VZCZCXYZ0016
PP RUEHWEB

DE RUEHAK #1176/01 1781417
ZNR UUUUU ZZH
P 261417Z JUN 08
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 6679
INFO RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEHAAA/NSC WASHDC PRIORITY

UNCLAS ANKARA 001176 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV ENRG ECON TU
SUBJECT: FOREIGN INTEREST DOWN FOR TURKEY'S PRIVATIZATION 
OFFERINGS 
 
REF: ANKARA 862 
 
¶1. (SBU) Summary:  Privatization receipts are a significant 
source of income for Turkey.  The AKP-led government has 
pursued an aggressive privatization program since it took 
office in 2002.  On June 12, Privatization Agency (PA) 
President Metin Kilci told us that although foreign investor 
interest has decreased in 2008, the PA plans to continue with 
its privatization agenda.  So far this year, telecom, 
petrochemical, and cigarette businesses have been privatized, 
with sugar factories, toll roads and the national lottery to 
follow.  The first of 20 planned energy tenders had 
"disappointing" results.  End Summary. 
 
FDI Breaks a Record.  Will Trend Continue? 
------------------------------------------ 
 
¶2. (SBU) In 2007, Turkey received a record $21.8 billion in 
foreign direct investment (FDI).  Privatization revenues are 
one component of FDI.  The $21.8 billion came from 
acquisitions via privatization, mergers, and real estate 
purchases.  In 2006, Turkey received $7.2 billion in 
privatization revenues.  In 2007, privatizations yielded only 
$3 billion.  In 2008 to date, PA revenues are $5.7 billion. 
Prime Minister Erdogan forecast a total of $18 billion FDI in 
2008, despite current global conditions and a liquidity 
crunch.  We believe this estimate may be substantially 
overstated.  Despite significant interest in electricity 
privatizations and 10 European companies prequalified to bid, 
only two of those foreigners actually bid.  PA President 
Metin Kilci told us he sees this trend continuing, noting 
there is definitely less foreign interest in privatization 
tenders. 
 
¶3. (U) In 2008 to date, Turkey has received $5.7 billion, of 
which $2 billion came from the Turk Telecom IPO (initial 
public offering) for 15% of its shares.  In 2005, 50% of Turk 
Telecom was sold to Saudi Oger Telecom for $6.5 billion. 
Turk Telecom's sale was one of the biggest IPOs in emerging 
market economies in the last five years.  Another $2 billion 
was received on May 30 from a 51% block sale of PETKIM 
(Turkish Petrochemical Industries) to Socar/Turcas 
consortium.  On June 24, PA received $1.7 billion from the 
sale of Turkish Monopolies (TEKEL) cigarette company to 
British American Tobacco PLC (BAT). 
 
Tekel and Smoking 
----------------- 
 
¶4. (SBU)  BAT's purchase of TEKEL for $1.7 billion makes BAT 
the world,s second largest tobacco company.  TEKEL's sale is 
the fifth largest privatization in Turkey, and it opens the 
market to much greater foreign participation.  Before the 
sale, TEKEL held 36 percent of the Turkish market and BAT had 
seven percent.  Philip Morris had 41% and Japanese Tobacco 
Incorporated had 20%.  According to the World Health 
Organization, about 60 percent of Turkish adults smoke.  In 
2007, the Turkish tobacco market was valued at $10 billion, 
according to the Tobacco and Alcohol Market Inspection Board. 
 There may be a decline in consumption following a May 2008 
indoor smoking ban, which BAT estimates could cause a four to 
five percent drop in Turkish consumption.  BAT sees 
significant opportunities to increase efficiency and cut 
costs at Tekel to boost profitability, although this could 
result in plant closings and lost jobs. 
 
Future Privatization Opportunities 
---------------------------------- 
 
¶5. (SBU) Kilci told us the GOT is determined to continue with 
the privatization program.  Later in 2008, privatizations of 
sugar factories, toll roads, and the national lottery are 
planned.  The two latter projects will require a technical 
legislative fix, but Kilci is confident that will be easily 
achieved.  Kilci said investment interest is declining due to 
global liquidity problems and international financing 
difficulty.  During the next two years, Kilci said the PA 
plans to privatize state infrastructure programs, such as 
Turkish mail service (PTT), cable TV, and satellites.  Kilci 
said the turbulence in European banks had started to affect 
Turkish banks, with borrowing costs increasing an average of 
at least 100 basis points. 
 
¶6. (SBU) Despite telling us earlier that Halkbank would be a 
2008 privatization priority, on June 12 Kilci did not even 
mention it.  In May 2007, Halkbank sold 25% of its shares 
through an IPO.  The PA has not announced a strategy to sell 
the remaining 75%, although the advising investment banks 
 
suggest a strategic block sale.  Prior to 2002, the GOT party 
in power sometimes used government-owned banks to make 
subsidized and unsecured loans to garner political support 
and votes.  This practice resulted in a number of defaults 
and losses.  In 2002, the IMF insisted the GOT stop this 
practice, which it did.  Recently, however, we have seen 
signs the practice has started again.  One example is a loan 
extended to Calik Holding for the purchase of Sabah/ATV. 
Calik is one of the AKP's large contributors and the Prime 
Minister's son in law is a top Calik manager. 
 
Energy Privatizations Not Off to a Great Start 
--------------------------------------------- - 
 
¶7.  (SBU) In the next two to three years, Kilci expects to 
finalize all energy privatizations, including distribution, 
generation, and some parts of the electricity and natural gas 
transmission units.  Kilci said the PA expects to receive an 
average of $1 billion from each of twenty regional 
electricity distribution privatizations.  Kilci reiterated 
PA's interest in attracting more U.S. and international 
investors to Turkish privatizations, but noted that his 
offerings are highly technical.  It takes more than a 
one-shot roadshow sales pitch to attract solid bids. 
 
¶8.  (SBU) The sale of Turkey's first two regional power 
distribution companies - Baskent (Ankara) and Sedas (Sakarya) 
- was met with lukewarm demand from investors.  Those 
tenders, detailed in reftel, closed on June 10, although no 
results have been announced.  PA contacts did tell us they 
were "disappointed" with the bids, which may suggest the $1 
billion per-project estimate could be tough to achieve. 
Kilci said there was strong interest from European firms in 
energy deals, but while many investors prequalified, only a 
few made bids.  Five bids for each distribution region were 
received and just two foreign firms bid in consortium with 
local partners.  The failure to attract more interest, 
especially among foreign investors, raises concerns about the 
outcome of the sale of the next two distribution regions and 
the total amount of money Turkey can raise from the long 
delayed privatization of its power distribution regions. 
 
¶9. (SBU) Comment: Given the prevailing political uncertainty 
in the country and the weak external environment, there is a 
growing risk that the valuations of Turkey's state assets 
offered for sale in the future could be undervalued and 
underbid.  If PA does not meet its privatization goals, it 
will also raise concern about financing of the growing 
current account deficit, which is estimated to reach $50 
billion by the end of 2008.  End comment. 
 
Visit Ankara's Classified Web Site at 
http://www.intelink.sgov.gov/wiki/Portal:Turk ey 
 
WILSON