Saturday, 29 July 2017

Greece’s Pivot toward China

This article was published by The Weekly Standard under the title, "How China acquired a major port in Europe". 

COSCO's first of two 80,000-tonne capacity floating docks, new additions to the Piraeus Port Authority's ship repair division. (Handout photo)

ATHENS, Greece - In the Salamis strait where an Athenian-led fleet of 380 ships once sank a Persian fleet of more than a thousand and altered the history of the Western world, the China Ocean Shipping Company (COSCO) is redrawing global trade routes. The strait lies just outside the port of Piraeus and is the heart of its cargo business. Container ships arrive around the clock to be loaded or unloaded with pinpoint precision. The only sound is that of whirring motors as containers are lifted from decks and placed on flatbed trucks to be stacked on the quay.

Since 2008, when it signed a 35-year lease from the Piraeus Port Authority to operate two container piers, COSCO has increased throughput from 700,000 twenty foot-equivalent units (teu) to what it estimates will be over four million this year. Within the next five years, Piraeus is scheduled to handle 7.2mn teu a year, making it the Mediterranean’s biggest cargo hub and putting it behind only Rotterdam, Antwerp and Hamburg in Europe. COSCO has sunk €600mn into shoring up the strength of the piers to shoulder the weight of container cities stacked six storeys high, doubling the size of the second pier, and installing 33 of the tallest gantry cranes in the world, capable of loading and unloading container ships so large, they have not yet been built. By the time COSCO finishes its investments, Piraeus will be the only Mediterranean port capable of harbouring five giga-container vessels simultaneously.

In 2013, Chinese premier Xi Jinping announced the One Belt One Road (OBOR) initiative, a dual strategy of developing an overland trade route across Asia and a maritime trade route around the subcontinent to facilitate the export of Chinese goods. China says it will spend almost a trillion dollars on roads, ports and other infrastructure, mostly being built by its state-operated companies. Piraeus has become a critical link in the OBOR, acting as the main European import and transshipment terminal.

Although it is the Chinese who are accomplishing this transformation, Greeks helped provide the vision, and they view it as a patriotic endeavour. “Piraeus’ strategic position is clear. It’s the first harbour as you steam north from Suez that provides inland access to Europe, which means that apart from using it as a transit point to other European ports, you can also use it as an import point. No other regional hub provides this,” says Tasos Vamvakidis, Commercial Director of COSCO’s subsidiary, Piraeus Container Terminal (PCT). Offloading at Piraeus saves a week’s sailing to the ports of northern Europe - and at least two million dollars per trip. Using Piraeus as an import point provides perquisites to Greek rail. PCT has bought a contract for up to ten freight trains a day to southeast Europe, and plans to eventually raise that. This is transforming how freight moves across Europe, explains Professor Stratos Papadimitriou of Piraeus University. “What happened in the past, because Mediterranean ports were useless,” he says, “was that cargoes sailed across the Mediterranean to deliver in Rotterdam, and the cargo would come south by road again to be delivered south of the Alps.” Vamvakidis envisions a future in which southern European ports rival those of the north. “We will be what in previous decades the large ports of northern Europe were when transatlantic trade was the rule. Now the Asia-Europe route through Suez is our great opportunity for the next eight years,” says Vamvakidis. After that, he believes, the export-driven economies of Asia will “reach the point where they consume what they now export,” and trade volumes from east to west may diminish.

On 8 April 2016, the Greek government announced the sale of PCT’s landlord, the Piraeus Port Authority itself, to COSCO. PPA is the body in charge of operating and developing the entire port, including its passenger and cruise shipping, freight operations, ship repair and vast property holdings. COSCO has announced investments of €294mn in the first five years. Among other things, it plans to build new cruise ship berths outside the harbour mouth. By the time the work is finished, Piraeus will be able to host 14 cruise ships simultaneously, including four behemoths, and turn Piraeus into a homeport for much of the Eastern Mediterranean cruising industry. This means that passengers will fly into Athens International Airport, stay in hotels before and after their cruise, eat and shop. Much of COSCO’s development budget is to be spent on hotels and shopping malls within the port.

