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Sustainable Economic Development in TCc - Private Sector Development Strategy 2011 - 2015

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The European Union’s Programme for the Turkish Cypriot Community

Sustainable Economic Development and ICT Sector Programme in the northern part of Cyprus

EuropeAid/127043/C/SER/CY

Cyprus - northern part

Private Sector Development Strategy 2011-2015

This project is funded by the European Union

This project is implemented by DIADIKASIA Business Consultants S.A.

Consortium

The European Union’s Programme for the Turkish Cypriot Community


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Table of Contents

Chapter 1. Methodological Approach ................................................................. 6

Chapter 2. Socio-Economic analysis of Northern Cyprus current situation ........... 9

2.1. Country Information ........................................................................................ 9

2.1.1. Geography ............................................................................................................ 9 2.1.2. Climate ................................................................................................................10 2.1.3. Demographic characteristics ..............................................................................10 2.1.4. Education ............................................................................................................12 2.1.5. Labour force and employment ............................................................................13 2.1.6. Physical and social infrastructure .......................................................................16

2.2. Macro-economic background ......................................................................... 18

2.3. Private Sector - Business environment ............................................................ 20

2.3.1. Identification of key sectors ................................................................................20 2.3.2. Identification of SMEs .........................................................................................30

2.4. Telecommunications& ICT sector.................................................................... 33

2.5. Financial sector .............................................................................................. 37

2.5.1. Fiscal policy .........................................................................................................37 2.5.2. Banking sector ....................................................................................................37 2.5.3. Tax System ..........................................................................................................38 2.5.4. Business environment regulatory framework .....................................................39

2.6. Investment climate ........................................................................................ 42

2.6.1. Incentives for Investors .......................................................................................42

2.7. Overview of current approaches to Private Sector Development ..................... 46

2.7.1. Current national strategy / programmes towards Private Sector Development46 2.7.2. Turkish Cypriot Community Administration priorities towards private sector

development .......................................................................................................47

Chapter 3. Key Points of socioeconomic analysis- SWOT Analysis ...................... 48

Chapter 4. Identification of major barriers to Private Sector Development ........ 50

Chapter 5. Private Sector Development Strategy .............................................. 52

5.1. Vision and Strategy ........................................................................................ 52

5.2. Strategic Objectives ....................................................................................... 53

5.3. Thematic Priorities & Interventions ................................................................ 59

Chapter 6. Action Plan ...................................................................................... 61

6.1. Proposed actions under the 1st Priority: “Competitive TCc economy” .............. 62

6.2. Proposed actions under the 2nd Priority: “Institutional framework” ................. 65

6.3. Proposed actions under the 3rd Priority: “Knowledge society and innovation” . 68

6.4. Proposed actions under the 4th Priority: “Employment and Social Cohesion” ... 70

6.5. Proposed actions under the 5th Priority: “Attractiveness of TCc as an area to invest, work and live in” ............................................................................. 71

Chapter 7. Strategy Monitoring Mechanism ...................................................... 73


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List of Tables Table 1 Population Basic Indicators (2002-2008) ............................................................... 10 Table 2 Distribution of Population by Districts and Sub-Districts according to the Results

of the 2006 Population Census .............................................................................. 10 Table 3 Household Population, Number and Size (2006 Census) ...................................... 11 Table 4 Distribution of Population by Sex and Age (2008) ................................................. 12 Table 5 Number of students pursuing in Higher Education (2008-2009) ........................... 13 Table 6 Expected enrolments (number of students) .......................................................... 13 Table 7 Household Labour force Survey - Main Indicators (2009) ..................................... 13 Table 8 Employment According to Household Labour Force Survey 2008* ...................... 14 Table 9 Household Labour force Survey – Employed level of education (2009) ................ 15 Table 10 Number of beds and health personnel in TCc for 2008 ........................................ 16 Table 11 Basic macroeconomic indicators of the TCc economy (2002-2008) ...................... 18 Table 12 Sectoral Distribution of Gross Domestic Product .................................................. 20 Table 13 Sectoral Distribution of Fixed Capital Investments ................................................ 22 Table 14 Credits - Sectoral (Total) (31 -03-2010).................................................................. 22 Table 15 Production of main agricultural products (2008) .................................................. 23 Table 16 Number of livestock and main animal products (2008) ........................................ 24 Table 17 Number of accommodation establishments by regions and categories ............... 25 Table 18 Number of arrivals and departures to and from TCc by nationality for 2009 ....... 26 Table 19 Number of Tourists and bed nights in tourist accommodation establishments by

district for 2009 ...................................................................................................... 26 Table 20 Number of tourism establishments and number of employees working in the

tourism sector for 2009 ......................................................................................... 27 Table 21 Size of the Company and Region (or percentage of each size of the company in

the Region) ............................................................................................................. 31 Table 22 Balance of State Budget as a share in GNP ............................................................ 37 Table 23 Justification of the proposed strategic objectives based on the findings of the

SWOT analysis ........................................................................................................ 54 Table 24 Justification of the proposed strategic objectives based on the key barriers to

private sector development growth ...................................................................... 58

List of Figures

Figure 1 Methodology for drafting the Private Sector Development Strategy .................... 6 Figure 2 TCc Distribution of population among districts .................................................... 11 Figure 3 Distribution of TCc urban and rural population .................................................... 11 Figure 4 Distribution of urban and rural population among districts ................................. 11 Figure 5 TCc imports and exports by countries (in Million US $) for the period 2002-2008

............................................................................................................................... 19 Figure 6 Allocation of TCc’s imports and exports according to the countries (2008)......... 19 Figure 7 Number of arrivals and departures to and from TCc by nationality for 2009 ...... 26 Figure 8 Percentage (%) of Tourists by district for 2009..................................................... 27 Figure 9 Size of the business entity (company) according to the number of employees ... 31 Figure 10 Turkish Cypriot Community compared to global good practice economy as well as

selected economies ............................................................................................... 41


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List of Abbreviations

2G Second Generation

3D Three Dimensional

3G Third Generation

ADSL Asynchronous Digital subscriber Line

ATM Automated Teller Machine – Asynchronous Transfer Mode

B2B Business to Business

CDMA Code Divided Multiple Access

CNC Computer Numerical Control

EC European Commission

ECDL European Computer Driving License

EFT Electronic Fund Transfer

EMU East Mediterranean University

EU European Union

EUROSTAT Statistical Office of the European Union

F/O Fibre Optic

GDP Growth Domestic Product

GIS Geographical Information System

GSM Global System for Mobile

HACCP Hazard Analysis Critical Control Point

ICT Information and Communication Technologies

ISDN Integrated Services Digital Network

ISO International Organization for Standardization

ISP Internet Service Provider

KAMUNET Public Network Committee

KOBIGEM SME Development Centre (Kobi Gelistirme Merkezi)

KTEZO Chamber of Craftsment and Artisians (Kıbrıs Türk Esnaf Zanaatkarlar Odası)

KTTO Chamber of Commerce (Kıbrıs Türk Ticaret Odası)

KTSO Chamber of Industry (Kıbrıs Türk Sanayi Odası)

NACE Nomenclature générale des Activités économiques dans les Communautés Européennes

NGN Next Generation Network

NGO Non Governmental Organisation

PDH Plesiosynchronous Digital Hierarchy

POS Point of Sale


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PSDS Sustainable Economic Development in TCc - Private Sector Development Strategy

R&D Research and Development

SBA Small Business Act

SDH Synchronized Digital Hieracrchy

SME Small and Medium Sized Enterprise

SPO State Planning Office

SWOT Strengths, Weaknesses, Opportunities and Threats

TCc Turkish Cypriot community

TDM Time Division Multiplexing

US United States

USD United State Dollars

YAGA Investment Development Agency (Yatırm Geliştirme Ajansı)

VET Vocational Education and Training


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Chapter 1. Methodological Approach

The methodology applied for drafting the private sector development strategy of the Northern part of Cyprus, is depicted in the following figure:

Figure 1 Methodology for drafting the Private Sector Development Strategy

Private Sector Development Strategy

Identification of barriers

and needs

VISION /

STRATEGY

Actions

Objectives

STRENGTHS

.

WEAKNESSES

OPPORTUNITIES THREATS

SWOT ANALYSIS

Priorities /

Interventions

More analytically the tasks foreseen in the framework of the selected PSDS’ methodology include the following:

Task 1 - Analysis of current situation: During this task data collection and analysis for the northern part of the island in terms of its basic characteristics, such as physical, geographical, demographical, as well as its general socio economic context, such as basic economic drivers, productivity and growth; the labour market including the structure of employment, unemployment and skills levels, as well as the share of the three sectors (agriculture, industry and services) in its economy, will take place. The sources of information that will be used for drafting the baseline analysis include:

Statistics from various stakeholders (e.g. Eurostat, local statistics services, YAGA, State Planning Organization, etc)

Other related project reports

Previous Studies and reports

Task 2 - SWOT analysis: Having completed the baseline analysis of the current situation the next step refers to the deployment of a strategic SWOT analysis, namely establishing the TCc current position in the light of its strengths, weaknesses, opportunities and threats.

SWOT analysis is a tool for assessing and communicating the current position of a particular reform option in terms of its internal Strengths and Weakness and the external Opportunities and Threats it faces. It provides a clear basis on which to develop a picture of the changes needed to build on strengths, minimise weaknesses, and take advantage of


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opportunities and deal with threats Moreover SWOT-Analysis involves specifying the objective of the project and identifying the internal and external factors that are favourable and unfavourable to achieving that objective. The objective of the SWOT is to determine to what degree the actual strategy is suitable and appropriate to meet the challenges and changes in the current environment. The value of the SWOT analysis lies mainly in the fact that it constitutes a self assessment for the private sector development strategy implementation in the northern part of the island.

Task 3 – Identification of barriers and needs: The completion of the above mentioned SWOT analysis will lead to the definition of the barriers and local needs of the TCc, in terms of promoting private sector development and increasing the competitiveness of the TCc economy. Emphasis will be given in the rational determination of TCc’s existing barriers and needs, as well as in setting them in order of precedence (hierarchy of needs) since they will be the base for the private sector development strategy approach in the next task.

Task 4 – Strategic planning: This task includes the process of defining the TCc private sector development strategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people. Strategic planning is a very important activity, which ends with objectives and a roadmap of priorities to achieve those objectives. In this framework, a specific vision - strategy for developing the private sector of the northern part of the island will be formed, in terms of improving the private sector’s competitiveness.

More analytically the Vision defines where the TCc wants to be in the future. It reflects the optimistic view of the community’s future. The vision statement must be SMART, namely

Specific

Measurable

Achievable Relevant

Time bound

At the same time the Strategy defines the way to implement this vision and make it true. Then this strategy will be specialized in particular Objectives, which in fact aim at addressing the specific intervention areas of the TCc private sector. Objectives, in fact, constitute the specific, time bound statements of intended future results.

These objectives will be translated into thematic priorities and intervention areas aiming at covering the identified local needs, so that the foreseen increase of competitiveness will be accomplished. Finally, the above mentioned intervention areas will be specified into specific


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actions that will be carried out by the local authorities and stakeholders in order to address the particular needs of the TCc, in terms of Private Sector Development and SMEs competitiveness improvement and entrepreneurship promotion.


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Chapter 2. Socio-Economic analysis of Northern Cyprus current situation

2.1. Country Information

2.1.1. Geography

Cyprus is situated in the Eastern Mediterranean Sea, at the hub of three continents where the trade routes intersect. It is the third largest island in the Mediterranean Sea after Sicily and the Sardinia. The total area of the island covers 9,251 square kms.

Northern Cyprus (Turkish: Kuzey Kıbrıs) is a de facto state located in the northern portion of the island of Cyprus.

The area of the Turkish Cypriot community is 3,242 square kms. The nearest neighbouring country is Turkey which lies at a distance of 65 kms to the north.

The northern part of Cyprus is a region divided into five districts as shown in the map above:

Nicosia (Lefkoşa)

Famagusta (Mağusa)

Kyrenia (Girne)

Morphou (Güzelyurt)

Trikomo (İskele)

The capital Nicosia is the largest city of the TCc. The other major towns are Famagusta and Kyrenia which are located on the coast.

The official language is Turkish but English is widely spoken and understood in official and commercial circles.

The religion is Islam, with Muslims making up 99% of the population.


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2.1.2. Climate

The northern part of Cyprus has a typical Mediterranean climate with about 300 days of sunshine per year. It enjoys dry, warm summers and mild winters. The bulk of the rain falls during the period from November to March. The coldest month is January having minimum and maximum mean temperatures of 6 oC and 16oC respectively. In the hottest month August the corresponding minimum and maximum mean temperatures are 21oC and 35oC.

2.1.3. Demographic characteristics

According to the final results of the Census of Population and Housing Unit, which was held on 30 April 2006, the de-facto population of TCc is 256,644. The population density is 79.16 persons per square km.

In the following table information about population development, population increase rate (%) and population density are shown regarding the period 2003-2008, according to the SPO statistics. It is pointed out that for numbers related to the years after 2006 are projections based on the General Population and Housing Unit Census.

