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Viewing cable 05ANKARA4141, TURKEY'S LIBERALIZATION WOES: SMOKE, BUT NO FIRE

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Reference ID Created Released Classification Origin
05ANKARA4141 2005-07-18 04:50 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Ankara
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 ANKARA 004141 
 
SIPDIS 
 
USDOC FOR 4212/ITA/MAC/CPD/DDEFALCO 
USDOE FOR CHARLES WASHINGTON 
TREASURY FOR C PLANTER AND M MILLS 
EB/CBA FOR FRANK MERMOUD 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EINV EFIN ECPS PGOV TU ENGR
SUBJECT: TURKEY'S LIBERALIZATION WOES: SMOKE, BUT NO FIRE 
 
REF: A. ANKARA 3223 
     B. ANKARA 3258 
     C. ANKARA 2812 
     D. ANKARA 3845 
 
Sensitive But Unclassified.  Please handle accordingly. 
 
1.  (SBU) Summary: Despite a modest but tangible political 
will to privatize, and efforts by the Privatization 
Administration, Competition Authority, and other sectoral 
regulatory bodies, Turkey's program of sectoral reform, 
liberalization, and privatization remains delayed and 
troubled.  Across several key sectors, particularly  energy, 
aviation and telecom, delay in liberalization and 
privatization appears to indicate a lack of political will 
to relinquish state control.  Reftels have provided 
background on impediments to privatization: deep opposition 
from the judiciary, unions, and the "deep state", 
particularly if it involves relinquishing control to 
foreigners.  Liberalization remains flawed or unsteady, 
given lack of regulatory transparency and/or weak and 
embattled regulatory agencies, in the face of entrenched 
government bureaucracy or dominant state companies.  End 
Summary. 
 
--------------------------------------------- --------- 
They Might be Privatizers, but they ain't Liberalizers 
--------------------------------------------- ---------- 
 
2.  (SBU) Turkey has made significant progress in rebounding 
from the 2001 financial crisis and stabilizing the economy, 
largely through competent fiscal and monetary policies 
overseen by the IMF.  However, with the IMF limiting itself 
to broad macro policies and a relatively limited set of 
structural reforms, the GOT is missing an opportunity to lay 
the foundations of stronger growth over the long-term by 
failing to aggressively privatize and, especially, 
liberalize several key sectors of the economy.  Sectors such 
as aviation, telecoms and energy continue to see a high 
degree of state intervention with only small steps towards 
liberalization likely in the medium-term.   Many small state 
enterprises have been privatized, but hardly any large SEES 
have been.  This could change, however, in the coming months 
if the Turk Telekom, Erdemir and Tupras deals are 
consummated.  While privatizing any of these flagship 
companies would be a major accomplishment in the Turkish 
context, the GOT's focus--and the public debate--continues 
to be on the proceeds of the sale, not on the benefits of 
moving to a fully-liberalized economy with strong regulatory 
bodies. Moreover, several significant state enterprises are 
not slated for privatization at all. 
 
--------------------------------------------- --- 
Energy: Need for Capital, but Fear of Foreigners 
--------------------------------------------- --- 
 
3.  (SBU) The Energy Regulatory and Market Authority (EMRA) 
has been engaged in bitter turf battles with the Energy 
Ministry and other parts of the bureaucracy, as it attempts 
to regulate and foster a competitive market in electricity, 
natural gas, and petroleum sectors.  EMRA reps have told 
Embassy they fear prospective legislation, which they say, 
would limit its independence.  Working with the World Bank, 
Turkey has put in place an Electricity Strategy Paper, which 
identifies the need for foreign capital to increase power 
generation capacity to fill a projected shortfall of supply 
over demand.  The Privatization Administration (PA) has 
targeted electricity regional distribution for privatization 
first.  U.S. firm AES is persevering in its interest in this 
potential tender, but there have been delays and uncertainty 
in finalizing privatization method, timing, and legislative 
underpinning (Ref A).  The GOT's love-hate relationship and 
steps forward and back on Transfer of Operating Rights 
(TORs) and other past models for encouraging foreign 
investment in generation has created historical baggage and 
impediments to privatization and liberalization. 
 
4.  (SBU) State pipeline company BOTAS has not been targeted 
for privatization, on the implicit grounds of need to 
protect the national champion to compete and negotiate with 
the likes of Russia state pipeline monopoly Gazprom.  In 
accordance with the Natural Gas Strategy Paper, the GOT is 
proceeding with tenders for new municipal natural gas 
distribution networks.  This is generally perceived as 
successful, but some observers worry about inadequate 
prequalification criteria.  The targeted transfer of BOTAS 
natural gas import contracts has been postponed at least 
four times.  A BP contact told us that the legislative 
underpinning and process were still unclear, with respect to 
gaining approval from sellers (Russia and Iran).  He fears 
that a new amendment under consideration would confer 
excessive control on sellers like Russian Gazprom and firms 
partnered with it. 
 