COSCO promises to use its dominant position in China to help bring Chinese cruise passengers. One company, Celestyal Cruises, has signed up to bring 2,000 Chinese cruise passengers this year.  “We believe that this will increase astronomically,” says Theodora Riga, the PPA’s head of marketing and strategic planning. Cruise passengers landing at Athens airport already increased by 86 percent last year to 123,000. So far this year the increase has been more than 100 percent. “We consider this a very dynamic niche market,” says the airport’s marketing and communications director, Ioanna Papadopoulou. What will turbo-charge this increase, however, is an imminent direct flight from China. Air China has had a flight from Beijing to Athens via Munich since 2011. “The information we have is that very soon, perhaps this winter, it will establish a direct flight… This is very important for the arrivals of Chinese tourists in general,” says Papadopoulou.

Increasing the number of container, freight and cruise ships visiting Piraeus also means more ship repair business at the PPA-owned shipyards. Cruise ships in particular, says Riga, “can’t be based here eight months a year and then be obliged to go abroad for repairs. It’s not cost-effective for them.” COSCO is restoring drydocks to working order, building two floating docks to repair ships of 80,000 deadweight tonnes, and advertising the comeback of shipbuilding and repair to Piraeus.

In spring last year, the Institute for Economic and Industrial Research, a think tank, estimated that COSCO’s buyout and investments in the PPA deal, along with all the secondary economic activity those will create, has the potential to reduce the Greek debt by 2.3 percent of GDP, create 31,000 new jobs and increase GDP by 0.8 percent.

The best possible deal?

Despite the fact that COSCO’s two deals in Piraeus are putting the port on the global map and contributing much to the beleaguered Greek economy, some people harbour serious doubts about whether Greece got the best possible bargain.

COSCO’s original lease of two container piers was the result of 18 months of intensive negotiations. Its value to the Greek economy in rent, dividends, taxes, salaries and investment was estimated at €4.93bn over 35 years – seven times the market capitalization of the PPA. PPA’s share price shot up 14 percent on the day of the announcement[1] and 10 percent the following day. The deal increased in value through two revisions, in 2011 and December 2014, to reach a net present value of €1.08bn. This meant that the PPA could have floated a bond worth at least a billion dollars on the strength of that one contract alone. Many politicians therefore questioned the wisdom of selling the government’s two-thirds stake in the PPA to COSCO less than two years later, for a mere €368mn.

The sale had been in the works for years. “When China finally bought the 67 percent, the money it spent was particularly good for the Greek economy at that time but generally for the location of the Piraeus port it could have spent more,” says Yiorgos Tzogopoulos, a close observer of Greece-China relations.  “Greece should have combined the privatisation with an increase of Greek exports to China but it did not do so.”

Foremost among the critics has been Yiorgos Anomeritis, the merchant marine minister who at the turn of the millennium did much to engineer COSCO’s involvement in Piraeus, and was responsible for the original lease of the two container piers. “Ports are not privatised through the wholesale disposal of shares,” he says. “Ports are privatised section by section, infrastructure by infrastructure, service by service, to a multitude of buyers. To turn a state monopoly into a private one, which is what’s happened here, is not reform.”

He is incensed that by acquiring PPA, COSCO became the beneficiary of what it committed to spend as a tenant. “PPA’s income after 2019, when the infrastructure was complete, would be €110mn a year. So the Chinese will make their money back for the purchase of the PPA shares in three years,” he says. He worries that COSCO’s ramping up of container traffic is not the result of its superior management of the cargo business, but rather due to its ability to divert cargo streams from its vast global business: “Do you know how much the cost of shipping containers has risen between 2010 and 2014 for importers and exporters? 28.4 percent,” he fumes. “The private monopoly behaved like a highway robber, which the state monopoly never did.” 