Table 1 Population Basic Indicators (2002-2008)

Indicator 2002 2003 2004 2005 2006 2007 2008

Population 213,491 215,790 218,066 220,289 257,513 11 268,011 274,436

Population Increase Rate (%) 1.1 1.1 1.1 1.0 16.9 4.1 2.4

Population Density 65.9 66.6 67.3 68.0 79.4 82.7 84.7

Crude Birth Rate (Per Thousand) 15.0 15.0 16.0 16.0 14.9 15.0 15.4

Crude Death Rate (Per Thousand)8.0 8.0 8.0 7.0 6.7 6.8 6.8

Natural Increase Rate (%) 0.7 0.7 0.8 0.9 0.8 0.9 0.9

Infant Mortality Rate (Per

Thousand Live Birth)10.0 10.0 10.0 9.0 15.8 15.0 14.3

Total Fertil ity Rate 1.8 1.8 1.9 1.9 1.8 1.8 1.8

Life Expectancy at Birth (Year)4

Male 71.0 71.0 71.0 71.0 71.4 71.5 71.7

Female 75.6 75.6 75.6 75.6 76.0 76.2 76.4

* Since 2006 mid-year de-jure population projections based on the General Population and Housing Unit Census are indicated, Source: State Planning Organization

Table 2 Distribution of Population by Districts and Sub-Districts according to the Results of the 2006 Population Census

District Total Urban Rural

Total 256,644 146,831 109,813

Nicosia 84,776 56,052 28,724

Famagusta 63,603 39,231 24,372

Kyrenia 57,902 24,876 33,026

Morfou 29,264 19,923 9,341

Trikomo 21,099 6,749 14,350 Source: State Planning Organization


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Figure 2 TCc Distribution of population among districts

33.03%

24.78%

22.56%

11.40%

8.22%

Nicosia

Famagusta

Kyrenia

Morfou

Trikomo

Figure 3 Distribution of TCc urban and rural population

57.21%

42.79%

Urban

Rural

Figure 4 Distribution of urban and rural population among districts

0,00% 10,00%20,00%30,00%40,00%50,00%60,00%70,00%

Nicosia

Famagusta

Kyrenia

Morfou

Trikomo

66.12%

61.68%

42.96%

68.08%

31.99%

33.88%

38.32%

57.04%

31.92%

68.01%

Rural

Urban

Table 3 Household Population, Number and Size (2006 Census)


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District

Total

number of Urban Rural

Total 71,376 55,335 16,041

Nicosia 22,869 20,173 2,696

Famagusta 18,363 13,187 5,176

Kyernia 15,893 14,473 1,420

Morphou 8,509 5,361 3,148

Trikomo 5,742 2,141 3,601 Source: State Planning Organization

As far as the life expectancy at birth rate is concerned in 2008 the relative number was 71,7 years for male and 76,4 years for female, while the natural population increase rate seems to be steady over the last 10 years (1999- 2008) in the levels of 0,9%.

In the following table the distribution of TCc Population by Sex and Age is depicted. More than half of the population (54.57%) is male, while the majority of the total TCc population is between 20 and 44 years of old (48%).

Table 4 Distribution of Population by Sex and Age (2008)

Age Total Male Female

Total 279,064 152,295 126,769

0-4 17,391 8,902 8,489

5-9 15,752 8,062 7,691

10-14 16,346 8,443 7,691

15-19 24,745 13,713 11,032

20-24 39,991 24,396 15,595

25-29 29,573 17,579 11,994

30-34 25,663 14,553 11,110

35-39 19,912 11,066 8,846

40-44 17,996 9,870 8,126

45-49 16,707 8,841 7,866

50-54 14,288 7,445 6,843

55-59 11,888 6,173 5,715

60-64 9,359 4,633 4,726

65-69 6,943 3,288 3,655

70-74 5,258 2,31 2,948

75+ 7,251 3,021 4,23

Total 100.0 100.0 100.0 Source: State Planning Organization

2.1.4. Education

The education system in the TCc consists of pre-school education, primary education, secondary education and higher education. More analytically:

Pre-school education is provided by kindergartens for children between the ages of 5 and 6

Primary education is provided by elementary schools and designed for the 7-11 age group, it lasts for 5 years and is free of charge and compulsory

Secondary education is provided at 2 stages: First stage is lasting for three years, is intended for children in the 12-14 age group and is free of charge and compulsory. Second stage is designed for the 15-18 age group and has a 4 year programme of instruction.

Higher education is provided by the 6 Universities that operate in the northern part of Cyprus


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The education level in the TCc is high and the education sector is one of the biggest sectors of the TCc economy.

In particular, the existing Universities have a great number of students. There are 6, 2 semi-public and 4 private, universities operating in the region. The approximate number of students is as follows:

Table 5 Number of students pursuing in Higher Education (2008-2009)

University name Number of

Students

Eastern Mediterranean University 13,255

Girne/ Kyrenia American University 4,936

Near East University 14,270

European University of Nicosia 3,529

Cyprus International University 4,348

Middle East Technical University, Northern Cyprus Campus1,243

Total number of students 41,581 * Data for 2008-2009 academic semester Source: Universities, State Planning Organization

The following table shows expected number of students in the next few years. (Note: One of the new universities will have online-higher education).

Table 6 Expected enrolments (number of students)

2010-2011 2015-2016

Eastern Mediterranean University 17,000 20,000

Girne/ Kyrenia American University 10,000 13,000

Near East University 15,000 15,000

European University of Nicosia 5,000 7,000

Cyprus International University 5,000 6,000

Middle East Technical University, Northern Cyprus Campus3,000 6,000

Total number of students 55,000 67,000

Expected enrolments

(number of students)University name

Source: YAGA – TCc Investment Development Agency

2.1.5. Labour force and employment

With reference to the Labour Market, TCc’ labour force consists of about 104,491 people

- 91,550 or 87.6% employed and

- 12,941 or 12.4% of which are not employed

according to 2009 Household Labour force Survey. The majority of the employed labour force is engaged in the services sector (46%) followed by the public sector (30.2%), construction (10%), industry (9%) and agriculture (4.8%).

The following table shows the main indicators for the Household Labour Force as per a Survey of 2009 by the State Planning Office:

Table 7 Household Labour force Survey - Main Indicators (2009)


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Indicators Total Nicosia Famagusta Kyrenia Morfou Trikomo

Non-corporate* Civilian Population age 15 or Over 209,310 70,586 50,589 49,473 22,355 16,307

Workforce 104,491 38,099 22,865 25,943 10,590 6,992

Employed 91,550 33,797 20,037 22,747 9,063 5,905

Unemployed 12,941 4,302 2,828 3,196 1,527 1,087

Rate of Inclusion in Workforce (%) 49.9% 54.0% 45.2% 52.4% 47.4% 42.9%

Employment Rate (%) 43.7% 47.9% 39.6% 46.0% 40.5% 36.2%

Unemployment Rate (%) 12.4% 11.3% 12.4% 12.3% 14.4% 15.5%

Unemployment Rate in Young Population ** 31.4% 31.5% 31.5% 28.5% 27.1% 43.9%

* Non-corporate civilian population: excludes those living in schools, dormitories, hotels, nurseries, rehabilitation centres, hospitals, penitentiaries, barracks and other army accommodations. ** Population between 15 -24 Source: State Planning Organization

Table 8 Employment According to Household Labour Force Survey 2008*

Sectors 2004 % 2005 % 2006 % 2007 % 2008 %

1. Agriculture, Forestry, Hunting, Fishing

7,278,00 8.4 4,681,00 5.5 4,378.00 4.8 3,170.00 3.5 3,171.00 3.5

2. Mining. Quarrying 114.00 0.1 144.00 0.2 113.00 0.1 115.00 0.1 113.00 0.1

3. Manufacturing 9,490.00 10.9 8,440.00 9.9 8,006.00 8.7 7,679.00 8.5 7,171.00 7.9

4. Electricity. Gas. Water 607.00 0.7 641.00 0.7 644.00 0.7 1,103.00 1.2 860.00 0.9

5. Construction. Public Works

8,079.00 9.3 8,375.00 9.8 9,590.00 10.4 9,664.00 10.8 10,491.00 11.5

6. Wholesale-Retail Trade 14,130.00 16.3 14,563.00 17.0 16,757.00 18.3 17,340.00 19.3 16,123.00 17.7

7. Restaurants. Hotels 5,039.00 5.8 4,942.00 5.8 5,755.00 6.3 5,493.00 6.1 5,941.00 6.5

8. Transport. Communication. Storage

5,289.00 6.1 5,378.00 6.3 5,250.00 5.7 5,017.00 5.6 6,082.00 6.7

9. Financial Institutions 3,403.00 3.9 3,044.00 3.5 3,541.00 3.9 3,142.00 3.5 3,638.00 4.0

10. Property Renting 3,595.00 4.1 4,261.00 5.0 3,319.00 3.6 4,120.00 4.6 3,004.00 3.3

11. Public Administration 13,309.00 15.3 14,346.00 16.8 14,969.00 16.3 14,344.00 16.0 14,854.00 16.3

12. Educational Services 8,576.00 9.9 9,120.00 10.6 9,743.00 10.6 9,479.00 10.6 9,715.00 10.6

13. Health Services 2,545.00 2.9 2,470.00 2.9 2,931.00 3.2 3,013.00 3.4 2,907.00 3.2

14. Other Community Services

5,460.00 6.3 5,178.00 6.0 6,821.00 7.4 6,108.00 6.8 7,151.00 7.8

Total 86,914.00 100.0 85,583.00 100.0 91,817.00 100.0 89,787.00 100.0 91,221.00 100.0

* Sectoral figures may not add up to the general total due to rounding. Source: State Planning Organization

According to the above figure the 17.7% of TCc employers work in Wholesale and retail trade; 16.3% work in Public Administration, 11.5% work in Construction and Public works, while on the other hand the lowest rates are presented in mining and quarrying and electricity gas and water activities (0.1% and 0.9% respectively).

The following table presents data on the level of education of the employed people of the TCc (labour force according to 2009 Household Labour force Survey).


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Table 9 Household Labour force Survey – Employed level of education (2009)

Education Level

Sector No education Primary School

Technical Primary School

Junior high school or

other equivalent

General high school

Technical High school

University, college

Master, Doctorate

1. Agriculture, Forestry, Hunting, Fishing

512 2,282 0 435 600 384 198 22

2. Mining, Quarrying 0 41 0 65 0 0 0 0

3. Manufacturing 229 3,650 0 937 1,018 654 773 52

4. Electricity, Gas, Water 0 293 0 156 197 203 84 18

5. Construction, Public Works 401 4,348 0 1,392 981 708 1,238 137

6. Wholesale-Retail Trade 284 4,674 35 2,013 4,315 1,795 2,329 164

7. Restaurants, Hotels 46 1,335 0 453 1,133 638 1,139 129 8. Transport, Communication, Storage

279 2,164 0 1,712 1,780 560 741 80

9. Financial Institutions 0 182 0 223 1,113 651 1,269 340

10. Property Renting 153 823 0 359 1,010 209 1,491 135

11. Public Administration 220 2,376 0 1,316 5,036 1,909 4,114 447

12. Educational Services 56 1,177 0 511 639 615 5,264 1,921 13. Health services and other social service activities

32 381 0 202 392 467 979 82

14. Other Community Services

128 1,184 0 916 1,623 587 1,121 100

Total 2,339 24,909 35 10,689 19,837 9,378 20,738 3,626

% of education level as per total employed people

2.55% 27.21% 0.04% 11.68% 21.67% 10.24% 22.65% 3.96%

Number of employees working in a firm

Level of education

No education Primary School

Technical Primary School

Junior high school or

other equivalent

General high school

Technical High school

University, college

Master, Doctorate

Total

1 - 10 employees 1,328 12,632 0 4,988 7,022 3,022 5,756 565 35,314

11 - 19 employees 440 3,595 0 1,894 2,431 1,448 2,889 350 13,046

20 - 49 employees 129 3,156 35 1,185 2,475 1,291 3,280 411 11,962

more than 50 employees 441 5,526 0 2,621 7,909 3,618 8,813 2,299 31,227

TOTAL 2,339 24,909 35 10,689 19,837 9,378 20,738 3,626 91,550

* Sectoral figures may not add up to the general total due to rounding. Source: State Planning Organization

The above data shows that there is a very satisfying and favourable picture regarding the active labour force education level, since the 22.65% of the employed have a university degree while the 43.6 % have a high school certificate.

Guidance in the Employment Sector

In the northern part of the island, body in charge of labour and social security has four major departments, one of which is Employment Services (ES). The ES has five branches located in Nicosia, Kyrenia, Morphou, Famagusta and Trikomo. The ES is providing the employers and employees/job seekers with a variety of services, e.g., including work permits, job matching, inspections and very limited active labour market programmes.

There is, however, no career counselling service being provided to the employed and unemployed people.

Since economic conditions are changing rapidly at local and international level, there is need to reorganize and restructure this department, in order to adjust to the new environment, by utilising new methods and modern information technology based techniques that will contribute to the provision of efficient career guidance and counselling services to all potential employers and employees.

Education Initiatives

The education level in the northern part of the island is high. In this framework the public authority regarding Education, Sports and Youth has planned and working on the


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development of technical high schools and training centres, to support the labour market with educated and skilled technical staff. Furthermore the other public authorities of the TCc are supporting this kind of projects, by collaborating with NGOs (Chambers and Educational Centres) to create a better working environment.

Additionally, there is a variety of training centres offering formal and informal training to the unemployed, employed, men and women. In the northern part there are six universities, most of which have a “Continuing Education Centre.” The centres offer a variety of courses and training programmes to individual and institutional clients. There is, however, lack of information system through which people get informed about the variety of learning opportunities. Within this context, career counselling services would increase the access to lifelong learning facilities and to the labour market.

