Creating collateral security packages

Types of collateral

What types of collateral and security interests are available?

The Turkish security law regime allows lenders in a typical project finance transaction to obtain a security interest over the following main categories of project company assets: real estate (eg, a mortgage), the project company’s movable assets, and the project company’s receivables. In a classic non-recourse project finance transaction, the lenders will have a security interest over the project company’s rights to the project land (which in most cases concerns a servitude right rather than ownership), the shares of the project company, the project company’s receivables arising from project documents, including the main project agreement, insurance proceeds and the project company’s bank accounts. In certain sectors, the lenders can also acquire security interest over the goods produced or extracted by the project company, such as in the case of mining projects.

Limited recourse project finance transactions are also common in Turkey where the lenders may obtain additional security interest other than the project assets, subject to the bankability of the project and the risk profile of the sponsors, such as parent company guarantees.

If a public-private partnership (PPP) project is in place, there may be further governmental payment supports available to the lenders (eg, debt assumption, compensation on termination) depending on the risk profile of the project, the applicable legislation and the governmental policy at the time. Direct agreements between the lenders and the relevant governmental authority have also became the norm in project finance transactions save for certain sectors (eg, brownfield port projects) and are considered indispensable, and thus an expected part of the security package.

Collateral perfecting

How is a security interest in each type of collateral perfected and how is its priority established? Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise them? May a corporate entity, in the capacity of agent or trustee, hold collateral on behalf of the project lenders as the secured party? Is it necessary for the security agent and trustee to hold any licences to hold or enforce such security?

While the tax legislation in Turkey requires payment of certain duties and fees for the below summarised security perfection actions, there is a blanket exemption provided in respect to financing transactions where one of the parties qualifies as a financial institution under the applicable law. As a result, there are no meaningful fees or duties to be paid to perfect security interests in project finance transactions.


Mortgages can only be established with an official mortgage deed to be executed before the title deed where the property is located and upon registration of the mortgage with the title deed registry. In terms of priority, the degree system adopted under Turkish law provides a priority ranking to mortgagees holding a mortgage with a preceding degree over other mortgagees in subsequent rankings.

Movable pledge

There is no single method that governs perfecting a security interest over movable assets and the relevant methods are explained below. The priority of security rights over movable properties are determined in chronological order, save for security interests subject to the Law on Movable Pledges in Commercial Transactions No. 6450 where the parties also have the option to adopt the degree system.

Movables not transferred to the pledgee

Perfecting security over the movable assets of a commercial entity is governed by the fairly new Law on Movable Pledges in Commercial Transactions No. 6450, which requires execution of a pledge agreement in electronic or written form, which must also be notarised, and registration of the agreement with the Movable Pledges Registry as a condition of enforceability. There are certain categories of movables excluded from the scope of the law, including, among others, movable properties subject to a separate registration requirement under other pieces of legislation such as ships, trademarks, mining rights, and pledges over precious metals, aircraft and motor vehicles.

Security interest over the shares

Perfecting security over the shares of a non-listed project company requires execution of a written pledge agreement (although not a legal requirement, always required in practice), endorsement of the share certificates by the project company shareholders, and delivery of such to the lenders or their agent. The endorsement may be in the form of a pledge endorsement or blank endorsement. In the absence of physical shares (which is legally possible under Turkish law), executing a pledge agreement in written form will suffice to perfect the security. However, in practice, the lenders will usually (if not always) require the issuance of physical shares. Although it is neither a validity nor a perfection requirement, in most cases a share pledge is also registered with the shareholder of the project company’s ledger for declaratory purposes.

Account pledge

Perfecting security over the project company’s accounts involves a fairly simpler process, including the execution of a pledge agreement and pledge notification sent to the banks in which the accounts are held. While there are certain contradicting opinions in terms of the enforceability conditions concerning account pledges against the account holding banks, notification to the banks has in practice become an indispensable part of the perfection stage.

