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Articles about legal and other aspects of Turkey.

Project Finance in Turkey

January of 2000 saw the completion of the new airport terminal and multi - storey car park at Istanbul Airport, at a cost of 306 million USD, this project is but one of an increasing number of infrastructure projects. It is little known that Turkey was in fact one of the first countries to implement Build-Operate- Transfer;(“BOT”), project schemes. This came about as a result of increasing pressure to keep up with the nation’s demand for energy in the 1980’s, (in 1970 the total installed capacity was recorded at a level of 2,235 MW whilst in 1996 this had increased dramatically to 21,164 MW, gross consumption having risen from 224 kWh per capita to 1,520 kWh within the same time period). Turkey currently has a daily demand of 390 million kwh of energy. Energy whether produced in Turkey or whether transported through its’ territory is currently a controversial topic yet increasing growth sustains continued investor interest. The focus in this page is upon energy projects but it must be highlighted that BO and BOT models are facilitated for other infrastructure projects such as tunnels, water treatment plants and high ways.

However as demand for electricity is growing at a rate of 8% it is not surprising that energy projects appear to be one the most popular forms of investment amongst both national and foreign participators. The most common methods of financing in the energy and other sectors is the BO and BOT model.

Turkey's shortage of energy has again become a hot topic for debate in view of a three day power cut across the country in January 2000. Government sources announced that January’s scheduled power cuts arose as a consequence of the bad weather conditions. The level of water in the Keban, Karakaya and Ataturk dams, all part of the GAP project, is said to have dropped greatly, severely hampering energy supply. Gas supplies were also hit by a failure in the compressor station at the Botas plant in Eskiseher . Many have commented that the cuts were an intentional attempt to gain public support for the first proposed nuclear power station at Akkuyu, the output of which will total 10 million kwh’s of energy.

Whatever the reason, the power shortages illustrate Turkey’s over-reliance upon energy imports and the danger of reaching a bottleneck situation. BO and BOT models for investment along with privatisation are seen as viable solutions. Yet in recent years Government institutions seemed divided in their support for BOT projects in particular. In one corner the Ministry of Energy wished to encourage private investment to the sector, pressing for restriction of state control, whilst TEAS (The Tukish State Electricity Producer), DSI (The State Hydraulic Works) and the DPT (State Planning Department) argued that the completion of long-term government projects would deem future increased private investment; in the BOT model, unnecessary. For example in 1998 the DPT excluded BOT projects from their development plans and rejected three applications for wind energy farms. Those parties opposing further BOT projects contended that the project costs were too high on account of the increased costs of or lack of foreign investment. Whilst this barrier has in part been removed by the latest constitutional amendments recognising international arbitration in public sector contracts, and corresponding amendments to BOT law; BOT law remains nonetheless complex.

THE FUTURE OF ENERGY - ENERGY PROJECTS IN TURKEY

Whilst the Turkish Government may have appeared passive in the advancement of certain domestic energy projects they have pushed ahead with plans to secure two pipelines through its’ territory, transporting gas and oil. Some commentators liken such pipelines to modern day rail roads, those who build and operate the pipelines gaining power and wealth. Undisputedly Turkey will prosper as a transit nation, the driving force behind their aggressive lobbying is however twofold. The Government needs to find a solution to meet the domestic demand for energy, but perhaps more significantly however is Turkey’s desire to increase its regional power with the assistance of the US.

„In the months ahead, together we will launch new projects worth billions of dollars, mostly in the energy sector, to bring jobs to Turkey and to bring our nations even closer“

President Clinton - Address to the National Assembly, November 1999

Transit through Turkey avoiding Russia and Iran obviously gains US support as it strategically forwards America’s national interest whilst both nations are keen to aid the New Independent States in the Caspian region gain economic independence from Russia. Turkey will thus be afforded the status of a major player in the advancement of the East-West energy corridor.