2.1.6. Physical and social infrastructure

This section includes brief information on the physical and social infrastructure and services in the northern part of the island. Public Services in the TCc include such spheres as healthcare, education, public transportation, fire and police services, electricity and gas, water services, waste management. Being a government-funded sector, public services are provided by state institutions for free (such as hospitals, schools, police department), thus guaranteed to be available for all the citizens regardless their social position or income. In this framework the following are mentioned:

As far as health services are concerned, the following table demonstrates some basic data regarding hospitals and medical facilities in the northern part of the island.

Table 10 Number of beds and health personnel in TCc for 2008

1. Number of Beds Public 971

Private 240

Total 1,211

2. Specialist Public 228

Private 256

Total 484

3. Practitioner Public 23

Private 50

Total 73

4. Dentist Public 21

Private 119

Total 140

5. Pharmacist Public 17

Private 159

Total 176

6. Nurse Public 663

7. Mid - Wife Public 10 Source: Ministry of Health, State Planning Organization

The structure of the health service is represented by hospital services; and primary care (dentists, opticians and pharmacists generally provide services as independent contractors). Hospitals are the major health care facilities in the TCc. There are general hospitals and medical facilities in all the towns (about 8 main hospitals exist). They provide with large numbers of beds for intensive care and long-term care as well as specialized facilities for surgery, childbirth, bioassay laboratories, etc. Private medical services are represented by clinics run by a private partnership of physicians. Clinics generally provide only outpatient services. Health centres provide services for ambulatory patients (as opposed to inpatients treated in a hospital). Some centres accept people with injuries or illnesses, which are not


Page | 17

serious enough for a visit to an emergency room. In these cases patients are examined by medical professionals. If patients need to be examined by a specialist, they are referred to hospitals or private physicians.

In this framework it has to be noted that as far as private health centres are concerned, over the last few years the level of their services has been upgraded and they are operating according to international quality standards.

There is a private transport system of buses and mini buses in TCc operating within and between towns during the day. Since 1974, rail transport in the northern part of the island is inactive. A national railway company has never been founded, and old rail stations are abandoned. Regarding air transportation there is one airport operating in the northern part of the island (Ercan airport). Furthermore there are two seaports in Famagusta and Kyrenia operating at the moment.

With regard to the TCc cultural and historical heritage there are lots of castles, museums, monasteries that a visitor can go to and learn about the island's life and history. In particular there are about 30 museums operating in the northern part (6 in Nicosia, 11 in Famagusta , 9 in Kyrenia and 4 in Morphou).

Lastly as far as the water resources are concerned, it is pointed out that in July 2010 a protocol was signed between the TCc and Turkey to deliver 75 million cubic meter of water from Turkey to Cyprus every year. The project will be completed in 4 years and it planned start implementing the project (laying down its foundation) this autumn.

From a submarine barrage in the area of Mersin a system of pipeline will be built between Cyprus to Turkey to bring water, not only for the northern part of the island but for the entire island of Cyprus.

The project will be completed in three phases; the first phase is related to a tender contract of the submarine barrage in Mersin. The total cost of the project is 450 million dollars and this cost will be covered by Turkish budget.


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2.2. Macro-economic background

During the last decade Northern Cyprus experienced a constant economic development and the real growth rate in the period 2000 - 2006 was increased from -0.6% to 13.2%, while for the years 2007 & 2008 it was considerable decreased to 1.5% and -3.4% respectively.

In 2004 the growth indicator of Northern Cyprus rose to 15.4 %. At the same time, the effort of reduction of inflation had as result a decrease from the 76.8 % in 2001 in the 2.7% in 2005 and 14.5% in 2008. It is pointed out that the inflation increase during the years 2006-2008 was mainly based on the relevant inflation increase of the Turkish economy.

The TCc applies a free market economy approach. Turkish Lira is the official currency used in the area where the stability of the macro economy has had positive progresses in the recent years.

Below are presented some macroeconomic indicators which can offer an overall picture on the status of the TCc economy.

Table 11 Basic macroeconomic indicators of the TCc economy (2002-2008)

Indicator 2002 2003 2004 2005 2006 2007 2008

GNP (Million $) 941,4 1,283.7 1,765.2 2,327.8 2,845.2 3,598.8 3.995,6

Real Growth Rate (%) 6.9 11.4 15.4 13.5 13.2 1.5 -3.4

GNP Per Capita (Current Prices TL/YTL)1 6,645,260,285 8,837,624,376 11,560 14,271 17,063 19,165 20,739

GNP Per Capita ($) 4,409 5,949 8,095 10,567 11,837 14,765 16,158

Inflation Rate (%) 24.5 12.6 11.6 2.7 19.2 9.4 14.5

Budget Deficit (Million $)2 225.1 176.9 104.2 185.3 287.3 221.2 369.6

Bank Deposits (Million $)3 1,153.5 1,785.9 2,355.8 2,707.4 3.330,4 4.239,2 3.678,6

Foreign Exchange Reserves (Million $) 941.6 1,222.6 1,544.6 1,597.6 2,030.9 2,072.1 1,802.6

Export (Million $) 45.4 50.8 62.0 68.1 68.1 83.7 83.7

Import (Million $) 309.6 477.8 853.1 1,255.5 1,376.2 1,539.2 1,680.7

Foreign Trade Balance (Million $) -264.2 -427.0 -791.1 -1,187.4 -1,308.1 -1,455.5 -1,597.0

Export / Import(%) 14.7 10.6 7.3 5.4 4.9 5.4 5.0

1 Indicated as New Turkish Lira from 2005. 2 Indicates the fiscal balance in the balance of state budget table 3 Includes Turkish Lira and foreign currency deposits Source: State Planning Organization

According to the data demonstrated in the previous table, until 2007, TCc presented an increased growth rate, which in 2008 decreased following the trends of the European Union, regarding real GDP growth rate1 indicator. Despite its small size of economy, TCc has one of the highest growth rates among European Union countries, which constitutes a potential advantage for business development.

As far as imports and exports are concerned the following table shows their composition per country.

The data presented reflects that TCc products are mainly exported in Turkey and east countries, while the export rates in EU countries are rather low.

1 Reference:

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tsieb020&plugin=1

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tsieb020&plugin=1


Page | 19

Figure 5 TCc imports and exports by countries (in Million US $) for the period 2002-2008

Imp. Exp. Imp. Exp. Imp. Exp. Imp. Exp. Imp. Exp. Imp. Exp. Imp. Exp.

1. Turkey 195.0 18.3 299.3 22.9 512.4 28.7 817.4 34.2 947.0 30.9 1,045.0 48.9 1,172.5 41.8

2. Other Countries 114.6 27.1 178.5 27.9 340.7 33.3 438.1 33.9 429.2 37.2 494.2 34.8 508.2 41.9

2.1. EU Countries 76.2 12.7 115.0 12.6 224.4 15.2 264.3 18.6 247.1 12.9 248.2 13.2 236.3 17.2

2.1.1. United Kingdom 34.2 11.9 49.3 11.9 91.0 13.5 101.4 13.8 87.1 8.4 71.6 7.4 58.3 4.62.1.2. Other EU

Countries 42.0 0.8 65.7 0.7 133.4 1.7 162.9 4.8 160.0 4.5 176.6 5.8 178.0 12.62.2. Middle East

Countries 9.7 3.7 12.7 3.8 23.5 4.3 42.0 6.8 57.1 9.2 52.2 6.9 49.4 12.7

2.3. Far East Countries 7.4 - 19.3 - 40.7 - 52.4 - 43.8 - 58.9 - 58.4 -

2.4. USA 3.1 0.1 3.7 - 7.1 - 8.3 0.1 9.8 0.1 16.0 .. 11.7 0.1

2.5. Other Countries 18.2 10.6 27.8 11.5 45.0 13.8 71.1 8.4 71.4 15.0 118.6 14.7 152.4 11.9

Total 309.6 45.4 477.8 50.8 853.1 62.0 1,255.5 68.1 1,376.2 68.1 1,539.2 83.7 1,680.7 83.7

2007 2008

Countries

2002 2003 2004 2005 2006

Source: State Planning Organization

The following graph demonstrates the allocation of TCc’s exports according to the countries for 2008.

Figure 6 Allocation of TCc’s imports and exports according to the countries (2008)

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

70,0%

1. Turkey 2. Other Countries

2.1. EU Countries

2.1.1. United Kingdom

2.1.2. Other EU Countries

2.2. Middle East Countries

2.3. Far East Countries

2.4. USA 2.5. Other Countries

69.8%

30.2%

14.1%

3.5%

10.6%

2.9% 3.5%0.7%

9.1%

49.9% 50.1%

20.5%

5.5%

15.1% 15.2%

0.0% 0.1%

14.2%

Imports Exports



Page | 20

2.3. Private Sector - Business environment

2.3.1. Identification of key sectors

The economy of Turkish Cypriot community is dominated by the services sector (77.1% of GDP in 2008), which includes Trade-Tourism, Transport-Communication, Financial Institutions, Ownership of Dwellings, Business and Personal Services, Public Services and Import Duties. Industry (light manufacturing & construction) contributes 17.8% of GDP and agriculture 5.1%. [Source: SPO]. Sectors in TCc have gone through a number of significant changes in the last few years.

Over the last 30 years, the structure of the economy has shifted from agriculture to tourism, construction and industry. Like other small island economies, the economic structure is less diverse and the service sector is the back bone of the economy. The following tables present the sectoral development in gross national product in the TCc.

Table 12 Sectoral Distribution of Gross Domestic Product

(current Prices, % )

Sectors 2002 2003 2004 2005 2006 2007 2008

1. Agriculture 8.9 9.4 9.1 7.0 6.3 6.3 5.1

1.1. Crop Production 5.4 5.8 5.5 3.7 3.2 3.5 2.7

1.2. Livestock Production 3.1 3.3 3.1 2.8 2.7 2.4 2.1

1.3. Forestry .. .. .. .. .. .. ..

1.4. Fishing 0.4 0.3 0.4 0.4 0.3 0.3 0.3

2. Industry 11.2 10.2 9.4 9.2 9.5 9.4 10.7

2.1. Quarrying 0.6 0.6 0.5 0.6 1.0 1.1 0.8

2.2. Manufacturing 5.3 5.2 4.8 4.8 4.5 4.4 4.0

2.3. Electricity - Water 5.4 4.4 4.0 3.8 3.9 3.9 5.9

3. Construction 4.4 5.0 4.3 5.4 7.9 7.9 7.1

4. Trade-Tourism 15.3 16.0 15.9 17.6 15.5 13.7 14.2

4.1. Wholesale and Retail Trade

9.5 9.6 10.8 12.1 11.4 9.5 9.7

4.2. Hotels and Restaurants 5.8 6.4 5.2 5.6 4.1 4.2 4.5

5. Transport-Communication 13.2 11.8 10.5 10.7 11.0 11.6 12.1

6. Financial Institutions 6.4 6.1 7.6 6.4 6.5 6.7 7.0

7. Ownership of Dwellings 2.9 2.7 2.5 2.3 3.0 3.1 3.5

8. Business and Personal Services

9.9 8.1 9.2 10.0 11.1 10.7 10.3

9. Public Services 19.7 21.6 20.8 20.5 20.3 21.8 21.7

10. Import Duties 8.1 9.1 10.7 11.0 9.1 8.8 8.2

GDP 100.0 100.0 100.0 100.0 100.0 100.0 100.0


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(1977 Prices YTL)

Sectors 2002 2003 2004 2005 2006 2007 2008 2009*

1. Agriculture 985.3 1,057.5 1,147.2 1,179.5 1,141.7 1,146.5 938.1 1,020.6

1.1. Crop Production 577.5 601.0 657.4 618.1 579.3 580.0 423.7 510.5

1.2. Livestock Production 343.8 388.7 412.0 463.2 489.6 478.1 434.0 428.9

1.3. Forestry 15.7 13.1 26.1 31.1 21.2 24.9 19.5 17.8

1.4. Fishing 48.3 54.7 51.7 67.1 51.6 63.5 60.8 63.4

2. Industry 1,075.9 1,159.0 1,282.4 1,364.7 1,638.4 1,624.4 1,457.6 1,363.1

2.1. Quarrying 29.0 36.1 39.2 43.5 64.1 64.8 58.8 49.6

2.2. Manufacturing 869.6 932.9 1,028.0 1,080.9 1,313.3 1,274.7 1,104.3 1,030.6

2.3. Electricity - Water 177.3 190.0 215.2 240.3 261.0 284.9 294.5 282.9

3. Construction 776.0 1,015.0 1,068.9 1,271.0 2,136.9 2,227.3 2,049.0 1,618.9

4. Trade - Tourism 1,420.0 1,597.9 2,004.8 2,420.9 2,650.7 2,578.9 2,524.8 2,114.9

4.1. Wholesale and Retail Trade

1,110.5 1,272.9 1,618.5 2,021.9 2,296.6 2,199.8 2,123.7 1,698.1

4.2. Hotels and Restaurants 309.5 325.0 386.3 399.0 354.1 379.1 401.1 416.8

5. Transport and Communication

1,149.4 1,197.9 1,303.3 1,487.8 1,478.0 1,425.0 1,456.2 1,519.4

6. Financial Institutions 390.3 416.3 414.9 432.4 470.7 500.5 548.7 558.9

7. Ownership of Dwellings 485.1 496.8 508.9 526.0 631.8 660.6 678.3 703.7


807.0 853.3 1,074.9 1,280.0 1,440.2 1,534.7 1,600.9 1,630.9

9. Public Services 1,454.3 1,514.6 1,592.8 1,700.8 1,741.0 1,884.0 1,906.1 1,884.8

10. Import Duties 519.0 710.5 1,043.2 1,353.1 1,344.5 1,509.5 1,497.8 1,343.3

11. GDP 9,062.3 10,018.8 11,441.3 13,016.2 14,673.9 15,091.3 14,657.4 13,758.6

12. Net Factor Income from Abroad

70.8 158.3 298.3 310.8 416.8 219.5 139.7 104.3

GNP 9,133,1 10,177,1 11,739,6 13,327,0 15,090,7 15,310,8 14,797,2 13,862,9 * Provisional figures, Source: State Planning Organization

With its sectoral distribution of Gross Domestic Product (GDP), TCc’ s economy resembles the characteristics of an “island economy”.

