Cablegate: Playing Politics with Privatization

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





E.O. 12958: N/A


This cable was coordinated with Embassy Ankara.

1. (SBU) Summary: A political and media furore has swirled in
recent days around the controversial 49-year lease for
Istanbul's Galata port on a prime stretch of waterfront
overlooking the old city. Critics point out that the winning
bid, announced at USD 4.3 billion, actually has a real
present value of only USD 240 million. Tangled up in the
controversy are allegations of malfeasance in the sale of
14.76 percent of national refiner Tupras earlier this year on
the Istanbul stock exchange. The sale was made without
public notice and the winning bidder (thought to be Israel's
Ofer Group, a principal shareholder in Royal Caribbean
Cruises and part of the winning consortium for the port)
stands to make USD 800 million on the transaction.
Government officials, up to and including Prime Minister
Erdogan (who himself first denied meeting Ofer, but then
conceded that he had done so), reject the criticism of both
deals and stress that they were carried out properly. The
point-counterpoint highlights, however, the political
sensitivities surrounding privatization in Turkey. End

2. (SBU) Sour Grapes?: Initial questions about the recent
flurry of deals involving Israel's Ofer Group resulted from
the profit it stands to realize from its apparent investment
in the Turkish refinery Tupras in March. At that time,
Turkey's Privatization Administration (PA) was given
permission by the High Privatization Board to realize YTL 1
billion (approximately USD 750 million) from its portfolio.
It finally settled on a package of deals that included the
sale of a 14.76 percent stake in Tupras through a private
placement to six investment funds, using Istanbul's Global
Securities as intermediary. The funds are thought to have
been acting on behalf of the Ofer Group (though this remains
unconfirmed). This month's block sale by the Privatization
Administration of a controlling share of the refinery brought
a stunning increase in the company's valuation to USD 8.1
billion (reftel), leaving Ofer with a profit of USD 800

3. (SBU) Critics in the press charged that the public was not
properly informed about the process whereby the shares were
sold in March. The drumbeat was subsequently picked up by
opposition politicians, who saw an opportunity to tarnish the
government. Contacts in Istanbul's financial community note
that such private placements have been used in the past, but
do create an appearance of impropriety. At least one notes
that he would have loved to have had an opportunity to
participate in the transaction, given that it offered the
opportunity to purchase a block of shares at a discount, at a
time when the stock was rising in value. Locally, only
Global Securities seems to have been approached by the PA,
though Global's owner Mehmet Kutman has said the PA reached
out to a number of international brokers, and only turned to
Global when it deemed that the concessions and guarantees
that the international firms were seeking were excessive.

4. (SBU) For their part, neither Turkey's Capital Markets
Board (SPK), nor the Stock Exchange itself, appears to have
been happy with the way the transaction was carried out. The
SPK told the PA and the Stock Exchange that the transaction
should have been publicly announced, but did not move to stop
it (an SPK investigation is ongoing). The Exchange
complained that the PA had not waited the required three days
after providing notification of the sale before completing
the transaction, but the PA has subsequently said that it is
not subject to this requirement. Defenders of the deal note
that use of discounts for such block sales is standard, and
that the March sale was hailed for the premium it provided
over the price offered in an earlier 2004 attempt to
privatize Tupras that Turkish courts had struck down. They
remind us that no one in March had an inkling of what the
company would sell for in September. Indeed, until the
results were announced, many analysts did not expect the
company to achieve its market cap, much less so dramatically
exceed it (USD 8.1 billion versus a market cap of 4.5

