Dr. Cagdas Evrim Ergun(2) & Asli Ibis(3)
The Turkish health sector has undergone major reforms over the past two decades as part of the Health Transformation Program. The most important pillar of such program has been the development of the public-private partnership (“PPP”) model health campus projects (also known as “city hospital projects”). The PPP model enables the provision of large-scale public infrastructure projects with the involvement and expertise of the private sector. In this sense, with the PPP model, the Turkish government has aimed to develop modern, high-quality and more specialized health facilities with the partnership of the private sector to increase effiency in the health sector.
Specific legislations were enacted to realize the health projects under the PPP model. To date, more than 20 health campus projects with an investment amount of more than €10 billion have been developed through PPP model in Turkey, and most of them are currently in operation.
Under Turkish law, the PPP model is not regulated by a framework PPP law, but there are 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 Health, the Ministry of Energy and Natural Resources, the General Directorate of State Airports (DHMI) and the General Directorate of Highways (KGM).
Until early 1980s infrastructure services in Turkey were performed primarily by the public sector. Until that date, public services were delegated to the private sector typically through “concession method” (imtiyaz usulü) where the public authority grants concession agreements to the private sector. Concession agreements are administrative law contracts which grant superior authority to the public administration delegating services to a private party as opposed to private law contracts where the contracting parties have a more balanced status.
In early 1980s, as part of a liberalisation wave in the Turkish economy, Turkey began gradually changing its legal framework to allow for the long-term delegation of public services as well as to provide more flexibility to the private sector by way of private law contracts.
The first PPP model used in Turkey was the build-operate-transfer (“BOT”) model. This model was initially established by the Energy BOT Law No. 3096 of 1984, which was specific to the energy sector. It was followed by the general BOT Law No. 3996 of 1994 (“BOT Law”), which covers almost every infrastructure sector in Turkey, including energy, transportation, communication and municipal services.
Following the BOT model, other PPP models, such as transfer of operation rights, build-operate and build-lease-transfer models, have also been extensively used in various sectors in Turkey. The transfer of operation rights (“TOR”) model, which is primarily defined under the BOT Law and Article 18 of Law numbered 4046 on Privatisation Procedures, allows for the transfer of the right to operate an existing project company in its entirety or only the production units of an existing company, in each case subject to conditions and up to a certain period. Ownership over the assets of the relevant company is not transferred pursuant to the TOR model.
The build-operate (“BO”) model is regulated under Law numbered 4283 on the Construction and Operation of Electrical Power Plants and the Purchase of Electricity, which applies to the construction and operation of thermal power plants only. The BO model is a form of project financing where a private sector party builds and operates a power plant and sells the electricity generated in such power plant to a state entity, with price and purchase guarantees. However, as opposed to the BOT model, the private sector party owns the power plant and does not transfer it to the public administration at the end of the contract period. Since the BO model is limited to the power plant projects, it has been applied in a limited number of projects in Turkey.
The build-lease-transfer model (“BLT”) was introduced in 2005 by the enactment of Additional Article 7 to the Health Services Basic Law No. 3359 (the “Repealed Health PPP Law”). Additional Article 7 was followed by the Regulation on Construction of Health Facilities in Return for the Leasing and Renewal of Such Facilities in Return for the Operation of Non-Medical Services (the “Repealed Health PPP Regulation”), which clarified the principles and procedures to be followed under Additional Article 7. Pursuant to Additional Article 7, the Ministry of Health (“MoH”) was authorised to tender the construction and operation of health facilities. Under the BLT model, the investor builds the health facilities, and provides certain general support and medical support services at the hospital campus; but the medical services are provided by the doctors and nurses of the MoH. At the end of the contract term, the investor transfers the facilities to the MoH.
