Greece Infrastructure Report Q3 2009

This quarter we reiterate our concerns regarding the health of Greek finances, the problems of which have cascaded into infrastructure-sector investments. A growing budget deficit and burdensome public debt are severe threats to the Greek economy. Not only is the government’s ability to finance large public infrastructure projects constrained by its aim to bring down the GDP deficit to 3.7% by the end of the year, to be in line with the 3% GDP deficit clause of the Maastricht Treaty, but in addition public finances are so dire that they would simply be unable to take any further strain.

Greece’s deficit malaise has been chronic, and thus the concept of utilising public private partnerships (PPPs) for infrastructure projects has gained traction in recent years. Greenfield PPP projects have been welcomed by the public – though there remains opposition to the idea of the private sector owning and operating infrastructure assets. The perceptions about concessions operating existing assets remains largely negative, bordering on hostile in some cases. A case in point is the opposition to the privitisation of part of the container operations at Pireaus Port, which has come not only from trade unions – which have a vested interest in seeing the port remain in public hands – but also from a large part of the population, who oppose the idea of private ownership of infrastructure assets.

Public opinion is not the only hurdle to PPPs. The burdensome bureaucratic edifice of Greece is costly to investors and is a major obstacle to doing business in the country. This is reflected in BMI’s Infrastructure Business Environment Ratings and Project Finance Ratings for Western Europe.

On a positive note, we can start talking about a maturing PPP market. Though the largest number of projects take place in the social infrastructure domain (schools, hospitals, courts, etc.), transport PPPs have by far had the largest investment volumes in recent years. Successful PPPs include the Athens Metro, the new International Airport in Athens, the Eleusina-Tsakwna motorway and Egnatia Odos. In the pipeline are many regional airport concessions, more motorway and urban railway concessions.

In BMI’s Q309 Greece Infrastructure Report, we forecast that construction sector real growth will continue along the downward trend it embarked on in 2008 as revised data from the national statistics agency revealed. First-quarter data came in negative, broadly in line with our expectations, through the fall was not as abrupt as we had expected. Accordingly, gross fixed capital formation for non-residential construction (including infrastructure) declined by 0.7% compared with Q408, while seasonally adjusted construction industry value registered real growth of -4.5% compared with Q408, but positive 1.4% compared with the corresponding quarter of the previous year. The latter figure is a very positive sign for our forecasts for 2009, which show that we expect to see a contraction, albeit one that is less steep than last year. Indeed, the first forecasts for the year seem to validate this view, with the year-on-year growth figure in positive territory.

Major players in the Greek infrastructure industry include locals Elliniki Technodomiki-Aktor-TEB Group, J&P-AVAX, Terna, Mytilineos, Aegek and Athena, some of which also have significant operations abroad, mainly in the Balkans and Middle East. We anticipate that expansion abroad will become an even greater of part of the corporate strategy of these firms in the coming years, as it will help offset the downturn in Greece. However, it should be noted that, with the possible exception of Saudi Arabia and Qatar, the Middle East and the entire Balkan region do not look too promising for 2009-2010 either. It is worth noting that at least for 2008, their strategy of internationalisation paid dividends, as the three companies reviewed in this report (Terna, J&P-Avax and Aktor) showed robust revenue growth for 2008, beating the downward trend set by many of their European rivals.