Transfer of receivables

In respect to the receivables of the project company, transfer of the relevant receivables to the lenders is more common as opposed to a pledge over such receivables. This requires executing a written agreement and notifying the relevant debtors of the project company of such transfer to hold them liable to pay their debt directly to the lenders in case of default under the financing documents. There are no additional registration requirements to perfect this type of security except in cases where the receivables transferred are governmental debts, such as in the case of the ‘government pays’ model PPP projects. In this case, the relevant agreement should to be executed before the notary public as a condition of enforceability.

Parallel debt

The concept of ‘trustee’ does not exist under Turkish law; therefore, there are no specific rules allowing exclusion of the assets secured in favour of the trustee from the bankruptcy estate in cases of bankruptcy. However, certain remedies are available under the Enforcement and Bankruptcy Law No. 2004 (EBL) - the main piece of legislation governing enforcement and bankruptcy proceedings - that the lenders may try to resort to against the security agent to recover their security interest.

To benefit from the concept of a ‘security agent’ in project finance transactions, which usually involve a syndicated loan, a ‘parallel debt’ structure is used. Under this scheme, the security agent has a direct and independent right to request repayment of the debt and to enforce the security in the event of failure to pay. This mechanism is not subject to any licensing requirements. While commonly used, the concept has yet to be tested by Turkish courts in terms of its enforceability.

Assuring absence of liens

How can a creditor assure itself as to the absence of liens with priority to the creditor’s lien?

Title deed registry and movable pledge registry records are open to the public and any third party with a valid interest can review the records to determine whether there are any prior registered security interests over the assets concerned.

As for security over assets that are not subject to the registry requirement, there is no straightforward due diligence opportunity. As a result, the relevant agreements usually include an undertaking by the project company or borrower regarding the non-existence of third-party security rights in addition to a negative pledge undertaking.

Enforcing collateral rights

Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the collateral?

There must be a default by the project company for the lenders to liquidate their security interest. The enforcement procedure is governed by the EBL. If secured assets are involved as in the case of project finance transactions, the law requires that the debt be satisfied primarily through liquidation of the assets provided as security rather than general seizure or bankruptcy proceedings. General seizure or bankruptcy proceedings against the project company can only be initiated if the debt cannot be fully recovered through the liquidation of the assets subject to security. Enforcement proceedings can be initiated in the original currency of the debt subject to the discretion of the lenders (in this case, the debtor will still have to pay the debt in Turkish liras but based on the exchange rate applicable on the collection date), but public sale of the assets can only be conducted in Turkish liras.

The lex commissariat rule (ie, preventing the lenders from claiming direct ownership over the secured assets) is applicable under Turkish law save for a limited number of pre-defined cases, including security agreements concerning capital market instruments in accordance with the Capital Markets Law No. 6362. However, the rule does not prevent the lenders or their agents from taking part in the sale process and acquiring ownership of the secured property through a public or private sale.

While public sale of the secured asset in the forms prescribed by law is the norm for enforcing security rights (particularly in the case of foreclosure of a mortgaged property where it is the only option), security agreements usually include the option for lenders to enforce private sale. Even though enforceability of the private sale option has not been tested by the courts, this method, which allows the lenders and the borrower to agree on the conditions of the sale prior to or during the sale process, is deemed a valid option by many scholars.

In terms of account pledges, agreements entitle the lenders to directly acquire control of the pledged accounts. However, there are some opinions that suggest the public sale procedure be followed to enforce security over the pledged accounts to avoid breaching the lex commissariat rule discussed above.

As for transfer of receivables agreements, contracts include a mechanism where the relevant amounts are either directly collected by the lenders and released only in case of non-default or for the issuance of a default notice to the debtors of the transferred receivables, or both, requiring them to make the payments directly to the lenders or their agent following a default or acceleration event.

Enforcing collateral rights following bankruptcy

How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral? Are there any preference periods, clawback rights or other preferential creditors’ rights with respect to the collateral? What entities are excluded from bankruptcy proceedings and what legislation applies to them? What processes other than court proceedings are available to seize the assets of the project company in an enforcement?

