

Financing and Minimum Equity

 All finance of the project shall be provided by the contractor. The minimum equity capital to be provided by the contractors shall not be les than 20% of the total fixed investment.

Required Performance Bonds

There are 3 different performance bonds which shall be required to be held by the Ministry of Health of Turkey:

a. Bid Bond 3% of either the Total Fixed Investment value shall be lodged by the bidder
at the bidding stage.

b. Construction Term Performance Bond The Construction Term Performance Bond shall be delivered by the Project Company on the execution date of the Health PPP Contract and its value shall be 3% (three percent) of the Total Fixed Investment Sum. When the Construction Term Performance Bond is lodged, the Bid Bond is returned by the Administration.

c. Operational Term Performance Bond The Operational Term Performance Bond shall be delivered by the Project Company on the execution date of the Health PPP Contract and its value shall be 1,5% (one and half percent) of the Total Fixed Investment Sum. When the Operational Term Performance Bond is lodged, the Construction Term Performance Bond is returned by the Administration .

Determination of Lease Payment and PPP Project Term

Lease Payments and project term will be determined by taking into consideration of
PPP projects’ construction cost on the following factors:

• value of the project,
• whether the Project Company provides medical equipment or not,
• revenues of the Project Company,
• whether it is permitted by the contract to operate other facilities of the campus
by the Project Company.

The operational term of the Health PPP projects’ contract may last until the end of the Project Term for duration of maximum 30 (thirty) years by law (Current projects are announced for duration of 25 years) commencing on the Completion Date of the Project unless extended or interrupted by the Ministry of Health.

Starting Date of Lease Payments

• The Project Company shall be entitled to receive lease payments from the Ministry of Health starting from the actual completion and the first operational date of the project up to the end of the operational term.

Adjustments in Lease Payments
• The Lease Payments of the Projects will be adjusted in the first days of every year on the basis of the inflation rates of previous lease term. For the purpose of the calculation of the new lease term, the arithmetic mean of the CPI (“Turkish Consumer Inflation Rate”) and the PPI (“Turkish Production Inflation Rate”) announced by the Turkish Statistical Institution will be applied. In addition, if the increase of foreign currency in the time of increasing of lease is higher than the increase rate of (CPI+PPI) / 2, it is also added to the lease payment.

Lease Payments’ Funding
• Lease payments are funded by not only the revolving fund mechanism budget but also the central budget of Ministry of Health. Therefore, all lease payments are under the payment guarantee of the government/Treasury by law.

Tax Benefit for Project Companies

• Any works to be done and contracts and documents which will be signed between the administration and the private law persons relating to the investments under the Law during the investment period are all exempted from stamp taxes and duties. This exemption is also valid for the main PPP contract which will be signed between the Ministry of Health and the Project Company.

• As per the VAT law, VAT is exempted in delivery of goods and services(diretly related to the investment) within the Project for the duration of the investment period.

Possibility of Transferring the Rights of the Project Company

• With the approval of the Ministry of Health, the Project Company is entitled to transfer of its rights and duties to third parties.

Transferring of Assets at the End of the Term by the Project Company

• All assets of the Project are deemed automatically transferred to the Ministry of Health in good operating, well-maintained and useable condition, free of all charges, encumbrance or undertakings at the expiration of the contract period. For this reason, the Project Company is responsible to maintain all assets of the project in a good condition during the operational period. At the end of the term of the Project Operational Term, the Ministry of Health of Turkey and the Project Company will issue a joint handover and delivery document, which explains all details and conditions of projects’ assets.

Debt Assumption

• The Council of Ministers is entitled to grant assumption of the financial burdens, (debts) for financing the project including its derivative debts through the Undersecretary of the Treasury of Turkey provided that
(a) the project value is over 500 million TL,
(b) it is agreed in the project contract that the administration is
entitled to take over the operation and assets of the project
before its agreed expiration date,
(c) Official proposal of the Health Minister.

Lenders’ step-in-rights in case of Default

• Lenders will be notified of any default of project company. If the project company cannot cure the default in the reasonable period granted by the administration in the default notice Lenders will be entitled to modify the shareholding structure of the project company in order to either complete the project in investment period or to continue the project in operating term.

• Lenders’ choice for new shareholding structure of the project company is subject to the approval of administration.

Dispute Resolution Procedure:

• As a rule; any dispute arising out of or relating to the contract shall be finally settled by Turkish Commercial Courts instead of Turkish Administrative Courts pursuant to Turkish laws.

• However, parties are also entitled to choose arbitration provided that the Turkish laws be applied to the merits of the dispute and the arbitration be held in Turkey, in accordance with Turkish International Arbitration Law.

Planning Regulation of Health PPP Projects

• All planning regulation for the buildings of health PPP Projects will be developed and undertaken by the Ministry of Environment and Infrastructure of Turkey instead of local municipalities.

PPP in Education Sector

General Legal Framework

• PPP in Education Sector is regulated by the Decree having the force of Law (KHK) numbered 652. Constitutionally this in itself does not cause any problem as to its constitutionality. It is valid as a Law.

• The relevant framework provisions are set down in Article 23 of the KHK
in particular paragraphs 3 to 6. KHK came into force 14 September 2011.

• For the implementation of the basic provisions of the KHK a By Law was published and entered into force on 08 September 2012.

