Cablegate: Foreign Interest Down for Turkey's Privatization


DE RUEHAK #1176/01 1781417
P 261417Z JUN 08



E.O. 12958: N/A


1. (SBU) Summary: Privatization receipts are a significant
source of income for Turkey. The AKP-led government has
pursued an aggressive privatization program since it took
office in 2002. On June 12, Privatization Agency (PA)
President Metin Kilci told us that although foreign investor
interest has decreased in 2008, the PA plans to continue with
its privatization agenda. So far this year, telecom,
petrochemical, and cigarette businesses have been privatized,
with sugar factories, toll roads and the national lottery to
follow. The first of 20 planned energy tenders had
"disappointing" results. End Summary.

FDI Breaks a Record. Will Trend Continue?

2. (SBU) In 2007, Turkey received a record $21.8 billion in
foreign direct investment (FDI). Privatization revenues are
one component of FDI. The $21.8 billion came from
acquisitions via privatization, mergers, and real estate
purchases. In 2006, Turkey received $7.2 billion in
privatization revenues. In 2007, privatizations yielded only
$3 billion. In 2008 to date, PA revenues are $5.7 billion.
Prime Minister Erdogan forecast a total of $18 billion FDI in
2008, despite current global conditions and a liquidity
crunch. We believe this estimate may be substantially
overstated. Despite significant interest in electricity
privatizations and 10 European companies prequalified to bid,
only two of those foreigners actually bid. PA President
Metin Kilci told us he sees this trend continuing, noting
there is definitely less foreign interest in privatization

3. (U) In 2008 to date, Turkey has received $5.7 billion, of
which $2 billion came from the Turk Telecom IPO (initial
public offering) for 15% of its shares. In 2005, 50% of Turk
Telecom was sold to Saudi Oger Telecom for $6.5 billion.
Turk Telecom's sale was one of the biggest IPOs in emerging
market economies in the last five years. Another $2 billion
was received on May 30 from a 51% block sale of PETKIM
(Turkish Petrochemical Industries) to Socar/Turcas
consortium. On June 24, PA received $1.7 billion from the
sale of Turkish Monopolies (TEKEL) cigarette company to
British American Tobacco PLC (BAT).

Tekel and Smoking

4. (SBU) BAT's purchase of TEKEL for $1.7 billion makes BAT
the world,s second largest tobacco company. TEKEL's sale is
the fifth largest privatization in Turkey, and it opens the
market to much greater foreign participation. Before the
sale, TEKEL held 36 percent of the Turkish market and BAT had
seven percent. Philip Morris had 41% and Japanese Tobacco
Incorporated had 20%. According to the World Health
Organization, about 60 percent of Turkish adults smoke. In
2007, the Turkish tobacco market was valued at $10 billion,
according to the Tobacco and Alcohol Market Inspection Board.
There may be a decline in consumption following a May 2008
indoor smoking ban, which BAT estimates could cause a four to
five percent drop in Turkish consumption. BAT sees
significant opportunities to increase efficiency and cut
costs at Tekel to boost profitability, although this could
result in plant closings and lost jobs.

Future Privatization Opportunities

5. (SBU) Kilci told us the GOT is determined to continue with
the privatization program. Later in 2008, privatizations of
sugar factories, toll roads, and the national lottery are
planned. The two latter projects will require a technical
legislative fix, but Kilci is confident that will be easily
achieved. Kilci said investment interest is declining due to
global liquidity problems and international financing
difficulty. During the next two years, Kilci said the PA
plans to privatize state infrastructure programs, such as
Turkish mail service (PTT), cable TV, and satellites. Kilci
said the turbulence in European banks had started to affect
Turkish banks, with borrowing costs increasing an average of
at least 100 basis points.

6. (SBU) Despite telling us earlier that Halkbank would be a
2008 privatization priority, on June 12 Kilci did not even
mention it. In May 2007, Halkbank sold 25% of its shares
through an IPO. The PA has not announced a strategy to sell
the remaining 75%, although the advising investment banks

suggest a strategic block sale. Prior to 2002, the GOT party
in power sometimes used government-owned banks to make
subsidized and unsecured loans to garner political support
and votes. This practice resulted in a number of defaults
and losses. In 2002, the IMF insisted the GOT stop this
practice, which it did. Recently, however, we have seen
signs the practice has started again. One example is a loan
extended to Calik Holding for the purchase of Sabah/ATV.
Calik is one of the AKP's large contributors and the Prime
Minister's son in law is a top Calik manager.

Energy Privatizations Not Off to a Great Start
--------------------------------------------- -

7. (SBU) In the next two to three years, Kilci expects to
finalize all energy privatizations, including distribution,
generation, and some parts of the electricity and natural gas
transmission units. Kilci said the PA expects to receive an
average of $1 billion from each of twenty regional
electricity distribution privatizations. Kilci reiterated
PA's interest in attracting more U.S. and international
investors to Turkish privatizations, but noted that his
offerings are highly technical. It takes more than a
one-shot roadshow sales pitch to attract solid bids.

8. (SBU) The sale of Turkey's first two regional power
distribution companies - Baskent (Ankara) and Sedas (Sakarya)
- was met with lukewarm demand from investors. Those
tenders, detailed in reftel, closed on June 10, although no
results have been announced. PA contacts did tell us they
were "disappointed" with the bids, which may suggest the $1
billion per-project estimate could be tough to achieve.
Kilci said there was strong interest from European firms in
energy deals, but while many investors prequalified, only a
few made bids. Five bids for each distribution region were
received and just two foreign firms bid in consortium with
local partners. The failure to attract more interest,
especially among foreign investors, raises concerns about the
outcome of the sale of the next two distribution regions and
the total amount of money Turkey can raise from the long
delayed privatization of its power distribution regions.

9. (SBU) Comment: Given the prevailing political uncertainty
in the country and the weak external environment, there is a
growing risk that the valuations of Turkey's state assets
offered for sale in the future could be undervalued and
underbid. If PA does not meet its privatization goals, it
will also raise concern about financing of the growing
current account deficit, which is estimated to reach $50
billion by the end of 2008. End comment.

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