Thursday, 21 July 2011

Another Estimate By Credit Suisse: 2.4 billion.

Credit Suisse has reached similar results to my First and Second Estimate. I am glad that there is now a lively discussions on costs and their effects.

I base the similarity from this report on stockwatch, which indicates the only substantial difference is the 600 million which will be recovered by the insurance has been factored in. I am still not sure if the insurance will pay up and thus barring any confirmation I left it out.

It is slightly sad to see that they do not reveal their sources, but for a private institution it is perhaps understandable. Once again I would urge economists and other professionals to crowd source and get both estimates policy implications collaboratively. If you are interested replay to this in the comment box.


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Tuesday, 19 July 2011

The cost to GDP of the Vassiliko for 2011: Bringing the economy down by -1.6%

Apparently (I have not had the chance to verify it) The Economics Minister has argued that the Vassiliko Explosion will reduce our growth from 1.5% this year to 0%. It means that the public assertion of Mr. Stelios Platis that the maximum damage can be a reduction of GDP by -1% is not believed by the Cypriot Government, as the Cypriot government expects a fall of at least -1.5%. I feel vindicated in saying that things are much worse than Mr. Platis suggested on the panel on Monday.

I have many reasons to doubt however if the Ministry number is accurate. Even if the first quarter GDP of 2011 showed we were on our way, there is no doubt that industry and retail felt that the second quarter there was a slowdown as unemployment was higher than what we expected during the tourist season.

I have thus converted my own estimates to GDP effects in order to have an attempt to calculate the effect on GDP. I corrected my previous estimates for several issues:
1) Electricity power cuts will be less severe thanks to T/C power. Hence time spent off work for those affected was reduced to just two hours a day (5 day working week).
2) I added the urban effect of Nicosia, which suggests that more people come to work in Nicosia from areas that might have uninterrupted electricity, by increasing the affected rate of Nicosia labour from 80% to 89%.
3) I argued that since Gross Fixed Capital Formation (i.e. creation of new capital) was 2.8 bn in 2010, it is not possible to invest more that 500 million to repair Vassiliko until the end of the year.
4) Thus there is a positive effect of rebuilding Vassiliko of 500 million, with its positive multiplier mean there is a positive GDP effect of 746 million.
5) I have also argued that the reduction of the capital to labour ratio will reduce our growth. If 30% of Growth is from capital deepening, and since capital stock took a hit of 6% due to Vassiliko and other failures of stock, then a reduction of the expected growth rate by 0.30% is very likely.
6) I added the cost of IT repair and IT systems after the demand of friends who constantly complain about this issue. I argued it only affects Tertiary companies and it affects then by raising costs (and hence intermediate consumption) by 0.005%. Let me know if this is valid or if it should be removed since it is a transfer payment between industries.

The results are shown below:


The effect is bad. I fully stand by my numbers and argue that at best we scrape with -1.5 / -1.7%% of GDP for 2011.

However i would not be a good researcher if I did not indicate what can alleviate the losses:

1) Faster, uninterrupted power supply. The above is based on regular power back on the the 18th of December. A faster power normalcy will can dramatically reduce the GDP impact.
2) A faster reconstruction of Vassiliko than the 500 million I suggest until the end of the year.

Here I would like to appeal for help. I have a very old input output table, and crappy capital stock and growth accounting for Cypriot growth. Being a fan of crowd sourcing I appeal anyone with relevant information to send it my way and we can work together.
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Monday, 18 July 2011

A fuss over the 3 bn number. It is a valid and worthwhile estimation, but we need to understand what it is.

An explanation of the 3 bn cost of Vasiliko.

There has been a good load of fuss over the number 2.9/3.1 bn. euro of my 2nd and 1st estimate respectively. I must re-iterate that this number is the reduction of Wealth Of Cyprus. What is the difference between reduction of wealth: this combines the loss of capital stock like Vasiliko in addition is showing losses of income.

In an odd way if only the losses of income where estimated first, people might have been puzzled why repairing Vasiliko would be positive for the income of the economy.
For economists, I will provide today a cost and benefit analysis in terms of GDP.

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Sunday, 17 July 2011

Article in Greek Presenting the Second Estimates At Kathimerini On Sunday

This is an article written by Michalis Perisianis and my self that explains the 2nd estimate and its impacts in Greek. It was published in today's Kathimerini.

My interview of CYBC on Saturday night on the Costs of the Naval Base Explosion

Calling for a debate and research on the cost of the Naval Base explosion and the Urgent action to be made on the naval base disaster. Things can be changed today, but once again brave but urgent decisions are being postponed.

2nd estimate on "best case" cost estimate: 2.9 Bn euro

This is the second estimate of the Cost of the Naval Base explosion using several different sources and internalizing many things that very previously exogenous. I still come to within 5% of the original estimate. I want to thank Michalis Persianis at Kathimerini and Manos of LolGreece for all their comments and help.

Once again this is a preliminary and rough estimate that that is here to show the "best case" scenario and to begin a debate on how to tackle the calamity. That I came within 5% of the original with different sources makes me more confident that this is the Lower Bound cost. Most international commentators argue I am much to conservative and that the true cost of the "best case" scenario could be up to 30% higher.

