Water companies prove to be illiquid assets for government: privatization plans stall due to court rulings and public opposition

Both EYDAP and EYATH, the water utility companies for Athens and Thessaloniki respectively, were originally due to be transferred to private ownership despite widespread popular opposition and negative experiences from such privatizations in other countries. Privatization of the water companies is a Memorandum obligation and revenue from the sales would have counted towards the revenue targets for privatizations which the government has struggled and largely failed to meet so far.

But the privatization of EYATH, which was at a more mature stage, has now been at least temporarily frozen according to an announcement by the HRADF at a shareholders’ general meeting yesterday. The fund cited adverse legal decisions and popular disapproval as reasons behind the suspension of the process. In an unofficial referendum in Thessaloniki for the water privatization in which over 200,000 people took part, 98% voted against the move.

However the HRADF has far from abandoned the process stating that it would, ‘re-examine the process of utilizing EYATH and will announce its relevant decisions.” The fund also stressed that it was obliged to protect the reliability of the privatization process indicating that it is unwilling to entirely abandon the move.

The ‘freezing’ of the EYATH privatization comes following a key decision by the Council of State that deemed the transfer of a controlling stake of the Athens water provider, EYDAP to the HRADF unconstitutional.  The court effectively reversed the transfer of a controlling stake in the company from the state to the Hellenic Asset Development Fund (HRADF). All of the shares were due to be sold to private investors.

Most significantly, the crux of the decision was that effectively transforming the water utility into a privately controlled for-profit company would render the state unable to guarantee that it could fulfill its constitutional obligation of providing affordable and clean water.The decision also noted the de facto monopoly of EYDAP in the Attica region given that the water and sewage pipes necessary for the proper sanitation of the city are among the company’s assets.

The ruling had cast a long shadow over the privatisation of EYATH for which the HRADF was at the stage of accepting binding offers from approved bidders. It was considered likely that the Council of State would issue a similar ruling for EYATH. While the HRADF is reportedly still examining ways that the management of EYATH would be given over to private investors together with a minority stake in the company (considered essential to render the investment attractive), the Court's ruling over EYDAP renders this legally complicated.

Now following the decision by the HRADF to freeze the sale of EYATH it is believed that the Fund may return 50% plus one share back to the government (it currently holds 74% of the shares in EYATH), with the remaining 24% to be sold to private investors. However a transfer of any shares back to the state from the HRADF is forbidden by the Memorandum Agreement. Specifically, according to the HRADF website, “Any asset transferred to the Fund is to be sold, developed or liquidated. The return of any asset back to the State is not allowed”.

In short, the ruling of the Council of State and the Memoranda are in conflict with each other over the issue and it is unclear which one will ‘win out’.

Campaigners as well as the general public will be breathing a cautious sigh of relief at the news. For the government however, it is yet another setback in its privatization programme which has continually failed to meet targets which have repeatedly been revised downwards. Revenue from the water privatizations were expected to bring in about 800 million euros in revenue towards the targets of 1.5 billion euros for 2014 and 2.24 billion euros for 2015.

The government will also be regretting the timing of the apparent collapse of the water privatizations, coming, as it has, as the government and the employees of the Public Power Corporation (DEI) prepare to face off over legislation that will provide for the sale of the profitable ‘little DEI’ to private investors.

The union GENOP-DEI is likely to be emboldened to dig in its heels by the failure of the government to push through the water privatizations, although public opinion is somewhat more divided over the question of the DEI privatization than for water utilities.

Note: an earlier version of this article had the title ‘Greek water to remain public as privatization plans are shelved’ but was changed as it was considered to be misleading given that the issue is still being examined. TPPI regrets the error.