Questioning privatization drive

Greece will be unable to meet its fiscal deficit targets as long as it views the public sector in general as the economy?s sacred cow and pursues economic policies leading to the crowding out of the private sector.

The privatization program could be a bright spot in helping fiscal adjustment but foremost in boosting competitiveness. However, some disturbing signals from the privatization front are already flashing.

There is no doubt Greece?s goal of raising 50 billion euros or 22 percent of the GDP by 2015 via the planned privatization and real estate property development program is ambitious and welcome.

The recent establishment of a National Wealth Fund to manage the process, having the consent of the two major political parties, is also a welcome development.

The program is also important because some 28 billion euros from privatization proceeds are included in the financing of the second rescue plan for the debt-ridden country till mid-2014.

Greece will have to raise some 1.7 billion euros from the privatization program by the end of September and 5 billion by the end of the year according to the medium-term fiscal strategy program.

For this year, the program included the sale of a 34 percent stake in OPAP betting agency, the sale of a 40 percent stake in Thessaloniki Water Utility (EYATH), the sale of 23.3 percent in Thessaloniki Port Authority (OLTH), the sale of 23.1 percent in Piraeus Port Authority (OLP) and the sale of a 34 percent stake in Hellenic Postbank (TT). Most of them are in the fourth quarter of the year with the exception of the two companies based in Thessaloniki.

The plan for 2011 also included the extension of the existing concession contract for the Athens International Airport, the extension of OPAP?s licence, the extension of mobile phone licenses and the sale of a 55 percent stake in DEPA (Public Gas Corporation).

With the Athens stock exchange plummeting some 20 percent in the first 20 days of this month, it did not take long for government officials to start leaking or openly saying they are considering delaying the sale of the stakes in the public-listed companies and replacing them with other privatizations.

Surprisingly enough, one thought was to bring forward the sale of a 35 percent stake in Hellenic Petroleum which is earmarked for sale in 2012 although it is a listed company as well.

Putting aside the Hellenic Petroleum case, one may argue that it makes sense for a government to want to delay the sale of stakes in listed companies when market prices are depressed even though no one can ensure that stock prices will be at much higher levels next year.

Moreover, very few seem to be paying attention to the fact that the proceeds will be used in the context of the Greek debt buyback program of the rescue plan.

With long-term Greek bond prices at depressed levels, it would be a good idea even if the money comes from the sale of equity stakes in state-controlled companies at depressed prices as well.

One may further argue that reducing the country?s debt burden may have more beneficial effect for the economy in the sense of helping gradually restore market confidence in its solvency.

However, the suspicion is that some government officials use the argument of low stock prices as an excuse not to touch well-entrenched vested interests and replace them with other assets whose sale will not be as politically damaging as those.

It is well known that OPAP is a cash cow that any government would like to control because it can put its money into good use from a social and political perspective.

So, what some pundits argue comes as no surprise. According to them, Greece will be able to meet the end-September target by relying on some 390 million euros from the earlier sale of a 10 percent stake in OTE telecom to Deutsche Telekom, another 200 to 300 million by extending the existing concession contract for the Athens International Airport with some 1 billion euros coming from OPAP via different forms, but not the sale of a 34 percent stake in the company.

In our view, this whole case comes down to a very simple question: Is the government willing to sell equity stakes in state-controlled companies in addition to receiving money from the extension of concession and other licenses, or is it making excuses not to do so?

The history of Greek privatizations in the last 20 years or so has been characterized more by the willingness of the governments in power to collect as much money as possible rather than anything else. Whatever economic gains ensued from such plans and the more efficient management of privatized companies were simply the outcome but the intended goal from the beginning.

The role of privatizations in fostering the competitiveness of the Greek economy has always come second to revenue collection.

With Greece?s public finances in such bad shape, one may rightly argue that the privatization proceeds will help reduce the state?s financing needs now or in the future. However, broader economic gains are more important than a few billion euros more at this stage in our view.