We can do better with SOE reform

[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.