Any other Norwegian model is the one promoted in Cyprus for gas revenues with the Hydrocarbon Fund. According to the head lecturer of Energy Strategy and Management of the University of Cyprus, Konstantinos Papaloukas, the positive thing is that the passage of the bill ensures that the Hydrocarbon Fund will not have the same fate as the Social Security Fund.
He welcomes the decoupling of the Fund from the public debt, pointing out that it should not be considered that the revenues from the natural gas will spoil the Government. According to Mr. Papaloukas, the bill gives supremacy to the current Minister of Finance, minimized the powers of Parliament and did not include the necessary safeguards so that the Fund Council is not politicized. He also notes that in a few years the citizens will benefit from hydrocarbons, adding that they will be immediately relieved of the EAC accounts.
A few days ago, the Parliament approved the bill for the creation of the Hydrocarbon Fund. What does the passage of the bill mean for Cyprus and for the ordinary citizen?
It is a very good development for Cyprus and the ordinary citizen. Provided, however, that the bill will be secured immediately with the adoption of regulations and draft laws. This will close all potential backdoors of the bill that run counter to what the Norwegian model and global best practices provide. First of all, the passage of the bill ensures that at least the Hydrocarbon Fund will not have the fate of the Social Security Fund (SSC), which, despite the World Bank's persuasions from 2007, should have a reserve of € 7 billion, almost the entirety. had been spent through the state budget, while what was left was deposited for some time in the General Accounting Office with zero interest rate. So the institutionalization of an investment fund puts a brake on such distortions, but again I insist that very serious steps are needed to ensure checks & balances, so that the Fund can fulfill its purpose and not go north. political aspirations.
Will the fact that the Parliament set aside the regulations affect the operation of the Fund?
In 2016, the lever of pressure to pass the bill immediately as it was was the obsession and phobia of the Minister of Finance with the rating agencies. Today, it seems that the Hydrocarbon Fund is also being politicized, as a very powerful Confidence Building Measure to calm Turkey down in terms of our energy plans. However, what are the current circumstances that push the Parliament to pass a bill are completely irrelevant to the importance of the correct voting of an operational bill in accordance with international best practices, as recommended e.g. by the World Bank and the International Monetary Fund. These practices will not allow anyone to operate arbitrarily, no matter where they are. Regardless of the provision of the transitional period, the regulations should be passed immediately together with proposals of law that will ensure the smooth operation of the Fund. What I mean is that we should not only vote when we want to send messages to creditors or to Turkey, but we should also send a message to the citizens of this country: An organization that is said to be built to preserve future generations. he must be free from the bad practices of the past that brought us here. If this is not done, even if we assume that the finance ministers of the current and tomorrow's governments are prudent, a single bad government is enough to justify its bad economic policy, to put its hand on the piggy bank and throw away the good one. decades of waste management. That is why it is of the utmost importance that the bill be shielded immediately.
Is the vote on the amendment not to link the Fund with the public debt in the right direction?
I welcome the adoption of this amendment, but only as a positive step. The decoupling of the Hydrocarbon Fund from public debt was perhaps the focal point of the 60-page report I sent to the Government and the parties in 2017 before the two-year freeze on the bill. On this report were based both articles hosted by your newspaper in the past entitled "Hydrocarbon Fund: Wish or Curse?". Today I have to say that the title is being reformulated into "Hydrocarbon Fund: Wish and Curse" wanting to compare it with the wish that parents usually give to their children as a wish and a threat to prevent future bad behavior. And the reason is that the bill as it is still lagging behind in several points.
If the revenues from hydrocarbons are invested in foreign portfolios, as the Fund should do, we will have better results. Maybe because of the steady flow of revenue from hydrocarbons we should make sure to extend our debt. Consider going into a loan agreement with a 2,5% interest rate + Euribor (negative), instead of investing in low-risk portfolios, as is the case with the Norwegian fund, which from 1998 to 2016 averaged annual returns of 5,7% (13,7% in 2017). By assuming that hydrocarbon revenues will "snatch" the state for any reason from past loan agreements, this translates as a respite of present generations and Governments to be less efficient in the non-hydrocarbon-related economy. to support the rest, the "laziness" of the state mechanism. Since it is argued that our economy is a surplus economy, let it remain so and pay for the mistakes of the past by learning to remain competitive. This way, it will not be endangered tomorrow after the commodification of our deposits by "Dutch disease" phenomena. My final suggestion in my report in 2017 was that we should keep the revenue from hydrocarbons as the apple of our eye, because depending on the increase in inputs, the annual return on investment will increase exponentially. But also in the then insistence of the Minister of Finance for repayment of the debt from the hydrocarbons, I had suggested at least that only the returns of the Fund go to the debt and not the ready income from the hydrocarbons. This would ensure that the Fund and the people who set it up are motivated to generate wealth (at risk) and not to see a recurrence of TKA mismanagement. I repeat that, albeit belatedly, the amendment was correctly tabled and voted on, but it must continue.
