Domestic privatization efforts go hand in hand with private international law when attracting foreign investment in the types of large scale-energy projects Turkey and the surrounding region demand.
In the past few decades, Turkey’s rapid urbanization has prompted the economy’s shift from agriculture to industry, and the attendant social and economic advancement has fueled a remarkable rise in national energy demand and consumption. Along with a rapidly increasing demand, supply security concerns have also become increasingly important. Furthermore, energy-dependence has increased, so the diversification of energy resources, like the use of nuclear energy, has become a key consideration for Turkey.
It would be a misunderstanding of Turkey’s tendencies for the past four decades to expect this volume and diversity to be provided by the state alone. It is crucial for private enterprise to play a major part in delivering on this desideratum. As the rest of this Newsletter sets out in detail, PPP models have successfully helped to deliver private-sector investment in a number of industries, and are rightly lauded as having helped to transform the Turkish economy. As successful as these structures may be however, they may at times prove inadequate when the involvement of international partners is required, which is not the question that the PPP legislation was designed to answer. International involvement may be necessary because the project in consideration is, by its very nature, an international undertaking, or where Turkey as a nation simply does not have the necessary know-how to attain the desired outcome. In such cases, the Turkish government has resorted to signing intergovernmental agreements (“IGA”s) to secure the necessary cooperation from partner governments.
The general structure of IGAs is to build a legal regime to apply to a particular project, and to make a commitment not to change that legal regime during the lifetime of the project. These project-specific legal regimes tend to include exemptions from laws of general applicability, such as preferential tax treatments; streamlined property condemnation procedures; and pared-down environmental restrictions. Of critical import is that under Article 90 of the Turkish Constitution, international agreements are beyond constitutional challenge once they have been ratified by the Grand National Assembly; these advantages are therefore safe from legal invalidation once granted.
One wrinkle that complicates this structure is that the burdens eased in an IGA are lifted off the shoulders of the entity that will realize the project, not the counterparty state. This means that a private law project company, not a nation state subject to international comity, must be given exemptions from laws of general applicability. This is often accomplished by appending the text of the host government agreement (“HGA”) to be signed between the relevant state authority and the project company to the IGA itself, making the HGA a part of the compact between nations. The HGA usually spells out the exemptions to be granted to the project company in specific detail, and gives a shielding effect to the project company from laws of general applicability by virtue of the protection of Article 90 of the Turkish Constitution.
The specific benefits offered in each IGA/HGA are necessarily project-specific, as the benefits that may be required will depend on the nature of the project and the particular bargain that is struck between the signatory nations. This article will review some of the most prominent IGA/HGA combinations and describe the benefits that have been granted under each set of agreements.
IGA/HGA Arrive on the Scene: the BTC Project
Being the first project in Turkey where the IGA model was implemented, the Baku-Tbilisi-Ceyhan Petroleum Pipeline Project (the “BTC Project”) has successfully demonstrated how investors could benefit from the legal regime created by the IGA/HGA duo. The BTC Project involves the national governments of Turkey, Azerbaijan and Georgia, which signed an IGA in Istanbul in November 1999 (the “BTC IGA”). Appended to the IGA as its integral part was an HGA (the “BTC HGA”) signed by the project company – a joint venture consisting of eleven sponsor companies led by British Petroleum and the Turkish government. Both the IGA and the HGA entered into force in Turkey upon their publication in the Turkish Official Gazette in September 2000 and the pipeline has been operative since 2006.
The two main privileges granted in the BTC Project are tax exemptions and land right grants. The BTC IGA specifically underlines that no project investor or person who provides goods, works, technology or services with respect to any part of the BTC Project is to be subject to any taxes arising from or related to the BTC Project. Taking it one step further, the BTC IGA emphasizes that the BTC HGA is to set forth a legal framework for the imposition of taxes and granting of tax exemptions or privileges. Article 9 of the HGA, which addresses taxes, in turn commands that “the provisions of Article 9 shall at all times prevail over all conflicting provisions of Turkish law,” by way of which the government effectively relinquishes its sovereign right of taxation in favor of the project company.
The approach to the creation of land rights in connection with the BTC Project also stands out as a significant incentive granted to this project. Under the BTC HGA, the project company is promised an exclusive and unrestricted right over all of the land parcels through which the BTC petroleum pipeline is to pass in Turkey. As part of this unprecedented “rights to land” framework under the HGA, a Turkish state entity (i.e., BOTAŞ) has expropriated a significant number of parcels owned by private third parties and then created property rights over these parcels in favor of the project company.
The land rights scheme put into place in the BTC HGA points out a very interesting aside: Turkish property law permits condemnation of private land only where there is a public interest. But the HGA explicitly states that the BTC Project is “not intended or required to operate in the service of the public benefit or interest” in Turkey. This dilemma can be resolved by noting the blurred distinction between the sovereign and the populace in the term “kamu yararı.” This phrase can refer just as easily to benefits derived by the sovereign as it does to benefits derived by the public at large. The BTC Project may not operate in the service of the public at large, but as long as it accrues benefits in favor of the Republic of Turkey, there can be said to be some public benefit (“kamu yararı”) in exercising eminent domain in furtherance of the project, rendering the use of the condemnation mechanism in line with the law.
