Selected Articles

Articles about legal and other aspects of Turkey.

BOT Law and Regulation - Energy Projects

Albeit with the assistance of the International Monetary Fund Economic Reform Program, the Turkish economy has shown commendable signs of recovery. Improved credit ratings and revenues gained from forthcoming privatisations will in the long term greatly improve the Government debt, stabilise the Turkish Lira and encourage a sustainable decline in interest rates. Progression in the development of the nation’s energy infrastructure, a must for further economic growth, is however just beginning to take effect.

Extensive macro and micro economic studies would no doubt reveal many of the underlying primary and contributing factors which have influenced the level of foreign infrastructure investment. However, we will attempt to illustrate, through specific discussion of the law relating to Build Operate Transfer (BOT) energy projects, that it is the Turkish energy, BOT law and regulations, which have in the past significantly created barriers to foreign investment rather than for example, political, country and foreign exchange risks. The good news is that in principle such legislative obstacles have now to a large extent been eliminated through recent amendments to the Turkish Constitution, which in turn has affected revision to BOT law and enactment of further procedural law. Nevertheless this “new law” is far from clear and has caused much controversy and debate amongst practitioners and academics alike. It would appear that on account of the imprecision resulting from various interpretations of the “new law”, parties to BOT projects must now await further clarification from the Judiciary and Government Authorities, through the means of: a) further legislation, b) Government Authority announcements/decisions/decrees and c) Court judgments. Interpretation of the law will thus evolve on a rather ad hoc basis.


In response to the imbalance between the increasing need for further large-scale energy infrastructure projects and the limited amount of public funds and fiscal revenues, Turkey first created the BOT form of privatisation back in 1984. The fruition of such concession arrangements and the success in attracting foreign investment is however also interdependent with foreign investment law. In this respect Turkish foreign investment laws have, since the mid-eighties, been non-discriminatory, sufficiently transparent, afforded property rights and allowed for expropriation of profits. Therefore in questioning why only ten BOT schemes have to date materialised whilst numerous projects were thrown out by the Danistay (the highest Administrative Court). All indicative factors point to an inadequate BOT legal framework which although now significantly modified warrants further endeavour in order to completely eliminate legal uncertainty and ensure unimpeded foreign investment. The following summary of the law emphasises the requirement for pro-active legislation and until such time that foreign investors can properly access the legal environment, finance for Turkey’s energy projects; whilst available, may remain teetering at the door.


In order to fully comprehend the current changes to energy and BOT law, it is necessary to make reference to the Turkish Constitution and to trace the historical relationship between the two Laws central to the problems mentioned above, namely; Law No. 3996, enacted in 1994 hereinafter referred to as “BOT Law” and Law No. 3096; in 1984; which for the purposes of this article we will call “GTDT Electricity Law”.

An appropriate starting point is to consider what is meant by a “concession” under Turkish law and how this has effected energy projects. Prior to its’ amendment, the Turkish Constitution determined that concession arrangements fell within the jurisdiction of the Danistay, but it was silent as to any proper definition. Drawing upon rights furnished by the Constitution, the meaning and scope of a “concession” was thus characterised through judgements by the Danistay, as a public procurement agreement subject to a) public/administrative law, b) Danistay review, approval and dispute settlement and d) adverse tax treatment. The denotation of a concession arrangement has never been synonymous to for example a public or private law license agreement. Moreover those activities listed under the BOT Law including BOT energy projects were categorised by the Courts as “concessions” as defined above.

What can thus be observed is a long struggle between the judiciary, the legislature and to a limit the executive, in respect to the classification of energy projects? The main area of conflict arose on account of the Turkish Government, eager to increase investment, revising legislation in an attempt to override earlier Danistay decisions, in order that: a) BOT energy projects were no longer defined as concessions and were accordingly excluded from the Danistay’s list of BOT concession projects and b) foreign equity contributions were lawful. The Government succeeded in their latter objective and whilst the Danistay, in accordance with the amended legislation, initially declined jurisdiction when examining new projects, the Constitutional Court subsequently retaliated in invalidating the legislative reform on the grounds that it was the Courts and not the legislature who were empowered by reason of the Constitution, to encapsulate the meaning of a “concession”.

Furthermore the Constitutional Court judgments in neglecting the legislative amendments, persisted in making reference to the original BOT Law list of activities, which of course included energy projects. To the frustration of both national and foreign investors, little was thus achieved bar a stalemate and BOT energy projects were to remain classed as concessions, assuming all the accompanying characteristics thereof.

In reaction to this situation of “deadlock”, the Government enacted Build Operate Law; (“BO Law”), so as to provide an alternative solution but their attempts to attract investment were dampened by the persistence of the Ministry of Energy, who continued to advocate BOT projects.

