Saturday, December 31, 2011

Government vs. Private Incentives

From an article discussing the recent natural gas find by Noble Energy:
Communications Minister Efthymios Flourentzos struck a note of optimism, saying that as a public listed company, Noble would always announce a more conservative estimate of the quantities of natural gas, so as not to run afoul of the New York Securities and Exchange Commission.
So what? Does that mean that a government company would announce a much more liberal estimate because it would not be penalized at all for being wrong? That sounds an awful lot like the rest of government functions.

Further in the article:
University of Cyprus professor and member of the group of experts appointed to advise the government, Panos Papanastasiou agreed, saying the find was "possibly the second largest offshore gas find in the last decade".
"Companies are usually conservative. They don't announce figures and then downgrade them because they run the risk of being penalized,"  Papanastasiou said.
It almost sounds like there is no easy way to hold a government agency or company accountable (i.e penalizing) if they make a costly mistake or misrepresent matters. Call me a cynic, but people are still under the delusion that government officials and employees are public servants.

Also in the article:
The minister added that some sort of national company needed to be created to manage the existence of hydrocarbons in Cyprus' EEZ, giving the state a "decisive role" in wealth management.
With all due respect, why? A national energy company gives too much incentive to the government to perform mischief, taking the proceeds from exploration and production and wastefully spending on social programs, neglecting necessary reinvestment in fields to maintain production. See Venezuela, for example, where oil production is declining and they can not get international investors interested, though you would think that with them producing oil, they could surely fund reinvestment to maintain a cash flow stream... except for those social programs!

The private sector would run the exploration and production better because they at least are accountable to shareholders (corporations have the agent problem, but governments are the ultimate example of the agent problem), and would probably maximize resources extracted from the field. The government can just take its royalties and taxes and be happy without having to manage a company.

Except, of course, if Cypriots want more government involvement in their lives through a national company adding significantly to the coffers, resulting in a government likely to lavish them with social programs and handouts. If they want to disincentivize themselves even more from self-reliance, then I suppose they deserve the government they have. They will likely realize too late what a mistake that would be.

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