Nicholas Birch in Istanbul -

Turkey struggles to refine its privatisation efforts in the teeth of fierce opposition by various parties.

There is no doubt it has been a hugely embarrassing affair for Turkey's government.

In September of last year, Turkey's largest conglomerate Koc Holding, together with Royal Dutch/Shell, won a tender to buy the remaining 51% share in oil refiner Tupras for a very generous $4.14 billion. That very same day, a trade union went to court to oppose the privatisation.

For months, Koc trailed from bank to bank arranging credit to buy the refinery; the court said nothing. On receipt of a cheque, the Treasury handed control of the refinery to Koc; the court said nothing. Koc selected its new board of directors and gave its new staff half a month's salary as a bonus; still the court said nothing. Then, on February 2, some six months after the initial tender, the court orders a freeze on the sale.

What makes the court injunction all the more surprising is that it comes at the end of several years that most commentators had identified as a turning point for Turkish business.

A NEW GOVERNMENT, A NEW MOOD

Turkey's law on privatisation dates back to 1984, but even the country's improving relationship with the EU following the 1995 signing of a Customs Union wasn't enough to accelerate the slow drip of transfers from public to private ownership.

All that changed with the 2002 election victory of the Justice and Development Party, or AK Party.

Gone were the weak coalition governments where reformists and nationalists cancelled each other out in mutual recrimination. Here was a group of politicians as keen to streamline state expenditures as they were to encourage inward investment.

The statistics are every bit as exuberant as the new mood. For years, Turkey had been able to attract on average only $1 billion in foreign direct investment, or FDI, annually. Last year, FDI totalled nearly $10 billion, more than the last decade put together. The Institute of International Finance reckons Turkey should attract at least $11 billion this year.

The drab, 10-storey block in central Ankara that houses Turkey's Privatisation Administration (PA) has been the setting for a similar revolution.

Between 1985 and the economic crisis of 2001, privatisation sales had topped $1 billion on only two occasions.

Not surprisingly, the privatisation process in Turkey got a reputation for being “protracted, delayed and bungled,” says David Tonge, who's been watching Turkey's economy for two decades as managing director of the Istanbul-based IBS Research & Consulting.

However, with the arrival in 2003 of a new director at the PA, Metin Kilci, that reputation began to change. In 2004, revenues from privatisation were $1.3 billion, $8.2 billion in 2005, and $7.3 billion has been raised so far this year.

It's not just the $17 billion in total transactions that pleases Kilci, a former veteran of the country's central bank - he's also glad to have finally got rid of companies that had become symbolic of Turkey's previ- ous failures at privatisation. Turk Telekom, for instance, was finally sold off in June 2005 for $6.5 billion.

But just as it had in the 1980s when Turkey's government first tried to privatise Turk Telekom, the trade union Haber-Is again tried to block the sale, claiming it would result in the loss of jobs. This time, though, Turkey's top administrative court threw the case out.

For Atilla Yesilada, economics analyst and a partner for Eurosource, this latest in a series of pro-privatisation rulings was a sign that “Turkish courts had reversed a decade-long hostility towards the [privatisation] process.”

Then came the ruling from Danistay, the top rung of Turkey's many-layered system of administrative justice, to halt the sale of Tupras to Koc.

DOWN BUT NOT OUT

It wasn't until February 17, two weeks after the original injunction, that the court issued a written statement explaining its surprise decision.

By that time, following shortterm panic selling on the Istanbul Stock Exchange, sales of both Koc and Tupras shares had been suspended for five days. On February 6, Merrill Lynch cited the court case in its report downgrading Turkey from market weight to underweight.

The court's statement only added to the general confusion. The sale of Tupras was legal, the court declared, but the tender document breached privatisation law in its lack of guarantees for Tupras' future production and investments. That lack, the court concluded, represented a violation of “public interest.”

Analysts following the Tupras affair accept that the PA may have made minor procedural errors in the tender. Sources close to the privatisation process over the past two years note that bureaucrats involved have a typically Turkish tendency to select legal counsel on the basis of political connections rather than legal expertise. But Eser Karakas, columnist with Turkish business daily Referans and an economics professor at Istanbul's Bahcesehir University, has no doubt that the court's intervention is essentially political in nature.

“When the Turkish judiciary starts declaring that it knows 'public interest' better than the elected government, that means it has set itself up in political opposition,” he says.

Self-styled pillars of secularism, judges in Turkey have never disguised their distaste for the religious conservative party currently in power. Usually, their opposition takes the form of ever stricter restrictions on where women can wear headscarves. In this case, Karakas alleges, “the court reasoned it could push the AK Party to failure by drying its money flow up.”

Money from privatisations has played a crucial role in the decline of public sector borrowing requirements since 2003. Turkey's budget deficit was 9.4% in 2003, 4.7% in 2004 and just 0.9% last year, the lowest since 1970.

Korkmaz Ilkorur, a banking expert and board member of Turkey's biggest business association TUSIAD, is equally harsh in his criticism of the court, describing its reasoning as “pathetic.”

“So all these 'investments' were made while Tupras was still a public company, were they?” Ilkorur says, ironically. “That must be why Turkey today has to import refined petrol to meet its needs; that's why Turkey's border with Iraq is choked with tankers bringing petrol in, most of it supposedly contraband.”

Indeed, even with four refineries capable of refining around 25 million tonnes of oil a year, Tupras has been unable to keep up with growing demand, with its share of the domestic market falling to less than 65% in 2005 from 78% in 2000.