Energy politics and resultant policy thus hampered legislative reform and little headway was gained. By way of example, the political agenda in the early nineties quite obviously shaped and determined the current practice of nominating a singular law, under which an energy project is carried out and categorised. To expand, ideally when commencing an energy project, participants thereto in electing a financial model, would seek guidance in terms of its’ financial structure and regulation from for example BOT or BO Law, whilst also ensuring compliance with statutory duties as provided for in the GTDT Electricity Law. However Turkish energy projects have always been initiated and classified by a singular particular law, in parallel to ministerial policy and hence the reason for many of the irregularities encountered in today’s legislation.


The aforementioned potted history will assist in the comprehension of more recent legal developments. In August 1999, three articles of the Constitution were amended: Articles 47, 125 and 155.

Article 47

A new paragraph to Article 47, provides for the first constitutional basis for privatisation. Furthermore it is now possible upon the enactment of enabling law at the sole discretion of the legislature, for a legal entity or real person to perform public services in accordance with agreements governed by private law.

Article 125

At this juncture we encounter just one of the problems surrounding the “new law”. In essence although Article 125 expressly allows for domestic and international arbitration in disputes regarding concession arrangements in relation to public service contracts, international arbitration is only available in disputes involving a foreign element.

The availability of international arbitration is thus restricted to and conditional upon a dispute involving a foreign element. It is clear that national investors to a domestic project may not rely upon this article but as the clause refers to disputes rather than projects the benefit of international arbitration for foreign investors is also impeded by both the aforementioned and moreover by the vague meaning under Turkish Law of “foreign element” and “international arbitration”.

Law No. 2675, “Private International Law and Procedure”, sets out a test in respect to choice of law and dispute resolution. Parties to an agreement governed by private law are in certain circumstances, of right to elect both the governing law and a dispute settlement clause provided that the contractual relationship involves a “foreign element”. Although Law No. 2675 is silent as to a definition of a “foreign element”, the requirement of the latter acts as a condition precedent to any choice of law and dispute settlement mechanism.

Since the meaning of a “foreign element” has been narrowly interpreted by the Courts and is evidenced by such factors as for example; a foreign party and contractual performance occurring abroad, few factors will thus be denotative of a “foreign element” in a typical Turkish BOT energy project. Furthermore since a Turkish company established solely with foreign capital is still deemed to be a national company, then accordingly in a typical concession arrangement any contract is seen to run between two national entities and thus the lack of a “foreign element” could bar international arbitration. The only saving grace for foreign investors is the possibility of an amendment to Law No. 2675 and a liberal interpretation of “a foreign element” satisfied by the contribution of foreign equity/finance to a project.

The “arbitration” issue is also plagued with further legislative gaps such as: a) Specific reference in the Art 125 amendment to “concession conditions and contracts”, which poses the question as to whether arbitration will be available in related project agreements? And b) the lack of a proper definition of “international” arbitration, when examined in terms of procedure and venue.

Finally attention must be paid to a risk often overlooked by investors, recognition and enforcement of an arbitration award. Enforcement in Turkey is of course subject to Turkish jurisdiction and procedural law.

Article 155

The Danistay’s role in reviewing concession contracts has now been restricted to merely expressing an opinion within a two-month time limit. However this development is overshadowed by the potential consequences of a “disapproving” opinion. If the opinion is negative to what extent is it binding? Irrespective of the legal debate surrounding the latter, it is politics that will dictate the outcome of this issue and shape the reluctance or willingness of the Ministry of Energy to discard the opinion. For example, were the Ministry of Energy to press on with projects regardless of a negative Danistay opinion, the benefit to investors is significant since they will then be better placed to balance and allocate risk to government agencies, through means of for example; assignment of rights and government default.

Taken as a whole, the above would suggest a “two way split”. A public service can now be subject to a private law agreement if so legislated. If not, parties to a public law concession agreement may nonetheless elect for arbitration but if parties fail to take up this right the Danistay will retain jurisdiction over contractual disputes and finally concessions are no longer subject to Danistay approval.


The constitutional amendments brought about further amendment to and enactment of legislation. The most important is the necessary legal framework for arbitration and amendments to the BOT law.

The enactment of Law No 4501, regarding the provision for arbitration in concession contracts, provided for retroactivity of the Law. Parties to concession agreements already executed or at the approval stage before enactment of both this law and amendments to BOT law, were within a set time limit, able to apply to the Ministry of Energy for a) conversion of the concession contract into private law and/or b) inclusion of an arbitration clause. Thereafter, dependant upon the request of the Ministry of Energy and subject to the approval of the Danistay, a concession agreement was capable of benefiting from these new provisions.


