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Turkey enjoys an optimal geographic location for developing solar power plants with the average daily solar insolation of 2,640 hours, and average daily solar radiation of 1,311 kWh/square meter. Yet its solar potential remain unexploited. The Turkish government has been formulating policy changes to encourage solar generation, not necessarily because it is the most environmental-friendly electricity generation system, but also (and primarily) because of its need to diversify its energy portfolio, which is currently dependent on fossil fuels.

According to the information available on the web site of the Unlicensed Electricity Generation Association, a total of 1995 unlicensed solar electricity generation applications have been accepted by Turkey’s Energy Market Regulatory Authority (“EMRA”), with a total installed capacity of 1,476 MW since the introduction of the “unlicensed electricity generation” concept at the end of 2010. However, there is not any available information on how many of the 1995 applications actually became operational.

The process with respect to licensed solar electricity generation activities, on the other hand, has been introduced more recently. In June 2013, 496 solar pre-license applications were received by the EMRA for the first time, for a total capacity of 600 MW, divided into 27 regions. Currently, only three pre-licenses have been granted by the EMRA as a result of those applications, and none of those solar power plants have become operational. 

In general, legal entities wishing to conduct electricity generation activities can submit pre-license applications to the EMRA at any time of the year. However, pre-license applications concerning wind and solar electricity power plants can be made only at pre-determined periods. According to applicable legislation, the Turkish Electricity Transmission Corporation (“TEIIASS”) should inform the EMRA before April 1st every year of the capacity available for the connection of electricity generation facilities based on wind or solar energy to connection points and/or on a regional basis, for the following five and ten years. As per the information provided by the TEIIASS, the EMRA should accept pre-license applications based on solar energy within the last five business days of October each year. As an exception to this rule, in 2015 (as they were in June 2013), pre-license applications based on solar energy will be received by the EMRA on April 1, 2, 3, 6, and 7.

Since solar pre-license applications are made only in relation to pre-determined connection points and/or regions, it is highly likely that there will be more than one application for the same connection point or region. In such cases, the TEIIASS holds a competition to determine the applicant(s) that would be connected to the system. The determination is made based on the highest bid per MW submitted by the pre-license applicants. The winning bidder is obliged to pay the contribution amount, which is to be calculated by multiplying the installed capacity of its project with its bid per MW. The contribution amount should be paid to the TEIIASS within the first three years after the relevant generation facility becomes operational. 

After receipt of the first set of pre-license applications by the EMRA, the TEIIASS held competitions with respect to the so called first, second, and third packages. The competition with respect to the first package was in relation to two of the 27 regions (namely 24-Elazig and 26-Erzurum), and was held on May 12, 2014. The competitions with respect to a total of nine additional regions (4-Antalya, 5-Antalya, 9-Burdur, 14-Mugla/Aydin, 16-Denizli, 22-Siirt/Batman/Mardin and 25-Sanliurfa/Diyarbakir within the second package and 1-Konya and 2-Konya within the third package) were held on January 29 and 30, 2015. Although there is no time limit set forth under the legislation, the TEIIASS is expected to hold competitions for the remaining 16 regions (357 MW in total) within the first half of 2015.

The highest bid submitted for a region within the scope of the first three packages is TL 2,510,000 (approximately USD 1.04 million) for the 1-Konya and 2- Konya regions, and the lowest winning bid is TL 68,000 (approximately USD 230,000) for the 26-Erzurum region. The successful winning-bidder legal entities of the first package were granted pre-licenses on November 20, 2014. If everything goes as planned, one of them is expected to obtain a generation license around the end of 2016, and the other within the first half of 2017. 

The aim of the Ministry of Energy and Natural Resources is to have solar power plants with a total installed capacity of 3,000 MW by 2019. In line with this ambitious aim, it is a very lively time for the Turkish electricity market. The TEIIASS is expected to hold competitions for the remaining regions, and the second set of solar pre-license applications would be received by the EMRA within a couple of months. The competitions already held by TEIIASS prove that investors are very keen to be among the first to be licensed to generate solar electricity in Turkey. 

We are hopeful that the problems faced with respect to the first set of solar pre-license applications will not be repeated, and that an established practice encouraging especially foreign investors regarding the implementation of the applicable legislation will be developed soon. Supported by solar-energy specific policies and with significant technical developments that reduce investment costs, solar power may become a solution to many of our energy-related problems. 

