Turkey: The Legal Framework For Privatization In Turkey

Last Updated: 2 March 2010
Article by Lachman Simayli & Aykut

Article by Lachman & Yeniaras Attorneys at Law

Privatization has been one of the most highly debated issues on the Turkish political scene over the past three decades. Although opponents to privatization rigorously argued that the State must render certain services in key industries such as health, steel manufacturing, telecommunications and energy, it is probably more realistic to favor a government focused on the inalienable duties of defense and justice, leaving less strategic industries to the private sector subject to State supervision to ensure fair competition and the rule of law. Beginning in late 80's Turkey witnessed a remarkable series of privatizations as a consequence of the liberalist social-economic approach that prevailed over more conservative voices.

Government-held stocks in more than 250 companies, 22 uncompleted and 103 completed production facilities, 524 real properties, 8 highways, 2 bridges, 6 sea-ports, the government's exclusive right to organize lottery games and automobile inspection stations have been included in the privatization program since 1985. (A relatively insignificant number of those assets were subsequently withdrawn from tender for various technical reasons.) As of 31 December 2009, the Turkish government generated approximately USD 28 Billion in sales proceeds through privatizations. Sugar factories, hydro-electrical power plants and energy distribution grids are among the major assets that will be transferred to the private sector in the year 2010.

Allocation of Authorities: Administration and Commission

The Law on Procedures of Privatization (the "Law") sets forth the rules and principles applicable to privatization and established the Presidency of the Administration of Privatization (the "Administration") and the High Commission of Privatization (the "Commission"). The Commission is composed of four ministers appointed by the Prime Minister and acts as the decision-making authority in determining the scope and extent of the privatization program, in addition to regulating the financial aspects of the transactions. The Administration is established as an auxiliary to the Commission for the provision of advisory services, the execution of the Commission's decisions, and taking all steps necessary for the seamless implementation of the procedural provisions of the Law.

The Law entitles the Commission to specify the strategically sensitive sectors with sufficient public interest to justify a certain amount of government control. The Commission typically sets a higher level of protection by way of issuing preferred stocks for the government in those areas when State-ownership falls below 50% as a consequence of the privatization. The Law also mandates that for tenders to private investors of majority ownership in Turkish Airlines, Ziraat Bankasi (the Agricultural Bank), Turkiye Halk Bankasi (the Turkey's Bank of People), TMO Alkoloid Muessesesi (the Office of Agricultural Products – Alcoloid Enterprise), or Turkiye Petrolleri AO (Turkish Petroleum Co.) the Commission must issue preferred stock to the State. On the other hand, the sale of real property to foreign nationals or entities is governed by the requirement of reciprocity in foreign affairs, as well as the applicable provisions of the Title Deed Law.

Mechanics: A Specialized Institutional Approach for a Special Practice

The concept of "privatization" refers to (i) the sale of the ownership interests of the central government and the municipalities in public enterprises, private companies and their subsidiaries, and (ii) the transfer of income-producing assets and services that are managed by administrative public institutions under the supervision of the government. The privatization of shares or assets may occur by sale, lease, transfer of usage rights, or establishment of rights in rem other than ownership (easements). The sale of the State-owned shares may be in form of block-sale, public offering or sale to the employees, international offering, sale through the stock-markets, offering to private equity funds, or any other combination of those methods as may be deemed appropriate by the Commission.

There are four main phases in any privatization process, although the competent authorities possess the right and flexibility to slightly amend the overall structure in order to optimize financial returns in the best interests of the public.

  • The first phase of the privatization process is the recommendation of the Administration to the Commission concerning the sale of State-owned stocks or assets in a target company (the "Target"). The Commission may elect to (i) directly initiate the privatization process for tendering the Target to the potential buyers, (ii) privatize the Target subject to the completion of a successful preparation period, or (iii) reject the Administration's offer and elect not to privatize. The Target may be privatized in whole or in part; whichever has a greater likelihood to result in greater public benefit.
  • The legal, fiscal and financial preparation of the Target for privatization follows the first phase in the event the Commission resolves to privatize but requires preparation work to be completed before the tender. Institutions chosen by the Administration handle the preparation work, which primarily consists of making certain necessary changes in the corporate books and records to accommodate private ownership, amendment of the constitutive texts of the entity, recalibrating its status for taxation, and putting fiscal regulations for private companies in place. Upon satisfactory completion of these actions, the Commission would include the Target in the privatization calendar and transfer it to the Administration for action.
  • The Law provides for a clear institutional framework for establishing the value of an asset to be privatized. This value is determined by a commission presided by the head of the project group manager in the Administration, and composed of members who have prior experience and expertise in similar financial valuation projects. The valuation work consists of the gathering and in-depth analysis of financial and commercial data customary for M&A transactions. These include estimates for the Target's profitability, exposure to legal and financial risks, potential for growth, as well as the physical condition of the Target's physical assets.
  • The tender and the bidding processes follow the valuation. A tender commission established under the supervision of the Commission and composed of members with relevant expertise is responsible for establishing the bidding procedure. The bids can be in sealed envelopes, verbally advanced at the tender date and place, or negotiated with the tendering authority, depending on the type and legal status of the Target. The Administration presents the result to the Commission for its final approval, which would be followed by a public announcement.

Real Property as Part of the Asset Package

The Law allows real properties owned by the Target to be put up as "capital in kind" in the Target if the Target is converted into a Joint Stock Company during the preparation phase immediately preceding the tender. In instances where the government is the majority shareholder of the Target, the State-owned property used by the Target would be transferred to the Target (i) as capital in kind if the Target was converted into a Joint Stock Company at the stage of preparation for privatization, or (ii) free of charge if the Target is not a Joint Stock Company. The tendering authority may also elect to allocate the real properties to the use of the Target by way of a simple transfer of usage rights without the conveyance of title.

In light of the provisions stated above, the Law mandates in principle that real property owned or used by the Target will remain under the control of the Target. The rationale behind this is that the real properties are considered to be an integral part of the entity's commercial operations, and to ensure maximum value should not be interfered with at the tender stage.

Concerns of Social Justice

Usually the workers at the privatized entities are the strongest opponents of privatizations. This is due to the post-privatization measures that many investors are customarily take, including down-sizing, change of working hours and conditions, and new, more restrictive employment contracts for competitiveness and efficiency.

Derived from the constitutional duty of the government to ensure the economic welfare of its citizens, the Law puts in place the privatization fund (the "Fund") intended to be used for a wide array of purposes including severance and retirement payments for employees laid off as a result of the privatization. The compensation for loss of a job is calculated on a daily basis, and equals two times the net daily salary of the subject employee per day of lost work. Employees who have worked for the Target for more than 550 days are entitled to compensation for 90 to 240 days (of pay) depending on their seniority. The Fund also serves as a financial source for settlement of the debts of the privatized companies, supporting other State-owned enterprises by way of increasing their capital or by other means that the Administration may deem appropriate.

The Law also provides a detailed policy for the transfer of public employees to other entities in the event the Administration determines that there is an excess labor force that needs to be relocated.


Turkey's aggressive privatization policy is likely to continue for the next decade, with a focus on energy projects as well as other heavy industries related to construction and commodities. The consequences of privatization have not only proved to be positive in terms of cost-cutting but also led to the transformation of Turkish economy into a relatively attractive market for international strategic and financial investors. The proceeds of tenders have also allowed the public authorities to re-channel the funds generated to crucial infrastructural developments that may not have otherwise been completed.

Privatization is a heavily regulated, multi-dimensional practice area that requires a good command of administrative and constitutional law in addition to the traditional deal structuring skills of an experienced business lawyer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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