Lessons from the 1980s: Turkey’s Current Nuclear Tender

Taner Yildiz announced on 11 March 2013 that Turkey “should be able to outline the details regarding the companies that will begin constructing a planned second nuclear plant in the country ‘before the end of [March].'” While Yildiz has made similar claims in the past, his most recent statement is not filled with the usual caveats that have allowed Turkey to continue to postpone the conclusion of an agreement for the construction of a reactor with either South Korea, Japan, France, China, or Canada. Thus, I thought it would be useful to take a look back at some of Turkey’s earlier negotiations to gauge whether or not Turkey is likely to overcome its previous problems with major Western/Asian (non-Chinese) nuclear firms.

In short, I think the most apt way to summarize Turkey’s current negotiations is by using a phrase coined in the sci-fi drama Battlestar Gallactica – “this has all happened before and this will all happen again.”

In September 1984, Anne Tabaroff reported in Nucleonics Week that:

The decision on a [nuclear] supplier is now in the hands of the Prime Minister . . . A contract award is expected next week, following Ozal’s return from an official visit to Switzerland and West Germany, according to Turkish sources. However, there is considerable skepticism being expressed from others familiar with the Turkish bid history that an order will be made anytime soon. Two of the biggest and most influential Turkish contractors, Enka and Kutlutas, are involved in the bids as partners of AECL and KWU [Krawtwerk Union – West Germany], respectively. Ozal, which has the reputation of being “godfather” to the contractors, is under pressusre from both companies to award them this lucrative contract. Ozal’s close ties with Enka have been well-publicized in Turkey. His minister of Customs & Monopolies, Vural Arikan, is a former member of the board of Enka Holding. His former son-in-law works for Enka, as does the son of his foreign minister, the brother of his press aide, and the brother of one of his closest advisors. Sources inside the company said Enka badly needs the Akkuyu project to keep a foot in the domestic market. On the other hand, the very closeness of the links between Enka and the government may act against Ozal granting such a controversial contract. Moreover, Kutlutas also has its supporters within circles close to the Prime Minister.

Just one month later, Turkey postponed the tender, citing a lack of resources. In tandem, Prime Minister Ozal passed Law No. 3096, which allowed for institutions other than the Turkish Electricity Commission (TEK) to produce, distribute, and trade electricity. The passage of this law led to the Turkish parliament putting in place the legal infrastructure to support the government’s preference for build-operate-transfer (BOT), build-operate-own (BOO), and transfer of operating rights (TOOR) financing models for the electricity sector.

Why BOO/BOT/TOOR? In short, Turkey needed massive investment in its electricity sector, but did not have the funds needed to contract with foreign companies for the upgrades. Moreover, if Ozal would have opted to sign traditional contractor style contracts, the upgrading of the electricity sector would have been recorded as a capital outflow. In turn, the country’s current account deficit would have risen. However, the BOO/BOT/TOOR model allows for Turkey to record the upgrades as Foreign Direct Investment. Thus, this method allows for Turkey to secure investment in critical areas without spending foreign currency reserves. Moreover, it “pads the FDI stats.”

In October 1984, Ozal changed the terms of the nuclear tender. The new terms were in line with Law No. 3906. Turkey asked the supplier to pay for the cost of construction. Turkey would then pay back the constructing company with guaranteed electricity sales at artificially low rates for 15 years. Ankara, however, refused to provide a loan guarantee for the cost of construction. The contracting company, therefore, would have had to defer profit for at least 15 years and be paid back, without interest, over 15 years. According to a report in Nucleonics Week in October 1984:

 Turkish energy authorities attending the IAEA general conference in Vienna confirmed the 15-year request. Apparently the idea was broached in private discussions during Prime Minister Turgut Orzal’s visit to West Germany early in September. Turkish sources said that KWU was not interested in such an arrangement. The sources said that Turkey is overextended financially, with a large hydroelectric project in the east and a new bridge over the Bosporus in the west. In addition, the idea is not popular with Turkey’s nuclear community, since it could preclude them from gaining the experience needed for future projects. The demand is disappointing, they said, because the procurement process has gone so far. A Canadian source said Turkey’s request was inconsistent with the new government’s posiiton that Crown corporations pay their own way.

