Friday 18 February 2011

The Unrealistic Outlook for Greece’s EUR 50 Billion Privatisation Programme

The past seven days in Greece have been marked by the furor over a public disagreement between the Troika and the Greek government on the former’s suggestion that the latter embark on a EUR 50 billion privatisation programme as a means of gaining additional funds for debt reduction.

The controversy apparently originated with European Commission representative Servaas Deroose, who in interviews apparently suggested that Greece

"sell" beach-front land, listed publicly controlled enterprises like electricity utility Public Power Corp., and engage in a massive sell off program of state portfolio holdings and real estate to raise EUR50 billion from privatizations by the end of 2015. The effort is deemed as absolutely necessary to reduce the nations EUR 330.1 billion debt, according to Deroose's comments. (Greek Finance Minister Criticizes EU’s Asset Sale Comments. Dow Jones Newswires, 13.02.2011)

What was controversial was not only the timing and manner of the Troika’s announcement, which was widely interpreted as being in the imperial (or imperious) manner of giving orders, but also the scale and timing of the plan. The number “50 billion” took most people by surprise, although there is some evidence that the government had already agreed to this in prior discussions with the Troika.

The government reaction was swift. Prime Minister Papandreou called IMF President Dominique Strauss-Kahn to complain; strident statements were issued by the Government spokesman; a political uproar ensued among the political parties and media. On Tuesday, the Prime Minister, in an apparent fit of panic, announced the drafting of a law to eliminate all sales of public land or assets to the private sector without an Act of Parliament. 

Most observers in Greece and elsewhere were probably caught by surprise by the scale of the hostile reaction. After all, the government itself has already committed itself, on 2 June 2010, to an aggressive privatisation plan with an approximate value of EUR 7 bln (available on the Hellenic Ministry of Finance’s website). This plan includes a mix of listings (IPOs), minority share sales, leases, and public-private partnerships involving the following organisations:

·         Agricultural Bank of Greece
·         Airports, Ports and OSE
·         Sewerage and Water Companies
·         Energy Companies, including DEH, DEPA and ELPE
·         Telecommunications (OTE)
·         Games (OPAP, Casinos)
·         Real Estate holdings by KED, OSE and Olympic Properties.

The actual situation, however, is far more complex. One could summarise the shocked reaction of the government due to the following, pervasive political sensitivities, which should not be ignored or underestimated:

a.       The government’s privatisation programme does not include outright, majority share or asset sales as a main policy objective. Instead, it relies on a mix of instruments which are designed to retain public control over the asset in question. For instance, the public shareholding of TrainOSE will remain at 51%; 49% will be sold to a strategic investor. The public shareholding in the Public Power Company (DEH) will remain at 51%, but wholesale and retail markets will be “opened”. This reflects a core political belief within PASOK that the state must continue to play a dominant role in the ownership of what it calls public goods. It is also the reason why, under its current form, it is highly unlikely a privatisation effort will succeed (more on this later).

b.      The public reaction to asset sales to the private sector brings with it the spectre of corruption. The Vatopedi scandal, in which a monastery in northern Greece managed to exchange almost worthless marshland into a portfolio of public property which by most estimates was valued at over EUR 200 million is an ongoing scandal in Greece, for which no criminal or civil responsibility has been assigned (the legal investigation is theoretically ongoing, but has been politicised by the Parliamentary inquiry into the affair).

c.       Even the partial privatisation of state-owned enterprises like the Public Power Company or the Agricultural Bank of Greece comprise a major political risk for the government. Labour unions such as GENOP (part of DEH) retain very real political influence, particularly within PASOK, and are no strangers to militant action. These unions have been well-trained and deployed in drastic opposition tactics by PASOK against the Karamanlis and Mitsotakis governments, and now have no compunction about using these same tactics against PASOK. The highway blockades mounted by farmers and truckers, the public transport strikes and the current strike by DEH are all indications of this. While any one privatisation would be expected to create significant social tension, PASOK’s privatisation plan calls for the partial sale or liberalisation of no less than 16 major entities. This is a recipe for political disaster, to put things mildly.

For this reason, I believe that on the one hand, the government has made a series of critical mistakes in its privatisation and liberalisation policy. But on the other hand, it is nearly inconceivable that Greece will manage to sell (or “exploit”) EUR 50 billion in the next five years. My reasons are the following:

Government (Regulatory) Side

·         The political risk to proceeding with partial privatisation of DEH, let alone 15 other entities, is massive. I believe that PASOK’s chances of successful implementation in the face of political opposition will be less than 15%, while its chances of actually devising an attractive and sustainable investment plan for these entities are close to zero.

·         The terms of investment are fundamentally unattractive. No investor in their right mind will purchase 49% of a state organisation, leaving the remaining 51% in the hands of an unstable government which is reluctant to face down militant, left-wing unions. PASOK would be better off examining outright liquidation or a 100% sale, but this is politically impossible for them to contemplate.

·         The requirement for Act of Parliament to approve transfer or partial privatisation is an act of investor genocide, to put it mildly. No responsible investor is going to put the success or failure of their investment in the hands of a parliamentary vote. This will be a future disincentive to investors as well, since we can assume that political turbulence will increase in the future, and that eventually a consortium government may come into being.

