In early April, Rosatom allocated $1.39 billion for the construction of the Akkuyu nuclear power plant to the project company Akkuyu NPP JSC (AKKUYU NGS ELEKTRIK ÜRETIM ANONIM ŞIRKETI). The project company is a 100% Russian owned subsidiary that is tasked with overseeing the construction of the power plant. The latest infusion of cash is likely to be used to build cranes, power lines, roads, temporary housing and water pipelines (see the satellite picture above to see what the site looks like today). Contrary to the reports, the money was not given to Turkey, but to the project company, which is a 100% Russian owned entity. In tandem, Akkuyu JSC filed its third Environmental Impact Assessment for the site. The other two had been rejected by TAEK because they were “flawed.” In addition, TAEK, for the fourth time, opened a tender for a technical service organization (TSO) to assist it in evaluating the construction plans. This TSO is expected to begin work sometime in 2014 and will give the green-light for the issuance of a construction license. If that happens, then Rosatom will begin to pay Atomstroyexport to construct the plant. There is an inherent conflict of interest with this approach, but in order to fully explain it, I must first begin with an explanation of the way in which the Akkuyu NPP is financed.
Akkuyu: The Financing History
The Akkuyu project is the world’s first nuclear power plant project to use the Build, Operate, Own financing model (BOO). The BOO model is, in fact, an evolutionary financing approach to the Build, Operate, Own (BOT) financing model, which Prime Minister Ozal first came up with in the early 1980s. The BO system has hindered Turkey’s development of nuclear power for close to four decades. (Turkey first proposed 100% vendor financing in 1977, but didn’t codify this approach into law until 1983.)
In 1982, General Evren 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.” 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 direct investment without having to spend scarce capital. The models works as follows: The vendor assumes all of the financial risk and is responsible for raising the funds for the nuclear power plant, the project company then establishes a local subsidiary (Akkuyu JSC), which then is tasked with overseeing the project. The vendor is also expected to operate the reactor and then decommission it. Turkey then agrees to purchase a specific amount of electricity at a guaranteed price per-killowat hour for some 20 years. After the allotted time expires, the vendor will sell Turkey electricity at market prices, in return for a percentage of the cash collected by the utility tasked with delivering the electricity – complicated, no? (*Caveat – As far as I can tell, the guaranteed price per-kWh, 12.35 US cents, is in excess of Turkey’s wholesale price per-natural gas – some 9 US cents per-kWh. So, in fact, Turks will be paying more for nuclear energy then natural gas. I can’t find reliable figure, so I’m happy to be proven wrong on this point.)
The model works well for cheap coal fired power plants (they cost some $20 million), but is ill-suited for nuclear power because the upfront costs are so high. The vendor, therefore, must look to outside financiers to raise capital for the cost of construction. Thus, when raising financing from lenders, the project vendor usually needs the contracting government to provide a financial guarantee, so as to convince lenders of the credit worthiness of the project (The government is the only “credit-worthy” partner for a potential lender to sign off on a large loan that will not be paid back for close to 20 years.”
In developing countries, where private industry isn’t credit worthy, the guarantees need to come from the government. Turkey refused to provide such a guarantee, which made the raising of private financing all but impossible for the project. Ankara refused to provide such a guarantee over fears that the Treasury would be exposed to risk, should the project be delayed and the budget for the project be exceeded. Ozal’s team argued that the vendor should assume all of the risk and that Turkey should only pay if the reactor works.
The model allows for developing companies to defer financial risk, but does include one notable drawback: it elevates price/financing 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.” During Turkey’s first BOT tender (1983), for example , a representative from Britain’s National Nuclear Corp. noted,” any vendor who produces a credit package for the Turks will get the Turkish order.” This continues, despite Ankara’s improved financial status.
Now, if one fast forwards to the future, one can see the same problems play out during the initial tender for the Akkuyu power plant. In 2008, Turkey passed a complicated nuclear law, designed to entice foreign vendors, without having to do away with the BOO format. Law No. 5710 empowered TETAS to oversee the bidding process and to select the most competitive offer. The vendor would then be required to negotiate a bilateral arrangement to sell a certain amount of energy produced at the site for up to fifteen years directly to TETAS, which would then distribute it to the country. The law is a variation on the 1984, 1986, and 1999 BOT/BOO related legislation.
Yet, from the outset of Turkey’s renewed interest in nuclear energy, vendors remained wary of Ankara’s financing terms. Westinghouse expressed no interest in the bid, while AECL made clear that “This time around … Turkey is probably going to have to put money on the table.” AREVA remained very cautious about the Turkish tender, saying that it would be “very choosy” when deciding whether to bid or not.
