This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 ANKARA 006165
SIPDIS
SENSITIVE
STATE FOR E, EB/IFD AND EUR/SE
TREASURY FOR OASIA - MILLS AND LEICHTER
NSC FOR BRYZA AND MC KIBBEN
USDOC FOR 4212/ITA/MAC/OEURA/DDEFALCO
E.O. 12958: N/A
TAGS: ECON EINV EFIN PGOV TU
SUBJECT: PRIVATIZATION UPDATE
REF: A. ANKARA 1447
B. ANKARA 2130
C. ANKARA 5075
D. ANKARA 1913
E. ANKARA 6144
1. (SBU) Summary. After years of slow motion on
privatization, IMF conditions and the AK government,s more
business-oriented approach seems to have led to a decisive
phase in Turkey,s privatization program. How serious the GOT
has become will be known by the end of the year, by when
three of the largest SEEs (Tekel, Tupras and Petkim) are
scheduled to have been sold. In 2004, a second wave of
important sales is supposed to occur. End Summary.
TEKEL
2. (U) As noted in Ref A, Tekel,s tobacco operations have
attracted substantial interest from, among others, Phillip
Morris, British American Tobacco, and Japan Tobacco. Press
reports value the tobacco subsidiaries at between $1.7
billion and $4.0 billion, which reflect primarily the
difficulty of determining how much new capital is needed to
modernize the operations. Although the alcohol subsidiaries
are also for sale, they represent only about 20% of the value
of the company and have not attracted as much interest.
3. (SBU) Bids for Tekel were originally due on September
26, but the deadline has since been extended to October 24.
Privatization Authority (PA) VP Ayhan Sarisu has assured
econoffs that the deadline will not be extended further.
Sarisu said that the main reason for the extension is that
bidders are having difficulty completing their due diligence.
Also, the PA is experiencing difficulty with Tekel,s real
estate, which is to be conveyed to the state in satisfaction
of unpaid taxes (Ref A).
4. (SBU) Post surmises, however, that the main reason for
the delay is that Phillip Morris is having difficulty
obtaining Competition Authority (CA) approval, which is a
condition of the sale. Tekel has a 58% market share, while
Phillip Morris has a 31% market share. The PA is trying to
convince the CA to permit a sale to Phillip Morris without
imposing potentially onerous antitrust conditions upon it,
but to date has met with stiff resistance due to the 89%
market share that the combined operations would achieve. The
CA and others (including potential bidders) have urged the PA
to sell the tobacco business in pieces, which would both
attract more bidders (since the cost of entry would be lower)
and lessen competitive concerns. However, the PA advises
econoffs that it cannot sell the company by year end if it
first must restructure it. Phillip Morris executives tell
econoffs that, if they cannot obtain regulatory approval, BAT
may have the edge.
5. (SBU) The Turkish press reports that the PA has
instituted a pre-sale retirement program that will reduce
Tekel,s workforce by 3,000 from 30,500, to the way8
for Tekel,s new owner. However, private analysts believe
that thousands more workers must go. (Per Ref A, Phillip
Morris believes that over 90% of the tobacco operations
workers are redundant.)
6. (SBU) Recent legislation promises Tekel a five year
period of gradually declining restrictions on entry by
competitors into the market, which the GOT openly admits is
intended to maximize the sale price (Ref A). Although Tekel
also receives tariff protection, the PA has advised econoffs
that it has made no commitment as to future tariff levels.
7. (SBU) During a September 17 meeting, PA Acting VP Ayhan
Sarisu told econoffs that sale terms are simple and
standardized. Terms will be either all cash, or 50% cash with
two yearly installments at 7% interest. In prior sales, the
PA has generally granted credit terms to bidders, since most
bidders have not had the financial wherewithal to pay cash.
However, all of the investors interested in the Tekel tobacco
operations can pay cash and, given the proffered interest
rate, Sarisu expects that the winning bidder will choose to
do so. The PA can either accept the highest bid, or put the
finalists through an open auction, which could occur as early
as November.
TUPRAS
8. (SBU) The PA intends to sell the state,s 66 percent
stake, retaining only a share8 to guarantee a
continued supply of refined petroleum products to the Turkish
military. There are no other restrictions on the purchaser,s
ability to reduce capacity or production levels (currently,
85-88% of capacity). Although Tupras has an estimated 76%
market share and supplies a majority of Petkim,s feedstock,
PA VP Koktas claimed that the sale will not attract
Competition Authority attention, since Tupras, market share
will not increase as a result of the sale, and Tupras,
individual refineries complement each other, and cannot
realistically be sold other than as a going concern.
(Nevertheless, a World Bank official with whom econoffs spoke
expressed concern about the competition issues.)
9. (SBU) The sale has attracted much attention, from
Russian companies, domestic investors, and consortiums. The
PA is not aware of any interest by U.S. companies, but notes
the possibility that they are participating in consortia. The
PA expects 3-4 companies to be serious bidders. Analysts
expect the company to sell for up to $2 billion.
10. (SBU) Bids had been due October 2 (itself an extended
date), but the PA has extended the deadline to November 23.