------------------------------------------------------------------------------------

Our thoughts are to the families of the deceased at these moments, but it is important to quickly understand the effect of this apparent negligent homicide and get a public dialogue on the costs. I tried to make calculations based on energy intensity per sector, but being out of power today for more than six hours meant that I could not access vital data. Once again this is an effort to stimulate debate and not by any chance a final projection of costs.

Total damages are close to 3 billion Euros, or 17% of the GDP of 2010. Even if we delay fixing 2/3rd of Vasiliko until after Christmas, the burden to the economy just in 2011 will be 11% of GDP, with the additional 6% to be imposed on 2012.

I am ever more confident of this estimate, and have calculated a 30% confidence interval at a 95% level. I know this is rough, but if you notice have at least internalized some issues such as costs of petrol etc. that where previously exogenous. Once again I have again biased all figures against what I expected (a high result), so this should be seen as a conservative estimate.



1) Vasiliko Power station
There is increasing hope in salvaging one turbine and perhaps recovering some of the investment, but until we hear a cost figure I stink to a low estimate of the recovery and repair. We need to ask original builders, Austrian Energy and Environment, which built the first phase, and Ansaldo which built the second.

2) Loss of Work Hours in Nicosia, Limmasol and Pafos
We argued that not all areas are affected by the power cuts. Thus we decided to try and capture that by only having the power cuts affect some workers of the economy. We argue that based on the areas that power rationing exists at present, 80% of the Nicosia workforce, 50% of the Limmasol workforce and 60% of the Pafos workforce is affected.

The using the total workforce of the 2009 labour Statistics (376,300) we needed to calculate how much of this labour force is in each province (without having access to the internet due to another powercut). Thus we argued that the population per district of the latest Demographic report is representative of the labour force per district, as use the share of total population to find out the population share per district. This was used to find the total employment per district. Actually this is almost certainly an underestimate as the we actually know that the economic activity rate in Nicosia is about 9.9% higher than that in Limassol, according to the EU’s urban audit.

Thus the total employment per district was multiplied by the proportion of employed population affected per district to argue that 194,146, or 51% of the islands labour force will be affected.

We then used the labour survey of 2009 to estimate the average salary of the labour force per hour. We assume that salaries are constant since 2009 (effectively meaning negative salary growth) in order to bias the result downwards. The average salary of 2,130 euros per month is multiplied by 13 salaries to get an annual average salary figure. Then we estimated that with allowed time of work, the average worker works 40.2 hours a week for 50 weeks (taking out the large number of public holidays in Cyprus, to estimate the average labour hours worked. We then divide the average annual salary by the average hours worked per year to get a annual creation of value added of 16 Euros an hour. Again this is quite an underestimate as the labour cost per hour worked in Cyprus is considered on average as 17.43 Euros.

How much labour time is lost by the power cut? Based on research by Dr. Tim Leunig of the LSE on train delays, predictable cuts (delays) are better for people than the type of unpredictable power cuts we have been having, as one can plan to maximize his efficiency around the power outage. Since power cuts are unpredictable, we estimated that there will be power cuts at least until the last week of December, and that they will be on 3 hours a day for 5 days a week, leading to 360 hours of powerless working time for each affected labourer.

We then argue that the unpredictable nature of the cut does not allow you to be very effective during power outages, being able to produce only 20% of when you have electricity. Thus for every hour of lost time, on average 12.8 euros of value added are lost. So for each worker that is affected the lost hours from the power outage from now until resolution before Christmas costs the economy 4608 Euros.

Again this is very optimistic and almost certainly and underestimate. The cost of planned outages is estimated at one third to one tenth of unplanned ones in Thailand, about one fifth to a quarter in Nepal, or about one half in Sri Lanka, etc. International commentators have argued that even these figures are very conservative as it omits, in a knowledge-based economy, the impact of data and service outages. LolGreece argues that the additional probability of an IT company going out of business following a major data loss incident can create additional significant costs.

By multiplying this by the amount of workers affected we get a staggering loss of the economy of 894,628,513 Euros of lost value added.

3) Additional loss due to Multiplier effect of no.2 (same for 5,7,9,13)
The loss of value added has cumulative effects the economy. Each 1 pound placed in the economy created more than 1 pound. Alternatively each 1 pound loss of the economy will reduce the income of the GDP by more than 1 pound. Using the input/output of the Cypriot economy we can then estimate the additional loss for the economy. Thus for 3, 5, 7, 9, 13 I calculate the knock on effect of the reduction of income when it is resolved through the economy of each cost.

However the Republic of Cyprus does not release its newest Input/ Output tables, and as a result the only publicly available input-output table is shamefully from 1986. Thus I reduced the multiplier effect to lower numbers (biasing against a high figure) to take account of the increased import dependence of our economy since 1986.

