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By Dr. Jim Leontiades
Cyprus International Institute of Management
During the days of apparent prosperity, before the 2013 bail-in, the country’s rapid economic growth encouraged a false sense of security, as well as an attitude of “live and let live”. No one was inclined to look too closely at inefficiencies or possible corruption. Obvious incompetence, high prices as well as a low level of service were tolerated, particularly in government-owned companies. Recent revelations and scandals now provide evidence that a number of government enterprises operated at a level of inefficiency and corruption not seen outside certain less-developed countries in Africa and Asia.
The deficiencies of these nationally owned companies was often recognised, but excuses were offered. Cypriots had been warned, for example, of the great difficulties that would follow the demise of Cyprus Airways (CY). A small island nation without its own airline! Would the country become isolated? How would tourists arrive? How would Cypriots travel to other destinations?
In the event, the indebted airline that has cost the taxpayer many millions in subsidies has disappeared with scarcely a ripple. According to reports, airline passenger seats to Cyprus have actually increased. So has competition and seat availability, as well as the number of special reduced fares. Recent testimony before a parliamentary committee revealed certain practices that help to explain the company’s lack of competitiveness. Reports of the testimony by CY’s previous legal advisor and former accountants refer to “mismanagement”, “ineptitude” , “bloated bonuses” and “too close ties with political parties”, as well as the use of a company plane to fly the car of a CY manager’s son to a more convenient location.
EXPERIENCE ELSEWHERE
France, Britain, Germany, Holland, Spain, along with most other European countries privatised their “national” carriers a long ago. Olympic Airways, the Greek airline, began life as a private company. I still remember my first trip on Olympic when that airline, popular and profitable at the time, was owned by Aristotle Onassis. The airline’s motto was “Your Greek holiday begins the moment you board the plane”. On entering, passengers were greeted with Greek music and a selection of traditional Greek sweets, courtesy of the airline. Small, smart, touches that helped make the airline successful and well known internationally. Onassis sold the airline to the Greek government when his son was killed in an airplane accident in 1973. Once it was nationalised, the main “courtesy” offered by Olympic was to Greek politicians who received free air travel. It has been downhill for the airline ever since.
Those best placed to judge the merits of national companies are countries which have had the most experience with them. After the reunification of Germany, almost 8,000 state-owned East German companies were privatised. Since the 1980’s, there have been over 170 German privatisations. German electricity production is now 95% privately owned.
In Britain, the Labour party led the campaign to take the “commanding heights” of industry into government ownership, part of a strategy for radical reform and modernisation. The result proved to be disastrous. The era of Margaret Thatcher followed, bringing with it the mass privatisation of gas, electricity, telecommunications, steel, even railroads. Again, there were predictions of the chaos that would follow if these industries fell into private hands. Instead, major gains in efficiency and productivity were recorded. The same companies that required state subsidies to survive now contribute to government tax revenues. Of course, there were also problems, but today, not even the political parties that opposed privatisation are willing to suggest a return to nationalisation.
POLITICAL PARTIES AND PATRONAGE
Cyprus lags well behind most European countries in this respect. Despite the evidence, privatisation encounters strong opposition on the island. Nationally owned companies are sometimes referred to as “national wealth”, even though they often depend on taxpayer financed subsidies to remain viable. Those that make a “profit” do so because they are monopolies. They can set whatever price they like on their product. Profitability is automatic, the consumer pays through higher prices.
Despite their obvious deficiencies, political parties usually support nationally owned companies. In return, they supply jobs for the party faithful. This system of mutual back-scratching puts effective management far down the list of priorities. They have also proved to be a fertile ground for corrupt practices. They are at the centre of what the President has referred to as the “Augean stables”.
As this country struggles to move toward a new economic model, the role of government will be critical. In a free market economy, the primary role of government is to set the framework of laws and regulations governing the country and its industries. Businesses operate within this framework. Politicians and their political parties are not suited either by background, experience or past performance to take on the role of business “owners”. They do not have ownership responsibilities or objectives. Their interests lie elsewhere. Where they have assumed such ownership the results have been disappointing. Cyprus is no exception.
