US embassy cable - 03ANKARA7785

UNCLAS SECTION 01 OF 03 ANKARA 007785 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD, AND EUR/SE 
TREASURY FOR OASIA - JLEICHTER AND MMILLS 
NSC FOR MBRYZA AND TMCKIBBEN 
STATE PASS USTR FOR LERRION 
 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, EIND, PGOV, KIPR, TU 
SUBJECT: AMBASSADOR'S MEETINGS WITH FINANCE AND ECONOMY 
MINISTERS 
 
1. (Sbu) Summary: In December 17 meetings with Economy 
Minister Babacan and Finance Minister Unakitan, the 
Ambassador stressed the need for continued fiscal discipline, 
structural reform and resolution of foreign investment 
disputes.  Both Ministers reconfirmed the GOT's commitment to 
continue economic reform.  On privatization, Unakitan seemed 
committed but overly focused on price whereas Babacan 
admitted GOT mistakes.  Unakitan insisted the GOT would not 
relent on fiscal discipline despite the upcoming municipal 
elections.  On investment issues, both Ministers accepted the 
need to resolve some U.S. company disputes and promised 
renewed effort.  Unakitan said the Prime Minister had given 
instructions to solve the data exclusivity problem. 
Babacan's comments on the U.S. Financial Agreement will be 
reported septel. End Summary. 
 
 
2. (Sbu) On December 17, the day before the IMF Board is 
scheduled to consider Turkey's Sixth Review, the Ambassador 
met separately, at his request, with State Minister for 
Economy Ali Babacan  and Finance Minister Kemal Unakitan. 
Ambassador congratulated the Ministers on the GOT's success 
in hitting 2003 macroeconomic targets, but also highlighted 
two major economic challenges:  not succumbing to the 
inevitable populist pressures to spend (or commit to spend) 
before local elections; and ambitiously implementing the full 
range of structural reforms, including privatization. 
 
 
Fiscal Discipline, Minimum Wage Increase: 
---------------------------------------- 
 
 
3. (Sbu) The Ambassador said that one challenge the GOT faced 
was to avoid the temptation to spend in the run-up to the 
March municipal elections.  One example of this danger was 
government consideration of a large increase in the minimum 
wage.  Note: the  press has reported--and GOT officials have 
confirmed privately--that the GOT is considering a minimum 
wage increase of as much as 55 percent.  Private analysts 
immediately pointed out that this could have damaging effects 
on the fiscal situation, inflationary expectations, and wage 
competitiveness. End Note. 
 
 
4. (Sbu) Minister Unakitan confirmed that he was working with 
the Labor and Economy Ministers and the State Planning 
Organization (SPO) to come up with a menu of options and 
their associated costs to present to the Prime Minister. 
Unakitan claimed that the minimum wage increase would not 
present problems from a fiscal perspective, since it could 
increase private sector income tax revenues and receipts of 
social security premia, and could even be a net fiscal plus 
to the State.  Instead, Unakitan said the concern was the 
impact on inflation and on exporters' costs, and seemed to 
imply that these concerns outweighed the advantages of a 
large increase.  In a separate meeting the day before, SPO 
Undersecretary Ahmed Tiktik told econoffs that he had advised 
against a large increase. 
 
 
5. (Sbu) On the broader issue of maintaining fiscal 
discipline despite the elections, Unakitan insisted the GOT 
would not sacrifice its hard-earned credibility, saying "we 
will not do populism."  Unakitan said they would not win 
elections through more spending but by maintaining budget 
discipline, and said the Prime Minister shares this view. 
Unakitan characterized fiscal discpline, along with 
transparency and honesty, as key components of good 
governance.  He personally was willing to be the bad guy and 
say no to spending, citing some USD 30 million in funds to 
municipalities that he does not intend to let them spend. 
 
 
Privatization: 
------------- 
 
 
 6. (Sbu) On the structural side, Babacan said the government 
had made progress, but he acknowledged there had been delays 
as well.  He stressed the government's commitment to reform, 
but added that some changes -- such as privatizations -- 
depend on outside (market) forces as well.  Ambassador 
interjected that, because no one could predict market 
developments, the GOT needed to focus less on the price the 
markets offered for a particular privatization and instead 
emphasize the efficiency gains from the sales.  He added that 
the bids on Tekel -- lower than the GOT had hoped -- 
reflected in part the discount investors demanded because of 
Turkey's poor environment for foreign investment.  The 
Ambassador also worried about some of the groups bidding on 
privatizations. 
 
 
7. (Sbu) Babacan agreed that the GOT had made a mistake in 
raising expectations, adding that he had advised other 
Ministers (read Finance Minister Unakitan) not even to 
whisper about price expectations ahead of the next 
privatization.  He added that Privatization Administration 
President Metin Kilci had told him that, legally, he could 
not accept a bid below the lower range of valuation estimates 
private sector advisors had developed for Tekel.  More 
broadly, he acknowledged that the major obstacles to 
privatization were price and lay-offs, to which Ambassador 
replied that privatization would only lead to efficiency 
gains if they produced lay-offs. 
 
 
8. (Sbu) Babacan argued that the political will to privatize 
had never been stronger, or at least not in recent memory. 
He noted that the GOT had reduced the number of workers at 
state-owned enterprises by 55,000 in 2003 (41,000 of the 
45,000 specified in the IMF plan, plus an additional 14,000 
from SEEs that exceeded their company-specific targets in the 
plan). 
 