The data presented in the next table show that during period from 2002 to 2008 the capital investments in specific sectors, such as quarrying, manufacturing, business and personal service, ownership of dwellings, etc were enormously increased (almost fivefold up).

Consequently it is understood that the TCc has a good amount of local material to exploit such as raw materials for construction activities. It is pointed out that these investments regarding natural resources of the community should be managed and controlled in a sustainable manner, in order to protect the TCc environment and preserve its natural beauty.


Page | 22

Table 13 Sectoral Distribution of Fixed Capital Investments

(Current Prices YTL)

Sectors 2002 2003 2004 2005 2006 2007 2008

1. Agriculture 15,876,418.2 19,505,376.0 25,067,329.5 30,288,995.7 37,031,696.5 25,096,397.8 33,118,594.9

2. Industry 22,529,433.0 40,640,073.2 70,693,090.7 84,573,998.0 154,480,514.6 188,370,607.1 199,708,263.8

2.1. Quarrying 240,120.0 581,744.8 730,071.1 1,210,690.9 1,494,338.6 1,716,774.9 1,708,417.6

2.2. Manufacturing 14,629,250.3 26,897,248.7 55,959,681.7 59,725,765.6 66,640,455.5 69,492,101.5 68,504,697.8

2.3. Electricity - Water 7,660,062.7 13,161,07.,7 14,003,337.9 23,637,541.5 86,345,720.5 117,161,730.7 129,495,148.4

3. Construction 4,327,423.0 8,909,608.5 21,259,857.0 43,258,675.4 34,687,310.1 20,913,624.0 14,016,685.2

4. Trade-Tourism 19,239,532.6 35,370,682.2 55,650,643.9 68,847,433.3 90,649,789.0 101,226,532.6 82,215,951.7

4.1. Trade 8,838,60.5 14,210,973.8 25,636,774.0 31,365,312.0 35,800,632.3 50,075,646.0 42,451,755.2

4.2. Tourism 10,400,923.1 21,159,708.4 30,013,869.9 37,482,121.3 54,849,156.7 51,150,886.6 39,764,196.6

5. Transport-Communication 29,705,307.4 44,707,365.5 63,636,784.3 86,087,316.9 125,687,146.5 71,995,694.2 97,322,396.4

6. Financial Institutions 1,371,729.5 1,953,076.3 7,523,937.0 9,103,826.6 10,069,587.4 11,418,664.9 14,893,304.4

7. Ownership of Dwellings 66,347,993.9 91,113,091.2 121,390,563.7 204,215,564.9 353,405,768.1 466,969,956.7 480,192,774.8


7,999,201.9 12,718,481.6 22,014,944.9 25,959,956.5 49,092,282.6 88,371,762.0 78,727,130.8

9. Public Services 31,834,567.3 51,285,602.2 79,363,510.0 93,124,289.1 111,555,220.1 89,918,968.8 62,507,292.3

9.1. Health 1,298,629.4 5,313,311.2 3,884,086.9 4,354,195.6 17,287,059.8 31,222,881.6 9,153,660.3

9.2. Education 15,117,50.0 23,454,844.6 41,220,862.1 54,362,203.5 51,152,845.3 10,076,850.3 9,135,207.9

9.3. Other 15,418,429.9 22,517,446.4 34,258,561.0 34,407,890.0 43,115,315.0 48,619,236.9 44,218,424.1

Total 199,231,606,8 306,203,356.7 466,600,661.0 645,460,056.4 966,659,314.9 1,064,282,208.1 1,062,702,394.2


The following table presents data regarding the total credits allocated by the TCc Central Bank to SMEs among the various sectors.

Table 14 Credits - Sectoral (Total) (31 -03-2010)

Sector Credits (TRY) %

Public Enterprises and Institutions 1.342.308.906,78 33,46%

Agriculture 24.514.640,91 0,61%

Mining and Quarrying 40.907,88 0,00%

Manufacturing 6.634.990,23 0,17%

Transport and Communication 6.243.986,62 0,16%

Foreign and Domestic Trade 616.853.578,39 15,37%

Export 5.352.603,09 0,13%

Tourism 4.368.522,13 0,11%

Building and Construction 86.499.362,17 2,16%

Small Businesses and Craftsman 28.915.674,30 0,72%

Personal and Professional Credits and Others 1.890.519.685,80 47,12%

Bills Discounted 0,00 0,00%

TOTAL 4.012.252.858,30 100% NOTES: (1) Figures are prepared on a declaration basis from transitional bank balance-sheets, reported to the Central Bank of the TCc (2) Figures exclude Saving Deposits Insurance Fund (SDIF) banks Source: Central Bank of TCc

Based on these data it is understood that most credits are granted to the public sector (33.46%) while the rest of them are personal and professional credits (47.12%). Yet it has to be considered that most of these personal and professional credits are utilised for business activities, since there is lack in the regulatory framework, regarding the issue of getting credits for business investments.

2.3.1.1 Agriculture


Page | 23

The agriculture sector was once the backbone of the TCc economy in 1980’s. Although its share in the economy has undergone a declining trend and decreased from 20.9% in 2005 to 6.4% in 2009, it still plays an important role in supplying vital input for the Tourism and niche Agrifood, which is perceived to be one of the primary sectors in the northern part of the island.

From the total area of 330,384 hectares of land cover in the northern part of the island 56.71% is covered by agricultural areas, 19.50% is covered by forests, 4.95% is covered by grazing land,10.69% is covered by towns, villages, rivers and lakes and 8.15% is covered by unused land {Source: SPO}.

The main agricultural products in the northern part include cereals, pulses, industrial crops, oil seeds, tuber crops, fodder crops, leafly or edible stem vegetables, fruit bearing vegetables, leguminous vegetables, root, bulb and tuberous vegetables, other vegetables, nuts, pome fruits, stone fruits, grape and grape like fruits and of course citrus fruit.

The following table presents the production in tons of the main agricultural products, regarding year 2008 {Source: SPO} and it understood that citrus and fresh vegetables constitute the main TCc production (53.7% and 28.1% respectively), followed by cereals and fruit and vineyard.

Table 15 Production of main agricultural products (2008)

Main Products

Production in

tons

% of total

production

Cereals 17,834 8.0%

Fodder crops 6,601 3.0%

Leguminous vegetables 3,178 1.4%

Fresh vegetables 62,846 28.1%

Fruit and vineyard 12,906 5.8%

Citrus 119,965 53.7%

Total 223,330 100.0%


It is pointed out, according to SPO, that the export share of Citrus, which is one of the important export products reduced to 28.1% in 2006 from 35.1% in 2003. In other words, in four year period export of citrus fruits increased by 2.8%, while halloumi and cheese by 27.5% and 29.8% respectively, citrus concentrates increased by 28.9%, within the annual average growth rate of total export as 10.6 %.

As far as the livestock production is concerned, the following table includes basic indicators regarding number of livestock and main animal products of the TCc for 2008.


Page | 24

Table 16 Number of livestock and main animal products (2008)

Sheep 230,992

Goat 58,918

Cattle 49,361

Broiler commercial type 6,503,376

Layer commercial type 109,978

Parent stock 68,897

Beehive 13,910

Total 7,035,432

Number of Livestock

Milk 109,626

Sheep goat 13,133

Cow 96,493

Poultry meat 9,810

Commercial eggs (in

dozens) 1,987,755

Muttons 3,627

Goat meat 738

Beef 4,066

Wool 272

Animal Products (in tons)


Regarding the existing equipment and machinery used in agriculture activities, it is mentioned {Source: SPO} that their number has been increased over the last five years and it is considered almost adequate, while most of it is old fashioned and has been purchased many years ago.

Moreover in the TCc forestry products are also produced; in 2008 the production of fire wood reached 1.635 sterling pounds, which compared to previous years (2003) presented a decrease rate of about 45%.

2.3.1.2 Industry and manufacturing

The manufacturing sector contributes with 10% to the economy in 2009 {Source: YAGA}. Food and beverages, textile, furniture and processed agricultural products are the main sub sectors of the manufacturing.

Manufacturing contributes with 10 % to the GDP and 9.1% to total employment in 2009. Also the Construction sector has 6.5% share and contributes 10.1% to total employment.

Construction sector showed a boom in the TCc economy during 2005-2007, and it was accelerated by showing 8.7% of reel growth on average during the last 5 years. According to the SPO, the construction sector has an influence on 27 sub-sectors in the economy, this is why, its impact in the economy is very broad.

The average annual growth rate of manufacturing sector is 1.2% in the last five years including 2009. Manufacturing sector has 50.3% share of the total exports earnings in 2009, where processed agri-business products has 71.6% share.

Industrial zones intend to provide ready infrastructure for investment, particularly for SMEs. These zones formed by supplying the land parcels whose borders are registered and provided, with the necessary infrastructure services and other necessary facilities. Main purposes of these zones are to group all newly developed businesses together and to encourage SMEs to develop their activity in healthier working conditions.

Available industrial zones in TCc are;

Nicosia Industrial Zone

Famagusta Small Industrial Zone

Famagusta Industrial Zone

Agios Georgios (Karaoğlanoğlu) Industrial Zone


Page | 25

Mia Milia (Haspolat) Industrial Zone

Gerolakkos (Alayköy) Industrial Zone

Rental time period is maximum 33 years (but may be extend twice more) and the rental price is low compared with similar conditions in other locations. As another advantage it is to mention that the renters in the industrial areas may register with the Land Registration Office and hand over or mortgage the buildings that they have inside the area during their rentals.

2.3.1.3 Services

Among the service sector, tourism and higher education are the leading sectors. Net revenues from tourism and higher education sectors are the two main sources of revenue and a major component of the current accounts in balance of payments. More analytically:

Tourism

Tourism is one of the leading growth sectors in TCc and the government places a high priority to the development of this sector.

Annual visitor numbers reached 809 thousand in 2008 and net tourism revenues is 434 million USD in 2009. In 2009 800 thousand tourists visited the country and net tourism revenues were reached to 450 million USD. In line with increasing visitor arrivals, TCc offers a wide range of accommodation from 5 star luxury hotels to holiday villages and a wide range of special tourism products such as bird watching, golfing, turtle watching, diving, historical site visit, eco/agro-tourism with more than 15.7 thousand bed capacity. According to the 2009 statistical yearbook of tourism there are approximately 134 facilities for tourist accommodation, the majority of which is located in Kyrenia (95 accommodation establishments) with the following distribution by regions and categories:

Table 17 Number of accommodation establishments by regions and categories

Tourism accomodation

establishments Total Nicosia Famagusta Kyrenia Morfou Trikomo

5 star hotel 12 1 1 9 1,0

4 star hotel 6 6

3 star hotel 16 2 1 12 1

2 star hotel 19 2 12 2 3

1 star hotel 19 1 13 1 4

special class hotel 1 1

boutique hotel 1 1

II. Class holiday village 6 5 1

touristic bungalow 32 2 28 2

apart hotel 6 1 4 1

traditional house 1 1

other accommodation establishment 15 1 1 4 9

Total 134 4 9 95 3 23 Source: 2009 statistical yearbook of tourism, Ministry of Tourism, Environment and Culture

The following tables and figures present data on the number of arrivals and departures to and from TCc by nationality (the majority is from Turkey):


Page | 26

Table 18 Number of arrivals and departures to and from TCc by nationality for 2009

Nationality Arrivals Departures Total %

Turkey 638,700 637,186 1,275,886 63.42%

United Kingdom 61,558 62,133 123,691 6.15%

Germany 7,250 8,554 15,804 0.79%

Iran 6,913 6,522 13,435 0.67%

Russia 6,690 6,501 13,191 0.66%

Italy 2,653 2,176 4,829 0.24%

Other 76,612 76,508 153,120 7.61%

Tutkish Cypriot 205,219 206,517 411,736 20.47%

Total 1,005,595 1,006,097

Source: 2009 statistical yearbook of tourism, Ministry of Tourism, Environment and Culture

Figure 7 Number of arrivals and departures to and from TCc by nationality for 2009

63.42%6.15%

0.79%

0.67%

0.66%

0.24%

7.61%

20.47%

Turkey

United Kingdom

Germany

Iran

Russia

Italy

Other

Tutkish Cypriot


Table 19 Number of Tourists and bed nights in tourist accommodation establishments by district for 2009

District

Number of

Tourists

Number of

Bednights

% of tourists

per district

Nicosia 17,945 41,968 3.78%

Famagusta 42,320 144,607 8.91%

Kyernia 361,100 1,277,318 76.01%

Morphou 584 1,056 0.12%

Trikomo 53,101 170,617 11.18%

Total 475,050 1,635,566 100.0% Source: 2009 statistical yearbook of tourism, Ministry of Tourism, Environment and Culture


Page | 27

Figure 8 Percentage (%) of Tourists by district for 2009

3.78%

8.91%

76.01%

0.12%

11.18%

Nicosia

Famagusta

Kyernia

Morphou

Trikomo


According to the same statistical yearbook, the number of tourists staying in tourist accommodation establishments reached 474,600 in 2009, with an average length of stay of 3.4 days.

