Turkey has added a new model in its successful public-private partnership campaign that has been put to good use in the healthcare industry, and no doubt has applications in other industries as well.
Introducing a new alternative to the familiar BOT and BO models – the BLT
The BOT and BO models have been among the most commonly used public-private-partnership models in Turkey since the 1990’s. Both models enabled the construction and successful operation of a number of infrastructure projects including power plants and airports. This duo has fairly recently been joined by a new PPP model, Built-Lease-Transfer (“BLT”).
The BLT bears its own particularities compared to the other two models, mainly due to the nature of the services provided or planned to be provided under this new model. BLT, unlike the BOT and the BO models, does not include a reference to the “operation” phase within its name - inevitably triggering the question of whom exactly carries out the operation under this newly introduced PPP model? Under the BLT model, unlike the BOT and BO models, the operation of the facilities will be carried out by the State itself and will not be transferred to the private entities. The private sector will mainly be in charge of the building, construction, and maintenance of the facilities together with a limited number of operational activities consisting of support services. The State, on the other hand, will qualify as the tenant during the “lease” term and will be in charge of running the main operations, particularly medical services. The BLT model can be customized for certain sectors (e.g. health and educational facilities) where the involvement of the State during the operation phase is crucial and the State is still under the obligation to provide public services alongside the privately run facilities.
Turkey’s first encounter with the BLT model was through the extensive health campuses program launched by the Ministry of Health in 2010. This program has, to date, resulted in at least seven projects successfully reaching the financial close through the involvement of number of international financial institutions, export credit agencies, and foreign and local commercial banks. Additionally, eleven projects have completed the tendering stages and are awaiting the financial close, five projects are still going through the tendering phase, and five projects are yet to be tendered. The second set of PPP projects to be launched under the BLT model are educational facilities projects, a sector, similar to the healthcare sector, where the State needs to keep its presence and offer public facilities in addition to private ones.
Legislative Framework Starting with Healthcare BLT Projects
Turkey’s first experience with the BLT model was within the context of healthcare projects. Substantial efforts have been put into forming a legislative framework that would carry out these projects over a term of nearly 30 years. The initial legislative steps to introduce the BLT model in the healthcare sector were taken in 2005-2006, through the insertion of Supplemental Article 7 to the Basic Health Services Law No. 3359, together with the Ministry of Health’s former BLT Regulation on the Construction of Healthcare Facilities in Exchange for Lease Payments, and the Renovation of Facilities in Exchange for Operation Rights of Non-Clinical Areas. While initial legislative attempts to address healthcare BLT projects were made as early as 2005, it was not until 2010 that the first tender was launched. During these five intervening years, work on the legislative framework continued and resulted in the issuance of the Law on Construction, Renovation and Operation of Facilities by the Ministry of Health through PPP Model(“BLT Law”). This law was specifically set up to define the legal basis for healthcare BLTs in 2013. The BLT Law addresses the legislative necessities experienced since the actual launch of the BLT projects in 2010, the outcome of a number of lawsuits initiated against the tendering stages of some of the BLT projects, and particularly the susceptibility of these projects to bankruptcy. The BLT Law is unique in the sense that compared to other PPP-related legislation in Turkey, it makes more references, albeit on a very general manner, to the lenders’ step-in rights and their ability to reach an agreement with the administration to take over projects. The number of BLT projects (currently thirty-four in total) in the healthcare sector has also created a synergy among the sector participants, lenders, and advisors (technical, financial, and legal etc.). This synergy has to a great extent resulted in the customisation of their project agreements to achieve the utmost transparency among all of the healthcare BLT projects, giving the investors and the lenders the comfort that all parties are treated equally, and also helping to overcome and clarify the legislative gaps through constant dialogue. It is also worth noting that the constitutionality of most provisions in the BLT Law have been challenged before the Constitutional Court, which ruled them to be constitutional in their decision dated on 1 April 2015. Now no new constitutional challenges can be brought against any of those same provisions of the BLT Law until 1 April 2025.
Project Agreements, Financing Documents including the Funders Direct Agreements
The project agreements that have been proposed by the Ministry of Health during the tendering stages of the healthcare BLT projects are commonly accepted to be among the most developed category of agreements used within the context of PPP projects in Turkey. This conclusion derives from the fact that each BLT agreement extensively regulates each particular stage of these projects – leaving relatively limited room for interpretation and/or contractual gaps. In other words, with respect to most of the legal points, the “funders” (as referred to in BLT project documents) and the sponsors know the exact contractual mechanism that they sign up for.
