The sale of public values in the midst of an economic depression and an abysmal crisis of public finances is an economic crime (Part 1)

by Niels Kadritzke. Original source (in German): NachDenkSeitenYou can download a printer-friendly version here

We have learned from the many experiments in almost all European countries that privatization is one of the great delusions of market fundamentalists. In Greece, however, the clientelistic abuse of public goods has led to a “privatization” of a very special kind. For example, there was a massive “secret” private appropriation of state land. The public sector was often treated like a “private club”, by the politicians of the old parties, who could add new members at will. The clientele state thus became almost the enemy of the welfare state. However, the sceptical attitude of the majority of the Greeks towards the public sector is by no means a blanket approval of any kind of privatization by the population. There is, for example, a clear majority against the privatization of water utilities.

Among the still prevailing conditions of clientelism, the probability that “public good” will be squandered or secretely privatized is high. The sale of public values in the midst of an economic depression and an abysmal crisis of public finances is an economic crime. This is evident in the privatization of the gambling company OPAP or the failed sale of the government stake in the natural gas company DEPA. By Niels Kadritzke.

As a prelude to the complex questions that arise under the word “privatization” in the case of Greece, I want to tell a story about the “parasitic public sector”. It is very appropriate at this point because it vividly illustrates the connection between the two topics.

It’s about the Athens tram, which was completed in 2004 just before the Olympics. The state enterprise TRAM AE operates a modest network of 26 kilometres in length (it actually involves only a single bifurcated line connecting the centre of Athens with Piraeus and the seaside suburb of Glyfada). In 2004 the company that started with a staff of 190 people, landed in the hands of the government of Kostas Karamanlis [Nea Dimokratioa, or ND party]. By 2009, in just five years under the ND regiment, TRAM AE had accumulated a deficit close to a three-digit million amount. During the same period, the company increased its workforce to 690 employees. The tram line was extended in this period by 690 meters. In other words, the expansion of the road network by a 2.5 % faced an expansion of staff by 363 %.

The story was recently reconstructed by the journalist Giorgos Papachristos in the newspaper Ta Nea (9 July). He refers to witnesses who experienced the expansion of the operation closely, as Karamanlis was heading for early elections in 2009. According to him, ND had their people infiltrate the company “through windows and doors, through skylights and vents,” as Papachristos writes ironically. The clientelistic orgy even forced the management to hire additional temporary office space to accommodate all the extra “blue people” (blue is the colour of ND).

TRAM AE is a subsidiary of the state-owned transport company Attiko Metro. The parent company also increased its workforce in the years before the crisis, but at least with a parallel continuous expansion of Metro routes. Nevertheless, Attiko Metro is a local service company with strong clientelistic traits. In this case, we can even exceptionally refer to an analysis, written by a business consultant, namely Philip Ammerman, an investment advisor living in Athens, (see the blog Philip Atticus). Ammerman for example refers to:

  • the lack of supervision and control of management performance (which has never been fired because of a negative track record, but only as part of a change of government);
  • the lack of financial transparency (no publicly available information on employment, wage structure, expenditures, procurement of materials, let alone strategic planning);
  • insufficient measures against clandestine passengers (the dodger rate in Athens is at 15 %; in comparable cities it is between 3 %, Berlin, and 6 %, Paris).
  • inadequate control of investments for maintenance and network expansion, which entails a high risk of corruption (bribery, kickbacks by over-invoicing, etc.).

It pays to read the detailed text in the original English. You certainly cannot agree with the author in all details (e.g. the ratio of fair-dodgers cannot only be explained from the lack of control, but mainly from the pauperization of precisely those Athenians who are reliant on public transport). But the big picture is well drawn and representative of many public companies. However, the most interesting reading is at the end, where the consultant offers us his recipe solution: The Attiko Metro should be privatized.

In the clientele system state enterprises had already been privatized

Before we, as honest leftist readers, get upset with this recipe, we should accept that such a conclusion is pretty obvious for many Greeks. Ammerman can only argue this way because situations like the tram are unacceptable for taxpayers – and the users of public services. But, of course, a business consultant cannot come up with the idea that the best solution to the problem would be the “third way”: neither a clientele business nor privatization, but a reasonably organized and efficiently functioning public company. One which merits the title of “public”, where customer and taxpayer are kings.

Thus, one aspect of the privatization debate has already been named, which is often overlooked in the case of Greece, but which however, is of particular importance. In most capitalist countries it comes down to the question of whether privatization of a public service / company is unacceptable, tolerable or even useful, especially considering two aspects – public benefit versus affordability. It usually comes down to two questions:

  1. Are certain types of amenities so important that they need to be designed in a “socially acceptable” way, i.e. not subject to the profit motive?
  2. What about affordability? Does the public sector have enough money (i.e. sufficient tax revenue) to fund / subsidize a certain public service, including the major investments that will be constantly needed?

The wave of privatization that we have witnessed worldwide and increasingly within the EU area in recent decades, is usually justified through the financial dire straights of public budgets, which was, however, previously deliberately induced through tax cuts. This argument was made more palatable through the assertion that private companies can always provide “cheaper” services to their customers than public ones.

