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Liberalisation, privatization and the European Social Model WP1: Background and history of liberalization and privatization in the EU Country report: GREECE 1. Public enterprise creation The first significant public enterprises were set up in Greece in the late 1920s. They comprised a number of specialized credit institutions, notably the Agricultural Bank of Greece, the National Mortgage Bank and the Bank of Greece. These were followed by a number of public enterprises created in the sectors of telecommunications, transportation, energy, military equipment, etc., after the end of the Second World War and through the 1960s. There followed two waves of nationalization of industries in financial distress in the 1970s and in the 1980s. More specifically, following the end of the military dictatorship, in 1974, the first elected government nationalized a number of large, mostly ailing companies, including the Olympic Airways, the Commercial Bank of Greece (the country’s second largest banking group at the time) and Aspropirgos Refineries ( a major refinery). The withdrawal of private capital from these sectors is largely explained by the rising costs of production, mainly due to the oil crises. Whereas in other areas of Europe, industry responded through mergers and acquisitions, in Greece the response was for the creditors (state banks) to take over the loss making firms, which were then acquired by the state (Patronis & Liargovas, 2004). A further nationalization wave occurred in the early 1980s, as it became apparent that a growing number of large private concerns were in serious economic difficulty. Again, the government stepped in, in an attempt to salvage them. Their debts were turned into equity and the Industrial Restructuring Organization (IRO) was set up, as a public holding group for non-profitable enterprises. The aim of the IRO was to return these companies back to the private sector, having restructured them. Thus, by the mid-1980s the presence of public enterprises in the economy was quite strong in Greece, comparable to that in Spain and Portugal (Table 1). Table 1 Presence of public enterprises in the economy (%) Spain Greece 1980 1985 1980 1985 Size of the public enterprise sector (1) i. share in value added ii. share in investment 9.0 22.0 14.0 21.0 n/a 12.7 n/a 19.0 Portugal 1980 1985 13.0 18.3 17.6 17.0 iii. share in employment Borrowing requirement/GDP (2) State subsidies to public enterprises as per cent of GDP 5.0 6.0 3.5 4.5 5.2 4.7 -0.7 -1.2 -1.9 -2.7 -9.3 -6.2 2.1 2.4 2.4 3.0 4.8 4.3 (1) For Spain, the size of the public enterprises sector is measured with respect to the non-agricultural sector. For Portugal, data refer to non-financial enterprises. (2) For Spain, it refers to the operating deficit of the main non-financial public sector groups Source: OECD Economic Studies No. 16. Spring 1991, Table 2, p. 180 It is interesting to note that the above periods of public enterprise creation in Greece have been called (i) the “developmental” wave (1950s & 1960s), aiming at supporting the country’s industrialization process; (ii) the “democratization” wave (1970s), occurring at the end of the military dictatorship in 1974 and signifying the return to “democratic rule” and (iii) the “socialist” wave (1980s), aiming at rescuing a large number of over-indebted firms and in this way, saving jobs (Pagoulatos, 2005). As we shall see, the policy of privatization has followed a reverse order. The first enterprises to have been privatized come from the two nationalization waves, while it is relatively more recently that the public enterprises set up in the 1950s and 1960s have come into focus. 2. Rationale of privatization policy The first enterprises to become privatized belonged to the 1980s nationalization wave. They were related to the policy of industrial restructuring under the IRO. In particular, the IRO was set up in 1983. Under it, the state acquired control in a number of industrial sectors: 20% in the cloth industry; 50% in cement, 40% in paper mills, 50% in fertilizers and 100% in the shipyard industry. By the early 1990s, the number of enterprises under the IRO auspices amounted to 62, employing 22,000 individuals. The sole aim of the IRO and thus of the state was to restructure these companies and to return them to the private sector. In actual fact, most companies under it were privatized on the basis of a special, fast-track liquidation procedure. The IRO was itself liquidated in 2002, having absorbed considerable amounts of public funds to little effect in terms of enterprise restructuring. It has been argued that the IRO was from the beginning doomed to fail, insofar as it came under pressure from a multiplicity of interest groups, with divergent