A legal primer on project finance in Turkey
Turkey has experienced an infrastructure boom over the past decade with a variety of projects being completed. Current projects include: Istanbul’s new airport, Kanal Istanbul, the Istanbul Grand Tunnel (the world’s first three-story tunnel), the Northern Marmara Highway, The Trans-Anatolian Natural Gas Pipeline (“TANAP”) project, which transports Azerbaijani gas to Turkey, and the upcoming Halkalı-Kapıkule high-speed train project, connecting the metropolitan area of Istanbul to the Turkish-Bulgarian border.
Project finance is commonly used as a source of funding in major Turkish construction projects of this kind in multiple sectors, including oil and gas, power, renewables, infrastructure and telecoms. Foreign investors are incentivised to participate: for example, stamp tax is exempt from loans given by banks to Turkish borrowers if the loans are used in Turkey.
As a result of such incentives, together with the potential of the Turkish economy, project finance has also helped to fund projects in the healthcare and telecommunications sectors. These have been encouraged by the government to help improve the living standards and welfare of a young population of 81 million people, which is growing by an additional one million every year, coupled with rapid urbanisation.
Turkey’s investment climate for project finance is further strengthened by domestic and international laws that protect investments and provide for international arbitration in agreements. There is no specific law governing project financing. Instead, relevant provisions of the Turkish Commercial Code numbered 6102, the Turkish Code of Obligations numbered 6098 and the Turkish Civil Code numbered 4721 are applied.
Nor is there any dedicated government authority or agency tasked with assisting or regulating project finance transactions. Depending on the relevant sector, certain licences or permits may be required from the relevant government authority (such as the Energy Market Regulatory Authority, the Ministry of Energy and Natural Resources, and the Ministry of Environment and Urbanisation).
Financing infrastructure projects through project finance offers multiple benefits: risk sharing, extending the debt capacity, releasing free cash flows, and maintaining a competitive advantage in the market. Project finance in Turkey enables the issuance of corporate repayment guarantees, so projects can be financed off-balance sheet. Sponsors can extend their debt capacity and raise funding for the project based on the contractual commitments.
Project finance in Turkey also allows sponsors to share project risks with other stakeholders. The structures used require sponsors to spread the risks through a network of security arrangements, contractual agreements, and supplemental credit support to investors.
In addition to the government, project finance in Turkey involves a range of stakeholders: sponsors, construction companies and lenders on projects and project financings which include both Islamic and conventional financing. Over recent years Turkey has also developed a wide range of Public and Private Partnerships (“PPP”) projects, implementing $135 bn worth of PPP projects in a variety of sectors: energy, ports, airports, highways, road and railway sector projects.
Turkey has favourable investment legislation for PPP investments that can be achieved through various models, such as build-operate, build-operate-transfer, transfer of operational rights, etc. PPP projects are therefore not a new concept to Turkey – they are derived from Turkey’s concession model, which involves the transfer of the right to provide public services to private entities by the way of an administrative law contract with a relevant administrative body (i.e. the Turkish Commercial Code numbered 6102).
Notwithstanding Turkey’s short-term economic challenges, facing both the government and international investors, the impetus for long term financing of projects to develop the country’s infrastructure remains significant. Once fiscal and financial stability are restored, confidence will quickly return. This will allow the pipeline of future projects and capital inflows supporting them to stage a strong recovery.