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 ISTANBUL 001716 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EUR/SE AND EB/OMA/IFD 
 
E.O. 12958: N/A 
TAGS: ECON EINV TU
SUBJECT: PLAYING POLITICS WITH PRIVATIZATION 
 
REF: ANKARA 5352 
 
This cable was coordinated with Embassy Ankara. 
 
¶1. (SBU) Summary: A political and media furore has swirled in 
recent days around the controversial 49-year lease for 
Istanbul's Galata port on a prime stretch of waterfront 
overlooking the old city.  Critics point out that the winning 
bid, announced at USD 4.3 billion, actually has a real 
present value of only USD 240 million.  Tangled up in the 
controversy are allegations of malfeasance in the sale of 
14.76 percent of national refiner Tupras earlier this year on 
the Istanbul stock exchange.  The sale was made without 
public notice and the winning bidder (thought to be Israel's 
Ofer Group, a principal shareholder in Royal Caribbean 
Cruises and part of the winning consortium for the port) 
stands to make USD 800 million on the transaction. 
Government officials, up to and including Prime Minister 
Erdogan (who himself first denied meeting Ofer, but then 
conceded that he had done so), reject the criticism of both 
deals and stress that they were carried out properly.  The 
point-counterpoint highlights, however, the political 
sensitivities surrounding privatization in Turkey.   End 
Summary. 
 
¶2. (SBU) Sour Grapes?:  Initial questions about the recent 
flurry of deals involving Israel's Ofer Group resulted from 
the profit it stands to realize from its apparent investment 
in the Turkish refinery Tupras in March.  At that time, 
Turkey's Privatization Administration (PA) was given 
permission by the High Privatization Board to realize YTL 1 
billion (approximately USD 750 million) from its portfolio. 
It finally settled on a package of deals that included the 
sale of a 14.76 percent stake in Tupras through a private 
placement to six investment funds, using Istanbul's Global 
Securities as intermediary.  The funds are thought to have 
been acting on behalf of the Ofer Group (though this remains 
unconfirmed).  This month's block sale by the Privatization 
Administration of a controlling share of the refinery brought 
a stunning increase in the company's valuation to USD 8.1 
billion (reftel), leaving Ofer with a profit of USD 800 
million. 
 
¶3. (SBU) Critics in the press charged that the public was not 
properly informed about the process whereby the shares were 
sold in March.  The drumbeat was subsequently picked up by 
opposition politicians, who saw an opportunity to tarnish the 
government.  Contacts in Istanbul's financial community note 
that such private placements have been used in the past, but 
do create an appearance of impropriety.  At least one notes 
that he would have loved to have had an opportunity to 
participate in the transaction, given that it offered the 
opportunity to purchase a block of shares at a discount, at a 
time when the stock was rising in value.  Locally, only 
Global Securities seems to have been approached by the PA, 
though Global's owner Mehmet Kutman has said the PA reached 
out to a number of international brokers, and only turned to 
Global when it deemed that the concessions and guarantees 
that the international firms were seeking were excessive. 
 
¶4.  (SBU) For their part, neither Turkey's Capital Markets 
Board (SPK), nor the Stock Exchange itself, appears to have 
been happy with the way the transaction was carried out.  The 
SPK told the PA and the Stock Exchange that the transaction 
should have been publicly announced, but did not move to stop 
it (an SPK investigation is ongoing).  The Exchange 
complained that the PA had not waited the required three days 
after providing notification of the sale before completing 
the transaction, but the PA has subsequently said that it is 
not subject to this requirement.  Defenders of the deal note 
that use of discounts for such block sales is standard, and 
that the March sale was hailed for the premium it provided 
over the price offered in an earlier 2004 attempt to 
privatize Tupras that Turkish courts had struck down.  They 
remind us that no one in March had an inkling of what the 
company would sell for in September.  Indeed, until the 
results were announced, many analysts did not expect the 
company to achieve its market cap, much less so dramatically 
exceed it (USD 8.1 billion versus a market cap of 4.5 
billion.) 
 
