|
|
In terms of forecast investment, Turkey is the fourth-largest
electricity market in the world behind China, India and Brazil.
Between 1970 and 1997 primary energy production nearly doubled but
consumption quadrupled. According to Citibank the government plans
to add 40,000MW of capacity by 2010, of which at least 25% will be
generated in gas-powered plants.
Traditionally, energy investments in Turkey, like all
infrastructure projects, have been a state monopoly. Since 1984 the
country has been in the throes of opening up infrastructure
investments to foreign and domestic private investors. "The
implementation of this has been subject to bureaucratic impediment
and continuing legal challenge," says David Tonge, chairman of
Istanbul-based research house IBS and an expert on the Turkish
power sector. "But step by step, private-sector power generation
has become a reality." The share of the private sector, which
provides around 13% of power generation, is due to increase.
Operating rights to over half of existing capacity are in the
process of being transferred to the private sector and a large
number of new plants are in various states of development.
The plan, in general terms, is to privatize power generation
and distribution and to encourage foreign investment. But these
efforts have been stymied by the lack of a relevant legal framework
and repeated failures to provide one. Making a private
infrastructure investment in the Turkish energy sector is like
having a picnic in a minefield.
"The obstacle in front of energy investments is neither
economic nor financial or technical," states a report by Tusiad,
Turkey's prestigious association of industrialists and businessmen.
"The obstacle is legal and bureaucratic. We live in a time of
paradox when the state cannot make the necessary investments in the
energy sector and cannot or will not allow domestic and foreign
capital to make it either."
The bureaucracy is dominated by state-minded, nationalistic
and xenophobic officials. "One most important reason why there has
not been sufficient progress in energy privatization is the
centralist and state-minded structure of the Ministry of Energy and
the state agencies related to it," as Tusiad puts it bluntly. The
same attitudes prevail in the judiciary.
But with power cuts becoming a serious threat, sweeter winds
have started to blow. American persuasion has also played a role.
Washington has told Ankara that if Turkey wants US support to
become the terminal of planned pipelines from central Asia it will
have to open up its energy market. "US companies have a great
appetite for Turkish energy investments and there are many waiting
outside the door," says a Citibank official.
A continuing controversy is the plan to build a 1200MW
nuclear power station at Akkuyu on the Mediterranean coast. The US
would clearly like Westinghouse to win the contract, and there were
reports in January that it was close to signing. But the project
has been dogged by environmental and health concerns as well as the
basic question whether it makes economic sense.
There are varying estimates of how big the need for
electricity is in Turkey and how much money is required to finance
extra capacity. The Turkish Electricity Generation Transmission
Company (Teas) claims that Turkey needs to spend more than $5.5
billion a year on power and that investment required by the end of
2020 is $127.8 billion. Government programmes include investments
in electricity generation and transmission and for transcontinental
gas and oil pipelines bringing energy from sources including
Russia, Turkmenistan and Azerbaijan.
However, the World Bank, which has been helping the
government to open the power system to private participation and
convert it from a primarily public to a mixed system, believes that
demand could be satisfied with substantially less investment.
"Investment required to allow Turkey's power system to keep
up with demand is some $2 billion a year," says a World Bank
expert. "So it's clear that the government alone cannot meet the
sector's expansion needs." According to Enerjisa, the Sabanci
Group's electricity company, annual growth in demand is expected to
be 8% to 10%. IBS forecasts electricity demand will increase by
9.5% a year to 2010 and then by 6.8% a year to 2020.
Glacial response to growth
Whatever estimate is used, Turkey is Europe's fastest-growing
energy market. Per capita electricity consumption at 1,500 kWh is
56% of the world average and 17% of that of advanced G7 countries.
So Turkey has attracted many of the world's largest construction
and supply companies and banks. But the feverish activity has not
been matched by results. Things are moving at a glacial speed
because the political, economic and legal environment is not up to
the requirements of the situation. Ten years had to elapse before
all elements could be brought together for the construction of the
Bircecik dam in south-eastern Turkey, for example.