In turning full circle we return to the BOT Law. As considered the legislature can now lay foundations for public procurement contracts to be governed by private law. The BOT Law was the first law to gain from changes made to Article 47 of the Constitution. Article 5 of the BOT Law was amended in its entirety and states that any projects listed under Article 2 and carried out under the BOT Law, are now subject to private law terms to be set out in an “Implementation Agreement”. The effect of the Article 2 amendment was not however quite as straightforward. Prima facie, the intention behind Article 2 was to once again add “electricity projects” to the BOT Law list and correspondingly energy projects would now be governed by private law. The rationale would seem simple enough, yet Article 13 of the BOT Law clearly states that the provisions of the GTDT Electricity Law remain in force. As a consequence of Article 13, energy projects may, subject to election of BOT Law or GTDT Electricity Law upon initiation of an energy project, be deemed as private law agreements or “concessions” accordingly. Furthermore, overlap may arise between communiqués enacted under the GTDT Electricity Law, the GTDT Electricity Law itself and the BOT Law and although in principle the two laws serve different purposes and are subject to either private or public law, a circumstance may arise were it is unclear as to which law will prevail in the instance of any discrepancy.

To an extent the above problem is in certain conditions overcome on account of Article 13(2), which states that at the option of the Ministry of Energy, Articles 5, 11, 12 and 14 of the BOT Law may be applied to a project carried out under the GTDT Electricity Law. Therefore application of Article 13(2) indirectly grants hierarchy of either law at the will of the Ministry of Energy within the confines of those articles mentioned therein.

In the event that the Ministry of Energy wish to refer to Article 13(2), then application of Article 5 is significant in that it would strongly imply that the Ministry of Energy are empowered to re-characterise a “concession” carried out under the GTDT Electricity Law as a private law agreement when seeking reliance upon Article 5, since this article makes reference to the amended Article 2 list, which as stated above, includes energy projects.

However it must again be noted that since the Ministry of Energy are not compelled to carry out the above procedure, an energy project may remain classed as a “concession” agreement carried out under public law.

The question of whether a contract is classed as a private law or public law agreement is of course of utmost importance to a foreign investor and any investor would be forgiven for thinking that such a question should be easily determined. Unfortunately, the “new law” does not pin point this issue and whilst the above procedure can be employed to redefine an energy project which has already been commenced under the GTDT Electricity Law, it would appear, as discussed above, that it is not a matter of law but of policy and moreover negotiation as to which law will be applied or imposed at the onset of a project. In recent years, irrespective of the fact that all projects were classed as “concessions” the Ministry of Energy has consistently favoured the BO or BOT model and Law. There is little evidence that this trend will discontinue thus investors can reasonably expect their project to be subject to an “Implementation Agreement” carried out under private law.

In light of the above it was therefore of comfort, that in one of the first decisions subsequent to the “new law”, the Danistay in examining an energy project at the application stage, held that on account of the recent amendments to the BOT Law, a project carried out under the GTDT Electricity Law could categorically no longer be considered as a “concession” subject to public law, irrespective of the provisions of Art 13 of the BOT Law. On this ground, the Danistay declined to provide any opinion of the project and ordered that the draft contract be returned to the Ministry of Energy for their review. It would therefore appear that the Danistay at this juncture is reshaping the law but unlike in earlier years, their influence is now felt through their reluctance to act. In interpreting their opinion it would seem that in light of their consideration of the new legislation, they are of the opinion that they are no longer entitled to examine such agreements and parties wishing to determine a project’s classification must now seek approval and direction from the Ministry of Energy, either at the stage of negotiation or through subsequent application of Art 13(2). As examined, their opinion in respect to a projects classification would appear to be correct but in asserting that it is henceforth not possible to formulate a project under the GTDT Electricity Law as a “concession” subject to public law, the position taken by the Danistay is questionable for those very same reasons forwarded for their finding of a lack of jurisdiction. It must be remembered that whilst the Danistay are no longer the appropriate governmental body to appraise the categorisation of a project, Article 13 of the BOT Law preserves the provisions of the GTDT Electricity Law and therefore the Danistay are empowered and are moreover obliged by Article 155 of the Constitution to provide an opinion in relation to “concession” agreements, upon the request of the Ministry of Energy.

Finally, although the Danistay are not strictly bound by their own decisions, it is unlikely that they would distinguish any future project application brought under the GTDT Law since as a matter of uniformity they rarely revise or repeal their previous decisions. More importantly, as the Ministry of Energy have now received a clear message that the Danistay no longer conceive neither “Concession” nor “Implementation” agreements to fall within their jurisdiction, they will in the future in all likelihood refrain from seeking the Danistay’s opinion.

We hope the above has illustrated that, whilst considerable and significant steps have been made in the right direction and legal barriers to investment have been greatly reduced, finer points of law are yet to be resolved but, needless to say, this legislative reform will greatly improve the level of foreign infrastructure investment in the energy sector in Turkey.


Erenköy Mah. Ethemefendi Cad. Gündoğdu Apt. 20/8 34738 Kadıköy, İstanbul/Turkey


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