TURK TELEKOM'S PRIVATIZATION: OPTIMISM AND GLOOM

UNCLAS SECTION 01 OF 03 ANKARA 002812

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SENSITIVE

USDOC FOR 4212/ITA/MAC/OEURA/CPD/DDEFALCO
FCC FOR A THOMAS AND A WEINSHCHENK
EB/CBA - MERMOUD, WALTERS

E.O. 12958: N/A
TAGS: ECPS BEXP EFIN TU
SUBJECT: TURK TELEKOM'S PRIVATIZATION: OPTIMISM AND GLOOM

REF: A. 04 ANKARA 6673


B. ANKARA 2072

C. ANKARA 1209

SENSITIVE BUT UNCLASSIFIED. PLEASE HANDLE ACCORDINGLY.


1. (SBU) Summary: Turkey's Privatization Administration has
extended to June 24 from May 31 the deadline for bids in the
sale of the 55% stake in state telecom company Turk Telekom.
While there is lively demand from eight separate bidding
groups for the tender, in combination with broad recognition
of the importance for achieving successful and timely
privatization of Turk Telekom, there are still many negative
factors and fears for further delays. Five international
bidding groups have pulled out of the process, including
Spanish, Belgian, Malaysian, and South Korean firms. End
Summary.


2. (SBU) On the margins of the fifth STEAM (Strategic
Technical and Economic Research Center) Telecom Conference in
Istanbul May 9-10, Economic Officer gauged the mood of
Turkish government and private officials on the privatization
of Turk Telekom (Ref A) and liberalization of the telecom and
IT sectors (Refs B and C).

Will She or Won't She? - Turk Telekom Privatization Prospects
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3. (SBU) While officials from the Privatization
Administration (PA) and the Transportation Ministry expressed
full commitment to achieving timely privatization of the 55%
share of state telecom company Turk Telekom and
representatives of some of the contenders expressed
enthusiasm, many observers expressed reservations and
pessimism. Turk Telekom management has expressed commitment
to privatization (to free them from public procurement and
oversight strictures),but the state telecom company was
noticeably absent from the conference. The company was busy
working with the PA and five of the bidders who had requested
an extension in the bidding deadline to continue to evaluate
the data. The PA announced an extension of the bidding
deadline from May 31 to June 24. Cynics on the meeting's
margins noted that summer would offer a convenient excuse for
further delay.


4. (SBU) The original list of 13 qualified bidder groups
has eroded down to the present eight. Over time, Belgian
firm Belgacom, Spanish firm Telefonica, Malaysian Multi
Global Link, South Korean SK Telekom, and Turkish MNG/MAPA
Company have pulled out of the running. The reasons have
been strategic, competing investment opportunities, and some
concerns expressed about valuation and management of Turk
Telekom's 40% share in the troubled Avea mobile operator.
Casting further confusion, one of the key contenders, Telecom
Italia (which has a 40% share and management control of
Avea),announced if it did not win the Turk Telekom bid, it
would pull out of Avea. Turkish authorities have sought
greater interest from European (or American) companies
without success. Deutsche Telekom, for example, recently
repeated its lack of interest.


5. (SBU) Here is the current list of contenders:

-Telecom Italia (viewed as one of the leaders)
-Emirates Telecommunications Corp (Etisalat)/Dubai Islamic
Bank/(Turkish) Cetel Calik Enerji (recently won the bid for
Albania Telecom)
-Saudi Oger Telecom (BT Telconsult is advisor)
-Koc Holding (prominent Turkish business group; partnership
with Sabanci group recently dissolved because of unrelated
business conflict; Sabanci is still considering pursuing a
separate bid or partnership)
-Dogan Companies Group (major Turkish media group)
-OYAK (Turkish military pension fund)
-Turktell Bilisim Servisleri (subsidiary of dominant mobile
company Turkcell),leading 14 member JV
-Turkish Privatization Investors (no information available)
(The local consortiums are still looking for suitable
partners.)


6. (SBU) Three leading contenders were enthusiastically
present at the STEAM Conference: Telecom Italia, Cetel Calik
Enerji, and Saudi Oger. Telecom Italia is perceived as the
front runner, but rivals privately grumble about its past
over-payment for the mobile license which became Avea's and
its recent comments quoted in the press: limited funds
available for investment in Turk Telekom and threats to pull
out of Avea if it does not win the Turk Telekom tender. An
industry expert speculated to EconOff that Saudi Oger might
raise concerns about "green" or "Islamic" capital for the
Turkish "deep state" or secular establishment (it does
sometimes conspicuously drop the "Saudi" part of its name).
There is still likelihood for bidders forming new
partnerships among themselves or with the outside.


