Part-payment:
OECD Proceedings (1999) argue that when a government uses this technique it allows investors to buy shares through a series of interest free instalments. This method’s main beneficiaries in the short run are the shareowners due to the rate of return compared to the money spent so far on buying the share. On the other hand, in the long run this unrealistic increase in turnover is equal to the money spent for the purchase of the share. Also this approach has a negative affect on revenue maximisation since the company’s shares are exposed to staging schemes since it offers free leverage to its investors.
Staged Sales:
According to Bishop et al (1996) this is one of the most commonly used methods of privatisation. By using this method, governments sale the state-owned firm’s shares in stages/tranches. This is achieved by establishing a price for the first tranche during the early stages of privatisation and then set up accurate prices for the last parts sold. By following this procedure revenue can be increased dramatically during the first steps of privatisation and has a positive effect on the number of share owners. On the other hand, OECD Proceedings (1999) argue that this technique has a really important disadvantage since the later trenches are sold at a discounted price which allows the owners to sell their existing shares for the original price and then buy them back at a reduced price. Due to the discounts on share prices revenue can be significantly reduced in the long-run.
In order to decide which privatisation technique, or techniques, could be used by the Greek government to privatise the PPC we should analyse the country’s market structure. According to Wall et al (2004) the best way to perform such an analysis is by evaluating it Political, Economic, Sociocultural, Technological, Legislation and Environmental environments. In other words, perform a P.E.S.T.L.E. analysis on the Greek energy market.
Political Environment:
As a member of the European Union, Greece has no restrictions towards foreign investment. The government tries to encourage as many foreign trade activities within its borders as possible. Labour laws, on the other hand, are quite inflexible, leading to significant difficulties in successfully managing the Greek workforce, as well as increasing operations costs.
Economic Environment:
According to The Western European Electricity Market Outlook (2008), Greece’s energy sector accounts for roughly 5% of its total GDP. The county’s energy power production is mainly sourced from coal fired power plants. Greece is also one of the EU’s smallest energy consumers, using only 30m tonnes of oil per anum. Although coal is mainly supplied by domestic producers located in the north of the country,
coal consumption is decreasing over the years and has resulted to an increase in oil demand by 17%. As a result, the country is planning to increase demand for renewable energy sources since they currently account for only 6% of total energy consumption. The Western European Electricity Market Outlook (2008) also states that end-user demand is rapidly growing in Greece when compared to other EU countries, with an equal increase between each sector.
Sociocultural Environment:
According to Wall et al (2004), Greece is highly defined by its Mediterranean culture. Also they argue that, in Hofsted’s terms, the country is characterised by a large ‘Power Distance’ and strong ‘Uncertainty Avoidance’. This means that Greek culture is strongly based on the authority of one’s position within a hierarchy and a well structured and consistent routine. In other words, the native workforce is expected to be less individualistic and comfortable with working within a highly bureaucratic organisation.
Technological Environment:
Greece’s most recent technological developments in the energy sector involve the creation of new energy production plants. Namely, according to The Economist Intelligence Unit (2005), a 147 mw gas-fired electricity plant was built by Iron Thermoilektriki at Viotia, which also provided back-up power during the 2004 Olympic Games. The Western European Electricity Market Outlook (2008) also states that six more gas-fired electricity plants are due to production. 4 of these plants are to be constructed by Greek private companies and the remaining 2 by a joint-venture between Greek gas producer Prometheus Gas and Italy’s Enelpower.
Legislation:
According to The Western European Electricity Market Outlook (2008), The Greek electricity market is regulated by the Regulatory Authority for Energy (RAE), which was created as an advisory body for the Ministry of Development concerning all energy market regulations. The RAE is also responsible for giving recommendations regarding energy policies, security of energy supply and the promotion of competition in the Greek market. The RAE was established in Greece in 2001 when EU Directive legislation required the liberalisation the Greek energy market and the PPC’s transfer into a limited company.
Environmental:
At the moment Greece is in a very fragile environmental state, since it has been exposed to severe natural and man-made catastrophes over the last 3 years. One of the worst situations was, according to The Economist Intelligence Unit (2007), during the summer of 2007. Starting from the middle of June, fires were set on forests in the centre and south of the country, most of the Peloponnese and the island of Evia. In the article it is also stated that in a single day almost 130 different species of birds, 45 different types of mammals and 30 different types of amphibians and reptiles became extinct due to fires that covered Mount Parnitha.
