Given its size and scope, financing the Gebze-Orhangazi-İzmir Motorway was no easy affair.

With a total cost of around $6.3 billion, the Gebze-Orhangazi-İzmir Motorway Project, (including the Izmit Bay Crossing and access roads), is one of the largest infrastructure projects in Turkey and includes erecting the fourth-longest suspension bridge in the world. The motorway, once complete, will reduce the average journey time from Istanbul, the largest city and financial capital of Turkey, to Izmir, located on the Aegean coast and the third-largest city in Turkey, from 8-10 to 3.5-4 hours.

Taking into consideration the immense scope and cost of such a project and due to the requirement of a rather complex financing structure, the Project is being structured as a public private partnership under the BOT model. Although construction of the project as a whole is expected to be complete in 2019, construction is ongoing, with certain sections moving to the operation phase as they come online, such as the suspension bridge, which is due to be operational in the first half of 2016. The legislation does not require project companies to commence operation as a whole and the implementation contract of the Project was designed to anticipate partial and sectional acceptance.

Main Pieces of Legislation

The main pieces of legislation governing the Project are the Law on the Procurement of Certain Investments and Services within the framework of the Build-Operate-Transfer Model (“BOT Law”), and the Council of Ministers’ Decree Concerning the Implementation Procedures and Principles of Law No. 3996 (“BOT Decree”), which together comprise the general procedures and principles relating to the appointment of joint stock corporations and foreign companies for building, operating and transferring certain investments and services within the framework of a Build-Operate-Transfer model. The awarding authority of the Project is the General Directorate of Highways (Karayolları Genel Müdürlüğü) (“the Directorate”). The Directorate is a public legal entity, established under the Law on the Organization and Duties of the General Directorate of Highways (“the Highway Law”), and affiliated with the Ministry of Transportation, Maritime Affairs, and Communications, but having its own private budget.

Forming the Project Company

The Project was announced to the public in 2008 and the Directorate started preparations for the project and the tender. The appointment commission awarded the tender to a group of sponsors including Nurol İnşaat ve Ticaret A.Ş., Özaltın İnşaat Ticaret ve Sanayi A.Ş., Makyol İnşaat Sanayi Turizm ve Ticaret A.Ş., Astaldi S.p.A, Göçay İnşaat Taahhüt ve Ticaret A.Ş., and Yüksel İnşaat A.Ş. in 2009.

The applicable legislation required the winning bidder company or companies to incorporate a special purpose joint stock company under the laws of Turkey. The sponsors incorporated Otoyol Yatırım ve İşletme A.Ş. (“Project Company”), and the implementation contract was signed between the Directorate and the Project Company in 2009 (“Implementation Contract”). The term of the Implementation Contract is 22 years and 4 months, 7 years of which are allotted for the construction period. Both the applicable legislation and the Implementation Contract oblige the Project Company to and transfer the Motorway to Directorate at no charge, in a well-kept, working and useable condition, and free of any debt or obligations, at the end of the operation period. Although the Project Company subcontracted its construction and operation duties following the execution of the Implementation Contract, it remains liable to the Directorate for all construction and operation work under the Implementation Contract.

Financing the Project

The Project Company is responsible for financing the Project. Naturally due to the size and complexity of the project, its financing has gone through various stages. Initially, the Project Company considered financing through Turkish banks and international institutions in order to raise the entire amount necessary to finance the Project. In the second half of 2012 however, it was agreed by the relevant parties to divide the financing of the Project into two phases. Later on, the financing of the Project was further structured into three phases.

The first phase of the financing (“Phase I”) covers construction of the road from Gebze to Orhangazi at a cost of USD 2,800,000,000. The financing was made available by foreign branches of eight Turkish banks (i.e. Akbank T.A.Ş., Finansbank A.Ş., Garanti Bankası A.Ş., Türkiye Halk Bankası A.Ş., Türkiye İş Bankası A.Ş., Türkiye Vakıflar Bankası T.A.O, Yapı ve Kredi Bankası A.Ş., and T.C. Ziraat Bankası A.Ş.). Lenders agreed to make a total amount of USD 1,400,000,000 (half of the total project cost of Phase I) available. The sponsors committed to make contributions for the remaining amount of project costs, to cover the other half of the total project cost of the first phase. The financial close of Phase I occurred in June of 2013.

