Turkey Economy: Fire Sale

Turkey's newly elected government is seeking to revive the country's stalled privatisation programme, and has set a target of US$4bn for asset sales this year

In the 17 years since privatisation was launched in Turkey, total sales proceeds have come to US$8bn, of which only US$515m was raised last year. Now Turkey's newly elected Justice and Development Party (AKP) government has signalled that it intends to get serious, with a programme of sell-offs that it hopes will raise US$4bn this year alone.

The revamped programme includes a significant change in policy, in that the government intends to give up state control of some sectors and to end the state presence completely in others, while at the same time selling off assets not previously designated for privatisation.

New government, new programme.

First up is the sale of a controlling 51% block in state petrochemical producer Petkim. The intention to give up control of Petkim is not new. The privatisation authority last year said that it would happily sell 100% of the company if it could find a bidder, but the outgoing government had repeatedly delayed announcing the sale, fearful that the inevitable restructuring and job losses would prove unpopular.

The success of the deal will hinge on price. Petkim is too small to offer significant economies of scale and has steadily lost market share to imports. However, the sale is expected to generate interest among some of Petkim's regular customers in Turkey's textiles sector. The company's products include fibres used in the textiles industry.

Planned to follow in May is the offering of the state's remaining 65% holding in Turkish oil refiner Tupras, the subject of an oversubscribed initial public offering (IPO) held in 2000, which saw 31.5% of the company sold off to private investors on top of 2.5% already traded. However, plans for a second public offering and block sale failed to generate sufficient interest as the state would have remained the largest single shareholder, raising fears over the company's future ability to act in its own best commercial interests.

Tupras has four refineries and, despite having no crude reserves of its own, controls some 85% of Turkey's refining capacity and benefits from legislation obliging distributors to source 60% of products within Turkey. These restrictions are due to be lifted in the next two years in line with reforms agreed with the IMF. The sale of Tupras is expected to attract significant interest from companies with crude oil reserves in the region, and the Turkish press says Russian energy giants Gazprom and LUKoil have already made inquiries.

Tupras in 2002 produced 22.2m tonnes of products, and imported 21.6m tonnes of crude oil (equivalent to about 430,000 barrels a day). Iran was the largest supplier, with 5.3m tonnes, followed by Libya and Saudi Arabia, at 3.9m tonnes each, and then Iraq and Syria, each supplying just over 1m tonnes.

Also expected to generate considerable interest is the sale of the state alcohol, tobacco and salt monopoly, Tekel, which is to be broken up and divested by a combination of block and asset sales. Tekel has a monopoly on tobacco wholesaling and production of spirits, and produces all of Turkey's domestic cigarette brands. Its alcohol and cigarette factories have reportedly already generated significant interest.

Other smaller state assets included in the programme for this year are the operating rights to several ports, the proposed asset sale of the factories of the state paper producer, SEKA, and the disposal of remaining state owned tourism facilities.

Lottery up for sale

Also likely to prove attractive to investors are several new additions to the privatisation portfolio: the Istanbul Stock Exchange (ISE); the Gold Exchange (IAB); Turkey's national lottery "Millipiyango"; and the rights to operate the two bridges over the Bosphorus. Analysts differ over the valuation of the ISE and the IAB, but some say the two entities could bring in up to US$2bn. Millipiyango generates revenue of some US$365m per year, giving it a theoretical valuation of up to US$5bn. At this price, the government is unlikely to find a buyer. However, the lottery's value could be whittled down to a more realistic level if its earnings were subject to heavy taxes, as has been suggested in the Turkish press.

On the shelf

However, three of the larger assets in the programme are less likely to generate interest. Turkey's national airline, Turkish Airlines (THY), returned to profit last year having been relieved of its legal obligation to fly unprofitable internal routes and to provide free tickets for politicians. However, the slump in the global airline sector means buyers will be hard to find.

The two state banks slated for sale this year, Vakif Bank and Halk Bank, are also likely to remain unsold, because of the poor state of the banking sector. Foreign investors are more likely to be interested in taking stakes in capital-hungry private Turkish banks, rather than take the risk of buying into two indifferently run public institutions.