TRENDS IN THE TURKISH LEGAL MARKET: AN OUTLOOK
The Turkish political scene has been turbulent since the summer of 2013. Significant numbers of people participated in street protests against the government. The protests eventually died down to an extent, but the waters did not remain calm for very long with corruption allegations on various cabinet members and their families, which in return resulted in heavy-handed intervention that included restrictions or bans on Twitter and YouTube, since mid-December 2013. These bans created serious difficulties, especially for international media reporting on developments on the Turkish scene.
With the political scene somewhat calmed by the local elections, Turkey nevertheless continues to work on facilitating investment to Turkey. Whilst the investment from Europe has continued so far (though decreased and mainly shifted to small and medium sized enterprises), Turkey has also been harvesting its relations in the emerging
markets, Africa and the Middle East. Playing for a leading position in the burgeoning Islamic finance movement, coupled with the development of its capital markets infrastructure attaining the level of the well-established finance centers, Turkey still seems well positioned to attract foreign capital in the foreseeable future.
Turkey has also revamped its energy laws to encourage development in this very critical area, and is poised to further diversify its energy portfolio by continuously updating the applicable law in energy generation through nuclear, traditional and renewable sources.
It is expected that 2014 may be a challenging year for Turkey but it would be no surprise if Turkey remains to be resilient as it has proven to be so far. For our part, we look forward to welcoming new investors into the country and guiding them through this exciting period of legal and political change.
AN OVERVIEW OF THE BRAND NEW ERA IN CAPITAL MARKETS LEGISLATION
The new Capital Markets Law numbered 6362 (the “Capital Markets Law”) has been adopted on 6 December 2012. Capital Markets Law creates a consistent practice with that of European Union and sets out the new practices for capital markets in conformity with the new Turkish Commercial Code numbered 6102. Laying out a stronger legal framework along with restructuring of the institutions, Capital Markets Law also aims to simplify the complicated structure set forth under the previous Capital Markets Law and thereby taking the fundamental step in creating the solid grounds to make Istanbul one of the eager players among the financial centers of the world.
In this context, with the purpose of meeting the requirements set forth under the Capital Markets Law, the Capital Markets Board of Turkey (the “CMB”) has promulgated a great number of new communiqués, thereby cancelling the older ones, in order to establish the planned capital markets structure. Revision of the communiqués still continues and draft communiqués are being published for comments of the market players. We will be covering hereunder several major changes that Capital Markets Law introduces with respect to public offerings, trading activities and squeeze out -sell out rights.
Under the Capital Markets Law, a prospectus should be prepared and approved by the CMB for the issuance and sale of the capital market instruments with a public offering while an issuance certificate would be necessary for the issuance and sale of the same without a public offering. Differing from the previous capital markets law under which the registration of the capital market instruments was required, the Capital Markets Law introduces the concept of approval of the prospectus or the issuance certificate. In this respect the companies
will no longer apply for the registration with the CMB; rather, the prospectus or the issuance certificate that they prepare will be subject to the approval of the same. The prospectus will be valid for 12 months following the approval and this is expected to maintain time and cost efficiency. In addition, the approval method will offer a more clear-cut framework for the issuers in relation to the procedures.
As regards to trading activities, the Communiqué Serial VI No.103.1 sets forth a new short swing profit rule pursuant to which, the executives of an issuer, in the event that they make a profit from their purchase and sales of the relevant capital market instruments, would repay the net profit they make from such activities to the issuer within 30 days following the realization of such profit. The person, who does not repay such profit to the issuer, would be subject to a penalty twice the amount of the profit she/he makes from such activities.
Another crucial trading activity related change is planned to be introduced with the draft Communiqué on Margin Trading, Short Sales and Lending and Borrowing of Securities (“Draft Communiqué”). The Draft Communiqué decreases the maintenance margin requirement to 35% for the short sales and provides for discretion on brokerage houses to alter such percentage in respect of a specific customer or a capital market instrument being subject to the foregoing ratio. Moreover, the Draft Communiqué stipulates that if the brokerage houses cannot reach the customer despite its efforts and diligence, then it is authorized to close down the short sales transaction without further notice by means of using the cash proceeds from short sales or sale of capital market instruments deposited as equity capital.
Another change that is worth mentioning is in relation to takeover bids and squeeze out - sell out rights introduced by the Capital Markets Law and the Communiqué on Share Purchase Offers (II- 26.1). Under the Capital Markets Law in the event that shares or voting rights entitling the control of management have been acquired in publicly-held corporations, it is mandatory to make an offer for
purchase of the other shareholders’ shares. Further, in the event that shares acquired as a result of a takeover bid or in a different way reach to or exceed a determined ratio of the voting rights, along with the votes of the parties acting in concert, the persons holding such amount of shares will gain the right to squeeze out the remaining minority shareholders and vice versa will also be applicable; i.e., sell out right will arise for shareholders who have become minority. Such shareholders may request that their shares be purchased at a fair price by the controlling parties within the period to be determined by the CMB.1
The Capital Markets Law and the secondary legislation promulgated thereunder are likely to provide more guidance to investors as well as the issuers with the recent changes introduced to meet the capital market needs.
NEW TENDER OFFER RULES INTRODUCED BY CMB
The Capital Markets Board (“CMB”) issued a new set of rules (Tender Offer Communiqué II-26.1) to govern tender offers targeting shares in Turkish public companies (“New Rules”). The New Rules became effective as of 23 January 2014 and have replaced the CMB Communiqué on Principles Governing Acquisition of Shares Through Tender Offers, numbered Serial: IV/44 and dated 2 September 2009.
The New Rules do not result in a complete overhaul of the regime governing tender offers, yet are introduced by the CMB as an effort to harmonize this area of capital markets regulation with the relevant provisions of Capital Markets Law numbered 6362 that entered into effect on 30 December 2012, and to address certain issues that the CMB encountered
throughout the lifetime of the former Communiqué.
Management Control and the CMB’s Reaction to the Redington Case
On 29 November 2010, Redington Turkey Holdings
S.a.r.l. (“Investor”) acquired 49.4% shareholding in Arena Bilgisayar Sanayi ve Ticaret A.Ş. (“Arena”), a company listed with the Istanbul Stock Exchange, whereby the remaining 50.6% was publicly held. The Investor did not make a tender offer to the remaining shareholders, presumably believing that a mandatory tender offer was not triggered without having acquired either: (i) ordinary shares vested with 50% or more of the voting rights; or (ii) privileged shares enabling the Investor to otherwise appoint a board of directors’ majority. The Investor did not satisfy either prong of the aforementioned test, yet was able to appoint all members of the board of directors, through a de facto voting majority attributable to a significant number of free float shares not participating in the general assembly of shareholders where election of new directors was on the agenda.
A minority shareholder subsequently challenged the fact of a tender offer not being made by the Investor who acquired such de facto control. The CMB rejected this argument on 22 February 2011 and the minority shareholder filed a lawsuit with the administrative courts to cancel the CMB’s ruling with the ultimate goal of forcing the Investor into buying out the minority shareholders at terms no less favorable than those made available to the sellers (i.e., former owners who disposed of 49.4% Arena shares).
