By Stelios Orphanides
The design of the national fund that will manage Cyprus’s future revenue from oil and gas has flaws, which could allow mismanagement to go undetected for a considerable time, the fiscal watchdog said.
Proposed legislation governing the creation and operation of the fund was submitted to parliament but discussion was postponed due to disagreements over its provisions among various government departments.
The Fiscal Council, an independent body tasked to monitor the drafting and execution of the budget to ensure more fiscal responsibility, said that as the bill stands, the fund will draft its annual report and forward it to the auditor-general three months after the end of each financial year. The finance minister will get to read it six months later before briefing the cabinet and forwarding the report to parliament.
“Based on this procedure, people will be informed with a delay of up to two years, which is something that should not satisfy any institution,” the Fiscal Council said. The comment was included in a report submitted to parliament as part of the debate on the government’s bill.
The bill provides that under certain circumstances, the government will be allowed to use part of the revenues to reduce government debt and other purposes.
While the finance minister will be briefed about the fund’s performance “periodically,” the absence of a provision to make information on the internal value and the detailed status of investment public, may delay a timely reaction when things go badly, the council said.
The continuous flow and access to information would not only allow the finance minister and the auditor-general to react in time, but also let parliament and people with related knowledge to monitor the situation and advise accordingly, the council said.
“Experience from the recent financial bubble and crisis shows that it is difficult to find and convict the perpetrators of financial crimes,” the council continued. “Most convictions resulted on the grounds that people gave deficient or misleading information. This is an additional reason to suggest clear provisions on transparency and the imposition of very strict penalties for related offences.”
According to the bill, the fund can divert reserves equal to 1 per cent of gross domestic product, or 25 per cent of the fund’s revenue to the government, after its total reserves grow to 30 per cent of GDP.
The Fiscal Council therefore recommended that in boom years, the above budget contribution should instead flow to a special “anticyclical reserve” that will be accessible in “times of crisis”. Still, the law should provide for the introduction of checks and balances which can limit the finance minister’s absolute discretionary power of deciding how to use the funds.
In the bill’s current form, the finance minister only has to consult the Central Bank of Cyprus and the Fiscal Council before using anticyclical reserve funds. No other institution has the power to prevent the minister from doing so.
In September, Finance Minister Harris Georgiades said that he expects an annual revenue of up to €600m from the sale of hydrocarbons 12 years after production at the Aphrodite field –so far Cyprus’s single hydrocarbon finding containing 4.5 trillion cubic feet of natural gas– begins.