Essay Plan - Corporate Governance

8/2/2019 Essay Plan - Corporate Governance

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HeriotWatt UniversitySchool of Management & Languages

Accountancy & Finance

Module: Corporate Governance

Module supervisor and Lecturer:

The Privatization Process andthe Resulting Effects on Greek

Firms and Greek Economy.

Petros Grammenos

Person ID: H00021540

-2010-


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Contents

Abstract ....................................................................................... 3

Introduction ................................................................................. 4

The Privatization Process and the Effects on Greek Firms .......... 5

Case study of privatized firms ................................................... 5

Privatization effects on Greek economy ...................................... 8

Conclusion ................................................................................. 11

REFERENCES .......................................................................... 14


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AbstractThe term of privatization refers to a transform of production facilities or even whole markets from

the public to the private sector. As a primary objective is to enhance competition and growth,

finding funds for investment in modernization and better management (the luck of which is known

to suffer the Greek government). The community enjoys better quality of products and services,while releasing resources for the state budget for social policy.

In this paper, I study the privatization process and the effects on Greek firms and on the Greek

economy. The paper is organized in two sections. First I try to present some of the main privatized

Greek enterprises in order to see the effects of that change. Second I present the results of

privatization on the Greek economy in order to see the benefits (or not) of this process. According

to the evidences I obtain that in most cases the incomes of the government were strongly increased

and also the state was released from the management of unprofitable enterprises.


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IntroductionThe term of privatization refers to the transfer of inputs from the public to private sector. A primary

objective is to enhance competition and growth, finding funds for investments and better

management. For the first time the concept of privatization mentioned in policy statements read out

in parliament by the Prime Minister; Constantine Mitsotakis, 24 April 1990.

The first privatization was the Public Transport Corporation in 1991. But the first major

privatization was the sale of Piraeus Bank to a group of investors in 1991. After that there is not any

major privatization until 1995.

The situation changed after 1995. Greek government adapted the European Monetary Union target.

Privatization was and still is the most important element of the economic policies of the social

governments. The EMU has a great impact on this change. At first EMU press the Greek

government to implement institutional reforms and therefore to increase the degree of commitment

and credibility of policy makers, reducing thereafter the degree of uncertainty in the economy. Andalso it has contributed to the ideological convergence among different parties. (Vasilis Patronis,

Panagiotis Liargovas, The tow faces of Ianus: Nationalization and Denationalization in Greek

economy, 1974-2000)

In 1997, the investigation in the course of privatization was made by the experts of the International

Monetary Fund. The delegates of the international organization were informed by the members of

the Ministry of National Economy. According to the plan would have been completed the second

securitization of OTE (Greek Telecommunication Company), the sale of Bank of Crete and the sale

of Greek Central Bank, the privatization of the Duty Free Shops and the partial equity of the Stock

Exchange.

In 1999, a Bill provided for the establishment of a new Special Office for Privatization in the

Ministry of National Economy, which was responsible for the study and promotion of the new

privatization program to be implemented from 2000.

In 2000, the government seemed determined to proceed with great changes, ignoring the political

costs and as the Prime Minister; Costas Simitis stated privatization will be done with force and

speed. In 2001, ten privatization and measures related to business activities, but also the protection

of the consumer, were included in the priorities of the Ministry of Development. In 2006, after a

several failed efforts Olympic Airlines was privatized and was sold to MIG.

Nowadays privatization is again one of the major priorities of the Greek government. The state will

try to privatize many state-owned enterprises in order to reduce the debt.

In the next chapters I will try to analyze some of the major privatized firms and the effects. In

Appendix 1 is almost all the major privatization action in Greece.


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The Privatization Process and the Effects on Greek FirmsFive public firms are examined which have been partially or totally privatized during the period

1991-2009. The standard theory used and the results of academic research found on this topic,

according to Georgopoulos, Mylonakis, Papadogonas (2006), are briefly presented.

a. Profits (return on assets). I expect an improvement on profits of privatized firms becauseone of the objectives of the new management is the profit maximization. Consequently, with

firm operating in an open competitive environment and globalized capital markets, theory

suggests that increasing profits is the best way to maximize value if the capital markets work

at least adequately if not perfectly.

b. Growth (sales growth). Theory suggests that post-privatization increased profitability due tothe alteration on management incentive and streamlined efficiency due to more competitive

environment after privatization, if that is really happening, will each one and in combination

produce significant growth in firm sales or output.

c. Investments. This is not an absolutely clear topic. Generally speaking we expect an increasein post-privatization investments, in order to catch up with real or potential competitors in

an open and aggressive competitive environment.

d. Leverage. Theory suggests that level of leverage decrease due to increase profitability whichin turn is the outcome of improved efficiency.

