The long-awaited Regulation on the calculation method of lease payments in healthcare public-private partnership (“PPP”) projects (the “Amending Regulation”) has been published in the Official Gazette on January 25, 2020. The Amending Regulation implements the changes made to the Health PPP Law No. 6428 (“Health PPP Law”) on July 19, 2019 in relation to the payment mechanism, and amends the Health PPP Regulation dated March 21, 2014 (the “Health PPP Regulation”) to provide the details of such new payment mechanism.
A. Changes in the Calculation of the Payments
The main payments by the Ministry of Health to the project company in a health PPP project are the lease payments, which consist of (i) the availability payments, payable on a quarterly basis, and (ii) the service payments, payable on a monthly basis.
Pursuant to the Amending Regulation, the availability payment, which is determined as a result of the tender, is adjusted quarterly based on the changes in the value of the relevant foreign currency (i.e. the currency or currencies of the loan agreement). However, the adjustment method provided by the Amending Regulation differs from the method provided by the previous version of the Health PPP Regulation as follows:
1. Inflation vs. FX Change
According to the previous version of the Health PPP Regulation (for the projects which are subject to Annex 2 thereof), the availability payment was firstly adjusted based on the inflation rate during the previous quarter. At a second phase, if the increase of the foreign currency was higher than the increase of inflation in the relevant quarter, the availability payment was further increased to reflect such difference. If, however, the increase of inflation was higher than the increase of the foreign currency, the difference between the inflation rate and the foreign currency change (which would be a minus figure) would not be reflected in the calculation.
The Amending Regulation has changed this method and provided that the availability payment shall be adjusted based on the inflation rate during the previous quarter; but if the increase of inflation was higher than the increase of the foreign currency, the difference would be reflected in the calculation, i.e. the availability payment shall be decreased to reflect such difference between the inflation and foreign currency change.
2. Senior Debt Floor
Prior to the Amending Regulation, the formula for adjustment of the availability payment provided that the value of the availability payment in a given quarter in the relevant foreign currency term shall never be less that the value of the availability payment in such currency in the previous quarter. The Amending Regulation has deleted such limb of the formula, which means that the availability payment in a given quarter may now be less than its equivalent in the relevant foreign currency in the previous quarter.
However, the Amending Regulation brought a different senior debt floor mechanism to protect the lenders. It provides that the amount of the availability payment in Turkish Lira shall never be less than what is required to buy an amount of money in the relevant foreign currency to both repay the debt to lenders in the relevant period and to meet the Debt Service Cover Ratio (DSCR) provided under the relevant loan agreement. Consequently, if the availability payment amount in a quarter is not sufficient to meet the DSCR, the availability payment in Turkish Lira shall be increased to meet such requirement of the loan agreement. However, in the event that he availability payment is so increased in a given quarter, such increase shall be deducted from the overall availability payment amount to be paid throughout the concession period by either (i) reducing the concession term or (ii) decreasing the overall availability payment amount.
3. Caps for Availability Payment
The Amending Regulation makes the availability payments subject to some caps as follows:
Firstly, the foreign currency equivalent of an availability payment to be made in any quarter cannot exceed the foreign currency equivalent of the availability payment made in the previous quarter as adjusted by the Foreign Currency Inflation rate (YPE).
Secondly, the total amount of availability payments made by the Ministry of Health to the project company in a project cannot exceed the Net Present Value (“NPV”) of such project.
The NPV is defined as the total amount of the availability payments and service payments to be made in a project throughout the concession period, as deducted by a discount rate to find the value of the project as of the calculation date of the NPV. According to the Amending Regulation, the NPV shall be calculated as follows:
- Firstly, the amount of availability payments and service payments which shall be made throughout the concession period shall be calculated by making some projections. The future inflation rate and the FX changes shall be projected by applying a formula which is based on the increase in inflation and the FX over the past 10 (ten) years preceding the date of calculation of the NPV. Such average increase rate shall applied for each future quarter to project the availability payment and the service payment to be made in each quarter until the end of the concession.
- Secondly, the total amount of the availability payments and the service payments calculated based on the above-stated projections shall be reduced by a discount rate to reach the present value of the project. The discount rate shall be calculated by the Ministry of Treasury and Finance as follows:
- If there exist debt instruments in the same currency issued abroad for the same term: current values of such debt instruments in the secondary market.
- If there does not exist debt instruments in the same currency issued abroad with the same term: current values and exchange clearance rates in the secondary market of the debt instruments in US Dollars issued abroad for the same term.
