Unit for Administrative Reform

Presidency

Action Plan for Growth

2nd Progress Report

______________________

December 2015

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1. INTRODUCTION

The sustainable growth of the Cyprus economy will only be achieved if fiscal consolidation and financial stability is complemented with a

robust and sustainable new growth model. To this end, an Action Plan for Growth has been developed, in line with Measure 7 of the

Memorandum of Understanding. The reforms and measures included in the Action Plan aim at enhanced competitiveness and a more

transparent and efficient environment for conducting business in

Cyprus.

This second Progress Report submitted to the Troika, provides an update on progress of implementation of the measures under the key

priority areas of the Action Plan such as the improvement of the overall business environment, encouragement of investment and

entrepreneurship, promotion of e-governance and significant sectors of the economy such as tourism and research and innovation. The

Body responsible for coordinating, facilitating, and monitoring the implementation of the reforms included in the Action Plan, is the

Presidency Unit for Administrative Reform, under the political supervision of the Deputy Minister to the President. More details on

the work of the Unit can be found in the website:

http://www.reform.gov.cy

The progress as regards the high priority measures is reported below. The implementation of the Action Plan is overall on track and no

major delays are expected as regards the priority measures.

2. PROGRESS IN IMPLEMENTING THE PRIORITY MEASURES OF

THE ACTION PLAN

The actions that are considered of high priority by the Government, and the main progress achieved so far is presented here below.

3.1. FORMULATING THE STRATEGIC ECONOMIC DIRECTION

FOR GROWTH AND COMPETITIVENESS

Tourism

Tourism has been identified as a major pillar for the recovery of the economy following the 2013 crisis. Nevertheless, Tourism suffers from

important structural problems, hampering its competitiveness. For

these reasons, the following priority measures are under implementation:

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- Assessment of the institutional framework of the tourism sector

The assessment of the institutional framework has been carried out

within the framework of the functional review for MECIT which started in Q2 2015 and was completed in December 2015.

The assessment of the current CTO Law (examining the factors

hampering competition) took place within the framework of the work undertaken by the Presidency and MECIT for the simplification of

procedures which started in Q2 2015 and was completed in December 2015.

The findings of the above assessments are now under consideration

and decisions will be taken as regards the implementation of the experts recommendations.

- Development of a Tourism Growth Strategy

A study will be undertaken for the development of a Tourism Growth

Strategy, including an action plan with timeframe for the implementation of the strategy. The Tender Procedure was completed

and the tender has been awarded to THR Asesores en Turismo, Hoteleria y Recreaction S.A. The relevant contract will be signed in

January and the study is expected to be delivered by Q3 2016.

Given the high importance of tourism, the high level Steering Committee, comprised of the competent Ministers in the areas of

tourism, connectivity and growth, the Chairman of the Board of Directors of CTO and the Chief Executive Officer of Hermes Airports

Ltd has been meeting regularly, establishing an enhanced coordination mechanism among the relevant stakeholders. In

addition, the two Sub-Committees which were formed in the areas of Tourism and Connectivity, have been working mainly on short term

measures.

The Sub–Committee on Tourism, in particular, has been examining

the formulation of short term measures for the enhancement of the sector, in anticipation of the completion of the study for the

development of a comprehensive Tourism Strategy.

- Connectivity The overall objective of this measure is the enhancement of Cyprus’

air connectivity, through the promotion of actions relating to the open air policy, the incentives provided to airlines, the airport charges and

the available traffic rights.

As regards the open air policy, the Action Plan of Cyprus’s Aero-political Strategy is implemented according to schedule and will be

reviewed yearly.

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Regarding the review of the current incentives scheme, a new scheme

was agreed with Hermes Airports Ltd and put in place in March 2015.

The new extensive package of six incentive schemes offered by Hermes aims to further strengthen the passenger and tourism traffic

to Cyprus.

Furthermore, a dialogue for the encouragement of airlines to provide new routes and direct connections to Cyprus is currently ongoing.

In addition, the auction of the available traffic rights was completed

and successful airlines were designated in early April 2015. Further scarce traffic rights that became available after Cyprus Airways’s

closure will be made available to airlines by Q1 2016.