By Jayse Hosta Okyar and Ebru Unal, Senior Associates, Herguner Bilgen Ozeke

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Legislative Developments

The area of Hungarian domestic energy law went through various important changes as the result of several significant legislative amendments that entered into force at the end of 2014. The nature of these changes makes it essential that industry participants become familiar with them.

Laws on electricity and natural gas supply were amended and the legislator introduced strict requirements relating to organizations certifying IT systems used by energy market participants for the issuance of invoices. These certifying organizations are required to meet new minimum requirements: (1) they must be accredited for a minimum of 3 consecutive years, (2) they must have at least three references, with at least 2 coming from adequately educated/trained professionals with at least 2 years of certification experience, and (3) they must obtain a “security certificate” for their branch offices (if any). According to market information, it is likely that only a few organizations are capable of meeting the new requirements. Industry participants should be aware that an invoice issued from a system that has not been properly certified shall be deemed invalid as of February 28, 2015 or June 30, 2015, depending the number of invoices to be issued by the respective industry participant. 

The amendment of the Act on uniform image of invoices of public service providers also entered into force at the end of 2014. This amendment introduced smaller technical changes relating to mandatory content requirements of the invoices issued by public service providers. The aim of this amendment is to facilitate the easier identification of the invoices and to assist in the provision of a wider range of information. Industry participants are obliged to harmonize their billing practices with the new requirements, as failure to comply could result in serious sanctions against infringers.

The so-called “network access fee” is also affected by the new regulatory developments. Under the previous regime, a two-tier regulatory system applied to the network access fee, and regulatory competence was divided between the competent minister and the president of the Hungarian Energy and Public Utility Regulatory Authority (HEPURA), which made regulatory transparency quite problematic. The legislator, in order to remedy this situation, discontinued the two-tier regulatory system, and the network access fee is now determined by a single decree issued by the president of the HEPURA.

In addition, the licenses issued pursuant to the Act on natural gas supply have been also amended so that property rights over natural gas kept in natural gas storage operated as a public customs warehouse may now be freely transferred and no natural gas-trading license or limited natural gas-trading license is required for this purpose. 

Prospective Challenges. 

The Hungarian energy market is facing major changes in the short and mid-term, and this presumably will result in the subsequent modifications of energy laws.

Hungarian Government Entering the Market. 

On the domestic level, it is significant that the Hungarian Government intends to establish a national utility holding company in 2015. A recently published Government Decree appears to reflect this intention, as it calls upon the Minister leading the Prime Minister’s Office to examine the options the Hungarian Government has to enter the electric supply and district heating market (as a universal service provider). The Minister, in accordance with the requirements of the national public utility system, is obliged to introduce a proposal to the Hungarian Government containing the most viable options.

EU Regulatory Developments. 

In the medium term, from the Hungarian energy market perspective, it will certainly be of great importance that the European Counsel recently approved the policy framework for climate and energy up to 2030 proposed by the European Commission (describing concrete goals in relation to the reduction of greenhouse gas emissions and the increase of the ratio of the use of renewable energy) and adopted implementing regulation on so-called REMIT data reporting requirements prescribed by Regulation (EU) No 1227/2011 of the European Parliament and of the Council on wholesale energy market integrity and transparency by the European Commission. 

By Pal P. Takacs, Partner, and Balazs Hegedus, Senior Attorney, Kajtar Takacs Hegymegi-Barakonyi Baker & McKenzie

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Market participants of the Hungarian capital market have witnessed some substantial developments recently. First of all, the Central Bank of Hungary took over the supervisory powers of the Financial Services Authority. Second, one of the biggest discount airlines in CEE, Wizz Air, which was planning to be listed on the Budapest Stock Exchange (“BET”), shut down the process at a late stage due to market volatility issues.

Quite the reverse happened to Btel, as shortly after being classified to the BUX-basket (a selection of shares on which the official stock market index of shares listed on the Budapest Stock Exchange is based) the telecom company was fined by the Hungarian watchdog, which resulted in its being placed on the lower (“standard”) category of the BET. 

