NYT: Greece Takes Steps to Win Back Foreign Investors

The New York Times
Saturday, May 31, 1997

By JOHN TAGLIABUE

ATHENS, GreeceFor Kostas Sinis, the dream of reviving the Kassandra mines was like a vision of returning to past glory. The mines, after all, have been operating for more than 2,000 years, since the days of Alexander the Great, yielding a variety of metals, from silver to zinc. But they also contain gold, and Sinis and his Canadian mining company invested heavily to get it out.

By late last year, though, the dream seemed in shambles. Legal battles and environmental protests made work impossible, and Sinis was threatening to pull out.

Then the Greek government stepped in more forcefully than it has in years. Police were deployed to keep the roads to the mines open, work resumed, and the big gold-mining project began to move ahead.

Business and government leaders saw this turnaround as a triumph, a break from a Socialist past marked by incessant strikes and excessive coddling of labor unions. Blue-chip companies ranging from Levi Strauss to Nissan had packed up and left. In Europe, Greece had become the odd man out, with galloping inflation, a shrinking economy and a budget deficit that by most measures was the worst on the continent.

But the government of Prime Minister Costas Simitis, which came to power in September, is trying mightily to right Greeces flagging economy and lure foreign business back. With the help of European Union funds, it is investing heavily in projects like roads and airports, offering tax breaks for foreign investment, and has set up an investment agency to help companies pierce the thicket of Greek bureaucracy.

Already there are signs of progress. Tourism and entertainment companies like Hyatt International and Virgin are investing in Greece. Economic growth this year is expected to be among the best in Europe. Inflation and budget deficits are down and investment is up. So is the Athens Stock Exchange, whose general index is up 65 percent this year, the second hottest market in the world.

"Finally we have a government that is interested in business," said Basil N. Theocarakis, the 66-year-old president of the Theocarakis Group, which is in banking and shipping and manufactures products from furniture to sports jackets. "Yes, there are still troubles. But basically they are on the right path to increase local and foreign investment."

Greece has an awfully big hole to dig itself out of. After 1981, when the country joined the European Union, corporate investment flowed in, often drawn by the lowest wage levels in the 15-member union.

But the Socialist government of former Prime Minister Andreas Papandreou, which ruled Greece through most of the 1980s, catered to the demands of organized labor and generally neglected the business community. Major industries like shipbuilding were nationalized. Generous wage accords caused productivity to drop, and fired up inflation.

Although Papandreou was driven from office in 1989, the conservative government that replaced him failed to make things better. By 1993, top corporations had begun to pull out, some to exchange their Greek plants for less costly ones in neighboring Turkey, or in formerly Communist countries of Eastern Europe. In 1993, Papandreou returned to power, but he died last year and was succeeded by Simitis.

Last year, Levi Strauss Co. cut its contract with a Greek jeans supplier and began supplying the Greek market from Poland, where wages are about one-tenth what they are in Greece, and Goodyear shuttered a plant in Salonika and laid off 350 workers, focusing future investment in Turkey and Poland. Earlier, Italys Pirelli tire company closed down a factory in Patras after repeated strikes to protest planned layoffs.

But for a microcosm of the recent Greek business climate, and of the turnaround Simitis government is attempting, one need look no further than the ambitious, $600 million attempt to modernize the Kassandra mines.

In the 1970s, extensive gold deposits were discovered at Kassandra. But continuous labor troublecoupled with a drop in the price of lead and zinc, the mines main productspushed the mines owners into bankruptcy. The government, in a solution typical of the times, nationalized the mines to prevent the loss of about 900 jobs. Though production sank to near zero, roughly $11 million was paid out in salaries alone.

"The miners kept busy mainly hoeing their vegetable plots," said Sinis, a former Shell Oil executive.

In the early 1990s, the government in Athens came under pressure from the European Union to sell the mines, but no bidders emerged. In 1994, a further effort produced two bids, and a $47 million offer from Sinis companyhe is president of TVX Hellas, a unit of the Canadian mining group TVX Gold Inc.was chosen over one from Australias New Crest.

But local community leaders, opposed to increased mining, organized protest demonstrations and cut telephone lines. The mayor of one nearby community, Stratoniki, demanded $220,000 to clean up previous environmental damage. During all this, the government stood idly byuntil TVX issued an ultimatum: Either clear the way for work or the mines will be shut.

