In-Depth

Learning By Doing

An ambitious privatization program forms part of the reform program for the Greek economy negotiated with the European Institutions and the IMF. How is it being implemented?

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 Art by Federica Bordoni

The road to recovery for the Greek economy is a masterpiece of makeshift engineering. Disagreements are evident among the main stakeholders, including the Greek government, the various European Union actors and the International Monetary Fund (IMF), on most aspects of its construction. Disputes surface periodically as successive markers are reached, requiring a new round of rancorous talks on conditions for the next release of bailout funds or loan repayments. While the talks have moved closer to the front page in the first few weeks of 2017, one aspect of the recovery program has begun to pick up pace: the country's extensive program of privatization.

The Hellenic Republic Asset Development Fund S.A (HRADF), better known by its Greek acronym TAIPED, was established in July 2011, both to implement the Greek state's privatization program and to maximize the value it returns to the state coffers. From an initially unrealistic €50 billion, the program is now aiming for total revenues of €15 billion by 2025, and at the same time encouraging new investment and opening various sectors of the economy to greater competition.

The program's asset portfolio can essentially be grouped into four segments: corporate, infrastructure, real estate, and land development. While criticism of the pace of Greek state asset sales is often logged as part of the international negotiating process, the scale of the program and the absence of equity market involvement disguise its progress to date. Over the past few years, numerous sales have been agreed

TAIPED has already completed several flagship real estate and land development deals. "We now have fewer than 90 actual real estate properties to bring to market, either by standard tender or through our electronic auctioning process," says Lila Tsitsogiannopoulou, executive director of TAIPED.

Although a few significant real estate deals are still in the pipeline, in the short term the focus will be on infrastructure, including energy companies, airports and motorways. "We also have several small marinas," says Tsitsogiannopoulou. "We believe that with the renewed promotion of tourism in Greece and the upgrade of our economy, the enhancement of these marinas will be timely and may also boost the real estate sector as a whole." How far has the program been hampered by the bearish condition of the Greek real estate sector in general? "Prices have been hit since 2009. That's evident," she comments. "However, if the price is right and the product is right, you will always attract investors."

Models

TAIPED relies on independent valuations and, in the case of the larger assets, it commissions more than one. These independent estimates set the floor price. "We will not sell for less than the valuation provided to us," says Tsitsogiannopoulou. "Once we receive an offer above that, we will enter negotiations, either on the price itself or on the potential for related investment, such as public spaces, access roads, and the creation of new jobs."

The program also avoids clustering of assets and selling them as a portfolio. "Potential investors will generally seek a discount in such cases, so clustering is not attractive," says Tsitsogiannopoulou. "In some cases, however, we recognize that investors might create additional value if they purchase more than one asset of the same type such as energy companies or airports. We did have two clusters of seven regional airports each, but these airports were a special case as they had important links between them."

While the privatization program is home-grown, TAIPED has engaged in dialogue with those involved in similar projects in other countries. "We have worked closely with Italy, from where we adopted the system of electronic auctions, and have adopted a few elements of Germany's program, but our independent consultants are a key source of expertise," she adds.

Investor Profile

Unlike many privatization strategies in other markets, the Greek program so far has not involved IPOs or public listings on an exchange. While this may partly reflect the insufficient depth of local secondary markets, it also has been deliberate policy. "In principle, we are open to different approaches," says Tsitsogiannopoulou. She notes, however, that IPOs are rarely appropriate, when the entity being marketed is carrying significant debt. "Most of the public assets we hold have issues; They do not have a positive P&L," she acknowledges. Where a transaction involves the direct sale of a single real estate asset, the new owners are free to absorb their purchase into a fund or other tradable vehicle. In most other cases, however, specific conditions will be attached that do not make even a partial flotation feasible.

Timing may also be a significant factor, given the context of the program. "It is often quicker to go for a direct privatization, promote it in both the local and international markets, and invite any investor who is interested to participate in a bidding process," Tsitsogiannopoulou explains.

While IPOs have thus far not been judged appropriate, TAIPED is, however, relatively relaxed about the structure and location of investors in the program. "Our purpose is not just to create a micro-economy around each specific project, but to help the country ease its debt burden," she says. "Our sale proceeds go into a special account to contribute to debt reduction. This is the purpose of TAIPED by law. It's not for us to decide on the geography or legal structure of the investor."

The benefits of privatization are still hotly debated both by Greek politicians and the public at large. For many local observers, the yardstick by which the health of the program will be judged is the redevelopment and regeneration of the Hellinikon site, the old international airport, which has essentially stood abandoned for 15 years. Once under way, the regeneration is expected to make a measurable contribution of up to 2% to Greek GDP.

One of the largest transactions in the privatization program, a sale of Hellinikon, was signed in 2014 with LAMDA Development and Global Investment Group, comprising Eagle Hills from United Arabic Emirates, the Chinese conglomerate Fosun Group and Latsis Group of Greece. While TAIPED's formal role ends once an agreement is signed, it continues to act as what Tsitsogiannopoulou calls "the safekeeper of the contract" to ensure the process stays on track. Over the past two years, she says, the contracting parties for Hellinikon have been working to fulfill agreed pre-conditions before development can begin in earnest. This has involved delays to the original timetable, but, she insists, "We expect the investors to be submitting their master project plan shortly and we have included the proceeds of sale in the 2017 budget we have submitted to the Ministry of Finance."

The Year Ahead

The latest sale to be completed was in mid-January, when state railway company TRAINOSE was acquired by Ferrovie dello Stato of Italy for €45 million ($48.1 million). A separate tender is running for the rolling stock and its maintenance.

Final bids for the port of Thessaloniki, the country's secondlargest, are expected in early March from five active participants. "The independent valuations to the board of directors will be submitted on the same day as the offers and we will most likely announce the successful bidder by end-March," says Tsitsogiannopoulou.

She identifies several other flagship privatizations to come in 2017, including the privatization of Egnatia, the motorway running across Greece, with 700 km of road linking ports with major cities; two national gas companies, as well as more marinas, ports and airports. In addition, there are two bids relating to the current international airport, one for a twenty-year management contract and another for the sale of a percentage of the company itself. The former is expected to complete in Q1, 2017 and the sale of up to 30% of the equity later this year. —Richard Schwartz