• A Brief Comparison between Ecuadorian and Turkish Public-Private Partnership Arrangements
  • September 27, 2016 | Author: Ozgur Kocabasoglu
  • Law Firm: Erdem & Erdem Law Office - Istanbul Office
  • Public-private partnerships (“PPP”) take a wide range of forms varying to the extent of involvement of, and risk taken, by the private party. The terms of a PPP are typically set out in a contract or agreement, often subject to the private law, to outline the responsibilities of each party and allocation of risk.

    Since the 1990’s, Turkey has implemented the build, operate and transfer law (“Turkish PPP Law” or “Law No. 3996” dated 08.06.1994) in order to attract private investment for infrastructure projects, and in 2013, introduced a PPP law specific to the health sector (“Law No. 6428” dated 09.03.2013), and one specific regulation (published in the Official Gazette dated 08.09.2012 and numbered 28405) for the education sector.

    In 2015, Ecuador implemented a PPP system for infrastructure projects that are modelled on that of Peru’s, Chile’s, Colombia’s and Uruguay’s PPP systems.

    Contrary to Law No. 6428, which is specific to the health sector, and construction of hospitals on the land provided by the administration in return for lease payments, and provision of secondary services; Ecuadorian PPP law covers a great range of sectors including, construction and sale of real estate projects, social housing and development works, Construction, rehabilitation, equipping, operation and maintenance of public works that provide public services, productive activities for research and development in which the State acts jointly with the private sector, new projects in the hydroelectric and alternative energy sectors, and other projects categorized as priorities. In this respect Ecuadorian PPP law provides similar provisions to the Turkish BOT law.

    The Ecuadorian PPP arrangement offers incentives and tax benefits mainly include:

    • Tax stability for the term of effectiveness of the investment agreement may be granted by administration.

    • Investment agreements for PPP projects will have the same term as the delegated management agreement.

    • Exemption on imports for direct use in project execution, provided the total amount of imports is in line with the criteria set by an inter-ministry committee on Public-Private Partnerships for each prioritized sector.

    • Exemption on income deriving from securities representing obligations at 360 calendar days or more and on transactions conducted in connection with such securities.

    • Exoneration from payment of income tax for ten years as of the first tax cycle in which operating income is generated on activities included in the PPP’s purpose.

    • Exoneration from the Foreign Exchange Exit Tax on: payments abroad for imported goods; acquisitions of services; payments to project financers; payments by the company as distribution of dividends or earnings to beneficiaries; and acquisition of shares, rights or participations.

    • Companies created to undertake these projects will act as withholding agents for the Value Added Tax under the same conditions and the same percentages as government corporations.

    • Expenses incurred to obtain, maintain and improve non-exempt income will be deductible.

    • Expenses incurred abroad that are necessary for obtaining income will be deductible.

    The Turkish PPP arrangement also offers incentives and tax benefits mainly include:

    • In case of early termination of agreement and transfer of relates facilities to administration debt assumption to be provided by administration for foreign financing of the health care projects.

    • Exoneration from the stamp tax in relation to all works and transactions between the administration and investor in relation to the project.

    In both PPP’s, the public entity should hold an open call for proposals and conduct a public tender. In the Ecuadorian PPP, the selected investor will sign a special contract known as the “Delegated Management Contract”. Also, in the Ecuadorian PPP, investors may propose a project to the administration, or may participate in a previously proposed project. The call for proposals in both systems are not governed by the public procurement regulations currently in force, it is a special regime that seeks to simplify the award of contracts.

    In the Ecuadorian PPP, the contract will define how risk is shared with the public entity; the tax incentives for the investor; the legal stability given to the investment in the event that local laws change, and dispute resolution. The Ecuadorian PPP Law emphasizes that the state will maintain control over strategic sectors; however, it grants private firms the right to bring some contract disputes to Latin American arbitration centers. The recourse to arbitration is limited -- Article 19 of the Ecuadorian PPP Law states that issues related to taxation or any other action directly related to the legislative and regulatory power of the Ecuadorian State shall not be subject to arbitration.

    Turkish PPP Law on the other hand provides that the arbitration is an option so long as the seat of arbitration is in Turkey, in the Turkish language and in accordance with the International Arbitration Law (law numbered 4686 dated 21/6/2001) which allows institutional arbitration or ad hoc arbitration.

    In both PPP arrangements, financing of the projects are responsibility of the private investors. In the Ecuadorian PPP Law, the external financing or third party financing is mentioned mostly for the application of the incentives. On the other hand, Turkish PPP Law provided specifically step-in right of the financiers and administration’s limit to terminate the contract without informing the financiers in order to enhance the finance ability of the projects.

    Conclusion

    In accordance with the Public-Private-Partnership In Infrastructure Resource Center, “a government may decide to enact a PPP law or a concession law for a number of reasons, such as to give priority to a process of developing, procuring and reviewing PPP projects that will take priority over sector laws, or to establish a clear institutional framework for developing, procuring and implementing PPPs. PPP laws can also be used to close gaps in the laws of a host country may need to allow for successful infrastructure PPP projects, such as enabling the grant of step-in rights to lenders and requiring open and fair procurement processes. These modifications may be embodied in sector-specific law, or in the case of procurement, a procurement or competition law, or the can be included in a general concession or PPP law.”[i] Ecuador appears to be trying to establish an institutional framework for the PPP in general; however, Turkey seems to applying PPP’s on the sectorial level.

    [i] Public Private Partnerships Law Concession law; - https://ppp.worldbank.org/public-private-partnership/legislation-regulation/laws/ppp-and-concession-laws#examples - date of access 25/07/2016.