 
9. (Sbu) Whereas Minister Babacan seemed to understand the 
problem of being overly wed to internal valuations of 
companies to be privatized, Unakitan seemed very much focused 
on the price to be had, and on not selling state companies 
too cheaply. He stressed his private sector background and 
his belief in privatization, and said the Prime Minister also 
supports privatization.  Saying privatization is a 
multi-faceted issue with labor, regulatory, competition and 
pricing dimensions, he vowed not to deviate from the path of 
privatization.  He said the the Privatization Authority staff 
was relatively inexperienced and would be more effective in 
2004. 
 
 
10. (Sbu) When disposing of state assets, however, Unakitan 
said he tries to sell them at the highest possible price. He 
cited the case of a fertilizer company in Istanbul that was 
going to be sold for USD 36 million until Unakitan, after 
consulting advisors, changed tack and eventually sold it for 
USD 105 million.  With Tekel's tobacco operations, Unakitan 
said they could not sell it for the bid price because it was 
too far below the valuation provided by the GOT's advisors at 
Citigroup.  Unakitan said that the Tupras privatization would 
be finalized in January after an environmental assessment but 
that Petkim was difficult to privatize because of the 
economic situation. 
 
 
Improving Market Confidence: 
--------------------------- 
 
 
11. (Sbu) Babacan pointed to the August 1 Fund decision to 
allow Turkey to "restructure" repayments, as well as a 
successful post-roadshow international bond issuance, as 
turning points in terms of market confidence.  The government 
will meet or exceed year-end inflation and growth targets 
(which SPO U/S Tiktik also told us December 16), and 
expectations for year-end 2004 inflation are within range of 
the government's 12 percent target.  Interest rates have 
fallen faster than expected (and already are at 2004's 
projected average, per IMF ResRep), enabling the government 
to save TL 7-8 quadrillion ($5-5.5 billion) in interest 
payments this year.  The government's interest rate 
projections for 2004 are "very conservative," as the 
government believes it is critical to meet its targets to 
establish credibility. 
 
 
12. (Sbu) Babacan stressed that the government was trying to 
be as consistent and predictable as possible, so as to boost 
investor and consumer confidence.  The success of this 
effort, combined with the fact that the Prime Minister 
clearly has supported the economic program in the last half 
of 2003, has had a positive impact on confidence. 
 
 
Investment Disputes: 
------------------- 
 
 
13. (Sbu) With both Ministers, Ambassador reported that the 
two governments had discussed foreign direct investment 
extensively at the recent Economic Partnership Commission 
meeting, and the GOT delegation had made an effective 
presentation on recent efforts to improve the investment 
environment.  However, attracting more U.S. investment 
required not only macroeconomic stability and a streamlined 
bureaucratic process, but also a good track record among 
existing investors.  Unfortunately, Turkey's track record 
vis--vis U.S. investors is not good.  With Babacan, he cited 
as examples Cargill's zoning problems (and noted that 
Cargill's plant here is its largest greenfield investment in 
the world) and the lack of data exclusivity for 
pharmaceutical companies.  The Ambassador handed both 
Ministers a non-paper laying out U.S. companies' problems 
doing business in Turkey. 
 
 
14. (Sbu) With both ministers, Ambassador suggested that the 
Prime Minister's late January visit to Washington and 
President Bush's late June visit to Turkey (for the NATO 
Summit) were great opportunities for Turkey to highlight its 
improved investment environment, and urged the government to 
resolve at least some of the investment problems/disputes 
before these events.  Turkey, he argued, needs some 
investment success stories. 
 
 
15. (Sbu) Babacan said he fully agreed.  The GOT's 
Coordinating Committee to Enhance the Investment Environment, 
which he chairs, had recently invited a number of foreign 
investors -- including Cargill and Pfizer -- to present their 
problems.  Subsequently, the Prime Minister (with Babacan) 
had met with the Foreign Investors Association (Yased), and 
the Prime Minister had taken detailed notes throughout a two 
hour Yased description of problems facing foreign investors. 
 
 
16. (Sbu) Babacan said awareness of the problem was the first 
step.  Now, the GOT wants to resolve as many of these 
problems as possible and make Turkey investor-friendly.  If 
it fails, Turkey will not attain its growth targets.  He 
argued that the biggest problem facing investment is Turkey's 
judiciary.  The courts take too long to make decisions, he 
said, and those decisions are completely unpredictable -- 
"like flipping a coin."  Judicial reform, he concluded, is 
essential.  (Comment:  Interestingly, State Planning U/S 
Ahmet Tiktik made the same argument to us December 16, 
calling for an "overhaul" of the judicial system.  End 
Comment.) 
 
 
17. (Sbu) Unakitan, who had to cut short the meeting, asked 
the Ambassador to set up another meeting, at which they would 
go over each U.S. company problem in greater detail. Unakitan 
promised to try to help, even if the dispute was outside 
Unakitan's portfolio. 
 
 
18. (Sbu) With Babacan, the Ambassador pressed for progress 
on data exclusivity for pharmaceutical companies.  He pointed 
out that the lack of IPR protection not only is a trade 
problem, in terms of our Special 301 process, but also is a 
disincentive to investment and could lead foreign 
pharmaceutical companies to stop bringing new products to 
Turkey.  He warned that, without progress, the U.S. was 
likely to place Turkey on its Special 301 Priority Watchlist 
next year. 
 
 
19. (Sbu) Babacan said he was aware of the problem, had 
discussed it with the Prime Minister, and intended to talk 
with the Health Ministry to find a resolution.  He said the 
Health Ministry feared the cost implications of implementing 
data exclusivity, but he (Babacan) was confident the 
pharmaceutical companies would work with the Ministry to 
minimize those costs.  Unakitan said the Prime Minister had 
instructed him to work on the data exclusivity issue and 
solve it despite the cost to Turkey. 
 
 
 
 
EDELMAN