Cablegate: Turkey Telecom Sector: Liberalization Is Hard To

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

191451Z Nov 04





E.O. 12958: N/A


1. (SBU) SUMMARY: A combination of poor service and high
costs for telecom and information technology users impedes
foreign investment and hampers Turkey's global
competitiveness. While many Turkish officials express
commitment and optimism, telecom sector liberalization is
proceeding slowly, with the core problems being lack of
progress in the privatization of the entrenched monopoly of
Turk Telecom and an ineffective independent regulator. A
process of accession to the European Union could help
accelerate progress. End Summary.

All Lines Connect to Turk Telecom

2. (SBU) The path to potential liberalization of the
telecom sector harks back to 1990 legislation and the
creation of the Turkish Telecom Regulatory Authority. Unlike
the energy sector wherein contemporaneous legislation
provided for unbundling of the electricity monopoly as a
first step, Turk Telekom maintained its dominant monopoly
position. Attempts to privatize Turk Telekom in small blocks
failed twice and the more recent attempt to privatize a
majority chunk has been oft delayed, and will face obstacles
from various interests, including Turk Telekom itself, the
GOT (significant cash cow and potential bad press of selling
crown jewels at perceived low price to foreigners), labor
unions (concerns about employment), and the legal system
(SEPTEL). The telecom sector liberalization itself has
contributed to delays in the Turk Telekom privatization, as
it creates ambiguity and a moving target.

How Effective is the Independent Regulator?

3. (SBU) The Telecom Regulatory Authority was created in
1990 to regulate and licence telecom operators. Through its
history, because of inadequate experience and size, it has
not been able to function effectively as an overseer to Turk
Telekom. The small, preexisting Wireless General Directorate
in the Ministry of Transportation, which had responsibility
for allocating frequencies, provided much of the personnel
for the start-up regulatory body and the coalition government
at the time gave the majority of initial board slots to
members of the National Action Party (MHP), rather than
necessarily to technically competent individuals. Although
in principle independent, it has been difficult for the
Telecom Regulatory Authority to operate independently of
pressure from the government and Turk Telekom.

Under Whelming Little Bang in Long Distance

4. (SBU) In principle, as of January 1, 2004 the long
distance service market was to open up with intended goals of
improving service and reducing consumer prices. In fact,
progress has been halting and slow. While in May 2004, the
Turkey Telecom Regulatory Authority granted about forty
licenses for long distance operation, only about five (among
which, major business groups Koc, Sabanci, and Dogan) have
actually signed agreements with Turk Telekom to interconnect
and go into operation, despite pressure to utilize
substantial investment put in place. Turk Telekom sought to
charge 5-7 cents per minute for interconnection, compared to
the 1-1.5 cent average rate in EU countries. Underlying
legislation provided for licensees to conclude agreements
with Turk Telekom by August 2004. The general lack of
timely success in signing agreements put the Telecom
Authority in the position of arbitrating a compromise. The
Authority announced new "reference prices" in October,
calling for current application of 3 cents interconnection
fees, and phased reductions to EU levels of 1.5 cents in
October 2005. Turk Telekom publicly protested the announced
fee structure, claiming it faced substantial fixed and
operating costs, and threatened to take its complaint to the

5. (SBU) In repeated conversations with EconOff,
representatives of the start-up long-distance operator
association, Telkoder, have bitterly complained about their
challenge in facing the entrenched monopoly of Turk Telekom.
In their view, not only have they been unsuccessful in
securing reasonable interconnection fees with the Turk
Telekom structure; in addition, they claim that Turk Telekom
had announced reductions in its retail fee structure to
maintain its market share. Telkoder reps have threatened to
take their complaints to the courts. Meanwhile, consumers
continue to rely on service from the monopoly provider. A
Turk Telekom advisor told EconOff he expected that more
licensees would be granted and eventually many would start
operation, but there would be a subsequent and inevitable
shakeout and contraction.
Mobile Telephone Sector Only Competitive Bright Spot
--------------------------------------------- -------
6. (SBU) Turkey's GSM mobile telephone market enjoys
considerable competition and the State Planning Board
estimates 30 million cell phone users, compared to 18 million
fixed telephone users. Four licenses for mobile telephone
operation have been granted in Turkey and three actually
operate. Mobile telephone operators also face high
interconnection fees to Turk Telekom,s infrastructure (15
cents per minute to decrease to 10 cents per the Telecom
Authority reference prices). Private company Turkcell
(listed on NYSE; Cukurova Group major stake) controls about
two-thirds of the domestic cell phone market and also
provides international roaming service. The balance of
subscribers use Avea (merger of Turk Telekom and Italian
owned entities) and Telsim (taken over by Turkey deposit
guarantee fund from bankrupt Uzan group), so the competitive
system is not as lively as it could be. Consumers generally
face high prices and poor service from cellular providers.
Unclear timing and details for a proposed public tender for
Telsim have contributed to delays in tendering Turk Telekom.