Although it certainly was not the best year for the Hungarian capital market, private markets performed pretty well. A number of venture capital accelerators and entrepreneurial societies were established, encouraged by success stories such as Prezi, Ustream, and LogMeIn. These companies followed very similar strategies: establishing on a Hungarian intellectual basis and expanding towards well-developed economies (maybe supported by a listing on a major stock exchange), while preserving a substantial market presence in Hungary. As a result, more than 100 venture capital and private equity-related investments were realized between Q3 2013 and Q3 2014, demonstrating that the VC/PE environment is market friendly and continuing to develop. 

This environment has also been boosted by legislative measures – primarily the composition of a comprehensive and (more importantly) a consistent regulatory framework. Investment fund regulation in Hungary is not separated by the type of the funds, but is compressed into one coherent act. Moreover, this act – Act XVI of 2014 on Collective Investment Forms and Their Managers – provides small venture capital and private equity fund managers with eased provisions regarding capital and organizational requirements, administrative and technical requirements, and valuation methods, in order to reduce fund operation costs. Additionally, the new Hungarian Civil Code introduced the concept of a fiduciary asset management agreement, which is a similar legal institution to a trust. Under a fiduciary asset management agreement, a fiduciary asset manager undertakes to manage the assets entrusted to him/her by a principal in his own name and on the beneficiary’s behalf, and the principal undertakes to pay the previously agreed fee. Despite the fact that the Hungarian market has not yet experienced how this alternative investment solution will work in practice, it is worth pointing out that fiduciary asset managers may easily generate severe competitive pressure on classic fund or asset managers. 

In summary, while the Hungarian capital market in the classical sense did not perform well in 2014, the private equity/venture capital markets are strong, so start-uppers/entrepreneurs can find the forms that fit them best in a genuinely innovative, fizzy environment, and should strongly consider scanning the Hungarian VC/PE market for investment and fund raising opportunities. 

By Zoltan Hegymegi-Barakonyi, Managing Partner, and Barnabas Simon, Associate, Kajtar Takacs Hegymegi-Barakonyi Baker & McKenzie

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

CMS recently celebrated 25 years of presence in Hungary. CEE Legal Matters sat down with Gabriela Ormai, the Managing Partner of the Budapest office, for a walk down memory lane. In light of the office’s acknowledged strength in banking/finance, we took the opportunity to discuss the many and controversial developments in that sector this year with the firm’s Banking/ Finance Head, Erika Papp.

G.O.: Like many stories that date back so long, this one starts with a young man, Douglas Wardle. In the summer of 1989, he was sitting in Greece on the beach and was reading about what was happening in Eastern Europe. When he went back to London, he spoke to the Partners at McKenna about the need to set up operations in the region. 

On our end, on April 1, 1989, we opened our office here in Budapest. Due to specific limitations at the time, it was difficult to join the Budapest Bar and we were part of a separate “secondary-if-you-wish” Bar – called Bar of Legal Advisors, which had us registered, like everyone else, as a simple number. If I recall right, we were “Legal Advisors Office No. 113.” My first client was the foreign trade company “Komplex,” and we soon started working for Samsung Electronics, which had just started a joint venture in the country. It was that summer that I met Douglas and, a few months later he showed up with a big box of files and said I should review it all and give him a report – it was the first due diligence report we carried out, since no one in Hungary at the time was working on such matters. After finalizing that project with him, we set up a cooperation agreement with McKenna. I still recall fondly how he brought his supervising Partner, Robert Windmill, to Budapest, and I remember Robert saying that we needed to have an office 10 minutes walking distance from the Stock Exchange and me replying simply: “There isn’t one in Budapest.”

G.O.: From one person in 1989 we grew to six lawyers by 1996. In the first 2-3 years the privatizations going on in the country provided much of the work. We were initially working for the state privatization agency but then changed to “the other side,” working primarily for investors. The move seemed like a natural one, since the aim was to keep the clients following the privatization process, and we were positioning ourselves well to do so since we were able to identify potential issues during the due diligence process and, as a result, were best equipped to support them in managing them after the acquisition was completed. That’s really the mechanism through which we started building up our “day-to-day” advisory practices. 

In 1996, we decided to take it to the next level and moved our office into the Bank Center. What followed was a period of very strong growth, which allowed us to reach 30 lawyers by 1999. This was also the period when we started to dedicate people to different practices – a rather natural evolution in light of the growth.

G.O.: The economy definitely helped, and so did our interaction with London, with considerable amounts of work coming from there, but I think we had reached a “hungry” phase where we were very active in acquiring work on our own. 

