The Greek privatization program has been a disappointment so far, characterized by large downward revisions in the revenue targets set by the representatives of the country’s official lenders. Weak demand for Greek assets coupled with institutional weaknesses and political foot-dragging have combined to delay privatizations. With more downward revisions in privatization receipts possible down the road, the authorities may have to take a second look at the process and stop viewing it as a tool to improve solvency but rather as a means to enhance productivity and economic growth.
Back in June 2011 the adjustment economic program agreed with the European Union, the International Monetary Fund and the European Central Bank projected proceeds from privatizations would reach 50 billion euros cumulatively in 2015. We, like others, had pointed out at the time that the target was completely out of reach and the product of wishful thinking by Greek and international policymakers. So the sharp downward revision of the goal to about 19 billion euros in the memorandum of understanding MoU in March 2012 came as no surprise.
The target was cut further in late 2102 to cumulative privatization revenues of less than 8 billion euros in 2015. The target for overall cumulative proceeds of 24 billion euros in 2020 specified in the troika program in March 2012 was revised downward to 22.3 billion euros earlier this year as it became evident Greece could not meet this year’s target of 3.56 billion and was scaled down to 1.3 billion euros.
Unfortunately, history teaches that the litany of downward revisions is likely to continue in the years to come, augmenting Greece’s financing needs accordingly in our view. The country raised some 10 billion euros from asset sales and the part-flotation of state-controlled companies on the Athens bourse during the 2000-08 period, when market conditions were much better. So it will likely take a turnaround in economic performance, a drastic change in perceptions about Greek debt sustainability, full market access and favorable international market conditions among others to approach the new target of 22.3 billion euros by the end of 2020. It is noted that the privatization deals signed so far amount to 4.9 billion euros in revenues over the 2011-14 period but less than 3 billion has been collected so far. In this regard and given the historical record, it is more realistic to expect cumulative proceeds to end up somewhere between 10 and 20 billion euros at best in 2020. Assuming the assumptions are right, this will create a financing gap of 2.3 to 12.3 billion euros from this source during the 2015-20 time span but it could be filled with domestic or/and foreign borrowing. The impact on debt sustainability will not be negligible, especially if it ends up at the upper end of the range, but should be manageable.
Therefore, the government and the lenders should take another look at the Greek privatization plan. In our view, they should accept the fact that privatizations cannot help much in improving the country’s solvency and revise the target for receipts to realistic levels. In doing so, the remaining bailout loans should not be linked to privatizations, at least as long as Greece has no full market access and cannot sell assets at a price which reflects the present value of projected income streams. This way the government would be able to counter accusations of fire sales demanded by the lenders so that their companies or others in their countries could buy the assets at very low prices.
More importantly, the authorities could redesign a number of privatizations and focus more on demanding higher investments within a reasonable time after the deal instead of a higher price upfront. This could help stimulate investments and prop up economic growth, which in turn could be more helpful in paying off debt. With the privatization of 14 regional airports in the final stage and the sale of the state’s majority stakes in the listed Piraeus Port Authority and Thessaloniki Port Authority to follow, this view should be taken into account. Francois Xavier Delenclos, an executive at APM Terminals of the Danish Maersk Group, which is interested in the ports, summed it up recently. “The Greek ports are choosing a partner for many decades to come. Therefore it is important that the ability and willingness to invest for the future is taken into account,” he said.
Of course, the political elite is generally speaking against privatizations and especially the transfer of full control to private interests because it is afraid this will loosen its grip on state-owned enterprises. This is correct and a good reason for privatizations not to take the form of selling minority stakes or the government holding a “golden share” in privatized assets. The privatizations should involve the transfer of control rights, both to do away with political influence and help the state extract the highest possible value from a deal.
Greece needs privatizations to boost productivity and efficiency and bring about transparency and fight corruption in some cases. This is done more easily when the focus is on investments rather than a high upfront price to help meet the privatization receipt targets. In this regard, the government and the lenders may have to overhaul the privatization program by setting more realistic revenue targets and promote investments. [Kathimerini English Edition]