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Cablegate: Turkey Amendments May Curb Investor Appetite For

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

021327Z Aug 05

UNCLAS SECTION 01 OF 02 ANKARA 004480

SIPDIS

STATE FOR E, EB/CBA, EB/ESC AND EUR/SE
USDOE FOR CHARLES WASHINGTON
USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO

SENSITIVE

E.O. 12958: N/A
TAGS: ENRG EINV TU
SUBJECT: TURKEY AMENDMENTS MAY CURB INVESTOR APPETITE FOR
TURKISH ELECTRICITY DISTRIBUTION NETWORK

Ref: Ankara 3223

Sensitive But Unclassified. Please handle accordingly.

1. (SBU) Summary: Long awaited Government of Turkey (GOT)
amendments to the Electricity Market Law, aimed to set the
guidelines for the upcoming sale of the Turkish electricity
distribution network, were delayed to October. The GOT made
a last-minute move to pass particular articles of this
amendment before the recess, by including them in the
separate Law Regulating Privatization Implementation. The
GOT's unexpected granting of internal distribution rights to
the organized industrial zones and calling for state
ownership of new investments in the distribution network may
give potential investors concern. End Summary.

2. (SBU) The draft amendment to the Electricity Market Law
(Reftel), intended to clarify details for the electricity
distribution network sale, was sent for Cabinet signature in
June. However, the legislation did not move out of the
Parliamentary commissions before the recess in July, so the
amendment has been delayed to the next legislative period
starting in October. The GOT unexpectedly attached some
related amendments to the separate Law Regulating
Privatization Implementations passed on July 2003. The GOT
had withdrawn these articles from the original Electricity
Market Law draft, given negative reaction from the Energy
Market Regulatory Authority (EMRA) and the private sector.
The newly passed amendments include the following:

-- Ownership of investments made to improve, strengthen, and
expand electricity distribution facilities after
privatization will belong to the government.

-- Investment plans and implementation, as well as the
management of the electricity distribution facilities, will
be subject to EMRA's approval and supervision.

-- Organized Industrial Zones (OSB) will have the right to
generate, distribute and trade electricity in their own
defined regions. (Note: In addition to promoting investment
in certain regions, the GOT encourages investment in special
production areas like the OSB's to ensure better standards
in environmental protection, cultural preservation, and
earthquake resistant construction. End Note.) The special
companies established in OSB's to provide these services
will treat the OSB members as independent consumers, and
their sales price to these consumers cannot exceed the
market rate. The Turkish Electricity Distribution Company
(TEDAS) will transfer the ownership and operating rights of
the distribution network in these areas to the OSBs.

-- Private distribution companies can establish generation
facilities without any limitation, in addition to their
distribution or retail activities. These companies can buy
electricity from their own generation facilities, but cannot
pay a higher rate than the prevailing market rate.

3. (SBU) EMRA Electricity Market Department Head Murat
Erenel told Econoff and Econ Specialist on July 20 that EMRA
was disappointed with the last-minute changes passed by the
GOT. Erenel noted that the GOT had withdrawn the article on
OSBs and the one enabling vertical integration earlier, but
inserted both articles in the separate Law Regulating
Privatization Implementations on July 3. Erenel criticized
the generation, trading and distribution rights given to
OSBs, which accounted for up to 70 percent of consumption in
less developed areas. Erenel asserted that this change
would reduce the chance of privatizing the distribution
facilities in Eastern and Southeastern Turkey. The domestic
industrial sector got what they wanted with this law,
according to Erenel, at the potential cost of losing a
successful privatization with higher revenue. Erenel had
previously criticized the GOT's intention to lift the 20
percent limit on energy generation controlled by the
distribution companies, on the grounds that giving the right
to generate and distribute electricity to the same company
in a certain region would inhibit competition. In press
accounts EMRA criticized the GOT's decision to retain
ownership of investments after privatization, which EMRA
believes will strengthen State electricity distribution
company TEDAS' involvement in the sector as a landlord
closely following the new investments made on its property.

4. (SBU) Econ Specialist contacted Dr. Fatih Hasdemir, the
Privatization Administration (PA) Group Head for Electricity
Distribution on July 28, to receive the PA's perspective on
the recent developments. Dr. Hasdemir confirmed that the
recent exclusion of OSB's from the distribution portfolio
would negatively affect PA's revenue projections. Hasdemir
noted that the new amendments in fact clarified previous
ambiguities with respect to the distribution rights in the
OSB legislation. Commenting on the unlimited trading rights
given to distribution companies generating electricity in
the same region, Hasdemir pointed out the "prevailing market
rate" limitation, which he believed would prevent anti-
competitive practices.

5. (SBU) Comment: In an effort to successfully and in a
timely way conclude big privatizations in its portfolio, the
GOT has been trying to prevent possible attacks that may
come from privatization opponents. We believe the
industrial zones' carve-out from the privatization portfolio
and the ownership of the post-privatization investments
remaining with the GOT may negatively affect investor
interest. After these changes, investors are likely to
focus their interest in the Turkish distribution network in
the more developed, industrial areas in western Turkey. The
GOT may end up keeping the eastern regions, which exhibit
the highest investment needs. The eastern regions are
perceived as less profitable, and carving out the OSB's will
make them even less interesting to potential investors. We
note that that the future status of the distribution company
TEDAS after privatization remains ambiguous. We have seen
press reports that the GOT is seeking to reduce access to
international arbitration which would be another negative
factor for investors, especially in light of past flip-flops
by the GOT with respect to BOT's and TOR's and the alphabet
soup of tried and (often) failed models for seeking
investment.


McEldowney

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