interests (Patronis & Liargovas, 2004). Namely, businesses, banks and workers. To the extent that a number of successive governments failed to take the necessary organizational and structural measures to implement the policy of industrial restructuring, the IRO could not indeed succeed in its task. The privatization of non-IRO public enterprises has been combined with market liberalization measures relating to the network industries, such as telecommunications, transportation and energy. The rationale for this policy has been expressed largely in terms of the EU requirement for the opening of competition and a leveling of the playing field in the markets where public enterprises operate as monopolists or oligopolists. Yet another aspect of this policy has been the need to comply with the Maastricht Treaty convergence criteria in view of membership of the Economic and Monetary Union. Overall, calls for the “deep restructuring” of public enterprises, in order for them to survive, have been quite common (OECD, 1999). The public enterprises under privatization from the mid-1990s to the present day include some of the largest enterprises in Greece - usually monopolists (or oligopolists) - in communications (telephony and mail), energy (electricity, lignite mining, petroleum and natural gas) and transportation (air, rail and urban transport). There are few industrial firms in this group. Their share in the public sector and in the economy as a whole is quite significant. In particular, in the late 1990s, they comprised nearly 50 enterprises – other than those of the IRO - and employed about 130,000 individuals, equivalent to about 3.5% of total employment and 6% of wage earners. Approximately 10 firms dominate. Table 2 shows the size and structure of the public enterprises under privatization, as in 1997. Table 2 Main public enterprises by sector 1997 Reve L- term Employ Employ nue Reve Invest Invest debt L- term ment ment (% (Drs. nue ment ment (Drs debt (persons) of total) Bio) (%) (Drs bio) (%) bio) (%) Transportation OASA(Athens urban) OSE (Rail) OA(air) Energy DEH (electricity) Hellenic Petroleum DEPA (natural gas) Communication OTE (telecom) ELTA (post) ERT (TV & radio) Water & sewerage EYDAP (Athens) Thessaloniki w&s cos Industry EAB (military equipm) EBO (military equipm) 31,521.0 9,586.0 11,758.0 10,177.0 37,570.0 33,999.0 3,350.0 221.0 38,421.0 23,387.0 11,581.0 3,453.0 5,380.0 4,745.0 635.0 4,617.0 2,886.0 1,731.0 24.5 341.5 7.4 38.1 9.1 25.4 7.9 278.0 29.2 1,427.5 26.4 830.6 2.6 596.9 0.2 29.8 964.5 18.2 840.0 9.0 83.2 2.7 41.3 4.2 86.7 3.7 69.7 0.5 17.0 3.6 48.2 2.2 33.1 1.3 15.1 9.5 1.1 0.7 7.7 39.5 23.0 16.5 26.7 23.3 2.3 1.1 2.4 1.9 0.5 1.3 0.9 0.4 111.3 3.1 88.3 19.9 484.9 277.7 93.4 113.8 271.4 268.9 0.2 2.3 18.6 13.4 5.2 11.7 8.2 3.5 8.5 513.1 0.2 166.7 6.7 338.7 1.5 7.7 36.8 1,311.0 21.1 1,227.4 7.1 8.0 8.6 75.6 20.6 157.0 20.4 128.0 0.0 0.2 29.0 1.4 24.5 1.0 12.4 0.4 12.1 0.9 69.8 0.6 66.0 0.3 3.8 26.2 8.5 17.3 0.4 67.0 62.7 0.4 3.9 8.0 6.5 0.0 1.5 1.3 0.6 0.6 3.6 3.4 0.2 SUBTOTAL 117,509.0 TOT PUB ENTERPRISES 128,797.0 SUBTOTAL AS % OF TOTAL PUBLIC 91.2 ENTERPRISES SUBTOTAL AS % OF ECONOMY (empl; GDP) 3.3 91.2 2,868.4 79.5 897.9 68.2 2,075.4 106.1 100.0 3,609.8 100.0 1,316.7 100.0 1,956.9 100.0 79.5 68.2 106.1 11.0 4.0 6.0 Source: Mylonas & Joumard (1999) 3. The legal framework The first privatization law was passed in 1991 (Law 2000/1991). It prescribed a number of different methods of privatization, while its main emphasis was on the rate of implementation. The law was passed by the conservative government of the New Democracy, which however collapsed shortly afterwards (1990-1993). The ND party was succeeded by the “blairite” type socialist party of PASOK, which ruled for the following 11 years (1993-2004). PASOK proved to be more effective in implementing the privatization law than the conservative party of the ND. It has been argued that this was due to the “pragmatic, gradualist and non-conflictual” style of the Simitis government (1996-2004) (Pagoulatos, 2005). The initial privatization law was reformulated in 2002 by Law 3049/2002, which lifted many of the remaining restrictions to policy, such as the maximum state holding that may be transferred to the private sector. Certain aspects of the new law are given in Box I below. BOX I Denationalization Law 3049/2002 (Gazette of the Greek Government, A/212/2002) 1. The law introduces the abolition of control of public sector enterprises, whereby “control” entails the possession of the majority of shares, or of the right to appoint the majority of the members of the Board of Directors or the management of the enterprise concerned. 