Cablegate: Turkey's Economy: Privatization Update

Published: Tue 25 Feb 2003 12:02 PM
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
REF: A. (A) ANKARA 1131
B. (B) 02 ANKARA 3538
Sensitive but Unclassified. Not for Internet Distribution.
1. (SBU) Summary: The GOT's ambitious $4 billion
privatization plan for 2003 is moving forward, with some
positive and negative developments. On the positive side,
three large state companies (TEKEL, PETKIM, TUPRAS) are
slated for sale in the first half of 2003: PETKIM's tender
is already out and the other two are being prepared. On the
negative side, fears of resulting job losses, which have
delayed privatization efforts for the past decade, have
resurfaced in the form of a proposed job privatization bill
that would guarantee 70,000 new civil service jobs for
laid-off employees of privatized firms. Another step
backward is the planned merger by the GOT of two steel
producers - one already privatized but bankrupt (Kardemir)
and the other a profitable company in the process of being
fully privatized (Erdemir). End Summary
2. (SBU) Privatization Administration Vice President Haluk
Buyukbas recently updated us on GOT's ambitious 2003
privatization program. There are currently 34 companies
(employing more than 62,000 unionized workers and 10,000
civil servants) under the portfolio run by the GOT,s
Privatization Administration (PA) ) 19 of those companies
are fully owned by the PA. Fourteen companies are scheduled
to go on the auction block this year, in 38 separate sales.
The highlighters for sale in the first half of 2003 are the
tobacco and alcohol giant TEKEL, the petrochemical company
PETKIM, and Turkish Refineries (TUPRAS).
3. (SBU) Tenders for the alcohol and tobacco giant TEKEL will
be advertised in June with final sale expected by the end of
the year. Sales of the spirits distilleries and cigarette
factories are expected to be made in two large block sales
and are expected to represent a large portion of the $4
billion 2003 privatization target. U.S. businesses have
complained of draconian import laws Parliament enacted last
year aimed at protecting TEKEL from competition during the
sales process, so as to ensure high market valuation (see
4. (SBU) The PA has announced a tender for PETKIM on Jan 20,
2003 and specified April 2, 2003 as the deadline for
submission of bids. Only 4% of PETKIM shares are currently
being traded at the Istanbul Stock Exchange (ISEM); the
Pension Fund owns 4% of the shares and PA,s shares amount to
89%. The PA is targeting block sale of a minimum 51% of
shares this year, which would switch control of the company
to the private sector. The investors will have the
flexibility to bid for up to 89% of the company shares in the
5. (SBU) Although PETKIM is the sole petrochemical producer
in the Turkish market, it only has a 35% market share; the
rest are imports. There are currently no trade restrictions
or customs barriers for petrochemical imports. PA has not
conducted a valuation for PETKIM so far. Buyukbas thinks
what potential buyers are willing to pay would become the
value of the company, rather than the PA setting the price.
The PA expects several international and Turkish consortiums
to bid for PETKIM.
6. (SBU) A total of 34.5% of TUPRAS shares are currently
traded at the Istanbul Stock Exchange. The PA is planning to
announce a minimum 17% block sale of TUPRAS in the second
quarter of 2003, in order to reduce state control of the
company to under 50%. TUPRAS currently has an 86% share in
the total crude oil processing in Turkey. Atas (owned by BP)
refinery processes the remaining amount, but the PA expects
this refinery to cease production by 2005, since it does not
satisfy EU environmental conditions due to a lack of
investment. Buyukbas said Russian energy companies Yukos and
Lukoil have expressed great interest in TUPRAS privatization.
Given their financial strength, they are likely to be the
most competitive bidders. Buyukbas said the PA appointed
Salomon Smith Barney as the consultant for TUPRAS
privatization, and the company is expected to prepare a
strategy for TUPRAS privatization by May 2003.
7. (SBU) Other large enterprises on the auction block for the
second quarter are Sumer Holding A.S. (textiles and leather),
Tugsas (fertilizers and ammonium nitrate), and Tumosan Turk
Motor (machinery). The highlighted tender for the second
half of 2003 is Turkish Airlines, which is scheduled to be
advertised in September under a block sale and a public
Two Recent Steps Backward
8. (SBU) Deputy PM Sener announced February 20 that the GOT
had agreed to submit to parliament a job
law8 that would guarantee 70,000 new civil service positions
for laid-off workers (see ref A). Besides defeating any gains
in efficiency resulting from privatization, this policy is
counterproductive, especially considering other programs are
already in place to mitigate the losses of laid-off workers.
A joint World Bank-GOT Social Support
Project,8 initiated in 1999, provides $250 million in
severance packages to displaced workers (70% funded by WB;
30% by GOT). World Bank expert Ismail Arslan told us the
severance packages would provide workers up to $30,000, and
that they were very generous when compared to similar
programs in other countries. He added that less than $20
million of the $250 million pot has been spent thus far,
because the GOT is not privatizing.
9. (SBU) On February 22, Deputy PM Sahin announced a plan to
merge the antiquated, bankrupt, and inefficient Kardemir
(steel company - see ref B) with Erdemir (iron and steel),
Turkey's largest steel producer which is already half
privatized and is planned to be fully privatized by the
Privatization Administration. Kardemir, which is owned by
its labor union, received a $250 million bailout in 1995 and
had its debts paid by the GOT. By 2001, the company was
again about to go bankrupt before being saved by a government
bailout, in the form of restructured debts and loans.
Erdemir management, meanwhile, plans to increase its annual
steel production and reduce its workforce, making it more
competitive with the private sector. Erdemir Board Chairman
Recai Berber told the press on Feb. 21 that Erdemir would
"stumble" if Kardemir was merged with it. (Comment: Merger
of the bankrupt but privatized Kardemir and the
half-privatized Erdemir will reduce Erdemir's remaining
privatization potential.)
Privatizations Further Down the Road
10. (SBU) As for new entrants into the PA portfolio, Buyukbas
said the PA had high expectations for the privatization of
toll ways, the National Lottery, and Istanbul Stock Exchange.
The GOT needs to amend certain laws to start the
privatization process for these entities. Buyukbas said
among these entities, the National Lottery Administration
would bring the highest revenue to the GOT, noting by way of
comparison that privatization of only 17% of the Greek
National Lottery brought Euro 500 million.
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