Campaign for Nuclear Phaseout
1 rue Nicholas Street, #412
Campagne contre l'expansion du nucléaire
Ottawa, Ontario, Canada K1N 7B7
tel: 613-789-3634 fax: 613-241-2292
1 rue Nicholas Street, #412
Printed copies of
The CANDU Syndrome:
Canada's Bid to Export Nuclear Reactors to Turkey
are available from the Campaign for Nuclear Phaseout.
[ Nuclear Sunset ]
6. The Turkish Nuclear Program
Turkey's flirtation with nuclear power began in July 1955, when it signed a bilateral agreement with the USA to cooperate in the "peaceful uses of nuclear energy". In 1956, the Turkish Atomic Energy Commission (TAEK) was created. Construction began in August 1959 on Turkey's first research reactor -- a pool-type reactor at the site of the Cekmece Nuclear Research and Training Centre (CNRTC), which was formally established in 1961. The 1 MW reactor, known as TR-1 (Turkish Reactor-1) went critical in 1962 and was reportedly shut down in September 1977 for financial reasons. It was upgraded to 5 MW by Belgonucleare in 1980. The upgraded 5 MW reactor, known as TR-2, first went critical in December 1981, and was shut down on August 5, 1995. Fuel for the TR-2 was fabricated by Cerca, in France. Prior to shutdown, the TR-2 reportedly experienced an accident in March 1993 involving a release of radioactive contamination into Kucuk Cekmece Lake.
A second research reactor, the ITU-TRR, at the Technical University in Istanbul, is operated by the Institute for Nuclear Energy. It is a 250 KW Triga Mark II reactor that went critical in March 1979. Fuel for the ITU-TRR is fabricated by General Atomics in the USA. In 1966, the Ankara Nuclear Research and Training Centre (ANRTC) was established by TAEK.
6.1. Turkey's First Nuclear Attempts -- The 1960s & the 1970s
Nuclear proponents in Turkey have made a number of unsuccessful attempts to initiate a nuclear power program. In 1965, the Electricity Survey Institute proposed construction of a 300-400 MWe PHWR (a Pressurized Heavy Water Reactor such as AECL's CANDU reactor). It was proposed that the reactor begin commercial operation in 1977. A combination of technical, political and economic factors derailed the proposal, including a military coup which took place on March 12, 1971.
Following its establishment in 1970, the Turkish Electric Authority (TEK) initiated studies for a 600 MWe nuclear power plant, including feasibility, site selection, and bid specification, which were carried out from 1972 to 1974. Site selection was narrowed down to Akkuyu Bay on the Mediterranean coast, 43 km southwest of Silifke, because of its allegedly superior seismic stability. TAEK actually issued a site licence for Akkuyu Bay in 1976. Negotiations began in 1977 with two quasi-public Swedish companies, ASEA-Atom and Stal Laval. However the deal collapsed in mid-1980 following a military coup, and a failure to reach an agreement on financing.
6.2. Turkey's Third Nuclear Attempt -- The 1980s
In 1982, TAEK was replaced by the Turkish Atomic Energy Authority (TAEA), which reports directly to the Prime Minister. In the fall of 1983, bids were invited from seven major reactor vendors for nuclear power plants. Letters of intent were received from three companies: Atomic Energy of Canada Ltd. (AECL) for a CANDU 6 (i.e. a 600 MWe reactor) at Akkuyu; Kraftwerk Union (KWU) of Germany for a 990 MWe Pressurized Water Reactor (PWR) also at Akkuyu; and General Electric (GE) of the United States for one or two 1,185 MWe Boiling Water Reactors (BWRs) at Sinop on the Black Sea.
A research team from GE in consultation with representatives from the International Atomic Energy Agency (IAEA) and Turkey eventually concluded that the Sinop site was unacceptable without much more research because of fault lines in the Black Sea basin, and the probability of earthquakes. However, negotiations with AECL and KWU extended into 1984, and contract negotiations had proceeded to an advanced stage on the basis of a turnkey agreement, when Turkey altered its position in favour of a Build, operate, and transfer (BOT) financial model.
In late 1984, KWU withdrew its bid, reportedly because Turkey was unwilling to give a sovereign guarantee on loans required to finance the project. AECL, however, was willing to accept the high financial risk, and agreed to the BOT scheme, signing a preliminary agreement in 1985, making it the only possible supplier for all three reactors. As usual, AECL did not release details of the negotiations and simply announced "the start of detailed negotiations and proposals for the construction of a CANDU unit in Turkey". The AECL proposal was facilitated by Nuclear Project Managers, a joint venture between AECL, SNC, Lavalin, and the Montreal Engineering and the Foundation company. The AECL Annual Report 1985-86 referred only to "a proposal to supply a CANDU 600 system to Turkey" and to "prolonged negotiations for the construction of a CANDU station in Turkey". At this time AECL established an office in Ankara, the Turkish capital.
