BLACK SEA BLOG: Pass it and they will come

By bne IntelliNews September 4, 2009

Nicholas Watson in Prague -

With a young, growing, increasingly affluent population, Turkey's already inadequate infrastructure clearly needs to be upgraded and expanded to meet its people's needs. That's why the Turkish government and foreign investors are looking keenly toward parliament to pass by the end of the year the country's first all-encompassing public-private partnership law.

Public-private partnerships, or PPP, a form of public spending that allows for private firms to build and run bits of infrastructure in return for decades of payments from the government, has actually been used in Turkey since the mid-1990s, when the government of the time was in dire need of building more power stations to keep the lights on. The hodge podge of laws passed did get about eight of these power stations eventually built, but much of the legislation was attacked on constitutional grounds, which resulted in delays and increased cost for many of the projects.

This new piece of primary legislation currently before parliament will, at a swoop, revoke all the previous laws on PPP and replace them with a single, sweeping law establishing the broad, standardised principles of PPP, including tendering, approval and dispute resolution. After this law is passed, probably by the end of the year, then secondary legislation governing the more detailed aspects of the projects will be introduced next year.

"The idea behind this PPP law is to provide a standardised model across all departments and all levels of government, because the type of projects that Turkey wants to come out of this are not just traditional roads, but will extend to things like hospitals and schools, more social infrastructure, along the lines of what has happened in the UK," says James Douglass, project finance partner and Turkish desk head for the international law firm Linklaters.

The comparison with the UK is apt, since it was there that PPP really took off under the Labour government of former prime minister Tony Blair (though it was first introduced by the previous Conservative government), encompassing not just roads and bridges, but also new schools, hospitals and even prisons. According to data from the PPP Forum, a trade association, some 630 PPP projects have been put in place since 1992, covering investment of about £63bn. And the lessons from this experience have been taken onboard by the Turkish government. "In fact, for the health sector the model produced by Turkey unashamedly borrows from the UK experience," says Douglass.

The health of the nation

It's in health that experts believe the benefits of the PPP law will be first felt. Turkey's public health system is unable to cope with the needs of a growing population of about 72m that's demanding western levels of healthcare. The Ministry of Health is currently tendering for the first new hospital to be built in the city of Kayseri since the 1940s. The estimated $500m PPP project will see the winning bidder build the facilities, supply the equipment and manage services such as the canteen, while the government will supply the medical personnel. The experience of this "smallish" project will then be taken and applied to PPP hospital projects in much larger population centres such as Istanbul and Ankara.

Likewise, education is another area that's coming under increasing pressure from the country's young, growing population and where the government is looking for PPP to play a much larger role.

In transport infrastructure, the government is looking to PPP to help finance the massive project to build a high-speed rail network in Turkey, which will include the $100m Ankara-Istanbul High Speed Train Project and an estimated $300m project to build the new Ankara train station, complete with shops, food outlets and conference facilities, to service that high-speed rail link. It is alos looking to build a third crossing over the Bosporus, as well as kilometres of new mortorways

All this infrastructure is desperately needed and few doubt the investment for these projects would eventually be found regardless of any PPP law. However, what the new law will do, say experts, is simplify and speed up the process as well as attract more investors, particularly foreign ones, to the projects. "I know from long experience that you can go into a project representing a consortium of foreign and local investors and you spend 18 months to two years negotiating about where you are going to litigate or arbitrate any disputes," says Douglass. "The new law will codify access to international arbitration, it will take that issue of the table."

And increasing the pool of potential investors for these big projects is essential given the current tight conditions for raising money and when these new projects are competing for funds that could also be used for the concurrent privatisation process in Turkey, which is seeing everything from ports to sugar factories to the lottery being sold off. PPP in the UK is suffering in the downturn as private companies are finding it hard to fulfil their contracts. In March, the UK government had to step in by setting up a small infrastructure bank within the Treasury that is designed to provide up to £2bn to such schemes struggling from the frozen credit markets.

Industry players say many banks, both foreign and local, are still showing interest in helping to finance these projects. But with some costing $5bn and up - Transport Minister Binali Yıldırım was quoted by local daily Milliyet as saying the Gebze-Orhangazi-Izmir Highway, a 20-year Built-Operate-Transfer project that will comprise a 421-kilometre highway and a bridge, will cost the Nurol-Ozaltın-Astaldi-Yuksel-Gocay consortium that won the tender an estimated $6bn to complete - delays are inevitable. "There's been some projects funded this year, but nothing more than a $1bn. Many of these new projects are between $1bn and $5bn, so the financing for some of these will have to wait until next year," reckons Douglass.

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