Other Sectors and New Economy Dependent on Turk Telekom
--------------------------------------------- ----------

7. (SBU) The New Economy/Knowledge Economy faces challenges
in Turkey because all suppliers must connect to Turk Telekom;
consumers face limited or poor service and high prices. Turk
Telekom also controls the cable television network. Although
cable television remains a monopoly, there is competition
from digital satellite television, so consumers receive
reasonable service and pricing. With respect to cable
internet provision, consumers face high prices and poor
service because of the lack of competion. The cable sector,
too, is caught up in contention between the Competition
Authority (seeks to split out cable service provision in the
Turk Telekom tender) and the Privatization and Telecom
Authorities (argue that Turk Telekom should keep this
component to enhance its attractiveness to potential

8. (SBU) Internet Service Providers (ISP) enjoy competition
with 91 licensed operators, but all must both connect and
compete with Turk Telekom itself, so residential and business
consumers do not enjoy the benefits of a truly competitive
environment. The Telecom Authority estimates about a 10
percent penetration in the population for internet usage, but
growing at over 25 percent each year.

9. (SBU) Broadband shows even a greater unmet potential for
consumers as Turk Telekom maintains direct control for
provision via either cable or DSL. There are about 250,000
broadband DSL subscribers who face prices of about 1.5 to two
times that of the U.S. and a speed of about five times slower
than in the U.S. The Telecom Authority aims to eventually
introduce licensing and competition in broadband, wireless,
and data transmission, but no specific timing has yet been

10. (SBU) Satellite service provides a niche market in
Turkey. There are twenty licenses and three active
operators. One provider told EconOff that it offered
lucrative business to corporate customers, because of the
non-competitive environment and lack of reasonable
alternatives. This company admitted that this business would
not be profitable if consumers had diverse and competitive
telecom service choices available.


11. (SBU) Many contacts lament the apparent lack of
interest on the part of American companies in the Turkish
telecommunications sector, either in the Turk Telekom
privatization or in other opportunities in telecom as it
(slowly) liberalizes. Only European and Asian companies have
so far participated in the information phase of the potential
Turk Telekom tender. These contacts yearn for "U.S. know-how
and can-do approach" or "people who answer the phone in
August". Over the years, some American firms, like Lucent
and SBC, have looked at opportunities and/or opened offices
in Turkey, but have later pulled back. While interesting
opportunities will continue to evolve in the telecom sector,
for many American firms, the Turkish market may look too
non-transparent or too "European". American firms accessing
the Turkish telecom infrastructure for multinational clients
have complained to the Embassy about high interconnection
fees and high international settlement rates. Unfortunately,
this situation may not change in the short term.

12. (SBU) COMMENT CONTINUED: Many Embassy contacts insist
that liberalization will eventually occur and are willing to
place better odds on that process in comparison with the
oft-delayed Turk Telekom privatization. Successful
liberalization will be dependent on the Telecom Authority
exercising greater independence, strength, and technical
know-how. (Telecom Authority reps have expressed interest in
contact with the U.S. FCC, for example, as a conference
organized in Turkey with a visiting FCC individual or team.)
Need to make both progress on E.U. harmonization and to
improve the investment environment will be positive factors
for catalyzing further liberalization. End Comment.


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