HYDROELECTRIC POWER PLANT TURKEY

BUSINESS PROPOSAL
OCTOBER 2010

BUSINESS PROPOSAL

Our client is a corporation assigned by the Energy Market Regulatory Board (EMRB) for
the purpose of energy production. The firm has facilitated and commissioned two Hydroelectric
Energy projects, with a capacity of 15,6 MW and 8,1 MW, via Electric Market License Regulation
and secured operation licenses for a period of 49 years in 2006. The firm is looking for a financial
partnership or a financial take-over of the plants.
The project sites are located on several brooks located in the Western Black Sea Region.
Due to the fact that the region is hilly it is possible to develop relatively higher heads without
expensive civil engineering works, so that relatively smaller flows are required to develop for the
desired power. With regulators constructed on the brooks the whole water potential of the river
beds upstream is appraised. Both projects are run-of-the-river plants, with no storage facility and
consist of a cofferdam, sedimentation pool, derivation channels, compulsory piping, plant building
and tail water discharging canal facilities.
For the completion of construction and hardware works and commissioning of the
Hydroelectric facilities, an application plan of 3 years was considered by the EMRB, starting
from the approval of the production license. In the first year of this duration the firm performed
investigation and drilling works, map and final project preparation, and executed all other
bureaucratic processes such as obtaining required permissions and approvals, preparation of
documents and specifications for construction works and hardware procurement tenders, tender
execution, expropriation of the facility area, renovation of transportation roads, construction site
establishment and mobilization works. In the second and third year of the firms investment plan
construction works, procurement and assembly of electro mechanic equipment, hydration and
test production were done.

Albars Consulting | Hydroelectric Power Plant Turkey

Since both projects generation facilities are based on renewable and domestic energy
resources the firm does not have to pay an annual license fee for the first eight years following
the facility completion year 2010. The government gives a 7 year price guarantee for renewable
electricity production. The projects offer a highly efficient source of renewable energy and a quick
return for investors. Expected returns on investment for these projects are expected to be around
20% for reasonable investors. Operating costs are low, nearly 0.02$ kilowatt per hour.
Comparison of Financial Indicators
Parameters

Unit

Data value Project A

Data Value - Project B

Installed capacity

MW

8,1

15,6

Grid connected output

MWh

43

64,7

Income tax rate

20

20

Interest rate

9,5

9,5

Economic Life Time

Years

50

50

Exp. Annual cost

1.965.243

3.381.183

Exp. Annual benefit

3.458.400

5.176.000

1.76

1.53

18,51

16,46

Benefit/Cost Ratio
IRR

By virtue of having established the Hydroelectric Power Plants, the firm commands the
necessary capital resources to operate the hydroelectric power plants. Our client firm searches
either for a financial investor to take stake in the company for 50 percent, or, a financial takeover
of the company with a minimum capital investment of 130 million USD. Purchase price and
stakeholder structure are negotiable.
Enclosed is an overview of the Hydroelectric Industry in Turkey, and related regulations
and incentives. Since the firm prefers to stay confidential, no preliminary technical or
geographical information is given out in this proposal. However, please feel free to contact us to
discuss additional information with you in person and/or to discuss any possibilities of a financial
business partnership with our client.
Ramazan Arslan, Attorney-at-Law
Founding partner of Albars Consulting

Albars Consulting | Hydroelectric Power Plant Turkey

TURKEY: RENEWABLE ENERGY

Because of social and economic development of the country, the demand for energy and
particularly for electricity is growing rapidly in Turkey. Turkish major sources of energy are oil
(28%), coal (34%), natural gas (30%), hydro energy (5%) and others (9%). Although Turkey is
very rich in natural energy resources, the country is a large importer of primary energy. Since
Turkey does not possess large oil and gas reserves and annual coal production is not enough, 70
percent of the energy needs have to be satisfied by imports and alternative sources. Therefore
optimum use of domestic resources and expanded use of alternative and renewable energy
resources is required.

HYDROPOWER
Energy is considered to be one of the key factors in economical development.
Sustainable energy resources are of vital importance and the energy resources, which are
continuously available for long durations and which have no detrimental social effects, are
compulsory for sustainable development. The alternative energy resources, including hydropower,
have some important advantages, such as being sustainable, renewable, environmentally friendly
and clean resources. The inherent technical, economic and environmental benefits of
hydroelectric power make it an important contributor to the future world energy mix, particularly in
the developing countries. Hydropower potential, especially small, is emphasized as Turkeys
renewable energy sources. Turkeys hydro electric potential can meet 33 to 46 percent of its
electric energy demand in 2020 and this potential may easily and economically be developed.

