Greece has been missing the targets for privatization revenues ever since it first sought a bailout from the eurozone and the International Monetary Fund in 2010. It will likely continue to do so this year and next unless the process is rethought.
Privatizations should be primarily judged for their effect on reducing the role of the state in the economy, especially when there is corruption, distortion of competition, barriers to entry and so on.
However, Greece’s official creditors saw in privatizations a tool to improve the country’s solvency and limit their exposure, and secondarily a structural reform to overhaul state-owned enterprises. So they linked financial assistance to privatizations. However, this has proved inappropriate and self-defeating.
It is worth noting that the updated memorandum of understanding (MoU) in June 2011 projected privatization revenues of 50 billion euros through 2015, of which 30 billion was related to real estate. It did not take the lenders long to realize this target was unrealistic, and they lowered it to 19 billion euros in the MoU dated March 2012, and even lower to 7.7 billion for the 2011-15 period in the MoU signed in December 2012.
A glimpse at the 2018 budget shows Greece received just 4.7 billion euros in cash from 38 completed transactions from 2011 through 2017 with the submitted binding bids amounting to 7.7 billion euros. It is aiming for 2.7 billion in 2018.
Behind this poor record lies the reluctance of local politicians to loosen their grip on state-owned enterprises and allow asset sales at lower prices due to high country risk.
But it is not just that. Successive Greek governments were concerned the official creditors would have asked for more austerity measures if the privatization revenue targets in the bailout programs were set lower. So, they agreed to higher targets, although they knew they were unrealistic, hoping to avoid the imposition of more austerity measures.
In addition to that, politicians did not want to bear the responsibility by putting their final stamp on privatization deals and risk criminal charges being brought against them later on by their opponents. Financial advisers in such deals recall the now-ruling SYRIZA party had specifically threatened, when in opposition, to prosecute everyone involved in the process.
The Hellenic Republic Asset Management Fund (TAIPED) was the perfect vehicle for getting the politicians off the hook, they say. The older model centered around a general secretariat for privatizations with the final approval for deals being given by an inter-ministerial committee.
Investment bankers who have been involved in deals and have had first-hand experience of both processes claim the new privatization model is more bureaucratic and has resulted in more delays. The model is based on turning privatizations into procurement of services, having successive layers where responsibility is passed and shouldered thereafter by legal opinions for every step of the way and the advisers’ opinion in accordance with their engagement contract.
In reality, the privatization revenue targets have been set without taking into account all the steps in the process and how long each step may take. So the timetables are not realistic and the deals are not completed on time. As a result, the revenue targets are not attained.
Pundits say the delays begin with the selection of advisers by TAIPED for the privatization of an asset and continue with the preparations in the second phase of the process – i.e. due diligence, data room etc – before the transaction.
It is often the case that the Greek authorities, hard-pressed by time, proceed with the tender offer even though certain issues remain pending. Because TAIPED is still politically sensitive, as the senior management officers are government-appointed, they hesitate to object if the process is not ready to be launched, they say. So the pending issues usually resurface later on in the process and the participants ask they be resolved before they submit their bids, otherwise threatening to walk out.
Needless to say that every preferred bidder will have to go through the State Audit Council, facing more delays. It is worth noting that the audit of the state council did not exist before and was introduced in this process so the politicians have a court to rubber-stamp any decision. Virtually all steps in the process are heavily influenced by lawyers and judges instead of technocrats, increasing the risk of suboptimal decisions.
People who are involved in the process claim things are getting worse in some instances – i.e. whereas in the past a potential investor just had to make a written declaration, now they have to make the declaration in front of the courts. This approach to privatizations explains to a large extent why there are time delays and the revenue targets have not been attained.
All in all, if Greece wants to speed up the privatization process and meet the revenue targets, it will have to review all the steps in the process with the goal of overhauling them to shorten the time it takes to close a transaction. Moreover, it will have to set revenue targets that take into account the complexity of each privatization deal. It is never late, but someone has to take action.
Dimitris Kontogiannis ([email protected]) holds a PhD in macroeconomics and international finance. He has written and reported for Reuters, The Financial Times and Kathimerini English Edition among others. He is currently working for public broadcaster ERT.