Travel to Norway to find out
Do you think that the non-utilization of the Fund's resources and the creation of a reserve for future generations is right? Where do you think the Fund's revenues should be invested?
Norwegian lawmakers have recognized the biggest problem for oil-producing countries, which is the inclination of governments to increase spending during periods of "euphoria", leading their countries to self-destruction. Latin America, Africa. That is why they have introduced a fiscal rule that puts a brake on the government to disburse more than 4% (recently 3%) of the Fund's estimated value into the state's annual budget to cover a non-hydrocarbon deficit. Statistics show that the non-oil budget deficit not only did not increase during periods of very high oil prices, but vice versa. Therefore, in order to conclude whether the creation of a reserve is right or wrong, it is good to go on a trip to Norway and ask the Norwegian citizens themselves. I remind you that in 2017, for the first time in the history of the Fund, the annual return on its investment exceeded for the first time the annual income from hydrocarbon activities! The fund does not invest at all in the domestic market to prevent the Dutch disease. Specifically for risk spread, it holds a small percentage in 9.158 companies in 73 countries, while investing in bonds and real estate. I think we should move somewhere in the same context.
The Norwegian Consultant also told us
What are the differences between the Cypriot and Norwegian funds?
The entire management of the Norwegian Fund is based on the fact that the Parliament, the Minister. The Treasury and the Central Bank Board have separate and clearly separated roles. On the contrary, our bill has given supremacy to the respective Minister. Finance, has minimized the powers of Parliament, without having taken the necessary valves for the Council of the Organization to be independent. As the Norwegian Model proposes, the decisions to be made for the fund should be aimed at a long-term horizon, ie not be 5 years old, in order to prevent the creation of a umbilical cord between the respective minister / ministry and the Cyprus Investment Management Agency. Therefore, there are several deviations from the Norwegian Model and I am not the only one who has identified this but also the Norwegian consultant himself who was hired by the Republic of Cyprus.
In a few years the benefits for citizens from natural gas
Ordinary citizens expect to benefit from the fund's revenues soon. When will they benefit?
People have every right to expect to benefit from the developments after all that has happened and continues to happen in recent years. However, the income from our natural wealth cannot be turned into checks that will solve our personal problems. This wealth, driven by the transparent framework of an organization, as it should be our Investment Fund, must begin to generate more wealth that will be channeled through fiscal rules in our economy so that we first never face the problems of the past again. and then purposefully stimulate our economy. People will start to see a lot of benefits from hydrocarbons in a few years, but to alleviate it immediately we could simply start by improving the EAC pricing policy which continues to pass on costs to the final consumer, such as poor timing of raw material purchase for electricity generation. Next year, it seems, we will also be burdened with fines for pollutants. The other would be to encourage companies that will be active in the Cyprus EEZ to participate in community service projects that will ultimately benefit society and not party mechanisms (see training young people in hydrocarbons). Of course, the people themselves will have to take on their responsibilities at some point. That is, to learn to reward good policies and to punish bad policies, no matter where they come from. So if we start with the simple and the small, then both the indirect and the immediate benefits will come. People have lost a lot of their confidence and it takes a lot of effort to reverse that.
After the approval of the bill, what do you think should be the future actions that the state should follow?
First of all, it must immediately lead to the adoption of the Regulations but also to proposals of law that will correct the distorted points of the bill. In addition, we now have in our portfolio the deposits of Aphrodite, Calypso and Glafkos and certainly new discoveries are coming. I recall something I pointed out a year ago on television about the example of Mozambique, where EMI and Exxon are working together to create a terminal. First of all, we must be able to solve the major issue that I have been emphasizing for years, ie to lead the deposits to the markets with the most favorable conditions and not only for political exchanges. At the same time, the state must immediately cut the umbilical cord of the Cyprus Hydrocarbon Company and the Ministry. EYK does not become a private law company, which is called to develop the potential of a participant in the energy giants, to be fed in the form of state sponsorship by the Ministry. Finance at a time when the millions of euros from the signing bonuses of the three rounds of licensing have ended up in the General Fund of the state. When will it manage to turn from a start-up into an independent organization that will stand worthy next to those organizations whose annual budget only for mining is equal to our GDP? All this should concern us. So we are facing a unique opportunity and we do not have the luxury to politicize an institution that no matter how beautiful and vague it sounds should really shield the future generations of our island. That is why we must be guided by what the Norwegians have succinctly set for themselves: "One day the hydrocarbons will run out, but the proceeds from the fund will continue to benefit our population." So it should be with us…