·         Poor planning and prioritisation. So far, the government has not come up with a convincing plan for privatisation and liberalisation. Its moves have been dictated by the Troika and, to a greater extent, by internal resistance. The failed Astakos deal is indicative of the lack of strategic planning in national investment policy; the delays in the Hellenikon investment are indicative of the difficulties in gaining investor confidence given unrealistic valuations and competing and incoherent investment objectives.

Market (Demand) Side

·         The greatest threat on the market side is, quite simply, the lack of trust by international investors. So many have been “burned” by fickle Greek policy in the past decade that it will take more than a nice policy paper to make serious money sit down with the government. The recent “I won’t pay” initiative, which saw drivers going through toll gates (owned by Vinci or Grupo ACS) without paying, and without any substantial reaction by the government, is a case in point. Other black marks include

§         the regular closure of ports, highways and border crossings by any number of special interest groups (truckers, farmers, dockworkers)

§         the attempt, in October – December 2009, by the new PASOK government to renegotiate the COSCO deal

§         the lack of any continuity in government policy and planning between administrations of different ideologies

§         the lack of a clear investment regime, and the ability of entities like the Council of State’s recent decision against the “Integrated Tourism Resort” concept and the impact on major investments like Costa Navarino

§         the constant sniping and harassment by left-wing deputies and unionists, and their apparent legal immunity even when committing gross misdemeanors and crimes.

·         The second greatest threat on the market side is the economic recession and, more seriously, the impending default by the Greek government. No serious economic observer believes that Greece can survive without a default: the longer Greece and the European Union take to reach a realistic settlement on Greek debt, the longer investors will take to commit themselves. The current economic climate favours waiting until the recession and default push asset values down still further. Time favours the investor.
·         The third greatest threat on the market side is the fact that Greece does not have any visible competitive advantages against other investment destinations. A competitive advantage is one which enables a supplier to generate superior profitability against competing suppliers in the same segment. If anything, Greece is losing competitive advantage:

§         Labour costs are higher than competing countries; more importantly, social security costs (payroll taxes) are absurdly high;

§         There is practically no connection between the education system and the workforce. This creates major distortions and the need for expensive re-training for either academic or vocational disciplines;

§         Government regulation is often neither logical nor not well adapted to the 21st Century economy. Government services rarely provide value-adding services: there is an authorisation-based public sector culture which creates long delays, provides a means of collecting bribes, and constitutes an important human resource burden and financial expense for companies;

§         The government dominates certain economic fields and does not permit real competition in others; 

§         The judiciary and legal system is in a shambles. It is practically impossible to enforce a contract without high costs and long delays (often lasting several years);

§         The cost of capital is high given the financial crisis affecting the country;

§         The system of public subsidies has created overcapacity in nearly every sector: pricing power has been destroyed;

§         Domestic demand is falling as the third year of the recession takes hold and households are hit by declining credit availability and surging unemployment;

Credit Side

All other points aside, a further major threat is the lack of international capital, and the lack of real marketable assets in Greece. The total value of government holdings in listed companies is probably less than EUR 10 bln at current valuations, while the value of government land, though high in book value, will be extremely difficult to realise given the global oversupply of commercial and residential real estate. The Financial Times reports that, according to DTZ, outstanding debt of global commercial real estate is valued at $ 6.8 trillion, of which $ 2.4 trillion matures in the next 2 years. (Property: Overarching Problems. Financial Times, 26.01.2011). Approximately one-third of commercial property is currently valued at less than its mortgage value.

A range of other factors will contribute to hesitant capital flows into Greece, including:

·         Political instability in the Gulf Region. A major focus of the Greek government’s investment drive has been on getting Qatari and other investors from the Gulf to invest in Greece. With Bahrain currently in upheaval, Dubai in the process of debt restructuring, and major uncertainty regarding Iran, it is likely that Gulf capital will seek safe havens in Switzerland or the United States rather than in a high-risk country like Greece.

·         European bank capital ratios are much less robust than one would expect. The continual and impending exposure to Irish and Spanish banks as well as Greek government bonds definitely puts a damper on enthusiasm for major investments in Greece, even in the private sector.

·         Other exogenous factors, such as a potential slow-down of China, rising oil prices, and sector shocks in the United States may materialise in 2011-2015.

In short, it is extremely difficult to see where the finance for a EUR 50 billion privatisation drive in Greece would come from, even if the political will and the investor interest were present. With the government apparently eager to put as many obstacles to foreign investment as possible, and with the looming debt restructuring still to resolve, I do not believe this target will materialise. This is not to say it is not a praiseworthy target: I support it implicitly, although I would expect it might take 10 years to deliver, i.e. to 2020, rather than 5.

But we should be aware of the realities surrounding decision-making and implementation in Greece. Since these have not fundamentally changed to favour rational, effective governance, it means that delivering on a EUR 50 billion privatisation programme by 2015 will be extremely difficult, if not impossible, to achieve.

© Philip Ammerman, 2010
Navigator Consulting Group

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