Albars Consulting | Hydroelectric Power Plant Turkey

The installed hydroelectric capacity

of 13.8 GW in Turkey corresponds
to just 38 percent of the countrys

Breakdown of technical
hydroelectric capacity (37.1 GW)
Installed capacity

technical hydroelectricity capacity of

37.1 GW. Turkeys annual total
gross,

technically

feasible

and

economically feasible hydropower

potentials calculated by the General

13%
9%

38%

8%

Licence approved

Directorate of State Hydraulic Works

(DSI) are 435, 215, and 128 TWh,

Licensed and
underconstruction
capacity
Licensed capacity

22%

10%

respectively. In preparing the hydro

Licence application
under review

power potential many small hydro

Unconsidered

plants are not taken in consideration.

PLANTS & CENTRALS

In total there are 25 hydrological basins in Turkey, 120 lakes, many rivers and five
separate watersheds. The Persian Gulf watershed in eastern Turkey includes the Tigris and
Euphrates rivers. The Aras/Caspian watershed in eastern Turkey includes the Aras river. The
Black Sea watershed covers much of northern Turkey, and includes Turkeys longest river, the
Kizilirmak. Most of the Black Sea region is hilly and can thus be relatively easily used to develop
power plants. The Mediterranean watershed covers much of southwestern Turkey. The fifth
watershed covers the region around the Marmara Sea, which includes several smaller rivers.
Turkeys annual hydropower potential according to DSI together with installed power values are
given in the following table.

Albars Consulting | Hydroelectric Power Plant Turkey

Basin

Gross Potential
(GWh)

Potential According to DSI

Economic

Installed Power

Feasibility

(MW)

Potential (GWH)
Firat (Euphrates)

84 122

39 375

10 345

Dicle (Tigris)

48 702

17 375

5 416

Eastern Black Sea

48 478

11 474

3 257

Eastern

27 445

5 216

1 490

Antalya

23 079

5 355

1 537

Coruh

22 601

10 993

3 361

Ceyhan

22 163

4 825

1 515

Seyhan

20 875

7 853

2 146

Kizilirmak

19 552

6 555

2 245

Yesilirmak

18 685

5 494

1 350

Western Black Sea

17 914

2 257

669

Western

13 595

2 628

723

Aras

13 114

2 372

631

Sakarya

11 335

2 461

1 175

Susurluk

10 573

1 662

544

Others (total)

30 774

1 788

546

TOTAL

432 981

127 623

36 950

Mediterranean

Mediterranean

th

The development of hydro-electricity in the 20 century was usually associated with the
building of large dams. Small, mini and micro hydro plants play a key role in the Turkeys
hydropower energy sector. Small-scale hydro is mainly run-of-river, and so does not involve the
construction of large dams and reservoirs. In Turkey, the upper limit of small hydro is accepted
as 50 MW, while internationally the upper limit varies between 2.5 and 25 MW. Turkey has 555
large dam reservoirs, 150 hydro electric power plants (HEPPs) and 664 small dams.

Albars Consulting | Hydroelectric Power Plant Turkey

THE MAIN ACTORS

Devlet Su Ileri (DSI), which is the General Directorate of State Hydraulic Works, is
Turkeys state water agency and has the responsibility for developing all water resources in the
country. Bilateral agreements have been signed with a number of countries to further international
cooperation in hydropower development. The majority of the HPPs are operated by the state itself.
The rest is divided among build-own-operate (BOT) and transfer-operational-rights (TORs) and
the private sector players. The government currently started privatizing its distribution companies
as a step towards full liberalization of the energy market. The 67% share in the total number of
new licenses granted to the private sector in 2008 being for the construction of new HPPs is
obviously to improve the private presence in the hydroelectricity generation sector. Moreover, the
Southwestern Anatolia Project (GAP), considered as one of the most ambitious water
development projects ever undertaken, will erect 22 dams, 19 hydro electronic power stations,
and an expensive network of tunnels and irrigation canals covering 1.7 million hectares of land.
Comparable projects are the Eastern Anatolia Project (DAP) and Konya Plain Project (KOP).
Despite not being excluded from the credit crunch, the Turkish renewable market is still
heating up, as reflected in consecutive disclosures of new investments and M&A activities by
cash-readys, and supportive statements by the domestic and international financing institutions
for the cash-needys. Much of the sector is now in the hands of domestic and private
undertakings. The main national actors in increasing energy investments in Turkey are: Sabanc
Group (Enerjisa), Ko Group (Tpra), Zorlu Group (Zoren), Akkk Group (Akenerji), alk,
Alarko, and Enka. Important recent Mergers & Acquisition transactions in the field of hydroelectric
power have been performed by Starkraft, Alstom, Pogry, Andritz, Voith Siemens and Sumitomo
Cooperation.