While BLT project agreements in Turkey are mainly based on the standard agreements used by the National Health Service of the United Kingdom, a country where the BLT model in healthcare projects has been used extensively since 1991, there are inevitably certain differences inspired by the local particularities, and occasionally some parts are lost in translation. The BLT project agreements address the following main categories that are relevant through the life of the projects: (i) land related provisions (as the land is transferred through a servitude rights agreement to the project companies free of charge to be used throughout the life of the project), (ii) terms and conditions governing the construction stage and, (iii) the operation stage including without limitation the service requirements and (iv) hand-over provisions governing the charge-free transfer of the facilities to the Ministry of Health at the end of the operation term. One of the most important aspects of the project agreement is the detailed termination regime setting forth clear rights and obligations between the administration and the project companies, applicable to all eventualities, thus resembling a backup guarantee from the administration.
While none of the ongoing healthcare BLT projects (the tendering of which is completed as of the date of this article) have benefited from a Treasury guaranteeor a State debt assumption, the BLT model came with its own particular guarantee-like compensation mechanism titled “compensation on termination.” Under this newly (for Turkey) introduced compensation model, in the event a BLT project agreement terminates, the funders become entitled to a lump-sum payment to be made by the Ministry of Health to cover all the outstanding financing debts of the relevant project company in charge of the project, including any breakage costs. The mechanism used in these healthcare BLT projects assures 100% coverage of the debt, unlike the debt assumption mechanism under which there are certain ratio limitations for the amount of the debt to be covered by debt assumption. Similar to the BOT and BO model projects, the funders who invest in BLT healthcare projects also benefit from the direct agreements entered into with the Ministry of Health, which regulates lender-specific issues such as step-in rights and payment of compensation on termination. Another comforting point both for the lenders and the project sponsors is the ability to refer to ICC arbitration with an arbitration seat outside of Turkey as a dispute resolution mechanism under the funders direct agreements.
As for the financing aspect, a set of agreements frequently used in financing of the BLT projects is mainly composed of the main and individual facility agreements, inter-creditor agreements and a different set of security documents governed by English law as well as Turkish law. Turkish law governed security documents mainly include account pledge agreements, transfer of receivables agreements, share pledge agreements, and mortgage over servitude right agreements. The mortgages in BLT projects are created over the servitude right granted by the Ministry of Finance free of charge to the relevant project companies over the project land. This enables the project lenders to have a first degree pledge right over the land, and to a great extent prevent any potential third party interference with respect to the land rights of the project company. We should also note that in certain BLT projects, depending on the particularities, a certain level of sponsor guarantees are also being made available for the benefit of the lenders for the construction and/or operation phase.
Finally, the BLT sector has evolved to a stage where even EPC and O&M Contracts executed between the project company and relevant contractors have been customized to a certain extent on the grounds that most of these agreements impose back-to-back obligations on the contractors all deriving from the main project agreement executed between the project company and the Ministry of Health. Lenders are also entitled to English law governed direct agreement with the relevant contractors increasing their level control over the EPC and O&M Contracts.
Educational Facilities BLT Projects
In addition to the legislative developments concerning healthcare BLTs, Decree Law No. 652 authorized the Ministry of National Education to utilize the BLT model for the construction of educational facilities. Such authority has been coupled with the Regulation on Construction of Education Facilities in Exchange for Lease Payments and Renovation of Facilities in Exchange for Operation Rights of Non-Educational Areas,which sets the details for the implementation of BLT projects in the educational sector. The first fruit of this legislative set-up devoted to BLT projects in the education sector occurred in 2014 as a project agreement executed between the Ministry of National Education and a private entity for a school construction project in Bursa, Turkey. The project’s construction term is 18 months followed by a lease term of eight years.
Further use of the BLT model can be seen in the education sector with the Law on Dormitories and Student Loansof 2010, which covers the construction of student dormitories. Similar to the BLT model implemented under the healthcare investment program, State-owned lands may be allocated free of charge for the project contractors during the lease period for both the construction of dorms and of school buildings.
Upcoming BLT projects in the Pipeline?
The Government is serious about improving public buildings and infrastructure through the BLT model. In addition to the substantial number of projects that have already reached financial close and are in the construction phase, there are still a number of projects in both the education and the health sector yet to be tendered. The Ministry of National Education has launched various regional and national architectural design contests for the construction of school buildings under the BLT model in regions such as Istanbul, İzmir, Adana, and Denizli. Once a design is selected, the construction/maintenance tenders will be launched. The Ministry of Youth and Sport on the other hand, has set forth an extensive investment program bringing opportunities for fifty-six new dormitory projects in regions such as Ankara, İstanbul, İzmir, and Gaziantep. These projects have not yet been tendered.
In the quickly-developing healthcare sector, the Ministry of Health has announced the authorization of new BLT model healthcare facility projects in several regions covering İzmir (Yenişehir), Aydın, Antalya, Diyarbakır, Trabzon, and Bartın. The relevant tenders are expected to take place between early 2016 and 2017. The number of expected tenders indicates that the Government is willing to expand the BLT model practice to most of the investments in Turkey. Underlying the 2023 targets on improvement of public buildings, the private sector may find a well enhanced playing area in the public investments.