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Cablegate: A Snapshot of Privatization in Turkey

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

191637Z Nov 04

UNCLAS SECTION 01 OF 02 ANKARA 006491

SIPDIS

SENSITIVE

TREASURY FOR RADKINS AND MMILLS
NSC FOR BRYZA AND MCKIBBEN
USDOC/ITA/MAC FOR DAVID DEFALCO

E.O. 12958: N/A
TAGS: EFIN EINV PGOV TU
SUBJECT: A SNAPSHOT OF PRIVATIZATION IN TURKEY

REF: 04 ANKARA 1929

THIS CABLE WAS COORDINATED WITH CONGEN ISTANBUL.

1. (SBU) SUMMARY. After a long period of inaction on major
privatizations, the GOT is attempting to move forward with
its largest ticket items--including Turkey's telecom
monopoly, Turk Telecom; petroleum refining company, Tupras;
Tekel's tobacco arm; Petkim and Turkish Airlines (THY); and
steel conglomerate, Erdemir. Over the past two decades, and
especially since the 2001 financial crisis, the GOT has
managed to privatize many smaller and medium-sized State
Economic Enterprises (SEEs) but it has hardly privatized any
of the larger SEEs. Court challenges, labor grievances,
repeated delays, political-sensitivities, and a focus on
proceeds rather than efficiency gains have hindered
privatization. Though the Privatization Administration (PA)
claims it is ratcheting up its efforts to move the larger
SEEs, the GOT's track record is not encouraging.

------------------------------
Privatization Administration's Priorities
------------------------------

2. (SBU) To date, the PA says it has raised 9 billion dollars
in cumulative privatization revenues, since 1985, including
about 1.1 billion dollars in 2004 alone from the sale of
close to 30 SEE's. However, most of these sales have been
small and medium companies, which means that the PA is now
left with the more challenging obligation of selling off the
state's largest companies--as agreed under the IMF program.
Several of these large companies continue to be perpetually
on the verge of privatization, with progress stymied for a
variety of reasons.

--Turk Telecom (TT): Unsuccessful efforts to privatize TT
date back to the early 90's. The GOT remains committed to
privatizing TT but its frequent postponement of promised
tender launches and conflicts between the Competition
Authority (CA) and Telecom Authority (TA) on (TT's
privatization strategy) have undermined the GOT's credibility
on TT privatization. Despite repeated announcements to open
tenders for a 55 percent block sale of TT in October and
again by November, the PA has yet to launch a tender. A
fuller discussion of TT will be reported Septel.

--Tupras: After a successful auction in the first quarter of
2004, won by a consortium led by Russian TATNEFT, the sale of
Turkey's oil refining company, was held up by legal
challenges brought by the company's labor union. An October
court decision rejecting the Turkish Competition Authority's
(CA) proposal to throw out the labor union's case has made it
more likely that the sale will be canceled altogether.

--Tekel: The PA planned to launch tenders for the sale of the
company's tobacco operations in October. This would have
been the second attempt to sell the tobacco arm--the first, a
year ago, being marred by unexpectedly low bids ultimately
rejected by the government. The CA has advised the PA to
sell Tekel's tobacco brands separately, but the PA has not
made an official announcement saying they would follow the
CA's advice. The GOT still hopes to privatize by year's end.

--Petkim and THY: The PA claimed that both the petrochemical
producer, Petkim, and Turkish Airlines (THY) would sell
shares through Initial Public Offerings (IPOs) in November
and December. There have been no recent reports of progress
with a Petkim IPO, however, the PA invited bids for a private
offering of 20 percent of THY shares on November 17.
(Currently, 98.17 percent of THY is state-owned.) The PA
also announced plans to provide discounts to small domestic
investors with eligibility for payment in 5 installments.
News reports indicate a block sale of a larger share of THY
stock may follow.

--Erdemir: This steel corporation is one of the biggest
companies in Turkey. The PA now says 46 percent shares will
be sold in a block sale in early January or February.
However, the President of the Competition Lawyer's
Association reported that Raiffeisen Investment, the PA
consultant for the Erdemir privatization, had ties with a
British/Indian investor, Lakshmi Mittal, who expressed
interest in acquiring Erdemir. If these claims are
substantiated, it could cast doubt on the impartiality of the
tender process. Press reports also suggest interest from
U.S. Steel and the Luxembourg-based Franco-Belgian Arcelor
Group.

-----------------------------
Comment: Dismal Track Record
-----------------------------

3. (SBU) Despite the GOT's repeated claims of making headway
on its privatization endeavors and news coverage of imminent
tender opportunities, Turkey's willingness or ability to
privatize its largest SEE's remains uncertain. The long
track record of delays, legal obstacles, and canceled
sales--whether due to unfavorably low bids or legal
decisions--seems likely to continue. The PA continues to
push back the launch of tenders for major SEE's. The GOT
remains fixated on price alone as the criteria for a sale
without considering the efficiency gains of private sector
management. Furthermore, the internal strife between the
bodies responsible for moving privatization forward--the PA
and CA--could add to the delays or create uncertainty for
potential bidders.

4. (SBU) The GOT says it is committed to its privatization
goals, but the political-sensitivity of the sale of one of
the GOT's most important companies, Turk Telecom, exemplifies
the challenges facing Turkey's privatization agenda. One of
the State's largest SEE's, TT, employs thousands of employees
and has historically generated cash for the State Treasury.
In addition, the GOT and TT itself may still oppose a TT,
"prize state asset," sale to foreigners particularly if it
yields a perceived low price--a likely result in the current
environment of reduced international investor appetite. Many
Post contacts tell us officials run a significant risk of
being prosecuted if they sell SEE's at too low a price.
Moreover, if Turkish courts continue to rule in favor of
labor's objections, then further delays and even
cancellations are predicted to follow. Thus, it is unlikely
that the GOT will meet its goals of privatizing its big
ticket items by the end of the year. This is particularly
true for block sales of majority stakes, as opposed to
minority IPOs like THY and Erdemir. These minority share
IPOs avoid accusations of selling state assets too cheaply,
since the stock market determines the price, and they enable
the GOT to retain effective control. End Comment.
EDELMAN

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