If the project company declares bankruptcy, all of the project company’s assets will be included in the bankruptcy estate and the lenders will be required to register their status as debtors with the estate. The secured debtors, such as the lenders, have priority (after deduction of the costs made to maintain and sell the assets secured) in terms of recovery of receivables from the bankrupt estate. In 2018, there was a legislative change rearranging the priority order in favour of the secured debtors who now have priority in terms of collecting their debt even over the amounts owed to the state. There is no distinction in terms of the treatment of foreign and local creditors.

Under the EBL, certain transactions are voidable in the case of bankruptcy. As a result, any transaction that decreases the value of the bankrupt’s estate in bad faith may be voidable. Transactions made during the year immediately prior to the insolvency proceedings such as pledges granted by the debtor to secure an existing debt, except those the debtor had previously undertaken to grant such security interest, payments made in any form other than cash or customary payment methods, as well as payments made for undue debts are listed as examples of voidable transactions under the EBL unless the counterparty of the transaction can prove that it was not aware of the financial situation of the insolvent debtor.

Bankruptcy procedures concern all capital entities whereas assets of the governmental bodies allocated to public services cannot be attached or be subjected to any enforcement proceedings.

Foreign exchange and withholding tax issues

Restrictions, controls, fees and taxes

What are the restrictions, controls, fees, taxes or other charges on foreign currency exchange?

Save for the inspection and reporting requirements of banks and anti-money laundering regulations, there are no restrictions on foreign currency exchange. Banking and insurance transactions tax at a rate of 0.1 per cent of the sales value is imposed on banks and authorised institutions regarding the sale of foreign exchange; however, certain transactions, including sales to borrowers having foreign currency loan payables, enterprises holding an industrial registry certificate and exporters who are members of exporters’ associations, are exempt from such tax.

As for general restrictions concerning foreign currency transactions, in an attempt to revive the decreasing value of the Turkish Lira, there have been substantial developments in 2018 to partially limit foreign currency borrowings by Turkish resident entities with no foreign currency earnings as well as the use of foreign currency-denominated contracts between Turkish resident entities (Communiqué No. 2018-33 regarding Decision No. 32 on Protection of the Value of Turkish Currency (Decision No. 32) and the amendments made in respect to Decision No 32). These newly introduced restrictions are not in absolute form and include numerous exemptions relevant to most project finance transactions in Turkey.

Financing agreements executed in connection with PPP model projects, as well as infrastructure projects carried as a result of a public tender that is also open to foreign bidders, are by default exempt from the restrictions concerning foreign currency borrowings. Similarly, the limitations concerning the foreign currency denominated contracts do not apply to contracts involving governmental authorities and the other agreements executed in the context of a PPP project such as financing agreements, engineering, procurement and construction (EPC) and operation and maintenance (O&M) contracts.

Investment returns

What are the restrictions, controls, fees and taxes on remittances of investment returns (dividends and capital) or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?

Dividends payments are subject to 15 per cent withholding tax for non-residents. If dividends are earned through a permanent establishment, withholding tax is not applied. Corporate income tax at a rate of 22 per cent, which is the applicable rate in 2018, 2019, and 2020, will be levied on corporate income. Interest payments for loans are subject to 10 per cent withholding tax and 18 per cent VAT (reverse charge) provided that the loan is not taken from a bank or financial institution. The rates may be reduced to avoid double taxation treaties. There is also a Resource Utilisation Support Fund (RUSF) charge on the loans depending on the average maturity. The RUSF rate is 1 per cent on loan interest payments in Turkish liras whereas the rate is between 0-3 per cent and applied on the capital if the loan is in FX.

Foreign earnings

Must project companies repatriate foreign earnings? If so, must they be converted to local currency and what further restrictions exist over their use?

Generally no, aside from a recently introduced temporary requirement concerning Turkish entities qualifying as ‘exporters’. Exporters residing in Turkey must repatriate their export revenues into Turkey within a period of 180 days from the actual date of exportation and convert at least 80 per cent of their revenues to Turkish liras by depositing it to Turkish banks. Such period may vary in accordance with the type of the export transaction. The relevant regulation was enacted as one of the measures against the foreign exchange crisis in 2018 and will remain in force until 4 September 2019.

