Privatisations in Greece: A win-win that's difficult to achieve

Agora Contributor: Jens Bastian

As the summer break draws closer, the political authorities in Athens, the quartet of creditors and international investors looking at Greece can take a brief time out to consider their options for the second half of 2016. The menu of policy challenges to be addressed in the coming months by Athens, Brussels, Frankfurt and Washington is considerable.

One key issue concerns the next agreements to be reached in the field of privatisation and licensing concessions. The disinvestment process of state assets held by the Greek government is entering a new phase, with the major institutional reconfiguration based on the prior actions mandated by the third Memorandum of Understanding (MoU) of 19 August 2015 and Greek law 4389/2016.

Transport infrastructure in general – and airport logistics in specific – will feature prominently in Greece’s privatization process in the coming months. More specifically, this process includes two airport-related issues. Firstly, the Greek privatisation fund HRADF announced in June 2016 the initial procurement of advisors for the commercial evaluation of an additional 23 regional airports that were not part of the recent agreement with the German-Greek consortium Fraport/Slentel to manage another set of 14 regional airports.

Secondly, the next tranche of regional airports will be subject to a concessions agreement. It forms part of the compliance requirements of the Greek government vis-a-vis its international creditors. HRADF must evaluate the received bids/offers by September.

It is important to note that HRADF will then have to transfer the state’s stake in these additional regional airports to the newly created Hellenic Company of Assets and Participations (HCAP). The new privatisation and investment fund will claim ownership of all Greek state assets, including real estate properties, all major state-run enterprises, utility companies, public transport, state shares in airports (including Athens International Airport, ΑΙΑ), banks and the assets currently held by HRADF.

In June HRADF also invited proposals for a second independent valuator for the Airport Development Agreement (ADA) of AIA. The second advisor is expected to perform an independent assessment of the value of AIA’s current concession and its planned extension for an additional 20 years, that is until 11 June 2046.


According to various media reports in Greece, HRADF wants the negotiations concerning AIA to have reached a “mature” stage by September 2016. This timeline is significant since HRADF will then formally hand over asset management and disinvestment responsibilities to its successor organisation HCAP.

HCAP will formally commence operations in Autumn 2016. Two representatives from the European Stability Mechanism (ESM) will sit on its supervisory board together with three Greek representatives appointed by the Greek government. One of the ESM members will also be the chairman of the board. Each side must approve the appointments of the other.

The key question international investors looking at Greece continue to be raise concerns the following: How likely it is that the Greek side will comply with its privatisation undertakings under the MoU? The most recent evidence on the ground suggests that government policies on fostering foreign investment and advancing privatisation remain erratic and rather unpredictable.

In trying to identify the next steps with regard to AIA, it is instructive to highlight the recent incident relating to the China COSCO Shipping Corporation and the privatisation of Piraeus Port Authority (OLP). This case was not only about the shipping minister, Theodoris Dritsas, trying to retroactively alter a landmark sales agreement from April 2016 under which the Chinese would buy a 67 percent majority stake in OLP.


More importantly, the conflict with COSCO shows that a flagship agreement between a large foreign investor and Greece’s privatisation agency was not automatically incorporated fully in the subsequent legislative draft and secondary legislation submitted to parliament. The content of the draft bill sought to reverse seven elements of the contract agreed between COSCO and HRADF. These elements included one related to the state having to approve project-licensing requirements within a specific (90-day) timeframe. This is a key procedural element, as it would impact on the timing of follow-up investments. Another important revision sought by Dritsas stipulated that labour laws governing private companies would not necessarily apply to OLP after the state’s disinvestment.

In essence, the dispute risked creating considerable reputational damage to the government’s international standing, particularly as it involved upsetting one of Greece’s few large foreign direct investors only days ahead of Prime Minister Alexis Tsipras’s official visit to China.

The government will be hard pressed in the coming months to signal to its international creditors and financial markets that the country’s political authorities are indeed embarking on a new course of action. The COSCO/OLP fallout signals the potential for self-imposed roadblocks. The AIA concession extension and privatisation could thus quickly turn into a defining test case for the government’s commitment to attract foreign capital.

Moreover, the government’s attempt to go back on its signature only two months after signing a bilateral agreement with COSCO is rather unprecedented and underlines how unpredictable policymaking continues to be under the SYRIZA-led government. It raises serious questions whether ministers are genuinely committed to making progress in a key policy area of the third MoU.

There is another lesson to be learned from the COSCO experience. The Tsipras government ultimately backtracked in parliament on the proposed changes to the sales contract with COSCO. This U-turn demonstrates that even when there is no ongoing review, the attempt to change elements of an agreement failed in parliament at the insistence of a formidable foreign direct investor. Moreover, the supermajority achieved for the legislation – 223 MPs backed it – shows that seeking support across the political spectrum has increased the law’s legitimacy and the chances of not being revised any time soon.

If the COSCO/OLP fallout highlights the potential of the SYRIZA-led government to create self-imposed roadblocks, the negotiations concerning the AIA concession extension could quickly turn into a defining test case for the administration’s commitment to attract foreign capital. The government can hardly afford to antagonise other potential investors currently looking at AIA. But as the individual line ministries involved in the process have repeatedly shown a lack of political will, resistance or obstruction can be expected before a final agreement is reached.

