By Brian Lait
It’s difficult to believe that it’s just over two years since I last reported on my favourite Cyprus semi-government organisation, but I realise that time flies when you are enjoying yourself with such pastimes as admiring the way the politicians are tiresomely failing to tackle the non-performing loans in pursuit of populism, and reading the very latest version of yet another revised Memorandum of Understanding (MoU). (Why don’t they number them?) Such exciting times I am blessed to live here in Cyprus, such a plethora of newsworthy matters to exercise the brain.
Aficionados of the tangled web woven by the Troika and the government over the conditions and timing of the bail-out procedures will recall that the MoU of September 2014, states in Article 3.5 that the electricity authority (EAC) will be privatised “by mid-2018”.
The final paragraph of that article reads: “The privatisation plan identified by the government after consultation with the programme partners will raise at least EUR 1 billion by the end of the programme period and an additional EUR 400 million by 2018 at the latest, which will be used for public debt reduction.”
Despite no one seeming to know how and when the total of €1.4 billion was calculated (pie in the sky?), my interpretation is that if EAC is privatised after January 1, 2018 it will not contribute to the necessary € 1.4 billion and, therefore, the entire sum will be raised through the privatisation of “CyTA (telecoms), CPA (commercial activities of ports), as well as land assets” (the quote is from the MoU).
Join me in watching this feat of financial magic as it unfolds. Pay attention though as I suspect, indeed I expect, that there will be much sleight of hand. Fascinating stuff this high finance, don’t you think?
Although, as I have said before, the island’s southern population is spread over some very rugged territory, with a myriad of small villages in challenging terrain, it is much smaller than a major city (10 per cent of London, half the size of Barcelona, one third of Paris or Rome), EAC should be recording good profits. However, it isn’t, as I’ll show, and to entice an entity to be interested in EAC for privatisation purposes a great deal would need to change.
I very much doubt, however, if this government or any successor will have the guts or ability to fight the unions and employees, so we will end up with the usual massive and unashamed political fudging. That the privatisation has been pushed back to a deadline of mid-2018 already points to that line of thinking with a consequent disregard for the nation’s financial plight.
However, let’s glance at a few items in the 2014 financial statements of EAC, which were only posted on their website in the second week of November, despite the auditors (KPMG) and the auditor-general dating their reports May 29 and July 21, respectively. (Incidentally, it seems a bit odd that the change of auditors from PricewaterhouseCoopers (PwC) to KPMG for 2014 is not mentioned in the chairman’s report. However, as he’s the fourth chairman in the last two years, perhaps they forgot to tell him).
In the past I have raised a number of questions about the way EAC is apparently run, but the organisation has declined to respond in any meaningful way.
While the annual reports are always well over 100 pages, very little information is given about fuel oil, despite the fact that in 2014, for example, it totaled 59 per cent of operating costs (53 per cent in 2013), or 23 per cent of 2014 revenues (2013, 15 per cent). The chairman mentions the high cost in his 2014 message, but my inquiries in the past regarding forward purchases when oil prices are low, and the tendering procedures followed went unanswered by EAC, other than confirmation that there is a tender process.
Perhaps the silence is explained by the lead comment in the Cyprus Mail on November 15: “Tender review authority reveals entrenched tolerance of corruption.” No surprises there then!
Another area of worry is staff costs. In an article two years ago, I stated that “wages and salaries” in 2012 were €37,602 per employee (2010 – €35,074), but when social insurance, pension costs, etc. were added, the cost rose to €54,008 per employee (2010 – €50,104). Staff numbers dropped from 2,465 in 2010 to 2,319 in 2012.
For 2014 staff numbers were 2,187 (2,219 in 2013) and “wages and salaries” were €32,303 per employee (2013 – € 36,733), rising to €41,026 with social insurance, pension costs, etc. added (2013 – €45,150). Another eye watering expense was the €7,459,613 “contributed” in 2014 (2013 – €6,565,728) to the Employee Medical Fund, which equals €3,411 each (2013 – €2,959). A further €51,260 was paid in 2014 “to cover … treatment of serious cases, in Cyprus and abroad”. Some 8,693 persons took advantage of this bounteous gift, of whom 5,343 (61 per cent) were dependents of EAC’s employees. Nice work if you can get it.
Notes to the financial statement explain various figures in the basic statements – balance sheet, profit and loss account, etc. The information should be expressed in simple terms so that the reader, albeit with a basic knowledge of accountancy, may understand what is going on. Note 9 in the 2014 financial statement (2013 – Note 10) is “Staff Costs” with information on a “Defined Benefit Plan” (i.e the pension plan).
Actuarial valuations were carried out in 2012 and 2014, but not in 2013. Regardless, the 2014 profit and loss has been charged with a whopping €244,317,000 described as a “Remeasurement of Pension Fund obligation”. There is no reference to Note 9 in the profit and loss.
The 2014 balance sheet now has a sum of €217,995,000 under current liabilities described as “Net obligation of Pension Fund”. A current liability means the liability is to be met by the end of 2015 which, for a pension fund, is puzzling. Regardless, there is no explanation (and there should be) to justify such a massive “remeasurement”. Were the actuarial valuations wide of the mark in past years (rather unlikely in view of the amount involved)? If so I would expect adjustment(s) to be made to prior year(s) financial statements. Or has there been an enormous increase in pensions to be paid?
EAC this month answered a Cyprus Mail query on the very matter: “The increase in the present value of its obligations resulted mainly from the substantial drop in interest rates globally, and as a result to the drop of the discount rate applied in the actuarial study from 3.73 per cent in 2013 to 2.14 per cent in 2014.”
While Note 9 does show the interest rates used, that a clarification question had to be asked shows that the information in the financial statement is somewhat deficient. Further, Note 9 describes the €217,995,000 as an asset, but it’s a liability.
EAC has a massive amount of property, plant and equipment, but has never generated the type of revenues to finance their acquisition. Instead this appears to have been achieved through very large loans and so-called overdrafts and I deduced in the past that the loans came from the European Investment Bank (EIB) at sub-commercial rates.
Indeed, Note 20 states that the effective interest rate for 2014 was a mere 0.90 per cent (2013 – 1.30 per cent). The note also has the usual ominous wording “Loans are guaranteed as to the repayment of principal and interest by the Republic of Cyprus”. As at the end of 2014 EAC had total borrowings of €502,127,000 (2013 – €616,634,000) of which €29,479,000 is due for repayment by the end of 2015 (2014 – €52,632,000).
While the status of borrowings at end of 2014 shows an improvement over past years, the entity still appears to be over dependent on this type of financing. However, while interest rates are at such low levels, maybe this is the way EAC should continue to finance itself.
Regardless, easy financing should not be used to pay for excessive wage and benefits packages or poor fuel oil acquisitions. But I can’t see any of that improving in the foreseeable future. The years of managerial incompetence, cronyism, populism and greed look well set to continue, and the Troika will do absolutely nothing to change any of that!
Brian Lait is a retired chartered accountant who has worked in 10 countries across three continents.