US embassy cable - 03ANKARA1447

UNCLAS SECTION 01 OF 03 ANKARA 001447 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EB/IFD/OMA AND EUR/SE 
TREASURY FOR OASIA - MILLS AND LEICHTER 
STATE PASS USTR - NOVELLI AND BIRDSEY 
STATE PASS USDA/FAS 
USDA/FAS FOR ITP/MACKE, MEYER, THORBURN 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, TU 
SUBJECT: TEKEL PRIVATIZATION: DOWNSIZING A MONSTER OR JUST 
MOVING IT TO THE PRIVATE SECTOR? 
 
REF: 02 ANKARA 3538 
 
 
Sensitive but unclassified.  Not for internet distribution. 
 
 
1.  (SBU) Summary:  The AK government has highlighted its 
commitment to accelerate privatization, and to realize $4 
billion in privatization revenue in 2003.  The  feature 
privatization in the first half of 2003 is TEKEL.  This cable 
describes Turkey's 70-year old tobacco and spirits giant 
TEKEL, its plans for privatization, and the conflict between 
this privatization and the goal of market liberalization. A 
newly formed tobacco and alcohol regulations board, which is 
supposed to liberalize the markets, consists primarily of 
former TEKEL employees who have a vested interest in 
protecting TEKEL, including in its privatized form, from 
competition.  Parliament helps protect TEKEL by maintaining 
high taxes and trade barriers on competitors.  The GOT 
justifies these measures by saying they are needed to make 
the sale of TEKEL attractive, to ease the pain of job layoffs 
in TEKEL, and to regulate alcohol sales in a Muslim country. 
The reality post-privatization is likely to be GOT exercising 
statist control over these industries, with little to no 
market liberalization gains. End Summary. 
 
 
A SNAPSHOT OF THE MONSTER 
------------------------- 
 
 
2.  (SBU) TEKEL is a classic, inefficient parastatal.  First 
founded in 1932 to carry out "monopoly services" concerning 
tobacco, alcoholic drinks, salt, gun powder and explosives, 
it has dominated Turkey's market for tobacco and spirits 
sales for 70 years.   TEKEL has 33,000 employees and direct 
subcontractors, and supports hundreds of thousands of tobacco 
farmers who sell tobacco leaf to the company.  TEKEL,s 
market share in Turkey is 69% for cigarettes, 96% in 
alcoholic spirits (TEKEL retains a monopoly on importing 
spirits), and 31% in wine.  With more than 1,300 workers in 
its salt industry establishment, TEKEL has dominated this 
industry as well.  In 2001, TEKEL,s total assets were valued 
at approximately $2.6 billion, its share of Gross National 
Product was approximately 2%, and its contribution to total 
tax revenues collected by the Treasury was about 4.9%, per 
TEKEL. 
 
 
3.  (SBU) In the tobacco sector, which has allowed foreign 
competition since 1991, Philip Morris is currently producing 
41% as many cigarettes as TEKEL despite only having 3% of 
TEKEL's cigarette workforce.  (TEKEL is currently producing 
66,000 tons of cigarettes per year compared to Philip 
Morris, 27,000 tons per year.  TEKEL,s cigarette 
establishment employs 7,375 employees in six factories, and 
another 15,628 in its leaf tobacco processing operations. 
Philip Morris, meanwhile, has just one factory in Izmir 
employing 650 people.  The rest of its operations are 
contracted.)  Sakir Karpat, Philip Morris Government 
Relations Manager in Turkey, said that once TEKEL is 
privatized, he envisions its tobacco operation could be run 
with only 2,000 employees. 
 
