US embassy cable - 04ANKARA6491

UNCLAS SECTION 01 OF 02 ANKARA 006491 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
USDOC/ITA/MAC FOR DAVID DEFALCO 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, PGOV, TU 
SUBJECT: A SNAPSHOT OF PRIVATIZATION IN TURKEY 
 
REF: 04 ANKARA 1929 
 
THIS CABLE WAS COORDINATED WITH CONGEN ISTANBUL. 
 
1. (SBU) SUMMARY.  After a long period of inaction on major 
privatizations, the GOT is attempting to move forward with 
its largest ticket items--including Turkey's telecom 
monopoly, Turk Telecom; petroleum refining company, Tupras; 
Tekel's tobacco arm; Petkim and Turkish Airlines (THY); and 
steel conglomerate, Erdemir.  Over the past two decades, and 
especially since the 2001 financial crisis, the GOT has 
managed to privatize many smaller and medium-sized State 
Economic Enterprises (SEEs) but it has hardly privatized any 
of the larger SEEs.  Court challenges, labor grievances, 
repeated delays, political-sensitivities, and  a focus on 
proceeds rather than efficiency gains have hindered 
privatization.  Though the Privatization Administration (PA) 
claims it is ratcheting up its efforts to move the larger 
SEEs, the GOT's track record is not encouraging. 
 
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Privatization Administration's Priorities 
------------------------------ 
 
2. (SBU) To date, the PA says it has raised 9 billion dollars 
in cumulative privatization revenues, since 1985, including 
about 1.1 billion dollars in 2004 alone from the sale of 
close to 30 SEE's.  However, most of these sales have been 
small and medium companies, which means that the PA is now 
left with the more challenging obligation of selling off the 
state's largest companies--as agreed under the IMF program. 
Several of these large companies continue to be perpetually 
on the verge of privatization, with progress stymied for a 
variety of reasons. 
 
--Turk Telecom (TT):  Unsuccessful efforts to privatize TT 
date back to the early 90's.  The GOT remains committed to 
privatizing TT but its frequent postponement of promised 
tender launches and conflicts between the Competition 
Authority (CA) and Telecom Authority (TA) on (TT's 
privatization strategy) have undermined the GOT's credibility 
on TT privatization.  Despite repeated announcements to open 
tenders for a 55 percent block sale of TT in October and 
again by November, the PA has yet to launch a tender.  A 
fuller discussion of TT will be reported Septel. 
 
--Tupras: After a successful auction in the first quarter of 
2004, won by a consortium led by Russian TATNEFT, the sale of 
Turkey's oil refining company, was held up by legal 
challenges brought by the company's labor union.  An October 
court decision rejecting the Turkish Competition Authority's 
(CA) proposal to throw out the labor union's case has made it 
more likely that the sale will be canceled altogether. 
 
--Tekel: The PA planned to launch tenders for the sale of the 
company's tobacco operations in October.  This would have 
been the second attempt to sell the tobacco arm--the first, a 
year ago, being marred by unexpectedly low bids ultimately 
rejected by the government.  The CA has advised the PA to 
sell Tekel's tobacco brands separately, but the PA has not 
made an official announcement saying they would follow the 
CA's advice.  The GOT still hopes to privatize by year's end. 
 
--Petkim and THY: The PA claimed that both the petrochemical 
producer, Petkim, and Turkish Airlines (THY) would sell 
shares through Initial Public Offerings (IPOs) in November 
and December.  There have been no recent reports of progress 
with a Petkim IPO, however, the PA invited bids for a private 
offering of 20 percent of THY shares on November 17. 
(Currently, 98.17 percent of THY is state-owned.)  The PA 
also announced plans to provide discounts to small domestic 
investors with eligibility for payment in 5 installments. 
News reports indicate a block sale of a larger share of THY 
stock may follow. 
 
--Erdemir: This steel corporation is one of the biggest 
companies in Turkey.  The PA now says 46 percent shares will 
be sold in a block sale in early January or February. 
However, the President of the Competition Lawyer's 
Association reported that Raiffeisen Investment, the PA 
consultant for the Erdemir privatization, had ties with a 
British/Indian investor, Lakshmi Mittal, who expressed 
interest in acquiring Erdemir.  If these claims are 
substantiated, it could cast doubt on the impartiality of the 
tender process.  Press reports also suggest interest from 
U.S. Steel and the Luxembourg-based Franco-Belgian Arcelor 
Group. 
 
----------------------------- 
Comment: Dismal Track Record 
----------------------------- 
 
3. (SBU) Despite the GOT's repeated claims of making headway 
on its privatization endeavors and news coverage of imminent 
tender opportunities, Turkey's willingness or ability to 
privatize its largest SEE's remains uncertain.  The long 
track record of delays, legal obstacles, and canceled 
sales--whether due to unfavorably low bids or legal 
decisions--seems likely to continue.  The PA continues to 
push back the launch of tenders for major SEE's. The GOT 
remains fixated on price alone as the criteria for a sale 
without considering the efficiency gains of private sector 
management.  Furthermore, the internal strife between the 
bodies responsible for moving privatization forward--the PA 
and CA--could add to the delays or create uncertainty for 
potential bidders. 
 
4. (SBU) The GOT says it is committed to its privatization 
goals, but the political-sensitivity of the sale of one of 
the GOT's most important companies, Turk Telecom, exemplifies 
the challenges facing Turkey's privatization agenda.  One of 
the State's largest SEE's, TT, employs thousands of employees 
and has historically generated cash for the State Treasury. 
In addition, the GOT and TT itself may still oppose a TT, 
"prize state asset," sale to foreigners particularly if it 
yields a perceived low price--a likely result in the current 
environment of reduced international investor appetite.  Many 
Post contacts tell us officials run a significant risk of 
being prosecuted if they sell SEE's at too low a price. 
Moreover, if Turkish courts continue to rule in favor of 
labor's objections, then further delays and even 
cancellations are predicted to follow.  Thus, it is unlikely 
that the GOT will meet its goals of privatizing its big 
ticket items by the end of the year. This is particularly 
true for block sales of majority stakes, as opposed to 
minority IPOs like THY and Erdemir.  These minority share 
IPOs avoid accusations of selling state assets too cheaply, 
since the stock market determines the price, and they enable 
the GOT to retain effective control.  End Comment. 
EDELMAN