Cyprus Mail

Yet another bad idea

By Timothy Spyrou

THE NEWS, if confirmed, that the government intends “to appoint a fully political board” which will consist of non-executives, while the current executive directors of the Cyprus National Hydrocarbons Company (CNHC) will be demoted to department heads, is a huge blow to the future of our economy, and our hopes for a lean, accountable and transparent state. It is an open tender for more corruption and patronage. It will be seen as a provocation by the Turkish-Cypriots, leading to a choice of messy outcomes.

Lastly, it is not just a blow, but a revelation. It is a revelation of why our international lenders aren’t really impressed by our claims of an economic revival centered on exploiting our natural gas reserves.

The first argument against turning the two natural gas related companies into a fiefdom of the political parties, particularly DIKO, is that it will undermine personnel recruitment. It was perfectly acceptable that we would have a state controlled hydrocarbons company that would search for partners and investors, as long as it was run by technocrats on the Norwegian model.

It is not acceptable to demote the current and future technocrats to mere managerial positions, dismissing their technological and market knowledge and experience as if it is a commodity that is universally available. Also, to say that the political board appointees would not be exercising any executive control is a falsehood.

Things will turn murky sooner or later. The political appointees will seek to place their family members, friends, friends of friends et cetera, into positions throughout the two natural gas related companies, ensuring that we won’t have the best qualified people running the operations at all levels. In fact, we could end up discouraging those who have the best engineering, scientific and business qualifications from even applying for a job in the first place, as they will probably balk at being told what to do by a self-important bureaucrat who is somebody’s relative.

If you had studied an engineering course at Imperial College London and worked as an intern at Royal Dutch Shell, would you like to be bossed around by someone who has far less knowledge and experience than yourself?

Would you tolerate it if your less productive colleague gets promoted? Furthermore, not only may we be giving up on professionalism in management, but this will also encourage a slap-dash culture amongst the skilled workers who, although they are not technocrats, still perform valuable work such as maintenance of equipment and operating systems.

The second argument against politicising the board of the CNHC is that it will be the equivalent of giving the pigs multiple troughs of pig slop every two hours. It will be a recipe for kickbacks as is the case for many countries that were unfortunate enough to have large oil and gas reserves paired with self-serving political elites.

I believe that people do not adequately understand the damage that kickbacks inflict during a tender/bidding process for highly important contracts. Here is a hypothetical example. The national hydrocarbons company will be putting out an auction for the exploration rights to a prospective natural gas field. There will be a variety of bidders.

The best bidder will be offering not just the best price to the government, but they will also be offering the best infrastructure plans and they will also be offering the best completion date estimate.

They will also have the best safety and environmental records. However, all it will take to torpedo this deal is a couple of politically appointed board members who have close ties to the government of the day and a company willing to offer a range of incentives, from jobs for the boys to guaranteeing sweetheart loans.

That company may not have a good safety and environmental record, may not have the best equipment, may not have the best completion estimate and may even seek to bargain down the royalties that it will pay.

It may also be a company that is engaged in complex legal problems elsewhere, which would lead to Cyprus being enmeshed in controversies that might make the money laundering accusations, real or alleged, look insignificant by comparison. The sheer choice of catastrophic outcomes is bewildering.

The potential for economically and legally disadvantageous scenarios do not end there. If an oil and gas exploration company is ethically dubious enough to engage in such malpractices, what about all of the partners, contractors and subcontractors that it will bring along?

Most oil and gas firms today, regardless of whether they are Western giants like Exxon Mobil, small and medium sized enterprises, nationally owned corporations like Petrobras, outsource different operations to specialized oil/gas service providers.

This is a recipe for even more kickbacks, even more slovenly work, even more lost growth and lost revenues.
It could also be a recipe for an environmental disaster that would not only cost billions to clean up, but would simultaneously wreck what is left of our natural beauty; wound our shipping industry; kill our tourism industry; increase our carbon emissions; incur the wrath of the European Commission and heavy fines we can’t afford; invite the condemnation of the international environmentalist community and enrage the neighbours, who, aside from being disinclined to work with us in developing the European Union/East Mediterranean natural gas market, will be demanding payment for their share of the cleanup effort. Cyprus could be directing the remake of the BP Gulf of Mexico Spill.

I would hate to be in President Anastasiades’ shoes as he begs the EU for funds to save the Akamas whilst simultaneously apologising to Prime Minister Samaras because the oil slick reached Crete and Rhodes. In fact, if we get a disaster of an appropriate size, it would strangle our natural gas hopes in their cradle and possibly do damage to the wider industry, earning us even more trouble.

The third argument against politicising the board is that it will turn the CNHC into a battleground for different partisan and ideological agendas.

Each political party will be trying to achieve its own objectives within the corporation, and won’t be focused on what is actually good for the bottom line. There will be limited consensus as eventually each party will get a slice of the pie.

