Turkey has tried a number of different models to increase the participation of private enterprise in electricity generation since the foundation of the Republic.
This article traces the evolution of these models from the first days of the Republic to the present day. Emerging from the ashes of the Ottoman Empire, the Republic of Turkey retained a culture and ideology that lent itself to a high degree of state control, but increased demand for power in Turkey has pushed the state beyond its power to provide the necessary supply of energy, requiring the integration of private suppliers into the picture. Of course the story of Turkey’s energy market privatization involves more factors than simply the pressure of increased demand, not least of which are harmonization efforts with the European Union, and this article touches upon these external factors as well.
How It All Started
The state provided most public services in Turkey following the foundation of the Republic. Over time, an increased population and rapid economic growth led to an increase in the quality and quantity of public services demanded, and there were insufficient public funds available to meet such demand, particularly in the energy industry. The Turkish Electricity Administration (Türkiye Elektrik Kurumu) (“Electricity Administration”) had been established in 1970, and by 1982 it enjoyed a monopoly on electricity generation, sale and distribution, when the state transferred to it all electricity facilities operated by municipalities and other public authorities. The only method for the private sector to participate was through a throwback to the Ottoman Era known as the concession agreement model. Unfortunately, parties to concession agreements are not equal. The state has superior powers such as terminating the agreement or amending its terms and conditions unilaterally. As a result, the concession model was unable to convince private sector investors, particularly foreign ones, to make electricity-related investments in partnership with the state. However, as a result of serious increases in electricity demand during the 1980s, the energy industry was among the first sectors to abandon state dominance and the centuries-old Ottoman concessions system, in favor of PPP models.
Build-Operate-Transfer (“BOT”) and Transfer of Operating Rights (“TOR”) Models
The Grand National Assembly (“Assembly”) passed the law on the Authorization of Institutions Other than the Electricity Administration to Generate, Transmit, Distribute Electricity and Trade of Electricity(“Electricity BOT Law”) in 1984, which introduced the BOT and TOR models for the first time.
Under the BOT model, private sector investors were authorized by the Ministry of Energy and Natural Resources (“MENR”) to build electricity generation facilities and to sell the electricity generated at these facilities to the Turkish Electricity Generation Transmission Corporation (Türkiye Elektrik Üretim İletim A.Ş.) (“TEAŞ”). This was to be accomplished via concession agreements between the MENR and private sector investors. At the end of the authorization period, the relevant land and the facility were to be returned to the ownership of the state, free of charge.
The TOR model, on the other hand, was designed to transfer the operation rights of electricity generation, transmission and distribution facilities owned and operated by public authorities to private sector investors for a specific period of time. The ownership of the relevant facility was not transferred to the private sector investor, during the operation period, and any additional investments made by the private sector investor for the efficient operation or maintenance of the facilities were also deemed to be owned by the relevant public authorities in much the same way that an owner/lessor retains rights to fixtures installed by a tenant/lessee.
At first glance, the Energy BOT Law may not seem that unique from the Concessions system, but for the first time it put the public sector on the same playing field as the private sector in energy by abolishing the monopoly status of the Electricity Administration regarding generation, distribution and sale of electricity. Eighteen hydroelectric power plants, four thermal power plants and two wind power plants were constructed successfully pursuant to the BOT model, and various facilities operated by public authorities were transferred to private sector investors.
In 1994, the Assembly followed up by passing the law on the Realization of Certain Investments and Services Pursuant to the Build-Operate-Transfer Model(“BOT Law”), to open up the BOT model to projects that require both advanced technology and large financial resources in sectors other than energy such as highways, bridges, tunnels, water treatment plants, waste water facilities, and railways. A major purpose of the BOT Law was to overcome the financing difficulties that had arisen out of the public law nature (established by the Council of State and Turkish Constitutional Court precedents) of concession agreements executed between the MENR and private sector investors. Under Article 5, implementation agreements executed pursuant to the BOT Law are not concession agreements, and they are subject to private law instead of public law. Another novelty was introduced with Article 11 of the BOT Law, authorizing the Council of Ministers (i) to provide payment guarantees to private sector investors who are building projects under a BOT model, for the payment obligations of public authorities, for goods and services the authorities undertake to purchase, and/or failure of authorities to provide production related inputs to investors; (ii) to provide guarantees on behalf of public authorities that have undertaken financial obligations under agreements to which they have become a party; (iii) to provide repayment guarantees necessary to obtain bridge financing arrangements pursuant to the agreements; and (iv) to provide repayment guarantees on behalf of the public authorities that undertake to pay outstanding foreign loans of the facilities built on the BOT model, and/or to pay for shares of companies that own such facilities. Although electricity generation, transmission, and distribution were initially within the scope of the BOT Law, an amendment made in 1994 left electricity outside the scope of the law generally; but under the same amendment, projects within the scope of the Electricity BOT Law were permitted to benefit from certain articles of the BOT law, including Articles 5 and 11.
