With over 80% of its foreign trade transported by sea and a coastline of over 8,000km, ports have always been a key part of Turkey’s infrastructure. Further, as a result of the privatisation program, nearly 20 of such ports are (already or in the process of starting to being) operated as public private partnerships or PPPs. In addition, there are a number of upcoming greenfield port PPP projects, such as the Galataport in Istanbul.

Turkey is one of the most exciting high growth markets. Over the last two years, it has had the highest real growth in gross domestic product of any OECD country and, by 2018, it is projected to be the world’s second fastest growing economy. It faces a substantial and increasing need for ports and other infrastructure. In a number of sectors Turkey does not have an existing track record in PPPs. However, port PPP projects are an area in which Turkey has had a fair amount of success via its privatisation program, including the Mersin and Iskenderun ports. Such port PPP projects have included both projects to operate existing ports as well as ones to develop new ports. In light of all of this and based on its economic fundamentals, its demand for infrastructure, its government’s support for such projects, and its current port PPP program, Turkey is a market with many potential opportunities.

Statutory Framework

Article 47 of the Turkish constitution allows the use of public-private partnerships. It allows the government to enter contracts with the private sector to carry out certain public services (including undertaking port PPP projects).

A number of laws apply potentially to port PPP projects. The key ones are the Law no. 3996 of June 13, 1994 regarding the realization of certain infrastructure and public services with the Build Operate Transfer model and the related Council of Ministers decree no. 2011/1807 implementing the Law no. 3996, and the Law no. 4046 of November 27, 1994 relating to privatizations.

Law no. 3996 is the general BOT law that covers various specified parts of the infrastructure and energy sectors. Development of greenfield ports have been undertaken under Law no. 3996 and could be described as “greenfield port projects”. The development of the Mersin yacht port was tendered in accordance with this law. However, the privatisation of existing ports is being undertaken pursuant to another statute — Law no. 4046 of November 27, 1994 relating to privatizations — as the core of such a transaction is effectively the transfer of the right to operate such a port for a fixed period of time. These could be referred to as “brownfield port projects”. The operation of the Mersin, Iskenderun and Bandırma ports were tendered, and the operation of the Izmir cruise port is currently being tendered, in accordance this law.

As a result of the somewhat “piecemeal” manner in which the various legislation relating to PPP projects has developed, there is currently an attempt to consolidate the three statutes. While a draft PPP law has been prepared, however, it is not anticipated that this law will be enacted in the near future.

Awards

There are three options as to the manner in which port PPP projects can be awarded. These are sealed bids among all bidders, sealed bids among at least three bidders and a negotiated procedure. Similar to other countries, the negotiated procedure may only be used if the other options could not work. Nevertheless, in the case of large port PPP projects, the process is likely to be a mixed one of sealed bids and negotiations, which can be finalized with an open auction process held among the bidders with whom negotiations are held.

A number of parts of the government will be either directly or indirectly involved in any port PPP project. However, the key government entities that will have a role will be the Supreme Planning Board (that is a committee made up of the prime minister and eight other ministers), the Under-secretariat of Maritime Affairs (that is responsible for the regulation of ports), the Under-secretariat of the Treasury, the Privatisation Administration (the key part of the government involved in privatisations) in relation to the privatisation of existing ports, and the two parts of the government that historically owned ports (that is Turkish Maritime Corporation and Turkish Railways). The Supreme Planning Board will be involved in a limited number of decisions of fundamental importance. The Under-secretariat of the Treasury will participate in certain decisions with financial implications.

Terms of Implementation Agreements

Some of the terms of port PPP project implementation agreements are controlled under the port PPP project regulatory framework. Other terms differ depending on whether it is a greenfield or brownfield port project. In any event, each implementation agreement will set out the obligations to construct the whole port for greenfield projects and (where applicable) capacity expansion for existing ports, and operate the port, as well as at the end of its term hand it back to the government.

When tendering a port project, the government may ask for upfront or periodic payments, or a combination of the two. In addition, for brownfield port projects, the project company may be required to continue to offer services at regulated tariffs for specified periods. For both greenfield and brownfield projects, there could also be obligations to encourage cost separation in order to ensure fair and competitive pricing.

