For a country with such an excellent track record, in terms of both PPP deal numbers and transaction value, Turkey surprisingly has neither a general PPP law nor a central PPP governmental authority.
The grandfather of all PPP models in Turkey up until the 1980s was the “concession” method, which continued to be run mainly under the Ottoman-era Concessions Law of 1910. The outdatedness of that regulatory framework is not the only shortcoming of the concession model; the main problem is that concession contracts fall under administrative law making them (i) subject to the prior review of the Council of State (Danıştay) before their execution, revision, or in principle their subsequent adjudication; and more importantly (ii) vulnerable to cancellation of the underlying tenders or procurement processes.
Starting in the 1980s, the legislative agenda focused more on creating private law-governed contractual schemes for PPPs. The overwhelming desire of the public and the legislature was to narrow energy and infrastructure investment gaps while scaling back the power of public entities to scrutinize public service or infrastructure projects delegated or partially delegated to the private sector.
During the 1980s and 1990s, new methods of delegation such as the Build-Operate-Transfer (“BOT”) and Build-Operate (“BO”) PPP models emerged as alternatives to the inflexible concession method, marking a distinct shift to the use of private law contracts. These earlier efforts (i.e. the initial BOT laws and pioneer deals) were challenged before the Constitutional Court and the Council of State in numerous cancellation lawsuits, some with success and some with at least the side-effect of prolonging the investment period or undermining the bankability of the deals.
► 1984: The first separate legal regulation regarding the cooperation of public and private sectors was the build-operate-transfer (“BOT”) model introduced in 1984 under Law No. 3096 on the Appointment of Institutions other than Turkish Electricity Administration for the Production, Transmission, Distribution and Trade of Electricity) (“Electricity BOT Law”). The Electricity BOT Law gave the private sector the opportunity to invest in the production, transmission, distribution and trade of electricity in Turkey. Along with the BOT model, this law also introduced the right to transfer of operational rights (“TOR”) model.
► 1988: Law No. 3465 on Commissioning of Entities other than the General Directorate of Highways to Build, Maintain and Operate Access Controlled Motorways (Highways) (“Highways BOT Law”) paved the BOT way towards a new sector. This law provided the private sector with the right to procure the construction, operation, and maintenance of highways and highway service stations. The Highways BOT Law removed the monopolistic control of the General Directorate of State Highways over highway construction, maintenance, and operation.
A more comprehensive practice towards PPP models emerged in the 1990s.
► 1994: Law No. 3996 on the Procurement of Certain Investments and Services under the Build-Operate-Transfer Model (“BOT Law”) was passed to govern BOT-model infrastructure projects requiring both advanced technology and large financial resources. The scope of the BOT Law covered the construction, operation, and transfer of various investments and services such as bridges and tunnels; drinking and utility water systems and treatment plants; communications; geothermal and waste water facilities and heating facilities; the generation, transmission, distribution and trade of electricity; highways and heavy traffic routes; railways, rail systems, and railway stations; and similar investments and services.
► 1994: Law No. 4046 on Privatization Practices (“Privatization Law”) was issued. The main purpose of the law was of course to set forth the details of the different methods and rules governing the privatization of state assets, but one of the methods introduced (along with other methods of block sale, lease, transfer of properties by way of establishment of intangible rights, etc.) was the TOR model applicable mostly to state-owned infrastructure and transferring the rights of their operation for a fixed period of time.
► 1997: Law No. 4283 on the Regulation of Establishment and Operation of Electrical Energy Generation Facilities and Sale of Energy under the Build-Operate Model (“BO Law”) was enacted as a model to be used exclusively for thermal power stations. This model excluded hydroelectric, geothermal, nuclear, and other renewable-source facilities from its scope of application.
In 1999, the Constitution was amended to limit the Council of State’s broad review authority over concessions. The new amendment only gave the Council of State the right to state an opinion within two months of such contracts. The Council of State’s opinion thus became non-binding; however, a classification by the Council of State to the effect that an agreement submitted to it is a “concession” in the first place continues to have binding effect. The Constitution was also amended to make it possible for disputes arising under concessions and PPP agreements related to public services to be settled by arbitration, provided that the disputes have a foreign element. More importantly, amendments to the Constitution enabled agreements concerning the delegation of public services to the private sector to be governed by private law, on the condition that the delegation was determined and specified in a law passed by the legislature, as opposed to an executive decision or a regulation.
Following the amendments discussed above, the 1990s and 2000s witnessed a different type of PPP model emerging in each sector, under a different piece of law enacted for the specific purpose. This meticulous approach to solidifying the legal groundwork of the implementation of PPP projects naturally and to a large extent minimized the number, or at least the negative effects of challenges and cancellation requests. However, the requirement to address each sector in a separate legislative enactment also resulted in today’s patchwork-style legislative environment.
► 2005: Law No. 5335 further developed the PPP sector by introducing the TOR model. Law No. 5335, an omnibus bill, allowed the General Directorate of State Airports Operations (“SAO”) to transfer the operating rights of airports, which were already being operated by SAO, to the private sector for a maximum period of 49 years. The law permitted the use of the lease and/or TOR methods under the Privatization Law for this purpose. Law No. 5335 thus also permitted the transfer of construction and operation rights of airports, which were transferred to the private sector through the BOT model under BOT Law. An additional amendment to Law No. 5335 in 2014 categorized the agreements under this model as “private law” contracts.
► 2006: Introduction of an additional article into the BO Law categorized all BO agreements under the scope of the law as “private law” contracts.
