GOT DECIDES TO TAKE OVER BOT COMPANIES

UNCLAS SECTION 01 OF 02 ANKARA 006612

SIPDIS


SENSITIVE


STATE FOR E, EB/CBED,EB/IFD AND EUR/SE
DEPARTMENT PASS OPIC AND EXIM
NSC FOR BRYZA
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO
USDOE FOR CHARLES WASHINGTON
TREASURY FOR OASIA


E.O. 12958: N/A
TAGS: EINV ENRG ECON PREL TU
SUBJECT: GOT DECIDES TO TAKE OVER BOT COMPANIES

REF: A. ANKARA 6423

B. ANKARA 4386

C. ANKARA 6538


This cable is sensitive but unclassified, not for internet
distribution. Please handle accordingly.



1. (SBU) Summary. The longstanding disputes between Build
Operate Transfer (BOT) electricity generation plants and the
Turkish government may have reached a new level due to the
government's apparent decision to take over these facilities
on what appears to be the presumption of corruption.
According to local press reports on October 21, the Ministry
of Energy (MENR) is planning to take over four BOT
electricity generation plants, including two owned by US
investors, ENRON and Doga Eddison Mission, with OPIC and EXIM
support. Energy Minister Guler is quoted as saying that the
government took action because of corruption in the
establishment of these facilities and due to high electricity
prices. Both ENRON and Doga told us that they learned about
the decision for the first time from the press and have not
yet been officially notified by any of the Turkish
authorities. The Energy Market Regulatory Authority (EMRA)
told us that they are not aware of any plans to "seize" or
"take over" BOT companies as reported by Hurriyet newspaper
and maintains that they are responding to BOT companies'
applications for licences. Post is seeking additional
information. End Summary.



2. (SBU) On October 21, two leading Turkish newspapers,
Hurriyet and Milliyet, reported that the MENR was planning to
take over four BOT plants: ENRON's Trakya Electricity (US),
Doga Edison Mission's Esenyurt Natural Gas facility (Capan
family),Unimar's Marmara Ereglisi-Unimar (Japanese),and
Gebze Dilovasi (Ova Electricity). Energy Minister Guler told
Hurriyet that the decision followed the State Auditing
Board's report, which concluded that there was corruption in
the establishment of these facilities. Guler said that the
problems were very complex; the investment costs were
exaggerated, the contracts violated, and the costs of loans
were overstated, all of which contributed to high energy
prices.



3. (SBU) Guler stressed that the MENR has prepared
alternative strategies depending on the BOT companies'
response, including international arbitration. He said that
the cost of arbitration would be bearable but he believed
that most of the companies will not seek international
arbitration and risk ruining their reputation with corruption
charges. Guler said that the MENR was waiting for (EMRA) to
comment on this matter. (Note: The MENR and EMRA have been at
odds on how to deal with BOT companies as reported in reftel
A.) EMRA officials told us that it is not party to any
government decision to take over BOT companies, while
stressing that EMRA continues to review BOT companies'
applications for licensing. Guler also reportedly expressed
regret that a compromise could not be reached and warned that
BOT facilities could go through a similar process as Cukorova
and Kepez Electricity, both owned by the notorious Uzan
family. (reftel B). At the same time, EMRA told us that BOT
contracts are not concession contracts and cannot be compared
to the Cukorova case, which was seized because the company
refused to transfer transmission assets to the State as
required by the Electricity Law. Guler insisted that Turkey
would no longer consider BOT projects but remain interested
in establishing new electricity generation facilities with
the BO model. When asked about what such action means for
Turkey's reputation in the international community, Guler
said allegations of corruption would be bad for the companies
reputation.



4. (SBU) Econspecialist contacted the MENR for
confirmation, and they did not deny the content of the press
reports. MENR's Press Dept Head said that the Ministry had
not issued a press release on the story, while confirming
that the newspapers were granted a private interview with
Minister Guler on October 20. We also called both ENRON and
Doga for a response: ENRON's executives currently are all in
London attending a Board meeting, but the General Manager
denied the corruption charges and told us that ENRON has not
yet been notified by the MENR. ENRON's GM questioned whether
the GOT would eventually seize the facility as in the
Cukorova case and wondered if the Hurriyet article was
referring to the government's early buyout option. He
speculated that the MENR may be trying to force EMRA to
negotiate conditions to issue licenses but it could also be a
message to the companies to lower their prices. He asked us
to share any info we receive from EMRA. Doga also told us
that they have not been contacted.



5. (SBU) The lawyer of one of the BOT companies also said
he had no prior notification from either EMRA or the MENR.
He said that the Milliyet article, which does not quote the
Minister directly, gives a clearer explanation of the
government's decision. Milliyet reported that the GOT
decided to take action for early transfer of the BOT
facilities back to the government. According to Milliyet, a
high level EMRA official said that the BOT companies could
not reach a compromise with the GOT on the electricity prices
after a year of discussion, and the GOT would take over these
facilities. The official said EMRA was planning to start the
takeover process in mid-November. He added that EMRA would
first prepare a list of suggestions for the companies to
comply with and would give the companies 1-2 months to revise
their contracts. The companies, which failed to revise the
contracts, will be asked to transfer the facilities to the
government early.



6. (SBU) According to the Hurriyet report, the MENR is
relying on the State Auditing Board's report on BOT,
Build-Operate (BO),and Transfer-Operating-Rights (TOR)
projects, which was released on October 17, to justify the
impending take over. The report states, for example, that
there was no feasibility study for any of these projects. It
claims that for some projects transfer costs that the MENR is
obligated to pay upon transfer of the facility to the
government is different for BOT facilities with similar cost
structures. The report also claims that the MENR had signed
contracts without any knowledge of the BOT's total investment
costs and financial plans and wrongly assumed all of the
risks. The State Auditing Board concluded that these
problematic contracts keep energy prices high and are a major
impediment to creating a free energy market. The report also
criticizes the energy forecasts that the Energy Ministry at
that time had made and contends that those faulty decisions
have resulted in an excess supply of natural gas and
excessive use of natural gas in domestic production as well.
(Reftel C notes this government's preference for indigenous
energy sources over natural gas.)



7. (SBU) Background. According to the terms of the
contracts, these BOT companies are guaranteed a set price for
every unit of electricity generated; however, the terms of
contract have been under dispute for a couple of years. The
GOT wants the companies to lower electricity prices, and some
companies have expressed a willingness to do so (reftel A).
Ankara envisions a liberalized electricity market with no
long-term contracts and has been seeking ways to eliminate
these expensive contracts. The main problem is that the GOT
cannot afford the early buy-out option and would have to wait
until 2009 when it can take over these companies at no cost.
These BOT contracts are performance contracts so during any
arbitration process the companies are legally obligated to
continue operations and Turkey is obligated to continue
paying for the electricity generated.





8. (SBU) Comment. This is yet another example of the
problems foreign companies operating in Turkey face, and the
GOT's action continues to raise questions about Turkey's
commitment to the rule of law and attracting further foreign
investment. The takeover decision reflects the Justice and
Development Party's (AK) determination to crack down on
corruption and also could give the GOT a way out of longterm
expensive contracts. Another complaint that we constantly
hear from BOT companies is that this government does not
understand the terms of the contract. End Comment.




EDELMAN