greek privatization
TRANSCRIPT
Lancaster University
2011
Analyses of the Extent to
which Privatization can
help alleviate the Greek
Debt Crisis. M.SC International Business
MNGT 575: Dissertation
2
ABSTRACT
In view of the heavy debt-crisis faced by the Greek economy in the year 2011, this research
study tries to analyze the extent to which the proposed privatization plan-under the European
adjustment program for Greece 2011, will help the Greek economy recover from the debt
crisis. The study reveals, the privatizations carried out in Greece previously and its outcomes,
followed by an analysis of Greece’s current situation. This study further holds a comparison
between the privatizations carried out in the United Kingdom and its challenges, with that of
the Greek Privatizations. This research also examines the issues that are likely to arise during
the implementation of the proposed privatization and tries to answer the very questions ‘is
privatization an answer to the Greek debt crisis? Does private ownership really matter?’ In the
light of this, the research study puts forward some facts that help analyze the suitability of the
‘Privatization’ as an effective solution.
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Acknowledgement
I would like to express my sincere thanks to Prof. Paul Ferguson for his unconditional
guidance and support throughout this research study. I also take this opportunity to extend my
sincere thanks to Lancaster University Management School for offering a unique platform to
earn this exposure.
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Contents
1 Introduction and Background……………………………………………………………...06
1.1 Introduction………………………………………………………………………06
1.2 Background……………………………………………………………………….07
1.3 Privatization – an answer to the Greek debt crisis?................................................08
2 Literature Reeview………………………………………………………………………….10
2.1 An introduction to Privatization…………………………………………………..10
2.2 Economic theory of privatization…………………………………………………13
2.2.1 Ownership matters – Private or Public Sector…………………………..14
2.3Determinants of Privatization……………………………………………………...15
2.3.1 Private and Economic Development…………………………………….15
2.3.2 Government Budget Constraints………………………………………..16
2.3.3 The role of Financial Markets…………………………………………...17
2.3.4 Political Majorities………………………………………………………18
2.4 Criteria for Privatization…………………………………………………………..19
2.5 How do Governments Privatize…………………………………………………..20
3 Research Methodology……………………………………………………………………..23
3.1 Methodology Used……………………………………………………………….23
3.2 Data Collection and Analysis…………………………………………………….25
3.3 Scope……………………………………………………………………………..26
3.4 Limitations……………………………………………………………………….26
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4 Findings and Interpretations………………………………………………………………27
4.1 Analysis of Privatizations
in Greece and of the Privatization Plan 2011
and the UK Experience …………………………………………………………….27
4.1.2The UK experience ………………………………………………33
4.1.3 Referring to the UK Privatization Experience………………………...36
4.1.4 Possible Outcomes of the Privatization Plan 2011…………………….36
4.2 Issues and Challenges of Privatization…………………………………………..39
4.3 Greece Public and Private Sector –a comparative analysis………………………40
5 Conclusion and Recommendations…………………………………………………………42
5.1 Conclusion………………………………………………………………………...45
5.2 Recommendations…………………………………………………………………46
6 References…………………………………………………………………………………...47
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Chapter 1: Introduction and Background
1.1 Introduction
The economies in the European Union (EU) face serious debt crisis with very high and
unsustainable public-debt. Greece, Portugal and Ireland have been borrowing huge sums of
money from the International Monetary Fund (IMF) and from other European countries in
order to evade defaulting. Of which Greece is an economy with the largest debt (as of year
2011) and is in the mid of an economic crisis. Greece has been spending beyond its means and
budget deficit has been ever growing.
Source: (BBC News, (2010a)),
Figure 1- Greek debt in relation to other Euro zone economies
The Greek economy in the 2000’s has had an access to easy capital from the increased
investors’ confidence, as Greece joined the Euro in the year 2001 and also from the flush
capital markets. These inflows of capital were not used to increased competition as most Greek
enterprises were publically owned. The European Union had designed certain rules in order to
limit the public debt but they also failed as the Greek economy was not strong enough to face
competition from the other European economies. In the year 2008-2009 there were unexpected
global financial crisis, which further strained the public finances in the Greek economy. To add
to this there were subsequent revelations of statistical data that was falsified which further
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increased Greece’s borrowing costs resultant to which Greece nearly risked a default on the
payment of its public debt.
Another fact that led to Greece’s debt situation of 2011 was that since Greece was ill-prepared
to cope up with global financial downturn the income from tax reduced as there was a
widespread of tax evasion. To revive from this situation the Greek economy was given a bail-
out from the EU and the IMF in the year 2010 worth 110 billion Euros, yet the restricting
carried out and the austerity measure taken have not worked. Due to this in the year 2011
Greece debt situation grew worse and again it was on the verge of defaulting with its current
debt-GDP ratio being 160 percent.
Greek economy in May 2011 has received a second bailout package from the IMF and the EU
worth 109 billion Euros and the Greek economy has to head for privatization as a condition
with aim to recover 50 billion Euros by 2015.Though this seems to be a highly ambitious
program, yet there are certain reason that justify that this privatization program is an effective
solution. This research study helps analyze the sustainability of this privatization program.
1.2 Background
Among the OECD (organization for economic co-operation and development countries) fiscal
high level of public debts and fiscal deficits are common. The financial crisis, resulted creating
large fiscal deficits in many countries which were once small and controlled to have increased
mainly due to direct fiscal costs of banks and due to the government policies aimed at
sustaining domestic demand in an environment of increasingly weakening economic activity.
The main factor responsible for such an intensified impact of the financial crisis has been the
failure of the governments, who failed to take advantage of the good times preceding the crisis
to consolidate the public finances. (Kaplanoglou and Rapanos, 2011).
Greece has been living a very high public debt for a very long time. In the year 1990 major
efforts were taken by the government of Greece to reduce the fiscal deficits and control the rise
of public debt in order to join the EMU in which they were successful, yet the effort was not
continued after this in the following years and therefore after the recent financial crisis, Greece
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found itself on the brink of collapse. The quality of fiscal governance in Greece has been very
low and for long it has been criticized. (European comission, 2010).
Greece is heavily burdened with debt and moreover investors have lost any kind of trust in the
economy, which has led to Greece not being able to pay of its debt. Moreover the European
Union can’t let the Greek economy default as it would have serious effects on the European
economy as a whole.
Though the Greek economy is a small one, yet the crisis it faces also expose the problems of
the Euro and therefore have a great impact on the other European Union countries. Concerns
about health of the financial sector of the Euro zone have greatly increased, which have led to
the creation of newer financial liabilities. This further has also led to increase in doubts for
closer integration.
The following are broad implications incase the Greek economy defaults:-
The exports of the European Union to the US (United States) are likely to be impacted,
since the crisis have slowed the growth rate causing the value of the Euro to depreciate
against the value of the US dollar. This increases the risk of the US financial markets
getting impacted; therefore the implications of Greece’s default would in turn be much
greater for the US.
Along with this the Banks of the US are also greatly affected. The direct exposure to
Greece of the US banks is 7.3 billion dollars. And other exposures such as contracts,
guarantees, credit commitments etc is worth 3.4 billion dollars.
The IMF (International Monetary Fund) is also greatly involved in the Greek economy
as it has in the recent past lent huge loans to the Greek economy.
1.3 Privatization- an answer to the Greek debt crisis?
Greece has the past from the year 1990’s, privatized some of its state owned enterprises
(SOE’s). However these privatizations were at a smaller scale. Its major privatizations were
carried out after 2001 which generated huge revenues. From this we see that privatization has
helped the Greek economy in the past. This motivated my interest to analyze the reasons
behind Greece’s current situation and why has Greece not opted for large –scale privatizations
in the past
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Therefore in this research study, I aim to analyze ‘the extent to the privatization plan 2011 can
help alleviate the Greek debt crises. It further extends to compare the privatizations of the
United Kingdom and its problem with that of the Greek economy and lastly aims to find
whether ownership matters (private or public ownership).
