TURKISH TREASURY PPP EXPERIENCE

Hülya PAŞAOĞULLARI Head of PPP Department Turkish Treasury

November 30, 2017 Astana PPP Market Overview in Turkish Treasury’s Role Debt Assumption Commitment Major PPP Projects in the Pipeline Strengths and Challenges PPP Market in Turkey

Potential Benefits

• Utilize private sector knowledge, efficiency and innovative potential • Enhance the quality, effectiveness and efficiency of public services • Provide flexibility by mobilizing private funds • Appropriate risk sharing between public and private sector Key Success Factors

• Affordability, feasibility, and risk sharing perspectives • Rational pricing, solid feasibility studies, and optimum risk allocation among stakeholders • Efficient long term contract management • Effective monitoring mechanism for contingent liabilities

Model- Legal Framework -Sector

Build-Operate-Transfer (90 project, %41) Law no 3996, 3465, 3096 In 2017 prices OPERATION CONSTRUCTION TOTAL Motorway, port, airport, marina, bordergate, power plant # PROJECTS 186 35 221 Build-Operate (5 projects, %2) INVESTMENT 19 Bn $ 41 Bn $ 60 Bn $ Law no 4283, thermal power plant AMOUNT Build-Lease-Transfer (21 projects, %9) CONTRACT 54 bn $ 77 Bn $ 131 Bn $ Law no 6428, 5396, 652, 351 AMOUNT* Hospital collage, dormitory, school Source: Ministry of Development *: Investment amounts and government revenues Transfer of Operating Rights (105 projects , %48) Law no 4046, 5335, 3096, 4458 Airport, port, power plant, electricy distribution 4

PPP Process in Turkey

Strategy Technical Contract SPV

Papers Drafting Establishment

& &

Financial Medium Term Technical Land Delivery Program Specification Economic

TENDERING Financial OPERATION APPROVAL

Sector Debt Closure CONTRACTING FEASIBILITY & FEASIBILITY Social

Strategies Assumption CONSTRUCTION PPP PREPERATIONPPP Procedures

5 Credit Enhancement Tools

Implementing Agencies: Revenue/ Payment Guarantee Energy: Operation oriented input/output guarantee, payment obligations Transportation: Minimum traffic guarantee payments, land expropraiton etc. Health: Lease and service payments, several compensations etc. Overall: Conditional specific compensations, several project specific liabilties

Turkish Treasury: Debt assumption commitment

Ministry of Finance: VAT, stamp taxes & duty exemptions

Other: «Step-in» rigths for lenders International arbitration

2023 Goals for Motorway Projects (MoTransportation)

Shortest contract period is the commen bidding criteria. Equity to debt ratia to be minimum 20/80. Shadow toll or minimum traffic revenue guarantees are provided. 8 motorway projects signed, 18 billion USD investment amount. Total contracted PPP projects 1361 km, 3 bridges and underground . Built Lease Operate: City Hospitals (MoHealt)

BLT Model: Totally 34 PPP projects in the pipeline. The SPV will supply and maintain the hospital facilities, while the provision of medical care and services will remain under the responsibility of the MoH. 21 projects are contracted with a total investment amount of 12 billion USD and a total bed capacity of 30.691, 4 hospitals became operational, 14 projects have reached financial close. 13 new projects are at several tendering processes. Source: Ministry of Health

Treasury’s Role in PPP Projects

Contingent liability management • Feasibility reviews in terms of economic and financial terms

Treasury investment guarantees (energy) • Monitoring PPP related commitments

Providing debt assumption commitment (transportation) • Pre-Tendering Contract Assessment • Post Tendering Contract Asessment • Negotiations on the Finance Documentation • Financial Closure 9 Debt Assumption Commitment (2012 - …)

Treasury debt assumption can be provided only if the project assets are taken over by the public administration in case of an early contract termination due to • public authority default, • project company default, or • any force majeure event.

As the assets are transferred to government, then the liabilities are covered by the Treasury in terms of the already disbursed amounts from the senior loans.