As we have learned from many privatization experiments in almost all European countries, this assertion has proved to be the great delusion of privatization fundamentalists. That is why today we are experiencing repentant municipalities trying to buy back their former public utilities, under pressure from the citizens, who have learned their bitter lesson of privatization.

That was the big picture. Now let’s go back to the case of Greece. Here, it is not just about the criteria of profit and affordability, though it is clear that the second aspect is particularly heavy in a quasi-bankrupt state that cannot even fund a minimum of welfare. So, if a privatization project also creates investments for which the state has no money, for most Greeks that appears as a perfectly reasonable solution. This explains, for example, the high acceptance of the idea that a foreign company would invest on reasonable terms in the ailing Greek railways.

The crucial point in the issue of privatization under Greek conditions is a third aspect, which is superimposed on the other two and thus greatly distorts them. We’re talking of course about the problem of clientelism: a public company loses its public service nature at the same extent as it becomes the “accommodation” for the clientele of the political class. This clientelistic abuse of a public good is tantamount to a “privatization” of a special kind, for which the example of the Athens Tram AE is only the most extreme. Nick Malkoutzis hits it right on the head when he accuses the Greek politicians of treating the public sector “like a private club, where they can add new members at will” (Kathimerini, 24 January 2013).

What I had already stated in another context: that of the clientelistic state being the greatest enemy of the welfare state (NachDenkSeiten, 30 August, 2012) is blatantly obvious in many public companies. A growing majority in Greece is about to learn that the hard way. Since the personnel overload of the public sector is no longer financially viable, and so many of those citizens who were formerly involved in the corruption cannot hope to secure jobs for themselves and their children, they can see the old clientelism with new eyes.

In these politically corrupt structures we can find one explanation why for some years now in, polls show a clear majority (approximately two thirds) for privatization. In April 2011, three out of four respondents said they considered privatization to be “generally” necessary. This approval rate should have slightly decreased by now, because the privatization programme does not generate the expected revenue for the state in times of crisis (more on this below). But still, most Greeks have such a negative image of the public sector that they basically cannot find privatizations to be wrong. This tendency is also supported by the public opinion approval of earlier completed privatizations. According to the already cited Public Issue survey, for example, a great majority was of the opinion that the former state company OTE (telephone company) and Olympic (Airline) worked better after privatization than before. The opposite view was only supported by a fifth of respondents.

A clear majority against the privatization of water utilities

However, the sceptical attitude towards the public sector does not signify by any means a general consent to every kind of privatization. In Greece, citizens identify a range of public services they don’t want to see delivered by private companies under any circumstances. The classic case is the water and wastewater companies of Athens / Piraeus and Thessaloniki. The privatization of EYDAP (Athens-Piraeus) and the EYTh (Thessaloniki) is rejected by a two-thirds majority. Only 23 % of respondents favour it, according to a survey from mid-June 2013. And if you consulted only those affected in the two urban regions, the rejection is likely to be even clearer.

In the case of public water works, the Samaras government must be prepared to phase fierce opposition from the population. However, both projects are high up on the privatization list: EYTh is to be sold to the highest bidder still in 2013, EYDAP by mid-2014. There is a detail that shows the importance that the Samaras government attaches to this project: In March, it appointed head of the state privatization agency TAIPED Stelios Stavridis, who was previously head of EYDAP, i.e. of the public water and sewerage companies of Athens / Piraeus. Succeeding Stavridis at EYDAP they appointed Antonis Vartholomaios, who previously sat on the Board of TAIPED. Thus it is guaranteed that both these men work hand in hand for the privatization of water utilities.

And this, although at EU level there are clear signs of a rethink. The initiatives of many citizens have forced the relevant EU Commissioner Michel Barnier to abandon the policy advocated for years in Brussels, which had promoted the privatization of municipal waterworks. Despite these “bottom-up” corrrections, the EU Commission (within the Troika) does not demand of the Athens government to take the sale of the waterworks off the agenda. The propagated goal of relieving the state treasury through “privatization revenue” still has absolute priority. The commentator Nikos Xydakis sees here a clear case of schizophrenia, because Greece is apparently forced “to violate” the latest common strategy “against the will of the EU”  (Kathimerini, 12 July).

This contradiction is also pointed out by some very active groups fighting in Greece for the maintenance of the municipal waterworks (information on website). Hillary Wainwright describes their well organized resistance, especially in Thessaloniki in the May issue of the independent left magazine “Red Pepper”. Particularly revealing is the reference to a condition that is essential for the success of the anti-privatization campaign in Greece: Trade unionists involved in the campaigns seek to make it clear to their allied comrades that they are engaged as citizens, and not (only) as employees of the EYTh by fear of losing their jobs. Therefore, they are not afraid to address corruption in the public sector and admit that there are unfortunately corrupt elements in their own ranks.

This self-criticism is also essential if the public sector unions want to play a role in the fight against the privatization of public non-profit enterprises. For most citizens still cherish a great distrust for the public sector unions, which in the past often acted like professional guilds and are therefore not seen as legitimate comrades in the movement of the crisis losers (I wrote in detail about the “peculiarities” of the Greek trade unions on NachDenkSeiten from 23 December 2010).

