Raising cash from the sale of public assets is a vital component of Greece’s economic stabilization and recovery plan–and one of the terms of the €130-billion bailout agreement with the European Union, European Central Bank, and International Monetary Fund. But even though the organizations and properties being offered for sale are quite attractive, Europe’s slide into economic crisis could mean Greece’s late start will make it miss its 2012 target.
Struggling under the weight of massive public debt and entering a fifth year of recession with an unemployment rate in the high teens, Greece’s economy has been brought to its knees. To make matters worse, foreign loans and the adoption of harsh austerity measures during the past two years have not seemed to help. Roughly 100,000 companies have gone out of business while the number of companies lining up for bankruptcy protection is growing. Those lucky enough to have jobs are constantly worrying about losing them, fuelling the uncertainty that is choking economic activity and feeding a vicious cycle.
One way to turn the economy around is through privatization. Greece has embarked on such a program with the aim of raising €50 billion by the end of 2015. Aside from being the largest privatization program in the world, according to the finance ministry, it is also the most ambitious the country has undertaken considering that Greece managed to net just €19 billion from state asset sales in the past two decades. The portfolio of assets to be sold over the next four years falls under three categories: real estate, infrastructure (including energy), and state entities (public utilities).
Greece managed to meet its privatization target for 2011, raising about €1.8 billion (€1.5 billion in cash and €0.3 billion in time payments), but this was a target revised downward from €5.5 billion. The first proceeds did not start trickling in before last June–twenty months after George Papandreou’s Panhellenic Socialist Movement (Pasok) won the elections, while the privatization agency, the Hellenic Republic Asset Development Fund (HRADF), began operating last August.
The delay in the privatization process can be attributed to several factors. “To start with, there is no free market ‘culture’ in Greece that would be receptive to privatization plans,” says Dr. Thanasis Stengos, professor of Economics at Canada’s University of Guelph.
“Even at the best of times when Olympic Air and the Port of Piraeus were privatized, there was a huge public backlash against these acts. All political parties paid only lip service to any attempt to get rid of unprofitable enterprises simply because no one really looked seriously at the costs of running these enterprises. I think the crisis has exposed this mentality and there is a growing awareness that costs cannot be ignored anymore,” he adds.
The sales realized in 2011 were the so-called easy ones. The first was the sale of a ten per cent stake in the Hellenic Telecommunications Organization (OTE) for €390 million to Deutsche Telekom, which already held thirty per cent of OTE’s shares and was the result of a put option agreed in 2008 and expiring in 2011.
The second sale was to gaming monopoly Opap (of which the state owns thirty-four per cent) for an extension of a concession agreement for an additional ten years to 2030 and the acquisition of a license for the operation of 35,000 Video Lottery Terminals (VLT’s) for a total of €849 million.
The third and final sale, as of the end of November, brought in €380 million for the acquisition of radio frequencies by the country’s three dominant mobile phone operators–Cosmote, Vodafone, and Wind Hellas.
Also in 2011, HRADF launched the tender for Hellenic State Lotteries. Speaking to the Greek daily Kathimerini, the agency’s CEO Costas Mitropoulos said he expected expressions of interest to be submitted by mid-December.
The tender for the development of Hellenikon, the site of the former Athens airport, was launched on December 8. Those interested will bid for the acquisition of a majority of the share capital of Hellenikon SA.Originally planned for September, the tender involves a tract of some 620 hectares along the capital’s southern coast to be developed for mixed residential, retail and commercial, and tourist use including a marina. Bids are expected by late March, with a decision by the end of 2012.
During the selection process, the government will also have to resolve the issue of environmental requirements for development and ownership rights, and according to press reports, it intends to do so in the first quarter. Actual work is not expected to begin before 2015, while the investor, together with the Greek state, will decide how the site will be redeveloped.
Five other tenders are expected to be announced by the end of January 2012. But unlike those completed, the privatizations ahead will be much more challenging since the government will have to attract investors and at the same time figure out a way to meet its targets without selling off assets at deeply discounted prices. Greece is also seeking foreign investment at a time when Europe’s economic climate is worsening–and its impact on the global economy is still unknown.
“This is an important problem that the current interim government and the government that will be elected will have to face. One way, if possible, is for the government to delay the sale of listed companies until the economic environment has improved,” Sotiris Papaioannou, Research Fellow at the Center of Planning and Economic Research (KEPE) says. “I think it’ll be easier to negotiate a more reasonable price if the government focuses first on non-listed companies.”
Stengos offers yet another approach: “The best and only viable strategy for privatization is to do a sequential off-loading of assets according to the structural needs of the economy. To that end, privatization of ports and parts of the railway system if done carefully could not only help to raise funds but also help improve competition in transportation and consequently the economy as a whole.”
