The sale of public values in the midst of an economic depression and an abysmal crisis of public finances is an economic crime (Part 2, end)

by Niels KadritzkeOriginal source (in German): NachDenkSeitenYou can download a printer-friendly version here. You can read part 1 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.

Part 2

The case of OPAP

The state share of 33 % in the gambling company OPAP went for 652 million Euros to a consortium named “Emma Delta”, which belongs by two-thirds to the private equity fund of the Czech Jiri Smejc and by a third to the Greek ship-owner George Melissanides. Emma Delta was the only one (of initially eight prospective customers) having submitted a binding offer for the OPAP shares, which initially amounted to 622 million Euros. But even the achieved 652 million were valued by the business pages in the media as a poor result in the light of the current market value of 712 million Euros. According to Kathimerini (2 May), Emma Delta with an estimated annual turnover of 4 billion Euros would have refunded its investment in just a few years. Thus, from the perspective of the Greek taxpayer the OPAP sale was not a particularly clever decision. The economic service “Financial Mirror” states that the business plan of Emma Delta already forsees a net profit of 213 million Euros in 2015, and after that a further sharp rise with the introduction of new betting and gambling activities (particularly internet betting and gaming). It is important to understand that the technical development of these new services as well as the necessary patents, had been largely financed by the former semi-governmental OPAP.

No matter where one stands in the business of gambling, in view of this prior investment it would have been a far better long-term solution for the Greek government to keep the OPAP shares and to participate in the yearly rising revenues. In terms of a sustainable stabilization of government finances the sale of a lucrative investment was certainly the wrong decision. That it was nevertheless taken, is only due to pressure from the Troika – and to the pressure exercised upon the Greek Privatization Agency TAIPED, which until May 2013 was unable to report a single “success” (except for the sale of real estate worth a meagre 110 million Euros).

Moreover, the whole OPAP case is far from complete. It hangs on a fine thread as Kathimerini (14 July) reports. For the Czech investor and his Greek partner threaten to terminate the whole privatization contract if OPAP does not give up the old cooperation agreements with the Intralot company. Intralot is part of the business empire of Sokratis Kokallis, considered the biggest beneficiary of the Greek clientelistic system, with which it has been closely linked for over 30 years, with the best business connections to both the Pasok and ND governments. Intralot has been the central software provider of OPAP since 2007. The contract closed at that time seems to be so beneficial for Intralot, that the new owners want to end this privileged relationship. The Czech oligarch Jiri Smejc has now declared that he would only accept OPAP if the Interlot contracts are cancelled. Even this first “success” of the Greek privatization saga threatens to burst.

The DEPA case

Only a month after the sale of the OPAP shares a bitter setback followed: On 10 June TAIPED had to report that the privatization of state shares in the natural gas company DEPA had failed for the time being. The only seriously interested party, the Russian company Gazprom, had withdrawn its offer. Since TAIPED had factored as revenue a sum slightly under one billion Euros (Gazprom said to have offered 900 million), the Russian withdrawal meant that the 2013 target of privatization revenues of 2.58 billion Euros can no longer be reached.

There was much discussion and speculation about the reasons for the Gazprom withdrawal. What certainly played a role was the information from Brussels that the EU Commission would have stopped the deal anyway. For that there was a good reason: DEPA buys 60 % of its gas supplies from Gazprom. The involvement of the Russian state company would thus violate the requirement that the prime contractor does not also control the supply network.

The principle of the separation of production from operation is part of the so-called “Third EU Energy Package” (2009). However, it is questionable whether Brussels would have stuck to this rule and would actually end up preventing a Greek “privatization success”, after the month-long pressure on the Athens government and accusations of TAIPED’s failure. In addition, the Russian government is already working on ways to deal with or work around the new EU rules by splitting the Gazprom group (see here). There is some evidence that there were quite different concerns that in the end prevented Moscow from closing the DEPA deal.

The Greek company is actually stuck with unpaid claims in the amount of 380 million Euros (see Reuters report of 21 May, 2013). DEPA is desperately trying to reduce these debts (the largest debtor is the state electricity producer DEI, which operates some of its power plants with natural gas). The Greek side in the negotiations was willing to cover up to 180 million of uncollectible receivables, but for Gazprom that would have still meant a potential loss of 200 million. In the end, the whole deal was apparently too opaque for the Russian side. This also applies to the question of whether the big consumer DEI would have continued to buy constant amounts of gas in the long term, which in turn depends on the unclear privatization fate of the electricity producer.

TAIPED only counts with a new tender on the privatization of the DEPA in 18 months at the earliest. Until then, there is the opportunity to thoroughly consider the lessons learned from this case. The most instructive aspect of the failed DEPA deal was the readiness of the Greek side to give in to almost all demands of the only potential buyer Gazprom until the end.

This clearly shows that a desperate seller can be blackmailed in more than just the price. Not only did TAIPED have to cut the originally planned amount of guarantee in half (i.e. the money that is thus lost for the interested party in the case of a deal failure), they also had to sign off a clause stating that Gazprom would be allowed to cancel the whole business if rates in the energy sector changed. The Russians even managed to push through a “drachma” clause by which they would have been allowed them to exit in case of a “Grexit”. All this only shows the asymmetric distribution of bargaining power that a Greek energy expert described as follows: “the harsh demands of Gazprom were even harder, because the Russians realized two things early on: that they are the only player, and that the Greek side is under heavy pressure to finally show privatization revenues” (Chrysa Liangou in Kathimerini, 11 June).