The Baku - Tblisi - Ceyhan pipeline, ( the Caspian Pipeline Consortium Pipeline), at a cost of 2.5 bn to 4 bn USD, (there are discrepancies as to its’ cost), is expected to transport 500,000 b/pd of oil within two years. In November of 1999, leaders from Turkmenistan, Azerbaijan, Georgia, Kazakistan and Turkey came together to sign an Intergovernmental agreement setting out the terms of the collective commercial investment in the project. Significantly the latter has yet to be ratified by all of these states. The biggest stake holders in the project include BP Amoco, Chevron, Exxon and Mobil. The pipeline will travel between Chechnya and Nagorno- Karabakh, pass Armania, travel through Georgia and then south through Turkey. Whilst Washington is pushing for the pipeline, the oil giants are keen to re-enter the Iranian market and are also hesitant in excluding Russia. There are in fact two outlets situated on the Black Sea at Novorossiysk in Russia and Supsa in Georgia. At present these pipelines are in need of further repair but oil companies favour their use for the shipment of early production. (The Novorossiisk pipeline is expected to be completed in 2001whilst the Supra pipeline is currently shipping oil from offshore oil fields).The possibility of a multiple pipeline system, with new western routes and existing Russian routes, should therefore not be overlooked, and it should be remembered that at the end of the day the oil companies will have the final say in any deal.

AIOC, (“ Azerbaijan International Oil Company” a consortium of 11 oil companies) first came together in the early 1990’s to develop three major Caspian fields. The consortium have estimated that the Baku- Tblisi -Ceyhan pipeline will cost 4 billion USD, whilst the Turkish Government puts the cost at 2.5 billion USD and have agreed to provide a guarantee for any extra costs for its’ section of pipeline to be built by the Turkish pipeline company.

Despite political pressure AIOC would appear reluctant to commit totally to the new pipeline, in addition to BP’s past determination to re-enter the Iranian market, the consortium are concerned as to the real cost of the pipeline set against the forecast production, it is simply not clear whether the volume of production will justify its’ costs.

Comfort has however been provided by Kazakstan, who have promised significant volumes of oil, whilst no specific figure was mentioned, it would make the venture more feasible.

Natural gas consumption is set to rise from approximately 15bcm to 50 bcm by 2010. Turkey currently meets its’ demand for natural gas by importing from Russia, supplying three quarters of Turkey’s consumption. There are three potential projects for the construction of natural gas pipelines for the supply of energy to Turkey and Europe.

The transportation of natural gas from Turkmanistan and Azerbaijan can either be shipped via a trans-Caspian pipeline or from Iran. Turkey and the US are for the geo-political reasons discussed above, disinclined to transport gas through Iran, but perhaps more importantly a pipeline through Iran could place Ashkabat in a vulnerable position in terms of costs of shipment.

As with oil, Turkish and American Government players favour a trans- Caspian gas pipeline, (“TCP”), transiting Turkey. The project is to be a joint venture between Shell, Bechtel and GE Capital and would guarantee a cost effective solution for Turkmanistan and Azerbaijan.

Alternatively gas could be transported from Russia to the Turkish port of Samsun under the Black Sea, (“the Blue Stream Project”). A consortium between Turkish partners Oztas, Hazinedaroglu, BOTAS, Gazprom from Russia and Saipem from Italy, was formed in early 1999 yet thus far progress has been slow due to technical complications and concerns regarding the impact to the environment. Moreover the pipeline if constructed would have a capacity of 16 to 30 bcm per year, which would in effect make the TCP redundant.

At this point it would appear that the TCP is being granted priority by the Turkish Government but perhaps there is some truth in a recent comment made by Gazprom’ chairman, Rem Vayaakhirev, “in this race the one who starts first will win”. Otherwise put, the race will hinge upon securing finance.

Construction of the Russian arm of the Blue Sream project commenced on the 3rd of February.

