Cablegate: Latest News On 2003 and 2004 Privatization And

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

201024Z Oct 03





E.O. 12958: N/A


1. (SBU) Summary. President of the Privatization Authority
(PA) and Treasury Undersecretariat Director General for State
Economic Enterprises updated Econoffs on the progress of the
2003 privatization and workforce reduction programs and
expectations for 2004. The 2003 privatization program appears
to be proceeding, albeit with some delay, and additional
retirement incentives may enable the GOT to meet the
workforce reduction targets. End Summary

Privatization Authority President Metin Kilci

2. (SBU) Although PA President Kilci is satisfied with the
current status of the 2003 privatization program, he
acknowledged that he will have a better idea of the
likelihood of meeting 2003 revenue targets after 24 October,
when bids on Tekel (tobacco) and Tupras (petroleum) are due
(Ref). While interest in Tupras is a &bit slower8 than in
Tekel, Kilci is confident that PA,s value assessments will
be met. Kilci insisted that reports that political
considerations may influence the PA not to sell Tupras to a
Russian company are false -- The PA will sell it without
regard to the nationality of the successful bidder.

3. (SBU) After bids are received, 2-3 weeks will pass
while the PA prequalifies bidders (essentially, to ensure
that their documents are in order) and gives them additional
data room access. Then, the PA will decide whether to hold a
second round of bids (its current thinking), or an auction.
If there are more than 5-6 bids (which Kilci does not
expect), a third round of bids will be held. The PA will
announce the winner shortly after the final round (within
5-10 days, per today's statement by Finance Minister
Unakitan), and the Competition Authority then has 15 days in
which to approve the sale. At this point (around the end of
November), the PA will negotiate a contract with the
successful bidder (1-2 months, per Kilci). Thus, the process
should conclude sometime in December or January.

4. (SBU) The PA is having difficulty hiring an advisor for
Turk Telekom because of public procurement law constraints,
but will soon discuss its proposed strategy with the World
Bank. Before tendering Telekom, Kilci wants to find at least
3 &seriously interested8 and adequately financed investors,
preferably with backing from an experienced strategic
operator. The PA plans an initial block sale of a majority
interest, followed in 6-7 months by an IPO of the remaining
shares. The PA is ¬ in a hurry8 to privatize Telekom,
since once the telecom sector is liberalized in 2004, there
will be many new entrants.

5. (SBU) Privatization of smaller companies is also
proceeding. Currently at the tender stage are 3 fertilizer
factories, 2 natural gas distribution companies, and 6-7
textile factories. Ten more companies will be tendered by the
end of this year.

6. (SBU) In 2004, the sale of sugar factories and
electricity generation and distribution assets will be major
projects, as will sugar factories. Kilci expects the PA will
also become more involved with bank privatizations. Kilci
thinks restructuring of bad debts is the major challenge
facing privatization of the state banks. (Following the Kilci
meeting, the GOT announced that for 2004 it was targeting
receipts from privatizations of USD 3 billion.)

7. (SBU) Kilci also explained why the PA had agreed to
restructure USD 195 million owed by Petrol Ofisi, arising out
of its purchase by Is-Dogan (a partnership between leading
private bank Is Bankasi and media holding company Dogan).
According to Kilci, without a restructuring PO would have
defaulted, because the original payment scheme was not well
designed: It required too much up-front money, and did not
require a bond. Payments have now been extended for an
additional two years (at the same interest rate) and a bond
(reportedly for USD 90 million) received.

Treasury D.G. Responsible for SEEs Mehmet Rasgelener

8. (SBU) In a separate meeting, Treasury Director General
Mehmet Rasgelener also said that the AKP administration is
&very eager8 to privatize. The IMF is pushing SEE-DG to
move quickly -- the program requires all SEEs to be
privatized within the next two years -- and Rasgelener
expects his department to be abolished within two years.
According to Rasgelener the only bottleneck is that the GOT
is having difficulty finding qualified buyers.

9. (SBU) Rasgelener explained that all SEEs are owned
either by PA or SEE-DG. Those that are ready for
privatization are transferred from SEE-DG to PA, upon
application by the PA to the Higher Privatization Council.
This can occur either because the PA thinks a SEE is
marketable, or because an outside buyer has expressed
interest. (In prior meetings, PA personnel advised Econoffs
that the SEE-DG occasionally seeks to transfer a SEE to the
PA knowing it must be liquidated, because SEE-DG prefers the
PA to do the dirty work.)

10. (SBU) Rasgelener said that there currently are 19
companies in the SEE-DG portfolio, 20 at the PA, and three
that both authorities are involved in, because of special
legislation (Turk Telekom, Ziraat Bankasi and Halk Bankasi).
Overall, the SEE-DG portfolio is profitable. Once Turk
Telekom is privatized, however, the portfolio will become
unprofitable, primarily because of the rail and coal SEEs.
The remaining money-losing SEEs are &manageable.8

11. (SBU) Rasgelener disputed Kilci,s claim that bad debts
are an impediment to bank privatizations. He thinks the major
problem is that the banks are so large it is hard to find
buyers. Rasgelener said that a consultant has been hired, and
GOT should have a &road map8 by early 2004. (Separately,
Citibank Manager Semih Ergun told Econoff he doubted any
buyer could be found for state banks Vakif, Ziraat and Halk
as currently structured.)

12. (SBU) With respect to workforce reductions (total YE
target 45,792; achieved to date 33,060), Rasgelener said that
the IFIs are insisting that not only must the overall target
be achieved, but also that each SEE must meet its individual
target. As such, the IFIs have refused to give GOT credit for
those SEEs that have exceeded their targets -- some 7,000
workers to date, and many thousands more once Tekel and
Tupras are sold (per Ref, probably by the end of January).
Rasgelener said that original targets were set by an
"unscientific8 process: The World Bank produced a study
showing 100,000 redundancies, and the GOT and World Bank
essentially horse-traded down to the current figure.
Nevertheless, next week the GOT will submit to Parliament a
draft law, providing an additional 20 p/c severance payment
bonus. With this additional incentive (which, according to
post calculations, will cost approximately $7,000 per
worker), Rasgelener expects to meet all targets by year-end.
Rasgelener also noted that, under the IMF agreement, SEEs can
re-employ up to 10% of the number of workers laid off, and
that it will take approximately one year before the gains
from reductions exceed the initial costs.

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