US embassy cable - 05ANKARA886

UNCLAS SECTION 01 OF 03 ANKARA 000886 
 
SIPDIS 
 
USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO 
DOE FOR C WASHINGTON 
EXIM FOR P ROSS AND M KOSTIC 
OPIC FOR R CORRIGAN, D SCHMITZER, AND T MAHAFFEY 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, TU 
SUBJECT:  Update on Turkey BOT Power Plants 
 
REF: Ankara 566 
 
04 Ankara 4601 
 
Sensitive But Unclassified.  Please Handle Accordingly. 
 
1.  (SBU)  Summary.  The importance for Turkey of 
honoring its "BOT" contracts with independent power 
projects despite their high cost has been on the U.S.- 
Turkey economic agenda since the beginning of this 
decade.  Despite public blustering and pressure on the 
companies to reduce prices, the government has allowed 
the plants to operate and has not taken any unilateral 
confiscatory or expropriatory action.  The government 
and the companies are currently negotiating contract 
changes, but even if these negotiations are mainly 
intended for public consumption, it is unlikely that 
the government -- which needs to attract substantial 
foreign and domestic private investment in generating 
capacity over the next few years -- will take dramatic 
action against the companies, which continue to involve 
substantial, though declining, U.S. financial 
interests.  End Summary. 
 
------------------------------ 
The Longstanding Issue of BOTs 
------------------------------ 
 
2.  (SBU)  Since the late 1990s, the Turkish government 
has grappled with the financial and domestic political 
problems presented by "take or pay" contracts that 
require it to purchase electricity from privately 
developed independent power projects (IPPs) at high 
guaranteed prices.  At several points, especially 
during and immediately after the 2000-01 financial 
crisis, Turkish officials threatened to unilaterally 
alter or abrogate these contracts.  At other times they 
have applied strong legal and regulatory pressures, 
often amounting to harassment, in unsuccessful efforts 
to convince IPP sponsors to agree to changes in 
contract terms.  With several of the plants having 
public and private U.S. debt and equity exposure, U.S. 
officials have continually urged Turkey not to take any 
actions that would call into question the principle of 
"contract sanctity" and thereby further damage Turkey's 
already fragile business and investment climates as 
well as U.S. commercial interests. 
 
---------------------------- 
BOT'S Become Political Issue 
---------------------------- 
 
3.  (SBU)  BOT's (Build-Operate-Transfer) account for 
40% of the country's current electricity generation and 
25% of installed capacity.  Especially in the context 
of severe government spending austerity since the 
financial crisis, the contracts have become a sensitive 
political issue.  Popularity-seeking politicians have 
made repeated promises to reduce electricity prices 
paid by businesses and consumers, while the 
sensationalist, nationalistic press constantly goads 
the government and public on the issue. 
 
4.  (SBU)  Two BOT gas-fired IPPs, Trakya Elektrik and 
Doga Enerji, have attracted the most controversy. 
Although the plants have never been issued formal 
licenses, the government has allowed them to operate at 
full capacity under the existing contracts.  Thus, GOT 
has taken and paid for the electricity produced per the 
take-or-pay contracts.  However, in an apparent effort 
to pressure the companies, Turkish officials have 
subjected them to intrusive tax and financial 
inspections that the companies claim -- and Turkish 
officials will privately admit -- has at times amounted 
to harassment.  At several points, the press has 
reported that the government intended to seize the 
plants.  The most recent such reports, in October 2003, 
were denied by the Energy Ministry. 
 
------------------------------ 
Mood Turns Toward Negotiations 
------------------------------ 
 
5.  (SBU)  More recently however, Turkish government 
officials have adopted a different tone and apparently 
a different approach to the problem, although the 
investigations of potential "misconduct" continue (ref 
B).  Turkish officials tell us they recognize the 
importance of not abrogating existing contracts. 
Instead, they say they are looking for negotiated 
"solutions," and have called for "voluntary reductions" 
from four existing BOT projects that would be 
negotiated between the government and investors.  The 
GOT and companies have recently entered into 
negotiations for a compromise, although companies 
continue to report an excess of inspection and pressure 
to unilaterally cut prices. 
 
