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Cablegate: Privatization Update: The First Major Sale Of

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 ANKARA 002130

SIPDIS


STATE FOR E, P, EUR AND EB
TREASURY FOR U/S TAYLOR


E.O. 12958: N/A
TAGS: ECON PREL TU
SUBJECT: PRIVATIZATION UPDATE: THE FIRST MAJOR SALE OF
YEAR; DEFENSE OF PRIVATIZATION JOB LAW

REF: A. ANKARA 2010
B. ANKARA 2051


1. (SBU) SUMMARY: A top GOT Privatization Administration
(PA) official told us March 28 the GOT is on track to meet
its $4 billion sales target for 2003, which will result in
$2.6 billion in PA revenue this year and the rest to be paid
by installment. The official defended the GOT's proposed law
to allow privatized state workers to convert to civil service
jobs, saying it will bring short-term savings by eliminating
the need to pay severance packages. World Bank officials say
this law may violate the current IMF Letter of Intent under
negotiation by exceeding the GOT hiring cap. The PA is also
preparing for next week's bid deadline for the purchase of
the first quarter's feature privatization - the petrochemical
giant PETKIM. END SUMMARY.


2. (SBU) On March 28, we met with new PA Vice President,
Kenan Isik, who had been an advisor to Deputy Prime Minister
Sener (Sener oversaw the PA until last week when the
privatization portfolio was officially moved to the Finance
Ministry - reftels). Isik said that of the more than $4
billion in expected privatization sales in 2003, about $2.6
billion will be realized this year, with the rest to be paid
in installments in later years. For large sales such as
TEKEL and PETKIM, high downpayments will be required
up-front. Isik also noted that the GOT recently included the
National Lottery Administration, Istanbul Stock Exchange,
Halk Bank, and tollroad motorways into the privatization
portfolio.


Defense of "Privatization Job Law"
--------------------------------------


3. (SBU) Isik worked closely with Sener in drafting the
"Privatization Job Law," proposed in February (and currently
in Parliament), that would allow workers in state economic
enterprises (SEEs) scheduled for privatization to convert to
civil service jobs. He claimed that this law is necessary to
reduce the resistance of unions that in the past have
successfully persuaded the High Privatization Board to cancel
privatization initiatives (for instance, PETKIM lawsuit - see
para 9). In addition, he said this law would actually lead
to fiscal savings.


4. (SBU) Isik said there are approximately 67,000 workers
employed in SEEs under the PA portfolio. He estimates that,
following privatization, 25,000 will convert to civil
service, 10,000 will stay with the privatized companies, and
the remainder will receive severance packages from the
Privatization Social Support Program, a joint GOT/World Bank
$250 million fund (the Bank funds 70 percent of this fund).
Civil service salaries are much less than the unionized State
Economic Enterprise (SEE) ones. Several SEEs are virtually
not producing anything. Isik estimates PA annual losses at
$250 million, largely salary expenses in unproductive
enterprises. Isik calculated that paying salaries to the
25,000 people who enter the civil service will cost the GOT
less than paying their severance packages.


5. (SBU) World Bank official Ismail Arslan, however, stated
that the WB is adamantly opposed to this legislation. "In
the short-run, conversion to civil service jobs might give
the impression of fiscal savings, but you're giving permanent
employment to these people and you have to consider the
medium and long-term implications," he said. Arslan said
this legislation also appears to violate a condition of the
current IMF Letter of Intent which requires the GOT to cap
its civil service hiring at 35,000 for 2003. He said that
from discussions with the GOT, most of these 35,000 jobs were
slotted for teachers, health professionals, and security
personnel (Isik stated that most of the 25,000 new civil
service employees would be inserted into the Health and
Forestry Ministries. However, Arslan questions whether this
block of employees would have the qualifications for such
skilled positions as were initially proposed.)


First Major Sale of Year is PETKIM
----------------------------------


6. (SBU) The Turkish state petrochemical company PETKIM is
slated for final sale by the end of this year. Arslan said
the World Bank is watching this privatization closely, as
PETKIM is one of five state companies the GOT must sell to
meet the conditions of a World Bank economic reform loan,
totaling $760 million (roughly half has been disbursed
already). Bid submissions are due April 2, and expected to
be made public that evening. Though PA officials won't
disclose the bidders thus far, sources at PETKIM have
informed us that Russian oil companies GAZPROM and LUKOIL,
along with Saudi paristatal SABIC (Saudi Arabian Basic
Industries Group), are among the bidders. Press reports from
March 23 indicate that the Turkish textile and construction
firm Sanko, based in Gaziantep, may bid for PETKIM as well.


7. (SBU) Once the bids are in, a tender commission
consisting of five PA officials will narrow down the list by
examining the prospective companies' partnership structures,
experience, investment strategies, and willingness to post a
$10 million deposit. In June, those companies that survive
the first cut will participate in a PA-led auction that will
be broadcast live on national television in Turkey. Once the
high bidder is selected, the PA will require a 40 percent
downpayment up-front.
8. (SBU) PETKIM's net sales in 2002 were $643 million and
its total assets in 2001 were $727 million, according to
official GOT data. Its most profitable years were in the
mid-1990s, when it brought in $1.2 billion profit in 1995 and
approximately $900 million in 1996 and 1997 (The decline in
profits over the past five years correlates to an overall
downturn in the petrochemicals industry. This is due in part
to the fact that operating costs for such companies are tied
to the price of crude oil). PETKIM currently has 4,586
employees and controls 35 percent share of Turkey's
petrochemicals market. PA owns 89 percent of the company,
while PETKIM's pension fund owns 7 percent, and the remaining
4 percent is sold at the Istanbul Stock Exchange (ISEM).
PA's plan is to have a block sale of anywhere between 51-89
percent of the company, with the remainder to be publicly
offered at the ISEM. Murat Celebi, a PA official working on
the PETKIM privatization, hopes to sell as much of the
company in the initial block sale as possible. He added that
the new investor will most likely build a new facility in the
Adana-Ceyhan region so that it can better take advantage of
natural gas inflows.


PETKIM Workers File Lawsuit
---------------------------


9. (SBU) Like most large companies in the privatization
portfolio, PETKIM's workers are starting to make noise.
Press reported March 26 that Petrol-Is Labor Union (the oil
sector labor union) filed a lawsuit to cancel PETKIM
privatization, claiming that the GOT should specify the
amount of shares to be sold, instead of announcing sale of at
least 51 percent of the company's shares. The union is also
claiming that PETKIM's sale should be held up because it is a
strategic company with products that many sectors rely on.


TEKEL Privatization Plan Approved
---------------------------------


10. (SBU) On March 31, the Privatization High Council
approved the PA's plan to sell the state alcohol and tobacco
company TEKEL. This is one of the four remaining prior
actions under the IMF Fourth Review. It allows the PA to
advertise the tender for TEKEL in June. The Privatization
High Council, which consists of the PM, DPM Sener, MinState
Babacan, Finance Minister, and Industry and Trade Minister,
may get a facelift soon. The GOT budget law that passed
March 29 contains an article that allows PM Erdogan to choose
the other four Council members from the GOT's Cabinet of 22
ministers. Ayhan Sarisu, the PA official leading the TEKEL
privatization program, said that Erdogan is expected to name
new Council members in the next few days.
PEARSON

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