The Turkish health sector has recently undergone major reforms, after the Ministry of Health (MoH) adopted a health transformation programme in 2003. The construction and renovation of integrated health facilities through the public private partnership (PPP) model was a crucial part of that reform package. Since 2009, the ministry has been conducting tenders and contract negotiations for 18 health PPP projects with an estimated investment of about $5 billion equivalent. These projects are at different stages, ranging from pre-qualification to financing.

Some of these health PPP projects have faced challenges in the courts from a group of non-governmental organisations and individuals. In July 2012, the Turkish supreme administrative court (the Council of State, or Danıştay) rendered an injunctive relief decision in some of these lawsuits, suspending the implementation of the projects.

The Turkish parliament has recently enacted Law No. 6428, concerning the construction of facilities, renovation of existing facilities and purchasing service by the MoH by public private partnership model, effective from 9 March 2013. The new law is designed to allow pending health PPP projects to move forward by rectifying the deficiencies that the Council of State’s July 2012 decision identified, and amending other provisions in existing legislation to provide further support and stronger legal footing for health PPP projects. Under the new law, the MoH is required to issue a regulation setting forth the principles and procedures of implementation of the new law within six months from its effective date of 9 March 2013.

Provisions that will progress existing projects

Before the new law was enacted, the main legislation governing health PPP projects consisted of supplemental article 7 of the health services basic law No. 3359 (which has been repealed) and the regulation of 22 July 2006 regarding the construction of health facilities in return of leasing and renewal of such facilities in return of operation of the services other than the medical services (which has also been implicitly repealed).

Commercial areas outside the health facility campus: For some health PPP projects, it was envisaged that existing buildings on land outside the site of the new health facility campus would be demolished and the land allocated to the project company to carry out commercial activities. The Council of State concluded in its July 2012 decision that this allocation was contrary to the legislation as it then stood and thus suspended the implementation of the relevant tenders. The new law stipulates that the terms of the tender specifications regarding such allocation will be deemed invalid, and the ministry will proceed with the pending projects without making this allocation.

Unconstitutionality claim: The Council of State said in its July 2012 decision that the repealed law transferred the legislative power of parliament to Turkey’s council of ministers by giving it unlimited authority to regulate the details of health PPP projects, such as the details of tender processes and the scope of project agreements. The Council of State decided that the unconstitutionality claim was serious and that the Turkey’s constitutional court should decide on this, sending the claim to that court on 6 July 2012. Accordingly, the new law also aims to prevent any adverse consequences of an unconstitutionality claim on pending projects. The new law incorporated most of the provisions that featured in the repealed regulation, such as the principles and procedures applicable to tenders and the scope of project agreements.

Provisions amending project agreements

Term: The term of the project agreement to be signed between the MoH and the project company (a maximum of 49 years under the Repealed Regulation) has been brought down to a maximum of 30 years plus an investment period.

Payments: Under the repealed regulation, payments under the project agreement were required to come from the working capital of either the related health facilities or the working capital of the ministry’s central accountancy. The repealed regulation also provided that payments were under the guarantee of the MoH. Pursuant to the New Law, these amounts shall now be paid from the working capital of the MoH and/or central management budget. The central management budget consists of the budget allocated for MoH under the Central Budget Law published each year. Therefore, although the MoH guarantee is not explicitly stated in the new law, payments under the project agreement should be deemed to be subject to the MoH guarantee by virtue of the provisions of the Central Budget Law and general principles of administrative law unless otherwise is agreed in the project agreement. The new law also envisages the possibility of debt assumption by the Treasury, as explained below.

Termination: The repealed regulation provided that the ministry could terminate a project agreement if the project company failed to perform its obligations and did not remedy the situation within the grace period stipulated by the ministry. However, the new law includes more sophisticated termination provisions which function as follows:

• Regarding agreements on construction works, should the contractor not fulfil its obligations, the administration should provide a reasonable time for remedy and the ministry should notify lenders of the situation.