6.  (SBU)  In late December 2004, the Energy Ministry 
initiated negotiations with the BOT sponsors to seek a 
solution to the BOT conundrum that does not disturb 
investors.  While citing the value of contract 
sanctity, the MENR called for a voluntary reduction in 
price in recognition of the changed market 
circumstances.  The BOT companies, quite naturally, 
remain suspicious.  A company official told us that the 
Ministry implicitly threatened to pursue the results of 
financial and customs inspections, without revealing 
any potentially incriminating information it might 
have.  The Ministry initial set a public deadline of 
January 15 for company offers and a determination to 
solve the BOT problem by May.  Without making any 
"offers" on prices, the companies all sent letters to 
the Ministry prior to January 15 asserting their 
steadfast adhesion to contract provisions and good 
faith intentions to seek a compromise with the Ministry 
of Energy -- as a contract partner.  The companies say 
they now expect to receive a "reference price" from the 
Ministry for discussion purposes and note that all 
their foreign partners' and creditors' assent would be 
needed for any deal.  A senior Turkish energy official 
told us that the government did not really expect the 
negotiations to result in significant contract changes, 
but that politicians needed to be "doing something" 
that they could point to with constituents. 
 
----------------------------- 
Goal of Market Liberalization 
----------------------------- 
 
7.  (SBU)  Budak Dilli, MENR Energy Affairs DG, 
reaffirmed to us on January 7 that the GOT would not 
seek to unilaterally amend or cancel the contracts with 
BOT's, noting the need to assure a transparent 
investment environment, based on rule of law, which 
would attract needed new capital.  He emphasized that 
the GOT was committed to moving to a liberalized 
market, with reduced public obligations.  Moreover, 
Dilli stated that no matter how tough the investment 
conditions were at the time these projects were 
launched, the contracts were badly designed and too 
expensive.  Dilli said that the parties needed to 
understand the changed situation and each others' 
positions and work together to reach a compromise. 
Energy Under Secretary Sami Demirbilek reiterated these 
points in a January 28 meeting (ref A). 
 
8.  (SBU)  The Ministry says that its objective is to 
transition the energy sector to a liberal, market- 
driven model, with which the high fixed price BOT 
contracts are inconsistent.  Dilli noted that the GOT 
was working closely with the World Bank on an 
Electricity Strategy Paper.  He admitted that there had 
been some delays, but he asserted that this showed that 
the GOT was serious about laying adequate preparations 
for successful liberalization and privatization of the 
distribution and production facilities.  He described 
the challenges as three-fold: a) attracting new 
investors given projections for increased energy 
demand, b) establishing a new investment model that did 
not depend on sovereign guarantees, and c) formulating 
a smooth transition from the old system - with the 
baggage of some "bad" contracts - to a new liberalized 
system - without scaring off potential investors. 
Dilli emphasized that transparency, an efficient legal 
system, and minimized regulatory risk were vital for 
investor confidence and liberalization. 
 
----------------------- 
Declining U.S. Exposure 
----------------------- 
 
9.  (SBU)  Meanwhile, U.S. private financial exposure 
to the plants has been declining.  In particular, the 
U.S. Edison Mission company is reportedly selling its 
interest in the 180 MW Doga Energi BOT project to a non- 
U.S. investor.  Similarly, we understand that Bechtel 
and Shell are selling their interest in the three 
"Intergen" BO projects (Adapazari - 777 MW, Gebze - 
1554 MW, Izmir- 1550 MW) to their Turkish partner, 
ENKA.  Finally, we have heard that Prisma, as the 
successor to Enron, may be interested in divesting 
itself of its interest in the 480 MW "Trakya Electrik" 
BOT project.  Both EXIM and OPIC, however, may continue 
to have exposure to these projects.  In addition, EXIM 
has credit outstanding to Turkish owned Baymina and 
Zorlu (a corporate generating facility) projects. 
 
------- 
Comment 
------- 
 
10.  (SBU)  The issue of the BOT's appears to have 
found a reasonably steady equilibrium.  The projects 
continue to operate according to their contracted terms 
and the risk of unilateral action by the government is 
still present, but is considerably less than it may 
have been earlier in the decade.  Contributing to this 
has been the government's recognition that confiscatory 
action would be contrary to its need to encourage 
private foreign investment in the energy sector needed 
to meet growing electricity demand, which could exceed 
supply by 2007 according to some projections.  Also, 
the period of highest prices under the contracts has 
been passed.  There was 15% price step-down in 2005 and 
there will be another in 2009.  While the local 
companies remain wary, they accept that they continue 
to operate and receive their return on investment. 
 
11.  (SBU)  Thus, Embassy does not believe that the 
Turkish government will resort to outright contract 
abrogation or seizure, as it is increasingly mindful of 
the importance of rule of law to attract badly needed 
foreign investment.  As Turkey moves further towards 
market based liberalization, it faces a special 
challenge in assuring transparent contract-based 
treatment of previous guaranteed (shielded from the 
market) obligations.  Although the country's lively and 
unrestrained press will continue to (mis)inform and 
exaggerate contentions, it seems to Post that the 
period of greatest risk has passed, but we will 
continue to monitor the situation closely. 
Edelman