COMMENT: By Michael S. Olympios
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When the Electricity Authority of Cyprus (EAC) couldn’t meet energy demands last summer half of the country’s capital experienced a blackout. Industrial units and hotels shut down air conditioning, people had to sleep in temperatures that exceeded 36 degrees and frustration over the state’s ability to deliver one of the most fundamental goods of the modern world skyrocketed.
Despite calls from the European Union to liberalize the energy and telecom sectors state owned companies resist competition, fearing loss of monopoly status. The state sponsored mess in the electricity sector has much greater dimensions; competition and regulation.
The OECD issued a report with guidelines on corporate governance for state owned enterprises in 2005. Among other things the report suggests the strict separation of the state’s ownership and the regulatory functions.
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Clearly, the purpose of the OECD principle is to ensure a level playing field in markets where private sector companies can compete with state-owned enterprises and that governments do not distort competition in the way they use their regulatory or supervisory powers.
Another major issue raised in the report is the challenge to find a balance between the state’s responsibility for actively exercising its ownership functions, such as the nomination and election of the board, while at the same time refrain from imposing undue political interference in the management of the company… precisely what the Papadopoulos government is doing. Any objective observer that follows the developments in the energy sector in Cyprus can see the political interference in the affairs of EAC but also in every other major state organization. Its effect, however, on their underlying valuation, let alone its deleterious effects on the economy, is already hitting rock bottom in the airline sector and the state telecom company follows.
The government’s failure to address real issues such as board independence and remuneration are only leveraging the problems. Key for anyone to become a board member, let alone chairman in any state-owned enterprise, is his affiliation with the president and his party. It also seems that women are banned.
Take for instance the case of the latest chairman of Cyprus Airways, a close friend and formerly a business associate of the president, also received several other appointments. Opposition party directors are excluded, thus allowing the government to go about its business without much scrutiny, usually the job of an independent audit committee.
Any company knows that competent directors usually come at a price. Aside from prestige, directors in state-owned companies have little incentive to check on management and provide the necessary guidance to achieve the desired performance.
Just recently, both state-owned airlines Eurocypria and Cyprus Airways experienced strikes that are damaging their already hammered reputation bringing them both even closer to the point of financial collapse. Strategic planning is consistently failing to deliver the promised results in both companies and layoffs are only a sign that the worse are still ahead.
Director pay is certainly part of the problem. These people spend hours to make decisions that involve tens and sometimes hundreds of millions of pounds and they only get 20 pounds per meeting and they have to pay taxes on top of that. Their incentive to scrutinize management and hold them accountable in all likelihood is close to zero. What’s more is that profits are declining, expansion is out of the question and as competition is closing in their chances of survival are hanging in the air.
The death of corporate governance in these organizations will soon lead to their own demise. It seems that the decades–old state organizations are falling victims of a rotten system that everyone understands but no one cares to change.
