Turkey: Latest Developments In Privatization

Last Updated: 11 November 2004
Article by Selin Özbek and Kemal Aksel

As mentioned in our previous articles, Turkey’s privatization program continues to be one of the hottest topics in the Turkish economy. The Government’s desire to privatize entities in the privatization portfolio has intensified in order to achieve the goals set forth by the International Monetary Foundation ("IMF"). Pursuant to the IMF Letter of Intent for the 8th review, proceeds acquired from privatization have reached USD $311 million in the first quarter of 2004. Pursuant to the information provided by Metin Kilci, the Chairman of the Privatization Administration ("PA"), the projects are carried out in accordance with the privatization agenda; the privatization of 14 entities has been finalized and the contractual negotiations are continuing for 7 other entities. Furthermore, new amended procurement legislation for public entities eases the procedure for the recruitment of outside consultants.

Although many of the relatively minor enterprises have been privatized, there were substantial difficulties in finalizing the privatization process for some well-known and publicized projects in 2004. Below are the new developments in Turkey’s privatization journey:

TÜPRAŞ: As reported in our Spring issue, Efremov Kautschuk Gmbh, a subsidiary of Tatneft, the Russian petroleum conglomerate, offered the highest bid of USD 1,302,000,000 to acquire the 65.76% government stake in TÜPRAŞ. Following the approval of the Privatization High Council, Efremov Kautschuk Gmbh, together with its Turkish partner, Zorlu Holding A.Ş., started the negotiations for the share purchase agreement to be executed with the PA. However, the privatization process in TÜPRAŞ has been challenged by the Labour Union (Petrol-İş). Although the closing was expected for the end of May 2004, the privatization process and sale of TÜPRAŞ have been ceased as a result of the administrative court’s ruling cancelling the Tender Committee’s decision for the sale of 65.76% government stake in TÜPRAŞ to the winning bidder. Currently, the judicial process continues with regard to several lawsuits initiated by Petrol-İş against the PA and the Government awaits finalization of the judicial process before taking any action. As a result of the legal actions initiated against the most promising privatization project of the year 2004, the Government may face difficulties in complying with its undertakings concerning privatization income as projected in its latest Letter of Intent to the IMF.

TEKEL: As reported in our Spring issue, the privatization of TEKEL Tobacco, Tobacco Products, Salt and Alcohol Enterprises ("TEKEL")’s alcoholic beverages section was completed as of 27 February 2004 following the execution of the Share Purchase Agreement between the Nurol-Limak-Özaltın-Tütsab joint venture and the PA. Privatization of TEKEL’s cigarette section, however, continues to be considered as one of the major privatization projects in the portfolio of the PA. In the last two months, discussions relating to privatization methods for Tekel Cigarette hit the newspapers again. Although in June there was news stating that the privatization of TEKEL Cigarette would be via block sale and separate sale of trademarks is not considered as a privatization method, the PA did not make any official announcements in that respect. Accordingly, changes to the privatization method for TEKEL Cigarette may still be expected, since the Chairman, Metin Kilci, noted that the method of privatization would probably be determined by the end of this year.

TURK TELEKOM: The PA recently selected the outside financial and legal counsels for TURK TELEKOM privatization. It is reported that meetings are ongoing for the provision of information on legal, financial and organizational aspects of the privatization. According to recent news, the PA plans to privatize TURK TELEKOM in October. The proposed privatization of TURK TELEKOM, is expected to include its cable TV and Internet operation rights. However, based on recent news, following the privatization, the purchaser may be obligated to sell the concerned operation rights within a specified period.

NATIONAL LOTTERY ADMINISTRATION: As reported in our Spring 2004 issue, the PA resolved to privatize the National Lottery Administration ("NLA") by granting separate operation licenses for each lottery activity, instead of block sale or public offering of the entity. Although the preparations for the tender process were expected to be finalized by the end of June, no official announcement has been made yet by the PA concerning the tender specifications. The privatization of NLA only includes lottery activities. Furthermore, a pre-payment and profit sharing system is planned to be established for a term of 10 years. Pursuant to the information provided by the Chairman, Metin Kilci, NLA’s privatization process is still ongoing and planned to be concluded by the end of this year.

ENERGY SECTOR: In line with the privatization plans, categorization of electricity production and distribution facilities is completed. Accordingly, production facilities are categorized into six groups and are planned to be included in the privatization agenda by June 2006. With regard to electricity distribution facilities, it is reported that incorporation of seven distribution regions is completed and the preparations for the incorporation of an additional 13 distribution regions is in progress as of today. At the first stage, 3 distribution regions are planned to be privatized by the end of 2004. It is reported that these 3 regions will be chosen among the ones that has not been party to any dispute and has completed its incorporation process (or is in a position to complete this process without any delay). Furthermore, the PA announced that it is planning to complete the privatization of all electricity distribution companies and regions by the end of 2006. In line with the foregoing the PA has selected Mc Kinsey & Company to carry out the necessary consultancy services for the privatization of TEDAS. This may be interpreted as an indication to show that the PA’s intention to privatize TEDAS has been intensified and the tender process might be launched on the expected date.

THY: This Turkish aviation state entity, which has been active in this sector for over 70 years, has 15% market share in the international market and 98,9% in the domestic market as of 2002. The Chairman, Metin Kilci, noted that the privatization process of THY will be carried out as planned by way of public offering. Furthermore, the PA also selected İş Yatırım Menkul Değerler A.Ş as the outside counsel. Based on these facts and the recent remarks of the PA, it may be expected that the Government would commence to carry out the necessary actions for the privatization of THY in the near future.

ERDEMIR: ERDEMIR, which is one of the most important enterprises in Turkey with approximately 42% market share, has a crude steel and related final products production of respectively 2.38 and 3.13 million tons. Privatization efforts for Erdemir are still continuing. Pursuant to remarks made by the Minister of Finance, Mr Unakıtan, the PA is in the phase of hiring consultants to perform the financial and legal consultancy services for the privatization of ERDEMİR. By virtue of these developments, ERDEMIR is expected to be one of the hottest privatizations of next year.

PETKIM: As reported previously, the PA had initiated two tenders for Petro Kimya Holding A.Ş (“PETKIM”), however, the results were disappointing. The second tender was cancelled as a result of the low bids offered by the bidders. Pursuant to the latest IMF Letter of Intent, the Government seems to be determined to initiate the third tender bid to privatize PETKIM. As indicated in the press release issued by the PA on 20 August 2004, the consultants are selected to carry out the tender process, accordingly, the tender of PETKIM may be expected in the near future.

OTHERS: It is recently reported that the Government plans to privatize Vehicle Inspection Stations, which will need to await approval of the National Assembly for the enactment of the legal framework enabling this project. The tender process is expected to be initiated as soon as possible upon the enactment of the relevant legislation.

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