In 1985, concerns were also raised in Canada about the possibility of corruption in the Turkey deal. "Finders fees" -- a euphemism for bribes, have apparently been an accepted practice in Turkish megaprojects. James Donnelly, then president of AECL stated, "We have a representative in Turkey, which is the only way to do business in Turkey". Donnelly said that AECL's agent in Turkey gets "a consultant's fee and he will get a percentage of the deal".
It is not clear if the proposed structure of the CANDU deal changed from when it was first discussed, however, in 1983 the media reported that Turkey required financing by Canada's Export Development Corporation of 80 to 85% of the total cost of the plant. It was also reported that Korea Heavy Industries (now known as Hanjung, a subsidiary of the Korea Electric Power Corporation -- KEPCO), and another supplier of the turbine/generator would be partners in the deal. By 1987, partners in the AECL deal were identified as NEI Parsons of Britain (turbine/generator set), and the Turkish engineering company Enka Insaat. In 1985, it was reported that Turkey would own 40% of the proposed plant and AECL would own 60%. It was not clear if the proposed level of Canadian financing had changed. It was later reported that as part of the deal, AECL would have to accept the risk of poor performance - reportedly a minimum 75% capacity factor. Clearing the way for a possible sale to Turkey, a Nuclear Cooperation Agreement was signed with Canada in 1985.
However, despite AECL's payment of agent fees, and despite three years of steady media reports about probable closure on the CANDU deal, the Canadian government apparently recognized a bad deal when it saw it, and prudently required that Turkey guarantee the loans. Turkey rejected this requirement and in October 1986, it was unofficially reported that Turkey had suspended the project. It has also been suggested that concerns about nuclear weapons proliferation may have played a part in the Canadian decision to cancel the deal -- in particular, concerns have been expressed about the possible transfer of nuclear technology from Turkey to Pakistan, which has maintained a clandestine nuclear weapons program for many years. Despite some contradictory messages, Turkey's nuclear relations with Canada were put on a back burner for several years, and Turkey looked elsewhere for the acquisition of nuclear technology.
6.3. Turkey's Nuclear Relations with Argentina
Following the collapse of negotiations with GE, KWU and AECL, Turkey turned to Argentina as a source of nuclear technology. On May 3, 1988, the two countries signed a 15 year nuclear cooperation agreement. Turkey was hoping to duplicate the Argentinean drive for nuclear fuel cycle independence. Argentina agreed to study the feasibility of building a 300 MWe PWR designed by Empresa Nuclear Argentina de Centrales (ENACE), and other fuel cycle activities were explored.
Turkey was also interested in a 25 MWe Argentinean production reactor known as the CAREM-25. A former Turkish nuclear official has described the reactor as "...too small for electricity generation and too big for research or training, however, very suitable for plutonium production", and therefore a very real threat in terms of nuclear weapons proliferation. In October 1990, the Turkish companies Sezai Turkes-Fevzi Akkaya (STFA) and TEK, along with the Argentine agencies Comision Nacional de Energia Atomica (CNEA) and Investigaciones Aplicadas (INVAP) formed a joint engineering firm to develop the reactor. It was agreed in October 1990 that two CAREM reactors would be built -- one in each country, with construction beginning in Argentina in 1991, and in Turkey in 1992. Former Turkish Prime Minister Turgut Ozal and Argentine President Carlos Menem personally negotiated the deal. However, one year later, TAEA decided to cancel the arrangement, due to international pressure because of proliferation concerns. In return for the Turkish decision to drop development of the CAREM reactors, OECD countries apparently agreed to support Turkish attempts to purchase larger nuclear reactors for electricity generation.
6.4. CANDUs for Turkey?
In January 1993, Turkey issued a request for bids for consultancy services on a new nuclear project with 100% financing. AECL reported that in response to a letter from TEK, it had submitted in 1993 a "preliminary proposal establishing the basis of an offer" ... "for one or possibly two" CANDU-6 reactors. The TEK plan called for the first plant to be in service by 2000. AECL formed a consortium with John Brown Engineers and Constructors BV Europe, from the Netherlands, and two Turkish construction firms, Gama and Guris. The consortium apparently re-established an office in Ankara and prepared to supply a bid for a CANDU-6 on short notice, once the actual request for bids on the project was issued.