On 18 July 2011, the Council of State (the Turkish court of appeals for administrative jurisprudence) issued a stay of execution order, which put the CMB decision dated 22 February 2011 on hold. The CMB then adopted a resolution according to which, regardless of the share percentage, acquisition of the shares enabling appointment of an absolute majority of the board of directors or acquisition of the privileged shares granting the right to nominate such majority of the board of directors at the general
assembly of shareholders may be taken into account in order to determine the change in management control. Consequently, the CMB requested the Investor to make a tender offer or to apply for an exemption from doing so. The Investor objected to this ruling and then filed a lawsuit to cancel the CMB’s ruling before the administrative court. On December 7, 2012 the administrative court of first instance cancelled the aforesaid ruling. As of today, the case is pending before the Council of State since the CMB appealed the decision on January 24, 2013.
This chain of events led the CMB to address the issue of de facto management control in the new CMB Communiqué governing tender offers.
Article 12(c) of the New Rules states that a de facto position in the general assembly of shareholders granting the ability to appoint a board of directors’ majority, does not suffice to conclude that management control is acquired. To be able to argue that management control of a publicly held company is acquired, and thus mandatory tender offer requirement triggered, one would need to establish that: (i) more than 50% (the former communiqué referred to 50% or more in contrast) of the voting rights have been acquired; or (ii) privileged shares granting the right to appoint a board of directors majority has been acquired by the investor or those acting in concert.
New Scenarios Where Mandatory Tender Offer Would Be Triggered
New triggers for mandatory tender offer were introduced by the Capital Markets Law in December 2012. The New Rules mirror these scenarios that first appeared in Article 26 of the Law.
A shift in management control resulting from a contractual arrangement is identified as an event triggering the mandatory tender offer by the New Rules. A shareholders’ agreement or voting agreement enabling the party or parties of such agreement to elect or nominate a board of directors majority in a public company would be captured by this provision. Therefore, one may be deemed as
having acquired management control, even in the absence of a straightforward change in management control through acquisition of majority shares or privileged shares enabling its owner to elect a board majority. The second paragraph of Article 11 of the New Rules envisages a change in management control by entering into a contractual arrangement where the parties undertake to vote in a particular manner with respect to composition of the board of directors; and/or are granted certain critical veto rights at the board of directors and/or general assembly of shareholders levels.
Other scenarios where a mandatory tender offer would be triggered are also introduced in Article 11 of the New Rules. The CMB is granted discretion to require a mandatory offer being commenced by the controlling shareholder in a public company enjoying a concession, provided the concession is revoked and the controlling shareholder is deemed to have caused such revocation. The CMB is also afforded discretion to protect the minority shareholders against the controlling shareholder where the controlling shareholder is found to have caused the revocation of a public bank’s banking license issued under the Banking Law numbered 5411; or where the control of the bank is transferred to the Savings Deposit Insurance Fund for protection of depositors. It would be relatively simple for the CMB to use its discretion to mimic the Turkish banking regulator, the Banking Regulation & Supervision Agency of Turkey (BRSA), on whether the bank failed in the prescribed manner and whether this was caused by the controlling shareholder. It leaves room for broader discretion and therefore debate in the scenario where the CMB will have to assess the significance of a certain concession for the public company’s activities and whether the controlling shareholder actually caused the concession being revoked. This resembles the type of judgment typically afforded to courts. One of the principal issues to be resolved by the CMB here would presumably be whether the concessionaire breached its contract or revocation of the concession was an exercise of political discretion by the governmental agency concerned.
Article 14 of the New Rules makes it clear that last six months’ weighted average stock exchange trading price will be one of the benchmarks for the mandatory tender offer price under all circumstances, not only where management control changes hands indirectly or through transfer of privileged shares.
One of the notable features of the new legal framework seems to be the robust sanctions applying to delays or outright failure to adhere to the tender offer rules.
Failure to commence a mandatory tender offer is sanctioned by administrative fines up to the aggregate price of shares that would potentially benefit from the mandatory offer. When in doubt about whether the tender offer requirement is triggered by acquisition of a public target, it would be advisable to make the filing for either the mandatory tender offer; or for an exemption therefrom. Failure to apply to the CMB may potentially end up in having to pay for 100% of the target company shares.
Accrual of interest at a punitive rate (Article 17) and the “freezing off” of voting rights (Article 13) are also built into the New Rules to deter investors from failing to comply with the prescribed mandatory tender offer timeline.
The New Rules recently issued by the CMB brings more clarity to some of the issues the CMB had to deal with since the former communiqué’s issuance in 2009, including, the Redington case. In dealing with this case, the CMB seems to have moved in a direction where it would be more predictable for an investor to foresee whether a mandatory tender offer would be triggered. The New Rules also feature certain provisions to deal with a more complex tender offer ecosystem, for instance, in a scenario where competing voluntary tender offers
may emerge to acquire shares of the same target company.
The New Rules harmonize the mandatory tender offer rules with the Capital Markets Law numbered 6362 that expanded the CMB’s discretion to use the mandatory tender offer as an instrument to observe equity through protection of minority shareholders’ interests, even on certain scenarios where there actually is no direct or indirect change in the management control of a public company. It remains to be seen how the CMB will exercise this instrument. One may expect the exercise of this regulatory power to be challenged in courts, possibly resulting in a new streak of administrative law litigation as was the case with Redington’s acquisition of Arena shares.
A CURRENT AND CEASELESS DEBATE: RIGHT TO PRIVATE LIFE VERSUS FREEDOM
OF THE PRESS CRITERIA FOR LAWFUL REPORTING UNDER TURKISH LAW
The political atmosphere in Turkey became tense due to corruption allegations against various cabinet members and their families after dawn raids were made on their homes on 17 December. The tension increased when audio tapes surfaced which allegedly contained recorded conversations of Prime Minister Tayyip Erdoğan, which were illegally acquired and some of which were denied and regarded by the prime minister as “montage.” These audio-tapes were the main subject on the Turkish political scene and -naturally- the media initiating the debate over how free the press really is.
Freedom of press is expressly protected by the
Turkish Constitution, which states that “[T]he press is free and cannot be censored.” The same fundamental principle is also reflected under the Press Law, which proceeds with defining the freedom of press as follows: “[T]he press is free. This freedom includes the freedom of information, dissemination, criticism, interpretation and creation of works.” However, freedom of the press is not absolute: it may be restricted when it comes into conflict with other rights protected by the constitution, such as personal rights including the right to a private life and the freedom of communication, or when it constitutes certain other criminal offenses such as interfering with ongoing judicial processes or inciting terrorism.
The conflict which presents itself most often is that between personal rights and the freedom of the press. The courts have fashioned a four-prong test to determine when the reported person’s personal rights are violated. As per the court precedents on this issue, the four prongs of this test are (i) whether publishing the news is in the public interest; (ii) whether the news is in accordance with the apparent facts; (iii) whether the news is sufficiently related to current events; and (iv) whether the style of the reporting is proportional to the content of the news being reported. If these four prongs of test are met, reporting of the news will be deemed to be in compliance with the law notwithstanding any potential violations of personal rights, and the press cannot be held liable for disseminating such news.
Public Interest: It is both a right and an obligation of the media to meet the needs of the public to receive information, to communicate, to express and disseminate ideas and to remain informed. It is frequently remarked that freedom of expression and the right of the public to be informed of the truth is essential to maintaining a democratic society. Further, the press is charged with meeting the public right and the public need to receive information which tends to advance these public interests. This public right to receive information is most pronounced where the relevant information concerns matters of public administration.