Table 20 Number of tourism establishments and number of employees working in the tourism sector for 2009

Type pf establishment Number of establishmentsNumber of

employees

Tourist accomodation 119 3,321

Other accomodation 15 43

Tourism & Travel agencies 144 340

Casinos 25 3,567

Tourist restaurants 360 1,953

Total 663 9,224 Source: 2009 statistical yearbook of tourism, Ministry of Tourism, Environment and Culture

From year to year, the northern part of the island has become an interesting destination for tourists hence it becomes a lucrative place where it worth to invest.


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Trade

The approved Green Line Regulation and Financial Aid Regulation of the EU for the Turkish Cypriot Community, and currently discussed Direct Trade Regulation, are the outcome of the understanding that the private sector in the northern part of the country needs special and well designed contributory programmes in order to develop and reach the EU’s standards under the given political circumstances. The aim of the regulations, especially the Direct Trade Regulation is to contribute to the development of the private sector and thus of SMEs through foreign trade. Similar programmes of the US through USAID also acknowledge the same understanding and aim at the development of the private sector and thus of SMEs in the northern part of Cyprus.

Considering that Turkish Cypriot SMEs have faced several economic and political fluctuations since 1963, the mentioned rationale behind these activities is important in providing a new level of international approach to Turkish Cypriot SMEs in the northern part of Cyprus.

The Green Line Regulation regulates the movement of persons and commercial products over the Green Line from the northern to the southern part of Cyprus. Looking to the performance of the Green Line Regulation (Report of the European Commission on the implementation of the Regulation, 2008) the total volume of trade as mentioned by the Turkish Cypriot Chamber of Commerce amounts to 8,575,190 Euro in the reporting period, where the breakdown is as follows:

vegetables 40%

wooden products/furniture 9%

building stones /articles of stone 12.5%

plastic products 9%

raw metal 12.5%

others 17%

The above mentioned value means a volume of approximately 714,000 euro monthly trade and this is considerably low. Considering the low performance on Green Line trade, EU Commission has proposed the Direct Trade Regulation just after the referenda on 26 April 2004. But this regulation is still in the negotiation process between the parties. Direct Trade Regulation (European Commission, COM 466, 2004) sets out reference to the statement made by UN Secretary General to UN Security Council which explains that “members can give a strong lead to all States to cooperate both bilaterally and in international bodies to eliminate unnecessary restrictions and barriers that have the effect of isolating Turkish Cypriots and impeding their development”.

The Direct Trade Regulation aims that goods which are wholly obtained and/or substantially improved in the northern part of Cyprus may be released for free circulation into the customs territory of the European Community with exemption from customs duties and charges having equivalent effect. This, of course, may bring additional impetus on exports from the northern part of Cyprus considering that almost half of the exports from this part of the island is already made to European countries (DPO, 2007) and, upon adoption and realisation of the Regulation, it may have positive impact on the development of the private sector as well as on the exporting SMEs from the northern part of Cyprus.

While some of the barriers on exports are related to unresolved political issues, considering the ongoing commercial relations with the other European and non-European countries, the foreign trade activities might be improved considerably by implementing comprehensive and targeted reforms in the foreign trade legislation and in relevant practices.


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Public Sector

According to the "Study on sustainability and sources of economic growth in the northern part of Cyprus" carried out by World Bank in 2006, the public sector has played a leading role in the economy of the northern part of Cyprus for three decades, supported by generous aid flows from Turkey.

Public enterprises have provided basic infrastructure, supplied financial services, marketed agricultural goods, and produced consumer products. Foreign trade has been controlled by taxes, licenses, and quotas. Public loans and subsidies have been handed out to firms and farms to promote investment and stabilize output. And the public sector has been the employer of last resort.

Public involvement in the economy was seen as necessary, given the uncertain political situation and considering the need to provide the TCc with jobs and economic stability; and according to the records, the public initiatives leaded also to a certain growth.

The cost of heavy public involvement in the economy, however, has become increasingly evident over the years. The public sector has grown to be too big, overstaffed, and inefficient and many areas of the private sector have become uncompetitive.


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2.3.2. Identification of SMEs

According to the information obtained during August 2010 till October 2010, it has been understood that the data regarding the precise number of enterprises as well as the standard set for official registration are not updated.

SMEs are registered either to more than one chamber, since they have more than one activity (i.e. most SMEs practice both industrial and commercial activities). Three chambers are operating in the region, where SMEs can be registered; name and number of registered Companies per chamber is as follows:

Institution No. of

Companies*

Turkish Cypriot Chamber of Commerce +3,500

Cyprus Turkish Chamber of Industry +530

Cyprus Turkish Chamber of Shopkeepers and Artisans +7,300

* Number of members, August 2010. [Source: KTTO, KTSO, KTEZO]

In the tourism sector, the internal market for private sector activity in the northern part of Cyprus is quite small and the size distribution of enterprises is highly skewed towards micro and small firms.

According to the Technical Report on the Labour Market Survey held in October 2009 –February 2010, under the EU project Technical Assistance to support the development and promotion of VET systems, lifelong learning and active labour market measures in the northern part of Cyprus,

- 91.6% of all enterprises are categorized as micro (0 to 9 employees),

- 7% are small (10 to 49 employees)

- 1.2% are medium (50 – 249 employees) and

- 0.2 % are large (more than 250 employees)


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Figure 9 Size of the business entity (company) according to the number of employees

Source: Technical Report on the Labour Market Survey held in October 2009 –February 2010, under the EU project Technical

Assistance to support the development and promotion of VET systems, lifelong learning and active labour market measures in the northern part of Cyprus

It is pointed out that the distribution of the enterprises per TCc region is as follows:

Table 21 Size of the Company and Region (or percentage of each size of the company in the Region)

Enterprise category Nicosia Famagusta Kyrenia Morfou Trikomo

Micro (0-9 employees) 62.5% 100/% 100.0% 84.1% 100.0%

Small (10-49 employees) 37.5% 12.7%

Medium (50-249 employees) 3.2%

Large (+250 employees) Source: Technical Report on the Labour Market Survey held in October 2009 –February 2010, under the EU project Technical

Assistance to support the development and promotion of VET systems, lifelong learning and active labour market measures in the northern part of Cyprus

According to a Survey conducted by the Chamber of Industry in October 2009, 70% of the industrial facilities work 50% under their production capacity. Only 5.9% of the industrial facilities are working over 75% of their production capacity additionally, 23.5% of the industrial facilities are working 25% under their production.

Another important finding from the survey is that 61.7% of the companies participating the survey believe that their production capacity usage has decreased in the first half of 2009 [Cyprus Turkish Chamber of Industry – Expectations and Appearance of the Industry in Northern Cyprus, 2009].

Although there are not enough data on the SME s performance level, yet recent studies and reports2 show that the major problems that TCc entrepreneurs and SMEs face are relative to the following issues:

The TCc market is small and trade restrictions and difficulties with Green Line trade hamper exports access to global markets. As a result, firms have small-scale plants and operate these plants at relatively low levels of capacity utilization.

2 According to the "Study on sustainability and sources of economic growth in the northern part of Cyprus" carried out

by World Bank in 2006


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Machinery in use in many companies in infrastructure and industry activities is older than the ones of competitors and the value of the new investments and technical upgrading is low.

Transportation costs are relatively high, because of

the need to tranship through Turkey due to trade restrictions,

small-volume imports and exports cost more to transport, and

relatively less efficient internal transport services

These increase the costs of key intermediate inputs and exporting. Port handling and other trade support services are also relatively less efficient and higher cost in the northern part of Cyprus than in competitor countries.

Infrastructure costs are higher (also utility rates are not full cost recovery rates) and quality of services lower than competitors, especially in the areas of water and electricity. Power outages are frequent and water shortages common. Many firms must run their own generators or operate their own water systems to produce, which adds extra cost to the business activity.

IT use is extremely low compared to competitors and the larger companies that do use computers make limited use of IT potential to manage production, inventories, and finance. Only about 1 per cent of companies have ever engaged in B2B e-commerce transactions.

The minimum wages for manufacturing and industry activities are particularly high compared with the situation in the recent EU member countries

Quality standards are relatively low and few firms have quality certifications (ISO 9000, HACCP).

Low productivity in the Food processing sector (as the largest sub-sector in the manufacturing). One of the reasons why some processors have low productivity is because of low upstream productivity in agriculture and in public marketing enterprises. The productivity of farms in the northern part of the island is low compared with the situation in the recent EU member countries.

Low investment demand in manufacturing and the lack of innovation and technical learning that accompanies it is a binding constraint on growth in the northern part of the island.


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2.4. Telecommunications& ICT sector

Information and Communication Technologies (ICT) is a crucial field for the TCc future both as a new potential business activity but also as a tool that is needed to raise the productivity of all sectors, particularly in high-potential service businesses.

The institutional framework of this sector consists the following local authorities:

The highest local authority

Local authority for Economy and Energy

Local authority for Public works and Communication

Local authority for Interior Affairs

Telecommunication Board under Public works and Communication

Telecommunications Office under Public works and Communication

Official Registrar under Economy and Energy authority

MAPS, Land Registry office under Interior Affairs authority

Public Network Committee (KAMUNET) under Prime State Administration

Municipalities

Currently the legal framework for the development of ICT sector has been put in place:

Regulation Description Number/Date

Law E-Signature Law 93/2007

Bylaw Legislation and bylaw for Operation of e-Signature Law 2007

Law Law for Privacy of Information 89/2007

Law Law for the Rules regarding the use of the private information

12/2006

The following laws are still under preparation:

Regulation Description Status

Law Electronic Communication Law in Commission

Law Cyber Crime Law In preparation

Law e-Invoice/e-Payment (e-Commerce) In preparation

Law Intellectual Property Rights In preparation

Law e-Government Not yet planned

Although considerable progress has been achieved in the regulatory framework of the ICT sector, there are still areas for improvement which need to be addressed, like: Central Bank Law, Revenue Tax Law, Sanctions Law, etc.

Regarding the development of existing Infrastructure for ICT, it has been assessed that ADSL, satellite, 3G, 2G and broad-band internet connection are very expensive and the quality of the services is low; and other options are not possible. The broadband connections provided by ISPs are used in an uncontrolled way.

The telecommunications sector is currently not up to the EU standards. In order to reach these standards, is necessary to ensure long-term sustainability and quality service provision, capacity needs to be built up, and in particularly is needed an infrastructure that facilitates the operation of competitive players in a liberalised telecom market.

Currently, telecommunication services are provided to the TCc by three suppliers:


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- two of these service providers are GSM operators, and

- one service provider is responsible for providing fixed lines services.

The mobile operators are owned and operated by two big GSM operators in Turkey. Since the GSM networks are run by private companies, they have better infrastructures, and allow for 3G technology usage.

Fixed telephony services and communication infrastructure are provided by a utility subordinated to the TCc administration (the “Telecommunications Office”) of the TCc. Telecommunications Office is the sole infrastructure provider in northern part of Cyprus. The organisation’s structure and operation should become in the future as much flexible as it is required to meet the demand for fixed line connection. As currently this is not in place, alternative solution has to be identified; particularly, broadband data services (Internet) and high bandwidth requirements by individuals and businesses particularly in rural areas need to be developed. Since the current status of Telecommunications Office is not sufficient to increase the services for having better and reliable voice and internet communications, privatization or liberalisation is foreseen as a possible alternative to improve the quality of voice and internet services. Even the revenues of Telecommunication Office are high and contribute considerably to the TCc budget, the office is not capable of making investments to solve the problems totally because the amount of money they can invest is limited by the budget.

Within the limited budget allocations for Telecommunications Office; high speed fixed line connections (metro Ethernet, ADSL, and ISDN) are provided at the centre of the districts in Nicosia, Kyrenia and Famagusta. The Telecommunication Office started a project based on WCDMA technology in 2007 because of the shortcomings in fixed line voice services. The project is still on-going and up to now 19 of 36 base stations have been installed. All of the units had been provisioned and the installation and operation of CDMA service is outsourced to two companies, to provide competitiveness. The fixed network is a traditional time-division-multiplexing (TDM) network utilizing SDH and PDH transmission infrastructure in star topology. The existence of only one fibre-optic connection abroad, i.e. to Turkey, which handles all telephone and internet communications outside the areas creates some restraints in the development of ICT. The NGN (Next generation Network) project planned to provide F/O channels for integrated and converged (voice, data, video) services to subscribers.

Even slowly, the current communication infrastructure of northern part of Cyprus is getting evolved. Broadband based wireless communication services provided by ISPs are very common, and this is due to the lack of fixed line services. The uncontrolled wireless broad-band environment for both voice and internet communications brings many difficulties to Telecommunications Office which cannot control the installation of the antennas and also this prevents the quality of the services, which is vital for e-Business/e-Commerce and e-Governance/e-Municipality. To overcome these problems, a regulation authority “Telecommunications Board” was set-up. The Board was appointed and is deploying the limited activities according to a bylaw but will become completely operational after the approval of “Electronic Communications law”.

