Privatisation scheme to boost the economy

Transcription

1 THE ECOMONIST CONFERENCE DEBATING ON EUROPE S FUTURE WHAT LIES AHEAD FOR CYPRUS WITH A NEW GOVERNMENT? PHIDIAS PILIDES PRESIDENT Cyprus Chamaber of Commerce & Industry 22 March 2013 Hilton Park Nicosia Privatisation scheme to boost the economy We are currently witnessing the radical unraveling of the Cypriot economy. The architecture on which the country has based its long term fast rate of growth and rapid improvement of the standard of living is abruptly turning upside down. The model on which the economy was based is fastly becoming a liability and needs an extremely radical and substantial overhaul, if the country is to regain competitiveness and confidence to resume robust and sustainable rate of growth. The challenges are many and concern the major sectors of economic activity. Both agriculture and manufacturing 1

2 have gradually lost competitiveness and are now extremely small and insignificant in the overall structure of the economy. Tourism has lost its shine and is stagnating for many years. Its contribution to GDP has declined as tourist foreign exchange receipts fell to 11% of GDP compared to almost 24% in the 1990s. Shipping and professional services have flourished and provide an important mainstay for the future. The vibrant sector of financial and business services has been dealt a substantial blow and our partners in Europe have demanded that we begin unraveling them because the sectors have grown disproportionately large and have exceeded any capacity of the country to guarantee their health and soundness. This is the price the country has to pay in order to receive the assistance that it needs to reform and restructure the economy in an ordinary and gradual manner. At the same time the country has developed a high cost public and semi public sector. In the period since the 2

3 beginning of the 1990s we witnessed an explosion in the size of the public sector. Some simple numbers will show the extent of this unhealthy growth, which has contributed to the loss of competitiveness of the economy. In 1990: government revenue represented 30% of GDP at current prices Public expenditures amounted to 31% of GDP Wider Public sector employment (excluding semipublic organizations) numbered employees In 2011: public revenues represented 40% of GDP, public expenditures were 46% of GDP While the total number of employees reached or almost double the equivalent number in During this period the semi public corporations continue to thrive, mostly growing through high wages and benefits 3

4 and are now some of the most high cost organizations of the country with an additional payroll of about persons. The overall expansion of the public sector coupled with the extremely generous remuneration and social benefits that public sector employees enjoy meant that the size of the public sector is not sustainable. The Cyprus Chamber of Commerce and Industry and the whole body of private entrepreneurs, have been clamouring for measures to contain and reduce the size and its onerous cost. This aspect of the public sector has also been singled out by troika in their memorandum with many suggestions for reform and restructuring. The list of measures includes downsizing of total employment and reduction of wages and salaries, including benefits, and radical reform of the non contributory scheme of public pensions. One very radical solution the private sector has been demanding was the 4

5 shrinking of many of the state entities, enterprises and public corporations. The demands include the gradual closing down of such entities which are considered to have completed their useful life and can be wound down, without damaging the functioning of the economy. In addition there are many state enterprises and entities which represent a natural extension of the private sector. We know of course that what characterizes semi public corporations are over-manning, high remuneration and extremely generous social benefits. As a consequence these organizations are providing high cost uncompetitive services to the private sector. An extreme example is the cost of electricity which according to the EU comparative tables is the highest in the whole of the EU. On the other hand Cyprus has had a very successful example of PPPs in the way that Cyprus airports have been turned over from purely public sector activities into PPPs with the private sector building, running and 5

6 eventually handing over to the state the new modern and properly functioning international airports. The PPP system was also adopted in a number of other projects where the private sector was invited to build and operate government buildings which will eventually become state property once the long term lease has been fully paid. We feel that these examples as well as full privatization in some very specific cases are the answer to the gradual reduction of the size of the public sector and the adoption of better management techniques and cost effective behavior, while boosting government resources in order to reduce the size of the public debt. The list of semi public entities that could be privatized, with a strategic partner undertaking the daily responsibility of managing and running these companies is not that long. But it could prove decisive in this very difficult period in order to provide funding requirements and reduce the need for further borrowing from official and market sources at prohibitively high interest rates. 6

7 We would like to see the privatization, or, whatever else the government would like to call such approach. We are open to constructive ideas as long as the final outcome is for the State to reduce its size, lower its costs and reduce the financing needs. It could be in the form of strategic partners to participate and hold the majority of shares in such enterprises or any other form as long the overriding consideration, is, that these companies will be run as private sector competitive entities with efficient management structure and low cost remuneration and well trained personnel. We believe that the prime candidates for this are Cyprus Airways (1.155), Electricity Authority (2.440), Cyprus Telecommunications (2.760), Cyprus Ports (360), Cyprus Stock Exchange (82), We believe that this list could be expanded to include minor entities such as: Forest Industries 7

8 State Fair Authority Housing Finance Agency Agricultural Insurance Organisation State Theater Oraganisation and State Slaughterhouse Of course we would expect that to supervise the operations of these enterprises, some of which would probably remain monopolistic, will be necessary to have strong prudential and supervisory bodies which will be monitoring operations with the implementation of strict regulations. We do not believe that there is a need for many such supervising authorities. Possibly the strengthening of the Commission for the Protection of Competition together with some already existing supervisory authorities will be adequate to ensure absence of abuse of dominant position and the provision of good quality of service to consumers. In addition there are many other state entities that could be wound down without any loss to the operation of the 8

9 state such organizations that do not serve any useful purpose. To mention a couple, just as example, these could include the Milk Industry Organisation and various marketing boards. These are outmoded organizations that have been kept alive by state holders, civil servants and politicians desperate to continue dispensing favours and offering opportunities for public employment. Their useful life has expired particularly since we joined the EU where such organizations have become redundant. There are also additional state entities which are the extension of the public sector even though their activities are partly funded by the private sector. These could be moved from the list of semi public organizations. What is of paramount importance for these organizations is to immediately change the civil servant status of their employees with high levels of remuneration and pensions which we know that they are non-sustainable. Some of 9

10 these could be passed on to the interested private sector entities that are benefiting from their services. Again, just to mention as examples, amongst many more, are the Cyprus Tourist and the Cyprus Standards Organization. So, ladies and Gentlemen, we would like to see a radical rethinking of the state. In this rethinking we would expect to see the shedding of many of its minor activities and the passing on to the private sector of those activities that are not the appropriate domain for public sector. Also we expect to see the full closure of those entities that have fulfilled their useful contribution to public life. We are ready to engage in an exchange of views and to adopt a flexible approach if we are to achieve our objectives for a smaller and leaner state. 10