## 1cypea2023003

## Source details

**Canonical URL:** [1cypea2023003](https://www.imf.org/-/media/files/publications/cr/2023/english/1cypea2023003.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2023/english/1cypea2023003.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2023/english/1cypea2023003.pdf.json)

---

### Preface — Mission, team, and meetings
- IMF FAD visited Nicosia during March 22  ̶  31, 2023 to assist the Ministry of Finance (MoF) of Cyprus on strengthening governance and oversight of state-owned enterprises (SOEs).
- Team leadership and members:
  - Team led by Mr. Sybi Hida.
  - Team included Ms. Natalie Manuilova, Ms. Sorana Rodica, and Mr. Richard Frederick.
- Key government and stakeholder meetings included Deputy Minister to the President, MoF senior officials, Treasury of the Republic, General Auditor Office, line ministries, regulatory entities, and major SOEs (EAC, CyTA, CPA, Larnaca Sewerage and Drainage Board, and others).
- Mission acknowledgement: thanks authorities for cooperation, with special coordination support from the Budget Director and Ms. Evgenia Constantinouou.

### Executive summary — legal, institutional progress, and key outcomes
- Legal and institutional progress:
  - Fiscal Responsibility and Budget Systems Law of 2014 (FRBSL) provides legal basis for financial oversight of public entities and assigns clear control functions to the MoF.
  - Ministerial Decisions and circulars and a Public Sector Governance Code (implemented in 2020) introduced elements of governance, accountability, and strengthened oversight.
  - MoF increased its monitoring role and developed analysis of public entities’ financial performance as part of its annual fiscal risk statement.
- Positive results highlighted:
  - Liabilities of public entities stable at about 11 percent of GDP in recent years.
  - Government guarantees decreased from 4.5 percent of GDP in 2015 to less than 3 percent in 2021.
  - Public entities accounted for less than 2 percent of total non-performing loans in 2022.
  - Most public entities’ boards are now non-executive directors.
  - An independent advisory council for board selection was established by the Council of Ministers in June 2023.
- Main gaps and risks:
  - MoF monitors only 58 public entities, excluding entities such as KEDIPES and pension funds operated by SOEs.
  - Public-entity categorization is based on legal status and does not differentiate commercial (SOE) versus non-commercial purpose.
  - MoF lacks comprehensive information on off-balance-sheet pension funds administered by some SOEs.

### SOE scale, classification, and notable aggregates
- Public entity counts and classifications:
  - MoF registers 58 public entities: 26 SOEs, 21 policy implementation agencies, and 11 regulatory and other function entities (MoF classification).
  - CySTAT publishes a list of 62 public entities: 19 government-controlled entities (or SOEs), 28 semi-government organizations, 8 extra-budgetary funds, and 7 social security funds.
- Fiscal and economic footprint (reported figures):
  - As of 2022, MoF reports 58 entities managed assets equivalent to 30 percent of GDP, with liabilities totaling 11 percent of GDP.
  - These entities employed about 2 percent of the labor force.
  - Mission team identified 17 SOEs among the 58 public entities using GFSM 2014 criteria; these 17 SOEs managed assets amounting to about 22.3 percent of GDP in 2021.
- KEDIPES and other off-list items:
  - KEDIPES (Cyprus Asset Management Company Ltd) not included in the MoF public entity list despite sole government ownership.
  - State support recovery target for KEDIPES: € 3.6 billion (14 percent of 2022 GDP); as of end-2022, € 880 million (3.5 percent of GDP) returned to the State budget.
  - KEDIPES classified by CySTAT as part of general government in 2018; business plan targets full repayment by 2028.
- Sectoral concentration:
  - SOEs hold largest assets in energy, telecommunications, and water utility sectors (EAC, CyTA, six district sewerage boards, three regional water boards).
  - Other large SOEs include CPA and Housing Finance Corporation (HFC).
  - Together these SOEs manage total assets of about 20 percent of GDP (mission calculations based on 2021 MoF Fiscal Risk Statement and official GDP data).

### SOE sector financial aggregates (2021)
- Sector totals (Euro million and % GPD preserved):
  - Total Assets: Euro million 5,226
  - % GPD: 22.30
  - Net Result: Euro million 100
  - % GPD: 0.43
  - Government Guarantees: Euro million 588
  - % GPD: 2.51
- Selected SOE-level figures (2021):
  - Electricity Authority of Cyprus (EAC): Total Assets 2,204; % GPD 9.40; Net Result -42; % GPD -0.18; Government Guarantees 195; % GPD 0.83
  - Cyprus Telecommunications Authority (Cyta): Total Assets 1,048; % GPD 4.47; Net Result 78; % GPD 0.33
  - Sewerage Disposal Board of Limassol – Amathus: Total Assets 495; % GPD 2.11; Net Result 9; % GPD 0.04; Government Guarantees 117; % GPD 0.50
- Aggregate profitability metric:
  - SOEs’ net result was 1.9 percent of assets or 0.4 percent of GDP; the largest SOE was loss making.

### Current legislative framework, governance weaknesses, and classification issues
- Legislative scope and weakness:
  - Current legislative framework applies to all public sector entities but "lacks a clear definition of an SOE as a commercial entity separate from the government."
  - Public entities are treated as extensions of government irrespective of objectives and mandates.
- Monitoring and reporting practices:
  - MoF applies a universal monitoring approach to all 58 entities, with identical monitoring requirements irrespective of mandate or economic nature.
  - FRBSL categorizes public entities by legal status into three categories but does not consider activity nature when classifying SOEs.
  - No centralized ownership function exists to take a shareholder perspective or publish aggregate SOE sector reports.
- Recommended classification action:
  - Use IMF GFSM 2014 as the basis for a unified classification system compatible with ESA 2010 to identify SOEs and distinguish commercial from non-commercial public entities.

### Ownership rationale, ownership policy, and separation of functions
- Ownership rationale absence:
  - There is no formal ownership rationale that requires justification for continued state ownership or defines its criteria.
  - Cyprus FRBSL and MoF Circular of February 9, 2021 do not specify conditions specific to SOE creation, do not include a subsidiarity principle, and do not condition SOE creation on market-failure or strategic criteria.
- OECD good practice and policy options:
  - OECD recommends a government ownership policy specifying rationales, implementation mechanisms, and roles of government offices; centralization of ownership rights is common practice.
  - Policy/legal options suggested after classification:
    - Bring commercial entities under Company Law and subject them to private-sector governance, accounting, reporting and audit requirements.
    - Introduce Company Law provisions into entity-level establishment legislation.
    - Mandate SOEs to develop Corporate Governance Codes aligned with the Public Sector Governance Code and private sector standards.

### Corporate governance, boards, and nomination practices
- Board composition, roles, and performance gaps:
  - No centralized entity collects systematic information on board roles, composition, or effectiveness.
  - Board time overly focused on procurement and compliance (reported up to 70 percent of board time) and on day-to-day decisions.
  - Some boards meet weekly; practices contrast with private listed companies where meetings range between seven to a dozen per year.
  - Few board members have capacity to oversee financial reporting, risk management, or control functions; no formal induction or training for board members.
  - All members of SOE boards are Non-Executive Directors (NEDs); evidence suggests limited active independent judgement and the perception that duty is mainly to the state.
  - In some cases CEOs act as Chairs, undermining independent board oversight.
- Nomination and selection improvements:
  - Steps being taken: new board member nomination body and process to depoliticize selection; independent Advisory Council to propose board members based on merit.
- Remuneration, term limits, and evaluations:
  - Board member remuneration is low; attendance fee of approximately EUR 100 per meeting for larger SOEs.
  - Term limits example: some SOEs set 30 months with one single renewal; international practice suggests two 3-year terms.
  - Boards do not conduct annual self-evaluations nor develop improvement plans.
- Recommended board-related reforms:
  - Professionalize nomination and selection, open pools to public and international experts, provide induction and training, separate CEO and Chair roles, require annual self-evaluations with remedial action plans, and consider harmonized remuneration policy.