The Sub–Committee on Connectivity is working on the overall issue of connectivity and preparing recommendations.

Legal advice has been asked from the Attorney General with respect to the potential of extending the Concession Agreement between the

government and Hermes Airports, which would enable a potential review of the airport charges, aiming their reduction for further

strengthening air connectivity.

It is noted that through the various measures promoted, an increase of 7.3% in passenger traffic has been observed in 2015.

Shipping Industry

The shipping sector is one of the major sectors of the economy and

the following actions are under way for the enhancement of its competitiveness and the international reputation of Cyprus as a

maritime center, as well as for the improvement of infrastructures:

- Enhancement of the competitiveness of the shipping

industry The Council of Ministers in March 2015 approved a framework of

measures for the recovery and further development of the shipping sector, on the basis of a study conducted by independent experts

aiming at the elaboration of a holistic Strategic Development Plan for the improvement of the competitiveness and the international position

of the Cyprus Shipping Industry. A number of Ad hoc Working Groups were established in April 2015 by the MTCW, in order to make specific

proposals for the implementation of this framework. The Groups concluded their work and proposals were forwarded to the Minister of

Transport in December 2015. The said Working Groups are now mandated by the Minister of Transport to proceed further with the

planning and implementation of the recommended measures

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particularly in 2016 (the measures cover inter alia actions related to the promotion and development of the Cyprus Maritime cluster).

Also, the functional review of the Department of Merchant Shipping has been concluded. The results of the review will be analysed further

and concrete measures will be taken so as to allow for the effective and flexible operation of the Department, contributing to the sector’s

competitiveness.

Green Energy

The Government, realizing Cyprus’s potential to be transformed into a green and energy efficient economy, has set the determination and

optimization of the energy mix as a priority, aiming to exploit its renewable energy sources in a sustainable manner.

- Optimisation of energy mix and introduction of a competitive

electricity market. Promotion of renewable energy sources.

Energy efficiency The objectives of the measures under this section are to formulate

and adopt a new electricity model, to promote renewable energy sources (RES) and to promote actions for a more efficient use of

energy.

Regarding the new electricity model, following public consultation conducted by CERA, (completed on 26/1/2015), CERA published on

12/5/2015 a Regulatory Decision titled “Detailed Electricity Market Design is adopted”. The Decision describes all the arrangements and

regulatory interventions proposed for the functioning of a competitive electricity market in Cyprus. The target date when the final Trade and

Settlement Rules are expected to be fully operational is March 2016.

Regarding the promotion of RES, a study, conducted by the

International Renewable Energy Agency (IRENA) was submitted to the Government in April 2015. In order to evaluate the effects on the grid

stability from the deployment of RES on the basis of the findings of this study and the integration of intermitted renewable energy

sources, a study was undertaken by the Joint Research Center (JRC) which is on-going, expected to be completed in 2016. In addition, the

National Action Plan for the Promotion of RES is currently under revision based on the results of the IRENA study. A first draft of the

revised National Action Plan for the Promotion of RES has been submitted to the Expert Advisory Committee in November 2015. A

relevant proposal is currently under preparation in order to be submitted to the Council of Ministers for approval.

Regarding the increase of energy efficiency, MECIT has secured:

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a. Funds of 1.6 million Euro from the EU Interregional Programme “Greece – Cyprus 2007 – 2013, ENERGEIN” for improving the

energy efficiency in existing public buildings during the period 2014

– 2015.

b. Funds of around 52.9 million Euro from the EU structural and cohesion funds for 2014-2020 in order to provide financial

incentives for the energy renovation of existing buildings (households, industrial and public), which also includes installation

of RES systems and the promotion of nearly zero energy buildings. To implement the above Programme, MECIT has announced two

subsidy schemes, called “Save – Upgrade” which will mainly finance deep renovation in households and commercial buildings of

enterprises.

In addition, MECIT is cooperating with DG EPCD for the preparation of a call for expression of interest, aiming to finance pilot projects of

combined heat and power generation in public authorities, local

authorities and public universities.

