Turkish Arbitration Issue Resolved

Turkish Arbitration Issue Resolved

March 01, 2000

The Turkish parliament passed implementing legislation at the end of January that allows international arbitration in most contracts for public services.

International arbitration can now be applied to all new contracts and concessions, and companies who are parties to existing contracts were given the right to request that international arbitration apply to their contracts.

Requests for retroactive application of the new arbitration law must have been made by February 22, 2000.

Background

Turkey has long sought to increase the flow of inward foreign investment through the privatization and development of large-scale infrastructure and energy projects. While Turkey has a substantial economy, is a member of the OECD and NATO, has a record of strong economic growth and huge energy and infrastructure needs, few of the projects proposed by the Turkish government have moved ahead. One major deterrent to foreign investors in such projects had been Turkey’s laws on arbitration, which had the effect of denying investors the right to seek international arbitration in an offshore venue.

Before last August, the Turkish constitution reserved to Turkey’s top administrative court, the Council of State or “Danistay,” the final call on issues surrounding interpretation of contracts for public services. Prevailing legal opinion in Turkey was that all contracts relating to power plants and other infrastructure projects were considered public service contracts and international arbitration was prohibited in resolving disputes under such contracts.

Last August, Turkey amended its constitution to leave the decision to parliament whether particular public service contracts are governed by Turkish law and accordingly are subject to the authority of the Council of State, or to allow foreign law or international arbitration to apply to such contracts. This amendment laid the groundwork for January’s legislation.

The new law should allow stalled projects to get back underway and encourage the development of new projects. Examples of projects likely to move forward in the near future include a $1.8 billion suspension bridge across the Izmit bay, a third Bosphorus crossing at Cannakkale, the Bodrum water supply project, a $200 million container terminal at Derince, a 336-MW lignite-fired power plant in Tufanbeyli, Adana, a 206-MW power plant to supply Alapi, Zonguldak and a 200-MW gas-fired power station in Eskisehir.

New Opportunities

The Government of Turkey has big plans for new energy projects. The Turkish Ministry of Energy estimates that electricity consumption in Turkey will nearly treble from 103 billion kWh in 1997 to 290 billion kWh in 2010. Analysts estimate that Turkey will need to spend $4.5 billion each year on electricity generation and distribution. Independent forecasters estimate that an additional 87,000 megawatts of installed capacity will be needed to meet the growth in demand for energy in Turkey over the next 20 years.

A number of new pipelines are also in the works. Turkey already imports 60% of the raw energy it uses and this percentage is projected to increase to 75% by 2020. As a result of this demand for imported energy, the Turkish government has proposed several natural gas and oil pipeline projects. The largest of these is the proposed $2.5 billion Baku-Ceyhan oil pipeline project. If completed this pipeline would transport one million barrels of oil per day from Azerbaijan through Georgia to the Mediterranean port of Ceyhan in Turkey.

US Support

The US Government strongly supports the “western route” Baku-Ceyhan pipeline, as well as investment in Turkish energy and infrastructure projects generally. Ambassador John Wolf, special advisor to the President and Secretary of State for Caspian basin energy diplomacy, has made it clear that the US government will play a significant role in providing financing and political risk insurance for energy and infrastructure projects in the region through the Overseas Private Investment Corporation and the US Export-Import Bank. As part of this initiative, the US government recently established The Caspian Financial Center in Istanbul, staffed with employees of OPIC, US Ex-Im and The US Trade and Development Agency. (For more information on the Center, see the website at www.caspianfinance.com.) OPIC’s first political risk insurance contract for a capital markets financing was also recently issued for a project in Turkey.

by Joel Baranowski and Peter Fitzgerald, in Washington