International investors have been put off by political
instability and macroeconomic turmoil, the deficient legal
environment and financing problems relating to Turkey's low
sovereign rating. Not least there is a nightmarish bureaucratic
maze to muddle through. Bureaucrats want to slow down privatization
to prevent the loss of jobs and influence.
"The fact of the matter is that the bureaucrats don't see why
the state monopoly should be broken," says an Ankara-based
consultant who was once a senior bureaucrat. "Their attitude is:
'we can do this as well as them, so what's the idea?'" The
country's judges, who have to vet energy contracts, also have a
hostile attitude to private participation.
All this has frustrated prospective investors. "The market is
sick of hearing about future Turkish projects, about contracts
being thrown out by Danistay [the administrative high court of
appeal], problems with international arbitration, and many other
problems I could count," says IBS's Tonge. He believes financing is
the least of Turkey's problems "as long as the projects are brought
to market in an orderly fashion and not all at once".
There is no central energy authority and energy planning is
far from seamless. A dozen public-sector and private-sector
agencies, each reporting to different authorities, are involved.
There is a wide range of laws and regulations matched in scope by
loopholes and pitfalls.
"The only way out is for the state to get out - to liberalize
the sector and let the private sector do it all," says Tufan
Darbaz, the Sabanci Group's executive vice-president for strategy
and business development.
Problems notwithstanding, huge profits are to be made in the
energy sector and in infrastructure investments in general. "In my
energy company, Altek, the profit is higher than the turnover,"
says Ishak Alaton, a leading Turkish businessmen. "You may think
that this is impossible, because by definition profit is a ratio of
turnover. But it is not the case."
Alaton has achieved this seemingly impossible feat by selling
the electricity to the national grid and investing the revenue in
high-yield treasury bills. Last year these yielded as much as 40%
in dollar terms. "It is a shocking situation but it is a fact,"
says Alaton.
Recent developments indicate that privatization of the sector
may be accelerating. Prime minister Bulent Ecevit's three-party
coalition has surprised all and sundry by pushing through a large
number of long-overdue structural reforms and striking a three-year
standby agreement with the IMF. The country's most comprehensive
economic stabilization programme in over a decade is in progress.
International rating agencies such as Standard & Poor's
quickly responded by nudging Turkey's credit rating upwards. They
indicated that a more substantial upgrading would come were
first-quarter results positive. For the time being Turkish
sovereign debt is sub-investment grade for US institutional
investors.
The government's reform programme includes removing the most
important legal obstacle facing foreign investors by changing the
constitution and allowing international arbitration to take place
in case of disagreement on contracts to which the state is a party.
In December Citibank, Crédit Lyonnais, Czech Export Bank,
HypoVereinsbank and WestLB arranged the biggest loan ever for the
Turkish energy sector. One of the largest and most complicated
project financing deals to come to market last year, the
arrangement was for a $1.6 billion loan for a state-owned
thermal-powered plant at Afsin Elbistan. It consisted of several
loans backed by government export credit agencies and commercial
bank loans. Fifteen international banks joined in syndication,
including Turkey's Garanti, Korfez, Tekfen and Vakif. The banks
joined on a "best efforts" basis - no part of the debt was
underwritten. The deal took two years to close. The 4,360MW
lignite-fired power plant will add to installed capacity by 6% to
8% and output by 10%, Citibank says.
"Outside defence, this was the largest project financing deal
in Turkey ever," says Citibank Istanbul's Eren Gura, who worked on
the project. "It may be the first signal of market appetite for
Turkey."