4) Loss through increase electricity cost (50% rise) primary and secondary sector(excluding Utilities), and 6) Loss through increase in tertiary sector

The Cyprus Electricity Authority can in no way absorb all the cost of the smaller and hence expensive units that are in use today due to Vassiliko being knocked out. In addition many companies have to rely on alternative power sources such as generators to keep operating even basic systems going. Thus the cost of electricity for companies and households will increase, despite any suggestions to the contrary. A brief survey found that electricity is approximately 4% of cost in the Secondary sector and 2% in the Tertiary sector. An increase in the cost of electricity by 50% (partly increased unit costs and partly cost of rebuilding) will thus lead to a reduction of the value added, as cost will jump by 2% in Primary and Secondary, and by 1% in the Tertiary sector. Thus assuming all else is constant (i.e. value added of 2010) there will be a reduction to the value added share due to the increase cost (2% or 1%) of electricity Production.

Once again LolGreece is correct to argue that we need to add to the estimate some cost consequences of other power plants running at high capacity levels, as indeed we have already experienced system failures through the overload on Friday. This can lead to more costly more maintenance and the increase the frequency of outages.

8) Loss of Utilities value added

All major utilities are affected, with electricity generation being the first. We estimate the loss of value added as 40% for the last six months of this year. This is based on estimates of increased cost per unit of electricity produced (i.e. a reduction of the value added share of electricity, as more of the gross output is cost), and of a reduction of electricity capacity. Similar reductions are expected on all major utilities, water / sewerage, as they are also main clients of electricity and hence very much affected by this crisis where our electricity maximum capacity has fallen below our demand for electricity.

It must be clear to all that there is no doubt that the income created by the production of electricity has been reduced as even if we come to our previous capacity the power currently produced by Moni, Dekelia and auxiliary sources, cost much more per MW hour to make than Vasiliko, as power plants have very large economies of scale in production.

11) Diverted resources of police, army, fire-fighters etc.

The diversion of police, army and fire fighters due to traffic duties, helping trapped visitors and gassing peaceful protesters diverts police time. I arbitrarily picked a low number for the overtime and additional work load based on high overtime wages

12) A fall of 1% of hotel occupancy rate due to tourism cancelations

Using estimates I devised in another project that attempts to measure economic interdependence between the communities in Cyprus, I have an estimate of how a 1% in occupancy rate impact the hotel and restaurant sector. Notice I am only suggesting a very small decline in occupancy and not a mass exodus of tourists – just a reluctance of a small number to come to Cyprus after the negative publicity.


Things I have not estimated include: Increase in insurance premiums due to increased car crashes (traffic lights are out); cost of repairing the damage to the villages around the base; cost of rebuilding the state of the art base that was destroyed; cost of compensation to victims if negligent homicide is proven; additional deaths caused by heat during power blackouts during the expected August heat wave; additional cost of health provision for the injured of the accident and of the accidents due blackouts; Machine degradation and IT support due to system shutdown and failure.

Saturday, 16 July 2011

Congratulating the Communal Chamber of Commerce

****I am not saying that the government did not aid the Chamber for this agreement to happen; all I am pointing out that a braver decision was to be candid about our energy means and do it directly****

The Cypriot Chambers of Commerce have reached an agreement in providing at least 70 MW of electricity from the Turkish Cypriot power station. This is the greatest relief for the economy and once again the private sector has steeped up to make decisive steps where the government prevaricated.

Electricity was always provided across the green line from the Republic of Cyprus to the Turkish Cypriots - this needed no involvement of the private sector and it went without saying that no one in the Turkish Cypriot Community thought that this entailed recognition of the sovereignty of Republic.

However the latest request to receive electricity was made in a major political issue by the government adding provisos that were not necessary, such as stating that this would take place only if it would not entail recognition.

That last statement shows lack of knowledge about the issues of the Cyprus problem. It is endemic of the lack of a clear line given top down to the whole government apparatus in how to behave in communal matters. There are very clear things that entail recognition, and also clear what things led to recognition. The republic and the Turkish Cypriot communities have constant interaction about day to day issues. In fact more informal interaction needs to be encouraged: Is it better to let a murderer run away because you do not want notify the police of the other community that he fled across the Green line? The answer is no - informal negotiations for mutual benefit happen even between parties at time of war.

However the government prevaricated, making a non-political issue political. Once again the Chambers of Commerce have shown that it can step up where the government prevaricates. It has secured a deal that saves us for a looming disaster: the existing electricity capacity is failing under the strain. The diagram below
explains the issue.



Our productive capacity has been suffering from using it 100% all the time and its falling to even less than 40% of what we had before the accident. From having a problem between the hours of 11 and 6 we now have a problem from 7:00 to 1:00 at night. We are not just in crisis in peak periods any more: we are in crisis in all the productive periods!.

EUROKO (and DHKO's Nikos Papadopoulos) are pandering to the masses saying that we do not need the T/C power. This is an outright lie. The loss of man hours through unpredictable power cuts is approximately 1 billion alone. This is only until December: Any further delay will increase the cost and the recession of the economy will deepen.

The new generating equipment for Israel and Greece will only provide at best 10% of T/C electricity. EUROKO (and DHKO's Nikos Papadopoulos) are being totally irresponsible in arguing that rationing or other sources can lead to an increase in capacity: T/C power is the best way to stop our economy bleeding to death. In a national crisis, we all need to stop and think of the consequences of what we are suggesting: EUROKO, by rubbishing the agreement, effectively tells us that even greater electricity rationing and much harder economic hardship is worth it, even if there is no issue of recognition. This is unacceptable behaviour.