Since the Greek electricity industry has already been liberalised by EU regulation (which means that there are no barriers of entry) and the PPC is a natural monopoly, the current market environment could be described as perfectly contestable. According to Griffiths et al (1996), in a perfectly contestable market public-owned monopolies set their prices depending on their fixed and variable costs in order to earn normal profits, thus decreasing the threat of entry of a private competitor with a more flexible price strategy. In order to have a view of a company in a perfectly contestable market we can examine the figure presented below.
Figure 1: Natural monopoly in a perfectly contestable market
(Source: Griffiths et al (1996) p. 517)
This theory argues that once a public corporation has been deregulated it gives foreign investors to the opportunity for hit-and-run entry. In other words, firms can enter a market and make their desired profits by buying shares of a public company, manage its facilities (depending on the percentage of shares bought) and in addition exit the market without any costs by selling their acquired shares.
It would also be useful at this point to perform a S.W.O.T. analysis on the PPC, in order to have a complete view of the company as well as its potential towards future competition post-privatisation.
The PPC is Greece’s main electricity producer and distributor. According to MarketWatch (2007), the company has the leading market position in Greece since it provides electricity to more that 7.4 million customers and has competitive advantage towards potential entrants since it is a well established brand. On the other hand, due to the market’s recent liberalisation competition is gradually increasing in the energy market and could have a negative effect on the post-privatised firm’s number of shareholders.
Table 2: PPC’s S.W.O.T. analysis
(Source: MarketWatch: Company Spotlight: Public Power Corporation p.33, 2008)
Strengths:
As mentioned earlier the company is a household name in Greece and is the sole distributor of electricity. According to The Western European Electricity Market Outlook (2008), the firm is also the owner of all transmition assets and generates 93% of the total electricity produced in its domestic market in its 90 power generating stations. The Western European Electricity Market Outlook (2008) also states that PPC-owned assets are strategically located throughout the land according to domestic distribution and demand of electricity as well as the location of lignite coal mines. As a result, the firm gains competitive advantage by efficiently minimising distribution costs and by offering competitive services at a national level.
Weaknesses:
According to MarketWatch (2007) almost all of the company’s operations, generation capacities and revenue generation are focused on its domestic market. In other words, if the PPC does not seek to internationalise post-privatisation it will be in risk of loosing its current market position and a decrease in its future revenue. There has been a significant decrease in the company inflows over the last 2 years with cash flow form operation being reduced by 10.1% from $1,075.7 million in the year end of 2006 to $960.7 million in 2007.
Opportunities:
Burnes (2004), state that the PPC is planning to internationalise post-privatisation and operate as South-eastern European energy distributor by altering its domestic operations and infrastructure, as well as through strategic investments in the EU regional markets. By following this procedure the company will be able to withstand competition and increase its future turnover. According to The Western European Electricity Market Outlook (2008), the use alternative sources such as wind, solar and renewable energy is increasing in Europe with 22% of the total energy produced by renewable sources. One of PPC’s subsidiaries, PPC Renewables, has already begun its production, engineering and commercial activities in Greece. MarketWatch (2007) state that the PPC is seeking to raise its market share to 20% in the renewable energy market, as well as increase its installed capacity from renewable energy sources by 5.4% by the end of 2013, from 0.7% which is its current capacity to 6.1%.
Threats:
Datamonitor (2009) argue that Greece is about to face economic slowdown throughout 2009 due to the global market crisis and have forecasted that the country’s GDP growth rate will decline by 2%, from 4% in 2008 to 2% by the end of 2009. Such a decrease on the GDP growth rate could have a negative impact on the demand for the firm’s products and services. According to The Economist Intelligence Unit (2005), the liberalisation law allowing competition in the Greek energy market was enacted in 1999 by the EU directive. The law came in to force in 2001 and it gave foreign investors the opportunity to access the country’s transmition and distribution channels. The Greek electricity market became fully open to competition in 2007 and required that the PPC unbundles its transmition.
