Road PPPs in Turkey

Road PPPs in Turkey

May 01, 2012 | By Keith Martin in Washington, DC

The Turkish government has embarked on an ambitious program of large landmark pathfinder projects done as public-private partnerships, and it is especially keen to encourage foreign sponsor and foreign lender participation. Turkey is one of the most exciting high growth markets. Over the last two years, it has had the highest real growth in gross domestic product of any OECD country and, by 2018, it is projected to be the world’s second fastest growing economy. It faces a substantial and increasing need for roads and other infrastructure. Turkey does not have an existing track record in road public-private partnerships or PPPs, but based on its economic fundamentals, its demand for infrastructure, its government’s support for such projects, and its current road PPP program, Turkey is a market with many potential opportunities.

This article describes the road PPP regulatory framework in Turkey.

Statutory Framework

Article 47 of the Turkish constitution allows the use of public-private partnerships. It allows the government to enter contracts with the private sector to carry out certain public services (including undertaking road PPP projects).

A number of laws apply potentially to road PPP projects. Two key ones are Law no. 3465 of June 2, 1988 regarding the construction, maintenance and operation of highways by entities other than the General Directorate of Highways, and Law no. 3996 of June 13, 1994 regarding the realization of certain infrastructure and public services with the build-operate-transfer model. In the 1990s, there were legal challenges to certain parts of this legislative framework, but the challenges are now only of historical relevance.

Law no. 3465 importantly removed the monopoly of the General Directorate of Highways on undertaking road projects.

Law no. 3996 is a kind of “general BOT law” that covers various specified parts of the infrastructure and energy sectors. The current greenfield road PPP projects are being developed under Law no. 3996. However, the highway privatization is being undertaken pursuant to a third statute, as well — Law no. 4046 of November 27, 1994 relating to privatizations — as the core of such a
transaction is the sale of the main existing highway network and the two existing Bosphorus bridges.

As a result of the somewhat “piecemeal” manner in which the various legislation relating to PPP projects has developed, there have been (and currently are) attempts by the government to consolidate the three statutes. Draft PPP legislation has been prepared. However, it is not anticipated that this will be passed in the near future.

Awards

There are three options as to the manner in which road PPP projects can be awarded. These are sealed bids among all bidders, sealed bids among at least three bidders and a negotiated procedure.

Similar to other countries, the negotiated procedure may only be used if the other options could not work. Nevertheless, in the case of large greenfield road PPP projects, the process is likely to be a mixed one of sealed bids and negotiations.

A number of parts of the government will be either directly or indirectly involved in any road PPP project. However, the three key government entities that will have a role will be the Supreme Planning Board (that is a committee made up of the prime minister and eight other ministers), the General Directorate of Highways (that is part of the Ministry of Transportation, Maritime Affairs and Communication), and the Under-secretariat of the Treasury. On a day-to-day basis, road PPP projects will be managed by the General Directorate of Highways. The Supreme Planning Board will be involved in a limited number of decisions of fundamental importance. The Under-secretariat of the Treasury will participate in certain decisions with financial implications.

Terms of Implementation Agreements

Some of the terms of road PPP project implementation agreements are controlled under the road PPP project regulatory framework. The important constraints are as follows.

The implementation agreement addresses the manner in which the project company will be remunerated. The project company revenue may be structured on the basis of a cost-plus formula or a capped price formula.

With respect to any state subsidy to be provided to the project company (and thereby built into its revenue structure), there are three options as to how the state may structure such a subsidy. These are a demand guarantee, a guarantee of the debts owed to the road PPP project’s lenders (domestic and foreign –- until recently this guarantee was restricted to foreign lenders), and a grant. There are various restrictions on offering grants: for example, they can only be offered in “exceptional” circumstances, so they can only be given if it is demonstrated that the road PPP project could not be undertaken without such a guarantee. A demand guarantee, meaning a guarantee that there will be at least a minimum traffic level on the new road, provides the project company a limited guarantee as to the level of its revenue: for instance, it is understood that for the third Bosphorus bridge project, the government will guarantee that there will be basically 135,000 cars per day and provide certain minimum guarantees as to the tolls that traffic would generate.

The private sector concession over a road PPP project may be up to 49 years. However, in practice it may be considerably shorter.

At the end of the term, the road PPP project must be transferred back to the government in good working condition, at nil cost and without any encumbrances.

The government is able to secure for a project company the land that it would need for a road PPP project. In doing so, the government would most likely need to pay compensation to those affected. However, the implementation agreement may require the project company to reimburse the government for some or all of such compensation and other costs that the government incurs. Further, the project company may have restricted rights over the land, which will most likely include or result in restrictions on its ability to grant security in it.

There are statutory exemptions from value added tax for road PPP projects. Further, the actual deal documents are exempted from stamp duty and fees.

The project company will be strictly liable for any damage caused by the road project. However, presumably it would cover this risk by passing it on to its subcontractors and insurance.

The project company will need to provide a bid bond of 1% of the total investment required to undertake the road PPP project when the implementation agreement is signed.

The equity part of the financing that the project company obtains should be at least 20% of the expected fixed costs of the project.

The project company may only assign its rights or transfer its obligations under the implementation agreement upon an affirmative opinion from the Ministry of Transportation, Maritime Affairs and Communication, and with the prior consent of the minister.

If the project company fails, the government has certain rights to step into the project, including to take over certain contractual arrangements that the project company has put in place.

The governing law for the implementation agreement will be Turkish law.

The dispute resolution mechanism under the implementation agreement can be either arbitration (which can be international arbitration if there is a foreign element — foreign arbitration awards are recognized in Turkey as it is a signatory to the New York Convention) or the courts. As road PPP projects are governed by private (not administrative) law, the relevant courts are the judicial and not the administrative ones.

Other Issues

Various consents are required to undertake a road PPP project, such as planning permission and obtaining environmental clearances.

Obtaining planning permission includes having the relevant zoning plan amended (the zoning plan for an area includes details of any planned construction), and obtaining the consents required for certain types of land. Amending the zoning plan can be a challenge. For example, there were 1,514 objections to changing the Istanbul Metropolitan Municipality zoning plan for the third Bosphorus bridge project, and litigation arising from this is ongoing. Even if changes to the zoning plan are approved by the relevant municipality (and by the Ministry of Environment and Urbanization, as the case may be), the approval is open to challenges in the courts. As a general rule, challenges to administrative actions and decisions (such as municipality approval) do not interfere with implementation, as long as no stay of execution has been secured.

Any new highway or road with more than four lanes requires an environmental impact assessment. An opinion will also be required from the Ministry of Environment and Urbanization that any negative environmental impact of the project is acceptable.

The double taxation agreement and bilateral investment treaties to which Turkey is party provide certain additional limited protection to foreign sponsors and foreign lenders involved in road PPP projects.

Such projects will be affected in other ways by the road PPP project regulatory framework. For instance, reflecting Turkey’s history, the Ministry of Culture and Tourism has the right to direct that action may be taken by a project company to protect antiquities: this may include suspending work at a site while the antiquities are removed.