IHS World Markets Energy | |
Significance | After a fractious debate that saw rioting across the capital, the Greek parliament has passed a bill imposing a series of fiscal austerity measures to rein in national debt, which includes the partial privatisation of state utility PPC. |
Implications | Although the bill mandates the sale of a 17% stake in PPC, the end result is by no means assured. Previous attempts to privatise Greek utilities have been blocked by the unions and slowed by political infighting and an inefficient bureaucracy. |
Outlook | Although some foreign buyers have shown an interest, the inclusion of PPC's social security fund is likely to become a stumbling block, while the current lack of cost-reflective pricing and high future carbon costs imply PPC will be sold at a very low price—a politically explosive prospect. |
Now Comes the Hard Bit
Greece managed to at least temporarily stave off economic meltdown yesterday after parliament approved the second stage of a EUR28-billion (USD40.6 billion) austerity plan, and Germany announced that its banks will support a new bailout package. The passage of the legislation means the International Monetary Fund (IMF), the European Central Bank (ECB) and European Union (EU) will now deliver EUR12 billion in aid immediately, but the remaining tranches depend upon the progress Greece makes in implementing its reforms.
A key plank of these reforms is the further privatisation of inefficient state-owned industries—notably the Public Power Corporation (PPC). Greece hopes to raise EUR50 billion from total asset sales and concessions over the next five years, beginning this year. In this vein, the government is now committed to reducing the state's shareholding in PPC from 51% to 34% through the sale of a strategic stake to a (probably foreign) investor, although it would retain control of management (that is, operations and strategy will remain determined by government policy).
The further privatisation of PPC is seen by the European Commission (EC) and the Greek energy regulator RAE as critical to the liberalisation of the power market (which is effectively monopolised by PPC, see Greece: 7 January 2011: EU Gradually Prising Open Greek Power Market). Indeed, even before the financial crisis, the Commission had launched legal proceedings against the Greek government for blocking non-state voting rights within PPC. PPC owns 93% of the installed power capacity in Greece, generated by lignite, fuel oil, hydroelectric and natural gas power plants, as well as by aeolic and solar energy parks. It is the largest business in Greece in terms of asset value, hence its fate is closely followed by the local media.
The Greek government may also dispose of, or reduce its stake in, gas monopoly DEPA (see Greece: 3 June 2011: Government Looks to Sell a Third of DEPA by Year-End). DEPA owns gas grid company DESFA as well as three distribution companies, but the government has not specified whether these subsidiaries would be part of the offer. It is 65% state-owned with the remainder held by Hellenic Petroleum, a refiner.
Militant Tendencies
Yet the sale of PPC is by no means assured. To begin with, opposition to privatisation and reform in general amongst the PPC rank-and-file workers is deeply entrenched. The majority of the utility's employees are part of the GENOP-DEH union, one of the most militant in Greece. Previous attempts at internal reform or even forging deeper strategic alliances with foreign entities have been met with fierce opposition and industrial action (see Greece: 27 February 2008: Union Action Again Prevents Board of Greece's PPC from Discussing RWE Co-operation Plans). Despite attempts to improve internal efficiency, workers who are "hell bent on maintaining the status-quo" according to an official at RAE, have prevented restructuring at every turn (see Greece: 31 March 2011: Greek Regulator Slams Incumbent PPC for Obstructing Power-Sector Development).
This determination on the part of the unions to block reforms was demonstrated through the past fortnight when strikes at PPC gave rise to power cuts across Greece (see Greece: Strikes at Greek PPC Continue; Bulgarian Imports Surge). The fact that the shutdowns cost PPC some EUR4 million per day and may lead to the utility being sued by municipal groups for presenting a risk to public health was not enough to prevent the industrial action, illustrating how deep opposition to reform runs. Part of the reason for this is that full privatisation could lead to the unbundling of various arms of PPC (notably the separation of the utility's coal pits from the rest of the firm), implicitly dividing GENOP into smaller groups.
As well as the militant unions' opposition, the sale itself will be a complicated process, not least because the value of PPC is extremely difficult to gauge. The liberalisation of the Greek power market holds mixed implications for PPC: on the one hand, the abolition of regulated prices (and implicitly the inefficient cross-subsidy mechanisms currently in place) and their replacement with higher, cost-reflective rates would increase PPC's revenues. Conversely, the inevitable decline in market share stands to reduce the utility's turnover. The unpalatable outlook for Greek power demand will also serve to dampen PPC's value. In addition, potentially tighter carbon markets in phase III of the EU Emissions Trading System (EU-ETS) would have a significant impact on PPC's margins since the utility operates one of Europe's most carbon-intensive generation portfolios. Perhaps most difficult to reconcile is the pensions issue: the generous scheme offered until 2001 means the state is currently paying out some EUR710 million per year to former employees—persuading a foreign investor to take on such a burden will be tricky.
All of these factors make it difficult to forecast how much PPC will be worth; hence negotiations are likely to be protracted. Less tangible inputs such as the impact of the government retaining managerial control will further muddy the waters. The fact that PPC is likely to be sold at a low rate will further sap political will.
Despite these concerns, investors are apparently forthcoming. Gazprom has already mooted interest in acquiring a stake in DEPA—this would fall in line with Gazprom's long-term ambition to build up a downstream position in Europe and complements the existing relationship between the two firms with regard to the development of a Southern Corridor gas pipeline (see Greece - Russia: 27 May 2011: Gazprom Throws Hat in Ring for Possible Greek Sell-Offs). Although seeking to consolidate its overseas operations, CEZ may also be interested in acquiring part of PPC, or perhaps some of the utility's generation assets, as the Czech state-owned utility could secure long-term supply contracts for its businesses in neighbouring Bulgaria and Albania. Surplus capacity in PPC's portfolio is likely to become available as Greek domestic demand contracts. RWE and Enel have also been mooted as possible investors and rumours of Chinese state investment corporations taking an interest abound.
Outlook and Implications
Previous attempts to privatise Greek state-owned industries have been held up by political infighting and inefficient bureaucracy. In 1991 the government embarked on a reform programme but failed to secure a single sale. The final sale of PPC is scheduled for late 2012, by which time it is hoped the current financial turmoil will have subsided and the market will offer a more stable outlook. Given the looming difficulties outlined above, this may be an optimistically early deadline.