Privatization of Turk Telekom A.S. and the concession contract

By Tolga İşmen

It is a long-standing ambition of Turkey to privatize Turk Telekomunikasyon A.S. (“Turk Telekom”), her incumbent telecommunications operator and the crown jewel of the privatization portfolio of Turkey. The current AK Party government issued strong statements about its intention to privatize Turk Telekom before the end of 2004. On November 11, 2003, the Minister of Transportation, Mr. Binali Yildirim, made an announcement and stated that the tender for the sale of 51% (or more) of the shares of Turk Telekom will be issued before May 31, 2004. He also stated that the Government is preparing a draft law to amend the
Telecommunications Law and to increase 45% share ceiling currently available to potential foreign buyers. On November 13, 2003 the Council of Ministers reached the decision to commence the privatization of Turk Telekom.

Although the Privatization Law is the primary legislation regulating privatizations in Turkey, for Turk Telekom, certain provisions of the Telecommunications Law are directly related to the privatization of Turk Telekom. There are three main regulatory/administrative bodies that will execute the privatization of Turk Telekom: the Privatization Administration (the “PA”), the Telecommunications Board and the Competition Board. These three bodies issued several, secondary legislation that will also have significant impact on the privatization procedure.

The Telecommunications Law sets forth a special provision and states that the Council of Ministers will be the decision making body for the privatization of Turk Telekom. Council of Ministers should decide on the commencement of the privatization of Turk Telekom as well as its finalization. The Council of Ministers decided upon the resolution commencing the privatization of Turk Telekom and this decision is published on the Official Gazette dated December 12, 2003.

The main provisions of this decision are as follows:

a) valuation of all of the shares of Turk Telekom will be determined by the Valuation Committee and will be approved by the Council of Ministers during the course of the tender process but prior to the submission of bids;

b) at least 51 % of the shares of Turk Telekom will be sold;

c) tender announcement shall be published until May 31, 2004,

d) the amount of the shares to be offered by a public offering and timing of such public offering shall be determined after the finalization of the block sale and shall be approved by the Council of Ministers at a later stage.

The progress since the decision of the Council of Ministers was not promising. There are only two months left for the deadline of the announcement of the tender, but the PA does not have financial or legal advisors. The PA issued two tenders for the appointment of financial and legal advisors. The tender for the financial advisor was cancelled and the tender for the legal advisor was not finalized as of April 1, 2004. The delays in the appointment of the advisors were linked with the provisions of State Tender Law and they significantly decrease the chances of meeting the May 31, 2004 deadline for the announcement of the tender for the privatization of Turk Telekom.

The privatization of The Turk Telekom differs from other privatizations on one important aspect. Not only the income bur also the expenditures of Turk Telekom will directly and beauty effected by the regulatory environment. The telecommunications regulation in Turkey is a hybrid of the old and new regulatory regime of the EU. The Telecommunications Law and certain secondary legislation mirrored the telecommunications regulation of the EU prior to the 2003 Regulatory Framework. However, most of the recent secondary legislation issued by the Telecommunications Board is aimed to be incompliance with both the Telecommunications Law and EU Regulatory Framework. Most of the telecommunications services sector is not open to competition at the time of the preparation of these secondary legislation and still Therefore, it is not possible to envisage the manner of implementation of the provisions set forth in these secondary legislation.

It seems that the telecommunications regulation in Turkey, both the Telecommunications Law and the secondary legislation prepared with the assumption that Turk Telekom remains to be a state owned entity. There are numerous provisions in the legislation that are either unenforceable or meaningless in an environment in which Turk Telekom is a private company. Telecommunications regulation shall be reviewed in its entirety to become workable after the privatization of Turk Telekom. The Ministry of Transportation announced a draft Electronic Communications Law and this draft law replaces the Telecommunications Law in its entirety, except the provisions regarding the privatization of the Turk Telekom.

Turk Telekom, like other telecommunications operators, needs an authorization to render telecommunications services. Currently this authority is granted to Turk Telekom with special type of concession contracts, called the Responsibility Agreements. The Responsibility Agreement will remain valid until Turk Telekom ceased to be controlled by the state, in other words until the closing of the privatization. From that moment on Turk Telekom would need another type of authorization to render telecommunications services and this authorization will be in the form of a concession contract since it will involve allocation of scarce resources. Concession contracts are administrative contracts executed between an agency of the state and a private sector company for the provision of a public service. The draft concession contract should be send to the review of Danistay at least two months prior to closing for its review.

There are two major issues associated with the Concession Contract to be signed by Turk Telekom after its privatization. Will Turk Telekom need to pay a fee for the Concession Contract, and if yes how much? And second, pursuant to the Turkish administrative law, all equipment and premises used for provision of the related public service need to be transferred to the state at the end of a concession contract. Will this rule be applicable to Turk Telekom and if yes, can the public perception on the valuation of Turk Telekom coincide with the impact of this rule on the valuation?

Provisions regulating the fees for concession contracts or telecommunications licenses were not drafted taken into consideration the privatization of Turk Telekom. Therefore, in some aspects the relevant provisions of Article 2(d) and Additional Article 18 of the Telecommunications Law shall not be applied to Turk Telekom. However, after its privatization Turk Telekom will be just another telecommunications operator and thus subject to these provisions. If those provisions will be applied, a valuation committee should be established to determine the value of the concession contract and then the value determined by this committee should be approved by the Council of Ministers. The main issue on this matter will not be the procedural delays but the monetary impact of such fee. We believe that the Government would like to increase the purchase price of Turk Telekom as much as possible to obtain public support on its privatization and to achieve that all supplementary monetary obligations associated with Turk Telekom will be eliminated. However, trying to do so without amending the Telecommunications Law may not be possible.

Another important issue is the fact that a company rendering public services under a concession contract should transfer all the assets and the equipment back to the state without any consideration once the concession contract is terminated for any reason. The duration of the concession contracts shall not exceed 49 years but they may be renewed. This rule will have a significant impact on the valuation of Turk Telekom. In one way, the purchaser will not acquire the title of the assets of Turk Telekom, it can use them for the duration of the concession contract but it should transfer them back. It should also be noted that Turkcell is also subject to the same risk factor but this did not prevent it to be listed both to the New York Stock Exchange and the Istanbul Stock Exchange. Therefore, it can be assumed that international intuitional investors are familiar with this risk and may decide to take it again for Turk Telekom.