TURKEY'S ECONOMY: PRIVATIZATION UPDATE

UNCLAS SECTION 01 OF 02 ANKARA 001214 SIPDIS STATE FOR E, P, EUR AND EB TREASURY FOR U/S TAYLOR E.O. 12958: N/A TAGS: ECON PREL TU SUBJECT: TURKEY'S ECONOMY: PRIVATIZATION UPDATE REF: A. (A) ANKARA 1131 ¶B. (B) 02 ANKARA 3538 Sensitive but Unclassified. Not for Internet Distribution. ¶1. (SBU) Summary: The GOT's ambitious $4 billion privatization plan for 2003 is moving forward, with some positive and negative developments. On the positive side, three large state companies (TEKEL, PETKIM, TUPRAS) are slated for sale in the first half of 2003: PETKIM's tender is already out and the other two are being prepared. On the negative side, fears of resulting job losses, which have delayed privatization efforts for the past decade, have resurfaced in the form of a proposed job privatization bill that would guarantee 70,000 new civil service jobs for laid-off employees of privatized firms. Another step backward is the planned merger by the GOT of two steel producers - one already privatized but bankrupt (Kardemir) and the other a profitable company in the process of being fully privatized (Erdemir). End Summary ¶2. (SBU) Privatization Administration Vice President Haluk Buyukbas recently updated us on GOT's ambitious 2003 privatization program. There are currently 34 companies (employing more than 62,000 unionized workers and 10,000 civil servants) under the portfolio run by the GOT,s Privatization Administration (PA) ) 19 of those companies are fully owned by the PA. Fourteen companies are scheduled to go on the auction block this year, in 38 separate sales. The highlighters for sale in the first half of 2003 are the tobacco and alcohol giant TEKEL, the petrochemical company PETKIM, and Turkish Refineries (TUPRAS). TEKEL -------------- ¶3. (SBU) Tenders for the alcohol and tobacco giant TEKEL will be advertised in June with final sale expected by the end of the year. Sales of the spirits distilleries and cigarette factories are expected to be made in two large block sales and are expected to represent a large portion of the $4 billion 2003 privatization target. U.S. businesses have complained of draconian import laws Parliament enacted last year aimed at protecting TEKEL from competition during the sales process, so as to ensure high market valuation (see septel). PETKIM -------------- ¶4. (SBU) The PA has announced a tender for PETKIM on Jan 20, 2003 and specified April 2, 2003 as the deadline for submission of bids. Only 4% of PETKIM shares are currently being traded at the Istanbul Stock Exchange (ISEM); the Pension Fund owns 4% of the shares and PA,s shares amount to 89%. The PA is targeting block sale of a minimum 51% of shares this year, which would switch control of the company to the private sector. The investors will have the flexibility to bid for up to 89% of the company shares in the tender. ¶5. (SBU) Although PETKIM is the sole petrochemical producer in the Turkish market, it only has a 35% market share; the rest are imports. There are currently no trade restrictions or customs barriers for petrochemical imports. PA has not conducted a valuation for PETKIM so far. Buyukbas thinks what potential buyers are willing to pay would become the value of the company, rather than the PA setting the price. The PA expects several international and Turkish consortiums to bid for PETKIM. TUPRAS -------------- ¶6. (SBU) A total of 34.5% of TUPRAS shares are currently traded at the Istanbul Stock Exchange. The PA is planning to announce a minimum 17% block sale of TUPRAS in the second quarter of 2003, in order to reduce state control of the company to under 50%. TUPRAS currently has an 86% share in the total crude oil processing in Turkey. Atas (owned by BP) refinery processes the remaining amount, but the PA expects this refinery to cease production by 2005, since it does not satisfy EU environmental conditions due to a lack of investment. Buyukbas said Russian energy companies Yukos and Lukoil have expressed great interest in TUPRAS privatization. Given their financial strength, they are likely to be the most competitive bidders. Buyukbas said the PA appointed Salomon Smith Barney as the consultant for TUPRAS privatization, and the company is expected to prepare a strategy for TUPRAS privatization by May 2003. ¶7. (SBU) Other large enterprises on the auction block for the second quarter are Sumer Holding A.S. (textiles and leather), Tugsas (fertilizers and ammonium nitrate),and Tumosan Turk Motor (machinery). The highlighted tender for the second half of 2003 is Turkish Airlines, which is scheduled to be advertised in September under a block sale and a public offering. Two Recent Steps Backward -------------- ¶8. (SBU) Deputy PM Sener announced February 20 that the GOT had agreed to submit to parliament a &privatization job law8 that would guarantee 70,000 new civil service positions for laid-off workers (see ref A). Besides defeating any gains in efficiency resulting from privatization, this policy is counterproductive, especially considering other programs are already in place to mitigate the losses of laid-off workers. A joint World Bank-GOT &Privatization Social Support Project,8 initiated in 1999, provides $250 million in severance packages to displaced workers (70% funded by WB; 30% by GOT). World Bank expert Ismail Arslan told us the severance packages would provide workers up to $30,000, and that they were very generous when compared to similar programs in other countries. He added that less than $20 million of the $250 million pot has been spent thus far, because the GOT is not privatizing. ¶9. (SBU) On February 22, Deputy PM Sahin announced a plan to merge the antiquated, bankrupt, and inefficient Kardemir (steel company - see ref B) with Erdemir (iron and steel), Turkey's largest steel producer which is already half privatized and is planned to be fully privatized by the Privatization Administration. Kardemir, which is owned by its labor union, received a $250 million bailout in 1995 and had its debts paid by the GOT. By 2001, the company was again about to go bankrupt before being saved by a government bailout, in the form of restructured debts and loans. Erdemir management, meanwhile, plans to increase its annual steel production and reduce its workforce, making it more competitive with the private sector. Erdemir Board Chairman Recai Berber told the press on Feb. 21 that Erdemir would "stumble" if Kardemir was merged with it. (Comment: Merger of the bankrupt but privatized Kardemir and the half-privatized Erdemir will reduce Erdemir's remaining privatization potential.) Privatizations Further Down the Road -------------- ¶10. (SBU) As for new entrants into the PA portfolio, Buyukbas said the PA had high expectations for the privatization of toll ways, the National Lottery, and Istanbul Stock Exchange. The GOT needs to amend certain laws to start the privatization process for these entities. Buyukbas said among these entities, the National Lottery Administration would bring the highest revenue to the GOT, noting by way of comparison that privatization of only 17% of the Greek National Lottery brought Euro 500 million. PEARSON