Generally, Build Operate Transfer (BOT) model can be described as a method which is used for the projects that require intensive capital and high technology. This method uses private capital for investments due to lack of funding. In this model, a concession is granted to Project Company who is under obligation to build project facilities or infrastructure, and to operate them within contract term (concession term). Since these kinds of projects require intensive capital, the project companys fund is not only provided by shareholders through equity commitment1 but it is also provided by secondary sources such as banks, international financial organizations by means of loan. At the end of the period in which project company earns revenue and repays its loan, all facilities are transferred back to the authority which granted that concession.
This research paper examines regulatory framework of BOT models in Turkey. It firstly describes the historical development of the regulations (related Law(s) and Bylaw(s)) and then mentions the sectors in which the BOT models are used. Since Turkey is a Civil Law System country, the Legal Context of BOT is vitally important. Hence, this paper pays great attention to annulment decision given by the Constitution Court of Turkey with respect to 5th article of Law 3996 and the amendments made to the constitution. All these issues are examined within the frame of deductive methodology. The paper concludes that, although there are big allegations against BOT particularly in terms of Treasury Guarantees it is said that these guarantees increase state debt stock and cause harm to state BOT is still regarded as a financing model that is beneficial to state provided that the required examination with respect to projects is conducted properly.
2. HISTORICAL BACKGROUND of BOT in TURKEY
Republic of Turkey was founded on 29th of October 1923 as a successor country of Ottoman Empire. Between 1929 and 1950(s), Statism policies dominated the Turkish economy. As a consequence of these politics almost all of the public services and investments were effected by state.2 Public Economic Enterprises [Kamu İktisadi Teşebbüsleri] were formed to carry out these investments and their management. As Democrat Party won the elections in 1950, Turkey commenced to move to the liberal economy. Foreign Investment Incentives Law and Foreign Capital Incentives Law were enacted in 1951 and 1954. Turkey succeeded to attract foreign investments in the amount of 167 million USD at that time.
In 1980, the Prime Minister Turgut Özal - who was a liberal economy supporter, and was regarded by some as a big reformist introduced Build Operate Transfer (BOT) model as a part of his economic liberalization policies. In fact, the term build operate transfer was used in some formal documents even before its law was enacted.6 It was 1988 when the term BOT appeared first time in a formal document. It was on the 63rd page of Execution Program of the government then in power and was expressed as; Foreign investment shall be promoted to carry out public investments that require high technology and intensive capital within the framework of build operate transfer model.
3. REGULATORY FRAMEWORK of BOT in TURKEY
3.1. Law 3096
The first codification with respect to BOT was made in energy sector in 1984. The Law 3096 which was named as "Commissioning institutions other than Turkish Power Authority in production, transmission, distribution and the trade of electricity8 changed the monopolistic structure of Turkish Power Authority (TPA) [Türkiye Elektrik Kurumu] and provided scope for private sector to conduct commercial activities in generation, transmission, distribution and trade of electrical energy. Law 3096 also covered Transfer of Operational Rights (TOR) of existing power plants and transmission and distribution facilities owned by the state (article 5). The Law dictated that at the end of the contract term all facilities and immovable assets had to be hand over the state at no cost (article 8).
With decisions of the Council of Ministers [Bakanlar Kurulu], four Bylaws were later issued to clarify the application of this law. Bylaw 85/9759 dealt with giving permission to build and manage electrical power plants by institutions other than TPA. Bylaw 85/9800 dealt with the allocation of the land to institutions other than TPA and separated Turkey into areas which are composed of city or cities and called each of them as Task Zone. These task zones are geographical border of the areas in which project companies operate trade activities in electricity sector. Bylaw 87/11488 dealt with the appointment of the institutions for generation, transmission, distribution, and trade of electricity energy. Bylaw 91/1630 dealt with the Electrical Energy Fund.
Under the 7th article of Law 3096, concession period might be no longer than 99 years. In practice, these periods were mostly defined as 30 years. Concession period could be extended at the end of the term under the 8th article. In procedure, private company had to make an application with a feasibility report to Ministry of Energy and Natural Resources (MENR) [Enerji ve Tabii Kaynaklar Bakanlığı] in order to be assigned as a project company. MENR examined these reports and gave its decisions. Therefore this Law was criticized a lot due to lack of tendering process.