Just one example from the past: In the case of state-owned “Olympic Airways” (completed in the fall of 2009) a clear majority of Greeks were for privatization because the company, operated increasingly at the expense of the general public. Although Olympic notoriously made a huge deficit that had to be compensated from the state budget, the unions of the different professional groups were able to expand their respective privileges constantly using their political leverage. The most extreme was the case of the pilots who even wanted to enforce by strike their right to reserve a fixed percentage of training courses for junior pilots for their own offspring. With such examples, the Greeks have had the bitter experience that not every “public company” automatically makes a contribution to a more just and caring society. Too often they have experienced the opposite.

State property misused

Τhe example of the state lands shows how probable it is that under conditions of clientelism “public good” is squandered or privatized under the hand. In Greece for historical reasons that have to do with the Ottoman history, the state is by far the largest landowner. At the beginning of the crisis the current finance minister Stournaras (then Director of the Economic Research Institute IOEB) once calculated that the state could have taken in 200 billion Euros from the sale of real estate before the crisis. However, this was a very abstract calculation, because it would have required that the state had any overview of its own properties. In 2009 that was still far from being the case. The registration of land is still not completed.

The reality about the state’s power over its own property can be illustrated through an example that was described a year ago in the Kathimerini newspaper. In July 2012, the inspectors of the state privatization agency went into the port town of Katakolon on the west coast of the Peloponnese (the port lives from the cruise ships that stop here so that passengers can a trip to nearby Olympia). When the inspectors came to appraise the state-owned land, they experienced a nasty surprise. Of the 2000 hectares of designated public areas only 200 hectares were unused. The vast majority of plots had been illegally appropriated by all sorts of people who had built houses, shops, small hotels, even whole settlements, and of course, mostly without planning permission.

This private appropriation which does not even qualify as “secret” can be seen at all corners of the country. And it does not only apply to the assets of the state, but also of the municipalities. The Athens government itself offers a glaring example of the use of public property: although the state owns a lot of real estate in the capital, major ministries have rented entire building complexes at expensive prices. Until recently no attempt was made to use the state property portfolio in such a way as to accommodate all ministries in state-owned buildings. Many of this state-owned property was not used to minimize government spending, but benefited the “clientelistic” potential to whom all sorts of favours were distributed: affordable rent for client A, free use by client B.

Selling real estate property, which cannot be sensibly used for public facilities (or public interest), would have actually been a reasonable decision long before the crisis, given the growing government deficits. And had this revenue flown in time, it may have averted – at least for some time – the national bankruptcy. Nevertheless, the above cited calculation by Stournaras would have been realistic if they had stretched the sale of real estate over several years. If, however the state sells its values all together, it can obviously not achieve optimal income more naturally because it contributes itself to its own price-dumping.

Privatization in a depression – an economic crime

This basic economic law applies to the entire privatization programme, which was imposed to the Greek state by the Troika. Greece has been under pressure since 2010 to sell off its “assets” in a “buyer’s market”. Already for this reason alone, the sale of public values in the midst of an economic depression and an abysmal crisis of public finances is an economic crime. This is completely independent of any consideration of social advantages and disadvantages or the financial viability of a “public sector”. That this privatization programme for today’s Greece is an absurd imposition is also reflected in the fact that the Troika keeps adjusting down their targets for the proceeds from privatizations.

In February 2011 Greeks were informed that they would have to make 19 billion Euros through privatization by 2015 and 50 billion by 2020. Since then, this requirement was gradually adapted to the reality of “market economy”. Currently, the troika believes that Athens can only make around 11 billion Euros by the end of 2016 and only 25 billion by 2020 (no date is mentioned any longer for the still existing target of 50 billions).

For 2013, the target has been reduced to 2.58 billion euros , but even this amount cannot be reached, after the privatization of the natural gas supplier DEPA, which was expected to fetch nearly one billion Euros, failed in early June.  Athens and the Troika have therefore informally agreed that this billion is to be moved to 2014, so that finally only 1.6 billion Euro of privatization proceeds need to be achieved this year.

But even this sum is far from being reached. So far this year, only two projects were implemented: the sale of the state lottery company OPAP and the sale of the state shares in the company DESFA, which supplies the Greek households with natural gas. In contrast, the privatization of the gas company DEPA, that imports wholesale natural gas and maintains the Greek pipeline network failed at the last minute.

In the following, I will consider these three privatization projects precisely because they can show the very different problems of the whole privatization programme. All three, however, have one thing in common: at the end there was only one interested party at the end of the “bidding offer”, that is: in none of these cases can we talk of a sale to a “highest bidder”.

(Part 2 follows on 23rd July 2013)

_______________

Translated by Ares Kalandides

About Ares

Ares Kalandides holds a PhD in Urban and Regional Studies from the National Technical University of Athens. He is the founder and CEO of Inpolis, an international consultancy based in Berlin, Germany and has implement several projects around the world. Ares teaches Urban Economics at the Technical University in Berlin and Metropolitan Studies at NYU Berlin.
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