US embassy cable - 05ANKARA3223

UNCLAS SECTION 01 OF 03 ANKARA 003223 
 
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, BEXP, EINV, TU 
SUBJECT:  TURKEY: SLOW PROGRESS ON ELECTRICITY 
DISTRIBUTION PRIVATIZATION 
 
Ref: Ankara 2114 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
1.  (SBU) Summary: Turkey's privatization of its 
electricity distribution company is proceeding slowly. 
All parties anticipate some delays, most likely to at 
least this autumn, primarily due to delays in putting in 
place important legislation underpinning process and 
mechanisms, but everybody gives importance to getting it 
right.  American firm AES is still very interested in 
this market opportunity.  End Summary. 
 
----------------------- 
Pending New Legislation 
----------------------- 
 
2.  (SBU)  The GOT has delayed announcing tenders for 
regional electricity distribution privatization because 
of lingering uncertainties on process and approach, a 
well as the need to provide related legislative 
amendments to the existing electricity law.  The 
Privatization Administration (PA) was successful in 
arguing for a "transfer of operating rights" (TOR)-backed 
share sale model, over a direct sale approach (reftel). 
The new draft law, which is intended to codify the 
"Electricity Strategy Paper" and resolve disputes and 
open-ended issues, has been forwarded to the Council of 
Ministers for signature, before transmittal to the 
Parliament for approval.  The amendment is intended to: 
 
-Minimize constitutional and other legal objections to 
the privatization. 
-Enable foreign majority ownership in individual 
electricity distribution and generation companies (but 
includes an ambiguous stipulation that precludes foreign 
domination in the overall sector). 
-Enable the Energy Ministry to permit new public sector 
investments in energy "in order to ensure the security of 
supply". 
-Preserve the 20 % limit on amount of regional generation 
that can be controlled by distribution companies (PA 
unsuccessfully sought to raise this pro-competition 
provision to provide greater enticement to investors). 
 
------------------------ 
Enthusiasm and Critiques 
------------------------ 
 
3.  (SBU)  In a June 3 meeting with Energy Officer, 
Energy Market Regulatory Authority (EMRA) Electricity 
Market Head Murat Erenel said he was pleased with the 
current draft.  Although he was frustrated with the delay 
in passage, he stressed the need to make the process 
clear and get it right.  Noting that the Parliament would 
go on summer recess at the end of June, he said that the 
tender process would be delayed to autumn, or even to 
next spring, because of the need for the PA to make 
preparations based on the new law.  Erenel lamented that 
there were still some transitional issues cited in the 
Electricity Strategy Paper that will still unachieved: 
transitional contracts between the state electricity 
companies; balancing and settlement procedures with the 
state trading company TEIAS, and the future status and 
role of the state distribution company TEDAS. 
 
4.  (SBU) Ministry of Energy Director General Budak Dilli 
expressed similar concerns to Energy Officer in a meeting 
on June 3.  He noted that the new law and/or subsequent 
implementation had to clear up transitional contracts, 
TEDAS' role, and tariff mechanisms.  In a separate 
meeting, Energy Under Secretary Sami Demirbilek expressed 
frustration with the PA's aggressive attachment to the 
TOR model.  He told ECON/C that he continued to fear this 
complex approach would discourage the most qualified and 
serious foreign companies from bidding; he encouraged 
prospective investors to express opinions to the 
Treasury, Finance, and PA. 
 
5.  (SBU)  Local World Bank expert Gurhan Ozdora 
expressed frustration over delays and lack of 
coordination between relevant agencies (not listening to 
each other).  He was pleased with progress on the law 
draft, but noted that the market structure was still 
based on "shifting sand."  Ozdora noted that 
privatization and liberalization of electricity 
distribution was a key test and a precursor for the next 
step of generation.  Ozdora observed that there was a 
bureaucratic reluctance to make key decisions and 
signatures, for fear of a future investigation from the 
next government. 
 
------------------------------- 
Interest from American Firm AES 
------------------------------- 
 
6.  (SBU)  Visiting AES manager for Turkey, John Turner, 
met June 2 with Energy Officer and FCS specialist.  AES 
remains seriously interested, having identified Turkey as 
a key market.  The AES CEO is planning to come to Turkey 
for high level meetings around June 28-30.  AES plans to 
hire a local consultant and establish an office in 
Ankara.  AES is still looking at both Oyak and Enka as 
potential local partners. 
 
Turner described the following issues still in play: 
 
-Still a perception of weak coordination and political 
will with respect to clearly setting process and timing 
for distribution privatization. 
 
-The proposed electricity law amendments are still at the 
Prime Ministry, so timing is unclear.  The Parliament 
will go on summer recess at the end of June. 
 
-The Privatization Authority has successfully pushed its 
preferred "Share Sale based on Transfer of Operating 
Rights" method.  AES said it can live with this, but 
would have preferred an "asset sale" approach (AES 
understands the argument that there were practical legal 
difficulties and potential challenges associated with an 
asset sale method). 
 
-Incentives for investors still in play.  PA had 
championed lifting the 25% cap on production which could 
be owned by a distribution company (to entice investors). 
EMRA and others have appeared to successfully push back 
on this vertical integration issue. 
 
-Tariff mechanisms and a regional equalization fund still 
unclear.  Transitional contracts between entities still 
unclear.  The role and status of TEDAS (the state 
distribution co.) still to be determined. 
 
-Prequalification criteria still unclear and intensely 
political.  AES will satisfy either way and would prefer 
a high bar.  But a high bar for experience might preclude 
some domestic actors. 
 
-AES has a tax issue as a U.S. company.  The distribution 
companies have been created as joint stock companies 
(anonymous companies); AES will want to convert to a 
limited partnership legal structure to avoid a tax 
disadvantage. 
 
-The press notes that there are still issues about 
foreign control and ownership of the distribution 
companies on an overall basis (but not on an individual 
distribution company basis). 
 
-PA is working on auditing and information memoranda to 
start with tenders for six more lucrative, western 
regions (of the 21 established).  It is not clear, but 
usually assumed, that PA has to wait for passage of the 
law (to make the process and environment fully clear). 
AES said PA said Russian companies are interested in 
eastern regions. 
 
7.  (SBU) Comment: Along with Turk Telekom, TUPRAS 
refining company (septel), and others, electricity 
distribution is identified as a key target for 
privatization.  The GOT cannot afford more failures on 
privatization, so delays - to get it right - are 
reasonable, up to a point.  The forces unwaveringly 
opposed to privatization - especially to foreigners 
(judiciary, labor unions, nationalists) are gearing up 
for action, and it is difficult to predict speedy 
privatizations, other than IPO's which do not transfer 
control. 
Moore