Turkey’s Ministry of Health (MoH) plans to reduce the termination guarantees for financiers of its next generation of hospital PPPs as part of a raft of proposed amendments to concession structures, IJGlobal can exclusively report. It has also emerged that other sectors of government are also planning to implement PPP concessions. 

Ramazan Arıtürk, founding partner of Elmadag Law Firm and legal counsel to the Turkish MoH, made several announcements on 19 November 2015 at White & Case’s seminar “Globalising the PPP model: a case study of the opportunities and challenges in Turkey.”

Any hospital PPPs to be launched to tender in future would be subject to changes to legislation and concession agreements. The MoH estimates completion of the changes by the end of 2015.

Turkey launched a €20 billion ($21.3 billion) programme of 50 healthcare projects in 2010, with around 20 tendered under in the first round. Seven projects have signed on debt agreements, the first three in late 2014.

The scale of some of the projects is enormous, outsizing any healthcare facilities in the world. For example DIA Holding is to fund the 3,804-bed Bilkent Integrated Healthcare Campus with a €1.18 billion financing.

Legislative amendments

The government wants to introduce changes to the programme now that a number of deals have been financed. Arıtürk announced: “The government aims to create more effective legislation. There have been some bureaucratic problems and the government wants a more acceptable risk allocation.”

There are three legislative changes under serious consideration:

• Additional tax exemptions for sub-sub-contractors
• The ability for the MoH to approve all contract variations, whereas before the High Planning Council needed to approve some of these
• Possible reduction of compensation payable to lenders and sponsors, particularly in the events of project company default or force majeure

As it stands, lenders have a direct agreement with the MoH guaranteeing 100% compensation, and sponsors are also entitled to full equity compensation.

At the White & Case event, one panellist pointed out that given the potential compensation reduction, equity investors, who take the first hit, will determine if projects are going ahead.

Robert Bartlett, executive director for infrastructure at MUFG, said: “Let’s see how it evolves. [The termination guarantee] has been an important factor for international banks entering the programme. But there is no doubt it offers a greater benefit to sponsors and lenders than elsewhere in Western Europe…. Provisions that impact on net compensation amounts could affect lender appetite, but they need to assess the whole risk profile for projects.”

The MoH is also working on some changes to the concession agreements. The MoH may separately tender the operation of commercial areas on the sites as well as the clinical support services such as laboratory and imaging services.

Panellists responded that third party commercial operations are not ever banked on, and a focus on the core infrastructure could be a welcome simplification.

International flavour

Bank clubs on hospitals have been very varied between projects. There have been all Turkish lending groups, international bank groups, purely commercial bank solutions, or a blend of multilaterals with domestic and foreign banks.

Victoria Westcott, partner at White & Case, commented: “I do think we’ll see the mix of international and domestic banks and investors and multilaterals continue on the financing side.”

Meridiam and Ronesans close on the Yozgat Education and Research Hospital PPP in June using an all foreign lending group of SMBC, MUFG, Siemens Financial Services and Banca IMI providing 18-year debt.

Bartlett said: “At the start of the programme we saw tenors of 15 years on senior debt for the healthcare PPPs, now we are seeing 18 years and there is talk of pushing it out even further.”

The Islamic Development Bank (IDB) is soon to make its first outing on the programme, taking a significant tranche of Islamic senior debt for YDA’s Konya Karatay Health Campus which is nearing financial close. It was the IDB which approached YDA, and it is looking to lend to more hospital projects, IJGlobal understands.

The European Bank for Reconstruction and Development, International Finance Corporation, Black Sea Trade & Development Bank and Korean Development Bank have all provided debt to the programme so far.

Westcott said: “With regards to international participation in infrastructure projects, at the construction level the Turkish contractors are very strong so it is difficult for non-Turkish contractors to compete. Italian contractor Astaldi is one exception. But I think given the sheer quantity of projects the domestic players capacity will start to be saturated leaving more opportunities for international contractors.”

“The same applies, to an even greater extent for operations contractors because of the long term nature of these contracts. The only international player today is Italy’s Inso but more international capacity is likely to be required,” she added.

Applying PPPs beyond healthcare

The Turkish government’s enthusiasm for PPPs extends beyond the MoH now that pathfinder deals have developed a model.

Çağdaş Evrim Ergün, partner at Çakmak Avukatlık Bürosu, said: “The Ministry of Education plans to adopt the PPP model for the education sector. This is not a short term plan. There is due to be a smaller pilot project that would launch next year and the aim would be to complete it by the year-end.”

He added: “The PPP model will be used in other sectors for sure. There is the Ministry of Education’s schools programme, but also plans for the liberalisation of the rail sector in one or two years; municipal waste treatment; and the Ministry of Justice plans to develop courts and prisons in the medium-term after the schools.”