VZCZCXRO6759
RR RUEHDA
DE RUEHAK #2332/01 1171356
ZNR UUUUU ZZH
R 271356Z APR 06
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 5149
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHIT/AMCONSUL ISTANBUL 0394
RUEHDA/AMCONSUL ADANA 0683

UNCLAS SECTION 01 OF 03 ANKARA 002332 
 
SIPDIS 
 
DEPT FOR EB/CBA FOR FRANK MERMOUD AND EUR/SE 
USTR FOR LERRION 
TREASURY FOR INTERNATIONAL AFFAIRS FOR CPLANTIER 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV ENRG EFIN TU
SUBJECT: FULL STEAM AHEAD ON TURKISH PRIVATIZATION 
 
Ref: (A) Ankara 455 
 
¶1. (SBU) Summary: The Privatization Administration (PA) 
has already realized USD 8 billion in cash proceeds 
from privatizations in 2006, with several profitable 
sales still in the pipeline for this year.  Initial 
public offerings are planned for several state-owned 
enterprises and a new wave of privatizations is on the 
horizon, leading the PA to believe that proceeds from 
privatization could total nearly USD 16 billion by year- 
end.  Although some government agencies and private 
interest groups continue to resist privatization, the 
overnment remains committed to privatization, 
recognizing the importance of liberalization of the 
economy and getting the government out of commercial 
activities.  End summary. 
 
--------------------------------------------- ---- 
IPO PLANNED FOR AIRLINE, PETKIM, AND TURK TELEKOM 
--------------------------------------------- ---- 
 
¶2.  (SBU) At the end of 2004, Turkish Airlines (THY) 
privatized 24.5 percent of its shares in an initial 
public offering (IPO).  According to Privatization 
Administration (PA) Vice President Osman Ilter, the PA 
is currently waiting for the Prime Minister's approval 
for a second IPO to privatize an additional 26 percent 
of the shares by the end of May.  Ilter noted that 
after the second IPO is completed, the PA plans to 
conduct a block sale of the remaining THY shares. 
 
¶3. (SBU) In April 2005, the PA sold 38.5 percent of 
Petkim in an IPO, and it plans to sell an additional 11 
percent in 2006 to bring the total state-owned shares 
under 50 percent.  Ilter described a series of problems 
with Petkim, particularly competition from foreign 
imports and a profit margin squeeze from higher oil 
prices.  The PA nevertheless hopes to take advantage of 
its recent leasing of land at Petkim "supersites" to 
increase interest in purchasing company shares. 
 
¶4. (SBU) In an effort to make THY and Petkim more 
attractive to potential bidders, Ilter told us the PA 
plans to reduce the state share for both companies to 
less than 50 percent before conducting a block sale. 
Ilter and other PA officials have stressed that having 
a state share larger than 50 percent is a major 
impediment to efficient management of these businesses. 
When a company is majority state-owned, it is subject 
to cumbersome public procurement regulation, and all 
investment comes under the public investment budget, 
which has been constrained by fiscal austerity under 
the IMF program.  In addition, these companies 
currently have a large number of employees with costly 
public-sector benefit compensation packages and 
privileges that may discourage potential bidders. 
 
¶5. (SBU) In 2005, the PA sold 55 percent of Turk 
Telekom (TT) through a block sale to Oger Telekom for 
USD 6.55 billion. Oger paid the first installment of 
the transaction, USD 1.31 billion, in November and the 
remaining amount is due by mid 2006. The PA still owns 
45 percent of TT and recently contracted financial 
advisory companies to launch an IPO for the remaining 
shares.  PA's TT Project Group Head, Gunden Cinar, told 
us that it was not determined what percentage of the 
remaining shares would be sold in the IPO, which 
expected take place in 2006. 
 
----------------------------------- 
OPPOSITION TO ERDEMIR SALE DWINDLES 
----------------------------------- 
 
¶6. (SBU) In December 2005, the High Board of 
Privatization (OIB) approved the sale of a 46.12 
percent stake in Turkey's largest steel maker, Erdemir, 
to the military pension fund Oyak.  PA Vice President 
Hasan Koktas told us that while the PA did not require 
that bidders on Erdemir have steel sector experience, 
they included a clause in the sale that allowed Oyak to 
enter into a joint venture with steel maker Arcelor in 
order to bring in a sectoral specialist.  Koktas told 
us that local opposition to the Erdemir privatization 
has died down recently. 
 
 
ANKARA 00002332  002 OF 003 
 
 
--------------------------------- 
PA OPTIMISTIC ABOUT TUPRAS RULING 
--------------------------------- 
 
¶7. (SBU) On February 2, the Council of State (Danistay) 
Administrative Court halted the enforcement of the sale 
of 51 percent of oil refiner Turpas shares to a Koc 
Holding-Shell consortium (ref A).  The 13th Chamber of 
the Danistay reviewed the case again on April 25, and 
said that it would announce its decision within 15 days 
of the Court date. Koktas believes that Danistay's 13th 
Chamber will rule in favor of the transaction. 
 