May project companies establish and maintain foreign currency accounts in other jurisdictions and locally?

Subject to anti-money laundering regulations, project companies can freely establish and maintain foreign currency accounts in other jurisdictions and in Turkey.

Foreign investment issues

Investment restrictions

What restrictions, fees and taxes exist on foreign investment in or ownership of a project and related companies? Do the restrictions also apply to foreign investors or creditors in the event of foreclosure on the project and related companies? Are there any bilateral investment treaties with key nation states or other international treaties that may afford relief from such restrictions? Would such activities require registration with any government authority?

There is no general restriction preventing foreign entities from having ownership of the project (through a Turkish subsidiary) or the project company unless the sector specific legislation imposes such restriction. Turkey is to a great extent a liberalised market in terms of foreign participation as a result of the governmental policy followed over the last two decades. However, there are still a limited number of sectors where there are certain restrictions concerning direct or indirect foreign entity ownership such as the aviation sector, including ground services and broadcasting activities.

In terms of land rights, which is an essential part of any project finance transaction, the real estate legislation requires clearance from the governorship of where the land is located if a company with a foreign shareholding of 50 per cent or other controlling rights acquires rights in rem over a real estate property located in Turkey. However, mortgage rights granted in favour of financial institutions are not subject to this requirement.

Insurance restrictions

What restrictions, fees and taxes exist on insurance policies over project assets provided or guaranteed by foreign insurance companies? May such policies be payable to foreign secured creditors?

As per the Insurance Law No. 5684, insurable interests located in Turkey of Turkish residents must be insured in Turkey by insurance companies operating in Turkey. Certain exemptions exist, mainly concerning transportation insurance. In a typical project finance transaction, the risks are re-insured abroad at a percentage based on the particularities of the transaction. Both the original insurances and reinsurances are assignable and also payable to foreign secured creditors.

Payments received by insurance companies are subject to the banking and insurance transactions tax, which is currently applied at the rate of 5 per cent. The income of insurance companies is subject to corporate income tax at the rate of 22 per cent for the taxation periods 2018, 2019, and 2020. Foreign insurance and reinsurance companies can operate in Turkey by establishing a branch there.

Worker restrictions

What restrictions exist on bringing in foreign workers, technicians or executives to work on a project?

Unless otherwise set under a bilateral agreement that Turkey is party to, foreign workers are required to obtain work permits to be eligible to work in Turkey. The applicable process is governed by the Law on Work Permits for Foreigners No. 4817 and the Law on International Workforce No. 6735. The latter also lists certain circumstances, such as project-based work (eg, construction), where workers can benefit from a simpler permitting process.

Similarly, if there is an intra-governmental agreement concerning the project (eg, nuclear power plant projects, oil transmission pipeline projects), there may be certain undertakings in those agreements to facilitate the work permit process concerning foreign workers.

Equipment restrictions

What restrictions exist on the importation of project equipment?

There are no general restrictions on the importation of project equipment other than what may be required under the import legislation and policies. However, there may be certain sector or project-specific cases where the legislation or tender require local equipment to be used. A relatively recent example of such a requirement is the healthcare PPP projects where the legislation (for projects the tenders of which are launched after a certain date) require that at least 20 per cent of medical equipment used be of local origin.

Nationalisation laws

What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected (from nationalisation or expropriation)?

The Constitution of the Republic of Turkey, as well as Law No. 3082 on the Nationalisation of Private Entities Engaged in Public Services in Cases of Public Interest recognises that project companies engaged in public services may be nationalised if public benefit requires such action and only upon the issuance of a law. The legislation requires that consideration be paid to the project company as a result of nationalisation based on the actual value of the company. The project company has the right to challenge the amount of consideration before the relevant courts.

Expropriation is regulated under the Expropriation Law No. 2942 in addition to the Constitution and can only be executed upon consideration of the actual value of the expropriated asset if there is a sufficient level of public interest to take such action. The affected party has the right to challenge the expropriation value as well as the expropriation decision before the competent courts.

