Construction and projects in Turkey: overview
A Q&A guide to construction and projects law in Turkey.
The Q&A gives a high level overview of the main trends and significant deals; the main parties; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; labour laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; the main construction organisations; and proposals for reform.
To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.
This Q&A is part of the global guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-mjg.
Overview of the construction and projects sector
Energy and infrastructure projects continue to be the most popular projects in Turkey. The government promotes independent investment in these sectors and has also put great focus on public private partnership (PPP) projects over the few last years. PPP is mainly focused on the Turkish healthcare, energy, airport, road and railway sectors. In addition, the government's urban transformation programme, residential mass housing and shopping mall developments have a substantial impact on the sector.
The current major projects in Turkey include:
Third bridge project in Istanbul. The project for the construction of a third bridge over the Bosphorus is being carried out by the joint venture of IC İçtaş and Astaldi under the build-operate-transfer model. The construction began in 2013 and is expected to be completed in 2015.
Third airport project in Istanbul. The joint venture consortium of Cengiz-Kolin-Limak-Kalyon-Mapa won the tender for this project on 3 May 2013. The project will be carried out under the build-operate-transfer model. Completion of the construction is expected to be in 2018 and the operation term will be 25 years. On completion, the third airport is expected to be one of the largest in the world in terms of passenger capacity and size.
Hospital PPP projects. These projects are expected to add more than 28,000 beds to Turkey's existing 200,000-bed capacity.
Gebze-Izmir highway and bridge project. This project is the first road project in Turkey to be procured under the build-operate-transfer model. The Turkish-Italian consortium of Nurol-Özaltın-Makyol-Astaldi-Yüksel-Göçay is carrying out the project, which is expected to be completed in 2016.
Akkuyu and Sinop nuclear power plants. The Turkish government is determined to be a nuclear developed country. Currently, the Akkuyu and Sinop nuclear power plants are contracted to Russian and Japanese-French consortiums respectively. The government recently revealed the plans for the construction of a third nuclear power plant in Turkey.
For private projects and especially large-scale and complex infrastructure and energy projects, the most common procurement arrangement is the execution of engineering procurement and construction (EPC) contracts on a turnkey basis. The EPC contractor is required to perform the works and provide a warranty for a certain period of time, which is usually approximately 24 months. A tender process is not legally required in the private sector. However, large companies generally prefer to run a tender process.
For public projects, the government conducts a formal tender process for awarding contracts in accordance with Public Procurement Law No. 4734. The implementation of public procurement contracts is governed under the Public Procurement Contracts Law No. 4735. The method of tender is typically in the form of an open tender or tendering to specific bidders that includes a prequalification phase. The negotiation method and direct tendering are only used in exceptional circumstances.
For big scale projects, the administration may also prefer to use a PPP model. As a PPP model, build-operate-transfer (BOT), build-operate (BO) and build-lease-transfer (BLT) are mainly used in the Turkish market for greenfield projects. For PPP projects, the Public Procurement Law No. 4734 is not applied.
As a general principle, tenders are conducted in a non-discriminatory manner, ensuring transparency, competition, reliability and confidentiality.
The procurement arrangements do not differ when the main parties are local or foreign.
For private projects, owners typically execute agreements with EPC contractors and a special purpose vehicle (SPV) is not required. However, an SPV may be required to be formed for public projects, depending on the tender specifications. After the public tender, companies forming the SPV usually execute a shareholders' arrangement to regulate their internal relationship. However, regardless of their contractual relationship, the companies forming the SPV are jointly and severally liable against the administration. In addition, joint ventures established in the form of business partnerships or consortiums are commonly used in Turkey, and depending on the tender specifications, may be allowed in public tenders.
The structures for international projects are the same as for local projects.
Financing of projects through commercial banks, export credit agencies and international financial institutions are commonly used. The debt-to-equity ratio is usually 20-80 or 30-70. The project assets, including receivables, are secured for the benefit of the lenders. Islamic finance is expected to take an important role in project financing.
For government projects, there may be other elements in financings such as:
A debt assumption by the Treasury.
A governmental authority's payment undertaking.
A step-in provision.
