Turkish Law Blog

Legal Aspects of Financing Models in Turkish Energy Investments

Enes Yıldırım Enes Yıldırım/ Statu Legal Law
17 March, 2020
245

In Turkish Economy (which considered as a developing country) huge investments are the sharp milestones in the pathway of economic development such as “Energy Investments” and “Substructure Investments”. As a crossroads between major energy consumers and suppliers, Turkey occupies a strategic location that serves as a regional energy hub. The existing and planned oil/gas pipelines, the critical Turkish straits, and promising finds of hydrocarbon reserves around Turkey allow for increased leverage over regional projects and reinforce the country’s gateway status. Republic of  Turkey occupies 5 th rank in Eurpoean Electricity Market with 88.5 Gw of installed capacity.

Every substantive energy substructure investment requires strong and well organized financial backgrounds. (Such as electric power plants, huge service facilities, bridges, hospitals etc.) Classic Financing Method which preferred at early times, that granted by State through Budget Acts or similar legal proccesses, became unpractical and insufficient against increasing populations and massive demands. In the following years after 1990’s Public Private Partnerships (PPP) became useful for governments to find required financings. The main difference or advantage of PPP versus traditional public procurement is the lack of needed initial investment. The major investment in the beginning is done by the private partner, whereas the public contractor pays a certain fee on a regular basis over the contracting time. This allows public institutions to distribute expenses over a longer period, which may have positive influence on public accounts. Other advantages may be the use of private know-how in technical project development, use of innovation potential, possible renegotiation in public tenders, risk transfer to private sector and possibility of off balance sheet accounting. By the Republic of Turkey, most commonly preferred branches of PPP are Build Operate Transfer (BOT) and Build Operate Own (BOO). BOT is a form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, own, and operate a facility stated in the concession contract. The build–operate–transfer (BOT) approach for developing infrastructure projects is a technique that allows fast realization of public works in cases of a shortage of public funds. BOO is  model in which a private organization builds, owns and operates some facility or structure with some degree of encouragement from the government. Although the government doesn't provide direct funding in this model, it may offer other financial incentives such as tax-exempt status. The developer owns and operates the facility independently. During the operation period, operation of all kinds of commercial activities is conducted by GTI. Besides, all operational procedures such as maintenance, heating, cooling, lighting and cleaning at the border gates are conducted by GTI and these operational expenditures are also met by GTI during this process.

It is no doubt that Turkey is a energy importer country, depending on such imports for 73 percent of its energy requirements. The energy import bill was USD 42.99 billion in 2018, increasing by nearly 15.6 percent compared to 2017. However, with the exception of fluctuations in certain years, the bills depict a significant downward trend given the considerable decline from USD 60.1 billion in 2012 to USD 37.2 billion in 2017. Turkey’s demand for energy and natural resources has been increasing due to economic and population growth. In recent years, Turkey has recorded the fastest growth in electricity demand among OECD members, with an annual growth rate of 5, 5% since 2002. Turkey’s energy use is expected to increase by 50% over the next decade.The import dependence has been the main driving force behind the formulation and implementation of new policies and investment models to commission local and renewable energy resources. Electricity Market Law  was enacted by the Parliament and published in the Official Gazette dated 30 March 2013. The New EML envisages substantial changes in the electricity market, particularly regarding license types and licensing procedures. The New EML abolishes auto-production licenses. Accordingly, the Energy Market Regulatory Authority will grant generation licenses to current autoproduction license holders without any license fee. The New EML introduces “supply licenses”, combining what used to be called a wholesale license and a retail sale license

Turkish Electricity Transmission Company (TEİAŞ) and the relevant boards of European Network of Transmission System Operators for Electricity (ENTSO-E) signed a long-term agreement on 15 April 2015 providing for the permanent physical integration of the Turkish and EU electricity markets. The integration of the Turkish electricity system and market with those of Europe has hence been taken to a higher level. An observer membership agreement was signed by TEİAŞ and ENTSO-E on 14 January 2016 and TEİAŞ became an observer member of ENTSO-E.