• When one compares the provisions of previous Health PPP Law Additional Article 7 with the provisions of Education PPP provisions in Article 23 of KHK it will be seen that they are almost identical.

• This finding raises the question whether this set of regulation would be claimed unconstitutional.

• Infact, KHK 652 was already made subject to an annulment case at the
Constitutional Court.

• However, this case was not specific to PPP matters. It, i.a., related to paragraphs 5 and 6 of the relevant Article 23. In particular, paragraph 6 which points out that implementation regarding the education PPP, namely the details in this regard would be regulated through a By Law to be adopted by the Council of Ministers(an identical provisions embodied in previous health PPP which was made subject to unconstitutionality).

• The Constitutional Court in its short (not the reasoned judgement)decision dated 6 February 2013 did refuse the annulment of the paragraphs 5 and 6.

• There is not any reported case at Danistay claiming the annulment of the By Law and the relevant provisions of the KHK, Law as on the same legal grounds with the previous Health PPP Law Additional Article 7.

• In conclusion, although theorically there might be a possibility for a similar case as in previous Health PPP Law, relying on the Constitutional Court’s short decision one may probably conclude that the Constitutional Court’s view would be affirmative.

PPP in Education Sector

Basic Provisions

 As the By Law on Education PPP is modeled upon the Health PPP the basics of the two systems are almost identical. However, due to the differences in the enactment of the two certain provisions inevitably differ, as shown in the following table.

Railway Sector

General Legal Framework

• A new law, numbered 6461, concerning the “Liberalization of the Turkish Railway
Transportation”, which opens railways to private investors in Turkey, was mad law on 24 April
2013. The law has been in force as of 01 May 2013.

• Unlike the previous state-controlled railway network, the new law has given green light to private law investors in the railway sector.

• It has abolished the long-standing state monopoly.

• Two separate entities with different purposes has been established:

i) Restructure the existing public entity General Directorate State Railways of Republic of Turkey (TCDD) as infrastructure operator
ii) Establishment of a joint stock company, as a state economic enterprise, titled
Republic of Turkey State Railways Transportation Joint Sock Company (TCDD
Taşımacılık A.Ş.) as a railway train operator.

• The law provides that both public entities and private law companies will be treated in equal manner under free competition principles.

Authorisations under the Law

• The law opens the following investment and services to the private law investors as well as other public bodies:
i. to construct railway infrastructure to be owned,
ii. to operate as infrastructure operator on the infrastructure owned by
themselves or by others,
iii.to operate as railway train operator on national railway infrastructure lines.

◦ Such authorizations shall be made by the Ministry of Transport,
Maritime Affairs and Communications.

◦ In the event of private law investors wish to construct railway infrastructure, relevant lands will be expropriated by the Ministry for a maximum period of 49 years and usufruct right be established thereon in the name of the investor company. The cost of the expropriation be born by the investor company.

TCDD

• It is the railway infrastructure operator and it is also a government institution that acts on behalf of the State in the railway sector.

• This institution is not only in charge of the management of the national railway infrastructure network but also the maintenance of the railway infrastructure network.

• Pursuant to the new law, TCDD will ensure that the same conditions are applied to all railway transportation companies, including TCDD Tasimacilik A.S..

TCDD Transportation A.Ş.

• It is a joint stock company established and being subject to Turkish Commercial Code as other private companies. TCDD Tasimacilik A.S will serve as a transportation company and will compete with other railway transportation companies in the railway market under the same conditions.

• No distinction will be made between TCDD Transportation A.Ş. and other private railway companies as they are all subject to the same rules and the regulations.

• In sum, it may be concluded that TCDD is the regulatory government institution for railways while TCDD Transportation A.Ş. is a private company being subject to Turkish Commercial Code and the regulations.

Railway Sector

Even though the railway sector will be liberalized, the State will continue to
lay an important role in the market. As far as private companies are
oncerned, private investors have several options to enter into this sector.

• First of all, all public and private entities including private investors are now able to build their own railway infrastructure by getting help from National Railway Institution They can either build their own railway infrastructure themselves or by a contractor and get revenue through renting their operating railways.

• The government plans to add more than 15.000 kilometers to the railway network within 10 years.

• This law and building railways through this system will ease the construction of new railways.

• Secondly, new investors may also enter into the railway sector as transportation companies. They can set up their own transportation companies by using the current railway roads provided by the government or the ones built by private companies by paying their usage fees.

• In this case, they must pay for the railway the same usage fee as other companies. It is expressly stated in the law that there cannot be any different payment list for competitor railway transportation companies.

• In sum, Turkish Railway Liberalization Law paves the way for not only Turkish private investors but also international investors to enter into the Turkish railway sector.

The Need

• It is needless to conclude that Turkey should have one unifying PPP law which regulates basic principles for all areas that are open to public private cooperation.

• In fact, there was a proposal dated 2006 to that end prepared by the State
Planning Organisation (DPT) which became statute-barred.

• The foregoing shows that the need for a unifiying law is increasing day by day. This would save labour and money.

• More importantly a unifying law in conformity with other local laws would clarify the questions of the private law parties in planning their investments. It will also strengten the legal security and foreseeability.

• A centralised PPP unit within the administration is also a must for a smoother operation.

• The Government believing in the same provided in the 10th Development Plan(which covering years 2014-2018) that a framework law shall be enacted to unify scattered PPP legislation.