Ercüment Erdem Prof. Dr. H. Ercument Erdem

Public-Private Partnerships in The Health Sector

May 2013

Public-private partnerships may be defined as the realization of long-term maintenance, operation and construction of public infrastructure investments by the private sector. Public services are thus provided in collaboration for a determined period of time and on the basis of mutual risk allocation through a contractual relationship between the public and private sectors.

Under this model, the public side gains an alternative source of financing for infrastructure and the provision of services, while the private sector obtains an opportunity that may be attractive with regards to risk allocation. Private sector participation is increasing in Turkey day by day in the health sector where the need for speedy and qualified infrastructure and service is dominant. The Law on the Construction and Renovation of Facilities and the Procurement of Services via Public-Private Partnerships by the Ministry of Health and the Amendment of Decrees Having the Force of Law (“Law No. 6428”) entered into force with its announcement in the Official Gazette on March 9th, 2013.

Historical Development

In Turkey, the roots of the public-private partnership model in the health sector may be found in the Health Services Fundamental Law No. 3359 (“Law No. 3359”). Law No. 3359 enabled public health institutions to be converted into public corporate entities by way of a Council of Ministers decision. The first step towards public-private partnership was thereby taken with the introduction of the concept of enterprise to the health sector.

The first regulation explicitly providing for the provision of health services with public-private partnerships was made with the addition of the Supplemental Article 7 to Law No. 3359. Pursuant to Supplemental Article 7, the construction of health institutions may be procured from private entities where the Higher Planning Committee deems it necessary.

The explicit regulation brought by the Supplemental Article 7 also fulfills the Constitutional requirement that public services to be procured from private entities by way of private law contracts shall be determined by way of law.

Pursuant to Supplemental Article 7 of Law No. 3359, the renovation of the facilities, procurement of medical equipment, management of the commercial areas within the facilities and the procurement of non-medical equipment of health institutions may also be realized by the private party .

The Regulation on the Construction of Health Facilities in return for Lease and the Renovation of Health Facilities in return for Management of Non-Medical Services and Areas (“Regulation”) entered into force in 2006. The Regulation’s goal is to aid in determining the application of the principals of Supplemental Article 7 of Law No. 3359.

Law No. 6428

Various actions of annulment were initiated against tenders realized under Supplemental Article 7 of Law No. 3359 and the Regulation, and a claim of unconstitutionality was made within this context. The Council of State found this claim to be of importance, thereby carrying the issue before the Constitutional Court. The claim of unconstitutionality was based on the fact that Supplemental Article 7 did not regulate the matter in detail and many aspects that should have been regulated by law were in fact regulated with the Regulation.

A new regulation was required in order to eliminate the criticism directed at Supplemental Article 7 of Law No. 3559 and to facilitate the financing of ongoing projects. Accordingly, Law No. 6428 was prepared and Supplemental Article 7 was abolished. The negative implications that a possible abrogation decision to be handed down by the Constitutional Court would create were thereby avoided since Constitutional Court decisions cannot be made retroactively. Since Supplemental Article 7 was abrogated, it may even be said that claims of unconstitutionality against said article have become void.

Pursuant to Law No. 6428, legislation making reference to Supplemental Article 7 of Law No. 3359 shall be deemed to reference Law No. 6428. Projects tendered before the promulgation of Law No. 6428 shall be governed by the old legislation. However there is an exception to this. For projects tendered while Law No. 3359 was operative, project specifications regarding the commercial management by the private party of areas outside the health facilities shall not be applied.

According to Article 10 of Law No. 6428, the application principals of the law shall be regulated with a regulation to be prepared by the Ministry of Health and promulgated by the Council of Ministers. However, until the entry into force of such new regulation, the Regulation for the application of Supplemental Article 7 of Law No. 3359 shall continue to be applied.

Law No. 6428 sets forth that “The Ministry of Health and its related institutions may, within the context of the preliminary project, preliminary feasibility report, basic standards, tender document and provisions of the agreement, and with the conditions determined with the agreement for the independent and continuous right of superficies to be established by the Ministry of Finance, have facilities constructed on immovables in the possession of the Treasury in return for a fee determined within the agreement”.

In the same context, the renovation of facilities already in use may also be realized by the private party in return for the provision of certain services in the facilities, the operation of commercial service areas and/or the payment of fees in accordance with the standards to be set by the Ministry of Health.

Tender

According to Law No. 6428, the preliminary feasibility report relating to construction works and other documents related to the project are to be prepared by the Ministry of Health. After the Higher Planning Committee has approved the relevant documentation and authorized the Ministry of Health to proceed with the project, the tender shall be held.

Projects planned under Law No. 6428 shall not be subject to the State Tender Law No. 2886 nor the Public Tender Law No. 4734. The tender authority is the highest-ranking administrator of the related unit of the central organization of the Ministry of Health and its affiliated institutions. For works that are to be conducted by local units, the tender authority shall be the highest ranking administrator of such local unit. This provides flexibility to the tender process.

The private party shall provide a bid bond and a performance bond each equal to at least 3% of the fixed investment amount (the total investment amount relating to the construction or renovation works and medical equipment requiring high financial sources as stated within the agreement) or the bid. During the operation period, the investor shall provide a bond in the amount of 1,5% of the fixed investment amount or the bid. Moreover, the private party equity allocated for construction cannot be less than 20 % of the periodic investment amount as determined within the project agreement.

