Reforming Greece's public enterprises

Economics Department

Gearing up for EMU Mark Henley/Cosmos

Greece is a candidate for entry into the euro area in 2001. To perform well once in EMU, it will have to step up its efforts of reforming its public-sector enterprises by introducing more competition and -improving management.

Greece’s economy has made great strides forward since the beginning of the 1990s. Inflation has fallen sharply, as has the budget deficit. More recent-ly, growth has begun to accelerate, exceeding 3% in real terms in 1997. It is on the strength of progress like this that Greece has set itself the objective of entering the euro area in 2001.

Nevertheless, significant challenges lie ahead. When it comes to structural reforms Greece lags behind most other OECD countries. The case of public enterprises is a perfect example.

Other OECD countries have demonstrated that restructuring of public monopolies and the introduction of competition make it possible to improve quality of goods and services and, in many cases, at lower prices as well. OECD calculations show that an ambitious reform of Greece’s public enterprises could generate a one-off increase in real GDP of as much as 10%, which would help boost employment. It would help relieve pressure on public finances and debt. This is very important for a country like Greece, where public enterprises each year claim a share of the national budget equal to 3.5% of GDP and where the general government debt exceeds 100% of GDP.

In 1996 the Greek government embarked on a programme to restructure public enterprises. The focus is on improving management, although more competition is also badly needed. Although government initiatives in this area have been encour-aging, much remains to be done if Greece is to perform well once inside the common currency area.

Poor performance

A number of factors are responsible for the poor performance of Greek public enterprises. Up to the early 1990s they were expanded to create employment, usually around election time. Their financial performance thus suffered from a policy of price restraint and cost growth. Today public enterprises are overmanned and productivity is below that of other OECD countries. Real wages have risen steeply, outstripping productivity and wage growth in the private sector. And by 1997 the average pay of public enterprise employees was 30% higher than in private-sector manufacturing.

Pricing policy, too, was often out of line with business management -criteria, reflecting high costs, techno-logy shortfalls and social obligations. Prices in certain public services were often frozen to guarantee access for the whole population, or indeed as a way to contain inflation. Never-the-less, prices of certain services, especially telephone and electri-city, are higher than in other OECD countries because of limited competition and a weaker technological performance.

Close the technology gap

There are wide technology gaps between Greece and its EU neighbours, as inefficient technology and equipment have affected public enterprise performance. For example, the national telecommunications company, OTE, runs of the least digitalised ser-vices in the OECD area. And the electricity-generating capacity of the public power corporation is barely equipped to meet peak load demand safely.

Since the early 1990s there has been substantial investment, largely financed by European Union funds. Over the period 1994–99 the main public enterprises will have received Ecu6 billion, equivalent to 6% of Greek GDP.

Greece’s public enterprises fulfil heavy service commitments without matching compensation. Their cost is difficult to appraise accurately because most enterprises do not keep separate accounts for individual operations. In general, the absence of transparent accounting practices is an impediment to progress in reform, especially in the area of cost containment.

The first step: priority for management

Improving management is a primary objective of the government’s reform plan. New managers have been hired with specific strategies in mind and each public enterprise has had to prepare a business plan. One of the aims was to reduce labour costs by way of attrition, through voluntary depart-ures. They are positive initiatives, though if they are to succeed fully, the new management teams should be given a sufficient degree of independence in policy matters, -notably employment, pay and award of contracts, compared with the previous rigid interventionist approach.

One reassuring advantage for Greece as it embarks on its reforms is that it can draw on the experiences of other countries which have already been down the same path. One lesson is that a well-designed regulatory framework is essential – it helps to bring new entrants into the market, to boost quality and reduce prices. The partial liberalisation of the air transport and mobile telephony markets in 1992 has already demonstrated this. Two private operators were granted the mobile telephony licences, resulting in a wider range of services than would have been possible otherwise. And in internal flights market, liberalisation has resulted in keen price competition led by several domestic private carriers.

Despite these successes, air transport and telecommunications remain key sectors where competition is still needed. Pressure to reform these two sectors quickly is bound to increase as the respective EU markets open up more and as technology advances -further.

But for the public airline company, Olympic Airways, the issue is also quite simply one of survival. The restructuring plan approved in 1998 was not ambitious enough and problems have already been encountered. The company should align itself with practice elsewhere. Labour costs, which rose by over 50% 1996–97, need to be cut to raise productivity, which is nearly half that of the company’s chief competitors. The company should also move out of long-range flights, which are largely loss-making, and concentrate more on core services. A strategic alliance with another airline would enable it to strengthen its advantages on medium-range flights, particularly to the Middle East.

The national telecommunications corporation is a somewhat different case: despite high costs, it is one of the country’s most profitable enterprises. In fact, OTE’s sizeable profits owes much to a high phone charges – parti-cularly for long-distance and mobile calls – which it has been able to maintain in a rapidly expanding market. The introduction of competition in the basic telephony market has been delayed until 2001. Yet, it is nearly as developed as networks in other OECD countries, such as Germany or Spain, where the telephony markets have already been opened. When new operating licences are awarded in Greece, prices will surely drop.

Electricity: a public monopoly

Another of Greece’s public enterprises requiring critical attention is one of the most important of all, electricity generation. Competition there is almost non-existent. The sector is still dominated by a public monopoly, which controls services at every level. The public power corporation, DEH, accounts for 98% of electricity supply and generating capacity. It controls the high-voltage transmission grid and the low-voltage distribution network. Its market advantage is further strengthened by Greece’s isolated geographical position with regard to the rest of the EU. DEH also enjoys preferential access to fuels and to public funding. Common financial interests among electricity, natural gas and oil clearly do not promote competition between these public sector enterprises.

The government plans to ‘unbundle’ DEH’s accounts in accordance with Brussels directives, but without splitting its activities into legally independent firms. The positive aspect is that the corporation’s accounts will be more transparent. And part of the power generation market will be opened to competition, again in accordance with Brussels. Although DEH will still have a strong competitive edge that will deter new entrants, extra effort to encourage private investment will make it possible to better meet fast-expanding demand without drawing on -public funds.

Less costly solutions

Price restraint may very well reflect a laudable social goal, by making some public services available to the most disadvantaged population categories. But that goal may be attained in a more focused manner and at lower cost. In the case of rail services and urban transport, it would be possible to adjust fares to operating costs and at the same time introduce a direct transfer to the poorest households, for example, in the form of allowances. The alternative would be to call for tenders and award the operation of certain lines to the best bidder.

The restructuring measures taken by the Greek government need to be strengthened and accelerated, with allowance made for differences between sectors as to the type of competition that can be introduced. This will mean setting up independent regulatory authorities to guarantee fair practices. In another context, although public enterprise reform should improve the economy’s growth potential in the medium term, in the short term it may result in some job losses, given the extent of overmanning. To minimise the social costs of these changes, better protection mechanisms may have to be introduced for those who lose their jobs as a result of restructuring, while at the same time pressing ahead with labour market reform to improve employment prospects in general.

These vital reforms are challenging indeed. If Greece succeeds in carrying them out, the reward will be the economic strength needed to perform well in EMU.

©OECD Observer No 216, march 1999 




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