US embassy cable - 05ANKARA2159

UNCLAS SECTION 01 OF 02 ANKARA 002159 
 
SIPDIS 
 
SENSITIVE 
 
EB/CBA FOR FRANK MERMOUD 
TREASURY FOR CPLANTIER AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
USDOC/ITA/MAC FOR DAVID DEFALCO 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, BEXP, TU 
SUBJECT: PA CONFIDENT ABOUT PRIVATIZATION DEALS, DESPITE 
ANOTHER FAILURE 
 
REF: ANKARA 2078 
 
1. (SBU) Summary.  Privatization Administration (PA) 
President Metin Kilci's confidence in the PA,s ability to 
move forward with its ambitious privatization agenda for 2005 
has been boosted by proposed changes to the GOT,s 
privatization law that should reduce legal challenges to PA 
transactions and by the unprecedented strong interest in 
critical SEEs like Turk Telecom and Erdemir steel company. 
Yet, the PA announced April 11 the failure of another tender 
for state tobacco company Tekel.  This additional failure 
suggests the PA may be able to keep selling minority shares 
through IPO's but will have trouble turning control of large 
companies over to private sector majority ownership.  End 
Summary. 
 
2. (U) In a April 5 meeting, Privatization Administration 
(PA) President, Metin Kilci said 2004 was a very good year 
for privatization and he predicts that 2005 will be an even 
more productive year.  In 2004, cash payments from 
privatization transactions amounted to $1.5 billion.  In the 
first three months of 2005 alone, the PA received 
approximately $600 million in cash proceeds.  Though some of 
this money came from last year,s transactions, $450 million 
came from the March 2005 initial public offering (IPO) of 15 
percent of state oil refiner, Tupras. 
 
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PETKIM AND OTHER SEEs IN THE PIPELINE 
------------------------------------- 
 
3. (U) Kilci was particularly bullish on the PA,s upcoming 
IPO of 30 percent of Turkey,s state petrochemical company, 
Petkim, and considers Petkim a bellwether privatization for 
the PA,s ambitious privatization agenda (see reftel).  The 
PA launched a road-show for Petkim April 6 in the U.S. and 
finished the European segment of its tour April 13.  Kilci 
noted that U.S. investors showed a lot of interest in past 
road-shows for Turkish Airlines (THY) and Tupras, so he was 
confident the PA would generate similar interest in Petkim. 
In fact, the PA told Economic Specialist that the road-show 
had been a success and the PA received higher than expected 
demand in the preliminary bid collection process.  The PA 
started to receive final bids April 13. 
 
4. (U) Kilci said privatization schedules for other large 
State Economic Enterprises (SEEs), including Tupras (oil 
refiner), Turk Telecom, and Erdemir (steel) were on track. 
After a successful Tupras minority share IPO in March, the 
Competition Board approved a block sale of a majority of 
Tupras's shares, and the tender announcement for the sale 
should be made sometime in April.  According to Kilci, Turk 
Telecom (TT) is attracting more compelling interest than ever 
before.  There are currently 10 domestic and foreign parties 
showing strong interest.  The PA will be collecting bids for 
the 55 percent block sale on May 31, as scheduled.  Kilci 
said there is also very high interest in the Erdemir steel 
corporation.  The PA hopes to start the tender process for a 
46.12 percent block sale of Erdemir in the second half of 
April and within two or three months of opening the tender, 
the PA believes it can evaluate the viability of interest. 
 
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LEGAL PROBLEMS REMAIN 
---------------------- 
 
5. (U) Electricity Distribution Privatization: Kilci said the 
electricity distribution privatization--intended to start in 
March--was delayed because certain legislative changes that 
needed to be in place before the privatization have not yet 
been implemented.  Kilci said, however, that the relevant 
agencies are now agreed on the proposed amendments and they 
should be sent to the Prime Ministry within weeks.  The PA 
expects to start the tender process within two weeks after 
the Parliament ratifies the amendments.  The PA will use a 
"hybrid" model whereby they will sell shares of a 
newly-created company that holds operating rights for the 
distribution network rather than by a direct sale of the 
assets, which will remain with the government.  Kilci called 
this a "transfer of operating rights-based share sale."  The 
term of the operating rights will be fixed between 30-49 
years.  The asset sales methodology would have required a 
changed in the Constitution--a move the GOT was not willing 
to make. 
6. (U) Turk Telecom: Kilci also addressed the unresolved 
constitutional issues concerning the Turk Telecom (TT) 
privatization.  The PA is seeking a ruling from the 
"Danistay" (Council of State) on a proposed draft concession 
agreement which will set the terms and conditions of the TT 
sale.  TT's buyer would have full use of the assets and 
infrastructure of the company, but the state would retain 
certain rights if the concession agreement were violated. 
 
7. (U) Tekel: A few days after the meeting with Kilci, the PA 
encountered yet another setback to its privatization agenda 
with the failure to receive bids on the tobacco operations of 
state company, Tekel.  This was the PA,s second failed 
attempt to sell the tobacco business--the first being spoiled 
by a GOT decision that the winning bid--$1.15 billion by 
Japan Tobacco--was too low and fell short of government 
expectations.  Officials have been reported saying that the 
lack of buyer interest in Tekel was the result of a recent 
special consumption tax increase on tobacco products. 
Tobacco companies originally interested in bidding on Tekel 
have reportedly requested the GOT to reduce the tax and 
commit to a fixed five-year tax rate. 
 
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OVERCOMING HURDLES 
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8. (SBU) Despite the above-mentioned challenges, Kilci 
remained confident that proposed legal amendments to the Law 
on Privatization Practices could eventually reduce the 
ability of opponents of privatization to challenge 
privatization transactions successfully.  He said that under 
the current system, any individual has standing to bring a 
suit against the PA for any transaction in any court.  There 
are currently 80 court cases pending throughout the country 
and the PA only has 15 lawyers to advocate on its behalf. 
The proposed amendment requires that any lawsuit against the 
PA be brought to the Danistay directly.  The Danistay has 
established a special "13th Chamber" that would only be 
responsible for privatization and competition cases. 
 
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COMMENT 
-------- 
 
9. (SBU) The PA is committed to achieving its privatization 
goals and appears to be pushing ahead with its ambitious 
agenda.  The Petkim road-show seems to have generated a good 
level of interest.  However, repeated delays, setbacks, and 
legal obstacles are a lurking threat.  The second failed 
attempt to privatize Tekel,s tobacco business underlines the 
PA's weak record, particularly for block sales of large 
companies.  So far, the PA has been successful with sales of 
minority share IPOs but larger enterprises like Turk Telecom, 
Erdemir, and Tupras--the GOT's "crown jewels" according to 
Kilci--have yet to be transferred into the private sector. 
End Comment. 
EDELMAN