Friday 19 March 2010

Thinking about Government II – The Role of OSE

To illustrate my earlier post on government, I have a few examples of government operations from Greece. Greece has over 1,800 government organisations or entities in which the government exercises a direct or indirect controlling share. I will focus on the Hellenic Railways Organisation (OSE), as an example of the most egregious such entity.

OSE is a state-owned organisation which includes three major holdings:

a. EDISE – management of rail infrastructure

b. Erga OSE – project development

c. Gaia OSE – buildings and commercial centres

A fourth subsidiary, TrainOSE, was transferred out of the OSE holding structure and spun-off as a 100% government-owned, independent entity, for provision of transport services (drivers, conductors, scheduling, etc.)

The company employs 1,800 full-time staff (including TrainOSE employees, who have since been transferred), and is responsible for running both suburban and inter-city rail services. OSE does not include the Attika or Thessaloniki metros, which are separate organisations. It does include the Athens Suburban Rail (Proastiakos).

Some basic financial dimensions:

· In its 2008 Annual Report, OSE claims total debts of EUR 8.04 bln. Of this debt, EUR 964 mln was borrowed in 2008.

· Total turnover in 2008 was EUR 195.6 mln, as opposed to EUR 116.2 mln in 2007.

· Annual losses in 2008 were EUR 794,6 mln, compared to EUR 950.3 mln in 2007. This reduction in losses is not a result of better operating results, but due to the “sale” (or transfer) of TrainOSE to the government.

· Total payroll costs were EUR 274.2 mln in 2008, nearly EUR 90 mln higher than sales.

· The company estimates its fixed asset value at EUR 12.6 bln. Of this asset value, however, the majority concerns rail lines, equipment and technical infrastructure.

· OSE is owed over EUR 500 mln in VAT returns from the government.

· The company is committed to investing a further EUR 9.3 bln in the period 2008-2017, for track upgrades and expansion.

In 2008, the company changed its Board of Directors and President four times.

According to its 2008 Annual Report, OSE objective is to have satistfied citizens, either as passengers or as commercial clients; to achieve a better image in international markets, and to contribute as a productive factor to the commercial, industrial, processing, and tourist development of Greece.

OSE’s further objectives are:

· The direct and indirect creation of new jobs

· The attraction of new investors in the fields of logistics, transport, port expansion, movement of goods, etc.

· The freeing up of transport capacity on the national road network through the reduction of trucks on the road

· To contribute to the environment, given that rail transport comprises the most economic and the most ecological form of transport for passengers and goods.

In reading the Annual Report, I can’t help but be struck by a powerful sense of unreality. OSE has over EUR 8 bln in debt, which grows by about EUR 400-900 mln per year in new borrowing. In 2008, its sales accounted for EUR 195 mln; its losses were EUR 795 mln. Financial expenses alone (debt service) amounted to EUR 428 mln). Payroll costs are far higher than annual sales. The company is bleeding money: no amount of restructuring is going to be sufficient to change the situation.

Not a single objective mentioned in the OSE report has to do with reaching economic self-sufficiency. Perhaps the Board and President of OSE have already determined that this is impossible, in which case the only option left is to decide some nebulous goals which have little bearing on reality.

A further danger is the fact that, according to the findings reporting by a Commission set up by the Ministry of Finance, although OSE’s EUR 8 bln debt is guaranteed by the government, it has not been added to the government balance sheet.

Asset sales and/or privatisation will probably not be enough to recoup the EUR 8 bln loss. Although there is a high asset value, little can be sold off separate from the technical assets and rail lines.

My questions for the Greek government are the following:

1. Do we need a national railways organisation?

In the 19th and early 20th centuries, the expansion of the rail network was considered to be a strategic asset for economic and military purposes. However, this experience accrued mainly from countries such as Germany, Russia, France and England, where the geographic, urban and industrial conditions were far different from Greece today. What is the strategic value of a national railways organisation today? Given the amount of money this is costing, are there no better means of realising this strategic value?

2. The privatisation option

Privatisation in the rail industry has been catastrophic, as the examples of the UK indicate, but there may be other examples where the damage has been less in financial terms. The government claims it is studying seriously the option of privatisation, and in particular the attraction of a strategic investor for OSE. If the government is considering privatisation, what provisions and guarantees will it make to ensure that after 4-5 years, it will not have to step in to bail out the investor? Can it split up OSE so that some lines, e.g. the Suburban rail line, will be sold separately (and have a higher chance of economic survival?)

3. Throwing good money after bad

How can the government justify, on economic terms, investing a further EUR 9 bln in OSE, when OSE already owes EUR 8 bln+? What will the financial impact of this investment be on OSE’s accounts? Why is it not mentioned in the 2008 Annual Report? Does the government still have the money, given its enormous debt, to make this investment?

