Letter to the President of the European Commision, Jose Manuel Barroso

Jose Manuel Barroso

April 18, 2012

Η. E. Mr. Jose Manuel Barroso President of the European Commission Brussels

Dear President Barroso,

Following our very fruitful meeting on 29 February 2012 and your subsequent letter of 6 March 2012, and in view of the forthcoming European Commission Communication, I would like to address some of the key issues we have been discussing that can significantly contribute to supporting growth and employment in Greece. Let me focus on the following priority areas which the Greek government has pursued in recent months, namely: financial support for SMEs; advancing major infrastructure projects; reducing youth unemployment; the privatisation programme; policies in the energy sector; the absorption and effectiveness of the EU structural funds.

1. Financial support for SMEs

With your backing, and that of Commissioner Hahn, an agreement was reached with the EIB on the basic parameters of the Guarantee Fund for the support of Small and Medium Sized Enterprises (SMEs). This agreement, which was signed on 21 March 2012 and entails a Guarantee of €500 million, should increase the available financing to the real economy by €1 billion. The new Minister of Development, Competitiveness and Shipping, Ms. Anna Diamantopoulou, continues to lead this initiative.

In addition, the Greek authorities have adopted further measures in order to address the shortage of liquidity in the banking system.

These measures include several financial instruments mainly managed by ETEAN (National Fund for Entrepreneurship and Development). The contribution of National Strategic Reference Framework (NSRF) funds to these measures is in the region of €1,189,000,000, and should constitute a significant driver for increasing liquidity in the economy. In this context, the role in leveraging EU funds of the European Investment Bank and European Investment Fund is pivotal and should continue with greater intensity.

The Greek government is also focusing on the identification and removal of obstacles that have hindered the disbursement of available financing from existing instruments to the SMEs. The Ministry of Development, in cooperation with credit institutions and the EU Task Force for Greece (TFGR), will monitor the situation and take measures aiming at substantially increasing the credit flow to the SMEs, and, more generally, the real economy.

2. Advancing major infrastructure projects

Progress is being made towards advancing major infrastructure projects. With regard to the five highway concessions, four of them were interrupted due to the extraordinary impact of the economic crisis on funding and toll revenue. A number of problems have been tackled to ensure the finalisation of the infrastructure projects and their financial viability.

After agreeing on the general principles guiding the negotiations (also presented to the European Commission) and identifying all the relevant technical, legal and financial issues in detail, the negotiations are currently focused on three topics, namely:

(i) the possible reduction in the size of the projects and the conclusion of agreements on requested
compensation due to delays;

(ii) the achievement of an internal rate of return (IRR) that makes the projects economically viable for
both the state and the concessionaires. This will partly depend on the cost of the available debt financing
for the projects and the contribution of the Risk Sharing Instrument, which will be key in this regard;

(iii) the way banks will address their exposures to these projects, which depends on the ability of the
concessionaires and construction companies to service their debts at a reasonable cost.

These negotiations would be significantly facilitated by the deployment of the Risk Sharing Instrument which would provide capital provisioning to the EIB that would enable the extension of loans or guarantees to co-finance infrastructure and other investment projects. The negotiations are likely to be finalised by summer 2012 and the revised Concession Agreements could be approved by the Greek Parliament in October 2012.

The Risk Sharing Instrument would also enable the financing of other important projects, such as energy and waste management projects. The Greek authorities are currently working in close co-operation with the EIB, DG REGIO, DG COMP and the Task Force for Greece (TFGR) in order to identify the portfolio of projects to be financed by this Instrument. The Greek government has made a proposal to the Commission services indicating those NSRF resources that could contribute to the Risk Sharing Instrument.

3. Reducing youth unemployment

The reduction in youth unemployment is a high policy priority for the Greek government. A key initiative in this regard is the Operational Programme “Human Resources Development” co-funded by EU structural funds (ESF).

As you know, this programme aims at:

(i) subsidising enterprises so that they may offer work experience and help enhance the professional skills of young unemployed aged between 16 and 24;

(ii) subsidising insurance contributions for private sector enterprises;

(iii) implementing community service programmes;

(iv) creating new jobs under the supervision of municipalities; and

(v) developing vocational training programmes in relation to the “green economy” and the tourism sector. The total beneficiaries of these five programmes are estimated at 158,000 young persons up to 30 years of age, and the total budget of the programmes is € 786,580,000.

