TURKEY: SLOW PROGRESS ON ELECTRICITY

UNCLAS SECTION 01 OF 03 ANKARA 003223

SIPDIS

USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO
USDOE FOR CHARLES WASHINGTON
TREASURY FOR C PLANTER AND M MILLS
EB/CBA FOR FRANK MERMOUD

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG BEXP EINV TU
SUBJECT: TURKEY: SLOW PROGRESS ON ELECTRICITY
DISTRIBUTION PRIVATIZATION

Ref: Ankara 2114

Sensitive But Unclassified. Please handle accordingly.


1. (SBU) Summary: Turkey's privatization of its
electricity distribution company is proceeding slowly.
All parties anticipate some delays, most likely to at
least this autumn, primarily due to delays in putting in
place important legislation underpinning process and
mechanisms, but everybody gives importance to getting it
right. American firm AES is still very interested in
this market opportunity. End Summary.

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Pending New Legislation
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2. (SBU) The GOT has delayed announcing tenders for
regional electricity distribution privatization because
of lingering uncertainties on process and approach, a
well as the need to provide related legislative
amendments to the existing electricity law. The
Privatization Administration (PA) was successful in
arguing for a "transfer of operating rights" (TOR)-backed
share sale model, over a direct sale approach (reftel).
The new draft law, which is intended to codify the
"Electricity Strategy Paper" and resolve disputes and
open-ended issues, has been forwarded to the Council of
Ministers for signature, before transmittal to the
Parliament for approval. The amendment is intended to:

-Minimize constitutional and other legal objections to
the privatization.
-Enable foreign majority ownership in individual
electricity distribution and generation companies (but
includes an ambiguous stipulation that precludes foreign
domination in the overall sector).
-Enable the Energy Ministry to permit new public sector
investments in energy "in order to ensure the security of
supply".
-Preserve the 20 % limit on amount of regional generation
that can be controlled by distribution companies (PA
unsuccessfully sought to raise this pro-competition
provision to provide greater enticement to investors).

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Enthusiasm and Critiques
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3. (SBU) In a June 3 meeting with Energy Officer,
Energy Market Regulatory Authority (EMRA) Electricity
Market Head Murat Erenel said he was pleased with the
current draft. Although he was frustrated with the delay
in passage, he stressed the need to make the process
clear and get it right. Noting that the Parliament would
go on summer recess at the end of June, he said that the
tender process would be delayed to autumn, or even to
next spring, because of the need for the PA to make
preparations based on the new law. Erenel lamented that
there were still some transitional issues cited in the
Electricity Strategy Paper that will still unachieved:
transitional contracts between the state electricity
companies; balancing and settlement procedures with the
state trading company TEIAS, and the future status and
role of the state distribution company TEDAS.


4. (SBU) Ministry of Energy Director General Budak Dilli
expressed similar concerns to Energy Officer in a meeting
on June 3. He noted that the new law and/or subsequent
implementation had to clear up transitional contracts,
TEDAS' role, and tariff mechanisms. In a separate
meeting, Energy Under Secretary Sami Demirbilek expressed
frustration with the PA's aggressive attachment to the
TOR model. He told ECON/C that he continued to fear this
complex approach would discourage the most qualified and
serious foreign companies from bidding; he encouraged
prospective investors to express opinions to the
Treasury, Finance, and PA.


5. (SBU) Local World Bank expert Gurhan Ozdora
expressed frustration over delays and lack of
coordination between relevant agencies (not listening to
each other). He was pleased with progress on the law
draft, but noted that the market structure was still
based on "shifting sand." Ozdora noted that
privatization and liberalization of electricity
distribution was a key test and a precursor for the next
step of generation. Ozdora observed that there was a
bureaucratic reluctance to make key decisions and
signatures, for fear of a future investigation from the
next government.

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Interest from American Firm AES
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6. (SBU) Visiting AES manager for Turkey, John Turner,
met June 2 with Energy Officer and FCS specialist. AES
remains seriously interested, having identified Turkey as
a key market. The AES CEO is planning to come to Turkey
for high level meetings around June 28-30. AES plans to
hire a local consultant and establish an office in
Ankara. AES is still looking at both Oyak and Enka as
potential local partners.

Turner described the following issues still in play:

-Still a perception of weak coordination and political
will with respect to clearly setting process and timing
for distribution privatization.

-The proposed electricity law amendments are still at the
Prime Ministry, so timing is unclear. The Parliament
will go on summer recess at the end of June.

-The Privatization Authority has successfully pushed its
preferred "Share Sale based on Transfer of Operating
Rights" method. AES said it can live with this, but
would have preferred an "asset sale" approach (AES
understands the argument that there were practical legal
difficulties and potential challenges associated with an
asset sale method).

-Incentives for investors still in play. PA had
championed lifting the 25% cap on production which could
be owned by a distribution company (to entice investors).
EMRA and others have appeared to successfully push back
on this vertical integration issue.

-Tariff mechanisms and a regional equalization fund still
unclear. Transitional contracts between entities still
unclear. The role and status of TEDAS (the state
distribution co.) still to be determined.

-Prequalification criteria still unclear and intensely
political. AES will satisfy either way and would prefer
a high bar. But a high bar for experience might preclude
some domestic actors.

-AES has a tax issue as a U.S. company. The distribution
companies have been created as joint stock companies
(anonymous companies); AES will want to convert to a
limited partnership legal structure to avoid a tax
disadvantage.

-The press notes that there are still issues about
foreign control and ownership of the distribution
companies on an overall basis (but not on an individual
distribution company basis).

-PA is working on auditing and information memoranda to
start with tenders for six more lucrative, western
regions (of the 21 established). It is not clear, but
usually assumed, that PA has to wait for passage of the
law (to make the process and environment fully clear).
AES said PA said Russian companies are interested in
eastern regions.


7. (SBU) Comment: Along with Turk Telekom, TUPRAS
refining company (septel),and others, electricity
distribution is identified as a key target for
privatization. The GOT cannot afford more failures on
privatization, so delays - to get it right - are
reasonable, up to a point. The forces unwaveringly
opposed to privatization - especially to foreigners
(judiciary, labor unions, nationalists) are gearing up
for action, and it is difficult to predict speedy
privatizations, other than IPO's which do not transfer
control.
Moore