Privatisation: Governance should take centre stage
- Troika says privatisation will usher a new era of professionalism and competition that will benefit the customer
By Petros Florides
Despite the Memorandum of Understanding between Cyprus and the troika that includes the privatisation of state utilities, vociferous opposition exists with threats of industrial action. Putting aside the requirement to raise much needed funds, there are good arguments to be made on both sides of the privatisation debate. Each can learn something from the other if maturity prevails within an environment of appreciative inquiry.
In any event, the over-charged and under-served customer is probably more concerned about how these utilities are governed and managed rather than ownership. For its part, the troika argues that in the addition to the EUR 1.4 bln hoped-for sale proceeds, privatisation will usher a new era of professionalism and competition that will ultimately benefit the customer.
Most neutral observers would agree the wider public sector is inefficient and largely self-serving. Decades of political meddling whilst pandering to specific interest groups have seen monopolistic profits squandered with the long-suffering customer feeling of least concern. Unfortunately, the systemically important private industry has shown itself to be no better. The Bank of Cyprus and Cyprus Popular Bank were commercial companies listed on the Cyprus Stock Exchange and operating in a highly competitive environment. Yet still, both collapsed after catastrophic failures of corporate governance and gross mismanagement leaving the customer to shoulder much of the burden. This should serve as evidence that non-state ownership and competition is no guarantee of a well governed or properly managed organisation focused on the best interests of the customer.
We could also learn from the experience of other countries. In the UK during the 1990s, there was great public anger over newly privatised utilities operating as monopolies and breeding “fat cat” directors. The result was the Greenbury Report (since folded into UK Corporate Governance Code) aimed at curbing excessive salaries and bonus payments despite, in some cases, worsening services. Two decades on, the UK’s experience with privatising state utilities and other infrastructure (rail, etc.) is still one of mixed results. For example, whilst the privatisation of telecommunication is largely considered a great success, ever-increasing energy bills and the real possibility of future electricity blackouts after years of under-investment has dominated the most recent political party conferences. Incidentally, the third choice of ‘mutualised ownership’ has also proven to not be a fail-safe option: the UK’s Co-Operative Bank now requires urgent recapitalisation of £1.5 bln amidst allegations of political interference, hubris and incompetence. Unfortunately, this sounds all too familiar.
In the final analysis, the question of whether to privatise public utilities in Cyprus may be moot as economic imperatives force our hand, despite the protests. But, as we have seen, the claim of the troika that privatisation will also lead to greater efficiency and customer satisfaction is not necessarily true.
So, what else should be done to help achieve this laudable desired outcome?
A golden opportunity presents itself to introduce a mandatory environment of exemplary governance for all systemically important public interest entities – that would include those marked for privatisation. This would demonstrate to our international lenders, and the rest of the world, that Cyprus is serious about leaving its past economic crimes and misdemeanors behind. Affected entities (whether under public or private ownership in the future) should be required to comply with a new Governance Charter based on ethics, value and principles that is reinforced by new laws and regulations – including personal liability of directors for any breach in letter or spirit. Much needed updates to Cypriot law should be informed by international developments. Examples are the onus placed on key executives courtesy of Sarbanes-Oxley in the US and the requirements for directors to pay due regard to a range of stakeholders under the UK Companies Act 2006.
Importantly, this new governance environment must be fearless in tackling Cyprus’ cultural idiosyncrasies that have thwarted any attempt at good governance to date. It should no longer be acceptable for boards or senior managers of affected entities to adopt an attitude of “no one can prove I’m doing anything wrong”. Moving forward, they should be required to explain to their multiple stakeholders: “This is what I’m doing right”. Specifically, they should be required to demonstrate active promotion and support of, inter alia: meritocracy, integrity, sustainability, ethical leadership, responsibility, customer empowerment and fairness. In addition, this should be done within a demonstrable framework of transparency and accountability, underpinned by a culture of robust enterprise-wide risk management. Anything less should be considered a dereliction of duty with appropriate penalties imposed on individuals concerned. This could include public ‘naming & shaming’, fines & penalties, disqualification and, in the most serious cases, a custodial sentence.
Moving forward, the government must stop trying to placate the same vested interests that have largely contributed to our current misfortune. Instead, it should use the 2-3 years provided in the privatisation roadmap approved by the Eurogroup this week to develop a new governance environment such as that described above. This would be the most effective way of resolving all issues and concerns held in good faith, and finally give Cyprus a chance of moving forward for the greater good.
The views in this article represent those of the author and not any other individual or organization.
Petros Florides is Regional Governance Advisor for World Vision International, and Executive Officer of World Vision Cyprus. Petros is also on the board of the Institute of Directors (Cyprus), co-founder of the Cyprus National Advisory Council for the Chartered Institute for Securities & Investments, co-founder of the Institute of Risk Management Cyprus Regional Group, and a Chartered Management Accountant.
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