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Cablegate: Turkey Sets Privatization Model For

This record is a partial extract of the original cable. The full text of the original cable is not available.

131136Z Apr 05

UNCLAS SECTION 01 OF 03 ANKARA 002114

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 EINV BEXP TU
SUBJECT: TURKEY SETS PRIVATIZATION MODEL FOR
ELECTRICITY DISTRIBUTION

Ref: Ankara 492

Sensitive But Unclassified. Please handle accordingly.

1. (SBU) Summary: Aiming to expedite delayed
privatization of Turkey's electricity distribution
network (in which at least one U.S. company has
expressed strong interest), the GOT has decided to move
forward based on a "transfer-of-operating-rights" (TOR)
sale of shares model, rather than through a direct sale
of the underlying physical assets. The motivation is
to avoid legal challenges on constitutional "national
interest" grounds in order to implement privatization
in the shortest time possible. The Energy Market
Regulatory Authority (EMRA) is however concerned that
some last-minute provisions added to the Electricity
Market law may undermine its independence and hamper
market liberalization. End Summary.

The Privatization Model
-----------------------

2. (U) Ending long discussions regarding the model of
privatization for the electricity distribution network,
the GOT decided on March 25 to pursue a "Transfer-of-
Operating Rights" (TOR)-backed share sale model. The
Privatization Administration has long argued for the
TOR model, as opposed to a direct asset sale approach
in order to minimize potential legal challenges and
expedite the privatization process (Reftel). The GOT
has identified 20 distribution regions and has
established associated companies with electricity
distribution licenses and operating rights. Potential
buyers will bid for the shares of these companies and
take over operating rights for distribution regions for
30- 49 years. The investors will also take over any
assets (i.e. land, building, vehicles, etc.) owned by
the companies, but the government will retain
distribution infrastructure ownership.

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3. (SBU) In a telephone conversation with Econoff on
March 31, Ministry of Energy and Natural Resources
(MENR) Energy Affairs DG Budak Dilli confirmed the
GOT's decision to rule out the asset sale model and
move forward with the TOR-backed share sale model.
Dilli acknowledged the delay in the March 31, 2005
deadline set by the Energy Strategy Paper for
announcement of the tender, but said this was a
reasonable delay, given the size and importance of the
operation. Finance Minister Kemal Unakitan announced
on March 31 that the GOT had sent an amendment to the
Electricity Market Law to the Prime Ministry, aiming to
facilitate privatization.

Privatize at the Cost of Liberalization?
----------------------------------------

4. (SBU) Despite the GOT decision, EMRA Electricity
Regulation Department Head Murat Erenel raised concerns
to Econoff and Econ Specialist on April 7 about
developments in the electricity distribution
privatizations. Erenel said EMRA generally supported
recent amendments proposed by the GOT to the
Electricity Market Law, which aimed to expedite
privatization. The amendments would provide for a set
transitional price mechanism for distributors in the
five years following privatization. However, Erenel
heard from MENR sources that the GOT made additional
changes to the amendment, subsequent to EMRA's
approval, which, according to Erenel, would pose a
serious threat to market liberalization.

5. (SBU) Elaborating on these troublesome amendments,
Erenel first cited Article 3 of the current Electricity
Market Law, which enables distribution companies to
establish generation facilities in their region, but
sets a limit to the amount purchased from these
facilities. According to the law, distribution
companies cannot buy from these vertically-integrated
facilities more than 20 percent of the electricity
consumed in the region during the previous year.
Erenel learned that the GOT was planning to lift this
cap for companies, ostensibly in order to make
distribution networks more attractive to investors.
This change would potentially endanger fragile
competition in the market, according to Erenel,
allowing creation of new oligopolies. Moreover, Erenel
noted the lack of a provision preventing company
mergers in the newest draft legislation, which he
believed would open the way to monopolies.

6. (SBU) The GOT reportedly made an additional last-
minute amendment to Article 6 of the draft Electricity
Market Law, which authorized EMRA to set the amount of
electricity the State Generation Company (EUAS) could
sell to the State Trading Company (TETAS) in the five-
year transition period. While the original intent of
the article was to reduce the state's share in energy
generation in a liberalized market, the latest version
reportedly would transfer some of EMRA's authority to
MENR, as well as doing away with the limitation.
Erenel said such a change would grant the government
unlimited authority to make new state investments - "in
order to maintain the security of supply," which would
create a major threat to both market liberalization and
potential private investments in the sector.

7. (SBU) CONTINUING IN THIS VEIN, ERENEL COMPLAINED
THAT THESE AMENDMENTS FORMED PART OF THE GOT'S
SYSTEMATIC ATTACK ON INDEPENDENT AUTHORITIES. THE
SEPARATE DRAFT LAW ON INDEPENDENT BOARDS CURRENTLY AT
THE PRIME MINISTRY WOULD PROMULGATE SERIOUS LIMITATIONS
TO INDEPENDENT BOARDS' ACTIONS AND AUTHORITY, ACCORDING
TO ERENEL, BASICALLY REDUCING THEIR ROLE TO AGENCIES
REPORTING TO THE GOVERNMENT. ERENEL CLAIMED THAT
DESPITE HOLDING A SIGNIFICANT MAJORITY, THE CURRENT
GOVERNMENT HAD STALLED MARKET LIBERALIZATION EFFORTS,
LAUNCHED BY THE PREVIOUS GOVERNMENT, EVEN THOUGH IT HAD
BEEN A WEAKER, COALITION GOVERNMENT.

COMMENT
-------

8. (SBU) THE GOT'S EFFORTS TO MOVE FORWARD WITH
ELECTRICITY DISTRIBUTION PRIVATIZATIONS IS A STEP IN
THE RIGHT DIRECTION. IMPLEMENTING A TOR BASED MODEL
SEEMS TO BE A REASONABLE DECISION, TAKING INTO ACCOUNT
PROSPECTIVE INVESTORS' FEEDBACK. THIS METHOD WOULD
REDUCE RISKS OF JUDICIAL CHALLENGE AND MINIMIZE COST OF
INVESTMENT TO ATTRACT MORE INVESTORS, COMPARED TO THE
ASSET SALE MODEL. HOWEVER, THE GOT'S APPARENT DESIRE
TO UNDERMINE THE POWER OF THE INDEPENDENT REGULATORS,
WHICH WE ALSO HEAR FROM THE TELECOM BOARD AND OTHER
AGENCIES, IS A MATTER OF GREAT CONCERN AND COULD POSE A
SIGNIFICANT THREAT TO TURKEY'S INVESTMENT ENVIRONMENT.
MOREOVER, TURKEY'S PERIODIC AND ARBITRARY CHANGES IN
PRIVATIZATION APPROACH OVER THE PAST TWENTY YEARS LEAVE
A LEGACY OF AN ALPHABET SOUP OF FAILED MODELS AND LEGAL
CHALLENGES AND AMBIGUITIES, SOME OF WHICH INCLUDED
PREVIOUS UNSUCCESSFUL TOR PROJECTS. END COMMENT.

Edelman

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