To mitigate the risks associated with these interventive actions, most project agreements executed with governmental bodies under the PPP scheme lists nationalisation and expropriation among the risk events, thus entitling the project company and, indirectly, the lenders to compensation rights in the case of such event.

Fiscal treatment of foreign investment


What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?

Turkish foreign investment legislation is based on the principle of equal treatment of local and foreign investors. As a result, there are no blanket rules either entitling foreign investors to preferential treatment or imposing additional burdens on them such as tax beyond what is available to or required for local investors as well.

The only exception is the resource utilisation support fund payment requirement imposed on foreign financial institutions (1 per cent of the interest amount if the loan is in Turkish liras and within the range of 0.5-3 per cent if it is foreign currency) for loans extended to Turkish entities with a maturity date of less than three years. Since the maturity date of loans in most project finance transactions are longer than three years, this requirement is rarely relevant in the context of project finance transactions.

Government authorities

Relevant authorities

What are the relevant government agencies or departments with authority over projects in the typical project sectors? What is the nature and extent of their authority? What is the history of state ownership in these sectors?

In a typical project in Turkey, there will be more than one governmental authority linked to the project with a varying degree of control. The governmental authorities may be part of the projects in the following capacities:

  • the procuring or contracting authority (such as in PPP projects, which can be a ministry, sector-specific authorities, or even municipalities);
  • the regulatory or licensing authority (eg, licence-based energy projects);
  • the land authority if there is state owned or controlled land;
  • the financial support authority if there are governmental payment supports available (eg, Ministry of Treasury and Finance in the case of debt assumption); and
  • local authorities, such as municipalities for ordinary permitting processes, including construction and building utilisation permits.

While the state used to have a monopoly in the major infrastructure sectors in Turkey, including telecommunications, energy, and transportation, all of these sectors have to a great extent been liberalised a result of the consistent governmental policy followed since late 1980s. Today, the relevant sectors are mostly dominated by private party investors, including many foreign entities except for limited number of sub-sectors.

The Ministry of Energy and Natural Resources is the main authority in charge of the government’s energy policies while there are also multiple sector specific authorities overseeing market activities under their capacity as licensing authorities. The Energy Market Regulatory Authority and Nuclear Regulatory Authority cover the electricity, natural gas and downstream petroleum activities whereas the General Directorate of Mining and Petroleum Affairs oversees upstream petroleum and mining activities. Water policies are subject to the authority of the Ministry of Forestry and Agriculture while certain specific duties are assigned to the General Directorate of State Hydraulic Works.

In terms of transportation and telecommunications, the Ministry of Transportation and Infrastructure is the main body in charge of the relevant policies and associated investments. However, there are various sector-specific authorities in the field, such as the National Directorate of Highways, the Civil Aviation Authority, the Information and Communications Technology Authority, and the General Directorate of State Airports, which supervise sector activities and also act as the licensing authority. In certain cases defined by the legislation, some of these authorities can also be directly in charge of the relevant infrastructure investments.

Finally, authorities over social infrastructure projects such as hospitals and schools mainly lie with the relevant ministries such as the Ministry of Health and the Ministry of Education.

Regulation of natural resources


Who has title to natural resources? What rights may private parties acquire to these resources and what obligations does the holder have? May foreign parties acquire such rights?

Petroleum resources (including oil and gas reservoirs) are owned by and at the disposal of the state. Private parties can acquire licences or leases to explore, extract, sell, import and export these resources. Although the owners of certain types of downstream licences must be Turkish companies (which can be owned wholly or partially by foreign individuals or legal entities), in general, upstream and downstream license holders can be Turkish or foreign individuals or legal entities.

All minerals that have an economic value are owned by and at the disposal of the state, irrespective of the ownership of the land they are located on. Only Turkish nationals (both individuals and legal entities) can acquire licences to explore and extract minerals. However, legal entities established in accordance with the provisions of the Turkish Commercial Law No. 6102 are considered Turkish legal entities even if 100 per cent (or less) of the total share capital of such companies are held by foreign investors.