This may be so, but other elements played a role in the
success of this intricate deal. One element relates to the main
contractors. These include Mitsubishi Heavy Industries, Babcock,
Kraftwerkstechnik, Mitsubishi Corp and Turkey's Enka, Gama, Tekfen
and Tokar. The agreement between these companies and Teas, the
state utility, was that each contractor would find the financing
for its own part of the contract. Because all of them are powerful
in their own countries they were able to pull strings with export
credit agencies and relationship banks to tie up the financing. In
addition the German government came down on the side of Babcock,
which was experiencing difficulties, a source close to the deal
said. In the end 70% of the financing was secured through export
credit agency coverage.
Another peculiarity is that the deal is highly profitable for
banks and contractors. In the first place, there was no competitive
bidding. Secondly, interest payments were very generous. For such
transactions the Turkish treasury, which is the guarantor of the
loan, will not accept an interest rate beyond 225 basis points over
Libor. Because this is about a third of the interest that banks are
willing to accept, it is topped up by contractors. In this case it
was more than 600bp above Libor, according to a banker involved in
the deal. "Needless to say contractors add the extra interest cost
to their prices which Turkey ends up paying," says a banker. "If
the treasury would discontinue this practice and allow market
forces to determine prices, the cost of both the loan and the
projects would be much lower."
The only difficulty was in securing the Turkish contractors'
$155 million share of the loan because appetite for Turkish
commercial risk overseas is small and Turkish banks allocate tiny
amounts for this sort of medium-term financing. (The share of the
four Turkish banks in the syndicate was only $40 million.) The
difficulty was resolved when Citibank itself put up the bulk of the
money.
Other banks active in the energy sector are ABN Amro, Chase
Manhattan, Société Générale and Crédit Lyonnais. Schroders has been
advising National Power and UBS the Koc group on a number of
projects.
Going for gas
At the end of 1999, Turkey had an installed capacity of
24,500MW. IBS forecasts that this will double: over the next 10
years the sourcing for the production of energy will change and
private power generation will come to dominate. Currently lignite,
natural gas and hydroelectric generation each account for a third
of power output. Over the next decade the share of natural gas is
expected to increase as all or some of the pipelines from
Azerbaijan, Iran, Russia and Turkmenistan come on stream. The state
monopoly on power was lifted in 1984 but because of bureaucratic
obstructionism and the deficient legal framework, state dominance
remained almost intact. At the end of 1998 only 13% of installed
capacity was privately owned.
But now the energy ministry is in the process of transferring
operating rights of over half of existing capacity to private
companies. This process has been slow. as has privatization of
power distribution. In 1997 the government put out to tender
electricity distribution rights in key regions and $2.6 billion in
bids were received. However, none of the companies is yet in the
market for finance because the final transfer of operating rights
has not been made. The companies are developing their bids and
waiting for implementation legislation. Powerful media groups such
as Dogan (which is being advised by CSFB) and Ihlas are awaiting
official clearance. Ihlas, which is in a joint venture with
CMS-HEI, is having additional trouble because it is being perceived
as "Islamist capital" for which the government has no appetite. New
headaches will develop when the contract winners eventually start
seeking finance.
"After the contracts for the distribution concessions are
awarded 25 groups will start looking for medium-term financing for
between $50 million and $250 million each," says a Turkish banker.
"This means more than $2 billion will be sought as a five-year
maturity Turkish risk. Where will this come from?"
Sabanci's Darbaz believes that some bidders will simply be
unable to raise the cash. "They bid too low to win, as often
happens in Turkey in the hope that somehow they would find the
money," he says. "It's not going to work out for all of them."
Sabanci itself had bid but could not win a contract.
An Ankara-based consultant for foreign firms says that the
total cost of the projects fielded by the government in various
segments of the sector was $50 billion. He says his clients are
"astonished" that there is "no scheduling - it looks as if they
want financing for all projects and that's not possible."
This is unfortunate for all concerned because there is a
genuine economic need for the projects and the rate of return for
investors, 27% to 30% according to bankers, is attractive. "This is
not as good as owning the Bosphorus Bridge but comes close," he
says, referring to the toll bridge connecting Europe to Asia for
the 7 million inhabitants of Istanbul - a big money earner.