• During construction, should the contractor not fulfil its obligations in the grace period, the ministry and lenders will be entitled to change the contractor’s shareholding structure. If the shareholding structure cannot be changed or the obligations cannot be performed despite a change, the ministry shall terminate the project agreement.

• During the operational period, should the contractor not fulfil its obligations during the grace period, the administration will obtain services from third parties using a bargaining method and will deduct the cost of these services from the amount to be paid to the contractor. If health services cannot be provided the contractor will be notified as soon as possible and the services will then be purchased in the name and account of the contractor. The right of the ministry and lenders to change the contractor’s shareholding structure will also be reserved.

• Regarding agreements on renovation, research/development and consultancy services, should the contractor not fulfil its obligations, the administration shall provide a reasonable time for remedy. If the contractor does not fulfil its obligations during this grace period, the project agreement will be terminated. If health services cannot be provided the project agreement will be terminated immediately.

Debt assumption by the state treasury

Law No. 4749 concerning public financing and debt management was amended in June 2012 to provide for the possibility of debt assumption by the treasury on health PPP projects. The law authorised the council of ministers to decide on the treasury’s assumption of the project company’s debts to foreign lenders if the MoH terminates a project agreement. The new law changes the applicability criteria for debt assumption and makes it available to more projects.

Firstly, it reduces the investment amount threshold from TL1 billion to TL500 million. Secondly, the new law also makes the mechanism available to projects that have already been tendered, since it removes the requirement for these projects to receive an affirmative opinion from the treasury for debt assumption before a project’s tender specifications have been produced.

In accordance with the new law, debt assumption may also be partial. The maximum amount of debt that the treasury is allowed to assume will be determined by the central budget law of the relevant year and the council of ministers is allowed to double this limit under the new law. However, the provisions of the new law covering partial assumption and debt assumption limits are not applicable to projects that were tendered before the new law went into effect.

Tax Incentives and contractor requirements

Under the new law, all transactions conducted between the MoH and the project company during its investment period are exempt from stamp tax under stamp tax law No. 488 as well as any duties under duties law No. 492. This exemption was limited to a maximum period of 36 months under the repealed regulation, and this limit no longer exists.

The new law also provides that bidders must post a bid bond and a performance bond, equivalent to a minimum 3% of the total investment or bid, before the execution of the project agreement. The only difference between this requirement and that of the repealed regulation was that the 3% bid bond amount was a fixed percentage. Additionally, the new law envisages that the contractor will provide an operational period bond, equivalent to 1.5% of the total investment or bid, upon completion of construction and before operations start.

Under the repealed regulation, the minimum contractor equity requirement was 20% of the total fixed investment amount laid out in the project agreement. Under the new law, the minimum contractor equity requirement will not be less than 20% of the periodical investment amount laid out in the project agreement during the investment period.

As a new requirement, the new law provides that at least 20% of the medical equipment in the scope of the investment be domestically manufactured. The domestic manufacturing percentage and conditions regarding domestic products shall be regulated under the tender specifications.

Likely effect of the new law

Under the new law, tender processes that started before the new law took effect will be concluded in accordance with their respective tender specifications. This is true except for article 3(7) of the new law regarding the tender method and process, which will apply from the current stage of the particular project. Exceptions regarding commercial areas and debt assumption are outlined above.

The new law is a positive step towards solving some of the legal problems that the pending health PPP projects have encountered particularly legal challenges and recent Council of State decisions. It also strengthens the bankability of the projects by, for example, extending the applicability of a debt assumption. The new law is also a clear demonstration of political will for these projects. However, its impact upon pending projects remains to be seen in practice, and will only be clear when the MoH issues regulations covering how it will implement the new law.

Mehtap Yıldırım Öztürk is counsel, Çagdas Evrim Ergün partner, and Nigar Gökmen an associate at law firm Çakmak Avukatlık Bürosu.