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Privatizations

Privatizations

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Published by Fotis Fitsilis

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Published by: Fotis Fitsilis on Oct 30, 2012
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PrivatizationsBy Fotis Fitsilis*
Talks about privatization had a constant presence in the last decades in the publicdebate and it is easy to understand why this issue has generated intense politicalcontroversy. Privatization is the transfer of ownership of state property to privatecompanies or individuals, partly or wholly. The state property can be a publiccompany or a real estate.Here we will present the benefits of privatization, some problems that are related toit, as well as its general principles. Finally, we will examine two examples of countries that have successfully implemented large-scale privatizations, Germanyand Slovakia.In Greece the debate on privatization was intensified after the signing of theMemorandum of Cooperation in 2010 between the Greek Government and the socalled Troika, which consists of the European Commission (EC), the InternationalMonetary Fund (IMF), and the European Central Bank (ECB). Back then it was agreedthat a percentage of the profits from privatization would be used to reduce publicdebt. There are various estimations of the amount of money that could be drawnfrom privatization actions. Both Government and Opposition presented privatizationplans in the order of 50 billion Euros, but without presenting technical details of theproject. Almost 2 years later, little progress has been made.Nevertheless, there are certain categories of public companies or public owned landthat is crucial to remain under state control. These could be companies, borderlandsor certain islands sensitive for the national security.
Benefits of privatization
If designed properly, privatization can lead to substantial increase in productivity andcompetitiveness. It is important to mention that benefits are not limited to theimmediate financial compensation following the awarding of a privatization contractto the highest bidder. Often investors proceed with additional investments in orderto modernize production facilities. But the most significant benefit comes from the
increased efficiency of the state’s economy as a whol
e, when unproductive publiccompanies turn into competitive businesses that operate according to the rules of market economy.This is why one reads in the literature that the direct economic benefits of privatization are just one third of the total long-term benefits. The remaining two-thirds come from the multiplier effect that privatization causes to the nationaleconomy. Beyond political considerations, one way to assess specific privatization
 
2cases on a technical level is a so-called cost-benefit analysis that compares the totalexpected benefit from a privatization against the cost of its implementation. In orderfor such an analysis to be complete, both the social dimension and the socialdividend resulting from privatization has to be captured.
Negative consequences and obstacles
Careful planning is essential, especially during the phase of creating the privatizationbody (a committee or a special purpose company) and its staffing. Ignorance of therules of the domestic and foreign markets and lack of transparency will mostcertainly lead to questioning these choices in a political and social level, thusresulting in long delays.The management of the privatization body will be required to provide specializedsolutions to a variety of problems, the most important being the following:a) Unclear legal status,b) Ownership issues,c) Reactions from the unions,d) Accusations for mismanagement.Proper design of the body, its operating rules and solutions to the above-mentionedproblems will largely determine the success of the privatization program in Greece.In Greece the respective body is called the Hellenic Republic Asset DevelopmentFund. Despite its foundation in 2011 and the recent change in its management, noreal progress has been demonstrated yet.
General principles of privatization
In my opinion, the four most important principles of a privatization program are:
First.
Partial or total involvement of private equityThe change of ownership alone is not a panacea. It must be accompanied by anextended restructuring of the organization, along with a complete rearrangement of its strategy and objectives. Even for companies where the majority of the sharesremains to the state, there is a potential for increased competitiveness with privateparticipation in the shareholder scheme.
Second.
TimingTiming is one of the most critical factors for success when privatizing anorganization. In times of political instability, a lot of investors are reluctant to investand, even if they do, the price they are willing to pay is far lower than the marketvalue due to the actual investment risk.
Third.
Independence and control of the privatization body
 
3The political independence of the privatization body is vital for its regular operation.Its operating framework will have to be approved by the National Parliament, inorder to allow for a democratic legitimacy of his actions. At the same time, the bodymust inform in detail both the Government and the Parliament, about itsachievements in the privatization procedure and its future plans. This information iscrucial because of the usually large volume of legislative acts and regulations thathave to be rapidly promoted by the Government. Ultimately, the transactions of theprivatization body have to be closely monitored and controlled by charteredaccountants.
Fourth.
TransparencyTransparency in the operation of the privatization body is of paramount importancefor a smooth privatization procedure. Without strict conditions of transparency, themanagement of sensitive and high-risk privatization projects will hardly reach highlevels of performance and each decision will be disputed. Citizens should be able toknow at any time the state of the privatization program.
Case studies
When it comes to privatization Greece does not have to reinvent the wheel. In thefollowing, we present examples of two countries that have implemented largeprivatization programs, Germany and Slovakia. Although none of them is similar toGreece, however an analysis of the privatization procedures could prove useful andoffer important conclusions.
a.
 
Germany
 
The agency that undertook the privatization of an entire former state (East
Germany) was founded in 1990 and named “Treuhandanstalt”, which roughly
translates as "Foundation Trust". The Foundation was governed by a five memberBoard of Directors, whose actions were controlled by a management council. It is of particular interest that the management of the institution was granted with certainlevel of legal immunity, in order to proceed with the work of privatization.The Foundation was dissolved in 1994 and the privatization program continuedthrough a series of specialized bodies, some of which still operate today. TheFoundation tried to privatize 14,600 businesses with over 4 million employees and24 million acres of land. Until 1994 around 8000 companies changed hands, butmore than 2.5 million workers lost their jobs. This led to massive protests and socialunrest and the assassination of the first president of the Foundation, Detlev KarstenRohwedder. The immediate profits from this series of privatizations amounted to 60billion Deutsch Marks (approx. 31 billion Euros), while losses were in the order of 

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