Albars Consulting | Hydroelectric Power Plant Turkey

INCENTIVE SYSTEMS

Recent developments in Turkey such as the liberalization of the electricity market and
improvements in the renewable legislations have opened the door for growth and investment
opportunities in renewable energy resources. The Ministry of Energy and Natural Resources is
mainly responsible for assisting, guiding, coordinating, and encouraging public sector involvement
in the energy industry.
The government provides a feed-inn tariff, an incentive structure to encourage the
adaptation of renewable energy through government legislation. The last decade the ministry
started restructuring the energy sector. The Electricity Market Law No. 4628 (the EML), which
was enacted in March 2001, authorizes the Energy Market Regulatory Authority (EMRA) to take
the necessary measures to promote the utilization of renewable energy resources. The Electricity
Market Licensing Regulation (the Licensing Regulation) also sets forth a number of provisions
aimed at promoting the exploitation of renewable energy resources and was revised in May 2005
by Law No. 5346 concerning the decentralization of the renewable energy sector in Turkey. The
Law aims to increase renewable energy resources utilization and generate low cost, secure, and
high quality electricity. Large HEPPs in terms of installed capacity are excluded from the law.
Incentives to facilities generating electrical energy from renewable energy resources are, as
provided by the Renewable Energy Law, made dependent on those facilities being granted the
Renewable Energy Resources Certificate (RER Certificate) by the EMRA.
Within the framework of Electricity Market Law and the related secondary legislation,
generation plants that generate electricity based on renewable sources are supported by the
following mechanisms:

The legal entities applying for licenses for the construction of facilities based on domestic
natural resources and renewable energy resources pay only one percent of the total
licensing fee.

The generation facilities based on renewable and domestic energy resources do not pay
annual license fees for the first eight years following the facility completion date inserted
in their respective licenses.

TEA and/or distribution licensees are obliged to assign priority for system connection of
generation facilities based on domestic natural resources and renewable resources.

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Applicable for sales to non eligible consumers; if the price of electricity generated at
generation facilities based on renewable energy resources is equal to or lower than the
sales price of TETA and if there is no cheaper alternative, the retail licensees are
obliged to purchase such energy for the purposes of re-sale to the non-eligible
consumers.

The legal entities engaged in generation activity at facilities based on renewable energy
resources may purchase electricity from private sector wholesale companies on the
condition not to exceed the annual average generation amounts indicated in their
licenses in a calendar year.

The Renewable Energy Law provides for a 7-year price guarantee for entities generating
electricity from renewable energy resources. The Council of Ministers may increase this
price with up to 20% per year.

The prices for rent, rights of access or usage of State owned land are reduced by 85% for
the first 10 years of investment or operation for the projects that will be finalized before
31/12/2012 where the property is to be used for the purpose of generating electrical
energy from renewable energy resources by undertakings being granted a RER
certificate.
Next to the above specified incentives, the undertakings being granted a RER certificate

may benefit from subsidies or other incentives determined by the Council of Ministers regarding
investments in energy generation facilities.

