Cablegate: "The Last Communist Town in Turkey"

Published: Tue 29 Jun 2004 05:33 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
B. ANKARA 3585
1. (Sbu) Summary: A trip to two Black Sea towns dominated
by steel and coal parastatals,
provided a glimpse of two very different state-owned
companies. The coal company is a
perennial money-loser with backward technology, a politically
powerful, highly-paid,
unionized labor force, with nary a hint of privatization.
The steel company, on the other
hand, appears reasonably well-run, currently profitable and
partially- owned by investors
on the stock exchange. However, since the steel company
could actually be privatized,
the GOT,s slowness to do so is revealing of Turkish
recalcitrance about meaningful
privatization. End Summary.
2. (U) Econoff and econ specialist traveled in early June
to the towns of Eregli and
Zonguldak on the Black Sea coast. Eregli,s economic
activity is dominated Erdemir the
state-controlled and 50-percent state-owned steel company
which has its headquarters
there. Zonguldak,s business life is dominated by the
100-percent state-owned coal
mining company, TTK.
Zonguldak, "The Last Communist Town in Turkey":
--------------------------------------------- --
3. (Sbu) In Zonguldak, where coal has been mined since late
Ottoman times, the town,s
economic life is dominated by the 100-percent owned coal
company, TTK. Emboffs met
first with the President, Secretary-General and Press Officer
of the local chamber of
commerce: Mr. Salih Demir, Ms. Renda Okay, and Mr.
Kemal Mert, respectively.
These private business people were scathing about TTK in many
respects. They pointed
out that it was difficult for local businesses to compete
with TTK,s highly-unionized and
highly-paid (by Turkish standards, anyway) labor force.
Mert said that TTK employees
are paid TL 1.3 billion (about $900) a month whereas the
going wage for an unskilled
laborer is about TL 400 million ($ 260). Note: At this
salary, TTK employees earn about
$12,000 per annum, more than three times Turkey,s per capita
GDP. End Note. The
Chamber of Commerce officials said the coal miners, labor
union is very powerful
politically, and that no Turkish official dares talk about
privatizing TTK. Emboffs couldn,t
help noticing that the coal miners, union building in
central Zonguldak was noticeably nicer
than the Chamber of Commerce building.
3. (Sbu) Though Zonguldak had the feel of a run-down
coal-mining town, the
Chamber of Commerce officials said there is nevertheless some
local business
other than TTK. Renda said the Chamber had helped get a ferry
company to begin
service from the Ukraine to Zonguldak, which has brought in
some suitcase trade
(i.e. Ukrainian traders and individuals who come to Turkey on
short consumer-goods
buying trips). Salih himself runs a private coal mining
company, leasing mines that TTK
is no longer using and using lower-wage workers to turn a
profit. Renda said there were
some small textile firms that do subcontracting for bigger
textile exporters, but the number
of workers employed in this line of work shrank by more than
50 percent with the 2001
financial crisis, and has not come back.
4. (Sbu) Citing the role of the labor union, and the heavy
presence of the TTK parastatal,
Mert said Zonguldak is "the last communist town in Turkey."
The Director General of
TTK, Rifat Dagdelen is a career government employee in the
mining sector, whom the
Chamber of Commerce people characterized as a communist type.
When emboffs went
to meet with the TTK manager, a floor-to-ceiling photo of
the face of a coal miner--much
larger than the requisite picture of Ataturk--provided
symbolic reinforcement to the
Chamber of Commerce official,s point. The DG seemed
reticent to provide much
information, saying it was inappropriate, for example, to
provide us a financial statement.
He did reveal, however, that TTK turned in a TL 493 trillion
($326 million) loss in 2003.
When asked whether there was any consideration to privatizing
TTK, he said there was none.
Note: TTK, like a number of other state-owned companies in
Turkey, are owned not by the
Privatization Authority, but by the Turkish Treasury. These
companies, such as TTK and
the railroad, are considered either too unprofitable to
privatize or too politically sensitive,
but they remain a long-term drain on the state. End Note.
5. (Sbu) The DG emphasized TTK,s profound need for
investment, repeating this point
several times, and implying that the state had underinvested
in TTK for decades. According
to both the DG and the Chamber of Commerce officials, the
new mining law, which was
passed by the Turkish parliament in recent weeks, may open
the way for some private sector
investment. First, TTK will conduct tenders for
Build-Operate (but not repeat not
Build-Operate-Transfer) coal-washing contracts. Bidders
would be required to bid to wash
each ton of coal at a given price. Under the new law, TTK
would also have expanded
scope to lease out mines to private companies.