Case study of privatized firms

There are five major privatized firms that I would like to examine in this paper. The most commonused methods of privatization are the import and sale of shares on the stock and the sale stake to a

strategic investor (e.g. privatization of OTE). The partnership between public and private sector

should be reported as an alternative method. Very often a combination of methods is the most

appropriate solution.

1. Hellenic Vehicles Industry. Founded privately in 1972 as Stayer Hellas was renamedELVO and nationalized in 1987. Finally, it was privatized in 1999 with the sale of 43% of

the shares and the transfer of management to Mitilinaios Group. In the table 1, I present the

statistics of the four indices from 1996 to 2003. The results are rather mixed. Two out of

four indices are in agreement with standard theory and evidence (profits and leverage) andthe other two (sales and investment) not. This case seems to face a rather competitive

environment. For more details see table 1.

2. Hellenic Duty Free Shops. Nationalized and essential founded in 1979, it entered the Greekstock exchange in 1998 and then was partially transferred to the Greek Public Agricultural

Bank (ATE) in 1999 and later on, in 2003, to tow private firms GERMANOS and FOLLIE

FILLIE, which is currently the sole owner. From the three indices available (profits, sales

growth and investments) no one agrees with the standard theory and evidence. A formal

monopoly from establishment to the year of privatization, it does not seem to have lost it,

almost, monopoly power after, although with no legal protection. The unimpressive results


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after privatization are perhaps the outcome of the abolishment of the duty free status for the

travelers inside the European Union. For more details see table 2.

3. Greek Telecommunications Company (OTE). Founded in 1949 this public companyentered the Athens Stock exchange in 1996 and began its partial privatization withsequential sales of its shares (1996: 8%, 1997: 12%, 1998: 10%, 1999: 14%, 2001:

exchangeable bonds 9%, 2002: 8%). The plan of a strategic investor has led to the

agreement with the German company Deutsche Telecom in 2008. At the moment the

Greek State owns directly a 17.93% stake and indirectly 25% and one auction, equally to the

share of Deutsche Telecom, which has the management of the organization. Two of the

indices (profits and sales growth) are in clear antithesis with the expected findings and only

investment seems to follow a clear increasing pattern. OTE is facing an increasing

competition in the mobile telephone sector, where it has lost its legal monopoly power. The

enhancement of competition does not seem to be in favor of the firm. For more details see

table 3.

4. Olympic Catering. Founded in 1970 and entered in the stock exchange in two phases in1999 and 2000, it was privatized in 2000. The findings of the three indices profit, sales

growth and investment) disagree with the standard theory. The company was forced after

privatization to compete in a rather open environment, with almost negative results. For

more details see table 4.

5. Hellenic Petroleum (ELPE). A public Greek company, which entered the Athens stockexchange in 1998 offering 23% of its shares to the public. In 2003 there was the association

with PETROLA. Considering 1998 as the moment of its partial privatization with the

introduction by its management of private elements, as for example an increase interest in

profits (essential element of the entrance in the stock exchange) we can see that not even one

of the four indices follows the standard suggestions. Overall, nothing seems to have changed

since 1998. ELPE was in an oligopolistic or even duopolistic environment with PETROLA,

the actual had become even more monopolistic than before. For more details see table 5.


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Table 2

Hellenic Duty Free Shops

Averages

Return on assets Sales Growth Investment Leverage

Before privatization 0.99 0.06 8.76

After privatization 0.51 -0.25 -0.28

Table 3

Greek Telecommunications Company (OTE)Averages


Before privatization 0.16 0.17 8.03 0.09

After privatization 0.13 0.03 0.08 0.10

Table 4

Olympic Catering

Averages


Before privatization 0.81 0.02 0.29

After privatization 0.51 -0.20 0.53

Table 5

Hellenic Petroleum (ELPE)

Averages


Before privatization 0.03 -0.02 0.28 0.26

After privatization 0.14 0.15 0.04 0.12

Table 1

ELVO

Averages


Before privatization 0.08 0.22 0.11 0.36

After privatization 0.15 -0.17 -0.17 0.18


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Privatization effects on Greek economyBy the reducing the business of the state and the best use of public assets, the privatization policy

aims primarily to deregulate, restructuring and efficient operation of public enterprises. Also it aims

to attracting investments from private sector, to develop new activities using private finds and thus

increase revenue for the government. In this context the importance of focusing on maximizing thevalue of public companies before carrying out the privatization results in the best possible financial

outcome. Also, because of the liquidity of markets and the specific characteristics of the Greek

economy, the state has to use all the methods (strategic alliances, full privatization, securitization,

Public Private Partnership, etc.) of privatization for each case.

