This record is a partial extract of the original cable. The full text of the original cable is not available.
241256Z Jul 03
UNCLAS SECTION 01 OF 03 ANKARA 004692
SIPDIS
SENSITIVE
STATE FOR E, EB/CBA, EB/IFD, AND EUR/SE
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO
USDA FOR FAS FOR EC AND CCC/FSA
TREASURY FOR OASIA - MILLS AND LEICHTER
NSC FOR BRYZA
E.O. 12958: N/A
TAGS: EINV PREL TU
SUBJECT: LITTLE PROGRESS ON RESOLVING BOT AND CARGILL/ADM
INVESTMENT ISSUES
REF: ANKARA 3343
1. (SBU) Summary: Turkish authorities are making little if
any progress toward resolving the investment disputes
involving U.S. power generation and starch-based sweetener
companies. The BOT issue is being held up in part due to
disagreements between the Energy Ministry and the Energy
Market Regulatory Authority (EMRA); each is waiting for the
other to act, and neither is communicating with the
companies. The EMRA President assured us this week that, if
the problem remains unresolved when the end-August licensing
deadline hits, he will unilaterally extend the deadline to
allow the companies to continue to operate. On the sweetener
issue, Cargill has made some progress in its legal battles
over zoning, but understands that Industry Minister Coskun
has tentatively decided not to increase the quota for
starch-based sweetener production from 10 to 15 percent, as
was done last year. If Coskun sticks to this decision, both
Cargill and ADM will face major difficulties. End Summary.
2. (SBU) During the past week, EconCouns met with Energy U/S
Sami Demirbilek and Energy Market Regulatory Authority (EMRA)
President Yusuf Gunay to express concern about the lack of
progress in resolving the issues surrounding U.S.-owned and
USG-supported BOT power generation projects. As reported in
reftel, the fundamental problem is that the Energy Ministry
has been pressing the power generation companies (in a
heavy-handed manner) to reduce their prices, or risk not
having their new license applications approved by EMRA.
(Note: Under EMRA regulations, all power generation
companies, including those already operating, are required to
apply and obtain new operating licenses. EMRA officials
insisted this was a pro forma process for existing companies,
but Ministry officials indicated it might not be. Moreover,
the langauge in the license applications suggested the
companies might be giving up their existing contractual
rights by applying. End note).
3. (SBU) EconCouns reminded both Demirbilek and Gunay that,
during a May 2003 visit to Ankara (reftel), a group of
international export credit agencies had expressed concern
about these developments and had urged the GOT to clarify in
writing that the companies, by applying for new licenses,
would not give up any of their existing contractual
obligations. They also had suggested that any GOT move to
violate or force changes in existing contracts would have
negative consequences for Turkey's broader efforts to attract
investment into the sector. (In response, GOT officials had
promised to clarify that the companies would not give up
their existing contractual rights by applying for new
licenses, and had insisted that they had no intention of
violating contracts. Rather, they were only asking the
companies to work with them to facilitate Turkey's transition
to a market-based energy sector.) Following the meeting,
OPIC had sent a letter to the EMRA President highlighting the
areas of discussion and the GOT commitments.
4. (SBU) EconCouns noted that, two months later, the GOT
has neither issued the promised clarification nor responded
to the OPIC letter. With the deadline for issuance of new
licenses fast approaching (end-August), we are increasingly
concerned about the lack of progress. EconCouns asked how
GOT authorities plan to resolve this problem.
5. (SBU) Demirbilek said there were many possible solutions
to the problem, but under any circumstances the GOT would not
violate or unilaterally abrogate the contracts. The first
step, however, is for EMRA to forward its proposals on how
the contracts could be revised to facilitate Turkey's shift
to a market-based electricity system. The Ministry would
review those proposals, and then try to find a solution.
