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