It can be an adventure in bureaucracy but the energy sector in turbulent Turkey offers lucrative and varied opportunities for investors
Despite the attempt by Turkey’s prime minister Recep Tayyip Erdoğan to shut down Twitter last week, top-tier local lawyers routinely claim that the odd dramatic incident aside, it is “business as usual” in Turkey.
Certainly at The Lawyer’s roundtable on Turkey, the talk was all about the opportunities for investors. Bezen & Partners partner Nadia Cansun tells delegates: “Turkish politics are portrayed in the UK press as a lot more traumatic than they are. It’s business as usual in certain respects – I’ve only had one deal die because of what’s going on.”
Earth and air
Amid unease over political turmoil and the resulting potential for relative business paralysis, there is still global legal profession enthusiasm for the jurisdiction, not least around the conventional and renewable
energy sectors. Field Fisher Waterhouse energy partner Carlos Pierce describes the country as “a real growth area for the sector, and for renewables in particular”.
Others see renewables as what one lawyer describes as a “difficult market” in Turkey, owing to a much longer focus in the jurisdiction on conventional energy. However, the view is that over the past year the renewables market – particularly for wind and solar – is expanding. Last summer there were tenders for a sizeable solar project and it is understood the authorities aim to have a third of the country’s energy derived from renewables by 2023. For a country of nearly 77 million people, that represents a considerable potential market.
Until now, much of the focus in renewables has been on wind power. The last window for licence applications opened in 2007 and there was significant investor interest. But bureaucratic wheels in Ankara turn slowly and the regulator is still reviewing applications.
The process also attracted a significant number of unsophisticated investors tossing their names into the hat for licences.
“Even the local baker could apply for a wind power licence – it’s been quite an experience,” comments Bezen partner Yesim Bezen.
A serious difficulty emerged when the Bakers and candlestick makers bagged licences and sat tight, hoping the bits of paper would appreciate in value.
“Those who were awarded licences often did nothing with them,” explains Cansun. “They then started selling them and created a lot of M&A activity in 2010/11. There were quite a few licences just changing hands so international investors came in and picked up targets they haven’t done much with.”
Turkish lawyers point out that licensing regulations have been tightened to dissuade casual applicants. A recently enacted electricity law stipulates that licence applicants must now show a proprietary right to the land allocated for wind and submit other information over a 12-month period.
“You have to put some effort into the process now,” says Cansun. “You can’t apply willy-nilly, and that is controlling things better.”
Another round of licensing in the solar sector is anticipated later this year. A significant change to the licensing regime is that ‘ultimate generation’ licences are no longer granted in the first instance. Instead, preliminary licences are a first step, after which there is a two-year period when developers must obtain further permits before breaking ground.
According to the lawyers, environmental impact assessment licences constitute the most time-consuming element of that process, especially if there are intersecting licence requirements – for example, relating to mining – over a piece of land. However, the authorities have recently created a board to determine priority.
“That’s a step in the right direction,” says Cansun, “because there hasn’t been that process for wind power projects. Foreign solar companies are trying to buy the companies that have made applications, reckoning that once they’ve got the preliminary licence, they’re in.”
Fire and water
Arguably, even more fraught with difficulty in the Turkish energy firmament are the hydro and nuclear options. Lawyers maintain there is considerable interest in the former. But, says Milbank Tweed Hadley & McCloy project finance partner Clive Ransome, hydro involves “a big ecological impact and is controversial in many respects”.
While water may be difficult, nuclear comes with a hanger-load of baggage. Nonetheless, there are two projects under development. The Russia-backed Akkuyu power plant is being built in Mersin on the Mediterranean coast, following a deal cut between Moscow and Ankara in May 2010.
It is about three years ahead of development of a Franco-Japanese consortium building a plant at Sinop on the Black Sea coast.
“They’re big projects,” says Ransome. “Not least in finding developers and investors keen to finance $17bn-20bn in debt. The projects are a long way off, but they will change the market significantly.”
Regardless of concerns around nuclear energy, Turkish politicians appear keen, with almost no opposition from any party-political quarter.
“These projects are being pushed through in the name of stability,” comments one roundtable lawyer.
Traditional carbon energy sources still provide a bedrock of activity, with Chinese and South Korean
investors particularly active. Lignite – or ‘brown coal’ – is high on the list for financiers from those two jurisdictions, although lawyers say it is almost impossible to drum up interest from European and US backers.
“There has been a general retraction by [Western] banks,” says Mayer Brown banking partner Trevor Wood. “They’ve put the shutters up. And the view is that the market isn’t going anywhere fast, especially with elections coming up.”
Ransome agrees: “Financing is hard to come by – commercial banks are not confident and debt is expensive.”
Another area where the brakes seem to have been slammed on is possible EU membership for Turkey. Speculation has floated around for years that the country straddling Europe and Asia would want to join the EU club. But, say lawyers, the attraction is wearing thin.
“Enthusiasm for membership has dropped,” comments one knowledgable delegate, who acknowledges that years of positioning for entry have had their benefits. “It’s been a good process in terms of modernising legislation and the way everyone operates. But I don’t think any Turkish government ever really expected to join the EU.”
However, remaining out of the EU causes difficulties for European investors, not least around employment law and the power wielded by local authorities. A leading legislative bete noire is the ‘one-to-five’ rule, whereby businesses must employ five Turkish employees for every foreigner on their books.
“It makes sense,” says Bezen, “because otherwise we’d be swamped with Chinese workers. But in certain areas, such as nuclear, you need experts. You can’t employ just anybody. It isn’t easy to obtain a work permit.”
Indeed, there are some professions – engineering, architecture, medicine, even legal – for which it is almost impossible to be granted a work permit.
But the biggest issue Turkey must overcome is a lingering impression among those in the developed economies that the country is not as advanced as it actually is.
“People treat Turkey as an emerging market where the documentation is going to be unsophisticated,” complains Cansun. “But that’s simply not true.”
Around the table
Yesim Bezen, partner, Bezen & Partners
Nadia Cansun, partner, Bezen & Partners
Carlos Pierce, partner, Field Fisher Waterhouse
Peter Castellon, partner, Proskauer Rose
Richard Cooke, partner, Pennington Manches
Trevor Wood, partner, Mayer Brown
Neil Budd, senior associate, SGH Martineau
Alan Rae Smith, partner, Freshfields Bruckhaus Deringer
Charles Fuller, chief legal counsel (Emea), Franklin Templeton Investments
Clive Ransome, partner, Milbank Tweed Hadley & McCloy
James Snape, partner, Nabarro
Catrin Griffiths, editor, The Lawyer
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