G.O.: By 2000 we had all the practice groups we have now: Banking, Property, Energy, Corporate and Commercial. It really was steady growth from that point on (with the exception of a slower period between 2001/2002) and by 2005 we increased our headcount to 49 lawyers. In 2005 we started creating what we call “specialist areas within the Commercial practice group: IT, IP, Competition, Employment, Litigation, Tax, etc. We reached 60 lawyers in 2008, and the number has stayed steady between 60 and 65 until today, with 10 partners. 

G.O.: A global footprint, including in the CEE region, is definitely a driving force at a macro level. I think many of the firms that left followed the privatization work, and I am unsure how many planned a long-term presence after it dried up. We had a different model in that we didn’t focus only on that business. Out of the 65 lawyers currently in our office, 30 are working in our CDR team (commercial, dispute resolution), which also includes tax, employment, life sciences, public procurement, competition – all areas that clients need on a day-to-day basis. 

This means that even in cases of economic slowdowns when big transactions disappear there are plenty of other sources of work, and we have the capabilities to refocus based on the market. For example, our banking team is now more focused on restructurings and regulatory work, the property team focuses on property litigations, the energy team was small enough to have enough work, all this while the commercial day-to-day team was kept busy. I have to admit, I did not advertise our approach in London too much since the City was heavily transactional-work-focused as well – we just did it. 

E.P.: The reality is that, when I joined in 1996, CMS was already identified as a banking firm. Yes, we were working on other areas as well, but with the existing base on banking, it was not hard for me and my Partner Alex Doughty to take the team that Gabriella led and had grown until that point and develop it further, especially since the booming years helped considerably. After 2008, growth went in a different direction. We had to refocus a bit, but once that was done, a lot of work on liquidations and insolvency kept us busy. At the same time, it helped that the team over time had developed regulatory capabilities in banking, not just transactional, which has been one of the USPs that helped greatly both in terms of growing during the good years and not being hurt by the bad. Not many firms focus on this side as well. 

Implementation of certain EU regulations such as the AML, AIFMD, BRRD and other EU directives tends to be seamless, and it comes down to supporting our clients on understanding them and providing them with sound and informed advice. Hungarian regulations have been a bit more dramatic in 2014, since Hungarian financial institutions were effected by new legislation requiring them to change their FX portfolios into HUF and there were new laws setting up parameters for “fair banking.”

E.P.: If I had to pick one, I’d say the most challenging aspect is that some of our clients are leaving the country, and I’m thinking here of players who have been in the market since the 80s and 90s, meaning that some of them have been our clients for 10-20 years now. Their exits are not just challenging in terms of advising them how to sell, but can also be quite emotionally challenging, since we feel we are losing a partner with whom we’ve worked a great deal. 

In terms of what I think might be the most interesting for me as a lawyer, I’d probably point towards portfolio transfers, which these days tend to be sold out piece by piece. The tricky aspect here is caused by the fact that the legal framework under which such transfers should be carried out is a bit unclear. 

G.O.: To illustrate that, the portfolios need to be sold, but there is a big question mark in terms of what happens with the hundreds, if not thousands, of ongoing litigations. It is uncertain now if many of them will be suspended or terminated as a result of recent legislation. 

E.P.: Project finance is not in a good state for sure, with banks being quite cautious as a result of recent regulations and the bank tax. There are some initiatives that are trying to put some life into lending. Having said that, there is a bit of movement on the property financing market, with 5-7 considerable ongoing cases at any point. This is a result of some players leaving and being by others, who are pulled in by the low prices. 

E.P.: The simple answer to that is that it is not a regulated market meaning that this type of risk is lowered considerably.

E.P.: Much of the impact of the regulatory changes I mentioned has settled down by now. There are still some pending administrative tasks to be concluded, but generally things should be calmer. One interesting aspect will be the new SPV set up by the Hungarian National Bank (called “Mark Zrt.”), through which the National Bank will offer to acquire institutional troubled assets.

G.O.: By releasing these bad debts, in theory, the loans market should ease as well, and if good projects come along, we might see some financing work – but in many sectors these projects are simply not in the pipeline  (although we see some manufacturing and export finance deals happening).

G.O.: At the end of the day, new deals are coming in, and there still is quite a bit of movement. Yes, there will be consolidations, but even in banking these portfolio transfers will keep us all busy. At the same time, litigations are always going to keep us busy also – many clients are contemplating investment arbitrations as well – and there is work to be done even before the decision is made in order to explore the variety of solutions.