Beyond the outbursts of indignation from various quarters, the fundamental question remains:

what is going to happen to Tupras?

Will it be returned to the state or has the process reached the point of no return?

POSSESSION IS NINE-TENTHS OF THE LAW

On March 29, the privatisation agency decided to refer the problem to the Higher Privatisation Council, a body presided over by Prime Minister Recep Tayyip Erdogan, which has the final say on privatisation projects. Almost everyone expects the government to press on with trying to push the sale through.

In any case, Aydin Ayaydin, a former head of Turkey's Competition Board, thinks Koc's possession is nine-tenths of the law. “The Danistay injunction refers to a public company under public law, but Tupras was no longer a public company when the injunction was issued. This has become a case for company law,” Ayaydin says.

Precedent certainly seems to be on Koc's side. Similar Danistay injunctions against a series of privatisations between 1993 and 1996 came to nothing because the buyers' capital had already been transferred to Turkish state coffers. A second verdict from a lower Danistay court, which has previously rejected anti-privatisation cases, is due on April 25.

The real potential for trouble lies with the petroleum workers union Petrol-Is, which actually launched the case against the Tupras privatisation. Most Turkish trade unions were severely weakened by laws passed following the 1980 military coup, but Petrol-Is is known to be both well-funded and politically radical. Not content with the injunction from Danistay, Petrol-Is workers at several Tupras sites went on strike in February and March in an apparent effort to maintain pressure on a court whose will they suspected was wavering.

“We're not saying Turkey is a lawless country, but if the court now permits the sale to go through, the only law will be the law of the jungle,”

Ibrahim Dogangil, Petrol-Is head in the western city of Izmir, said at a February 20 demonstration.

Petrol-Is' secretary-general, Mustafa Oztaskin, has repeatedly expressed his intention to take the case all the way to the European Court of Human Rights if necessary.

That could mean 'noise' from the case continuing for another year at least, analysts warn. Oztaskin, though, is unlikely to be troubled over how long the case takes: his fight against the privatisation agency dates back to early 2004, when he successfully appealed against the sale of 65.8% of Tupras shares to a Russo-Turkish consortium for $1.3 billion. Metin Kilci of the PA now admits that that sale was “ill-prepared.

”But the union's real ascent into its present position as standard-bearer for Turkish-style economic nationalism only came in mid-2005, when the so-called “private placement affair” hit the headlines.

SMALL STAKE, BIG STINK

The sale in March 2005 of a smaller stake of 14.8% in Tupras to a consortium of five international buyers had all the elements craved by rumourmongers in the Turkish press: sophistication, secrecy and shades of malpractice. But it also came at a time when the ruling AK Party's reputation for probity (ak in Turkish means white or pure) was beginning to dim.

Objectively, the sale in March 2005 was a great success, fetching $446 million and leaving a controlling share for the government to sell at a later date. But voices were immediately raised criticising the sale procedure. Why did the PA hurry the sale through in such secrecy, failing to notify Turkey's capital markets in advance?

“This is not the sort of decision you take at midnight the night before, as the PA did,” says Yigit Bulut, a former banker who fronts a finance programme for the private TV channel CNN-Turk. He considers the sale to have been illegal.

The PA's choice of broker in the deal also did little to help its case.

The rise to prominence of the head of Istanbul-based Global Securities, Mehmet Kutman, coincided with the notoriously venal governments in the 1990s that were headed by a relative Mesut Yilmaz. Ignored by the previous administration, critics say, Kutman has been ever-present in privatisations organised by the AK Party government.

When the news broke last September that Koc Holding was offering US$4.14 billion for 51% of Tupras, privatisation opponents had a ready-made argument at hand.

Kutman and the PA had deliberately connived in lowering the price on the 14.8% private placement, they claimed. “In the space of less than half a year, [Kutman] quintupled his clients' investments,” raged the serious, secular daily Cumhuriyet.

Trade union leader Mustafa Oztaskin, meanwhile, filed charges against Kutman and PA chief Kilci for insider trading.

A REMINDER OF THE BAD OLD DAYS

A tired-looking Kilci brushes off the allegations. “Analysts at the time saw the price we got for the private placing as a miracle,” he says. “The Istanbul Stock Exchange did very well, most share prices increased. How could we know Tupras' value would gain so much over the following months?”

Tupras' shares rose 65% between January and September last year.

Mehmet Sami, vice-president of the investment bank Ata Invest, thinks the PA chief has put his finger on the real story behind the Tupras deal: what he calls “the extraordinary transformation of the Turkish market between 2004 and 2005.”

Back when the PA tried to sell Tupras in 2004, he points out, there were only two bidders. In the tender won by Koc, 13 pre-qualified bidders took part, with the winning bid coming at an 81% premium to the refiner's market capitalization.

The privatisation of steelmaker Erdemir attracted identical interest, driving up the sale price to a 79% premium to its market cap. In a much smaller deal, Star TV sold for 190% more than the starting price.

“This is a sellers' market such as Turkey has never seen before,”

Sami says, pointing out that privatisation and merger deals signed in 2005 brought in $38 billion, $21 billion of that in FDI. “2005 was a oneoff - I doubt we'll see anything like it again.”

Business columnist for the centrist daily Milliyet, Metin Munir agrees, saying that what makes the Tupras case so unfortunate is that it continues to remind the world “just how dangerous it is to do business with the Turkish state.”