The Turkish Government must now treat their new found role as regional mediator carefully as both trans-Caspian routes are interwoven, their success will be dependent upon the careful negotiation amongst the New Independent States,Turkey and Russia. Azerbaijan having already pressured Turkey to commit to the purchase of gas as part of the on going negotiations for the Baku - Tblisi - Ceyhan pipeline. The significance of these projects and the East -West energy corridor is essential to shaping the regions stability, it represents support to the Caspian states in their independence from Russia and opens up the possibilities of the west establishing strategic links with China and India. Yet commitment is far from being set in stone for example in addition to transit through Turkey, Georgia has recently promoted the idea of transporting oil through the Ukraine, whilst Kazakhstan are exploring the possibilities of transportation via Latvia. In fact it would appear to be a misconception that Russia is being totally frozen out as Russia owns a 24% stake in the Novorossiisk project, (this pipeline will transport oil from the Tengiz fields to a new marine terminal near Novorossiik), and Kazakhstan are also discussing the possibility of a Baltic pipeline system to be connected to the terminal of Primorsk.

THE GAP PROJECT

The GAP project; (Turkish acronym for the Southeastern Anatolian Project), is one of the largest multi-sectoral and intergrated projects in the world. The project is situated in the south east of Turkey covering 9 provinces totaling an area of 75,358 square kilometers. Originally devised as an irrigation and hydroelectric energy production project, it is envisaged that 22 dams and 19 hydroelectric power plants are to be constructed along the Euphrates and Tigris rivers producing 27 billion kWh of energy per year whilst irrigating.

1.7 million hectares of land. The total cost of the project is 32 billion USD and at the year end of 1998, 42.8 % of the project finance had been realised. Pre 1998, some of the dams completed were built on a BOT basis, although as stated above bureaucratic support from the DSI has declined in recent years. The scheme was transformed in the 1980’s into a multi-sectoral, socio- economic project, the aim of which was to alleviate the regional disparity by raising production and welfare levels through the creation of employment and improved infrastructure. Accordingly the scope of the project has widened to include all related social and economic sectors such as inter alia mining, education, and transportation.

A note on: Wind Energy

Solar panels on a small scale have long been popular in Turkey but sustainable forms of energy are only just beginning to be seen as an alternative to fossil fuels. However just as with many economic developments in Turkey, it is the speed at which such changes take place that is both surprising yet characteristic of the country. The first wind farm was built in Cesme in 1998 by Demirer Holding, (Autoproduction model - 1.74 MW) , who have since completed another farm on the island of Bozada; (BOT model -10.2 MW), in June 2000. There are currently only three wind farms in Turkey but the Ministry of Energy forecasts that wind energy will produce more than 500 MW within the next two years whilst output is to be increased by 10% each year. This equates to a staggering increase in the number of potential projects and although Ankara sets high standards for applicant companies, this has not discouraged the increasing number of applications. (In 1998, 28 applications were made to the Ministry.) Further evidence of optimism can be seen through the establishment of regional offices by German turbine company De Wind and German -Danish Nordex and growing interest from a significant number of major Turkish Holding Companies.

To conclude, prospects for project finance in Turkey are likely to improve as Turkey’s Sovereign rating is upgraded and Sovereign borrowing becomes cheaper. Furthermore, energy project financiers have now taken a more positive stance in light of recent legislative amendments and the agreement reached with the World Bank for an Economic Reform Loan in the amount of 750 million USD. A portion of this loan will be facilitated so as to assist Turkey in; a move towards a real market energy model, rationalisation and deregulation of generation and distribution of energy and the establishment of regulatory body.

However, many projects have been delayed on account of new energy policy. The State Planning Organisation contend that the Ministry of Energy and TEDAS, (“ the national generation and transmission company”) have in recent years over estimated electricity consumption and in addition thereto, consider that TEDAS are currently paying too higher a price to electricity generators. The policy review thus proposed that BO projects are to be granted priority, whilst certain BOT projects would now be given preference yet other, until recently encouraged projects, are to be delayed. New policy is supposedly in line with electricity output requirements.

Despite the above, the general outlook for project finance in Turkey would appear favourable. Local national and foreign banks support this new wave of optimism and have indicated that they will increase their project finance portfolios, make further application of multi-sourced financing and export guarantees and even project bonds.











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