US embassy cable - 05ANKARA446

UNCLAS SECTION 01 OF 02 ANKARA 000446 
 
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: "2005-YEAR OF PRIVATIZATIONS?" 
 
REF: ANKARA 06963 
 
1. (U) Summary:  Vice President of the Privatization 
Administration (PA), Hasan Koktas, told us he is bullish on 
Turkey's privatization prospects for 2005 noting Turkey's 
favorable market conditions.  Koktas is in charge of several 
of the GOT's largest pending privatizations: the tobacco 
division of Tekel; the state oil refining company, Tupras; 
and the massive steel corporation, Erdemir.  If the PA can 
pull off one or two of its planned large privatizations in 
2005, it will help restore the credibility of the program. 
End Summary. 
 
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Privatizing Portfolio of Large Companies 
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2. (U) Koktas told econoffs that while the PA has succeeded 
in privatizing most of the state's small and medium-sized 
companies, it is hoping to privatize 3 to 5 of the state's 
largest companies this year.  Koktas is in charge of some of 
the most ambitious privatization projects slated for 2005, 
including: the tobacco division of Tekel; the state oil 
refining company, Tupras; and the steel corporation, Erdemir. 
 Though not under Koktas' responsibility, the PA also plans 
to tender telecom parastatal Turk Telecom in 2005 and to try 
again to sell the petrochemical company, Petkim.  Having 
succeeded in selling much of its portfolio of small 
companies, Koktas claimed that the PA is ready to move to 
market the large state-owned companies.  He pointed out that 
there is not enough domestic capital to support the 
privatization of some of the larger companies--making 
international interest from "strategic investors" critical. 
Koktas was hopeful that a good economic outlook, EU 
accession, and favorable global market conditions will 
facilitate this. 
 
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Plans for Three Giants: Tekel, Tupras, and Erdemir 
--------------------------------------------- -------------- 
 
3. (U) Koktas shared with econoffs the PA's privatization 
timeline and plans for Tekel, Tupras, and Erdemir: 
 
--Tekel: 4 or 5 companies are interested in the tobacco 
operations of Tekel.  The PA expects to receive the first 
round of bids on February 18.  Japan Tobacco International 
(JIT) and British American Tobacco are two interested 
companies which purchased tender documents.  (Though Koktas 
claimed that Phillip Morris was still undecided on whether or 
not it would bid, press reports indicate that competition 
barriers would more than likely exclude Phillip Morris from 
bidding.)  Note: In 2003, JIT's $1.3 billion bid was rejected 
as too low.  End Note. 
 
--Tupras: The PA expects to launch a tender announcement for 
Tupras during the first week of April.  Though the last 
attempt to sell 65% of the company was blocked by legal 
challenges, Koktas is confident the next attempt will be more 
successful.  He thought that expected changes in the 
Privatization Administration basic law being debated in 
Parliament would reduce the grounds for legal challenges. 
The PA is contemplating selling 51% of the company in a block 
sale and 14% through Initial Public Offerings (IPOs).  Koktas 
also emphasized the need for greater interest from 
international investors, particularly from the U.S. and 
western Europe.  He noted that mainly Russian companies had 
shown serious interest in Tupras previously. 
 
--Erdemir:  As one of the biggest companies in Turkey, Koktas 
said that a successful sale of the Erdemir steel corporation 
would be a significant achievement in the GOT's privatization 
efforts.  Currently, 51% of the company is publicly owned and 
traded on the Istanbul stock exchange.  Erdemir itself owns 
2.9% of the company.  The PA plans to sell its 46.12% of the 
total capital of the company.  Along with the 2.9% this would 
ultimately give the buyer the ability to have control of the 
company if it buys an additional 1.1% from the stock 
exchange.  The PA plans to lift the "golden share" condition 
in order to comply with EU principles.  The announcement for 
the sale is scheduled for mid-March.  Note: Erdemir has been 
profitable in 2004 and 2003, as Turkey's auto and white goods 
boom has accelerated demand for steel.  U.S. Steel has 
expressed strong interest in Erdemir (ref), which is welcomed 
by Turkish officials at all levels.  End Note. 
 
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The Tender Process 
------------------- 
 
4. (U) Econoffs asked Koktas if price alone was the main 
factor in evaluating bids and Koktas said it depended on the 
company.  For Erdemir, for example, the PA looks at 2 
pre-qualifications--one being financial and the other 
operational.  Before analyzing the pre-qualifications of the 
company, the PA usually takes 5 months to prepare the tender 
document followed by 2 months of due diligence.  The PA then 
obtains bids and analyzes the business plans--be it 
employment or expansion plans or projections-- as well as the 
pre-qualifications of the companies.  The PA then opens the 
companies' "price envelopes" and prepares a short list of 
companies to participate in the auction process.  The results 
of the tender process are sent to the Competition Authority 
for approval and subsequently to the Privatization High 
Council. 
 
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Legal Obstacles to Privatization 
-------------------------------- 
 
5. (SBU) The PA's last successful sale involving a large 
parastatal, was the sale of a minority share of Turkish 
Airlines (THY) through an IPO.  But Koktas believes any 
future big sales for Turkey will require greater interest 
from strategic investors.  He claims, however, that the 
current Turkish legal system presents major obstacles to 
Turkish privatization and hampers foreign direct investment 
(FDI) as evinced in the previous failed attempt to sell 
Tupras.  Koktas said that Turkish judges have an ideological 
view of privatization rather than judging transactions on 
their legal merits.  Koktas told econoffs that a new draft of 
the PA law will go to Parliament shortly--amending one of the 
law's articles to ensure that any future suits are sent to 
the high courts and not local courts which might take a 
parochial view of privatization. 
 
6. (SBU)  Comment:  If the PA succeeds in several of its 
planned privatizations as described above, 2005 will be a 
blockbuster year for GOT privatization.  However, if the GOT 
continues, as it has in the past, to focus primarily on price 
as the key criteria for a successful bid and if it does not 
resolve labor grievances before they escalate in the Turkish 
court system, then 2005 may not produce the big ticket sales 
the PA is promising.  If, on the other hand, the PA is 
successful with even one or two big privatizations, it will 
revive the battered credibility of the program, encourage 
Foreign Direct Investment, and help finance the current 
account deficit.  End Comment. 
EDELMAN