Education

Education and training entails a horizontal policy element, affecting the growth prospects of all economic sectors. Increasing the skills,

knowledge, capability and flexibility of the workforce is a critical element in the ability of the sectors to achieve their potential for

growth.

- Aligning the Education and Training System to the needs of the labour market

Some of the measures promoted towards the implementation of this action are:

a. The approval of the Strategic Planning for the System of Technical and Vocational Education and Training 2015-2020 in April 2015 by

the Council of Ministers, which aims to ensure an integrated, attractive, flexible and high-quality technical and vocational

education and training system that meets the current and future needs of the Cyprus economy.

b. The mapping of the Higher Education Area in Cyprus which has shown that vocational, undergraduate and post graduate

programmes of study in areas with high demand have been added in almost all Higher Education Institutions to meet the needs of

the labour market and society. c. The transfer of responsibility of the New Modern Apprenticeship

Scheme to the Ministry of Education and Culture as of 1/9/2015. d. The setup of a Committee to prepare a study and

recommendations with respect to the recognition of the Post

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Secondary Institutes of Vocational Education and Training, as tertiary level education. The final version of the study will be

submitted to the Quality Assurance Agency for Higher Education

for approval in Q1 2016. e. A bill amending the relevant legislation aiming at a new and more

effective system of teacher recruitment has been approved by the House of Representatives on the 9th of July 2015. The Law will be

enacted in 2018. f. The submission of the final proposal by an appointed Committee

for the introduction of a new evaluation system of teachers and school work to the Ministry which is currently studying the

financial and other aspects of its implementation. There is currently dialogue between the Ministry and all stakeholders

regarding the submission of the final proposal. g. New school timetables and new curricula have been implemented

as of September 2015. Adequacy targets and attainment targets have been introduced in the new curricula.

Research and Innovation

In order to address the fact that Cyprus’s performance in research and innovation lags behind member states of comparable

development level, the following measures have been promoted:

- Development of a Strategy for Research and Innovation The objective of this measure is to develop a comprehensive strategy

for research and innovation for Cyprus taking into account the findings of the Study by the National Commission on Research,

Innovation and Technological Development (NCRITD), and the current fiscal constraints. The main findings and recommendations of the

NCRITD study have been identified as well in the Smart Specialisation Strategy (S3CY).

The S3CY includes an Action Plan, to be implemented over the period 2015 – 2022, with measures amounting to €139,5 mln. The Action

Plan of S3CY is expected to also address the main issues of the R&I system in Cyprus such as the inclusion of SMEs in RTDI activities and

the attraction of private sector in RTDI investments, the establishment of synergies between the research and academic

community with the business world and the enhancement of extroversion of the Cyprus RTDI system.

As regards the implementation of the S3 Cy Action Plan, the Research

Promotion Foundation (RPF) has completed the Public Dialogue concerning the New RPF Programmes 2015-2020. This Public Dialogue

took place in two phases:

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Phase 1: “Horizontal Issues” which concerned consultation on horizontal issues such as the “Submission, evaluation and

selection of proposals”, “Project monitoring”, “Procedures and

regulations for participation”and “General and Legal issues”.

Phase 2: “Programmes”, which concerned consultation on the draft New Programmes 2015-2020, based on the results of the

First Phase of the Public Dialogue on "Horizontal Issues" and the Action Plan of the Smart Specialisation Strategy.

The New RPF Programmes 2015–2020 are expected to be launched in

January 2016.

Furthermore, the Ministry of Energy, Commerce, Industry and Tourism has launched the programme “Enhancing Entrepreneurial

Innovation” included in the S3Cy Action Plan. The deadline for the submission of proposals was March 16, 2015. The evaluation process

of the application is under way.

The other two stakeholders, that is the University of Cyprus and the

Ministry of Agriculture, Rural Development and Environment are expected to launch their programmes in 2016.

- Improvement of the Research and Innovation Governance

System The findings of the Strategy by the NCRITD regarding the institutional

framework and the R&I governance system have been examined and the Presidency’s Unit for Administrative Reform has formulated

proposals for the refinement of the current governance system. For the time being the Government will continue with the existing

structures, aiming at the timely implementation of the Smart Specialization Strategy and utilization of the Structural Funds to this

effect.