In the period 1990-2009, the Greek government received from privatization about30 billion, about

12.5% of GDP in 2009, however, continue to control another important part of the share capital of

several listed companies and 100% of many SOEs capital refers to the last weekly bulletin of Alpha

Bank.

Specifically, the state portfolio includes major holdings in banking, equity Telecommunications

(OTE) and energy utilities (electricity, DEPA, etc), traffic (OECD, Metro and OSE), the

management company and pipeline (Public Gas Corporation DEPA and the National Transmission

System Operator, or Gas) in water and sewerage companies (EYDAP, EYATH), port management

companies (PPA, THPA) and Airport (AIA), to Conduct Racing Organization of Greece (Horse

Racing), the state monopoly on betting company (OPAP) and the property of the Olympic Games,

the Public Real Estate Corporation (KED) and utilities.

According to the Budgets Reports the benefits of privatization was the modernization of

organizational structures and functions of systems administration, the development of new

administrative systems information and upgrading of services internal financial management

control, the better utilization of human resource systems and the adoption of incentive systems and

the new industrial relations conditions and the acquisition of modern knowledge and improvement

and development of services and products.

The economic benefits of privatization on the Greek economy are presented in the next tables

(tables 6, 7, 8, 9).


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Table 6. Revenues from privatization (until 2003)

Firm Privatization method Revenues ( m)

Public Power Company (PPC) Quotation of 16% shares through ASE 464

ETBA Sale 57.78% of share to Piraeus Bank 511

Commercial Bank Sale 2.37% of shares to CA 56

Scaramaga Shipbuilding Quotation 100% of shares through ASE 50OTE Sale 8% of shares to strategic investors 652

OPAP Quotation 19% shares through ASE 508

Olympic Catering Sale 58% of share to EVEREST S.A. 18

Hellenic Casino Sale 49% of shares to Hyatt-ET 170

Total 2429

Source: State Budget 2004

Table 7. Revenues from privatization (2004)

Firm Privatization method Revenues ( m)AGNO Quotation 99% of shares through ASE 12

KAE Quotation 40% of shares through ASE 174

Hellenic Petroleum Quotation 16.65%of shares through ASE 326

Hellenic Casino (II) Quotation 49% of shares through ASE 90

OPAP Quotation 24.61% of shares through ASE 736

EXAE Quotation 33.4% shares through ASE 89

Port of Piraeus (OLP) Quotation through ASE (25% stock share) 55

National Bank of Greece (ETE) Sale 11% stock share to strategic investors 490

PPC Sale 15.57% of shares (ASE) 636

Total 2608




Agriculture Bank of Greek (ATE) Quotation 7.18% of shares through ASE 328

Postal Bank of Greece Quotation 34.84% of shares through ASE 612

Commercial Bank of Greece Sale 11.01% of shares to Credit Agricol (ASE) 364

Total 1304




OPAP Sale 16.44% of shares (ASE) 1266

OTE Sale 10% of shares (ASE) 835

Total 2101



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Firm Privatization method Revenues ( billion)

OTE Sale 10.7% of share to strategic investors (ASE) 1.2

Postal Bank of Greece Sale 20% of shares to strategic investors (ASE) 0.51Total 54



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ConclusionPrivatizations in Greece have now a history of 20 years. The majority of privatizations benefited the

Greek economy but also the firms became more profitable and competitive. On the other hand there

are cases that the privatized firms did not achieve to improve their performance because of the

tough competition and the bureaucracy. The main point of all the privatization cases is that theGreek government released from firms which were unprofitable. The Greek government through

privatization succeeded to increase the revenue and reduced the debt. That period of time Greece is

under the most dramatically financial position of its early years. That is because of the bad

management of the public sector and also because of the worldwide financial crisis. For that reason

Greek Government should make great efforts in order to reduce the debt and turn back to a wealthy

economy. Privatization should be one of the main strategic plans in this effort.


