Cyprus bailout: Privatisation of semi governmental organisations.
Cut them off and cut our losses!
Under the terms of the Cypriot bailout the government is to proceed with the sale of state owned enterprises and state owned real estate.
From the MoU (updated on Sep.13 )
The Cypriot authorities will initiate a privatisation plan to help improving economic efficiency through enhanced competition and encouragement of capital inflows, and to help restoring debt sustainability
And further down
This plan should consider the privatisation prospects of state-owned enterprises (SOEs) and semi-governmental organisations (SGOs), including, inter alia, CyTA (telecom), EAC (electricity), CPA (commercial activities of ports), as well as real estate/land assets.
As it is often the case, leftist parties and union groups are up in arms protesting over the sale of SOE’s and SGO’s . Some claim that overall as an investment portfolio, these companies generate positive cash flows to the state.
To this day there was no effort to back up these claims.
So I decided to examine these claims using audited data from the biggest SOE’s and SGO’s. For this exercise I’ll be examining only the SGO’s due to data availability via the Cypriot General Auditor’s Office.
Additionally I won’t be examining the market in which these SGO’s operate (whether it’s a monopoly or otherwise). This is important because state monopolies are profitable by default, whereas if they were to operate in a competitive environment they may falter.
Understandably, I shall disregard any taxes paid but I shall only be looking at dividends paid to the republic.Taxes are going to get paid anyway whereas dividends only go towards the owners. Also any investments made by the SGO’s in government bonds or other government entities shall be disregarded.
Furthermore to examine the cost to the tax payer only state endowments towards the SGO’s running costs are included (state guarantees are not included).
I have also excluded SGO’s that have been abolished or are in process of merging, however, these are so small in size so they will not affect the final result.
The results
Overall the exercise showed that over the past 8 years SGO’s as a portfolio investment netted a loss of 64 million euro.
Arguably the only SGO that paid substantial dividends to the state is CyTA the Telecom Company.For the record the dividend amount is regulated by law for both EAC and CyTA and will be paid upon request by the council of ministers of the Republic of Cyprus. From 2012 onwards dividend payements to the state are capped to 10% of net profits materialised the previous year. Before 2012 the ceiling was at “no more than half of net profits materialised the previous year”.
Both the state broadcaster CyBC and the Cyprus Sports Organisation expenses are covered by 70-90% from state aid, while revenue inflows from commercial activities is negligible.
What should Cyprus do next
The minister of finance told Reuters
To be honest I don’t know what he means but I do know that it is not prudent to sell assets under duress. These SGO’s should have been sold long ago to improve state finances. At this point I would prefer closing down loss making SOE’s/SGO’s and handing over the management of the remaining organisations to an external consultant.
The consultant will be tasked to restructure the SGO’s and privatise at the 1st opportune moment.