Despite repeated queries, Demirbilek did not comment on why
the GOT had failed to provide the promised clarification of
the companies' rights under the existing contracts. In a
troubling aside, he noted that the Ministry had determiend
that one of the companies -- Doga (partly owned by U.S.-based
Edison Mission) -- was violating the terms of its contract,
and was continuing to look into the other companies'
performances. (Note: A standard GOT approach on domestic
and international energy issues has been to use a minor,
technical violation of contracts to force concessions from
its "partners.")
6. (SBU) Gunay countered that EMRA was in no position to
present proposals to the Ministry, and in any case the
Ministry had no right to judge the utility of any proposals.
Instead, Gunay has asked the companies to offer ideas on how
they could facilitate the sector's transition. These might
include, for example, giving up government purchase
guarantees in return for a longer operating period before
they turn the projects over to the government.
Unfortunately, Gunay said, the Ministry's approach on prices
has "turned off" the companies, making them defensive and
unenthusiastic about offering any concessions. Gunay said
price should not be the issue. Sure, the contract prices are
high, but the GOT signed these contracts and thus has no
grounds for complaint.
7. (SBU) As for next steps, Gunay said he had written to
the Ministry advising that EMRA had reached the licensing
stage. He is not seeking the Ministry's approval, but wants
to be able to show that the Ministry was aware that EMRA
would be issuing licenses so that they could not later blame
EMRA for issuing licenses and thus undermining the Ministry's
efforts to obtain price concessions. If the Ministry
responds to his letter by saying it is about to reach
agreement with the companies on a new price, he will extend
the licensing deadline to allow the agreement to be
concluded. If the Ministry says there is no such agreement,
he will issue the licenses. He urged us not to worry,
saying that, in the worst case, he would extend the licensing
deadline so the companies could continue to operate. Gunay
added that he would respond to OPIC's letter as soon as he
heard back from the Ministry.
8. (SBU) In a separate meeting, Cargill executives updated
us on the problems facing both the company and the broader
starch-based sweetener industry, including U.S.-based ADM.
There has been some progress on the Cargill-specific issue,
which involves legal actions against its factory for being
improperly zoned. The Danistay (State Council) had recently
rejected two law suits aimed at annulling its construction
license, based on the Danistay's view that the plaintiffs had
no legal basis for suing. However, the Danistay had ruled
against Cargill in a third case -- brought by the same
plaintiffs -- involving the plant's emissions permit, based
on the argument that, since the plant was improperly zoned,
its emissions permit was improperly issued. Cargill is
appealing this decision, and generally sees the Danistay's
actions as positive. Meanwhile, senior Industry Ministry
officials, including Minister Ali Coskun, continue to tell
Cargill that they expect to submit to Parliament a new
industrial zoning law, which would effectively enable Cargill
to "re-zone" its factory, in September. (Note: Cargill
executives are a bit skeptical, as Coskun has been promising
action on this for some time.)
9. (SBU) The other issue, which affects ADM as well as
Cargill, is how the government will implement the sugar
production quota. Under the Sugar Law, the Sugar Board sets
an annual production quota for the entire sweetener industry
(sugar, fructose, glucose), and fructose/glucose producers
such as Cargill and ADM are limited to 10 percent of the
quota. Last year, the government set the total quota
significantly above domestic demand (2,340,000 tons compared
to domestic demand of about 1,850,000 tons), and raised the
fructose/glucose sub-quota to 15 percent (as allowed by the
law). These two moves enabled starch-based sweetener
producers to continue operating at reasonable levels, even if
below capacity.
10. (SBU) This year, however, Cargill has heard that Minister
Coskun is siding with the sugar beet producers and is
planning to keep the sub-quota at 10 percent (though the
overall sweetener production quota will remain at 2,340,000
tons). If he sticks to this decision, the starch-based
sweetener producers will be forced to produce at far below
capacity, raising serioius questions about their ability to
continue. Cargill and ADM have organized a group made up of
their major customers -- the cola, fruit juice, and
confectionary companies -- to meet with Prime Minister
Erdogan in the coming weeks to lobby for a 15 percent quota.
If this approach fails, Cargill and ADM might ask the Embassy
to weigh in (until now, they have kept us informed but asked
us not to weigh in).
DEUTSCH