The outline of this research study is as following:-
Chapter 1:- Introduction and Background- this chapter outlines the reasons for the Greek debt
crisis in the year 2011 and the solution to this problem.
Chapter 2:-Literature Review- this chapter details what is privatization, the economic theory of
privatization, the criteria for privatizing and lastly the methods of privatization.
Chapter 3:- Research Methodology- this chapter outlines the methods and the data used to
carry out the above analysis and the reason for it.
Chapter 4:- Findings- this chapter includes the comparison of the UK case with that of Greece,
it also includes the issues that Greece is likely to face during the implementation of the
privatization program and it further extents to answer the question does ownership matter- will
privatizing the enterprises make a difference.
Chapter 5:- Conclusions and Recommendation- this chapter includes an overall conclusion to
privatization being a solution and also to what extent will it help alleviate the Greek debt
crisis? It further includes certain recommendation for helping the Greek economy, which I
have analyzed through my findings.
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Chapter 2 - LITERATURE REVIEW
2.1 An introduction to Privatization
Privatization is an act of reducing the role of government, or increasing the role of private
sector, in an activity or in the ownership of assets. (Savas, 1987)
Privatization is one of the main important events of financial and economic history of the post
war period which refers to transfer of ownership rights from the public to the private sector.
Privatization involves the opening of state monopolies (such as bus services) to competition
from the private sector, selling public corporations to private shareholders and contracting out
publicly provided services to private firms. The main argument from such privatization policies
arises is that reduction in government interference and introduction of market forces into
sectors from which they were previously prohibited will lead to a question that whether this
private ownership would increase performance and whether the reduced role of government in
the privatized sectors is a good option. (Savas, 1987)
If we look into the history of privatizations the milestones were as follows. The first
privatization in the modern era was taken by the ‘Adeneur government’ in the federal republic
of Germany.
In the year 1961 the German government first formed the policy of denationalization of the
economy and sold a majority stake to ‘Volkswagen’. It was done through a public offering
followed by the sale of ‘Veba Shares’ in the year 1965. Both offer in the market were well
received until the first stock market slump, the government had to recue in investors by bailing
them out and reversed the privatization or the denationalization policy.
The concept of Privatization picked up in the year 1979 in the United Kingdom under Mrs.
Margaret Thatcher’s Government (The conservative party). The Thatcher’s government policy
of Privatization- disposal of state owned assets left a lasting mark in the economic history of
the United Kingdom.
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However the path to Privatization was not easy as it was opposed by economists, media and
commentators in general, where on the other hand the labor party promising to return to public
ownership if it returned to power. Since many privatized enterprises were successful the
conservative party gained a wide political support. By the year 1997 nearly all state owned
enterprises were sold out and their value accounted a marginal level in the GDP (Vickers and
Yarrow 1988; World Bank, 1995).
In the 1990’s Privatization became an important and fundamental element of ‘global economic
orthodoxy, which greatly in developed, emerging and in the less developed economies. The
main argument for privatization policy can be found in the recent literature yet to understand
the concept of privatization better by tracing down the theories given by Adam Smith
(1776:1771).
‘Characters do not exist who are more distant than the sovereign and the entrepreneur’ Adam
Smith
This means people tend to be more generous with the resources of others which would lead to
inefficient use off public resource since the employees do not have direct interest in the
economic outcome of their own actions. According to Adam Smith (1776:1785) the selling of
public property which in during that time was land had various other effects revenue can be
allocated to reduce the public borrowing and furthermore the lower charges of interest can
alleviate public finances in a great way than the ownership of the public property.
Hence with Privatization therefore efficiency is increased. According to the modern contract
theory this occurs due to the reason that since in such a case ownership rights are not neutral
but they have an effect on the profitability of the companies after many years now Adam
Smith’s intuition has been amply confirmed. It is due to the transfer of ownership rights that
the privatized companies have greatly become efficient and are successful.
Today the privatization cycle of the 1990’s is over. In the year 1999 when global revenues after
reaching the peak started to decline sharply in the world economies and the trend continued in
the coming years is very similar to what happened in the economy of the United Kingdom un
Mrs. Thatcher’s privatization plan which reached its climax in the year 1989 when at that time
most economies of the world were still standing on the sidelines. Europe is an economy most
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involved in the phenomenon of privatization yet now it seems that it has exhausted specially
for the European economies(Bortolotti and Siniscalco, 2005), which lead us to understand the
challenges that a privatization plan can face (Meggison and Netters, 2001).
I. Privatization has reduced the weight of SOE’s to half the level within the GDP
of industrialized economies but in the lesser developed countries the progress
has been difficult.
II. The efficiency and the overall output level of the privatized companies has
increased at an average in comparison to public owned companies, there has
also been an increase in profitability yet the final impact of the privatization and
its effect on layoffs has a mixed review.
III. In case a privatization occurs in public equity markets, under pricing is an
important aspect in order to favor a sale; therefore investors who invest in the
initial IPO earn significantly more.
IV. Privatization involving large program based on public equity markets is a way
to modernize an economies corporate governance system.
In the recent years there has been a lot of dissatisfaction by the performance in the countries
which are controlled by the state and the failure of state control in achieving its objectives. The
extent to which privatization can improve society’s welfare depends on the characteristics of
the firm being privatized. There will be maximum gains in transfer of ownership where it has
been most difficult for the state to effectively control the operations of the firm and gains from
competition will be the greatest where market forces have played a minor role. Another
dilemma arises for any government which is trying to sell firms in state ownership that the
firms that are already running effectively will have more potential buyers and easier to sell but
in this case the overall gains from the transfer of ownership are small. It is also important to
understand how a firm is being privatized in order to realize the potential benefits in full.
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2.2 Economic theory of Privatization
The role of governments in the economic system is very old in this part of the chapter we aim
to study concise part of the economic theory of privatization.
If we look at the case of the United Kingdom particularly we see that it marked the first large
scale privatization program during the 19970’s which were more dependent on faith as then
most privatization theories were not developed. As Vickers and yarrow-1988 note that the
program of privatization in the UK was mainly triggered due to the existence of dissatisfaction
with the performance of the state owned enterprises and by the need to meet public finances. It
was not done or worked according to the Cartesian application of sophisticated theories, but by
mainly adopting adoption of practical approaches based on the intuition of many great
economists such as Hayek (Vickers and Yarrow,1998). The UK experience provided a
laboratory to economists for empirical analysis.
According to the incomplete contracts approach ownership matters greatly as it affects the
incentives and has important consequences to company’s performance. Another important fact
is that under competitive condition companies tend to outperform the enterprises owned by the
state and are able to generate large efficiency gains. This happens mainly due to the fact that
there is dramatic change in the incentives that privatization induces for the management of the
firms, yet when companies pursue the social objectives usually there comes up a tradeoff
between productive and allocative efficiency. Privatization indeed helps in saving costs by
providing incentives. Since in the beginning regulation happens to be imperfect the first
privatizations are more difficult comparatively.
However it is possible to recognize or identify the exact conditions in which a privatization can
entail welfare gain for the society. The above mentioned arguments are appealing and call for a
very large scale privatization yet more efficient resource allocation comes with the social costs
which end up creating political backlash and also policy reversals. If the privatization method
is properly designed some of the pitfalls can be avoided.