The best and immediate way to get electricity is the solution that did not have to be political and that a prevaricating government let the private sector to finalize. Well done the Chambers of Commerce on both communities: showing us that tough times needs rapid and brave decisions.

Friday, 15 July 2011

The Macroeconomic costs of the Naval Base blast

In this third article on the “E Florakis” base I will consecrate on the macroeconomic problems that arise from the disaster. Just to recap, up to now we have seen the very serious microeconomic effect to companies, and that the lowest estimate possible of costs of the disaster is €3.1 billion, or 17.9% of the whole income of the economy (GDP).

Sadly this only captures what we call the static costs of the accident. This only takes account of income lost until the damage is fixed in the electricity generation and in fixing the generating capacity of Cyprus. However, experience has shown that the dynamic costs on the economy can be much more significant, and still have an effect in the economy after many years.

The dynamic costs will reduce not just income today but create conditions that keep the growth of income of Cyprus lower than it would have been. I will focus on three issues: Inflation, Reduction of Capital intensity, and national debt.

1) Inflation:

The electricity produced either by the existing stations or through generators is by far more expensive to produce that the (relatively) cost efficient Vassiliko power station. At times like this the emphasis on basing our energy future on carbon based power stations rather than diversifying in renewable energy is clearly seen for what it is: totally myopic. The cost per MW hour of many of the power sources currently used to make electricity are more expensive than renewable resources, resources for whom funding was partially reduced in an effort to cut costs in the last 2 years.

Part of this additional cost of electricity will be passed to the consumer: it is not possible for firms and the electricity authority to absorb this added cost in their entirety as they have already been struggling due to the economic crisis. An increase of fuel bills though a hike in electricity bills or indirectly through emergency taxation, is unavoidable.

Thus prices will increase (i.e. inflation) across the board, and inflation tends to create a self fulfilling cycle of further inflation in the future. This increase in prices will have two main effects that will create further downward pressures in our total income (GDP). The purchasing power of the income of those working in the private sector will fall, reducing consumption and thus further reducing the expenditure that keeps the economy afloat. More serious is the second possible effect of a reduction to competitiveness. An increase in prices makes all our products and services less competitive relative to other EU countries, who can freely export to Cyprus. Thus imports are expected to increase while exports fall, making it very difficult for the economy to find the road to recovery.

2) Reduction to capital intensity

Economic growth depends on many factors, but the most important are considered increases in capital (both human - education and physical - power stations) and the adoption / generation of technology. In my first article I explained how the lack of power is slowing down the rate of technology adoption (or even at times making people go to older less efficient technology, like analogue phones). This will reduce the rate of economic growth in the future, as long as our electricity needs are not fulfilled.

More serious is the loss of capital intensity, or the amount of capital per worker in the economy. According to all theories of economic growth (Unified Growth Theory, Endogenous Growth Theory, Neo Classical Growth theory) the increase of the amount of capital per worker is the single largest component of economic growth and prosperity. Simply put, a man with just a needle can only sew one shirt a day, but with a sewing machine (more capital per worker) he can produce much more. Using a personal example i cna relate it to what we are experiencing today: I am writing this by candle light, without internet access.

The destruction of the largest investment project of the island though ineptitude lead to a mass reduction in capital intensity. It is not just that the capital stock of the economy is poorer by €2 billion euro. It is also the fact that so much capital is lain dormant at as the unexpected power cuts prevents their use.

All growth theories argue that a reduction of capital intensity can lead not to just lower growth, but in extreme cases it can lead to a reversal of the growth process. This is by far the most serious consequence of the blast: it reduced not just our current capabilities for growth, but our future capabilities for growth as we need an ever greater amount of capital to reach the capital to labour ratio that we had on the 10th of July, since our population keeps rising.

3) National debt

The debt we will need to incur for Vasiliko alone is in excess of 1 billion; even if we assume that the insurance will pay 600 million despite not being an act of god or war damage. This is debt was not projected for 2011 and for 2012, and the ability for the government to borrow both from domestic and for external markets was already being questioned before the accident and the additional need to find resources to rebuild the damage. The issue is how the government can raise the money for repair without raising too much debt, and without lowering the GDP. Both are crucial as Debt to GDP (Debt / GDP) is a measure used by international markets and the EU to judge solvency of a country.

The choices of the government are thus as follows:
a) Appeal for aid: This will be ineffective our traditionally major aid donors (US, UK, Greece), since they are already in debt trouble of their own. EU aid is a possibility.
b) Save: An emergency withholding of 5% of government wages to be used to repair Vasiliko will have little impact in terms of GDP as additional revenue created by the government wage bill (i.e. the multiplier effect) is very small.
c) Tax: Taxation will need to go up, but as taxation reduces output, this can actually still increase the debt to GDP ratio as the economy will shrink further.
d) Borrow: It will be at much higher rates that previously; thus government will still need to save through a reduction of government wages in order to afford the repayment of the debt. It will also lead our debt to GDP ratio at close to the levels seen in other Eurozone countries when they requested EU/IMF bailouts and hence we will be running the risk of handing fiscal control to outside organizations.

Choice A and B are by far the “least bad” choices. We must remember that even before the explosion we were talking about the need to lower wages in the government sector: this negligent homicide has me convinced that the best policy right now is an across the board reduction in wages, for both the government and the private sector, bit with an greater cut for the government employees.