In the summer of 1994, the Turkish Electric Authority (TEK) was divided into two companies -- the Turkish Electricity Generation and Transmission Company (TEAS), and the Turkish Electricity Distribution Company (TEDAS). These companies are eventually slated for privatization. It was reported that Turkey again intended to require BOT financing for the nuclear plant, similar to the 1980s BOT scheme, and that the reactor vendor and TEAS would form a joint venture company, selling the electricity to TEDAS. As one commentator has stated,The BOT [build-operate-transfer] model will be the preferred option, but other 'creative financing' approaches will also be considered.
In December 1994, or early 1995, TEAS awarded the consultancy contract for the initiation of its nuclear program to the Korea Atomic Energy Research Institute (KAERI) in partnership with two other Korean companies -- Hidec and HEC -- and the Turkish company GAMB. At $350,000 (US), KAERI's bid for the project was reportedly the cheapest of 18 bids received by Turkey.
However, by March 1995, plans to initiate the bidding process for the nuclear plant were delayed following protests by residents around the Akkuyu site and by environmental groups. The Mayors of 24 towns in the vicinity of Akkuyu were protesting the government's nuclear plan, arguing that it would damage tourism as well as agriculture.
Bid specifications were finally released by TEAS on December 17, 1996. Initially, it was announced that bids would be due on June 30, 1997, but this was subsequently changed to September 4, 1997. In late August 1997, the bid deadline was delayed yet again, to October 15, 1997. The delays have been granted at the request of the Westinghouse/Mitsubishi consortium, which has reportedly been unable to obtain financing for the local content portion of its bid.
It had originally been suggested that the first reactor would be commissioned in year 2000. By 1995, this had slipped to 2002-2003. The official target then slipped further to the year 2005. Following the delay of bids to September 4th, TEAS announced that it would choose a vendor in March 1998, six months after the deadline. Twelve months later, credits were expected to be confirmed, with construction beginning in mid-1999. Allowing for a 6.5 year construction period, completion and start-up would take place in 2005. It is not clear if this schedule has officially slipped following the delay of the bid deadline to October 15th, however, it is expected that start-up of the first reactor would not likely take place until 2006.
The TEAS bid specifications are somewhat complex, identifying two alternatives, that provide flexibility for the reactors being offered by the competing vendors:
Alternative I (Main offer): NPP [nuclear power plant] having net output max. 1400+5% MW (1 or 2 units according to size offered)
Alternative II (Optional): NPP having net output max. 2800+5% MW (2 or 4 units according to size offered)
Minimum unit size allowed is 600 MW (net) and minimum NPP plant size 800 MW (net)
Three consortia have been identified as bidding:
- Westinghouse (USA) and Mitsubishi Heavy Industries (Japan); Raytheon (USA); Enka (Turkey)
- Atomic Energy of Canada Limited (AECL) (Canada), with Kvaerner-John Brown (UK); Gama-Guris-Bayindir (Turkey); Hitachi (Japan); Korea Electric Power Corporation (KEPCO) and Hanjung (Korea Heavy Industries and Construction Company -- KHIC) and Daewoo (South Korea)
- Nuclear Power International (NPI), including Siemens (Germany) and Framatome (France); Campenon Bernard; Hochtief AG; Garanti Koza, STFA, Tekfen & Simko (Turkey)
Ansaldo Energia of Italy also attempted to organize a bid with the Russian state nuclear company Minatom, but was apparently unable to arrange financing. TEAS has confirmed that Asea Brown Boveri-Combustion Engineering (ABB-CE) considered bidding, but an American source has stated that the company thought the project was "not well founded and involved too much political and economic risk". General Electric apparently also considered making a bid, but decided against it.
The AECL 1994-95 Annual Report noted that AECL's consortium for the Turkish bid consisted of "AECL, John Brown (Europe) and three Turkish contractors, GAMA, GURIS, and Bayindir... Nuclear Project Managers and Canatom are providing support to the initiative." According to AECL's 1996 annual report, the consortium has expanded even further, to include the Korea Electric Power Corporation (KEPCO) and Hanjung (Korea Heavy Industries and Construction Company -- KHIC) of South Korea. It has also been reported that Hitachi of Japan will be a partner in AECL's bid. In addition, it has been suggested that the Korean conglomerate Daewoo is also part of the consortium. AECL officials have reportedly stated that Korean involvement in the Turkish deal would be double the Korean input in the sale of two CANDU-6 reactors at Qinshan to the Peoples' Republic of China. This also implies that the financing provided by the Koreans would be correspondingly larger.