As if to pre-empt further criticism, the government recently announced that it would end the practice of selling the stock of port authorities for ten ports still under privatisation. “We will no longer do sales; we will subcontract operations,” said a government official.

Why did the Greek state sell the PPA for as little as it did? Indeed, why did it sell it at all? And why did it sell to a Chinese state-owned company?

The right price?

The price was the product of share performance in a volatile political climate. The conservative government of Antonis Samaras first announced an open tender process for the privatisation of the PPA in March 2014. In January 2015, before it could be completed, the government lost an election to the radical leftwing Syriza. Syriza attempted a confrontation with the country’s creditors, the Eurozone and the International Monetary Fund, which ended in disaster. Greece defaulted on a loan to the IMF in July, and days later signed onto its third bailout loan under humiliating terms. From May 2014, when the conservatives’ poor showing in European Parliament elections made a general election seem inevitable, to July 2015 when the Syriza government signed the third bailout, the interest rate international markets demanded to buy a 10-year Greek government bond rose from six percent to 15 percent[2], and the Athens Stock Exchange plummeted from over 1,300 points to 460 as institutional investors pulled out. When the original tender process for the PPA was announced in 2014, there were six interested bidders. By the time Syriza re-launched the sale, only three were left and only one, COSCO, eventually submitted a binding offer. Under pressure to make €6.4bn from privatisation over three years, Syriza accepted.  

Touting the deal a month before it was finalised, Stergios Pitsiorlas, head of the government privatisation body, called the €22 per share COSCO was paying very satisfactory. Four valuators had set PPA’s share value between €18.4 and €21.2. “[The COSCO offer] puts PPA’s total value at €550mn, which I think exceptional,” said Pitsiorlas. The state was tired of earning meagre profits from its companies, he said. “The COSCO rent was financing the PPA’s deficits, and the state was earning peanuts. At this rate, it would take the state 300 years to earn what it will earn in 40,” Pitsiorlas told Avgi newspaper.  

Anomeritis pish-poshes this way of thinking. “What is stock value anyway?” he says. “A load of hot air. Ports have docks, piers, buildings, an enormous electrical infrastructure. How can you match that with stock value when the Athens stock market is nosediving? We’re talking about 550 hectares of storage space and 40km of docks.”

Why sell?

Greece’s three memoranda of understanding with creditors (2010, 2012 and 2015) listed the PPA as a privatisation target, but did not specify selling its fixed assets, only its voting shares. Though recognition of the Greek state’s crippling inefficiency has become almost universal over the last quarter-century, the sale of infrastructure remains anathema to the Greek way of thinking.

Privatisation was unheard of in the statist Greek economy of the 1980s. While Margaret Thatcher was divesting the British state of carmakers, utilities and infrastructure, Greece was nationalising bankrupt industries to save jobs. All that changed after the fall of communism in Europe. The conservative government of Konstantine Mitsotakis in 1990 embarked on an ambitious programme of rolling back state monopolies or dominance in banking, telecommunications, the broadcast industry and the airline industry. But the infrastructure underpinning network industries such as ports, airports, rail and copper wire networks, was kept under strict state ownership and control. A quarter of the PPA was eventually floated in 2003, but the government held absolute control through the remainder.

The second great impetus for privatisation came with Greece’s bankruptcy in 2008. Wall Street’s financial crisis led bankers to price risk into Eurozone sovereign bonds that had previously been treated as failsafe. Greece was forced out of markets and in May 2010 signed its first memorandum of understanding with its fellow Eurozone countries, whereby they would bankroll the Greek state to the tune of €110bn, while Greece would balance its budget and reform its economy to make it more competitive. Unnoticed in the reams of the loan’s terms and conditions was an undertaking to sell €50bn euros in state assets. While this unrealistic target was eventually revised to €6.4bn in the third bailout loan signed by Syriza, the memoranda annexes contained lists of every major state company or entity, including the PPA, and irreversibly placed their development by private entities in the political vocabulary.

