"2005-YEAR OF PRIVATIZATIONS?"

UNCLAS SECTION 01 OF 02 ANKARA 000446

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E.O. 12958: N/A
TAGS: EFIN EINV PGOV TU
SUBJECT: "2005-YEAR OF PRIVATIZATIONS?"

REF: ANKARA 06963


1. (U) Summary: Vice President of the Privatization
Administration (PA),Hasan Koktas, told us he is bullish on
Turkey's privatization prospects for 2005 noting Turkey's
favorable market conditions. Koktas is in charge of several
of the GOT's largest pending privatizations: the tobacco
division of Tekel; the state oil refining company, Tupras;
and the massive steel corporation, Erdemir. If the PA can
pull off one or two of its planned large privatizations in
2005, it will help restore the credibility of the program.
End Summary.

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Privatizing Portfolio of Large Companies
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2. (U) Koktas told econoffs that while the PA has succeeded
in privatizing most of the state's small and medium-sized
companies, it is hoping to privatize 3 to 5 of the state's
largest companies this year. Koktas is in charge of some of
the most ambitious privatization projects slated for 2005,
including: the tobacco division of Tekel; the state oil
refining company, Tupras; and the steel corporation, Erdemir.
Though not under Koktas' responsibility, the PA also plans
to tender telecom parastatal Turk Telecom in 2005 and to try
again to sell the petrochemical company, Petkim. Having
succeeded in selling much of its portfolio of small
companies, Koktas claimed that the PA is ready to move to
market the large state-owned companies. He pointed out that
there is not enough domestic capital to support the
privatization of some of the larger companies--making
international interest from "strategic investors" critical.
Koktas was hopeful that a good economic outlook, EU
accession, and favorable global market conditions will
facilitate this.

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Plans for Three Giants: Tekel, Tupras, and Erdemir
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3. (U) Koktas shared with econoffs the PA's privatization
timeline and plans for Tekel, Tupras, and Erdemir:

--Tekel: 4 or 5 companies are interested in the tobacco
operations of Tekel. The PA expects to receive the first
round of bids on February 18. Japan Tobacco International
(JIT) and British American Tobacco are two interested
companies which purchased tender documents. (Though Koktas
claimed that Phillip Morris was still undecided on whether or
not it would bid, press reports indicate that competition
barriers would more than likely exclude Phillip Morris from
bidding.) Note: In 2003, JIT's $1.3 billion bid was rejected
as too low. End Note.

--Tupras: The PA expects to launch a tender announcement for
Tupras during the first week of April. Though the last
attempt to sell 65% of the company was blocked by legal
challenges, Koktas is confident the next attempt will be more
successful. He thought that expected changes in the
Privatization Administration basic law being debated in
Parliament would reduce the grounds for legal challenges.
The PA is contemplating selling 51% of the company in a block
sale and 14% through Initial Public Offerings (IPOs). Koktas
also emphasized the need for greater interest from
international investors, particularly from the U.S. and
western Europe. He noted that mainly Russian companies had
shown serious interest in Tupras previously.

--Erdemir: As one of the biggest companies in Turkey, Koktas
said that a successful sale of the Erdemir steel corporation
would be a significant achievement in the GOT's privatization
efforts. Currently, 51% of the company is publicly owned and
traded on the Istanbul stock exchange. Erdemir itself owns
2.9% of the company. The PA plans to sell its 46.12% of the
total capital of the company. Along with the 2.9% this would
ultimately give the buyer the ability to have control of the
company if it buys an additional 1.1% from the stock
exchange. The PA plans to lift the "golden share" condition
in order to comply with EU principles. The announcement for
the sale is scheduled for mid-March. Note: Erdemir has been
profitable in 2004 and 2003, as Turkey's auto and white goods
boom has accelerated demand for steel. U.S. Steel has
expressed strong interest in Erdemir (ref),which is welcomed
by Turkish officials at all levels. End Note.

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The Tender Process
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4. (U) Econoffs asked Koktas if price alone was the main
factor in evaluating bids and Koktas said it depended on the
company. For Erdemir, for example, the PA looks at 2
pre-qualifications--one being financial and the other
operational. Before analyzing the pre-qualifications of the
company, the PA usually takes 5 months to prepare the tender
document followed by 2 months of due diligence. The PA then
obtains bids and analyzes the business plans--be it
employment or expansion plans or projections-- as well as the
pre-qualifications of the companies. The PA then opens the
companies' "price envelopes" and prepares a short list of
companies to participate in the auction process. The results
of the tender process are sent to the Competition Authority
for approval and subsequently to the Privatization High
Council.

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Legal Obstacles to Privatization
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5. (SBU) The PA's last successful sale involving a large
parastatal, was the sale of a minority share of Turkish
Airlines (THY) through an IPO. But Koktas believes any
future big sales for Turkey will require greater interest
from strategic investors. He claims, however, that the
current Turkish legal system presents major obstacles to
Turkish privatization and hampers foreign direct investment
(FDI) as evinced in the previous failed attempt to sell
Tupras. Koktas said that Turkish judges have an ideological
view of privatization rather than judging transactions on
their legal merits. Koktas told econoffs that a new draft of
the PA law will go to Parliament shortly--amending one of the
law's articles to ensure that any future suits are sent to
the high courts and not local courts which might take a
parochial view of privatization.


6. (SBU) Comment: If the PA succeeds in several of its
planned privatizations as described above, 2005 will be a
blockbuster year for GOT privatization. However, if the GOT
continues, as it has in the past, to focus primarily on price
as the key criteria for a successful bid and if it does not
resolve labor grievances before they escalate in the Turkish
court system, then 2005 may not produce the big ticket sales
the PA is promising. If, on the other hand, the PA is
successful with even one or two big privatizations, it will
revive the battered credibility of the program, encourage
Foreign Direct Investment, and help finance the current
account deficit. End Comment.
EDELMAN