Spring waters are considered an integral part of the land they are located on and title to the spring waters can be acquired by purchasing the relevant land. Title to underground waters, however, is vested in the state. Private parties who would like to operate spring waters and drinking waters must obtain a production permit and obtain the approval of the relevant facility. Private parties may search for underground water on their lands after obtaining an exploration permit, and if they find underground water, they may use such water after obtaining a usage permit.

Title to plants growing on a plot of land belongs to the landowner. However, there are some limitations on removal of certain types of trees from land.

Royalties and taxes

What royalties and taxes are payable on the extraction of natural resources, and are they revenue- or profit-based?

Petroleum (both oil and gas) exploration licence and production lease holders must pay the state 12.5 per cent in royalty fees for petroleum produced from an exploration or production area. There is no distinction between Turkish nationals and foreigners regarding calculation of the royalty amount to be paid to the state.

Mining licence holders must pay the state a royalty fee at a certain rate for minerals produced by the licence holder in the licensed area. The royalty fee varies between 1-15 per cent, depending on the group that the relevant mineral belongs to and the amount extracted, and is calculated in proportion to the sales revenue over the per quarry sales price declared by the licenceholder.

Exploration licence and production lease holders (for both petroleum and minerals) are subject to corporate tax, withholding tax, value added tax, and private consumption tax, among others. However, as per the Turkish Petroleum Law No. 6491, the sum of taxes that a petroleum rights holder is liable to pay or withhold cannot not exceed 55 per cent of the licensee’s taxable income. Also, the import of materials, tools, fuel, or transfer vehicles for petroleum activities or buying these items from a domestic provider, is exempt from custom duties and levies and stamp tax duty.

Export restrictions

What restrictions, fees or taxes exist on the export of natural resources?

There are no generally implemented limitations or restrictions on, or fees and taxes applicable to, export of natural resources.

Legal issues of general application

Government permission

What government approvals are required for typical project finance transactions? What fees and other charges apply?

There is no approval process directly targeting project finance transactions. However, there are various phases during the implementation of projects underlying project finance transactions that are subject to governmental approval or licensing requirements. While the specific range of these requirements varies based on the nature of the project, the essential approval and licensing requirements that may be relevant can be categorised as follows:

  • licensing in relation to core activities if the project occurs in a regulated sector (eg, energy projects);
  • real estate-related approval requirements including not only land rights but also construction and usage permits; and
  • environmental permits, including, but not limited, to environmental impact assessments.

The applicable licence or permit fees are rather minimal with the exception of the regulated sectors such as energy where the licence fees are usually determined pro rata to the production capacity.

Registration of financing

Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?

Loan transactions based on or indexed to foreign currency need to be notified to Turkish Central Bank periodically after the ending of each accounting period by the borrower. Furthermore, if the project is based on the PPP model, the project agreements in most cases require filing financing agreements in addition to the project documents with the relevant governmental or contracting authority as a contractual requirement.

For any agreement in a foreign language to be used or enforceable before a Turkish court, a notarised Turkish translation must be filed. Additionally, Law No. 805 on the Use of Turkish Language by Commercial Entities requires that any contract between two Turkish entities be executed in Turkish to be enforceable. As a result, a dual-language contract structure is very common in Turkey in project finance transactions if the agreement fits the definition under Law No. 805.

Arbitration awards

How are international arbitration contractual provisions and awards recognised by local courts? Is the jurisdiction a member of the ICSID Convention or other prominent dispute resolution conventions? Are any types of disputes not arbitrable? Are any types of disputes subject to automatic domestic arbitration?

Turkey is party to the New York Convention as well as the ICSID Convention, which both dictate the enforcement rules to be applied in Turkey if the award falls under their authorities. The ICSID Convention enables automatic enforcement of foreign arbitral awards without the need to resort to domestic courts for enforcement. As for arbitral awards subject to the New York Convention, Turkish courts apply the enforcement tests set therein.

Additionally, the Turkish International Arbitration Law No. 4686 was adopted in 1999 and applies to cases concerning international arbitration (determined as a result of the foreignness test under the same law) if Turkey has been set as the place of arbitration by the contracting parties. The enforcement conditions set under the Turkish International Arbitration Law mirror those set under the UNCITRAL Rules to a great extent.