The first BOT project in energy sector was realized by a consortium, namely Seapac, which was composed of Westinghouse, Chiyoda and Man companies in 1988. It was a coal fired thermal station. After this project, there were almost 14 new projects and 70 feasibility report for the examination of MENR. Since a general BOT law enacted later, this Law is not applicable for new projects after 2000.
3.2. Law 3465
Even BOT projects mostly appear in energy sector, there are quite number of projects with respect to Highways as well. Law 3465 came into force on 02.06.1988 and was named as Commissioning institutions other than the General Directorate of Highways in construction, management and maintenance of highways. Afterwards, with the decision of Council of Ministers, Bylaw 93/4186 was published on 14th April 1993 on official gazette, which clarified Law 3465.
This codification enables private sector members to participate in construction, maintenance and operation of highways and all establishments such as hotels, restaurants and gasoline stations on the highways within the framework of Law 3465 and the agreement concluded between the parties (articles 1, 2). It has its own competitive tendering procedures (article 4 and related articles of Bylaw). It has a maximum 49 year contract term (article 5). It dictates that at the end of the contract term all facilities and immovable assets must be handed over the state at no cost (article 6).
Kinali Sakarya Highway (1.6 million USD), and Highway Service Building on the way of Ankara (3.6 million USD) are the just two of many several millions dollars projects that effected pursuant to Law 3465. Besides these relatively small projects, some big projects, such as the Çanakkale Bridge which is debated to be built on Çanakkale Strait that connects Black Sea with Aegean Sea, have been debated.
3.3. Law 3996
Both Law 3096 and Law 3465 are restricted in terms of their scope. As we mentioned above Law 3096 dealt with Electricity, and Law 3465 dealt with Highways. In 1990s financial strains also increased for public infrastructure investments due to lack of funds. Therefore, there was a need of a codification which would regulate (unify) BOT models in every sector in economy, a general BOT law. As a consequent of these reasons, Law
3996 which regulates BOT model as general was enacted in 13th of June 1994. Afterwards, Bylaw 94/5907 was published on October 1994 to clarify the application of this law.
This code covers; bridges, tunnels, dams, irrigation channels, water purification and sewerage systems, communication networks, mining operations, manufacturing plants, generation, transmission and distribution of electricity, environmental pollution protection systems, highway and railway constructions, subway and railway garages, seaport and airport construction and other related investments (article 2).
It also provides exemption of stamp duty and fees (article 12). It has a contract term up to 49 years (article 7). It dictates that at the end of the contract term all facilities need to be given back to the state at no cost (article 9). It consists of the tendering procedures, open, transparent, competitive and non-discriminatory (article 4 and related articles of Bylaw). It allows all firms including foreign companies to equally participate in tendering. It enables investors to go to an international arbitral tribunal to settle disputes arising out of BOT contracts. (Please look at below (section 4) for further information.)
Law 3996 was amended in 20.12.1999. This amendment is vitally important because it contains a provision which states that the agreements concluded between the parties are subject to Private Law. Since Turkey is a Civil Law System country, there is a great importance between to be subject to private law (Jus Privatum) or administrative law (sub-discipline of Jus Publicum). This distinction is made based on the type of relationship between the parties. If the parties are deemed to be purely equal, in other words, if there is no hierarchy between the parties, this relation will be subject to Private Law such as Law of Obligations or Commerce Code. Otherwise, for instance in the event of supremacy of one party (governmental authorities), the relation would be subject to and would be interpreted in pursuant to Jus Publicum.12 If an agreement is subject to Jus Publicum, that means any disputes (leaving some exemptions alone) arising out of or in connection with that transaction will be settled by the Administrative Courts by way of applying Jus Publicum not Law of Obligations or Commercial Code.