Limitations Model type: Only for BOT model and BLT models Budget type: Only for general & special budget public institutions Debt type: Only for foreign financing, senior loans Investment cost limit: A threshold for the investment amount for BOT projects minimum 1 billion TL; for BLT projects minimum 500 million TL Annual treshold: A budgetary debt assumption limit – 4 billion $/annual (@ 2017) Partial assumption: Authority default & force majeure % 100 of principle amount, company default % 85 of principle amount

Debt Assumption Commitment: Projects

Total Project Loan Amount Project PPP Model Date Cost (USD) (USD)

Build-Operate- 11.12.2012 1.239.863.000 960.000.000 Transfer

Northern Marmara 13.05.2014 2.318.000.000 Build-Operate- Motorway 3.456.244.239 Transfer (3rd ) 11.03.2016 420.000.000

Gebze--İzmir Build-Operate- 05.06.2015 6.312.392.047 4.956.312.328 Motorway Transfer

TOTAL 11.008.499.286 8.654.312.328 Eurasia Tunnel ()

BOT model, 1st debt assumption project Highway tunnel going underneath the seabed Connects Asian and European sides Cost USD 1.2 bln, loan USD 960 mln Construction started in 2011 Operation started in 2016 Operation period: 26 years Gebze-Orhangazi-İzmir Motorway (incl. Bridge)

BOT model Over 400 km of motorway – Connecting İstanbul, and İzmir İzmit Bay – 4th longest in the world Samanlı Tunnel- longest motorway tunnel in Turkey Total Investment Amount: USD 6.3 bln / Loan: USD 5 bln Partial financing is applied and in 2015 financial closure with refinancing The bridge is now operational, full completion expected in 2019 Operation period 15 years

Third Bosphorus Bridge: Yavuz Sultan Selim

BOT model Total length 95 km including 3rd Bosphorus Crossing Bridge Total cost: USD 3.5 bln / Loan: USD 2.7 bln Approximately 1875 meter long 3rd Strait bridge that is the most prominent part It has 2x4 lanes of motorway and 2x1 lanes of railway Inauguration was in Aug. 2016 Operation period: ~ 7 years, 9 months

İstanbul New Airport

BOT model Debt assumption for €4.5 bl is provided by the implementing agency (DHMI) 25 years operation period, contracted in 19 Nov. 2013 Contract Value: EUR 22 bln (excl. VAT) 4 phases, construction of the initial phase is set to be completed by 2018 150 million passengers capacity, initial capacity 90 million passenger per year Northern Marmara Motorway (Third Bridge Conjunction Roads)

BOT Model 2 projects: Asian Side (196 km) & European Side (88km) Total Investment Amount: USD 2.5 bln / Loan: Under discussion Treasury debt assumption will be provided Expected financial closure Q4, 2017 3 year investment period, around 5 year operation period

16 Çanakkale 1915 Bridge & Malkara-Çanakkale Motorway

BOT model Bridges and sides of the Strait Cost USD 2.61 bln, loan under discussion The 1915 Bridge will be the world's longest bridge with a central span of 2,023m Construction starts in 2017 and completion is expected in 2023 The contract period is 16 years 2 months and 12 days

Strengths Strong economic fundamentals Dynamic construction and banking sector High level of government support for PPP programme Existing successful PPP track record Effective credit enhancement tools Comprehensive legal framework

There is room for improvement….

Effective appraisal and selection of projects The institutional capacity increase Central administrative structure for the PPP Projects Harmonization among PPP Laws Effective monitoring and evaluation system Hülya PAŞAOĞULLARI Head of PPP Department Undersecretatiat of Turkish Treasury Thank you for your attention! [email protected] +90 (312) 204 73 63 APPENDIX

20 Treasury Investment Guarantee (… - 1999)

Treasury used to provide Investment Guarantee until 1999 in energy projects via BOT, BO and TOR models.

Article 11 of the General BOT Law (Lw N.3996), regulates Treasury Investment Guarantees. Council of Ministers is authorized to extend Treasury Investment Guarantees.

Guarantee Types

• payment obligations of the public institutions from purchasing commitments and non- performance of supply commitments • repayment obligations of the public institutions • assuming the foreign debt in case of contract termination • bridge loan repayment obligations of the public institutions or the appointed company Treasury’s Involvement in PPP Projects

Debt Assumption (2012-…) Investment Guarantee (…-1999)

Applicable for the projects undertaken Applicable for sub-sovereign by general budget institutions and institutions (i.e. SOEs, municipalities special budget institutions and special budget institutions)

In case of termination of IC and transfer In case of non-payment/default of the of the Facility to the Implementing guaranteed public institution, Treasury Public Authority, Treasury assumes will pay the defaulted amount on outstanding foreign debt behalf of that institution

Treasury will become the primary Public institution will become the obligor of the outstanding foreign debt primary obligor of the outstanding foreign debt

Used to enhance the loan quality Used to enhance the creditworthiness of non-central government institutions