1. INTRODUCTION
As a developing country and attraction center of the world, it can be seen in Turkey that the number of major investment projects developed by both public and private sector is increasing rapidly. Many major projects have been developed in recent years as a consequence of increasing number of foreign direct investments. As per the statistics published by the Ministry of Economy, total amount of foreign direct investments has exceeded 110 billion US Dollars in Turkey between the years of 2003 and 2012.
Considering the sizes of these investments, standard financing methods have failed to satisfy the needs of public authorities in the process of preparation and development of many projects. Therefore, public-private partnership models are utilized to satisfy such needs by means of engaging the private sector into the projects to be developed by public authorities.
Public-private partnership models increase their importance day by day in execution of diverse investments. The most important feature of this world-wide model is that the public authorities become a party buying and supervising the services rather than personally rendering such. As a branch of public-private partnership models; build-operate-transfer model is frequently utilized in Turkey.
Public institutions and organizations may procure certain investments and services via build-operate-transfer model pursuant to the Law numbered 39961 if such investments and services require advanced technology or large scaled fundings. Accordingly, the public authority (i) publishes tender specifications, (ii) conducts a tender, and (iii) executes the project related agreements with the awarded private company such as implementation agreement and operation agreement governed entirely by the private law. Through such agreement, the private company will be commissioned to developed a project. In recent years, there has been a significant increase in the number of projects to be developed via built-operate-transfer model. In this respect, İstanbul new airport project, Eurasia tunnel project, third bosphorus bridge and Gebze-Izmir highway project can be examples to the projects to be developed via built-operate-transfer model.
It should be noted that the commissioned company is obliged to procure the required financing of a project under the implementation agreements. Lenders usually demand various securities from the investors as a condition for utilizing large amount of credits to major investments. However, securities provided by the investors do not usually satisfy the creditors. In order to find a way out of this problem, article 8/A has been added to Code of Public Financing2 on February 21 2013 as an alternative solution. Pursuant to such provision, Secretariat of Treasury may assume the debts under certain circumstances in order to secure the loans borrowed by commissioned companies. Considering that the Secretariat of Treasury becomes a party in such investments as a debt assuming party, the reliability of lenders on an investment increases whilst both the lenders and investors are better attracted.
In the light of the foregoing, this article intends to provide brief explanations in relation to (i) the scope, procedures and principles of debt assumption by the Secretariat of Treasury, and (ii) guarantees that may be provided by the treasury as well as similarities and differences between such debt assumptions and guarantees.
2. TERMS OF DEBT ASSUMPTION
Procedures and principles regarding the debt assumption by Secretariat of Treasury are regulated under the Regulation on Debt Assumption3. In this sense, debt assumption can be made in the projects investment amount of which is higher than one (1) billion Turkish Liras if such projects will be developed by public authorities having general or special budgets under the build-operate-transfer model4. In case an implementation agreement states that the facility may be handed over to the authority after an early termination, the Secretariat of Treasury may assume the repayment of loans and relevant charges originated from overseas upon a resolution of the Council of Ministers. It should be noted that a debt may be assumed entirely or partly.
Pursuant to article 4 of Regulation on Debt Assumption, debt assumption can be made by the Secretariat of Treasury provided that the following conditions are satisfied;
(i) implementation agreement as annexed to the tender specification must envisage that the authority may take over the facility and assume the debts after an early termination of such agreement,
(ii) authority requesting such assumption has not failed to timely perform any of its obligations towards the Secretariat of Treasury,
(iii) debt assumption has not exceeded the relevant yearly limits,
(iv) draft implementation agreement prepared by the public authority must include the provisions stated in article 4 of the Regulation on Debt Assumption.
In this regard, Secretariat of Treasury is not allowed to assume debts in every single project. It should be noted that, pursuant to the article 8/A of the Code of Public Financing; maximum amount of the debt assumptions to be undertaken in the same financial year shall be determined under the Code on Central Administration Budget5. For example, pursuant to article 12 of Code on Central Administration Budget, total amount of debt assumptions to be undertaken by the Secretariat of Treasury shall not exceed three (3) billion US Dollars in the year of 2014.
3. SCOPE OF DEBT ASSUMPTION
Secretariat of Treasury shall assume the debts;
(i) to an extent of 85% of the loan amount plus financing charges if the implementation agreement signed between the authority and the commissioned company is terminated due to company’s default, or
(ii) to an extent of 100% of the loan amount plus financing charges if the implementation agreement signed between the authority and the assigned company is terminated due to reasons other than company’s default.
In case the termination notice is furnished as per the implementation agreement, repayments of loan and financing charges which have become payable after the assumption date shall fall into the scope of debt assumption.
In addition to the foregoing, repayment amounts which have become payable before the assumption date may be assumed by the Secretariat of Treasury under certain conditions notwithstanding the reason of termination. In this respect, shareholders of the borrower company must jointly and severally provide a surety to Secretariat of Treasury amounting to at least 10% of the highest repayment installment. In the event of satisfaction of this condition, such overdue amount, default interest and financing charges may be assumed by Secretariat of Treasury.
However, the loans to be borrowed by the commissioned company for (i) providing equity finance to be allocated by the commissioned company to the project, (ii) covering increases in costs arising out of the commissioned company’s default, or (iii) financing cash needs, shall not fall into the scope of debt assumption. Hence, despite the common understanding, Secretariat of Treasury may not assume thedebts in such cases. In other words, loans to be borrowed by the commissioned company for other financial needs shall not fall into the scope of debt assumption.