AECL is bidding its standard CANDU-6 reactor, in both a two unit and four unit station. Nuclear Power International (NPI -- the French/German consortium of Framatome/Siemens) is apparently bidding a 1980s vintage Siemens 1400 MW 'Convoy' model PWR, using Neckarwestheim-2 in Germany as the reference plant. Westinghouse and Mitsubishi Heavy Industries will probably offer a one or two unit PWR station, with Ohi-3 and -4 in Japan as the reference plants. NPI president Ulrich Fischer has alleged that AECL together with the International Atomic Energy Agency (IAEA) manipulated Turkey into requiring that a reference plant of the kind being bid must have at least five years operating experience. This resulted in the elimination of more advanced, less expensive reactors from the NPI consortium -- Framatome's N4 Pressurized Water Reactor (PWR) and the European Pressurized Water Reactor (EPR). The EPR is still in the design stage and the N4 PWR reference plant has not operated the required five years.
This is not the only potentially crooked dealing by AECL in the Turkish bid. As noted above, the Korea Electric Power Corporation (KEPCO) as well as Hanjung (formerly known as the Korea Heavy Industries & Construction Company, KHIC) will be major participants in the AECL consortium. KEPCO is the state-owned South Korean utility, and is a major shareholder in Hanjung. There has been a major conflict of interest because the Korean Atomic Energy Research Institute (KAERI), which set the terms for the bidding process and acted as a consultant to TEAS, is also part of the Korean state nuclear industry. The President of KEPCO is also chairman of the Board of Directors of KAERI. TEAS has decided to replace KAERI mid-way through the bidding process, so that while KAERI acted as consultant for the formulation of bid specifications and initial negotiations, a new consultant will be hired to evaluate the bids and finish negotiations. Conflict of interest has not been mentioned as a reason for the switch -- it has been suggested that the reason relates to a restructuring of the South Korean nuclear industry, implying inadequate resources on the part of KAERI.
It has been suggested that the AECL bid would not likely be able to match the cost of the NPI Convoy plant, however, this evaluation may have assumed that AECL would only be bidding one, instead of two or four CANDU 6 reactors. The two or four reactor bid may have altered the economics, and much will obviously depend on the financing package.
One report has suggested that AECL has lost its earlier edge in the bidding process. AECL was thought to have an advantage, based on the supposedly greater self-sufficiency of the CANDU fuel cycle, since it does not require a high degree of uranium fuel enrichment. However, any perceived fuel cycle advantage for CANDU because of its use of 'natural' uranium is deceptive. Although CANDU fuel requires less processing, the heavy water, needed for both cooling and moderation, is expensive to purchase and difficult to manufacture. In addition, given the relatively low cost of uranium, Turkish officials no longer believe that the use of natural uranium is a particular advantage.
It has also been suggested that the forced change in government in Turkey may affect the outcome of the Akkuyu bidding process. Under pressure from the military, in June 1997, the Islamist government of Prime Minister Necmettin Erbakan was replaced by a conservative government under Prime Minister Mesut Yilmaz (see "The Quasi-Coup" below). The pro-American leanings of Yilmaz may favour the Westinghouse/Mitsubishi bid.
6.4.1. Opposition to Nuclear Power in Turkey
Local fishermen and farmers in the Akkuyu Bay area have been protesting nuclear plans since the time when the land was expropriated in 1976. In the last five years, however, there has been widespread organized grass roots opposition. Beginning in 1994, opposition has focused on annual national anti-nuclear rallies that have been held on Hiroshima-Nagasaki Days (August 6-9) in Akkuyu-Buyukeceli. Buyukeceli is the nearest village to the Akkuyu Bay site, and has about 2,000 residents.
Local opposition to the building of a nuclear plant at Akkuyu Bay has been strong. On December 24, 1994, a number of local municipalities organized 300 people in nine buses to travel to the Turkish capital of Ankara, in an attempt to meet with President Demirel, and former Prime Minister Tansu Ciller. After being refused entry to Parliament, the citizens went to Ciller's party headquarters. After performing traditional folk dances in the street for hours, Ciller finally invited them to a meeting, that was filmed by TV crews and attended by journalists. Ciller offered only glib reassurance that with nuclear power, "The Mediterranean will remain blue". The Mayors of 24 towns in the vicinity of Akkuyu joined the protest against the government's nuclear plan, arguing that it would damage tourism as well as agriculture. As noted above, the protests did not prevent TEAS from awarding a contract to the Korean Atomic Energy Research Institute (KAERI) to manage the bidding process. However, it seems that the opposition from residents around the Akkuyu site and by environmental groups did result in a delay of the bidding process itself.
