US embassy cable - 04ANKARA3677

UNCLAS SECTION 01 OF 03 ANKARA 003677 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR E, EUR/SE, AND EB/IFD 
TREASURY FOR OASIA - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, EIND, PGOV, TU 
SUBJECT: "THE LAST COMMUNIST TOWN IN TURKEY" 
 
REF: A. ANKARA 3257 
     B. ANKARA 3585 
 
1.  (Sbu) Summary:  A trip to two Black Sea towns dominated 
by steel and coal parastatals, 
provided a glimpse of two very different state-owned 
companies. The coal company is a 
perennial money-loser with backward technology, a politically 
powerful, highly-paid, 
unionized labor force, with nary a hint of  privatization. 
The steel company, on the other 
hand,  appears reasonably well-run, currently profitable and 
partially- owned by investors 
on the stock exchange.  However, since the steel company 
could actually be privatized, 
the GOT,s slowness to do so is revealing of Turkish 
recalcitrance about meaningful 
privatization. End Summary. 
 
2.    (U) Econoff and econ specialist traveled in early June 
to the towns of Eregli and 
Zonguldak on the Black Sea coast.  Eregli,s economic 
activity is dominated Erdemir the 
state-controlled and 50-percent state-owned steel company 
which has its headquarters 
there.  Zonguldak,s business life is dominated by the 
100-percent state-owned coal 
mining company, TTK. 
 
Zonguldak, "The Last Communist Town in Turkey": 
--------------------------------------------- -- 
 
3.  (Sbu) In Zonguldak, where coal has been mined since late 
Ottoman times, the town,s 
economic life is dominated by the 100-percent owned coal 
company, TTK.   Emboffs met 
first with the President, Secretary-General and Press Officer 
of the local chamber of 
commerce:    Mr. Salih Demir,       Ms. Renda  Okay, and Mr. 
Kemal Mert, respectively. 
These private business people were scathing about TTK in many 
respects.  They pointed 
out that it was difficult for local businesses to compete 
with TTK,s highly-unionized and 
highly-paid (by Turkish standards, anyway) labor force. 
Mert  said that TTK employees 
are paid TL 1.3 billion (about $900) a month whereas the 
going wage for an unskilled 
laborer is about TL 400 million ($ 260).  Note: At this 
salary, TTK employees earn about 
$12,000 per annum, more than three times Turkey,s per capita 
GDP. End Note.   The 
Chamber of Commerce officials said the coal miners, labor 
union is very powerful 
politically, and that no Turkish official dares talk about 
privatizing TTK.   Emboffs couldn,t 
help noticing that  the coal miners, union building in 
central Zonguldak was noticeably nicer 
than the Chamber of Commerce building. 
 
3.  (Sbu) Though Zonguldak had the feel of a run-down 
coal-mining town, the 
Chamber of Commerce officials said there is nevertheless some 
 local business 
other than TTK. Renda said the Chamber had helped get a ferry 
company to begin 
service from the Ukraine to Zonguldak, which has brought in 
some suitcase trade 
(i.e. Ukrainian traders and individuals who come to Turkey on 
short consumer-goods 
buying trips).  Salih himself runs a private coal mining 
company, leasing mines that TTK 
is no longer using and using lower-wage workers to turn a 
profit.  Renda said there were 
some small textile firms that do subcontracting for bigger 
textile exporters, but the number 
of workers employed in this line of work shrank by more than 
50 percent with the 2001 
financial crisis, and has not come back. 
 
4. (Sbu) Citing the role of the labor union,  and the heavy 
presence of the TTK parastatal, 
Mert said Zonguldak is "the last communist town in Turkey." 
 The Director General of 
TTK,  Rifat Dagdelen is a career government employee in the 
mining sector, whom the 
Chamber of Commerce people characterized as a communist type. 
 When emboffs went 
to meet with  the TTK manager, a floor-to-ceiling photo of 
the face of a coal miner--much 
larger than the requisite picture of  Ataturk--provided 
symbolic reinforcement to the 
Chamber of Commerce official,s point.   The DG seemed 
reticent to provide much 
information, saying it was inappropriate, for example, to 
provide us a financial statement. 
He did reveal, however, that TTK turned in a  TL 493 trillion 
($326 million) loss in 2003. 
When asked whether there was any consideration to privatizing 
TTK, he said there was none. 
Note:  TTK, like a number of other state-owned companies in 
Turkey, are owned not by the 
Privatization Authority, but by the Turkish Treasury. These 
companies, such as TTK and 
the railroad, are considered either too unprofitable to 
privatize or too politically sensitive, 
but they remain a long-term drain on the state.  End Note. 
 
5.  (Sbu) The DG emphasized TTK,s profound need for 
investment, repeating this point 
several times, and implying that the state had underinvested 
in TTK for decades.  According 
to both the DG and the Chamber of Commerce officials,  the 
new mining law, which was 
passed by the Turkish parliament in recent weeks, may open 
the way for some private sector 
investment.  First, TTK will conduct tenders for 
Build-Operate (but not repeat not 
Build-Operate-Transfer) coal-washing contracts.  Bidders 
would be required to bid to wash 
each ton of coal at a given price.  Under the new law, TTK 
would also have expanded 
scope to lease out mines to private companies. 
 
