The first attempts at privatisation in Turkey were made in 1984, when the first privatisation legislation was introduced. Since 1984, various pieces of legislation have been brought in to regulate privatisation activities. This patchwork of legislation was consolidated in 1994 with the introduction of the Law on Privatisation Applications (Law 4046, published in the Official Gazette on November 27 1994). In has been subject to major amendments over the last decade, including a simplification of the privatisation process in 2005.
For the past few years, the ruling Justice and Development Party (AKP) has promoted an extensive privatisation programme aimed at minimising state involvement in industrial and commercial activities. The general elections in 2007 slowed down the privatisation process but following the conclusion of these elections in favour of AKP, privatisation is commencing again. There is no doubt that a new phase of privatisation awaits Turkey in the near future.
Energy and banking, two of the sectors where the state has significant involvement, have been only partially privatised. Potential future privatisations are described below.
Energy
Turkey's process of liberalisation and privatisation in the electricity industry has been slow and faltering. As long ago as 1984, primary legislation was enacted to end the state monopoly in generation, transmission, distribution and supply activities in the industry. However big private sector involvement did not follow quickly. In 1993, the Turkish Electricity Authority was divided into the Turkish Electricity Distribution Company (TEDAS) and the Turkish Electricity Generation and Transmission Company (TEAS). This was sub-divided into two parts, a state-owned generation company (EUAS) and a state-owned transmission company (EIAS).
There followed a troubled programme of independent power generation projects, which suffered well-documented constitutional problems concerning the legal nature and standing of concession arrangements. It is generally accepted that these constitutional problems were addressed by legislation passed in 1999. At the end of the nineties, Turkey embarked on a comprehensive process of market redesign as a precursor to gradual liberalisation and privatisation of the electricity industry. The first major step in this process was the enactment of the Electricity Market Law in 2001. The Electricity Market Law paved the way for a restructuring of the electricity market and a gradual opening of the retail market to competition. It laid the foundations for privatisation of state-owned industry, with an understanding that there would be full functional separation between generation, transmission, distribution and supply.
This whole market approach looked set to provide Turkey with a sound platform on which to privatise the industry, attracting good quality domestic and international investors. Since 2001 a great deal of work has been undertaken: first to flesh out the roles of the various institutions that will have a place in the new market structure; second, to complete the unbundling of TEAS envisaged in the Electricity Market Law; third, to establish Energy Market Regulatory Authority (EMRA); lastly and more generally, to establish a new market and regulatory framework. Many regulations and communiqués have been promulgated by EMRA and the difficult and complex process of unbundling the public sector industry is well underway. Some of these arrangements are described further below.
The proposed privatisation of the distribution companies will be the first major test of these new arrangements. TEDAS was responsible for the distribution and retail sale of power within Turkey. In the new market structure, TEDAS' distribution systems have been divided into 21 zones, each of which will be under the responsibility of a separate distribution company. Each distribution company is responsible for the operation and maintenance of its distribution system and has a monopoly on distribution of electricity within its designed geographic zone. They will be required to hold a distribution licence granted by EMRA. A distribution licence will have a term of between 10 and 49 years.
As in any complex privatisation, the policy framework has evolved and the Electricity Market Law has changed on many occasions since its introduction. This was perhaps inevitable. However for the Turkish government it means that much of the work previously undertaken will need to be reviewed in light of the changes, some of which are fundamental. For investors, it makes the due diligence exercise particularly important because some of the changes will have a significant impact on the economics of the distribution businesses. This will be even more critical if the changes are not followed through with detailed regulations, licences and other arrangements – both in regard to matters already established and those still to be worked out. The Privatisation Administration is the salesman in relation to the distribution companies. But it is not yet clear what the privatisation arrangements and contracts will achieve, other than merely disposing of the shares in the distribution companies.