Lastly, we’ll continue our approach of specific sector focus and we are strengthening our cooperation throughout the region to maximize the large number of panels that CMS is already a part of globally. 

We do need to put quite a bit of work in each local market to get even the work from these panels since, if we are not working with the local people, we stand to lose a lot of work. That considered, I’m quite optimistic about our upcoming 2-3 years, despite the uncertainties in the market.

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Following Russia’s “annexation” of Crimea in March 2014 and the ongoing fighting in eastern Ukraine, a swathe of western powers, including the EU, US, Canada, and Japan, imposed a range of sanctions targeting the Russian economy. The Russian energy sector has been amongst the hardest hit.

The three main Russian energy companies – Rosneft, Gazprom, and Transneft – were targeted on two fronts in the September 8, 2014, round of EU sanctions. First, the EU prohibited the supply into Russia of certain oil- and gas-related equipment, technologies, and services for use in specified projects. Second, the EU impeded the ability of these companies to fund both existing and future projects by restricting access to EU financing.

So what has this meant for the Russian energy sector, and what is it likely to mean in the future?

Autumn 2014 saw two global energy majors, ExxonMobil and Shell, announce their suspension of joint projects in Russia, and leading offshore rig company Seadrill suspend its cooperation with Rosneft, forcing Rosneft to announce that it would continue its Arctic development projects on its own. Other Russian companies have sought to step in and fill the voids that have been left in such projects, but major Russian players are also looking further afield for viable new partnerships.

In May 2014, Gazprom signed a USD 400 billion landmark gas supply agreement with China, while Rosneft is continuing to invite both Chinese and Indian companies to join Russia’s top projects. The construction of pipelines that will connect Russia to Asia, such as the Power of Siberia and Altai pipelines, have become a priority, contrasting sharply with the loss of interest on the South Stream pipeline that was intended to further connect Russia with Europe. 

China and India are not the only beneficiaries, however. Rosneft closed a deal to acquire Kyrgyzstan’s Bishkek Oil Company in October 2014, consolidating Rosneft as a considerable market force in the country. South Korean companies have expressed their interest in participating in the financing of petroleum projects in Russia, and Rosneft has agreed to establish a joint venture for the development of hydrocarbons in the Arctic with PetroVietnam. Brazil and Mexico have shown an increasing openness to Russian energy firms as well, and Gazprom is discussing a cooperation agreement with Argentina’s state oil company YPF.

Nevertheless, it is clear that the deterrent effect of sanctions is not confined to European and American companies. Energy companies from other regions are also exercising caution in light of the political and economic uncertainties in the region. India’s ONGC reneged on the proposed acquisition of a stake in a major Russian LNG project immediately following the introduction of EU sanctions, and although they did not identify the sanctions as the reason for the withdrawal, the timing would appear to be more than coincidental. 

Kuwait Energy Company recently sold all of its assets in Ukraine – symptomatic of the downturn of business in the region. The economic and political climate in Ukraine, previously a steady and reliable trading partner, is clearly also having an impact in Russia. 

Russian energy companies are therefore losing a substantial amount of revenue for reasons that a year or two before would have been unimaginable, and they are being forced to rapidly adjust their biggest projects against the sudden lack of foreign technology and funding. 

Russia, true to form, is trying to put on a brave face.  

Gazprom has announced plans to boost its investments to RUB 1.026 trillion this year, and Rosneft plans a 30% increase of its 2015 investment program.  

Despite their confident budget announcements, Rosneft and Gazprom have challenged the legitimacy of the EU sanctions and have admitted to sizeable declines in profits for 2014. Further, in October 2014 Rosneft publicly requested financial aid from the Russian government, claiming RUB 2 trillion (USD 49 billion) is needed to address being locked out of international capital markets and the substantial foreign currency debt maturities that it is facing in 2015.  

As if the sanctions were not enough for the Russian economy to bear, in yet another cruel twist of fate the OPEC cartel has abstained for several months now from cutting its production of oil, creating a significant glut in the market. Oil prices have tumbled worldwide, and since oil and gas sales represent half of Russia’s national budget, the Russian economy has too. If Russia decides to stop pumping oil in an attempt to reduce supply, the country’s wells will freeze. Further, there are no viable storage facilities for the extra oil. Russia seemingly has no choice but to continue putting this oil on the market, even if the current price it will sell for is about half of what the country needs to support its economy. 