Greece’s ability to meet its privatization targets is not just important in terms of raising much-needed funds but also important in terms of regaining credibility. “The first task of the new government is to restore confidence, which has been dealt a serious blow…Thus, the country must avoid any further delays or deviations from targets at all costs,” the Bank of Greece stated in its Interim Report on Monetary Policy 2011.
To do this, Greece must raise €9.3 billion through the sale of assets in 2012; €3.3 billion in the first quarter and €2 billion in each of the remaining three quarters. According to the draft budget Finance Minister Evangelos Venizelos presented to Parliament on November 18, assets marked for sale include the racetrack operator ODIE, or Hellenic Horse Racing Co., shares in the Hellenic State Lotteries and gaming organization Opap as well as various utlities.
The finance ministry has not specified what percentage of state holdings it plans to divest. Press reports stated it is likely the government will act in accordance with the targets set forth in the Medium-Term Fiscal Strategy (see table).
“Due to the current market conditions it may prove difficult to reach the privatization targets under the timeline described above; at the same time complying with these targets is critical in order to avoid that the Greek government falls short of the targets for fiscal consolidation,” the Task Force for Greece, created by the European Commission to assist Greece in implementing necessary reforms, stated in its first quarterly report released in November.
Ensuring that the privatization process does not turn into a simple fund-raising exercise is very important. Aside from reducing government debt through asset sales, the privatization program’s purpose is “to promote the business transformation of Greece, by encouraging improved business practices and higher investment,” the Task Force stated in its report. “In a word, to increase the competitiveness of the real economy in Greece.”
One way to boost competitiveness is through the reform of public enterprises since most are found in strategic sectors that the rest of the economy relies on, as the Organization for Economic Co-operation and Development (OECD) points out in its 2011 Economic Survey on Greece.
An example is the energy sector. According to the OECD, “The electricity sector is characterized by a high level of public ownership and vertical integration, inhibiting effective competition.”
The Greek State owns fifty-one per cent of the Public Power Corporation (PPC), the country’s dominant electricity producer. “Besides being a key market player, PPC also retains control over important access issues. In particular, PPC owns 49 per cent of HTSO–the Hellenic Transmission System Operator–and has ownership of the transmission and distribution networks. The incumbent also has exclusive rights to exploit and use low-cost lignite mines, which allows it to be profitable, despite relatively low prices,” the OECD said in its survey.
In mid-November, George Papaconstantinou, Minister of the Environment, Energy and Climate Change, told Parliament that he was in talks with the European Commission on opening the lignite coal-powered market to DEH’s competitors, granting a forty per cent market share to private investors. According to press reports, the deal would entail the sale of four lignite-powered units, energy swaps, and the sale of additional units should energy swaps fall short.
While a specific timeframe has not been announced regarding the privatization of the public power corporation DEH, the power company is included in the Medium Term Fiscal Strategy program for the period 2011-15. “The benefits in terms of competition and transparency could be larger, if deeper steps were taken regarding separating the operations (generation, transmission, and distribution) in the electricity and gas markets, as was recommended by previous Surveys,” the OECD stated.
The privatization of DEH has proved a headache for governments mostly due to its powerful trade union that often threatens with and carries out strikes, resulting in extended black-outs throughout the country. One example of the power DEH’s GENOP union wields, is when it shut down the power at DEH’s data processing headquarters in Athens for three days in November and blocked access to the building as a protest against a property levy being included on electricity bills, with the threat of households having their power cut off for nonpayment. GENOP has also staged building occupations and threatened to strike should the government proceed with the sale of power plants.
However, Greece has made more progress towards liberalizing the gas sector, the OECD acknowledged, since in 2010 more than ten per cent of the gas imported to Greece was provided by suppliers other than the Public Gas Corporation (DEPA). But, DEPA continues to dominate the market since it fully owns the transmission system operator DESFA, slated for sale this year.
DEPA, which is on the privatization list for 2012, and according to Mitropoulos should be privatized in the first quarter, is 65 per cent owned by the state. The remaining 35 per cent is held by Hellenic Petroleum (ELPE), also a state-owned enterprise up for sale. But this could be complicated by its involvement in the South Stream natural gas pipeline and its contracts with DEH.
Although the task at hand is a difficult one, Greece must succeed in completing its privatization program as a step toward reducing what the Bank of Greece has termed a “credibility deficit” and reviving the economy. Repeated delays in the past, not just of privatizations but of the reforms needed in preparation for the sale of state assets, should be a lesson that doing nothing does not mean the problem will go away. The current government and those that will follow must finally assume the associated political cost and move forward with the painful but much needed structural reforms.
But privatization is one way to economic recovery and goes hand-in-hand with other measures. Combating tax evasion, doing away with useless public sector entities, and shrinking a bloated public sector are also necessary steps that need to be taken.