The milestones that Greece needs to accomplish over the coming weeks include the approval of the privatisation of state-run power grid operator ADMIE and the appointment of the supervisory board of HCAP. The transfer to this fund of a second portfolio of public utilities is behind schedule. According to the third MoU, these actions should have been completed by the end of June.

Under these circumstances, the resignation last Wednesday of all three members of HRADF’s executive board – Aris Xenofos (CEO), George Koutsos (Deputy CEO) and Anastasios Gagales – has not helped its operational capacity.

HRADF is now a privatisation agency in wholesale transition and subject to the transfer of its authority and assets into the new HCAP superfund. As it will take time until the new agency is fully operational, we should expect administrative delays in various privatisation projects in the coming months.

Airports and beyond

The concession agreement for the management of 14 regional airports with the German-Greek Fraport/Slentel consortium as well as the COSCO/OLP contract could easily have served as important catalysts for direct foreign investment in Greece. The reality is, however, that the time taken to conclude such agreements and to implement their legal and regulatory frameworks is excessive and fraught with potential political hurdles.

The achievement of rather easy win-win situations is frequently frustrated by the actions of individual line ministries not fully committed to the deal. Discrepancies between signed contracts and subsequent bills submitted to parliament are so recurrent in the Greek privatisation process that they jeopardise investor interest in future projects. Investors continue to face the risk that line ministries will attempt to materially alter signed corporate agreements in subsequent legislative bills.

For any investor in other forthcoming Greek privatisation projects, such as the AIA concession, these events present formidable lessons to be learned and applied in the negotiating strategy, for example in terms of submitting biding offers, due diligence procedures and legal compliance requirements on the part of the government.

As HCAP will only become operational in September 2016, we should not expect quick success stories to emerge. The conclusion of agreements will continue to be contentious among decision-making bodies within HCAP and the line ministries. Equally, it may be well into 2017 before HCAP reaches full operational capacity, has appropriate staffing levels and establishes political legitimacy.

In theory, the voting rights held by HRADF imply that the fund is now the majority shareholder in AIA (with 55 percent) and could thus define the strategic priorities of AIA. But the stake cannot be seen as a single unit. Rather, it consists of two separate packages, one initial shareholding of 25 percent and the recent additional 30 percent stake. The privatisation method for the transferred 30 percent equity stake, previously held by the finance ministry, is currently under consideration.

In April 2016 talks began between HRADF and the Canadian Public Sector Pension Investment Board (PSP) concerning the extension of the concession lease for AIA. These initial discussions are in line with the obligations and timetable mandated by the third MoU.

The current president of HRADF, Stergios Pitsiorlas, has argued that the sale of the 30 percent package is a priority. An outright sale of the package through a competitive tender process appears the more likely option, but Pitsiorlas has not ruled out an IPO, for example by listing it on the Athens Stock Exchange. Both asset disinvestment options are included in the prior actions programme of the third MoU.

AIA has reported a steady increase in passenger traffic, in particular since 2014. During the first five months of 2016, passenger traffic reached 6.73 million, corresponding to an increase of 10.4 percent compared to the same period in 2015. Airplane traffic rose by 7.3 percent.

These numbers illustrate that AIA is a major source of revenue for the government through usage fees. It remains to be seen if and how lower fees could result from an extension of the concession by 20 years. In light of such numbers, a number of possible scenarios have emerged.

First, HRADF – and from September HCAP – will first proceed with the conclusion of an agreement to extend the concession by 20 years until 2046. This process would be finalised by the end of 2016. There is a 35 percent probability of this happening.

Second, in the course of the first half of 2017, HCAP will then proceed with the sale of the 30-percent AIA stake (though an IPO or competitive tendering). This has a 25 percent likelihood.

Alternatively, HRADF/HCAP will prioritise the sale of the 30 percent package (the remaining 25 percent stake will stay for a defined period in the hands of HCAP) and subsequently proceed with the extension of the concession. This comes with a 30 percent probability.

Fourth, HRADF/HCAP will proceed with a competitive tender that includes an automatic extension of the concession until 2046 for the successful bidder. This option was considered in the past but is said to have been rejected by one of AIA’s shareholders, PSP, which holds a 26.7 percent stake in AIA which it bought from the German Hochtief company in May 2013. Ten percent likelihood.

*This article first appeared in our weekly e-newsletter, which is available to subscribers. There is more information about subscriptions available here.

You can follow Jens on Twitter: @Jens_Bastian

3 Comment(s)

  • Posted by: Dean Plassaras

    They say the secret to successful investing is buy low and sell high. Greece wants(forced to) to sell low which is not a money making proposition.

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  • Posted by: Michael Romanos, University of Cincinnati

    The Greeks view privatization suspiciously, because they consider too many goods and services "public" and are suspicious of the private sector either monopolizing services or creating exclusionary regimes, like prohibitively high pricing. Add to that the widespread mistrust of any kind of capitalist free market mechanisms, and you have an economic environment where the state is not only expected to be the major employer, but also to be the provider of most goods and services. With that kind of state power and control, it is no wonder that the bureaucrats weld so much power, and the public is so used to, and accepting of the idea of clientelism.

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    • Posted by: Dean Plassaras

      Very little to do with what you say. This is a 100% timing issue. You never sell illiquid assets at the lowest possible price and when there are no qualified buyers. To conduct a successful price negotiation you need at least 3-5 bona fide offers which then you could use in obtaining maximum negotiating leverage.

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