On the 50th anniversary of Hiroshima, August 6, 1995, 2,000 environmentalists and villagers gathered at Silifke to protest the nuclear proposal. Silifke is the closest large city, 43 km northeast of Akkuyu Bay.
Environmentalists have also challenged the Akkuyu project legally. Environmental groups from the southeastern Mediterranean region, together with lawyers from the Izmir Bar Environmental Commission applied initially in 1995 at the Administrative Court of Adana for an annulment of the planning and operation of the Akkuyu Nuclear Power Plant (File No. 1995/317). They argued that TEAS acted illegally in issuing its request for bids on December 17, 1996 without conducting an initial Environmental Impact Assessment Study, with its accompanying requirements for public reporting and public participation, according to Turkish Environmental Law No. 2872. Adana Administrative Court rejected the case on April 24, 1996, but the plaintiffs have applied to be heard before a higher court, the Turkish Council of State (Danistay). As of September 1997, the file was being examined by the Council of State.
On January 4, 1997, representatives of TEAS, TAEK and the IAEA visited Akkuyu-Buyukeceli along with 20 journalists in a promotional tour. Villagers spontaneously reacted to the unpopular visitors by throwing vegetables at them, stoning their bus, and running them out of town. On January 17, 1997, southeastern environmental associations from Iskenderun, Tarsus and Antakya again applied to the Adana Administrative Court (File No. 1997/86), arguing that TEAS had violated Turkish Environmental Impact Assessment Regulations and General Health Regulations. This case was also rejected by the court on April 29, 1997.
Turkey's Fourth Annual National Anti-Nuclear Meeting took place at Akkuyu-Buyukeceli village on August 9 & 10, 1997 (Nagasaki Day). The 1997 meeting was initiated for the first time by the villagers themselves, and was attended by over 2,000 villagers, and more than 1,000 environmentalists from all over Turkey. The rally drew national media attention in Turkey, and featured speeches of opposition to the nuclear plant from men, women and children of the village. The meeting resulted in a strong, nationally coordinated network of groups opposing the nuclear project.
6.4.2. Security Threats
Terrorists do not need nuclear weapons if they can trigger a catastrophic radiation release by attacking a nuclear power plant. Security risks at a future nuclear power plant in Turkey are an extremely serious consideration for several reasons. As noted below, Turkey has been in a virtual state of civil war for more than a decade with several armed rebel groups (mainly the Kurdish Workers Party -- PKK), and the conflict shows no sign of letting up. Sabotage of energy infrastructure is already an established PKK tactic. On January 24, 1997, the PKK attacked the Mardin-Midyat oil pipeline, near the city of Mardin. After an explosion, the resulting fire was only controlled after 24 hours, and damage was estimated at $700,000 (US). The PKK has also engaged in suicide attacks, which are extremely hard to defend against.
In addition to internal security threats, there is also a concern about external threats. The proposed nuclear plant at Akkuyu Bay would be within sight of the divided island of Cyprus, possession of which has been a matter of dispute between Turkey and Greece for many years. Cyprus has been divided since 1974, when Turkey invaded and occupied the northern third of island, following a coup engineered by the military junta that ruled Greece at the time. About 30,000 Turkish troops occupy northern Cyprus, which declared itself an independent state in 1983, but is recognized only by Turkey.
In January 1997, the (Greek) Cypriot government announced that it would buy Russian S-300 surface-to-air missiles to counteract the Turkish air force. The missiles have a range of about 150 km. Turkey, then under the leadership of Necmettin Erbakan of the Islamist Welfare Party, declared that it would consider a military strike against the placement of the missile launchers. The missile dispute threatens to re-ignite hostilities between Greece and Turkey, which were already aggravated by four deaths in Cyprus 1996. The Cypriot government under President Glafcos Clerides has shown no signs of backing down on the missile placement.
7. Nuclear Weapons Proliferation
Turkey ratified the Treaty on the Non-Proliferation of Nuclear Weapons (NPT) on April 17, 1980, and the safeguards agreement went into force on September 1, 1981. At the controversial "Extension Conference" of the NPT in April 1995, the five nuclear weapons states sought, and despite strong opposition, obtained indefinite extension of the treaty. Turkey demonstrated its loyalty to the international nuclear status quo by supporting the "indefinite and unconditional extension" of the treaty.
