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 002130 
 
SIPDIS 
 
 
STATE FOR E, P, EUR AND EB 
TREASURY FOR U/S TAYLOR 
 
 
E.O. 12958: N/A 
TAGS: ECON PREL TU
SUBJECT: PRIVATIZATION UPDATE: THE FIRST MAJOR SALE OF 
YEAR; DEFENSE OF PRIVATIZATION JOB LAW 
 
REF: A. ANKARA 2010 
     ¶B. ANKARA 2051 
 
 
¶1.  (SBU) SUMMARY: A top GOT Privatization Administration 
(PA) official told us March 28 the GOT is on track to meet 
its $4 billion sales target for 2003, which will result in 
$2.6 billion in PA revenue this year and the rest to be paid 
by installment.  The official defended the GOT's proposed law 
to allow privatized state workers to convert to civil service 
jobs, saying it will bring short-term savings by eliminating 
the need to pay severance packages.  World Bank officials say 
this law may violate the current IMF Letter of Intent under 
negotiation by exceeding the GOT hiring cap.  The PA is also 
preparing for next week's bid deadline for the purchase of 
the first quarter's feature privatization - the petrochemical 
giant PETKIM.  END SUMMARY. 
 
 
¶2.  (SBU) On March 28, we met with new PA Vice President, 
Kenan Isik, who had been an advisor to Deputy Prime Minister 
Sener (Sener oversaw the PA until last week when the 
privatization portfolio was officially moved to the Finance 
Ministry - reftels).  Isik said that of the more than $4 
billion in expected privatization sales in 2003, about $2.6 
billion will be realized this year, with the rest to be paid 
in installments in later years.  For large sales such as 
TEKEL and PETKIM, high downpayments will be required 
up-front.  Isik also noted that the GOT recently included the 
National Lottery Administration, Istanbul Stock Exchange, 
Halk Bank, and tollroad motorways into the privatization 
portfolio. 
 
 
Defense of "Privatization Job Law" 
-------------------------------------- 
 
 
¶3.  (SBU) Isik worked closely with Sener in drafting the 
"Privatization Job Law," proposed in February (and currently 
in Parliament), that would allow workers in state economic 
enterprises (SEEs) scheduled for privatization to convert to 
civil service jobs.  He claimed that this law is necessary to 
reduce the resistance of unions that in the past have 
successfully persuaded the High Privatization Board to cancel 
privatization initiatives (for instance, PETKIM lawsuit - see 
para 9).  In addition, he said this law would actually lead 
to fiscal savings. 
 
 
¶4.  (SBU) Isik said there are approximately 67,000 workers 
employed in SEEs under the PA portfolio.  He estimates that, 
following privatization, 25,000 will convert to civil 
service, 10,000 will stay with the privatized companies, and 
the remainder will receive severance packages from the 
Privatization Social Support Program, a joint GOT/World Bank 
$250 million fund (the Bank funds 70 percent of this fund). 
Civil service salaries are much less than the unionized State 
Economic Enterprise (SEE) ones.  Several SEEs are virtually 
not producing anything.  Isik estimates PA annual losses at 
$250 million, largely salary expenses in unproductive 
enterprises.  Isik calculated that paying salaries to the 
25,000 people who enter the civil service will cost the GOT 
less than paying their severance packages. 
 
 
¶5.  (SBU) World Bank official Ismail Arslan, however, stated 
that the WB is adamantly opposed to this legislation.  "In 
the short-run, conversion to civil service jobs might give 
the impression of fiscal savings, but you're giving permanent 
employment to these people and you have to consider the 
medium and long-term implications," he said.  Arslan said 
this legislation also appears to violate a condition of the 
current IMF Letter of Intent which requires the GOT to cap 
its civil service hiring at 35,000 for 2003.  He said that 
from discussions with the GOT, most of these 35,000 jobs were 
slotted for teachers, health professionals, and security 
personnel (Isik stated that most of the 25,000 new civil 
service employees would be inserted into the Health and 
Forestry Ministries.  However, Arslan questions whether this 
block of employees would have the qualifications for such 
skilled positions as were initially proposed.) 
 