4. The better transport argument

If a strategic argument for keeping OSE alive is to have more environmentally-friendly transport, or less-congested roads, what are the economic costs of the alternatives? How many trucks and passengers does OSE transport per year, and what is the net environmental benefit of transporting this number by rail as opposed by private or public transport? How many pubic busses could we buy for EUR 964 mln per year? How many trees could we plant? How many solar power installations or wind farms could we build?

5. The places of employment argument

If OSE has 1,800 employees, then one measure of the total cost of their employment in capital terms is EUR 535,556 per year. (Debt issued in 2008 / # employees). This is, by any objective measure, far too high, and given OSE’s debt needs, will rise every year. It would be much cheaper to pay them to stay home.

My assessment is the following:

a. Greece has copied a model of industrial development from the early 1900s, ignoring the economic and geographic realities of the country.

b. Successive administrations have packed the organisation with political appointees, and launched grand investment programmes, for political and personal benefit in the form of bribes, kickbacks or other benefits.

c. The “strategic” value of OSE is not even zero: it is a huge liability in public finance, which will have to be paid by the Greek taxpayer, who has had absolutely no part in the decision-making concerning this “organisation”.

d. There are similarly no alternative sources of value given the costs involved: not in terms of environment, nor of employment, nor of transport.

e. The fact that the government has not declared the liabilities of OSE on its total debt is yet another example of financial manipulation.

f. Even assuming that a privatisation results in EUR 1 bln of income (which it won’t with the financial indicators already seen), at least EUR 7 bln in debt will have to be transferred to the government.

It would be far better to close this organisation immediately and sell off its assets, which will have a higher value as real estate than as railway plant or equipment. The Proastiakos can be sold separately or even converted to a dedicated bus line run by someone else. Other rail links can be sold or converted to road transport, real estate or other use.

The Greek government (of any political affiliation) cannot run a railroad: it can’t even build sidewalks or roads properly. To pretend otherwise is a gross distortion of reality.


  1. the three acts you've mentioned took place after the elections.

    what about the numerous acts before the elections.

    - he knew about all the deficit since mr. Provopoulos had told both Karamanlis AND Papandreoy the economic situation in Greece.

    - What about the famous (or infamous, depends how you look at it) "there is money"

    Didn't he know about the monies which were stolen from the Greek public, by various PASOK members (obvious example: Tsoukatos) and therefore we (the people) would have to pay up for the various Villas and the "famous weddings" at 4 Season's Paris France?

    After all he WAS MINISTER of foreign affairs that time...

    If he knew and didn't say it this is withholding the truth from the Greek Public.

    If he didn't know at all, he wasn't good enough to undertake the position of Greek Prime Minister.

    Neither PASOK nor Nea Democratia can rule any longer. There are corrupted parties and should fold.

    In Greece there is a desperate need for an honest party regardless its political ideology (being to the "right" or "left").

    Because the other real alternative at the moment is the Communist Party (KKE).

    Thx for your time (and space :))

    ps: I will repost your article at

  2. Ari, thanks for your comment!

    I agree fully that endemic corruption and mismanagement has occurred in both PASOK and ND administrations, dating back at least to 1981, and clearly before that as well.

    I also feel that George Papandreou must have been aware of what was going on, both with the Tsoukatos example, but also so many others: Tsochadzopoulos (the "wedding"), the Koskotas affair, etc.

    The question right now is: will he be able to implement (a) some "reforms" and (b) the "right" "reforms".

    The OECD estimates that every year, Greece loses at least EUR 28 bln in tax revenue that it should have collected.

    The total revenue impact in terms of cost savings that the Stability & Growth Plans I & II have gained (if they are implemented) will be about EUR 3-4 bln in the best case scenario.

    Cutting salaries and "epidomata" is an easy target. Reducing tax evasion should also be easy-it's just a little bit harder, and requires real political will.

    The solution isn't to cut salaries blindly: it's to cut the numbers of civil servants; get better services by migrating many basic things online; reward productivity in the public sector; make real examples of corrupt officials, e.g. Customs, Eforia; etc.

    I don't see how we can even talk about "compensation reform" in the public sector when so many teachers and employees with less than 10 years experience are earning about EUR 1,200 per month. This is a joke: it's below the poverty line.

    And here's another mystery: both Papandreou and Karamanlis had TREMENDOUS public support after their first election. Why aren't they using it to go after the real problems?

    Why not just appoint 30-40% of their ministers and cadres from outside their party, or outside the senior ranks of their party, if they can't get the job with their "barons?"

    It seems that we are on a railway carriage without a locomotive, heading straight for a cliff. Instead of stopping the carriage, our government (and opposition) are arguing about what colour we should paint the carriage, whether we should re-upholster the seats, how tall the cliff is.