- If any of the foregoing conditions is not met: current values and exchange clearance rates in the secondary market of the debt instruments in US Dollars issued for a similar term.
It is important to note that the NPV, which is the cap for the total amount of availability payments, includes both availability payments and the service payments. In other words, the services payments portion of the NPV provides an additional buffer in the overall cap for the availability payments.
4. FX Calculation Period
Pursuant to the Amending Regulation, in FX adjustments to the availability payments, the average value of the relevant foreign currency (which is the currency or currencies of the loan agreement of the relevant project) shall be calculated based on its value in the last 10 (ten) business days of the previous calculation period (i.e. the previous quarter). Prior to the Amending Regulation, it was calculated based on the average value of the whole 3 (three) months period of the previous calculation period rather than its last 10 (ten) business days only.
B. Amount of the Performance Bonds
Pursuant to the Health PPP Regulation, the project company must submit a performance bond to the Ministry of Health, which must be in an amount corresponding to 3% of the total fixed investment amount during the construction period and 1.5% of the total fixed investment amount during the operation period. The Amending Regulation provides that the amount of the performance bonds shall be adjusted every year based on the changes in the Domestic Producer Price Index – D-PPI (Yurt İçi Üretici Fiyat Endeksi – Yİ-ÜFE). This provision of the Amending Regulation does not bring a new requirement, but only aligns the Health PPP Regulation with the relevant provision of the Health PPP Law, which was amended in the same direction on December 5, 2018. Therefore, the Amending Regulation provides that such provision of the Amending Regulation shall be effective retroactively as from December 5, 2018.
C. Seat of Arbitration
Article 4 of the Amending Regulation deletes the words “with a seat of arbitration in Turkey” in Article 67 of the Health PPP Regulation. Accordingly, the parties to the project agreement (i.e. the Ministry of Health and the project company) can provide international arbitration with a seat outside Turkey for the resolution of disputes arising from the project agreement. Such right was already available to the parties since the change in the Health PPP Law by Law No. 6639 on April 15, 2015. Therefore, this provision of the Amending Regulation does not introduce a new right but only aligns the arbitration provision of the Health PPP Regulation with the relevant provision of the Health PPP Law as already amended in 2015. Please note that such provisions of the law and the regulation are not applicable to the Funders’ Direct Agreement between the Ministry of Health, lenders and the project company, but only the project agreement to which the lenders are not party. As for the Funders’ Direct Agreement, international arbitration with a seat of arbitration outside Turkey was always permitted under the general principles of Turkish law; i.e. prior to the 2015 amendments to the Health PPP Law as well.
D. Retroactive Application of the Amending Regulation
Article 5 of the Amending Regulation provides that the changes introduced by the Amending Regulation are applicable both retroactively and prospectively, i.e. they apply to existing health PPP projects as well.
The Amending Regulation implements the amendments made to the Health PPP Law on July 19, 2019, which provided that the availability payments and the service payments under the existing and future health PPP projects could be changed upon mutual agreement of both the Ministry of Health and the relevant project company. The Amending Regulation provides detailed formulas, floors and caps for such changes in the payment mechanism.
Although the Amending Regulation does not expressly provide that the changes can be made only by mutual agreements of the parties, we believe that the mutual agreement condition of the underlying law should be applied, and therefore, the Amending Regulation should not be interpreted as granting to the Ministry of Health the authority to impose any unilateral change in the payment mechanism of the existing health PPP projects. Further, the Ministry of Health should not intend to use the Amending Regulation to change the adjustment mechanism of the service payments, since the Amending Regulation does not change the service payments but refer to them only in the context of calculation of the NPV as the overall cap for the availability payments.
From the bankability perspective, the senior debt floor (DSCR protection) of the Amending Regulation is a positive feature, but the effects of the Amending Regulation on the profitability of the projects from the sponsors’ perspective should be analysed on a project-by-project basis. While the availability payments may increase or decrease in the initial quarters on a project-by-project basis by application of the floors and the caps, the overall effect of the Amending Regulation should also be considered as it may result in shortening of the concession period under certain circumstances.
As for the next steps, the Ministry of Health is expected to invite the sponsors of each project to start negotiations for amending the project agreement as per the above-explained provisions of the Amending Regulation. If mutual agreement is reached between the Ministry of Health and the project company (which would also require consent of the lenders under the finance documents), the project agreement (in particular Schedule 18 on Payment Mechanism) would be amended and the availability payments would start to be calculated according to the new rules brought by the Amending Regulation.
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