It is not so difficult to understand why this amendment was made by the Government then in power. It is made due to attract foreign investment to Turkey. But this amendment also brought big debates with itself. Because, the agreements made until the amendment date had been considered as Concession Agreement (contrary to Common Law System, the term Concession is used in Civil Law System to express that it is an administrative agreement which shall be subject to Jus Publicum not Private Law) and all agreements were subject to Judicial Review of Council of State [Danıştay]. As we know, all codifications should be compatible with Constitution of that country. Consequently, if you are making law without making necessary amendments in the constitution, that law would not be in force for a long time. That is what happened in Turkey. 110 members of
Grand National Assembly of Turkey [Türkiye Büyük Millet Meclisi] (Parliament) under the leadership of Mümtaz Sosyal made an application to Constitution Court of Turkey on 02.08.1994 alleging that the 5th article of Law 3996 conflicts with the provisions of Turkish Constitution particularly with its 2nd, 5th, 8th, 9th, 11th, 125th, 129th and 155th articles.15 Constitution Court cancelled the 5th article of Law 3996 on 28.06.1995. (Decision no. 1995/23)16
4. DECISION of the CONSTITUTION COURT of TURKEY
In Turkish Administrative Law, the agreements concluded under BOT model had been considered as Public Service Concession Agreement until the amendment was made to 5th article 18 of Law 3996. The amendment declared that these agreements were subject to Private Law. The Constitution Court cancelled (abrogated) this amendment due to all services and investments made in this context were subject to Law Publicum under Turkish Constitution. The articles 47 (Confiscation), 125 (Jurisdiction) 155 (Authorities of Council of State [Danıştay]) of Turkish Constitution are the legal bases of interpreting BOT models in concept of Law Publicum.
4.1. The Reasoning of the Court
4.1.1. It conflicts with the 47th article of Constitution.
The agreement concluded between the project company and the administration is a Concession Agreement. This acceptation is a result of some attributes of the agreement such as, a) One side of the agreement is Administration, b) Administration has some supreme authorities that do not exist in Private Law, c) The subject of the agreement is relevant with Public Service. Therefore, it can not be subject to Private Law.
4.1.2. It conflicts with the 125th article of Constitution.
All activities and transactions of the administration will be subject to judicial review of administrative courts and Council of State under constitution. Since the amendment stipulates Private Law, it surely conflicts with Constitution, because administrative courts do not exist in Private Law.
4.1.3. It conflicts with the 155th article of Constitution.
The administration is making an agreement with a private sector participant with respect to public service. Therefore, it is a concession agreement and subject to preliminary examination of Council of State before it is concluded under constitution. Codification of a provision which states
.will not be in the form of Concession
. is deemed as an attempt to bypass this examination power of Council of State. Hence it conflicts with the regulation of the constitution.
- All agreements became administrative agreements and subject to Law Publicum.
- Foreign investors did not like the idea of being subject to Law Publicum.
4.3. How was the Problem settled?
As it is mentioned above, abrogation of the amendment had bad affects on foreign investments in Turkey. Foreign investor did not like the idea of being subject to Public Law and to be under supervision of the Council of State. As time went on, Turkey realized the importance of foreign investment particularly in the projects that require high technology and intensive capital. Finally, the government then in power did what should have done before. It changed the Constitution in 13.07.1999.
Under Turkish Law, it is difficult to amend constitution due to any amendment to constitution requires great majority of the Parliament (Grand National Assembly of Turkey). The great majority was achieved as the votes were counted, and the Law 444621 was enacted. Law 4446 modifies the 47th, 125th and 155th articles of the Constitution.
4.3.1. Amendments to 47th article of Constitution
This article provided confiscation power to administration in the event of public interest. The amendment states that Public services and investments which are conducted by administration may be delegated (assigned) to real person or legal entity through Private Law agreements provided that enactment of a relevant particular law. This amendment also becomes the base article for privatization as well. It can be asserted that the expression to be subject to Private Law in Law 3996 has found its legal base in constitution after this amendment.
4.3.2. Amendments to 125th article of Constitution
One of the most important issues for foreign investors is jurisdiction and/or choice of law. Since most of the projects in project finance are capital intensive and most of the developing countries has bad records on trial in terms of both trial duration and their impartiality as they are judging foreign capital, foreign investors require (seek) some guarantees such as international arbitration.
Therefore, the Turkish government, for the purpose of attracting more capital, modified the 125th article like this Any disputes arising out of project agreements which are relevant to public service, can be settled through international arbitration provided that the parties of contract agreed upon this arbitration and there is foreign capital. With this amendment, judicial review power of Council of State has been indirectly abolished, and psychological comfort has been provided to foreign investment.
4.3.3. Amendments to 155th article of Constitution
This article regulates the powers of Council of State [Danıştay]. As we mentioned previously, Council of State has vital powers such as Judicial Review on administrative actions and Preliminary Examination of the agreements to be concluded between the project company and the administration. The amendment made in 125th article of the Constitution provides international arbitration.
