An open letter to Dominique Strauss-Kahn and the IMF

Dear Mr. Strauss-Kahn,

Congratulations, for lack of a better word, on the recent intervention of the IMF in the Greek stability and growth programme. I am one of the small minority in this country who believe that without the IMF, the government will have neither the political will, nor the technical skills, to pass meaningful public sector reforms and gain control of its drastic debt situation.

In the many details of reforms that have been considered or adopted since this crisis began, I see that the most important one has not yet been raised: Parliamentary Immunity. As you are no doubt aware, all serving Members of Greek Parliament enjoy full immunity based on Articles 61 and 62 of the Constitution while the Parliament is in session (except in very narrow cases of criminal acts). You may not be aware that this immunity continues indefinitely after the end of a Parliamentary term unless the full Parliament votes in favour to waive it. In practice, this never occurs.

The result is that the major public sector corruption scandals since the restoration of democracy have for the most part never resulted in the single criminal conviction of a member of Parliament, or a single party official.

Contrasting this to France where for instance Charles Pasqua was just handed a 4 year sentence for bribery regarding arms sales to Africa, or Germany, where Helmut Kohl resigned over a funding scandal, and one can easily see the difference in the culture of public administration. This is not to say that France and Germany are perfect, but the differences with Greece are significant.

Regrettable, even with this current crisis, I do not believe the Greek Parliament will vote to change the constitution. It will be imperative, however, that the “troika” of the IMF, the European Central Bank and the European Commission devise ways of improving the transparency and accountability of the political system that has brought Greece—and the Eurozone—into this position.

This calls for a rigorous monitoring of all public sector expenditure, both on and off the central government balance sheet, and perhaps a condition that a technical team be stationed at the Ministry of Finance over the long term to assist with reforming the conditions of public procurement and disbursement. Alternatively, the financial loans granted should only be used for debt re-finance, rather than regular public sector expenditure, and the troika should use its power to name and shame examples of egregious or corrupt public sector expenditure.

I am afraid that the time for normal courtesies and protocols is over. The majority of Greek citizens are disgusted with the corrupt, ineffectual and nepotistic practises of our political parties and our public administration, but we are essentially powerless to change them. We only hope you will be able to succeed where we have failed.

Sincerely yours,

Philip Ammerman

Schinias Beach Cleanup: Sunday, April 25th 2010

In honour of Earth Day, the Friends of Schinias are participating in a cleaning of the National Forest of Marathon-Schinias on Sunday, April 25^th, 2010.

This event occurs within the framework of a wider volunteer initiative launched bv the Hellenic Ministry of Environment, Energy and Climate Change named Green Action – Clean Action volunteer campaign, and the National Park of Schinias-Marathon is one of the two regions in Greece chosen to pilot the campaign.

As a result, we hope for a high turnout on Sunday, to help clean areas of the forest which we have not been able to access before. We will be working with Elix, a company with long experience in volunteering activities, has been chosen by the Ministry to coordinate the event.

We will be meeting at 09:30-10:00 at the parking lot of the Olympic Rowing Centre, and will clean from 10:00 – 13:00. A picnic lunch will follow at 13:00.

Please remember to bring:

a. A hat and long-sleeve shirt or jacket and mosquito repellent

b. Water to drink

c. Food to contribute to the picnic, if you will participate.

We look forward to seeing you on Sunday, April 25^th!

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The OASA (Attiki Bus Network) is supporting the Schinias Beach Cleanup on Sunday, April 25th. It is providing buses with free transport for volunteers to and from the event.

Departures will occur between 09:00 – 10:00 to Schinias, and from 13:00 – 15:00 from Schinias back to Athens. There are two departure points:

· From Platanos Square in Kifissia (πλατεία Πλατάνου)

· From Doukissis Plakentias Metro Station in Halandri (Δουκ. Πλακεντίας)

For further information, please call the OASA call centre 185, or check their website

http://www.oasa.gr/index.asp?PAGEID=461

Mirages over the Corinthian Gulf

Our family vacation house sits on the northern shore of the Corinthian Gulf, about 20 km after the town of Galaxidi on the coastal road towards Nafpaktos. My parents bought a plot of land in 1976 or thereabouts, cleared it, and after great trouble, built a small, red tile-roofed house. Their dream was to have a house by the sea, and I remember the work we did, filling 40 liter plastic kanates by the village spring and bringing them by car to water the olive trees we had planted. Some 25 years later, those little spindly olive saplings that were whipped so mercilessly by the maestros wind have grown into large, green-silver trees that block the view the sea. But I still remember how we toiled to water them.

