Turkey Economy: Everything Must Go

If 2005 was a year of records with total privatisation sales exceeding US$20bn, the current year has proved to be one of problems, with legal challenges delaying the completion of three major sales.

Fortunately, successive challenges made to the sales of 55% of Turk Telekom to a consortium of Saudi Oger and Telecom İtalia for US$6.55bn, and to the sale of a controlling 51% stake in state oil refiner Tupras to a consortium of Turkey's Koc group (98%) and Shell (2%) for US$4.14bn were finally rejected, resulting in the completion of the two biggest privatisation deals yet seen in Turkey.

Both sales had long been considered highly controversial owing to the strategic nature of the companies and their position as major suppliers to the armed forces, and their completion has widely been taken as signalling a sea change both in the working of the Turkish economy and in the relationship between the state, the military and the government.

"National interest"

Ironically it is the sale of control of state steel producer Erdemir to the military's semi-autonomous pension fund, Oyak, for US$2.77bn that is still suffering from ongoing legal challenges, with Turkey's highest court "suspending" the sale while it deliberates on allegations that the transaction is against the national interest. Suspension does not necessarily translate into cancellation--as a similar ruling against the Tupras sale proved. However the use of "national interest" to delay and hamper major sales has raised fears that future privatisation deals, especially those in the energy sector may face a long and tricky legal path before being finalised.

Problems with large state concerns notwithstanding, the past year has seen the successful sale of a significant number of assets and smaller companies. Largest of the sales outside the privatisation programme was the sale of seized mobile-phone operator Telsim to Vodafone of the UK for US$4.55bn. Within the programme the majority of sales were of assets, with assorted real estate sales realising a total US$523m, and three salt mines raising a total US$129m, with the only other completed company sale that of Basak Insurance for US$268m. Also successful were public offerings of 25.17% of Vakifbank and 25% of the national carrier Turkish Airlines, which raised US$208m in total.

Sell-off candidates

Having emerged from a bout of economic turbulence in the first half of the year, the government is picking up the threads of the privatisation programme. Much of this entails revisiting deals that, for one reason or another, failed to be consummated the first time round.

One of these is the tobacco arm of the state cigarette and alcoholic beverages firm, Tekel. After two attempted sales attracted a highest bid of only US$1.15bn--way below the government's valuation--the State Privatisation Authority (OIB) has concentrated on selling off Tekel's non-core assets. Recently the OIB announced that it would not hold another tender for Tekel's cigarette operations before 2007 citing the need to determine the most effective sale strategy. Although over the past couple of years Tekel's market share has dropped below 50% for the first time, analysts caution that the company is just too big for a successful sale, with some potential bidders excluded owing to monopoly considerations and others put off by the high price. Potential bidders are reported to be lobbying for the company's break-up with individual plants and brands offered for sale separately.

Another long-standing privatisation target is Turkish Airlines. Following a third public offering in May 2006, the state held stake in the airline fell to 49%, with 8.6% held by the Franklin Templeton emerging markets fund. With the company now, nominally at least, out of state control, the sale of the remaining minority stake should now depend solely on identifying the optimum time to sell. With an agreed shutdown of further sales of shares in Turkish Airlines until next year the OIB will be hoping that current high fuel prices and uncertainties over air travel will not adversely affect the company's margins.

Petkim again

Two failed attempts at selling an 88.86% controlling block in Petkim, Turkey's largets producer of petrochemicals, resulted in a highest bid of only US$605m--way below the government's valuation. However following an over-subscribed public offering of 34.5% in 2005, OIB had been expected to move quickly to a block sale in 2006. However, recent announcements have indicated that OIB is looking to hire a consultant to work on a possible block sale of the remaining state holding of 54.36% in 2007. Analysts caution that despite high petrochemical prices, Petkim is only marginally profitable and is likely to attract more interest for its substantial real estate portfolio rather than its operations. They warn that if it is to be sold as a going concern it needs to attract bids from international oil companies which can supply their own raw materials. To date none has expressed an interest.

Privatisation in the banking sector looks more promising, particularly following the strong interest in the recent sale of several privately held Turkish banks. The government clearly hopes that this experience will be repeated in the planned sale of the remaining three state held banks, Ziraat Bank, Vakifbank, and Halkbank--respectively Turkey's second-, sixth- and seventh-biggest in terms of assets.

Despite the successful sale last year of 25.17% of shares in Vakifbank, to date no plans have been announced for the remaining state 58.45%. However plans have begun for the sale of Halkbank, which was recently transferred formally to the privatisation programme. Current plans envisage a block sale in early 2007 with the sale to be finalised by the end of the year. Interest is expected from owners of other Turkish banks (both Turkish and international) and from international banks looking to enter the Turkish market. Efforts to sell Ziraat Bank are expected to begin after the sale of Halk Bank.

Energy

Turkey's long awaited energy sector privatisation looks finally set to go ahead with the first tenders expected to be opened by the end of this year. Currently in the privatisation portfolio are fixed-period operational rights of 49 years to 20 of the country's 21 regional electricity distribution regions and a total of 26 individual power stations, as well as a job lot of smaller hydro-electric plants situated on rivers. Other owned state power plants are slated for eventual inclusion in the programme, although a recent decision to transfer hydro-electric power stations currently operated by the State Water Authority (DSI) has yet to be implemented. Critics of privatisation of Turkey's power sector are legion, and the process is widely expected to face numerous legal obstacles and other challenges. Not least is the problem of how to introducing a free market in power into a sector where existing private generators enjoy Treasury guarantees fixing both the volume and price of electricity they sell, while at the same time keeping prices to consumer prices down.

The sale of operational rights to Turkish ports has long proved problematic with the past year seeing the cancellation of the sale of Samsun port, legal problems halting the sale of rights to the port of Iskenderun and the sale of rights to the port of Mersin to a consortium of Singapore Ports Authority and Turkey's Tekfen for US$755m still awaiting final approval. The sale of 49-year rights to operate the port of Izmir is currently ongoing with bids expected from several consortia of international operators and a number of Turkey's biggest exporters.

The most controversial deal, though, is that of the moribund Istanbul port of Galata, which is scheduled to be redeveloped as a tourism and recreational facility, and whose sale to a consortium of Turkish and Israeli businessmen close to the government was cancelled after a public outcry. The sale is expected to be re-tendered before the end of the year.

Already underway are the first sales of Turkey's 27 state sugar companies and the sales of mining exploration and extraction rights held by several state companies, with the Ministry of Energy and Natural Resources inviting bids for its huge portfolio of thousands of exploration blocks known to hold metallic and non metallic minerals. Long discussed but still to have a strategy devised are the sales of operational rights for Istanbul's two Bosphorus bridges and six state owned motorways.