By Dimitris Kontogiannis
The Greek government has instructed its advisers to find a strategic investor for OTE, the state-controlled telecoms organization, but may have picked the wrong company. The state-owned Public Power Corporation (PPC) needs a foreign strategic partner more than OTE does.
PPC’s flotation on the Athens Stock Exchange in December 2001 was not as good as government officials may have wished at the time but the performance of the utility’s stock in the next couple of years turned out to be one of the best on the Greek bourse. This helped the government raise more money by selling another equity stake in the utility in 2002 which brought its holding down to around 67.20 percent. It reduced further its stake in PPC to just above 50 percent in 2003 and that’s where it stands now.
The gains of the stock mirrored the company’s financial performance to a large extent during the same period. Earnings per share grew by more than 140 percent in 2002 and more than 40 percent in 2003 and the company was able to distribute cash dividends to its shareholders, driving the dividend yield to over 3.0 percent annually.
But the success of PPC was due to a great extent to its monopoly status. Greece had asked and received permission from the EU Commission not to proceed with the full liberalization of its home electricity market. This was more due to pressure from special interest groups than anything else.
According to the first Greek liberalization law enacted in February 2001, Greek industrial corporations, consuming over 100 GWh were allowed to pick their own supplier with PPC acting as the supplier of last resort. However, Greek households were to be given the same privilege, starting in the summer of 2007.
The Public Power Corporation took advantage of its monopoly status and the strong demand for electricity on the heels of strong economic growth to deliver strong earnings growth during this period despite the fact that administratively set tariff hikes were modest at best. It is not strange therefore that demand for electricity exceeded the country’s strong GDP growth rate all these years.
PPC also tried to reduce its work force, cut its non-payroll expenses and better manage working capital to boost its profits but also did something which was going to hamper the company’s future prospects.
It lowered capital expenditure in a country where the prospect of demand exceeding supply down the road was clearly visible and experts suggested Greece needed some 400 MW in new capacity annually in the next few years to meet demand requirements and avoid blackouts.
Given the lead time, estimated at about three years, required for a power plant to come on board and the heavy capital investment involved, PPC’s decision was not correct. Especially if one takes into account the fact that the company relies heavily on low-cost lignite to produce electricity and lignite is a pollutant for which the company would be called upon to pay penalties based on EU (European Union) and Kyoto Protocol standards.
Imports of cheaper electricity from neighboring countries, especially from Bulgaria which accounted for 80 percent of total imports, helped alleviate any problems but also highlighted Greece’s dependence on foreign countries for electricity. This will become more clear this year since Bulgaria is closing down the two remaining 440 MW Kozloduy plants.
A steep rise in the price of oil in the last few years rendered a portion of its electricity production uncompetitive and the company’s failure to address its operating costs helped PPC’s financial results take a turn for the worse in the last few years.
The appointment of an experienced manager with international credential from the private sector a couple of months ago revived hopes that PPC will be able to cope with competition at a time the EU Commission is expected to take measures to deprive former monopolies of a good deal of their previous privileges in an effort to liberalize the sector.
But time is running against PPC. Its powerful labor unions do not appear to fully comprehend the new landscape the utility is called to operate in and other special interest groups which profit from the current situation of the company are not expected to give in so easily.
At the same time, PPC has to become more efficient, reduce its dependence on lignite and cut its operating costs. One way out of this difficult situation is to team up with a major European utility.
Such a strategic partnership requires political courage since the government will have to reduce its equity stake in PPC dramatically and reach a shareholders’ agreement with the prospective major European utility.
The latter will acquire a significant stake in PPC via a share capital increase and the proceeds will be used to finance a range of capital investments in power plants in the country. This way, PPC will be able to speed up its investment program, become more efficient and competitive, reduce the penalties for excessive CO2 emissions in the future and severe the company’s ties with the ruling political party.
Of course, the strategic investor will have seats on PPC’s board and a strong say in the management and even given a path to control of the company in the future. Such a development will be well received by the EU Commission in Brussels and the investment community in Greece and abroad since it will constitute a major structural reform.
All in all, PPC needs a strategic investor more than OTE. Despite the political costs involved and the strong opposition to it by trade unions and others, the country would be better off if PPC had access to managerial know-how and capital resources of a major European utility, being its strategic partner in Greece and abroad than going it alone. So, the government should dare to go for it.
(Kathimerini, 19/03/2007)