Nearly every day out here, we see 2- or 3-aircraft flights of the Hellenic Air Force, about 400 metres off the deck, practicing strike runs over the mountains. Aging A-7 Corsairs; Mirage 2000s, sometimes even F-16s. They streak up from the Corinthian Gulf, gain altitude to clear the peaks, and disappear somewhere to the north, towards Giona mountain.

Each time I see them, I stand a little taller. These are the flyboys on which the freedom of Greece literally depends. They hurtle through space on aging airframes, practicing for a day we hope will never come. They are paid a ridiculously low salary, put themselves at risk every time they strap a plane on their back, and are largely unrecognised by a society more concerned with the doings of Julia Alexandratou or Eleni Menegaki than by the real world.

Whenever the planes go by, I reflect as well on the meaning of patriotism, and the vast contrast between these men and women in uniform, and the politicians that purport to lead this country. I reflect on the party cadres from both PASOK and ND that have dealt with various weapons suppliers, and on the deals that have been made. I reflect on the fact that in Greece, our politicians have not just gotten kickbacks on weapons sales, but even on the issue of public debt to fund their purchase.

In the democracy we claim to have, I often wonder whether the chronic problem of political corruption and incompetence is a symptom or a cause. In other words, has the political class brought about a society where Eleni Menegaki’s divorce has become a dominant issue, or has this society created and tolerated a political class which reflects its true self?

In either case, a growing share of the population—particularly among those educated professionals that view the Greek government and its political elites as a source of Greece’s problems rather than its solution--do not have a real choice among political parties today. The tired slogans of PASOK or ND no longer conceal the moral bankruptcy of either party, or of the country itself. Fundamental questions, such as whether the state should be responsible for spending up to half of national GDP while Greece’s ranking in nearly every international benchmark continue to decline, are never asked, or never acted upon, by either major party.

Unless a fundamentally new political movement is started, we will be condemned to hearing the same rubbish and watching our economic position deteriorate, while social problems multiply. Such a movement should reflect and reinforce the fundamental values of the century we live in: transparency, mobility, volunteerism, entrepreneurship and involvement. It should be open to Greeks of the diaspora as well as citizens of other countries living in Greece. It should develop the tools needed for competitiveness and individual self-realisation in a globalised society. The politics of generational nepotism, of rural party barons delivering subsidies and government jobs, must be eliminated.

Perhaps this sounds unrealistic, or naïve. After all, who wants to go to the trouble of getting involved in Greek politics? I certainly don’t, and I can’t imagine many other people do either. But I see no other solution to the systemic problems that affect this country. If we take a systems analysis view of Greece, it’s clear that the problem starts with the political parties: how they are financed and governed; their impunity to prosecution while in Parliament; their inability to offer real solutions.

We are on the brink of national bankruptcy, which has been exacerbated by the fundamental, chronic inability of either political party to deal with the major social economic issues which count. We do not have Sweden for a neighbour, and where economic weakness leads us, the erosion of political sovereignty follows.

Rocket Science in Kharkhiv

The first time I visited Kharkhiv, an industrial city in north-eastern Ukraine, was on 8 March 2000. I was implementing a sales audit of JSC Obolon Brewery, Ukraine’s largest drinks group, and I spent the day visiting customers and the Obolon sales office and distribution centre. It was bitterly cold, snow covered the ground, and the season was definitely not suited for beer.

Coincidentally, it was International Women’s Day, the first of the new millennium. At the hotel we were staying, a grim block in the outskirts of Kharkhiv, the hotel restaurant was packed with young couples dancing and celebrating. For a tired consultant thinking of home, it was just about the last thing to deal with.

What I remember most about this trip occurred in the hotel room. One of the windows was either broken, or hadn’t been insulated properly, and it was cold. Too tired to go back down 12 floors to a reception that was otherwise occupied, I decided to tough it out. Waking up the next morning, after taking a shower and getting dressed, I went to put on my shoes, which I had left at the foot of the bed. As I reached down to take the first one, a little grey blur jumped out and disappeared somewhere under the bed. It was a mouse! A little grey Kharkhiv mouse had apparently taken shelter in my loafers for the night, and was most rudely awakened by their inconsiderate owner who needed to start work in the morning. I still remember that cold day in March 2000: another story from the road.

