Viability of public sector projects must be assessed by experts ahead of anything else

By Savvakis C Savvides

The recent debacle leading to the rush decision on how to proceed with the Larnaca marina project proves, yet again, that we never learn from our mistakes.

Some even argue that the pressure exerted on politicians and bureaucrats to serve special interests is so big that all they need to proceed with serving their cronies is a cheap excuse that is likely to be well received by the media and be good enough to fool the public at large.

How else can one interpret the president’s recent proposal and subsequent decision to assign the study of such a hugely important project involving the public sector to dubious private concerns in Greece on the pretext of an existing intergovernmental agreement between the two countries!

My position is, and has always been, that we should never put the cart before the horse and that one should make sure that we first have in place an economically and financially viable project. Easier said than done however, especially in Cyprus.

It is imperative that an expert and independent organisation must consider the various proposals for such projects and assess both the expected return and risks. There are independent and competent entities, such as the World Bank or the European Investment Bank (EIB) that can provide such critical studies.

But surely, the way to proceed is not through assigning such tasks to private funds or consultants who may neither apply the correct methodology nor have the right expertise to perform this crucial first step.

This should be the primary concern of politicians rather than diving into a premature discussion about who undertakes partially or wholly the shareholding of the new company to be created.

Only when a proper evaluation and risk analysis is firmly in place can one prudently consider who undertakes which parts of the project and its funding. Not before! Moreover, the risks thus identified and quantified can pave the way for arriving at a fair stakeholders’ agreement for sharing the risks and return among parties involved.

It is imperative however that economic viability is first and foremost studied and confirmed before a project is undertaken to ensure that it enhances welfare and economic development.

As an illustration, Figure 1 displays the stages that are necessary to arrive at a proper evaluation of economic viability and for assessing and measuring the project risks.

The funding and financing of the project is the final stage that comes into play only after a Risk/Return Financing Profile is derived from the findings and conclusions of the previous three stages of Financial Modelling Projections, Competitiveness Appraisal and Risk Analysis probabilistic simulation.

It is totally unorthodox and fraught with all sorts of perils to be considering and even negotiating the funding of any given project without first fully understanding its strengths and risks.

A complete and correct assessment of risk and return in such mega projects can only be achieved by having the project appraisal and risk analysis undertaken and performed by a proper and independent competent authority.

It is exactly for this purpose that the European Union advises member states who do not have such competent financing institutions to create a fully independent National Development Finance Agency which must approve and provide some of the funding for projects that the public sector is involved in and whose capital investment requirement is higher than a minimum specified amount. Apparently, the previous government endorsed this advice at the council of ministers level, but ultimately never implemented it.

In Cyprus, we had such an independent professional financing institution. One that was the bright example of many development banks around the world and which also led and guided the recovery of the country following the devastation caused by the 1974 Turkish invasion.

Unfortunately, previous governments made sure that this unique independent expert organisation that we had for leading the evaluation and financing of such projects involving the public sector was dead and buried through the privatisation of the Cyprus Development Bank.

Savvakis C. Savvides is an economist, specialising in economic development and project financing. He is a former senior manager at the Cyprus Development Bank and has been a regular visiting lecturer at Harvard University and Queen’s University.