Cablegate: Controversy Swirls Around Petkim Privatization

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 004061

SIPDIS

SENSITIVE

STATE FOR E, EUR/SE AND EB
TREASURY FOR OASIA - MILLS AND LEICHTER
NSC FOR QUANRUD AND BRYZA
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO
USDA FOR FAS FOR EC AND CCC/FSA

E.O. 12958: N/A
TAGS: ECON EFIN ENRG TU
SUBJECT: CONTROVERSY SWIRLS AROUND PETKIM PRIVATIZATION

REF: (A) ANKARA 2130 (B) ANKARA 3784

Sensitive but unclassified. Not for internet distribution.

1. (SBU) Summary: The first major sale in Turkey's
ambitious 2003 privatization program is nearing the finish
line, with the imminent submission of the winning bid for the
state petrochemical company Petkim to Turkey's High
Privatization Council for approval. The tender is engulfed
in controversy, however, both because of the bid amount--too
low in the estimation of some, at USD 605 million, against a
pre-tender market capitalization of just over USD 1.1
billion-- and because of the identity of the winning bidder:
Turkey's notorious Uzan family, well-known for its
telecommunications exploits and more recently stripped of the
concession contracts of its two power companies-- Kepez and
Cukorova Electric-- for persistent contract and legal
violations (ref b). With a USD 4 billion revenue target for
the year, but only USD 12 million realized to date,
Privatization Administration (PA) officials stress that
completion of the sale at the bid price would mark an
important step forward. They defend their decision to permit
the Uzans to participate, noting that the family has
fulfilled its obligations to the PA in the past, and they are
not permitted to consider bidders' dealings with other state
bodies. Given Cem Uzan's emergence as a chief political
rival of the ruling AK Party and the controversy surrounding
the family, however, high council approval is not a foregone
conclusion. End Summary.

2. (SBU) A Lackluster Bidding War: PA Project head Meray Ekin
outlined the bidding process in a June 20 meeting with
Econoff and economic specialist. Of the original five
bidders who submitted bids in April 2003, three remained in
the final round: the Uzan's Standart Kimya, Vakif Bank, and
Sanko and Zorlu holding (individual bidders in the first
round, who elected to join forces). Speculation has swirled
around the presence of Vakif, a semi-state bank in the
process, with some market observers in Istanbul speculating
that it served as a stalking horse for the PA, enabling it to
set a floor price in the auction. (Separately, Treasury
sources told us that the PA gave an instruction to Vakif to
bid, given legal requirements that at least three bidders
participate.) For her part, Ekin dismissed such speculation,
suggesting instead that Vakif was acting as a front for an
Iranian group, but indicating that she did not have any
proof.

3. (SBU) Price Controversy: In response to bidding demand,
the PA decided to sell the full 88.86 percent of the
company's shares that remain in government hands (the
original tender specified a range from 51 to 88.86 percent).
The Uzan's winning bid came in at USD 605 million. The
Zorlu/Sanko partnership dropped out at USD 570 million (the
price one major Istanbul brokerage told us it expected the
company to bring). Bidders are expected to pay 40 percent as
an immediate payment, and then 20 percent each year for three
years. There is a 10 percent discount if the full price is
paid at the outset. The amount of the Uzan's offer
immediately sparked controversy, with critics calling it a
"firesale" price, given that before the tender the company's
market capitalization on the Istanbul Stock Exchange (where
some 11 percent of shares are traded) approached USD 1.1
billion. (It has since dropped by over 20 percent.) Prime
Minister Erdogan, who serves as chair of the Privatization
High Council, added his voice to those who questioned the
sale price. PA officials, however, defend the price, noting
that whoever takes over the company will need to invest at
least USD 1 billion to make the company productive and
efficient (a figure Ekin said all bidders accepted).
Separately market analysts at brokerages including HC
Istanbul and Global told us that they had anticipated a
figure between USD 500 and 570 million.

4. (SBU) Controversial Winner: Adding to the controversy is
the identity of the winning bidder: the controversial Uzan
family, whose dealings in areas ranging from
telecommunications to electricity have sparked lawsuits and
complaints of deceptive and illegal business practices. Most
famous for defrauding Motorola and Nokia out of nearly USD 2
billion in supplier credits, the Uzans' other business
practices have also been widely questioned. In addition,
family scion Cem Uzan's Genc (Young) Party has played on a
set of nihilist, anti-American themes to emerge as the AK
party's most ardent challenger. Ekin stressed, however, that
legally the PA had no basis for excluding the family from
participating in the Petkim tender: they had, she said, the
"best company record" with the PA regarding payments and
meeting privatization terms in the past. She conceded that
the family's post-PA dealings with their companies were less
blameless, but noted that Turkish legislation does not permit
the PA to consider a bidder's dealings with other state
institutions. Failure to pay taxes or meet obligations to
other parts of the GOT is not grounds for exclusion from the
bidding, she said, so the family's difficulties regarding its
power companies Cukorova and Kepez, which were stripped of
their government concessions for legal and contract
violations, "cannot legally be an obstacle." (A point
Industry Minister Ali Coskun emphasized publicly following
the companies' takeover.)

5. (SBU) Next Steps: After clearance by the PA, the Uzan
offer was submitted to Turkey's Competition Council, which
also cleared it on June 23, saying it posed no problems under
Turkey's competition law. The final decision is thus left to
the high council, chaired by Erdogan and composed of four
other ministers. The council's discretion is constrained
only by the need to preserve confidence in the privatization
process. It thus does not need a legal pretext to disallow
the Uzan's bid.

6. (SBU) A Tough Call: Ekin stressed that because of the
large price difference between the Uzan and Zorlu bid, the
contract could not be awarded to the next highest bidder, if
the Uzan bid is not accepted by the high council. Instead,
the process would have to start from scratch. This, she
judged, would negatively impact the upcoming privatization of
Tekel (the state alcohol and tobacco monopoly) and Tupras
(the state refinery), and imperil the government's target of
USD 4 billion in privatization revenue for the year.

7. (SBU) Comment: The government faces a tough call on the
Petkim privatization, with political considerations-- both
normative and tactical-- mitigating against approval of the
tender, in the first place to keep the company out of the
hands of a notorious clan, and in the second in order to keep
the pressure on the family, which has been shaken by the
Cukorova and Kepez decision. On the other hand, however,
rejection of the tender would deal a blow to government
attempts to jump-start its privatization program and make a
real dent in the year's ambitious revenue goal. It would
also negatively impact upcoming privatizations, particularly
if officials continue to argue that the price is too low. In
our contacts with GOT officials, we have stressed our hope
that the council will avoid second guessing the bid price,
and will not make its decision on that basis, but on other,
sounder (i.e. anti-corruption) grounds. Clearly, the tender
has highlighted shortcomings in Turkey's privatization law,
in that broader requirements for bidders would have prevented
this embarrassing outcome.
PEARSON

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