A hard slog for privatizations

The biggest sovereign debt restructuring in modern history has improved the sustainability of the Greek public debt and substantially reduced the chances of a euro exit. However, this may prove a fruitless exercise if the local economy does not get out of the doldrums. Privatization is one of the key tools to boost economic growth and do away with the default risk but results have been disappointing so far, fomenting concerns about the future.

About a year ago, the government has committed to the leaders of the European Union to raise 50 billion euros from privatization proceeds and real estate asset sales by 2015 in return for better lending terms, including a lower interest rate and extending the maturity of EU bilateral loans to Greece in the first bailout package. The 50-billion-euro figure was subsequently included in the country?s medium-term fiscal strategy plan.

Like some others, we argued at the time that the 50-billion-euro target was over-ambitious and would most likely not be attained. After all, Greece had managed to raise just 10 billion euros from privatization proceeds since 2000. How could it manage to raise 50 billion between 2011 and 2014? 

We also pointed out the high target figure was going to raise questions about the credibility of the economic adjustment program since market participants were simply not going to buy it.

Having said that, one must admit that the figure was conservative if we were to have taken seriously suggestions made by some in Greece that the country had sellable state assets worth some 300 billion euros or more. Obviously, the troika — the so-called EU, IMF and ECB — bought the argument.

As expected, Greece failed to meet the targets set for privatization proceeds in 2011, that is, raising 1.7 billion euros by end-September and 5 billion euros by year-end. It ended up with 1.7 billion euro for the whole of 2011, mainly thanks to the state-controlled OPAP lottery.

The country raised some 400 million euros from the sale of a 10 percent stake in OTE Telecoms to Deutsche Telekom, and some 850 million euros by extending the monopoly rights for 10 years by 2030 and giving the exclusive rights for the operation of VLTs to OPAP. It also got some 380 million euros from the extension of mobile phone licenses, while another 110 million euros came in from selling CO2 rights.

Ultimately, the troika realized that the 50-billion-euro privatization target amounted to a mission impossible for the 2011-2014 timespan, and revised it downward to 19 billion euros, of which some 3.5 billion euros should come in by the end of this year.

We should point out Portugal has already raised 60 percent of its 5-billion-euro privatization target from selling 40 percent of power grid operator REN to China State Grid and Oman Oil, and a 21 percent stake in utility EDP to state-owned China Three Gorges.

Although the 19 billion figure is much lower than the previous one, experts who are well aware of the tendering processes and the complexities characterizing some real estate and other assets are not optimistic at all. They are especially downbeat about 2013 and 2014, saying that Greece does not have enough sellable assets to meet the target.

Others argue that the country has been a laggard on the privatization front. They say it should have done more to sell equity stakes in listed companies such as the water supply and sewerage companies in Athens and Thessaloniki and the country?s main ports even if it meant prices would have been beaten down due to the prevailing unfavorable economic and market conditions.

They argue — and we think they are right — that Greece has to establish a track record in privatizations and this means accepting the fact that it may get less than wished for at the beginning.

However, most worrisome is something else. Experts see political motives camouflaged behind technocratic difficulties as the true reason for back loading the privatization of some listed companies like the water supply and port firms.

Given the objections of most Greek politicians currently in power and trade unions to privatizations, this is not surprising. After all, this is the reason a number of people question the commitment of the country?s political elite to privatizations.

Unfortunately, all of them have seen privatizations more as a form of filling the gap in the budget and cutting the public debt, and less as a means of increasing the economy?s efficiency and boosting potential GDP growth.

Of course, times are different now as the economic situation of the country is dire. But, privatizations can also attract private investments to boost the real economy in addition to making the public debt more sustainable and therefore hitting two birds with one stone.

However, there is a real risk the privatization program may go astray if the new government does not take steps to speed up the various processes and ignore politics. As a start it should try to lure Greek investment bankers from abroad and follow with a shake-up of the board of the Privatization Fund by removing all political appointees even though some know the job.