Why? Well, it costs money to put together a “serious” nuclear tender and the companies had been burned so many times in the past that they were rightfully wary of Turkey’s latest effort. Despite this lack of interest in its latest tender, Turkish officials remained confident, saying, in January 2008, that “the list of reactor vendor companies anticipated to file initial offerings includes Areva; Atomic Energy of Canada Ltd., or AECL; Atomstroyexport; General Electric Co.; Westinghouse Electric Co.; and Korea Electric Power Corp., or Kepco.” Ankara believed that it would be able to select a vendor by the end of 2008. Ankara also quietly let suppliers know that it wanted vendors to take back spent fuel, which further indicates that Turkey had no plans for reprocessing, or long term spent fuel storage. As of 10 April, only four companies, Atomic Energy of Canada Ltd., Itochu Corp., Vinci and Suez Tractebel, had decided to purchase tender documents. Moreover, in a sign of the continued concerns about Turkey’s financing terms, only one firm, Russia’s Atomstroyexport (ASE) in partnership with Ciner Holding, opted to submit a bid for the tender. The other five envelopes were simple thank you letters.
Why? Two reasons: 1) Financing, 2) the Take-Back provision. Most countries don’t want to store nuclear waste and instead want to leave it on site for the host country to deal with (This means that in the case of Sinop, Turkey will have to store spent fuel. The next question is who will pay for the geological repository?) And, more importantly, Turkey was still refusing to offer the necessary financing guarantees. Nevertheless, the Turkish government began exclusive negotiations with Atomstroyexport (ASE). The two sides, however, disagreed over the guaranteed cost of electricity.
TAEK began to review the Russian proposal in October 2008 to ensure that the bid met the tender specifications. TAEK approved the Russian bid in December, prompting TETAS to begin to review the financial and commercial bidding documents in January 2009. The Russian bid, however, offered 21.16 U.S. cents per kilowatt-hour. The price was nearly three times as high as Turkey’s average wholesale energy price in 2009. In February, Atomstroyeksport revised its bid, dropping its price to 15.35 cent per kilowatt-hour. In August, Russian Prime Minister Vladimir Putin visited Turkey to help finalize the deal. The deal remained contingent on Russia lowering its price per kilowatt-hour (kWh) and, according to Western diplomats, “the outcome of separate ongoing negotiations between the two countries over future natural gas pipeline projects.” The statement by Western diplomats suggest some element of corruption in the final decision-making process. However, in late September 2009, Taner Yildiz, Minister of Energy and Natural Resources, indicated that the price per-kWh was still too high.
On 12 November, the Turkish Council of State suspended three articles of the tender, after it accepted a lawsuit filed by the Union of Chamber of Turkish Engineers (TMMOB). The primary complaint was that MENR allowed Russia to revise its price per-kWh, which the TMMOB claimed would expose to lawsuits from the suppliers who opted not to submit a bid. In turn, the government was forced to either restart the tender process, or amend the regulations in question. The lawsuit prompted Turkey to cancel the tender on 20 November. Yildiz continued to support the development of nuclear power, but made clear that the “electricity unit price was one of the determining elements in nuclear power plant tender.” Yildiz added, “we have to make the price reasonable.” (Financing over performance.)
In late January 2010, Yildiz chose to forego another tender process, in favor of direct bilateral negotiations with a Russian consortium led by Rosatom. At the time of the announcement, Yildiz made clear that the conclusion of the agreement was dependent on the price for the off-take agreement. Thus, like in the case of Turkey’s previous tenders, the conclusion of the agreement ultimately came down to “the commercial and financial considerations, rather than the technical elements…”
On 12 May, the two sides reached an agreement for Rosatom to build, operate, and own four VVER-1200 nuclear reactors at the Akkuyu site. Rosatom agreed to establish a local special purpose vehicle (SPV) to finance and manage the construction and operation, while TETAS agreed to purchase 70% of the electricity from the first two units for a guaranteed price of 12.35 U.S. cents per-kWh. TETAS also agreed to purchase 30% of the electricity from the third and fourth unit. Critically Rosatom retained the right to sell 49% of its 100% equity in the project. It has since sought to do so on multiple occasions, but has failed to find a partner willing to assume the considerable financial risk.
