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