Private-public partnership projects reach $88 billion

Mustafa Sönmez -Hürriyet Daily News  April/28/2014

Instead of the state putting on an investor cap for public infrastructure investments that are mostly in the energy, transportation and port sectors, the state has been championing public-private partnership (PPP) projects undertaken by local-international consortiums. These PPP projects totaled 167 at the end of 2013, with the value of the projects reaching $88 billion.

With this PPP model which is particularly supported by the World Bank, many projects in several countries have been completed and are ongoing. In the PPP system, three basic aspects of support are sought from the state. 1) The allocation of public land as well as public assets such as coasts, forests and water resources. 2) The guarantee to buy the produced energy or other services for a period of 25-30 years. 3) Assurances to international banks that debts will be covered jointly during the building of projects as necessary.

Treasury guarantee

Last week, a Cabinet decision published in the Official Gazette regarding the “Treasury guaranteed credit” part of the PPP model began attracting attention. The Undersecretariat of the Treasury will provide guarantees to assume responsibility for debts in build-operate-transfer projects worth 1 billion Turkish Liras and in build-lease (BL) projects of the Health and Education Ministry whose minimum investment is 500 million liras.

The decision in question will include what Prime Minister Recep Tayyip Erdoğan defines as mega projects which are either planned or underway, such as Istanbul’s third bridge and third airport, the Gebze-İzmit Highway Project and Kanal Istanbul. Educational campuses to be built in eight provinces and city hospitals to be built in 15 provinces will also benefit from the new regulation.

The decision in question will cover those mega projects that have a total investment value of $88 billion – most of which were launched by businessmen known to be close to the ruling Justice and Development Party (AKP).

Funding facilities

With this method, the top limit of the Treasury assurance will be $3 billion. However, it was announced that the projects that have been advertised for auction will be exempt from this limit. This means that in those projects such as the third bridge and the third airport, the Treasury will step in if they experience any financial trouble.

Those public institutions which seek financial support for their projects will submit a written application to the Treasury; this demand will be submitted to the Cabinet together with the proposal of the Cabinet minister asking for financing. If the Cabinet approves according to the decision of the Treasury, the relevant debt takeover agreement will be signed. However, the signed debt acceptance agreements will not be published in the Official Gazette, meaning the public will not be able to learn which projects were provided Treasury assurances.

Within the scope of this practice, there will be credits obtained from abroad. In the case that debt acceptance is sought from the Treasury, the amount that needs to be paid by the relevant creditor will be reported to the undersecretariat. The treasury will constitute a “state external debt register.”

PPP trend

The PPP trend in Turkey dates back to a law that enabled private companies to generate electricity in the early 1980s.

Since the enactment of a law that facilitated the build-operate-transfer model in 1994, 167 project contracts have been signed with various models with a total contract value of around $88 billion, particularly in the transportation and energy sectors as of 2013, according to Development Ministry data.

When looking at other countries in the world, Brazil leads in terms of PPP projects with $402 billion, according to World Bank data that also shows that India has inked $306 billion in contracts, followed by Russia at $127 billion, China at $119 billion, Mexico at $115 billon and at Argentina $91 billion. Turkey ranks seventh out of the top 10.

A $9 billion tranche of Turkey’s $88 billion projects were planned before the AKP period, while the remaining $79 billion was planned during the party’s rule. Around $46 billion of the projects, including the “mega project” slated for the northern section of Istanbul, were planned between 2010 and 2013.

As a new development, officials have decided to use the PPP model to ramp up the number of health facilities with a law that took effect in March 2013. A Public Private Partnership Office established under Health Ministry in 2007 has been one of the most important tools in executing PPP operations in an organized and systematic way. This entity has taken a number of initiatives in many provinces regarding the establishment of new health facilities.