This is not unprecedented in face of disaster; union agreed a large pay cut and an increase in hours worked after the 1974 invasion and it must be understood that what happened in the 11th of July is the second biggest calamity faced by Cyprus since independence.

A reduction in wages (especially if wage indexation is suspended until Vasiliko is repaired) can aid both with inflation low, and the reduction of the wage bill will allow for repair expenditure at Vasiliko.

What can we due to reduce this Macroeconomic costs:

1) Buy Cypriot:

Our producers of goods and services will need support since they are now competition with other EU countries while facing power cuts and higher costs.

2) Regular and planned power cuts:

The cost of planned outages is estimated at one third to one tenth of unplanned ones in Thailand, about one fifth to a quarter in Nepal, or about one half in Sri Lanka, etc. Planned outages reduce the microeconomic and macroeconomic consequences of the loss of Vasiliko.

3) Set up an Escrow account for repair:

The civilians, companies and government officials that might be requested to make monetary sacrifices will need to feel that such sacrifices are not misused. A separate account from central government accounts needs to be created, with deposits only being withdrawn if they are to be used to repair the effects of the calamity. This account needs to be transparently managed, allowing the people to make the sacrifices without feeling that accounts are misappropriated (i.e. it is not being used for dental work for government officials).

4) Wage reduction:

The government unions must now understand that there is not choice: the only real savings that can be made in the government budget, is a substantial reduction of the pay scale at all levels. This is the “least bad” way of financing reconstruction as it calms the markets and prevents us going to the international markets with a large amount to borrow. PASIDI, OELMEK and other government unions need to realise that the most patriotic think is to allow the government to withhold a 5% of their monthly wage in an Escrow account to rebuild Vasiliko, or else the whole economy will be in much greater danger of default.

5) Immediate debt restructuring:

We do not need to wait until we are in the position of Greece to ask the private sector to come to a new, more favourable deal with the government for the existing debt. Even if we can reduce debt repayment by 1% through such voluntary re-negotiations, this can release valuable funds for the immediate repair of the damage.

Sadly all of the above needs a government that is willing to be innovative and acts decisively fast, and the events since the 11th of July seem to indicate that the present government seems incapable of taking accountability, acting rapidly and being brave.

Thursday, 14 July 2011

Αγανάκτηση

‎"καλύτερα στη μπανανιά κι ας τρώω μόνο μπανάνες" - Ιντα τόπος είμαστε σιορ..



Θ’ ανέβω σε μια Μπανανιά
Στην πόλη βρήκες δουλειά
και στο καψόνι σ’ έχουν ταράξει
τρέχεις για αλλωνών λεφτά
κι εσύ δεν έχεις βενζίνη στ’ αμάξι
Σπίτια ,νταηλίκια ακριβά
κι έτσι μένεις σε μία τρύπα
όλοι άγνωστοι στη γειτονιά
δεν ξέρεις ούτε τον δίπλα
Διασκέδαση ,δύο ποτά
κάθε Σάββατο σ’ ένα μπαράκι
να του πει να πας σινεμά
Κυριακή,τι πίκρα παιδάκι
κι εγώ
Θ’ ανέβω σε μια Μπανανιά
και θ’ αρχίσω να τρώω μπανάνες
καλύτερα στη μπανανιά
κι ας τρώω μόνο μπανάνες
Θ’ ανέβω σε μια Μπανανιά
και θ’ αρχίσω να τρώω μπανάνες
καλύτερα στη μπανανιά
κι ας τρώω μόνο μπανάνες
καλώδια στην κίνηση με κόρνες
κάμερες και μπάτσοι στη χρονιά
εκμετάλλευση, βαράς διάλυση
πάμε μαζί στην Μπανανιά
Άτοκες δόσεις, υποχρεώσεις,
δε φτάνουν τα λεφτά
ακρίβεια, κι εσείς τα ίδια,
ανέβα σε μια Μπανανιά
Θ’ ανέβω σε μια Μπανανιά
Με το ευρω σου πατάνε καλά
σου πίνουν το αίμα, μα ο χρόνος κυλάει
κυβερνήσεις πέφτουν,απο αυτες περιμενεις
τα θες κ τα παθαινεις
όλοι τα ξερουν κ ολοι τα κραζουν
ολοι μιλανε κ ολοι φωναζουν
οι ιδιοι σωπαινουν, οι ιδιοι βελαζουν
μολις βολευτουν, αραζουν
κ εγω
Θ’ ανέβω σε μια μπανανιά
και θ’ αρχίσω να τρώω μπανάνες
Καλύτερα στη μπανανιά
Κι ας τρώω μόνο μπανάνες
Θ’ ανέβω σε μια μπανανιά
και θ’ αρχίσω να τρώω μπανάνες
Καλύτερα στη μπανανιά
Κι ας τρώω μόνο μπανάνες
Δικτυο, καλωδια, στην κινηση με κορνες
καμερες και μπατσοι στη γωνια
Εκμεταλλευση, βαρας διαλυση
Παμε μαζι στη μπανανια
Άτοκες δόσεις, υποχρεώσεις,
δε φτάνουν τα λεφτά
ακρίβεια, κι εσείς τα ίδια,
ανέβα σε μια Μπανανιά

Excellent Review by Finance Lecturer, Alexander Michailides. This insanity goes right to the top.