7. (SBU) But will it happen? There was broad recognition of
the need for privatization to provide better service in this
critical sector to Turkey's business and investment
environment. Moreover, there is a perception that this would
be the last chance, after two previous failed attempts and as
some of the most lucrative corporate business gradually gets
"cherry picked", reducing potential Turk Telekom value. Some
speakers called for greater emphasis on transparent
market-based privatization process, as opposed to emphasis on
privatization price target. Noting a smaller participation
at this STEAM telecom conference, one participant told
EconOff that it indicated either fatigue and frustration with
the protracted privatization/liberalization process or
preference to be out doing telecom business in Istanbul.


8. (SBU) Nevertheless, there are several factors that could
contribute to more delay or another failed process (Ref A):
-Entrenched opposition from labor and the judiciary (the PA
is seeking a ruling to limit judiciary appeals to the
Danistay- high administrative court).
-Turk Telekom generates and transfers significant dividends
to the Turkish Treasury (which would be partially replaced by
the sale price and taxation of the new owner, in addition to
ongoing excise taxes).
-Concerns about foreign ownership of a key strategic asset
and can the "deep state" accept this? (Especially in
combination with foreign control of mobile telecom companies:
Turkcell's pending majority ownership from Teliasonera;
troubled Telsim's (held by state bank fund) potential foreign
acquisition- Vodafone is seriously looking; and Avea's
significant ownership by Telecom Italia).
-Overemphasis on price, which could exacerbate unrealistic
expectations and fuel opposition to whatever price the market
determines (at a time of reduced international investor
appetite and capacity).
-Conflict between Turk Telekom, the Telecom Regulatory
Authority, and the Competition Board and continued ambiguity
and delay in market liberalization.
-Is there the political will to let go of control of a "crown
jewel"?

Liberalization at a Crawl - Turk Telekom Sees a Zero Sum Game
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9. (SBU) Besides doubts about prospects for a timely
privatization of Turk Telekom, the conference generated wide
complaints about Turk Telekom's zero sum game mentality and
its taking advantage of its dominant position. The well
intentioned, but weak, Telecom Regulatory Authority (with a
new President- Tayfun Acarer) and the (marginally stronger)
Competition Board have been unable to agree on or enforce
decisions on interconnection fees and competition (Ref C).
Only a few of the 43 long distance service license holders
have been able to start operations. ISP's face a price
squeeze from Turk Telekom between interconnection wholesale
cost and Turk Telekom's retail price for its competing
service. ISP's have not been allowed access to the
"Kablonet" cable television system (to be split off from Turk
Telekom). Turk Telekom has maintained a monopoly on wide
band internet service (ADSL) and has not allowed ISP
providers or Kablonet to re-market this service, nor to
widely put in place VOIP (Voice Over Internet Protocol)
service. In seeking to increase its ADSL subscriber numbers
in advance of privatization, Turk Telekom has used its
advantages to unfairly compete with Kablonet for internet
business. Turk Telekom has regularly ignored Telecom
Regulatory Authority and Competition Board rulings and/or
taken some of its fledgeling competitors to court to
challenge them.

Comment
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10. (SBU) While privatization of state enterprises is a key
commitment of the GOT with the IMF, the PA has so far taken
the path of lesser resistance in garnering IPO's which do not
relinquish state control of major assets and sectors. For
the sale of the highly visible and valuable state asset of
Turk Telekom, overemphasis on "last chance" and opportunity
for a great symbolic splash with the international investment
community, while true, is based on wishful thinking. Many
observers fear that delays and entrenched opposition will
carry the day, while delays will risk to diminish value,
which will be self-fulfilling. Leadership of a strong
domestic business group may ultimately be a politically and
strategically feasible solution, but will it provide adequate
capital and know-how to assure high value and innovative
service for Turkish consumers? Interested parties recognize
Turkey's strong need for a consistent, coherent, and
competitive telecom regulatory structure and environment. It
is still a work in process. This may ultimately be more
important than the prospective Turk Telekom privatization.
EDELMAN