In the immediate future, a number of additional programmes will be activated covering:

(i) the National Network of Social Intervention for the Social Inclusion and Support of Vulnerable Social Groups;

(ii) subsidising enterprises for hiring unemployed university graduates aged up to 35 years;

(iii) workplace training for youth; (iv) vocational education in developing sectors, implemented through the training voucher system;

(v) community service programmes in the culture sector; and

(vi) promoting social entrepreneurship. The beneficiaries of these additional programmes are estimated at 46,700 young people, and the total budget is €352,750,000.

In order to achieve the objectives of these programmes and ensure the effective implementation of actions that will lead to longer-term job creation, it is important to devise a broad strategy that entails innovative and flexible solutions. In this context, the Ministry of Development, in colaboration with the Ministry of Labour, is developing an “Action Plan for the promotion of entrepreneurship and boosting of youth employment” to be launched in the first semester of 2012.

It aims at:

(i) fostering synergies between the three Structural Funds (ERDF, ESF, EAFRD) in order to attain the highest possible utilisation and value-added of their resources;

(ii) focusing on supporting sound and extroverted entrepreneurship, as the main source of job creation;

(iii) using ESF funds earmarked for young entrepreneurs and existing financial engineering instruments, mentioned under section 1, to enhance the financial position, viability, development and competitiveness of enterprises; and

(iv) supporting the primary sector of the economy and the processing of primary sector products.

The envisaged Action Plan, to be completed by end June 2012, would reach a total funds appropriation of €4.3 billion until 2015, with the objective of strengthening growth and job creation. The competent ministries estimate that such a plan could achieve the creation of 170,000 additional jobs, while securing 85,000 existing SME jobs. Some 36,000 beneficiary SMEs and 350,000 individual beneficiaries (work experience, vocational training) could take advantage of the Plan’s resources.

The Action Plan includes the continuation of existing measures that work well, the creation of new actions that can respond to the crisis-related needs of the Greek economy, as well as the adoption of a series of measures that focus on SMEs (such as improving the business environment to boost entrepreneurship, providing support to innovative firms or streamlining banking procedures). Beyond the funding available from the ESF programmes outlined above, this Plan hinges on the successful and rapid implementation of legislation such as the recently adopted Law 4072 of 11 April 2012 on Business-Friendly Greece.

Indeed, at a time when one out of three firms is shutting down and one out of five Greeks is unemployed, conventional approaches to supporting entrepreneurship and tackling unemployment may not be sufficient. In addition to measures that will enhance the growth potential of the economy in the medium and longer term, we need to devise solutions that are able to directly kickstart the process of job-creation.

In this context, it would be worth considering the following practical steps which could facilitate the successful implementation of the Action Plan:

For ESF-financed programmes: greater flexibility and expansion of ESF eligibility criteria, such as financing the maintenance of jobs and welfare-related actions.

For the programmes supporting youth entrepreneurship: a reduction of the business contribution rate in the co-financed structure (e.g. to 20% of the total investment cost); expansion of eligibility of operational expenses, for a certain period of time (e.g. the first 2 years of the new business); review and redirection of EU structural fund resources not yet absorbed, in favour of new entrepreneurs; more flexible terms for new enterprises with regard to the maintenance of job positions; amendments to the procedures for calls for expression of interest (rolling invitation) and for proposal assessments.

For the programmes supporting entrepreneurship in general: rewarding genuinely innovative entrepreneurial ideas and the creation of high value-added enterprises; investigating the possibility of providing loan guarantees and enabling low interest rate loans with simple procedures, at least for NSRF action-eligible recipients; expansion of the limits for state aid carried out under de minimis.

4. Privatisation programme

In March 2012, steps were taken by the Hellenic Republic Asset Development Fund S.A. (HRADF) regarding the second international tender procedure for the Hellenic State Lotteries, and the invitation for expression of interest for the privatisation of Hellenikon S.A. The relevant provisions on Hellenikon were adopted in Law 4062 on 27 March 2012.