Despite Turkey's observation of the non-proliferation proprieties, there have been past concerns about alleged nuclear proliferation connections with Pakistan. Signing the NPT does not necessarily mean much. Article X of the NPT allows any party to withdraw with only three months notice if "extraordinary events... have jeopardized the supreme interests of its country". Alternately, states such as Iraq and the Peoples Republic of China have simply ignored the strictures of the Treaty, despite their continued adherence. Pakistan has actively pursued nuclear weapons capability for many years, and has refused to sign the NPT. Pakistan is in an unofficial sub-continental nuclear arms race with India -- and both countries are considered undeclared nuclear weapons states. Connections with such states may have serious implications -- Chinese nuclear dealings with Pakistan have been the main cause of an American nuclear trade boycott of China.
The first allegation of a Turkey/Pakistan nuclear connection was in 1981. The current Turkish ambassador to Canada, Omer Ersun (then Chief of Policy Planning at the Turkish Ministry of Foreign Affairs under the military junta) has confirmed that the US administration protested a $30,000 shipment of "inverters" from a Turkish textiles firm to Pakistan, allegedly for use in the Pakistani uranium enrichment program.
Relations between Turkey and Pakistan became increasingly close after the military coup in Turkey on September 12, 1980. The respective military leaders of Turkey and Pakistan, President/General Kenan Evren, and President/General Zia ul-Haq exchanged a series of official visits that only ended with Zia's 1988 death in a plane crash. In the early 1980s, Greek Prime Minister Papandreou charged that "Pakistan expected Turkey to act as a transshipper of material for a nuclear bomb and would reciprocate by proudly sharing the nuclear bomb technology with Turkey".
It has also been reported that Canada withdrew its bid to supply CANDU reactors to Turkey in the mid-1980s, partly "in response to pressure from Western countries which [are] concerned that Turkey may build a nuclear bomb based on CANDU technology".
Concerns about Turkey's potential involvement in nuclear weapons proliferation have continued in the 1990s. As noted above, international pressure was required in 1990-91 to force an end to joint plans by Argentina and Turkey to build the CAREM-25, a 25 MW reactor in their respective countries. As noted above, Yalcin Sanalan, a former Director of TAEA stated that the CAREM-25 was "...too small for electricity generation and too big for research or training, however, very suitable for plutonium production" Furthermore, in 1992, Senator John Glenn and other US congressmen accused Turkey of supplying sensitive technology to Pakistan in order to aid in that country's acquisition of uranium enrichment technology.
In 1995, a Greek foreign ministry official, Thanos Dokos repeated concerns about "nuclear cooperation between Ankara and Islamabad... and reports that Turkey might try to acquire nuclear weapons material and technology and recruit nuclear scientists from the Muslim republics of the former Soviet Union."
It has been suggested that the American government does not have serious concerns about the nuclear proliferation potential of Turkey. However, the potential for nuclear weapons proliferation through the sale of CANDU reactors to Turkey remains a valid concern. It can be assumed that the American government is pleased with the ouster of Erbakan's Islamist Refahyol government, and its replacement by the more pro-western government of Mesut Yilmaz in June 1997. However, two issues must be raised in response. One is that Erbakan may be returned to power in the near future if the military allows a democratic election to take place. Second, continued military domination of Turkey should not really give any reassurance. As noted above, the military has also had strong ties to Pakistan, and may favour the creation of 'Islamic' nuclear weapons.
8. Financing Nuclear Exports
Nuclear power plants have a high capital cost and a relatively low operating (variable, including fuel) cost. By comparison, fossil-fired power plants have a lower capital cost, but a higher operating cost. Nuclear power has a number of additional unique financial characteristics, which tend to make it a higher risk investment:
- a longer lead time for design, approvals, and construction (typically six to ten years or more);
- higher operating risks due to the complexity of the technology (the risk of poor performance and/or premature shutdown);
- the risk of a serious accident (with both on-site and off-site consequences);
- a requirement for third party liability coverage, with a legislative limitation on liability due to the potential for catastrophic accidents; and
- huge (and often underestimated) 'back end' costs for decommissioning and radioactive waste management.
A 1997 analysis of the economic cost of electricity in Ontario demonstrated that the economic cost of CANDU-generated nuclear electricity, before counting environmental costs, was 11.7 cents/kWh, compared to 6 cents/kWh for fossil generation, and 5.5 cents/kWh for industrial cogeneration. With the addition of mid-range environmental externalities (i.e. with the average cost for adverse environmental impacts added), the corresponding costs are 15 cents/kWh (nuclear); 10.1 cents/kWh (fossil); and 6.6 cents/kWh (cogeneration).
