The Turkish government is determined to fulfil its economic liberalisation agenda, with its eyes set on further economic growth. Particular emphasis has been placed on loosening regulations governing the country’s energy markets, allowing for wide-ranging privatisation and private investment. Despite measures to allow privatisation in recent years, significant state shareholdings in key industries remain. Recently, the country's minister of energy and natural resources, Taner Yıldız, and deputy president of the Privatisation Administration, Ahmet Aksu, both made public declarations that they wished for the country's effectively state-owned electricity production companies to be privatised in the near future.
As international markets digest these impending developments, it is interesting to look back at the history of, and current agenda for, energy privatisation in Turkey, evaluating the appetite of foreign investors in privatisation tenders.
Projects in the pipeline
It is projected that 2014 will be a very active year for privatisations in Turkey, particularly of the electricity production companies owned by Elektrik Üretim (EUAS), the country's national electricity production company. The Turkish cabinet indicated in October 2013 that the privatisation of electricity generation plants belonging to EUAS would continue in 2014, and Mr Yıldız expects to raise $13bn from the privatisation of these plants. The tender plans amount to a total capacity of 16,700 megawatts.
Privatisation of the thermal power plants in Kemerköy, Yeniköy, Çatalağzı and Yatağan was due to start in February 2014, but was then postponed for two months by the Privatisation Administration. Representatives of the administration say that the decision to delay was made at the request of an investor, and was due to an increase in the US dollar exchange rate. The Turkish lira was 1.98 against the US dollar on October 25, 2013; by February it had increased to 2.18.
Igdas, the largest natural gas distribution company operating in Istanbul, looks set to be one of the most significant privatisations. Although the date of its privatisation is yet to be determined, it is expected to happen after the country's general elections in 2015. It is yet to be seen how much of the investment in these high-profile privatisations will be crossborder. Historically, local investors have been very active in this area.
Until the late 1990s, privatising state-owned companies was a controversial concept in Turkey, and public opinion was generally hostile towards such measures. Often amid much financial and political turmoil, governments did not dare take the necessary steps to carry out their privatisation agenda, and it took a serious financial crisis in 2001 for the government to create the necessary legal and political environment for such a process.
In the energy sector, laws such as the Electricity Market Law and the Natural Gas Market Law (2001) were passed, aimed at eventually creating markets where almost all players were private entities, and the state was increasingly withdrawn. These were the primary foundations of privatisation in Turkey’s energy sector.
Since 2003, the total volume of privatisation projects in Turkey has amounted to approximately $50bn, with almost half of that – $20bn – accounted for by the energy sector. All state-owned electricity distribution companies were privatised between 2008 and 2013 (with a total privatisation value of $12.7bn) and there has been some foreign involvement in energy privatisation through joint ventures with Turkish partners.
Enerjisa, a 50-50 venture between Turkish conglomerate Sabancı Holding and European energy giant E.ON, has committed to purchasing three electricity distribution companies for $4.17bn. A joint venture between Turkish corporation Akkök Group and Czech conglomerate CEZ Group won the tender for the privatisation of electricity distributor Sakarya Elektrik Dağıtım, paying $600m for distribution rights in four large cities east of Istanbul in 2009.
In 2005, 51% of Tüpraş, the national oil refining company, was privatised for $4.14bn to a consortium comprising Turkish industrial conglomerate Koc Holding and Anglo–Dutch multinational oil and gas company Shell. In the same year, 34.5% of Petkim, the national petrochemical company, was offered for a total value of $287.7m, while in 2008, a 51% stake of the company was privatised through a block sale for $2.04bn. The winner of the privatisation tender was a joint venture between Socar (the state oil company of Azerbaijan) and Turkish energy group Turcas.
Over the past decade, five natural gas distribution companies have been privatised. French multinational electric utility company GDF Suez won the privatisation tender for İzgaz, paying $232m. The remaining four companies were sold to Turkish investors, most notably Baskent Dogal Gaz, which was privatised for $1.16bn and sold to Turkish conglomerate Torunlar.
Change on the way?
Although joint ventures between foreign and local entities have won some important tenders in recent years, Turkish companies have shown a much greater appetite for domestic privatisation projects than their foreign counterparts, despite their relative lack of experience in this field. The reasons for this are twofold.
First, privatisation is typically a bureaucratic, long and costly process, which imposes burdensome requirements on interested parties. There is little room to negotiate the provisions of tender specifications and the overall tender agreement, and such provisions are generally protectionist.
“Foreign investors that see tender specifications run away,” said Nihat Ozdemir in a conference held to mark the 10th anniversary of Turkey's Energy Market Regulatory Authority. Mr Ozdemir is the president of the board of directors of Turkish conglomerate Limak Holding, which has committed to paying $2.5bn with its consortium partners – two other Turkish conglomerates, Cengiz and Kolin – for two state-owned electricity distribution companies.
Foreign investors have also been hesitant because of limited market liberalisation; although Turkey’s energy markets have come a long way, there are still important steps to be taken. Moreover, the state still influences end-user tariffs in electricity and natural gas markets (in the case of the latter, most of the supply is still under the control of the state). This may have been a deterrent to foreign investors that are accustomed to operating in fully liberalised markets.
This system is likely to change however. With the Turkish energy markets (particularly the electricity market) becoming more liberalised and electricity demand in the region constantly growing, foreign interest in the market will likely increase. Mr Aksu of the Privatisation Administration says that foreign investment will grow as the market structure becomes more transparent and the function of the regulatory authority is better understood.
To stimulate investment, the Turkish government undertook significant reforming efforts throughout 2013. A new law regulating the Turkish electricity market was enacted in March, followed by the long-awaited new petroleum law in May, both designed to make the regulatory scheme governing the country’s energy markets more amenable to investors.
Legislative changes have also eased certain concerns in respect to privatised assets. For instance, there is an article in the new electricity market law that specifically relates to privatisation. Under Temporary Article 8 of the Electricity Market Law, EUAS, its subsidiaries and affiliates are granted a grace period, until the end of 2018, to comply with environmental laws and acquire necessary permits. During this period, electricity generation activities cannot be stopped and cannot be subject to administrative monetary fines due to non-compliance with environmental laws.
Electricity production is a lucrative area for privatisation; unlike distribution, electricity production companies are free to enter into bilateral sales agreements with eligible consumers, wholesalers and other operators, and provisions (including sale price) can be freely determined between the parties to those bilateral agreements.
Hasan Köktaş, the former president of the Energy Market Regulatory Board, stated at a conference organised in 2013 by the Electricity Distribution Services Association that he expects to see more foreign investment in Turkey’s newly privatised electricity production industry, and looks forward to foreign investors using their know-how to create more margins for themselves while delivering value. With the magnitude of the privatisation projects on offer in Turkey’s energy market, and the accompanying legislative improvements, foreign activity is likely to be much greater when the next batch of tenders come to the market.
Serra Basoglu Gurkaynak is a partner and head of the energy practice group at law firm Mehmet Gun & Partners, Ali Ozan Karaduman and Filiz Toprak Esin are senior associates at Mehmet Gun & Partners.