► 2013: Law No. 6428 on the Construction, Renovation and Purchase of Services by the Ministry of Health by way of the Public-Private Cooperation Model and Amendments to Certain Laws and Decrees with the Force of Law (“BLT Law”) introduced the BLT model in the health (and to a lesser extent the education) sector. The BLT Law explicitly states that project agreements executed under the BLT Law will qualify as private law agreements for a period of up to thirty years, excluding the fixed investment period set forth under the project agreement.
PPP Models in Turkey Now
After the legislative developments outlined above, the prevalent PPP models currently being implemented in Turkey include the following:
- Concession: The Law on Concessions Regarding the Provision of Public Services sets forth the legal framework of the concession model, which is defined as the establishment and operation of new facilities or the operation of already established facilities, through which public services are provided by a private party pursuant to a long-term agreement signed with the administration. The agreement in the concession model is subject to administrative law. The profit, damage, and loss associated with providing public services belong to the private party. It was enacted prior to the founding of the Republic of Turkey, but as the next two examples indicate, the concession method remains a popular model for delegating public services through privatization of existing infrastructure. Due to the high volume of applicants in privatization projects, concession contracts have evolved from rudimentary summary contracts into comprehensive and detailed agreements adaptable to the needs of investors.
- Transfer of Operating Rights (TOR) - concession method: The TOR model in general refers to an administration transferring the operation of its assets for a designated period to the private sector in consideration for a payment. Ownership of the asset remains with the administration.
- Build Operate Transfer (BOT) – concession method: Today, the BOT model and concession method are used concurrently for many PPP projects. The concession route is used mainly for the transfer of operating rights to existing publicly-owned infrastructure, such as ports, roads, and electricity distribution facilities. This method was used to transfer the operation rights to sizeable ports, as well as a portion of the entirety of the country’s vehicle safety inspection stations, to the private sector.
- Build-Operate-Transfer (BOT): Under this model, the private party finances, builds, and operates the project during the term of the agreement. At the designated expiry date, the private sector partner returns the property to the administration.
- Build-Operate (BO): Under the BO model, the private party finances, builds, and operates the project. However, the ownership of the property remains with the private party even after the expiry of the agreement.
- Build-Lease-Transfer (BLT): The BLT model is predicated on the administration providing a private party with usufruct rights over certain real property, and the private party financing, designing, and building the facilities. The private party then leases the facilities back to the administration for a designated time period and also provides certain operational services. The usufruct right and thus the facilities are handed back to the administration free of charge and without encumbrances at the end of the contract period.
The basic features of the above mentioned PPP models can be found in Table 1.
The lack of a single framework or umbrella legislation for all PPP projects has led to inadequate coordination between the various public bodies carrying out different PPP projects. Both the private sector and the relevant government administrations have long felt that there is a need for framework legislation to consolidate the PPP legal regime. The Ministry of Development (formerly the State Planning Organisation) went so far as draft an umbrella law in 2007 (“Draft Law”). Unfortunately, this Draft Law never came into force, despite having triggered numerous and heavy discussions and excitement among actors across nearly every industry.
Nevertheless, recent government plans and reports indicate that the government intends to enact the Draft Law. Plans to adopt an umbrella framework were included in the latest Government Plan and the 10th Medium-Term Plan (for the years 2016 to 2018) of the Ministry of Development. The Public-Private Partnership Special Committee Report on the 10th Development Plan (for the years 2014 to 2018) also set forth that adoption of a single, clear-cut umbrella law would be the initial step to creating unified legislation, and that revoking a great number of various legislation was necessary in order to harmonize and simplify the legislative schemes. In light of such indications coming from governmental sources, it is not unreasonable to expect some progress to be made by the Government by the year 2018.
Notwithstanding these official pronouncements, our feeling is that excitement about enacting the Draft Law is fading, and the idea of revising the multiplicity of specific micro-level legislation is gaining favour instead. As examples of such surgical interventions, industry insiders suggest that the BLT Law may be revised to limit or remove the need to obtain High Planning Council approval before changes can be made to project agreements. Similarly, informed speculation indicates that the components or triggers of termination on compensation clauses may be changed for projects to be newly tendered.
It may indeed be beneficial to set up a central PPP administration to oversee nationwide PPP policy. Such a PPP authority would be able to coordinate the procedures to be followed in setting the procurement regime and the agreement phase, harmonize when financiers would be given step-in rights, crystalize the general terms and conditions about when the State’s or the Treasury’s debt assumption undertakings would be triggered, and standardize the general obligations of project companies. Whether project agreements and implementation agreements are subject to private law or administrative law is a fundamental decision, and we believe this discretion should be exercised by the legislature and on an industry-specific basis. We therefore believe that the requirement that this decision be made at the level of a properly promulgated law separately for each industry should be retained, or else addressed and resolved directly and specifically in an overarching PPP law. However it is accomplished, if the legislature clearly sets out the procedures to be followed when awarding PPP projects in a framework of national applicability, it would certainly help potential investors to know exactly what to expect when gearing up to enter into a long-term cooperation agreement with the state.
Regardless of the exact scope of the revisions to the legislative framework governing PPPs, one factor that must be kept in mind is the vested rights of concessionaires in ongoing projects. Because PPP projects by their nature span multiple decades, it is very important that investors who have been granted certain rights and privileges in the past are adequately protected from changes in the law. It is crucial to make it absolutely clear that any updates to the legislative framework have prospective effect only. In order to remove all doubt as to the status of existing concessionaires, it may be necessary to make this carve-out explicit by way of provisional articles that directly address this question. These provisional articles will need to be drafted by experts who are intimately familiar with the particular PPP project to be affected, as this particularized effect cannot be attained by using general clauses. If the Turkish government is to continue to present itself as a reliable long-term partner to would-be investors, the importance of shielding existing PPP partners from changes to the law cannot be overemphasized.