US embassy cable - 03ANKARA2902

UNCLAS SECTION 01 OF 02 ANKARA 002902 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E 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 
USDOC FOR 4212/ITA/MAC/OEURA/DEFALCO 
 
 
E.O. 12958: N/A 
TAGS: EAGR, ETRD, EFIN, PREL, TU 
SUBJECT: SUGAR LAW LEAVES BITTER TASTE 
 
 
REF: ANKARA 1447 
 
 
Sensitive but Unclassified.  Not for internet distribution. 
 
 
1.  (SBU) SUMMARY:  A new sugar law implemented in September 
2002 was supposed to eliminate the sugar industry's  rampant 
overproduction, as well as GOT subsidies for its export, and 
eventually move the industry toward the free market. 
However, even as state-owned sugar company SEKER (its 
privatization process is scheduled to begin in June) is being 
reigned in, its lobbying efforts caused the GOT to include in 
the sugar law quotas that hurt SEKER's competitors in the 
cornstarch-based sweetener industry.  END SUMMARY. 
 
 
Quotas Aimed at Ending Overproduction 
------------------------------------- 
 
 
2.  (SBU) Prior to the onset of the Sugar Law, SEKER 
factories gave guaranteed procurement prices to Turkish sugar 
beet farmers, causing rampant overproduction (these 
guaranteed prices stemmed from a 1945 law).  To reduce its 
stocks, SEKER needed significant GOT subsidies to export its 
overproduction at competitive world prices.  (Beet sugar 
prices are higher, on average, than sugar cane because the 
costs of production are much higher.  When combined with 
refining inefficiency, SEKER must sell its sugar at the rate 
of $550/ton.  The world average is $260/ton.) 
 
 
3.  (SBU) The new Sugar Law, enacted in April 2001 and taking 
effect in September 2002, was intended to meet market 
liberalization criteria under the IMF Letter of Intent and 
the EU Accession Partnership Accord.  The law ends guaranteed 
procurement prices to farmers as well as GOT export subsidies 
to SEKER and PANKOBIRLIK (Central Union of Sugar Beet 
Producers Cooperatives).  The law establishes production 
quotas for the sugar industry, synchronizing sugar production 
with domestic demand each year until 2007 (at which time the 
industry is supposed to be totally deregulated, in accordance 
with Turkey's WTO obligations).  The quotas are assigned by 
the Sugar Board, an independent regulatory body created under 
the Sugar Law that consists of seven members -- three from 
the GOT, three from the sugar-beet industry, and one from the 
cornstarch-based industry (Cargill). 
 
 
4. (SBU) This year (September 2002-August 2003), SEKER is 
allowed to produce 1.67 million tons of sugar, PANKOBIRLIK 
474,000 tons.  Next year's (September 2003-August 2004) 
production quota for SEKER was supposed to be the same as 
this year, but has been reduced to 1.3 million tons due to 
320,000 tons of remaining excess refined sugar (in addition 
to 220,000 tons of excess raw sugar).  Due to the high costs 
of maintaining these stocks, our contacts say that, though 
export subsidies have officially been eliminated, SEKER has 
gotten special permission to export with the subsidy until 
August 2003.  There is a substantial political push to 
increase these quotas.  Since the Sugar Board was created 
prior to AKP's electoral victory in November, rumors are 
swirling that the new government is trying to abolish the 
board.  These rumors have been confirmed by our contacts on 
the Sugar Board. 
 
 
Quotas for One, Quotas for All 
------------------------------ 
 
 
5. (SBU) Even as sugar production quotas are theoretically 
being brought down, subquotas mandated by the sugar law are 
limiting production from the entire cornstarch-based 
sweetener industry in Turkey to 10 percent of the total sugar 
quota, or 234,000 tons (in 2002-2003), well below the 
industry capacity of 468,000 tons.  (The industry capacity, 
in turn, is below domestic market demand.)  Cargill reps have 
told us that all of their corn syrup production goes to local 
Pepsi and Coca Cola factories.  However, with such a low 
production quota, they cannot meet the demand of the soft 
drink makers.  Cargill reps claim that, should the low 
production quotas continue, their Turkish operations cannot 
survive. 
 
