US embassy cable - 03ANKARA6554

UNCLAS SECTION 01 OF 02 ANKARA 006554 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
NSC FOR BRYZA AND MC KIBBEN 
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PGOV, TU, EINV 
SUBJECT: LATEST NEWS ON 2003 AND 2004 PRIVATIZATION AND 
WORKFORCE REDUCTION PROGRAMS 
 
 
REF: ANKARA 6165 
 
 
1.    (SBU) Summary. President of the Privatization Authority 
(PA) and Treasury Undersecretariat Director General for State 
Economic Enterprises updated Econoffs on the progress of the 
2003 privatization and workforce reduction programs and 
expectations for 2004. The 2003 privatization program appears 
to be proceeding, albeit with some delay, and additional 
retirement incentives may enable the GOT to meet the 
workforce reduction targets. End Summary 
 
 
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Privatization Authority President Metin Kilci 
----------------------- 
 
 
2.    (SBU) Although PA President Kilci is satisfied with the 
current status of the 2003 privatization program, he 
acknowledged that he will have a better idea of the 
likelihood of meeting 2003 revenue targets after 24 October, 
when bids on Tekel (tobacco) and Tupras (petroleum) are due 
(Ref). While interest in Tupras is a &bit slower8 than in 
Tekel, Kilci is confident that PA,s value assessments will 
be met. Kilci insisted that reports that political 
considerations may influence the PA not to sell Tupras to a 
Russian company are false -- The PA will sell it without 
regard to the nationality of the successful bidder. 
 
 
3.    (SBU) After bids are received, 2-3 weeks will pass 
while the PA prequalifies bidders (essentially, to ensure 
that their documents are in order) and gives them additional 
data room access. Then, the PA will decide whether to hold a 
second round of bids (its current thinking), or an auction. 
If there are more than 5-6 bids (which Kilci does not 
expect), a third round of bids will be held. The PA will 
announce the winner shortly after the final round (within 
5-10 days, per today's statement by Finance Minister 
Unakitan), and the Competition Authority then has 15 days in 
which to approve the sale. At this point (around the end of 
November), the PA will negotiate a contract with the 
successful bidder (1-2 months, per Kilci). Thus, the process 
should conclude sometime in December or January. 
 
 
4.    (SBU) The PA is having difficulty hiring an advisor for 
Turk Telekom because of public procurement law constraints, 
but will soon discuss its proposed strategy with the World 
Bank. Before tendering Telekom, Kilci wants to find at least 
3 &seriously interested8 and adequately financed investors, 
preferably with backing from an experienced strategic 
operator. The PA plans an initial block sale of a majority 
interest, followed in 6-7 months by an IPO of the remaining 
shares. The PA is &not in a hurry8 to privatize Telekom, 
since once the telecom sector is liberalized in 2004, there 
will be many new entrants. 
 
 
5.    (SBU) Privatization of smaller companies is also 
proceeding. Currently at the tender stage are 3 fertilizer 
factories, 2 natural gas distribution companies, and 6-7 
textile factories. Ten more companies will be tendered by the 
end of this year. 
 
 
6.    (SBU) In 2004, the sale of sugar factories and 
electricity generation and distribution assets will be major 
projects, as will sugar factories. Kilci expects the PA will 
also become more involved with bank privatizations. Kilci 
thinks restructuring of bad debts is the major challenge 
facing privatization of the state banks. (Following the Kilci 
meeting, the GOT announced that for 2004 it was targeting 
receipts from privatizations of USD 3 billion.) 
 
 
7.    (SBU) Kilci also explained why the PA had agreed to 
restructure USD 195 million owed by Petrol Ofisi, arising out 
of its purchase by Is-Dogan (a partnership between leading 
private bank Is Bankasi and media holding company Dogan). 
According to Kilci, without a restructuring PO would have 
defaulted, because the original payment scheme was not well 
designed: It required too much up-front money, and did not 
require a bond. Payments have now been extended for an 
additional two years (at the same interest rate) and a bond 
(reportedly for USD 90 million) received. 
 
 
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Treasury D.G. Responsible for SEEs Mehmet Rasgelener 
----------------------- 
 
 
8.    (SBU) In a separate meeting, Treasury Director General 
Mehmet Rasgelener also said that the AKP administration is 
&very eager8 to privatize. The IMF is pushing SEE-DG to 
move quickly -- the program requires all SEEs to be 
privatized within the next two years -- and Rasgelener 
expects his department to be abolished within two years. 
According to Rasgelener the only bottleneck is that the GOT 
is having difficulty finding qualified buyers. 
 
 
9.    (SBU) Rasgelener explained that all SEEs are owned 
either by PA or SEE-DG. Those that are ready for 
privatization are transferred from SEE-DG to PA, upon 
application by the PA to the Higher Privatization Council. 
This can occur either because the PA thinks a SEE is 
marketable, or because an outside buyer has expressed 
interest. (In prior meetings, PA personnel advised Econoffs 
that the SEE-DG occasionally seeks to transfer a SEE to the 
PA knowing it must be liquidated, because SEE-DG prefers the 
PA to do the dirty work.) 
 
 
10.   (SBU) Rasgelener said that there currently are 19 
companies in the SEE-DG portfolio, 20 at the PA, and three 
that both authorities are involved in, because of special 
legislation (Turk Telekom, Ziraat Bankasi and Halk Bankasi). 
Overall, the SEE-DG portfolio is profitable. Once Turk 
Telekom is privatized, however, the portfolio will become 
unprofitable, primarily because of the rail and coal SEEs. 
The remaining money-losing SEEs are &manageable.8 
 
 
11.   (SBU) Rasgelener disputed Kilci,s claim that bad debts 
are an impediment to bank privatizations. He thinks the major 
problem is that the banks are so large it is hard to find 
buyers. Rasgelener said that a consultant has been hired, and 
GOT should have a &road map8 by early 2004. (Separately, 
Citibank Manager Semih Ergun told Econoff he doubted any 
buyer could be found for state banks Vakif, Ziraat and Halk 
as currently structured.) 
 
 
12.   (SBU) With respect to workforce reductions (total YE 
target 45,792; achieved to date 33,060), Rasgelener said that 
the IFIs are insisting that not only must the overall target 
be achieved, but also that each SEE must meet its individual 
target. As such, the IFIs have refused to give GOT credit for 
those SEEs that have exceeded their targets -- some 7,000 
workers to date, and many thousands more once Tekel and 
Tupras are sold (per Ref, probably by the end of January). 
Rasgelener said that original targets were set by an 
"unscientific8 process: The World Bank produced a study 
showing 100,000 redundancies, and the GOT and World Bank 
essentially horse-traded down to the current figure. 
Nevertheless, next week the GOT will submit to Parliament a 
draft law, providing an additional 20 p/c severance payment 
bonus. With this additional incentive (which, according to 
post calculations, will cost approximately $7,000 per 
worker), Rasgelener expects to meet all targets by year-end. 
Rasgelener also noted that, under the IMF agreement, SEEs can 
re-employ up to 10% of the number of workers laid off, and 
that it will take approximately one year before the gains 
from reductions exceed the initial costs. 
EDELMAN