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Tuesday, 3 May 2011

U CAN HAZ GOVERNMENT ASSETS!

UPDATE: For the latest developments in this story, see here.

Since the idea of the great EUR50bn Greek asset sale first became a matter of national debate in a staged intramarital spat earlier this year, there's been a good deal of speculation on whether it can be done, how it might be done and what might go under the hammer. Depending on one's predisposition for foaming at the mouth, the purported stakes tend to range from the National Electricity Co., to Greek islands or indeed the Parthenon.

The idea itself is not new. In fact, in a curious twist of fate, the senior opposition party (of whom I am a repentant voter) had proposed the Great Asset Sale as early as  mid-2010. They even mooted the original 50bn figure. To hear some in the Left speak of 'selling off the People's property' you might think that a majority of Greek are against privatisations. In fact, the most recent poll on this subject (commissioned by a centre-right leaning daily) found that 41% believe they are 'definitely' necessary, while another 33% believe that they are 'probably' necessary. 58% generally believe they are a good thing. The most popular target for privatisation is the Hellenic Railway Organisation group (a listed company), which as one of our few libertarian MPs (and a minister of finance for a mere 2 years) put it back in 1992, once made more losses than the cost of booking every last rail passenger in the country a taxi.

I've promised to look into this matter in the understanding that our Government is hoping to use privatisations to build a war chest of cash that will help Greece default a little earlier. Alternatively a proper price list of public property could facilitate the equity to debt swaps I've called for here. Either way selling state assets could break an important deadlock because, although we can't default without a primary surplus, the longer you draw out a default that everyone knows will happen, the worse off everyone is. And of course everyone's patience is beginning to wear thin.

This will take some time for me to research properly so please come back to this page later if you have time. Here's what I've got to date.

One place to start digging for past privatisation data is the World Bank's privatisation database, which covers the periods from 1988 to 2008. It is focused on developing countries, but let's face it. That's what we are, too. Alternatively, the European Privatisation Barometer is another option. Registration is required to view the data, but it is free.

Examples of such mass privatisation are scarce; indeed most examples come from post-communist states where mass privatisation programmes were carried out almost overnight. (A very interesting review of this experience showing a link to higher mortality rates can be found here. It shows that social capital is a crucial mediating factor mediating the effects of privatisation on mortality, and I think this will be a telling factor in our case as well.)

Of course moving from communism to (hopefully) capitalism is not the same as the Greek experience will be as we have an experience of things like private ownership, corporate governance, protection of minority investors and the trappings of half-way workable markets. But it can still go very very wrong.

Another good place to start is this review which shows that privatisation tends to improve efficiency in publicly owned enterprises and that this more than makes up for loss of jobs where these do occur. I note that the productivity gains aren't necessarily passed on to consumers (the evidence is not there for me to be able to say this). And by the way privatisations mostly tend to cost middle-managers, rather than blue-collar workers, their jobs (evidence reviewed here).

More details soon.

6 comments:

  1. Privatisation for sure will bring cash to the government and in some cases, in Greece, a more efficient way to run some companies. But in the case that the Electricity Co and/or other utilities are sold the ones that are going to lose are:
    a) The consumers as prices are going to go up (don’t have the data available, but Greece was one of the countries with the lowest cost of electricity within EU)
    b) The country as a whole since greek competitiveness will be hurt after the price rise
    In addition, it might turn out that privatisation won’t be necessarily better as an alternative to the inefficient state monopoly if:
    a. You break the monopoly into many smaller companies (not able to exploit economies of scale)
    b. You don’t break the monopoly to a sufficient large number and you don’t have the appropriate regulatory mechanisms to monitor the market for collusion etc
    Conclusion, private ownership especially in markets that by definition are not competitive (i.e. water, electricity) is not necessarily better than state ownership.

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  2. As a rule, this sort of situation gets treated by keeping the infrastructure (in this case the grid)in public hands and privatising the service provider. The idea (which you explained very well) is that no one benefits if a natural monopoly owned by the state gets turned into a private monopoly.

    This solution tends to work quite well on all manner of things from railroads to telecoms to power companies.

    Usually 'social partners' on the employer side tend to make the case that privatisation brings in 'superior management'. I think that's 100% bullshit. The only thing of value privatisation can bring into public utilities is superior incentives and if you can't have that then you shouldn't try.

    But in the case of Greece the assumption that ΔΕΗ is a 'natural monopoly' is only true given the current barriers to entry for foreign competitors. I'll bet you people like EDF don't think ΔΕΗ is a natural monopoly; they just think Greece is a closed market. Once this is reversed, things change very rapidly.

    It remains to be seen how intelligent the government will be about this. Either way, I don't think ΔΕΗ has any business surviving as a vertically integrated group.

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  3. Your point now is that it is going to be competition for the services of the utility or product and that the infrastructure will remain in government hands. This seems to be working in some cases, telephone for example. But even there, it is not clear whether the price fall was due to privatization or the rapid technological change in the market. Essentially, you are claiming that there is (or should have been) competition between train companies for the service let’s say from London to Nottingham or Sheffield. To my knowledge there is only one train company running this service. Is there any competition between water companies? I remember some years back in a city in the midlands, I had a problem with a water company because I could not open an account. I complained and they told me, as a last solution I could switch to another provider. Guess what there was no other provider. As for electricity and gas companies, it was 2008 (if I remember well) that all of them were increasing the price by exactly the same amount. If a state monopoly is going to be privatized, I want competition on the price, not on the color of the leaflet that they send me when I have to pay the bill.

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  4. @Anon I'm sure in many instances it will be as you say. Nothing for it then. But where this is not the case, we're better off selling. I think the acquisition targets are limited in number so it's fairly easy for us both to prepare our respective cases.

    It's not a case of changing my argument; I'm just adapting to the ever more specific (but admittedly realistic) instances you're throwing at me.

    Finally, as per your original post, it's entirely likely that we might want to sell off even natural monopolies in order to build a war chest that will allow us to default sooner. In those cases I'd still go for privatisation, combined with a plan for buying back said utilities.

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  5. I thought that greece is planning to privatise public companies in order to reduce its debt/GDP and not to have some cash, for the rainy day of restructuring to cover the deficit. Anyway, my opinion is that a quick privatisation will be more close unfortunately to the russian experience. The reason is that in greece the independent authorities monitoring competition are nonexistent. So private monopolies will have a party. I hope I am going to be proven wrong

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  6. @Anon

    I cannot know what the Greek government is planning. I can only say what I have in mind. For what it's worth, it appears that the Greek Government is not very keen on privatisation and has dragged its feet consistently when it's been quick to play to the IMF's script on other things. Perhaps, as one friend suggested on Twitter, we are not expecting to get very much out of state enterprises because they are unreformable in the short term.

    I see your concern regarding competition and I can't say that it is baseless or that the realities do not concern me. What little study I've done of the Russian case however tells me that it was a *whole* other kettle of fish.

    We're not looking to privatise ΔΕΗ by handing out share coupons to people who have never heard of what a share is, nor is Greece a country with no concept of minority shareholder protection. Competition authorities may be toothless (I can't back this up with evidence but I believe so) but at least people have heard of competition before, and know it's a good thing; they can push for better safeguards and even achieve them.

    That said, the Eastern Bloc review I have cited is precisely for you and for all those who might agree with you. I know it approaches the subject from an unorthodox angle but it's more interesting for that reason. If I can find more material I will post it.

    ReplyDelete

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