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2.2.1Ownership Matters: Private and Public Sector
In the past (Bortolotti and Siniscalco, 2004) there have been striking differences between the
operational performance of private firms as compared to that of the state owned enterprises. To
understand this concept better let’s take the incomplete contracts approach and Privatization is
an interesting application of this approach. Incomplete contracts is an appropriate approach, as
in case of complete long-term contingent programs, irrelevance can be assumed on an
assumption that they are contracts that can be written and enforced and for surplus economic
activities to exist there have to be relationship specific investments which in no case can be
contracted by any party.
To understand this concept better Schmidt (1996) (Bortolotti and Siniscalco, 2004) takes the
example of a monopolistic firm that is involved in producing a public good. During the initial
stages the government in involved in deciding whether the firm or the enterprise has to be sold
to an owner-manager or to hire a professional manger while keeping it publically owned.
According to information in Shapiro and Willig (1990) costs are privately known to the owner
of the firm only and therefore privatization provides a reallocation of this privately owned
information. In subsequent time, the effort level has to be chosen by the manager and this level
of effort chosen affects the probability of the state of the world. This happens so that incase a
manger chooses a high level; the result will be higher productivity and increased efficiency.
This in turn would reduce costs for any level of output. Finally in the last period, the transfer
scheme is decided by the government and the payoffs are realized.
On the other hand if a firm or enterprise is state owned, the parameter of the cost structure is
directly analyzed by the government and therefore the government directly implements the first
best allocation. This is done by choosing ex post production level.
However, in such a case, the manager income is fixed and therefore he has no incentive for
putting in any effort. On the contrary side in case of a privately owned enterprise the exact cost
function is not known to the government and therefore, this makes it essential for the private
owner to be provided with an incentive, which is in the form of an informational rent.
Now in such a case if transfers are costly, then the production level set by the manager will be
low. Therefore the manager under privatization has many more incentives to invest and make
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more efforts.fro this we can conclude that better managerial incentives provide cost saving and
therefore enterprises that are privately owned work better. This also proves that ownership
matters and privately owned enterprises are more efficient in comparison to the state owned
ones.
2.3 The Determinants of Privatization
The privatization process of the United Kingdom spread across the world progressively during
the 1970’s which accelerated during the 1990’s and we see that in the 20th
century it has
slowed down. Since some countries go for a very large scale privatization while there are some
that don’t privatize at all. In this chapter we try and analyze that what factors lead to
privatization and the type of Privatization by mainly focusing on economic, political and
institutional determinants of Privatization.
2.3.1Privatization and economic development
SOE’s (State owned enterprises) do not exist in the United States and The United Kingdome
was one of the first countries to launch a large scale privatization which was then followed by
the remaining European Countries, Oceania, Latin America and Asia. In some countries the
process began in 2001 for example the Middle East and the Sub-Saharan Africa (Bortolotti and
Siniscalco 2005).
All this may lead one to think that Privatization is inevitable consequence for a country to
economically develop and that the course of Privatization is not dependent on the historical
specifics. It is in the initial stages of development only that the state can be promoting the
accumulation of capital in highly capital-intensive industries and in infrastructure. Once the
development is set then the state rolls back from the process of privatization. Sometimes stated
as “the Colbert phase followed by thatchrite phase” when in relation to the stages of
economic development and if the above view is true then there exists a systematic relationship
between income and privatization.
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2.3.2 Governments Budget Constraints
Government constraints are an important aspect in determining the country’s decision of
privatizing. Let us take one of the main examples of a successful privatization-the United
Kingdom, they undertaken this program in order to efficiency but also to consequently reduce
the country’s debts and deficits and since then the issue has not changed. Privatization remains
an important method of curbing debts and privatization also contributes to the narrowing
deficits(because of comparatively lower interest payments on debt and since the state has to no
longer subsidize loss-making SOE’s). The reasons stated above have now become stringent,
where the economic world of today aims to achieve balanced budgets.
Privatization in many developed and less developed economies has been representing a
significant part in the budget adjustments and it is often considered an alternative to budget cut
or tax increases. Though privatization helps in reducing public debts by selling public assets
yet it is not easy to gauge the benefits of privatization on public finances.
In some cases of the developing and the transition countries did not achieve much from
privatizing they ended in a negative payoff, since the revenues did not provide for the
repayment of debts nor did it help in severance pay and fees to consultants and advisors but in
most countries privatization program ended up in giving significant profits yet in such cases
the allocation of revenue became an issue.
Let us take the examples of some countries which clearly indicate the role of government
budget as a determinant of privatization. The European countries for example have had an
impulse to privatize starting from the need to square public finances, given the debt targets and
the deficit limits set in the Maastricht treaty. In Italy where debt-to-equity ratio has been very
high and interests rates which were almost out of control in the 1980’s and in the beginning
years of the 1990’s and where SOE’s run with vague or lax budgetary practices, has absorbed
massive resources over the years, budget constraints mattered in Italy as far as the decision to
expand privatization was concerned. (Cavazzuti, 1996; Macchiati, 1996). The privatization
process speeded up 1992 onwards when serious financial crisis crept in.
In Germany the privatization process is a very recent one that culminated in 2000 a year that
marks the third tranche or portion of Deutsche Telekom which globally accounted for more
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than $12 billion of revenue. In Spain the process of privatization process speeded up in the year
1995, with a perfect coincidence of there being crisis of public finances at that time.
Similarities in the factors lie behind privatizations in many Latin American countries which
were already burdened with huge foreign and public debt. In this context we can say that
privatization attracts a lot of foreign capital. If take the case of Brazil, we see that it is very
analogous, with substantial waves of the privatization process and also with macro economic
and financial crisis. the middle Eastern and African countries between the period of 1997 and
1998 when crude oil prices fell and corresponding to which the government revenues fell,
privatization was then seen as an policy option.
2.3.4 The role of financial markets
It is a well known fact that the developments of financial markets give rise to more efficient
allocation of resources as it directs the savings to projects with best prospects. This leads to
capital accumulation and finally helps achieve economic growth (Levine and Zervos 1998).
The main element of financial markets is liquidity which helps investors to buy or sell shares,
in a way liquidity is more important than market capitalization (Bortolotti and Siniscalco
2005).Liquidity is also very crucial since it facilitates diversification (Pagano 1993; Levine
1997), information aggression and also monitoring of managers along with regulating the
firms.
One important method of measuring financial market development is market capitalization and
the empirical literature sets forth many methods to measure market liquidity. One of the most
popular one is the turnover ratio which compare the value of trade with the total market
capitalization.
Divesture is indeed facilitated by a large and liquid stock market which in turns allows the
governments to increase revenues. Let us take the example of the privatization of Nippon
Telegraph and Telephone (NTT) the Japanese telecommunications monopoly. It is an
interesting case in this aspect which began in 1986 when NTT went public. The Japanese
government sold 12 per cent of the stock which gave a total yield of $15 billion, in the year
1987 there was a boom in the stock market with a 30 per cent increase in the market
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capitalization approximately. The Japanese government took advantage of the situation and
launched a second tranche of the similar amount in the year 1997. This helped them earn
revenue of $ 40 billion which is the highest share issues in history. Japans stock market decline
is probably the reason behind the slowdown in the privatization process in the 1990’s which
regained in 1999 after two NTT sales as Japan rose from the financial crisis.
It is a known fact that when the markets are in booming state, they are exceptionally liquid.
The great bull market of the 1990’s can be taken as an example for explaining the privatization
boom at the end of the 20th
century. Selling a new share at a price lesser than the initial price
offer, leads to, initial investors realizing a capital loss forcefully. However the professional
investors have the expertise to cope up with such problems by going for portfolio
diversification, on the other hand the small shareholders holding shares of privatized
companies are more exposed to financial risks and therefore may be reluctant in participating
in new privatization issues.