 
4.  (SBU) TEKEL,s excessive weight is not entirely the fault 
of its management.  Until early 2002, when Parliament enacted 
legislation officially transferring it to the Privatization 
Administration (PA), TEKEL was required to buy tobacco stocks 
from farmers across the country, often taking in stock that 
it did not need.  TEKEL continues to buy unneeded tobacco, 
even without formal instructions.  This includes a 
substantial amount of tobacco from Southeast Turkey, which is 
considered inferior to tobacco grown along the Aegean coast, 
near Izmir.  As a result, TEKEL currently has 500,000 tons of 
tobacco in warehouse storage, nearly five times its annual 
level of production. 
 
 
Current Status of Privatization 
------------------------------- 
 
 
5.  (SBU) Ayhan Sarisu, the PA official who oversees the 
TEKEL privatization, told us the PA plans to advertise the 
primary tender for the sale of TEKEL by June 2003, and hopes 
to complete the sale and collect revenue by the end of this 
year.  The PA has to first await final approval of the TEKEL 
privatization plan by the GOT's Higher Privatization Council, 
expected shortly, which is a prior condition for completion 
of the IMF 4th Review. 
 
 
6.  (SBU) Sarisu has declared that 100% of TEKEL will be sold 
in two primary block sales:  one for the tobacco operations 
and the other for alcohol.  The tobacco sale will be further 
split into two parts:  the six cigarette factories will 
encompass the June 2003 tender while TEKEL's two large 
tobacco leaf processing plants, in Izmir and Diyarbakir, and 
its excess stocks of tobacco will be tendered later this year 
(Sarisu stresses that all sales will be finalized by the end 
of the year).  One of Sarisu's top goals is reducing the 
baggage TEKEL currently has to prepare it for sale.  He plans 
to resolve TL 600 trillion (approximately $400 million) worth 
of unpaid tax liens by transferring some of TEKEL,s unused 
real estate assets to the Treasury Undersecretariat. 
 
 
7.  (SBU) Sarisu realizes that many portions of the TEKEL 
enterprise are unwanted, and worries that any purchaser will 
immediately downsize certain warehouses and distribution 
centers with little regard to the social effects.  Thus, he 
wants to sell TEKEL,s distilleries and six tobacco plants, 
then use the PA authority to close down warehouses and 
distribution centers using a portion of the proceeds from the 
TEKEL sale as severance packages for the displaced workers. 
This would supplement the 2001 World Bank-GOT funded 
&Privatization Social Support Project,8 which provides $250 
million in severance packages to state employees who lost 
their jobs.  The World Bank funds 70% of this program while 
the GOT funds the remaining 30%. 
 
 
8.  (SBU) While Sarisu wants to get rid of TEKEL,s dead 
weight, some industry officials claim that he is not going 
far enough.  Karpat, of Philip Morris, said that if all six 
factories are sold in one block sale, it will severely limit 
the amount of bidders with deep enough pockets to afford a 
bid that might be in excess of $1 billion.  (Karpat said that 
only Philip Morris and British American Tobacco would be able 
to afford all six factories.)  More worrisome for Karpat is 
the reaction of the Competition Authority (CA).  If Philip 
Morris were to purchase TEKEL,s six tobacco factories and, 
thus, acquire TEKEL,s popular brand names, its market share 
would increase from 25% to approximately 85%, possibly 
disqualifying it from purchasing TEKEL.  Sarisu insists this 
is not the case.  He said that the solution for Philip Morris 
is to form a consortium with other tobacco companies so that 
it can delegate parts of the tobacco operations after the 
purchase.  The CA, which was expected to have three of its 11 
board members replaced by the new AK government on March 5, 
is expected to rule on the TEKEL tender shortly. 
 
 
Privatization's Conflict 
with Market Liberalization 
-------------------------- 
 
 
9.  (SBU) A separate but related issue is liberalization of 
the alcohol and tobacco markets.  (As a part of the 1996 
Customs Union between Turkey and the European Union, various 
trade liberalization measures were to be taken, including 
elimination of TEKEL's monopoly status for alcoholic beverage 
imports, by 1999.)  Accompanying the legislation that added 
TEKEL into the PA in February 2002 were provisions designed 
to protect TEKEL from competition during the tenders process 
so that the GOT can command a higher price. GOT officials are 
not hiding the motive.  &We did it to protect TEKEL to make 
it more attractive" for potential bidders, the PA's Sarisu 
said. 
 
