US embassy cable - 03ANKARA4692

UNCLAS SECTION 01 OF 03 ANKARA 004692 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/CBA, EB/IFD, AND EUR/SE 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
USDA FOR FAS FOR EC AND CCC/FSA 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA 
 
 
E.O. 12958: N/A 
TAGS: EINV, PREL, TU 
SUBJECT: LITTLE PROGRESS ON RESOLVING BOT AND CARGILL/ADM 
INVESTMENT ISSUES 
 
 
REF: ANKARA 3343 
 
 
1.  (SBU) Summary:  Turkish authorities are making little if 
any progress toward resolving the investment disputes 
involving U.S. power generation and starch-based sweetener 
companies.  The BOT issue is being held up in part due to 
disagreements between the Energy Ministry and the Energy 
Market Regulatory Authority (EMRA); each is waiting for the 
other to act, and neither is communicating with the 
companies.  The EMRA President assured us this week that, if 
the problem remains unresolved when the end-August licensing 
deadline hits, he will unilaterally extend the deadline to 
allow the companies to continue to operate.  On the sweetener 
issue, Cargill has made some progress in its legal battles 
over zoning, but understands that Industry Minister Coskun 
has tentatively decided not to increase the quota for 
starch-based sweetener production from 10 to 15 percent, as 
was done last year.  If Coskun sticks to this decision, both 
Cargill and ADM will face major difficulties.  End Summary. 
 
 
2.  (SBU) During the past week, EconCouns met with Energy U/S 
Sami Demirbilek and Energy Market Regulatory Authority (EMRA) 
President Yusuf Gunay to express concern about the lack of 
progress in resolving the issues surrounding U.S.-owned and 
USG-supported BOT power generation projects.  As reported in 
reftel, the fundamental problem is that the Energy Ministry 
has been pressing the power generation companies (in a 
heavy-handed manner) to reduce their prices, or risk not 
having their new license applications approved by EMRA. 
(Note:  Under EMRA regulations, all power generation 
companies, including those already operating, are required to 
apply and obtain new operating licenses.  EMRA officials 
insisted this was a pro forma process for existing companies, 
but Ministry officials indicated it might not be.  Moreover, 
the langauge in the license applications suggested the 
companies might be giving up their existing contractual 
rights by applying.  End note). 
 
 
3.  (SBU)  EconCouns reminded both Demirbilek and Gunay that, 
during a May 2003 visit to Ankara (reftel), a group of 
international export credit agencies had expressed concern 
about these developments and had urged the GOT to clarify in 
writing that the companies, by applying for new licenses, 
would not give up any of their existing contractual 
obligations.  They also had suggested that any GOT move to 
violate or force changes in existing contracts would have 
negative consequences for Turkey's broader efforts to attract 
investment into the sector.  (In response, GOT officials had 
promised to clarify that the companies would not give up 
their existing contractual rights by applying for new 
licenses, and had insisted that they had no intention of 
violating contracts.  Rather, they were only asking the 
companies to work with them to facilitate Turkey's transition 
to a market-based energy sector.)  Following the meeting, 
OPIC had sent a letter to the EMRA President highlighting the 
areas of discussion and the GOT commitments. 
 
 
4.  (SBU)  EconCouns noted that, two months later, the GOT 
has neither issued the promised clarification nor responded 
to the OPIC letter.  With the deadline for issuance of new 
licenses fast approaching (end-August), we are increasingly 
concerned about the lack of progress.  EconCouns asked how 
GOT authorities plan to resolve this problem. 
 
 
5.  (SBU) Demirbilek said there were many possible solutions 
to the problem, but under any circumstances the GOT would not 
violate or unilaterally abrogate the contracts.  The first 
step, however, is for EMRA to forward its proposals on how 
the contracts could be revised to facilitate Turkey's shift 
to a market-based electricity system.  The Ministry would 
review those proposals, and then try to find a solution. 
Despite repeated queries, Demirbilek did not comment on why 
the GOT had failed to provide the promised clarification of 
the companies' rights under the existing contracts.  In a 
troubling aside, he noted that the Ministry had determiend 
that one of the companies -- Doga (partly owned by U.S.-based 
Edison Mission) --  was violating the terms of its contract, 
and was continuing to look into the other companies' 
performances.  (Note:  A standard GOT approach on domestic 
and international energy issues has been to use a minor, 
technical violation of contracts to force concessions from 
its "partners.") 
 
