TURKEY: PRIVATIZATION PROCESS ADVANCES, DELAYS

C O N F I D E N T I A L ANKARA 000642 SIPDIS SIPDIS EEB FOR A/S SULLIVAN E.O. 12958: DECL: 04/04/2018 TAGS: ECON ENRG EFIN TU SUBJECT: TURKEY: PRIVATIZATION PROCESS ADVANCES, DELAYS EXPECTED REF: ANKARA 473 Classified By: ECONOMIC COUNSELOR DALE EPPLER FOR REASONS 1.4 B AND D ¶1. (C) Summary: The GOT has 16 major privatizations on its 2008 agenda that are expected to begin and/or be completed this year. Their estimated sales prices are USD 24.475 billion, although the GOT would not actually receive much of that money until 2009. These deals are estimated to draw in USD 6.175 billion in foreign capital in 2008. The GOT continues to strongly support the privatization process generally, but there have been frequent delays. Union lawsuits have delayed completion of the Petkim petrochemical privatization, tendered in July 2007 and the Izmir Port privatization, tendered in May 2007. The privatization of energy distribution companies was delayed in 2007 to avoid it becoming an issue in national elections, and then again this year by strategy disputes between the Privatization Agency and the Ministry of Energy. Now, however, the GOT is planning to explicitly link energy privatization revenues to financing the GAP project, and it already has completed two small "test" energy privatizations. Foreign capital inflows from privatizations will be one of the key variables to determining how large a financing gap Turkey faces this year. Four of these privatizations -- Turk Telecom, TEKEL, Izmir Port and the Electricity Distribution Companies -- account for 98% of all the expected foreign capital inflows from privatizations this year. Thus, any delays in closing these deals will take on greater than usual significance. Of these, Izmir Port (tendered in May 2007) already is mired in a complex legal challenge, and its status remains in doubt. The Mersin Port privatization went through a similar legal process that took 27 months to resolve. The global financial turmoil that is now buffeting Turkey may make financing for some of these deals difficult and costly. The AKP closure case also could adversely affect the energy privatizations, as their value is heavily dependent on the AKP's ability to complete the de-regulation of Turkey's energy markets. End summary. What's on the Privatization Agenda -------------- ¶2. (SBU) The GOT is continuing its privatization efforts, although sensitive privatizations such as energy are moving at a noticeably slower pace. The 16 major privatizations that are expected to begin or be completed (or both) this year are: -- Turk Telecom: public offering (IPO) of at least 15% of shares. Estimated sales price, USD 3.0 billion. Estimated capital inflow this year: unknown until GOT announces the foreign-domestic division of shares. If, as expected, it allocates 70% for foreigners, capital inflows this year would be USD 2.1 billion. -- THY: Third public offering of up to 49% of shares. Estimated sales price: unknown until size of offering is announced. Estimated capital inflow this year: none (unlikely to close this year). -- TEKEL (Tobacco monopoly) 100% assets sale: Estimated sales price: USD 1.5 billion. Actual sales price (February 22): USD 1.7 billion. Sold to British American Tobacco. Estimated capital inflow this year: USD 1.7 billion. Approved by Competition Authority on March 28. -- Petkim petrochemical production facility, block sale of 51% of shares. Estimated sales price: USD 2.04 billion. Estimated capital inflows this year: uncertain. The purchasers are an Azeri-Turk-Saudi consortium that will use 50% loans and 50% equity financing and invest an additional USD 2-3 billion, but they have not announced how much foreign financing is involved. There also are ongoing legal challenges by unions. The Council of State rejected a union appeal on March 3, but the union says it will continue actions in court. The purchasers say the sale could be completed in May. -- Sugar Factories block sale of 100% of shares: Estimated sales price: USD 500 million. Estimated capital inflows this year: none (sale delayed until December). -- National Lottery license: Estimated sales price: USD 750 million. Estimated capital inflows this year: none (planned for May 2008. Sale likely to be completed in 2009). -- Halkbank 75% of shares block sale: estimated sales price: USD 7.5 billion. Estimated capital inflow this year: none (payment will be made in 2009). -- Izmir Port privatization: Sold for USD 1.275 billion last year, sale expected to be completed in 2008. Estimated capital inflows this year: USD 1.275 billion. -- Iskenderum Port privatization: Estimated sales price: USD 100 million. Estimated capital inflows this year: USD 100 million. -- Bandurma Port privatization: Estimated sales price: unknown (PA has not set an estimated price). Estimated capital inflows this year: unknown. This is a recent addition, with bids due on April 22. Samsun Port privatization: Estimated sales price: unknown (PA has not set an estimated price). Estimated capital inflows this year: unknown. This is a recent addition, with bids due on April 22. -- Bridge and Highways operating rights: Estimated sales price: USD 1 billion. Estimated foreign capital inflows this year: none. This is unlikely to be completed in 2008. -- Ankara Electricity Generation Facilities: Estimated sales price: USD 300 million. Actual sales price: USD 510 million. Sold to Zorlu Energy. Estimated capital inflows this year: none, since purchaser was Turkish company. -- Electricity Distribution companies 100% block sale of operating rights for 20 companies (including Baskent, Sakarya, and Istanbul Anatolian side): Estimated sales price: USD 2 billion. Estimated capital inflows this year: USD 1 billion. -- Ankara Natural Gas Distribution Network (EGO) 100% block sale of operating rights: Estimated sales price: USD 1 billion. Actual sales price: USD 1.6 billion. Sold to Global Investors Group. Estimated capital inflows this year: none, since purchaser is Turkish investment company, although some foreign capital may come in through subsequent partnership with foreign company. -- Istanbul Natural Gas Distribution Network (IGDAS) 100% block sale of operating rights: Estimated sales price: USD 2.5 billion. Estimated capital inflows this year: none (sale will take place after EGO sale, with payment in 