Because of the voice and internet communication high costs, institutions in northern part of the island are not motivated to use internet technologies in their business.

There are 22 local banks in north Cyprus and only the two or three banks are operating internet banking due to the reason of high communication costs. The online payment systems (POS, vPOS, ATM) are not common and banks prefer manual off-line models of operation. Virtual POS system (Card+) was built with co-operation of six banks to enable


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payment systems direct from Card+ (like paypal) and from the systems of the banks. EFT Systems are not available, recently a project was started to enable EFT in northern part of Cyprus by support of Banks Association and Central Bank. Banks does not have sufficient number of ICT professional staff and don’t invest to ICT as required. Generally, banking sector is the driving sector in ICT and they should be motivated to invest in ICT technology and qualified ICT staff.

ICT Business is very important for north Cyprus and ICT is considered as one driving sector for economical growth; various stakeholders such as Chambers and Universities have already taken initiative for the promotion of ICT. In particular, the Chamber of Industry has made amendments in their bylaws in order to register ICT companies as members, since currently the ICT companies does not fulfil the basic requirements to become a member.

Universities in north Cyprus have also active role in the development of ICT through with curricula and with Technology Development Centres. The start was done by the Eastern Mediterranean University (EMU) early in the year 2000 with the establishment of the Technology Development Centre in Famagusta. Currently three Techno Parks established by Kyrenia American University and Near East University in Nicosia are operating independently of each-other.

For the development of technology in the TCc with the purpose of accelerating the development of the economy at the VII Turkey-TCc Joint Economic Committee meeting Technology Development Regions law put into progress with the coordination of the State Planning Office, representatives from the Aid Commission of Turkey, Department of Industry, Universities within the TCc and the Cyprus Turkish Chamber of Industry. All participants working in coordination defined the necessary infrastructure, the legal framework and the administrative structure of the Technological Development Regions.

Laws regarding the establishment, operation, administration and control of Technological Development Regions and for determining tax exemptions and incentives were also prepared and approved in January 2005. The first Technological Development Region was established in Famagusta. The second Technological Development Region is established in Near East University in Nicosia, but is not active yet. In order to increase the utilisation of such centres, new investments have to be done and a minimum of infrastructure shall be made available when a company starts business in the centre (e.g. CNC Unit, 3D laser shaping, Land Surveying Robot, Virtualization, etc.)

The universities and the state of TCc are providing to the SMEs and young entrepreneurs facilities within the Technological Development regions to allow them to update with the recent technologies in a short period of time.

In the field of public administration, the “Public Network Committee-KAMUNET” was built to facilitate e-Governance in local authorities. Currently, almost all of the local authorities except municipalities, are connected to each other on very fast (3Gb/sec) capacity network. However, the centralization of servers and policy development is still ongoing.

Most of the municipalities use computers in the offices for administrative applications that are locally developed. The biggest municipalities (Nicosia, Gönyeli/Kioneli, Lapta/Lapethos, Famagusta) have also the GIS applications functioning either fully or partially. GIS maps of northern part of Cyprus are produced by public and private sector, but not accredited by Land Registry and Cadastre Office.

ECDL training and certification is considered as a key element to increase awareness of the ICT. ECDL Course and certification are available at the basic level in TCc. Following initiatives were implemented to provide ECDL course and certificate to individuals:


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- USAID funded ”Capacity Development Programme” (122 graduates)

- EU funded project “Computer knowledge development for unemployed an disabled persons” (25 graduates)

- Courses organised y the ICT Association – modest cost - (30 graduates)

- Free ECDL trainings to public sector provided by Public Staff Office.

The ECDL Certification examinations are provided by Kyrenia American University, Near East University, East Mediterranean University, International Cyprus University, ICT Association, Libem Training Centre. These authorities are accredited by ECDL foundation.


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2.5. Financial sector

In the following chapters information about the TCc financial sector is provided, in order to identify the various factors undermining the economy’s ability to achieve sustainable growth and develop policies to address them.

2.5.1. Fiscal policy

The following table presents some useful information regarding the balance of the TCc state budget as a share in GNP, covering the period from 2002 to 2008.

Table 22 Balance of State Budget as a share in GNP

2002 2003 2004 2005 2006 2007 2008

I. BUDGET REVENUES 32.6 40.1 44.7 39.8 36.8 40.9 37.6

1. Local Revenues 24.6 31.5 37.7 33.2 29.6 34.9 31.9

1.1. Tax Revenues 16.1 17.8 20.4 20.2 18.7 20.4 22.5

1.1.1. Direct Taxes 8.1 8.9 9.6 7.7 7.9 8.4 9.5

1.1.2. Indirect Taxes 8.0 8.9 10.9 12.5 10.8 12.0 13.0

1.2. Other Income 6.0 6.0 6.1 6.8 4.7 4.8 3.2

1.3. Fund Revenues 2.6 7.7 11.1 6.1 6.3 9.6 6.2

2.Foreign Aid 8.0 8.6 7.1 6.6 7.2 6.1 5.7

2.1. Republic of Turkey 7.9 8.5 7.1 6.6 7.2 6.1 5.7

2.2. Other 0.1 0.1 .. .. .. .. ..

II. BUDGET EXPENDITURES 56.5 53.9 50.7 47.7 46.9 45.5 46.1

1. Current Expenditures 15.6 17.5 17.5 18.2 18.1 20.0 20.0

1.1. Personnel Expenditures 13.2 15.0 15.1 15.4 15.2 16.2 16.9

1.2. Other Current Expenditures 2.4 2.6 2.5 2.8 2.9 3.8 3.1

2. Transfers 32.1 26.6 24.8 22.3 19.1 18.1 19.0

2.1. Social Transfers 11.4 11.7 11.6 - - - -

2.2. Other Transfers 20.7 14.9 13.2 - - - -

3. Defence 3.8 3.6 3.1 2.5 2.9 2.6 2.9

4. Investments 5.1 6.1 5.2 4.7 6.8 4.9 4.3

III. BUDGET BALANCE -23.9 -13.7 -6.0 -7.9 -10.1 -4.6 -8.5

IV. ADVANCES - - - - - -1.6 -0.7

V. FISCAL BALANCE -23.9 -13.7 -6.0 -7.9 -10.1 -6.1 -9.3

VI. FINANCE 23.9 13.7 6.0 7.9 10.1 6.1 9.31. Credits from Republic of

Turkey 21.5 14.1 6.6 9.3 7.8 5.8 8.4

2. Internal Loans 2.4 -0.4 -0.6 -1.4 2.3 0.3 0.8 Source: State Planning Organization

2.5.2. Banking sector

The official currency in the TCc is Turkish Lira (TL). Real persons and corporate bodies are free to keep and save foreign currency, to use foreign currency as a means of foreign exchange and to express in foreign currency figures appearing on payment orders and contracts.

The official rates of exchange are fixed daily by the Central Bank and announced. Banks, foreign exchange bureaux and the Central Bank are free to fix different rates of exchange for the purchase and sale of foreign currency.

There is a developed banking system in the TCc. In addition to the Central Bank and the Development Bank there are 24 local commercial banks and 14 branches of large foreign banks. Banks are free to keep foreign currency, act as intermediary in import and export


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transactions, accept foreign currency savings, engage in purchase and sale of foreign currency, deal in bonds required to be paid in foreign currency, give foreign currency loans, engage actively in money and foreign currency markets and in compliance with international banking usage, to deal in every kind of foreign currency transactions. The Central Bank of TCc is responsible for the monetary, credit and exchange policy, and acts as banker to the government.

2.5.3. Tax System

The northern part of the island has one of the most competitive tax rates on corporate gains among the EU countries.

All companies and other corporate bodies, except cooperative societies, are chargeable with Corporation Tax. Corporations which are registered in the state as "Local Companies" are chargeable with 10% tax on chargeable income.

Corporations which are "Foreign Companies" whether registered in the state or not, are also chargeable at the rate of 10% on chargeable income derived from trade or other income in the TCc.

A corporation is "Locally Registered Company" in the case where the central management and control of its business is in the TCc. For tax purposes, all profits of such companies, including profits from other countries are liable to Corporation Tax, but for the avoidance of double taxation a set off for similar tax paid abroad is allowed. Corporation Tax is paid in two instalments;

- 31st May and

- 31st October of each year

In addition to the Corporation Tax liability the corporations which are operating under the Corporations Tax Law have to withhold income tax at source at a standard rate of 15% on the net chargeable income after corporation tax is deduced.

Companies engaged in education and health facilities and engaged in industrial activities in the regions approved by the council of Public Authorities, withhold income tax according to the Undistributed Profit/Paid Up Capital ratio (This ratio must not exceed the standard rate). Foreigners operating in the field of transportation, including corporations, shall not be subject to withholding tax on taxable income to be ascertained under the provisions of the Corporation Tax Law and the Income Tax Law.

Income tax is levied on income accrued in, derived from or received in the TCc. For permanent residents income arising within or outside the TCc is subject to income tax, but for the avoidance of double taxation a set off for income tax paid abroad is allowed.

Before income tax is charged, allowances granted to individuals under Income Tax Law are as follows;

Contributions to Social Security Funds

Personal Allowance

Earned Income Allowance (20% for employees-10% for self-employed)

Wife Allowance

Child Allowance

Disability Allowance

Old Age Allowance (for the individuals who are at the age of 65 and over)


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Individuals are liable to income tax under a progressive tax system. The personal income tax is levied at the statutory rates ranging from 10% to 37%.

Value Added Tax was introduced in 1996 as a Consumption Tax. Six (6) VAT rates are applied in accordance with VAT rates regulation. In TCc, supply of goods and services, demand of goods and services and imports are subjected to Value Added Tax (VAT): There are six VAT rates in Northern Cyprus. The VAT rates are: 0%, 3%, 5%, 10%, 15% and 20% respectively. The average VAT rate is 16%.

2.5.4. Business environment regulatory framework

In order to assess the business environment regulatory framework of the TCc a review of the TCc Doing Business 2010 report {Source: YAGA} is presented below, in terms of investigating regulations that enhance business activity and those that constrain it.

Doing Business presents quantitative indicators on business regulations and the protection of property rights that can be compared across 184 economies, from Afghanistan to Zimbabwe, over time.

A set of regulations affecting 10 stages of a business’s life are measured: starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business.

1. Starting /Establishing a Business

The provisions for establishing a business are set out in the Companies Law- Cap.113. It requires 16 procedures, takes 29 days and costs 19.6% of GNP per capita to start a business in the TCc. It is pointed out that the main form of business establishments in TC is “Private Limited” companies

2. Dealing with Construction Permits

Construction companies are under constant pressure from government to comply with inspections, with licensing and safety regulations, from customers to be quick and cost-effective. The required steps to building a Warehouse in TCc include 11 procedures, take 255 days and cost 488.1% of GNP per capita.

3. Employing Workers

TCc scores 37 on the Rigidity of Employment index, and provides 12 weeks of wages for companies dismissing one redundant worker. TCc is ranked 100 overall for Employing Workers.

4. Registering Property

The required steps to Registering Property in TCc include 4 procedures, take 19 days, and cost 12.5 % of property value to register the property.

5. Getting Credit

In TCc the major concern is the lack of reliable credit registries, making it hard for credit institutions to check the credit rating of individuals and companies. Most credit is collateral


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based, severely hampering growth and initiative. Therefore TCc is ranked 113 overall for Getting Credit.

6. Protecting Investors

TCc is ranked 154 overall for Protecting Investors. The major reason for this poor performance is the complete lack of protection for minority shareholders, and the fact that majority of the companies are family owned, unnecessarily increasing the risk of minority shareholdership in TCc enterprises. Another issue is the lack of director liability for decisions made; this may create perverse incentives in the management of companies, especially in cases of blatant conflict of interest.

7. Paying Taxes

TCc is ranked 115 overall for Paying Taxes. Companies in the northern part of the island face 59 tax, semi-tax payments and contributions payments, spend 163 hours preparing taxes, and face a tax burden of around 41.2% of profits.

8. Trading Across Borders

In the northern part of the island, an entrepreneur has to prepare 9 documents, needs 21 days, and spends 940 USD to export a container to any port outside of Mersin, Turkey. Similarly, he/she prepares 7 documents, needs 7 days, and spends 840 USD to import a container of similar size. Therefore, Northern Cyprus is ranked 71 overall for trading across borders.

9. Enforcing Contracts

TCc is ranked 37 overall for Enforcing Contracts. 37 procedures, 625 days, and costs of 10.9% of the claim are required to enforce a contract.

10. Closing a Business

In TCc an investor or a lender can count on recovering around 38% of the investment in the case of liquidation of a failed enterprise. Most of the loss is due to the loss in asset value associated with foreclosure – liquidation 30%; administrative expenses 11%; depreciation 7.5% of the asset value and finally the loss due to the time value of proceeds 13.5%, which will be collected in 1.5 years. Therefore TCc is ranked 60 overall for closing a Business.

In conclusion TCc, as another economy in the 2010 Doing Business Economy Rankings of the World Bank for 184 economies, is ranked 101 out of total 184 economies.


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Figure 10 Turkish Cypriot Community compared to global good practice economy as well as selected economies

Source: YAGA – TCc Investment Development Agency, Northern Cyprus Doing Business Report 2010

When compared with the countries on the same income per capita range, the overall ranking of Northern Cyprus exhibits a relatively poor performance. This score, on the other hand places Northern Cyprus among the same rankings with countries such as Papua New Guinea, Guyana, Yemen Republic, Marshall Islands, Croatia, Jordan, Solomon Islands.