Achieving Balanced Growth

Monitoring the implementation and performance in relation to international benchmarks is needed as part of the goal to provide all

tradable sectors with an investment friendly institutional and legal framework and to remove impediments / reduce the cost of doing

business, in order to attract investments and become competitive at international level. The incorporation of the monitoring of

international indicators into the national policy framework will facilitate the design of the necessary actions and policies in order to

improve these indicators.

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- Monitoring of International Benchmarking Reports and Indicators

The objective of this measure is to undertake a competitiveness

benchmarking exercise for determining Cyprus’s performance in terms of international competitiveness across a range of indicators and to

examine the possibility of issuing competitiveness reports on a regular basis.

A proposal on the format and structure of a Competitiveness Report,

containing benchmarking analysis based on selected indicators, to be published annually, has been prepared and is currently being

finalised. The aim of the report will be to provide an analytical tool for assessing the performance of Cyprus, to facilitate the dialogue with

the private sector, as well as to contribute to setting the agenda for reforms aiming at competitiveness improvements. A list of indicators

for monitoring performance to be included in the report has been compiled and the collection of such data is underway. This includes

composite competitiveness indicators published by international

organisations, outcome indicators as well as indicators which measure the drivers of the competitiveness.

- Improve Cyprus’ rankings in global indices

The aim of this measure is to examine the possibility of introducing a mechanism, in coordination and collaboration with all public entities

and CIPA, with the aim to identify and propose reforms that will improve the rankings of Cyprus.

A mechanism has been put in place to improve the rankings of

Cyprus. Starting with the World Bank’s Doing Business Indicators, a series of meetings took place with all relevant public entities including

CIPA, the contact body in Cyprus for the World Bank’s Doing Business Report. The aim of the meetings was the identification of problematic

areas and bottlenecks per indicator that have a negative impact on

the rankings of Cyprus. Discussions took place aiming at proposing specific improvements for each indicator. This process will be ongoing.

It is noted that according to the latest Doing Business report for 2016,

published in October 2015, Cyprus has moved up 13 places to become one of the top ten most improved countries in terms of

economic and business reforms. Cyprus is considered at the top of the three European and Central Asian countries to show an improvement.

Cyprus specifically showed improvements in the sectors of getting electricity, getting credit, paying taxes, enforcing contracts, and

resolving insolvency.

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2.2. ENCOURANGING STRATEGIC INVESTMENTS AND CREATING A GROWTH ORIENTED ENTREPRENEURSHIP

ECOSYSTEM

Investment

Investment is a key contributor to growth. Cyprus suffers from low

capital formation in relation to other European countries and it is thus necessary to develop a comprehensive strategy to promote

investments and establish the necessary legal framework and fast track mechanism for strategic investments.

Furthermore, a business friendly environment needs to be developed,

that will enhance competitiveness and generate growth and jobs. The main actions that have been put forward for this area together with

their progress are listed here-below.

- Introduce a Law for Attracting and Facilitating Investment

The Final Report for the study for facilitating strategic investment was officially approved by Cyprus Authorities on the 5th of November

2015. In parallel, based on the conclusions of the report, the legal experts prepared the first draft of the Legislation which was submitted

to the Cyprus Authorities beginning of November. A revised draft law was submitted on the 8th of December 2015. The new procedural and

legal framework on the strategic investment, including the set up of a fast track mechanism, is expected to be put in place in early 2016.

- Simplification of procedures for the employment of highly

qualified third country nationals Simplifying the procedures for granting employment visas to highly

skilled third country nationals will facilitate foreign investment. In this respect, the procedure that is currently being followed for the

employment of highly skilled third country nationals, is under review

in order to be simplified as much as possible.

Entrepreneurship

The government’s ambition is for Cyprus to acquire a competitive environment in which to start and grow a business. Given the critical

role that the Small and Medium Enterprises play in the domestic economy and considering the unemployment challenge Cyprus is

currently facing, especially among university graduates, significantly increasing the number of entrepreneurs and start-ups is considered as

hugely important for Cyprus’ economic growth.

