Wednesday, 17 October 2018

Flying high, feeling down

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After new legislation in 2013 to make PPPs more attractive to foreign investors, Turkey has seen European banks pile into its infrastructure projects.

It is a tale of two public-private partnerships – on the one hand a hospital and on the other an airport. The first is a state-of-the-art 1,550-bed hospital PPP signed for Adana Integrated Healthcare Campus Project in southern Turkey in mid-December.

“This is the first project whose finance agreement has been signed out of a total of 30 health campus projects in Turkey,” said Carlo Vivaldi, head of Central and Eastern Europe at UniCredit.

It is everything a PPP should be. The €540m (US$605.4m) construction project is made up of €430m of debt and €110m of equity, and is led by global infrastructure firm Meridiam. Together with its partners – Ronesans Holding, Sıla and SAM – it will design, build, finance, operate and transfer the hospital, with a 36-month construction period followed by a 25-year operating period.

“The Adana Integrated Healthcare Campus represents an important transformational step forward in the development of Turkey’s healthcare sector,” said Thierry Deau, president and founder of Meridiam.

“We do not want to be a country consuming healthcare, but instead aim to contribute to health-related sciences and providing medicine”

So far so normal. What makes the project financing so different in this case is the names on the deal. Not only is the project being led by a French company, but many of the banks involved are European rather than the long list of Turkish lenders one would normally see.

The banks on the deal – HSBC, BBVA, SMBC and Siemens Financial Services – are much more commonly seen on big European infrastructure projects.

And what raises eyebrows even further is the number of international development institutions that were involved. These included the EBRD, the IFC, French development agency Proparco, German investment corporation DEG, and Korean Development Bank,, as well as the World Bank’s Multinational Investment Guarantee Agency, which has provided a €142.5m 20-year guarantee to Meridiam’s investment.

Starting a trend

As proof that this deal was the start of a trend rather than a curious one-off, the Adana project was followed soon afterwards with the financial close, just before Christmas last year, of the PPP for the €350m construction of the 1,253-bed Mersin Integrated Health Campus on the Mediterranean coast of southern Turkey.

Although the construction company is Turkey’s Dia Holdings, the €272m 15-year loan was signed with a group that included Italy’s UniCredit as well as local lenders Yapi Kredi and Denizbank.

What has happened? It should be no surprise that what is driving international enthusiasm not just for Turkey, but for healthcare is government support.

Minister of Health Mehmet Muezzinoglu wants to make Turkey a health centre in the region. He has said he intends to increase the total bed capacity in the country to 95,000 by 2023 and expects annual revenues of US$20bn to US$25bn from medical tourism.

“We do not want to be a country consuming healthcare, but instead aim to contribute to health-related sciences and providing medicine,” he said in a speech at the end of last year.

To encourage investment, the Turkish parliament enacted a new Turkish Health PPP Law in 2013 (based on the British PFI model) tweaked to make investment as seductive and attractive as possible for foreign companies.

It includes, for example, full compensation on termination in euros rather than the more volatile Turkish lira, even in the case of contractor default; the government will back ongoing payments; but most significantly of all, there is a set peg to the euro that makes it easy to work out the terms of long-term debt deals.

The legislation has worked and won plaudits.

“The Turkish healthcare market is experiencing a tremendous transformation – a result of the government’s clear vision for ambitious healthcare reforms,” said Anthony Casciano, chief executive of healthcare finance at Siemens Financial Services.

The healthcare projects stand in sharp contrast to what is rapidly becoming a memento mori for the country’s old style of PPP deal – the Limak-Cengiz-Kolin-Mapa-Kalyon Turkish consortium to build Istanbul’s third airport.

A behemoth of a project, the construction is a 25-year build, operate and transfer scheme that will be the world’s largest airport. Construction officially began on May 1 and is expected to complete in 2017; indeed the €4.5bn loan agreement for the first phase of the project is likely to be signed as this report goes to press.

Unlike its aircraft, the project has not been quick to get off the ground. The winning bid was announced in May 2013. But what makes the project so different to the healthcare projects is neither the snail’s pace of implementation nor its scope, rather its painfully traditional structure.

It had been expected that up to 10 lenders would participate in the financing for the airport. In the end, seven banks are taking part. Not only are all of them domestic banks with private lenders, such as Yapi Kredi and Garanti, but three of them are state-owned banks: Ziraat, Halkbank and Vakif.

As if that were not enough, there is an unmistakable whiff of politics about the deal too. This was confirmed when it was revealed that the airport would be named after President Recep Tayyip Erdogan. In other words, it is a conservative, old-school style PPP project.

It is no wonder then, that the success of the Adana hospital project is what is driving future projects and that it is healthcare projects that are seeing international interest.

“Last December’s Adana project proved to be a good example for successful PPP financings in Turkey,” said Siemens’ Casciano.

The country has a pipeline of more than 30 similar projects with a value of around €12bn on the go and at least five are expected to sign this year. Meridiam, for example, is already working on several new projects.

The most immediate is the €150m 475-bed Yozgat Education and Research Hospital PPP in Central Anatolia with an up to €35m 20-year guarantee from MIGA. But the company is also looking at similar projects in the towns of Bursa and Elazig.

For the rest of the year, attention is going to focus on the two largest hospital PPPs in the current pipeline: the €1.1bn 3,566-bed Etlik Integrated Health Campus to a consortium of Astaldi and Turkerler in Ankara, and the €1.2bn 3,662-bed Bilkent Integrated Healthcare Campus by Dia Holdings, also in Ankara.

Both are clearly complicated projects, but both are also primarily using international banks. Under the PPP structure for the former, Astaldi and Turkerler will supply and maintain the hospital facilities, while the provision of medical care and services will remain the responsibility of the Ministry of Health. The concession is structured on a 28.5-year design, build, finance, operate and transfer model, with a 42-month construction period and 25-year operating period.

With UniCredit and Citigroup as advisers and lenders, a swathe of international lenders have come in. The EBRD is providing an 18-year €125m A-loan and a similar sized, shorter Tranche B loan of 15 years.

The IFC has come in for a €75m A loan; the Black Sea Trade & Development Bank for a €60m Tranche A loan; and SACE, the export credit agency of Italy, with a covered loan of €125m. This is not to say that Turkish banks have been ignored, but Isbank and Turkiye Sınai Kalkınma Bankası are not the headliners.

It is a similar story with the latter, where Dia Holdings will provide the facilities management services and other clinical and non-clinical support services for a 25-year operating period.

Some €890m debt on the PPP was signed in early April predominantly with a Turkish bank group. Garanti and DenizBank were the leaders along with Finansbank, Isbank and Yapi Kredi. But what is significant is that there were international players as well. Both UniCredit and Siemens Financial Services took a portion.

With the country’s healthcare sector now comfortable using more modern and international PPP structures, future success will depend on other sectors following suit. Only then will the country’s project finance truly be able to take off.


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