 
6. (SBU) This 10 percent quota was the result of a campaign 
from sugar beet farmers (approximately 380,000 of them) and 
SEKER to limit the competition during SEKER's transformation 
process.  "There is a very strong political constituency to 
maintain sugar beet factories and employment within them," 
according to a World Bank official here.  The 
cornstarch-based industry successfully lobbied the Council of 
Ministers to increase the quota to 15 percent for this year, 
or 351,000 MT.  The industry is pushing the Council of 
Ministers to continue the 15 percent quota into next year - 
the quota is scheduled to return to the 10 percent mark in 
September. 
 
 
7.  (SBU) Cornstarch-based industry reps are also complaining 
that the GOT has assigned quota percentages for sugar and 
cornstarch-based sweeteners under a common umbrella.  Most 
countries, including those in the EU, have separate 
production quotas for sugar and corn-starch based products. 
That is because the weight of purified centrifugal sugar is 
100 percent dry matter while fructose corn syrup is diluted 
with 25 percent water.  Thus, by comparing the weights of 
sugar and fructose corn syrup on a 1:1 scale, as the GOT 
production quotas have done, the sugar industry has a 
distinct advantage in how the quotas are weighed and 
quantified, says Archer Daniels Midland (ADM) Turkish Rep. 
Rint Akyuz.  "It's like measuring apples and oranges," he 
said. 
 
 
SEKER Privatization Scheduled for 2004 
-------------------------------------- 
 
 
8.  (SBU) The privatization of SEKER's sugar refineries, 
which has been postponed twice in the past, is scheduled to 
begin shortly.  In early April, State Minister for Treasury 
Ali Babacan said the road map for the privatization of 
SEKER's sugar factories was expected to be approved by the 
High Privatization Council by the end of June. (The Council 
is comprised of PM Erdogan, Babacan, Coskun, Finance Minister 
Unakitan, and Transportation Minister Binali Yildirim. 
Yildirim was the most recent appointee, unseating Deputy PM 
Sener.)  Coskun said April 18 that the privatization calendar 
for SEKER's 27 sugar refineries would be submitted to the IMF 
by June 30.  He added that the GOT was planning to sell 
redundant and unused assets, and use the proceeds to 
strengthen the company and make it more attractive for 
investors.  As an example of redundant assets, Coskun said 
the GOT was planning to sell the farmland in Ankara Etimesgut 
Sugar Factory to Ankara Municipality and the Union of 
Chambers and Stock Exchanges (TOBB). 
 
 
9.  (SBU) Ahmet Aksu, the Privatization Administration (PA) 
official responsible for the SEKER sale, gave us similar 
information on April 15.  He said the GOT is still working to 
consolidate roughly $500 million in debts owed to the 
Treasury Ministry.  He added that the 27 factories will most 
likely be sold in 5-6 separate blocks.  SEKER's total assets 
in 2001 were $1.4 billion (per website www.turkseker.gov.tr). 
 
 
Comment 
------- 
 
 
10. (SBU) Political obstacles to liberalization and 
privatization of Turkey's sugar industry are similar to those 
of other state-owned monsters like TEKEL (reftel).  In this 
case, Turkey's inefficient sugar industry employs some 20,000 
workers, as well as 380,000 farmers, and the political cost 
of offending this constituency is huge.  The sugar 
establishment is hindering GOT efforts to liberalize the 
market, and the net effect are government losses in the form 
of high storage prices, private industry losses in the form 
of unjust production quotas, and consumer losses in the form 
of higher prices.  Given the political pressure to continue 
protective measures for the sugar industry, successful 
privatization of SEKER over the next 12 months will be a true 
test of the GOT's commitment toward free market reforms. 
PEARSON