In the Global Infrastructure Forum were the Multilateral Development Banks (MDBs), the United Nations, the G-20, and development partners from around the world meet to discuss opportunities to harness public and private resources to improve infrastructure worldwide, and to ensure that investments are environmentally, social and economically sustainable. Check out the event site to view the livestream on April 22.
Imagine the difficulty of designing, financing, building and operating a €360 million, 1,000-bed hospital campus that serves a region of 1.6 million people? This is exactly what the government of Turkey is doing in Elaziğ, a city of 350,000 in eastern Anatolia. The facility will serve and accommodate about 20,000 patients and their relatives per day with a broad range of services including women and children’s health, psychiatric services, and a dental clinic.
A project of this size is bound to be challenging and complex. But the approach taken by the Turkish Government has been a success—to involve a private-sector partner through a public-private partnership (PPP) with support from multilateral development banks. How did they do it?
A key factor is the government’s acceptance of a private sector role in infrastructure and social services. Turkey has been using PPPs successfully for over 30 years to develop its infrastructure , mainly in the power and transportation sectors. So in 2007, when the government introduced its Integrated Health Campuses Program, it looked to the PPP model to finance improvements to the healthcare sector, both in terms of facilities and operational efficiency. A part of this effort is an ambitious PPP investment program to build 29 health campuses throughout Turkey , including the one in Elaziğ.
Successful partnerships with MIGA, EBRD and IFC enabled Turkey’s first greenfield project bond
Another factor is the involvement of multilateral development banks to back the issuance of a 20-year, €288 million euro-denominated bond to finance the PPP. The European Bank for Reconstruction and Development (EBRD) and the World Bank’s Multilateral Investment Guarantee Agency (MIGA) have developed an innovative risk mitigation scheme:
EBRD provided €89 million to mitigate the risks of construction and operation.
MIGA provided political risk insurance for the bond as well as for the project’s equity investment.
What did this involvement do for the project? A lot. It bumped up the Moody rating to Baa2, two notches above Turkey’s rating. The International Finance Corporation (IFC) invested on a parallel basis in an unenhanced tranche of the bond. As a result, the credit enhancement mechanism enabled the participation of a larger pool of investors and mobilized new sources of funding. The 28-year concession was awarded to a consortium to design, build, finance, equip and maintain the integrated hospital campus.
A few lessons
There are some valuable takeaways from this project for any government looking to improve its healthcare infrastructure and services.
1. Government support is a precondition for success. PPPs have been successful in Turkey because of a deliberate policy for increasing private sector participation in infrastructure and public services. Turkey has had a solid PPP framework in place for over 30 years. It understands that a PPP is not an easy source of financing, but the result of commitment and hard work by many stakeholders towards public-sector goals.
2. PPPs provide funding and expertise. Upgrading facilities, equipment, and applying best practices in healthcare management is costly and requires expertise. Private sector participation in healthcare projects brings money and experience to the table, and enabling investments that government cannot afford by itself.
3. A robust contractual framework with a well-defined revenue payment mechanism, risk allocation and a favorable termination regime is fundamental to attract new classes of private investors.
4. Rating agencies recognize the EBRD-MIGA risk mitigation product and the multilateral involvement in Elaziğ’s bond rating. The credit rating uplift was driven by the complementary features of EBRD’s and MIGA’s risk mitigation instruments. Specifically, the MIGA PRI policy covers currency transfer, expropriation and breach of contract while EBRD standby facilities provide liquidity in construction and operations mitigating risk of protracted arbitration. Also recognized is the potential deterrent effect of EBRD and MIGA given their track record of resolving investment disputes.
5. This approach can be replicated. Credit enhancement may be rolled out across many markets and sectors for PPPs (both for greenfield financing and brownfield refinancing) helping to crowd in private investment.
In the end, these efforts benefit the public by accelerating development and increasing the quality of life. This partnership between Turkey, the private sector, and multilateral development banks, means that public health services will be accessible to more of Turkey’s population. Other countries can also benefit from this approach.
Dr. Ahmed Al-kalawy