 
10.  (SBU) On the alcohol/spirits side, the key regulatory 
barrier states that, in 2002, only companies whose annual 
production, imports or sales in Turkey exceed 1 million 
liters will be permitted to import, price, and distribute 
their products directly.  All other companies must continue 
to channel their sales, with the exception of whisky and 
champagne, through TEKEL.  This high threshold severely 
curtailed the ability of foreign exporters to enter the 
market independent of TEKEL control last year, as very few 
companies could achieve sales in excess of one million 
liters.  TEKEL itself only imports 400,000 liters of spirits 
annually.  According to the decree, the 1 million liter 
minimum was reduced to 900,000 liters in 2003, and will be 
phased out in increments until 2007, when the Board of 
Ministers will be authorized to eliminate this sales minimum. 
 In addition, a number of onerous labeling and certification 
requirements have been implemented in the past year. 
 
 
11.  (SBU) Similar provisions exist on the tobacco side.  In 
2003, the new legislation requires companies wanting a 
production license to build factories with an annual 
production capacity of at least 2 million cigarettes, which 
translates into approximately 2,000 tons; this once again 
severely limits entry into the market.  The threshold is 
reduced to 1 billion, 800 million cigarettes in 2004, and is 
again phased out in increments until 2007.  In addition, a 
number of new importation taxes will make it more difficult 
for existing tobacco producers such as Philip Morris and for 
any potential newcomers. 
 
 
12.  (SBU) TEKEL,s role as a government regulator has been 
transferred to a new alcohol and beverages regulation board. 
Staffing for this board has just begun, with nearly all its 
personnel former TEKEL employees.  The committee will 
eventually be comprised of 240 officials, and fall under a 
7-person Board of Ministers comprised of political appointees 
selected by various GOT ministries.  The chairman of this 
board, Niyazi Adali, is the former Deputy Director General of 
TEKEL. 
 
 
13.  (SBU) Officials of the new regulatory body dismiss 
conflict of interest allegations, claiming that TEKEL 
employees have more experience in the industry than anyone 
else in Turkey.  They say that the harsh restrictions at 
present are a benevolent way of carefully opening up markets 
that have social implications.  Board official Fugen Basmaci, 
a former TEKEL employee of 22 years, commented that TEKEL had 
&a nice history8 since the 1930,s with no counterfeiting 
or health problems.  She said the board is trying to 
liberalize the market, but that &after 70 years, opening the 
doors is difficult.  We are trying to protect the market from 
cheap, unglorified products.8  She added that, in a Muslim 
country, the board needs to be sensitive to how alcohol is 
distributed. 
 
 
14.  (SBU) Embassy has received complaints about TEKEL's 
privatization from U.S. companies in both the distilled 
spirits and tobacco businesses.  In response, Embassy 
officials have raised the issue of protective trade measures 
with the PA and the General Directorate of Tobacco and 
Alcohol.  We have impressed upon the GOT that the current 
laws on import of distilled spirits is inconsistent with free 
market principles, and have requested that they consider 
modifying this law to allow greater transparency and 
competition. 
 
 
Comment 
------- 
 
 
15.  (SBU) Offering TEKEL for privatization as planned this 
June will be a good indication of the GOT's reform 
commitment, and it will attract serious foreign investor 
interest. However, the various justifications given for 
extending the company's monopoly privileges until 2007, a 
lifetime in Turkey, all ring hollow.  They rob the 
privatization of some of the efficiency benefits which would 
otherwise flow.  And as the experience of privatized steel 
plant Kardemir shows (see reftel), industry here, whether 
privatized or not, remains tied to the state, and often acts 
as an instrument of state policy. 
PEARSON