PUBLIC PRIVATE PARTNERSHIPS IN TURKEY  Good morning, ladies and gentlemen. Thank you for that kind introduction and for inviting me to speak today at the International Public Private Partnership Workshop. I also welcome my fellow guest speakers and this distinguished audience.
Public Private Partnerships Public Private Partnerships—PPPs—are in the news in many places around the world today and they are also on the minds of many policymakers here in Turkey. I would like to discuss the following this morning: How can PPPs do a better job for Turkey? How can PPPs benefit Turkey by attracting private operators and capital into funding for infrastructure? I believe that PPPs can benefit Turkey, provided they are used under the right circumstances and provide a good balance between the traditional public sector and the private sector. Both the public and private sectors need to play extremely important roles to make PPPs work for the benefit of the economy and its citizens. PPPs are vibrant mechanisms, but no single PPP model works for every country. In general, PPPs lead to longer-terms contracts for service delivery and transfer project risk from the Government to the private sector. Yet they also provide public oversight to ensure that social objectives receive the highest priority during implementation. PPPs enhance efficiency by coordinating projects with the Government. In addition, PPPs can be useful where the public and the Government believe that delivery of public services should remain within Government ownership. Turkey’s Need for New Infrastructure Why are PPPs becoming more popular? Funding is a key consideration. Emerging countries such as Turkey are constructing and rehabilitating massive amounts of infrastructure. How does Turkey do that without draining its local and central Government budget? The Government funding is simply not there to meet the demands of power, water supply, sanitation, railways, roads and solid waste—all while complying with environmental standards on air and water quality. If Government were to fund all these demands on its own, the tax and debt burden on business and the population would be unmanageable. Turkey is already well endowed with high-quality infrastructure compared with other emerging economies. But it will need to further develop its infrastructure to catch up with the EU member countries and EU standards. Businesses can be held back by costly, low-quality infrastructure services. For example, the transport sector faces congestion and deteriorating road quality. The cost of telecommunication services and energy is extremely high. Other problems include water quality, the lack of operating wastewater treatments and safe disposal of solid waste, and air pollution—fixing all of these involves very large financial costs, running into the billions of Liras and for which private sector participation is needed. The challenge is to move from state entities providing infrastructure and social services toward the mix of private and state enterprises that characterizes efficient higher-income economies. Turkey has been a world leader in this regard, enacting more than twenty years ago legislation allowing private sector participation in the power industry. This was followed in 1994 with a broader law allowing Build-Operate-Transfer rights (called BOTs) in general infrastructure. Options for Involving the Private Sector Turkey already has experience with several aspects of PPPs through BOTs, such as power projects and airport construction. But PPPs can come in many forms. For the future, one option for Turkey is to introduce PPPs through management contracts or leases, often used when full privatization is not feasible or the public interest requires continued Government ownership. Under a management contract, a public authority makes a private company responsible for managing and delivering a service, typically for a period of three to five years. The public authority retains financial responsibility for the service, thus limiting risk for the contractor. The contractor is paid a flat fee, usually with additional performance-related payments (and penalties). Using management contracts in utility commercialization is a reasonably new phenomenon. Examples of the management contract approach in Turkey include a World Bank-financed project, the Antalya Water and Sewerage Project, to provide water and sewerage services in Antalya. The operator managed the Antalya system until June 2002. Further, in the towns of Alacati and Cesme, a private operator was selected in June 2003 to provide water and sewerage services under the Bank-financed Alacati-Cesme Water Supply and Sewerage Project. I should add that one must be realistic since the experience with management contracts has been varied and not always successful either for the Government or the operator. Well-structured management contracts, however, could be one useful interim solution, both to commercialize a utility quickly and to wait, if necessary, for a better offer for full scale privatization of an enterprise when the investment climate is right. Lease-type arrangements are another possibility that can also be considered, if they are differentiated from management contracts. PPPs and Political and Regulatory Risk PPPs can be implemented well if political and regulatory risk perceptions have been taken into account. Global experience shows it is essential to pay sufficient attention to policy development and involvement of all stakeholders. Information should be shared at all levels and maximum focus should be maintained on institutional strengthening of the respective entities. This strengthening requires training of civil servants in the appropriate frameworks and design of PPPs as well as adequate support for improving procurement capacity. Fortunately, in Turkey the existing commercial code and the code related to corporations are sufficiently developed to implement and manage successful PPPs. Problems usually arise with the proposed ownership structure of the PPP. The key issue often is who controls the decision-making process in the PPP Board. In most PPPs, the contract design is obviously central to whether private management will deliver benefits. Three aspects are crucial: the need to identify the extent of control exercised by private managers, the need for third-party oversight, and—perhaps most important—the need to link the pay of private managers to performance. If these needs are met, successful PPPs can be a valuable way to support commercialization. Short of using a PPP, commercialization is possible under state ownership and management of infrastructure companies. In some countries progress has occurred in cases involving commercialization under continuing state ownership and without PPPs. But, interestingly a recent World Bank study of commercialization under state ownership showed that, in the power sectors of eight countries, water sectors of four countries, and rail sectors of fourteen countries of the region, performance remains poor by all standard measures—labor productivity, cost per unit, and so on. This again shows that different types of models should be considered to weigh the pros and cons of approaches and learn what works. PPPs in Turkey Turkey’s approach to private participation in the power sector provides a solid environment for PPPs. The Turkish reform program has included unbundling of the vertically integrated state-owned power company into separately owned generation, transmission and distribution entities. It has included the establishment of an independent energy regulator for each of these, following passage of a new energy law in 2001. Some transition economies experienced a surplus of power generation capacity following the decline in power demand at the end of socialism. In Turkey, a need arose during the 1990s for additional power capacity to support economic growth. This capacity has been provided by the private sector, which has mobilized about $7 billion and constructed
8,500 megawatts of generating capacity under BOTs. The Turkish experience is important in the context of wider power industry privatization in the ECA region because the private sector has demonstrated both a willingness to invest in power generation in the region and an ability to construct and operate power plants efficiently. Turkey also stands out in Southeastern Europe for its progress in power sector regulatory reform and the extent of private sector participation in power generation. In addition to its progress in a key sector such as power, Turkey has made substantial progress in designing important changes to its general legal and regulatory structures. Even though much work remains to be done, Turkey is fully aware of its internal market liberalization and fully understands the key role of integrating with international markets. As a result, a Turkey that is liberalizing and moving faster than many EU countries demonstrates that the enabling environment is present and should be attractive for private investment. Turkey can easily and successfully implement many PPP models throughout its economy. Based on assessments of infrastructure and Turkey's favorable investment climate, there is significant opportunity for PPPs in all of the infrastructure sub-sectors—energy, water and wastewater companies and rail freight companies, as well as in some of the service sectors, including at the municipal level. Finally, Turkey's experience can set an example for both other emerging markets and the EU accession and pre-accession countries. PPPs are not the cure for all investment needs in Turkey or in other countries but they are a workable and successful model which have and can bring great benefits to the economy and to the population. Thank you. |
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