In this connection, Court of Appeals decisions have recognized that the lives of public figures such as politicians can be regarded as more transparent and open to the public compared to those of private people. Therefore, reporting about the lives of politicians within the scope of objectivity is a part of the media’s obligation to inform the public, advancing the public interest. On the other hand, disseminating news with the sole purpose of gaining personal economic benefit, or of punishing others, or of obtaining personal benefits for others will not be considered to fulfill a public interest. News disseminated with such intentions is not exempted from the constitutional protections afforded to personal rights, and may be prosecuted for having violated these guarantees.
Veracity: The media must be objective in reporting the news. However, the press is not obligated to verify what appear to be plain facts at any given moment; that an apparent fact may later prove to be untrue will not subject the reporting institution to liability at the time that the falsity of the apparent fact is discovered.1 Since the press cannot be held liable for reporting apparent facts, it may report and interpret facts in accordance with what appears to be the truth at that given moment.
Relevance to Current Events: The press’s interpretation and reporting must be important for the public at the date of the publication. The press may report news about current matters in a way in which it will draw the public’s attention.2 The newsworthiness of events depends on large part to whether they are related to the developments taking place at the time that they are reported. Thus, news of an event that is long in the past may be thought not to be relevant to current events, and thus the public interest in reporting it may be though not to outweigh the harm that would be done to the person about whom the news is reported.
Proportionality: Reporting must be proportional to the underlying facts, meaning that the tone of a
report must match the underlying substance. This standard means in practice that mundane facts may not be reported under titillating headlines completely out of proportion to the underlying story. Moreover, news must not include humiliating or discrediting commentary, and must not mislead the public.3 A person should not be accused of a crime if the person has not been convicted in court, and news which comprises an explicit breach of the right to a private life and communication, should not be reported in the absence of compelling public interest.
Under Turkish law, if all of the criteria stated above are not satisfied in a particular report, freedom of the press may be made to give way to personal rights; this may result in exposing the press to liability for breaching personal rights such as the right to a private life or the right to the privacy of communications. Turkish laws stipulate compensation for breaches of personal rights. In case news is reported without satisfying the abovementioned criteria, the person whose personal rights are breached may request pecuniary and non-pecuniary compensation pursuant to the Turkish Civil Code and the Code of Obligations; in addition, such person may invoke his right of rectification and reply set forth under the Turkish Constitution.
To sum up, the rights and freedoms provided by the Constitution are not limitless, and therefore may conflict with each other. The most current example for such a conflict appeared between the freedom of the press and personal rights in the context of the latest corruption allegations occurring in Turkey. In order to for the freedom of press to outweigh personal rights, reporting must be in the public interest; must be in accordance with the apparent truth; must be related to current events; and finally the style of the reporting must be proportional to the content of the news and the facts being reported. As stated in appellate court decisions, the freedom of expression and the right of the public to be informed are markers of a democratic society. When the public
interest necessitates, the public right and the public need to receive information and the press’s right to inform must have precedence over personal rights.
ISLAMIC FINANCE IN TURKEY: SOME PRACTICAL
Islamic finance is growing at a considerable pace throughout the world. Whether to attract capital from the Gulf region to diversify the investor base, or due to distrust to conventional banking following the global economic crises, countries are investing more in Islamic banking and finance. Turkey is one of the countries that is aiming to lead the market. Just recently, the World Bank launched its first representation office on Islamic finance which is the Global Islamic Finance Development Center, in Istanbul. With the support of the government to develop Islamic finance in Turkey, Turkish and foreign investors are becoming more and more aware of Islamic financing methods and products in Turkey; but what are some of the legal and practical issues investors face and the level in terms of legislative progress?
The main legislation regulating Islamic banking in Turkey is the Banking Law No. 5411 (the “Banking Law”). The financial institutions whose activities are in compliance with the Islamic rules are called participation banks (katılım bankası). Today there are four participation banks in Turkey: Bank Asya, Albaraka Turk, Kuveyt Turk and Turkiye Finans. The conventional banks and the participation banks are both governed by the Banking Law and monitored by the same authorities (Banking Regulation and Supervision Agency and the Savings Deposit Insurance Fund). Regulated under the same legal framework, participation banks must establish their own financing models approved by the shariah
scholars,1 to the extent it is in compliance with the Turkish laws. Due to lack of specific regulations on Islamic finance, financing offered by participation banks has its own obstacles.
One of the main legal issues to tackle concerns the legislation applicable to different types of Islamic finance contracts. In an Islamic financing model, the financing is always based on a real transaction, as a method of addressing speculation and interest concerns2 and common types of Islamic finance contracts have evolved to serve this purpose. The Turkish banking legislation lists the types of loan participations banks may extend,3 except for few exceptions (e.g., the minimum content of a revenue-loss participation contract), the legislation does not provide guidance regarding the content of these contracts. The trick of Islamic financing documentation is to establish a financing relationship, whereby the underlying transaction of the financing is subject to general contract law provisions. As there is no specific legislation regulating the concepts of Islamic finance contracts, the main piece of law applicable to contracts is the Turkish Code of Obligations. For instance, the provisions regarding the sale contracts to murabaha4 (e.g., certain ownership and defect related liabilities, rules regarding the transfer of asset), the provisions regarding ordinary partnerships (adi ortaklık) to
musharakah5 and mudarabah6 (e.g., representation of the partnership before third persons, adoption of partnership decisions, termination of partnership) will be applicable. At the end of the day, it must be kept in mind that even though the parties may freely regulate their rights and obligations pursuant to the freedom of contract principle, the general rules applicable to contracts under the Turkish Code of Obligations will be applicable to the extent they do not breach the mandatory rules of Turkish laws.
Another practical consideration are potential tax liabilities. Participation banks are subject to the same tax regime as conventional banks. In principle, if the financing is deemed one of the types of loans under
the Banking Law, the tax regime for loans should be applicable. However, for an Islamic financing model, the financing is always based on a real transaction. The taxation problem occurs if the authorities apply separate taxes on the underlying transactions. Do taxes arise on a musharakah partnership formed between a participation bank and the customer? How will the income and profit of the partnership be taxed? Do taxes arise on the acquisition or sale of an asset under a murabaha agreement? The tax authorities cannot provide clear opinion on these questions.
Despite such legal and practical issues yet to be resolved, Turkey is determined to work on any obstacles to increase its standing in the Islamic finance market. This year, a notable legislation was introduced by the Capital Markets Board regarding lease certificates (sukuk). This new Communiqué on the Principles on Lease Certificates introduces new forms of sukuk, improving the scope of the previous
Communiqué adopted on 2010.7 The Turkish Treasury and several Turkish banks have already been heavily involved in sukuk issuances and are planning to be involved in more. Islamic banking and finance in Turkey is increasing steadily. There are still issues that need to be solved practically and legislatively as mentioned above; yet, these are now like birthing pains, and the new is on the road to improvement.
“YES, BUT NOT ENOUGH”
– DESPITE TAX EXEMPTIONS FINANCIAL LEASING COMPANIES ARE STILL PREJUDICED!