Given the higher cost of nuclear power, it is clear that purchasers are looking for something other than cheap electricity. The perceived prestige of mastering a 'high technology' such as nuclear power may provide some rationale, or more ominously, the development of nuclear know-how for military applications may be a factor. However, the ability of AECL and other reactor vendors to provide financing, with generous terms, is crucial, since most developing countries have a distinct shortage of capital. AECL President Reid Morden has stated,
This will be the first time in living memory that we [AECL] have been in a true, competitive, international competition. Clearly, price will be a critical element... We have a strong consortium and expect to have a competitive bid. As always, financing will be a major challenge, and we are working hard to maximize the amount that we obtain in Canada.
Although it seems possible that South Korea may supply a larger part of the project than in the case of the two reactors sold to China, the financial requirement from Canada will likely be $1 billion or more.
8.1. The Chinese Deal: A Bad Precedent
In the November 1996 sale of two CANDU reactors to China, Canada provided an unprecedented $1.5 billion (Cdn) loan through the Canada Account of the Export Development Corporation (EDC) -- the largest loan in Canadian history, public or private. The total cost of the two reactors was reportedly $4 billion (Cdn). The US Export-Import Bank provided $250 million (US) in financing, the Japanese Export-Import Bank provided $200 million (US), and presumably much of the balance of the financing will come from South Korea.
Former Natural Resources Minister Anne McLellan said the financing for the Chinese sale was a "commercial" deal, "at a non-concessional interest rate as set under the International Consensus Agreement by the Organization for Economic Cooperation and Development." However, it must be emphasized that while the EDC administered the loan to China, the funds actually came from the Government of Canada. Like other export credit agencies, the EDC has risk limits for various countries, which, in the case of most developing countries, would be exceeded by a mega-project such as AECL's two-reactor CANDU sale. When this occurs, special deals must be cut by channelling loans through the EDC's "Canada Account", as opposed to the "Corporate Account", which is carried on the EDC's own books.
The EDC's "Canada Account" loans are carried on the books of Canada's Department of Foreign Affairs and International Trade. The government must make the loan for two reasons: it would be far too large a loan for the EDC to handle, and longer-term sovereign loans to developing countries are too risky for the private sector financial community. Since Mexico defaulted on loans in 1980, the private sector has been very wary of this type of business. In other words, the taxpayers of Canada will be forced to accept the risk of a loan to Turkey for a billion dollars or more. It is clear that the private sector would not even consider such a loan. As a crown corporation, the EDC's mandate is to promote Canadian export trade and foreign investment. Although the EDC operates on a financially self-sustaining basis according to commercial principles, it does borrow money at the low fixed rates of the Canadian government, and therefore can lend less expensively and for longer periods than commercial banks, and at fixed rates.
The Chinese deal is a bad precedent not just financially. In January 1997, the Sierra Club of Canada filed an application for judicial review to ensure that an environmental assessment is conducted in connection with the $1.5 billion in public financing for the two reactors. Just prior to the finalization of the agreement with China, the Canadian government rushed through changes to regulations under the Canadian Environmental Assessment Act that would have required it to undertake comprehensive environmental assessments of overseas projects. The changed regulations were given the force of law the next day without the usual sixty day comment period. As of September 1997, this matter is still before the courts, and may have serious implications for further CANDU sales, including the possible sale to Turkey.
On August 11, 1997, a report leaked to the media revealed that the Canadian government had also ignored the advice of one of its own consultants on the CANDU sale to China. A report by Marbek Resource Consultants advised that there was not enough scientific analysis and data available to fully determine the environmental impact of the two reactors. The federal government received the report prior to the November 26 1996 final signing of the agreement with China.
8.2. OECD Consensus Rules -- Will they be observed?
At the time of the November 1996 CANDU sale to China, the Canadian government was at pains to point out that the financing was under the OECD Consensus Agreement. At that time, the agreed consensus rate was reportedly 7.5%. In addition to setting a minimum interest rate, the OECD consensus rules also stipulate that the maximum term length for the loan is 15 years. The consensus agreement is intended to promote fair competition and discourage subsidization. However, it should be noted the consensus rate is non-binding, and is easily breached -- typically by so-called crédit mixte of aid and loans. The crédit mixte approach has been used extensively by the French, and it is widely suspected that Framatome's Daya Bay plant in China was financed in this way. Since the French are AECL's competitors in the Turkish bid, it is reasonable to demand full disclosure on the financing arrangements for the Turkish CANDU deal. Such information has not been forthcoming. It has not been revealed how much of the Turkish deal will be financed by Canada, and how much will be financed by its partners. The only certain information is that Turkey will not be financing any part of the deal, since 100% financing has been specified as part of the bidding requirements. This will include financing even the local costs, which will be of direct economic benefit to Turkey.