------------------------------ 
TEKEL ASSET TENDER SET FOR MAY 
------------------------------ 
 
¶8. (SBU) Koktas told us that the PA will launch a new 
tender process in May to sell many of tobacco maker 
Tekel's trademarks, factories, and inventories.  The 
company's real estate would not be part of the deal. 
Koktas said that taxation is a key issue in any tobacco 
privatization, as 75 percent of the retail price is 
tax.  He mentioned that in Morocco and Indonesia, the 
government committed to hold the taxation of cigarettes 
at a constant rate for several years in order to make 
the sale of the state-owned tobacco company more 
attractive to potential bidders.  Koktas said he was 
not sure whether Turkish officials would follow the 
same policy.  Though Koktas downplayed the problems, 
press is reporting that Tekel's market share has 
collapsed over the past 12 to 18 months, falling from 
around two-thirds of the market to one-third. The 
reasons seem to be a combination of poor management, 
counterfeit cigarettes from Iraq and other countries, 
and aggressive competition from private tobacco 
companies. 
 
----------------------------------- 
ENERGY PRIVATIZATION ON THE HORIZON 
----------------------------------- 
 
¶9.  (SBU) PA Vice President Osman Demirci told us that 
the electricity distribution sale is underway but he 
could not be specific about a timeframe, as the key 
step in the process is passage of related legislation 
in Parliament.  Demirci said that all underlying 
documents are ready and will be shared one-on-one with 
investors, but will not be made public.  (Note: 
American firm AES had pushed for the opportunity to 
review and comment on key sale documents.)  He said the 
tariff system and the equalization mechanism is almost 
fully complete and ready to share with investors. 
While Demirci said that the law's 50 percent limit on 
foreign control would not be a problem, it is still an 
unsettled issue.  Both the PA and the GOT are committed 
to energy privatization, but the process is complex, as 
the interests of the Ministry of Energy, the regulator 
EMRA, the transmission company TEIAS, the trading 
company TETAS, and the investors all must be 
coordinated. 
 
---------------------------------------- 
STATE BANK PRIVATIZATION FINALLY MOVING? 
---------------------------------------- 
 
¶10. (SBU) After two different false starts and many 
delays in recent years, the promised privatization of 
Turkey's large state-owned banks seems finally to be 
making progress.  Unlike other state companies, the 
state bank privatizations will be managed by a troika 
of the PA, Treasury and each Bank's management team. 
The World Bank's chief local economist is hopeful that 
the process is finally moving forward.  PA VP Koktas 
confirmed that the Government had selected a consortium 
of investment banks, including Goldman Sachs, to 
propose a strategy for the sale of Halk Bank.  Under 
the Terms of Reference for the investment bankers, 
negotiated with the World Ban, the bankers have wide 
latitude as to the type of privatization they can 
propose and will be compensated in part in proportion 
of the cash proceeds from the privatization. Koktas was 
optimistic the sale could go forward by year-end.  The 
strengthening of state bank balance sheets, the 
reduction in interest rates and government borrowing, 
 
ANKARA 00002332  003 OF 003 
 
 
and the strong foreign appetite for Turkish bank 
acquisitions have combined to sharply improve the 
prospects for state bank privatization.  The 
Government's strategy is to first privatize the more 
manageable Halk Bank, before moving on next year to the 
more challenging privatization of Ziraat Bank, a much 
larger institution. 
 
------------- 
THE NEXT WAVE 
------------- 
 
¶11. (SBU) There are still quite a few state-owned 
companies waiting to be sold, including electricity 
production companies, sugar factories, steel, energy, 
iron  and copper factories, and the remaining shares in 
THY, Petkim, and Turk Telekom.  Koktas told us that the 
PA has whittled its list of companies in the initial 
privatization portfolio from 80 down to 10, and is now 
proposing adding new companies to the list of those 
destined for privatization.  Koktas said that in 
proposing taking over a new set of companies, the PA 
has run into resistance from other government agencies 
that oversee or regulate the companies.  Koktas noted 
that other agencies cannot say that they are against 
privatization, as it is government policy - rather, 
these agencies say that they will go through with 
privatization but then drag their heels and delay the 
process. 
 
------- 
COMMENT 
------- 
 
¶12. (SBU) In a refreshing change from most local 
discussion of the merits of privatization, Koktas told 
us that the most important reason to privatize is to 
liberalize the economy and get the government out of 
commercial activities.  He believes the Government 
leaders agree, but have to point to the cash proceeds 
of the sales in their public comments - otherwise Turks 
would suspect state assets are being sold too cheaply. 
He noted that the PA has realized USD 8 billion in cash 
proceeds from privatizations so far this year, which is 
equivalent to the total receipts received in the last 
20 years.  He believes that several large deals - 
including the THY and Petkim IPOs, the Izmir port deal, 
the sugar factory privatizations, and the privatization 
of at least two electricity distribution companies - 
could be completed by the end of 2006, meaning that 
profits could double by year-end. 
 
WILSON