### Transparency, financial reporting, and audit practices
- Reporting and audit observations:
  - Major SOEs produce financial reports under IFRS and audits under ISA.
  - No information on percentage of audited statements receiving qualified or unqualified opinions.
  - Professional bodies raised capacity concerns for producing IFRS-compliant statements.
- Auditor General role:
  - Auditor General (AG) appoints external auditors for SOEs, potentially reducing conflicts but raising concerns about fee pressure, delays, perceived duty of auditors to AG, and reduced board responsibility for controls.
- Timeliness and disclosure:
  - Audited financial reports often available 9 months or more after fiscal year end; in some cases a year or more (example: CPA not publishing audited reports since 2016).
  - Current legal requirement: submission to the registrar within 12 months of balance sheet close (described as insufficient).
  - Recommendation: public disclosure of audited financial reports should be mandatory within 5 months of fiscal year end.
- Internal audit and website disclosure:
  - Internal audit often used ad-hoc rather than as an assurance function; independence and direct access to board are weak.
  - No uniform governance disclosure on SOE websites; OECD recommends publication of ownership structure, governance information, board CVs, policies, and financial reports.

### Performance planning, monitoring, and PSOs
- Distinction and current practice:
  - MoF conducts budget monitoring but no performance monitoring of SOEs.
  - Cyprus does not use performance contracts, statements of corporate intent (SCIs), letters of expectation, or formal KPIs for SOEs.
  - PSOs are not contracted explicitly; costs of PSOs are not always well understood or compensated.
- Recommended performance reforms:
  - Introduce performance contracting and performance monitoring (SCIs, KPIs), make PSO costs explicit and compensated, and locate skilled financial analysis within a centralized ownership or oversight function.

### Fiscal risks, pension liabilities, and sector vulnerabilities
- Fiscal risks and exposures:
  - SOE fiscal risks include lower dividends and taxes, budget transfers for loss-making activities, materialized contingent liabilities from government guarantees, bailouts, and non-delivery of core public services.
  - Profitability: pandemic reduced EBITA in 2020 and 2021, while EBITA remained above 5 percent of sector assets for sector overall.
  - Government guarantees decreased from 4.5 percent of GDP in 2015 to less than 3 percent in 2021.
  - SOEs accounted for 1.9 percent of total non-performing loans as of March 31,2022.
- Pension liabilities:
  - In 2021, CYTA and EAC pension obligations amounted to above 8 percent of GDP with unfunded liabilities of 2.7 percent of GDP.
  - MoF lacks a comprehensive assessment of unfunded liabilities across all SOEs.
  - Some pension assets are held in trustee-administered funds or schemes administered by SOEs and are not reported in SOE financial statements.
- Greenhouse gas emission allowances risk:
  - EAC emission allowance cost increased by €90.5 million in 2021 compared to €7.6 million in 2020.
  - Country per capita emissions in 2019: 11.2 tCO2e (exceeding EU average by 3.3 tCO2e).
  - Share of renewable energy in 2019: 13.8 percent.
  - Country's 2030 target: 22.9 percent share focused on heating, cooling, and electricity sectors.
- Governance and operational vulnerabilities increasing fiscal risk:
  - Uncompensated quasi-fiscal activities, excessive dividend/tax extraction, arrears, inadequate central oversight, political interference, and weak boards.

### MoF monitoring gaps, analytical tools, and recommended oversight enhancements
- Current MoF practice:
  - Directorate of Budget and Fiscal Control collects financial and supplementary data and produces an annual fiscal risk statement.
  - Analysis should be deepened with broader ratios and prioritization by size, importance, and liabilities; high-risk SOEs may require increased monitoring frequency (e.g., quarterly).
- Recommended institutional actions:
  - Establish a dedicated financial oversight team (suggested three-staff team within the Budget Department) focused on financial oversight (not ownership functions).
  - Complete classification of public entities and build a dataset with financial and non-financial information for SOEs.
  - Primary responsibilities: analyze historical performance, conduct scenario analyses, engage with SOEs on three-year strategic plans and budgets, and compile an annual aggregated report on SOE performance and risk profile.
- FAD analytical tools presented:
  - SOE Health Check tool:
    - Assesses fiscal risks at company and sector levels across profitability, liquidity, solvency.
    - Input-minimizing template; accommodates up to 15 years of financial data for up to 40 SOEs.
    - Applied to EAC and CYTA; training provided to two Budget Directorate staff.
  - SOE Forecasting and Stress Test tool:
    - Projects company financials and fiscal consequences over a six-year horizon under baseline and stress scenarios; benchmarks against global peers and quantifies fiscal impacts.
- Transparency recommendation:
  - Publish analysis and financial performance of SOE sector as part of budget documentation or separately; Annex 2 outlines a good SOE monitoring report structure.

### Recommended reforms, priorities, and timelines (selected from Key Recommendations and Next Steps)
- Immediate/prioritized recommendations and timelines (as presented in source):
  - Conduct an inventory and categorize all public entities according to the IMF GFSM 2014.
    - Responsible: Ministry of Finance
    - Timeline: December 2023
  - Develop an SOE governance reform strategy and action plan.
    - Responsible: Inter-ministerial working group
    - Timeline: December 2023
  - Establish a formal institutional structure to support SOE board nominations.
    - Responsible: Government
    - Timeline: December 2023
  - Strengthen capacity of the MoF Budget Directorate to undertake financial oversight and fiscal risks analysis of the SOEs.
    - Responsible: Ministry of Finance
    - Timeline: December 2023
  - Develop an ownership policy specifying roles and responsibilities of institutions involved in SOE oversight and governance.
    - Responsible: Ministry of Finance
    - Timeline: April 2024
  - Revise the Code of Public Enterprises in line with the OECD Guidelines 2015.
    - Responsible: Ministry of Finance
    - Timeline: April 2024
  - Publish annual report on SOE performance.
    - Responsible: Ministry of Finance
    - Timeline: April 2024 and continues
  - Establish a centralized ownership function to coordinate SOE oversight.
    - Responsible: Government
    - Timeline: December 2024
  - MoF/Budget Directorate to consider using SOE Health Check and Stress Test Tools.
    - Timeline: December 2024
  - MoF or oversight body to produce templates for board self-evaluations.
    - Timeline: December 2024
- Other priority reforms and supporting measures:
  - Professionalize board nominations and selection, open public and international candidate pools, and consider search firms.
  - Clarify and strengthen board roles; provide capacity building for board members and executives.
  - Introduce performance contracting (SCIs), KPIs, and explicit compensation for PSOs.
  - Improve reporting timeliness: mandate audited financial reports within 5 months of fiscal year end.
  - Mandate minimum disclosure requirements and publish aggregate SOE annual report from a shareholder/financial perspective.
  - Enhance competitive neutrality, separate CEO and Chair roles, and rationalize board remuneration.
  - Corporatize statutory enterprises into corporate legal forms where feasible.

