Turkey has set terms of guarantees to be granted to companies permitted to build 29 small and medium-sized power plants to help cover its electricity deficit, according the comments from an industry source reported by Reuters on Thursday.

The source told Reuters the treasury agreed to grant five-year guarantees to companies, which will carry out the projects on the built-operate-transfer (BOT) basis through international financing with the help of the guarantees.

“The guarantee can be extended if the loan’s maturity is longer than five years. In the remaining years, the treasury would only guarantee Turkish Electricity Generation and Transmission Corporation’s (TEAS) actual purchases,” the source, who asked not to be named, said.

The issue of guarantees has been a stumbling block for potential overseas investors, who are urgently needed to construct new power plants in order to relieve a growing power shortage in Turkey. The energy ministry have been at odds with their Treasury counterparts over guarantees since the IMF imposed restrictions as a condition associated with a $3.9 bn loan for economic reforms.

Turkey also plans to open its energy market to the private sector by licensing some coal-fired power plants and several distribution grids for an expected income of $1.95bn. These projects also need treasury guarantees, but the Council of State, the highest arbiter, objected to guarantees. The schemes face cancellation if they fail to meet an October 31 deadline.

Energy Minister Zeki Cakan has said if the plants are not privatised the government will have to invest $1.98bn to improve their technology to avoid energy shortages, thus increasing the burden on the treasury.

Companies awarded operating rights are not hopeful of receiving guarantees for electricity grids due to the court’s view they should only be granted to 29 schemes.

The industry source said a decision on these 29 projects could be expected by the end of this month. “The treasury’s offer has been submitted to companies involved in 29 BOT projects. A solution is expected by the end of this month,” he said.

An electricity market law passed in March mandates that the $1.5bn, 1379 MW BOT projects should become operational before the end of 2002 to benefit from guarantees.

While Cakan said only 500-600 MW could be operational before end-2002, the industry source said companies were determined to complete all projects if guarantees were provided.

Should treasury guarantees not be granted, the companies said that they would seek international arbitration.

With a growing population and a low per capita electricity consumption, Turkey has become one of the fastest growing power markets in the world. Projections by TEAS indicate that over the next 15 years, electricity demand growth could reach ten per cent per year. Analysts believe this figure to be too high, with eight or nine per cent a more realistic figure.

The energy ministry believes that this requires an investment of at least $3-5bn per year. Much of this investment must come from the private sector.

The approval of BOT projects ran into legal problems when a court ruling deemed them to be ‘public concessions’ and therefore subject to judicial review. This slowed the implementation of many BOT projects, but a change in Turkish law last year, means that power projects are now classified as ‘commercial agreements’, helping to pave the way for multi-million dollar investments in the country.