Our View: ‘Strategic project’ EuroAsia Interconnector in funding disarray

We have been hearing about the EuroAsia Interconnector that will connect Cyprus to the power grids of Israel and Greece via submarine power cable, for more than 10 years. A project of this scale, complexity and cost, admittedly requires many years of planning as it involves three states and aims to create the world’s longest and deepest high voltage direct current (HVDC) electricity interconnector.

The submarine power cable will stretch 310km from Israel to Cyprus and another 898km from Cyprus to Greece and will run across the Mediterranean Sea floor at depths of 3,000 metres. It has been labelled a strategic project as it would end Cyprus’ energy isolation, linking it with the European network; the EU wants all member-states to be connected.

Designated as a Project of Common Interest (PCI) by the EU, the project received €657 million in funding from the European Commission with another €100m coming from the Cyprus Recovery and Resilience Fund. In the last week however, it emerged that the project faced serious funding problems with reports that the contract with the company that would design and manufacture the cables, Nexans, was at risk.

On the day this report appeared, however, EuroAsia announced that it had awarded the contract for the submarine cable that will connect Cyprus to Greece to Nexans, at a cost of €1.43 billion. The CEOs of both companies praised the deal, with EuroAsia’s, Nasos Ktorides saying the electricity interconnector “will put Cyprus on the world energy map, ending its energy isolation”.

Although the contract with the cable manufacturer has been signed, it does not seem to be plain sailing for the project yet, as the problem of funding remains. Energy minister Giorgos Papanastasiou said on Wednesday that the bill for the project had increased by 23 per cent because of the rising costs of raw materials. The initial cost estimate of €1.57bn has jumped up to €1.97bn, with EuroAsia reportedly seeking an amount in the region of €600m in loan guarantees from the state.

What was meant to be a privately funded project could now burden the Republic with almost a third of its funding requirements. What has changed? If the company cannot find private investors for the project does this raise questions about its viability? The €657m funding from the EU was given on condition that the project promoter would have secured the rest of the funding, something that appears not to be the case now. Why had private investors shown no interest in the project?

An application for funding had also been made to the European Investment Bank (EIB) but its response is unknown. Conveniently, it is said the EIB had yet to make a decision. Why? Could it be that it did not deem the project viable? If it had it would have offered funding and the project promoter would not be seeking assistance from the Cyprus government, on which the future of the interconnector now seems to depend.

Papanastasiou said as much in an interview with Cyprus News Agency on Wednesday, explaining that the government was now looking at three options. He justified the bailing out of the project by the government on the grounds that it was a strategic project and that it was difficult for a private company to fund a €1.97bn enterprise.

The first option, he said, was for the government not to get involved and leave the project promoter to find the funds. The second would be for the government to provide a loan guarantee and the third would be for the state to take a shareholding in the company, which would also give it a say in the project. He repeatedly emphasised

that the project was “very important and strategic for Cyprus”, giving the impression that the do-nothing option had been ruled out.

Finance minister Makis Keravnos was non-committal, when asked about the matter, saying that the issue of state guarantees had not been brought up. He did say that this was “a major investment that needed to be discussed in depth from all sides”. He was absolutely right. The government must tread very carefully, given that even providing loan guarantees would impact the public debt, while a big blow would be dealt to public finances if it pays and the project proves unviable.

Before any decision is taken, the government must hire independent consultants to examine the project and its viability. It cannot invest – or guarantee loans to – in a project that the EIB was not convinced about its viability and which failed to find private investors. This was, after all, supposed to be a privately funded project and there is now the danger of the taxpayer being forced to bail it out, because it is “very important and strategic for Cyprus”.

Had the state explored other possibilities? Why was it not enough to link Cyprus only to Israel’s grid which would be much less costly and still end the island’s energy isolation? Cyprus could end up with an energy project it had not chosen, imposed on it by a private company which had misleadingly claimed the project would be privately funded. And now, it is seeking financial assistance from the state to complete the project that the state had not asked for and, worse still, might not be viable.