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- Develop a Strategic Framework for Promoting Entrepreneurship and Enhancing SMEs Competitiveness

In order to increase entrepreneurial activity in a more friendly

business environment, a National Policy Statement on the development of the Entrepreneurial Ecosystem in Cyprus, was

approved by the Council of Ministers on the 14th of December. The National Policy Statement leads to specific actions under 5 pillars: (i)

Enterpreneurial Culture, (ii) Business Environment, (iii) Entrepreneurial Innovation, (iv) Access to Finance and (v) Access to

Markets. For the preparation of the National Policy Statement a number of meetings between the competent Working Group and wide

stakeholder consultation took place the last few months.

In order to prepare more targeted grant schemes for the programming period 2014-2020, the recommendations of the ex-post

assessment of the MECIT schemes implemented during the 2007-2013 programming period, financed by the Support Group, will be

taken into consideration.

- Improve the Regulatory Framework for business set

up/operation A new Impact Assessment mechanism, including an SME Test, will be

developed in Q1 2016 and expected to be fully implemented by end 2016. In addition, discussions are underway with the competent

Authorities, such as the Department of Companies’ Registrar, the Tax Department etc, in order to identify and promote further simplification

measures for businesses, especially for new companies to set-up.

- Establishment of an Entrepreneurs Office In order to promote business activity and entrepreneurship in Cyprus,

with special emphasis on support for start-ups, an Entrepreneurs Support Centre will be set up. The Centre will undertake all operations

of the existing One-Stop-Shop and also assist existing and new

entrepreneurs through the appointment of project facilitators, mentoring mechanisms, development of funding networks, knowledge

sharing, licensing etc. Following an Open Call procedure for consultancy services to be contracted for the operational design of the

center, the study was assigned in August 2015. Deliverables are expected at the beginning of 2016. Based on the findings of the

study, further decisions regarding the operational design, the provided services and the staff of the Center will be taken by the

competent authorities.

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3.3 COMBATING BUREAUCRACY FOR ALL AND REMOVING BARRIERS TO GROWTH FOR BUSINESS

Better Regulation

Despite the attractive business tax regime, the current regulatory framework suffers from a number of problems which negatively affect

economic activity and do not allow Cyprus to exploit its full potential as an attractive place to live and do business. Some sectors are over-

regulated, or have either an obsolete or distortive legislation and regulatory framework. The main actions that have been put forward

for this area together with their progress are listed here-below:

- Establish a mechanism for implementing smart regulation An Action Plan on Better Regulation, was prepared taking into account

best practices from other MS (through technical assistance financed by the SG, a scoping mission of experts from the UK Better

Regulation Delivery Office took place in March 2015 and suggestions

for drafting the Action Plan were submitted in July 2015, while a study visit was arranged in Germany in September 2015). The Action Plan

was approved by the Council of Ministers on 29th October 2015.

- Improving (Simplifying or Eliminating) Administrative Procedures

Selected activities of simplification have been initiated in: a. Tourism: an assessment of the existing legislation and procedures

took place, aiming at reducing the administrative burden by 25%. The results of the study were submitted in December 2015.

b. Construction permits: This is an area were serious delays in investment have been identified. For this reason, the Ministry of

Interior is expected to get technical assistance, for delivering a new legislation framework to replace the existing building

legislation framework implemented in Cyprus related with the

building and planning permit procedures (i.e. the Town and Country Planning Law as well as the Streets and Building Law).

c. Simplification of procedures are also promoted in selected processes of the Social Insurance Service (SIS) and the Civil

Registry and Migration Department (CRMD). Technical assistance has been requested for consultants (proposals were submitted in

December and are currently under assessment) to assist with the end purpose of identifying weaknesses and simplifying the

procedures at the CRMD. The SIS is trying to arrange a study visit at the Department for Work and Pensions in the UK.

The modernisation and simplification of these services/procedures in

conjunction with the simplifications/modernisations in the Registrar of Companies and the Tax Department will substantially reduce the

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administrative burden for the benefit of both people and business and improve the business environment.