There are certain categories of disputes that cannot be subject to arbitration under Turkish Law, such as disputes regarding the rights in rem over real estate located in Turkey and disputes in which the parties are not entitled to discretionary settlement. The latter has mostly been defined through court decisions and includes disputes in connection with family law, criminal law, employment law, competition law and bankruptcy law, among others.

There are a very limited number of cases where local arbitration is mandatory, including disputes in connection with sports contracts and consumer claims.

Law governing agreements

Which jurisdiction’s law typically governs project agreements? Which jurisdiction’s law typically governs financing agreements? Which matters are governed by domestic law?

If there is a PPP project in place, legislation requires Turkish law to be the governing law of the main project agreement. Furthermore, any agreements granting land rights to the project company and the agreements concerning security interest over the land and movables located in Turkey are governed by Turkish law in accordance with the mandatory rules. Otherwise, parties have the freedom to choose a foreign law as the governing law of their contract provided that there is an element of foreignness (eg, financing agreements). The provisions of foreign law governed agreements may be unenforceable before the Turkish courts only if the enforcement of such provisions would be against public policy.

In addition to the main project agreement and security agreements concerning assets located in Turkey, construction and operation agreements are also usually governed by Turkish law with limited number of exceptions. Financing agreements are commonly governed by English law due to the involvement of foreign financial institutions while Turkish law is preferred if the financing transaction does not involve any foreign parties.

Submission to foreign jurisdiction

Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?

As a general rule, parties have the freedom to submit their dispute to a foreign jurisdiction if there is an element of foreignness. However, if there is a PPP project in place, there are certain jurisdictional restrictions arising from the legislation that dictate the authority of Turkish courts over disputes as the default option and also giving the parties the right to refer to international arbitration to the extent the substance of the dispute is governed by Turkish law. However, the PPP legislation does not entitle the parties to refer to the jurisdiction of foreign courts.

Disputes arising from financing agreements are usually referred to international arbitration or the jurisdiction of courts in London if there are non-Turkish lenders involved, which is commonly the case.

As per the jurisdictional immunity, which concerns sovereign states, the Turkish International Private and Procedure Law explicitly states that the states may not benefit from jurisdictional immunity for the disputes arising out of their private law relations.

Environmental, health and safety laws

Applicable regulations

What laws or regulations apply to typical project sectors? What regulatory bodies administer those laws?

In addition to the international agreements that Turkey is party to, the main piece of law governing the environmental requirements for any infrastructure project is the Environmental Law No. 2872, which governs both general environmental permitting and environmental impact assessment processes. The enforcement authority is the Ministry of Environment and Urbanisation. In terms of workplace safety, the Ministry of Family, Labour, and Social Services is the main body in charge whereas the Work Health and Safety Law No. 6331 is the main piece of legislation. The project finance market is also familiar with heightened environmental and social requirements arising from the Equator Principles due to the involvement of various foreign international financial sectors (IFIs) in the sector.

Project companies

Principal business structures

What are the principal business structures of project companies? What are the principal sources of financing available to project companies?

The two essential types of capital companies in Turkey are joint stock corporations and limited liability partnerships. The PPP legislation requires project companies to be established in the form of a joint stock corporation. Even if there is a non-PPP project (eg, licence-based energy projects) or a sector based legislative requirement, project companies are in most, if not all, cases still established in the form of a joint stock corporation as the governance structures of joint stock corporations are more fit for big scale projects.

In addition to the equity that the project company shareholders must provide due to a legislative requirement (such as in case of PPP projects) or the lenders requests, the main source of financing available to the project companies is conventional, syndicated loan financing. While there are a limited number of projects financed solely by a group of commercial banks, the most common type of lending group includes IFIs, export-import (exim) banks, and commercial banks, occasionally joined by participation banks. However, there is a movement in the market in favour of non-conventional financing methods and there has recently been a social infrastructure project financed with off-shore project bond issuance. There are also a limited number of projects financed with the combination of equity and corporate loans as opposed to project financing.

