Cyprus Mail

Implementing the troika memorandum provisions on privatisation

By Costas Apostolides

The privatisation provisions of the Memorandum of Understanding with the troika and Eurogroup  is the most controversial aspect of the current readjustment process.

It is also one that has fallen behind schedule, primarily owing to the obvious priority of getting things right in the banking sector, but also because of strong opposition from the state corporations, trade unions and some political parties (notably AKEL and DIKO).

Professor Christoforos Pissarides, chairman of the Committee of Economic Advisors to the President, has stated that within September the committee will submit its recommendations regarding the best way to proceed to meet these privatisation requirements.

He emphasised that the objective would be that privatisation would be undertaken in a gradual manner with the aim of achieving the real value of the state corporations involved.

He referred several times to the selling of shares in state enterprises, which is in line with President Anastasiades’ own commitments during the election campaign, in which he referred to the government maintaining control through a state majority holding and selling shares up to 49 per cent of the total.

On this Pissarides mentioned selling of shares to employees and consumers, while the government has mentioned involving strategic investors. No doubt these issues will be dealt with both by the committee’s report and in consultations with the government, parliament and the troika.

The memorandum includes privatisation under Chapter 2 Fiscal Policy and Chapter 3 Fiscal-Structural Measures, with the emphasis being on raising €1.4 billion by 2018.

It should be noted that the objective also relates to the International Monetary Fund’s standard dogma of reducing government involvement in the economy, demonstrated in the memorandum also through the promotion of Private Public Partnerships and privatisation.

This is justified on the grounds of increasing competition and efficiency but has not been successful in all sectors (for example museums, and controversial in prisons).

The main provisions of the memorandum relating to privatisation are as follows:
1.    A detailed inventory of all government and municipal assets, including immovable property, land and State Owned Enterprises (SOE), should be prepared by December 2013.
2.    Introduce a plan to improve governance of SOEs by September 2013 and legislation by December.
3.    Enhance monitoring powers over central and local government SOEs, including budget procedures (September 2013).
4.    Consideration of privatisation prospects of SOEs and land assets including CYTA, EAC and the Ports Authority and discuss with troika by September 2013 and enact a legislative framework for the regulatory framework of natural monopolies and the privatisation process by December 2013.

These tasks are enormous and cannot be undertaken realistically within the time span specified. They relate to a fire sale of assets which is akin to a car boot sale rather than a carefully planned privatisation process designed to assure that reasonable value is achieved. It would be more realistic to shift the time schedule to the end of 2014.

That would mean that privatisation could coincide with the full functioning of the banking and financial systems of Cyprus, including the stock exchange which would be central to the privatisation process.

Much of the political discussion has revolved around the privatisation of CYTA and the EAC which are monopolies and profitable, but there are also other public sector enterprises that are suitable for privatisation such as the Housing Finance Corporation with over a billion in deposits which could bring a sale price of over €100 mln, and would not cause resistance, while there are disaster cases such as the central municipal slaughterhouse at Kophinou which should be sold off to save money owing to accumulated losses.

All the SOEs have to be systematically examined, but the most difficult to privatise is the EAC and possibly the ports authority which has much valuable state land. Think, for example, of how valuable the many fishing shelters are around the island, all of which could also function for tourism.

The EAC is difficult because it is the central monopoly institution for the supply of electricity. It not only produces electricity but it owns the distribution and the metering system.

The model for a competitive electricity sector has to be decided first and established, the network should be owned by the transmission operator, who should be the buyer of electricity from EAC and the private sector, or use his services as a delivery mechanism for private competition.

The high cost old units of EAC should act as a reserve or be closed down, and a licence issued to a private operator to compete. All this would take at least four years to put together.

But before the structure of the electricity sector is decided no valuation can be made for the EAC.
CYTA is the easiest case to deal with, because a valuation can be made and shares can be sold on the stock exchange, but that will have to wait for a couple of years for the banking and the financial sector to function under normal conditions.

In conclusion the government and the SOEs are behind schedule for privatisation, but that is simply because it is complex to undertake and the immediate priority is the banking sector and the issues of balancing the state budget in the middle of a recession.

But there is little indication that work has begun in earnest on this. Hopefully the government will get its act together and cooperate closely with the political parties to get the legislation in place for restructuring the electricity sector and for privatisation, which also appears to require constitutional change.

Costas Apostolides is Chairman of EMS Economic Management Ltd ([email protected]).

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