VZCZCXRO4094
RR RUEHDA
DE RUEHAK #0041/01 0100549
ZNR UUUUU ZZH
R 100549Z JAN 07 ZDK
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 0523
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPARTMENT OF ENERGY WASHDC
RUEHIT/AMCONSUL ISTANBUL 1898
RUEHDA/AMCONSUL ADANA 1504

UNCLAS SECTION 01 OF 02 ANKARA 000041 
 
SIPDIS 
 
DEPT FOR EB/CBA FOR FRANK MERMOUD AND EUR/SE 
USTR FOR LERRION 
TREASURY FOR INTERNATIONAL AFFAIRS FOR JROSE 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV ENRG EFIN TU
SUBJECT: TURKEY: ELECTRICITY PRIVATIZATION POSTPONED UNTIL AFTER 
ELECTIONS 
 
REF: Ankara 6410 and previous 
 
¶1. (SBU) Summary: Confirmation that the Government has decided to 
postpone electricity distribution company privatizations planned to 
begin this month put a damper on markets at the start of the new 
year.  The reason for the delay appears to be the political desire 
of the AKP Government to avoid electricity price increases, which 
privatization would have entailed, during an election year.  The 
postponement will make it harder to find a solution to Turkey's 
expected tight supplies of electricity in coming years, sends a 
negative signal about economic reforms, and could create problems 
for the IMF program.  End Summary. 
 
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Government Postpones Privatization 
---------------------------------- 
 
¶2. (SBU) The long-awaited privatization of the first three regional 
electricity distribution companies has run into election-year 
political pressures.  Prime Minister Erdogan shocked markets and the 
business community January 4 by implying that the privatizations 
would be postponed.  On January 9, Energy Minister Guler confirmed 
publicly that the privatizations would not go forward until after 
the November parliamentary elections.  Seventy-nine pre-qualified 
companies were already examining information about the companies in 
the "data room," and as recently as December 21, Privatization 
Authority President Metin Kilci told us he expected the bid deadline 
of January 19 to hold. 
 
------------------------------------- 
The Devil is in the Electricity Price 
------------------------------------- 
 
¶3.  (SBU) In his January 9 statement, Guler emphasized the 
importance the GOT gives to infrastructure, and set forth the GOT's 
underground wiring project as the reasons.  But it seems clear to 
all observers that the driving factor behind the government's 
hesitation is fear of the electoral impact of an election year price 
increase for consumers of electricity.  Electricity prices have not 
increased in Turkey since 2002 and have not kept up with the 
dramatic increase in global energy prices since then.  In order for 
the privatized entities to be financially viable, the government 
would have to allow significant price increases. 
 
--------------------------------------------- ---- 
Question Marks About Supply Adequacy, IMF Program 
--------------------------------------------- ---- 
 
¶4. (SBU) The Government's decision leaves many questions unanswered. 
 IMF officials told us in November that they had secured Economy 
Minister Babacan's agreement to seek Government approval of 
electricity and gas price increases to shore up the finances of the 
state-owned energy companies.  The IMF did not make price increases 
an explicit condition of its program, but Fund staff doubt the 
Government can achieve the 6.5% 2007 primary surplus target for the 
entire public sector without electricity and gas price increases. 
The primary surplus is the cornerstone of the IMF program and the 
main indicator the Fund and markets look to in assessing Turkey's 
compliance. 
 
¶5. (SBU) Electricity distribution privatization was also important 
to deal with Turkey's looming domestic power crisis.  As strong 
economic growth continues, most analysts foresee supply tightness 
beginning as soon as 2008 or 2009 given the lack of significant 
upgrade in generation capacity since 2000.  The government had hoped 
that private investment in the sector would help cover the gap.  But 
that investment has not been forthcoming because of the unresolved 
pricing and issues that would need to be resolved before the 
privatizations could go forward. 
 
¶6. (SBU) The distribution company privatizations were already 
technically difficult: one potential U.S. bidder provided us with a 
long list of potential problems for bidders.  Even if the Government 
had increased prices, Kilci told us the deal was structured with a 
set minimum profit margin, so as to induce the buyers to get most of 
their upside from cost reduction. However, all these were 
foreseeable risk factors for the companies and they were included in 
their bids.  The GOT's last-minute cancellation, without any 
commitment to eliminate these risks in the long term, is likely to 
have an adverse effect on the GOT's next electricity privatization 
effort. 
 
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ANKARA 00000041  002 OF 002 
 
 
Comment 
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¶7. (SBU) The Government has generally shown political courage in 
selling off state-owned enterprises, despite widespread public 
skepticism about the benefits of privatization, and outright 
opposition from other political parties, the President and the 
judiciary.  Privatizing electricity companies -- and raising prices 
-- in an election year was apparently a bridge too far.  It may also 
signal a broader pause in the pace of economic reforms, as the 
Government takes care not to hand the populist, anti-reform 
opposition any new political clubs. 
 
McEldowney