SUGAR LAW LEAVES BITTER TASTE

UNCLAS SECTION 01 OF 02 ANKARA 002902

SIPDIS


SENSITIVE


STATE FOR E AND EUR/SE
TREASURY FOR OASIA - MILLS AND LEICHTER
STATE PASS USTR - NOVELLI AND BIRDSEY
STATE PASS USDA/FAS
USDA/FAS FOR ITP/MACKE, MEYER, THORBURN
USDOC FOR 4212/ITA/MAC/OEURA/DEFALCO


E.O. 12958: N/A
TAGS: EAGR ETRD EFIN PREL TU
SUBJECT: SUGAR LAW LEAVES BITTER TASTE


REF: ANKARA 1447


Sensitive but Unclassified. Not for internet distribution.



1. (SBU) SUMMARY: A new sugar law implemented in September
2002 was supposed to eliminate the sugar industry's rampant
overproduction, as well as GOT subsidies for its export, and
eventually move the industry toward the free market.
However, even as state-owned sugar company SEKER (its
privatization process is scheduled to begin in June) is being
reigned in, its lobbying efforts caused the GOT to include in
the sugar law quotas that hurt SEKER's competitors in the
cornstarch-based sweetener industry. END SUMMARY.


Quotas Aimed at Ending Overproduction
--------------



2. (SBU) Prior to the onset of the Sugar Law, SEKER
factories gave guaranteed procurement prices to Turkish sugar
beet farmers, causing rampant overproduction (these
guaranteed prices stemmed from a 1945 law). To reduce its
stocks, SEKER needed significant GOT subsidies to export its
overproduction at competitive world prices. (Beet sugar
prices are higher, on average, than sugar cane because the
costs of production are much higher. When combined with
refining inefficiency, SEKER must sell its sugar at the rate
of $550/ton. The world average is $260/ton.)



3. (SBU) The new Sugar Law, enacted in April 2001 and taking
effect in September 2002, was intended to meet market
liberalization criteria under the IMF Letter of Intent and
the EU Accession Partnership Accord. The law ends guaranteed
procurement prices to farmers as well as GOT export subsidies
to SEKER and PANKOBIRLIK (Central Union of Sugar Beet
Producers Cooperatives). The law establishes production
quotas for the sugar industry, synchronizing sugar production
with domestic demand each year until 2007 (at which time the
industry is supposed to be totally deregulated, in accordance
with Turkey's WTO obligations). The quotas are assigned by
the Sugar Board, an independent regulatory body created under
the Sugar Law that consists of seven members -- three from
the GOT, three from the sugar-beet industry, and one from the
cornstarch-based industry (Cargill).



4. (SBU) This year (September 2002-August 2003),SEKER is
allowed to produce 1.67 million tons of sugar, PANKOBIRLIK
474,000 tons. Next year's (September 2003-August 2004)
production quota for SEKER was supposed to be the same as
this year, but has been reduced to 1.3 million tons due to
320,000 tons of remaining excess refined sugar (in addition
to 220,000 tons of excess raw sugar). Due to the high costs
of maintaining these stocks, our contacts say that, though
export subsidies have officially been eliminated, SEKER has
gotten special permission to export with the subsidy until
August 2003. There is a substantial political push to
increase these quotas. Since the Sugar Board was created
prior to AKP's electoral victory in November, rumors are
swirling that the new government is trying to abolish the
board. These rumors have been confirmed by our contacts on
the Sugar Board.


Quotas for One, Quotas for All
--------------



5. (SBU) Even as sugar production quotas are theoretically
being brought down, subquotas mandated by the sugar law are
limiting production from the entire cornstarch-based
sweetener industry in Turkey to 10 percent of the total sugar
quota, or 234,000 tons (in 2002-2003),well below the
industry capacity of 468,000 tons. (The industry capacity,
in turn, is below domestic market demand.) Cargill reps have
told us that all of their corn syrup production goes to local
Pepsi and Coca Cola factories. However, with such a low
production quota, they cannot meet the demand of the soft
drink makers. Cargill reps claim that, should the low
production quotas continue, their Turkish operations cannot
survive.



6. (SBU) This 10 percent quota was the result of a campaign
from sugar beet farmers (approximately 380,000 of them) and
SEKER to limit the competition during SEKER's transformation
process. "There is a very strong political constituency to
maintain sugar beet factories and employment within them,"
according to a World Bank official here. The
cornstarch-based industry successfully lobbied the Council of
Ministers to increase the quota to 15 percent for this year,
or 351,000 MT. The industry is pushing the Council of
Ministers to continue the 15 percent quota into next year -
the quota is scheduled to return to the 10 percent mark in
September.



7. (SBU) Cornstarch-based industry reps are also complaining
that the GOT has assigned quota percentages for sugar and
cornstarch-based sweeteners under a common umbrella. Most
countries, including those in the EU, have separate
production quotas for sugar and corn-starch based products.
That is because the weight of purified centrifugal sugar is
100 percent dry matter while fructose corn syrup is diluted
with 25 percent water. Thus, by comparing the weights of
sugar and fructose corn syrup on a 1:1 scale, as the GOT
production quotas have done, the sugar industry has a
distinct advantage in how the quotas are weighed and
quantified, says Archer Daniels Midland (ADM) Turkish Rep.
Rint Akyuz. "It's like measuring apples and oranges," he
said.


SEKER Privatization Scheduled for 2004
--------------



8. (SBU) The privatization of SEKER's sugar refineries,
which has been postponed twice in the past, is scheduled to
begin shortly. In early April, State Minister for Treasury
Ali Babacan said the road map for the privatization of
SEKER's sugar factories was expected to be approved by the
High Privatization Council by the end of June. (The Council
is comprised of PM Erdogan, Babacan, Coskun, Finance Minister
Unakitan, and Transportation Minister Binali Yildirim.
Yildirim was the most recent appointee, unseating Deputy PM
Sener.) Coskun said April 18 that the privatization calendar
for SEKER's 27 sugar refineries would be submitted to the IMF
by June 30. He added that the GOT was planning to sell
redundant and unused assets, and use the proceeds to
strengthen the company and make it more attractive for
investors. As an example of redundant assets, Coskun said
the GOT was planning to sell the farmland in Ankara Etimesgut
Sugar Factory to Ankara Municipality and the Union of
Chambers and Stock Exchanges (TOBB).



9. (SBU) Ahmet Aksu, the Privatization Administration (PA)
official responsible for the SEKER sale, gave us similar
information on April 15. He said the GOT is still working to
consolidate roughly $500 million in debts owed to the
Treasury Ministry. He added that the 27 factories will most
likely be sold in 5-6 separate blocks. SEKER's total assets
in 2001 were $1.4 billion (per website www.turkseker.gov.tr).


Comment
--------------



10. (SBU) Political obstacles to liberalization and
privatization of Turkey's sugar industry are similar to those
of other state-owned monsters like TEKEL (reftel). In this
case, Turkey's inefficient sugar industry employs some 20,000
workers, as well as 380,000 farmers, and the political cost
of offending this constituency is huge. The sugar
establishment is hindering GOT efforts to liberalize the
market, and the net effect are government losses in the form
of high storage prices, private industry losses in the form
of unjust production quotas, and consumer losses in the form
of higher prices. Given the political pressure to continue
protective measures for the sugar industry, successful
privatization of SEKER over the next 12 months will be a true
test of the GOT's commitment toward free market reforms.
PEARSON