Court case studies
The history of Turkish power
It has been eighteen years since Turkey first allowed private investment in the electricity sector under the famous Build-Operate-Transfer (?BOT?) model. The industry was previously reserved for the State utility. The Government then created new models for power generation.4 By 1996, four BOT projects were successfully financed with international resources on a project finance basis: the Birecik hydroelectric project and three gas-fired BOT projects (Marmara (Enron), Marmara II (Unit) and Esenyurt (Edison Mission)).
Those following the developments in the Turkish energy market might be familiar with the struggle that independent power developers have been facing in Turkey since the 1996 decision of the Turkish Constitutional Court announcing that BOT projects constituted concessions and, as such, require review and approval by the Turkish High Administrative Court (?Danistay?) and are further subject to the ongoing jurisdiction of Danistay. No private power projects have been realized on a BOT basis with international financing since then.
In 1999, the Turkish Constitution was amended to facilitate the development of those projects, which were blocked because of the so-called ?concession? problem. The implementing legislation of the Constitutional amendment introduced an application deadline for those pending projects wishing to benefit from private law status or arbitration (instead of Danistay jurisdiction) by keeping their concessionary status. Most of the project companies requested conversion into private law contracts, with a minority either requesting to have arbitration introduced into their concession contracts only or simply to maintain their status quo.
Thereupon, while sponsors of those projects were striving with the Ministry of Energy and Natural Resources (the ?Ministry?) to create a set of project documents acceptable to international lenders, Turkey enacted Law No. 46285 on 3 March 2001, to liberalize the electricity market in Turkey as part of its commitments under the protocol with the International Monetary Fund. Law No. 4628 eliminated the long term purchase guarantees, limited the availability of Treasury guarantees to a specified number of projects and set forth further limitations for the TOR projects. Law No. 4628 neither invalidated the other existing energy laws nor created an explicit exemption for the projects outstanding under such laws enacted prior to Law No. 4628.
The challenge to Law No. 4628
In May 2001, a challenge was brought before the Constitutional Court by the main opposition party in the Turkish Parliament at the time, against Temporary Article 4 of Law No. 4628 (?Temporary Article 4?) and Temporary Article 8 of Law No. 4628 (?Temporary Article 8?), on the basis that they were contrary to the Turkish Constitution. Another challenge was brought before the Constitutional Court by the main opposition party in the Turkish Parliament, against Article 1 of Law No. 4694 amending the Temporary Article 4 on the same basis.
Pursuant to Temporary Article 8, Treasury guarantees under the provisions of previous energy laws would only be granted for a number of pre-determined projects. The Ministry, together with the Undersecretariat of Treasury (the ?Treasury?) and the State Planning Organization, has designated only 29 projects to benefit from this Article, excluding some of the major projects.6
Temporary Article 4 stated that the contracts of those TOR generation and TOR distribution companies, which did not complete their transfer procedures by 30 June 2001, would become invalid. Such deadline has been amended by Article 1 of Law No. 4694 by extending it to 31 October 2001.
The constitutional court decision
On 13 February 2002, the Constitutional Court invalidated the first paragraph of Temporary Article 4 and the first paragraph of Temporary Article 8. Since Constitutional Court decisions become applicable only after they are published in the Official Gazette (together with their reasoning), the Constitutional Court in the meantime suspended the implementation of such provisions in their entirety until the publication of such reasoning.7 The Constitutional Court also invalidated Article 1 of Law No. 4694, and suspended the implementation of same until publication of its reasoning.8 The Decision was published in the Official Gazette on 18 April 2002.