¶5. (SBU) Galataport: The controversy deepened when the Ofer 
Group, together with a number of Turkish and foreign 
partners, including Global Securities, won the tender to 
operate Istanbul's historic but run down cruise ship terminal 
(Galataport) for 49 years for USD 4.3 billion.  Observers 
were initially astounded at the high price the group paid. 
That sentiment turned around, however, when "Sabah" newspaper 
published the 49-year payment plan for the lease, showing 
that only USD 36 million is due in its first ten years, and 
that its present value is only USD 244 million.  A range of 
critics in the press and opposition, as well as business, 
then emerged, criticizing the tender and seeking its 
annulment.  Among them was Koc Group Honorary President (and 
former Chairman) Rami Koc, who told the press that if he had 
known of the payment conditions in the tender, he personally 
would have entered a bid.  On October 3, a labor union went 
to court to invalidate the deal, arguing that the 
build-operate-transfer model used by the government was 
inappropriate for a cruise ship terminal.  Questions are also 
swirling around exactly what sort of development the winning 
bidders will be allowed to create on the sensitive waterfront 
site. 
 
¶6. (SBU) Resolute: Despite the criticism, the government has 
stuck to its guns and staunchly defended the transaction. 
Prime Minister Erdogan, in a speech on October 1 in Abant, 
noted that the Ofer group has extensive experience in the 
tourism sector, and will bring valuable expertise to the 
project.  Transportation Minister Binali Yildirim noted that 
the port earned only USD 5 million last year, and that even 
if the losing bids (which came in at only one-third of what 
the Ofer Group offered) had been accepted, the government 
would realize a profit.  He noted that the tender process had 
unfolded over three years, and had been widely publicized in 
Turkish newspapers.  "We couldn't send out seventy million 
letters," he said sarcastically.  The Koc Group's current 
chairman Mustafa Koc also came to the government's aid (and 
implicitly rebuked his father), by noting that the tender was 
"transparent" and accessible to all who were interested. 
Despite the controversy, the Privatization board okayed the 
process on September 27, sending it to Finance Minister 
Unakitan for his approval. 
 
¶7. (SBU) Did he, Didn't He?: Briefly fanning the flames of 
the debate were contradictory statements by Prime Minister 
Erdogan about whether he had met Sami Ofer.  Initially he 
denied such a meeting, however within hours his office issued 
a correction admitting that such a meeting had occurred.  The 
Prime Minister subsequently stressed that he would meet with 
any and all, both foreign and domestic, who are interested in 
investing in Turkey.  "I have met, am meeting, and will 
continue to meet" with such individuals, he said defiantly. 
The fact of the meeting, however, was seized on by opposition 
politicians in the Cumhuriyet Halk Partisi (CHP) and the 
Dogru Yol Partisi (DYP) to charge that the government had 
engaged in corruption and insider trading.  The CHP 
subsequently announced that it would submit a motion of 
censure to the National Assembly. 
 
¶8. (SBU) Controversial Broker: An additional point of 
controversy has been the identity of Ofer's Turkish partner, 
Global Securities' Chairman Mehmet Kutman, the cousin of 
former Prime Minister Mesut Yilmaz.  Yilmaz himself remains 
on trial on corruption charges, and newspapers and others 
have sought to insinuate that Kutman has succeeded in 
building a relationship with the AK party similar to that he 
formerly enjoyed with Yilmaz's ANAP party. 
 
¶9. (SBU) Anti-semitism: Some have also seen a tinge of 
anti-semitism in the debate, pointing to the fact that 
virtually every article about the controversy has referred to 
Ofer either as Jewish or Israeli, something that is 
uncharacteristic of articles concerning other transactions. 
Interestingly, however, this has not been as true of the 
country's Islamist press, which has largely avoided 
mentioning Ofer's background.  Instead they have staunchly 
defended the government against the corruption accusations, 
noting sarcastically, for instance, that the "secret" 
Galataport transaction was widely advertised in papers that 
have since criticized the deal. 
 
¶10. (SBU) Comment: The Ofer debate highlights the range of 
issues opponents seize on when they seek to challenge 
privatization and seek to score points off the government. 
From questioning the price at which the transaction occurred, 
to seeking to question the transaction on nationalistic 
grounds, opponents are not shy about exploiting every opening 
they see.   State Minister Babacan suggested another force 
that may be at play as well: disappointment in Turkish 
business circles that foreign interest is driving prices 
higher and preventing them from acquiring assets "on the 
cheap" as they have in the past.  In this case, however, at 
least as regards the Tupras sale, the murky manner in which 
the transaction was handled has given critics an opening to 
exploit.  End Comment. 
JONES