PA CONFIDENT ABOUT PRIVATIZATION DEALS, DESPITE

UNCLAS SECTION 01 OF 02 ANKARA 002159

SIPDIS

SENSITIVE

EB/CBA FOR FRANK MERMOUD
TREASURY FOR CPLANTIER AND MMILLS
NSC FOR BRYZA AND MCKIBBEN
USDOC/ITA/MAC FOR DAVID DEFALCO

E.O. 12958: N/A
TAGS: EFIN EINV BEXP TU
SUBJECT: PA CONFIDENT ABOUT PRIVATIZATION DEALS, DESPITE
ANOTHER FAILURE

REF: ANKARA 2078


1. (SBU) Summary. Privatization Administration (PA)
President Metin Kilci's confidence in the PA,s ability to
move forward with its ambitious privatization agenda for 2005
has been boosted by proposed changes to the GOT,s
privatization law that should reduce legal challenges to PA
transactions and by the unprecedented strong interest in
critical SEEs like Turk Telecom and Erdemir steel company.
Yet, the PA announced April 11 the failure of another tender
for state tobacco company Tekel. This additional failure
suggests the PA may be able to keep selling minority shares
through IPO's but will have trouble turning control of large
companies over to private sector majority ownership. End
Summary.


2. (U) In a April 5 meeting, Privatization Administration
(PA) President, Metin Kilci said 2004 was a very good year
for privatization and he predicts that 2005 will be an even
more productive year. In 2004, cash payments from
privatization transactions amounted to $1.5 billion. In the
first three months of 2005 alone, the PA received
approximately $600 million in cash proceeds. Though some of
this money came from last year,s transactions, $450 million
came from the March 2005 initial public offering (IPO) of 15
percent of state oil refiner, Tupras.

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PETKIM AND OTHER SEEs IN THE PIPELINE
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3. (U) Kilci was particularly bullish on the PA,s upcoming
IPO of 30 percent of Turkey,s state petrochemical company,
Petkim, and considers Petkim a bellwether privatization for
the PA,s ambitious privatization agenda (see reftel). The
PA launched a road-show for Petkim April 6 in the U.S. and
finished the European segment of its tour April 13. Kilci
noted that U.S. investors showed a lot of interest in past
road-shows for Turkish Airlines (THY) and Tupras, so he was
confident the PA would generate similar interest in Petkim.
In fact, the PA told Economic Specialist that the road-show
had been a success and the PA received higher than expected
demand in the preliminary bid collection process. The PA
started to receive final bids April 13.


4. (U) Kilci said privatization schedules for other large
State Economic Enterprises (SEEs),including Tupras (oil
refiner),Turk Telecom, and Erdemir (steel) were on track.
After a successful Tupras minority share IPO in March, the
Competition Board approved a block sale of a majority of
Tupras's shares, and the tender announcement for the sale
should be made sometime in April. According to Kilci, Turk
Telecom (TT) is attracting more compelling interest than ever
before. There are currently 10 domestic and foreign parties
showing strong interest. The PA will be collecting bids for
the 55 percent block sale on May 31, as scheduled. Kilci
said there is also very high interest in the Erdemir steel
corporation. The PA hopes to start the tender process for a
46.12 percent block sale of Erdemir in the second half of
April and within two or three months of opening the tender,
the PA believes it can evaluate the viability of interest.

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LEGAL PROBLEMS REMAIN
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5. (U) Electricity Distribution Privatization: Kilci said the
electricity distribution privatization--intended to start in
March--was delayed because certain legislative changes that
needed to be in place before the privatization have not yet
been implemented. Kilci said, however, that the relevant
agencies are now agreed on the proposed amendments and they
should be sent to the Prime Ministry within weeks. The PA
expects to start the tender process within two weeks after
the Parliament ratifies the amendments. The PA will use a
"hybrid" model whereby they will sell shares of a
newly-created company that holds operating rights for the
distribution network rather than by a direct sale of the
assets, which will remain with the government. Kilci called
this a "transfer of operating rights-based share sale." The
term of the operating rights will be fixed between 30-49
years. The asset sales methodology would have required a
changed in the Constitution--a move the GOT was not willing
to make.

6. (U) Turk Telecom: Kilci also addressed the unresolved
constitutional issues concerning the Turk Telecom (TT)
privatization. The PA is seeking a ruling from the
"Danistay" (Council of State) on a proposed draft concession
agreement which will set the terms and conditions of the TT
sale. TT's buyer would have full use of the assets and
infrastructure of the company, but the state would retain
certain rights if the concession agreement were violated.


7. (U) Tekel: A few days after the meeting with Kilci, the PA
encountered yet another setback to its privatization agenda
with the failure to receive bids on the tobacco operations of
state company, Tekel. This was the PA,s second failed
attempt to sell the tobacco business--the first being spoiled
by a GOT decision that the winning bid--$1.15 billion by
Japan Tobacco--was too low and fell short of government
expectations. Officials have been reported saying that the
lack of buyer interest in Tekel was the result of a recent
special consumption tax increase on tobacco products.
Tobacco companies originally interested in bidding on Tekel
have reportedly requested the GOT to reduce the tax and
commit to a fixed five-year tax rate.

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OVERCOMING HURDLES
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8. (SBU) Despite the above-mentioned challenges, Kilci
remained confident that proposed legal amendments to the Law
on Privatization Practices could eventually reduce the
ability of opponents of privatization to challenge
privatization transactions successfully. He said that under
the current system, any individual has standing to bring a
suit against the PA for any transaction in any court. There
are currently 80 court cases pending throughout the country
and the PA only has 15 lawyers to advocate on its behalf.
The proposed amendment requires that any lawsuit against the
PA be brought to the Danistay directly. The Danistay has
established a special "13th Chamber" that would only be
responsible for privatization and competition cases.

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COMMENT
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9. (SBU) The PA is committed to achieving its privatization
goals and appears to be pushing ahead with its ambitious
agenda. The Petkim road-show seems to have generated a good
level of interest. However, repeated delays, setbacks, and
legal obstacles are a lurking threat. The second failed
attempt to privatize Tekel,s tobacco business underlines the
PA's weak record, particularly for block sales of large
companies. So far, the PA has been successful with sales of
minority share IPOs but larger enterprises like Turk Telecom,
Erdemir, and Tupras--the GOT's "crown jewels" according to
Kilci--have yet to be transferred into the private sector.
End Comment.
EDELMAN