The article 155 was also amended for the purpose of restricting commission and power of the Council of State. The amendment modified the provision
examines concession agreements
.gives his opinions with respect to concession agreements within two months. This modification not only restricts examination power of the Council but it also restricts the Council in terms of time.
4.4. Evaluation of Amendments made in Constitution
It was a log running debate in Turkish law whether BOT model subject to Private Law or Administrative Law. This was very important not only in terms of legal context but also in terms of attracting more foreign investment. Since the Constitution Court of Turkey abrogated the amendment which had been made in the 5th article of Law 3996 in 28.06.1995, regulatory context of BOT model became to be based on Law Publicum again which did not make foreign investor very much comfortable.
In 13.07.1999, the government then in power enacted Law 4446 which amended 47th, 125th and 155th article of the Constitution of Turkey. This amendment finished all debates with respect to legal context and applications of BOT model. With this amendment, BOT model, without any doubt, is considered to be subject to Private Law.
5. THE SECTORS IN WHICH BOT(s) ARE USED
As we mentioned previously in this paper, Law 3096 regulated the BOT model in Energy sector until the enactment of Law 3996. Energy is the first sector in which a regulation with respect to BOT is made. It is also the most important sector because the majority of BOT projects are realized in this sector.
According to the data acquired from State Planning Organization (SPO) [Devlet Planlama Teşkilatı].23 There are 391 BOT projects in the total investment amount of 28 billion USD. Energy sector BOT(s) take the first place among these projects with the amount of 21 billion USD.
Law 3465 Commissioning institutions other than the General Directorate of Highways in construction, management and maintenance of highways. came into force on 02.06.1988. This law enabled private sector members to participate in construction, managements and maintenance of highways. There were several BOT projects under Law 3465 until the enactment of Law 3996 which is a general BOT law.
The scope of 3465 was narrow. It regulated highways construction and maintenance, and operation of all establishments such as hotels, restaurants and gasoline stations on the highways. After the Law 3996 enacted, the scope is extended to railway constructions, subway and railway garages, seaport and airport construction (transportation sector) and other related investments.
The biggest or the most important projects that are debated to be build within the framework of BOT model in transportation sector so far are Çanakkale Bridge and third Bosphorus Bridge of Istanbul (which will link Asia part of Istanbul with the European part of Istanbul). Third Bosphorus Bridge project will be bided next year and will be built by means of BOT model. The approximate cost of this coming project is 1.2 billion USD. Annex 1 is attached to this paper for the purpose of demonstrating how this coming project may generate revenue to repay loans.
Law 3218 Free-zones Law came into force on 06.06.1985. The purpose of this law is to increase exportation investments and production. It is possible to achieve this purpose (increasing investment and production for exportation) by means of BOT model under Law 3218. This act enables Turkish Treasury to rent parcels (plots) of land to private parties with an agreement up to 99 years (in practice 20 years period is used). Mersin, Free-zone, Antalya Free-zone, Adana free-zone, are just a few samples. These cities dwell by Mediterranean Sea.
6. TREASURY GUARANTEES
11th article of Law 3996 and 39th article of Bylaw 94/5907 are the legal bases for Treasury Guarantee. The majority of the guarantees provided so far are emanated from Purchase Guarantees (which means Administration is the Offtaker) and Subordinated Loan Guarantees (This is a secondary loan (credit) which will be provided by the government to meet unpredicted financial needs of the project provided that this need does not arise from default of the project company). 39th article of Bylaw 94/5907 provides that Treasury will make payment to the project company for the services and/or products if the related administrative agency (who is a party in the agreement) does not. In this case, administration is the Offtaker.
There is also a big allegation against Treasury Guarantees. It is said that these guarantees increase State Debt Stock and cause harm to State. Professor Yerlikaya argues that treasury guarantees have been given without conducting proper examinations over the projects.30 Also, State Auditing Agency [Devlet Denetleme Kurulu] stated, in its research report dated 21.07.2003, that some treasury guarantees had been given by the MENR although this authority ultimately belong to the ministry to which Turkish Treasury was affiliated.31 In fact, the only BOT project in which the government had to make payment was İzmit Water Supply Project until the year 2003.
This project, the biggest privately financed water supply project under BOT model in the world and at the same time the first in Turkey, aimed to provide 142 million m3 of water annually to consumers in Kocaeli (a city that dwells by Istanbul) over 15 year operating period, until the year 2014.32 It is expected that this project will cost 3 billion USD to The Treasury by 2014.