Still, nowhere else has a sale of Greek infrastructure happened. The telecommunications network, electrical grid and railway network remain under state ownership as their operations are privatised. PPA stands as the sole example of a buyer assuming control of state assets - moreover, assets whose value it had previously increased as a licensee. “The Chinese would not have made the deal if they didn’t have total control of the infrastructure,” says a source with knowledge of negotiations between the Greek government and creditors. “They could see how policy was prone to change with every new government.”

Why sell to China?

Under pressure to attract investment, Greece has looked both for government-to-government deals in the east, and private sector deals in the west. Neither exercise has been particularly successful, because the Greek state, jealous of monopolies and natural resources, has earned a name for obstruction, obfuscation and delay.

Through Greece’s tribulations with creditors and investors, COSCO has spoken softly and carried a big stick. It complained publicly only twice, once in January 2016, when refugees shut down the main rail link north into the Balkans for several weeks, and once in June that year, when the government tried to surreptitiously change the agreed terms of sale in parliament. However, when crane operators went on strike for 53 days in 2006-7 over the imminent lease of the container piers, diverting dozens of ships to other ports and costing the PPA at least $12mn in lost business, COSCO waited patiently. Hostile electoral rhetoric left it unimpressed. Socialist leader George Papandreou came to power in October 2009, after COSCO leased the container piers, vowing to throw the Chinese back into the sea. By the end of the following year he had received Chinese premier Wen Jiabao in Athens and signed ten agreements to strengthen maritime cooperation[3].

COSCO’s strategic patience has obviously been easier with the deep pockets and political backing of a state-owned company than with a free market corporation answerable to shareholders for quarterly results. This became clear in January 2016. Under pressure for key investors, Canada’s Eldorado Gold announced it was suspending what was going to be Europe’s biggest gold mining operation, in the northern regions of Halkidiki and Thrace, after its painstakingly won environmental permits were revoked. The investment was worth almost €3bn over 30 years, and $700mn had already been spent. “Since 2012, we have experienced the Ministry of Energy and Environment and other agencies failing to fulfill their permitting and licensing obligations,” said CEO Paul Wright in Athens. “These investments are seen a litmus test by all potential large investors – both domestic and international.  They should serve as an advertisement for investing in Greece.  It is personally very disappointing to be here today telling you otherwise.” Eldorado Gold has since relaunched its plans in Halkidiki, but the investment was shelved for three years critical to the Greek economy, and the damage to Greece's image was done. 

Other signature investments have also languished, such as a 600-hectare redevelopment of the old Athens airport on prime city real estate; private electricity generation; and the sale of billions of dollars’ worth of public real estate. Yet COSCO has quietly executed its timetable of investments, demonstrating that it is a dependable stakeholder.

In pure revenue terms, the Greek state might indeed have done better with COSCO as client rather than owner of the Piraeus Port Authority, but the state was unlikely ever to streamline the PPA and develop the port. As COSCO invests, the results speak for themselves. The PPA’s revenue rose by 3.6 percent in 2016, to €103.5mn. Anyone who bought PPA stock in the last year saw its value rise by 20 percent. The FT’s forecast is that the stock will outperform the market and come close to realising the $22 value COSCO paid for it within the next year.

The fact remains, however, that Greece’s deal with COSCO is statist in nature. COSCO assures the success of its investments as much through attracting clients competitively, as through its ability to contract other Chinese companies like Huawei, ZTE and the Shanghai International Ports Group, all of which it has signed deals with, to ship goods through Piraeus. The imminent Athens-Beijing air connection through Air China, the flag carrier of the People’s Republic of China, also suggests Beijing’s nod. Piraeus is therefore more than a business deal. It presumes a new political understanding between Greece and China. This has not gone unnoticed in Brussels. “European institutions wanted the privatisation, but would have been happier if the buyer was someone other than COSCO,” admits the source with knowledge of government talks with its creditors.

