US embassy cable - 05ANKARA2114

UNCLAS SECTION 01 OF 03 ANKARA 002114 
 
SIPDIS 
 
USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO 
USDOE FOR CHARLES WASHINGTON 
TREASURY FOR C PLANTER AND M MILLS 
EB/CBA FOR FRANK MERMOUD 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ENRG, EINV, BEXP, TU 
SUBJECT:  TURKEY SETS PRIVATIZATION MODEL FOR 
ELECTRICITY DISTRIBUTION 
 
Ref: Ankara 492 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
1. (SBU) Summary:  Aiming to expedite delayed 
privatization of Turkey's electricity distribution 
network (in which at least one U.S. company has 
expressed strong interest), the GOT has decided to move 
forward based on a "transfer-of-operating-rights" (TOR) 
sale of shares model, rather than through a direct sale 
of the underlying physical assets.  The motivation is 
to avoid legal challenges on constitutional "national 
interest" grounds in order to implement privatization 
in the shortest time possible.   The Energy Market 
Regulatory Authority (EMRA) is however concerned that 
some last-minute provisions added to the Electricity 
Market law may undermine its independence and hamper 
market liberalization.  End Summary. 
 
The Privatization Model 
----------------------- 
 
2. (U) Ending long discussions regarding the model of 
privatization for the electricity distribution network, 
the GOT decided on March 25 to pursue a "Transfer-of- 
Operating Rights" (TOR)-backed share sale model.  The 
Privatization Administration has long argued for the 
TOR model, as opposed to a direct asset sale approach 
in order to minimize potential legal challenges and 
expedite the privatization process (Reftel).  The GOT 
has identified 20 distribution regions and has 
established associated companies with electricity 
distribution licenses and operating rights.  Potential 
buyers will bid for the shares of these companies and 
take over operating rights for distribution regions for 
30- 49 years.  The investors will also take over any 
assets (i.e. land, building, vehicles, etc.) owned by 
the companies, but the government will retain 
distribution infrastructure ownership. 
 
3. (SBU) In a telephone conversation with Econoff on 
March 31, Ministry of Energy and Natural Resources 
(MENR) Energy Affairs DG Budak Dilli confirmed the 
GOT's decision to rule out the asset sale model and 
move forward with the TOR-backed share sale model. 
Dilli acknowledged the delay in the March 31, 2005 
deadline set by the Energy Strategy Paper for 
announcement of the tender, but said this was a 
reasonable delay, given the size and importance of the 
operation.  Finance Minister Kemal Unakitan announced 
on March 31 that the GOT had sent an amendment to the 
Electricity Market Law to the Prime Ministry, aiming to 
facilitate privatization. 
 
Privatize at the Cost of Liberalization? 
---------------------------------------- 
 
4. (SBU) Despite the GOT decision, EMRA Electricity 
Regulation Department Head Murat Erenel raised concerns 
to Econoff and Econ Specialist on April 7 about 
developments in the electricity distribution 
privatizations.  Erenel said EMRA generally supported 
recent amendments proposed by the GOT to the 
Electricity Market Law, which aimed to expedite 
privatization.  The amendments would provide for a set 
transitional price mechanism for distributors in the 
five years following privatization.  However, Erenel 
heard from MENR sources that the GOT made additional 
changes to the amendment, subsequent to EMRA's 
approval, which, according to Erenel, would pose a 
serious threat to market liberalization. 
 
5. (SBU) Elaborating on these troublesome amendments, 
Erenel first cited Article 3 of the current Electricity 
Market Law, which enables distribution companies to 
establish generation facilities in their region, but 
sets a limit to the amount purchased from these 
facilities.  According to the law, distribution 
companies cannot buy from these vertically-integrated 
facilities more than 20 percent of the electricity 
consumed in the region during the previous year. 
Erenel learned that the GOT was planning to lift this 
cap for companies, ostensibly in order to make 
distribution networks more attractive to investors. 
This change would potentially endanger fragile 
competition in the market, according to Erenel, 
allowing creation of new oligopolies.  Moreover, Erenel 
noted the lack of a provision preventing company 
mergers in the newest draft legislation, which he 
believed would open the way to monopolies. 
 
6. (SBU) The GOT reportedly made an additional last- 
minute amendment to Article 6 of the draft Electricity 
Market Law, which authorized EMRA to set the amount of 
electricity the State Generation Company (EUAS) could 
sell to the State Trading Company (TETAS) in the five- 
year transition period.  While the original intent of 
the article was to reduce the state's share in energy 
generation in a liberalized market, the latest version 
reportedly would transfer some of EMRA's authority to 
MENR, as well as doing away with the limitation. 
Erenel said such a change would grant the government 
unlimited authority to make new state investments - "in 
order to maintain the security of supply," which would 
create a major threat to both market liberalization and 
potential private investments in the sector. 
 
7. (SBU) CONTINUING IN THIS VEIN, ERENEL COMPLAINED 
THAT THESE AMENDMENTS FORMED PART OF THE GOT'S 
SYSTEMATIC ATTACK ON INDEPENDENT AUTHORITIES.  THE 
SEPARATE DRAFT LAW ON INDEPENDENT BOARDS CURRENTLY AT 
THE PRIME MINISTRY WOULD PROMULGATE SERIOUS LIMITATIONS 
TO INDEPENDENT BOARDS' ACTIONS AND AUTHORITY, ACCORDING 
TO ERENEL, BASICALLY REDUCING THEIR ROLE TO AGENCIES 
REPORTING TO THE GOVERNMENT.  ERENEL CLAIMED THAT 
DESPITE HOLDING A SIGNIFICANT MAJORITY, THE CURRENT 
GOVERNMENT HAD STALLED MARKET LIBERALIZATION EFFORTS, 
LAUNCHED BY THE PREVIOUS GOVERNMENT, EVEN THOUGH IT HAD 
BEEN A WEAKER, COALITION GOVERNMENT. 
 
COMMENT 
------- 
 
8. (SBU) THE GOT'S EFFORTS TO MOVE FORWARD WITH 
ELECTRICITY DISTRIBUTION PRIVATIZATIONS IS A STEP IN 
THE RIGHT DIRECTION.  IMPLEMENTING A TOR BASED MODEL 
SEEMS TO BE A REASONABLE DECISION, TAKING INTO ACCOUNT 
PROSPECTIVE INVESTORS' FEEDBACK.  THIS METHOD WOULD 
REDUCE RISKS OF JUDICIAL CHALLENGE AND MINIMIZE COST OF 
INVESTMENT TO ATTRACT MORE INVESTORS, COMPARED TO THE 
ASSET SALE MODEL.  HOWEVER, THE GOT'S APPARENT DESIRE 
TO UNDERMINE THE POWER OF THE INDEPENDENT REGULATORS, 
WHICH WE ALSO HEAR FROM THE TELECOM BOARD AND OTHER 
AGENCIES, IS A MATTER OF GREAT CONCERN AND COULD POSE A 
SIGNIFICANT THREAT TO TURKEY'S INVESTMENT ENVIRONMENT. 
MOREOVER, TURKEY'S PERIODIC AND ARBITRARY CHANGES IN 
PRIVATIZATION APPROACH OVER THE PAST TWENTY YEARS LEAVE 
A LEGACY OF AN ALPHABET SOUP OF FAILED MODELS AND LEGAL 
CHALLENGES AND AMBIGUITIES, SOME OF WHICH INCLUDED 
PREVIOUS UNSUCCESSFUL TOR PROJECTS.  END COMMENT. 
 
Edelman