How Not To Sell Off The Ranch

For investors, Turkey has been a highflier this year. The Istanbul Stock Exchange composite index is up 77% in dollar terms, and with good reason: An export surge by companies taking advantage of Turkey's devalued lira has boosted corporate earnings an average 25% in 1995. Spending cuts imposed by Prime Minister Tansu Ciller in April, 1994, at the height of a Mexican-style financial meltdown have also begun to pay off. Inflation is down to 77% after hitting a numbing 156% early this year, while the economy is expected to grow 4% in 1995 after plunging 6% in 1994.

But continued progress hinges on the government's ability to carry through with promised structural reforms--especially privatizing the bloated state enterprises, which lost an estimated $2.5 billion in 1994. And there's the rub. Back in January, officials predicted privatization proceeds of $5 billion in 1995 from the sale of dozens of banks and companies in industries from tourism to mining. Instead, by June, just $216.5 million in deals had been completed, and officials had lowered their yearend revenue forecast to $2.7 billion--a number many still consider unrealistic.

FAMILY EMPIRE. To be sure, on July 19, the High Privatization Council signed off on the sale of state-owned dairy producer SEK. All but two of the company's 32 milk-processing plants, plus its familiar brand name, have been parceled out to private buyers for $75 million. Trouble is, the SEK sale was an exception in a privatization program riddled with scandal. "Rules and regulations about privatizations aren't being followed consistently," charges Sami Erol, managing director of Global Securities Inc., Turkey's largest brokerage. "And there still isn't enough transparency to discourage corruption."

A string of aborted or controversial sell-offs has resulted in widespread charges of mismanagement. Of 17 privatizations handled this year by the Privatization Administration (OIB), three have been canceled and seven are bogged down in litigation. In many cases, the deals folded during negotiations. It all proved too much for Can Yesilada, the third OIB chief in three years, who quit in April after criticizing Ciller for mishandling the sell-off process.

He may have a point. Many analysts cite the government's April decision to sell its 42.5% stake in steelmaker Metas to a company owned by the wealthy Uzan family as evidence that winning bids and political connections too often go hand in hand. Why the fuss? The Uzans--ethnic Bosnians who emigrated to Turkey in the 19th century--don't exactly have a reputation for building shareholder value. In 1993, the Turkish government sold them a majority stake in a state-owned utility, Cukurova Elektrik. By the middle of last year, regulators charge, the Uzans installed new, pliant management and put the utility's cash balances in interest-free accounts at Uzan-controlled banks. Cukurova's earnings plunged to just $200,000 last year, down from $59 million in 1992. The Uzans have declined to comment on the allegations.

BOTCHED DEALS. One angry shareholder: J. Mark Mobius, chief executive of Singapore-based Templeton Developing Markets Fund. "The government's bottom-line message to minority shareholders is you'll have to take your knocks and tough luck," says Mobius, who lost big after taking a 10% stake in Cukurova and who also holds stock in Metas. Metas was the ninth state company to wind up in the Uzans' hands.

Other deals were simply botched. In February, after critics accused Ciller of courting pro-Islamic votes by accepting an Islamic trade union's lowball offer for giant meat and fish processor EBK, she canceled the sale. And in April, the sale of tiremaker Petlas fell through when an Iranian buyer failed to come up with an advance payment on the $65 million asking price. Indeed, until the SEK deal, the $36 million sale of airport ground handler Havas in March was the only relatively smooth privatization of 1995.

Turkish privatization officials, stung by the uproar over the scandals, are now promising to make the flotation process more transparent. They had better hurry. New OIB boss Ufuk Soylemez says the state will sell 23 companies this year, including petrochemical maker Petkim and steel giant Erdemir. And Parliament has given the green light for the multibillion dollar sell-off next year of Turk Telekom--the nation's phone company. With national elections set for October, 1996, another batch of bungled sales could cost Ciller dearly. That's not much time to spread the welcome mat out for investors.

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