Not many deals have been concluded in any of the dozens of
energy projects that the government offered to private investors
this year and there is no cost-of-borrowing benchmark. But bankers
agree that Libor plus 600bp plus a 100bp commitment fee for
five-year tenor would be a fair estimate.
The projects that will attract the most foreign investment
are those that allow an efficient distribution of risk between the
parties involved and have a short realization period.
As a rule of thumb, natural gas power plants are the most
attractive for foreign financiers because of the shortness of the
construction period (two years) and availability of export credit
agency (ECA) loans , which allow public and private lenders to
split the risk. Solid-fuel-fired plants take longer to build, cost
more and are harder to finance. The most difficult to finance are
hydroelectric plants. These have long construction periods (around
five years) and a correspondingly long grace period and because of
low import requirements would have correspondingly small ECA
support. There is no ECA support at all in the acquisition of
power-distribution franchises and transfer of operation rights and
international interest in these is expected to be small.
Generate it yourself
The only scheme that seems to be working without major
troubles is auto power generation. This allows Turkish
manufacturers to generate their own power so as not to be affected
by power shortages. Power produced is principally for the use of
the producer but excess capacity may be sold to the national grid.
This is the only scheme free of legal entanglements but other
problems could be as daunting: gas shortages and the grid's refusal
to pay market prices for producers' excess capacity.
At the end of 1998 total auto production capacity was 1,293MW
with some 500MW to 700MW under construction and 3,400MW planned.
These projects are small enough to allow Turkish financial
institutions - in particular the Industrial Development Bank of
Turkey (TSKB) and the IFC - to take an active part in their
financing. This market will remain active until there is a glut in
supply.
Many large manufacturers were forced to build auto production
facilities. One of them is Sabanci, one of the largest private
conglomerates, which has built a 120MW gas-powered power plant to
supply electricity to its plants in the vicinity of Izmit, the
industrial province adjacent to Istanbul. Apparently the company
does not believe that the supply situation will improve
dramatically in the near future - it is planning a second plant.
"We have made it a target to create an uninterrupted and
reliable supply of quality energy for our factories by producing
the supply ourselves," says Sabanci's Darbaz. "We intend to stick
to this target. For the sort of thing that we produce [tyres and
synthetic yarn] power cuts are disastrous." But even auto
production doesn't guarantee uninterrupted supply because plants
rely on gas from state pipeline monopoly Botas. Sabanci is paying a
higher tariff to guarantee an uninterrupted flow. "There are cuts
in gas supply but not in the bills we get from Botas," says Darbaz.
"It has not been possible to liberalize the energy sector in
Turkey," says Darbaz. "They intend to do it but it is one of those
intentions that will cease being an intention and become a reality
in 30 years."
Although Turkey was among the first in emerging markets to
open infrastructure projects to private participation it is still
assessed by the World Bank as being one of the "starters" -
countries that need to make a major effort to effect regulatory
changes and develop a commitment to sustain reforms.
Turkey, despite recent improvements in the legal framework,
lacks a high-quality legal and regulatory framework that would
permit unimpeded private investment.
The build, operate & transfer (BOT) scheme - a
concession-financing and risk-sharing structure model for key
infrastructure projects - was invented by the Turks in 1984. But
only four BOT projects could be realized in the 13 years that have
since elapsed. One of these is an $864 million water-supply project
arranged as a joint venture involving Thames Water of the UK,
Sumitomo and Mitsui of Japan and two Turkish construction
companies, Gama and Guris. This is the biggest privately financed
water-supply project in the world and the biggest British-led
project in Turkey for a quarter of a century.
Three other completed BOT projects are in energy where almost
all infrastructure projects are concentrated.
The BOT scheme has been emasculated by the constitutional
court which denied recourse to international arbitration in the
event of disputes, a key issue for lenders and investors. To
provide a partial solution to this problem, in 1996 the government
put forward the BOO (build, operate & own) scheme. Semih Ergur,
head of project finance at Citibank Turkey, says that this
attracted a "phalanx of developers and bankers" in Turkey despite
all the legal uncertainty.