Security and contractual protections
The most common form of securities, both for local and international projects, are as follows:
Pledge on movables. A pledge on movable properties requires the actual delivery of physical possession of the pledged assets by the pledgee or a third party escrow appointed by the pledgee.
Commercial enterprise pledge. Movable properties and licences of a commercial enterprise can be subject to a commercial enterprise pledge that provides a security without taking possession of the pledged assets (such as fixed assets and intangible rights of the pledgor).
Share pledge. Shares of a company can be pledged under Turkish law under a share pledge agreement.
Pledge over receivables. Receivables of a company can also be pledged by the pledgor by written agreement.
Bank account pledge. A pledge over bank accounts held with a Turkish bank or a branch of an international bank is another form of security arrangement that is commonly provided.
Mortgage. A mortgage can be established over immovable property or certain rights in rem connected to the immovable property (such as a usufruct right) in order to secure the payment of existing or future debts.
Assignment of receivables. Assignment of receivables is also commonly used as a security mechanism. This involves the transfer of the receivables of the creditor (assignor) to a third person (assignee) by execution of a written agreement.
The common forms of contractual protections that funders require are as follows:
Assignment of implementation agreements and project receivables.
Direct agreements with EPC and operations and maintenance (O&M) contractors.
Step-in rights. There is no step-in right mechanism established under Turkish law except for the step-in right provided under the licensing regulations in the energy sector. There is also a step-in right provided under the Healthcare PPP Law No. 6428 for healthcare projects.
Standard forms of contracts
Parties generally draft and execute their own contracts with respect to private projects. The owner usually has its own standard form contract, which sets the basis for negotiations. Standard form FIDIC contracts are also occasionally used.
For public projects within the scope of the Public Procurement Law No. 4734, non-negotiable standard form public procurement contracts issued by the Public Procurement Authority must be used. The standard contracts regarding procurement of goods and services and construction are published in the Official Gazette. For PPP projects, the project agreement is also a part of the tender documentation.
The forms of contract used for local projects are also applicable for international projects.
The contractor typically has the following obligations, among others, and is responsible for the risks related to:
Performing the works in accordance with the construction and delivery schedule and is liable for delay-related liquidated damages.
Duly obtaining and performing the work in compliance with the required permits and land rights, and is liable for the failures or delay in the obtaining of, and acting in breach of, such permits and rights.
Complying with the relevant health and safety regulations and social security obligations. The contractor generally undertakes to procure that subcontractors also comply with the same regulations.
Procuring, paying for, receiving, transporting and storing all construction equipment, tools and utilities necessary for the performance of the work.
The contractor can typically only request variations under specific circumstances determined by the contract, such as a change in the law, failure of the owner to obtain owner's permits, and so on.
In order to mitigate the risks arising from the contractor's breach of its obligations, the contractor is usually required to provide performance bonds.
There are no key variations between local and international projects.
Parties can limit their liabilities by:
Types of indemnifiable claims.
Imposing time limits on claiming compensation.
Accordingly, such agreements may exclude, among other things, liability for any indirect, special or consequential damages or loss of profits, loss of use, loss of production, loss of contract or opportunity or loss of goodwill based on contracts, warranties, torts or strict liability.
However, liabilities arising out of gross negligence and wilful misconduct cannot be restricted in any manner. In cases of gross negligence or wilful misconduct, the limitation of such liabilities under a contract would be deemed invalid before the Turkish courts under the provisions of the Turkish Code of Obligations.
Caps on liability
Parties generally negotiate and set a cap on liability. Parties usually set the limit for a contractor's total cumulative liability on all claims, losses, damages and expenses based on contract, tort (including negligence) and strict liability to 100% of the contract price.
A cap for liability on liquidated damages and contractual penalties is often determined separately and the parties mutually agree on limits varying between 10% and 25% of the contract price.
However, in practice, liability in relation to the following is not commonly contractually capped:
Wilful misconduct, gross negligence or fraud.
Third party damages (including, but not limited to, environmental liability, personal injury, death).
Intellectual property rights.
These limitations are based on the mutual agreement of the parties and there are no key variations between local and international projects.
Force majeure exclusions are available and enforceable under Turkish law. Parties generally include detailed provisions in relation to force majeure in their contracts.