 
6.  (SBU) Gunay countered that EMRA was in no position to 
present proposals to the Ministry, and in any case the 
Ministry had no right to judge the utility of any proposals. 
Instead, Gunay has asked the companies to offer ideas on how 
they could facilitate the sector's transition.  These might 
include, for example, giving up government purchase 
guarantees in return for a longer operating period before 
they turn the projects over to the government. 
Unfortunately, Gunay said, the Ministry's approach on prices 
has "turned off" the companies, making them defensive and 
unenthusiastic about offering any concessions.  Gunay said 
price should not be the issue.  Sure, the contract prices are 
high, but the GOT signed these contracts and thus has no 
grounds for complaint. 
 
 
7.  (SBU)  As for next steps, Gunay said he had written to 
the Ministry advising that EMRA had reached the licensing 
stage.  He is not seeking the Ministry's approval, but wants 
to be able to show that the Ministry was aware that EMRA 
would be issuing licenses so that they could not later blame 
EMRA for issuing licenses and thus undermining the Ministry's 
efforts to obtain price concessions.  If the Ministry 
responds to his letter by saying it is about to reach 
agreement with the companies on a new price, he will extend 
the licensing deadline to allow the agreement to be 
concluded.  If the Ministry says there is no such agreement, 
he will issue the licenses.   He urged us not to worry, 
saying that, in the worst case, he would extend the licensing 
deadline so the companies could continue to operate.  Gunay 
added that he would respond to OPIC's letter as soon as he 
heard back from the Ministry. 
 
 
8.  (SBU)  In a separate meeting, Cargill executives updated 
us on the problems facing both the company and the broader 
starch-based sweetener industry, including U.S.-based ADM. 
There has been some progress on the Cargill-specific issue, 
which involves legal actions against its factory for being 
improperly zoned.  The Danistay (State Council) had recently 
rejected two law suits aimed at annulling its construction 
license, based on the Danistay's view that the plaintiffs had 
no legal basis for suing.  However, the Danistay had ruled 
against Cargill in a third case -- brought by the same 
plaintiffs -- involving the plant's emissions permit, based 
on the argument that, since the plant was improperly zoned, 
its emissions permit was improperly issued.  Cargill is 
appealing this decision, and generally sees the Danistay's 
actions as positive.  Meanwhile, senior Industry Ministry 
officials, including Minister Ali Coskun, continue to tell 
Cargill that they expect to submit to Parliament a new 
industrial zoning law, which would effectively enable Cargill 
to "re-zone" its factory, in September.  (Note:  Cargill 
executives are a bit skeptical, as Coskun has been promising 
action on this for some time.) 
 
 
9.  (SBU)  The other issue, which affects ADM as well as 
Cargill, is how the government will implement the sugar 
production quota.  Under the Sugar Law, the Sugar Board sets 
an annual production quota for the entire sweetener industry 
(sugar, fructose, glucose), and fructose/glucose producers 
such as Cargill and ADM are limited to 10 percent of the 
quota.  Last year, the government set the total quota 
significantly above domestic demand (2,340,000 tons compared 
to domestic demand of about 1,850,000 tons), and raised the 
fructose/glucose sub-quota to 15 percent (as allowed by the 
law).  These two moves enabled starch-based sweetener 
producers to continue operating at reasonable levels, even if 
below capacity. 
 
 
10. (SBU) This year, however, Cargill has heard that Minister 
Coskun is siding with the sugar beet producers and is 
planning to keep the sub-quota at 10 percent (though the 
overall sweetener production quota will remain at 2,340,000 
tons).  If he sticks to this decision, the starch-based 
sweetener producers will be forced to produce at far below 
capacity, raising serioius questions about their ability to 
continue.  Cargill and ADM have organized a group made up of 
their major customers -- the cola, fruit juice, and 
confectionary companies -- to meet with Prime Minister 
Erdogan in the coming weeks to lobby for a 15 percent quota. 
If this approach fails, Cargill and ADM might ask the Embassy 
to weigh in (until now, they have kept us informed but asked 
us not to weigh in). 
DEUTSCH