### Examples, benchmarks, and good-practice references cited
- European Council recommendations (July 2022) aligned on increasing transparency, merit-based nominations, separating ownership from policy functions, and opening commercially viable markets.
- Country examples and guidance cited: OECD Guidelines (2015), Lithuania’s transparency guidelines and consolidated reporting timelines, France, Estonia, Sweden, and prototype reports from World Bank.
- Tools and templates: FAD SOE Health Check and SOE Forecasting and Stress Test tools, Annex 2 outline for SOE monitoring report.

*Source: IMF mission report Preface, Executive Summary, and Technical Report excerpts (March 22  ̶  31, 2023) contained in 1cypea2023003 - Preface and selected sections.*

### Preface _________________________________________________________________________ 6

### Preface

### Mission, team, and meetings
- At the request of the Ministry of Finance (MoF) of Cyprus, a team from the IMF’s Fiscal Affairs Department (FAD) visited Nicosia during March 22  ̶  31, 2023, to assist the authorities with strengthening the governance and oversight of state-owned enterprises (SOEs).
- Mission leadership and team members:
  - Team led by Mr. Sybi Hida.
  - Team included Ms. Natalie Manuilova (both FAD), Ms. Sorana Rodica, and Mr. Richard Frederick (both FAD short-term experts).
- Key government and stakeholder meetings:
  - Deputy Minister to the President, Ms. Irene Piki; Secretary of the Councils of Ministers, Ms. Penelope Papavasilio.
  - From the MoF: Permanent Secretary, Mr. George Panteli; Budget Director, Ms. Melina Catsounotou; Director of Strategy and Coordination, Mr. Kyriakos Kakouris; Director of Debt Management, Mr. Phaedon Kalozois; Director of Financial Services, Ms. Avgi Chrysostomou Lapathiotis.
  - Treasury of the Republic: Mssrs. Marios Hadjidamianou and Aigli Constantinou.
  - General Auditor Office: Mr. Akis Kikas and Ms. Markella Koukkoulli.
  - Line ministries and regulatory entities including Ministry of Energy, Ministry of Transport, Ministry of Interior, Cyprus Energy Regulatory Authority, Commission for the Protection of Competition, and Chairman of Fiscal Council, Mr. Michalis Persianis.
  - SOEs: Electricity Authority of Cyprus (EAC), Cyprus Telecommunications Authority (CyTA), Cyprus Ports Authority (CPA), Larnaca Sewerage and Drainage Board, and others (specific participants listed in source).
- Acknowledgement: mission thanks authorities for frank discussions and cooperation, and notes outstanding support from the Budget Director and especially Ms. Evgenia Constantinouou in coordinating the mission.

### Executive summary — key findings and sector overview
- Legal and institutional progress:
  - The Fiscal Responsibility and Budget Systems Law of 2014 (FRBSL) provides the legal basis for financial oversight of public entities, including SOEs, and assigns clear control functions to the MoF.
  - Ministerial Decisions and circulars have been issued to strengthen oversight and fiscal risks management and allocate responsibilities.
  - A Public Sector Governance Code was implemented in 2020 introducing elements of good governance and accountability for public entities.
  - MoF has increased its role in monitoring public entities and developed analysis of public entities’ financial performance as part of its annual fiscal risk statement.
- Positive results to date:
  - Liabilities of public entities have remained stable over recent years at about 11 percent of GDP.
  - Government guarantees decreased from 4.5 percent of GDP in 2015 to less than 3 percent in 2021.
  - Public entities accounted for less than 2 percent of total non-performing loans in 2022.
  - Most public entities’ boards are now non-executive directors.
  - An independent advisory council to support selection and appointment of qualified board members to public entities’ boards was established by the Council of Ministers in June 2023.
- Gaps and risks:
  - MoF monitors only 58 public entities, excluding entities such as the Cyprus Asset Management Company (KEDIPES) and pension funds operated by SOEs.
  - Public-entity categorization is based on legal status and does not differentiate commercial (SOE) versus non-commercial purposes.
  - The MoF lacks comprehensive information on off-balance-sheet pension funds administered by some SOEs.

### SOE scale and classification
- Public entity counts and classifications:
  - MoF registers 58 public entities and groups them by activities and budget transfers: 26 SOEs, 21 policy implementation agencies, and 11 regulatory and other function entities (MoF classification).
  - CySTAT publishes a list of 62 public entities and classifies them as 19 government-controlled entities (or SOEs), 28 semi-government organizations, 8 extra-budgetary funds, and 7 social security funds.
- Fiscal and economic footprint (reported figures):
  - As of 2022, MoF reports that 58 entities collectively managed assets equivalent to 30 percent of GDP, with liabilities totaling 11 percent of GDP.
  - These entities employed about 2 percent of the labor force.
  - Using GFSM 2014 criteria and available information, the mission team identified 17 SOEs among the total of 58 public entities; these 17 SOEs collectively managed assets amounting to about 22.3 percent of GDP in 2021.
- Notable entities and off-list items:
  - KEDIPES (Cyprus Asset Management Company Ltd) is not included in the MoF public entity list despite the government being its only shareholder.
    - KEDIPES was established to recover non-performing loans and other assets from the liquidated Cyprus Cooperative Bank Ltd.
    - The state support recovery target is € 3.6 billion (14 percent of 2022 GDP); as of end-2022, € 880 million (3.5 percent of GDP) have been returned to the State budget.
    - KEDIPES was classified by CySTAT as part of general government in 2018; KEDIPES' business plan outlines gradual and complete repayment of the state aid by 2028.
  - Postal services are provided directly by the Department of Postal Services (Cyprus Post) of the Ministry of Transport, Communications and Works until 31st December 2027; thereafter the universal postal provider will be selected by the Commissioner of Electronic Communications and Postal Regulation through open competition.
- Sectoral concentration:
  - SOEs manage the largest assets among public entities, primarily in energy, telecommunications, and water utility sectors (EAC, CyTA, six district sewerage boards, three regional water boards).
  - Other large SOEs include CPA (port services) and Housing Finance Corporation (HFC) in the financial sector.
  - Together these SOEs manage total assets of about 20 percent of GDP (mission calculations based on 2021 MOF Fiscal Risk Statement and official GDP data).

### Legal framework and recent reforms
- FRBSL 2014 and follow-up measures:
  - The FRBSL 2014 strengthened centralized financial oversight of SOEs and assigned MoF functions including review and approval of annual budgets, headcounts, new investments, borrowings, and quarterly and annual financial reporting.
- Additional legal acts and instruments referenced:
  - Decision 2018: provisions for effective management and accountability of state grants allocated to SOEs.
  - Decision 2019: requires SOEs to develop strategic plans and three-year rolling budget plans submitted to parent ministries and MoF approval.
  - Circular 2020: guidelines for identifying and analyzing entity-level risks and annual reporting of such risks by all public entities starting from 2021.
  - Public Sector Governance Code (implemented in 2020): introduces governance and accountability framework for public entities.
- Legislative gap:
  - An SOE Bill submitted in 2014 was withdrawn due to lack of political consensus; alternative legal acts have been approved to address pressing governance weaknesses.

