[Accountancy Cyprus No. 119, June 2015.]
The (mis)management of state-owned enterprises (SOEs)
is widely recognized to be a major and chronic problem in Cyprus. The SOE label
covers a large number of very diverse organizations. They are often classified into
two groups on the basis of their legal status: the large majority are so-called
semi-governmental organizations (SGOs) operating under public law, while a
smaller group operates under private law. The distinction is not very helpful,
however, as within each group one can find organizations that are very
different in nature. The SGO group in particular includes commercial companies,
universities, regulatory agencies, the CyBC (RIK), the CSE (XAK), and others.
Governments set up SOEs for several reasons: to
provide services that the private sector cannot provide; to manage state
assets; or to provide regulation and oversight. Over time these reasons often cease
to exist or the circumstances change significantly, giving rise to a need for change
or even dissolution. But change is hard, especially in Cyprus. Cyta is a prime
example. It was set up in the 1950s as a state monopoly to unify the island’s telecommunications
network. Today’s telecommunications landscape is radically different and continues
to evolve rapidly, yet Cyta must continue to operate within the archaic and
inflexible framework of an SGO.
Although the problematic governance of SOEs has been
long and widely recognized, the Cypriot political system has been unable to
deliver change. Enter the Memorandum of Understanding (MoU), which forced
Cyprus to take a hard look at the way its SOEs operate. SOEs that no longer
serve a meaningful purpose are to be closed, while others are to be turned into
public companies (operating under corporate law) and possibly privatized. But progress
has been slow as there is a lot of resistance to these much belated moves
toward modernization.
The government has drafted a new bill aiming to
streamline the operations of SOEs and bring them under tighter ministerial
control. The move is motivated by the large number of financial scandals, mismanagement
and corruption that have plagued SOEs. Although the frustration is
understandable, this is not the right response. SOEs are very diverse; it is impractical
to have a single framework for all of them. Moreover, SOEs are set up as independent
organizations for a reason. If this reason no longer applies to some
organizations, they should be folded into the civil service. If not, they
should retain their operational flexibility and autonomy and be judged on the
basis of their performance. Handing additional powers to ministers will lead to
the overt politicization of these supposedly independent organizations. If tighter
control is deemed necessary, it should be granted to an independent entity, as
recommended by the OECD.
The draft bill does not address one of the main
problems plaguing the management of SOEs: the selection of directors. It
stipulates that appointments will be made by the Council of Ministers on the
basis of recommendations by the responsible minister. This is just a continuation
of the failed policies of the past, where positions on SOE boards were one of
the most lucrative spoils of power. Positions on boards were divvied up among
political parties, with the governing parties receiving the lion’s share. SOE
boards have significant authority over tenders, appointments and promotions,
which are an important way of doling out favors.
The appointment of SOE directors needs to be radically
overhauled. The process needs to be transparent and meritocratic. For each SOE,
an assessment needs to be made for the type of skills needed on the board. In
addition to basic managerial and financial skills, some boards may need
directors with expertise in engineering, economics, or other specific areas.
Once the desired profile of each board is determined, positions should be
widely advertised. Expressions of interest should be submitted to an
independent body that will evaluate the candidates. A set of suitable
candidates will be selected and passed on to the Council of Ministers to make
its choice. The private sector can be involved in the selection process as it
has the required expertise.
The government has done well to take an initiative to
reform SOE governance, but it can do better in terms of many of the details. The
time is ripe and the opportunity must not be lost.
