Many of the world’s governments face a long backlog of much-needed infrastructure and development projects. Debates surrounding the priority of these projects dominate election campaigns, and very few nations have the resources to complete everything they would like to achieve. Often, the only feasible solution is to delay plans over and over again, much to the detriment of the communities that rely on them.
To make these projects possible, governments are increasingly pursuing public-private partnerships (PPPs) to source additional funds, while also minimising risk. Such opportunities give private investors the chance to profit from the sector, while also providing a vital contribution to an often under-funded part of society.
Rönesans Healthcare Investment has invested in a number of PPP deals in Turkey, including the Ikitelli Hospital and Elazig Hospital. Rönesans Holding has also acquired Dutch-based constructor Ballast Nedam, along with other European companies, including: Hergiswil of Switzerland; Heitkamp of Germany; and a minority share purchase of Porr of Austria.
Kamil Yanıkomeroglu, Chairman of Rönesans Healthcare Investment, spoke to Mrassociates about how these deals represent an innovative new way of doing business.
The healthcare industry in Turkey has progressed a lot in recent years. Could you tell us about its development?
The beginning of the PPP story in Turkey dates back to 2003, when the Ministry of Health (MoH) launched its Health Transformation Programme. Being the main government body responsible for healthcare sector policymaking and the provision of healthcare services, the MoH recognised the need for renewed facilities and improved healthcare technology. Consequently, it started searching for a new scheme of financing these within a very short time frame. The target was big, so the transformation of old methods had to be fundamental.
PPS give private investors the opportunity to profit from the sector, while also providing a vital contribution to a sometimes under-funded facet of society
After an in-depth assessment of models in the world, the MoH decided to follow the PPP route, which has proven very efficient in terms of value for money for many other states. Since Turkey had sufficient private initiative to realise these investments, PPP schemes would give the Turkish Government a lot of leverage in terms of financing many new hospitals, while at the same time being able to extend its tenor of payment of these investments. Therefore, the government decided this would be the best scheme, and the MoH announced tenders. This was actually the beginning of a difficult process.
The project agreement in its initial form was not considered robust enough, and non-recourse project financing seemed to be a difficult target. After much hard work, amendments to the legislation to clarify grey areas and line-by-line assessment of the agreements with the MoH, we finally achieved the agreements in their current form in 2014. Today, this has proven a very robust structure, banked various times by international financing institutions.
All in all, I believe that the government’s decision to proceed with a PPP scheme was the correct decision. Since it was first implemented in Turkey, despite some bumps on the road at the very beginning, Turkey’s PPP adventure has become an example to many other countries aiming to adopt similar infrastructure development schemes.
What are the most important things to consider before making an investment in a PPP project in Turkey?
In general terms, the forex protection, termination regime and payment guarantee provided by the MoH are the strengths of the PPP scheme in Turkey. The scheme and our projects have already been banked several times by international lenders and international financial institutions, including the European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), European Investment Bank, SMBC, Bank of Tokyo-Mitsubishi (BTMU), Siemens, Japan Bank for International Cooperation (JBIC), Nissay and Daiichi, as well as NEXI as a principles for responsible investment provider, and many others. We partnered with Meridiam in four of the projects, and with Sojitz in the Ikitelli Hospital project. At this stage, we have opened Yozgat PPP Hospital (475 beds) in January 2017 and Adana PPP Hospital (1,550 beds) in September 2017, with both doing very well operationally. We finished these hospitals comfortably on time and in budget.
We have a great cooperation with the MoH, and the transition from construction to operation worked very well. Although we did experience the difficulty of being the first investor to open a PPP hospital in Turkey, with support from the MoH, Ministry of Finance and other stakeholders, every problem was solved. We have been receiving payments in accordance with the agreements, without any delay, and operations have been going smoothly. As a result, we have now successfully entered phase two (operations) of these investments.