There is nothing to add to this. Expect for the reasonable assumption that the failed DEPA deal is not such a bad result for the Greek economy. The price that Gazprom demands for its natural gas from the Greeks, is now 30 to 40 % higher than the contract price from other EU countries, explains the “Association of energy-consuming enterprises” (EVIKEN). Its chairman Kouklelis warns that the Greek economy may be strangled by the high energy costs (Kathimerini, 12 July). For a long time now, the association has demanded of the Samaras government that the (still state-controlled) DEPA lowers natural gas prices. This was always rejected, complains the association, with reference to the intended privatization (Kathimerini, 21 June). This shows that the fixation on a “privatization at any cost” is not only financially foolish but also an economically harmful strategy.

The DESFA case

DESFA is a DEPA subsidiary. It maintains the pipe network that delivers natural gas to the Greek households and operates an LNG plant (production of liquid gas). Under an agreement dated 19 June, the Azeri state company Socar, which was left as the only bidder, will buy the 66 % state share in the company for 400 million Euros. As Panagis Galiatsatos wrote in the FAZ of 20 June, this offer was “significantly below expectations” for Athens. According to Greek press reports Socar had initially only offered 305 million Euros, but this price was bolstered by a phone call from Prime Minister Samaras with President Aliyev in Baku.

Even more interesting is the news (Ethnos 21 June, 2013), that the first offer of the Azerbaijanis, filed in January 2013, was at least 750 million Euros. If these figures are correct, it would confirm the claim of the Ethnos commentator about a “sell-out” of the Greek gas distributor. Which is strictly speaking not a “privatization” since Socar stands for “State Oil Company of Azerbaijan Republic”. To refer to this group as a state enterprise, is an understatement: Socar is basically the Azerbaijani state. Because of its export earnings, it covers 95 percent of the local government budget from (figures from 2012). One must rather say then, that Greece has sold its gas company, together with its single LNG plant, to a not so “flawlessly democratic” republic.

To justify this sale at an embarrassingly low price, prime minister Samaras has presented the DESFA sales as a major strategic coup, which has contributed significantly to the Baku’s government decision to construct the TAP gas pipeline through Greece (and thus against the rival Nabucco project), a decision that constitutes great “confidence” in his country. I already commented upon this big-mouthed argument in my last post ( NachDenkSeiten of 11 July ). Of course the decision for TAP was taken by the Aliyev government and the international TAP consortium based alone on economic criteria. The fact that the course of the trans-Adriatic pipeline corresponds with the Greek wishes, possibly played a minimal role, if at all. However, it could well be that the great interest which Samaras showed so demonstratively in the TAP project, may have given the Baku regime the idea they could push for a particularly low price for the acquisition of DESFA. This way Greece will have already paid a state contribution for the participation in the TAP investment.

However, Greece can expect a weighty advantage from the deal with Baku. The Azerbaijani gas is likely to come cheaper than the Russian Gazprom supplies. The only question is, what quantities do the Azerbaijanis and their partners from the TAP (which mostly brings gas to Italy) want to direct into the Greek system. This might also depend on the prices to be achieved. In this context it is interesting that until today – nearly a month after the preliminary agreement – Socar has still not signed a definitive purchase agreement with TAIPED. According to the latest Greek press reports there is a big catch: The Azerbaijanis want to ensure that they can carry out an “independent commercial policy” on Greek soil (Kathimerini, 15 July), meaning that they can set the fees for the pipeline. Apparently there are doubts in Athens whether this claim is consistent with the ideas in Brussels.

Blame the stupid market conditions

Thus, even the third privatization “success” is still at risk. But even if the DESFA sales should be completed soon, at least for this year the end result for the TAIPED remains short of the expectations of the Troika and the promises of the Greek government. And there is little evidence that the recipe, with which the TAIPED president Stilianidis wants to improve this balance, could work out. His announcement, to speed up the sale of the 51 % state-share in the Port Authority of Piraeus (OLP), depends on the willingness of the Chinese. The Chinese state-owned enterprise Cosco has indeed already declared its interest. A Cosco subsidiary operates two container piers in Piraeus, with considerable success. But even in the Athenian government there is doubt as to whether they should get involved for a quick deal with a business partner who has once before used the dire situation of the Greek state. Especially when Cosco is again the only bidder.

The rumours surrounding the price for the selling of the entire port is one billion Euros (Wall Street Journal, 19 June). This is a sum, which no government in Athens would have accepted at the beginning of the privatization euphoria. But these are the market conditions for a country that is “caught up in a recessionary spiral, further strengthened by continual demands of new taxes and austerity measures by the Troika”, to quote Galiatsatos (Frankfurter Allgemeine Zeitung of 21 June). TAIPED head Stavridis expressed that even more clearly, when he wanted to explain to the Wall Street Journal on 10 June why the DEPA privatization did not take place at the end: “It was not failure, it was due to the market conditions, and that is not our fault”. Freely translated into Clinton’s English: It’s the market, stupid. A sentence that unfolds its full truth when applied to the entire privatization adventure: A bankrupt state that wishes to save itself through privatization is bound to fail because of market conditions.

_____________

*Translated by Ares Kalandides

Original source (in German): NachDenkSeiten. You can download a printer-friendly version here.

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