### Recommendations and reform priorities (extracted from Table 1: Key Recommendations)
- SOE Classification
  - Conduct an inventory and categorize all public entities according to the IMF GFSM 2014.
    - Responsible: Ministry of Finance
    - Timeline: December 2023
- State Ownership and SOE Governance
  - Develop an SOE governance reform strategy and an action plan.
    - Responsible: Inter-ministerial working group
    - Timeline: December 2023
  - Establish a formal institutional structure to support the government on SOE board nominations.
    - Responsible: Government
    - Timeline: December 2023
  - Develop an ownership policy that sets the roles and responsibilities of the institutions involved in the oversight and governance of SOEs, including the roles of SOE board and management.
    - Responsible: Ministry of Finance
    - Timeline: April 2024
  - Revise the Code of Public Enterprises in line with the OECD Guidelines 2015.
    - Responsible: Ministry of Finance
    - Timeline: April 2024
  - Establish a centralized ownership function to coordinate the SOEs oversight.
    - Responsible: Government
    - Timeline: December 2024
- SOE Financial Oversight and Transparency
  - Strengthen capacity of the MoF Budget Directorate to undertake financial oversight and fiscal risks analysis of the SOEs.
    - Responsible: Ministry of Finance
    - Timeline: December 2023
  - Publish annual report on SOE performance.
    - Responsible: Ministry of Finance
    - Timeline: April 2024 and continues

### Suggested next steps highlighted by the mission
- Establish and regularly update a consolidated inventory of public entities using IMF GFSM 2014 criteria to differentiate commercial SOEs from non-commercial public entities.
- Develop and publish an SOE governance reform strategy with benchmarks based on the OECD Guidelines on Corporate Governance of SOEs (2015).
- Formalize and professionalize SOE board nomination and selection processes to be formal, transparent, merit-based, and aligned with entities’ operational objectives.
- Develop an SOE ownership policy clarifying state ownership rationale and the roles and responsibilities of institutions involved in SOE oversight, governance, and management.
- Strengthen MoF capacity (additional staff with fiscal and financial expertise) to undertake periodic financial and non-financial reporting, fiscal risk monitoring, and application of IMF FAD analytical tools (SOE financial performance analysis, fiscal risk assessment).

*Source: IMF mission report Preface and Executive Summary (March 22  ̶  31, 2023) contained in 1cypea2023003 - Preface.*

### 8.      The current legislative framework applies to all public sector entities. However, it lacks a

### 1cypea2023003 - 8.      The current legislative framework applies to all public sector entities. However, it lacks a

### Current legislative and governance weaknesses
- The current legislative framework applies to all public sector entities but "lacks a clear definition of an SOE as a commercial entity separate from the government."
- Public entities are "treated as extensions of the government, regardless of their objectives and mandates."
- Best practices from the OECD guidelines (2015) require SOEs to "adhere to the highest standard of corporate governance applied to listed companies."
- Enforcement gaps:
  - CoM decisions have been "only partially implemented" due to "lack of capacity in government and limited SOEs’ understanding on their obligations."
  - "SOEs currently do not submit the three-year strategic plan to the parent ministry and the MoF."
  - SOEs submit statements on compliance with the Public Sector Governance Code to the MoF, but "no entity is assigned with analyzing these statements or reporting on the implementation of the code."

### Monitoring, reporting, and data practices
- The government follows a "universal monitoring approach for all public entities."
- The MoF "oversees and monitors all 58 entities," applying identical monitoring requirements irrespective of mandates and economic nature.
- The FRSBL categorizes public entities into three categories—"(i) general government entities, (ii) state-owned organizations, and (iii) state-owned enterprises—based on their legal status," but "it does not consider the nature of their activities to determine their classification."
- The MoF’s Directorate of Budget and Fiscal Control:
  - collects financial and supplementary data to analyze financial performance and employment data for all public sector entities;
  - performs annual analysis "based on the entities’ main financial indicators and performance ratios" to assess performance versus approved budgets, reliance on public funding, and measure risks;
  - relies on entities’ financial statements and additional data to produce the annual Fiscal Risk Statement published on the MoF website.
- There is "no centralized ownership function" that takes a shareholder perspective or publishes an aggregate report on the state of the SOE sector.

### Classification, inventory, and proposed prioritization
- The mission identified the need to establish "a consolidated inventory of public entities" including entities at central and district levels and "entities established off-balance sheet by existing SOEs."
- The IMF Government Finance Statistics Manual 2014 (GFSM 2014) is recommended as the basis for a "unified classification system for public entities" compatible with ESA 2010.
- The mission team "has identified 17 entities that could be classified as SOEs based on the GFSM 2014."
- In 2021 these SOEs "managed assets that accounted to about 22.3 percent of GDP."
- The SOE sector financial aggregates for 2021 (from the included table):
  - Total Assets: Euro million 5,226
  - % GPD: 22.30
  - Net Result: Euro million 100
  - % GPD: 0.43
  - Government Guarantees: Euro million 588
  - % GPD: 2.51
- Selected individual SOE figures from 2021 (Euro million and % GPD preserved):
  - Electricity Authority of Cyprus (EAC): Total Assets 2,204; % GPD 9.40; Net Result -42; % GPD -0.18; Government Guarantees 195; % GPD 0.83
  - Cyprus Telecommunications Authority (Cyta): Total Assets 1,048; % GPD 4.47; Net Result 78; % GPD 0.33
  - Sewerage Disposal Board of Limassol – Amathus: Total Assets 495; % GPD 2.11; Net Result 9; % GPD 0.04; Government Guarantees 117; % GPD 0.50
- Aggregate profitability metric: SOEs’ "net result (equivalent to profit) was only 1.9 percent of assets or 0.4 percent of GDP," and "the largest SOE was loss making."

### Ownership function, accountability, and reporting gaps
- There is "no centralized ownership function" to exercise shareholder oversight, incentivize performance, or publish aggregate sector reports.
- The absence of an ownership policy or SOE law: "There is no formal ownership policy or SOE law."
- International best practice elements for SOE definition (from Box 2) retained:
  - Separate legal personality;
  - At least partial government control;
  - Engagement predominantly in commercial or economic activities.
- GFSM 2014 two basic tests for an SOE noted: "Government control" (eight indicators) and "Market producer" (sales at least half of production costs over three years), while acknowledging application "involves judgement."

### Recommended next steps, policy options, and reforms
- Immediate institutional steps:
  - "Establish a consolidated inventory of public entities" including ownership status, shareholder responsibilities, and sector of operation; the MoF can lead or establish an inter-ministerial working group and include CySTAT.
  - "Adopt a unified classification system for public entities" using GFSM 2014 to identify SOEs and distinguish them from non-commercial public entities.
- Legal and governance options to align with OECD Guidelines, once SOE classification is completed:
  - Bring commercial entities (per GFSM 2014) "to the auspices of the Company Law, subjecting them to the same corporate governance, accounting, reporting and audit requirements applicable to the private sector entities."
  - "Introduce all relevant provisions of the Company Law into the individual entity-level establishment legislation of SOEs" as they relate to governance, accounting, reporting and audit.
  - "Mandate SOEs to develop their own Corporate Governance Codes, based on the Public Sector Governance Code, aligning corporate governance, accounting, reporting and audit requirements with those applicable to the private sector entities."
- Corporate governance improvements needed:
  - "Professionalizing SOE boards" and "achieving the right balance of skills and professional expertise at the board level."
  - Introduce "linkages between SOE performance and senior management compensation" via entity-level KPIs linking accountability to financial and nonfinancial performance.
  - Enforce "complete and timely publication of SOEs’ audited financial statements on their websites, or via an alternative medium, accessible to public."
- Recommendations with timelines:
  - Recommendation 1: "The government should conduct an inventory of all public entities and categorize them according to the IMF GFSM 2014, with the aim of identifying all entities operating in commercial activities (by December 2023)."
  - Recommendation 2: "The Ministry of Finance should revise the legal framework to introduce the definition of SOE, and align corporate governance, financial reporting, and transparency requirements with those applied by the private sector companies applying one of the three options (December 2024)."

