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Turkish Health PPP Projects

April 2017 - Projects, Energy & Natural Resources. Legal Developments by Ergün Avukatlik Bürosu.

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The Turkish health sector has undergone major reforms over the past ten years as part of the health transformation program. The most important pillar of such program has been the development of public-private partnership (“PPP”) model health campus projects. More than twenty health campus projects with an investment amount of more than € 10 billion have been developed through PPP model in Turkey. They are currently at different stages ranging from tendering to operation, and more than ten health PPP projects are still in the pipeline.

Legal Framework and Relevant Authorities

Under Turkish law, PPP model is not regulated by a framework PPP law, but different pieces of legislation, some of which are specific to PPP types (such as the Build-Operate-Transfer Law No. 3996 or the Build-Operate Law No. 4283), while some others are sector-specific (such as the Health PPP Law No. 6428). Turkey does not have a centralized PPP authority either. The competent authorities for PPP projects are separate in each sector, such as the Ministry of Transportation, Ministry of Health, Ministry of Energy and Natural Resources, General Directorate of State Airports (DHMI) and General Directorate of Highways (KGM).

Bankability of Health PPP Projects

Several of the health PPP projects have already been successfully financed by several financial institutions including IFIs, ECAs, MDBs as well as Turkish and foreign commercial banks. Most of the mechanisms and concepts that the Lenders usually expect from a project to be considered as bankable at international standards, including the followings, are available in the Turkish PPP model:

  • payment guarantees by the Ministry of Health for both availability and service payments
  • Ministry of Health guarantee for the payment of a termination compensation covering both equity and senior debt as well as all financing costs in all termination cases;
  • direct agreement among the Ministry, Project Company and the Lenders;
  • long-stop date for completion of the construction;
  • non-exhaustive list of force majeure events;
  • expropriation and change in law protections;
  • involvement of an independent technical advisor at the acceptance procedures of the facilities;
  • reinstatement test for the utilisation of insurance proceeds;
  • recognition of the concept of “uninsurability”;
  • lenders’ step-in and/or substitution mechanisms; and
  • international arbitration as dispute resolution forum.

In addition, the obligations of the Ministry of Health, including its payment guarantees, qualify as State obligations as a matter of Turkish law, since the ministries do not have a separate legal personality but represent the State of the Republic of Turkey.

Operation Phase

Health PPP projects usually involve an operation period of 25 years. PPP model hospitals qualify as state hospitals and therefore medical services are performed by the Ministry of Health. However, medical support services, such as imaging and sterilisation, and some other non-medical services as well as the maintenance of the facilities throughout the operation period are performed by the project company.

At the operation period, a market testing shall be performed regularly in order to determine the supplier who will provide the services.

In the event of failures in the availability of the facilities or the services performed by the project company, deductions may be applied to availability and service payments. However, such deductions are usually subject to a cap in order to provide a guaranteed cash flow for continuity of the projects.

There are two types of payments to be made by the Ministry of Health to the Project Company, namely the availability payments and the service payments. Availability payments are protected against both inflation and foreign exchange risks while the service payments are protected against the inflation.

The variations that the Ministry of Health may request from the project company are also subject to a cap for both construction works and the services.

Concluding Remarks

In recent years, several mega health PPP projects have been progressed rapidly. They have been successfully financed and some of them have already started operation, such as Yozgat and Mersin hospitals. Successful financing and operation of health PPPs are expected to encourage the use of PPP model in other sectors, such as education, municipal waste disposal, water management and railway sectors in the near future.

This information is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons. This should not be acted upon in any specific situation without appropriate legal advice. This information is protected by copyright and may not be reproduced or translated without the prior written permission of Ergün Avukatlık Bürosu (www.cergun.av.tr).