Cyprus: Increasingly Poor Decisions on Public Investment Projects

Decision-making on the appraisal, risk assessment and possible partnership agreements with the private sector as well as the project management of public investment projects are taken increasingly with little consideration to the potential economic viability and environmental friendliness of such projects and, indeed, whether these add to the welfare of the people at large.

Decision-making shifts

This deterioration is importantly attributable to the profound shifts in the bodies influencing decision-making on key and some partially EU-funded, investment projects. Prior to the government administration of Glafcos Clerides from 1988 to 1998 the ex-Planning Bureau in Cyprus in cooperation with the publicly owned, but independent Development Bank, exercised considerable power and expertise in evaluating and financing of capital investment projects as well as in determining the structure of partnerships between the public and private sectors in the formulation and execution of investment projects (PPPs).

However, during the years of the Clerides regime the power of the Planning Bureau staff was steadily diminished and transferred to the Ministry of Finance. And some years later this transfer of power and the politicization of decision-making was intensified from 2013 onwards under the Anastasiades administration with the Planning Bureau being absorbed into the Ministry of Finance and renamed the “Directorate General for European Programmes for Coordination and Development”.

As a result, important advice and final decisions on the evaluation, financing and award of large public sector projects were mainly taken by members of the Council of Ministers in association with their political and business collaborators. And the ex-President, himself, appears to have become highly influential with his alleged ordering of the Vasilico project without competitive tenders to a company with virtually no experience in establishing LNG terminals.

Impact

During the early years of the first Anastasiades administration the European Commission became critical of the increasingly poor and relatively low use of EU funds for investment and structural reforms. In fact, in the September 2015 MOU it is stated that “the (Cyprus) authorities will assure that the institutional capacity to implement current and future programs is improved and the appropriate human resources of the Managing Authorities and implementing bodies are available” and I would have added “and effectively used”.

Furthermore, eight years later it was reported by the European Commission, that of the EU funds of 1.25 billion euro available to Cyprus over the period 2021 to 2026 under the Recovery and Resilience Plan, less than 5% of this amount had been taken up in the financing of investment projects by September 1, 2023.

While the very low absorption of EU funds is disturbing, it is the failure to use both public and EU funds productively in economically viable and environmentally friendly investments that should be of most concern to Cyprus policy-makers and taxpayers. Indeed, it appears that government officials including some members of the past and current Council of Ministers and their private sector collaborators are more interested in making personal short-term financial gains from the negotiation and awarding of projects rather than in assessing the potential of such investments in contributing to economic development and environmental sustainability. And do persons making decisions on the award of projects seriously consider whether the successful contractor has the capability to complete execution of the project on time and according to its specifications? Indeed, the absence of such careful consideration seems to have been the situation most notably with the Vasilico and waste management projects.

Institutional procedures

In fact, the institutional procedures for the evaluation, selection, formulation, and award of projects, provide much scope for the exercise of political influence and corruption and the related extraction of personal financial gains. Under these procedures government Ministries and Agencies initially propose projects in their budgets, that are supposed to be in line with the government’s policies. In preparing project proposals little account is taken of the potential economic viability and impact on the environment of each project and that the main concerns are whether their costs fit into the budget allocated to it by the Ministry of Finance and whether EU funds are available for their financing. Thereafter, in deciding which projects have priority minute use is made of cost/benefit and risk analysis in determining their ranking.

Subsequently, each Ministry prepares the selected projects, frequently with biased specifications to favor a particular contractor, sometimes the project designer, and invites tenders to bid and implement these projects. However, unsuccessful tenderers can appeal to the Tenders Review Authority against the winner by paying relatively small fees and not providing any detailed explicit reasons for the appeal.  Moreover, with the number of these low-cost appeals unlimited, government officials claim that endless appeals are a key factor explaining the lengthy delays and even cancellations of many EU funded projects.

Hence, with unlimited appeals and government ministries wanting to fully use their budget allocations of EU funds these entities are forced to scramble and put lower priority and/or previously non-EU funded investments into their budgets for EU projects. And this messy and time-consuming process seriously diminishes the quality of public investments.

 Concluding Remarks and Recommendations

Despite repeated recommendations by the European Commission and promises by the Cyprus authorities on reforms and measures to substantially raise the institutional capacity of Cyprus to use EU funds more effectively in its public investments, including for the green and digital transitions, little has been accomplished and scandals relating to incomplete projects and the wasteful deployment of EU funds predominate.

The current Cyprus government like its predecessor does not seem to have the willingness and capability to effectively use its budget allocations for development, which are mostly for public investment projects. Over the last decade the implementation rate for government development expenditure has averaged less than 65% with a considerable part of such outlays being on land annexations and low-priority projects like the renovation of courthouses. And in the first six months of 2024 development expenditures amounted to just 22% of the amount budgeted for the year as the execution of projects such that for the Larnaca Marina and for the Vasilico LNG terminal were severely delayed.

In its management of the public finances the government needs to substantially shift priority to the quality of public services and investments over the generous compensation of its bloated army of employees and advisors. Indeed, it is disgraceful that in the first six months of 2024 inequitable government compensation of its well-paid employees[1] rose by a staggering 12.5%, while gross capital expenditure excluding land annexations declined by a precipitous 20.9%. 

Given that decision-making on the arrangements of large-scale investment projects is heavily influenced by questionable relations between government Ministers and officials and their collaborators in the private sector, that display limited willingness and competence in addressing economic, financial and environmental issues, fundamental institutional changes are required. In particular, as long recommended by Savvakis Savvides and this author there is a compelling need to set-up an independent Development-type finance agency with apolitical technical expertise tasked with appraising, formulating and financing large-scale investment projects.

In addition, the need for greater efficiency and genuine competitiveness in the award of selected projects for implementation, the procedures of the Tenders Review Authority require streamlining with the number of appeals limited and accompanied by substantial reasons for any appeal. Furthermore, this authority requires decision-makers who have the competence to judge whether companies bidding for public contracts have the ability to fulfill the terms of the contract and effectively complete the awarded project.

Moreover, even with fundamental institutional changes and reforms, the system of decision-making on the evaluation, formulation, financing and execution of public investment projects would remain fragile and vulnerable to the incompetence and corruption of the usual suspects. Undeniably, unless the culprits for past and ongoing poor decision-making on public investments are held accountable and prosecuted by the legal authorities, healthy economic development and environmental protection will continue to be seriously hampered by the dearth of productive public investments in Cyprus.