There will be limited stability in corporate decision making, with actions by the professionals being undermined constantly.

A change of government will see all current employees, professional or political, marginalised by a new influx of political personnel, resulting in the CNHC becoming yet another bloated state owned company.

Some parties will be tempted to expand the firm’s role beyond that of a state energy company searching for partners and investment. AKEL may aspire to emulate Venezuela’s PDVSA, which the late Chavez turned into a vehicle for interfering in a multitude of industries and a social welfare organization.

Today, its productive capability is in decline because, rather than employ technocrats knowledgeable about petroleum engineering-or poverty reduction for that matter-and investing in new drilling technologies and untapped fields, it instead employs a bunch of people whose only qualifications are loyalty to Chavez’s memory and a love for throwing money around.

Another reason why the appointment of a politicized board is a resoundingly bad idea is that it will destroy any hopes of gaining a good reputation in the global oil and gas industry and damage our investment prospects.

The article in the Sunday Mail illustrates this perfectly. The government probably spent over a million euros hiring a team of consultants linked with Norway’s Statoil so that it can be provided with advice on how the CNHC and DEFA should be structured.

We, the Cypriot taxpayer, were paying for advice so that our state natural gas and petroleum enterprises could emulate the best practices of an energy company that has operations in 36 countries, 23000 employees, a market capitalization of 50 billion euros and is ranked by Forbes Magazine as the eleventh largest oil and gas company in the world and 26th largest company overall by profitability. It is also an example of how an economy could judiciously manage its natural resource endowments without incurring costs such as overheating, bubbles and oil price volatility.

Yet, contrary to all logic, the Commerce and Energy Ministry rejected the impeccable advice provided by the Norwegians and decided to proceed in the exact opposite direction by giving political appointees the seats on the board of directors.

As a result, we have damaged our natural gas industry’s credibility with what could be a key partner and mentor before we even got the company off the ground. Furthermore, in the globalization age, information as to whether a corporation is following good or slovenly business practices travels fast amongst peers.

Every player that may want to do business with us already has us figured out from this piece of information. As I said before, it is gullible to believe that the politically appointed board of directors will not be operating as executives. They will eventually turn out to be non-executives in name only.

Already, the trend towards this inevitable outcome is taking shape, with the Energy Secretary not only arbitrarily deciding who will be included and excluded in future negotiations with Noble Energy, but who would conclude negotiations already in progress and who would sign the actual deals.

It is a policy designed to undermine the executives’ authority in their running of the corporation. It is also a signal to would be foreign investors that deference should be paid to the politicians and the bureaucrats as they are the ones with the cards to deal.

There is a reason why the oil and gas industry, at least in the West, is known as “Big Oil”. Besides their market capitalization, they possess some of best public relations personnel and lawyers that money can buy and have unprecedented political power.

Even the smaller enterprises, like Noble Energy [at $22.93 billion, it is bigger than our rapidly shrinking economy] wield some of that power. Some of them have been involved in human rights and environmental abuses and gotten away with it. A few oil and gas industry players have left American presidents politically bloodied.

Cyprus needs specialists that possess the ability to decide whether a prospective investor is trustworthy or not and whether the deal on the table has benefits that far outweigh the costs. If we take a casual attitude to negotiating with the global oil and gas industry by having political appointees as our representatives, then, they will walk all over us.

The last argument against the politicising of the CNHC board is that it will complicate the Cyprus Problem.

The Turkish Cypriots, rightly or wrongly, fear that we plan to prevent them from benefiting from their share of the natural gas wealth, regardless of whether we have a managed partition or a reunified bizonal, bicommunal federation.

The appointment of political appointees will appear like a coordinated plan to turn the natural gas industry and its benefits into the property of the Greek-Cypriot political elites and their clique. There is a choice of bad endings regarding this possibility.

One is that Ankara might engage us in a manufactured crisis that would scare away investors and halt all infrastructure development plans, regardless of the international condemnation.

The alternative bad ending could be that, in the event of reunification, the Turkish Cypriot political elite will demand full participation in the turning of the CNHC into a dysfunctional, rent seeking, vested interest run organization.

Given that Serdar Denktash’s party emerged as the real winner in the ‘elections’ on an anti-economic reform platform similar to that adopted by Greek-Cypriot politicians, this is a certainty.

This the reason why our international lenders dismissed our pleas to trust us, on the basis that our economy could be dramatically revived by natural gas led investment, and that we could pay the full €17 billion that we initially asked for.

They know that the governing class lacks the mentality to manage our newfound wealth without further entrenching the vested interests that support our dysfunctional and unaccountable bureaucracy. This is why we should have welcomed the Troika’s suggestions that they have oversight over our energy development plans. They do not trust us, regardless of the ideological orientation of our government. And they are quite possibly right.


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