4. PROCEDURE OF DEBT ASSUMPTION
Pursuant to the article 5 of Regulation on Debt Assumption, public authorities are, prior to the announcement of tender specifications, required to apply to the Secretariat of Treasury in writing for the debt assumption together with draft implementation agreement. Secretariat of Treasury shall grant its approval if it considers such application acceptable having evaluated provisions of the draft agreement which are directly related to the debt assumption.
As per the Regulation on Debt Assumption, Council of Ministers is the competent authority to decide on whether (i) to nominate the Secretariat of Treasury as an authorized body to assume debts in relation to public authorities with general or special budgets and (ii) to authorize it for negotiating the conditions of debt assumption in terms of scope of financial obligations, content and payment terms. Following the decision of Council of Ministers, the public authority shall conduct the tender and submit the draft implementation agreement to the Secretariat of Treasury once again after the tender process. Secretariat of Treasury shall evaluate the provisions which are directly related to the debt assumption and give its second approval if it considers such provisions acceptable.
As the final step of such procedure, the Council of Ministers shall be requested to evaluate the debt assumption in terms of financial obligations, content and payment terms. If the Council of Ministers considers such application acceptable having evaluated the foregoing terms, the debt assumption agreement shall be executed between Secretariat of Treasury, commissioned company and lenders.
5. TREASURY GUARANTEES
In addition to the debt assumption, the Secretariat of Treasury can provide guarantees under certain conditions. In this regard, the principles and procedure regarding such guarantees have been regulated under the Code of Public Financing and Regulation on Treasury Guarantees6 . There are four (4) types of treasury guarantees, namely; repayment guarantee of treasury, investment guarantee of treasury, collateral of treasury and governmental guarantee of treasury.
Treasury guarantees can be provided in favor of public economic enterprises, social security institutions, enterprises which are publicly owned but governed by private law (at least 50% of their shares are owned by public), metropolitan municipalities, municipalities and other municipal corporations. It should be noted that the treasury is allowed to provide such guarantees in favor of the public institutions and organizations only for their overseas loan debts. Secretariat of Treasury is authorized to conduct any kind of negotiation with respect to provision of treasury guarantees and amendment of the terms and conditions thereof.
Public institution or organizations in favor of which the treasury guarantee is provided shall pay a guarantee fee for once in the amount of 1% of the sum guaranteed for each guarantee.
Borrower institutions or organizations shall primarily al - locate sufficient amounts in their yearly budgets for repayment of the loans which are guaranteed by the treasury. However, such institutions may request treasury to assume the loan repayments wholly or partly in case their financial status appear to be insufficient to cover such repayments due to occurrence of adverse conditions in their income streams.
Applications for debt assumption regarding the guaranteed loan debts shall be made to the General Directorate of Public Finance in writing at least fifteen (15) days prior to repayment date of such loan debt. In addition, template form of loan assumption and lending agreement shall be procured from the Secretariat of Treasury prior to such application.
Even though the term of “guarantee” implies that the “person who assumes a third party’s liability shall be obliged to reimburse the damages arising from the failure of such third party” pursuant article 128 of the Turkish Code of Obligation, Regulation on Treasury Guarantees states that the guaranteed loan debts will be “assumed” by treasury. In this respect, it can be argued that such transaction shall be qualified as a “debt assumption” rather than a “guarantee” as article 195 and following articles of Turkish Code of Obligations envisages that the debt assumption is the “obligation of a person, who executes a debt assumption agree - ment with the debtor, to discharge the debtor of its debts by means of fulfilling the debtor’s debt or assuming its debts with the consent of the creditor”. It should be noted that this may cause ambiguity as to whether such transaction will be considered as a guarantee or a debt assumption.
6. CONCLUSION
Certain rights such as step-in rights requested by the lenders in strategically important projects to be developed by the Turkish government via build-operate-transfer model are inapplicable in Turkish law. In addition, considering the legal status of the project sites, certain securities such as pledges cannot be established in favor of the lenders. In light of the foregoing, debt assumption of the treasury have been enforced as result of the market needs and it is a mechanism being implemented for the projects which fall within the scope of debt assumption of treasury and which will be developed through build-operate-transfer model under the supervision of public authorities with general and special budgets. In case the implementation agreements of such projects are terminated, the investor’s specific loan debts can be assumed by the treasury with the approval of the Council of Ministers. Such debt assumption can be undertaken if the maximum amount for debt assumption in relevant year has not been exceeded as per the Code on Central Administration Budget.
Apart from those stated above, treasury guarantees can be provided to certain public authorities regarding their overseas loan debts. Moreover, in order to provide debt assumption under such guarantees, relevant public authority must obtain the template form of loan assumption and lending agreement from Secretariat of Treasury and apply to the General Directorate of Public Finance.
FOOTNOTE
1 Code on Commissioning of Certain Investments and Services within the Framework of Build-Operate-Transfer Model published in Official Gazette dated June 13, 1994 and numbered 21959.
2 Code on Public Finance and Regulation of Debt Management published in Official Gazette dated April 9, 2002 and numbered 24721.
3 Regulation on Debt Assumption by Secretariat of Treasury published in Official Gazette dated April 19, 2014 and numbered 28977.
4 Investments and services to be executed by Ministry of Health and Ministry of National Education via build-rent-transfer model are also fall into the scope of debt assumption provided that the envisaged value of such investments exceeds 500 million Turkish Liras.
5 Code on Central Administration Budget published in Official Gazette dated December 27, 2013 and numbered 28864.
6 Regulation on Procedures and Principles to be Applied for Assumption of Payments to be made in the Scope of Treasury Guarantees published in Official Gazette dated December 21, 2002 and numbered 24970.
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