Temporary Article 49:
According to the Decision, the Constitutional Court invalidated the first paragraph of Temporary Article 4 by excluding the term ?...30 June 2001...?. The Court decided that it was not necessary to render any decision with respect to such date since that request became groundless due to the amendment made by Law No. 4694 (extension until 31 October 2002) which was already invalidated by such Decision. The Constitutional Court invalidated the remaining part of the first paragraph of Temporary Article 4 based on the following reasons:
(i) only the parties to a contract may decide as to when and how a contract shall be terminated; therefore this Article is contrary to Article 48 of the Turkish Constitution, which envisages the freedom to work and conclude contracts;
(ii) the said provision terminates contracts which were previously entered into between the parties in accordance with their free will, and thus such a provision violates the general principles of law and the principle of rule of law which is listed as one of the characteristics of the Turkish Republic in the Turkish Constitution; and
(iii) the principle of ?pacta sund servanda? (agreements of the parties to a contract must be observed) is very important in a country that is governed by the rule of law and such a principle requires the protection of ?freedom to conclude contracts?.
Temporary Article 810:
The Constitutional Court, based on the same reasoning indicated for Temporary Article 4, stated above, invalidated the first paragraph of Temporary Article 8 as well. Additionally, the Decision stated that Treasury guarantees to be issued under Law No. 3996 as stated in the first paragraph of Temporary Article 8 are an integral part of and inseparable from the contracts of the existing projects. The fact that the Ministry or another public entity is a party to the contract and that the Treasury guarantee is to be issued by the Ministry in charge of the Treasury does not affect the outcome since they are both branches of one unified administration. In addition, the project companies that are parties to these contracts have undertaken these investments and services with an understanding and belief that Treasury guarantees would be provided to their projects.
Law No. 4694:
The Constitutional Court invalidated Article 1 of Law No. 4694 based on the reasoning that the principle of ?pacta sund servanda?, and thus the principle of ?freedom to conclude contracts?, had been violated. The Constitutional Court also invalidated the remaining articles of Law No. 4694 since such articles do not have any scope of application due to the invalidation of Article 1 of the same Law.
Effects of the decision on existing projects
Obviously the effects of the Decision on the existing projects are extremely positive.
Treasury Guarantees:
All existing energy projects with a signed contract11 have become eligible for Treasury guarantees. Those projects, which were approved and whose contract terms were agreed upon with the Ministry should also qualify for the Treasury guarantees.12
The Constitutional Court did not invalidate the second paragraph of Temporary Article 8. This can be interpreted to mean that the Court also concurred that no Treasury guarantee shall be granted to new projects.
Accordingly, pursuant to the Decision, both Treasury guarantees and purchase guarantees should be provided to the existing projects as set forth in their contracts.
TOR Projects:
The Constitutional Court did not invalidate the second paragraph of Temporary Article 4 since the Court did not deem such paragraph unconstitutional. The second paragraph of Temporary Article 4 provides a two-year cure period for TOR projects to complete the facilities preventing environmental pollution and to obtain the necessary permits under the environmental legislation. The second paragraph applies only to TOR Projects, the transfer transactions of which have been completed by 31 October 2001.
One interesting point is that, technically the term ?30 June 2001? still remains in the first paragraph of Temporary Article 4. However, it seems that the Constitutional Court did not render any decision concerning such term with an understanding that such deadline was already invalidated by the cancellation of Law No. 4694. The issue of whether or not the term ?30 June 2001? remains in this Article is not clear.
In any case, the TOR projects, the transfer transactions of which have been completed by 31 October 2001, shall continue to benefit from the provisions of the second paragraph of Temporary Article 4 based on the principle of ?non-retroactivity of the Constitutional Court decisions?. According to this principle, the cancellation decisions of the Constitutional Court will not affect the legal statuses acquired or transactions completed based on a law in effect before the publication date of such cancellation decision. What is not certain is the status of projects, which have completed their transfer procedures after such date or the status of those that will complete such procedures from now on. If there is a legal gap created by this Decision (which seems to be the case) then such gap must be filled by the Turkish Parliament in light of such Decision. Otherwise, the expansion of the application of such provision will be subject to the Government's discretion. But then again such expansion can be subject to a challenge before the Turkish courts.
