Eyewitness: Greece – it's a mess but there are chinks of light

We might think things are bad in the UK; teachers and other public sector workers are taking to the streets in demonstration at the cuts to their pensions. But it is nowhere near as bad as it is in Greece. Conversation generally revolves around the dire state of the economy. In addition there are lots of shops that are closed - businesses which just can’t survive. The basic costs of living are rising (particularly energy) but the Greeks are suffering from huge cuts in public sector pay and jobs and the attendant impact on the private sector is clear to see. The scale of the problem in Greece is unprecedented and the impact of the austerity measures far-reaching. This is not a commentary on how or why Greece has ended up in this situation but more about how this situation impacts on construction and other opportunities in Greece.

Beware of Greeks bearing PPPs…

Greece has a history of using PPP projects as a means of delivering key infrastructure for the state. They originally procured four toll-road projects, for example, and building on the success of those schemes (possibly looking less of a success at the moment with active toll avoidance becoming an issue) decided to emulate the UK PPP market with respect to social infrastructure. The scale of the anticipated pipeline was impressive - more than €5bn - made it the second largest in Europe. However, even before the economic meltdown of the country, very little had been achieved with the programme. Only one or two schemes, a fire station and a small schools project, both with IFC support, seem to have reached financial close.

That said, Greece presses on with its procurement of PPP projects. Most recently we’ve seen waste, energy and schools projects brought to market. In fact more PPP projects seem to have come to market in Greece than in the UK over the last 18 months. And bidders keep bidding. But the same questions are asked by everyone - how can the government pay for these schemes? Who will fund them if any form of sovereign guarantee is effectively worthless?

Might there be any chance of EU cohesion funding being made available to the Greeks? It isn’t at the moment but there surely could be an argument that is should be in the next round

So, where does this leave the Greek PPP market?

There is a small chink of light. EU grant funding. The Western Macedonia Waste Project (and the Thessalonika and Athens Waste Project which are allegedly following) will necessitate “Jessica” (Joint European Support for Sustainable Investment in City Areas ) funding to make it viable and bidders are expected to convince themselves of the viability of this funding as a pre-cursor to taking their proposals forward. We could write a whole article about Jessica funding and whether and to what extent it could be used in a scheme such as Western Macedonia but the important point for this article is that without it the scheme would be a non-starter.

Might there be any chance of EU cohesion funding being made available to the Greeks? It isn’t at the moment but there surely could be an argument that is should be in the next round. Of course this comes with some structural challenges in terms of “Jaspers” (Joint Assistance to Support Projects in European Regions) funding but work is under way to address some of these challenges so that the potential of the funds can be unlocked.

However, until there is greater clarity over the application of Jessica funding or any other form of EU grant funding it surely remains rather optimistic that the Greeks will be able to get anyone to fund their PPP projects. So, what other opportunities are there in Greece at the moment?

The Big Fat Greek Fire Sale

As part of the ongoing requirements on the Greek government to address their deficit, their creditors have insisted that they embark upon a significant privatisation programme. There are a range of assets on the list including the Public Gas Corporation (DEPA) which is likely to be very attractive to the Greek Railways (OSE) which is generally regarded as a huge loss leader. In between there are the State Lottery, Greek Highways SA and the Athens International Airport.

The privatisation programme is being driven by Greece’s Creditors and managed through the Greek Wealth Management Fund which sounds more like a sovereign wealth fund than a structure to capture the proceeds of what must be considered by many to be the largest fire sale in the world. There is a significant amount of work to do to even bring the assets to market - there is little transparency over the value of some of the assets and precisely what falls within our outside the privatisation programme. And it is recognised that there needs to be some restructuring to address what are bound to be significant concerns in relation to ownership of property, for example.

However, with the creditors driving the programme forward and a number of advisers already in place it would seem most likely that this is the place where most activity will focus and a number of major international players are considering their options.

And another new idea - the Fund for the Utilisation of State Property

The Greek government has also created a new entity under the rather fancy name of Fund for the Utilisation of State Property.

The main goal of the fund is not to make new investments or facilitate investment initiatives. The goal is to utilise the property of the state in the most efficient way so as to assist with managing the outstanding significant sovereign debt. For this reason, by law, all proceeds from this entity will directly go to repay part of the outstanding debt of the country.

The fund will take the transfer of assets designated by the government which will go into the fund with out any possibility of a claw back - this is intended to counter against any new government to claim back the assets at a later date (although in theory a new law could be passed which changed the framework under which the transfers operate which could reverse the transfer).

Leaving aside this small issue, the fund will be able to use all financial instruments (including securitisation of future earnings) to utilise the assets which are transferred into it. It is anticipated that real estate and shares in public utilities/other companies owned by the State will be the sorts of assets which transfer into the fund.

The fund will have a wide-ranging ability to utilise its assets. For example, it is anticipated that it will be able to lease property transferred into it, enter into right of use agreements, outsource the management of the assets and contribute assets to SPVs in exchange for shares. In addition it is expected to be able to enter into all kinds of debt instruments, share sale agreements and shareholders agreements, even if these include put and call options.

The legislation which establishes the fund creates a new property right akin to a long term lease right for real property. This concept, new in Greece, will assist in leasing out large tracts of state owned land as it creates a distinction between the owner of the land (the state or the fund) and the owner of the buildings built on the land.

The fund will be managed by a five-member board of directors who have a variety of experience covering mediation and arbitration, project management and fund administration, credit and capital markets, real estate and securitisation. The choice of the directors clearly demonstrates the Greek state’s desire to try to make the most of the assets they will have left. It remains to be seen whether this combination of experience and intellectual capital can make a greater success of managing the state’s assets than the current government seems to have managed.
 

This article was co-authored by Kate Orviss is a partner in the projects & construction team at Pinsent Masons.

Constantinos Lambadarios is a partner at Lambadarios law firm. Constantinos has been advising a US multinational on the largest PPP issued by the Greek Government on Port Security valued at €343m. The project will relate to the installation and operation of security systems in 12 Greek Ports in order to comply with international and European safety regulations.