More generally, the regulatory framework and EU state aid provisions remain a key component of the privatisation programme: it is important that assets under privatisation enjoy the highest possible legal certainty according to European law, and that privatisation is implemented in a manner that does not raise issues of state aid or other uncompetitive practices.

To ensure legal certainty and compliance with state aid provisions, the HRADF has submitted, and will continue to submit, to the Commission services information concerning the legal and financial status of assets under privatisation, as well as information on the privatisation process envisaged for each asset (i.e. privatisation structure and tender procedure).

This will allow the Commission services to identify potential state aid issues that might arise, and ensure that such issues are addressed in a timely manner1.

Against this background, I expect that the privatisation programme will continue to receive the guidance and approval of the European Commission from a state aid perspective.

With respect to the privatisation of assets such as motorways, regional airports, ports, lotteries, water and sewage infrastructures, certain public policies need to be developed and regulatory reform is necessary before the transfer of such assets to private operators can take place. The Greek authorities are making progress in this regard to ensure the successful conclusion of the privatisation of the relevant assets.

Additionally, the transfer of state monopolies to the private sector has to be accompanied by the strengthening of the relevant regulatory regime, as also foreseen in the second economic adjustment programme. In order to further develop public policy and to ensure technical soundness, the Greek government has requested technical assistance from the TFGR in several relevant aspects.

5. Policies in the energy sector

Greece’s energy sector is of strategic economic importance and can play a key role in fostering growth over the medium to longer term. With regard to the “Helios” project, this has significantly progressed in all its aspects (financial modelling, land availability, grid connectivity, licencing process), with intensified meetings with the European Commission, the German Environment Ministry and the EIB. The Greek government has appointed financial advisors for the project who have worked on the financial modelling.

A solar Geographic Information System (GIS) has been developed, and available public and municipal land for the project has been identified. A collaboration agreement was signed between the EC Joint Research Centre and the Ministry of Environment, Energy and Climate Change, on technical assistance in determining optimal transmission routes and the necessary infrastructure investments for full-scale deployment. The Helios legislation (Law 4062/2012) provides for the creation of Helios S.A., the management of the project, licencing procedures and land parcels selection issues.

As regards the functioning of the energy market, Greece was among the first member states to adopt the third EU energy package. In electricity, Greece has chosen the ITO model as a first step to full ownership-unbundling that is planned over the coming years. Over the last two months, the new Transmission System Operator company (ADMIE, a 100% subsidiary of PPC) has become operational and has assumed the ownership, control, operation and planning of the High Voltage System. At the same time, the new market operator LAGIE (a successor of the previous grid and market operator company DESMIE) has started operating the day-ahead wholesale market.

At the end of March, the new distribution operator (DEDDIE) was also established so that Greece now has separate entities for the operation of the transmission and distribution networks, and for the wholesale market. In the retail market, Greece has been stepwise deregulating the PPC tariffs since the end of 2010. At present, the only tariffs still regulated are those of Low Voltage clients. The final deadline for fully deregulating these tariffs is June 2013, in line with the second economic adjustment programme.
Regarding the natural gas sector, Greece has pursued the development of pipeline projects that cross the country (ITGI, IGB, South Stream, TAP) which will increase liquidity in the gas market.

For a Greek gas hub to be established, it is necessary that more participants become active in the gas market. This goal is also served by the expansion of the existing LNG storage facility in Revythoussa, to be completed by 2014. The gas hub needs also price signals and this is currently served by the monthly average gas price published by the regulator. The first amendment of the gas Grid Code last autumn has also increased transparency in the grid access, facilitating the use of the grid by an increased number of market participants.

The gas sector will be further transformed following the privatisation of DEPA currently underway (17 companies have expressed interest). At the same time, Greece is also actively engaged in exploring its hydrocarbons potential through seismic surveys and tendering using an “open door” policy.

