Turkey’s efforts to privatise its electricity generation assets: challenges ahead

August 2014 | EXPERT BRIEFING | SECTOR ANALYSIS

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Privatisation of state-owned economic units to foster liberalisation of the markets has been on the Turkish government’s agenda since the early 2000s. Electricity generation and distribution assets constituted a large part of this privatisation scheme. Among these assets, priority was given by the Turkish Privatisation Administration (PA) to the electricity distribution assets, the privatisation of which has finally been concluded in 2013. Now, electricity generation assets are on the table.

Overview of State-owned generation assets

The PA had initially structured the large-scale state-owned generation assets under nine portfolios. These portfolios comprised three thermal portfolios, four hydro portfolios and two mixed portfolios comprising both thermal and hydro plants. Nevertheless, after the High Privatisation Board cancelled the tender for the privatisation of motorways and bridges on the grounds that the bids were too low, the PA has shifted from the portfolio model and has started to tender out large-scale thermal power plants separately to be able to maximise their values and to avoid the risk of tenders being cancelled. Accordingly, Kangal (457MW), Kemerköy (630MW), Yeniköy (420MW) and Çatalağzı (300MW) thermal plants in addition to Hamitabat (1,156 MW) and Seyitömer (600MW) thermal plants, which had originally not been part of the portfolios, have been tendered out separately so far. Tender for Yatağan (630MW) thermal plant is currently pending. Other large scale thermal plants, such as Soma B (990 MW), Orhaneli, (210MW), Tunçbilek (365MW) and Çan (320MW), are expected to be next in the pipeline.

The government has not made any official announcement so far as to whether the remaining plants in the portfolios will be restructured under new portfolios or whether they will be tendered separately. Similarly, it remains unknown for the time being whether hydro plants will be involved in the tenders any time soon. Currently, privatisation of thermal plants seems to be the priority for the PA.

Economic outlook in 2014

Despite the government’s efforts to attract foreign investors in the electricity generation assets, the interest of foreign investors in these tenders have been very limited so far. Bidders have consisted of domestic construction and energy companies. Furthermore, domestic investors’ appetite seems to have decreased in 2014 compared to 2013. Tenders originally scheduled to take place by the beginning of the year have been postponed to mid-year as a result of the extension requests of the investors. This is largely due to the devaluation of Turkish Lira against foreign currencies (Turkish lira was devaluated approximately 15 percent between May 2013 and May 2014). Consequently, the bids submitted in 2014 by domestic companies are below the 2013 figures. In terms of financing, international banks have not been active so far, and the financing of the acquisition of the plants, such as Kangal and Seyitömer, has been secured from local banks which are most familiar to the market and its players.

Potential effects of Soma mining disaster

Most recently in May, Turkey suffered a tragic incident in a coal mine in Soma where 301 mine workers were killed as a result of lack of security measures in the mine. This disaster has led to discussions for occupational health and safety measures for mining operations which have been transferred to private investors. This is particularly crucial from a privatisation perspective, because a significant number of the thermal plants which are in the process of being privatised are coal-fired thermal plants and the winners of these tenders are awarded, in addition to the plant, the operating rights of the mining licences for the respective coal mines. Accordingly, given the ongoing discussions on increasing the quality of security measures in mining operations, coal-fired plant privatisations are likely to be under more scrutiny than ever, leading to a slowdown in the ongoing privatisation process. It is also possible that the transfer contracts between the PA and the investors may include more stringent terms on health and safety measures than before.

Environmental compliance and Constitutional Court’s ruling

On a related note, the Electricity Market Law No. 6446 of March 2013 had a special clause (Temporary Article 8) for environmental compliance obligations of the state-owned plants, including plants to be privatised. According to this clause, state-owned plants were granted a grace period until 31 December 2018 to complete their investments to be able to comply with the environmental laws and complete their environmental licences and permits. Until then, these plants would be protected from any sanctions or suspension of activities as a result of their missing permits. This was a key protection mechanism for the plants to be privatised because these plants usually require significant investment to be able to comply with the discharge and emission standards under the environmental laws and in most cases, the State may have failed to obtain the necessary environmental permits. Nevertheless, the Constitutional Court announced in May that it has annulled this clause as it is in breach of the Turkish Constitution. The reasoned decision is not available yet; therefore, the rationale for such annulment is not yet known. Nevertheless, it is probably no coincidence that the annulment of this clause, which shielded private investors from immediate compliance with environmental laws, came in the aftermath of the Soma incident. Overall, in the absence of such a protective clause, the existing conditions of state-owned plants vis-à-vis environmental laws now appears as a new risk item for private investors.

Political challenges going forward

Finally, 2014 is a particularly ‘political’ year for Turkey with the municipal elections in March and the upcoming presidential elections in August. Economic activities slowed down to a certain extent at the beginning of the year, pending the results of the municipal elections. A similar slowdown may also be seen until after the presidential elections in August.

Mustafa Durakoğlu is a senior associate at Çakmak Avukatlık Bürosu. He can be contacted on +90 312 442 4680 or by email: m.durakoglu@cakmak.av.tr.

Mustafa Durakoğlu

Çakmak Avukatlık Bürosu