With respect to any state subsidy to be provided to the project company (and thereby built into its revenue structure), there are two options as to how the state may structure such a subsidy. These are a demand guarantee (meaning a guarantee that there will be at least a minimum customer flow in the new or existing port), and a guarantee of the debts owed to the port PPP project’s lenders. There are various restrictions on offering these subsidies. They are only offered in exceptional circumstances. As a result they are only given if it is demonstrated that a PPP project could not be undertaken without such a guarantee. Indeed, none of the recent PPP projects that have been tendered had a debt or demand guarantee.

The private sector concession over a port PPP project may be up to 49 years. However, in practice it may be considerably shorter. At the end of the term, the port PPP project (including the machinery and equipment) must be transferred back to the state in good working condition, at nil cost and without any encumbrances.

There are statutory exemptions from value added tax for greenfield port projects. Further, the actual deal documents are exempted from stamp duty and fees. Double taxation agreements or bilateral investment treaties to which Turkey is party provide certain additional limited protection to foreign sponsors and foreign lenders involved in port PPP projects.

The project company will be strictly liable for any damage caused by the port project. However, presumably it would cover this risk by passing it on to its subcontractors and insurance.

The project company may only assign its rights or transfer its obligations under the implementation agreement upon an affirmative opinion from the Ministry of Transport, Maritime Affairs and Communications, and with the prior consent of the minister.

The equity part of the financing that the project company obtains should be at least 20% of the expected fixed costs of the project.

If the project company fails, the government has certain rights to step into the project, including taking over certain contractual arrangements that the project company has put in place. Recently new legislation has been enacted, in relation to projects undertaken under the general BOT law, to explicitly confirm that the relevant part of the government has the right to assume the loans and other financial obligations taken out by the project company, if an implementation agreement is terminated early.

The governing law for the implementation agreement will be Turkish law. The dispute resolution mechanism under the implementation agreement can be either arbitration (which can be international arbitration if there is a foreign element — foreign arbitration awards are recognized in Turkey) or the courts.

Other Issues

Like Turkish investors, foreign investors (including foreign lenders if they need to enforce security over a port PPP project) can own up to 100% of the equity in the project company for a port PPP project. Nevertheless, Law no. 815 of April 19, 1926 provides that certain maritime activities are reserved for Turkish persons (such as the provision of certain auxiliary services in Turkish ports). Therefore if the operator of a Turkish port does not qualify as a Turkish person, it would need to outsource such reserved activities to Turkish persons.

Various regulatory approvals are required to undertake a port PPP project, such as approval of revised zoning plans (where relevant), obtaining environmental clearances and competition approvals. Further, privatisation of existing ports by way of transfer of the rights to operate such a port is subject to an opinion from the Council of State, the supreme administrative court.

Obtaining the approval to revising zoning plans includes having the relevant zoning plan amended (the zoning plan for an area includes details of any planned construction), and obtaining the consents required for certain types of land. Amending the zoning plan can be a challenge. Even if changes to a zoning plan are approved by the relevant municipality (and by the Ministry of Environment and Urbanization, as the case may be), the approval is open to challenge in the courts by the public. However, as a general rule, challenges to administrative actions and decisions (such as municipality approval) do not interfere with its implementation, unless a stay of execution has been secured or there is any final court decision overturning it.

Any port with a capacity over 1,350 DWT requires an environmental impact assessment. An opinion is required from the Ministry of Environment and Urbanization that any negative impact of the project on the environmental is acceptable. With respect to brownfield port projects the environmental impact assessment report and decision for the original project usually would not cover any potential upgrades or capacity increases. Therefore the project company may have to go through a further environmental impact assessment process in respect of any additional investments.

Any land reclaimed by private port operators during the construction or increase in the capacity of a port becomes public land. Therefore, if a project company requires ongoing access to such land, it would need to agree a lease in respect of it with the General Directorate of National Property (that is part of the Ministry of Finance).

In addition, port PPP projects are also subject to the general Turkish regulatory framework and the issues may arise as a result of such. For instance in respect of the operation of any greenfield port project, the project company must apply to the relevant local authorities to obtain the required licenses and permits. Indeed there have been instances where existing ports have not had all required licenses.

With respect to antitrust controls, different ports generally serve different regions and therefore usually not substitutes for each other. Nevertheless, during the privatization of Iskenderun port there was an objection from the Competition Authority, to that port being awarded to the highest bidder as that bidder had already been the successful bidder in the privatization of the nearby Mersin port.

Finally, reflecting Turkey’s history, the Ministry of Culture and Tourism has the right to direct that action may be taken by a project company to protect antiquities: this may include suspending work at a site while the antiquities are removed.