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

19

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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