Original source: Stockwatch 14.07.2010
http://blog.stockwatch.com.cy/?p=580
By: Dr. Αλέξανδρος Μιχαηλίδης

Αξιότιμε Πρόεδρε της Κυπριακής Δημοκρατίας, κύριε Δημήτρη Χριστόφια.

Επειδή έχετε στο πρόσφατο παρελθόν ενθαρρύνει τα παιδιά του γυμνασίου να έχουν και να εκφέρουν άποψη, πιστεύω θα θέλατε και τους καθηγητές πανεπιστημίου να εκφράζουν και τη δική τους άποψη.

Επειδή τα εκρηκτικά στο Ζύγι σκόρπισαν το θάνατο και άφησαν την Κύπρο χωρίς τη μισή της ηλεκτρική ενέργεια στην πιο κρίσιμη στιγμή της οικονομίας μετά το 1974.

Επειδή δεν μπορείτε να πείσετε τους πολίτες ότι είτε δεν είχατε γνώση του προβλήματος, είτε ότι δεν χρησιμοποιήσατε το φορτίο σαν μέσο άσκησης εξωτερικής πολιτικής.Επειδή η δικαιολογία «Ο Πρόεδρος δεν γνώριζε» δεν είναι ούτε πιστευτή, ούτε αποδεκτή.

Επειδή η κυβέρνηση χρειάζεται επαγγελματίες σε όλα τα επίπεδα για να ελπίζει ότι θα μπορεί να δουλέψει επιτυχημένα, δεδομένης της πολυπλοκότητας διακυβέρνησης μιας μελλοντικής ομοσπονδιακής χώρας με τους Τουρκοκυπρίους.

Επειδή επαγγελματίες όπως ο Αθανάσιος Ορφανίδης (Διοικητής της Κεντρικής Τράπεζας) και η Χρυστάλλα Γιωρκάτζη (Γενική Ελέγκτρια) δεν έχουν διοριστεί από εσάς αλλά από τους Τάσσο Παπαδόπουλο και Γλαύκο Κληρίδη αντίστοιχα.

Επειδή αντί να προστατεύετε τους πιο πάνω επαγγελματίες, είτε τους υπονομεύετε (Ορφανίδη) είτε τους αγνοείτε (Γιωρκάτζη).

Επειδή οι ανάλογοι διορισμοί από σας είτε δεν εμπνέουν το κοινό (Παπασάββας), είτε δεν έχουν τα ανάλογα προσόντα (Χριστοφόρου), είτε έχουν παραιτηθεί υπό την κατηγορία για διαφθορά (Μολέσκης, Βάσος Γεωργίου), ενώ συμβάντα όπως η «απόδραση» Κίτα δε βοηθούν την εικόνα της διακυβέρνησης.

Επειδή δεν βασίζεστε σε αξιοκρατικά κριτήρια για τους διορισμούς σας. Αλήθεια, ο κ. Χάρης Θράσου ήταν τόσο καλός υπουργός Συγκοινωνιών κατά τη διάρκεια του ατυχήματος της Ήλιος που έπρεπε να τον επιβραβεύσετε με το διορισμό στην προεδρία της ΑΗΚ;

Επειδή ο κομματισμός οδήγησε την Ελλάδα εκεί που έχει οδηγηθεί και το χρώμα της κομματικής ταυτότητας από μόνο του (είτε αυτό είναι κόκκινο, είτε μπλε) δεν θα οδηγήσει ποτέ σε αποτελεσματική διακυβέρνηση.

Επειδή η αναβλητικότητα και αναποφασιστικότητα στην εισαγωγή μέτρων για την οικονομία είναι παρόμοιας μορφής με τη διαχείριση του φορτίου. Και όπως για το φορτίο σας τα έχει γράψει στην έκθεση της η κα Γιωρκάτζη, για την οικονομία σας τα έχει γράψει τουλάχιστον ο Διοικητής της Κεντρικής εδώ και πάνω από 2 χρόνια.

Επειδή όπως ο λαός δεν ξεχνά τι έγινε στις 15 Ιουλίου 1974, ο λαός δεν θα ξεχάσει τι συνέβηκε στις 11 Ιουλίου 2011.

Επειδή δεν αμφιβάλλω ούτε για τη δική σας τιμιότητα, ούτε για τον πατριωτισμό σας, ούτε για τη θέληση σας να προσφέρετε στον τόπο. Λανθασμένοι χειρισμοί όμως είτε από άγνοια, είτε από ερασιτεχνισμό, είτε από περισσό γινάτι, παραμένουν κατακριτέοι.

Επειδή η προσπάθεια της κυβέρνησης να αποδώσει αλλότρια κίνητρα στους επικριτές της δεν είναι μόνο προσβλητική για τους πολίτες, αλλά δείχνει και μια ανησυχητικά επικίνδυνη αντίληψη και ερμηνεία των πραγματοποιηθέντων γεγονότων.

Επειδή έχετε απωλέσει την εμπιστοσύνη των πολιτών ότι μπορείτε να κυβερνείτε αποτελεσματικά τη χώρα.