### European Council recommendations alignment
- The European Council recommendations (Box 1) to improve governance and accountability highlighted gaps vis-à-vis OECD Guidelines and recommended:
  - "Increase transparency of and higher accountability for financial performance and public objectives"
  - "Implement merit-based and transparent process for nominations to SOE management bodies"
  - "Introduce clear separation of the SOE ownership function from the policy-making function carried out by line ministries by delegating ownership function to a dedicated central body"
  - "Open up commercially viable markets where SOEs currently have a dominant position (e.g., in the energy market)"
- The government is "committed to improving SOE governance standards and practices" responding to the July 2022 European Council recommendations.

*IMF | Technical Report — Source: 2021 Fiscal Risk Statement, MoF*

### 24.      There is no formal ownership rationale that requires the justification for continued state

### There is no formal ownership rationale that requires the justification for continued state ownership or defines its criteria.

### Ownership rationale and state ownership policy
- An ownership rationale is a statement that defines the reasons for continued state ownership and typically calls for regular review of SOEs in the state portfolio to ensure the rationale for continued state ownership continues to exist.
- An ownership rationale is typically found in an SOE law or in an ownership policy.
- Such a rationale typically establishes conditions such as: market failure (as a result of natural monopoly and/or externalities); strategic significance; or infant industries that the state wishes to protect or promote for a limited period of time.
- Cyprus Fiscal Responsibility and Budget Systems Law requires that the creation of new public entities be subject to criteria defined in the Ministry of Finance Circular of February 9, 2021.
  - That circular does not: a) specify the conditions that apply specifically to the creation of SOEs; b) contain a subsidiarity principle (State ownership of SOEs should exist only where private provision of products and services is not feasible); or c) make the creation of new SOEs conditional to the criteria noted immediately above (such as market failure).

### Ownership policies and the state’s role as owner (Box 4)
- OECD analysis shows a clear convergence toward centralization or co-ordination in the state ownership function; around half of reviewed countries vest ownership rights and responsibilities within one single centralized entity.
- Of the 32 jurisdictions participating in a 2020 inventory conducted by the OECD, 17 jurisdictions reported having explicit ownership policies.
- Examples of how state ownership policies are set out:
  - Specific legislation: Hungary, Korea, Latvia, Lithuania, New Zealand, Philippines.
  - Government decision, resolution or decree: Chile, Estonia, Germany, Norway, Sweden, Switzerland.
  - Government policy statements: Colombia, Iceland, the Netherlands.
  - Combination of these elements: Czech Republic, France.
- OECD Guidelines recommendations summarized:
  - The Government should develop an ownership policy specifying rationales for ownership, implementation mechanisms and respective roles of different government offices.
  - The exercise of ownership rights should be centralised in a single ownership entity, or if not possible, carried out by a coordinating body with capacity and competencies to effectively carry out its duties.
  - The government should allow SOEs full operational autonomy to achieve their defined objectives and refrain from intervening in SOE management; the government acts as an active and informed owner, but at arm’s length from the company.

### Degree of autonomy and separation of functions
- The degree of autonomy and the degree of separation between the state’s policy, regulatory and shareholder functions varies considerably from enterprise to enterprise.
  - Example: Cyprus Port Authority (CPA) — Council of Ministers and the Ministry of Transport may influence tariff setting (CPA may be better considered part of government administration rather than an SOE).
  - Example: Electricity Authority of Cyprus (EAC) — board has broad decision-making autonomy; ministers can communicate opinions but cannot force the company to make, for example, an investment.
  - Energy sector regulatory separation: independent Cyprus Energy Regulatory Authority (CERA) sets electricity tariffs that aim to achieve full cost recovery for EAC.

### Corporate governance codes and standards
- The existing Code of Public Sector Governance (2018) does not adequately address fundamental requirements of SOE governance.
  - The Code places emphasis on the role of stakeholders but does not clearly define the distinct roles of shareholders (the owner), boards, and management.
  - It does not define precise duties, roles, responsibilities, or functions of a board or address the issue of independence.
  - The Code lacks detail and falls short of internationally accepted good practice.
- Enforcement and disclosure weaknesses:
  - The Public Sector Governance Code is enforced through comply or explain; however, compliance reports are not actually read by the authorities and are not made public.
  - Recommendation: require regular mandatory public disclosure of governance practices compared to the Public Sector Governance Code.
- Alignment with OECD Guidelines:
  - Neither the Code nor other formal pronouncements have the explicit goal of complying with the OECD Guidelines for the Governance of SOEs.
  - The OECD Guidelines are the international standard for SOE governance agreed by many governments and international trade union and business bodies and constitute a necessary reference point for benchmarking.

### Competitive neutrality
- SOEs and the private sector do not always compete on a “level playing field.”
- Current fiscal and legal posture:
  - SOEs are assessed to operate on a sustainable basis and do not request or receive significant financial support from the state.
  - SOEs benefit from guarantees by the state which promise to make up for cash shortfalls, permits on-lending, and guarantees loans.
  - It appears that SOEs are not subject to insolvency law.
- Factors impeding SOE competitiveness reported by SOEs:
  - Limitations on staffing and on investments.
  - Political interference in management decision making.
  - Public service obligations (PSOs).
  - Status of many SOE employees as civil servants with implications for personnel costs and human resource management.
  - Restrictions on aspects of management decision making, composition and quality of boards, politicization of board member selection.
- Dividend, cost of capital, and budget contributions:
  - SOEs do not have a formal dividend policy.
  - Statutory SOEs are not expected to cover their cost of capital or generate any return to the owner — suggesting an advantage over private competitors.
  - SOEs may be asked to contribute funds to the state budget on an ad-hoc basis (example: EAC during the Covid-19 crisis where losses from decreased tariffs mandated by the state were not compensated).
  - Full compensation of the costs of PSOs would be considered a good practice.
  - One SOE reported being unable to pursue necessary investment projects due to the absence of ability to use its retained earnings.