2.3.5 Political Majorities
Politics in a way can provide an explanation to privatization. The governments should have
much more faith in the markets and should in turn reduce the presence of the state and its
bureaucrats in the economy.
It widely believed that most governments that are supported by the liberal and the conservative
coalitions favor economical growth and therefore privatization much more than the leftist
governments which, as a traditional belief, are keener on broadening the size of the
government.
To understand political majorities as a determinant of privatization let us take the example of
the French case. In the beginning of the 1980’s, the socialist government had a massive
nationalization program involving five major industrial firms (Compagnie Generale
d’Electricite(CGE), Rhone Poulenc, Saint Gobain, Pechiney, and Thomson Brandt ) and two
financial companies (Paribas and Suez) and other than this thirty nine banks (Bortolotti and
Siniscalco, 2004). After the electoral defeat of the socialist government in France in 1986 and
the conservative government took over which led by Chirac decided to re-privatize thirteen
companies and financial institutions. From the very beginning up till 1997, the French
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privatization program has been favored by the conservative government and always been
opposed by the left. Another example can be of Argentina where privatization has been
strongly backed by the conservative governments. The above examples clearly suggest that
Politics can also be a key element in determining why governments privatize.
2.4 The Criteria for Privatization
All Privatization plans are based on certain principals that guide them and priorities and
problems are important aspects of a privatization plan should be pre-determined. Privatization
in a way can also be stated as selling of 50 per cent shares to private shareholders (Bortolotti
and Siniscalco 2005). Yet the main aim behind privatization is to improve industry
performance by increasing the role of the market forces. Many contributing factors to this are:-
Freeing of entry into an industry
Encouraging competition
Permitting of joint ventures
However market forces can also be increased by restructuring the economy that is nationalized.
By doing this several successor companies will be created which may be publically owned.
In order to achieve higher industry performance more means of promoting competition have to
be adopted.
Every privatization plan should be tailored to the particular conditions of each industry. The
following are some of the general considerations that should be taken into account when
launching a privatization program (John Kay, 1986).
A privatization plan should be designed in order to maximize the net consumer
benefits (generally measured by lower prices and higher quality of service rather
than stock market proceeds). A future market for shares would result in
floatation.
It should focus on promotion of competition which can be achieved by
removing artificial restrictions on entry of firms into an industry, making
resources equally accessible to all potential entrants. The most effective means
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to maximize the consumer benefits is by restructuring the existing industries
which also helps in curbing monopoly.
There should be strict competition policies which is more preferable to rate of
return regulations or efficiency audits or even to other forms of government
‘Nannying’.
As far as ideas for uneconomic services and the sources of finance for them are
concerned, clear ground rules should be laid down.
Compensation for transitional unemployment, even though the employee
prospects are going to get enhanced by privatization.
Those privatizations should be given highest priority where the consumer
benefits are going to be the maximum. Potential benefits depend on industry
size and whether competition rather than monopoly is going to ensue.
The scope of privatization is substantially greater than is commonly believed. Consumers
benefit from privatization if appropriately designed directly or indirectly.
2.5 How do Governments Privatize?
Privatization involves a balancing between the conflicting objectives of the government in
places especially where economic and institutional constraints play an important role (Savas,
1987). It is to understand that how do governments privatize to achieve the conflicting
objectives.
The following are four broad strategies that should be followed in order to benefit both the
government and the society:-
1. Load Shedding:-Market place and the voluntary organizations should be encouraged by
the government to supply what the government provides. This is called load shedding-
the partial or complete withdrawal of the government from an activity. Load shedding
can be done in many ways for example it can be carried out by divesture, default,
accommodation or even by gradually replacing government activity and through
voluntary activity. Denationalization of the state owned enterprises through divesture or
by other means is an important aspect of load shedding.
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2. Adopting arrangements that have minimal government involvement: - If in an activity
government involvement is required then government role can be reduce by devolution-
making use of the private sector through franchises, contracts or vouchers. And another
thing that can be done in such a case is that work can be giver to lower levels of the
government department so that the work carried out is closer to people that are being
served.
3. Instituting User Charges: - Government costs should be made more evident and this can
be done by levying user charges wherever possible and also along with this stimulating
interest in alternative arrangements.
4. Introducing competition: - Competition is an important aspect and it should be
introduced wherever possible along with breaking up of government monopolies. A
useful tool for accomplishing this is deregulation.
The above mentioned four broad strategies can be greatly helpful in devising a privatization
plan and they are also mutually reinforcing and they can’t be blended together. It is a fact that
decline in the quantity or qualities of service will leading the citizens to see other alternative
methods to supply more adequate service which invites load shedding. There are a number of
institutions available for taking up the slack and assuming some of the responsibilities that
have accrued to the government. Privatization through divestment is another example of load
shedding (Savas, 1987).
User charges and government spending programs should be directly linked to taxes so that cost
of programs is more visible enabling clear comparison of cost and benefits which thereby
encourages alternatives to government services.
Competition can be promoted by contracting and vouchering which can be employed along
with load shedding. More effective and better public services can be achieved through
promotion of competition. A monopolistic arrangement often results in poor performance.
Other than this contracting can occur if the following four conditions are satisfied:
1. The government is under fiscal stress.
2. Saving costs are likely to be large.
3. The act of contracting is politically feasible.
22
4. The status quo is disturbed and change is required.
The main opposition to privatization comes from public employee unions and the strong
argument that they pose is the fear of corruption however skilled politicians, leaders can
generally convince the public employees and create coalitions to overcome unreasonable
opposition and they also are able to develop techniques to overcome the impact on employees
which are affected from contracting.
Many techniques can be used to induce competition among the supplier s of services and
‘contracting in’ can supplement ‘contracting out’. Contract specifications must be prepared
with care as they have an effect on the number and the quality of bids. These specifications can
also be manipulated in order to undermine the decision to contract or for favoring a particular
bidder.
Once the contract is in effect the performance must be continuously monitored. Techniques for
this purpose should be including complaint monitoring, citizen surveys, field observations,
measurement and examination of records.
Privatization is well established and there is a lot of experience available for making and
implement the decision of privatization and a large body which has practical knowledge has
been developed to help the officials of the government and to give them confidence for taking
this step.
23
Chapter 3 Research Methodology
3.1 Methodology
The main objective of this research work is to determine the extent to which privatization can
help in alleviating the Greek Debt Crisis. In other words in this study I have tried to analyze the
extent to which privatization can help Greece in recovering from the debt crisis. To do so I
have adopted an empirical research methodology. Empirical research methodology is one in
which real life data or analysis of a certain specific event is observed with aim of identifying a
trend which that specific event maintains. Based on this a researcher tries to draw conclusions.
However it important to note that empirical research requires empirical evidence i.e. a record
of one’s observations which can be used for analysis either qualitatively or quantitatively.
Source: (hubpages.com 2009)
As further explanation to the diagram above, in this research work the Greek debt crisis can be
referred to be observed problem. The induction and deduction are referred to the proposed
solutions i.e. the austerity measures and then looking at privatization as the key solution.
Testing and evaluation stages here are referred to analyzing the suitability and appropriateness
of the proposed Greek privatization plan.
In this study I have used this research design, as it is the most appropriate method to
understand the trend of privatizations in other countries and in turn it has helped me find
24
relevant answers to the question in i.e. ‘ to what extent can privatization help in alleviating the
Greek debt crisis’.