Force majeure events are generally contractually defined as an event that:
Prevents or delays the due performance of the affected party's obligations under the contract.
Is beyond the affected party's control and does not result out of its fault or gross negligence.
Could not be prevented or avoided by the affected party through the exercise of due diligence.
Any event satisfying these qualifications may be deemed as a force majeure event and the contractor would be able to benefit from a force majeure clause if there are problems in performing the contract due to a delay in the supply of materials because of exceptional events beyond its control. In practice, parties may also choose to provide an exhaustive list of force majeure events satisfying the above conditions that usually consist of natural phenomena, wars, fire and national legal strikes. If so, the level of assistance to the contractor would usually be limited.
To avoid delays during the pre-construction period, the owner usually gives a notice to proceed before commencement of construction on the satisfaction of certain conditions precedent, such as obtaining required permits, execution of finance documents and procurement of necessary insurances.
During the construction period, certain milestones are typically determined under the contract. If one or more of the milestones are not achieved within the dates set out in the contract, delay-related liquidated damages must be paid by the contactor if this eventually results in delay in completion. The liability for these liquidated damages is usually capped at 10% to 25% of the contract price. If the contractor exceeds the maximum amount provided as payable for delay liquidated damages, the owner is usually entitled to both:
Terminate the contract.
Request that the contractor assign all the agreements signed between the contractor and the subcontractor and the key supplier to any party designated by the owner to allow the owner to complete the project itself.
Additionally, contracts usually allow contractors to request for extensions of time due to reasons beyond the contractors' control, provided that the delay is not attributable to the contractor.
There is no key variation between local and international projects.
The owner may request variations and/or adjust the work schedule by issuing a written variation order, and instruct the contractor to make changes in the work. On such a request for variation, the owner and the contractor negotiate the terms of the change order and determine the extent of adjustments, including the costs related to the changes. To request a work schedule adjustment for variations, the contractor must reasonably demonstrate that the requested/approved variation has affected the timing of all elements of the work. With respect to price adjustments for variations, the contractor is expected to use commercially reasonable efforts to minimise the costs of such variation and maintain proper and detailed documentation of the costs.
Contractors may request variations, subject to the owner's consent. Variations are also possible in cases where it becomes necessary to conform to a change in the relevant law.
There are no key differences between local and international projects.
Other negotiated provisions
The parties usually heavily negotiate:
Testing and acceptance procedures.
Respective liabilities (including limitation of liabilities).
Clauses regarding material delays and variations.
There are no key variations between local and international projects.
Architects, engineers and construction professionals
For private projects, owners are not obliged to conduct a formal tender process and often prefer to work with contractors that they have previously worked with. However, for corporate maintenance reasons, large-scale companies often receive proposals from multiple companies and select professionals according to their internal tender process.
For government projects, construction professionals are selected by a formal tender process.
Construction professionals are generally appointed by contracts that are usually in the owner's standard form, rather than engagement letters.
There are no key variations between local and international projects.
The fees and liability provisions of the construction professionals are often heavily negotiated. In addition, working methodology provisions are also heavily negotiated as the owners usually prefer professionals who are able to work harmoniously with their own employees and contractors. The liability of construction professionals for wilful misconduct, fraud and gross negligence are covered by the Turkish Code of Obligations and the applicable regulatory requirements imposed by relevant professional unions and organisations. For limitation of liability, see Question 9.
Payment for construction work
Methods of payment
There is no statutory legal procedure for payments. In practice, the owner usually makes an advance payment varying from 10% to 20% of the contract price on the commencement date and may occasionally make a down payment equal to approximately 1% of the contract price on the notice to proceed. During the construction period, milestone payments of different amounts are determined by the parties. Generally, payments are made following site delivery to ensure safe delivery of the equipment in EPC contracts.
The contractor is required to issue invoices, the required content of which may be determined by the contract. The invoices are usually issued when the milestone payments are due. In practice, owners may occasionally request that monthly payment statements are submitted by the contractor subject to the owner's review and approval before the issuance of an invoice. The payment is usually made by wire transfer.
In practice, contractors secure payment under contracts through payment bonds and parent company guarantees. In addition, unless provided otherwise in the contracts, under Turkish law the contractor can place a lien or attachment over the works and the owner's property in the contractor's possession.
