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Turkey: Project Finance Is Getting Too difficult For Thermal Power Plants – OpEd


Coal field royalty tenders are in line with expectations these days. Companies get the rights to operate coal fields in order to build new thermal power plants nearby. They will build thermal power plants with technology appropriate to fire local coal, generate electricity, sell to the local market, get revenues and pay unit rental royalties to the treasury for the next 49 years.


In order to reach this target, investors have a four-year construction period and maybe two to three years to secure project finance and select the appropriate contractors to build the plant. Investors do not have the time. Investment money is scarce and very precious. They are expected to contribute to the overall cost with their own money. They have to stick their neck out and share around 20- 30% of the project financing risk by contributing their own company sources.

The remaining 80-70% of the project cost is sourced from international financial markets. Investors look for financing packages from reliable contractors with the appropriate technology at the cheapest price and payment terms. They look for a return on their money in the shortest possible time period.

In order to secure project finance they have to work with the best consultants to prepare the necessary “due diligence” and “environmental impact assessment” (EIA) reports to present to financial markets. We are taking about billions of dollars of project financing. Investors must find a trusted team of international advisors to secure the necessary project finance. Expensive “road-shows” are organized for this purpose.

For such bankable upfront reports, a few million dollars are spent to convince the international finance institutions to put money into the project. There are no shortcuts; even if you release an “EIA is not necessary” law, markets would still require you to submit a bankable EIA for the interested parties and funding agencies to review. Those reports are much more serious than our locally made reports. All kinds of technical-political-social risks are investigated very seriously. Advantages and disadvantages are clearly stated, net return, social impacts, political risks, and return on investment are all clarified in detail. For more information on the EIA procedures, one should read the annual “IFC bankable EIA” document.

With reliable and bankable due diligence and EIA reports, the credit rating agencies call for international project finance to construct the thermal power plant. The reports clarify project costs, risks, interests, repayment period, and grace period for interested international financial institutions.


In the end, financial institutions with some extra money may become interested in the project. They come together and create a partnership to share the risks and revenue. For the co-financing, they form a consortium to work together to realize the project. The consortium is made public through media sources. All participants, engineers, lawyers, and financiers get acrylic plaques called “tombstones” to commemorate the closing of the project finance. Your writer also has a few of them on his work table. A nearly 1,000-page financing contract is written with the risks, revenues, guarantees, and penalties clearly stated. For all risks, each risk parameter is specified and clearly priced. Lawyers, funders, engineers—everyone earns money.

In order to receive international funding, it is necessary to have certain minimum financial political social conditions in the country. Free, competitive, transparent market conditions are to be secured. The “rule of law” is to be maintained. Laws, rules, and regulations should not be changed arbitrarily. International laws are to be recognized and local laws are to conform to international norms, i.e. European Union norms. The rule of law, separation of powers, freedom of speech, transparency, competitive tendering, are very important in order for local markets to attract project financing. Corruption and bribery are to be avoided by all means.

It is our sincere feeling that there is an ongoing, informal, undeclared ban on international financing for domestic investment projects due to the new prevailing not-so democratic climate. If these needed investment norms are not met in the local market, then risks increase, the country’s financial ratings get lowered, project premiums (i.e. interest rates) increase, and the appetite for investment toward that market falls. Projects cannot attract the attention of international funds. If a market is in a mess, if risks cannot be clearly identified, if laws/rules/regulations are arbitrary or unreliable, if there is no freedom of speech, if there are corruption rumors at the top, then international project financing institutions will be reluctant to get involved. Funds become inaccessible. Money sources dry up.

In this case, what happens when East Asian companies get interested and involved in those projects in a high risk climate? Nowadays, we see very cheap turnkey proposals for the thermal power plants from those sources financed by their export-import banks. There is always an accumulated high price in return. These companies put down their own terms on the negotiation table.

They dictate their own terms, and insist that the local investor accept all of them; they wait patiently till the end. They have limited or even no flexibility in their terms most of the time, no guarantees, no penalties, and very limited liability terms in their contract. There is no change in their contract terms. They wait until the investor accepts all as submitted. There is almost no bargaining power in the hands of the local investor. It is a trap, and investor must accept it because there are no other options.

A bankable EIA report is not important for them. It is only important that you accept all their loose contractual terms. The wording in plant guarantees, efficiency, performance, availability, delivery terms, delay penalties are all meaningless. Most of the time there are no necessary spare parts or spare equipment to ensure the power plant’s continuous, smooth operation. They do not use our standard contract terms available in our public institutions.

The simplest contract term for a “two-month uninterrupted trial period” does not exist in the final contract. It’s all intentionally ignored so that the plant cannot be rejected in case the plant fails. You have no right to insert your own contract terms. The initial price may be very low. But in the end, the project’s final, cumulative cost is not cheap at all. Environmental protection equipment, dust collection filters, and sulfur retention systems are inadequate. Combustion efficiency is lower than market norms. The designs are not tested nor proven to be able to fire local domestic coal over long-term operation. Contractors complete their two-year probationary operation and immediately leave the site. The owner is left with a problem-ridden plant incapable of operating without interruption.

Investors, those owners of the plant with similar experience all around the world, do not reveal information about their problems. Fearing a loss of reputation, they hide their problems—even as matters get worse—and finally they turn to rehabilitation, re-powering, and renovation and spend more money to upgrade their power plants.

In the past, these contracting companies would bring their low-cost workers from their own country to do civil construction, foundations, and the plant’s site installation. In recent years, legal regulations have been passed to stop the use of foreign workers. Now, all construction and site installation works are carried out by domestic companies who would offer cutthroat low prices. In any case, it provides some opportunities for local employment.

The money allocated to foreign investment is very valuable and not easy to put together. Money is not easily earned anywhere. Project financing for billion- dollar thermal power plant investments is a very serious activity. Hence market direction, public regulation and serious limitations are to be enforced to secure the proper spending of investors’ public money. So it is all our prime responsibility to restore the necessary international investment norms and preconditions in our local environment.

Haluk Direskeneli

Haluk Direskeneli, is a graduate of METU Mechanical Engineering department (1973). He worked in public, private enterprises, USA Turkish JV companies (B&W, CSWI, AEP, Entergy), in fabrication, basic and detail design, marketing, sales and project management of thermal power plants. He is currently working as freelance consultant/ energy analyst with thermal power plants basic/ detail design software expertise for private engineering companies, investors, universities and research institutions. He is a member of Chamber of Turkish Mechanical Engineers Energy Working Group.

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