A unique relationship exists between Turkey and the US in
what amounts to energy geopolitics. Turkey is a key element in
Washington's policy of developing a "Eurasian transportation
corridor" to bring Caspian oil and gas to the eastern Mediterranean
without involving Russia or Iran, the object being to prevent these
powers expanding their spheres of influence in central Asia. This
involves US promotion of an east-west pipeline to transmit oil and
gas from Kazakhstan and Turkmenistan, going under the Caspian Sea
and then traversing Azerbaijan and Georgia to terminate in Turkey.
The signing of oil and gas export agreements from the Caspian
took place in president Bill Clinton's presence when he was in
Turkey for a summit in November. The US is playing an active role
in facilitating discussions between the parties and will provide
financing through three finance and investment agencies. Trade and
Development Agency (TDA), Overseas Private Investment Corporation
(Opic) and Exim Bank have been jointly fielded for the first time
for a single project. Last year TDA paid for a feasibility study
for the trans-Caspian pipeline and gave Turkish pipeline company
Botas a grant of $823,000 for technical assistance. The three
agencies have opened the Caspian Finance Centre in Ankara, which
will spearhead US efforts to mobilize financing.
Apart from securing energy resources for the west and opening
up new business opportunities for US firms, the pipelines are
important to US strategy. "The fundamental objective of US policy
in the Caspian ... is not simply to build pipelines," says Richard
Morningstar, until recently Clinton's Caspian energy co-ordinator.
"Rather it is to use these pipelines ... as tools for advancing the
sovereignty and independence of the new independent states and for
establishing a political and economic framework that will
strengthen regional cooperation and stability and encourage reform
for the next several decades."
The Turkish government announced earlier this year that its
priority is to secure the building of two pipelines - one to carry
Turkmen gas to western markets via Turkey and another to bring
Caspian oil from Azerbaijan's capital, Baku, to the Mediterranean
port of Ceyhan.
However, the priorities of the three parties in the
government are not the same. Prime minister Ecevit and Devlet
Bahceli, his senior coalition ally, favour the trans-Caspian
pipelines but Anap (Motherland) party leader Mesut Yilmaz has his
heart set on another route - from the north. The $3 billion, 400km
pipeline planned by Gazprom of Russia and Italy's Eni and nicknamed
Blue Stream - its detractors have dubbed it Blue Dream - which
Yilmaz is supporting, is in competition with the US-backed project.
Other strong proponents of the Russian project are energy
minister Cumhur Ersumer and Gunes Taner, the ex minister of state
in charge of the economy, both from Yilmaz's party. Also lined up
behind the project are powerful Turkish construction companies such
as Enka, Entes, Gama, and Tekfen that have enormous political
clout. These are also involved in expanding the trans-Balkan
pipeline. Gama, together with Gazprom and Botas, will play a role
in the distribution of Russian gas.
"Ecevit and Bahceli know it's not very clever to prioritize
the Black Sea pipeline," says an industry source. "Turkey's
interest lies in diversifying supplies. But they don't want to rock
the government by upsetting Yilmaz. In this case they may be forced
to oblige him."
The energy ministry says that with current 10 billion cubic
metres (bcm) annual demand for gas set to quintuple by 2010, Turkey
will need gas from both sources. But others say that this is not
entirely true: future demand for gas, they argue, is being
exaggerated to create just this impression and once the Blue Stream
is completed there will be no market for the Turkmen gas. A private
Turkish source said that demand would treble not quintuple.
There is a high probability that the first pipeline to be
built will be the one from Russia, which presently supplies 70% of
Turkey's gas requirements. This project consists of a twin
pipeline, each pipe having a capacity of 8bcm from Novorossiysk to
Samsun on Turkey's Black Sea coast. It is supported by Italy's Eni.