Based on the information derived from the P.E.S.T.L.E. analysis on Greece’s energy market and the S.W.O.T. analysis performed on the PPC, we can argue that rather than following a certain privatisation technique it would be more advantageous for the country if the government followed a combination of techniques. Namely, the government could start the privatisation process by using the Staged Sales to strategic investors technique. Since the company’s board of directors is considering the expansion of the firm into the European energy market, this technique would increase revenue maximisation as well as support the company in maintaining effective corporate governance in an international level. In addition, the government could perform employee buyouts in order to increase share ownership as well as encourage employees to own parts of the company and thus be less reluctant to change. During the final stages of privatisation, since one of the firm’s main threats is the reduction of shareowners, the government could perform IPOs via the stock market thus continue widening share ownership.
As mentioned earlier, in Hofstede’s terms Greece has a large power distance; its population has strong uncertainty avoidance and prefers to work in a bureaucratic organisation and is reluctant to change. According to Burnes (2004), during the introduction of privatisation markets fall into a divergent state thus forcing change into the markets’ environment and challenging its organisation’s goals, structure, culture and governance. In circumstances such as these the most appropriate type of management is the Emergent approach to change, combined with Transformational leadership. Burnes (2004) argues that the Emergent approach to change is accomplished by continuous adaptation to new environments as well as alterations in everyday processes in order to lead to fundamental changes through a series of small adjustments in everyday routines and breakdowns. Burnes (2004) also stresses that since this approach is most useful in an increasingly dynamic market of developing yet unpredictable nature, there could be five Internally Consistent guidelines which are:
‘1. Embeddedness, studying processes across a number of levels of analysis.
2. Temporal interconnectedness, studying processes in past, present, future.
3. A role in explanation for context and action.
4. A search for holistic rather than linear explanations of process.
5. Link process analysis to the location and explanation of outcomes.’
(Burnes 2004)
Finally, in order to create a competitive pricing strategy the post-privatised firm’s board of directors could adopt the following the guiding principal illustrated on the graph below.
Table 2: Identifying the price/output target
(Source: Griffiths et al (1996) p. 510)
Griffiths et al (1996) argue that this pricing method generates a price whose outcome is accepted by the public and at the same time allows natural monopolies to generate maximum profit. By setting Ppo and Qpo as the target price and output respectively, the industry is able to capture economies of scale, monopolists are unable to abuse their market position and the firm’s operating costs are decreased significantly.
Conclusion
In conclusion, we can identify that privatisation can be used by governments in order to increase competition in their domestic market, promote foreign direct investment and gain competitive advantage at a national level. On the other hand, due to the complexity of the privatisation processes, in order to be successful governments have to follow different techniques in order to achieve economies of scale, competitive advantage and reach their objectives. We also examined Greece’s energy market by performing a P.E.S.T.L.E. analysis, as well as the PPC’s potential post-privatisation towards incoming competition by performing s S.W.O.T. analysis. Moving on, we identify the appropriate privatisation techniques that the Government should follow in order to maximise the PPC’s number of shareholders, maintain revenue maximisation and efficient corporate control as well as reduce its employees’ reluctance to change. Finally, we argue that the appropriate approach to change post-privatisation for the PPC in order to gain competitive advantage could be the Emergent approach in association with Transformational leadership and an effective pricing strategy.
References
Bishop M., Kay J., Mayer C., (1996). Privatisation and Economic Performance. New York. Oxford University Press. USA.
Bortolotti B., Siniscalco D., (2004). The Challenges of Privatisation: An International Analysis. New York. Oxford University Press. USA.
Burnes B., (2004). Managing Change 4th Edition. Harlow. Pearson Education Limited. England.
Business Insights., (2008). The Western European Electricity Market Outlook 2008: Country profiles of supply, demand, regulation and infrastructure. Business Insights Ltd.
Datamonitor., (2009). Public Power Corporation SA: Company Profile. Datamonitor Plc. USA.
Griffiths A., Wall S., (1996). Intermediate Microeconomics: Theory and Applications. Harlow. Addison Wesley Longman Limited. England.
MarketWatch., (2007) Company Spotlight: Public Power Corporation.
OECD Proceedings., (1999). Corporate Governance: State Owned Enterprises and Privatisation. England.
Wall S., Rees B., (2004). International Business 2nd Edition. Edinburgh Gate: Pearson Education Limited. England.
The Economist Intelligence Unit, (2007). Country Report October 2007 – Greece.
The Economist Intelligence Unit Ltd. New York. USA.
The Economist Intelligence Unit, (2005). Energy and Electricity Forecast June 2005 – Greece. The Economist Intelligence Unit Ltd. New York. USA.
The Economist, December 13th-19th 2008, Greece’s riots: They do protest too much.
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