Unfortunately for the Russian energy sector, it seems that America (and by extension therefore, the EU) has no plans to lift its sanctions anytime soon. EU sanctions are to be extended to September 2015, with Western attitude towards Russia and its perceived involvement in the Ukrainian crisis still cold. In the absence of a lasting political solution in the region, it is questionable whether sanctions will in fact be lifted in 2015.

Russian energy companies know that they cannot count on the government to bail them out of this situation. Insisting on going it alone is also not an economically sustainable option. In the longer term, the Russian energy sector will find a way to continue developing without the cooperation of western players and will instead likely enter into partnerships with Asian and Latin American investors. 

The West has seemingly turned its back on Russia and so Russia has decided to look elsewhere. It remains to be seen whether Russia will welcome its Western partners back with open arms if and when the sanctions are lifted. 

By Jean-Francios Marquiare, Managing Partner, and Gregor Kennedy, Senior Associate, CMS

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

With an expected growth rate of 3% in 2015, Turkey has one of the fastest growing economies in the world. This growing economy has translated to a growing demand for energy. Gross electricity consumption in Turkey in 2012 reached 242.4 billion kWh, and increased by 1.3% in 2013. Electricity consumption is expected to increase by 5.5% annually and reach 375.4 TWh in 2020.

However, the rate of local energy production is too low to cover the increase in demand, and thus Turkey is forced to depend on energy imports – primarily of oil and gas. As a result, increasing domestic electricity generation capacity is a priority for Turkey. 

Priorities 

In 2009, the High Planning Council adopted the Electricity Energy Market and Supply Safety Strategy Paper, which established the following general policies: (i) an increase in the variety of resources with an emphasis on local resources, (ii) an increase in renewable energy resources’ share, and (iii) an increase in energy efficiency.

By implementing these policies, Turkey aims, by 2023, to have: (1) all local lignite and coal resources used for electricity energy generation; (2) two nuclear power plants operating and the construction of a third nuclear power plant begun; (3) the share of renewable energy increased to 30%; (4) total hydroelectric potential used for electricity generation; (5) established wind energy power increased to 20,000 MW; (6) a total of 600 MW geothermal potential in use; (7) established power capacity for electricity energy exceed 100,000 MW; and (8) total electricity generation increased to 440 billion kWh.

Liberalization

Historically, state-owned enterprises have dominated the domestic production of energy in Turkey. However, the need to satisfy demand in the energy sector and increase the use of domestic resources requires increasing the involvement of the private sector. The milestone for the liberalization in the energy sector was the enactment of the electricity market law and establishment of the Energy Market Regulatory Authority in 2001. In this new era, the energy market opened up to competition (albeit not to the complete satisfaction of the private sector). A second set of material regulatory changes came with the new electricity market law in 2013 and its secondary legislation. The private sector awaits a fully liberalized and competitive market to be effected under this legislation.

Currently, approximately 33% of domestic production is carried out by EUAS, a state-owned generation company. However, privatization of the state-owned generation assets operated by EUAS is ongoing on a portfolio basis (i.e. investors bid for portfolios rather than individual plants). The portfolio groups have prepared by taking into account factors like market share, geographical location, and certain common factors such as shared coal reservoirs. The share of greenfield projects by the private sector has also increased steadily since 2006.

As for distribution, 21 distribution regions in Turkey have been privatized through the transfer of operation rights agreements with TEDAS, the state-owned distribution company. Transmission activity, on the other hand, is conducted as a monopoly by TEIAS, a state-owned transmission company, and it is not expected to be privatized. A further increase in the involvement of the private sector is expected as per Turkey’s energy policies.

Renewables

Since 2010, diverse incentive schemes have been implemented in the renewable energy market in order to encourage the use of renewable energy resources. The renewable energy generators commencing their operations before December 31, 2020, can benefit from a purchase guarantee over the feed-in tariffs (which includes an additional domestic equipment incentive) for 10 years. Other incentives include priority in connecting to the national grid, discounts in applicable license application fees, exemption from annual license fees for 8 years following the commencement of commercial operations, and facilitation in the use of state-owned lands.

Water has been the leading renewable resource, but wind and solar are also expected to have considerable market share in the near future. An important set-back for increasing the available wind and solar capacity is the limitation of the grid infrastructure, and network expansions are necessary to integrate more wind and solar resources into the market.

