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Backed into a corner over SGOs
WITH THE troika at the gates, election campaign declarations are taking a back seat to the exigencies of salvaging the economy. Pledges that the so-called ‘profitable’ semi-governmental organisations (SGOs) would be left untouched are now being put to the test.
Lines drawn in the sand before the elections are now being swept away by the tide of bailout talks. Publicly at least, the goalposts on what constitute acceptable terms of a bailout seem to be shifting by the day, by the hour. Mere talk of a haircut on deposits - which the government has rejected - means that priorities must be re-jigged.
On February 14, three days before the first round of the presidential elections, candidate Nicos Anastasiades met with the bosses of the Cyprus Telecommunications Authority (CyTA). “We are steadfastly opposed to privatisations,” he told them.
“We shall fight, making use of new reports concerning the recapitalisation needs of the banks, to avoid what is being threatened and what has been agreed,” Anastasiades had said, alluding to a clause in the memorandum of understanding (MoU) struck between the previous administration and the troika.
And in an interview with the Financial Times conducted on the day of the runoff vote, Anastasiades signalled he was not prepared to accede to some of the demands made by international lenders, particularly sweeping privatisations, which some in Brussels believe can raise as much as €2 billion and thus reduce the bailout figure.
“We’d like to discuss whether we can postpone [privatisation] for perhaps three years, depending on the pace of recovery and progress with other reforms,” Anastasiades told the FT. “There are several possible scenarios ?.?.?.? but we have to preserve social cohesion and peaceful labour relations.”
That was before. On February 27 finance minister Michalis Sarris appeared not to rule out privatisations, even displaying a certain bias on the subject. He told newsmen that consumers pay high prices and demand good services for public utilities, adding: “Who owns [the SGOs] is less important, and I think what is needed is to improve pricing and the quality of services offered.”
He did hasten to add, however, that the possibility of privatisations is linked to whether the national debt is sustainable.
Communist AKEL immediately pounced, prodding the new government to clarify its position vis-a-vis the SGOs. Anastasiades was apparently forced to repeat his pre-election pledge; he assured staff at SGOs that their jobs were secure and their rights protected whatever happened. No doubt there was a disconnect between the president and his economy czar.
A case of doublespeak, or were Anastasiades and Sarris doing the good cop/bad cop routine?
Article 3.7 of the MoU states: “If necessary to restore debt sustainability, the Cyprus authorities will consider a privatisation programme for state-owned and semi-public companies.”
That’s been the Anastasiades government’s throwback position whenever it’s called out on the SGOs: our hands are tied because the previous guys in charge already agreed to it.
It’s probably a little more complex than that; a more accurate description would be that the realities of talking shop with international lenders are starting to sink in.
Caught between a rock and a hard place, Anastasiades may well be forced to agree to privatisations. But besides the president eating humble pie, some commentators are suggesting that the fate of the SGOs will prove the first stress test for the DISY-DIKO alliance.
The pre-election pact forged between the two parties stated: “Semi-governmental organisations that are nationally and socially beneficial must not be privatised, but rather be supported, rehabilitated and rendered more competitive.
“Where state involvement relates to areas of a purely entrepreneurial nature, the prospect of a shares issue, a strategic partner or denationalisation would be examined.”
How would DIKO, a traditional stalwart of SGOs, react should Anastasiades go back on his word? Would it strain the partnership?
That’s unlikely, thinks political analyst Christoforos Christoforou. For one thing, he says, the framework agreement between the two parties is so loosely worded that it’s subject to many different interpretations.
“Call it constructive ambiguity,” he jokes.
Moreover, the analyst doesn’t put much stock in pre-election rhetoric. The new government has very little wiggle room as it tussles with the troika. What with talk of a haircut on deposits and demands on Cyprus to raise its corporate tax rate - threatening both the financial sector and the country’s standing as an investment centre - the government has bigger fish to fry than worry about the blowback from denationalising state-owned enterprises.
That said, Christoforou advises that the government should still put up a fight for the SGOs, if only as a bargaining chip.
“They could insist on the state retaining a majority stake, that is, a partial privatisation,” he says.
Stavros Tombazos, assistant professor of political science with the University of Cyprus, likewise thinks it unlikely that privatisations would seriously damage the DISY-DIKO alliance.
He can see DIKO being convinced that privatisations are a necessity, under the circumstances.
“Pre-election promises have little weight because the situation right now is very difficult. We’re in the midst of the deepest economic crisis, one might even call it an existential crisis. Tough decisions are needed,” said Tombazos.
But Tombazos is not at all sold on the partial privatisation scheme, which the government appears to be inclined to.
“Even if you did find foreign investors, why on earth would they throw money at Cypriot SGOs without being assured of a controlling interest?” he asks.
“Or, if they did agree to buying shares, they’d pay less. Since as minority stakeholders they won’t be able to call the shots and to restructure the SGOs to cut costs and boost profits, they’ll be making less money on the dollar. So the lesser the incentive, the lower their offer.
“On the other hand, by selling 100 per cent of the SGOs, you’d be raising more than double the cash you’d get for selling just 50 per cent,” he argues.
Tombazos is also critical of the government’s staunch opposition to raising corporate tax.
“If you don’t do that, then where is the state going to get extra revenues to pay back the troika loan? You guessed it, it’s going to have to cut salaries and raise fresh taxes.”
But economic analyst Dr Stelios Platis is wary of selling off state assets to make a quick buck in order to help pay off the debt.
“Under these conditions we’d be talking about a fire sale, so would the cash be enough to make the debt sustainable? Probably not,” he told the Sunday Mail.
Platis warns also that by denationalising SGOs - particularly the electricity utility - state monopolies could be replaced by private ones, meaning a raw deal for end-consumers.
“Experience shows that Cyprus lacks the safeguards against the private sector abusing its power. Competition laws may be in place, but implementation is weak.”
Though Platis advocates the modernisation and restructuring of SGOs - in part to rid them of heavy political influence - he would not have them dismantled overnight because of bailout pressures.
And from an economic point of view, he does not believe that partial privatisation would improve the sustainability of the national debt.
“Current annual dividends to the state from SGOs are greater than the savings you’d generate by borrowing at a 2.5 per cent interest rate for a reduced debt [bailout] amount,” he says.
Still, if push comes to shove, and bank deposits or corporate tax are on the line, Platis would “rather privatise SGOs than sacrifice Cyprus and everything we have worked for over the past decades.”
He acknowledges that the present government is in a tight spot, but says there’s still some room for manoeuvre.
“It’s not black and white. Perhaps the government could retain a majority share in SGOs, but hand over effective control and management to a strategic investor. The devil is in the details.”
Government spokesman Christos Stylianides understandably chose his words carefully when asked for the administration’s position.
“If Cyprus’ debt is deemed unsustainable, then yes we are open to discussing privatisations, and then the question becomes the degree and manner of privatisations,” he told the Sunday Mail.
“But we’re trying to make sure it doesn’t come to that.”
* The heads of SGOs CyTA, the Electric Authority, the Port Authority and the Cyprus Tourism Organisation handed in their financial records to Finance Minister Michalis Sarris yesterday. A team from the ministry will go through the books to determine their current and potential values as talks with Troika continued.