March 16, 2006—In Ankara, Turkey’s bustling capital city, everyone used to talk about power outages. With output virtually even with consumption, concerns about potential blackouts dominated conversation. Demand would soon outstrip supply, experts predicted, and outages would become routine.
It was a problem. In fact, for a nation trying to attract foreign investment by showcasing its advantages as a lower-cost place to operate a factory, it was a really big problem.
And then, in 1999, a devastating earthquake hit, followed by a financial crisis that silenced factories, sent inflation soaring, and forced a nation-wide belt-tightening that reduced electricity consumption and created excess capacity.
Into these challenging market conditions ventured SUEZ Energy International—the international energy division of SUEZ—which had the foresight to envision a boom in electricity demand as the nation rebounded and as legislative and regulatory reform sparked new economic growth.
Within a remarkable 26-month timeframe beginning in the difficult days of 2002, Suez Energy International turned a greenfield site into a fully operational power plant on the outskirts of Ankara. Today, Baymina runs quietly and efficiently, providing 770 MW of new gas-fueled electricity at reasonable rates and respecting environmental requirements. The World Bank’s Multilateral Investment Guarantee Agency (MIGA) was the lynchpin holding together the deal’s complex financing package, protecting the investment against political risks while lowering the risk premium and reducing project costs.
“This is a typical project for MIGA,” says Yukiko Omura, the agency’s Executive Vice President, “really representing the niche that we serve: helping developing countries kickstart capital-intensive and high-risk infrastructure projects with huge economic development payoffs. This project also exemplifies our efforts to re-engage traditional infrastructure investors who have really abandoned these types of projects over the past decade or so.”
The deal, which was singled out for “Deal of the Year 2002” honors by Project Finance magazine, involved a limited recourse financing structure that included French bank BNP Paribas and four major export credit agencies. “This project was quite risky for banks, and so it took a while to get it off the ground and to get the financing from lenders,” explains Patrick Eeckelers, Baymina Enerji’s Chief Financial Officer.
And for a country with a high perception of risk, reeling from dual disasters, the infusion of international capital and confidence has played a powerful role in the nation’s recovery.
Today, Baymina senior executives say the deal could not have happened but for MIGA’s involvement. “SUEZ Energy International needed political risk insurance—they wanted the maximum amount of cover, otherwise we wouldn’t get the lending,” says Eeckelers.
MIGA guarantees cover SUEZ Energy International’s investment and loans to BNP Paribas. Guarantees are for $35 million and $80.5 million, respectively, to cover a $39 million shareholder contribution and an $84.7 million loan to Baymina Enerji A.S. The guarantees protect against the risks of transfer restriction, expropriation, war and civil disturbance, and breach of contract for a period of 15 years.
Of course, such deals do not happen in a vacuum. Changes in the nation’s legal and regulatory framework—as well as the way public-private energy sector partnerships were designed—paved the way for Baymina.
Until recently, Turkish power facilities, characterized by aging assets, poor management, high rates and under-par utilization, operated on build-own-transfer (BOT) arrangements, under which operational responsibilities were handed back to the government after a relatively brief timeframe. The government monopoly controlled distribution, resulting in a non-competitive market vertically integrated from distribution to generation—not a good recipe for efficiency.
“In the days of BOT, there was only one buyer—the state—and the regulatory system was state-owned,” explains Budak Dilli, general director for Turkey’s Ministry of Energy and Natural Resources. As a result, he says, prices were high, and efficiencies were few.
But as Turkeyramps up efforts to complete its accession into the European Union, the nation has deregulated its energy sector, allowing for competition and setting the stage for improvements in the sector’s performance. Retail prices have come down dramatically as a result. “Because of competitive bidding, prices are half the price they were under BOTs,” Dilli says. And the reasonable rates boost consumption, as consumers and businesses alike take greater advantage of available electricity resources.
The build-own-operate structure that is increasingly typical of Turkey’s energy sector also contributes to success, say those involved with the Baymina project. Under Baymina’s long-term build-own-operate (BOO) contract with the government, the company was committed to designing, constructing, maintaining, and operating the plant in ways that maximize capacity and extend plant life.
“Under shorter-term BOT contracts, plant owners do not have the same incentives to maintain and operate the plants to such a high standard,” says Baymina Enerji’s chief executive officer Kemal Taragay.
The government agrees. “We think BOOs are a win-win for both of us [the government and the company],” says Dilli. “Our aim is to see all new capacity to be built by the private sector.” The combination of projected business expansion, new foreign direct investment, and increased consumer purchasing power are expected to drive up demand. Dilli speculates that more capacity will be needed as soon as 2009 to keep up.
The company has already established itself as a good corporate citizen and active participant in the life of the community. Baymina funded the construction of a nearby elementary school that serves as a resource for the entire region. The company sponsors yearly health checks for the children and conducts routine water analysis to ensure that drinking water is clean. And a popular sport has received enormous support as well—a Baymina-sponsored wrestling competition draws huge crowds. “You can’t underestimate the popularity of wrestling in Turkey,” says Mustafa Tokgoz, Deputy CFO of Baymina, with a laugh. On a more serious note, he says, “We step in as a good neighbor when required. For example, after the rains, we repaired the road here.”
Baymina represents a continuing commitment to Turkey by Suez, which has long had a presence in the country. This is not MIGA’s first project in Turkey, either. Currently, MIGA’s portfolio in Turkeyincludes projects in the financial, infrastructure and manufacturing sectors, consistent with the assistance strategy identified by the Turkish government in consultation with World Bank Group country experts. Overall, Bank efforts are designed to help lay the basis for sustained long-term growth and a reduction in the country’s vulnerability to financial and economic crises.