There are three main findings in the research study which are:-
Part I: - Analysis of the Privatizations in Greece and the proposed Privatization Plan
with Reference to the U.K experience.
Part II: - The Issues and challenges of Privatization in Greece.
Part III: - Greece - Public and Private sector a comparative analysis.
The part I of my findings is based on a Case Study – ‘Privatization in the United Kingdom’.
This is an empirical analysis of the trend of privatizations in the U.K that began in the 1970’s
and how far was it successful along with identifying the issue that occurred during the process
of privatization in U.K. On the basis of this information I have compared the case of Greece
which has not privatized at such a scale ever before.
The Part II of my findings deals with the problems that Greece is likely to faces from the
implementation of the highly ambitious privatization program, imposed on to them by the IMF
and the EU.
And Part III of my finding tries to answer whether privatizing enterprise increases efficiency.
In other words is Privatization a good solution if we take ownership as a determinant i.e. does
private ownership or public ownership actually making a difference?
The above findings will help me answer the suitability of the privatization plan and how
realistic is the plan? And finally to what extent will the privatization plan actually be able to
help Greece recover from the debt crisis.
25
3.2 Data Collection and Analysis
The data analysis in this research study is both qualitative and quantitative in nature. The
qualitative data is secondary based which aims to answer the trend of the privatization process
in the United Kingdom and issues and problem that can occur during the privatization plan. For
this I have studied research papers, text, internet journals, newspaper articles and books. Some
of which are:-
Book: aul R. Ferguson and Glenys J. Ferguson. Induatrial Economics. London: The
Mavmillan Press Ltd, 1994.
Book: E.S. Savas. Privatization: The key to better government. New york: Chatham
House Publishers, Inc, 1987
Book: John Kay, Colin Mayer and David Thompson, Privatization and regulation :the
UK Experience, Oxford 1986
Research paper: The Greek Fiscal Crisis and the Role of Fiscal Governance Book:
(Kaplanoglou and Rapanos, 2011)
The economic adjustment program for Greece: first review - summer 2010.
(Luxembourg: Publications Office of the European Union, 2010.)
BBC NEWS: Greece austerity measure (may 2010) and Financial Times article : rescue
hopes ease pressure on Greece
Research paper: The Greek Fiscal Crisis and the Role of Fiscal Governance. (Georgia
Kaplanoglou and Vassilis T. Rapanos June 2011).
Book: The economic adjustment program for Greece: first review - summer 2010.
(Luxembourg: Publications Office of the European Union, 2010.)
BBC NEWS: Greece austerity measure (May 2010) and Financial Times article: rescue
hopes ease pressure on Greece.
The case study on the U.K privatization along with the case of Greece Privatizations till date
includes the analysis of some quantitative data which helps in analyzing the revenue earned by
privatizing enterprises both in Greece and in the U.K in the past. This data however is
secondary data based on the information provided by the World Bank, IMF, and various other
sources.
26
3.3 Scope
The scope of this research work is to study the ‘extent to which Privatization can alleviate the
Greek debt crisis. It further extends to analyzing the role of IMF and the EU in the Greek
economy and comparing the Greek case with the U.K experience in Privatization. And
studying the effectiveness of public and private ownership is also within the scope of this
project. However the analysis of the effects of the fiscal deficits and public debt in the
economy of Greece is not within the scope of this project. It also include the analyses of the
current proposition made in area like pay cuts, pensions, tax reforms and privatization by the
government as a solution to recover from debt crises.
3.4 Limitations
Privatization plan in Greece is currently being implemented and therefore an accurate
analysis of what is the future of the plan is difficult,
Unexpected occurred due various reasons like changes in the plans; data required for
study is not easily available etc.
Accuracy of information and reliability on various sources during the study is another
limitation of qualitative research which is likely to occur.
Although all problems and impacts will be studied and the recommendations will be
made however there might be certain unidentified problems occurring due to situational
factors for which recommendations would be difficult to purpose.
27
CHAPTER 4: FINDINGS AND INTERPRETATION
4.1 Analysis of the Privatizations in Greece and the proposed Privatization Plan 2011
4.1.1 Privatizations Plan 2011 and past Privatizations in Greece.
The proposed privatization plan for Greece debt recovery can be termed as an ambitious one,
yet the privatization plan along with the real estate development plan is likely to help Greece
recover from its current debt situation and it will also be a great support to the fiscal
consolidation efforts. The objective of the privatization plan is to realize EUR 50 billion from
now to 2015. This in turn can reduce the Greek economies debt ratio by at least 20 percent in
the next 5years. This privatization program is likely to generate economic efficiency and gain
investors trust which would in turn lead to high investments and exports. However a critical
factor in this would be the government’s commitment to this process of privatization along
with determination to tackle various issue arising and tackling vested interests and privileges.
The success of this program would lead to an improvement in the market sentiment, the Greek
economy as a whole would develop (European commision 2011, 2011).
Source: (Greek Default watch, 2011)
28
The Following table lists the State Owned Enterprises to be privatized in the Proposed
Privatization Program of Greece.
Source :( (Ministry of Economy and Finance 2011)
Greece from the year 1991 to 2006 had approximately 61 transactions that accounted for US$
20 billion from the privatizations (Ellenki Dhimokratia, 2009). Greece in the past 20 years has
reached the following privatization milestones.
1. Greece began privatizing in the year 1990, which was after the election of right wing –
New Democracy party. The Greek Government then considered Privatization as its
main policy objective and made a list of firms that were to be privatized. The initial
privatization plan involved the privatization of enterprises that were belonging to the
IRO. It began with the complete selling of Olympic Marine shipping company in the
year 1991 and 1992 along with Bank of Chios and Elvim (Heracles Gen Cement).
However due to strong oppositions faced by strong political and labor unions the
privatization were blocked (Ellenki Dhimokratia, 2009).
29
Privatization Program end-September 1991
Total number of available enterprises
Contracts negotiated
Bids received or deadline for bids set
Financial advisors appointed
In liquidation
Other
Companies sold
170
12
18
23
25
82
10
Source: (Ministry of National Economy, 1991)
2. In the year 1995 the context changed completely after the Greek economy got the
candidacy for admission in the European Monetary Union (EMU). With this the Greek
government was pressured to implement structural reforms, which were aimed to foster
credibility. This divestment process resumed after three years and soon gathered
momentum. After this and till date the privatization in the Greek economy mainly
involved privatizations of services, telecommunications (Ellenki Dhimokratia, 2009).
3. Telecommunications were privatized first in Greece in the year 1996 by Initial public
offer 7.6 percent of the shares of Hellenic Telecommunications Organization(OTE) and
from this time on the sale of the telecommunication occurred as following:-
Year 1997- 12.4 percent of the capital was sold.
Year 1998- Two main tranches one of 3.5 and the other of 15 percent of the
capital was sold and continued in 1999, in 2002 and in 2005.
To date 70.6 percent has been sold of the total the total capital.
This in total helped in raising US$ 5.6 billion.
30
Telecom Privatizations
Telecom Operator Stake
(%)
Type of
offer
Existing
free float
Amount
Dollars bn.
SPT Telecom (Czech Rep.)
Matav (Hungary)
Telefonica D'Espana
Gelgacom
Bezeq (Israel)
Stet PT Telecom
Indonesia
OTE (Greece)
Deutsche Telecom
KPN Netherlands/1996
Telecom South Africa/1996
27
40
12
30
25
61
N/A
8
49
30
30
I/D
I/D
I/D
I
I/D
I/D
I/D
I/D
SS
IPO (*)
68%
SS
24%
35%
IPO
IPO
IPO
30%
SS
1
1
1
1.8
0.5
7
2
0.5
10
4
1
(*) 30% strategic stake sold to Ameritech & Deutsche Telecom in 1993
IPO=Initial Public Offering; I=International; D=Domestic; SS=Strategic Stake
(Source: Financial Times, 1995)
Other than this some of the following privatizations took place in the subsequent years:-
I. The National Bank of Greece which was privatized initially in 1998 and 1999
by the sale of 16 percent of the shares.