Although, Northern Cyprus is a very small economy suffering from severe economic restrictions due to the unresolved Cyprus problem; the findings of 2010 reports demonstrate that making improvements in regulations and procedures can put the country in a better place in the rankings. Even under these circumstances, it is still obvious that by providing favourable business and investment climate could attract the Foreign Direct Investment (FDI) flows and increase local investments.


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2.6. Investment climate

2.6.1. Incentives for Investors

Investment Incentives Applied Under the Incentive Law

The following incentives are applied to investments with Incentive Certificates, regardless of whether an investor is local or foreign. Incentive Certificates are granted from the State Planning Organization.

Investment Allowance: Investment allowance is 200% on the initial fixed capital investment expenditure for the investments in Priority Development Regions and in sectors with special importance. Investment allowance is 100% on the initial fixed capital investment expenditure for the investments in other sectors and regions. Morphou and Rizokarpazo were determined as Priority Development Regions by the Council of Ministers.

Exemption from Custom Duties and Funds: Import of machinery and equipments concerning the project are exempt from every kind of custom duties and funds in accordance with Incentive Certificate. Regulations on importation of raw materials and semi-finished goods are specified by the Prime Ministry and are subject to the approval of the Council of Ministers.

Zero Rate VAT: Zero rate VAT is applied for both the imported and locally purchased machinery and equipment in accordance with the Incentive Certificate.

State Owned Land and Building Lease: State owned land and building lease is possible for the investments that are granted Incentive Certificate in accordance with the regulations in force.

Fund Credits: Long term and low rate investment credits are available from the Investment and Export Incentive Fund.

Exemption from Construction Licence Fee: Investments that are granted Incentive Certificates are exempt from all kinds of taxes and fees related with construction licence.

Reduction of Stamp Duty for Capital Increase: Reduction of stamp duty concerning capital increase is provided for the investments that are granted Incentive Certificate.

Reduction of Fee on Mortgage Procedures: Reduction of stamp and registration fees is applied on mortgage procedures necessary when using bank credit for the investments that are granted Incentive Certificate.

Incentives Applied Under the Tax Legislation

Allowances are given for capital expenditure incurred on the acquisition of plant and machinery, fixtures and fittings owned and used by a person or corporate body in trade or business or scientific research. These capital allowances are:

- Initial (Investment) Allowances

- Annual (Wear and Tear) Allowances

Allowances are also given on existing buildings or on the construction, extension or adaptation of buildings owned and used by a person or corporate body. In total, tax allowance is given equal to the cost of an asset plus the investment allowance.


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Initial (Investment) Allowance rate is 50%.

Investment allowance rate can be increased up to 100% or new rate, which is not less than legal rate, can be determined by the Council of Ministers with the recommendation of Ministry of Finance for the investments in Priority Development Regions and in sectors with special importance specified under the Incentive Law and the Tourism Industry Incentive Law. If there are regulations concerning investment allowances under special Incentive Laws, the rates and principles are applied in accordance with Incentive Law concerned instead of applying the allowance rates in accordance with Income Tax Law.

Annual (Wear and Tear) Allowances:

Machinery and Equipment 10%

Saloon type motor vehicles and motorcycles 15%

Motor vehicle with “T” licence 25%

Other motor vehicles (trucks, buses, vans etc) 20%

Industrial Buildings and Hotels 4%

Shops and Residences 3%

Furniture and Fixtures 10%

Initial allowances and annual depreciation allowances are deducted before setting net chargeable incomes.

Other Allowances:

Expenditures on company formation are amortized in five years.

Expenditure on patent and patent rights

The purchased tools and fixtures which have the values not exceeding the monthly gross minimum wage at the beginning of the year, may not be subject to depreciation and the payments for these tools and fixtures may be immediately recorded as expense.

Twenty percent of earnings of corporate bodies from exports of goods and services is exempt from corporation tax. But the exempted amount cannot exceed the amount equal to 80% of net income which is obtained from exports.

The exports of all goods and services are exempt from VAT. According to the legislation the exporters can claim credits or refunds for the VAT paid on their inputs.

Air, land and sea transportation services, from the TCc to foreign country, from foreign country to the TCc or from foreign country to foreign country via the TCc, except passenger transportation services which are provided by transportation corporations in the TCc, are exempt from VAT. According to the legislation carrier can claim credits or refunds for the VAT paid on their inputs.


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Services provided in ports or airports for the sea or air transportation vehicles used in the production of income are exempt from VAT.

Other incentives / Free Port and Zone

The Government of the TCc is keen to encourage foreign capital investment, either in the form of joint-venture or independently, through capital commitment or introduction of improved technology in all sectors. The Famagusta Free Port and Zone covering an area of 115 acres offers foreign investors excellent opportunities for transit trade as well as manufacturing opportunities for middle-east and near-east countries.

The Free Port and Zone Law states that only 'Approved Enterprises are entitled to operate and erect concerns in the Free Port and Free Zone Areas'. An "Approved Enterprise" is defined as one which has received approval from Free Port and Zone Council to function in the Free Port and Zone Areas. Applications for "Approved Enterprise" status are to be submitted to the Free Port and Zone Council on forms supplied by this body.

Operations and activities permitted in the Free Port and Zone Areas are as follows:

Engaging in all kinds of industry, manufacturing and production.

Storage and export of goods imported to the Free Port and Zone Areas.

Assembly and repair of goods imported to the Free Port and Zone Areas.

Building, repair and assembly of all kinds of ship

Banking and Insurance services

Any other kind of activity approved by the Council of Ministers.

Investors applying to the above activities are charged a fee up to 1000 $, this fee being changeable according to the activity undertaken.

Incentives provided to businesses established in the Free Port and Zone, are as follows:

- All income derived from activities and operations undertaken by investors in the Free Port and Zone are exempt from Corporate and Income Tax. This exemption does not apply to the exports of goods and services not manufactured and undertaken in the Free Port and Zone and that are directed to the TCc.

- No limit on repatriation of profit and capital

- Exemption from custom duties and indirect taxes

- Permission to employ foreign expert, engineer and technical personnel

In addition to the above incentives there is ample supply of skilled and unskilled labour and wages are reasonable. The Port's handling charges are much lower than the other neighbouring ports. The port, which is geographically well located, offers sufficient covered storage area, experienced stevedoring and good security.

A sound and receptive civil service, coupled with minimum of formalities, provides investors and dealers with a favourable working climate. All types of port machineries (fork-lifts, cranes etc) are available.


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Therefore, implementing structural reforms, reducing barriers for Investments, and adopting favourable Investment policies can greatly increase the chances to attract local and foreign investments.


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2.7. Overview of current approaches to Private Sector Development

2.7.1. Current national strategy / programmes towards Private Sector Development

In TCc national strategy or either a programme towards Private Sector Development has not been designed in a coherent framework, although TCc authorities have formulated an agenda, including relative action plans, regarding the period 2010-2012. All actions – initiatives that are taking place are designed and executed in an ad hoc basis and an overall national strategic paper on private sector development is a need that has to be fulfilled. A short review of these policies is given below:

2.7.1.1 Foreign Investment Policy3

Encouragement of foreign investment is among the primary objectives of the TCc development policy. Consequently those wishing to invest in the northern part of the island can be sure of a positive Government attitude.

In accordance with its development policy TCc is giving preferential treatment to export-oriented industries. Due to its small domestic market the TCc authorities focus on export of goods and services. Priority is given to those projects that facilitate transfer of modern technology, knowhow, new management techniques into the TCc and that provide highest value added. However, it should be mentioned that every project proposed by an investor will be considered on its own merits.

Co-operation between local and foreign firms in the form of joint ventures is actively promoted, and TCc offers numerous advantages and incentives to the foreign investor including full protection of the property rights.

Nationalization has never been part of government policy nor is it contemplated in the future. The Constitution of the TCc guarantees the right of private property while it does not discriminate between citizens and aliens. The fixed capital investments have been 1,064,282,208.1 TL at current prices in 2007. The public sector financed 24.6% of total fixed investments and the remaining 75.4% was financed by private sector. Public services and electricity water sector constituted the biggest shares of the public sector investments. The shares of public sector investments have been 38.5% and 34% respectively. On the other hand, private sector investments have been intense with 57% in dwelling and with 11% in business and personal services sectors.

Under the Incentive Law, 350 incentive certificates have been granted until the end of the year 2008. The total of fixed investments with incentive certificate amounted to 3,228,387,468 TL. Tourism sector has the highest share in fixed investments and this sector holds 68.7%. Industry and education sectors follow it with 17.1% and 7.3% respectively.

By the end of 2008, the total amount of credit approved to be financed from the Fund is 31,082,992.6 TL, of which 22,813,644.1 TL has been used. The distribution of the used credits by tourism, industry, health and education sectors has been realized as 39.1%, 27.3%, 22.9% and 10.7% respectively.

3 Source: Guide for Foreign Investors, June 2009, State Planning Organization


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2.7.2. Turkish Cypriot Community Administration priorities towards private sector development

In order to create a competitive private sector economic environment and ensure sustainable growth, and taking under consideration that the TCc private sector is comprised mainly (99.98%) of SMEs, the Public Authority regarding Economy and Energy took the initiative to establish an SME Development Centre (KOBIGEM) in July 2010, in order to develop an integrated “SME Strategy and Action Plan” and carry out activities to increase the competitiveness of the TCc SMEs (e.g. training, consulting, marketing, grant programmes, loan support programmes, etc.). In this framework a “Steering Committee” was also created by the related organizations in order to monitor and steer the entire procedure and ensure transparency and wide participation of the all interested parties. This steering committee consists of:

Public authorities regarding Economy and Energy, Finance, Education, Youth and Sports, Agriculture and Natural Resources, Tourism, Environment and Culture

The State Planning Organization

Chamber of Commerce, Chamber of Industry and Chamber of Artisans and Shopkeepers

YAGA (Investment Development Agency)

Universities

The Banks Association

According to the needs and unexpected emerging issues, the committee will reform its combination by adding more members from other relevant Institutions.

Main task of the Committee is to examine, evaluate and report the actions undertaken within the SMEs sector, taking into consideration the actions and reports of the core institutions and organizations related to the SME sector, by putting forward their plans regarding a national strategy and policy, for creating an efficient SME strategy and action plan.


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Chapter 3. Key Points of socioeconomic analysis- SWOT Analysis

Having completed the baseline analysis of the current situation (previous chapters of this report) the next step refers to the deployment of a strategic SWOT analysis, namely establishing the TCc current position in the light of its strengths, weaknesses, opportunities and threats.

The SWOT analysis is divided into two basic units:

Data on the internal environment (within the TCc) referring to current strengths and weaknesses. In particular:

Strengths include all internal development factors that help explore opportunities and deal with threats.

Weaknesses include all internal development conditions or deficits undermining the TCc’s competitive position or hindering the exploration of opportunities.

Data on the external environment (outside the TCc) referring to current threats and opportunities which have not yet been explored. In particular:

Opportunities include all external conditions or features favouring a boost in demand in the TCc or contributing to the creation of a comparative advantage.

Threats include challenges that arise due to non-favourable trends or any external conditions that affect the TCc’s development position in a non -favourable manner.

In the following table the main key points of the socio-economic analysis, in terms of strengths, weaknesses, opportunities and threats are presented:

Strengths Weaknesses

1. Strategic geographical location in the South east Mediterranean between three continents which makes TCc accessible to EU and international markets

2. Favourable climate conditions which advantage the TCc to 4 season tourism as well as agricultural activities

3. The educational level is high and most of the TCc speak English

4. Wide distribution of cultural and natural resources

5. Small market in terms of flexibility and easy adjustment to new techniques and methods

6. Existence of raw materials for

1. Lack of efficient SME funding mechanisms and limited access of SMEs to finance and long-term credits

2. Quality standards are relatively low and few firms have quality certifications

3. Uncertain property rights

4. Insufficient regulatory framework regarding the commercial environment

5. Lack of business skills and competencies

6. Low rates of technical labour force

7. Weak rates of research and development activities undertaken by enterprises

8. Very high production costs for industrial activities due to lack of raw materials and the high energy costs and minimum


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construction activities

7. Strong willingness to entrepreneurship initiatives

8. The existence of a governmental loan guarantee institute which enables the investment climate improvement

9. Large area of well preserved land that can be used for agricultural activities

10. High standards in private health services

wages rates

9. No links between the High schools /Universities and the labour market needs

10. Limited financial market sophistication

11. Low quality of physical infrastructure (transport, telecommunications, water and electricity)

12. Lack of adequate infrastructure in the Industrial Zones

Opportunities Threats

1. High potential possibilities for growth in the area of services and especially tourism

2. International demand for alternative tourism activities (e.g. ecotourism, special interest tourism etc)

3. Considerable amount of highly educated emigrants

4. Utilization of the TCc geographical location as a transit trade centre by developing the harbour infrastructure

5. International constant technological and ICT advance

6. Strong willingness to harmonize regulations to accelerate the adoptions of EU Acquis communitaire

7. The resolution of the political issues in a timely manner will get TCc closer to becoming an EU member

8. The signed protocol between TCc and Turkey for electricity and water supply programme

1. Global economic crisis

2. Market limits due to political issues and limited trade access to EU countries

3. The constraints laid under the Green Line Regulation (e.g. access to EU markets only through the southern part ports)

4. Dynamic entry of new competitors in the tourism sector (e.g. South Turkey)

5. Increased rates of departure of top level scientific potential abroad

6. Competition by neighbouring countries offering low labour cost

7. Further dependence of local economy on tourism, an activity which is particularly vulnerable and affected by external and imponderable factors

The outcome of the SWOT analysis frames the outline of the TCc’s private sector development vision and the public policies chosen in order to meet internal needs, taking existing external resources into account.