Legislating healthcare PPP projects through the Repealed Health PPP Law and the Health PPP Regulation has attracted a significant amount of criticism. The main criticism was that the Repealed Health PPP Law was not sufficiently detailed to govern such material projects and all necessary details were included under the Repealed Health PPP Regulation. This raised concerns because Article 47 of the Turkish Constitution sets forth that the applicability of private law to contracts of a concessionary nature should be decided by law and the Repealed Health PPP Regulation arguably circumvented this requirement because it was not a law enacted by the Parliament but a regulation issued by the administration. Several tenders under Additional Article 7 resulted in lawsuits.
In order to put the above criticism and lawsuits to rest and in an attempt to allow the launched projects to continue, a new draft law was prepared by the MoH and proposed to the Parliament by the government. The draft law included the main procedures and principles applicable to the tender, the project agreement and the project company of healthcare PPP projects; aimed to eliminate the legal risks faced by investors in the Turkish public healthcare sector and to facilitate access to financing for healthcare projects. Consequently, Law numbered 6428 Concerning the Construction of Facilities, Renovation of Existing Facilities and the Purchase of Services by the Ministry of Health under the Public Private Partnership Model (the “Health PPP Law”) was published in the Official Gazette numbered 28582 on March 9, 2013. The Health PPP Law also included provisions for the projects subject to lawsuits to proceed with the applicable terms of the new law and their tender specifications.
The Health PPP Law was followed by the Implementation Regulation Concerning the Construction of Facilities, Renovation of Existing Facilities and the Purchase of Services by the Ministry of Health under the Public Private Partnership Model (“Health PPP Regulation”), which further clarified the application of the Health PPP Law. Currently there are more than 20 city hospital projects realised under the Health PPP Law at various stages.
The Health PPP Law provides that the project agreements in connection with healthcare PPP projects are private law contracts. It is confirmed both in Article 4(1) of the Health PPP Law (for the projects tendered subsequent to the enactment of the law) and by the Constitutional Court decisions numbered 2013/30 dated February 14, 2013 and numbered 2013/50 dated April 1, 2015 (for the previously tendered projects). Consequently, project agreements of the health PPP projects are private law agreements which give the freedom to its parties to perform, amend and terminate the agreement in accordance with their terms, as opposed to an administrative law agreement under which the MoH may amend or terminate in accordance with general principles of administrative law even if no such rights are expressly stipulated in the agreement.
The operation period under the project agreement of a healthcare PPP project can be up to 30 years. In practice, for most of the health PPP projects, the construction term is 3 years and the operation term is 25 years.
PPP model hospitals qualify as state hospitals and therefore medical services are performed by the MoH. However, medical support services, such as imaging, laboratory 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 (every 5 years) in order to determine the sub-subcontractor of the project company (i.e., the subcontractor of the operation and maintenance company) which will provide the relevant services for the next 5 years.
An independent and continuous servitude right over the project site is granted to the appointed project company free of charge. The servitude right can be granted for up to 30 years (excluding the construction period). During the term of the servitude right, the appointed project company has the right to build or retain the facilities on the project land. Servitude right agreements are signed between the respective project companies and the Ministry of Finance in each of the projects.
As a matter of Turkish law, normally only servitude rights whose terms are at least 30 years can be subject of a mortgage. However, in the health PPP projects the term of the servitude right is shorter than 30 years and therefore it was initially not legally permissible to establish mortgage to the benefit of the lenders. To support the bankability of the projects, a provision has been included in the Health PPP Law to permit mortgage over the project site even if the term of the servitude right is shorter than 30 years. Consequently, mortgage security is available in all of the health PPP projects.
The project company may not collect fees directly from the patients using the facilities. Instead, the project company receives monthly lease payments, comprised of availability payments and services payments, from the MoH. While availability payments constitute consideration for the MoH’s use of the facilities, service payments serve as consideration for the services provided by the project project company in the facilities.
Availability payments are protected against both inflation and foreign exchange risks while the service payments are protected against the inflation. The variations that the MoH may request from the project company are also subject to a cap for both construction works and 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 also subject to a cap in order to provide a guaranteed cash flow for continuity of the projects.
