By Brian Lait
THE NOVEMBER 6 headline in the Cyprus Mail “Troika piles on the pressure for SGO sell-off, EAC union pledges to resist” tickled my taste buds, and here I was in my happy retirement thinking that the circus was a dying industry.
What first caught my beady eye was a report on October 30 which stated “(EAC) has no competitors but faces serious cash flow problems that have prompted the Auditor General (AG) to question whether it could stay in operation in the foreseeable future. The EAC has prepared an action plan to try to meet its liquidity needs in the near future.”
But when did this serious situation arise and come to the AG’s attention? It must have been very recently as I see that the external auditors’ report on the 2012 financial statements was August 6 this year and it made no mention in the audit opinion of any financial difficulties. By law the AG must also report, which she did on August 8, simply stating that she has examined the external auditors’ report and that she is “….satisfied that it is appropriate”. So up to August 8 “no worries”.
Intriguing, as I can’t find any reports of any EAC catastrophe between August and the end of October. Never mind, let’s have a look at a few items in the 2012 financials and see what’s been cooking in EAC’s life in the last couple of years.
Sunday Mail readers with excellent memories and who savour high quality literature will remember my series of articles in March and June last year regarding EAC’s financials for the five years to December 31, 2010. In March 2012, I said that borrowings at the end of 2010 stood at an €576,704,000 and suggested that “….based on the net profits being chalked up borrowings cannot be repaid even over the very long term”. I further stated that EAC were repaying loans at an annual average of €33,120,000 which, without further borrowings, would take until 2032 for the debt to be cleared.
It seems most of the loans are from the European Investment bank (EIB) whose loan rates are sub-commercial, but in my June, 2012 article I said “I suggest that such a method of financing is unsustainable for EAC even with EIB’s generous lending rates and terms…..” In 2006 EAC had a gearing of 15 per cent. In 2010 it was 29 per cent; 30 per cent in 2011 and 28 per cent in 2012. That has become high geared financing.
At the end of 2011 EAC’s borrowings were €664,819,000 and €673,501,000 in 2012. A mere €241,054,000 is due for repayment during 2013.
I’m not up to date with recent developments in International Financial Reporting Standards (IFRS) and International Auditing Standards (IAS), but the wording in Note 1 to the 2012 financial statements appears somewhat worrying and makes my auditor’s aged antennae waggle furiously. EAC was greatly affected by the financial crash in March 2013, and will continue to be so, and part of Note 1 reads:
“The uncertain economic conditions in Cyprus, the unavailability of financing, together with the current instability of the banking system and the anticipated overall economic recession, could affect (1) the ability of the Authority to obtain new borrowings or re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions, (2) the ability of the Authority’s trade and other debtors to repay the amounts due to the Authority and (3) the consumption of electricity resulting to decreased turnover for the Authority”.
Further on it states:
“The Authority is unable to predict all developments which could have an impact on the Cyprus economy and consequently what effect, if any, they could have on the future financial performance, cash flows and financial position of the Authority.
“On the basis of the evaluation performed, the Authority has concluded that no additional provisions or impairment charges are necessary.
“The Authority believes that it is taking all the necessary measures to maintain the viability of the organisation and the development of its business in the current business and economic environment.”
Such uncertainty, when combined with the overall financial status of the EAC, raises serious questions about its ability to continue as a going concern i.e. continue in life. Note 2 apparently is supposed to justify continuance by declaring that EAC has prepared a Liquidity Response Plan which amazingly is dependent on the four assumptions listed.
The intriguing point is that despite the magnitude, and therefore the seriousness, of the matter there is nothing about this in either the external auditors’ or AG’s reports, and I would love to learn the rationale behind this treatment of such a calamitous state of affairs.
Has the AG now had second thoughts?
Perhaps all are looking at Note 21 which, as in past years, simply states that “loans are guaranteed as to repayment of principal and interest by the Republic of Cyprus”. Eureka!
In my article last June, I posed four main points for the EAC to answer, which they declined to do.
One was why no fuel oil is purchased in advance at a fixed price to minimise costs when prices are low. As with the five years to 2010 the 2012 annual report gives no details regarding fuel oil, which continues to be the costliest individual item in EAC’s electricity production, other than to give the quantities purchased.
Another question was the criteria for the appointment of EAC board members. I see we still have a bank employee, a businessman in computers and a Greek literature teacher which does not fill me with confidence.
Yet another was the overall costs of the staff. In 2010 “wages and salaries” were €35,074 per employee and when social insurance, pension costs, etc. were added it rose to €54,008. The equivalent in 2012 was €37,602 and €50,104, respectively, with a drop in staff numbers from 2,465 to 2,319. Another eye-watering statistic is the annual employees’ medical fund set up by the authority. This was €7,311,858 in 2010 (€2,966 per staff member) and €7,584,923 in 2012 (€3,270 per staff member). In 2010 6,782 dependants, pensioners and widows benefitted from this fund and in 2012 the figure was 6,936.
And so I return to the matter of privatisation and start by repeating what I said last March.
“Privatisation? Well, the island’s southern population which is spread over some very rugged territory, with a myriad of small villages in challenging terrain, is much smaller than many major cities (10 per cent of London, half the size of Barcelona, one third of Paris or Rome, a quarter the size of Madrid and smaller than Birmingham). Would such a challenge appeal to a commercial enterprise?”
Add the financial status I have pecked at above and I suggest any buyer would require a complete restructuring of the business methods, finances and all levels of staff and their remuneration. A mammoth, and questionably rewarding, task.
Well, Mr President, let’s see what you do with years of managerial incompetence, cronyism, populism and greed, especially after assuring the so-called SGOs that they would not be privatised. But please hurry as the EAC hangs onto the cliff by its nails. So much excitement to look forward to!
Brian Lait is a retired chartered accountant who has worked in 10 countries across three continents.