 
First Major Sale of Year is PETKIM 
---------------------------------- 
 
 
¶6.  (SBU) The Turkish state petrochemical company PETKIM is 
slated for final sale by the end of this year.  Arslan said 
the World Bank is watching this privatization closely, as 
PETKIM is one of five state companies the GOT must sell to 
meet the conditions of a World Bank economic reform loan, 
totaling $760 million (roughly half has been disbursed 
already).  Bid submissions are due April 2, and expected to 
be made public that evening.  Though PA officials won't 
disclose the bidders thus far, sources at PETKIM have 
informed us that Russian oil companies GAZPROM and LUKOIL, 
along with Saudi paristatal SABIC (Saudi Arabian Basic 
Industries Group), are among the bidders.  Press reports from 
March 23 indicate that the Turkish textile and construction 
firm Sanko, based in Gaziantep, may bid for PETKIM as well. 
 
 
¶7.  (SBU) Once the bids are in, a tender commission 
consisting of five PA officials will narrow down the list by 
examining the prospective companies' partnership structures, 
experience, investment strategies, and willingness to post a 
$10 million deposit.  In June, those companies that survive 
the first cut will participate in a PA-led auction that will 
be broadcast live on national television in Turkey.  Once the 
high bidder is selected, the PA will require a 40 percent 
downpayment up-front. 
¶8.  (SBU) PETKIM's net sales in 2002 were $643 million and 
its total assets in 2001 were $727 million, according to 
official GOT data.  Its most profitable years were in the 
mid-1990s, when it brought in $1.2 billion profit in 1995 and 
approximately $900 million in 1996 and 1997 (The decline in 
profits over the past five years correlates to an overall 
downturn in the petrochemicals industry. This is due in part 
to the fact that operating costs for such companies are tied 
to the price of crude oil).  PETKIM currently has 4,586 
employees and controls 35 percent share of Turkey's 
petrochemicals market.  PA owns 89 percent of the company, 
while PETKIM's pension fund owns 7 percent, and the remaining 
4 percent is sold at the Istanbul Stock Exchange (ISEM). 
PA's plan is to have a block sale of anywhere between 51-89 
percent of the company, with the remainder to be publicly 
offered at the ISEM.  Murat Celebi, a PA official working on 
the PETKIM privatization, hopes to sell as much of the 
company in the initial block sale as possible.  He added that 
the new investor will most likely build a new facility in the 
Adana-Ceyhan region so that it can better take advantage of 
natural gas inflows. 
 
 
PETKIM Workers File Lawsuit 
--------------------------- 
 
 
¶9.  (SBU) Like most large companies in the privatization 
portfolio, PETKIM's workers are starting to make noise. 
Press reported March 26 that Petrol-Is Labor Union (the oil 
sector labor union) filed a lawsuit to cancel PETKIM 
privatization, claiming that the GOT should specify the 
amount of shares to be sold, instead of announcing sale of at 
least 51 percent of the company's shares.  The union is also 
claiming that PETKIM's sale should be held up because it is a 
strategic company with products that many sectors rely on. 
 
 
TEKEL Privatization Plan Approved 
--------------------------------- 
 
 
¶10.  (SBU) On March 31, the Privatization High Council 
approved the PA's plan to sell the state alcohol and tobacco 
company TEKEL.  This is one of the four remaining prior 
actions under the IMF Fourth Review. It  allows the PA to 
advertise the tender for TEKEL in June.  The Privatization 
High Council, which consists of the PM, DPM Sener, MinState 
Babacan, Finance Minister, and Industry and Trade Minister, 
may get a facelift soon.  The GOT budget law that passed 
March 29 contains an article that allows PM Erdogan to choose 
the other four Council members from the GOT's Cabinet of 22 
ministers.  Ayhan Sarisu, the PA official leading the TEKEL 
privatization program, said that Erdogan is expected to name 
new Council members in the next few days. 
PEARSON