In practice, the contractor executes a separate agreement with the subcontractor in compliance with the terms of the main agreement and the owner does not have a contractual relationship with the subcontractor unless otherwise agreed. The parties may determine a list of subcontractors approved by the owner under the main contract and subject any changes of the subcontractors to the owner's prior approval.
Under the main agreements, the contractor generally undertakes to make proper payments to subcontractors and to indemnify and hold harmless the owner against all liabilities, claims and expenses arising from the contractor's breach of its payment obligations against the subcontractor, including social security payments. The Social Security Institution can claim social security payments directly from the owner if the subcontractor or contractor fail to make the necessary payments. The owner may then require recourse to the contractor for the social security payments under their contractual relationship.
Contractors and construction professionals must be registered with the relevant professional chambers, and contractors must be issued an authorisation certificate from the Provincial Directorate of Public Works and Settlement to carry out local construction work.
There are no specific licensing requirements for international contractors and construction professionals. However, to perform works in Turkey, international contractors and construction professionals must also fulfil the criteria required by the relevant legislation. Accordingly, foreign contractors must obtain work permits for foreign professionals to be employed only in relation to the undertaken engineering and architectural work.
Required prior consents include:
Approval of zoning plans. The owner must apply to the relevant municipality, special provincial administration or government ministry, depending on the nature and location of the project for the revision of the zoning plans.
EIA approvals. Depending on the nature of the project, either EIA approval or an EIA Not Required Certificate is required. See Question 25.
Construction permit. Under Zoning Law No. 3194, a construction permit must be obtained from the relevant municipality before commencement of construction. Construction permits have a term of five years, which means that the construction of the relevant structure must be completed within five years from the date of the construction permit unless the permit term is extended.
Obtaining land usage rights. Land usage rights over privately owned lands can be obtained through lease, creation of easement right, the expropriation or purchase of the land (although this is not usually preferred due to its high costs).
Other permits depending on the nature of the project. Depending on the nature of the project and the site where the project is located, other permits and approvals may be required before construction, such as:
approval of the General Staff;
approval for protection zones and national heritage sites;
approval of the General Directorate for Mining Affairs; or
a preliminary licence issued by the Energy Market Regulatory Authority for energy generation facilities.
The consents required during a project include:
Workplace opening and operating permit. No workplace can be opened and operated without a workplace opening and operating permit. This permit is issued by local municipalities or management of organised industrial zones for an indefinite period of time.
Site Selection and Facility Establishment Permit. For workplaces classified as first degree non-sanitary workplaces, this permit is required for obtaining a workplace opening and operating permit. If obtained, this permit comprises EIA approvals.
The consents required on completion include:
Occupancy permit. Once the construction is completed, the owner of the structure or the contractor must obtain an occupancy permit from the relevant municipality or the special provincial administration depending on the location of the project. This permit certifies that the structure in question has been properly constructed and is fully suitable for its purpose and therefore can be occupied.
Temporary/Final acceptance by the Ministry of Energy and Natural Resources. On completion, power plants must be issued temporary and final acceptance certificates by the Ministry of Energy and Natural Resources.
Environmental permits. See Question 25.
Industrial Registry Certificate. Industrial facilities must be registered with the industrial registry held by the Ministry of Science, Industry and Technology and obtain an industrial registry certificate from them within two months from commencement of their operation, which must be updated every two years.
The following insurances must be taken out, depending on the nature of the project:
Social security registrations of the workers.
Hazardous materials liability insurance.
Coastal facilities marine pollution liability insurance.
The following types of insurances are usually contractually required:
Professional liability insurance.
Third party liability insurance.
Property damage insurance.
Local workers are employed pursuant to Labour Law No. 4857. Accordingly, there may be some restrictions depending on the type of the work. For instance, women and individuals under the age of 16 cannot be hired for works to be conducted underwater or underground, such as mines, construction of tunnels and so on. Individuals under 18 but above 16 can be only hired for basic construction works under the Regulation on Employment of Young and Child Labour.
Foreign workers are employed pursuant to the Law on Work Permits of Foreigners No. 4817. The types of work permit are:
Work permit for a definite time.
Work permit for an indefinite time.
Independent work permit.