Albars Consulting | Hydroelectric Power Plant Turkey

LICENCE

According to the Law, all market activities in the electricity market may only be conducted
by licensed undertakings. The licenses are to be obtained from the Energy Market Regulatory
Authority (EMRA) for a period of 49 years with a minimum term for generation & transmission
and distribution licenses of 10 years. Separate licenses are required for each market activity and
for each facility/region where the activity is carried out.
License holders are obliged to keep separate accounts for each of the licensed they have.
In order to obtain the relevant licenses to operate in the electricity market, the legal entities are
required to apply to EMRA by submitting the full documents determined by the decision of the
board of EMRA. A license holder shall deposit an annual generation license fee (e.g. for 5-10MW
produced 5.000 TL; for 10-25 MW produced 10.000 TL). The license transfers are allowed only
between companies whose shareholders are the same. The transfers of shares of the licensee
are subject to the Board approval of EMRA.
The rules and procedures regarding the license applications in order to operate in the
electricity market are provided in the Electricity Market Licensing Regulation of 4 August 2002
(Regulation). In line with this Regulation, all legal entities that have been established as joint
stock or limited liability companies in accordance with the provisions of the Turkish Commercial
Code No. 6762 and that have been granted a license by EMRA, may engage in generation,
transmission, distribution, wholesale, retail sale, retail sale services, and import and export
activities in the electricity market. However, undertakings in organized industrial zones may
perform distribution and/or generation activities within their approved borders in order to meet the
electricity demands of the undertakings in the zone upon receiving the relevant licenses from
EMRA, without being subject to the condition of incorporating according to the Turkish
Commercial Code.

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RES CERTIFICATE
For activities on the market for renewable energy, in addition to the above reviewed
legislation there is also special legislation in the form of Law No. 5346 Concerning the Use of
Renewable Energy Resources for the Generation of Electrical Energy (Renewable Energy Law).
Within the framework of this law, electricity generation based on renewable energy resources is
promoted and EMRA is commissioned to issue Renewable Energy Certificates (RES Certificates).
These certificates entitle the holders to benefit from the incentives under the Law. The
procedures and principles regarding the issuance of this Certificate are specified in a regulation.

PRIVATE PLAYERS

A HPP project can be started by a private player in two ways:

1. Self-initiated projects: Private players may develop their own project and apply to
the DSI for a Water Use Agreement (WUA).
2. DSI announces the list of HPP projects to be transferred to the private sector for
operation. In case there is one applicant, the project is granted to this applicant.
In case of more than one applicant, a tender is launched to collect bids per KWh
to be generated, and the winning bid is posted as income by DSI.

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FDI CLIMATE
Turkey offers many benefits and competitive advantages; with a fast growing economy,
the largest youth population of Europe, and a good strategic location it forms a great location for
foreign direct investment. The Government of Turkey views foreign direct investment as vital to
the country's economic development and prosperity. Accordingly, Turkey has one of the most
liberal legal regimes for FDI in the OECD. Foreign investors find Turkey attractive for a number of
reasons:

The Government maintains a liberal policy towards all forms of foreign investment

The market is large and continuously growing

The location is unique: between Asia and Europe

The labor force is relatively cheap and abundant

There is Customs Union with the EU since 1 January 1996

Turkey has Free Trade Agreements with EFTA and several countries

There are several privatization projects under progress

Regulations governing foreign investment are, in general, transparent. The Law on

Foreign Direct Investment (No. 4875) has been in force sine June, 2003. The objective of the FDI
Law is to regulate the principles to encourage foreign direct investments; to protect the rights of
foreign investors; to define investment and investor in line with international standards; to
establish a notification-based system for foreign direct investments rather than screening and
approval; and to increase foreign direct investments through established policies.

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Equal Treatment for Domestic and Foreign Capitalized Companies

All rights, exemptions and privileges granted to domestic capital and businesses will be
available under the same conditions to foreign capital and businesses operating in the same field.
All permits granted by the General Directorate of Foreign Investment have been abolished. As a
result, all transactions for establishing a company with foreign capital are the same as local
companies. Foreign investors are entitled to establish or participate in any of the company types
designated by Turkish Commercial Code and Code of Obligations. The national treatment
principle is applicable by all means. With respect to this principle, no additional approvals and
authorizations are required for the establishment of the foreign companies, branches and
participation to the existing companies. However establishment of liaison offices is subject to the
approval of the Undersecretaries of Treasury. The principle also includes the acquisition of real
estate by foreign-owned corporate entities registered under Turkish law, and in most sectors does
not have an investment screening system.

No Capital Requirement
Foreign investors are no longer required to bring a minimum capital of USD 50,000 since
this obligation was abolished as a result of the introduction of the Foreign Direct Investment Law.
Foreign investors are now required to bring those capital amounts which are required by the
Turkish Commercial Code.

Unrestricted Foreign Ownership

Foreign investors can freely transfer a variety of capital abroad including: net profits,
dividends, proceeds of sale and liquidation, compensation payments, funds arising from license,
management or similar agreements, and reimbursement of loans and interests. Accordingly, it is
no longer necessary to register royalty, cost sharing, management service and similar types of
agreements with the Foreign Investment Directorate of the Treasury.