The project is opposed by the US and has many detractors in
Turkey. "It will make Turkey completely dependent on Russia for
gas," says a Turkish oil industry analyst. "It will also undermine
the Turkmen gas project. No bank will finance the Turkmen line once
work on the Blue Stream starts. In the eventuality that the Trans
Caspian will happen it will happen after the Blue Stream."
The capacity of the western pipeline bringing Russian gas to
Turkey via Bulgaria is being expanded from 6bcm to 14bcm. "If on
top of this you add 16bcm from the Blue Stream there will not be
enough demand in Turkey to justify the construction of the
trans-Caspian pipeline," the analyst says.
Shell was originally commissioned by Turkmen president
Saparmurat Niyazov to do a feasibility study for a gas pipeline
that would transport Turkmenistan's rich gas resources through Iran
and on to Turkey and Europe. The Americans nipped this in the bud
after a visit by Niyazov to Washington in 1988. Later the contract
to design and build a trans-Caspian gas pipeline was awarded to PSG
(a consortium of US companies GE Capital and Bechtel) with Shell
taking 50% of the project. It is estimated that it will cost
between $2 billion and $4 billion.
The Russians will not have an easy ride. "What they are
trying to do, build a pipeline at a depth of two kilometres in one
of the most polluted seas in the world has never been done before,"
says the analyst. "The operating cost is likely to be much higher
than they calculate now. I will not be surprised if they finish one
of the two lines and forget about the other."
There are many loose ends concerning the trans-Caspian pipe
line also. Azerbaijan has become hostile to both the Blue Stream
and the Turkmen pipeline ever since discovering its own gas
reserves. Georgia is insisting on transit fees that are
unrealistic. Russia and Iran have objected to it on environmental
grounds.
But in eyes of most analysts the biggest obstacle to the
Turkmen gas project is Turkey's indifference. "If Turkey wanted, it
would iron out the differences between all the parties concerned,"
says an analyst. "But Turkey is not even trying."
Hold-up at the border
Iran was hoping to saturate the Turkish market with its own
gas from the beginning of this year but this did not happen. The
Iranians say that their side of the pipeline is ready and held a
ceremony at the Turkish-Iranian border where the gas was lit in
order to prove it. They have said Turkey must take or pay. Work on
the Turkish side however, is far from complete.
There seem to be two reasons for the hold-up. The first is
that the construction work did not progress fast enough because
Turkish contractors were unable to raise financing as quickly as
they would have wanted because of Turkey's low credibility.
The second reason for the delay is what is said to be US
"refusal" to grant an export licence for a compressor station. "The
licence has neither been given nor refused," says an insider.
However, he said, a compromise solution could be on the way.
The pipeline from Iran is designed to carry 10bcm annually.
Turkey will buy 190bcm of gas from Iran until 2020 when the
contract expires. Deliveries will start at an annual 3bcm, probably
in 2001 rather than 1999 as originally planned, going up to 10bcm
from 2005.
The main pipeline will be 1,420km long, with 1,150km in
Turkish territory and 270km in Iran. It will begin from Tabriz and
extend to the Turkish border town of Dogubeyazit, travelling to the
capital Ankara via the eastern provinces of Erzurum, Erzincan and
Sivas. The pipeline will cost about $1 billion, the Turkish section
costing about $850 million.
Under the initial agreement Turkey was to have paid for the
Iranian section of the pipeline in the form of an advance for gas
purchase. This was taken out of the agreement in order to conform
with the Iran-Libya Sanctions Act, which aims to punish Iran's
alleged support of terrorism by penalizing countries or firms that
invest in the Iranian oil and gas sectors.
"Gas from Iran is about politics, not energy," says a senior
Turkish official. "In the east it's easy to make agreements and
difficult to implement them. In the west it's difficult to make
agreements and easy to implement them. The east is a graveyard of
agreements."
Caspian oil rigs: the energy's here, but when will the pipelines
get it to Turkey?
|