The China Pivot

Greece faces a broader difficulty in its relations with the West. It has been shut out of capital markets for most of the past decade. The glaring contradiction between creditors’ exhortations to grow through reform and the recessionary effect of government spending cuts has convinced many Greeks that the medicine was intended to weaken the Greek state and open it up as bargain basement for capitalist interests. The balance of power in the European Union has shifted, too, with the departure of Greece’s ally, Britain, and Germany’s sudden rise to undisputable hegemony over the European project through its control of the Eurozone. Germany has persistently refused to countenance a rescheduling of the Greek debt along the lines proposed by the IMF to make it sustainable. Absent that restructuring, the Greek state remains too predatory and arbitrary to attract private investors. Divesting itself of key public assets with no prospect of a growing free-market economy seems to many a game leading to Greece’s expulsion from the Eurozone. The US, Greece’s Cold War protector and key ally, has come across as unable to influence Eurozone policy towards it. Furthermore, US interests in the Middle East dictate a continued close relationship with Greece’s adversary Turkey. Greece thus lacks confidence in the alliances it has known since 1945, and feels increasingly alone in a shifting world. Its difficulties and disappointments have dramatically altered Greeks’ perceptions of traditional allies.

Defending COSCO’s buyout of the PPA in parliament, merchant marine minister Thodoris Dritsas described the disillusionment in Greece with what the free market economy has become: “Current conditions, and the days through which Europe and other parts of the planet are living, are tragic. There is the deconstruction of the rule of law, the deconstruction of the welfare state, the deconstruction of the principles of public interest, and venal policy as a desperate way out for certain powerful economic interests from the crisis.” Dritsas was directly implying that the state was being sold piecemeal to private interests, which had no other way to grow.[4]

While disillusionment with the West has grown, Greece and China have discovered that they have the makings of a strategic relationship. Greeks own one in five merchant ships plying the oceans today. That fleet is gainfully employed ferrying raw materials to China and finished goods from China. Greeks are doing much of their shipbuilding and repair in China, and look favourably on the prospect of repatriating that activity under Chinese management. Through the stellar performance of its subsidiaries in Greece, China is keen to demonstrate the alleged superiority of its model of state capitalism even as it abandons socialism. Greece’s geopolitical position is good for Chinese interests in the EU even as it has become less interesting to the US. And a close relationship with China seems to bear none of the risks of a shift towards Russia, with its brash and confrontational style towards both Europe and the US.

“Everything starts from economics and trade but China is certainly looking for a more important geopolitical role, a more important international role, and Greece is a country where this can start from,” says Tzogopoulos. Greece is a key member of China’s so-called 16+1 discussion and investment forum linking the countries of Eastern Europe. In April this year Greece and China further tightened their relations by inaugurating the Ancient Civilisations Forum. The Forum’s declaration recognises “civilisation and cultural diplomacy as a soft and smart power”, hails the preservation of cultural heritage as a defence against “terrorism, radicalisation, extremism… and other forms of related intolerance.” It is a signal that Greece and China intend to use what they have in common to cultivate a closer political bond.

The Truman Doctrine was inspired by the need to prevent Greece (and, by extension, Turkey) from falling into the communist bloc in 1947. It led to the Marshall Plan, which spent $13bn on the devastated economies of Europe and was key to lifting Greece out of postwar poverty. It is no coincidence that the only statue of a foreign leader in downtown Athens is a giant bronze of Harry Truman. Just as his legacy will never be forgotten here, the want for American cash and the lack of American political reach are palpable. In announcing a trillion dollars in overseas investment, China is consciously echoing the Marshall Plan. It is a choice partly dictated by necessity. The post-2008 recession has left the developed world with little money for investment, and the Chinese government is looking for a return on its stockpile of three trillion dollars. But just as the Marshall Plan cultivated political loyalties and favourable markets for the US, so surely will Xi Jinping’s Belt and Road initiative do so for China.

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