Project Turkey

Despite the obvious geopolitical problems in the neighbourhood, Turkey’s PPP market has been in great shape.

In fact, things have been working so well that prospects for more business are not tied solely to political issues. If anything, the market could end up being a victim of its own success, with the spectre of capacity constraints potentially impeding future activity.

In 2015, the healthcare sector was at the forefront of the PPP market, thanks to a number of projects forming the initial phase of the Turkish Healthcare Transformation Programme (HTP) reaching financial close.

The ambitious plan for Turkey’s healthcare sector has its roots in 2003, when the government started the sector’s reform via the 26,000-bed HTP, supported by the World Bank. The €12bn programme is planned to result in new and expanded facilities for about 60 hospitals across the country. It needs the collaboration of the private sector to bring it to fruition.

Attracting the private sector into the plan, however, was going to take some keen commitment around the regulatory framework. The signal of that commitment came in 2013, when the Turkish parliament enacted a new PPP law specific to the healthcare industry.

The law, based on the British PFI model, was tweaked by the Ministry of Health in order to make its build-operate-transfer projects more attractive to sponsors and banks.

“It took a while to get the first projects going,” said Mete Yegin, partner at Yegin Ciftci Attorney Partnership, the Turkish law firm Clifford Chance cooperates with in Turkey. “It needed hand-holding at various levels and the active participation of banks in structuring deals to ensure they would fly.”

Perhaps the key adjustment was the formula to mitigate inflation and foreign exchange risks.

With funding denominated in hard currency, hedging was of critical importance to the success of these projects, said a banker in Turkey.

Projects were awarded on the basis that the private developer would act as facility manager, providing building maintenance and non-clinical services, while medical services will remain the remit of the Ministry of Health.

PPP plaudits

Turkey’s healthcare PPP law has won plaudits and so have some of the ensuing projects themselves. The largest hospital in Turkey’s first pipeline of PPPs, Ankara Bilkent Integrated Health Campus, which reached financial close in May 2015, was awarded “Turkish deal of the year” by IFR’s sister publication Project Finance International.

At the time, Bilkent achieved the longest tenor for any non-export credit agency-covered commercial facility in Turkey. It was also the first PPP project with pure commercial facilities, where some of the Turkish banks involved as well as the international lenders provided financing with a door-to-door tenor of 18 years – a pioneering long tenor for financing by Turkish banks.

“The domestic banks feel the need to support these very large projects as there is public benefit to them,” said Yegin. “They are also able to leverage their experience to bring local knowledge to the deals.”

Clifford Chance advised the lenders.

Not long afterwards, the debt was signed for the €1.12bn Etlik Integrated Health Campus PPP. The financing differed from the slightly larger Bilkent deal, which featured an almost exclusively Turkish bank group. In the case of Etlik, a combination of 12 lenders came into the transaction, with €880m of debt provided by European and Turkish commercial banks and multilaterals.

The tenor on the A and B loans was 18 years.

Lending over such long tenors is a sure sign that the Turkish loan market is maturing.

“It would have been very unlikely to see lending out to 15 and 18 years like this, even just five,10 years ago,” said Yegin.

As well as maturities being extended, pricing also shifted during 2015, with the Etlik deal showing at around 450bp, representing a drop of about 100bp from where Turkish banks lent to Bilkent. Etlik reached financial close in December 2015.

This was all achieved against the backdrop of war being waged near its borders, a massive refugee crisis, a government unable to form a working coalition and a falling Turkish lira.

Acceptably bankable

The successful closings of, Bilkent, Etlik and other healthcare PPP projects confirmed the acceptance and bankability of these projects.

“It’s been a year of good news in the Turkish PPP market,” said Jean-Patrick Marquet, country director for Turkey at the EBRD. “But there are still a lot of projects to be financed and there are signs that the market is approaching some capacity constraints.”

Eight projects from phase one of the hospital PPP programme have reached financial close and the tender process for the second phase is ongoing.

“The international financial institutions (IFIs) are almost full, the international banks are struggling with the long tenors on the loans due to Basel III and the domestic banks are already exposed,” said Marquet. “We need to diversify the financing sources – both debt and equity.”

Marquet explained that the EBRD has approved a total of €600m for lending to Hospital PPPs in Turkey, but with €300m of that sum already used across three projects, there were proposals to extend the lending envelope to €950m.

“But that is conditional on mobilising new sources of debt,” he said.

And this new source of debt is likely to come from a couple of avenues. Insurance companies, stuck in a world of low interest rates, are increasingly showing more confidence in infrastructure projects as they search for assets that provide long-term safe cashflows at a return higher than available in the bond market.

The participation of institutional investors has been a notable trend in wind-farm projects from northern Europe, but there is a surfeit of suitable projects available in which to invest and, so, their net is set to be cast further afield. It may yet take some time before they are completely convinced about Turkish healthcare, however.

“We’ve not seen big insurance companies or pension funds coming to the market as yet, but the project bond structure is being considered to bring in a wider array of investors,” said Yegin.

Bankers agree that it may be a bit early for insurance companies and pension funds to invest in the projects, as the assets are not at the stage to generate cashflows.

They expect institutional investors to first make their presence felt once there is better access to the more traditional bond markets.

Here again, the IFIs are playing a role in preparing the ground for the development of such a market.

As well as being a reassuring presence in the lending process, the EBRD is also intent on promoting bonds as a means of recycling debt.

“The EBRD is looking at providing a partial guarantee on bonds in order to get an investment-grade credit rating that would be attractive to bond investors,” said Marquet. “There is a pilot project underway that could result in something coming to market in the second half of the year.”

There are also strains on the equity side of the projects, with the resources in the large Turkish sponsors also being stretched.

“We need to bring financial sponsors, offering to co-invest, into the mix,” said Marquet.

That may be a trend in the offing, but, for now, the local sponsors continue to go after the business aggressively. That will likely change as the calendar of PPPs is rolled out.

“We’ve not seen much in the way of international sponsors,” said a banker. “But local groups will be much more challenged as the banking system itself becomes challenged.”

Local banks are experiencing a relative decline in revenue-generation and profitability and so their capacity and appetite for long-term lending is tempered. Even though local liquidity is still a force to be reckoned with, domestic banks are likely to become more selective in the choice of project they lend against.

It certainly suggests that international construction companies, PE funds and PFI specialists with established relationships with international banks may be more evident in the market as Turkey pursues its investment plans.

And healthcare is not the only game in town.

Template for success

As seen in other countries that implemented availability-based PPP schemes for the first time, Turkey will be able to use its template for other sectors, such as schools, prisons and, most importantly, for the improvement of its infrastructure.

“The success of the healthcare PPP law is repeatable but at the moment the law is particular to each sector,” said Marquet.

“Education is a big priority for the government, as it needs to upgrade and expand in that sector,” he said. “We are in discussions with the Ministry of Education and we are hopeful that a PPP programme might be launched.”

But there is more.

Health, infrastructure and energy are top priorities for the country, as such projects are seen as the growth engine for the economy.

Each sector is seemingly jockeying for position.

“Railways might overtake education projects,” suggested Yegin.

Already, eight teams have submitted bids for the long-awaited Northern Marmara highway build-operate-transfer project.

The PPP market in Turkey has already proved its relevance in recent years and it is expected to gain even more importance in the future.

The authorities have shown that they understand the benefits of involving private companies in the provision of public services and infrastructure and that these investments are essential in driving economic growth.

A fast-growing economy, a growing track record in successful PPPs, and developing capital markets will continue to attract international banks to Turkey. The conditions should also start to pique the interest of a wider cross-section of investors and sponsors alike. There is a lot of business to be done.