Thanks to the Law regarding Amendments to Certain Laws and Decrees numbered 6495 (“Bundle Law”) passed by the Turkish Parliament on August 2, 2013 which granted value added tax (“VAT”) and corporate income tax (“CIT”) exemptions to sale and lease back of real property, industry officials are expecting an increase of 100% in the 2014 sale and lease-back transaction volume. The Bundle Law amended Article 17 of the Value Added Tax Law numbered 3065 (“VAT Law”) by including “sale and lease back of real property” in the list of exempt transactions on the condition that ownership of the property is returned to the seller at the end of the lease term. In addition, subject to the same condition, the Bundle Law amended Article 5(1)(e) of the Corporate Tax Code numbered 5520 (“CTC”) by granting full exemption to such transactions and waived the 2-year holding-on principle applicable to the proceeds of sale of real property.
Despite the recent VAT and CIT exemptions, financial leasing companies are still prejudiced
due to lack of specific financial leasing legislation that allows for deduction of the general and special provisons set aside by financial leasing companies in a given year from their corporate tax base. Unlike the Law regarding Financial Leasing, Factoring and Financing Companies numbered 6361 (“Financial Leasing Law”), Article 53 of the Banking Law numbered 5411 (“Banking Law”) allows deposit and participation banks (both can engage in financial leasing transactions) to deduct 100% of the special provisions set aside in a given year from their corporate tax base. General provisions set aside by banks are listed among Excluded Deductions by CTC Article 11(1)(ç) and, therefore, not allowed. With respect to special provisions, banks and financial leasing companies follow similar criteria to set aside such provisions and in a nutshell, a special provision can be set aside for the receivables based upon three main aging categories:
Banks: (i) third tier loans and receivables (limited collection capability): receivables aged more than 90 days but less than 180 days, (special provision allowed is 20%), (ii) fourth tier loans and receivables (doubtful collection capability): receivables aged more than 180 days but less than 1 year, (special provision allowed is 50%), and (iii) fifth tier loans and receivables (loss provision): receivables overdue more than 1 year (Special Provision allowed is 100%).
Financial Leasing Companies: (i) principal and interest receivables aged more than 150 days but less than 240 days (special provision allowed is 20%), (ii) principal and interest receivables aged more than 240 days but less than 1 year (special provision allowed is 50%), and (iii) principal and interest receivables overdue more than 1 year (special provision allowed is 100%).
As a general rule, in the absence of an industry specific law allowing for special provision deductions, tax payers would utilize amortization provisions of the Tax Procedure Law numbered 213 with respect to their doubtful receivables. Article 323 of the Tax Procedure Law defines “doubtful receivable” as one being related to deriving commercial and
agricultural revenue, and that is either (i) subject to a pending litigation or an execution proceeding, or
(ii) despite more than one payment notice is served, it is not worth initiating legal proceedings. It is important to note, however, that a “financial leasing special provision” does not in and of itself qualify for a “doubtful receivable” as defined under article 323 of the Tax Procedure Law and therefore, is not allowed to be deducted under this general rule.
In a recent private opinion1 (özelge), the Turkish Revenue Administration (“TRA”) stated that financial leasing companies cannot utilize the 323 deduction for the special provisions they set aside under the financial leasing legislation, which does not allow for any deduction. TRA further stated that deduction under Tax Procedure Law Article 323 is not allowed for financial leasing companies because the “323 deduction” is only allowed for commercial and agricultural enterprises which recognize revenue on an accrual basis which, in turn, has a direct effect on the final accounts and/or profit of the respective year. Given the nature of the financial leasing receivables, financial leasing companies are also not allowed to utilize the 323 doubtful receivables deduction for the leasing receivables that had not been recognized as revenue in the respective year.
In view of the foregoing, despite the recent tax exemptions, financial leasing companies are still prejudiced due to lack of specific leasing legislation allowing for deduction of special provisions being set aside against leasing receivables. Further, Article 53 of the Banking Law creates an uneven playing field that favors the banks by allowing them to make such deduction. The situation could be remedied either by allowing the deduction of financial leasing special provisions under the Financial Leasing Law or by introducing financial leasing special provisions as a new deduction item among Deductable Items from corporate tax base listed under Article 8 of the Corporate Tax Code.
A NEW MEANS FOR FUNDING REAL ESTATE PROJECTS BEYOND CONVENTIONAL METHODS – REAL ESTATE INVESTMENT FUNDS
The Capital Markets Board (the “Board”) has introduced a new financing model for real estate projects with its Decree on the Principles Regarding Real Estate Investment Funds1 (the “Decree”). Given the flexibility of the real estate investment fund model (no public offering procedure, easier liquidation process, etc.) in comparison with other funding methods (real estate investment companies, etc.), it is expected that real estate investment funds will gain popularity as a new financing tool for real estate projects within a short time following the Decree’s coming into force on 1 July 2014.
The real estate investment fund is defined under the Decree as an estate, established for a definite or indefinite period of time for the purpose of managing the assets acquired with the funds provided by qualified investors in return for contribution shares. The portfolio of the fund should be operated based on fiduciary ownership principles in the name of the investors. Real estate investment funds may be founded for the purposes of both investing in a specific project and/or sector as well as for an unspecified purpose.
A real estate investment fund may only be established by portfolio management companies and real estate portfolio management companies (the “Founder”) that are registered with the Board. The establishment of a real estate investment fund is subject to the approval of the Board. To obtain such
approval, the internal regulation of the fund, the standard form and other relevant documentation, as may be requested, must be submitted to the Board. Upon the Board’s approval, the fund is established upon the registration of the internal regulation of the fund before the relevant trade registry.
Founders may either manage the fund directly or hire another portfolio management company or real estate portfolio management company as the manager of the fund.
Real estate investment funds do not have legal personality, the assets are held by the fund on the basis of the fiduciary ownership principles on behalf of its investors.2 As an exception, the fund is deemed to have legal personality with respect to the registration of real estate related rights. In other words, the real property held by the fund will be registered before the relevant land registries in the name of the fund.
With the purpose of protecting investors’ rights, the estate of the fund is deemed separate and different from the estate of the Founder, portfolio trustee and/ or the portfolio manager. Accordingly, the assets of the fund cannot be levied; even for the collection of public receivables, put in pledge and provided as a guarantee for the obligations of the Founder and/or portfolio manager. The obligations of the Founder and/or portfolio manager to third parties cannot be set off with the receivables of the fund from such third parties.
Qualified Investors - Contribution Shares
Contribution shares are issued to investors, in return for the cash provided by such investors to the fund. The contribution shares of the real estate investment funds do not have any nominal value. The value of the contribution shares is determined on the basis of the total value of the assets of the
fund (i.e., total value of the assets / total number of the contribution shares). Accordingly, if the fund is managed profitably by the Founder or portfolio manager and the value of the assets increases following the establishment of the fund, the value of the contribution shares owned by the investors will increase proportionately, which will constitute the return of the contributors’ investment in the fund.
As per the Decree, contribution shares may only be issued to qualified investors,3 which are generally defined as the legal or real persons holding cash deposits and financial assets exceeding TL 1,000,000.4 Accordingly, the issuance procedure in real estate investment funds is simpler than that in the public offering procedure: the Founder should apply to the Board with the issuance certificate (ihraç belgesi), the standard form and other relevant documentation as may be requested by the Board. Following the approval of the issuance certificate by the Board, the contribution shares of the fund may be issued and submitted to the investors through appropriate distribution channels.
