The European Commission is calling for substantial cuts in the way governments are run.
The Commission staff working document accompanying the Council Recommendation on the National Reform Program 2022 of Cyprus and the Council Opinion on the Stability Program 2022 of Cyprus begin the analysis with the finding that the governance of state entities in Cyprus does not meet international standards.
The Commission notes that although the governance of government entities is a challenge to achieving the goals of sustainable development, this challenge is not addressed in the Recovery and Sustainability Plan. The same is true of other problems, such as further strengthening the financial sector, promoting sustainable, sustainable and inclusive growth, ensuring energy security and a green transition.
Lack of transparency
The document contains a brief analysis of the current situation. The strong presence of semi-governmental organizations in the real economy is recorded, but in a way that distorts the development of the private sector.
Initially, the current governance framework of government entities in Cyprus is largely lacking in transparency, as Cyprus does not publish comprehensive data on the performance of these entities in achieving financial and, where appropriate, public policy objectives.
In addition, the appointment process to the management bodies of these companies is not transparent. According to the OECD index for the regulation of the product market, the state entities of Cyprus are subject to political interventions, mainly because they belong to the competent policy ministries and not to a special central body.
In addition, state-owned entities are to some extent not subject to market discipline, as not all are governed by company law. Government entities dominate some important economic sectors and their profitability is supported by government transfers. State ownership may be justified for public services, mainly in the regulatory and educational sectors, but this is less true for commercial state-owned entities, it is noted.
Asset 27% of GDP
Their total assets amount to 27% of GDP in 2020 and therefore commercial state-owned entities are an important part of the Cypriot economy, mainly in the fields of energy, financial services, telecommunications, healthcare, of water supply and sewerage.
The case of the EAC is mentioned as an example of the influence of semi-governmental organizations in the Cypriot economy.
In the energy sector, Cyprus must increase its energy from renewable energy sources to the EU average (12% vs. 37.5% in 2020).
The State. as the owner of the established energy supplier (of the Cyprus Electricity Authority, with a market share of 86.8% in electricity generation and 98.7% in supply), can play an important role in achieving the green transition. This will also help reduce the country's high energy dependence on imports.
Overall, state-owned commercial entities are profitable, with net profits of 0.7% of GDP in 2020, but their revenues are supported from state subsidies of 1.9% of GDP.
In particular, the State Health Services Organization receives significant amounts, although by law it should become financially and functionally autonomous by June 2024.
The Commission services state that “although some progress was made in 2019, the Recovery and Sustainability Plan did not include measures to improve the governance of state entities. Progress has been made only to a degree in country-specific qualification. 2019 Recommendation for Cyprus “to approve key legislative reforms aimed at improving the governance of state entities”.
Specifically, in 2019 the Council of Ministers issued decisions, inter alia, to oblige the board of directors and the key competent ministers to prepare a risk report for each state entity and to link the strategic plans and staffing levels of these entities with the next annual budget.
In 2019, the General Accounting Office also issued a circular with a detailed procedure that government entities must follow to be eligible for the state grant.
The process requires government agencies to provide the relevant ministries/sub-ministries with information on audited financial statements, strategic plans, staff recruitment, public procurement procedures. In addition, government entities are required to submit a statement of their board of directors signed by the chairman on the implementation of good corporate governance practices, sound financial management principles, compliance with laws/regulations, implementation of procedures and internal controls.
< The Recovery and Sustainability Plan includes a number of measures to open up the electricity market to competition, mainly by ensuring the independence of the Cyprus Transmission System Operator from the established Cyprus Electricity Authority (by the end of 2021). However, the broader issue of governance of state entities is not addressed, the document emphasizes.
What needs to change
European Commission services report that transparency and greater accountability in terms of financial performance and public objectives are expected to increase the efficiency of government entities.
“In addition,” he said, “opening commercially viable markets in which these entities currently have a dominant position (eg renewable energy sources) will increase the efficiency of these markets, accelerate the green and digital transition, and will contribute to the diversification of the economy.
This, in turn, will improve the productivity of entities and the quality and/or price of the services they provide (eg the price of electricity) .
Overall, this will increase the effectiveness of governance, as well as the fairness and transparency of the market for local and foreign companies, in line with the objectives of the long-term strategy for Cyprus and the action plan that supports it. p>
Effective supervision will also reduce budgetary risks. State support takes various forms, such as grants, loan financing, capital increases or guarantees. In particular, government entities in the healthcare sector are currently at risk of needing additional support in addition to previous estimates (as shown, for example, by comparing the actual financial results with the 2020 budget plan). In addition, the state is exposed to the ability of its entities to meet their retirement obligations for their large workforce. “Increasing long-term growth and reducing fiscal risks will also help to address the high public, private and external debt vulnerabilities identified in the macroeconomic imbalances process.”