Moves by the Turkish government to encourage foreign investment in its healthcare system offer investors an opportunity for strong returns in a generally favourable political and corporate governance environment.

Health is one of the areas earmarked by the Turkish government for significant development over the next decade. However, unlike many other countries, the focus of this expansion is not solely on the country’s own citizens – Turkey also plans to become one of the world’s top providers of health services to patients from other regions, particularly north Africa and the Middle East.

Expenditure on healthcare is expected to double between 2006 and 2015 and private healthcare services represent a significant portion of this state investment. Forecasts for revenue from medical tourism suggest that it will be worth as much as $700m by the end of next year as overseas patients are attracted by shorter waiting times, the cost of treatment and the quality of the infrastructure.

The €10bn ($1.35bn) investment in the health campus programme in Turkey represents the largest pipeline of public- private partnership (PPP) hospitals anywhere on the globe.

The Ministry of Health, with the support of the World Bank, is implementing this 26,000-bed health transformation programme with the objectives of renovating healthcare infrastructure throughout Turkey to meet increasing healthcare demands, bringing together smaller hospitals under several integrated health campuses and increasing the quality and efficiency of the health service.

Turkey is already among the top 10 healthcare destinations globally, according to Deloitte’s 2014 Global Life Sciences Outlook, with 250,000 medical tourists in 2012, up from 74,000 in 2008. The country’s health tourism strategy includes medical, spa and healthcare for elderly and disabled people, and foreign patients are also seeking medical care in dentistry, optometry, orthopaedics and plastic surgery. There are more than 1,600 thermal springs in the country for those who seek alternative methods of treatment.
 
Turkey plans to introduce tax-free healthcare zones specifically tailored for foreign patients as part of its strategy to increase the number of medical tourists to 500,000 by 2015 and 2 million by 2023.

In February, Saudi-based Nesma Holding and Reaya Holding acquired a 50% stake in Turkish eye hospital chain, Avrupagoz, which has plans to open new clinics in Turkey and abroad, and is gearing up for an initial public offering on the London Stock Exchange by 2015.

Private sector investment has driven much of the healthcare sector’s growth in recent years. According to government statistics, foreign direct investment grew at a compounded average rate of 39% in the four years to 2012. Ernst & Young describes Turkey as offering one of the highest risk-reward ratios to foreign investors and more than half of respondents to its 2013 Turkey Attractiveness Survey were considering establishing or developing additional activities in the country during 2014.

Opportunities are available for both private equity and strategic investors, as well as in the context of public-private partnerships, explains Turgut Cankorel, an associate at law firm Chadbourne & Parke based in Istanbul.

“Private equity interest in hospitals continues, even in secondary private equity sales. For example, we represented Carlyle Group in its acquisition of a stake in Medical Park in 2009, and last year Carlyle Group exited this investment by selling its stake to another private equity group, Turkven.”

Abraaj Group exited its investment in the Acibadem healthcare group by selling it to Malaysia’s sovereign investment fund, which then proceeded to acquire a significant majority of the health insurance business of Acibadem.

“In addition, new private equity investors are entering the space, such as Gulf Capital acquiring a stake in Dogu Tip Merkezi last year,” adds Cankorel. “The increasing involvement of multilateral agencies such as the EBRD and the IFC – who have significantly bolstered their operations in Turkey – in healthcare projects is expected to act as a catalyst to attracting new private investment funds, some entering into Turkey for the first time.”

It should be noted that there have been certain legal challenges to the healthcare PPPs, which have slowed down progress in various projects and led to administrative courts issuing a stay of execution for three healthcare projects. A new PPP healthcare law was enacted with hopes of overcoming certain of the legal issues identified in the court challenges, although some of these challenges are still going on.

Improved governance
Recent overhauls in Turkey’s commercial and capital markets legislation aim to improve corporate governance standards for Turkish companies, explains Cankorel. “The revised legal framework addresses typical investor concerns related to transparency, director independence, minority protections and other corporate governance best practices.”

From the public sector standpoint, investors are generally cautious during election periods and the 2014-15 period is noteworthy in that respect due to the schedule of municipal, presidential and parliamentary elections. “Based on recent experience, however, the investment climate generally has returned to its normal activity following election periods,” adds Cankorel.

All projects in the Ministry of Health programme are funded with project financing, where investors can either be a bank or provide equity as a shareholder or invest by means of a loan, says Samed Kartci, head of PPP business development at Turkish construction firm YDA Group.

“Under the concession agreement it is obligatory to have at least 20% equity in these projects. The tenders are very competitive and in general equity has an internal rate of return of 11% to 12%. There is a high appetite from international markets to participate in this programme, including private equity funds.”

He believes investors are confident about levels of corporate governance. All projects have the same documentation – concession agreement and its schedules – which is bankable and equivalent to UK NHS PFI standards. A number of international consulting and legal firms were involved in due diligence for this documentation and the project agreement allows parties to take a dispute to the International Court of Arbitration and to hire an independent certifier if the public sector partner cannot complete commissioning on time.

State guarantees
Kartci observes that since its foundation as a state, Turkey has never been in default. “The Ministry of Health guarantees the senior debt floor to lenders and the payment of equity to investors if the concession agreement is terminated, no matter what the cause is.”
According to official figures, foreign direct investment inflows to the health and social work sector increased by 39% annually between 2008 and 2012, reaching $545m in 2012, says Aylin Dirioz, a consultant at FTI Consulting.

“International investors enter Turkey mostly through joint ventures, where personal contacts with domestic firms are important in winning public tenders. Turkey needs to improve its global competitiveness rankings on international procurement standards and transparency.

Turkish commercial law sets the commercial agreement framework, with international arbitration as a facilitation tool that provides a working basis for international investors. Political stability is a key factor in attracting inward investment and Turkish officials are very aware of the consequence of political volatility on convincing investors to enter the market.”

Turkey has proven there is continued commitment to strategic projects that are critical to the economic power of the country both regionally and internationally, irrespective of government change, she continues.

“It is unlikely there will be strategic reorientation. If a more conservative government takes office, the favourable terms for international investors might tighten to benefit the state even more, but there will be continued orientation towards profitable ventures in key strategic sectors such as healthcare.”

Per capita healthcare spending in Turkey is about one-third of the OECD average, with a lot of room for growth, says Cankorel. “As a result, we have seen merger and acquisition and other investment activity in virtually all areas of the Turkish healthcare sector, including healthcare services, medical equipment, clinical and educational infrastructure, pharmaceuticals and medical insurance.”

Regulatory challenges
However, opportunities in Turkish healthcare are subject to various regulatory and policy challenges warns Cankorel.

“For example, shortfalls in data collection systems and policies focused on reducing prices have led to concerns about the sustainability and quality of services. In the pharmaceuticals sector, limited research and development and product development by Turkish manufacturers is often attributed to inadequacies in licensing regulations, data protection rules, low cost pricing policies and incentive mechanisms. The broad scope of the universal health coverage system has been criticised for putting pressure on private health insurers.”

The prospects for medical devices are brighter as a result of the alignment of Turkish medical device legislation with EU regulations, which facilitates the marketing of Turkish medical devices in EU countries and vice versa. The healthcare PPP law requires that at least 20% of the medical equipment used in domestic projects must be of Turkish origin.