Erdemir: a (missed) opportunity for a privatization:
--------------------------------------------- -----
6. (Sbu) Erdemir, the 50-percent state-owned steel company,
seemed quite the opposite of
TTK. Erdemir gave every impression of being a reasonably
well-managed, currently
profitable, stock exchange-quoted company. Emboffs met with
Erdemir Director-General
Kerim Dervisoglu, who said he had come out of retirement to
manage the company after
some less-successful managers had run into problems a few
years ago. Dervisoglu, who had
spent his career with the company and said he had been
trained by Americans from U.S.
Steel, came across as a business-oriented steel expert, as
did his board member colleague,
Ali Sedat Kara, and SVP for operations, Fadil Demirel.
Note: Erdemir has an significant
American connection. A USAID loan in the 1960,s played a
key role in the financing, and
U.S. Steel helped set up the company and train the staff.
End Note. In a quick plant tour of
Erdemir,s large flagship complex at Eregli, the production
lines were of varying vintage but
included one mid-nineties coil rolling facility that seemed
very modern. Erdemir officials
said they are working towards complying with ISO 14000
environmental and safety standards.
7. (Sbu) Erdemir is the largest steel company in Turkey. It
produced 3.5 million tons of steel in
2003, with sales of $1.3 billion in 2003, up from five
straight years of less than $1 billion in sales.
Whereas Erdemir ran small losses for four of the previous
five years, in 2003 it turned a healthy
$360 million net profit. By all accounts, Erdemir is on
track to do well in 2004 as well. Osman
Ilter, the Privatization Authority Vice President responsible
for the Erdemir privatization process,
recently told econoffs that Erdemir could not keep up with
surging local demand for steel from
the booming Turkish auto and white goods sector, which
Dervisoglu confirmed. Ilter said that,
for this reason, Erdemir, even though it is theoretically on
the verge of being privatized, is going
ahead with a self-financed expansion to 7 million tons
capacity. Dervisoglu explained that the
expansion will take place in stages, expanding to 4.5 million
tons by the end of 2005 and to 7
million tons of capacity by 2007. Dervisoglu pointed out
that the Erdemir Group also owns 90
percent of Isdemir, the steel company in Iskenderun, in
Southeast Turkey, and that the group
is making a significant investment to convert Isdemir's
production entirely to flat products
by 2007. Note: These capacity-expansion investments are
among a relatively small
number of such investments in Turkey that post is aware of.
End Note.
8. (Sbu) A combination of strong local demand, decent
management and, more recently,
favorable global steel prices, have sharply improved
Erdemir's performance and near-term
prospects. Econoff had asked Ilter why the GOT did not take
advantage of favorable
conditions and performance to move quickly to privatize
Erdemir, particularly since Ilter
said two big steel groups (Arcelor and LNM of India) were
interested. Ilter said two
potential bidders were not enough, and that they needed to
await the privatization of the
oil refinery, TUPRAS, to demonstrate credibility. He also
complained that the recent reduction
of Chinese steel prices had unfairly reduced Erdemir,s stock
market value. Unlike most
Turkish state companies, nearly half (46.27 percent) of
Erdemir's shares are quoted on the
Istanbul Stock Exchange, a fact that could, in theory help
the Privatization Authority's problem
with evaluating whether bids on block sales reflect a "fair"
9. (Sbu) Dervisoglu said nothing about privatization, and
gave every indication that he and
his team would be running the company for the foreseeable
future. Though Dervisoglu talked
like a company man, rather than a bureaucrat, he and his
fellow board members are appointed
by the state. Even if, as Finance Minister Unakitan recently
suggested on a U.S. trip,
Erdemir is able to float some additional shares in the U.S.,
giving private shareholders majority
ownership, the state would most likely retain effective
control through its power to appoint
board members.
Comment and Conclusion:
10. (Sbu) Erdemir and TTK are in some ways symbolic of the
two categories of state-owned
companies in Turkey. Erdemir, like many of the companies in
the Privatization Authority,s
portfolio, has real value, and could be privatized with the
consequent benefits of efficiency
gains and sales proceeds which would help the state reduce
its debt burden. Instead, of
moving quickly to privatize, however, the state gives every
appearance of moving at a snail,s
pace, meanwhile happily retaining control, with the political
power that implies.
11. (Sbu) TTK, at the other end of the spectrum, is a
politically-untouchable, loss-making,
throwback to an earlier age, and will probably stay that way
for some time. Each company,
in its own way, exemplifies how deeply-rooted is Turkish
state ownership
of at least a portion of the corporate sector.
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