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Western EuropeMay 1 2005

The great sell-off

Turkey is pushing ahead with privatisation of its overstaffed, money-losing state enterprises in the run up to EU membership.
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Prime Minister Recep Tayyip Erdogan’s government is moving ahead with the most ambitious reform since the establishment of the republic 82 years ago: the privatisation of Turkey. In a sweeping programme, the administration intends to complete Turkey’s drive to sell the nation’s state economic enterprises, or KITs as they are known locally, before general elections in 2007.

Initiated 19 years ago by late prime minister and president Turgut Ozal, the country’s privatisation programme has continued in stops and starts since then due to weak governments, lack of legislation and regulations governing sales, and strong opposition from rival political parties, labour unions and the entrenched state bureaucracy.

Last in the region

Thus, Turkey is the only remaining country in central south-east Europe where the state dominates economic life. Even most of the former communist states have thrown off the shackles of state ownership of industry since the collapse of the Iron Curtain and made more economic progress than Turkey, industry watchers say.

“Most of the former communist nations grew faster than Turkey because they completed privatisation of many of their state assets, ” says Yalçin Sönmez, publisher and editor-in-chief of KobiEfor, a leading Turkish monthly business magazine. “Many of these states have become members of the European Union, or are slated for membership, ahead of Turkey, which is still struggling with a cumbersome state sector.”

To qualify for EU membership, Turkey needs to privatise many of its state economic enterprises, which control 40% of the nation’s industrial production, and more than 25% of bank assets and deposits, and employ more than 500,000 people. Membership talks open on October 3.

The state economic enterprises are a legacy of Kemal Ataturk (1881-1938), Turkey’s revered founder and president, who opted for state-owned, state-operated industries to overcome the country’s economic underdevelopment. State companies now constitute virtual monopolies in railways, utilities and postal services. They also cover banking, textiles, telecommunications, tobacco, salt, cement, airlines, iron and steel, chemical products, radio and television broadcasting and airlines. State concerns also dominate agribusiness, fertiliser production, meat processing and fish canneries, mining and mineral processing and oil exploration, extraction and refining.

 Drain on economy

In time, the KITs became overmanned, undercapitalised and money-losing companies, unresponsive to market forces and a drain on the economy. Mr Erdogan aims to yank the state out of the manufacturing industry and the service sector, and limit its activities to market regulation.

The only activities that will remain under state administration are the armed forces and the police, the judicial system, and the customs and tax administrations. Postal services, railroads, as well as national education and public health services, and energy companies will also stay under the government’s domain, although considerable private investment has already entered most of these areas.

The Privatisation Administration (OIB), the main government agency carrying out the sale of state assets, has issued tenders for the privatisation of Turk Telekom, Turkey’s state telecommunications network; Aluminyum A.½., the nation’s sole primary aluminium manufacturer; and the six cigarette plants of former state monopoly Tekel. It also plans to sell its flat steel manufacturer Erdemir some time this summer, as well as the state lottery, Milli Piyango.

It is also ready to sell the nation‘s Motor Vehicle Inspection Stations to a Turkish consortium for 20 years for $613.5m. The stations operate fixed sites on highways in 71 provinces and 13 counties and mobile stations in 10 provinces and 578 counties. They inspect mainly commercial vehicles, including international transport lorries, and they help reduce accidents on the highways. The stations also provide spare parts and components.

The government also plans to privatise major sea ports and airport terminals. It is also planning to turn over hundreds of mines and 30 major hydroelectric dams and thermal energy power plants to the private sector.

State oil pipeline operator BOTAS is preparing to sell natural gas import contracts to local and foreign private companies and to privatise natural gas distribution throughout Turkey. The OIB intends to sell the country’s 21 electricity distribution regions.

The State Railways Administration (TCDD) aims to rent out 904 train stations and terminals in 57 provinces to the private sector, in the greatest reform in the history of Turkey’s biggest money-losing state economic enterprise. The TCDD intends to raise $500m annually through the leases that would allow the private sector to build hotels, cafes, restaurants, sports facilities and shopping centres at the stations and terminals.

The Savings Deposits Insurance Fund (TMSF), a state banking receivership fund, is also carrying out privatisation. The TMSF is planning to sell 11 cement plants, Turkey’s second biggest GSM operator Telsim, Star TV newspaper and hundreds of other companies it seized from the controversial Uzan family to recover $5.8bn in debts owed to the fund over the collapse of Imarbank in 2003.

Complete withdrawal

From 1986 to 2004, Turkey generated $9.4bn from privatisation. In 2004 alone, privatisation revenues totalled $1.3bn. The state has completely withdrawn from animal feed production, dairy products, catering services, and forestry products as a manufacturer, petroleum distribution services, and tourism. More than 50% of state shares in textiles, cement, iron and steel and sea freight transportation have been privatised. Several state banks, or state assets in the banks have been sold.

The government has been more successful in recent months in selling shares in state companies in public offerings than in block sales.

In 2004, the OIB sold a 23% stake in Turkish Airlines, the national carrier, for $191m, and this March it sold a 14.7% share in state oil refineries concern Tupras on the Istanbul Stock Exchange for $446m. In the same month, the OIB offered a 30% share stake in Petkim, the state petrochemical concern, in a new public offering. It also plans a public offering in shares in a large state bank, Vakiflar Bankasi, in 2005.

Opposition grows

Whether the government can succeed in its privatisation programme will largely depend on its ability to attract local and foreign investors and contain rising opposition to its plans. Nationalists and socialists fear the country will come under foreign domination and Turkey’s economic independence will be threatened if privatisation is carried out in full, and labour unions are worried their members will lose their jobs.

Some 750 state paper industry workers occupied a government pulp and paper mill in Izmit, a city in western Turkey, for two months, after the administration shut down the money-losing plant in December 2004. The workers ended the seizure of the facility when the Izmit Municipality offered them new jobs.

The main opposition, left-leaning Republican People’s Party (CHP) has been the most critical of the privatisation programme. “If there is even a grain of nationalism left in you, you should end this folly immediately and stop the sales,” Mustafa Gazalci, a deputy with the CHP, told members of the government in a heated debate in the Grand National Assembly in February.

Finance minister Kemal Unakitan, responding to Mr Gazalci, urged the CHP to “abandon its statist views”.

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