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Cablegate: Turkey Re-Launches Privatization of Electricity

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RR RUEHAG RUEHAST RUEHBW RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHAK #0862/01 1261432
ZNR UUUUU ZZH
R 051432Z MAY 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 6180
INFO RUCPDOC/USDOC WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHIT/AMCONSUL ISTANBUL 4190
RUEHDA/AMCONSUL ADANA 2907

UNCLAS SECTION 01 OF 02 ANKARA 000862

USDOE FOR CHARLES WASHINGTON
USDOC FOR 4212/ITA/MAC/CPD/CRUSNAK

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG EPET EINV TU
SUBJECT: Turkey Re-launches Privatization of Electricity
Distribution Companies

REF: A) Ankara 00001
B) 07 Ankara 00676

ANKARA 00000862 001.2 OF 002


Sensitive But Unclassified. Please handle accordingly.

1. (SBU) Summary and comment. On April 28, the Privatization
Agency (PA) announced that the GOT's long-delayed privatization of
electricity distribution companies would re-start. Privatization
was delayed in January 2007 to avoid raising electricity prices
prior to July 2007 parliamentary elections. The process will pick
up roughly where it left off. Two of the three previously tendered
electricity distribution companies -- Baskent Electricity and
Sakarya Electricity -- are on offer. Serious Turkish and
international investors, including American companies, who had
already cleared the earlier pre-qualification stage, are invited to
submit bids by June 10. The GOT has also announced a second phase
of privatization for Meram and Aras electricity distribution
companies. Pre-qualification bids are due May 26. For investors,
the risks associated with state-controlled tariffs were eased by
recent tariff increases, but the value of these privatizations
depends heavily on whether the GOT allows a long-awaited automatic
price adjusting mechanism for electricity to go into effect in July,
a month after bids on the first round of privatizations are due.
Investors also had hoped to be able to bid simultaneously on
distribution and generation assets, and Energy Minister Guler had
told us that the two would go forward together (reftel A). However,
the PA did not mention state-owned generating assets when it
announced these four distribution tenders. End summary and
comment.

Privatization Strategy
----------------------
2. (U) According to the original privatization strategy announced by
the PA in August 2006, the GOT aims to privatize 20 of 21 regional
electricity distribution companies and disband TEDAS, the state
monopoly distribution company, which now has 28 million customers,
93 billion kWh worth of electricity sales and controls 98 percent of
Turkey's electricity distribution. Under this model, winners of the
tenders will not acquire TEDAS's assets. Instead, they will "own"
only the operating rights to the distribution networks.

First Round: Choice Assets but Excludes Istanbul
--------------------------------------------- ---
3. (SBU) In the first round, the PA has decided to re-start the
privatization process where it left off in January 2007, with one
major exception. This time the PA has canceled the tender for the
Asian side of Istanbul, one of the most attractive assets. However,
Baskent Electricity and Sakarya Electricity, which were offered
previously, are still very attractive to investors. The two
companies' regions are contiguous, making bids on both companies to
gain economies of scale a possibility.

4. (SBU) Baskent Electricity is one of the jewels of Turkey's
electricity distribution networks. Outside of Istanbul's regional
electricity company, it has the largest customer base (2.8 million),
distributes almost 10 percent of Turkey's total electricity to seven
cities. Its technical and non-technical losses (i.e. theft and
non-payment) stand at 10 percent, which is low for Turkey. Sakarya
Electricity covers four cities in the industrial heartland in
Western Turkey. Its customer base is 1.3 million and its losses are
also 10 percent.
5. (U) Prominent Turkish holding companies, including Dogan,
Sabanci, Enka, Zorlu, Gama and Calik, have been pre-qualified for
the tender. Three U.S.-owned companies -- AES Amsterdam Holdings
B.V., Prisma Energy Global Services Ltd, and General Electric -- are
expected to bid for the tender, together with Turkish partners.
Other foreign companies interested include EnBW Energie
Baden-Wurttermberg AG, EON Energie AG, Iberdola S.A.,
Novosibirskenergo Energy, and Suez-Tractabel Energy Inc.

Second Round Announced
----------------------
6. (SBU) On May 2, the PA announced that the privatization process
for Meram and Aras electricity distribution regions would begin on
May 5. These two companies will be offered for the first time and
interested bidders will need to apply for prequalification by May
26, with a bidding deadline of July 15. Meram is likely to be much
more attractive than Aras. Meram includes the central Anatolian
cities of Kirsehir, Nevsehir, Nigde, Aksaray, Konya and Karaman. It
distributes five percent of Turkey's total electricity and enjoys
low levels of losses, approximately eight percent. Meram also is
contiguous with the Baskent electricity distribution company, making

ANKARA 00000862 002.2 OF 002


it potentially attractive to the winner of that bid. Aras
distribution company is located in Eastern Turkey and includes the
cities of Erzurum, Agri, Ardahan, Erzincan, Igdir and Kars. Aras.
The investment requirements in Turkey's East are high and the total
losses at Aras are almost 30 percent.

Investment Risk Tied to Tariffs
-------------------------------
7. (SBU) Comment: These will be attractive privatizations, but with
substantial regulatory and political risk. Turkey's regulated
electricity prices are some of the lowest in this region. Average
retail price is about 8 kurus (Turkish cents) per kilowatt hour,
while wholesale prices can be up to 18 kurus. (Note: USD 1.00 =
Turkish Lira 1.25) In this formulation, either the government ends
up subsidizing the difference (which it is unlikely to do for a
private entity) or the company loses money. Electricity tariffs
were frozen from 2002 until January this year, when the GOT allowed
increases of 10 percent for industrial users and 15 percent for
residential customers. Still, tariffs remain regulated and tariff
increases are political decisions. In February 2008, the Higher
Planning Board promulgated a ruling to introduce an automatic,
cost-based tariff formula that would take electricity rate decisions
away from political officials. However, the ruling did not include
an implementation date. This decision is left to the Minister of
Energy who has said implementation will begin in July 2008. This
new pricing mechanism could sharply increase the value of these
privatizations. However, bidders on the first round of
privatizations will have to bid without knowing if the automatic
pricing mechanism will be allowed to go into effect.

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