### SOE boards: composition, roles, and performance
- Information gaps and ownership oversight:
  - There is no entity to collect systematic information on SOE board roles, board composition, or how effectively boards function.
  - An ownership function typically provides these insights to the state.
- Board roles and time allocation:
  - Roles and responsibilities of board members are not clearly defined and there are gaps relative to good international practices.
  - SOE boards in Cyprus focus on day-to-day decisions, especially on compliance issues; procurement and compliance issues were reported to take up to 70 percent of board time.
  - Some SOE boards meet weekly; international practice for a private listed company may range between seven to a dozen meetings per year.
  - Few board members have the capacity to oversee financial reporting, risk management, or control functions.
  - There is no formal induction or training on the roles and expectations of board members.
- Expected board responsibilities under good international practice include:
  - Review and guide strategy; establish goals and evaluate performance; help select management and conduct succession planning; ensure an effective control environment (including independent internal audit); oversee corporate communications and reporting; oversee remuneration and incentives; develop and oversee ethics codes, anti-corruption efforts and whistle-blower programs; conduct self-evaluations and develop remedial action plans.
- Duty of board members and prioritization:
  - Internationally, duties of board members are loyalty and care to the company and its shareholder(s); OECD SOE Guidelines and G20/OECD Principles underscore duty to act in the interest of the company and its shareholders.
  - In Cyprus, statutes, law and business culture suggest the duty of board members is mainly to the state and to the achievement of the state’s policy goals; trade-offs between policy goals and commercial/financial goals are often unclear.
- Independence and chairing arrangements:
  - The proportion of independent board members and the quality of independent judgement could not be established.
  - All members of SOE boards are Non-Executive Directors (NEDs).
  - Feedback suggests limited active exercise of independent judgement; understanding among board members appears to be that their role is to ensure compliance with government directions.
  - It appears that, in some cases, CEOs can act as Chairs of boards — a practice that would undermine the capacity of the board to exercise independent oversight over the executive.
- Improvements to nomination and selection:
  - Steps being taken to improve board composition through a new board member nomination body and process aiming to depoliticize selection and ensure merit-based appointments.
  - Historically, selection of board members was made by the Council of Ministers and perceived as opaque and politically driven.
  - Government has suggested establishment of an independent Advisory Council to propose board members based on merit; advisory bodies should be independent, apolitical, and supported by a formal and transparent mission while allowing governments to express legitimate policy concerns.
- Board talent and term limits:
  - Practical challenge: finding sufficient board talent given the small population of the country.
  - Current practices: board member positions are not open to public expressions of interest; use of search consultants and attraction of foreign talents may be considered.
  - Term limits: some SOEs set board member terms at 30 months with the possibility of one single renewal.
  - International private enterprise practice suggests two 3-year terms strike a good balance; government may wish to lengthen term limits or allow a 3rd term if board talent is scarce.
- Remuneration and incentives:
  - Board member remuneration is low; no harmonized board member remuneration policy.
  - Board members of larger SOEs receive an attendance fee of approximately EUR 100 per meeting.
  - Low remuneration provides little incentive for skilled participation and may have contributed to a recent trend of board member resignations.
  - Low fees may incentivize boards to hold a greater number of meetings to increase income.
- Board evaluation and improvement:
  - Boards do not conduct annual self-evaluations of their governance practices, nor do they develop governance improvement plans.
  - In other countries, board evaluations lead to development of board improvement plans that are regularly reviewed and help identify skills needed on the board.

*IMF | Technical Report*

### Box 6. Board Evaluations

### Box 6. Board Evaluations

### Board evaluation practices and examples
- Governments are increasingly encouraging board evaluations to maximize board performance and minimize risk.
- Evaluation practices vary from informal evaluations conducted by the Chair to formal self-evaluations, to formal evaluations conducted by external experts and facilitators.
- Evaluations may concern individual directors and/or boards as a whole.
- Country examples cited:
  - Brazil: Ministry of Planning requires SOE boards to conduct annual self-evaluations based on a detailed questionnaire and to share the results with the Ministry.
  - Chile: ownership agency coordinates performance reviews for all SOE boards but outsources much of the evaluation work to corporate governance centers.
  - Israel (2015): developed a structured process of board evaluation including a system for self-evaluations; evaluation focuses on the board as a group as well as individual directors.
  - Poland: Ministry of Treasury periodically evaluates supervisory boards of enterprises within the ministry’s portfolio, based on documentation prepared by boards of directors; sectoral ministries evaluate SOEs with public policy objectives under their supervision.
  - Switzerland: SOE boards are evaluated against strategic goals set every four years; boards are assessed as a whole and feedback is provided to the Chair.

### Purpose and outcomes
- Board evaluations help form a clearer view of:
  - the board’s overall functioning;
  - the desirable attributes the board should possess;
  - needs that could be addressed through future nominations.

---

### E. Transparency

### Key findings on financial reporting and audits
- Major Cypriot SOEs produce financial reports under International Financial Reporting Standards (IFRS) and audits are conducted using International Standards on Auditing (ISA).
- No information is available regarding the percentage of audited financial statements that received qualified (negative) or unqualified (positive) opinions from their independent external auditors.
- Repeated qualified opinions are usually a sign of significant weaknesses in reporting processes and governance.
- Professional accounting and audit bodies raised concerns about the capacity of accountants within SOEs to produce IFRS compliant statements.

### Auditor General role and implications
- The Auditor General (AG) appoints the external auditor for SOEs (a responsibility typically exercised by the SOE board or its audit committee under good practice).
- Positive aspects of AG appointment:
  - may shield the external auditor from potential conflict of interest with management or the board;
  - may result in cost savings through centralized procurement.
- Concerns raised:
  - pressure to reduce fees may affect quality of services;
  - delays in hiring external auditors and approval of financial reports since the AG manages the external auditor and approves audit results;
  - auditor may perceive duty to the AG rather than to the company;
  - central role of the AG removes a classic oversight role from boards and audit committees, potentially reducing board accountability for control and reporting environment.

### Timeliness of audited financial reports
- Audited financial reports of SOEs are often available 9 months or more after the end of the financial year; in some cases, a year or more can pass.
- Example: Cyprus Port Authority (CPA) has not published audited reports since 2016.
- Current legal requirement: submission to the registrar of companies within 12 months of the closing of the balance sheet (described as insufficient).
- Recommendation on timeliness: public disclosure of audited financial reports should be mandatory within 5 months of fiscal year end.

### Internal audit and website disclosure
- The internal audit function is often poorly understood outside the largest SOEs:
  - best practice: independence from management, right to set audit plan, direct access to the board or an independent audit committee.
  - in Cyprus practice: internal audit often used on an ad-hoc basis to verify transactions rather than as an assurance function for controls and risk containment.
- There is no uniform disclosure of governance-related information on SOE websites, limiting public accountability.
- OECD recommendation cited: SOEs should publish information on ownership structure and other governance-related information on websites or annual reports.
- Countries with mandatory website disclosures for SOEs include Brazil, Costa Rica, Czech Republic, Korea, Latvia, Lithuania, New Zealand, and Panama (among others).
- Typical website disclosures recommended: relevant legislation; governance structure; board membership including CVs; ethics, conflict of interest and other policies; governance codes and compliance; whistleblower information; financial reports.

---

### F. Performance Planning and Evaluation

### Distinction between budget monitoring and performance monitoring
- MoF actively engages in budget monitoring but there is no performance monitoring of SOEs.
- Differences:
  - Budget monitoring: alerts the state to differences in spending behavior; budgets typically produced on a cash basis.
  - Performance monitoring: shows financial and operational health; potential cash flow problems; risks due to capital structure; long-term financial sustainability; relies on accrual-based financial reports.
- Performance monitoring requires skilled financial analysts; some countries locate financial analysis in a centralized ownership function (examples: Canada, France, Latvia, Norway, Sweden, UK).

### Current practice in Cyprus
- Cyprus does not use performance contracts, statements of corporate intent, letters of expectations or other performance contracting tools.
- High-level expectations are communicated through 3-year plans and general objectives of the government but not through a formal and transparent goal-setting process.
- The state does not establish any KPIs for financial performance or for the achievement of PSOs (public service obligations).
- PSOs of SOEs are not contracted explicitly; costs of PSOs are not always well understood.

