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 001214 
 
SIPDIS 
 
 
STATE FOR E, P, EUR AND EB 
TREASURY FOR U/S TAYLOR 
 
 
E.O. 12958: N/A 
TAGS: ECON PREL TU
SUBJECT: TURKEY'S ECONOMY:  PRIVATIZATION UPDATE 
 
 
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). 
 
 
TEKEL 
----- 
 
 
¶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 
septel). 
 
 
PETKIM 
------ 
 
 
¶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 
tender. 
 
 
¶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. 
 
 
TUPRAS 
------ 
 
 
¶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 
offering. 
 
 
Two Recent Steps Backward 
------------------------- 
 
 
¶8. (SBU) Deputy PM Sener announced February 20 that the GOT 
had agreed to submit to parliament a &privatization 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 &Privatization 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. 
PEARSON