2. Denationalization Ministerial Committee (DMC): Minister of Economy and Finance (chairman), Minister of Development, Minister of Labour and Social Security and minister supervising the enterprise to be denationalized. The DMC decides on the method, extent and procedure of denationalization. 3. Methods of denationalization: Sale of an enterprise as a going concern; listing on the ASE or other organized market; sale of the share capital or part of it, with or without shareholders’ agreement; concession of licenses or other rights of the enterprise; lease of the enterprise or of particular rights, assets, units or branches of it; assignment of the management of the enterprise to a third party; the exchange of shares of the enterprise with privatization certificates; the sale of the share capital under special contractual agreement (e.g. buy-back agreements); sale of the share capital to a domestic or foreign legal person with the latter issuing securities exchangeable with the shares sold; issuance of bonds convertible into shares. Enterprises to be denationalized have to take measures to facilitate process within certain time limits. 4. “Special share” (art. 8): In the case of public enterprises offering services of public interest and social utility associated with national defense and security, public health, energy, transportation and communications, the exploitation of national resources, the government may maintain a “special share” in the denationalized enterprise, giving it enhanced rights and especially the right to veto particular decisions of strategic importance. The circumstances under which the “special share” regime may be applied are decided by a ministerial committee, consisting of the Minister of Economy and Finance, the Minister of Development and the minister responsible for the enterprise under denationalization. Source: Panagiotis K. Staikouras, in European Journal of Law and Economics, May 2004, 373-398 Generally, Law 3049/2002 has been criticized for its lack of transparency, for offering no protection to the workers of the enterprises under denationalization, as well as for contravening the EU provisions on the freedom of establishment (art. 43 of the Treaty) and the freedom of capital movement (art. 56 of the Treaty). To the extent that the legal framework of privatization policy is further liberalized, the quality of the regulatory framework becomes especially pertinent. Serious doubts have been expressed regarding the quality of the Greek regulatory framework. In particular, the National Competition Commission reviews abuse of dominant position and competition issues arising out of the privatization of monopolies. Between 20002005, it investigated 5 cases in-depth, while concern has been expressed over insufficient enforcement, as there have been reports of common and overt agreements among firms about prices, operating hours and services. The NCC operates with a particularly low budget and a small staff. Its enforcement level – measured in terms of the human resources committed to it and adjusted for the size of the economy - is among the lowest of OECD countries (OECD, 2005). Similarly, the National Telecommunications and Postal Commission has a very low operational budget, while it is also seriously understaffed. Doubts with respect to the effectiveness of the Greek regulatory system have been expressed by a number of authorities. In particular, the Inspectors-Auditors of Public Administration have noted the following problems (i) regulatory overlaps &/or vacuums; (ii) complicated, time-consuming and non-transparent administrative procedures; (iii) bad-quality legislation codification (2001 Report). Furthermore, the Global Competitiveness Report 2002-2003 of the World Economic Forum places Greece in the 52nd place (ranking from less to more corruption) out of 80 countries and in the last in EU15. The existence of significant weaknesses of the Greek supervisory system were further revealed by the 1999 stock market crisis, as extensive market manipulation and insider trading phenomena, with the involvement of government controlled portfolios, appeared to be at the core of the crisis. 4. The Greek privatization record Greece is a relatively late starter in the area of privatization. As shown in Table 3 below, the proceeds from privatization were insignificant in the early 1990s, while it is only in the late 1990s, that they became significant, e.g. in relation to the total privatization proceeds recorded on the level of EU15, peaking in 1998-1999. Table 3 Privatization proceeds of Greece - Share in EU15 1990-2000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 19902000 2000 Priv/n proceeds 35 73 44 558 1,395 3,960 4,880 1,384 12,329 (USD mio) As % of 0.00 0.00 0.00 0.11 0.27 0.12 1.20 2.07 6.58 7.92 2.96 2.93 EU15 Source: OECD, Recent Privatization Trends, in Financial Market Trends, No. 79, June 2001 The late starting point of privatizations in Greece is also evident in relation to Spain and Portugal, as shown in Fig. 1. Figure 1 Share of Portugal, Spain & Greece in EU15 privatization proceeds 1990-2000 (%) 70.00 60.00 50.00 40.00 Percent P AS % OF EU15 S AS % OF EU15 G AS % OF EU15 30.00 20.00 10.00 0.