By Gozde Cankaya, Counsel, and Irem Su, Senior Associate, Yegin Ciftci Attorney Partnership

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Although mid-market M&A activity was dynamic in 2014, the overall market was primarily driven by privatizations such as the National Lottery and Kalamis Marina. Certain private sector deals – such as BBVA’s minority stake acquisition in Garanti Bankasi, Khazanah’s acquisition of Sabiha Gokcen, and Anadolu Holding’s Migros acquisition – were also significant. The total estimated value of 2014 M&A transactions  – about USD 20 billion – was increased compared to 2013. Outbound investments, such as Yildiz Holding’s acquisition of United Biscuits, were also noteworthy. Investors showed interest in the consumer goods and retail, financial services, energy, and infrastructure sectors.

Although strategic investor activity dominated the number/volume of M&A, the activity of financial investors was also considerable. Private Equity houses continued to be selective for new acquisitions, focusing on expanding through small/mid-size add-on investments and diversifying by replacing other funds in exits. Venture capital was directed towards TMT (i.e., e-commerce/payment systems). International financial institutions such as the EBRD, IFC, and GS, also made notable minority stake investments in Turkey. 

Highlights on Investments & Exit Transactions by Financial Investors

Noteworthy transactions by financial investors and PE houses in 2014 included: the co-investment of the EBRD and Abraaj in Yorsan; EMF Capital Partners’ and Deutsche Investitions’ acquisition of Aviva; Esas Holding’s and Actera’s co-acquisition of U.N Ro Ro; the EBRD’s EUR 125 million investment in Pasabahce; the IFC’s USD 170 million investment in Gama Enerji; the Partners Group’s minority investment in Enerya; Abraaj’s minority stake acquisition in Hepsiburada; and Goldman Sachs’ USD 250 million acquisition of a 30% stake in Petlim. 

2014 was also relatively active compared to previous years for exit transactions, which included BC Partners’ exit from Migros, KKR’s exit from U.N Ro Ro, the IFC’s exit from Finansbank, and Turkven’s exit from Tekin Acar. 

2015 Climate/Market Trends for M&A and PE

Considering Turkey’s resilience to the impact of the declining activity in the Eurozone, it appears that Turkey – with its strong banking system and EU-compliant legislative environment – will remain an important regional hub. Turkey’s GDP growth expectations and high population will continue to create high IRR investment opportunities. Activity is currently held back by the upcoming general elections, yet we expect that these positive factors may nevertheless keep the M&A climate vibrant and increase overall activity in Q4. We believe that the sizable/long-awaited privatization of infra-assets (for instance, that of the Istanbul gas distribution company IGDAS), may fuel the volume.

There are various growth opportunities for private equity in Turkey and we expect their appetite to continue. International PE houses were cautious about the Turkish market in 2014 due to the country’s presidential and local elections, and the upcoming general elections and limited number of big-ticket assets may lead to a similar approach for 2015. That said, Turkish PE houses are expected to be more active compared to their large international peers once again due to their greater risk appetite and knowledge of Turkish markets/businesses and acquaintance with local management. 

Mid-market activity will likely continue to increase and be dominated by domestic players. We expect global players to be target/sector specific and focused on sizable transactions. That said, certain global players may diversify their focus and target mid-market deals as well. We expect PE investments to focus primarily on consumer goods/retail, financial services, and healthcare in 2015. Growth areas may also include energy/infrastructure and TMT. 

Almost all assets/investments of Turkish conglomerates are in Turkey and there is a need for risk diversification. Turkish investors are learning to operate from a distance and have observed successful outbound investments, despite their noteworthy passion for close control. Therefore, we expect an increase in outbound investments by Turkish investors in 2015.

We also expect PE houses to adopt buy+build strategies using add-on acquisitions to build market share and generate value through consolidation. PE houses are increasingly considering co-investing with international financial institutions in their investments (e.g. the co-investment of the EBRD and Abraaj in Yorsan), which could also support the increase in overall activity in the Turkish M&A market.

Finally, 2015 may also be a year of exits. Turkven and Actera may kick-start exit plans for their prize-jewels in retail (Dominos and Mars Cinema). 

By Itir Ciftci, Partner, and Kemal Aksel, Senior Associate, Yegin Ciftci Attorney Partnership

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.