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LEGAL BUSINESS FORMS

Companies that are established by foreign investors in Turkey under the provisions of the
Turkish Commercial Code, either on their own or with Turkish partners, are regarded as Turkish
companies and entitled to all the rights granted to companies founded by Turkish citizens. Turkish
Commercial Code, in its provisions related to the formation of companies, makes no essential
distinction between Turkish citizens and foreigners, nor does it distinguish between partners and
founding partners, be they Turkish or foreigners.
According to the Turkish Commercial Code (TCC), legal forms of business entities may
be classified as follows: Corporations (Anonim irketi A..); Limited Liability Companies
(Limited irketi Ltd. ti.); Ordinary Partnerships (Adi Ortaklk); Limited Partnerships
(Komandit irket); Registered Partnerships (Kollektif irket; Limited Partnership Divided into
Shares (Sermayesi Paylara Bolunmu Komandit irket); and, Sole Proprietorships.

Comparison of the three most common types of legal presence

Corporation (A..)

Limited Liability Company

Branch

(Ltd.)

Legally dependent on its

Legal Status

Independent legal entity

Independent legal entity

Tax Status

Full tax liability (resident)

Full tax liability (resident)

Limited tax liability

Number of shareholders

Min: 5 Max: no limit

Min: 2 Max: 50

N/A

Capital Requirements

50.000 TL

5.000 TL

No specific limit

Executive body

Board of Directors

Responsibility for
shareholders for tax and
public liabilities
Corporate income tax rate
Dividend withholding tax
rate
Legal reserves

Managing partners and/or

Manager

headquarters

Branch manager

Limited to the amount of

Liability is in proportion to

The headquarters are

capital contributed.

the share in capital

liable.

20%

20%

20%

15% (if profit is distributed)

15% (if profit is distributed)

15% (if profit is distributed)

Must be provided

Must be provided

N/A

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TAX STRUCTURE
In recent years, due to the increase in the competition among developing countries for
foreign investment, Turkey has implemented several regulations and modifications to the tax
systems and amended its Tax System and Code in order to have a more transparent and simple
tax regime. As a result of these changes, many tax incentives have been granted to foreign
investors and reductions have been made in the tax rates in order to attract foreign direct
investment.

Income Tax
Income taxes in Turkey are levied on all income, including domestic and foreign
individuals and corporations residing in Turkey. Non-residents earning income in Turkey through
employment, ownership of property, business transactions or any other activity which generates
income are also subject to taxation but only on the income earned in Turkey.

Corporate Income Tax

Whether a company is subject to full or limited tax liability depends on its status of
residence. A company, whose statutory domicile or place of management is established in Turkey
(resident company), will have full tax liability; in this case worldwide income is taxable. In Turkey
the basic corporate income tax rate levied on business profits is 20 percent. If a non-resident
company conducts business through a branch or joint venture, it will have limited tax liability, i.e.
fully subject to corporate tax on profits that are earned in Turkey on an annual basis.

Withholding Tax
The companies residing in Turkey are subjected to withholding tax - 15% of the profits,
15% of Bank deposits and 15% of REPO agreements must be paid as a withholding tax. Interests
on treasury bonds and other bonds or bills which are derived by resident corporations are free
from taxes.

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Individual Income Tax

The limited tax liability covers trade or business income from a permanent establishments,
salaries for work done in Turkey (regardless of payment location or whether or not remitted to
Turkey), rental income from real property in Turkey, Turkish derived interest, and income from the
sale of patents, copyrights and similar intangible assets. Income tax rates applicable to yearly
gross earnings earned in 2010 are as follows:

Income Salaries (TL)

Rate (%)

Up to 8,800

15

8,801 22,000

20

22,001 50,000

27

50,001 and over

35

Value Added Tax

The generally applied value added tax (KDV in Turkish) rate varies between 1% and 18%,
where VAT payable on local purchases and imports is regarded as input VAT and VAT
calculated and collected on sales is considered as output VAT. VAT is not levied on exported
goods.

Albars Consulting | Hydroelectric Power Plant Turkey

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ALBARS CONSULTING
A.Nafiz Grman Mah. Mehmet Akif Cad.
Turunlu Sok. No 25 D 2 Mesa Plaza
34173 Merter / Gngren ISTANBUL

Ramazan Arslan
T. +90 212 557 50 00
F. +90 212 557 50 00
E. rarslan@albarsconsulting.com

Albars Consulting | Hydroelectric Power Plant Turkey

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