Since then, I’ve been to Kharkhiv twice more, once for customer interviews in 2004; once for a due diligence study for the Kharkhiv Tile Plant, Ukraine’s largest ceramic tile factory, in 2007. It’s a city I’ve never really had time to explore, so I was really looking forward to my trip this week. My consulting company, Navigator, started a due diligence and business plan for the CIS leader in ball and roller bearings.

The first thing I decided was that, unlike the last trips, I would stay in a good, city centre hotel. After consulting TripAdvisor, I chose the Chichikov Hotel, located on Gogol Street off the central boulevard. The Chichikov is named after the protagonist of Gogol’s ‘Dead Souls’, a story of wealth and self-discovery in 19^th Century Russia. Apparently a staple of Soviet education (I had never read the book, but all my Ukrainian colleagues had), this book was the inspiration for the hotel, which was excellent in every respect. Modern, understated and casual, with first-class furnishing and cuisine, and attentive, considerate service by every single staff member encountered, the Chichikov will be our hotel of choice in Kharkhiv in the years to come.

The second thing I decided is that even if the schedule would be hectic, I would take some time to walk through the city’s historical centre. And I was glad I did. Despite its vast industrial heritage, Kharkhiv is a university town, with over 5 major universities and polytechnics in various disciplines of science and engineering. You see groups of people talking in cafes or on the street, discussing in a quiet manner which is totally foreign to Kiev or other major cities. Kharkhiv has one of the highest per capita populations of PhD graduates, well above the Ukrainian and Russian average.

The cafes are glorious: small but elegant, with excellent coffee and food, at a very competitive price—less than half Kiev or Athens prices. It’s rare to find a good cafe in Kiev, where pretention is often confused with quality. In Kharkhiv, you see little jewels strung out along the main street or tucked into quiet alleys.

WiFi is free, and available everywhere. People walk the sidewalks, speaking into mobile phones or sit in cafes, reading their textbooks, or tapping away on laptops. There are also some fantastic jazz bars—I wasn’t able to visit any this trip, but in 2007 I stumbled upon a jazz trio which was simply sublime. Next time!

The city shows the typical development of Ukraine after 2000. Buildings have been renovated; designer stores have opened; the city centre has been improved to the extent the Municipality’s limited budget allows.

There are some problems: the roads are among the worse I’ve seen, particularly in the outskirts of the city. Living standards are still low: prices are low because the average per capita income is lower than Kiev. But there is a lot going on—new factories opening, buildings being renovated, new projects launched.

Another major discovery on this trip wasn’t the city itself, but the company I was working in. This company is part of a larger industrial conglomerate, which recently decided to centralise its research and development function, and invest in this area. They reasoned that only by increasing the ‘intellectual value’ of their products to over 50% of total value could they compete with lower-priced Asian imports.

This is the first Ukrainian company I’ve seen, after working here in over 20 leading CIS manufacturers, which has a serious industrial R&D function. With over 200 of Ukraine’s best and brightest engineers and scientists employed on a full-time or project basis (including former designers of the Soviet Union’s ICBMs), the conglomerate has established clear research priorities, budgets, projects and return-on-investment monitoring.

And their efforts have paid off. One of the first new products out the gate was a new rail bearing specifically designed for the harsh conditions of railroad transport in the former Soviet Union. Working with their major customers, the R&D group developed a duplex bearing unit which increases the rated lifecycle from 350,000 km to 800,000 km, and provides improved properties against friction heating and wear. This product included joint research with Western equipment providers, including some of Europe’s top names in the field. This product has been patented, and now being tested in major customers.

I was really impressed. The last time I had the privilege of working in a company with a strong R&D function was at ABB in Sweden 10 years ago. To see this level of engineering in Ukraine, in the face of challenging financial conditions and a competitive environment marked by declining profits, was inspiring. This is exactly what European manufactures need to be doing more of: investing in basic and applied research, with a clear link between customer needs, corporate strategy and R&D priorities.