Agreement

A special vehicle company to be established by the private party shall be party to the agreement to be entered into with the Administration. This agreement shall be governed by private law. Its term shall be determined by the Administration and shall not exceed 30 years.

It has been explicitly set forth that the private party shall be liable for all damages which may arise due to their defaulting in respect of their contractual obligations or causing third party damages, and that penal clauses for such circumstances shall be regulated within the project agreement.

Turkish law shall govern disputes arising in connection with the agreement. Courts of the Turkish Republic shall have jurisdiction. However, it is also possible that the dispute be resolved by arbitration in accordance with International Arbitration Law under the condition that the choice of law is Turkish Law.

Financing and Fee

The private party is responsible for the financing of all of the works to be realized within the scope of the project agreement.

Accordingly, the investor shall make periodic investments for such works. Payments shall be made to the investor periodically as determined within the project agreement as consideration for the works and services that are provided and the commercial areas that are operated.

Law No. 6428 provides that payment shall not be made before the completion of the construction. However it may otherwise be stipulated within the agreement that payment be received for completion at different stages and partial delivery of the facility.

The determination of the price shall be made in consideration of the characteristics of the investment, medical instruments, the immovable and whether or not the services and the operation of the commercial areas shall be assigned to the private party. The payment shall be made from the working capital of the Ministry of Health or the central budget.

Thus arises an important opportunity for the investor as works are realized without demand risk for a sum that is determined contractually. Although the assignment of the operation of the services and commercial areas is discretionary, it has been observed that lately the inclination is towards the procurement of such services from the private sector.

Law No. 6428 distinguishes between obligatory and discretionary commercial areas. Accordingly, some of the commercial areas must be included within the health facilities whereas others may or may not be, as determined within the agreement. Since health facilities are often established outside of urban areas, it is a requirement that all kinds of services be provided within the facilities. The provision, whilst responding to this need, may also be deemed advantageous for the investor.

Another provision that may be advantageous for the investor is that an increase equal to half of the Producer Price Index (“PPI”) and the Consumer Price Index (“CPI”) shall be made in the price at term end. There is also a provision regarding exchange rate disparity. Where the investor has obtained financing in a foreign currency, if a change has occurred in the foreign currency exchange rate at the end of a term which is more or less than half of the total of PPI and CPI, the exchange rate difference shall be calculated and added to or subtracted from the price. This provision is also reassuring for the investor.

Incentives, Treasury Guarantee

In line with the old regulations, tax incentives are provided in the form of exemption from the stamp duty set forth under Stamp Duty Law No. 488 and the Charge Law No. 492 for the work projects and papers executed under Law No. 6428.

One of the most important provisions of Law No. 6428 is clause 8/A. According to this provision the Treasury may assume debt for projects which are terminated before the end of the term of the agreement and which are transferred to the relevant administration. The debt assumption shall be realized by way of a Council of Ministers decision. The Treasury shall assume the debts and other financial obligations of the private party under foreign financing schemes. However, in order for this possibility to apply, the project agreement must be for investments and services:

  • to be carried out under Law No. 3996 regarding the Realization of Certain Investments and Services within the Framework of the Build Operate Transfer Model and which are of a minimum amount of one billion Turkish Lira; or
  • to be carried out under Law No. 6428 and Decree having the Force of Law No. 652 relating the Organization and Duties of the Ministry of Education with the build-lease-transfer model and which are of a minimum amount of five hundred million Turkish Lira.

According to this provision, advice regarding debt assumption from the Undersecretariat of the Treasury shall be obtained either before the announcement of the tender specifications, or after the tender and before the signing of the agreement. Debt assumption may be partial or for the entire debt.

Termination

In cases where the private party has not performed his obligations arising from the agreement or Law No. 6428, the project agreement may be terminated by the administration.

If the private party has not fulfilled his undertakings during the designated construction period, the administration shall serve a written notice requesting that the work be completed in a reasonable amount of time. The lenders shall be informed of this situation as well. At the end of the allotted period, if the relevant undertaking is still not performed, the financial backer is granted the right to realize the work by means of amending the shareholding structure of the private party enterprise by coming to an agreement with the administration. If this option is not realized either, the administration shall terminate the agreement.

During the operation period, the administration shall terminate the agreement directly if the private party performs poorly. In the event of failure in the provision of health services, the administration shall procure the work from a third party in the name of the private party. For works other than health services, the private party shall be informed with a written notice requesting that the work be completed in a reasonable amount of time and the lenders shall be informed of this situation as well. If the work is not completed within the given period, it shall be performed in the name of the private party and the amounts paid for these services shall be deducted from the fee of the private party.

On the other hand, if health services become unsustainable in relation to other service, research and development, consultancy or renovation agreements concluded between the public sector and the private party, such agreements shall be terminated immediately. For works other than health services, if the private party does not perform within the amount of time given in the notice of the administration, the agreement shall be terminated by the administration.

Conclusion

Law No. 6428, aims to provide a more stable legal ground for the projects which have been and will be completed as public-private partnerships.

The rules discussed in this article are in line with the old regulation, with some innovations promoting the public-private partnership model and more detailed regulations regarding the process.

It may be said that Law No. 6428 eliminates claims of unconstitutionality related to Supplemental Article 7 of Law No. 3559 and the Regulation, solves problems arising from practice and makes projects financeable for loan institutions; thereby encouraging those projects which have already been tendered and which are still in the process of tendering.