II. The next privatization was of the state power producer Public Power
Corporation (PPC) in three subsequent issues in the years 2001, 2002, 2003 and
in 2005 which helped generate US$1.4 billion.
III. Along with this the Greek organization of football prognostics was privatized in
four main tranches in the years 2001, 2002, 2003 and 2005 which was worth
US$ 2.75 billion . (Ellenki Dhimokratia, 2009)
31
Source ( (Greek Default watch, 2011)
4. The maximum number of proceeds were gained from the privatization of the OTE ,
which accounted for the 41 percent of the total revenue, further proceeds from other
privatization were such as Public utility services accounted for 21 percent of the total
revenues which included the following:-
Water supply and sewage systems- privatized in 1999
The privatization of Gas supply company EPA-Thessaloniki in the year 2000
And PPC in 2001 in the electricity sector (Ellenki Dhimokratia, 2009).
5. The financial sector is also been of significance in Greece privatizations. Many
investment banks, commercial banks and holding companies were privatized (Ellenki
Dhimokratia, 2009). The banking firms that have been privatized are:-
The bank of Chios -1991
The Bank of Athens – 1993
The Athens Bourse – 1997
The General Hellenic Bank – 1998 and 2004
The National Bank of Greece - 1998, 1999, 2003, 2004
The Hellenic Industrial Development Bank – 1999
The Greek Stock exchange Holdings –2000
The agricultural bank of Greece – 2000
32
6. The conservative government of 2004 i.e. Karamanlis’ conservative government in
2004 had privatization as one of its main aims. Their first move was selling of 8.2
percent shares of Hellenic Petroleum in the 2004 for an amount of approximately
US$240 million. In November 2004 the national Bank of Greece was given to private
and foreign institution investors (7.46 percent stake) through book building process.
Revenues generated from this were approximately US$ 725 million (Ellenki
Dhimokratia, 2009).
7. In the year 2005 the Greek government had the goal of reducing the budget deficit
which in turn resulted in a very ambitious privatization program. This program aimed at
raising US$ 2 billion. For achieving this gambling company OPAP was sold, 16.4
percent of the total stake. Through retail and through an IPO this raised more than US$
1.5 billion. In the same year another tranche of OTE was sold through an IPO of value
10 percent of the total stake. This again generated revenues worth US$ 1 billion
(Ellenki Dhimokratia, 2009).
8. The privatizations continued in the next year 2006 with another IPO of 35 percent of
the postal savings bank for barely US$ 800 million at the Athens Stock Exchange. This
was followed by the complete selling of Emporiki Bank which is the biggest
privatization ever occurred in Greece and along with this selling of Credit Agricola for
US$ 2.2 billion(35.56 percent stake) (Ellenki Dhimokratia, 2009).
9. Finally in the year 2007 the government sold another 10.07 percent of stake of OTE,
which raise US$ 1.5 billion in order to accomplish its highly ambitious privatization
program (Ellenki Dhimokratia, 2009).
10. And in the same year Greek Postal Savings bank was privatized for US$ 500 million
(Ellenki Dhimokratia, 2009).
33
By privatizing the above enterprises in the year 2007 Greece was able to accomplish its
revenue targets, EUR 1.7 billion, well in advance.
4.1.2 The UK Experience- Privatization
Starting from the post Second World War period till about the 1970’s the macroeconomic
policy of the United Kingdom was based on the aggregate demand approach of the Keynesian
economics. In the period between 1950 to1990, the U.K economy had been successful in
attaining full employment. This distinctly showed the chances of expansion and a tendency of
relatively mild recession.
Then came the unexpected inflation in the 1970’s and the influence of the trade unions grew
therefore the Government in the United Kingdom had to adopt an alternative approach.
Another important factor to be noted of that period was that Keynesian economics and
techniques did not have any kind of answer to the occurring “stagflation” (rise in the level of
unemployment and inflation rate at the same time). The reason for this was that the Keynesian
economics only dealt with price and income factors which had no answer to the instability in
the levels of increasing unemployment along with controlling the increasing levels of
unemployment simultaneously (John Kay, 1986).
The performance of the U.K economy in the 1970’s, in comparison to that of the previous
decade was very disappointing firstly it was an unexpected situation and then the rate of
unemployment had doubled from 2 percent in the 1960-1970 period to about 4 percent in the
1970’s and another alarming factor was the inflation rate which increased three time from the
1960’s period to the 1970’s. It reached approximately 12.6 percent from 3.5 percent. The result
of this was that the growth levels declined sharply from 3.3 percent to 2.3 percent. All this
finally resulted in a deficit in the balance of payments (John Kay, 1986).
Financing of state programs was severely affected due to the continuous acceleration in the
inflation rate and due to the slowing growth rate for example social welfare. There was a
decline in the public spending, and income policies due to the beliefs in the planks of the post
war consensus.
34
Due to an additional monetarist counter revolution in the field of macro economics led many
economists and politicians to put up questions on the Keynesian economics.
The Keynesian beliefs were as follows:-
In case of lack of aggregate demand management, western economies will experience
large scale unemployment for prolonged periods.
By using some of the macroeconomic measures that are designed to stimulate aggregate
demand the unemployment levels can be reduced permanently.
In the year 1979 under the governance of the conservative government run by Mrs. Thatcher
had to witness a radical change in the economic and political philosophy. The main difference
that existed was that previously the conservative and the labor party would argue that
improvement in the overall economic situation was strictly limited. By this they meant that if
they focused on reduction in the inflation rate, they would only be able to create conditions of
sustained growth in output levels and employment (Bortolotti and Siniscalco, 2004).
The main element of the Mrs. Thatcher’s phase was that there was a reduction in the public
sector which involved policies of privatizations of the state owned industries and they
concentrated on removing regulations on businesses and also encouraged the selling of the
state council houses (Bortolotti and Siniscalco, 2004).
This was done with a clear view that the government in no case would be subsidizing or bailing
out the loss- making industries.
The privatization in the U.K was due to the following political reasons:-
The state is an inefficient producer and therefore it should not be involved in any
productions.
And another reason was the failure of the governments in innovation and industrial
growth.
The U.K privatizations covered three main areas:-
I. Denationalization: privatizing the public sector assets.
35
II. Deregulation: removing of restriction on competition which was previously given to
statutory monopolies.
III. Contracting out: franchising to the private contractors the production of goods and
services.
The main aims of the British privatization were:-
Efficiency enhancement
Reduction in the borrowings in the public sector.
Reducing the government involvement in government decision making.
Pay determination problems were to be eased.
Widening of share ownership along with the encouragement of employee share
ownership.
Gaining political advantage.
The privatizations in the UK accounted for 19 percent of the total no. of transaction and 20
percent of the revenues of Europe.
The following is a list of privatization in the UK and the revenues generated:-
Privatisations 1981-91 From Nigel Lawson, The View from No. 11 (Bantam, 1992).