2009). Total of estimated sales price: USD 24.475 billion. Total estimated capital inflows this year: USD 6.175 billion, assuming the percentage of Turk Telecom IPO shares allocated to foreigners remains at 70%. Expect Delays -------------- ¶3. (SBU) There have been frequent legal delays in privatizations, usually from lawsuits brought by affected labor unions after a bid winner is announced. Two major privatizations on the 2008 list -- Petkim and Izmir Port -- already have been delayed substantially by union legal actions. The Izmir Port concession was tendered in May 2007. The port labor union had asked the Council of State to cancel the tender process in advance of the bidding, but their action was turned down. On appeal, however, in February 2008, an appellate administrative body cancelled the May 2007 tender. Both sides now are awaiting the court's statement of the merits of the case, and then the action will move to the courts. The Mersin Port privatization went through a similar legal process that took 27 months to resolve (in favor of the purchasers). In the case of the Petkim petrochemical privatization, tendered in July 2007, the petroleum workers union filed four challenges to the sale. The Council of State has resolved three of those in favor of the purchasers, but two of those resolutions are suspended while the union appeals. ¶4. (C) Others have been delayed for political and bureaucratic reasons. The GOT cancelled the privatization of operating rights for regional electricity distribution companies in 2007 to avoid it becoming an issue in elections. Since then, the Privatization Agency (PA) and the Ministry of Energy (MOE) have been arguing about how and when to move forward again on privatizing electricity distribution, and whether to include electricity generation as well. The PA wants to do distribution first, while MOE wants to privatize both distribution and generation simultaneously. MOE also wants to play a large role in selecting the winning bid. ¶5. (C) Finance Minister Simsek told the Ambassador on April 3 that the GOT was planning to allocate funds from energy privatizations (including hydroelectric projects) over the next four years towards paying much of the YTL 14 billion needed to complete the Southeast Anatolia (GAP) Project. See septel. This is perhaps the strongest indication yet that the GOT intends to move forward quickly with major energy privatizations. First Steps in Energy Privatization -------------- ¶6. (SBU) The PA held its first "model" generation privatization tender on March 5, to measure market appetite in the energy sector. It sold off the operating rights to eight power plants (seven hydro and one thermal),along with one set of gas turbines, totaling 140 MW of generating capacity. Sector analysts thought that the disbursed locations and variable quality of the plants would turn off investors, but there was record interest in the tender, with 30 bidders. Zorlu Energy won the tender for USD 510 million. The high per MW price seemed to bode well for future electricity privatizations, although some analysts believe that Zorlu intentionally overpaid in exchange for preferential treatment when more lucrative assets are offered in the future. The Competition Agency approved the deal on April 2. ¶7. (SBU) There was much less investor interest in the transfer of ownership rights for the city of Ankara gas distribution network on March 12. The PA had expected a sales price of USD 2 to 3 billion. Despite on-air pleading from PD officials as the bidding was closing, the highest bid was only USD 1.6 billion. Several investors who had expressed interest, including Russia's Gazprom, ultimately did not submit bids. There are rumors in business press, however, that the winner of that auction, Global Investors Group of Istanbul, may sell a part of the company to Gazprom in a private deal. Privatizations and the Financing Gap -------------- ¶8. (C) Investment banking analysts have begun predicting that Turkey will have a financing gap this year (see reftel),but are not in agreement on how large the gap will be, with predictions ranging from USD 8 to 20 billion. One of the key variables determining the size of this gap will be the amount of capital inflows from privatizations. Thus, the timing of sales this year, and any delays caused by legal challenges, will take on greater than usual importance. Note that just four of these privatizations are expected to produce 98% of all foreign capital inflows from privatizations this year: TEKEL (USD 1.7 billion in capital inflows); Turk Telecom (USD 2.3 billion); Izmir Port (USD 1.275 billion) and Electrical Distribution Companies (USD 1.0 billion). The Turk Telecom public offering is unlikely to be disrupted by lawsuits. However, Izmir Port already is mired in a union legal challenge, while TEKEL and Electrical Distribution are likely to face legal actions. On the positive side, resolution of the Petkim legal challenges this year probably will bring some foreign capital in, though the timing and amount of foreign inflows from that deal is not yet clear. ¶9. (C) Comment: These privatizations are not taking place in a vacuum. They will be directly affected by the international global financial conditions that are now hitting Turkey. Financing for some of these deals, particularly the large block sales, may be hard and costly to arrange. Investors worldwide are re-assessing risk and may decide to pay less for Turkish assets. The closure case against the ruling AKP also may adversely affect these privatizations, particularly the energy-related deals. Turkey's energy markets are only halfway de-regulated. Purchasers of these assets are making assumptions about the AKP delivering on its promises to complete energy market de-regulation, including allowing electricity companies to pass their costs on to consumers via increased rates without prior regulatory approval. If investors assess that the AKP has been weakened, that its ability to deliver on unpopular reforms has gone down, they are likely to bid substantially less for the energy privatization deals. With the GOT tying completion of theGAP project to the proceeds from those deals, the impact of a loss of investor confidence would be both political and fiscal. End comment. . Visit Ankara's Classified Web Site at http://www.intelink.sgov.gov/wiki/Portal:Turk ey WILSON