To obtain a work permit, the following criteria must be satisfied:
A minimum of five employees who are Turkish citizens must be employed for each foreign employee in every workplace where a foreign employee is employed.
The workplace must have either:
issued capital of at least TRY100,000;
gross sales of at least TRY800,000;
exports of at least US$250,000 in the previous year.
The amount of monthly wages announced to be paid by the employer to the foreigner must be appropriate to the foreigner's job definition and competence. For senior executives, it must be more than 6.5 times the minimum wage.
Different criteria may apply to workers deemed as key personnel employed in direct foreign investments with particular features.
Labour Law No. 4857 and its regulations is the main legislation that regulates the minimum wage and restrictions on working hours. The Labour Law also covers all employment rights, agreements, subcontracting and so on for all types of employment. The relevant provisions of the Turkish Code of Obligations also apply.
Under Labour Law No. 4857, when an employment agreement is terminated, an employee may be entitled to receive a severance payment, if he was employed with the same employer for more than a year. The payment is equivalent to 30 days' gross salary (including continuous monetary benefits) for each full year of service and is based on the most recent gross salary of the employee. The Council of Ministers periodically fixes a ceiling that must be taken into account when calculating the severance payment, regardless of the actual salary of the employee, if the severance payment calculated based on the actual salary of an employee exceeds the ceiling.
However, redundancy payments are not necessarily paid at the end of every project. If employees have an employment agreement with an indefinite term, their agreements are not automatically terminated at the end of a project and they may be used for other works and statutory redundancy payments are not made.
Health and safety
The main pieces of legislation regulating occupational safety are:
Labour Law No. 4857.
Law on Occupational Health and Safety No. 6331.
The International Labour Organisation's Health and Safety in Construction Convention numbered 167.
Regulation on Occupational Health and Safety.
Regulation on Occupational Health and Safety Services.
Regulation on Occupational Health and Safety Boards.
Regulation on Employee's Occupational Health and Safety Education Principles and Rules.
Regulation on Assessments of Occupational Health and Safety Risks.
Regulation on Occupational Health and Safety at Construction Workplaces.
Regulation on Occupational Health and Safety at Mine Workplaces.
Under the Occupational Health and Safety Law No. 6331, employers must:
Appoint at least one occupational safety specialist, a workplace doctor and other health personnel.
Provide education regarding occupational health and safety to its employees.
Assess risks of the work.
Establish a committee whose decisions must be applied by the employer if the employer employs more than 50 workers at the workplace.
Cease work if a life-threatening event occurs.
Notify the Social Security Institution of occupational accidents and illnesses within three business days after an accident occurs.
Failure to comply with the above requirements may result in various administrative fines of up to TRY5,601 per month/employee/non-compliance.
In addition, employers and their managers, directors or representatives may be held liable for operational accidents and be subject to penalties such as imprisonment under the Turkish Criminal Code.
Under the Environmental Permits and Licences Regulation, facilities with polluting effects must obtain an environmental permit in which all environmental permits, including air, water and waste, are gathered under a single permit. Accordingly, depending on the nature of the project, environmental permits may consist of an emission permit, noise control permit, a waste water discharge permit, a wastewater with hazardous material discharge permit and/or a deep sea discharge permit.
Emission limits are determined by the Air Quality Control Regulation for industrial facilities. An environmental permit is required when a certain limit is exceeded. In addition, facilities that are not subject to environmental permits must minimise their emissions through the use of high-tech methods.
The Water Pollution Regulation regulates the limits for domestic and industrial wastewater and its discharge. An environmental permit covering a discharge permit is required if certain limits are exceeded. In addition, for discharge through a sewage connection, either a connection permit or connection status certificate from the relevant water and sewage administration is required.
The requirements relating to waste include:
Excavation Soil Control. Under the Regulation Regarding the Control of Excavation Soil and Construction Related Wastes, entities producing more than two tons of excavation soil and construction-related soil must obtain a waste transportation and acceptance certificate from the relevant municipalities.
Package Waste Management. Entities producing and disposing of package waste have certain notification, recycling, collection and certification obligations under the Package Waste Control Regulation.