Date Company % of equity initially
sold
Proceeds
£m
Feb 1981 British Aerospace 51.6 150
Oct 1981 Cable & Wireless 50 224
Feb 1982 Amersham International 100 71
Nov 1982 Britoil 51 549
Feb 1983 Associated British Ports 51.5 22
June
1984
Enterprise Oil 100 392
July
1984
Jaguar 99 294
36
Nov 1984 British Telecom 50.2 3,916
Dec 1986 British Gas 97 5,434
Feb 1987 British Airways 100 900
May
1987
Rolls-Royce 100 1,363
July
1987
British Airports Authority 100 1,281
Dec 1988 British Steel 100 2,500
Dec 1989 Regional Water Companies 100 5,110
Dec 1990 Electricity Distribution Companies 100 5,092
Mar
1991
National Power and Powered 60 2,230
May
1991
Scottish Power and Scottish Hydro
Electric
100 2,880
(Nigel Lawson, 1992)
4.1.3 Referring to the United Kingdom Privatization policy
From the example of the United Kingdom Privatization Case- study we see that when a
privatization is done at a large scale and when a single entity is in the lead of the whole process
and is responsible for all the assets to be privatized then the privatization program is highly
successful and effective and in comparison to which the privatization in the Greece has never
been at such scales and therefore no long term benefit could be drawn whereas, the current
privatization plan will prove beneficial in case it is implemented successfully and the private
sector market responds well.
4.1.4 The expected Outcome of the proposed Privatization Program 2011
The Greek government in order to revive itself has set up strong Governance and in order to
become stable has decided to scale up the privatization program substantially aiming to collect
EUR 50 billion by 2015 as mention earlier which is not only going to help in attain sustainable
growth but also will help regain the investor confidence. The privatization proceeds will not be
of any help in the fiscal consolidation efforts however the proceeds would contribute towards
37
fiscal sustainability, since privatization is likely to reduce interest expenditure as debt reduces
and it will bring competition into the market which would in turn increase efficiency and
productivity. This privatization should also be contributing in reduction of corruption(
(European Commission, 2011)
The set up currently in the Greek economy is not very effective; at present each ministry of
smaller of small entities and a myriad are responsible for and manage the assets of the
government. Their effectiveness in handling these assets and extracting true value out of them
is very low. The Greek government has also started to make a compilation of the following:-
Comprehensive inventory of state assets
Stakes in listed and unlisted companies
Buildings and commercially viable land
On the basis of which, this mission will in turn help in making the Privatization program more
specific.
Privatization in a way as seen in various examples ensures sustainability. There are three
resultant scenarios until 2025 of the proposed privatization program along with other economic
adjustment decisions taken by the Greek Government (European Commission, 2011).
Assumption - Nominal Interest rates – 4.5 percent and 5.5 percent for each pair. Both interest
rates are below the current market rate. However, these assumptions are not unrealistic if the
Greek government keeps its determination to stabilize the financial markets and if the
government is able to keep fiscal accounts in order.
38
Source: (The investment insight, 2010)
The scenario’s are as follows:-
First Scenario –
Growth rate will not exceed 2 percent and the primary surplus will not exceed percent of
the total GDP of the country- this is the level projected for 2013: in this scenario there is
insufficiency of structural reforms and there is unfinished fiscal consolidation. In such a case
there is no sustainability of debt developments. According to this scenario, in order to sustain
the stability the following has to be done to contribute to potential growth:-
Consolidation has to be continued
Ambitious implementation of structural reforms.
Second Scenario –
If the Growth rate is exceeding percent beyond 2014 which has also been currently
projected for 2014 and along with this there is a 5.5 percent primary surplus which is a high
value, yet it is not higher than some of the high-debt European Union (EU) economies which
had managed to keep these surpluses for longer periods. The result of this will be as currently
projected, the Government debt will be first sustainable and then it will decline with time
although till 2025 the government debt will remain above 100 percent of GDP.
39
Third Scenario –
This can be referred to as the most favorable scenario to the Greece economy. Which
considering the Privatization EUR 50 Billion worth of assets by 2015 program again, the Greek
economy will be able to reach the same debt ratio by 2025 without the privatization program if
primary surpluses by 2014 are above 7.5 percent, this level however seems realistic.
4.2 The Issues and challenges of Privatization in Greece
Privatization is seen as a valuable tool for promotion of the structural reforms and forming a
progressive economic policy which aims at creation of opportunities in many fields of
economic activities. All the benefits that are derived from Privatization are spread across
economy. Which in turn effects the underlying markets along with its customers and state
owned enterprises and simultaneously it also impacts the central government (Ottens, 2011).
It has been seen in the past instances that privatization has benefited the companies that have
been privatized in terms of capital structure improvement, investment rationalization, corporate
governance development, competiveness, managerial effectiveness and high quality of
products and services ordered. This value creation benefits both the company and the
shareholders. Privatizations are also generally accompany market liberalization which in turn
increases entrepreneur ship as it greatly attracts domestic and foreign private investment and it
also increases employment and rate of return from the capital invested (Ottens, 2011).
Privatization is an effective way of reducing state participation in the economic activities
which allows the state to focus on its main of role of being a regulator. Privatizations increase
public revenues and they also help in the reduction of public debt along with removing the
fiscal burden of subsidizing loss-making state owned enterprises.
The most common method for privatization is by initial public offering (see Chapter 2.2), trade
sales to institutional or strategic investors. An alternative to reduce state participation is by
Public and private partnership (PPP) structures. In the past the European countries have used
different methods of privatization depending on the government objectives, the market
conditions, and the nature of the enterprise in question and the political agenda of the
government. For instance if we see, privatizations in Portugal and France were carried out in
40
1980-2001 at a percentage of 60 and 57 percent respectively. These privatizations were mainly
through initial public offers and secondary public offers. Whereas in Spain, if we see, only 9
percent of the privatizations were carried out though market regulation and the rest was
through trade sales (Ottens, 2011).
In the European countries the privatization phenomenon gained a considerable momentum
during 1990-2000 which represented a new design in the economic policy. If we now look at
the case of Greece, it is evident that Greece has been slower in these developments of
privatizing and adopted privatization with a significant delay as compared to other European
economies.
The laws by which privatizations in Greece are governed primarily are 3049/2002. According
to the Greek Legislation Interministerial Privatization Committee (IPC) is responsible for the
formation of the privatization policy, which is supported by special Secretariat of Privatization
for the implementation of the privatization policy.
The Greek Economy is supposed to generate a sum of EUR 50 billion from the proposed
privatization program by 2015. It is a condition put by the International financial support in
order to avert the sovereign default. Yet some analysts predict that in the current scenario
Greece will not be able to raise even half the expected amount from the selling’s.
The government in Greece owns a lot and there is a plenty to sell as quoted by columnist in
Fox news that the country can easily pay of EUR 300 billion out the EUR 347 billion debt by
selling the shares that are held by the government and also by selling the assets held by the
state.
Yet there are certain problems that are likely to arise in successfully implementing the
privatization are discussed below:-
According to Adam Smith institute’s Eamonn Butler this privatization will be
problematic and it is already being opposed by the labor unions According to Eamonn
Butler points out that Greece has been able to generate EUR 10 billion from the
privatizations since 2000 and in comparison to which the new privatization program
aims to raise five times more the amount in half the time. Another notable fact is that
41
many of the listed enterprises for privatization have been listed from a very long time,
yet there are no buyers (Ottens, 2011).
Another problematic issue is that corruption and nepotism exists in almost all levels of
publically held companies. The payroll in the state railroad for example is four times
larger than the sale of the tickets (Wall Street Journal, 2011). The country on the whole
needs to raise EUR 1 billion on yearly basis in order to keep afloat and in a current state
when investors are unwilling to invest, since there is low hope or credibility the
possibility of attaining this are quit faint.