---

### G. Next Steps (Priorities and Supporting Measures)

### Priority measures (selected for anticipated impact and relative ease of implementation)
- Develop an SOE governance reform strategy and an action plan:
  - aim to achieve practices described in the OECD Guidelines for the Corporate Governance of SOEs;
  - use OECD benchmark to do a gap analysis and develop an action plan;
  - implementation assigned to a specially created working group on SOE reform including key stakeholders (MoF, main line ministries, representatives of SOEs, the Office of the President) with some degree of independence.
- Professionalize board member nominations:
  - formalize the institutional structure for board nominations and ensure independence of the body (Advisory Council is a positive step);
  - make the nominations process formal and public; appointments guided by merit and operational needs as determined by board evaluations where available;
  - open pool of potential nominees to the public and international experts; consider search firms if opportune.
- Develop an ownership policy:
  - formal document describing roles and responsibilities of institutions involved in SOE oversight and governance and the state’s ownership rationale;
  - Cyprus may opt for a policy document rather than a law.
- Clarify and strengthen board roles and decision-making powers:
  - provide capacity building for board members, top executives, and government officials on good governance practices;
  - define board roles distinct from management and owners; discourage micro-management and interference; define decision-making authorities in an ownership policy.
- Revise the Code on Public enterprises:
  - align recommendations explicitly with the OECD Guidelines;
  - change implementation from comply or explain to a mandatory explanation of practice;
  - publish a report on the SOE’s governance compared to the Code annually on the SOE’s website.
- Introduce performance contracting and performance monitoring:
  - develop and implement statements of corporate intent (SCIs) focusing on high-level outcomes including financial and non-financial objectives;
  - use KPIs to track SOE performance and health, include PSOs, and make explicit who pays for PSOs.
- Improve reporting timeliness:
  - public disclosure of audited financial reports should be mandatory within 5 months of fiscal year end (current 12-month submission to registrar of companies is insufficient).
- Establish a centralized ownership function or coordinating body:
  - placed within a central ministry or as a separate entity under the Council of Ministers;
  - tasked with monitoring SOE performance and reporting in aggregate on the SOE sector;
  - should have capacity to conduct financial analysis and explicit goal of enhancing SOE governance.
- Enhance board autonomy and independence:
  - provide greater autonomy while increasing accountability through performance contracting;
  - reduce direct control of SOEs by ministers and ministerial representatives as performance contracting is introduced;
  - develop rules that mandate dismissal of board members only for cause.
- Annual board evaluations:
  - require self-evaluations (ideally assisted by external experts) to identify gaps, needs, and improve composition, governance, and operations;
  - evaluations should lead to remedial action plans against which to measure progress.

### Supporting measures (to be pursued in parallel or subsequently)
- Mandate minimum disclosure requirements for SOEs by the centralized oversight function:
  - require SOEs to emulate disclosure of a private company listed on a stock exchange;
  - report on financial, non-financial, governance, environmental and stakeholder indicators and foreseeable future risks;
  - governance disclosure to include identity and CVs of board members (with conflicts of interest), governance practices and policies, nominations, conflict of interest, whistleblower, ethics policies, and remuneration policy for top executives and board members;
  - ESG reporting is increasingly expected.
- Introduce aggregate reporting on SOEs:
  - ownership entity to produce an annual aggregate report on the SOE sector from a shareholder/financial perspective covering financial targets and PSOs; make the aggregate report public on the ownership entity’s website.
- Enhance competitive neutrality between private and public sectors.
- Separate CEO and Chair functions where combined to strengthen board oversight and ensure greater independence.
- Rationalize board member remuneration:
  - review current SOE board member remuneration and develop a uniform remuneration policy aligned with international practice;
  - analyze appropriateness of fees, mix of fixed honoraria versus per meeting fees, variation consistent with market conditions, and potential legislative changes.
- Corporatization and legal transformation of SOEs:
  - convert statutory enterprises into standard corporate legal forms subject to company law and private sector governance practices where feasible; if not feasible, subject statutory enterprises to company law to the extent possible.

### Specific implementation deadlines in recommendations
- Recommendation 3: develop an SOE governance reform strategy and an action plan (by December 2023).
- Recommendation 4: establish a formal institutional structure to support the government on SOE board nominations (By December 2023).
- Recommendation 5: develop an ownership policy that sets roles and responsibilities of institutions involved in SOE oversight and governance, including roles of SOE board and management (by April 2024).
- Recommendation 6: revise the Code of Public Enterprises in line with the OECD Guidelines 2015 (April 2024).
- Recommendation 7: establish a centralized ownership function to coordinate SOE oversight (December 2024).
- Recommendation 8: MoF or the oversight body should produce templates to be used for self-evaluations by SOE boards (December 2024).

*Source: IMF | Technical Report (excerpts from pages 25–31).*

### 59.      Identifying and managing fiscal risks arising from SOEs could help reduce budget costs

### 59.      Identifying and managing fiscal risks arising from SOEs could help reduce budget costs

### Overview
- Fiscal risks from SOEs can raise budget costs and disrupt public services through:
  - lower dividends and taxes from profitable SOEs;
  - budget transfers to cover loss-making activities;
  - materialization of contingent liabilities from explicit government guarantees on SOE debt;
  - periodic injections required to bail-out loss-making entities;
  - non-delivery of core public services (water, electricity, public transportation).
- Governments should ensure SOEs are well managed and such risks are mitigated.

### Current fiscal exposure and SOE financial status
- Profitability: Pandemic reduced earnings before interest, tax, and amortization (EBITA) in 2020 and 2021, while EBITA remained above 5 percent of the sector's assets for the sector overall.
- Government guarantees: Decreased from 4.5 percent of GDP in 2015 to less than 3 percent in 2021.
- Non-performing loans: SOEs accounted for only 1.9 percent of total non-performing loans as of March 31,2022.
- Some SOEs experienced negative returns (see Table 1 in Section I of the source).

### Pension obligations
- Pension liabilities are a material SOE risk:
  - In 2021, CYTA and EAC pension obligations amounted to above 8 percent of GDP with unfunded liabilities of 2.7 percent of GDP.
  - Pension funds are defined benefit schemes and are highly sensitive to market interest rates.
  - The MoF does not yet have a comprehensive assessment of unfunded liabilities across all SOEs.
  - SOEs contribute to other defined contribution plans whose assets are held in trustee-administered funds (or pension schemes administered by SOEs and its employees) and are not reported in SOE financial statements.

### Greenhouse gas emission allowances risk
- EAC emission allowance costs:
  - In 2021, the cost increased by €90.5 million compared to €7.6 million in 2020.
  - Purchase of emission allowances began in 2020 after the European Commission discontinued previous free rights to the EAC.
- Emissions and renewables context:
  - Country per capita emissions in 2019 stood at 11.2 tCO2e, exceeding the EU average by 3.3 tCO2e.
  - Share of renewable energy reached 13.8 percent in 2019.
  - Country's 2030 target: a 22.9 percent share focused on heating, cooling, and electricity sectors.
- Without steady progress to a more efficient and green economy, emission allowances costs are likely to remain high.

### Governance and operational vulnerabilities
- Key weaknesses that increase fiscal vulnerability:
  - Uncompensated quasi-fiscal activities (e.g., charging less than cost-recovery prices; paying certain suppliers above commercial price; over-employment). No comprehensive information or estimated cost currently available for these obligations.
  - Excessive dividends or tax extraction that exceed distributable income, weakening SOE financial health.
  - Arrears among SOEs and other government units leading to direct impacts on SOE financial performance.
  - Inadequate central oversight increasing risk-taking, inefficiency, and moral hazard (example cited: South Africa's Eskom, where a debt relief package of about 4 percent of GDP was required after blackouts).
  - Political interference in corporate governance and boards lacking requisite skills and experience.

### MoF monitoring, current practice, and gaps
- Existing practice:
  - MoF’s Directorate of Budget and Fiscal Control collects financial and supplementary data for all public sector entities and prepares an annual report summarizing financial performance and employment data.
  - Analyses based on key financial indicators are included in the annual fiscal risk statement published on the MoF website.
- Identified gaps and priorities:
  - Need to strengthen financial oversight and fiscal risk analysis with specific focus on SOEs.
  - Analysis should incorporate a broader range of financial ratios aligned with key performance indicators and used to estimate potential future risks.
  - Prioritization of oversight should consider size and importance of each SOE, financial performance, and magnitude of liabilities.
  - For important and high-risk SOEs, monitoring frequency could be increased to, for example, on a quarterly basis.

