EIB pours more money down the Greek Railway Drain

I was hit by a powerful sense of unreality in reading today’s announcement that the European Investment Bank allocated a EUR 2 bln loan for Greece, of which EUR 1 bln will be spent on rail investment. This including upgrading the Patras-Athens-Thessaloniki-Promahonas line, developing a railway node at Acharnes, a freight complex at Thriassio and a rail link to the Neo Ikonio Container Terminal at Pireaus.

It should be mentioned that OSE, the Hellenic Railways Organisation, has a debt of over EUR 9 bln. Its 2008 turnover of EUR 195 mln was far outstripped by its operating loss of EUR 794 bln.

I have not seen an investment plan, business plan or turn-around plan for OSE. The government claims it wants to sell 49% of the business, including the management, to a strategic investor. Unless the government takes over the debt, and backs the potential investor to reduce and replace staff, I fail to see who could possibly be interested, or how such a partial privatisation could work.

The fact that the government has recently been asked by the Troika to take OSE’s debt directly onto its balance sheet, rather than treating OSE like a special-purpose vehicle, only worsens Greece’s fiscal situation.

Unless this investment somehow translates into a major demand for passenger and cargo traffic between Pireaus, Patras and Thessaloniki, I do not see how it can possibly be justified on economic grounds:

· The high debt of OSE means that adding a further EUR 1 bln, for an investment project that will take at least 3 years to complete, and then will not easily result in a direct return on investment, simply seems irresponsible at this point in Greece’s development.

· If Greece is to take on more debt, it should target an annual ROI of at least 10-15% within the first 2-3 years. This means that the debt can be serviced quickly, the project can be implemented quickly, and the investment adds to national income, not national debt.

· Greece has not mastered multimodal transport hubs, and neither Pireaus nor Patras appear well-suited for such a hub involving a rail-road-port nexus. The fact that the major ports, with the exception of part of the Pireaus cargo terminal, are controlled by militant unions or unproductive state monopolies means that any development in these areas will be slow, expensive and uncertain.

· The terrain of Greece and the unstable geology along the northern shore of the Corinthian Gulf and the eastern coast of continental Greece means extremely high costs and technical risks, as well as recurring costs due to high maintenance and engineering costs.

· The presence of a national highway which is currently being upgraded, and the relatively short distances between the three cities, means that road transport is very competitive against rail. What alternative returns would have been gained by simply expanding the road network, or investing in road transport, which is in fact the objective of the 2 PPP contracts? Why split the potential ROI between two competing transport forms, and invest in double infrastructure (road and rail) along both routes?

I am also continually wondering why Greek and the EIB do not examine and back alternative, more productive investments?

· A EUR 1 bln investment in Patras, Corinth or alternate locations on the Corinthian Gulf, to create and integrated cargo and high speed ferries port as well as bonded warehouses, commercial zones and manufacturing sites similar to the Jebel Ali Free Trade Zone. Such an industrial, trade and transport hub would be much easier to reach from Athens, and can link directly to the Corinth-Athens-Thessaloniki national highways (which are already being upgraded through 2 PPP partnerships).

· A EUR 1 bln investment into Thessaloniki airport, creating a Balkan transport and cargo hub for the rapidly-growing Balkan countries plus Turkey, would enable Greece to compete against the regional hubs of Istanbul, Vienna and Munich. This would link into the Egnatia road, and hopefully into a modern port complex, which is sorely needed in northern Greece.

· A EUR 1 bln investment in renewable energy would bring far higher returns to Greece, both in terms of offsetting carbon emissions (for which Greece will soon be paying a financial penalty) as well as in terms of improving the trade deficit. Rather than importing oil at $ 80/bbl (or burning our high-sulfur coal), we would generate carbon-free energy.

· A EUR 1 bln investment in modern, large-scale agriculture using geothermal energy and modern greenhouse technology (which requires almost no pesticides or chemicals) would create a new export sector, improve the trade balance, and create many places of employment. Each 100,000 m² unit costs about EUR 20 mln, employs around 45 people, produces about 15 tonnes fruits and vegetables per day, and generates annual sales of about EUR 7-9 mln. This would literally revolutionise high-value agriculture in Greece, which could then be further valorised by investing in processing.

· A EUR 1 bln investment in a high-technology IT and energy incubator for entrepreneurs of any nationality who wanted to set up in Greece would lead to potentially world-class technologies which could transform the country in ways we cannot begin to imagine. While such an investment would have to be managed by several established sectoral VC firms operating under contract (of the caliber of Accel Partners, 3i, Kleiner Perkins, etc), this would show more than anything else that Greece is investing in the future, rather than in the hoary past of loss-making railway lines.

Instead, Greece continues to allocate scarce financial resources to a sector which is operated by a state-owned monopoly with impossibly high fixed costs and no competitive future. We expect OSE’s annual losses to continue, and see now way in which it’s debt can be repaid. Rather than privatising OSE, we should be liquidating large parts of it, and channeling any further financial resources into sectors with a greater future viability, far beyond the dead hand of the Greek state.

Related Links

First Steps in Consolidating Greek Debt: OSE/OASA

Thinking about Government II: The Role of OSE