Hazardous Waste Management. Under the Regulation on Hazardous Waste Control, entities producing hazardous waste have certain obligations regarding the removal of hazardous wastes, preparation and approval of waste management plans, and notification.
Environmental impact assessments (EIAs)
Under the Environmental Impact Assessment Regulation, facilities within the scope of the regulation must either obtain an EIA Approval or an EIA Not Required Certificate. Facilities listed under Annex 1 of the EIA Regulation are subject to EIA Approval, whereas facilities listed under Annex 2 are subject to selection and elimination criteria following which the relevant administration determines whether an EIA Report is necessary. Annex 1 of the EIA Regulation sets out a detailed list setting out specific projects subject to EIA approval. These include:
Thermal power plants above 300MWt.
Nuclear power plants.
Railway tracks longer than 100km.
Airports with a landing field longer than 2,100 metres.
Highways and state roads.
Ports allowing the passage of vessels above 1.350DWT.
Dams and ponds with a capacity above 10 million m3.
Hydroelectric power plants with an installed capacity above 10MWm.
Wind power plants with an installed capacity above 50MWe.
Solar power plants with an installed capacity above 10MWe.
Electricity transmission lines above 154kV and longer than 15km.
Under Annex 2 of the EIA Regulation, the following projects, among others, are subject to selection and elimination criteria:
Railway tracks not listed under Annex 1.
Airports not listed under Annex 1.
Ring roads longer than 20km.
Collective housing projects consisting of more than 500 houses.
Shopping malls above 50,000m2.
Electricity transmission lines above 154kV and between 5km and 15km.
Hydroelectric power plants with an installed capacity between 1MWm and 10MWm.
Wind power plants with an installed capacity between 10MWm and 50MWm.
Solar power plants with an installed capacity between 1MWe and 10MWe.
Coal processing facilities.
Governmental authorities may instruct facilities in compliance with good engineering practices. Under Environmental Law No. 2872, authorised institutions performing project evaluations must take into account sustainable development principles. In addition, for completion of power plant projects the Ministry of Energy and Natural Resources must issue temporary and final acceptance certificates evidencing the project's compliance with the regulatory requirements. Apart from these, the requirement to use sustainable construction practices is generally a contractual issue.
Turkey is a party to the Kyoto Protocol to the United Nations Framework on Climate Change. However, Turkey does not have the obligation to reduce its gas emissions until 2020. Therefore, there are no requirements for new buildings to meet carbon emission or climate change targets under the Kyoto Protocol.
However, Environmental Law No. 2872 imposes various administrative fines on facilities that are in breach of their air emission obligations (for example, if they exceed certain emission limits). In addition, under the Energy Efficiency Law No. 5627, buildings must comply with certain energy efficiency requirements, including heat insulation.
Prohibiting corrupt practices
The main piece of legislation applying to acts of corruption is the Turkish Criminal Code No. 5237, which prohibits domestic bribery, corruption in a position of public trust, malfeasance and embezzlement.
Article 252 of the Turkish Criminal Code in particular defines bribery as providing a benefit to a public official for the performance or omission of an act with respect to his lawful duty. The Turkish Criminal Code penalises both the individual who gives a bribe and the public official who receives it.
Foreign bribery was also introduced in 2005 into the Turkish Criminal Code in line with the rules envisaged by the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
Other Turkish anti-corruption legislation includes the:
Law No. 657 on Public Officers.
Law No. 3628 on Declaration of Property and Fight against Bribery and Corruption.
Regulation on Ethical Principles for Public Officers and Procedures and Principles for Application.
In addition, Turkey is party to many international conventions on anti-corruption adopted mainly by the Council of Europe and other international institutions such as the United Nations and the Organisation for Economic Co-operation and Development.
Under the Turkish Criminal Code, the penalty imposed for bribery is imprisonment for between four and 12 years. Officials who receive the bribe(s) are subject to the same penalty.
In addition, a legal entity for which an unlawful benefit has been created through bribery may be punished under Article 253 of the Turkish Criminal Code by:
The invalidation of a licence granted by a public authority.
Seizure of goods or pecuniary benefits arising from the bribery.
