The Greek Default Watch blog has published an article about this topic, once again an excellent article. I will now add some points to it with my “Austrian perspective”. Austria has a wide range of experiences with privatizations (good and not so good) due to the fact that there has been so much of the Austrian economy to privatize. Until the 1970s, Austria’s public sector accounted for over 50% of the economy (the reasons for that had to do with post-WWII issues, i. e. to protect against expropriations by the Soviet Union).
Post-WWII Austrian politics were based on a 2-party system where the two parties (People’s, Socialists) accounted for 80-90% of the vote. They soon discovered that, instead of fighting each other, it was much more comfortable to form a coalition and to divide the country fairly and equally between them. For that, they had entered into a written Proporz-Agreement which stipulated that all leading positions in the public sector were to be awarded proportionally, relative to the results of the last election. And once the leading positions were split proportionally, those leaders could make sure that all jobs below them followed the same logic. The following joke became popular: for each public sector position you need 3 people. One “black”, one “red” and one who does the job. Not that far from the truth! Obviously, the Austrian 2-party system was a bit extreme but the points which can be drawn from it apply everywhere, perhaps to a lesser degree.
So the first point I would add to GDWs points is: there is no way to avoid party influence in a public sector company. There will always be people for whom politicians “have to find a job; an ‘adequate’ position” and they will be placed in public sector companies. Therefore, public sector companies are split from top to bottom into camps along party lines (and often into separate cultures, too). Those who prefer to remain neutral really don’t do themselves and their careers a favor. What develops is the opposite of a meritocracy. Some of the results are: distrust, envy, unfair play, etc. In short, the quality of the public sector company as a social system deteriorates enormously.
Secondly, there is no way that a public sector company like in the Austrian scenario can be managed like a private sector company. First of all, the managements are political appointments and generally not experts at management. But even if they were, they can’t manage freely. The largest Austrian corporation at the time was the state-owned steel company Voest. It was public knowledge that the head of Voest’s workers’ council (Betriebsrat) had more to say than the CEO and his board members. Why? Suppose the CEO did something which the head of the workers’ council did not like. This head would then call the Chancellor of the Republic and complain. And now get this: the Chancellor of the Republic would accept the phone call of the head of the workers’ council of a steel company, listen to his complaints and then call the CEO of the steel company to give him a dressing-down for taking decisions without first having them approved by the workers’ council!
Thirdly, the public sector is a wonderful instrument to “shave-down” unemployment statistics. You simply have the public sector employ those who would otherwise be unemployed. An Austrian Chancellor of the “good old days” coined an unforgettable phrase in a speech to the workers’ council of Voest. At a time of national debate about the dangers of a rising public debt he pronounced: “And I repeat what I have said on many occasions — a few billion more in public debt cause me a lot less sleepless nights than a few thousand unemployed would”. Standing ovations, of course.
That steel company eventually collapsed under its own weight and it cost tax payers enormous sums of money. Today, what used to be one Soviet-style conglomerate are more than a dozen privately-owned successor companies. The steel company (Voest AG; not a giant, though) has become one of Europe’s most successful players in the steel industry. All the other companies are working profitably.
I hasten to add: it is not really the ownership per se which is the issue (I have seen excellently managed public sector companies, too). What matters are the motives behind the owners. A private owner might even be worse than a public owner if it is a brutal financial investor who has little interest in the long term viability of the company but top interest in maximizing his short-term financial profit.
The problem is: when the state is the owner, you have no choice over the motives. Politicians generally have the same motives. When you privatize a company you do have a choice of the new owners’ motives. You might reject the financial investor and prefer a strategic partner with long-term objectives (even if he pays a little less).
Whether or not the sales price is good for Greek public sector companies in the midst of today’s chaos is irrelevant, in my opinion. Any sale can be structured in such a way that the state can compensate for a perceived lower sales price through options on future profits. For example, for the setting of the sales prices one would establish a base case for, say, 10 years reflecting today’s rather depressed situation and give the state the option for additional benefits should the base case be exceeded during those 10 years.
For Greece, I think the most important argument for privatizations is the know-how transfer that goes along with it (know-how in ALL respects, not only technical know-how!). Put differently, a privatization which does not assure know-how transfer is not a defensible privatization. A multinational which extracts the R&D resources back to its own Head Office and leaves an operating shell in Greece should be discarded. A financial investor should not even be talked to.
The ideal investor would be someone who wants to build up competences in Greece. Perhaps not only for the Greek market but, more importantly, for regional interests. An investor who does not shut down when labor costs become cheaper in, say, Bulgaria. An investor who has a proven track record of a long-term business philosophy and who is prepared to make a long-term commitment to Greece.
Such investors do not exist? I believe there are a lot of them but perhaps many of them are not publicly-traded companies. Most such companies are privately-owned (some of Germany’s largest companies are still family-owned). Such privately-owned companies typically pursue long-term business philosophies and do not change strategy with every turn of the market. Those are the type of companies which, I believe, Greece should place its bets on.
Addendum from personal experience
About 15 years ago, I assumed the position of Regional Director for the federal state of Salzburg for Austria’s largest bank. It was no longer state-owned then but the principles of “party influence” could still be felt at all corners.
Under Austrian Corporate Law, the corporation is run by a management board headed by the CEO and supervised by a Supervisory Board. One can imagine that in the case of prestigious companies, the Supervisory Board includes very prestigious people. By law, the members of the workers’ council must also be represented on the Supervisory Board.
I had in my own region my own regional workers’ council. It was headed by the man who supervised the 5-person mail room. Possibly not the most challenging management task. It just so happend that this man had also been elected by his superiors in the workers’ council to be a representative on the Supervisory Board and that he and the CEO shared the same party affiliation. So, I was in the unusual situation that a third-level supervisor on my staff was also one of the supervisors of my CEO (and a “party-friend” of his whereas I had no party affiliation whatsoever).
Having spent my previous career with Americans, the thought that I would not be the first person whom my CEO would come to see when he visited never even crossed my mind. Well, I had to learn in a hurry in connection with the CEOs first visit. I knew the CEO had arrived in the building but he didn’t show up in my office. Upon inquiry, I was told that he had gone straight to the mail room to talk to the head of the workers’ council and his staff (all, of course, sharing the same party affiliation). By the time the CEO came to me, he was already fully informed about all the ongoings in my region (and probably about my behavior as a boss as well…).
The first time I was floored. From then on I became accustomed to it (had to…).