Investors may always exit the fund by selling their contribution shares to other qualified investors. However, unlike in other types of investment funds, the investors may not exit from the fund by freely returning their contribution shares to the real estate investment fund. The return of the contribution shares may be restricted under the fund documents (internal regulation, issuance certificate, etc.) with certain time periods (e.g., once a year, etc.).
Moreover, the return of the contribution shares of the funds having a definite duration may be restricted to the complete term of the fund, which means that the contribution shares may only be returned to the investors upon the dissolution of the fund.
The foregoing restriction regarding the return of the contribution shares arises from the immovable nature of the assets held by the fund. The liquidation of the assets are more time consuming than other types of financial instruments, such as equity, forex transactions, etc., which restricts the ability of the fund for immediate return of the contribution shares (liquidity issue).
The Decree adopts a flexible approach with respect to the liquidity issue. It does not impose any minimum cash requirement to ensure the liquidity of the fund. Instead, the Decree encumbers all responsibility for ensuring the liquidity regarding the return of the contribution shares to the Founder. Such liquidity may be ensured by the Founder by any means deemed appropriate. The Founder may also opt for purchasing the contribution shares in its name, to ensure the liquidity for the return of the contribution shares. However, contribution shares to be acquired by the Founder may not exceed %50 of the total number of contribution shares and the respective contribution shares should be returned to the fund within 2 years following the acquisition of the contribution shares by the Founder.
It is possible to apply a commission for sales and/ or return of contribution shares, provided that terms and conditions regarding such commission are expressly set forth in the internal regulation and the issuance certificate. Such commissions would be included in the fund’s assets as revenue.
The estate of the fund is comprised of real estate investments, as well as other types of financial instruments. However, at least 80% of the total value of the fund’s assets should be real estate related investments, as real property, real estate related rights, shares of real estate investment companies
and joint stock companies 75% of the total assets of which consist of real estate investments, real estate certificates and other real estate investment funds. The remaining part of the estate may consist of other types of rights and investments such as deposits, investment funds other than real estate investment funds, derivative transactions and other similar financial instruments.
The total net asset value of the fund should reach at least TL 10,000,000 within a year at the latest, following the commencement of the sales of the contribution shares. The assets of the fund should be subject to asset valuation by institutions recognized by the Board, at least once every year and the results of the asset valuation should be notified to the investors. The asset valuation should also be conducted prior to each real estate transaction of the fund.
Scope of Investments
The fund is entitled to purchase all types of real estate (land, residence, office buildings, shopping centers, hotels, etc.) and real estate related rights (construction right, usufruct right, etc.). The fund may also use credits for the investments to be made and grant mortgages over the fund’s assets for such credits, on the condition that the total amount of the credits does not exceed 50% of the total value of the fund’s assets, and that the Board and the investors are sufficiently informed of such credit related transactions.
The Decree sets forth certain restrictions regarding the abovementioned investments. Real estate investment funds are not allowed to make short- term real estate investments on an ongoing basis. They may not directly manage or operate real estate projects or undertake the construction works with respect to the real estate projects. If a property owned by the fund needs to be operated or any construction work should be conducted, such works must be outsourced to third parties.
All buildings and other similar constructions to be acquired by the fund must have occupancy permits
and condominium ownership should be established over the respective properties. However, acquisition of buildings such as hotels, shopping centers, offices, hospitals, commercial warehouses for the purpose of gaining lease income, is exempted from the condominium ownership requirement.
Real estate investment funds may acquire real estates and real estate related rights that are subject to transfer restrictions or encumbrances (mortgages, etc.). However, the value of such real estates and real estate related rights may not exceed 30% of the total value of the fund’s assets.
Agreements granting rights in favor of the funds such as promise to sell agreements, promise to sell agreements in return of land share, revenue share agreements etc. must be registered with the land registry. However, the agreements executed with the Housing Development Organization (TOKİ) and its subsidiaries are exempted from the above- mentioned registration requirement.
The Founder or portfolio manager may collect performance fee from the investors over the revenue and sale profit generated from the real estate investments and/or increase in the value of the fund’s real estates, provided that such fee is expressly set forth in the internal regulation and the issuance certificate.
During the last 20 years, real estate investment funds have gained popularity in Europe. They were first regulated in Europe by Switzerland and Germany; followed by the other European states. By the beginning of 2010, the number of these funds was around 780 and their value was Euro 210 billion, approximately.5 These figures indicate the significance of the funds in the real estate investment market.
The Turkish real estate market (as an emerging
market) needs constitutional foreign investments and alternative investment tools to become a mature investment jurisdiction. Given the relative flexibility of the legislation, it seems that real estate investment funds may attract the attention of local and global market players and contribute to the achievement of the above goal.
SECURITY PACKAGES IN HEPPS
Ensuring the energy security is one of the most important challenges of our century. Increasing diversity of energy and use of local energy resources are considered as solutions for the energy security. Use of renewable energy resources is a rising policy in energy production. Nowadays among other renewable energy resources, hydro energy and hydroelectric power plants (“HEPP”) are becoming more popular in Turkey, by help of large water resources of the country and its geographic availability.
HEPPs require high investments. The financial needs of HEPPs, in Turkey, are fulfilled by loans provided by bank consortiums, composed of Turkish and/or foreign investment banks. Such finance methods, recourse or non-recourse, contain in their security packages various types of registered and non- registered security interests. The security packages may vary, depending on the phases of the project and the scope of the assets owned and/or used by the project owner, and generally include mortgage over the lands, buildings or easement rights owned by the project owner, commercial enterprise pledge (the “CEP”), assignment of receivables regarding major project documents of the project owner and insurance policies, share pledge, corporate guarantee/surety of shareholders and/or sponsor companies.
In the light of the above explanations, we will summarize herein below the three most common securitization alternatives used in project finance
of the HEPPs: (i) CEP, (ii) mortgage, and (iii) assignment of receivables, with their specifities regarding the HEPPs.
Commercial Enterprise Pledge
Commonly preferred in the Turkish financial market, a CEP constitutes an essential exception to the rule of the transfer of physical possession of the pledged movables to the pledgee set forth under the Turkish Civil Code numbered 4721 (“Turkish Civil Code”).1
The CEP is regulated under Commercial Enterprise Pledge Law numbered 14472 (the “CEP Law”). In this type of pledge, the possession of the movable pieces of property on which the pledge is established will not be transferred to the pledgee and the pledgor which is the project owner will continue to use the plant subject to the CEP in its energy production operations.
According to Article 3 of the CEP Law, a CEP may cover the following assets:
trade name and business title of the pledgor (project owner); machinery, tools, equipment and motor transportation vehicles allocated to the activities of the commercial enterprise (HEPP) at the time of the registration of the CEP; intellectual property rights such as trademarks, models and licenses etc. of the pledgor (project owner).
Only intellectual property rights of the project owner may be left out of the scope of the CEP.
Within the context of HEPP financing, a CEP is established over all of the project owner’s rights, title and interest in its assets valued above a certain monetary threshold listed in the annexes of the CEP agreement. Each item on the list should be
clearly defined so that those pledged properties are noticeably identified. During the operation of the HEPP and the repayment term of the loans, in order for a newly imported/purchased asset to be included within the scope of the CEP, the lenders and the project owner usually agree, in the CEP agreement, to amend and update the list of pledged assets on a yearly basis.3
CEP agreement must be (i) executed before a notary public located around the commercial enterprise and (ii) registered with the trade registry where the commercial enterprise is established within 10 (ten) days following its execution before the notary public. Following the registration of the CEP, the trade registry will then notify such to other relevant registries with respect to the assets included in the CEP such as vehicles and trademarks.4
A CEP does not include the immovable property on which the HEPP is established. The immovable property on which the HEPP is established, in order to be included in the security package, should be subjected to a mortgage agreement to be executed between the project owner and the lenders.