At Rönesans, we have many hats. We are the investor at the special purpose vehicles, the engineering, procurement and construction contractor, and the facility management contractor. If I put on my investor hat for this question, I would observe that the scheme has repeatedly proven itself to be robust – not only in Europe through our partnership with Meridiam and European banks, but also in the Far East, thanks to our partnership with Sojitz and our friends at JBIC, NEXI and other Japanese financing institutions. As such, a new foreign investor should certainly seize this opportunity in Turkey and catch the train.
It is also important to underline that when you get comfortable with the product or project itself, local partners are always crucial when you enter new regions.
Are there ever any conflicts of interest between the public and private sectors concerning PPP deals?
The primary concerns for the public sector are having the hospital built and constructed to a certain level of specification, while providing good quality service at the lowest possible cost within a sustainable scheme. Of course, this has to allow some margin for the private investors to ensure that it is a sustainable business model throughout the life of the concession. The private sector has a concern of making that margin in return for the services provided and, at Rönesans, we are always concerned with preserving our reputation in the eyes of the public. Indeed, that angle is always a consideration for us while undertaking all these roles in hospital projects.
With the PPP scheme, the private sector is required to procure a high set of standards for design, construction and equipment, and then to provide services in accordance with well-defined standards. Without these, the revenues become subject to penalties defined under the project agreement, so protection for standards is already written into the agreements.
When you look at these projects from a general public benefit perspective, we value the social impact and, as a responsible organisation, we act next to the public sector and work together with it to bring out the best possible results for the whole community. Since the rules are clear in the agreement from day one, I would not say that we have material conflicts of interest with the public sector in any of these projects.
How significant are financial institutions when it comes to new construction projects, like the recent Elazı˘g Hospital deal, or your more recent Ikitelli deal?
Financial institutions are part of the foundation of a long-term PPP investment. At Rönesans, when we make decisions about new investments, we always assess the bankability of the project, across all sectors. We have a very large investment arm including our real estate and PPP business, and we have always leveraged our equity with external financing and in the real estate business, also with refinancing. This has also helped us reinvest our capital to new projects, helping us grow our investments and the company.
In the PPP projects, we have tried different schemes. For our Elazı˘g project, following our partner Meridiam’s experience in bond financing in other projects, we decided to do a bond financing. This was a first-ever in Turkey in many senses and included very innovative components and new products from EBRD. We had the support of EBRD, the Multilateral Investment Guarantee Agency and IFC. Without them, the Elazıg bond would not have been possible. Together they set a very good example and pioneered an excellent scheme of financing other future projects.
Turkey’s PPP adventure has become an example to many other countries aiming to adopt similar infrastructure development schemes
Ikitelli was another adventure in itself. Being one of the largest PPP hospitals in Turkey, with a debt requirement of $1.5bn, we had to find new resources to finance this project. After collaborating with Sojitz, we were able to tap Japanese financing resources. Furthermore, JBIC and NEXI have provided great support for this huge deal and have made it possible. Our trusted banks SMBC and BTMU, who we now consider reliable business partners, have also provided a great deal of support. This deal also had some interesting and first-ever aspects, with newcomers including Standard Chartered, Nissay and Daiichi coming to the pipeline. The deal was the largest infrastructure deal in Turkey for JBIC with 18 years tenor, and it was the first in Japanese currency in the pipeline.
From our point of view, financial institutions and their support to all new projects are fundamental, and we believe in building trust and long-term relationships with financial institutions.
What are some of the main responsibilities involved in the creation of what will become one of the world’s largest hospitals?
Constructing the biggest hospital in the area brings several responsibilities, both in technical and operational terms. In technical terms, since it is a large project with a gross building area of over one million sq m, the main challenge is to design a project that can both be operated efficiently and be navigated across easily. You need to think of various ways to provide efficiency for the MoH staff delivering these healthcare services, and also comfort and convenience for the patients who will benefit from these services. The second challenge concerning the design is the seismic base-isolator component. Ikitelli, like our Adana, Elazı˘g and Bursa hospitals, has seismic isolators and will be the largest building in the world with seismic isolators, dethroning our Adana hospital. Adana had previosuly been selected as the world’s second largest building to have isolators, according to ENR’s recent listing (with Apple’s new headquarters in California being the largest).