The reaction of the government
According to the press, the Ministry has determined continuation of 30 BOT projects and 15 TOR projects and submitted them to the approval of the Treasury.13 Such list includes the previous 26 projects out of previously listed 29 and some other projects that were not included in such list. Interestingly this new list also includes the projects already challenged the Turkish State at local or international forums. The Treasury's response to such request was to wait for the opinion of Danistay, which we understand sought for.14 In the mean time another 15 TOR projects have been declared to be privatized by the Privatization Administration.15 Then on May 24, 2002, the Ministry and the Treasury made a joint declaration inviting the project companies to negotiate with the Ministry with a warning clarification that the targets of Law No. 4628 and the balance of energy demand and supply shall be observed during such negotiations. The Ministry is expected to invite the project companies after the conclusion of the approach of the Treasury on this matter.16 No specific invitation from the Ministry has been reported as of 2 August 2002 and there is no expectation for a concrete development until the conclusion of the upcoming election and establishment of a new Government as a result thereof.
Conclusion
Although the Turkish Government seemed to have chosen private power as the principal means in meeting the wide gap between energy supply and demand in Turkey and engaged in a crossfire over private power with the judiciary (that started in the early 1990s), there has been a backlash against private power and privatization of power by State agencies. In addition to the World Bank's request to re-examine the new projections in order to be certain that investments for new power projects are necessary, the approach of the relevant Governmental entities has also been inconsistent from time to time. Consequently, there has been confusion and uncertainty, adversely affecting the development of energy investments in Turkey.
In contrast to its prior (hostile) approach to privatization, we believe that by this Decision, the Constitutional Court has given a very clear message both to the Ministry and the Treasury that the BOT and TOR projects agreed upon before the publication of Law No. 4628 should be carried out on the basis of the laws and contractual terms which they were subject to and that all such projects should be granted purchase guarantees and Treasury guarantees as envisaged in their contracts and/or authorizations by enforcing the true meaning of the rule of law principle. The Constitutional Court has also made it clear that no Treasury guarantee will be granted to new projects.
As discussed above, the final approach of the Turkish Government has not been formed. Consequently, the whole picture could be seen only after the Government takes its definitive position. Nevertheless, considering the recent developments in the Turkish politics and the upcoming early election which will be held on 3 November, 2002, it appears like those projects will go through another phase of uncertainty for a while. However, one thing which seems to be clear is that in the event the Turkish Government does not offer a solution to the existing projects within the guidelines indicated by the Decision, the Turkish State will face significant compensation claims from the owners of the existing projects either in the Turkish administrative courts or in the international forums, depending on the nature of the underlying documents and structure of the project company in question. n
Mehtap Y?ld?r?m-Öztürk (Member of the Ankara and New York Bars) and S. Sebnem Önder (Member of the Ankara Bar) welcome any comments and queries with respect to this article at M.Yildirim@cakmak.gen.tr.
Their website is http://www.cakmak.gen.tr
Footnotes
1 ?????
2 Published in Official Gazette No. 24335 dated 3 March 2001 (repeated edition). Law No. 4628 was amended by Law No. 4694 published in Official Gazette No. 24459 dated 11 July 2001 and Law No. 4646 concerning the Natural Gas Market was published in Official Gazette No. 24390 dated 2 May 2001.
3 Decision No. E. 2001/293, K. 2002/28 and Decision No. E.2001/389 K. 2002/29, both dated 13 February 2002, of the Constitutional Court were published in Official Gazette No. 24730 dated 18 April 2002.
4 There were four areas of private power opportunity in Turkey ? sometimes referred to as ?models? ? as described below:
(i) BOT Model: The BOT was the classic model in Turkey for private power generation, with four internationally financed projects to its credit, both hydro and thermal. Under the BOT model, the Ministry licenses private Turkish companies to build and operate new generation facilities and to sell the electricity to the State utility for a specified license period (in practice, about 20 years) and at the end of such license period the plant is then transferred to the State. The BOT model is subject to (i) Law No. 3096 concerning the Authorization of Enterprises Other than Turkish Electricity Authority for the Generation, Transmission, Distribution and Trade of Electricity published in Official Gazette No. 18610 dated 19 December 1984 and (ii) Law No. 3996 concerning the Realization of Certain Investments and Services on the basis of Build Operate and Transfer Model published in Official Gazette No. 21959 dated 13 June 1994 (as amended by Law No. 4493 published in Official Gazette No. 23914 dated 22 December 1999 and Law No. 4501 published in Official Gazette No. 23941 dated 22 January 2000).