The lands on which HEPPs are constructed are generally divided into three main categories:
the lands owned by private parties, including the project owner itself; the lands owned by the Treasury; and the lands under the control of the Treasury (i.e., forestry area, water hold areas etc.).
Accordingly, the lands owned by private parties can either be directly purchased by the project
owner or expropriated5 in accordance with the electricity market legislation with the involvement of the Energy Market Regulatory Authority (the “EMRA”). The project owner can also execute an easement right6 and/or lease agreement with the Treasury, represented by the Ministry of Finance or with respect to the lands which are under the control of the Treasury, a usage right can be granted to the project owner by the Treasury.
Pursuant to Article 881 of the Turkish Civil Code, a mortgage can be established over the immovable property in order to secure existing or future credits of a debtor, in our case of the project owner. A mortgage can only be established on the immovable properties registered with the land registry. However due to the location and structural characteristics of the HEPPs, generally only a limited part of the land where the HEPP is constructed is owned by the project owner and the main part of the land is used under other methods of allocation, such as easement right, lease agreement and usage right summarized herein above.
A mortgage can also be established on the easement rights registered with the land registry. According to Article 826 of the Turkish Civil Code, an easement right will be registered with the land registry as an immovable, only if it is a continuous and independent right. The independent right character of an easement right depends on its assignability. An easement right which can be freely assigned to third parties by the right holder and which can be transferred to heirs of the right holder without being subjected to any conditions/consent of a third party/ regulatory authority will be deemed as independent. In addition, an easement right will be deemed as a
“continuous” right, if it is established for a term of at least 30 (thirty) years.7
Most of the sites of HEPPs are generally located within forestry area, ownership to which is reserved to the Treasury and the project owner will only hold a contractual right of usage of such lands, similar to a license/lease, which cannot be assigned or transferred to third parties and in which a security interest may not be granted.
Assignment of Receivables
Assignment of receivables is commonly used as a security interest in HEPP projects. Agreements regarding assignment of receivables mostly cover receivables arising from major project documents, including construction contracts, insurance policies, supply contracts, hedging agreements, rights arising from energy generation license issued in accordance with Electricity Market License Regulation,8 all future receivables of the project owner arising from energy sale operations, including current and future receivables arising before the Market Financial Settlement Center or from carbon emission trade.
The agreement regarding assignment of receivables must clearly specify the receivables to be assigned by the project owner to the lenders.
The security packages in a project finance transaction should be structured, depending on the characteristics of the project, electricity sale method selected by the project owner, legal status of the lands on which the HEPP will be constructed, in consultation with legal and project consultants appointed by the lenders, to create a comprehensive collateral which provides risk mitigation in favor of the lenders. In addition to the alternatives project owner are also used in the financing of HEPPs.
2014 OVERVIEW OF TURKISH OIL AND NATURAL GAS LEGISLATION
This article aims to provide an overview of the latest status of the oil and natural gas legislation in Turkey in the wake of spring 2014 period.
Natural Gas Market Figures
Turkey has long held a strategic role in the natural gas map of the world.
The last decade has witnessed a significant rise (almost three times the 2002 figures) in natural gas consumption: Turkey consumed a total of 46.3 billion m3 of natural gas in 2012 alone.1 1.36 per cent of this consumption was supplied by the domestic production and 98.64 per cent of it was imported. An overwhelming portion of this import being carried out by State-Owned Petroleum Pipeline Corporation (Boru Hatları İle Petrol Taşıma Anonim Şirketi or “BOTAŞ”).
17 per cent of the total import consisted of the LNG imports processed through the two currently existing LNG terminals in Turkey.
Furthermore, natural gas is the primary source of energy in Turkey’s electricity market. According to 2011 figures, 52 per cent of national natural
1 Kindly note that official 2013 figures had not yet been announced as of the date of this article.
gas consumption was drawn by gas cycling power plants alone.
In an effort to address this growing potential for production, import and consumption, and the need for a liberalised natural gas market capable of competing with more cost-effective markets in other countries, the Turkish Government has successfully staged various legislative instruments in the recent years.
The underlying legislation governing the exploration and the exploitation of natural gas is primarily the petroleum and gas trading activities are regulated under the Natural Gas Market Law (published in the Official Gazette dated 2 May 2001 and numbered 24390).
The Petroleum Law has been recently enacted in June 2013 replacing the former Petroleum Law of 1954 and a draft natural gas market law was also prepared in 2013 by the MENR, which is currently pending parliamentary enactment.
Oil Market Figures
Turkey has witnessed an increase in crude oil consumption over the last decade in line with its economic growth. The petroleum consumption rate for civil use was 19.5 million tonnes in 2012 alone, with the refinery capacity utilisation having increased from 74.8 per cent to 78.7 per cent between the years of 2011 and 2012.
On the legislative front, mirroring the legislation applicable to the natural gas market, the petroleum market activities are also governed by a set of investment-friendly rules and regulations.
The foremost of the business-friendly novelties brought by the Petroleum Law has been to strengthen the entry conditions into the exploration and exploitation market for third-party applicants against the de facto market monopoly of the Turkish Petroleum Corporation (Türkiye Petrolleri Anonim Ortaklığı or “TPAO”) acting on behalf of the State (TPAO being a State-owned business enterprise).
I. DEVELOPMENT OF OIL AND NATURAL GAS
The regulatory framework applicable to the oil and natural gas sector overlaps on certain activities. While downstream regulation is distinctively divided into a separate set of rules under the Natural Gas Market Law (published in the Official Gazette dated 2 May 2001 and numbered 24390) and the Petroleum Market Law (published in the Official Gazette dated 20 December 2003 and numbered 25322), when it comes to upstream activities (exploration and exploitation) both the oil and natural gas sector are jointly regulated under the Petroleum Law. The Petroleum Law, commonly refers to crude oil and natural gas as “petroleum products”, i.e., hydrocarbons reserved underground (henceforth jointly referred to as “hydrocarbons”).
Key Governmental Authorities
The key governmental authorities active in the natural gas sector (LNG included) are the following:
The Ministry of Energy and Natural Resources (“MENR”) is the ministry responsible for the oil and natural gas sector. The General Directorate of Petroleum Affairs (“GDPA”) of the MENR remains the regulatory authority for all upstream activities of all hydrocarbons and also for the transit passage of hydrocarbons. The Energy Market Regulatory Authority (“EMRA”) is responsible, among others, for granting licences to conduct market activities such as distribution, again capturing both natural gas and (crude and fuel) oil.
The market entry is deliberately encouraged with a number of incentives, e.g.:
Licence Holders are granted the right to request expropriation of their project sites
and the lands occupied by their connection lines.
Foreign participants or Turkish participants with foreign shareholdings, can equally apply for exploration and exploitation licences. The restriction on the number of exploration licences that can be individually held by licence holders has been revoked, enabling all participants to apply for an unlimited number of exploration licences. Total taxes collectable on the revenues of Licence Holders are capped at 40 per cent, in comparison with the earlier cap of 55 per cent.