The privatisation of three distribution companies started in 2006 but has since been put on hold. The three zones were the Asian side of Istanbul (AYEDAS), Ankara (Baskent Elektrik Das¦t¦m-BEDAS) and Sakarya Elektrik Dagitim. The government has, however, recently announced that it will continue with the privatisation of Sakarya and Baskent in a few months time. The planned sale of the distribution company on the Asian side of Istanbul has, on the other hand, been withdrawn from the initial privatisation list. According to the information provided by the Privatisation Administration, 24 companies pre-qualified for the Baskent Elektrik Das¦t¦m tender, while 30 pre-qualified for Sakarya Elektrik Das¦t¦m.
Electricity
All existing generation (excluding IPPs/BOT projects) is vested in EUAS. EUAS then on-sells all its power to TETAS (a state-owned wholesale company), which currently acts as a single wholesaler for the market. The existing BOT and BO power plants sell their generation directly to TETAS. At the outset therefore, all power will be purchased by TETAS as the wholesaler. TETAS will then sell wholesale power to the distribution companies under initial five-year vesting contracts. In the future, however, new generators will be able to sell to TETAS or bypass TETAS and sell their power to other wholesalers or directly to distribution companies.
The government has included a third of the state-owned generation facilities in the privatisation programme. Each generator requires a licence granted by EMRA. These generation licences can be issued for a maximum of 49 years and a minimum of 10 years. Each generation licensee may engage in the activities of construction and commissioning of generation facilities, electricity generation and sale of electricity and/or capacity to customers. They may be affiliated to distribution companies, but cannot have control over them. The total market share of any private generation company, together with its affiliates, may not exceed 20% of the total installed capacity of Turkey.
In a recent winning tender, Zorlu Enerji offered $510 million for nine power plants of Ankara Dosal Elektrik Üretim As with a total installed capacity of 141 MW. Consequently, the privatisation body will transfer the operating rights of Tercan, Kuzgun, Mercan, Skizdere, Çildir, Beyköy, Ataköy hydroelectricity power plant, and Denizli geothermal power plant to Zorlu Enerji for 30 years via the sale method. Zorlu Enerji expects to take over these plants sometime in June or July of this year.
Following the successful privatisation of small-scale power plants through transfer of operating rights, the government decided to investigate the privatisation of the remaining 46 power generation plants of EUAS. Those power plants where the private sector can improve generation capacities with small investments will be re-grouped and offered to private investors. This grouping method will expedite the process and will ensure that the plants do not work below their generation capacity.
National gas
Baskent Dosalgaz Dasitim As
The distribution of 3 billion cubic metres of natural gas in Ankara was formerly operated by EGO, the municipality body responsible for electricity, natural gas and transportation services. In September 2007, the Municipality of Ankara incorporated Baskent Dosalgaz As (Baskent – a private joint stock company whose shares are owned by the Municipality) and obtained a licence from EMRA to distribute natural gas in the capital, Ankara, for a period of 30 years. Then in December 2007 the Municipality of Ankara launched a sale process of Baskent. The Municipality offered its entire 100% stake in the company in a block sale, but the purchaser will have to offer 10% of the shares back to the Municipality without any payment for such shares in accordance with the Natural Gas Market Law.
On March 14 2008, Global Yat¦r¦m-Energaz (Energaz already has the right to distribute natural gas in 12 cities) won the Ankara gas utility tender by submitting the highest bid of $1.61 billion. This price was lower than the forecast of $3 billion. Global Yat¦r¦m recently announced that ABN Amro Infrastructure Capital Management Ltd has agreed to join the consortium formed by Global Yat¦r¦m and Energaz, with the aim of acquiring a 22.3% stake (maximum 30%).
The SGDAS deal
IGDAS obtained a distribution licence for Istanbul from EMRA in February 2007 for a period of 30 years. It currently has around 3.7 million subscribers. The privatisation process for IGDAS is expected to start shortly after the March 2009 local elections. The Municipality of Istanbul has not yet decided the number of shares that will be offered or the privatisation procedure. It may be that this will involve a full IPO. Meanwhile, the natural gas distribution company of the Izmit Municipality (Izgaz) will be privatised in the near/mid-future. The tender date is July 10 2008.
