By Erol Riza
Whilst the Cypriot private sector with government support has in the past managed to adapt and recover in former crises, a new approach is needed this time as government will be more important than ever before.
For the second time in a decade, the government has been called upon to make decisions and medium term planning for a credible and EU-accepted road map to bring the Cyprus economy, which has depended for decades on external demand, to a new age which implements sustainable investments and the introduction of digital transformation.
The Recovery and Resilience Facility (RRF) established by the European Council must be embraced by the government and the private sector for what it offers is a way out of the current difficulties and the hope for a more resilient economy. In order to be eligible for the loans and grants, the EU Commission will scrutinise plans submitted by member states and funds for eligible projects must be approved by the EU and not by the Cyprus authorities.
The RRF is Pillar 1 of the Next Generation EU which includes loans and grants; there are three pillars, and these can be viewed on the Commission’s website. Grants are frontloaded and Cyprus will receive 764 million euros for years 2021-22 and 204 million euros in 2023.
In fact, the EU Commission has provided member states with guidance on how to submit their plans for funding and grants. This is set out in a paper which the Commission has published, and it is a template for the plans to be submitted by member states.
The EU Commission website states the following:
Based on their relevance across member states, the very large investments required, and their potential to create jobs and growth and reap the benefits from the green and digital transitions, the Commission strongly encourages member states to include in their plans, investment and reforms in the following flagship areas:
- Power up – The frontloading of future-proof clean technologies and acceleration of the development and use of renewables.
- Renovate – The improvement of energy efficiency of public and private buildings.
- Recharge and Refuel – The promotion of future-proof clean technologies to accelerate the use of sustainable, accessible and smart transport, charging and refuelling stations and extension of public transport.
- Connect – The fast rollout of rapid broadband services to all regions and households, including fiber and 5G networks.
- Modernise – The digitalisation of public administration and services, including judicial and healthcare systems.
- Scale-up – The increase in European industrial data cloud capacities and the development of the most powerful, cutting edge, and sustainable processors.
- Reskill and upskill – The adaptation of education systems to support digital skills and educational and vocational training for all ages.
The government needs to identify very soon those sectors that should benefit and be in compliance with the three key indicators of better healthcare, green economy and digital economy. Plans have to be submitted from October onwards for funding next summer. These are not tough choices since all three will make Cyprus less reliant on external demand and able to cope with any future shocks from future crises.
In short Cyprus needs to rid itself of the caps it has placed on solar energy and allow the private sector to undertake more solar energy, onsite and offsite, and to enable corporate power purchase agreements between producer and consumer. Cyprus does not have a market big enough to introduce suppliers as an additional party as this makes the market more complex. In the EU we see many large energy producers selling direct to business consumers and this market has taken off in a big way. Solar is the best solution for Cyprus as there is no cost for the feedstock and it is quick to implement. Moreover, the cost of energy from solar does not require subsidies and is part of the transformation to a green economy. The government should offer land it owns with long leases and at low cost so that the private sector actively invests in solar energy.
The digital transformation, accelerated by Covid-19, is taking place all over the world and it has proved that the economies that have implemented digital processes, prior to the recent crisis, became more competitive and flexible. In Cyprus, either because of union objections or fear of technology, the government has not done enough itself to make the public sector more efficient.
It is clear from the above guidance from the Commission that emphasis must be placed on work that can be done via communication technology as well as to automate more processes for the public. This may entail less staff in the public or private sector and that is why another sector likely to receive grants is reskill and upskill. The Cyprus government as part of this programme can revive a department which had this focus. This was the Cyprus Productivity Centre and by collaborating with experts abroad it can support the retraining of employees.
The healthcare infrastructure in Cyprus is lacking, and there is ample scope to build new specialist medical centres and decent living facilities that provide the aged with dignified living conditions. This is what a welfare state should offer at the very least, and healthcare is undergoing a technological revolution itself in terms of telemedicine and virtual medical contact. New technology needs to be introduced in healthcare and care staff training offered by the universities; this would come under reskill and upskill plans.
Finally, as part of energy conservation, the public sector should set a good example and make all public buildings energy efficient given that the summers are long and very hot. Going forward, all public buildings should be supplied energy from solar PV. It is no good moving a ministry to a building 25 years old with so much glass that it requires a lot of air conditioning. Much better to plan how to make the best use of the state fair land to build a complex of new buildings to house several ministries in Nicosia. This will also reduce the road traffic in the centre of the capital.
Cyprus needs to show that it is adopting the guidance above to stand the government in good stead for getting loans and grants which the island badly needs to remodel/reform the economy and reduce it dependence on external demand.
Erol Riza is managing director of the UK-based Mithra Capital Advisors Limited