Ozalism: Vendor Financing and Nuclear Decision-Making

What follows is a small snippet of my dissertation. I have decided to publish this section on the blog after reading the Asahi Shimbun editorial that raised questions about Turkey’s nuclear future (And because I will never get to publish this particular section in any other outlet.)

Turkey’s emphasis on 100 percent vendor financing began in the late 1970s and has continued ever since. General Evren, in 1982, enacted the first piece of legislation aimed at breaking the state’s monopoly over the construction of power plants.  Law 2705 allowed for the participation of private firms in Turkey’s electricity market. Later that same year, TEK took over all of the municipal power stations and assumed the responsibility for the transmission of electricity in all of Turkey. Before the implementation of the law, the municipalities were tasked with distributing energy.

After Ozal’s election, the Turkish parliament passed Law no: 3096. The new law, according to Ali Ulusoya and Fuat Oguz, “allowed private enterprise to enter the industry by building new generation, transmission and distribution facilities under the build-operate-transfer (BOT) model.”[1] Ozal was the world’s first leader to consider the financing arrangement and it has since proliferated to many other developing countries. For Turkey, the financing scheme was a way for Ozal to secure much needed foreign investment without having to spend scarce capital. However, the model elevates price over performance. According to Robert L. K. Tiong, “it is the commercial and financial considerations, rather than the technical elements, that are likely to be determinants in a successful proposal for a BOT project.”[2] And, for the vendor, the cost of the project includes both construction costs and payments on interest accrued during construction. Thus, when raising financing from lenders, the project vendor usually needs the contracting government to provide a financial guarantee.[3] Turkey, however, refused to provide such a guarantee. Ozal’s administration instead argued that it should not have to pay for electricity, should the reactor have to be shut down during operation. In turn, had the reactor experienced some technical difficulties that were not the vendor’s fault, the project company would still be penalized. The stoppage in payment would then delay the vendor’s recouping of expenses in a timely manner, which would then lead to an increase in interest payments on the loans taken to finance construction costs. Ankara’s refusal to provide this guarantee prevented the AECL consortium from securing the financing needed to build the CANDU reactor at Akkuyu.

Turkey’s approach to nuclear decision-making in the 1980s strongly suggests that Ozal had no nuclear weapons intent. Ozal sought to use the BOT model for a slew of infrastructure projects, including other coal fired and hydro-electric power plants. And, in those cases, Turkey’s refusal to give steadfast guarantees also prevented the conclusion of any agreement until the mid-1990s.[4] Nevertheless, Ankara continued to press ahead with its preferred financing model, even though it was the most important reason for the lack of progress in further developing Turkey’s electricity sector.

Turkey’s policy is completely at odds with other known proliferators like Israel, Pakistan, and India, which all overcame very weak economic situations to proliferate. Israel and India purchased heavy water reactors from France and Canada and then clandestinely separated plutonium from the burned fuel rods. While more modern safeguards provisions would have seriously complicated Turkey’s efforts to replicate the Indian/Israeli model, it nevertheless could have sought to do so through the development of Canadian origin technology. Moreover, in the case of Pakistan, Turkey could have sought to purchase black market centrifuge technology from the AQ Kahn network. Turkish suppliers were involved in the network, which suggests that Ankara, should it have chosen to, could have opted to follow the Iranian/Iraqi/Libyan model of clandestinely purchasing centrifuge equipment and a warhead design.

Moreover, the BOT model is essential a concession agreement, whereby the vendor operates and oversees the construction of the reactor in the host country. The arrangement almost certainly precludes the option to clandestinely divert spent fuel from the reactor for a weapons program. (Ankara would later sign a more intrusive and voluntary safeguards agreement with the IAEA known as the Additional Protocol. I will discuss this development in a later section.) However, in the original iteration of the arrangement, the vendor would have had to transfer the reactor to the state after fifteen years. Thus, in theory, the Turkish government could have then used the facility to proliferate, should it have chosen to.

However, in 1994, Prime Minister Suleyman Demirel, who had recently returned to politics after the coup in 1980, sought to reinvigorate the BOT model. In 1994, the Parliament passed Law No. 3996, which, according to Gurcan Gulen, “attempted to extend the BOT framework by rendering it more appealing to private capital.” The law sought to do so by allowing for the dispute to be taken to international arbitration, rather than having to be settling in Turkish administrative courts.[5] At this point, Turkey’s Constitutional Court stepped in and declared that the BOT contracts were in fact concessionary agreements, and thereby necessitated the oversight of Danistay. In response, then Turkish Prime Minister Tansu Ciller’s Council of Ministers issued Decree No. 96/8269, which introduced the concept of Build, Operate, Own (BOO). The updated model dropped the provision that the vendor transfer the facility to the Turkish state after a certain amount of time. Moreover, in a further indication of Turkey’s non-nuclear intent, the impetus for Demirel’s and Ciller’s actions was not to hasten the delivery of a nuclear power plant. Instead, Turkey was eager to finalize the BOT agreements for the construction of up to 10 coal, gas, and hydro-electric power plants intended to decrease Turkey’s reliance on petroleum for power consumption.

In addition, in 1993, TEK had been split into two entities, TEAS and TEDAS. TEAS is responsible for electricity generation and transmission and TEDAS oversees distribution and retail services. The BOO format allowed for the vendor to retain control over the facility and to sell electricity directly to the end user without using TEAS.[6] Danistay suspended Ciller’s decree shortly thereafter, which eventually prompted the Turkish Parliament to vote to change the constitution in 1999. According to Ulusoya and Oguz:

The 1999 amendment opened the door to privatization in the energy markets. To begin with, the amendment gave Parliament the authority to allow for the provision of public services through private law contracts. The amendment also allowed international arbitration in concession contracts, which was denied previously by [Constitutional Court] and Danistay.[7]

The settling of this dispute helped to hasten the completion of numerous BO style projects. And, from a nuclear decision-making stand point, the decision made during the time period all but ended any chance that Turkey could use foreign supplied equipment to develop a nuclear weapon.

Turkey used the BOO model during its nuclear negotiations with numerous vendors in the mid-to-late 1990s and the 2000s. I will discuss these negotiations in more detail in the next chapter, but  the agreements Turkey has struck with Russia and Japan obligate the vendor to own, build, operate, maintain, and then decommission the reactor. While Turkish personnel will be on site, the reactors Ankara intends to have built will be foreign owned. In turn, the government has for all intents and purposes foresworn a nuclear weapons option for the foreseeable future.

[1] Ali Ulusoya and Fuat Oguz, “The privatization of electricity distribution in Turkey: A legal and economic analysis,” vol. 35, no. 10 (October 2010), pg. 5025.

[2] Robert L. K. Tiong, “BOT projects: Risks and securities,” Construction Management and Economics, vol. 8, no. 3 (Summer, 1990), pg. 315.

[3] Ibid

[4] Ibid

[5] S. Gurcan Gulen, “Electricity in Turkey: A Legal Battleground in an Ongoing Privatization War,”  Power Economics, 31 December 1998.

[6] Ibid; Ali Ulusoya and Fuat Oguz, “The privatization of electricity distribution in Turkey: A legal and economic analysis,” pg. 5025.

[7] Ibid

About aaronstein1

I am an Istanbul based PhD Candidate a King's College London.
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2 Responses to Ozalism: Vendor Financing and Nuclear Decision-Making

  1. Frank Marciano says:

    enlightening article. Thank you

  2. Edward Kee says:

    I am hoping your dissertation work goes smoothly. I would very much like to see the complete dissertation when it is complete!

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