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Appendix 1: The chronicle of the privatization since 1991

1991Sale of the Pireaus Bank to group of investors led by Professor and banker

Mr Michalis Salas

1991 Privatization of urban transport, establishing the Transportation Association (SRA)1993 Equity and the introduction of the Greek Sugar Industry in Stock

1993 Sale of Bank of Athens to Hanwha First Investment

1996 First floating to the Athens Stock Exchange (ASE) of

1998First and second equity Duty Free Stores (public revenues 20 billion and 82

billion drachmas respectively)

1998 First and second ASE equity (public revenues 22 billion and 10 billion drachmas)

1998 Second and third OTE equity (public revenues 126 billion and 302 billion drachmas)

1998 Sale of shares of National Bank (public revenues 63 billion drachmas)

1998 Sale of Bank of Crete in Eurobank (public revenue-advance-22 billion drachmas)

1998 Equity ISAs (public revenues 35 billion drachmas)

1998 Bank of Macedonia-Thrace Bank, Piraeus (public revenues 27.3 billion drachmas)

1998Sale of Bank of Central Greece, Egnatia Bank (government revenues 17.3 billion

drachmas)

1998 Equity Olympic Catering (public revenues 2.5 billion drachmas)

1998 Equity of General Bank (public revenues 14 billion drachmas)

1999 Equity National Bank (public revenues 281 billion drachmas)

1999 Third equity Duty Free Shops (public revenues 127 billion drachmas)

1999 Fourth OTE equity (public revenues 341 billion drachmas)

1999 New faculty equity (public revenues 50 billion drachmas)

1999 Equity EYDAP (public revenues 60 billion drachmas)

1999 sale of Ionian Bank to Alpha Bank (public revenues 272 billion drachmas)

1999 New equity Olympic Catering (government revenue 3 billion drachmas)

2001 New equity OPAP (public revenues 90 million)

2002 Sell ETVA Piraeus Bank (public revenues 511 million)

2002 New equity OTE (public revenues 652 million)2002 New equity OPAP (public revenues 508 million)

2002 First and second equity PPC (public revenues 814 million)

2002Sale 2.3% package of shares in Emporiki Bank Deposits and Loans Fund in Credit

Agricole-CA (public revenues 56 million)

2002 Sale 58% of the Everest Olympic Catering SA (public revenues 18 million)

2002Sale 49% of the Greek Parnes Casino in Venture Hyatt-ET and investment (public

revenues of EUR 170 million)

2002 Sale of Greek Shipyards (shipyards Scaramanga) in HDW.

2003 Third PPC equity (public revenues 636 million)


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2003 Sale 11% package of National Bank (public revenues 490 million)

2003 Third equity (24.61%) OPAP (public revenues 736 million)

2003 Sale package 16.65% of the Greek Petroleum (public revenues 326 million)

2003 Sale 40% package of Duty Free Shops (public revenues 174 million)

2004 Package Sale 8.21% of the Greek Petroleum (public revenues 192 million)

2004 Sale package 7.46% National Bank (562 million)

2005 Placing 16.44% shares of OPAP (public revenues 1266 million)

2005 Placing 10% of OTE shares (public revenues 835 million)

2006Introduction to the disposal of ASE 34.84% stake in Postbank (public revenues 612

million)

2006 Allocation of 11.01% stake in Commercial Bank (public revenues 364 million)

2007 Sale of 10.7% stake in OTE (public revenues of EUR 1100 million)

2007 Placing 20% stake in Postbank (public revenues 510 million)

2008 Of 3% of OTE shares (431 million)

Source: Ministry of Economy


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REFERENCESGeorgopoulos, Mylonakis, Papadogonas (2006), An Empirical Examination of Privatization

Performance in Greece (1990-2004).

Manto Lampropoulou (2009), Public Utilities reform in Greece: Privatization, MarketLiberalization and Implications for Citizens as Consumers.

Vasilis Patronis, Panagiotis Liargovas, The tow faces of Ianus: Nationalization and

Denationalization in Greek economy, 1974-2000

Spiros Serafim (2010), What do you know about privatization? (in Greek)

Costas Melas (2008), Privatization (in Greek)

Hellenic Republic Ministry of Finance, Hellenic Privatization Programme 2010

The Government Budged Report 2003, Hellenic Republic Ministry of Finance







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