Επειδή αν παραιτηθείτε ίσως να διασώσετε την υστεροφημία σας. Σαν ο πρώτος πρόεδρος που παραιτήθηκε για να αλλαχτεί το σύστημα και να βάλει πίεση στον επόμενο πρόεδρο να ακολουθεί αυστηρά αξιοκρατικές διαδικασίες. Να βάλει τέλος στους ερασιτεχνισμούς, τέλος στον κομματισμό και τέλος στο ρουσφετισμό.

Για όλα αυτά τα επειδή κύριε πρόεδρε, σας καλώ να παραιτηθείτε και να προκηρύξετε άμεσα προεδρικές εκλογές.

Ο Αλέξανδρος Μιχαηλίδης είναι καθηγητής χρηματοοικονομικών στο Πανεπιστήμιο Κύπρου.

Wednesday, 13 July 2011

Counting the cost of the disaster of Naval Base / Vasiliko Power station

*****These are very rough estimates done in a day to get a dialogue on the issue. Improvements, suggestions and criticisms are welcome****

This second article is a very rough, “back of the envelope” attempt to understand the monetary cost of the disaster. It is the first such attempt and no doubt better attempts can be made once we know more facts about Vasiliko, and once I have electricity in my office so I can use the internet to collect data.

In order to defray criticism of scaremongering, I have consciously decided to be completely open in how I come to these numbers, and use the lowest possible estimates in order to bias myself against a high cost.

Unfortunately even with such a negative bias I could estimate the cost of the accident at 3.1 billion Euros, well over 18.5% of the whole income of the Economy in 2009. This is huge: it is the largest ever cost suffered by the economy of Cyprus since the 1974 invasion.



Below I will try and explain how I derive each number:
1) Cost to rebuild power station:

We are still unsure of this but there have been suggestions of 1 to 2 billion euro and thus I took the average of these numbers. No doubt we will know this when a full evaluation of the situation is completed.

2) Loss of electricity Value Added (50% of 2009 Value added)
There is no doubt that the production of electricity has been reduced. Thus the gross output of electricity has also been reduced, reducing the total GDP (income) of the economy. In addition the power currently produced by Moni, Dekelia and auxialiary sources, cost much more per MW hour to make than Vasiliko. Hence the created income (i.e. value added) of each unit of electricity is much less.

3) Loss of income through Multiplier due to loss of electricity

The loss of value added has cumulative effects the economy. Each 1 pound placed in the economy created more than 1 pound. Alternatively each 1 pound loss of the economy will reduce the income of the GDP by more than 1 pound. Using the input/output of the Cypriot economy we can then estimate the additional loss for the economy.
4) Lost man-hours

Once again the most conservative estimates were used. I estimated that less than 1/3 of the labour force (I used 100,000) will lose 2 hours of productive work per day for only 12 weeks. I also reduced the lost productivity to just 23 euros an hour. This is a major underestimate and no doubt with more data and and understatement of how long these shortages will be taking place this cost could rise and be as big as the reconstruction of Vasiliko.

5) Diverted resources of police, army, fire-fighters etc.

The diversion of police, army and fire fighters due to traffic duties, helping trapped visitors and gassing peaceful protesters diverts police time. I arbitrarily picked a low number for the overtime and additional work load based on high overtime wages.

6) Reduction of Manufacturing by 1% / 8) Loss of Tourism by 1%

I wish I could do better here by knowing the proportion of cost of electricity to manufacturing. As I do not I just assume a 1% fall in production.

7) Loss of Income through Multiplier due to loss of Manufacturing / 9) Loss of Income through Multiplier due to loss of Tourism

The loss of value added has cumulative effects the economy. Each 1 pound placed in the economy created more than 1 pound. Alternatively each 1 pound loss of the economy will reduce the income of the GDP by more than 1 pound. Using the input/output of the Cypriot economy we can then estimate the additional loss for the economy.

11) Destruction of products 0.005% of retail

Another very difficult estimate – until i have state from companies I arbitrarily said that 2.5% of value added of food retailers is consumed by the cot of wasted products, which is approximately 20% of the retail sector’s value added.

12) Increase in cost due to more petrol imported + imported machinery

This is very speculative. I need more time to look at cost of petrol and of generators but i think this is an underestimate.

Tuesday, 12 July 2011

A first Microeconomic analysis of the disaster in the Naval Base and Vasiliko Power station.

*****14/07/2010 update: substantial aid in terms of electricity expected from UN force in Lebanon (Germany) and Greece. Expected to alleviate partially the effects below, especially if they pay their costs of production.

The economic effects of the apparent negligent homicide in the “E. Florakis” naval bases are immediate and far reaching. I will concentrate on the microeconomic consequences here, but i am hoping to expose the macroeconomic effects as well as the criminal, political and psychological damage in further articles.

Economically speaking the effects where the tragic loss of life (which needs to be compensated as their death was apparent homicide), the loss of skilled workers and the damage to our electricity network.

