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Cablegate: Turk Telekom Privatization Update

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 001929

SIPDIS


SENSITIVE


STATE FOR EUR/SE AND EB/IFD; TREASURY FOR OASIA - LEICHTER
AND MILLS; NSC FOR BRYZA


E.O. 12958: N/A
TAGS: ECON ECPS EFIN PGOV TU
SUBJECT: TURK TELEKOM PRIVATIZATION UPDATE

REF: 03 ANKARA 7052


1. (SBU) Summary: According to a Privatization Authority
(PA) official, the PA is trying to apply lessons learned
from the aborted privatization of Tekel,s tobacco operations
(Ref) to the Turk Telekom (TT) privatization: Managing the
expectations of potential investors, public officials and
other stakeholders is essential to success. However, the
difficulties inherent in the sale of a mammoth and bloated
SEE have been compounded by problems arising from an
unexpected source: The new, World Bank-sponsored, procurement
law. In a separate meeting, the TT General Manager insisted
the GOT is committed to privatize the company. End summary.


--------------------------
PA Official Says Public Procurement Law Prevents Retention of
Outside Advisor:
--------------------------


2. (SBU) On 24 March Econoffs met with Gunden Cinar, a PA
expert who is responsible for the TT privatization. Cinar
said that the PA wishes to avoid unpleasant surprises, such
as occurred with Tekel and in its two prior unsuccessful
attempts to privatize TT, and thus intends an &interactive8
tender process for TT, in which the PA and potential
investors have an ongoing dialogue, so that each is fully
cognizant of what the other expects, before bids are made.
Cinar said that the PA already has had meetings with
interested parties, and that it intends to take account of
investor sentiment when it makes its internal valuation of
TT. (Press reports indicate that TT could be worth as little
as USD 2-5 billion, although the GOT assuredly is hoping to
receive much more.) According to Cinar, the GOT is prepared
to sell 100 percent of TT (other than a golden share whose
current, legislatively-specified, scope needs to be narrowed
in order to attract investors), and to sell it to a foreign
company. Cinar believes that some level of foreign ownership
is inevitable, since no Turkish companies have the necessary
know-how and financial wherewithal to act alone -- not even
the giant Koc and Sabanci groups, who are widely reported to
be preparing a joint bid for the company.


3. (SBU) Earlier this year, the PA launched a tender for a
financial advisor for the TT sale. However, according to
Cinar, the new public procurement law that the World Bank
championed imposes conditions so onerous that none of the
firms that bid on the tender -- including well-known
international investment banks -- qualified. Thus, the tender
was cancelled. The problem, according to Cinar, is that the
law, while appropriately-designed for traditional public
procurement tenders, is not suited for the selection of
privatization advisors -- for instance, it forbids payment of
success fees and imposes financial ratios that no investment
bank can satisfy.


4. (SBU) A GOT Council of Ministers decree -- a
requirement of the IMF,s Sixth Review -- requires that the
tender for TT be launched by the end of May. However,
according to Cinar, a formal tender cannot take place by
then, since the PA has not yet hired a financial advisor.
Rather, the PA will invite interested parties to Ankara to
convey &expressions of interest.8 By the end of June,
interested parties are to sign confidentiality agreements and
be provided with a prospectus. However, Cinar admitted that
it would be difficult for the PA to prepare a prospectus
without a financial advisor. Moreover, local press reports
state that the Ministry of Transport intends to submit a law
requiring TT to be sold at public auction rather than by
sealed bid, a change that will further delay preparation of a
prospectus.


5. (SBU) The PA has drafted a law to address the foregoing
impediments to the process. Under this draft, the PA,s
ability to hire financial advisors will be improved, the
scope of the golden share will be reduced, and the Council of
Ministers will have the authority to announce a &reserve8
or minimum bid for TT (to improve the transparency of the
process). The draft will also address the
politically-sensitive issue of labor redundancies: TT is
seriously overstaffed (according to one analyst, by as much
as 90%), and most employees are non-dischargeable civil
servants. To date, however, Cinar said, senior government
officials -- including Finance Minister Unakitan -- have not
taken up the PA recommendations. Nor, according to Cinar, is
the World Bank keen on changing the procurement law.


--------------------------
Turk Telekom GM Insists GOT is Committed to Privatization:
--------------------------


6. (SBU) In a recent meeting, EconCounselor was told by
TT,s General Manager Mehmet Ekinalan that TT management,s
prime focus this year is to prepare the company for
privatization. Ekinalan insisted that the Prime Minister, the
Finance Minister and the Transport Minister are all committed
to privatization, and that TT itself is pushing the PA to
move ahead. Ekinalan said that TT is actively reducing its
workforce, and projects for 2003-04 a net decrease of 3,700
(assuming that Parliament passes a law to encourage early
retirement). Ekinalan, like Cinar, believes that the
successful bidder will be a consortium composed of foreign
and local companies. Pending privatization, TT's strategy is
to focus on data services, especially wide band services,
since fixed line service offers little growth opportunity, TT
is weak in GSM services, and no competition currently exists
in telephony wideband (although a local cable TV company
offers internet services). TT is offering an 80 percent
discount on wide band internet access, and may cut prices
even more, pursuant to a strategy to reduce unit costs
through increased volume.


--------------------------
Comment:
--------------------------


7. (SBU) Unlike previous Turkish governments, the current
administration seems reconciled to the sale of TT. However,
all signs point to a sale later, rather than sooner. Indeed,
the GOT,s claim that TT can be sold by year,s end has a
certain Alice-In-Wonderland quality. In order for TT to be
privatized, (a) Parliament must revise the procurement law,
reduce the scope of the golden share, and change the method
of sale; (b) the PA must conduct and finalize a tender for a
financial advisor; (c) the financial advisor must value the
company and prepare tender documents; (d) the PA must
announce a tender for TT,s sale; (e) interested parties must
conduct extensive due diligence and submit bids; (f) the PA
must choose a winner and the Council of Ministers must
approve this choice; and (g) the PA must negotiate and obtain
Council of Ministers approval of a contract. All this must be
done over the anticipated objections and obstructions of what
Cinar referred to vaguely as &various constituencies8
(including but not limited to the unions and the military).
At the same time, the PA must restructure TT,s bloated labor
force through what will undoubtedly be extraordinarily
difficult labor negotiations. Under these circumstances, the
GOT,s claims that TT will be sold by year,s end seems
unrealistic. End Comment.
EDELMAN

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