US embassy cable - 04ANKARA1929

UNCLAS SECTION 01 OF 02 ANKARA 001929 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR EUR/SE AND EB/IFD; TREASURY FOR OASIA - LEICHTER 
AND MILLS; NSC FOR BRYZA 
 
 
E.O. 12958: N/A 
TAGS: ECON, ECPS, EFIN, PGOV, TU 
SUBJECT: TURK TELEKOM PRIVATIZATION UPDATE 
 
REF: 03 ANKARA 7052 
 
 
1.    (SBU) Summary: According to a Privatization Authority 
(PA) official, the PA is trying  to apply lessons learned 
from the aborted privatization of Tekel,s tobacco operations 
(Ref) to the Turk Telekom (TT) privatization: Managing the 
expectations of potential investors, public officials and 
other stakeholders is essential to success. However, the 
difficulties inherent in the sale of a mammoth and bloated 
SEE have been compounded by problems arising from an 
unexpected source: The new, World Bank-sponsored, procurement 
law. In a separate meeting, the TT General Manager insisted 
the GOT is committed to privatize the company. End summary. 
 
 
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PA Official Says Public Procurement Law Prevents Retention of 
Outside Advisor: 
-------------------------- 
 
 
2.    (SBU) On 24 March Econoffs met with Gunden Cinar, a PA 
expert who is responsible for the TT privatization. Cinar 
said that the PA wishes to avoid unpleasant surprises, such 
as occurred with Tekel and in its two prior unsuccessful 
attempts to privatize TT, and thus intends an &interactive8 
tender process for TT, in which the PA and potential 
investors have an ongoing dialogue, so that each is fully 
cognizant of what the other expects, before bids are made. 
Cinar said that the PA already has had meetings with 
interested parties, and that it intends to take account of 
investor sentiment when it makes its internal valuation of 
TT. (Press reports indicate that TT could be worth as little 
as USD 2-5 billion, although the GOT assuredly is hoping to 
receive much more.) According to Cinar, the GOT is prepared 
to sell 100 percent of TT (other than a golden share whose 
current, legislatively-specified, scope needs to be narrowed 
in order to attract investors), and to sell it to a foreign 
company. Cinar believes that some level of foreign ownership 
is inevitable, since no Turkish companies have the necessary 
know-how and financial wherewithal to act alone -- not even 
the giant Koc and Sabanci groups, who are widely reported to 
be preparing a joint bid for the company. 
 
 
3.    (SBU) Earlier this year, the PA launched a tender for a 
financial advisor for the TT sale. However, according to 
Cinar, the new public procurement law that the World Bank 
championed imposes conditions so onerous that none of the 
firms that bid on the tender -- including well-known 
international investment banks -- qualified. Thus, the tender 
was cancelled. The problem, according to Cinar, is that the 
law, while appropriately-designed for traditional public 
procurement tenders, is not suited for the selection of 
privatization advisors -- for instance, it forbids payment of 
success fees and imposes financial ratios that no investment 
bank can satisfy. 
 
 
4.    (SBU) A GOT Council of Ministers decree -- a 
requirement of the IMF,s Sixth Review -- requires that the 
tender for TT be launched by the end of May. However, 
according to Cinar, a formal tender cannot take place by 
then, since the PA has not yet hired a financial advisor. 
Rather, the PA will invite interested parties to Ankara to 
convey &expressions of interest.8 By the end of June, 
interested parties are to sign confidentiality agreements and 
be provided with a prospectus. However, Cinar admitted that 
it would be difficult for the PA to prepare a prospectus 
without a financial advisor. Moreover, local press reports 
state that the Ministry of Transport intends to submit a law 
requiring TT to be sold at public auction rather than by 
sealed bid, a change that will further delay preparation of a 
prospectus. 
 
 
5.    (SBU) The PA has drafted a law to address the foregoing 
impediments to the process. Under this draft, the PA,s 
ability to hire financial advisors will be improved, the 
scope of the golden share will be reduced, and the Council of 
Ministers will have the authority to announce a &reserve8 
or minimum bid for TT (to improve the transparency of the 
process). The draft will also address the 
politically-sensitive issue of labor redundancies: TT is 
seriously overstaffed (according to one analyst, by as much 
as 90%), and most employees are non-dischargeable civil 
servants. To date, however, Cinar said, senior government 
officials -- including Finance Minister Unakitan -- have not 
taken up the PA recommendations. Nor, according to Cinar, is 
the World Bank keen on changing the procurement law. 
 
 
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Turk Telekom GM Insists GOT is Committed to Privatization: 
-------------------------- 
 
 
6.    (SBU) In a recent meeting, EconCounselor was told by 
TT,s General Manager Mehmet Ekinalan that TT management,s 
prime focus this year is to prepare the company for 
privatization. Ekinalan insisted that the Prime Minister, the 
Finance Minister and the Transport Minister are all committed 
to privatization, and that TT itself is pushing the PA to 
move ahead. Ekinalan said that TT is actively reducing its 
workforce, and projects for 2003-04 a net decrease of 3,700 
(assuming that Parliament passes a law to encourage early 
retirement). Ekinalan, like Cinar, believes that the 
successful bidder will be a consortium composed of foreign 
and local companies. Pending privatization, TT's strategy is 
to focus on data services, especially wide band services, 
since fixed line service offers little growth opportunity, TT 
is weak in GSM services, and no competition currently exists 
in telephony wideband (although a local cable TV company 
offers internet services). TT is offering an 80 percent 
discount on wide band internet access, and may cut prices 
even more, pursuant to a strategy to reduce unit costs 
through increased volume. 
 
 
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Comment: 
-------------------------- 
 
 
7.    (SBU) Unlike previous Turkish governments, the current 
administration seems reconciled to the sale of TT. However, 
all signs point to a sale later, rather than sooner. Indeed, 
the GOT,s claim that TT can be sold by year,s end has a 
certain Alice-In-Wonderland quality. In order for TT to be 
privatized, (a) Parliament must revise the procurement law, 
reduce the scope of the golden share, and change the method 
of sale; (b) the PA must conduct and finalize a tender for a 
financial advisor; (c) the financial advisor must value the 
company and prepare tender documents; (d) the PA must 
announce a tender for TT,s sale; (e) interested parties must 
conduct extensive due diligence and submit bids; (f) the PA 
must  choose a winner and the Council of Ministers must 
approve this choice; and (g) the PA must negotiate and obtain 
Council of Ministers approval of a contract. All this must be 
done over the anticipated objections and obstructions of what 
Cinar referred to vaguely as &various constituencies8 
(including but not limited to the unions and the military). 
At the same time, the PA must restructure TT,s bloated labor 
force through what will undoubtedly be extraordinarily 
difficult labor negotiations. Under these circumstances, the 
GOT,s claims that TT will be sold by year,s end seems 
unrealistic. End Comment. 
EDELMAN