Petkim and petrochemicals
Petkim, the biggest petrochemicals company in Turkey, was incorporated in 1965 and was added to the privatisation portfolio in 1986. Currently, 38% of the shares are held by the public although 51% of the shares were due to be privatised in July 2007. The procedure for this is still pending as it was delayed by three administrative lawsuits for cancellation of the transaction. Two of the lawsuits are for the cancellation of the privatisation decisions of the Privatisation High Council and the Privatisation Administration, and one is for the cancellation of the sale transaction due to claims that Turcas is restricted from participating in any tenders. The courts rejected the claims and the privatisation is still being carried out. The claimants have lodged appeals in all cases; that is to say, the legal process is not yet complete. The final decision of the Council of State, the highest administrative court of Turkey, will determine the ultimate outcome.
Meanwhile, the Socar-Turcas-Injaz joint venture, which was awarded the Petkim tender, incorporated the project vehicle company on April 14 2008. The deadline for the transfer of the shares to the project vehicle has recently been extended from May 7 to May 30 2008.
State-controlled banks
Structural weaknesses in the state-controlled banks and the significant intervention of the government in their activities are believed to be two of the main reasons behind the financial crisis of 2001 in Turkey. Therefore the view that it is necessary to privatise state-controlled banks has gathered much support in recent years. Following a period of debate, the government appears to be determined to implement a dense programme of privatisation, including that of the state-owned banks, in the near future.
The Privatisation Law states that giving priority to the privatisation of state-controlled banks is one of the main principles of privatisation. In addition to the Privatisation Law, two other pieces of legislation relate to the privatisation of state-controlled banks in Turkey: (i) Law 4603 which has been adopted to ensure the restructuring of certain state-controlled banks – Türkiye Halk Bankas¦ As (Halkbank) and Türkiye Cumhuriyeti Ziraat Bankasi As (Ziraatbank) – so that these banks will be fully prepared for privatisation; and (ii) Türkiye Vak¦flar Bankas¦ TAO Law (Law 6219, the Vak¦fbank Law) relating to the incorporation of Türkiye Vak¦flar Bankas¦ TAO, as a result of which we understand that the privatisation of Vakifbank is not required to be made under the Privatisation Law. Supplementary Article 2 of the Vak¦fbank Law authorises the Council of Ministers to determine the procedures and principles applicable to the sale of all group A shares and group B shares that are held by the General Directorate of Foundations of Turkey in Vak¦fbank. The total sum of the group A shares is equal to 43.0023%, and the total sum of the group B shares is equal to 15.6362%, of the share capital of Vak¦fbank.
The state-controlled banks on the government's privatisation agenda are Halkbank, Vak¦fbank and Ziraatbank. It appears that Halkbank will be initially privatised and will be followed by Vak¦fbank and subsequently Ziraatbank.
Halkbank
Starting with a lengthy, strong industrialisation wave in Turkey during the 1960s, Halkbank was founded as the leading bank for small and medium enterprises. Halkbank, which sees progressive continuation in banking as its major business strategy, has 555 branch offices, 962 ATMs, 14 regional directorates, 20 private transaction centres and a foreign representative office. In addition, 24.98% of the share capital of Halkbank has already been offered to the public in May 2007.
The restructuring programme applied to Halkbank under Law 4603 (referred to above) appears to have given positive results, and Halkbank has managed to facilitate a much more dynamic and focused banking structure. Therefore Halkbank was included in the privatisation programme by the Privatisation High Board resolution dated February 5 2007 and numbered 2007/8. Currently, the Privatisation Administration holds 74.98% of the share capital of Halkbank.
Although the government had initially suggested that it sell 99.9% of the shares of Halkbank through a block sale method, this approach has been altered such that in May 2007 only 24.98% of the share capital of Halkbank was offered to public. Debate continues and uncertainties remain as to the privatisation method that will be adopted for the remaining 74.98% portion. According to recent press reports, though, adoption of a block sale method is a strong possibility.
Vakifbank
Vak¦fbank was founded in 1954 under the Vak¦fbank Law with the purpose of establishing a strong financial management mechanism for foundations and their incomes. Apart from its specialty in this area, Vak¦fbank is also active in institutional, commercial and personal banking.