The latest development with respect to Treasury Guarantee is Electricity Market Law (EML). EML which introduces competition into electricity sector prohibits granting Treasury Guarantees for electricity projects within both BOT and BO models (provisional article 8).
7. BOT MECHANISM (SIMPLIFIED VERSION)
Here is the simplified version of BOT mechanism which has to be followed to realize a BOT project in Turkey;
First of all, the service and/or investment which are aimed to be realized under BOT model have to be one of the services/investments stated in the 2nd article of Law 3996. Under this article, BOT model covers
bridges, tunnels, dams, irrigation channels, water purification and sewerage systems, communication networks, mining operations, manufacturing plants, generation, transmission and distribution of electricity, environmental pollution protection systems, highway and railway constructions, subway and railway garages, seaport and airport construction and other related investments... Consequently, any investment that is not stated in this article can not be realized under BOT.
Any service or investment to be realized under BOT is either promulgated by the administration (tendering way of building BOT) or proposed by Private Law persons (making an application with a feasibility report) to related administration.
Related administration notifies projects to the ministry to which it is affiliated. The related ministry (for example, in case of a highway construction, it is the Ministry of Public Works and Settlement [Bayındırlık ve İskan Bakanlığı]) makes an application to SPO to gain its opinion. The related Ministry also makes an application to High Planning Authority (HPA) [Yüksek Planlama Kurulu]35 for authorization to realize the project. Related administration promulgates that the project will be realized under BOT upon the approval of HPA. At the end of the announcement period, the project company appointed among the applicants by administration in accordance with criteria provided under Bylaw 94/5907 (related articles: from 9th to 15th). When the project company is appointed, Draft of Execution Agreement37 is conveyed to Council of State to express his view with respect to agreement. Council of State has to release its views (opinions) within two months.
The administration is empowered to audit the project company on any phase of the project (construction, operation, etc.).
At the end of the contract term all facilities need to be given back to the state at no cost. However, the contract term, under Bylaw, can be extended.39
BOT projects were commenced as a result of liberalization policies in Turkey in 1980s. The first codification was made in Energy sector under Law 3096 which changed the monopolistic structure of the state owned institution, namely Turkish Power Authority, and provided scope for private sector to conduct commercial activities in this sector. Law 3465 and Law 3996 followed this enactment.
The most important step ever made among these codifications was the amendment made to 5th article of Law 3996. This amendment which was abrogated by the Constitution Court of Turkey, provided that agreements concluded between the parties would be subject to Private Law. After the annulment decision, the government enacted the Law which chanced the related articles of the Constitution. This amendment not only provided legal base for being subject to Private Law in BOT projects but it also provided international arbitration. All these steps reached the goal and attracted billions of dollars of foreign investment.
Besides these regulatory developments, the issue treasury guarantees were (are still) debated a lot. It is asserted that these guarantees were misused in projects which caused millions of dollar harm to state. It is also alleged that these guarantees increase public debt stock. As a result, Electricity Market Law which introduces competition into electricity sector prohibits granting treasury guarantees for electricity projects within BOT model.
From the above it is easy to conclude that, Turkey has moved forward a lot since the 1980s and can easily be regarded as a successful country in terms of attracting foreign investments by way of BOT.
Uras. T. G., Foreign Investment in Turkey (Istanbul: Turkey, Formül Printing House, 1979) Pp. 165 in Turkish.
Asso. Prof. Yerlikaya, G. K., Build Operate Transfer Model, Legal Context and Taxation (Ankara: Turkey, Seçkin Publication, 2002) Pp. 56, in Turkish.
Prof. Zevkliler. A., Civil Law (Izmir: Turkey, Savaş Publications, 1988) Pp. 36 in Turkish.
Constitution Court of Turkey (Official Website), Annulment Decision for 5th article of Law 3996,
Istanbul Metropolitan Municipality Official web-site.
Asso. Prof. Yerlikaya. G. K., Build Operate Transfer Model in Turkey and Public Barrowing, www marmara edu tr/maliyesempozyumu/tebligler/5-3.doc
State Auditing Agency, Research Report with respect to applications of BOT and TOR, at www tccb gov tr/tr_html/DDK/enerji.htm
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