Finally, in a solid effort to protect the implementation of the project from hindrance by the local licensing bureaucracy, Article 7 of the HGA imposes on the relevant Turkish state authorities the obligation to provide a complete and finalized list of all documentation necessary to obtain specific licenses, visas, permits, and the like. The same article also requires these licenses, visas, and permits to be issued on a priority basis within 30 days of an application being filed.
IGA/HGA in Other Contexts
The BTC Project seems to have paved the way for the recent nuclear power plant projects in Akkuyu and Sinop requiring an investment of significant magnitude and transfer of complex know-how unprecedentedly sophisticated for Turkey.
Following a failed attempt in 2009 to implement a nuclear power plant based on a public tender model, the Turkish government changed its strategy and used the IGA model with which it was already familiar from the BTC Project. Eventually, in May 2010, an IGA (the “Akkuyu IGA”) was executed between the Turkish and Russian governments authorizing a Russian-owned project company, a Rosatom subsidiary, to build, own and operate a nuclear power plant in the Akkuyu district of Mersin, a city on Turkey’s Mediterranean coast (the “Akkuyu Project”). The project company is 100% Russian-owned (49% of which could be sold to third parties upon the Turkish government’s consent) and will be the owner of the nuclear power plant including the electricity it would generate.
In a major divergence from the BTC Project, the Akkuyu Project lacks an HGA appended to the IGA to spell out the implementation principles in more detail. Instead, the Akkuyu IGA itself includes a level of detail that would typically be found in an HGA.
While the Akkuyu Project was not as fortunate as the BTC Project in terms of tax exemptions, the Turkish government was generous in allocating the project site in Akkuyu to the project company free of charge until the end of the decommissioning period. Similar to the BTC Project, the government promised expropriation of all other land owned by private parties required in connection with the project. The Russian government returned the courtesy and undertook in the Akkuyu IGA to train Turkish citizens free of charge, and to employ them widely during the operation phase. The Turkish government further evidenced its commitment to the project by guaranteeing to purchase, through TETAŞ, the state-owned electricity wholesale and trading company, a significant portion of the electricity to be produced by the power plant under a 15-year power purchase agreement which would secure a fixed revenue stream in US Dollars.
Variations on a Theme: the Sinop IGA
With the momentum of the 20-billion USD Akkuyu Project, the Turkish government opened a new chapter in negotiations with the Japanese government for a 22-billion USD second nuclear power plant in Sinop, a coastal town on the Black Sea (the “Sinop Project”). In May 2013, a relatively short IGA was entered into between the two governments (the “Sinop IGA”). Appended to the IGA was the “essential elements of the HGA” providing general implementation outlines instead of the full text of an HGA. The parties also signed a memorandum of cooperation with a highly detailed HGA appended to it (the “Sinop HGA”). All four documents were ratified together in May 2015, giving the IGA and HGA of the Sinop Project a legal effect prevailing over any conflicting Turkish legislation.
The investment model that the parties preferred for the Sinop Project was a typical public-private partnership, with 49% of the project company controlled by EÜAŞ, the Turkish state-owned electricity generation company, and 51% by the consortium of Mitsubishi Heavy Industries and Itochu (as contractors) and GDF Suez (as the operator).
As typical examples of IGA-HGA commitments, the Turkish government undertook to allocate the project site to the project company until the end of decommissioning, and to build and maintain the infrastructure necessary for the project outside the project site, both free of charge. Accordingly, the project company has been assured an exclusive right to construct, use, possess and control the facilities on the project site. It will also have the right of ownership of the electricity generated by the plant. The Turkish government has further agreed, if it should become necessary, to expropriate privately-held land and transfer the rights to it to the project company, again free of charge. The government’s undertaking also includes full indemnity against any liability that may be incurred as a result of any third party interest.
The Sinop HGA also included some operational benefits. The Turkish government promised to facilitate the permitting process for the employment of eligible non-Turkish nationals. Taking the Akkuyu Project as precedent, the Sinop HGA also installed a 20-year power purchase agreement for 100% of the electricity amount to be estimated on an annual basis.
While the IGA model may resemble the PPP model in the sense that it brings public and private elements together, the role of the government and its agents in the IGA model is more of a facilitating and shielding character supported by non-interference of domestic laws, rather than a true partner in the PPP sense. The IGA model is necessarily tailored for use where international investment is desired; while the model as a concept is somewhat set, the exact contours of benefits offered under each particular agreement will differ in line with the needs of the specific project. This model has been quite successful in encouraging know-how focused foreign investment into Turkey, and in accommodating multinational projects where Turkey plays an integral part. It can be debated whether the exemptions granted under IGAs/HGAs are worth the investments they attract, but the beauty of the system lies in its flexibility, letting the political process sort out the exact bargain to be struck in each particular case.