In the light of legal practice of BOT and BOO projects in Turkey, proccess begins with Contract of Terms of Refference that settles between Contracting Authorities and Relevant Corporation. Turkish Authorities shall  pursue Open Tender Procedure in accordance with Public Tender Act Law No 4734 to determine relevant corporate. Corporations or group of companies (Major Members of Turkish Market ) that willing to acquire Contract of Terms of Refference participates in open tender and bring forward their bids. Administration shall receive and evaluate all of the bids arising from participant companies in the course of open tendure procedure. Also in practice, recent years, Contracting Authorities are apply standart deviation among bidding amounts to determine exact probable cost of the project as if administration build whole project by itself. Also contracting authorities are taking the legal responsibility of financial suretyship through Contract of Terms of Refference. In the any event of dishonour to creditors regarding payment of the debts, contracting authority (Administration of Turkish republic) would became debtor before such creditors. Creditors shall have their legal Locus Standi to pursue directly against state.

After determination proccess, such tender winner corporation or group of companies are used to begin negotiations with external creditors to gain financial loan. Due to massive costs of energy projects, no market actor has the economical power of overcome in Turkish Market. In the negotiations, Turkish corporations are usually attributes to Suretiyship of Republic of Turkey to grant guarantee for external creditors in negotiations of persuade. As mentioned above, in the any event of dishonour to creditors regarding duly payments, contracting authority would became legal debtor before such creditors. Suretiyship of government assures creditors to collect their claims.

Creditors are usually transfer credits part by part as much as construction of the project proceeds. In real practice, first transfer begins after completing of at least %20 percent of construction which consist of 20-30% of total credit.

The most important item of Turkey's privatizations is the privatization of the energy plants and electricity distribution companies since energy is regarded as the partaking of a country's economic and politic power as well as in the international arena.  The operational fundamentals of electric market are defined by Electric Market Law, no 4628 which went in effect in 2001. Additionally, with Electric Market and Supply Security Strategy, a draft was made for the liberalization in sector and supply. Energy investment projects, when they completed duly and properly, creates upward trend on country’s economical growth graphics. By the end of 2017, about 84,000 people were already employed in Turkey’s renewable energy sector, primarily in the solar industry. By comparison, the entire legacy electricity and gas sector employs a total of 819,000 people and only directly employs one-third of that number. Indeed, local content requirements will drive up economic activity and create new jobs, but one should also consider the upfront costs and time needed to create a domestic manufacturing base. Turkish stakeholders should factor in these considerations when planning for the country’s energy transition in order to avoid both delays and increases in the current account deficit.

As an example of Turkish practice, Project of Akkuyu Nuclear Power Plant, On August 21 Russia's state-owned banking and financial services company “Sberbank” stated that it would provide a $400 million loan for the construction of Akkuyu nuclear power station. The project, for which the intergovernmental agreement was signed in May 2010, is expected to be up and running at full capacity by 2025. It will consist of four VVER-1200 power units with a total installed capacity of 4,800 megawatts.    

There are two essentail methods of governmental suretiyship that parttaking on Contract of Terms of Refference in Turkish practice of energy investments, “Purchase Method” and “Take-Over Method”. Purchase Method shall provide legal authority for government to cancel the entire project provided that purchase all the expenses made by Tender Winner Corporation and Credit Payments with contractual rates and interests. On the other hand  Take-Over Method enables government to replace corporation to conduct relevant project with it’s entire liabilities and rights. In ccordance with latest amendments on Public Tender Act Law No 4734, Turkey has updated aspects of the public tender regime outlined in such law. Most notably, surety bonds issued by insurance companies will now qualify as collateral during public tenders. Surety bonds issued by insurance companies located in Turkey within the scope of surety insurance shall be accepted as collateral during public tenders.                                                                                                                                             

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