This is another reason that justifies Butler’s doubt on attaining the target. Privatization
program will not be successful until and unless the enterprises that are to be sold are
made fit and also their debts are paid off.
The future of this privatization also has a serious impact on the future impression on the
markets, the extent to which Greece is serious and is Credible. To achieve this
determined effort has to be put in both by the government and the labor unions; they
have to prepare the enterprises and the working force for competition (Ottens, 2011).
The main issue with Greece is that it does not have much time to put everything in
order. According to some of the most optimistic accounts the debt is likely to increase
to a level of 160 percent of the GDP and by 2014 it might surpass 190 percent of the
GDP (Ottens, 2011).
In the case of Greece the economy has to be shrunk and private investors have to be motivated
to run business on their own, efficiently and to profitably mange the unexploited assets.
42
4.3 Greece Public and Private Sector a Comparative Analysis
When markets are perfectly competitive there is efficient allocation of resources and due to this
reason when rules of competition are violated then market failure occurs for instance natural
monopolies. For this very reason government intervention is important and therefore promoted.
Government intervention can be promoted by regulating the privately owned monopolies or
nationalization is another method on the basis of increasing efficiency and promoting a more
equal distribution of welfare (Ioannis, 1992).
Taking the property rights theory by Williamson Alchian and Demsetz 2001, privately owned
enterprises are more exposed to competition in the markets and therefore are expected to
perform better than privately owned monopolies or state owned enterprises (SOE’s), thus
efficiency reduces in the government owned enterprises and private monopolies due to the
following reasons:-
1. Asymmetry of Information. In most cases the enterprise itself happens to know more
than the government. Under Market regulation there are no incentives to introduce and
kind of improvements in technology which eliminates the chances of any future price
decreases.
2. Politicians. Politicians are believed to be institutions looking for vote maximization and
there re-election becomes a priority over social welfare.
3. Managerial discretion is difficult to implement in state owned enterprises for instance
Shirking and Slacking.
There are many ways to enhance efficiency in resource allocation and by doing so an economy
can reach Pareto Equilibrium (An allocation of resources when there is no better alteration of it
that can make someone better off without making someone else worse of-(Vilfredo Pareto
1848-1923)). Another alternative method is to increase and promote competition and market
deregulation.
Greek economy for long has been dominated by State owned enterprises post Second World
War. Public sector Corporation’s account for at least 70 percent of the total output produced by
the industrial and the service sector and at least 40 percent of the workforce has been linked to
the government apparatus (industrial reconstruction organization 1990) (Ioannis, 1992).
43
Due to these reasons at the beginning of the 1990’s the consumer inflation was approximately
25 percent and public borrowing accounted for 20 percent of the total GNP of the Greek
economy with a deficit of 10 percent in the current accounts and the GDP has been
continuously declining over the years.
Every aspect of the Greek economy has been very political and from trade unions and
stretching down to student organizations in the universities. This intense political control at all
levels has been a major reason for countering efficient productivity, since political interest as
mentioned above overshadows social welfare. The Greek industry can to a great extent hold its
closeness and reliance over the government and the encouragement for this given by the state
owned-banks. Moreover the country’s bureaucratic lumbering is another reason that adds up in
creating problems for businesses. ‘The investors lose a lot of time in dealing with the various
fragmented official of state departments’ as quoted by John Grimes 1989-CEO of Hellenic
Business Development and investment Co. along with this another reason due to which the
Greek Businesses suffer is that most business try to operate on short-term basis in order to
avoid any high political costs or sometime in order to maximize political benefit which in turn
results in marginal profits. The countries macroeconomic performance in comparison to other
European countries has been very low (Zolotas, 1990) and further the Greek economy has to
have a growth which is twice as fast as the European economy or else it will not be able to pay
off its current debt. After 1990 since the government could not ignore the issues that are likely
to arise due to the above mentioned state of the country therefore they redefined the role of the
state like Mrs. Thatcher did in the case of United Kingdom’s Privatization. The Greek
government should now aim at successfully privatizing its State owned assets in a way that
results in a sustainable growth of output and also increases the employment levels. This will
intern help the Greek they are able to pay back the high amounts of debt and achieve their
highly ambitious privatization program.
The state owned enterprises in Greece lack adaptability and flexibility; moreover the large
deficits affect the competitiveness of the state owned companies in Greece. State owned
companies are presumed to be a part of the social welfare policy and therefore operating them
under a normal private economic criterion becomes difficult. This presumed idea contrasts the
European form which states that the state owned enterprises have to be profitable.
44
Here the problem arises that how do public companies face competitions from either private or
public companies in the European Union economies? The solution to this could be a change in
the framework in which the state owned companies operate. I believe that the suggested
privatization policy can bring this change. According to the “ownership matters” approach as
mentioned in part 2 of the chapter 2 (economic theory of privatization) which suggests private
owned companies are more profitable as well as more efficient than the state owned
enterprises. From this it can be argued that the privatization policy will help the economy of
Greece to grow with the other European countries as it would help in the reduction of the
PSBR and the public deficit.
45
Chapter 5: Conclusion and Recommendations
5.1 Conclusion
The proposed privatization plan will help in managing the public assets and in turn would
result in reduced debts. And it is going stimulate growth, greater efficiency as it is likely to
attract foreign investment.
The findings above show that though the privatization plan for the Greek economy is highly
ambitious and difficult to achieve, yet learning from the case of the privatizations in the U.K
(as shown in…) and as we know that ownership matters and private sectors has and does
perform more efficiently than the public sector (as shown in …..) I conclude that privatization
in Greece is a step in the right direction. Further to this, the Privatization plan if implemented
successfully, it will help Greece regain the investors’ confidence, in time the economy will be
able to revive to a stable financial position.
The Fact is quite clear that the current scenario of the Greece economy is highly vulnerable and
also difficult for the people of Greece. There exist structural problems in Greece and the
European Prosperity can’t be used as a disguise as an obstacle to long-term growth. There also
exist a lot political rivalries within the economy of Greece. With a slow growth rate of 1
percent and debt-to-GDP ratio accounting for 170 percent, Privatization has to be enforced and
probably it is primary tool that can help Greece regain from the financial crisis as privatization
primarily would increase competition, leading to overall welfare.
There exist certain doubts about the success of the Greek privatization plan, yet the private
sector of the Greek economy, with the leadership and guidance of institute of International
Finance and Public sector together are now responding to the market pressures. Therefore a
more rigorous approach will prove to be highly beneficial in bringing Greece back on stable
financial grounds and will also in turn remove the risk of Greece to default in future.
46
5.2 Recommendations
This research recommends that labor reforms and the markets should be reformed which would
help in enhancing competitiveness and also would raise incomes. This in turn would lead to
higher growth which would greatly help in alleviating the public debt. Another important
factor is the progress of the reforms. Policies should be well devised and strategically
implemented
If privatization as concluded above is the key solution to the Greek debt crisis then the
following points are recommended:-
1. Some enterprises should reduce the workforce for the time being, as this cost is short
term and would in the end prevent from closing down of many enterprises that are
privately owned, since they don’t benefit from any kind of state subsidies.
2. Reconstruction and reorganization of public sector companies at this stage is important
and for doing so, an institute can be activated that would help the public sector in this
plan during the privatization transition period.
3. The managerial department of any organization has an important role and therefore
newer professionals and mangers that are experienced should replace political
appointees of the past this in turn would reduce corruption and party politics.
In today’s time modifications are important as the global economy is becoming more and more
interdependent. In this situation of debt crises, it is important for the Greek people to
understand the unsustainable past policies and should move towards a fundamental
transformation, with less state intervention. All this will involve greater determination,
economic responsibility and creativity.
47
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