Sponsored briefing: Notable developments in construction law and practice

Yazıcı’s Bilge Müftüoğlu on the effect of government incentives on the energy sector

There are major criteria that investors consider in advance of determining the type and extent of their investment in any sector and the energy sector is no different. Incentives granted by states are one of these as they have considerable impact on construction contracts of projects involving infrastructure and energy, such as power plants.

Until 2012, energy investment trends displayed increased demand for natural gas combined cycle power plants (CCPPs), due to their subsidisation, and hydroelectric power plants (HEPPs). When incentives granted to natural gas power plants were revoked so as to promote coal, electricity producers immediately steered away from natural gas power plants, and turned towards power plants using domestic and imported coal to generate electricity. The coal trend also benefited from the interruptions in natural gas supply as well as an increase in natural gas prices as the Turkish lira lost value. Ultimately, new natural gas investments halted and many CCPP projects were cancelled.

It was from 2012 onwards that renewable energy projects, such as wind and solar farms, as well as geothermal power plants, started to proliferate. That trend continues, and increasingly so: renewable energy projects that are incentivised by the state, generally by the granting of VAT and customs levy exemptions during the investment term, and supporting the investors through the tariffs and electricity purchase guarantee during the operation term.

Accordingly, investor preferences are determined in accordance with state policies. This also affects the type of contracts that are used. When a renewable energy investment involving wind or solar farms or geothermal energy is in question, usually, supply and installation agreements – which are generally regarded as sales contracts rather than work contracts from a legal perspective – are prepared and negotiated. If an investment is a HEPP, then generally an EPC contract (typically Yellow Book or Silver Book) in FIDIC contract form is prepared and negotiated. It should be noted here that we did not have the opportunity to assess the implications of the new set of FIDIC contracts published in December 2017 and these are not commonly used in the Turkish construction market. As various clauses under the new set of FIDIC contracts are drafted on quite a detailed basis, the execution of these contracts will become more difficult for both employers and contractors. As such, the 1999 revisions of the Yellow Book and Silver Book are still well liked and used, but time will show how the Turkish construction industry adapts to the 2017 revisions.

Whatever the investment type is or whatever incentives are granted by the state, currency fluctuations negatively affect the Turkish economy and although the foreign currency loans enable realisation of these projects, they also represent a major risk concern on the investor side. With a view to reduce costs, employers typically choose the cheapest bid and contractors may submit unrealistic offers, hoping to recover their profit at a later stage. From where we stand, a fragile economy is all the more reason why tailoring contracts to the specific needs and risks of a project are crucial in high contract value projects.