Erdemir: a (missed) opportunity for a privatization: 
--------------------------------------------- ----- 
 
6. (Sbu) Erdemir, the 50-percent state-owned steel company, 
seemed quite the opposite of 
TTK.  Erdemir gave every impression of being a reasonably 
well-managed, currently 
profitable, stock exchange-quoted company.  Emboffs met with 
Erdemir Director-General 
Kerim Dervisoglu, who said he had come out of retirement to 
manage the company after 
some less-successful managers had run into problems a few 
years ago.  Dervisoglu, who had 
spent his career with the company and said he had been 
trained by Americans from U.S. 
Steel, came across as a business-oriented steel expert, as 
did his board member colleague, 
Ali Sedat Kara,  and SVP for operations, Fadil Demirel. 
Note: Erdemir has an significant 
American connection.  A USAID loan in the 1960,s played a 
key role in the financing, and 
U.S. Steel helped set up the company and train the staff. 
End Note.  In a quick plant tour of 
Erdemir,s large flagship complex at Eregli, the production 
lines were of varying vintage but 
included one mid-nineties coil rolling facility that seemed 
very modern.  Erdemir officials 
said they are working towards complying with ISO 14000 
environmental and safety standards. 
 
7. (Sbu) Erdemir is the largest steel company in Turkey. It 
produced 3.5 million tons of steel in 
2003, with sales of $1.3 billion in 2003, up from five 
straight years of less than $1 billion in sales. 
Whereas Erdemir ran small losses for four of the previous 
five years, in 2003 it turned a healthy 
$360 million net profit.  By all accounts, Erdemir is on 
track to do well in 2004 as well.  Osman 
Ilter, the Privatization Authority Vice President responsible 
for the Erdemir privatization process, 
recently told econoffs that Erdemir could not keep up with 
surging local demand for steel from 
the booming Turkish auto and white goods sector, which 
Dervisoglu confirmed.  Ilter said that, 
for this reason, Erdemir, even though it is theoretically on 
the verge of being privatized, is going 
ahead with a self-financed expansion to 7 million tons 
capacity.  Dervisoglu explained that the 
expansion will take place in stages, expanding to 4.5 million 
tons by the end of 2005 and to 7 
million tons of capacity by 2007.  Dervisoglu pointed out 
that the Erdemir Group also owns 90 
percent of Isdemir, the steel company in Iskenderun, in 
Southeast Turkey, and that the group 
is making a significant investment to convert Isdemir's 
production entirely to flat products 
by 2007.  Note: These capacity-expansion investments are 
among a relatively small 
number of such investments in Turkey that post is aware of. 
End Note. 
 
8. (Sbu) A combination of strong local demand, decent 
management and, more recently, 
favorable global steel prices, have sharply improved 
Erdemir's performance and near-term 
prospects.  Econoff had asked Ilter  why the GOT did not take 
advantage of favorable 
conditions and performance to move quickly to privatize 
Erdemir, particularly since Ilter 
said two big steel groups (Arcelor and LNM of India) were 
interested.  Ilter said two 
potential bidders were not enough, and that they needed to 
await the privatization of the 
oil refinery, TUPRAS, to demonstrate credibility.  He also 
complained that the recent reduction 
of Chinese steel prices had unfairly reduced Erdemir,s stock 
market value.    Unlike most 
Turkish state companies, nearly half (46.27 percent) of 
Erdemir's shares are quoted on the 
Istanbul Stock Exchange, a fact that could, in theory help 
the Privatization Authority's problem 
with evaluating whether bids on block sales reflect a "fair" 
valuation. 
 
9. (Sbu) Dervisoglu said nothing about privatization, and 
gave every indication that he and 
his team would be running the company for the foreseeable 
future.  Though Dervisoglu talked 
like a company man, rather than a bureaucrat, he and his 
fellow board members are appointed 
by the state.  Even if, as Finance Minister Unakitan recently 
suggested on a U.S. trip, 
Erdemir is able to float some additional shares in the U.S., 
giving private shareholders majority 
ownership, the state would most likely retain effective 
control through its power to appoint 
board members. 
 
Comment and Conclusion: 
--------------------------------- 
 
10. (Sbu) Erdemir and TTK are in some ways symbolic of the 
two categories of state-owned 
companies in Turkey.  Erdemir, like many of the companies in 
the Privatization Authority,s 
portfolio, has real value, and could be privatized with the 
consequent benefits of efficiency 
gains and sales proceeds which would help the state reduce 
its debt burden. Instead, of 
moving quickly to privatize, however, the state gives every 
appearance of moving at a snail,s 
pace, meanwhile happily retaining control, with the political 
power that implies. 
 
11. (Sbu) TTK, at the other end of the spectrum, is a 
politically-untouchable, loss-making, 
throwback to an earlier age, and will probably stay that way 
for some time.  Each company, 
in its own way, exemplifies how deeply-rooted is Turkish 
state ownership 
of at least a portion of the corporate sector. 
EDELMAN