6. Accelerating the absorption of EU funds

With regard to the faster implementation of the National Strategic Reference Framework, the aforementioned Law 4072 of 11 April 2012 also foresees measures to speed up the funding of ongoing projects held up due to regulatory bottlenecks, bank liquidity shortages and firm financing constraints. In addition, a general action plan initiated in June 2011, as well as an action plan for technical assistance, were drawn up and addressed to the Commission and TFGR services, consisting of concrete administrative measures to reduce bureaucracy and streamline procedures relating to new and ongoing projects.

These measures were already implemented with significant results at the end of 2011; new measures are being implemented, with deadlines between April and September 2012, and are expected to further enhance the flow of existing funds into the economy. They relate to the simplification of the Management and Controls System of the NSRF and include:

- Speeding up the screening of projects and the amendment of checklists, thus reducing the time spent for proactive checks while improving the quality of tenders (schedule for completion: end of July 2012).

- Clarifying and standardizing the cases where amendments of approval decisions are necessary (schedule for completion: end of April 2012).

- Reducing the budget lines per Operational Programme (OP). At the moment, there are over 250 budget lines used under the Public Investment Budget and the target is to reduce them to 27 lines, saving time and effort for Management Authorities and beneficiaries (schedule for completion: national regulatory changes expected by end 2012).

- Simplifying cost structures mainly for ESF projects. Specific proposals on this subject have also been made by the TFGR (schedule for completion: end of May 2012).

- Signing power transferred from Deputy Minister to senior management level. This will reduce necessary signatures from 9 to 3, and the time needed for each payment from 1 to 3 months to about 5 days (schedule for completion: end of April 2012).

Implementation of these measures is expected to lead to an acceleration in payments for already contracted projects of up to € 2.3 billion in 2012.

Law 4055 of 12 March 2012 partly addressed relevant judicial procedures. In addition, as stated under section 1 above, the initiatives taken in cooperation with the Commission and the EIB to activate relevant financing instruments will help mitigate the liquidity shortage in the economy.

7. The continuing importance of EU structural funds

A broader issue of high importance for my country concerns the Multiannual Financial Framework (MFF) 2014-2020. As a number of the above points show, the Union’s budget, which co-finances EU structural funds, can be an essential development tool, especially in times of crisis. EU structural funds will undoubtedly help the Greek economy overcome the prolonged recession, implement the second economic adjustment programme, and return to a sustainable growth path in the coming years.

In this regard, as the MFF negotiations advance, I take the opportunity to highlight the need to find workable solutions especially for EU member states in extraordinary circumstances. One specific issue is the impending abrupt and very significant loss for Greece of EU funds due to, inter alia, the change of status of several regions.

The Attiki region in particular, which accounts for a large part of the Greek population and GDP, is facing an economic and social crisis. In the same context, the priorities of the EU Agricultural Policy in the new MFF should not lead to an abrupt interruption in the financing of a key sector for the Greek economy at this point in time.

In conclusion, I would like to make two additional remarks. It is well understood that the successful implementation of fiscal consolidation and structural adjustment crucially hinges on the far-reaching reform of the Greek state. The long-standing structural weaknesses of the public administration and. more broadly, the general government sector have been a source of misallocation of resources, diminished effectiveness of policy implementation, impediments to private sector entrepreneurship and. indeed, social injustice.

For this reason, state reform constitutes a top national priority and a key element of the second economic adjustment programme, with a strategic focus on areas such as: tax policy and revenue administration reform; land registry; regulatory and judicial reform; public administration and local government restructuring, and the establishment of a stable inter-ministerial coordination structure under the Prime Minister’s Office.

In all such areas, the government, with the valuable technical assistance of the TFGR. is implementing a fully-fledged reform programme, the successful completion of which will significantly enhance the policy capacity of the state and the growth potential of the economy.

Finally, I would like to express the Greek government’s appreciation for the ongoing, multi-faceted support of the European Commission to Greece. I would further like to underscore the importance of the aforementioned policies, which will also be addressed in the Commission’s forthcoming Communication. The implementation of these policies will be complementary to the growth-enhancing structural measures of the second economic adjustment programme.

The mutually reinforcing nature of this two-pronged strategy should bring forward the recovery of the Greek economy and forge the foundations for sustained growth.

Yours sincerely,
Lucas Papademos