However, as of October 2013, Rosatom and TETAS have yet to finalize the power-purchasing arrangement. The delay raises more questions about the viability of the BOO financing model. Nuclear Intelligence Weekly notes, “The lack of a PPA lead to speculation that the Russians are hesitant to agree to final terms before seeing the final structure of the deal, including the PPA, for the second project at Sinop, on the Black Sea …” In a follow-up meeting, Putin told Erdogan that Russia expected Turkey to provide tax incentives and guarantees of a long-term price for power that were not specified in the 2010 agreement and the subsequent negotiations. (Turkey gave the Russian/French consortium better financing terms. EAUS, for example, will take a stake in the project company.)
The Conflict of Interest
The project company has an incentive to finish the plant on-schedule (They won’t). If the construction drags on, then the project company will accrue more interest on the loans they took to finance construction. The interest, in turn, will eat into their potential profits – which are already deferred for at least 20 years. Rosatom therefore has an incentive to build the plant as fast as possible. Now this would not be a huge problem if the country’s regulatory regime was well established. It isn’t. Turkey is relying on Rosatom “to handle all aspects of the new program, from the construction to the day-to-day operation, and even the regulation,” according to U.S. Nuclear Regulatory Commission (NRC) Chairman Allison Macfarlane. Moreover, after the IAEA visited Turkey in November, they “recommended on Feb. 20 that Turkey enact a law establishing an independent regulatory body to oversee its ambitious nuclear newbuild program, the Vienna-based agency said in a statement. The recommendation came in a report, not made public, on an IAEA Integrated Nuclear Infrastructure Review mission that visited Turkey in November.”
There is still a whole lot to do at Akkuyu. The two sides need to finalize the EIA, TAEK needs to select a TSO, the two sides need to agree to a final PPA (will the guaranteed cost of electricity be indexed to inflation, for example), and then Rosatom can begin to pay ASE to start building the site. To be sure, Russia’s ability to tap the sovereign wealth fund to finance the Akkuyu project gives it a “better than good chance” to actually begin construction at the site. However, in the case of Sinop, the combination of delays, a still incomplete PPA, and potential delays when trying to build the Atmea1, could scuttle the project. In both cases, there is still a lot to do before concrete is poured. And, more broadly, given the regulatory issues, one has to ask: Is the BOO model really a good idea?
 Ali Ulusoya and Fuat Oguz, “The privatization of electricity distribution in Turkey: A legal and economic analysis,” Energy Policy, vol. 35, no. 10 (October 2010), pg. 5025.
 Robert L. K. Tiong, “BOT projects: Risks and securities,” Construction Management and Economics, vol. 8, no. 3 (Summer, 1990), pg. 315.
 Unofficial Translation1 of the Turkish Law No. 57102 Concerning the Construction and Operation of Nuclear Power Plants, Republic of Turkey, 9 November 2007, available at: http://www.oecd-nea.org/law/legislation/turkey/Turkey2007-npplaw.pdf.
 Mark Hibbs and Ann MacLachlan, “Areva, AECL react cautiously to Turkey’s bid for reactors,” Nucleonics Week, 8 February 2007.
 Mark Hibbs and David O’Byrne, “Turkey to pick reactor vendor by end of 2008,” Platts Nucleonics Week, 31 January 2008.
 David O’Byrne, “Four companies buy bid documents for Turkey’s first nuclear plant,” Platts Nucleonics Week, 10 April 2008.
 Mark Hibbs, “Council of Ministers to decide future of Turkey’s reactor bid,” Platts Nucleonics Week, 6 November 2008.
Mark Hibbs, “Turkey to build VVERs at Akkuyu if Tetas, Cabinet approve ASE bid,” Platts Nucleonics Week, 15 January 2009.
“Russian-Turkish consortium bids for Turkey’s first nuclear plant,” BBC Monitoring Europe – Political, 19 January 2009.
 “Russian-Turkish consortium revises bid for Turkish nuclear plant,” BBC Monitoring Europe – Political, 13 February 2009.
 Mark Hibbs, “Russia, Turkey still negotiating on terms of nuclear, gas accords,” Platts Nucleonics Week, 13 August 2009.
 “Turkey determined to build nuclear power plant – minister,” BBC Monitoring Europe – Political, 25 September 2009.
 “Turkey: electricity price decisive factor for nuclear plant bid,” BBC Monitoring Europe – Political, 19 January 2009.
 Robert L. K. Tiong, “BOT projects: Risks and securities,” pg. 315.
 “Uncertainty over Turkey’s Projects,” Nuclear Intelligence Weekly, vol. 8, no. 43, 25 October 2013.