Among others, the Petroleum Law provides for two separate kinds of major licences for hydrocarbon upstream activities. These are (i) the exploration licence (arama ruhsatı), and (ii) the exploitation licence (işletme ruhsatı).
Applicants are initially required to apply to the GDPA to obtain an exploration licence the utmost term of which is five years for onshore explorations, and eight years for offshore explorations. In any circumstance, the extension period cannot exceed nine years for onshore exploration and 14 years for offshore exploration. Exploitation licences are granted for a maximum term of 20 years, which may be extended twice, each time not exceeding a term of 10 years.
State owns 12.5 per cent of the hydrocarbon production exploited by the licence holders.
Hydrocarbon exploitation and exploration right holders are allowed to transfer their revenues to offshore accounts in the form of foreign currency.
Transfer of Interest
Share and licence transfers for upstream activities require prior approval of GDPA, whereas those
concerning downstream activities are subject to the prior approval of EMRA.
Among others, developers of hydrocarbon reserves are primarily required to obtain the following permits:
an environmental impact assessment report (“EIA Report”) for hydrocarbon exploration projects provided that the Ministry of Environment and Urban Planning (“MEUP”); an EIA Report for projects involving drilling for crude oil in an amount corresponding to 500 tonnes/day and drilling for natural gas in an amount corresponding to 500,000 tonnes/day; for transportation lines exceeding 40 kilometers in length and 600 millimeters in diameter; and specific environmental permits for crude oil and natural gas production activities (water discharge permits, emission permits, etc.).
Land Utilisation Rights
As it is also the case for their project site, applicants would be required to secure the utilisation rights of the lands on which their transportation line crosses or their exploitation site is to be stationed, i.e., private acquisitions settled with private land owners or requesting expropriation of the same, or obtaining leasehold rights from the State via easement or land allocation permits. Applicants resorting to the expropriation option must file their applications with the GDPA.
I. IMPORT AND EXPORT
Import and Export of Natural Gas
In the natural gas market, trading may be conducted by the holders of one or more of the following licences: (i) import; (ii) export; or (iii) wholesale.
Licensees, except generation licensees, are prohibited to sell more than 20 per cent of the national natural gas consumption forecasted for the relevant year. This includes export sales.
No new gas purchase agreements can be executed by any licensee with a country which has an ongoing contract in place with BOTAŞ. These countries include Turkmenistan, Russia, Azerbaijan, Nigeria, Algeria and Iran.
In an effort to grant market access to other players, the Natural Gas Market Law prohibits BOTAŞ from executing new natural gas import agreements until its import levels are reduced to 20 per cent of the national consumption amount. Note that the current market level of BOTAŞ is still over the 80 per cent scale. Again in an effort to decrease BOTAŞ’s market share, BOTAŞ routinely assigns portions of its existing import contracts to interested bidders.
Note that the above restrictions are not applicable for the import of LNG.
Import and Export of Oil
Holders of oil refinery licences, oil distribution licences or bunker delivery licences may engage in oil import activities without being subject to further licensing. Import can only be conducted through certain authorised customs points that are equipped with necessary measurement capabilities. Export of oil is permissible but is capped at 35 per cent of hydrocarbon produced onshore and 45 per cent of hydrocarbon produced offshore.
II. NATURAL GAS DOWNSTREAM ACTIVITIES
The transportation of natural gas through BOTAŞ’s pipelines is regulated under the Transmission Network Operation Regulation (published in the Official Gazette dated 26 October 2002 and numbered 24918) and the Transmission Network Operation Principles (“Network Code,” published in the Official Gazette dated 22 August 2004 and numbered 25561). BOTAŞ operates the transmission
network, and manages and coordinates the access of third parties to the network.
Contracts for Transportation of Natural Gas
Applicants wishing to transport natural gas through pipelines of transmission and distribution license holders must enter into a standard transportation contract (“STC”) with the licensee, which shall be in conformity with the mandatory provisions of the Network Code.
Applicants wishing to use BOTAŞ transmission network for transportation of natural gas should first apply to a capacity allocation at an entry and exit point.
The Network Code does not set any explicit limitation on the extent of negotiability of the STCs. In practice, it is our experience that STCs are in general non-negotiable from BOTAŞ’s perspective.
Below are some of the other major limitations, on the freedom of contract on the natural gas transportation:
No provision of the STCs can override or conflict with the Network Code. EMRA has the sole authority to issue the transportation pricing tariffs. A transportation capacity allocation is granted only for one year. The shippers must warrant the quality of the natural gas they deliver to the exit point.
Emergency and Force Majeure Measures
If, due to an emergency case, BOTAŞ is unable to entirely or partially accept the natural gas supplied by the shipper for delivery, it will be entitled to adopt necessary measures, including interrupting the transport.
Dispute resolution by EMRA
EMRA acts as the authority to resolve disputes between BOTAŞ and shippers regarding capacity
allocations. The parties may appeal EMRA’s decision before the Administrative Court of Appeals.
I. OIL DOWNSTREAM ACTIVITIES
In order to participate in fuel oil distribution and dealership market activities, a distribution and/or dealership licence must be obtained from EMRA.
Distributors are entitled to delegate their sales rights (save for wholesales) to licensed dealers by way of executing franchise contracts. Each dealer can engage with only one distributor.
Should they prefer so, distributors can sell directly to the consumers without involving dealers as intermediaries, but sales made via distributor’s own stations cannot exceed 15 per cent of its total sales amount. Furthermore, a distributor’s market share in the national distribution market cannot exceed 45 per cent.
II. FOREIGN INVESTMENTS
The Petroleum Law clearly states that applications for upstream hydrocarbon activities can be filed by both foreign and Turkish companies. Applications for downstream oil and natural gas licences, however, must only be filed by Turkish companies, i.e., companies established in Turkey. That said, there is no limitation prohibiting the applicant Turkish companies to be fully or partially foreign- owned by foreign individuals and/or entities.
III. PROSPECTIVE LEGISLATION
In 2013, the two new draft laws prepared by the MENR were at the centre of attention, with one being set to replace the current Petroleum Market Law by extending its coverage to LPG and CNG, and the other set to amend the current Natural Gas Market Law significantly. Although the two drafts are in relation to different markets, currently they have some overlapping provisions in relation to CNG. While the draft laws have been provided
to the public (as draft for comments), there is no official information as to the initiation of their enactment processes.
Below are some of the significant novelties that may be introduced by these new draft laws:
Fuel Market Law draft
The current draft law proposes that the fuel market activities be directly placed under the supervision and monitoring of the MENR, thus abolishing all supervisory authority of EMRA over the current petroleum market.
If the Fuel Market Law is adopted as is, the MENR would be entitled to create several dealer classes (whereas no classes exist currently) by taking into account technical and economic qualifications. Supervision and inspection of dealers will be handled by Governorships.
Natural Gas Market Law Draft
The amendments proposed by the draft law primarily relate to the licensing scheme whereby the Turkish Government is planning to restructure the licensed market activities.
LNG terminals are currently operated under LNG storage licences. The draft law, if enacted, will treat storage and terminals separately. Accordingly, the operation of a LNG terminal would become a separate natural gas market activity subject to licensing, and any existing storage licence for a LNG terminal would be replaced with a LNG terminal operating licence.
