16 October 2024

Authors

Dr Andreas Charalambous & Prof Dr Mustafa Besim

Executive Summary

The Cross Community Investments Project aims at enhancing the economic interaction and cooperation between Greek Cypriot (GC) and Turkish Cypriot (TC) enterprises and investors in Cyprus. It is designed to tackle the current low level of economic interaction between the two economies and the untapped potential for mutual development.

The initiative’s major goal is to promote bicommunal investments, by capitalizing on the complementary comparative advantages of the two economies.

Despite significant differences in macroeconomic performance and fundamentals, the GC and the TC economy are characterized by similar structures and investment priorities. Both economies have a strong
tourism and, in broader terms, service sector, while, during the last decade, the real estate and the construction sector have been the main drivers of growth. Moreover, both economies need investments in the energy sector (renewables and energy saving) and are laggard in digital transformation as well as sustainable food-related investments.

The economic activity and trade between GC and TC communities have been so far facilitated solely by the Green Line Regulation (GLR), which serves as the legal foundation for the movement of products, services, and persons between the TC and GC economies. Nevertheless, the effectiveness of the framework has been hindered by a variety of critical factors, such as complicated procedures at crossing points, cumbersome licensing and insurance procedures, limited number of crossing points and restricted labour mobility for business purposes. These challenges are further compounded by a taxation framework that is unfavourable to businesses, ineffective payment structures, the absence of advisory infrastructure for businesses, insufficient awareness of GLR opportunities, and political and psychological obstacles. This report delineates a series of policy measures that are designed to address these concerns and contends that the GLR framework requires a comprehensive and collaborative reform, through the involvement of GC, TC, and independent experts, under the supervision of the European Commission.

Addressing the identified shortcomings of the GLR would, without doubt, facilitate trade between GC and TC businesspeople. However, this would not be sufficient to allow joint bi- communal investments to materialize. Therefore, in the context of this report, additional recommendations are made, addressing the specific barriers that constrain joint investments in Cyprus.

Serious challenges and obstacles should be tackled to facilitate bicommunal investments. These include:

• the absence of a common regulatory framework,
• a lack of stable, business-friendly macroeconomic policies,
• ineffective financing arrangements and costly payment structures,
• inadequate insurance for goods transport,
• cumbersome business procedures at crossing points,limited exit routes for investors,
• property rights disputes,
• insufficient infrastructure, and ineffective advisory services.

Political and psychological barriers, due to Cyprus's problem, further impede the cooperation between GC and TC businesses. Deep-rooted perceptions and historical grievances make it difficult for businesses to collaborate, even when mutual economic benefits are clear. This environment of uncertainty and mistrust significantly hinders the potential for joint ventures and economic co-operation between the two communities.

Addressing these barriers with effective policies could unlock untapped potential, enhance market access, and offer cost advantages.

Given the unresolved Cyprus problem, we propose strategic recommendations that focus on addressing institutional, legal, and governance disparities between the GC and TC, through several structured initiatives and frameworks.

The holistic approach adopted in this report covering the main important economic, legal, institutional and governance issues, justifies some optimism, that this initiative, if supported by the two leaders, the European Commission and international financial organizations would lead to tangible outcomes, albeit in a gradual manner.

Institutional and Governance Arrangements

1. UN Umbrella Initiative: The entire initiative should be conducted under the United Nations' auspices, with high-level consent from both GC and TC leadership to build confidence.

2. Special Economic Zones (SEZs): Establish SEZs tailored to the Cyprus' unique context, providing a common legislative and regulatory framework, simplified arbitration mechanism, a transparent taxation framework, and financial facilitation. SEZs, should be located in accessible and strategically beneficial areas, such as the buffer zone.

3. Special Purpose Vehicles (SPVs): Investors should be required to set up a company like SPVs, adhering to international legal standards (e.g., UK, EU member state) to ensure compliance and ease of operations. SPVs can enable clustering for niche goods production, granting GC and TC businesses the option to collaborate, without relocating production.

4. Shareholder Agreements: Implementing shareholder agreements governed by a UK or EU member state's legal framework can mitigate recognition issues and streamline dispute resolution.

5. Investment Committee: An investment committee that is both operational and effective is vital for this initiative. Its primary purpose would be to foster high-quality bicommunal projects, in priority areas, benefiting both communities.

Supportive Institutional Arrangements

1. Information Campaigns and Investor Support Services: Targeted campaigns and advisory services will inform and assist potential and approved investors.

2. Dispute Resolution Mechanism: Establish an independent, accessible, and efficient arbitration system to handle bicommunal business disputes.

3. Taxation and Financing: Propose a tax-free status for approved investments initially, with fees to cover operational costs. Establish a dedicated grant facility through IFIs (e.g., EBRD, EIB, MIGA) and the European Commission, as financing options.

4. Payment and Transport Solutions: Resolve technical payment issues by forming a dedicated working group and streamline transport and insurance processes. Additionally, establish dedicated border crossings and extend office hours to enhance the efficiency of bicommunal trade.

5. Certification of Qualifications: Form a committee to address qualification certification issues, fostering mutual recognition and cooperation.

6. Advisory Services: Provide comprehensive advisory support for legal, financial, and business development aspects.

Strong involvement of the TC and GC leaders would be necessary for the proposed initiative to materialize. The support from IFIs and the European Commission is also vital.

Investment projects under this initiative should be led by Cypriots and designed to benefit both communities, fostering interaction between them. Priority should be given to projects focused on the green transition, digital transformation, energy, sustainable food production, and other innovative areas that are of high importance to both communities.

It should be noted that although the various recommendations included in this research project, would facilitate bicommunal investments, the unsolved Cyprus problem will continue to act as a constraint. Without sufficient progress and/or a comprehensive solution to the Cyprus problem, joint bicommunal investment projects are unlikely to reach their full potential.

Cross-Community Investments Research Project