Is ‘Greece Inc’ ready for privatization?

As the political authorities and corporate representatives in Athens embark on the most ambitious privatization program ever undertaken in Greece, many across Europe are watching with interest and concern to see if the endeavor pays off. Apart from the adoption of the privatization legislation and the publication of a roadmap for state divestment, a new privatization agency has been established and the chief executive appointed.

A sense of anticipation is spreading about the program, its subsequent implementation capacity and obvious execution risks, the social acceptability among various constituencies in Greece and the level of political compliance to be achieved with regard to the conditionalities established in negotiations with the troika of the International Monetary Fund, the European Union and the European Central Bank.

The Papandreou government is seeking to accomplish two key objectives with the combination of asset sales, leasing contracts for state-owned property and the granting of further concession rights. On the one hand, the divestment plan serves to illustrate the government?s capacity to deliver on agreed targets and policies, i.e. establishing momentum that will convince the international investors? community that the governing authorities are serious about privatization and can execute their plans accordingly.

The other objective is linked to using the additional revenue from the divestment drive for paying down Greece?s public debt mountain. The stated numbers — 50 billion euros by 2015 — are very ambitious and do not allow for any slippage regarding timely implementation or potential mistakes in the identification of asset price levels.

In my view, the Papandreou government committed a political mistake to bind itself so tightly to the privatization mast with two numerical benchmarks against which any success or failure will quickly be [mis-]judged by critical outside observers. I can already hear the siren songs of privatization experts and asset managers who are waiting on the sidelines with only one objective in mind: to point fingers and argue that another ambitious Greek plan is yet again off course in terms of revenue generation and manifest implementation delays.

One issue that has repeatedly been overlooked by the privatization advocates in the Greek case is the complexity of the task, in particular when taking a much wider perspective on the matter at hand. More specifically, privatization is hardly about asset sales as such, let alone under the conditions of having to hold a ?fire sale.? If and when privatization is primarily executed as a means to raise revenue, the risks of failure, i.e. underachievement, loom large.

Rather, divestment strategies include both a pre- and a post-privatization process against which any assessment of success has to be judged. In that respect it should also be borne in mind that privatization and divestment are neither only nor primarily about revenue generation. The procedures also involve substantial costs, i.e. financial, employment-wise, regulatory and administrative.

Seen in this brighter light, it may be instructive to go back in history and look at one of the most ambitious and equally controversial privatization endeavors in recent European asset sale history. For those of us who refuse to have short memories, it is helpful to revisit the privatization in former East Germany, in particular the workings of the privatization agency that came to be known as the Treuhandanstalt. Some of the lessons learned back then may prove helpful to apply today, not to mention keep in mind when Athens embarks on its own privatization journey.

In various debates about the Greek undertaking to establish a privatization agency, the former German pendant has been served up as a blueprint institution. The Treuhandanstalt was established in March 1990 as a limited liability company with a public mandate under the legal supervision of the then existing East German government. After unification in October 1990 its control was subsequently transferred to the federal government of Chancellor Helmut Kohl in Berlin. While its initial objective was to focus on privatizing companies in former East Germany, its mandate also included the stated goal of dissolving itself at a time of its own choosing.

With the benefit of hindsight, we are now in a position to argue that right from its inception the Treuhandanstalt underestimated the magnitude of the task and overstated the potential for divestment of East German companies and properties as well as the liabilities. When it finally folded in December 1994 the privatization agency had registered losses that exceeded ?100 billion. Moreover, as a terrible testament to the controversies and disagreements the Treuhandanstalt was confronted with, its first president — Detlev Karsten Rohwedder — was assassinated by the terrorist Red Army Faction on April 1, 1991.

The German version of the privatization agency was initially focused on asset assessments and identifying what subsequent sale procedures to apply. However, over time and due to the complexity of the task, the Treuhandanstalt increasingly became involved in finding solutions for employment issues resulting from privatization, the restructuring of state-owned companies and being used as a platform for industrial policymaking, e.g. for the chemical industry in the former East Germany.

Moreover, as the German privatization process was making progress, two issues drew increasing public scrutiny, namely: the definition of what constitutes an investor and how these had to be vetted before as well as monitored after the ink on the sales contract had dried; and, secondly, the centrality of the post-privatization process from the point of view of compliance with agreed procedures, targets and benchmarks.

Put otherwise, the mandate of the Treuhandanstalt was subject to change over time as those responsible realized that an exclusive focus on asset sales proved shortsighted and lacking in empirical substance as well as conceptual coherence. Similar changes in the profile, resource allocation and toolbox, as was the case with the Treuhandanstalt, may also prove necessary in the Greek case the more the privatization agency in Athens moves forward in the coming years.

For the Greek authorities it is thus worth remembering and consulting the lessons learned in former East Germany. While the point of departure for the Greek asset sale program is fundamentally different, the potential similarities between both examples can only be underestimated at one?s own risk. In short, Athens may want to turn to Berlin and talk.

The Papandreou government and the newly established privatization agency are thus well advised to look into the Treuhandanstalt?s inner workings and consult with their present-day counterparts at the Ministry of Economy in Berlin. Sharing experiences and knowledge transfer are paramount to making the government?s divestment plan work at an operational level and achieving the critical mass of support inside Greece and from prospective foreign investors.

* Jens Bastian is a German citizen currently working as a visiting fellow for the political economy of Southeast Europe at St Antony?s College, Oxford, UK. He is also senior economic research fellow at the Hellenic Foundation for European and Foreign Policy (ELIAMEP), an Athens-based think tank.