In 2005, 25.18% of the share capital of Vak¦fbank was successfully offered to the public. The General Directorate of Foundations currently has a 58.45% shareholding and the Vak¦fbank Retirement Fund has a 16.1% shareholding. 25% of the share capital of Vak¦fbank is expected to be privatised. Given that 25.18% of Vak¦fbank has been publicly held since 2005, the expected privatisation of a further 25% will make Vak¦fbank a private sector bank, since more than 50% of its share capital will then be held by private entities. However in a recent interview with a business magazine, Bilal Karaman, the general manager of Vakifbank, stated that there was still no decision in favour of further privatisation of the bank and, whatever the market conditions, Vakifbank was not considering a second public offering.
Ziraatbank
Having commenced its operations in 1863, Ziraatbank was founded to provide essential funds to agriculture and has allocated a significant portion of its funds for this purpose. Today Ziraatbank has 1,137 national and nine foreign branch offices, three representative offices, 70 special transaction centres and employs 20,684 employees, which make it the most widespread Turkish banking services network. In 2006 Ziraatbank represented 14% of the Turkish banking sector, with its accumulation of assets amounting to TL72 billion ($55 billion) in total. Ziraatbank has been a significant force in the economic development of Turkey, providing financial assistance and support to merchants, businessmen, entrepreneurs and its major target audience, farmers.
State ownership of Ziraatbank is still considered important for the Turkish economy, and it is expected that the public offering will have a significant effect on the rationalisation of the management and business of the bank as a whole. The government plans to privatise a maximum of 49% of the shares of Ziraatbank. But given its size and widespread operations, even this portion should constitute a considerable challenge for investors. The public offering rates and timeframe have not yet been announced, but it appears from press reports that the privatisation of Ziraatbank will commence after 2010.
Bridges and highways
In addition to privatisation in the energy and banking sectors, the government also plans to privatise the two Bosphorus bridges and six highways in a tender package. This will transfer the operating rights of these facilities to the private sector for between 20 and 25 years. Transfer of operating rights method was also used in the privatisation of the airports. It is impossible to determine where the race for this tender is heading, but it is expected that the price is already set at between $5 billion and $6 billion. The required amendments to the legislation have been sent to parliament. Besides this package, another development that is exciting highway managers is the Supreme Planning Council (SPC) authorisation for the Gebze-Izmir highway project, which includes building a bridge over the bay. This project will be based on a BOT model and thus will encourage investors. It is expected that there will be a bid worth between $5 billion and $6 billion for this highway, which will be the first among the six that will be built with the SPC.
National Lottery
There is strong support for a project to privatise the state-owned lottery company, Milli Piyango. A subcommission formed by officials from Milli Piyango, the Privatisation Administration, the Finance Ministry and the Treasury is still working on the project details. The sale is expected to be launched this year and is projected to be completed by 2009. Therefore the winning company can expect to start operations in the beginning of 2010. The subcommission has not drawn up a privatisation strategy yet. However there are two options: (i) privatisation by revenue sharing; or (ii) transferring of operating rights with an advance payment method. If the government chooses to go with the transfer of operating rights, Milli Piyango will be transferred for a period of seven or 10 years.
Turk Telekom
Turkey's only fixed-line operator, Turk Telekom, is also the majority stakeholder in the GSM company AVEA. The government intends to finalise the IPO for Turk Telekom in 2008. The government will list 15% of the company's shares, pending an assessment of market and economic conditions, immediately before launching the IPO. In 2005, Oger Group bought 55% of Turk Telekom in a privatisation tender for $6.55 billion. The latest reports however indicate that the project may be shelved due to global economic conditions.
The process of privatisation in Turkey is well underway. With the recent amendments to the Privatisation Law, and support from the Turkish government, it is likely to gain speed in the next year. The scale of assets and income streams in the energy, transport and banking sectors are likely to attract the most foreign investment. But given the geographical size of Turkey and its economy's potential for growth, comparatively smaller investments in other areas such as telecommunications are also likely to yield significant interest.