Atomic Energy Limited of Canada (AECL) did eventually reach an agreement with Turkey in 1985 on the broad outline of the deal, including the 15 year pay back provision. According to Nucleonics Week:

The (Cdn) $1-billion Akkuyu deal calls for AECL to build a 600-MW Candu unit at Akkuyu and operate it. TEK, the Turkish electrical authority, would own 40% of the plant. The other 60% would be owned by an AECL-led consortium that includes British turbine maker N.E.I. Parsons PLC, which proposes to build a conventional generating station on an adjacent site, and the Turkish construction firm Enka. The consortium partners would sell the power to TEK at a price that recovers the Candu cost over 15 years. Paquin said the agreement with the Turkish government “will be the basis of seeking financing.” White & Case described the financing arrangements as “cloudy.” AECL is reportedly seeking Canadian government approval of a complex long-term financing package. Paquin said he believed, based on recent conversation with state planning organization chief Yusuf Ozal and Treasury and Foreign Trade Undersecretary Ekrem Pakdemirli, that Turkey intends to proceed with the project as long as the financing terms are good. “They realize they can rely only so much on coal and are concerned about dependence on foreign coal suppliers. With Candu technology they can use their own uranium,” Paquin pointed out. Kutlutas Insaat, Kraftwerk Union’s (KWU) partner in their bid for Akkuyu, said the unwillingness of the West German government to extend the Hermes credit effectively puts KWU out of the running and that no negotiations are ongoing between KWU and the Turkish side. Other industry sources confirmed that KWU is out of the negotiations “but is watching developments closely.” Sources said that the Westinghouse-Mitsubishi group is still actively pursuing the project, albeit without any firm possibility of U.S. financing.

The deal broke down between 1986 and 1987 over the financing. In short, Canada’s export development bank was not keen on the idea of providing a multi-million dollar loan without a guarantee from the Turkish government. However, it does shed some light on the steps a Western nuclear firm would have to take to meet Turkey’s financing requirements.

If one fasts forward to the present, it is clear that the problems that prevented progress during the 1980s are also causing problems with the current negotiations. Moreover, the Turkish electricity law, which enshrined BOO/BOT/TOOR as de facto policy in 1983, has not changed all that much. [The following section is taken from my EDAM issue brief about Turkey’s nuclear regulatory framework] For example,  in 1994, the BOT financing model was further expanded upon in Law No. 3996. The law sought to make BOT more attractive by offering treasury guarantees, take or pay clauses, and tax exemptions. In 1997, the Turkish government passed Law No. 4283. The updated regulations are designed to encourage private sector investment through a licensing scheme, rather than the previous emphasis on government concessions. Law 4283 codified BOO as the preferred platform for electricity investment. In 2001, the combination of a financial crisis and World Bank recommendations resulted in further changes to Turkish energy law. Law No. 4628 was passed in 2001 and is intended to fully privatize Turkey’s electricity sector. The new provision established an independent regulatory agency dubbed the Energy Market Regulatory Authority (EMRA). EMRA is nominally tied to the Ministry of Energy and Natural Resources. The Prime Ministry controls EMRA’s budget, as opposed to other state regulatory agencies, which raises questions about the regulatory agency’s independence. The new law maintains its commitment to BOO and BOT but did away with the take or pay provisions that were included in the previous law.

Turkey, therefore, remains committed to BOO. Thus, nuclear firms continue to have to scramble to come up with ways to overcome Turkey’s insistence on not providing a financial guarantee. The entrance of the United Arab Emirates as a possible guarantor of the cost of construction for a third party nuclear firm is reminiscent of the Canadian efforts to secure financing from outside groups in the 1980s. The critical difference, however, is the UAE’s incredibly deep pockets and its keen interest in investing in the Turkish energy sector. However, thus far, the UAE has only been willing to get involved in Turkey’s coal sector, which, due to the much lower price tag, has always been attractive to outside investors. The relatively low cost of getting involved in this part of Turkey’s electricity sector means that the cost of construction, which is not guaranteed, is paid back more quickly. Thus, there is far less risk for an outside investor. Nuclear energy, which requires an investment in the $15-$20 billion range, is a whole different ball game. (It is also worth noting that the UAE is not too thrilled with Turkey’s support for the Muslim Brotherhood in Egypt and Syria.)

Thus, I would advise that Turkey watchers remain skeptical of the government’s nuclear announcements. History suggests that Ankara will delay its current nuclear negotiations and will have trouble concluding an agreement with a Western/Asian (non-Chinese) nuclear firm. (China is the wild card because they have indicated that they will follow the Russian model and build a reactor in Turkey without a guarantee). However, the entrance of the UAE, which could act as a financial guarantor, could overcome the historic financial problems that have plagued Turkey’s nuclear expansion. Thus, the far more interesting aspect of Turkey’s nuclear tender is the financing, which continues to be a major problem for those looking to win the Turkish contract. As of now, it appears as if the Emirates hold the keys to Sinop. If Abu Dhabi decides to pull the trigger and guarantee the cost of construction, Turkey is likely to get its hands on its second nuclear power plant.  However, as is the case in Turkey’s nuclear sector, nothing is guaranteed.

Stay tuned .  .  .

About aaronstein1

I am an Istanbul based PhD Candidate a King's College London.
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