So, it was a great trip. Apart from the necessity of transiting through Kiev, Kharkhiv is a great place to do business, and a great place to relax after work (in the remote case this might be possible). And I finally got to meet a genuine, bona fide rocket scientist.

George Papandreou’s Third Act of Political Theatre

Prime Minister George Papandreou, emboldened by the success of his campaign to portray Greece’s debt problems as a result of financial speculation, has launched the third act in his ongoing political theatre. This is his threat to turn to the IMF if the European Union or the Europgroup do not soon decide on a financial support mechanism at the March 25-26 meeting of EU leaders.

His first act came in November-December 2009, when upon taking office, he raised the estimate of public debt from about 6.7% before the October elections to 12.7%. This was done by adding certain costs relating to public healthcare expenditure. The mistake he made was not adding these debts, but:

a. The fact that he added some debts, but not all debts (there are at least another EUR 40-50 mln off the books), and

b. The fact that the primary motivation for this was not necessarily to resolve the debt issue, but to discredit the previous government, and

c. Miscalculating market reaction, as well as that of the European Union.

To put it bluntly, his essentially political tactic back-fired massively. The European Commission and the Eurogroup were more incensed that the National Statistics Service had been partially doctoring its statistics collection and reporting methods (though this was hardly new), and rapidly put Greece under intense financial supervision. Greek lending prices rose; Greece’s credit rating fell.

As a parenthesis, I will add that this is not necessarily a bad thing. Greece should pay more for its sovereign debt, since it has a far higher credit risk given its macroeconomic and fiscal situation, and clearly it is only the threat of external financial events which has finally prompted the government to act.

His second act of political theatre was to denounce the rise in interest rates as “financial speculation”. In doing so, he made it appear as if Greece’s low credit rating and high borrowing costs were somehow the result of “profiteers”, rather than Greece’s own debt mismanagement. Greece’s latest sovereign debt issues have been at rates of 6-7%, about 300 basis points above the German Bund. This is more than fair, given the fact that the government appears to have no idea what its actual public debt level actually is, or how it will repay it.

This act too appears to have succeeded. Papandreou received favourable hearings from Nicholas Sarkozy, Angela Merkel, Barack Obama, and others. He has not, of course, solved his primary goal (to access low-cost credit), or even his secondary goal (to somehow restrict financial derivatives, which are largely irrelevant to the situation). But it’s made for good press.

Now, he’s launched his third act. This involves threatening European political leaders that unless they come up with a financial support mechanism by March 25-26, he will turn to the IMF. This is perhaps a triple irony:

a. Why should the European leaders agree to a financial mechanism, when at every press conference Papandreou states that “we are not looking for financial help or a bail out?”

b. Why is a financial mechanism needed, when all that remains of the major debt refinancing tranche in April – May is EUR 10 bln, and Greece’s most recent issues have been 3-4 times over-subscribed (albeit at a higher interest rate)? There will be no problem at all to raise EUR 10 bln between now and mid-May.

c. Does he really understand what going to the IMF entails? So far, the government has not taken a single structural reform measure. It has undertaken cosmetic measures of partial salary reductions or bonus reductions. It has tinkered with the tax system. It has not fired a single useless public sector employee (of whom there are tens of thousands); it has not closed a single redundant public sector organisation. It has not jailed anyone for tax evasion; has not confiscated any property; has not razed a single illegal villa built on forest land; has not closed a single illegal nightclub or restaurant.

I am personally in favour of an IMF exit. I see this as the only change that a serious external organisation will force serious change upon Greece. Left to its own devices, neither this government, nor one lead by Papandreou’s former college room-mate, Antonis Samaras, will take meaningful structural reforms.

An IMF exit would enable a Greek government to blame yet another nefarious external bank, while hopefully taking serious measures to clear up its own mess.

I can only hope that the IMF will be involved for at least 5-10 years in Greece, and impose the harshest conditions possible. Unfortunately, it’s the only way forward, absent a debt default and expulsion from the Eurozone. It may also be the only way Papandreou can force through reforms in the face of determined opposition from his own party, and the usual craven tactics of the other political parties.

I seriously doubt George Papandreou has fully understood what he is about, but in the case of the IMF, let’s hope he continues on his current track. I will raise the first toast to him if he succeeds in alienating our European partners to the extent that the IMF is the only option left.

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 19^th and early 20^th 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.