The overriding goal of Turkish energy policy is to satisfy demand in Europe's fastest-growing energy market.

The government has started to set the stage for achieving that end by initiating privatisation of decrepit state-controlled energy generation and distribution.

A policy review initiated by the State Planning Organisation - a more enlightened body than its Soviet-sounding name suggests - has found the energy ministry's demand forecasts to be inflated. But even conservative estimates indicate that demand for natural gas is likely to quintuple between now and 2020.

Planners are still however in disarray on two fronts: turning planned private sector energy deals into reality and setting the regulatory framework for an effective market.

In a letter spelling out its development policy to the World Bank, the government announced it intended to "revitalise the energy sector reform programme in 2000 in order to ensure Turkey's energy security at affordable cost."

A big obstacle to achieving energy security at affordable cost in the past has been the Turkish state itself, whose Byzantine machinery has sometimes proved stronger than market forces.

The World Bank, meanwhile, has challenged methods used by Turkey until now to bring private operators into the energy business. In return for a $750m loan to finance energy sector liberalisation, Turkey has agreed to desist in future from awarding costly forms of energy contracts to private sector generators established under the build-operate-and-transfer model. These contracts threaten to bankrupt Teas, the state-owned electricity utility.

Energy bought from the generators by the state for 8 to 9 cents per kilowatt hour is being sold to consumers for 6 cents.

Turkey plans also to swap outright asset sales for its earlier preferred method of leasing generating assets or distribution rights to private operators. But few deals have been finalised since parliament last August approved a crucial constitutional amendment allowing international arbitration in contracts involving the state. This was a sine qua non for encouraging more foreign investment.

The energy ministry has until recently been haggling over terms with a dozen consortia that have signed contracts to distribute electricity and cut energy losses presided over by state utilities. On the generation side, five build and operate plants and ten BOT projects may soon get off the ground once they complete financing arrangements.

The World Bank has forcefully denied persistent Turkish press speculation - thought by some analysts to be motivated by powerful vested interests in less advanced projects - that it has ever sought the cancellation of signed deals. Instead, it says it has sought to discourage projects still in the pipeline and whose electricity output would cost too much and is not urgently needed. "As Turkey has already signed these [15 deals] they should go ahead," says Ajay Chhibber, director of the World Bank office in Turkey. "If all 15 projects go through, Turkey should have enough capacity for the next five years."

Turkey has also undertaken to press ahead with plans to liberalise the gas sector and institute independent regulatory bodies for the energy modelled on those developed in the EU.

eanwhile, and without explicitly saying so, Ankara appears to have laid to rest for the time being the idea of commissioning Turkey's first nuclear power plant. Its latest postponement of a final decision - until the middle of next month - followed the Treasury's refusal to guarantee a project costing more than $4bn. Many critics have argued that the necessary investment would entail a bigger level of indebtedness than Turkey can afford as it seeks to put its finances in order with the help of the International Monetary Fund.

But it is no accident that Turkey, where the state has long had priority over individual freedom, has shown a rare determination in pursuing energy pipeline projects which intersect with the state's geopolitical interests.

Two projects - respectively to ship Caspian oil and gas to western markets via Turkey - would not only secure energy supplies but expand Turkey's regional power. Turkey has also benefited from strong backing by the US, which sees the projects as isolating Iran and enhancing the independence of former Soviet republics from Russia, which dominates existing export routes.

A seminar held last month in Istanbul and attended by senior US and Turkish officials, western and Turkish energy companies and new producers from the Caspian, underscored Turkey's crucial position in energy geopolitics. At the seminar, government officials held the signing ceremony for the last governmental accord needed before the $3bn plan for a pipeline from the Azeri capital Baku to Turkey's Mediterranean port of Ceyhan can be submitted to would-be investors.

"This project has just been transformed from a geopolitical project to a big commercial project," enthused Dan Yergin, chairman of Cambridge Energy Associates, the US think-tank which organised the conference. But as even John Wolf, President Clinton's envoy on Caspian energy, hinted at the conference, it is vital for Kazakhstan to commit additional oil volumes to make the project. He predicted it would. Others are not sure about this materialising before the 2004 deadline by which the US and Turkey would like to see the project completed.

Even the US concedes, however, that prospects seem much less certain for the proposed Trans-Caspian gas pipeline from Turkmenistan to Turkey. Turkmenistan has dragged is heels over agreeing commercial terms put to it by private sector sponsors for the deal in spite of a 2002 deadline for the completion of the project. Meanwhile, Azerbaijan's discovery of natural gas of its own has made Turkmen reserves, which are further away from Turkey and western markets, a less attractive proposition. Finally, Russia and Italy have already begun building a competing pipeline to transport natural gas from Russia to Turkey underneath the Black Sea.

"There are more unknowns than the number of equations in these projects," says one western banker. What is clear is that Turkey is still in the grips of daily power cuts. Ever-growing demand means that sooner or later it will have to set free the forces of private enterprise, combined with proper regulation of the sector as it is liberalised.


Era of the real thing
Sights are set beyond the core
Sector set to undergo sweeping reforms
Here to stay this time


State Planning Organization