### Recommended institutional and analytical next steps
- Establish a dedicated financial oversight team and dataset:
  - Recommended formation of a specialized three-staff team (with financial expertise) within the Budget Department focused on financial oversight (not ownership functions).
  - Complete classification of public entities and build a dataset with financial and non-financial information for SOEs.
  - Budget Department already has sufficient data for annual fiscal risk statements, but additional information is required for deeper analysis.
- Primary responsibilities for the team:
  - Analyze historical financial performance and compare with relevant companies.
  - Conduct scenario analyses and engage with SOEs on their three-year strategic plans and budgets.
  - Compile an annual aggregated report on performance, financial status, and risk profile of all SOEs.
- Reporting expectations from SOEs:
  - Ensure timely, comprehensive financial and nonfinancial reporting beyond annual financial statements, including three-year strategic plans and any material intra-year information.
  - Macro-critical and risky SOEs should provide required information to the MoF team on a more frequent basis.

### Analytical tools presented and use
- Two FAD analytical tools presented: SOE Health Check and SOE Forecasting and Stress Test (developed by FAD; built in Microsoft Excel; publicly available including user guidelines).
- SOE Health Check tool:
  - Assesses fiscal risks at individual-company and sector levels across profitability, liquidity, and solvency metrics.
  - Provides aggregate sector overview, sectoral breakdowns, and identification of largest/potentially riskiest SOEs.
  - Performs single-company assessments with summarized financial statements, ratio calculations, and risk profiling.
  - Minimizes data collection: input limited to key financial information; template automatically calculates ratios and classifies according to risk thresholds.
  - Can accommodate up to 15 years of financial data for up to 40 SOEs.
  - Allows forward-looking analysis when forecasted financial data are input; risk thresholds can be customized.
  - Tool was applied to 2 SOEs (EAC, CYTA) using their published annual financial statements; a training session was provided to two Budget Directorate staff.
- SOE Forecasting and Stress Test tool:
  - Combines backward-and forward-looking analysis to assess financial and fiscal risks over a six-year horizon under baseline and stress scenarios.
  - Benchmarks company financial indicators against global sectoral peers using median, top 75th and bottom 25th percentiles across countries by sub-sector.
  - Projects income statement, balance sheet, and cash flow; synthesizes ratios (profitability, liquidity, solvency, productivity); quantifies consequences for fiscal accounts, including outstanding debt stock and contribution to public sector net worth.
  - Stress scenario can incorporate shocks such as GDP growth, oil price, exchange rate, sales tax, market-specific shocks.

### Transparency and publication
- Recommendation: Publish analysis and financial performance of the SOE sector as part of budget documentation or separately to ensure transparency and accountability.
- Examples cited: France (annual aggregate report of Shareholding Agency included in budget draft law), Estonia (SOE annual report published simultaneously with submission to parliament), Sweden (SOE annual report reviewed by parliamentary committee), Lithuania (implemented SOE transparency requirements and publishes annual reports).
- Annex 2 of the source provides an outline of a good SOE monitoring report as a reference.

*IMF | Technical Report*

### Box 8. Lithuania’s Transparency Guidelines for State-Owned Enterprises and Annual Reports

### Box 8. Lithuania’s Transparency Guidelines for State-Owned Enterprises and Annual Reports

### Framework and publication timelines
- The Government has set out guidelines for the transparency of SOEs in accordance to achieve openness, active ownership, and good governance.
- The guidelines prescribe a framework of corporate reporting applicable to all Lithuanian SOEs that puts SOEs on an equal footing with listed companies and is consistent with the OECD Guidelines.
- Consolidated reports for the SOE sector are published quarterly, within three months of the end of the period, and a consolidated annual report is presented no later than April 30.

### Required content of SOE 6-month interim and annual reports
- Business strategy, financial and nonfinancial targets, opportunities and threats
- Assessment of performance relative to targets
- Dividend policy
- Description of significant events during the financial year
- Description of services or products
- Description of major customer groups
- Description of investment of fixed assets and future investment plans
- Analysis of annual labor costs
- Description of social policy obligations
- Information about compliance with transparency guidelines

### Recommendations (from the source)
- Recommendation 9: The MoF should strengthen capacity of the Budget Directorate either by creating a separate unit or assigning a team of 3 staff to undertake financial oversight and fiscal risks analysis of the SOEs (December 2023)
- Recommendation 10: The Budget Directorate to consider should using the SOE Health and Check and Stress Test Tools to analyze financial performance of SOEs (December 2024).
- Recommendation 11: The MoF should prepare and publish an annual SOE performance report (April 2024 and continues).

### Suggested structure and contents for an annual aggregated SOE performance report
1. Overview of State Ownership
- Summary of state ownership framework
- Key objectives for SOEs (including performance targets)
- Dividend Policy

2. Overview of Compliance with Governance Framework
- Requirements to produce Business/Strategic Plans
- Requirements for Board Structure and Composition
- Board Selection Process
- Board remuneration policy and outcomes (average remuneration of executives by sector)
- Transparency requirements for SOEs (reporting, accounting, audit, requirements)

3. Overview of Financial Results for the SOE Sector
- Summary of key performance aggregates of the sector and comparison to previous year
- Aggregated financial statements for the SOE sector
  - Profit and loss and balance sheet aggregates
  - Key financial performance indicators for profitability, liquidity, and solvency
  - Explanation of the factors impacting on the financial results (including details of any one-off factors or valuation of assets/liabilities)

4. Overview of Financial Results by Sector or SOE
a) Industry Sector Overview
- Vision and strategy with ownership in that sector
- Key developments/events
- Key summary indicators e.g. turnover and employment

b) Summary of financial outcomes and key financial indicators
- Aggregate sector financial statements (including income statement and balance sheet for each sector)
- Key financial performance indicators for profitability (e.g. operating profit, earnings before interest and tax, return on equity etc.), liquidity (e.g. current or liquidity ratio), and solvency (e.g. interest coverage ratio, debt to equity ratio).
- Explanation of the factors impacting on the financial results
- Gap analysis with private sector (market value, return on equity, capital structure and operational efficiency).
- Strategic view on potential performance improvement and value optimization

c) Brief overview of the performance of major SOEs in each sector
- Financial outcomes and performance
- Operations details (business overview, key transactions, products, markets etc.)
- Market, objectives and achievements and goals
- Management (top management details)

4. State Policy Obligations of SOEs
- Summary of the major government functioned assigned by the state to SOEs to implement social and policy objectives.
- Discussion and quantification of the impact of undertaking these quasi-fiscal activities on SOE financial position, and details of any compensation made to SOEs for undertaking these functions (by sector and/or my entities engaged in significant quasi0fiscal activities such as heating and utility companies).

5. Summary of planned reforms to SOE sector
- Summary of ongoing and planned reforms
- Progress against achieving reform outcomes

Annex A: List of SOEs
- SOE name, turnover, employment, share of state ownership

### Guidance and good-practice references (as cited in the source)
- OECD (2022), Monitoring the Performance of State-Owned Enterprises: Good Practice Guide for Annual Aggregate Reporting.
- World Bank (2021), State Owned Enterprises Annual Report (Prototype) 2021.

*Source: Governance Coordination Center of the Republic of Lithuania: Annual Review, State-owned Enterprises in Lithuania, 2021/2022.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1cypea2023003.pdf_