Early-bird investors

Turkey is on the frontline. Two of them, actually. Supposedly committed to combatting Islamic State (IS) on its Syrian border, government troops are also engaged in a ferocious campaign against regional independence fighters in the Kurdish region. Violence has spread across the country, pitting civilians against each other and making peace talks between the warring factions a distant memory.

The country is also being attacked on the economic front: a bout of risk aversion across emerging markets, prompted by wobbles in China and an impending interest rate rise in the US, has hammered the domestic currency and triggered capital flows.

Nor is the political picture more reassuring. Voters are to go to the polls for a second time this year after June elections resulted in a hung parliament, creating uncertainty over policies and projects. Recep Tayyip Erdogan, the Turkish President, is meanwhile taking no chances and cracking down on dissent.

There’s at least one bright spot, however. Notwithstanding the current turmoil, the country has recently made the headlines for hosting some of the world’s most ambitious healthcare projects – and for garnering enough international backing to make them happen.

The first champagne cork popped last December, when the Adana Integrated Healthcare Campus secured a €550 million financing package from the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC) and a group of international commercial lenders. The operation also saw Paris-based fund manager Meridiam Infrastructure become the first overseas-based global investor to complete a deal in the Turkish public-private partnership (PPP) market.

This was followed by the successive closings of the 1,250-bed Mersin Health Campus, the 3,700-bed Bilkent Integrated Healthcare Campus and the 475-bed Yozgat Education and Research Hospital Project. The Etlik Hospital Campus, near Ankara, is expected to reach a €1.12 billion financial close by the middle of October.

These successes were a long time in the making. Turkey’s Ministry of Health (MoH) launched its first healthcare tenders in 2007, at a time when the government was also working on involving the private sector in building motorway and tunnel projects. MoH was keen to innovate: understanding that the classic Build-Operate-Transfer (BOT) model was less suited to complex assets like hospitals than transportation projects, it went down the PPP route.

Although MoH’s first project agreements were largely inspired by the UK’s Private Finance Initiative (PFI) and Spanish PPP frameworks, tweaking them to comply with Turkish law made most of them economically non-viable. Which is why, explains Sule Kilic, deputy country director for Turkey at the EBRD, none of the tenders that completed before 2010 initially managed to achieve financial close.

Another five years elapsed before the first milestone was reached. “It took a long time to negotiate with the Turkish government so that the projects would become bankable,” explains Jean François Marco, a senior investment director at Meridiam. “That’s because we didn’t go in with a ready-made approach. We listened to what were the ministry’s demands and came up with a tailored model.”

Adana, Bilkent and other hospital deals recently closed are part of an ambitious healthcare programme pushed forward by the MoH. The first phase of tenders, of which all the above are part, involves 16 projects with a total cost of about €6 billion. Attracting investors to the better-designed ones is no longer a problem, asserts Kilic.

“Adana Hospital PPP reached financial close through the backing of international financing institutions only, without involvement of Turkish banks. Then Etlik Hospital PPP achieved the longest tenor financing with an 18-year tenor – which was accepted not only by international lenders but also, for the first time, by Turkish banks. This is a good proof that these projects are now financeable.”

The programme’s second phase is already on the starting blocks, and has similar ambitions. The difference is that most of the 16 projects in its pipeline are smaller in size – typically with a capacity of 1,000 beds at most.

There is one exception, however. The next round of tenders also includes Istanbul’s Sancaktepe hospital PPP, a €2 billion project with a planned capacity of 4,500 beds. And according to sources, blue-chip fund managers such as Aberdeen Asset Management, InfraRed Capital Partners, InfraMed Management, John Laing and Mubadala Infrastructure Partners could be interested in the opportunity.

“These infrastructure funds are getting serious about the Turkish market. They’ve seen projects close on acceptable and bankable terms, and now they’re seeking to partner with local partners and facility management experts to bid for deals,” says an investor with knowledge of the process.

These may only come to fruition after the next elections. But Marco is not worried about their future. By contrast with a number of projects currently on the back-burner in the transportation sector – such as the Third Istanbul Airport or the Third Bosporus Bridge – regional hospitals are not really vulnerable to changes in the political climate, he says. As the election campaign rages on, these aren’t receiving any of the criticism – unlike the former.

“In Yozgat, inhabitants currently have to drive at least an hour to receive treatment. So yes, a third bridge on the Bosporus would make people’s life a bit easier. But these new hospitals are more vital for the population, especially in Turkey’s mid-sized towns.”

Other ministries are watching MoH’s progress with interest. Such is the case with education authorities, which Kilic says are already determined to pursue as many as 90 projects throughout the country. “We’ve prepared the Scope of Work regarding feasibility studies and legal preparation together with the Ministry of Education PPP team.

Hopefully we’ll get to start technical co-operation after the elections. But we expect the Ministry to speed up the process as soon as possible.”

The government is being advised to group planned campuses – each of which is budgeted at between €50 million and €75 million – in lots of four or five, to try and make them attractive to bigger players. What should make things go smoothly regardless, Kilic reckons, is that a number of people from the MoH with experience of the PPP programme have now migrated to the Ministry of Education. “Hopefully education projects will be up and running much more quickly than the first hospitals were.”

Marco sounds convinced. “The Turkish population is growing fast so there is a strong demand. It’s going to happen, and we’re certainly looking at it.” But that’s not all.
Although it is probably too early to take the plunge, he adds, another area could soon open up to private investment: the water sector.

Demand there is driven by frustration within the Ministry of Environment over the fate of water treatment plants, which municipalities regularly shut down after construction. Kilic observes that local authorities, while responsible for these facilities, have little experience in running them and struggle to keep tabs on costs. “The problem is not really financing, it’s running them efficiently.”

Evolution in the sector is still at a very early stage, she says. A pilot municipality will soon be put to the test, allowing a decision on whether or not to replicate the experience. Operating such assets will also involve a different set of skills and experience than previous PPP projects – which is why Kilic reckons the largest players there will likely be overseas water companies like Veolia or Abengoa, though fund managers could also own stakes in projects.

Whatever happens, innovation will probably be pursued on another front. The sheer amount of financing needed to bring all these projects to close has already prompted existing players to seek to raise liquidity elsewhere: on the capital markets. The pioneer here was Mersin International Port project, which was refinanced in 2013 through a $450 million bond after a few years of operation.

Using capital markets for greenfield projects, which is where much of the liquidity will be needed, would be something new. But Kilic points out that the government is keen to show its commitment to making investors and lenders more comfortable: its hospital PPP projects involve termination mitigation mechanisms during the construction phase and first years of operation.

Once again Meridiam seems keen to help. “If we want to open up the infrastructure market and bring it to its next phase we need to develop the Turkish bond market,” Marco says. “One success would probably be enough to make investors look at Turkey differently.”