PA VP Koktas has given two reasons for the extension: First,
bidders have requested additional time in which to complete
their due diligence; and second, when Parliament reconvenes
in October, the GOT will submit a new law that will
liberalize the petroleum market. This law will permit
refineries to engage in distribution activities, which should
increase the value of Tupras. The GOT expects Parliament to
approve this law quickly.
11. (SBU) In September, Tupras employees staged brief work
stoppage. However, Koktas has told econoffs that Tupras
itself does not have excess workers and that the stoppage was
intended to protest the privatization of Petkim, whose
workers belong to the same union.
PETKIM
12. (SBU) The unfortunate history of this privatization is
detailed in Ref C. The bidding was reopened on August 26,
2003, with a November 18, 2003 deadline. The PA, and all five
prior bidders, agree that at least $1 billion in capital will
need to be invested in order to modernize the company. As
such, the Uzan bid of $605 million, while criticized by
President Erdogan and others as ,8 would appear to be
at the high end. PA expects a sale by year-end.
ELECTRICITY SECTOR
13. (SBU) Under the Electricity Market Law, the state's
generation assets and most of the distribution assets (but
not the transmission system) are to be privatized. The
national grid has been divided into thirty-three distribution
grids, and turned over to the PA, which to date has sold one.
Prior to sale of the others, the independent regulatory
agency EMRA is supposed to establish regional tariffs that
will more closely reflect actual costs (and thus render the
grids more attractive); however, per Ref E, this effort is
currently deadlocked, for political reasons. Another problem
is pending litigation that resulted when the GOT canceled 14
regional operating contracts in order to permit a full
ownership sale. The World Bank thinks that the main problem
is many players.8 No easy or quick solution can be
expected.
NATIONAL LOTTERY
14. (SBU) PA officials have advised econoffs that the sale
will be finalized early in 2004, and should produce around $1
billion. Turkish conglomerates Koc and Sabanci say they
intend to submit a joint bid for the lottery license.
SEKER
15. (U) Three factories of the sugar parastatal, Seker,
have been prepared for sale in early 2004; the remaining 25
will be sold once legal and administrative problems are
resolved.
TURK TELEKOM
16. (U) On September 17, Transportation Minister Binali
Yildirim said the timetable for Telekom,s privatization will
be announced at the end of October. Council of Ministers
approval of a privatization strategy for Telekom is a
requirement of the IMF,s Sixth Review. The GOT has approved
regulations lifting Telekom,s landline monopoly at the end
of the year. Turkish conglomerates Koc and Sabanci say they
intend to submit a joint bid for Telekom. On this issue, the
World Bank believes that the GOT is making progress.8
TURKISH AIRLINES
17. (SBU) The Ref D prediction that privatization in 2003
would be difficult has come to pass. On September 16, the PA
announced that it is postponing privatization to 2004, due to
lack of demand. The PA believes that the best option in
current market conditions is a 10% IPO.
WORKFORCE REDUCTIONS
18. (SBU) The SEEs under the PA portfolio are thought to
require a workforce of about 10,000 (Ref B). However, they
currently employ 71,618 employees: 52,438 full-time workers;
6,538 workers8 ( in name only); and
12,642 civil servants (who cannot be laid off and thus must
be transferred). In a September 16 meeting, PA Employment
Department Head Veysel Tekeloglu confirmed to econoffs that
GOT,s year end IMF program workforce reduction target for
all SEEs is 45,000 workers, of which 21,000 are to come from
the PA SEEs. By the end of August, PA had achieved a
reduction of 14,500 workers, so it is hopeful it will achieve
its year end numbers. To this end, Tekel is the most
important company in the PA portfolio, with 24,000 workers.
If the PA can sell it by year end, then PA will easily meet
its target. If Petkim and Tupras are also sold before year
end, then some 9,000 more workers will be removed from the
state payroll, thus ensuring that GOT,s overall SEE
workforce reductions will be met.
COMMENT
19. (SBU) If (as the PA and GOT confidently predict) Tekel,
Tupras and Petkim are sold close to schedule (by year end or,
at the latest, the end of January, 2004), the 2003 program is
likely to be judged by the IFIs to be acceptable. PA
management recognizes that meeting its 2003 targets is but
the end of the beginning, and has already started working on
its 2004 privatization program (2003 was the first year in
which it had a formal program).
20. (SBU) Challenges remain. The PA is unable to provide
purchasers with zoning variances lasting more than five years
Also, a recent (and generally favorable) World Bank report
makes a number of criticisms: SEE profits and privatization
sale proceeds have been used to finance the unprofitable
holdings rather than being returned to the Treasury and used
to retire debt (pending legislation should solve this
problem); the requirement that the Privatization High Council
approve all sales has forced even small divestitures to be
recycled several times, significantly lowering their value
and reducing transparency; and a few particularly sensitive
privatizations (e.g., Turk Telekom are not controlled by the
PA. From a broader policy perspective, the seemingly
single-minded focus on maximizing the proceeds from
privatization in some cases deters market liberalization and
competition, as protected or dominant market positions are at
least partially passed on to the new owners (e.g., Tekel,
Tupras).
EDELMAN