There is strong reason to believe that the CANDU deal may not be conducted on the basis of the OECD consensus rules. One of AECL's partners in the Turkish deal is Hanjung (Korea Heavy Industries and Construction -- a subsidiary of the Korea Electric Power Corporation (KEPCO). In October 1996, the Banque Nationale de Paris revealed that South Korea (which is not a member of the OECD) violated the OECD consensus agreement by agreeing to finance 100% of capitalized interest for the Qinshan Phase II station, rather than 15% as stipulated by the consensus agreement. Faced with this decision by the South Koreans, France and the other financing parties simply decided to violate the agreement as well. Financing of local costs and capitalized interest is a tremendous incentive to countries such as China and Turkey, which are starved for capital. However, depending on construction time, the potential cost to the financing parties is huge. It has also been disclosed that French financing for the Daya Bay plant included 30% financing of capitalized interest -- a doubling of the OECD consensus rate.
Canada's financing of AECL's sale of reactor to the Peoples' Republic of China had neither political risk insurance, nor an Enhanced CoFinancing (ECO) guarantee (essentially a guarantee of the guarantee). Political risk insurance is provided by most export credit agencies, including the EDC. The Multilateral Investment Guarantee Agency (MIGA) of the World Bank, formed in 1988, is another popular source for political risk insurance. Political risk insurance typically covers areas such as currency transfer/foreign exchange; expropriation; breach of contract; and war/civil disturbance. Insurance for these contingencies would seem to be prudent in the case of any large scale loan to Turkey, which is subject to significant political unrest. The country is in a virtual state of civil war, and has experienced three military coups in the last 40 years. The Turkish military also forced a change of government in 1997. Coups or forced changes in government may result in dramatic policy swings on controversial and expensive mega-projects such as nuclear power plants. As noted above, the 1971 and 1980 military coups were an important factor in the failure of earlier Turkish attempts to build nuclear reactors.
8.4. Technology Transfer
As in the case of the sale of reactors to China, it is virtually certain that AECL will negotiate some degree of technology transfer in order to promote a sale. At the very least, AECL will commit to technology transfer as part of any subsequent or incremental part of the deal. Typically, there would be less technology transfer in an initial reactor sale, with a correspondingly greater benefit to the vendor. AECL has already proven itself willing to part with CANDU design information for modest fees.
South Korea is the only country that has actually bought more than one CANDU reactor, and with a buyers' market in effect for so long, Korea was able to negotiate increasingly greater technology transfer for the second, third and fourth reactors. Only Wolsong-1 (ordered in 1976) was a turnkey project. For example, the last two reactor sales to South Korea (ordered in 1992) created only $250 million each worth of business for Canadian-based companies, since the Koreans built roughly 75% of the reactors themselves.
AECL is under tremendous financial and political pressure to come up with sales, and faces stiff competition for the Turkish deal. Turkey is thus in a good position to demand generous terms for a loan, and to obtain technology transfer as part of the deal. AECL and nuclear power supporters in the government and federal bureaucracy are undoubtedly prepared to make large sacrifices in order to obtain the public relations victory of another reactor sale.
8.5. Performance Guarantees and Warranties
Another question about the CANDU deal with China is whether AECL will be providing performance guarantees of any kind. In the case of the proposed BOT (build, operate, and transfer) deal with Turkey in the 1980s, AECL reportedly had to guarantee a 75% capacity factor. This would pose an extremely high risk for AECL, since CANDU reactors have an extremely poor performance record. In 1996, Ontario Hydro's 19 CANDU reactors ran at an average capacity factor (load factor) of 66%. In 1996, the average load factor for Pressurized Heavy Water Reactors (the generic name for CANDUs), worldwide was 61.5%. Even under a 100% financed turnkey (i.e. non-BOT) deal, Turkey may be requiring a performance guarantee.
Regardless of possible performance requirements, a warranty is being required by Turkey for spare parts during a two year warranty period plus an optional 3 year warranty. What part of this liability (if any) will be born by AECL's partners? In multi-billion dollar nuclear mega-projects, such considerations can involve hundreds of millions, even billions of dollars.
NEXT: The CANDU Syndrome, Part Three