International Business : Telephone Co. Imbroglio Slows Privatization Efforts in Turkey

ISSUE: Riding a wave of interest in the emerging stock market here one of the world's hottest--Turkish officials are traveling the globe to sell foreign investors on the government's privatization program.

But even the most enthusiastic Turkish officials know that the true hard sell for the program must first occur at home--both on the principle of privatization and on the need to sell specific companies, such as Turkish Telecommunications. Conservatives are reluctant to sell to foreigners, although government officials say they can raise more money abroad.

Turkey, a nation of 60 million people at the crossroads of Europe and the Middle East, is a brawny, fast-growing American ally. It long ago embraced the idea that the privatization of state industries--which account for half of its economic output--is necessary for the country to modernize and thrive.

But the privatization program has faced several obstacles, including court and administrative delays and opposition from Parliament.

"We have to start running, not walking," said Can Yesilada, 43, a banker appointed to head Turkey's privatization program.

BACKGROUND: Public offerings of state assets have had an erratic history since they began in 1988. Sales of shares of Turkey's main airline caterer and five cement factories to foreign buyers ultimately succeeded. But not before delays caused by threats of legal actions to stop the deals and political infighting.

In the interim, investment bankers note that state companies lost value as their monopolies were rapidly being overtaken by competition from the private sector in some areas. And, where privatization was a novelty in the late 1980s, all of Europe is now awash with state assets for sale.

With Turkey's budget deficit growing dangerously close to more than 10% of gross national product, Prime Minister Tansu Ciller--faced with an inefficient state sector and its bloated debts and the cost of suppressing a Kurdish rebellion--has made no secret of her desperate need to raise money.

Privatization has raised only $450 million so far this year, well below the government's target.

Soon after coming to power in June, Ciller set her sights on the state's biggest cash cow: the telephone and telecommunications branch of the Turkish post office, the PTT. Estimates of the company's worth range between $10 billion and $25 billion.

But Ciller, when making her privatization plans, had not reckoned on her opponents in Parliament. A motley alliance of leftists, conservatives and Islamic fundamentalists successfully blocked her plans in court. And in mid-September, the constitutional court ruled that the decree authorizing the sale was illegal. "The government's policy to get rid of public enterprises quickly in order to cover the budget deficit has finally collided with the wall of law," said one parliamentary deputy, Mumtaz Soysal.

But others have their doubts. "Mrs. Ciller's mistake was to put all her eggs in the same basket--the telephone company. It became such an issue that the whole issue of privatization has suffered a setback," said Osman Ulagay, Turkey's leading financial columnist.

The government will probably concentrate now on other deals. Stakes in Turkish car makers, state banks and telecommunications manufacturers will go on the auction block, Yesilada said in an interview before Turkish officials were to make presentations to international fund managers in Boston and New York.

Similar pitches have been made in Europe.

STRATEGY: The easiest way to invest in the market is through the Turkish Investment Fund, traded on the New York Stock Exchange and run by Morgan Stanley Asset Management. By September's end, the stock price of the $68-million fund had risen 125% so far this year.

That was less than the exchange's 163% increase in the same period; taken over longer periods, however, the fund has often outperformed the exchange. Fund managers say they avoided speculative privatization stocks this year since owners face debts and bloated payrolls.

A move this month by the Turkish treasury to tax capital gains by foreign corporations--including the Turkish Investment Fund--may have a negative effect. Mutual funds and individuals are still exempt.

"If Turkey wants to have a successful privatization program, they should avoid making foreign investors subject to taxes," said the Turkish Investment Fund's manager, Peter Bennett.

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