Public-private partnership legislation

Applicable legislation

Has PPP-enabling legislation been enacted and, if so, at what level of government and is the legislation industry-specific?

Turkey has a long history of PPP projects. As a result, there are various pieces of PPP legislation in place. However, the legislation can be described as scattered at best, with certain laws governing specific sectors and others focusing on the PPP model rather the sector. Adoption of a framework PPP law has been on the government’s agenda for the past five years with no substantial outcome as of yet.

Apart from the still in force but dormant PPP legislation, the main pieces of PPP legislation include Law No. 3996 on the Procurement of Certain Investments and Services under the build-operate-transfer model, which covers nearly all infrastructure categories with no distinction in terms of the procuring governmental authority; Law No. 6428 on the Construction, Renovation, and Purchase of Services by the Ministry of Health by way of the Public-Private Partnership Model, which only concerns the Ministry of Health and healthcare facilities to be built under the build-lease-transfer model; and the Privatisation Law No. 4046, which regulates the transfer of operation rights and long term lease models, among others.

PPP - limitations

Legal limitations

What, if any, are the practical and legal limitations on PPP transactions?

The Turkish Constitution explicitly allows the involvement of private parties in delivering public services. It also requires an explicit provision in the applicable law for the involvement of the private parties in such services upon the execution of private law contracts, which is a crucial component for the bankability of projects. Otherwise, private parties can still be involved in the delivery of public services but under the auspices of an administrative law regime. As a result of the governmental policy favouring PPP projects over the past decade, private law agreements became almost the norm in the transfer of the authority to provide public services to private parties.

In terms of financing of PPP projects, governmental expenditure is subject to the procedures and limitations set under Law No. 4749 on Public Finances and Debt Management as well as Law No. 5018 on Public Finances Management and Control, which set the budgetary principles applicable for each governmental authority and set the boundaries for debt incurring transactions such as issuing payment guarantees or debt assumption arrangements. The annually issued budget law is another crucial component of the expenditure limits concerning the governmental authorities included under the central governmental budget.

The key point in a project finance transaction, including governmental payment or guarantee obligations is to understand the source of revenues for the governmental authorities involved in a PPP project and whether they are part of the central governmental budget (eg, ministries) or qualify as independent bodies (eg, National Directorate of Highways). Governmental bodies that are part of the central budget do not own or operate their own treasuries and rely on the yearly allocations under the central budget whereas the remaining bodies are in charge of their own treasury and revenue management.

PPP - transactions

Significant transactions

What have been the most significant PPP transactions completed to date in your jurisdiction?

There have been numerous big-scale transportation and social infrastructure projects in Turkey over the past decade based on the PPP model. Those include the Gebze-Orhangazi-Izmir Motorway project including the fifth-longest suspension bridge in the world with an investment value of US$6 billion; the Eurasia Tunnel project, the first underwater car tunnel project crossing the Bosphorus in Istanbul with an investment value of over US$1 billion, the new Istanbul Airport with an investment value over US$15 billion - all based on the build-operate-transfer model. The past decade has also been marked with the use of the PPP model for the first time in the field of social infrastructure such as healthcare projects. There have been more than 20 healthcare projects launched under the build-lease-transfer method with Etlik and Bilkent healthcare campuses located in the capital city Ankara being among the projects with the largest bed capacity - 3,566 and 3,711 respectively. It is expected that the model will be more commonly used in the future in other categories of social infrastructure projects such as educational and student dormitory facilities.


Recent developments

In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?

Key developments of the past year30 In addition to the above, are there any emerging trends or ‘hot topics’ in project finance in your jurisdiction?

Given the size of the current project finance market in Turkey and the increasing number of projects both in the field of transportation and social infrastructure, current sector discussions include the ways to mobilise alternative financing methods for project finance transactions such as issuance of project bonds, and involving the pension funds and insurance companies in the sector in an attempt to go beyond the boundaries of conventional financing and overcome the gap between the required level of infrastructure investments and the monetary sources available.