3.4. MOVING TO A DIGITAL ERA FOR THE GOVERNMENT

The use of Information and Communication Technologies (ICT) is a

key horizontal factor for growth. Despite some progress observed in the past few years, Cyprus still lags behind the EU average in a

number of important ICT indicators, such as the demand and the supply of e-government services.

Digital Strategy and E-Government

This pillar of reform focuses on flagship e-government projects, the main progress of which is indicated here below:

- Establishment of a Call Centre which will act as a teleservice

single point of contact (SPOC) The Call Centre will be implemented in two phases:

Phase I: As of 02/03/2015, the Call Center is operated by the Citizen

Service Centers (CSC). Citizens/businesses can call the number 1434

nationwide to have the following services: a. Information on the procedures for the 97 services already

provided by CSC. b. Submission of applications for 18 services (from the 97 services),

through telephone. c. Information on the status of requests for a number of services

provided by CSC.

Phase II: This concerns the operation of a permanent integrated solution for Call Center, which will be operated by an external

operator (outsourced), using the number 1434. The completed Call Center will be a communication center that will accept applications

from multiple communication channels (telephone, SMS, email) and will provide the following services:

a) Information on the procedures for all the services that the public

sector offers to citizens/businesses (around 500 services). b) Information on the status of requests.

c) Information on the contact details of all government bodies (eg phones, postal addresses, URLs, etc).

The Call Centre is expected to start its operation in September 2016.

- Selection of new services to be provided online through the

government gateway (“Ariadni”) Through this action, the Internet will be used more effectively to

provide information and more public services online. The Government

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Gateway - "Ariadne", will provide information on the procedures for all the services that the public sector offers to citizens and businesses,

information on the status of requests and public services online.

The selection of new services is underway. The egovernment Board in

its meeting last September instructed the Administrative Reform Unit/egov to prepare a proposal with the new eservices that will be

offered to citizens and businesses through ARIADNI (in the next 2 years). This proposal will be submitted to the Council of Ministers for

approval in January 2016.

- Review and redefine the existing national ICT/e-government structure and the responsibilities of each of the involved

actors It was decided that this action would be part of the functional review

of the Ministry of Transport, Communications and Works. The final report of the experts was submitted at the end of November 2015.

The main suggestion regarding the ICT/ egovernment structure is that

the new structural arrangements should be given a period of operation of 24 months in order to assess how they function. The

report also includes a suggestion for further changes to the structures after the 24 months, in case the new structural arrangements are in

the meantime judged as not sufficient.

New structural arrangements: A Digital Strategy Group was created, by Decision of the Council of

Ministers on 3rd June 2015, in which relevant stakeholders of the public, academic and private sectors participate. The Group will

review the Government’s structures for the Digital Strategy.

The Council of Ministers on 13 of May 2015, decided to replace the Executive Computerization Board with the E-government Board, with

representatives at the highest level. The objective of the E-

government board is to approve all the e-gov actions, monitor the progress of the e-gov actions and give solutions on significant

problems that affect the implementation of e-gov actions.

The E-government Board will be supported by the Presidency Unit for Administrative Reform (e-government team).

- Development of a Web-Portal for SME’s

The portal for the Point of Single Contact will serve also as the web portal of the Entrepreneurship Support Center. For this reason the

Point of Single Contact will be expanded in order to include all the necessary information/ links. A template for the web portal content is

being prepared. The web portal is expected to be developed at the end of 2016.

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- Digitalization of all schemes granted for the Enhancement of Entrepreneurship

For this action, the Greek Government will provide the Digitization

System to the Cypriot Government (in the context of an MoU signed by the two parts concerning the promotion of entrepreneurship). The

Cypriot Government will need however to configure the system to adapt it to the Cypriot legislation and procedures.

The system is expected to be in operation in 2016.

- Introduce “e-signature and eID” policy and assess the

“Electronic Certification System of the State”, in order for the state’s system to be able to support electronic

signatures and other electronic security services A new memo was prepared with the several options for the provision

of electronic signature and e-authentication which was submitted to the e-government Board in September 2015.

The egovernment Board in its meeting last September, instructed the Reform Unit/egov and DITS to investigate further the option to

purchase esignature and eauthentication certificates for citizens.