This record is a partial extract of the original cable. The full text of the original cable is not available.

171332Z May 05

UNCLAS SECTION 01 OF 03 ANKARA 002812 
 
SIPDIS 
 
SENSITIVE 
 
USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO 
FCC FOR A THOMAS AND A WEINSHCHENK 
EB/CBA - MERMOUD, WALTERS 
 
E.O. 12958: N/A 
TAGS: ECPS BEXP EFIN TU
SUBJECT: TURK TELEKOM'S PRIVATIZATION: OPTIMISM AND GLOOM 
 
REF: A. 04 ANKARA 6673 
 
     ¶B. ANKARA 2072 
     ¶C. ANKARA 1209 
 
SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE ACCORDINGLY. 
 
¶1.  (SBU)  Summary: Turkey's Privatization Administration has 
extended to June 24 from May 31 the deadline for bids in the 
sale of the 55% stake in state telecom company Turk Telekom. 
While there is lively demand from eight separate bidding 
groups for the tender, in combination with broad recognition 
of the importance for achieving successful and timely 
privatization of Turk Telekom, there are still many negative 
factors and fears for further delays.  Five international 
bidding groups have pulled out of the process, including 
Spanish, Belgian, Malaysian, and South Korean firms.  End 
Summary. 
 
¶2.  (SBU)  On the margins of the fifth STEAM (Strategic 
Technical and Economic Research Center) Telecom Conference in 
Istanbul May 9-10, Economic Officer gauged the mood of 
Turkish government and private officials on the privatization 
of Turk Telekom (Ref A) and liberalization of the telecom and 
IT sectors (Refs B and C). 
 
Will She or Won't She? - Turk Telekom Privatization Prospects 
--------------------------------------------- ---------------- 
 
¶3.  (SBU)   While officials from the Privatization 
Administration (PA) and the Transportation Ministry expressed 
full commitment to achieving timely privatization of the 55% 
share of state telecom company Turk Telekom and 
representatives of some of the contenders expressed 
enthusiasm, many observers expressed reservations and 
pessimism.  Turk Telekom management has expressed commitment 
to privatization (to free them from public procurement and 
oversight strictures), but the state telecom company was 
noticeably absent from the conference.  The company was busy 
working with the PA and five of the bidders who had requested 
an extension in the bidding deadline to continue to evaluate 
the data.  The PA announced an extension of the bidding 
deadline from May 31 to June 24.  Cynics on the meeting's 
margins noted that summer would offer a convenient excuse for 
further delay. 
 
¶4.  (SBU)  The original list of 13 qualified bidder groups 
has eroded down to the present eight.  Over time, Belgian 
firm Belgacom, Spanish firm Telefonica, Malaysian Multi 
Global Link, South Korean SK Telekom, and Turkish MNG/MAPA 
Company have pulled out of the running.  The reasons have 
been strategic, competing investment opportunities, and some 
concerns expressed about valuation and management of Turk 
Telekom's 40% share in the troubled Avea mobile operator. 
Casting further confusion, one of the key contenders, Telecom 
Italia (which has a 40% share and management control of 
Avea), announced if it did not win the Turk Telekom bid, it 
would pull out of Avea.  Turkish authorities have sought 
greater interest from European (or American) companies 
without success.  Deutsche Telekom, for example, recently 
repeated its lack of interest. 
 
¶5.  (SBU)  Here is the current list of contenders: 
 
-Telecom Italia (viewed as one of the leaders) 
-Emirates Telecommunications Corp (Etisalat)/Dubai Islamic 
Bank/(Turkish) Cetel Calik Enerji (recently won the bid for 
Albania Telecom) 
-Saudi Oger Telecom (BT Telconsult is advisor) 
-Koc Holding (prominent Turkish business group; partnership 
with Sabanci group recently dissolved because of unrelated 
business conflict; Sabanci is still considering pursuing a 
separate bid or partnership) 
-Dogan Companies Group (major Turkish media group) 
-OYAK (Turkish military pension fund) 
-Turktell Bilisim Servisleri (subsidiary of dominant mobile 
company Turkcell), leading 14 member JV 
-Turkish Privatization Investors (no information available) 
(The local consortiums are still looking for suitable 
partners.) 
 
¶6.  (SBU) Three leading contenders were enthusiastically 
present at the STEAM Conference: Telecom Italia, Cetel Calik 
Enerji, and Saudi Oger.  Telecom Italia is perceived as the 
front runner, but rivals privately grumble about its past 
over-payment for the mobile license which became Avea's and 
its recent comments quoted in the press: limited funds 
available for investment in Turk Telekom and threats to pull 
out of Avea if it does not win the Turk Telekom tender.  An 
industry expert speculated to EconOff that Saudi Oger might 
raise concerns about "green" or "Islamic" capital for the 
Turkish "deep state" or secular establishment (it does 
sometimes conspicuously drop the "Saudi" part of its name). 
There is still likelihood for bidders forming new 
partnerships among themselves or with the outside. 
 