In accordance with the Health PPP Law, the lease payments must be made from the working capital and/or the Central Management Budget of the MoH and its affiliates. Thus, lease payments in connection with healthcare PPP projects benefit from multiple layers of protection against the possibility that the MoH may have insufficient funds to make the payments. If the working capital of the MoH is insufficient to cover lease payments to a given project company, then the MoH is authorised to reallocate funds from other health institutions under the MoH, which have adequate financial capability. If such allocation is also insufficient to cover the lease payments, the outstanding lease payments would be covered by transferring the proportion to MoH Central Accountancy of Working Capital Budget of the MoH, which consists of the amounts transferred from the working capital of the MoH and its affiliates. If the Central Accountancy of Working Capital Budget is also not sufficient, the Central Management Budget of the MoH will be used, and if this is not sufficient either, then the President would be entitled to transfer up to 2% of the General State Budget Allowance to the Central Management Budget of the MoH as supplementary allowance.
In addition, all payments under the project agreements are guaranteed by the MoH by virtue of the provisions of the Central Management Budget Law and general principles of Turkish administrative law. As a matter of Turkish law, the ministries (including the MoH) do not have a legal personality which is separate from the Turkish state. Under Turkish law, ministries do not have revenue or assets of their own, but are entitled to: (i) use revenue or assets of the state; (ii) make commitments on behalf of the state in their respective fields; and (iii) finance expenditure from the allowances allocated to them in the central budget. In effect, the MoH represents and binds the state; therefore, the Turkish State itself (as ministries do not have a separate legal identity from the Turkish State) is ultimately responsible for the MoH’s payment obligations under the project agreements.
The Health PPP Law provides that the Treasury may give a debt assumption undertaking to the benefit of the lenders in projects where the investment amount is higher than TRY 500 million. Although the mechanism of debt assumption by the Treasury is theoretically available for healthcare PPP projects, it has not been applied in any healthcare PPP project so far in practice. Instead, a contractual debt payment guarantee is usually provided by the MoH, pursuant to which the MoH, and (as ministries do not have a separate legal identity from the Turkish State) ultimately the Turkish State, agrees to cover the project company’s payment obligations to the lenders if the project agreement is terminated prematurely. Such commitment of the MoH is regulated both in the project agreement and its schedules as well as a separate direct agreement (namely the Funders’ Direct Agreement) to be signed between the MoH and the lenders directly.
The parties may designate international arbitration as the mechanism for settling disputes arising under the project agreement, provided that Turkish law will be applied to the merits of the dispute. Accordingly, both the project agreements and the funders’ direct agreements include international arbitration as the forum for settlement of disputes in most of the health PPP projects.
Several of the health PPP projects have already been successfully financed by 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 (some of which are explained above) are available in the Turkish PPP model:
The healthcare system in Turkey has reached a considerably efficient level along with the development of healthcare facilities with the PPP model. Such efficiency and level of service have been particulary important and helpful in the fight against Covid-19 pandemic. Currently there are more than 20 projects at different stages ranging from financing to operation. Although the Turkish healtcare PPPs are generally a success story, some problems and difficulties were encountered throughout the long development and financing processes of the initial projects, and the legal framework and project agreements were amended to reflect the lessons learned from such experience. Based on such efforts and amendments, construction of most of the healthcare PPP projects have been completed and they are successfully in operation for years.
The successful implementation of the PPP model in Turkey, which had started to be used more than 30 years ago in the energy and trasportation sectors and more recently in the healthcare sector, is expected to encourage the use of the PPP model in other sectors as well, such as education, municipal waste disposal, water management and railway sectors in the near future. Although the healthcare PPP projects in Turkey was initially based on the UK PPP model, with significant changes throughout the long development and financing processes, a “Turkish PPP model” has emerged, which has already started to be taken as the basis model for some other, especially developing, countries which intend to use PPP in the healthcare and other sectors.