Despite the government efforts to classify BOT agreements as private law agreements, the Turkish Constitutional Court cancelled Article 5 of the BOT Lawa year later, declaring once again that agreements between the government and public sector entities for the purposes of the procurement of public services must be executed in the form of concession agreements subject to public law. Consequently, agreements regarding the application of the BOT model, no matter whether they were executed pursuant to the Electricity BOT Law or the BOT Law, were once again subject to the review of the Danıştay. As there were a great number of BOT projects that were now subject to Danıştay review, the review process started taking a considerable amount of time, and caused delays in the execution of agreements. In addition, the Danıştay revised the agreements submitted to its review in a way that favored the relevant public authority, and continued to reject provisions regarding choice of international arbitration as the dispute resolution mechanism.
The process of challenging private law contracts for public services procured from private sector entities caused chaos for nearly fifteen years. This particularly discouraged foreign investors and delayed new electricity facilities from going into operation. Moreover, the MENR was already a party to various investment related disputes with domestic and international investors being heard before arbitral tribunals, and in some of these cases it had been ordered to pay compensation and to bear the costs of the arbitral proceedings.
It became almost impossible to find international project financing for the BOT model projects as a result of the Turkish Constitutional Court decisions insisting that agreements which are executed to procure public services are to be subject to public law, and that the Danıştay was to provide strict review of these agreements, putting the public authorities, as a party to such agreements, in an unacceptably dominant position. Fortunately, the Assembly finally solved the problem by amending the Turkish Constitution in 1999. Law No. 4446 amended Article 47 of the Turkish Constitution to allow public services procurement utilizing agreements that are subject to private law, Article 125 of the Turkish Constitution to allow disputes arising out of agreements on public services procurement that have a foreign element to be settled by international arbitration, and Article 155 to replace the “reviewing” authority of the Danıştay over concession agreements with a much more limited right to “express an opinion” within two months following their submission.
Build-Operate (“BO”) Model
Passed in 1997, the law on the Establishment and Operation of Electricity Generation Facilities and Sale of Electricity (“Electricity BO Law”) introduced the BO model, which has been used only in relation to thermal electricity generation.
The Electricity BO Law was enacted to ensure that electricity generation facilities could be built using private law agreements, and that the parties to it could freely determine the dispute resolution mechanism under such agreements to be international arbitration, instead of being subject to the jurisdiction of the Danıştay.
Under the BO model, investors own the facilities they build, without a time limitation. Furthermore, under this model, the contracting party would be TEAŞ rather than MENR. TEAŞ is not a governmental authority, but rather a private sector legal entity, allowing agreements it executes to be subject to private law. Projects built using a BO model also enjoy Treasury guarantees under Law No. 4283, which authorized the Ministry of Finance to provide payment guarantees with respect to the payment obligations of TEAŞ arising out of electricity sales agreements.
In all, investors and the state have successfully employed the BO model to build five thermal power plants with significant installed capacities, all of which are still operational.
Where We Stand Now
In 2001, the Turkish legislature enacted the Electricity Market Law (“Market Law”) as a part of the European Union harmonization process. The Market Law defined the framework of the newly established electricity market and the main principles governing the privatization of electricity distribution and generation assets owned and operated by public authorities. The main purposes of the Market Law were (i) to develop a financially sound, stable, and transparent electricity market operating in accordance with private law provisions in a competitive environment; (ii) to deliver sufficient, high quality, low cost and environmentally friendly electricity to consumers; and (iii) to ensure autonomous regulation and supervision of the market.
With the establishment of the electricity market, generation, wholesale, and retail sale of electricity have become market activities that are accessible to all private sector players through a well-defined licensing regime. This new electricity market structure has significantly increased the interest of private sector players, without requiring the support of the state.
In accordance with the general policy to decrease the role of the state in the electricity market, the Market Law ended the treasury guarantees to facilities built under BOT Law and the Electricity BO Law. The Market Law also limited the Electricity Generation Corporation’s (Elektrik Üretim A.Ş.) (“EÜAŞ”) ability to build new electricity generation facilities to only instances when the MoE determines that the security of supply is at risk. In addition, the electricity generation and distribution assets owned by public authorities have been added to the privatization portfolio, and almost all of them have been privatized over the last 15 years. Therefore, although the Market Law did not revoke the laws governing the usage of PPP models in the energy sector, it indirectly ended the usage of PPP models in this sector.
According to the Electricity Generation Market Report of EÜAŞ dated 2015, in 2014, 17.25% of the total electricity generated in Turkey was generated by facilities built under the BO model, 4.63% was generated by facilities built under the BOT model, 1.94% was generated by facilities subject to the TOR model, 1.73% was generated by independent producers, 28.13% was generated by facilities operated by EÜAŞ, and 46.5% was generated by electricity generation license holders. Both domestic and foreign investors continue to show interest in the privatization of the remaining electricity generation facilities operated by EÜAŞ, and each year a significant number of private sector investors become electricity market players, by obtaining pre-licenses and/or electricity generation licenses.
The saga of privatization in the Turkish electricity market demonstrates that the PPP model can provide a useful tool for transition from a state-controlled economy into a privatized one. The success of the PPP models in the Turkish electricity sector will no doubt constitute a useful roadmap both for transforming other state-dominated sectors in the Turkish economy, as well as other countries reframing their economies to remain competitive in the 21st Century. However, given the current conditions, PPP is no longer the preferred model for electricity market investments, and unless there is a dramatic policy change, we believe there is no need for this current trend to change.