¶7.  (SBU) But will it happen? There was broad recognition of 
the need for privatization to provide better service in this 
critical sector to Turkey's business and investment 
environment.  Moreover, there is a perception that this would 
be the last chance, after two previous failed attempts and as 
some of the most lucrative corporate business gradually gets 
"cherry picked", reducing potential Turk Telekom value.  Some 
speakers called for greater emphasis on transparent 
market-based privatization process, as opposed to emphasis on 
privatization price target.  Noting a smaller participation 
at this STEAM telecom conference, one participant told 
EconOff that it indicated either fatigue and frustration with 
the protracted privatization/liberalization process or 
preference to be out doing telecom business in Istanbul. 
 
¶8.  (SBU) Nevertheless, there are several factors that could 
contribute to more delay or another failed process (Ref A): 
-Entrenched opposition from labor and the judiciary (the PA 
is seeking a ruling to limit judiciary appeals to the 
Danistay- high administrative court). 
-Turk Telekom generates and transfers significant dividends 
to the Turkish Treasury (which would be partially replaced by 
the sale price and taxation of the new owner, in addition to 
ongoing excise taxes). 
-Concerns about foreign ownership of a key strategic asset 
and can the "deep state" accept this? (Especially in 
combination with foreign control of mobile telecom companies: 
Turkcell's pending majority ownership from Teliasonera; 
troubled Telsim's (held by state bank fund) potential foreign 
acquisition- Vodafone is seriously looking; and Avea's 
significant ownership by Telecom Italia). 
-Overemphasis on price, which could exacerbate unrealistic 
expectations and fuel opposition to whatever price the market 
determines (at a time of reduced international investor 
appetite and capacity). 
-Conflict between Turk Telekom, the Telecom Regulatory 
Authority, and the Competition Board and continued ambiguity 
and delay in market liberalization. 
-Is there the political will to let go of control of a "crown 
jewel"? 
 
Liberalization at a Crawl - Turk Telekom Sees a Zero Sum Game 
--------------------------------------------- ---------------- 
 
¶9.  (SBU)  Besides doubts about prospects for a timely 
privatization of Turk Telekom, the conference generated wide 
complaints about Turk Telekom's zero sum game mentality and 
its taking advantage of its dominant position.  The well 
intentioned, but weak, Telecom Regulatory Authority (with a 
new President- Tayfun Acarer) and the (marginally stronger) 
Competition Board have been unable to agree on or enforce 
decisions on interconnection fees and competition (Ref C). 
Only a few of the 43 long distance service license holders 
have been able to start operations.  ISP's face a price 
squeeze from Turk Telekom between interconnection wholesale 
cost and Turk Telekom's retail price for its competing 
service.  ISP's have not been allowed access to the 
"Kablonet" cable television system (to be split off from Turk 
Telekom).  Turk Telekom has maintained a monopoly on wide 
band internet service (ADSL) and has not allowed ISP 
providers or Kablonet to re-market this service, nor to 
widely put in place VOIP (Voice Over Internet Protocol) 
service.  In seeking to increase its ADSL subscriber numbers 
in advance of privatization, Turk Telekom has used its 
advantages to unfairly compete with Kablonet for internet 
business.  Turk Telekom has regularly ignored Telecom 
Regulatory Authority and Competition Board rulings and/or 
taken some of its fledgeling competitors to court to 
challenge them. 
 
Comment 
------- 
 
¶10.  (SBU)  While privatization of state enterprises is a key 
commitment of the GOT with the IMF, the PA has so far taken 
the path of lesser resistance in garnering IPO's which do not 
relinquish state control of major assets and sectors.  For 
the sale of the highly visible and valuable state asset of 
Turk Telekom, overemphasis on "last chance" and opportunity 
for a great symbolic splash with the international investment 
community, while true, is based on wishful thinking.  Many 
observers fear that delays and entrenched opposition will 
carry the day, while delays will risk to diminish value, 
which will be self-fulfilling.  Leadership of a strong 
domestic business group may ultimately be a politically and 
strategically feasible solution, but will it provide adequate 
capital and know-how to assure high value and innovative 
service for Turkish consumers? Interested parties recognize 
Turkey's strong need for a consistent, coherent, and 
competitive telecom regulatory structure and environment.  It 
is still a work in process.  This may ultimately be more 
important than the prospective Turk Telekom privatization. 
EDELMAN