It is common practice to insert a provision in contractor contracts stating that the contract can be terminated in the event of the contractor's bankruptcy or insolvency. In addition, in the event of the contractor's bankruptcy or insolvency, the owner may avoid performing its obligations under the contract until a guarantee is provided by the contractor. If the contractor fails to provide such guarantee within a reasonable time, the owner is entitled to terminate the contract. In this case, its receivables under the contract become due and payable. Such receivables can be collected by applying to the bankrupt's estate. During collection, some receivables have priority over the owner and funder's receivables, such as secured receivables or public claims, and so on.
PPPs have been regularly used in the Turkish market since the 1980s under various models (including concession agreements, build-operate-lease, build-operate or transfer of operational rights). The main sectors in the PPP model are energy, transportation and healthcare. In recent years, healthcare has been emerging as the leading sector with an increasing number of hospital PPP projects. The PPP method is expected to be used in education and prison projects as well.
The following legislation is relevant to PPPs:
Law on the Construction and Renovation of Facilities and the Procurement of Services via Public-Private Partnerships by the Ministry of Health No. 6428 dated 9 March 2013.
Regulation on the Implementation of the Construction and Renovation of Facilities and the Procurement of Services via Public-Private Partnerships by the Ministry of Health dated 9 May 2014.
Law on the Authorisation of Legal Entities other than the Turkish Electricity Authority for the Generation, Transmission, Distribution and Trade of Electricity No. 3096 dated 4 December 1984.
Law on the Realisation of Certain Investments and Services through the Build-Operate-Transfer model No. 3996 dated 8 June 1994.
Council of Ministers' Decree No. 2011/1807 re the implementation of Law No. 3996.
Law on the Authorisation of Legal Entities other than the General Directorate of Highways for the Construction, Operation and Maintenance of Highways No. 3465 dated 2 June 1988.
Law on the Development and Operation of Electricity Facilities based on the Build-Operate Model No. 4283 dated 16 July 1997.
The Council of Ministers Decree No. 97/9853 of 1 August 1997 Regarding the Implementation of Law No. 4283.
Law on Public Financing and Debt Management No.4749 dated 28 March 2002.
Debt Assumption Regulation published in the Official Gazette dated 19 April 2014.
For PPP transactions, the governmental authorities conduct a tender process by either:
Open tender (transparent).
Tendering to Specific Bidders (includes a prequalification phase).
Negotiation (in exceptional circumstances).
The tender documents consist of:
Administrative and technical specifications.
Instructions to bidders.
The draft contract to be executed between the investors.
Formal dispute resolution methods
There is an evolving tendency in Turkey to use arbitration for dispute settlement and arbitration is becoming a more common practice. In addition, the courts are displaying a more pro-arbitration approach regarding the validity of arbitration clauses and the recognition and enforcement of arbitral awards. The Turkish Civil Code has modern arbitration provisions applied to domestic disputes. However, if the dispute has a foreign element, the International Arbitration Law No. 4686, which is almost a verbatim adoption of the UNCITRAL Model Law on International Commercial Arbitration 1985, is applied as lex arbitri. Court litigation is also still commonly preferred by the parties as a dispute resolution method.
Courts and arbitration organisations
ICC arbitration is the most commonly used arbitration in Turkey. The Istanbul Chamber of Commerce has an arbitration institution that was founded in 1979, although it is not as commonly preferred. Additionally, The Istanbul Arbitration Centre Law No. 6570 was enacted on 29 November 2014 and becomes effective as of 1 January 2015.
As Turkey is party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, construction disputes may be resolved before the International Centre for Settlement of Investment Disputes, provided that the dispute arises out of a foreign investment and the other necessary conditions are fulfilled.
ADR methods are generally used as a pre-condition to the arbitration or litigation stage although there are no specific rules on ADR methods in Turkey. It is also common practice in construction projects to execute an evidential contract according to which an expert's reports serve as binding evidence in court cases. Turkey's ADR practice is not very developed but it is expected to advance in the near future.
Turkish VAT is applied generally at a rate of 18% and can normally be completely recovered through the offsetting mechanism on a monthly-basis. The general rate of stamp tax, which is not a transaction tax, is just under 1%.
Title deed charges apply in the event of the transfer of title of the real estate, establishment of right in rem over it, or any other operation that performed before the land registry (such as the establishment of mortgage, construction servitude or condominium right, and so on).