5. (SBU) Galataport: The controversy deepened when the Ofer
Group, together with a number of Turkish and foreign
partners, including Global Securities, won the tender to
operate Istanbul's historic but run down cruise ship terminal
(Galataport) for 49 years for USD 4.3 billion. Observers
were initially astounded at the high price the group paid.
That sentiment turned around, however, when "Sabah" newspaper
published the 49-year payment plan for the lease, showing
that only USD 36 million is due in its first ten years, and
that its present value is only USD 244 million. A range of
critics in the press and opposition, as well as business,
then emerged, criticizing the tender and seeking its
annulment. Among them was Koc Group Honorary President (and
former Chairman) Rami Koc, who told the press that if he had
known of the payment conditions in the tender, he personally
would have entered a bid. On October 3, a labor union went
to court to invalidate the deal, arguing that the
build-operate-transfer model used by the government was
inappropriate for a cruise ship terminal. Questions are also
swirling around exactly what sort of development the winning
bidders will be allowed to create on the sensitive waterfront

6. (SBU) Resolute: Despite the criticism, the government has
stuck to its guns and staunchly defended the transaction.
Prime Minister Erdogan, in a speech on October 1 in Abant,
noted that the Ofer group has extensive experience in the
tourism sector, and will bring valuable expertise to the
project. Transportation Minister Binali Yildirim noted that
the port earned only USD 5 million last year, and that even
if the losing bids (which came in at only one-third of what
the Ofer Group offered) had been accepted, the government
would realize a profit. He noted that the tender process had
unfolded over three years, and had been widely publicized in
Turkish newspapers. "We couldn't send out seventy million
letters," he said sarcastically. The Koc Group's current
chairman Mustafa Koc also came to the government's aid (and
implicitly rebuked his father), by noting that the tender was
"transparent" and accessible to all who were interested.
Despite the controversy, the Privatization board okayed the
process on September 27, sending it to Finance Minister
Unakitan for his approval.

7. (SBU) Did he, Didn't He?: Briefly fanning the flames of
the debate were contradictory statements by Prime Minister
Erdogan about whether he had met Sami Ofer. Initially he
denied such a meeting, however within hours his office issued
a correction admitting that such a meeting had occurred. The
Prime Minister subsequently stressed that he would meet with
any and all, both foreign and domestic, who are interested in
investing in Turkey. "I have met, am meeting, and will
continue to meet" with such individuals, he said defiantly.
The fact of the meeting, however, was seized on by opposition
politicians in the Cumhuriyet Halk Partisi (CHP) and the
Dogru Yol Partisi (DYP) to charge that the government had
engaged in corruption and insider trading. The CHP
subsequently announced that it would submit a motion of
censure to the National Assembly.

8. (SBU) Controversial Broker: An additional point of
controversy has been the identity of Ofer's Turkish partner,
Global Securities' Chairman Mehmet Kutman, the cousin of
former Prime Minister Mesut Yilmaz. Yilmaz himself remains
on trial on corruption charges, and newspapers and others
have sought to insinuate that Kutman has succeeded in
building a relationship with the AK party similar to that he
formerly enjoyed with Yilmaz's ANAP party.

9. (SBU) Anti-semitism: Some have also seen a tinge of
anti-semitism in the debate, pointing to the fact that
virtually every article about the controversy has referred to
Ofer either as Jewish or Israeli, something that is
uncharacteristic of articles concerning other transactions.
Interestingly, however, this has not been as true of the
country's Islamist press, which has largely avoided
mentioning Ofer's background. Instead they have staunchly
defended the government against the corruption accusations,
noting sarcastically, for instance, that the "secret"
Galataport transaction was widely advertised in papers that
have since criticized the deal.

10. (SBU) Comment: The Ofer debate highlights the range of
issues opponents seize on when they seek to challenge
privatization and seek to score points off the government.
From questioning the price at which the transaction occurred,
to seeking to question the transaction on nationalistic
grounds, opponents are not shy about exploiting every opening
they see. State Minister Babacan suggested another force
that may be at play as well: disappointment in Turkish
business circles that foreign interest is driving prices
higher and preventing them from acquiring assets "on the
cheap" as they have in the past. In this case, however, at
least as regards the Tupras sale, the murky manner in which
the transaction was handled has given critics an opening to
exploit. End Comment.

© Scoop Media

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