The Vasiliko power station is gone. This event is the largest negative shock to our economy since the Cyprus invasion of 1974. One could ask how is it possible that in a country living under the threat of a possible war, our capacity to generate electricity was centered on just one source. Although the plant was 60% of our capacity, it must be realized that it was by far the cheapest source of energy on the island, and hence its 60% was almost always in use. The graph below (from the transmission system operator) indicates the seriousness of its loss.



The ability to produce electricity was about to receive a massive boost from the unused new power unit at Vasiliko, comfortably being capable in boosting production to above 900 MW hours, the average peak demand in the summer. The destruction of the power station (and the new and unused power unit) meant that we are suddenly not in any position to satisfy the projected summer demand of 900MW, since our maximum capacity has been cut way below the peak demand for electricity. Even if the projected capacity rises over time, we are doomed to still face power cuts and disruptions since no electricity grid can operate without some capacity going offline for repairs and maintenance.

So despite the government’s encouraging announcements is it very clear that we will be in this situation for at least a year: barring building a new power station in record time, the measures suggested by the government can only provide an additional 10/100 MW each. Floating electricity plants can provide more than 200MW which would ease the situation, but such big electricity systems can really operate in very calm waters (i.e. rivers) and in areas where the electricity infrastructure has been adapted to its use; we will need to construct the capability to house such a unit, which might take 6 months. They are also usually very expensive to run and maintain, as the experience of Pakistan shows.

The dire situation is confirmed when one looks at the electricity consumption of this week last year, shown below:



Assuming the fact that we can operate at full (750MW) operating capacity at all times, we could not cover the electricity needs of last year needs during the weekdays, as demand in peal time is way above our cut off of 750MW.

However the cost of this explosion does not just affect in terms of rebuilding, compensating and repairing. The dynamic effects on companies will ensure a return to recession, especially if you factor in the effects of the electricity crisis is having in Cypriot companies. The electricity shortage causes three devastating blows to our economy: Reliability, Capability and Cost.

The lack of Reliability in electricity provision provides a great drag to the economy. Already power cuts are taking place and sadly it seems that since our electricity system is operating in full capacity the authorities have not been able to announce when and where such cuts should occur. As a result business are already suffering from lost labour time, repairing software and hardware issues relating to cuts, and an ever greater need for technical support, all in a period where the focus has been to cut costs and thus remain competitive to other European companies, who can operate freely in the EU market without having such reliability constraints.

The lack of reliability makes the desire for the imposition of Flexible working hours immediately. Government offices especially should move to working hours that go around the peak time, and thus reducing the load on the network. There should be an immediate agreement with the unions to adopt the model of the Cyprus Central Bank, where staff is in several shifts with varying starting times, from 8:00 to 12:30 and various leaving times from 5:00 to 8:00. This will spread electricity demand enough to ensure we stay below our maximum capacity and this will aid in reliability. The electricity authority should also release a schedule of cuts as soon as possible, and emergency legislation should be put in place to allow companies to schedule working time around these cuts without fear of union action for as long as the shortage in electrical capability is an issue.

The second is electrical capability. This in an issue usually faced by Less Developed Countries, whereby several innovative ideas and machines can fail due to the fact that electricity is rationed. Electricity is what we call a “general purpose” technology: it allows for other machines and people to make their jobs more effectively. Any restriction in our ability to use electricity also restricts our ability to use other machines, which are constructed for countries where electricity is not a rationed good. As a result the rationing of electricity lead to a slower dissemination of productive technology in the economy.

A good example of our diminished capability and the additional cost to society is the traffic chaos that the electricity cuts have been causing, since traffic lights switch off, causing accidents and delays, and needing an ever greater number of traffic officers diverted from more important duties.

The third and most pressing issue is cost of the current electricity provision. Power stations have massive economies of scale; this means that the cost per unit of electricity produced gets cheaper and cheaper the bigger the power station. Vasiliko was the biggest (and most modern) power station we had in Cyprus, and thus it produced the cheapest electricity per unit. The remaining power stations were effectively backups to Vassiliko: their cost per unit of electricity was much higher, and their capacity was effectively only used when the power needs were higher than Vasiliko’s capacity to cope. In addition running such factories at 100% of their capacity dramatically raise costs, as staffing cost rise and the necessity to expedite spare as well as putting less efficient generating machines online.

So the raising of the cost of production leads to the big issue that all politicians avoided: A new increase in the electricity bill of Cypriots is inevitable, as the Electricity Authority, who has also posted large losses and has already substantially increased the electricity bills of consumers by 30% in April.
Let us be clear: this is not an additional cost to repair (or rebuild) the Vasiliko power station. This is additional cost that we have to pay for the current electricity we receive from other sources, now that the cheapest source of electricity has been destroyed.

This is the most terrible news for our economy. When companies are faced with increased cost of production, the reduce the quantity the produce at any price. If the company was willing to produce 1,000 shampoo bottles for €2 euro, it will now have to produce less if the market price remain the same. The result is more companies on the verge of bankruptcy and more unemployed workers, just as the economy is struggling to get back on track after the recession.

This accident has singlehandedly led us back into a recession, with very serious consequences both for our level of unemployment, our society and our credit rating. Quick, decisive action is needed. In a crisis a government that leads with brevity, rapidity and open to radical solutions can act as a positive catalyst. Sadly, the 3 years in power show that this government lacks, the strength, will and ability to do anything drastic.