(ii) Transfer of Operation Rights (?TOR?) Model: The TOR generation model involves the ?transfer of operation rights? (i.e., lease) to Turkish companies for the operation (and rehabilitation if necessary) of existing power plants owned by the State utility during specified license periods of about 20 years. A long-term energy sales agreement will be entered into with the State utility for the sale of electricity during the license period. The TOR generation model is based on the same legislation as the BOT model.
(iii) Autoproduction Model: Autoproduction (or self-generation) is a simple, quick and efficient means by which a Turkish company in need of electricity may obtain a license to generate electricity to meet those needs. The Autoproduction generation model is based on the same legislation as the BOT model.
(iv) Build-Operate (?BO?) Model: The BO model is quite similar to the BOT model, with the principal differences being (i) the authorization contract with the Ministry is replaced by a simple license from the Ministry and (ii) ownership of the plant belongs to the project company with no transfer to the State at the end of the term. Four BO (?skenderun, Adapazari, Gebze and ?zmir) projects have been successfully financed with international resources and the fifth one (Ankara Project) is in the financing stage. The BO model is subject to Law No. 4283 concerning the Establishment and Operation of Electrical Energy Generation Facilities and the Regulation of Energy Sales by Means of the Build-Operate Model published in Official Gazette No. 23054 dated 16 July 1997.
5 For a more detailed explanation of Law No. 4628, see ?New Era in the Turkish Energy Market and Legislation?, 220 Project Finance International, 27 June 2001, p.77, by Mesut Çakmak and Mehtap Y?ld?r?m-Öztürk.
6 The names of these 29 projects were published in NTVMSNBC's web site on 15 September 2000. Further, according to the press releases, the number of these pre-determined projects has fallen down to 26 due to cancellation of three projects by the Ministry.
7 Interim Decision No. 2002/5 of the Constitutional Court was published in Official Gazette No. 24672 dated 15 February 2002.
8 Interim Decision No. 2002/6 of the Constitutional Court was published in Official Gazette No. 24672 dated 15 February 2002.
9 The modified version of Temporary Article 4 as amended by the Constitutional Court Decision is as follows:
Temporary Article 4. 30 June 2001.
A period of two years starting from the transfer date shall be granted in order for the completion of facilities preventing environmental pollution if such facilities are to be constructed by TEAS, and for obtaining the necessary permits from the standpoint of environmental legislation with respect to the transactions of transfers of operation rights which could be completed by the date stated in paragraph 1 above. During such period, the electricity generation activity cannot be stopped with such an excuse.
10 The modified version of Temporary Article 8 as amended by the Constitutional Court Decision is as follows:
Temporary Article 8. Except for these projects, no Treasury guarantee shall be granted within the framework of the provisions of Law No. 3996 dated 8 June 1994 and Law No. 4283 dated 16 July 1997.
11 Existing contracts are defined to cover concession and implementation contracts and those contracts signed before the entry into force of Law No. 4628 (3 March 2001) in accordance with the provisions of Law No. 4501, Law No. 4283, Law No. 3096 and Law No. 3996.
12 The Treasury guarantees shall also be subject to the Public Finance and Regulation of Debt Management Law No. 4749 published in Official Gazette No. 2472 dated 9 April 2002.
13 TEBA news 1053, 13 May 2002, page 18.
14 TEBA news 1054, 20 May 2002, page 18.
15 TEBA news 1055, 20 May 2002, page 9.
16 TEBA news 1055, 27 May 2002, page 18.
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