> But it was only with the victory of Simitis last fall that the pace of change accelerated. Faced with the possible loss of a major investor, the new prime minister named a committee to assure that TVX could work freely, and sent police to restore order.

"It was quite obvious Greece was in danger of losing its fair share of foreign investment," said Loukas Valetopoulos, a former corporate banker who is now general manager of the Hellenic Center for Investment, the agency Simitis established to help prospective investors.

In the few months of its existence, the agency has helped Virgin obtain the approval of a slow-moving archeological commission for its hotel project on Hydra, and pushed through approval of a McDonalds restaurant against the objections of local authorities in Athens. But the centers main effort is trying to bring ashore four major investments, totaling almost a half billion dollars. Valetopoulos will not reveal details other than to say they involve investors from the United States, Belgium and South Korea.

Yannos Papantoniou, the finance minister and a principal architect of government policy, insists the changes are real. By the end of this year, he said in an interview, inflation is expected to sink below 5 percent, from 12 percent in 1993, and the economy is expected to expand by 3.5 percent, after shrinking 1 percent in 1993.

All this, he said, should enable Greece to adopt Europes single currencyif not in 1999, in the first wave of unification, then by 2001.

But even though Athens acted in the TVX case, it is an open question whether the government can stick to its guns. For none of this belt-tightening, of course, pleases Greek labor leaders, who point to unemployment that has risen to 11 percent from 6 percent in 1993.

Ioannis Orfanidis, who heads the federation of bus and truck drivers, blames Europes Maastricht Treaty, which sets the conditions for joining the single-currency system.
"If Maastricht is not changed," he said, "unemployment will go up, and the unity of Europe will be destroyed."

In June, the unions will send delegates to a Europe-wide demonstration for jobs in Amsterdam, Netherlands, he said, but though public-service unions in Greece have protested with demonstrations and strikes by teachers and civil servants, union workers in the private sector have been relatively passive.

Papantoniou acknowledges that much of the growth comes from massive public works projects, paid for mainly by the European Union, to upgrade transportation and energy supplies. In Athens, a $3 billion airport is under construction. The national telecommunications group is spending $2.2 billion to improve phones; a $3 billion project to bring Russian and Algerian gas to Greece is near completion.

But such investment is crucial, he says, if Greece is to anchor Europes southern flank as it integrates other Balkan economies, like Croatia and Bulgaria, and builds commercial bridges to the Caucasus and the Middle East.

What does Greek business think of the new climate?

In 1995, the $340 million-a-year industrial conglomerate headed by Theocarakis was forced to shut down a joint venture with Nissan of Japan that was Greeces only automobile manufacturing plant. The plant was opened in the 1960s, Theocarakis explained in an interview, to skirt import barriers and high tariffs. So in part it was made unprofitable by Greek entry into the European Union and the opening of its borders to imports. But part of the problem, he said, could be traced to the governments failure to support efforts to keep the factory alive by modernizing and enlarging it.

Now, Theocarakis group is a partner in a Hyatt hotel and casino project in Salonika, and he is upbeat about the new policies.

"Greece cannot only be a hotel," he said. "We need more industrial activity, and the government understands this."

Jason Stratos, president of the Union of Greek Industrialists, was also burned by past government decisions. In the mid-1980s, the textile group his family owned, with 6,000 employees, was nationalized and soon run into the ground by state-appointed managers. For the last two years, successive governments have sought, unsuccessfully, to sell its pieces.

> Stratos, in an interview, listed the advantages of Greece for foreign investors, like substantial tax incentives and a labor force that is "well versed on traditional tools, and easily adaptable to new ones." But drawbacks remain, he said: a kind of wage indexation, limits on overtime, and restrictions on layoffs.

His biggest complaint, however, is the new governments slowness in selling off nationalized industries. While pledging privatization, it continues to own key industries, like paper manufacturing, utilities and about 70 percent of banking. The most notable selloff has been a 10 percent share of the telecommunications group. Yet Stratos says, "What we are seeing of this policy is still largely words."

Sinis advises watching the progress of the TVX mines to judge the seriousness of government intentions.

"I think we are at the stage where we can see the light at the end of the tunnel," he said. Yet he added that the TVX investment remains a "test case, from every point of viewfor shareholders, to see whether there has been real change; for the government, to see whether it can do it."

"In a country where progress was delayed for 20 years, its dangerous to talk about progress," he said. "You have to see things happening."