Other requirements for international contractors
Reform and trends
The most important reform proposal is the Draft PPP Law, which has been awaiting enactment for several years.
Legislative reforms are generally made based on demand and the economic trends in the Turkish market. For instance, the Healthcare PPP Law No. 6428 dated 2013 and its implementation regulation dated 2014 have been enacted due to the need to transform the healthcare sector. As with the healthcare sector, specific PPP legislation regarding education and prison PPPs are expected to be developed. In addition, in the energy sector, regulatory bodies such as the Electricity Market Regulatory Authority regularly issue legislation based on the needs of the market and revise the current legislation.
Main construction organisations
Union of Chambers of Turkish Engineers and Architects (Türk Müşavir Mühendisler ve Mimarlar Birliği)
Main activities. The Union of Turkish Engineers and Architects is a confederation of all chambers of architects and engineers in Turkey and is responsible for protecting the rights of its members and issuing regulatory texts. All engineers and architects in Turkey must be registered with local chambers of engineers and architects that are the members of this union.
Union of Turkish Contractors (Türkiye Müteahhitler Birliği)
Main activities. The Union of Turkish Contractors is an independent, non-profit professional organisation based in Ankara and represents the leading construction companies in Turkey. It is responsible for protecting the rights of its members.
Chamber of Electrical Engineers (Elektrik Mühendisleri Odası)
Main activities. The Chamber of Electrical Engineers is one of the constituent chambers of the Union of Chambers of Turkish Engineers and Architects and represents Electrical, Electronics, Computer, and Biomedical Engineers. Its main duties are the protection of its members' interests and auditing professional services and products to improve quality.
Description. The Ministry of Economy's website contains Turkish and English versions of the legislation regarding foreign direct investments.
Description. The Ministry of Labour and Social Security's website contains Turkish language legislation regarding employment and work permits.
Description. The Energy Market Regulatory Authority's website contains Turkish and English versions of the legislation regarding the energy market.
Zeynel Tunc, Partner
Professional qualifications. Turkey, Lawyer
Areas of practice. Energy; natural resources; infrastructure; PPPs; construction; project finance.
Non-professional qualifications. Graduate of Kocaeli University School of Law; LL.M., University of Westminster, London; Executive MBA from Sabancı University, Istanbul
Leads the projects group, heading the Energy, Infrastructure and Construction practice with extensive experience of the Turkish energy sector.
Heavily involved in advising on the regulatory processes, privatisations, PPPs, licensing requirements, and project finance work, working along with the sponsors, lenders, including DFIs and ECAs, procuring entities, suppliers, contractors, the government agencies, the Turkish energy regulator, and the consultants in power, gas, mining, and infrastructure investments.
Advises on a wide range of FIDIC and non-FIDIC based construction, engineering and maintenance of large and mid-size power projects and infrastructure facilities from tender to contract negotiation, and resolution of construction disputes.
Vast banking and finance experience, acting for international financial institutions, lenders and borrowers in cross-border loan facilities.
Languages. English, Turkish
Professional associations/memberships. International Bar Association; Istanbul Bar Association.
IFLR Turkey Guide 2014 - PPPs.
Law Business Review series Public-Private Partnership Law Review TR Chapter.
IFLR Guide to Turkey 2013 - Energy, Oil & Gas Law Business Review series, The Energy Regulation and Markets Review, Turkey chapter.
Aslı Kehale Altunyuva, Associate
Professional qualifications. Turkey, Lawyer
Areas of practice. Energy; natural resources; infrastructure; PPPs; construction; project finance.
Non-professional qualifications. Graduate of Galatasaray University, School of Law; LL.M., University College London, 2008
Advising clients on drafting and negotiating energy purchase agreements, EPC contracts, O&M contracts, and other project related agreements.
Drafting, reviewing and commenting on corporate documents, shareholders agreements, project agreements, and joint venture agreements related to energy assets or acquisitions.
Languages. English, Turkish, French
Professional associations/memberships. Istanbul Bar Association.
Law Business Review series Public-Private Partnership Law Review TR Chapter.
IFLR Guide to Turkey 2013 - Energy, Oil & Gas, Law Business Review series, The Energy Regulation and Markets Review, Turkey chapter.