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Year Source: OECD, Recent Privatization Trends, in Financial Market Trends, No. 79, June 2001. The privatizations that have taken place over the period 1991-2004 is shown in Table 4 below. Table 4 Privatization of public enterprises in Greece 1991-2004 1991 Bank of Piraeus International competitive tender (67%) 1992 Heracles General Cement Co.(AGET) Trade sale (70%) Athens Bus Company Renationalized in 1994 Eleusis Shipyards Trade sale 1993 Bank of Athens Block trade through stock exchange (67%) Hellenic Sugar Trade sale 1994 Neorion Shipyards Trade sale 1996 Greek Telecom (OTE) I Initial public offering (8%) 1997 Greek Telecom (OTE) II Second public offering (12%) 1998 Macedonia Thrace Bank Block trade through stock exchange (33%) General Bank Private placement and listing (33%) Bank of Crete International competitive tender (97%) Hellenic Petroleum I Initial public offering (23%) Bank of Central Greece Block trade through stock exchange (51%) Greek Telecom (OTE) III Additional secondary public offering (10%) Athens Stock Exchange Private placement (10%) 1999 Ioanian Bank Trade sale by holder Commercial Bank (51%) Greek Telecom (OTE) IV Additional secondary public offering (14%) Public Gas Co. Exercise of Hellenic Petroleum option (22%) Break up into two entities: initial public offer Athens Water & Sewage of the services entity (30%) Olympic Catering I Initial & secondary public offering (25%) Olympic Catering II New public offering (25%) Duty Free Shops Trade sale (67%) 2000 Hellenic Development Bank Initial public offering (30%) Hellenic Petroleum II Secondary public offering (12%) Trade sale to strategic investor (43% & Hellenic Vehicles Industry management) Athens Stock Exchange Initial & secondary public offering (10%) COSMOTE Initial public offering (15%) Commercial Bank Strategic investor and alliance (7%) Agricultural Bank Initial public offering (13%) 2001 Football Prognostics Org/n (OPAP) Corinth Canal Salonica Port Authority Skaramanga Shipyards Public Power Corporation (DEH) I Greek Telecom (OTE) V 2002 Hellenic Industrial Development Bank Football Prognostics Org/n (OPAP) Greek Telecom (OTE) VI Attica Beaches - marinas 2003 Hellenic Petroleum III Duty Free Shops AGNO Dairy Company Greek casino of Mont Parnes Football Prognostics Org/n (OPAP) Athens Stock Exchange Piraeus Port Authority Public Power Corporation (DEH) II 2004 General Bank Hellenic Petroleum (IV) National Bank of Greece Initial public offering (5%) Concession agreement (100%) Initial public offering (25%) Trade sale (100%) Initial public offering (16%) Exchangeable bonds (9%) Trade sale (67%) New public offering (19%) New public offering - accelerated book building (8%) Long-term operation contracts Trade sale to strategic investor (17%) Trade sale (33%) Trade sale (100%) Trade sale to strategic investor (49%) New public offering (25%) Last tranche (33%) leading to 100% privatization Initial public offering (25%) New public offering (12%) Minority stake to strategic investor (22%) New public offering (8%) Accelerated book building (7%) Source: Ministry of Economy & Finance, as quoted in Pagoulatos, 2005 As we can see, twelve banks were privatized through merger or acquisition over the period 1991-2004. Over the same period, the presence of the state was drastically reduced in certain cases, such as that of the telecommunications organization (OTE), where it now amounts to as little as 39%. In other cases, such as in the electricity and petroleum products sector, it has also been significantly curtailed. In addition to the above, it is worth noting that novel types of privatization have also been introduced in Greece, such as the “build – operate – transfer” (BOT) type concession agreements. For example, the Athens airport, the Rio-Antirio Bridge, the Athens ring road and all major projects for the 2004 Olympic Games were constructed on the basis of BOT agreements. Overall, following its late start, Greece is well on the way to privatizing as much of the public sector as possible. For example, the present conservative government is contemplating constitutional changes that will further enhance the role of the private sector at the expense of the public one, in such areas as education, health, etc. Similarly, the use of public-private partnerships is spreading fast. In this sense, the Greek case constitutes a paradigm of particular interest in relation to the social implications of privatization. M. Frangakis May 2006