This content is from: Local Insights

Financing port projects

The expanding volume of global trade is having a profound impact on world shipping, especially container shipment traffic. This is naturally giving rise to a need for ports with well-run facilities, infrastructure and superstructure, which in turn require high investment. Turkey – a country whose coasts are long and available for port construction, whose location makes it geopolitically important, and 91.4% of whose international trade transportation is conducted by sea – is attractive to investors interested in the port construction and operation sectors.

Private-sector involvement in Turkey's port industry takes place by means of transferring operation rights through privatisation, the build-operate-transfer (BOT) model and by launching private greenfield projects through licensing and permit methods.

The financing of these three models varies according to the scope of the investment. In practice, the transfer of operation rights is used for projects limited to extension and operation of a public port, rather than construction from scratch. Thus, the private sector requires Capex financing of the business and acquisition financing for payment of the concession fees. However, greenfield and BOT models require construction financing for the construction of ports from scratch and also capex financing for the operation period. It should be emphasised that the legislation and practice for better structuring project finance for port construction and operation deals is improving. However, complete success has yet to be achieved.

In transfer of operation rights agreements, the inclusion of step-in rights in favour of financing institutions or banks – to be triggered when the private investor defaults under the facility agreement – is a definite improvement. Nevertheless, implementing the step-in right seems difficult, since the proposed third party has to comply with the requirements in the tender specifications, and it is unclear how the financing institution or bank will choose the third party.

In a project finance-structured deal, it is essential to form an effective financing structure, as the project will mainly be financed through revenue to minimise the input from project sponsors. Accordingly, the profitability of the project is essential, since the financing is secured by the revenue and assets of the project itself. A detailed feasibility study of the project to be implemented should be made in order to achieve secure and functioning implementation of the project itself and its financing structure.

The main piece of legislation applicable to greenfield port projects, namely the Regulation on Immovable Property Owned by the Treasury, has recently been amended, changing the procedures for obtaining permission, bringing discounts over the annual usage and servitude rights fees, and introducing the possibility of suspending servitude and usage rights in the event of a force majeure. However, this regulation still does not provide a specific procedure for financing these projects. Furthermore, establishment of security over the main assets of these projects (the servitude and usage rights obtained form the General Directorate of National Real Estate) is a bottleneck. Transfer of these rights is subject to the approval of the administration, which is entitled to amend the relevant agreement executed with the investor for the specific servitude and usage rights if these rights are transferred, and there is no defined legal procedure for obtaining prior consent of the administration for a possible transfer. The legislation should be re-considered with a view toward this approach for easing the financing of greenfield projects that are of interest to the private sector today, such as the jetties in Aliaga and developments on the southern coast of Turkey, such as Iskenderun.

Risk minimisation is another essential aspect of project finance. In order to have a successful project finance-structured deal, the project's financing risks should be identified and analysed, then allocated to the party that will be able to minimise the chances of such risk, and bear its consequences if realised. Risks such as those relating to changes in law, political approaches, or involvement of the public give rise to hesitation over implementing port projects by virtue of the disequilibrium in agreements to which state or administrative authorities are a party. Therefore, sophisticated risk mitigation mechanisms should be introduced and approved to attract private capital to port projects.

In conclusion, we believe amendments in the relevant legislation should continue with the aim of overcoming hesitation and attracting private capital to the port industry through improvement of the bankability of port projects. In particular, we expect the relevant legislation and consequent practice to foster an increase in well-drafted contracts that provide for structured risk mitigation mechanisms.

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