5. (SBU) State oil company TPAO is also not slated for 
privatization as national champion.  As in many other 
countries, foreign oil companies are required to partner 
with the domestic state company for exploration.  The 
investment regime for oil and gas exploration and 
development is generally perceived as not that favorable for 
foreign firms.  There are a few lingering investment 
disputes.  A prospective new petroleum law, which would 
introduce modest improvements and incentives, has been held 
up at the parliament.  The state refinery TUPRAS is slated 
for privatization and there is significant interest, but 
there is significant opposition from the labor union, which 
was successful in derailing the last tender won by Russian 
Tatneft and Turkish Zorlu.  A labor-sponsored advertising 
campaign used fear of giving away the national wealth to 
argue against TUPRAS' prospective privatization (Ref B). 
 
--------------------------------------------- ------------ 
Telecom: Need for Foreign Capital, but Fear of Letting Go 
- Two Strikes, and ... 
--------------------------------------------- ------------ 
 
6.  (SBU) State firm Turk Telekom is the overwhelmingly 
dominant presence in the fixed line telephony, although 
private Turkcell dominates mobile telephony.  The July 1 win 
by Oger Telecom of the bidding process for 55 % stake in 
Turk Telekom raises hope the deal could finally go 
through(Ref C)  Turk Telekom's privatization has failed two 
times before, so this is generally viewed as the last 
chance.  This privatization round has faced delays, and will 
have to overcome entrenched opposition from labor, the 
judicial system, and - some say - the "deep state" (concerns 
about foreign control of what is perceived as a  strategic 
asset).  The announced sale of a majority stake in mobile 
company Turkcell to Nordic TeliaSonera has been reneged upon 
by the Cukurova Group (in favor of a minority interest 
transaction with Russian Alfa Telecom), and TeliaSonera has 
taken the case to the courts. Either of these deals being 
consummated will represent a major new inflow of FDI and a 
powerful symbol that both the telecom sector and the climate 
for foreign investment are changing. 
 
7.  (SBU) Uncertainty, lack of competition, and 
expensive/inadequate service in the telecom/internet sectors 
has contributed to overall weakness in the investment 
climate.  While competition and liberalization exist in 
principle in some key domains, such as long distance and 
internet access, in practice Turk Telekom has used its 
dominant position to stifle competition.  Providers in these 
areas complain about facing a price squeeze between 
wholesale access to the Turk Telekom network and retail 
competition with Turk Telekom.  The well-intentioned, but 
relatively weak Telecom Regulatory and Competition Boards 
have struggled to enforce rulings.  Turk Telekom has has not 
allowed remarketing of its sole wide-band (ADSL) service and 
value-added service such as Voice Over Internet Protocol 
(VOIP).  Consequently, Turk Telekom's dominance is unlikely 
to be resolved by merely selling a 55% stake, however 
positive a step this is. 
 
----------------------------- 
Aviation: Fear of Competition 
----------------------------- 
 
8.  (SBU) Although competition exists on paper, state 
enterprise Turkish Airlines still controls slots and routes. 
Turkish Airlines recently exercised this control in 
squeezing out private upstart Atlas Airlines, which had the 
audacity to compete vigorously on price with Turkish 
Airlines on the key Ankara-Istanbul trunk route.  Turkish 
Airlines is on a half-hearted "B-list" for possible 
privatization, but sale of shares to the public-with 
continued government control--is the most likely outcome. 
 
------- 
Comment 
------- 
 
9.  (SBU) The state seems loathe to yield control of vast 
swathes of the economy still firmly in its grip.  Long 
promised to the International Financial Institutions, and 
long identified as critical for providing access to needed 
foreign capital, embracing E.U. accession, and providing 
better service to its citizens, privatization and, 
especially, liberalization are hard to do.  Despite a 
government with a clear majority, there has only been a 
political will for partial privatization, rather than for a 
more aggressive privatization program coupled with 
liberalization.  Turkey's failure to transfer its large 
state enterprises to private control is a major weakness of 
its economic reform program.  Turkey faces the risk that it 
will fritter away chances to move ahead in global linkages 
and competition, while the value of the state firm dinosaurs 
will decline.  Successes so far by the Privatization 
Administration have been generally limited to IPO's, which 
gain revenues trumpeted by the PA, but which do not 
relinquish state control of these strategic assets. 
Struggling sectoral regulatory boards fear prospective 
legislation that would further decrease their independence, 
vis a vis the government bureaucracy. 
 
MCELDOWNEY