The second most important responsibility is to operate the hospital professionally. Thousands of people will be using the hospital on a daily basis, and this could create a chaotic environment if not managed efficiently; an advanced level of facility management is required. By the time we open the Ikitelli PPP hospital, our facility management company will have gained wide experience running large-scale operations across other projects. We had already started training our staff before we opened Yozgat and those trainees have grown to become trainers in Adana. Our organisation is, therefore, able to transfer experience and expertise from site to site, improving its processes and capability each time a new hospital is opened.
What are some of the most important aspects of your recent international partnerships?
We believe in trust in business life, and we build trust with our partners. I would say this is the underlying element of each of our partnerships. We have a partnership with American AGP in some of our real estate projects, with GIC of Singapore in the real estate platform, with French infrastructure fund Meridiam in PPPs, and with Japanese trading house Sojitz in our heavy industry projects in Turkmenistan and in PPP projects in Turkey. We have also been acquiring large European construction companies and, when doing this, you have to make efforts to integrate your own culture with the culture of those organisations. We believe these partnerships reflect our organisation’s ability to build trust with many different international players and also demonstrate our ability to reach a common ground with our mutual organisations. Indeed, our capabilities have always allowed us to create synergies in many areas, which have led to strong and sustainable partnerships. In any case, if there is no trust, then there is no reliability and then there is no partnership. The basis for any successful partnership is trust and good will.
The construction industry appears ripe for disruption. Why did you recently choose to acquire Ballast Nedam?
At Rönesans we work tirelessly to maintain our pace of growth, no matter what the global and local circumstances may be. A few years ago, if you asked others, they would have told you that the health PPPs in Turkey are a big risk and will probably never happen, but now it has become a very attractive investment, supported by the global financing community and international investors. We analyse our potential investments thoroughly and we do not refrain from challenges, otherwise we would not be able to grow, and we always consider future opportunities for growth. Ballast Nedam fit perfectly into our long-term strategy to grow in Europe, so we seized the opportunity to acquire this large, deep-rooted company, so we could achieve our goal of growing in Europe earlier than planned. We will now utilise Ballast’s infrastructure expertise to expand our business in Europe.
Having been at the company for 15 years now, how does your experience influence the decisions you make?
Having been more than 25 years in business life, I have always worked in environments where the balance can shift very fast and circumstances are perpetually changing. In business, you have to think and act fast to seize critical opportunities and I learned from experience to do exactly that, while also making sensible decisions in high-pressure situations.
Working for more than 25 years in the private sector, building partnerships with various international partners and developing various projects alongside international companies, has given me a strong global insight. Looking at things from different perspectives always helps innovative thinking and progression. For long-term decisions, I think the thorough consideration of political and economic circumstances are necessary in order to distinguish the right investments from the wrong ones.
Environmental and social impacts can be significant in any construction project. How does Rönesans Holding keep sustainability at the forefront of its work?
Part of the success of our investments and construction business comes down to the importance we attach to meeting global environmental and social (E&S) standards. All of our projects are subject to very strict E&S principles and health and safety guidelines, as we always allocate a significant budget for monitoring these issues. There are periodic requirements for each project that need to be satisfied and reported. This comes from our dedication to build trust with all stakeholders that are involved in our projects.
What can we expect for the future?
We are planning to export our PPP scheme to some target countries that aim to improve their social infrastructure through this scheme. We will continue to grow in Europe, mainly with new infrastructure projects. We will definitely be interested in new tenders in Turkey, with PPP hospitals and other large infrastructure projects expected to be launched by the government in the near future. We are also developing some new real estate projects and plan to open others in 2018. In summary, we intend to expand our infrastructure arm with more projects in Turkey and Europe in the near future.