Shortly before the commencement of negotiations for the financing of the second phase of the Project from Orhangazi to Bursa including the Ovaakça Intersection (“Phase IIA”), one of the sponsors, Yüksel İnşaat A.Ş. decided to exit from the Project. Its shares in the Project Company and the EPC contractor of the Project, which was established in the form of an ordinary partnership, were acquired by three of the five remaining sponsors.  As the transfer of shares in the Project Company was made among current shareholders, it was only subject to the Directorate’s approval, whereas the High Planning Council’s approval upon the affirmative opinion of the Directorate would have been required if it were a transfer to a third party. The exit of one of the sponsors resulted in a hurdle of amendments to certain Phase I finance documents. This was followed by the Phase IIA financing in August 2014, with the same lenders making available an additional amount of USD 600,000,000.

The third phase is referred to as “phase IIB” and covers the financing in the Bursa section including the Karacabey Intersection, and the Balıkesir – Edremit exit sections to the İzmir section (“Phase IIB”). This phase was made concurrent with the refinancing of the initial two phases.  In addition to the existing lenders under Phase I and Phase IIA, Deutsche Bank AG London Branch also joined the lending group for the last phase of financing which was a combination of the refinancing of Phase I and Phase IIA, and the financing of Phase IIB worth a total amount of approximately USD 5,000,000,000. The financial closing of this large phase of financing was completed to the Project Company in July, 2015.

The Project benefits the Debt Assumption of the Turkish Treasury

Following the first-of-its-kind pioneer debt assumption agreement between the lenders and the Turkish Treasury on the Istanbul Strait Road Tunnel Crossing Project (Eurasia Tunnel Project), a debt assumption agreement was also signed between the Republic of Turkey Prime Ministry Under-Secretariat of Treasury (T.C. Başbakanlık Hazine Müsteşarlığı) (“Turkish Treasury”) and the lenders of the Gebze-Izmir Motorway Project. According to the terms of the debt assumption agreement, the Turkish Treasury undertakes to assume the amounts specified in the debt assumption agreement upon termination of the implementation contract. Debt assumption is not a Treasury guarantee, and the Turkish Treasury does not guarantee the obligations of any public institution or the Project Company. However, it does undertake to assume certain outstanding amounts due to the lenders under the senior loan facility agreements in the event that the implementation contract is terminated prior to the expiration of its term. 

Despite the fact that there were only basic provisions with respect to debt assumption during the negotiations for the financing of Phase I, the legislation applicable to debt assumption has evolved over the course of the Project’s phases. In Phase I, the Turkish Treasury entered into a debt assumption agreement with the lenders in accordance with the BOT Law and the Kaw Concerning the Public Financing and the Arrangement of Debt Management (“Public Finance Law”). In 2014, shortly before the financing of Phase IIA a regulation concerning Debt Assumption to be realized by the Treasury (the “Debt Assumption Regulation”) was enacted. Thus, debt assumption-related transactions after the enactment of the Debt Assumption Regulation have also been performed in line with the provisions of the Debt Assumption Regulation, with the exception of certain provisions that are not applicable to the Project. 

The Debt Assumption Regulation requires the sponsors to provide joint and several surety in an amount that is at least 10% greater than the largest instalment amount to be made by the project company under the senior loans for the financing costs to be subject to debt assumption.  The shareholders of the Project Company have provided such suretyship in line with the terms under the Debt Assumption Regulation. In light of the foregoing, the Project Company entered into challenging discussions and negotiations at each stage of the financing, (as well as in the case of Yüksel İnşaat A.Ş.’s exit), with the Directorate and the Turkish Treasury due to the sophisticated financing structure, as well as various changes and amendments to the applicable legislation.

It’s a Landmark Project

From the beginning stages of the Project up to the present day, the Gebze-Orhangazi-İzmir Motorway Project has been a landmark for financing infrastructure-related PPPs using the build-operate-transfer model in Turkey. Due to the sheer size and scale of the Project, its financing was a challenge for all the relevant parties involved in the Project. The financing underwent several difficult stages not the least of which was the exit of a sponsor and the subsequent refinancing phase. Additionally, it has undergone various processes with the Directorate and the Turkish Treasury, and it has been subject to certain changes of law over the years. As has been the case since its initial phases, the Project’s organization, financing structure, and its transaction documents are considered to be guiding examples for other PPP projects to follow.