TURKEY - The POAS & Tupras Privatisation Issues.

The privatisation of strategic state economic enterprises (SEEs) in Turkey as been a controversial process since the mid-1980s. In the case of petroleum-related SEEs, the main opponent of this process has been the petroleum workers union Petrol-Is.

After years of delay, a 51% majority in POAS was in July 2000 sold at $1.26 bn to a JV of Turkiye Is Bankasi, the second biggest banking group in Turkey, and Dogan Sirketler Grubu Holding, a leading but controversial media group which had branched into the electricity business in a big way. On March 10, 2000, the Competition Board approved the group's March 3, 2000, bid which was the highest. The bid price was in line with POAS' market value. POAS then held 44% of the Turkish oil market and ran a 4,500-site retail network in the country. But it was inefficient and grossly over-staffed as the firm employed about 3,800 people. As the 51% acquisition was concluded, the group hired Ertugrul Tuncer, then 60 and previously the CEO of BP in Turkey, to head POAS. He said even after privatisation politicians asked him if he could keep some staff on the payroll. The answer was a polite "no". Petrol-Is was the main lobbyist against the privatisation of POAS and its subsequent downsising.

Two-thirds of the staff were laid off, a move facilitated by a government decision to take 1,300 white collar employees to other state-owned firms. His predecessor had "60 to 70 advisers" on the POAS payroll. He was able to dismiss 1,230 blue-collar workers simply by paying them compensation totalling $20m. He added: "The corresponding savings on wages and salaries for the year was $40m, so the payback period was six months. It was a very smooth operation, without too much protest from the unions".

Apart from attracting a new team of professionals, Tuncer remodelled an "out-of-date" organisational structure to more closely resemble those of its multinational competitors such as BP, Turkey's second largest retailer after POAS. He split the company into two profit centres, one for fuels and one for lubricants, with shared services for both. It was thanks to that restructuring that POAS became more profitable and its market value rose. That was why OMV had to pay about $1 bn to get a 34% equity in POAS in March 2006. POAS then had about 35% of the fast-growing Turkish market. POAS and OMV are considering a new complex refining venture in Turkey (see above). OMV in 2004 bought the Romanian oil company Petrom, which is among the oil producers in Turkey (see omt18TurkFieldsApr28-08).

The sale of state assets is managed by the Privatisation Administration (PA) under the supervision of the Privatisation High Council (PHC), which is chaired by the prime minister (PM).

Privatisation was first adopted in the mid-1980s, under former premier Turgut Ozal, with sporadic offerings of equity in SEEs done either through block sales of shares, IPOs or a combination of the two. The process gathered steam in early 1995, after a law in November 1994 cut through legal issues blocking privatisation. But it was stalled again in the subsequent years. It was only after Bulent Ecevit took over as PM in 1999 that the state managed to speed up the process in 2000, with fuel prices raised as part of deregulation which was accelerated in early 2000. The second IPO of POAS took place in March 2002, when the PA sold another 16.5% stake - or 8.25 bn shares. The PA got $183m from the sale, which was perceived as an important test after the financial crisis in 2001 brought selling plans to a halt.

In contrast, the PA could only sell 34% of Tupras in 2000 through two IPOs. Efforts in 2002 by the PA to sell another 17% in the refining company, to give a private Tupras greater management freedom, were stalled. The AKP government in late 2003 decided to sell its whole 66% stake and in early 2004 judged Tatneft's $1.3 bn offer reasonable. Tatneft, of Russia's Tatarstan, had as a partner the local Zorlu company. But the Tatneft deal was annulled by court action in November 2004, with Petrol-Is leading the opponents of the sale (see down18TurkRefMay1-06).

On Sept. 2, 2005, the PA sold 51% of Tupras to a consortium led by the Turkish industrial conglomerate Koc Holding and including Shell for $4.14 bn. Other partners in that sale are Turkish firms Aygas (a Koc unit which is Turkey's biggest LPG distributor) and a Total unit. In February 2005, the PA had sold 14.76% of Tupras on the open market through the Istanbul stock exchange for $445m, which meant 65.76% of the company was sold. The Koc-led bid put the market value of Tupras at US$8.11 bn.

However, the petroleum workers union Petrol-Is contested the privatisation of Tupras and in early 2006 won a suspension of the deal, although the Koc-led JV had already paid the money and installed a new management at the refining company. In May 2006, the State Council (the highest court) upheld the sale which it regarded as being in the public interest.

Tupras has since adapted to radically changing market conditions. A phased removal of price controls had ended the obligation for retailers to buy 60% of their products locally. As a result, Tupras has sharply reduced costs in an effort to keep a high share of the Turkish oil market, which in 2006 was 78%.

Much depends on whether Tupras will be able to maintain good relations with its current customers, the largest of these being POAS. Tupras will also have to diversify out of oil refining. Already having a 130 MW of power generating capacity on its refinery sites, it could branch into the electricity business and into the import and distribution of natural gas - now that TEAS and Botas are losing their monopoly over power and gas.

Aygaz and Turkish car firm Tofas are promoting autogas use through a new dual-fuel injection car, the Fiat Albea. Aygaz and Tofas have developed the car for Turkey's taxi drivers or anyone else who would like to switch to a car run on LPG. Aygaz initiated the project in 2002 and then negotiated with Tofas until a deal was finalised in February 2006. Tofas produces and imports Fiat vehicles in Turkey.

Autogas is a tempting switch for Turkish motorists because it is still much cheaper than gasoline. The price differential has narrowed since 2005, when autogas was 48% cheaper than gasoline. Around 20-22% of Turkish cars run on autogas. Car promotion is important for Aygaz as LPG sales in the domestic sector face competition from natural gas. Increased use of autogas in cars would boost Aygaz's LPG business. Aygaz holds a 30% share of Turkey's retail LPG market and 20% of the autogas market (see down18TurkRefMay1-06).

Tupras has Turkey's four oil refineries and thus controls this sector. Tupras has implemented a modernisation programme at its refineries which has involved an investment of more than $2.3 bn. Before deregulation began in 1999, fuel prices in Turkey used to be heavily subsidised and demand for petroleum products was growing fast.

The Turkish downstream has attracted several Western majors in recent years. With BP in the lead, ExxonMobil, Total, Agip, ConocoPhillips and Chevron have been among those marketing oil products in Turkey. But Shell in 1998 sold its 27% stake in the ATAS plant, which was the only private refining venture in the country. Shell remains a big investor in Turkey's power sector and intends to spend heavily in the gas business (see Gas Market Trends 19).

In March 1998 Snam, the Italian gas utility part of ENI group, reached an agreement with Dogus Holding to jointly pursue gas-related projects including power generation and gas distribution. The move challenged the monopoly of Botas, the state-owned pipeline and distributor of gas which is to be privatised. Dogus has another JV in the power sector with a US company.