The draft law also aims to resolve the vertically integrated legal entity status of BOTAŞ.Accordingly, within one year following the entry into force of the draft law, BOTAŞ would be restructured as three companies. Following the restructuring, one of the three companies would engage with transmission activities only, one would be responsible for conducting the operation of the LNG facilities and
performance of storage activities and the other one would conduct the remaining activities.
All these in overall pave way to a more investor friendly oil and gas environment for Turkey in 2014. The energy market community is excited to see a widening horizon of transaction opportunities the new legislation promises to bring to the table. Along with the opportunities new legal challenges will surely arise. These, energy law experts of Hergüner Bilgen Özeke are ready to address and propose neat solutions.
SOPHISTICATED YET HIGHLY DEBATED: TURKEY’S MOVE TO NUCLEAR ENERGY
While nuclear power has been an agenda item for Turkey since the 1970s, the first significant steps could only be taken four years ago when the Turkish government signed an inter-governmental agreement (“IGA”) with the Russian Federation for the construction of a nuclear power plant (“NPP”) in the Mediterranean costal region Akkuyu, Mersin to be almost immediately followed by a second NPP project in Sinop, the Black Sea coast of Turkey. Considering the increasing demand for electricity and dependence on oil and gas imports, the government believes that it is now time, more than ever, that Turkey moves for a busy nuclear energy implementation program diversifying its energy sources with the nuclear plants generating 5% of the country’s electricity within the next 10 years despite the heating debates.
The steps taken for the Akkuyu NPP paved the way for the next nuclear power project. The government disclosed that it agreed on the terms of an IGA with the Japanese government in the first half of2013 for the quarter-billion Sinop NPP which will be built by a joint venture consortium of Japanese Mitsubishi
Heavy Industries and French Areva. French electric utility company GDF Suez will be the plant operator. The Minister of Energy announced it is intended that Turkish Electricity Generation Corporation (EÜAŞ) will have a shareholding percentage of around 35 in the project company. Despite the fact that it was not the method followed for the Akkuyu NPP but was the case for other similar projects, the next step for the Sinop NPP would be to have a host government agreement between the Turkish government and the relevant project company to be established for the purposes of Sinop NPP to govern the details of implementation of the project. The Sinop NPP is expected to commence power generation in 2023 coinciding with the 100th year of the Turkish Republic. This collaboration with Japanese parties is also regarded as indicative of Turkey’s recently enhanced strategic relationship with Japan: the Sinop NPP will be Japan’s first overseas nuclear technology and the second major challenge in Turkey following the Marmaray tunnel, operative as of October 2013, also built by a Japanese consortium to connect Istanbul’s European and Asian coasts.
The government is still maintaining its firm stance and is confident that NPPs will make a significant contribution to the Turkish economy in the upcoming decade; however, there has been an undeniable public reaction against the Akkuyu and Sinop NPPs right from their inception. The protests against both plants focus on environmental concerns, the untested reactor types to be used and the scale of a possible nuclear disaster in Turkey. The fitness of Turkey, as one of the most seismically active regions in the world, to host such sophisticated structures is also questioned by the anti-nuclear groups in the aftermath of the Fukushima disaster.
To trigger more controversy, the parliament made two failed attempts to exempt the NPPs from the requirement of preparing an environmental impact assessment (ÇED) report, one of the environment related key re-requisites for construction and operation. The parliament re-worded the specific exemption provision of the Environmental Impact Assessment Regulation twice to have the Akkuyu
NPP be free of the obligation in this regard. Both attempts were, however, halted by the Council of State.
The NPP projects have also been facing political opposition mounted against the specifically engineered unique regulatory regime created through the IGAs. The opposition party challenged the law approving the ratification of the Akkuyu IGA for the Akkuyu NPP before the Constitutional Court. The essence of the claim was that the Akkuyu IGA gave leeway to circumvent national regulations such as the mandatory competitive tender process that must have been otherwise followed and to shield the whole process from judicial review. This challenge, however, was left unsupported by the Constitutional Court responding in November 2013 that an assessment of the IGA’s content including the regulatory regime created thereunder would be beyond the court’s authorities.
The Japanese side, on the other hand, is also busy with its own public debates on the Sinop NPP. The anti-nuclear groups are specifically concerned about the Agreement for Co-Operation in the Use of Nuclear Energy for Peaceful Purposes between Turkey and Japan (“Agreement for Peaceful Purposes”). Subject to the Presidential act and issuance of the decree by the Council of Ministers for promulgating the law deeming the Agreement for Peaceful Purposes proper for ratification, entered into force upon its announcement in the Official Gazette, as of 20 January 2014. It is alleged that the clause in the agreement allowing Turkey to export Japan’s spent fuel re-processing technologies raised questions about any potential efforts in proliferation of nuclear weapons. The Turkish government, on the other hand, emphasizes that the clause merely aims that Turkey gets Japan’s on nuclear fuel reprocessing know-how and experience. These concerns are easy to refute considering that Turkey is already a party to the Treaty on the Non-Proliferation of Nuclear Weapons, a landmark international treaty to prevent the spread of nuclear weapons and weapons technology.
The Turkish Atomic Energy Authority (“TAEK”)
does not remain indifferent to the safety concerns and continues to focus on the regulatory aspects of nuclear power to maintain a well-structured national legal framework. Accordingly, TAEK issued the Regulation on Radioactive Waste Management (Radyoaktif Atık Yönetimi Yönetmeliği) in 2013, the Regulation on Physical Protection of Nuclear Facilities and Nuclear Substances (Nükleer Tesislerin Ve Nükleer Maddelerin Fiziksel Korunması Yönetmeliği) in 2012 and the Regulation on Protection of Subcontractor Employees from Ionizing Radiation (Kontrollü Alanlarda Çalışan Harici Görevlilerin İyonlaştırıcı Radyasyondan Kaynaklanabilecek Risklere Karşı Korunmasına Dair Yönetmelik) in 2011.
The Turkish Ministry of Energy also displays efforts in establishing a national regime for liability as one of the mostly debated nuclear power issues. While the Paris Convention on Third Party Liability in the Field of Nuclear Energy (the “Paris Convention”) of 1960 has the force of law in Turkey, it leaves room for its contracting states to adopt supplementary domestic legislation in relation third party nuclear liability issues. A draft law on liabilities in the field
of nuclear energy (the “Draft Nuclear Liability Law”) has been prepared by the Ministry of Energy and submitted to the council of ministers. Going one step beyond the Paris Convention, the Draft Nuclear Liability Law sets an upper limit to NPP operators’ and nuclear fuel carriers’ third party liability arising a nuclear incident. Moreover, draft proposal foresees the establishment of a nuclear damage determination commission to determine the amount of damage where the nuclear damage is above the liability upper limit of nuclear facility operators and nuclear fuel carriers. The raft Nuclear Liability Law also sets forth that both operators and carriers must maintain insurance in relation to their activities and that failure to comply with this requirement may result in administrative fines or revocation of operation licences. The Draft Nuclear Liability Law grants the monitoring authority to the Turkish Atomic Energy Authority.
While the Prime Minister Erdoğan admits that no project could be 100% safe and the nuclear opponents hope that Japan had lessons to learn from its recent experience, Turkey tries its best to secure a well-developed national regime to accommodate this sophisticated alternative source of energy.