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Chapter 4. Identification of major barriers to Private Sector Development

The subject of this chapter lies on the identification of the major barriers to private sector development growth as well as the needs arising from those obstacles that should be addressed by the private sector development strategy, to be formed.

The main barriers that prevent the TCc private sector growth are mostly related to the political situation of the island. This situation creates barriers in the TCc economy such as the trade isolation, which leads to exporting through Turkey – a solution that increases the costs - as well as the unresolved property issues, which brings obstacles towards investments in this part of the island.

Although those problems are large enough and possible overwhelming, there are also other constraints that should be addressed in order to provide a strong thrust to private sector development in short and long term periods.

These obstacles are mainly related to the following areas:

i. Regulatory framework issues

ii. Financial issues

iii. Working environment issues

iv. Education and entrepreneurship issues

More analytically, the major barriers to Private Sector Development growth and the relative needs arising from them include:

i. Regulatory framework issues

- reduction of bureaucracy

- tax policy reformation

- export and import regulations reformation

- Incentive Law purification

- institutionalize public legal structures (e.g. one stop shops) to support SMEs

- development of E-Government

- launch of a regulation on balance sheets - transition to international standards

- reformation of foreign investment legislation in terms of utilizing local market

- rebuild the techno-parks operation (necessary arrangements on relative legislation framework)

- creation of businesses inventories in the context of SMEs

- creation of a national SME database, including the NACE adoption as well updating mechanisms, accessible by all relevant public authorities and institutions


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ii. Financial issues

- renewing regulation of credit rates and the high interest loans from the past

- project based financial support

- creation of alternative financial resources for SMEs

- monitoring mechanisms for companies who have received financial support (evaluate the value added of the aid provided )

- efficient and transparent access to public SME grant programmes

- renewing the banking loan system

iii. Working environment issues

- launch modernisation projects on industrial zones

- usage of alternative energy resources in the industrial zones

- solving the infrastructure related problems within the industrial zones

- implementation of activities – projects on SMEs Clustering

- modernization of machinery

- elaboration of quality standards and acquisition of quality certifications (ISO 9000, HACCP)

- launch of modern technologies and innovation in the production lines

- establishment of links between SME related NGOs and local as well as international public authorities and organizations

- development of e-trade

- supporting SME exporting

- deployment of small scale projects for SMEs in terms of creating potential market initiatives in order to increase their competitiveness

iv. Education and entrepreneurship issues

- establishment of links between universities and industrial public institutions

- establishment of links between universities and the labour market

- improvement of business management skills and competencies

- extension of entrepreneurs capacity building programmes

- enhancement of vocational and technical education

- establishment of business development centres

- implementation of training programmes to SME to increase market share and exports

- raising awareness on techno-parks operation

- implementation of innovation and technical learning programmes

- introduction of ICT use


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Chapter 5. Private Sector Development Strategy

5.1. Vision and Strategy

The criteria on which the strategy was drawn up are:

to integrate economic, social and environmental considerations;

to have a long-run perspective and an ethical dimension with regard to future generations;

to be backed by strong political commitment;

to develop capacity and itself generate an enabling environment;

to promote the development of monitoring and assessments procedures;

to foster an educative process and a sustainable development culture;

to be coherent, in that there should be a balance between funding potential and strategy priorities

In this framework the strategy to be adopted will aim at:

Helping society work towards improving the quality of life of all members of society, promoting convergence between the interests of different sectors and layers of society and between the interests of current and future generations.

This approach relies on policy effectiveness through strategic planning and implementation mechanisms.

The overall vision for the TCc private sector development regarding the next five years, namely the period 2011 – 2015 is:

To establish a flexible, dynamic and sustainable economic structure in TCc, which is able to produce marketable goods and services according to EU standards, expand the community’s growth potential and increase productivity, with the prospect to boost employment, achieve real convergence with the EU, preserve the environment and improve the quality of life for all citizens.


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5.2. Strategic Objectives

To attain the aforementioned strategy and vision, the development effort will focus on the following strategic objectives (1st level of strategic planning):

Strategic Objective 1: Improving the efficiency, productivity and competitiveness of the TCc economy, by supporting SMEs business development and institutionalization

Strategic Objective 2: Upgrading the institutional environment in line with adopting the EU acquis, simplifying the business regulatory framework, increasing efficiency in governance and proceeding to an essential modernization of the public sector at all administration levels

Strategic Objective 3: Promoting innovation, technology, entrepreneurship, research and development, as well as links between them

Strategic Objective 4: Creating more and better jobs and enhancing access to employment, in line with ensuring greater social cohesion

Strategic Objective 5: Enhancing attractiveness of TCc as an area to invest, work and live in by developing infrastructures in a sustainable manner

In the next table the justification of the proposed strategic objectives is presented, based on utilizing the strengths and opportunities arising from the TCc ‘s current situation analysis and on the same time addressing the recognised weaknesses and threats that the northern part of the island faces.


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Table 23 Justification of the proposed strategic objectives based on the findings of the SWOT analysis

Strategic Objectives 1: Improving the

efficiency, productivity and competitiveness of

the TCc economy, by supporting SMEs

business development and institutionalization

2: Upgrading the institutional environment in line with adopting

the EU acquis, simplifying the business regulatory framework,

increasing efficiency in governance and proceeding to an essential

modernization of the public sector at all administration levels

3: Promoting innovation, technology,

entrepreneurship, research and

development, as well as well as links between

them

4: Creating more and better jobs and enhancing

access to employment, in

line with ensuring greater social

cohesion

5. Enhancing attractiveness of TCc as an area to invest, work and

live in by developing

infrastructures in a sustainable

manner

Stre

ngt

hs

Strategic geographical location in the South east Mediterranean between three continents which makes TCc accessible to EU and international markets

X X X X X

Favourable climate conditions which advantage the TCc to 4 season tourism as well as agricultural activities

X X X X

The educational level is high and most of the TCc speak English

X X

Wide distribution of cultural and natural resources X X

Small market in terms of flexibility and easy adjustment to new techniques and methods

X X X

Existence of raw materials for construction activities X X

Strong willingness to entrepreneurship initiatives X X X X

The existence of a governmental loan guarantee institute which enables the investment climate improvement

X X X

Large area of well preserved land that can be used for agricultural activities

X X X

High standards in private health services X X X


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Strategic Objectives 1: Improving the efficiency,

productivity and competitiveness of the TCc

economy, by supporting SMEs business

development and institutionalization

2: Upgrading the institutional environment in line with adopting

the EU acquis, simplifying the business regulatory framework,

increasing efficiency in governance and proceeding to an essential

modernization of the public sector at all administration levels



development, as well as well as links between them

4: Creating more and better jobs and enhancing access to

employment, in line with ensuring

greater social cohesion

5. Enhancing attractiveness of TCc as an area to invest, work

and live in by developing

infrastructures in a sustainable manner

We

akn

ess

es

Lack of efficient SME funding mechanisms and limited access of SMEs to finance and long-term credits

X X X

Quality standards are relatively low and few firms have quality certifications

X X

Uncertain property rights X X X

Insufficient regulatory framework regarding the commercial environment

X X

Lack of business skills and competencies X X

Low rates of technical labour force X X

Weak rates of research and development activities undertaken by enterprises

X X X

Very high production costs for industrial activities due to lack of raw materials and the high energy costs and minimum wages rates

X X

No links between the High schools /Universities and the labour market needs

X X X

Limited financial market sophistication X X

Low quality of physical infrastructure (transport, telecommunications, water and electricity)

X X

Lack of adequate infrastructure in the Industrial Zones

X X


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Strategic Objectives

1: Improving the efficiency, productivity and competitiveness of



2: Upgrading the institutional environment in line with adopting the EU acquis, simplifying the business regulatory framework, increasing efficiency in

governance and proceeding to an essential modernization of

the public sector at all administration levels







5. Enhancing attractiveness of TCc as an area to invest, work and

live in by developing

infrastructures in a sustainable

manner

Op

po

rtu

nit

ies

High potential possibilities for growth in the area of services and especially tourism

X X X X

International demand for alternative tourism activities (e.g. ecotourism, special interest tourism etc)

X X X X X

Considerable amount of highly educated emigrants

X X X

Utilization of the TCc geographical location as a transit trade centre by developing the harbour infrastructure

X X

International constant technological and ICT advance

X X X

Strong willingness to harmonize regulations to accelerate the adoptions of EU Acquis communitaire

X X

The resolution of the political issues in a timely manner will get TCc closer to becoming an EU member

X X X X X

The signed protocol between TCc and Turkey for electricity and water supply programme

X


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2: Upgrading the institutional environment in line with adopting the EU acquis, simplifying the business regulatory framework, increasing efficiency in

governance and proceeding to an essential modernization of

the public sector at all administration levels



development, as well as well as links between

them




5. Enhancing attractiveness of TCc as an area to invest, work and live in by

developing infrastructures in a sustainable manner

Thre

ats

Global economic crisis X X X X X

Market limits due to political issues and limited trade access to EU countries

X X X X X

The constraints laid under the Green Line Regulation (e.g. access to EU markets only through the southern part ports)

X X X X

Dynamic entry of new competitors in the tourism sector (e.g. South Turkey)

X X X X

Increased rates of departure of top level scientific potential abroad

X X X

Competition by neighbouring countries offering low labour cost

X X X

Further dependence of local economy on tourism, an activity which is particularly vulnerable and affected by external and imponderable factors

X X X

Furthermore in the next table the justification of the proposed strategic objectives is presented, based on the barriers and obstacles to private sector development growth already recognized in previous chapter.


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Table 24 Justification of the proposed strategic objectives based on the key barriers to private sector development growth





2: Upgrading the institutional

environment in line with adopting the EU acquis, simplifying the business regulatory framework, increasing efficiency in

governance and proceeding to an

essential modernization of the public sector at all

administration levels







5. Enhancing attractiveness of TCc as an area to invest, work

and live in by developing

infrastructures in a sustainable manner

Bar

rie

rs t

o p

riva

te

sect

or

de

velo

pm

en

t

gro

wth

Regulatory framework issues X X X

Financial issues X X X

Working environment issues X X X X

Education and entrepreneurship issues X X X X

Sustainable Economic Development in TCc - Private Sector Development Strategy

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5.3. Thematic Priorities & Interventions

According to the socio-economic analysis and the aforementioned strategic objectives, the following 5 thematic priorities are defined. These thematic priorities specify the TCC’s strategic objectives in the course of the private sector growth and promote the accomplishment of its development vision.

i) Competitive TCc economy

ii) Institutional framework

iii) Knowledge society and innovation

iv) Employment and Social Cohesion

v) Attractiveness of TCc as an area to invest, work and live in

The abovementioned thematic priorities include specific interventions (2nd level of strategic planning), that will be implemented in order to achieve the strategic objectives as well as the overall TCc Private Sector Development Strategy.

Thematic Priority

Intervention areas

Competitive TCc economy

Identification and promotion of the most competitive productive sectors of the TCc economy that will bring value added to the services sector and the capacity to be exported in international markets

Support SMEs to modernize their services and production processes, including purchasing of new machinery and introducing CE marking and EU standards

Reformation of the banking system with focus on supporting SMEs access to finance, especially for infrastructure and construction investments

Promotion of the TCc export policy by informing SMEs about international standards and channelling them to exporting

Improvement of the SMEs skills and competencies, especially the ones regarding the production processes and financial management and planning

Promotion of natural and cultural heritage as a vital factor of the TCc’s economic growth


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Thematic Priority

Intervention areas

Institutional framework

Enhancement of Public Administration efficiency and improvement of the quality of delivered work and services in specific sectors of public action, of crucial importance

Modernization of the TCc institutional framework by using Information Communication Technologies

Reformation of legislation in priority areas in line with adopting the EU acquis

Reduction of administrative burdens in priority areas regarding TCc business environment

Development of the Public Administration and the Business Support Organizations human resources capabilities

Improvement of the administrative structures and mechanisms of public authorities, in the framework of promoting good governance

Knowledge society and innovation

Improvement of productivity and quality of life through the use of ICT, new technologies and best practices in their operations

Turn R&D into innovative products, processes and services, and assist the transfer of technology and know-how to SMEs, through cooperation schemes with Universities

Support innovative entrepreneurship in sectors presenting a competitive advantage

Employment and Social Cohesion

Reinforcing the adaptability of the young and women labour force Improvement of workforce skills and promotion of lifelong learning Improving quality and productivity at work

Attractiveness of TCc as an

area to invest, work and live

in

Improvement of the TCc industrial zones Promotion of investments in the fields of environment protection

and renewable energy sources Regeneration of the TCc physical infrastructures Improvement of the educational infrastructure in terms of expanding

its capacity


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Chapter 6. Action Plan

This chapter lays out the strategic actions (3rd level of strategic planning) that are proposed for implementation in order to attain the Private Sector Development Strategy.

More analytically an Action Plan for the next 3 years, namely 2011-2013 has been formulated in order to identify actions/ projects or group of projects that need to be implemented by utilising local and international resources within the framework of main strategic elements and determined basic problems within the scope of this Private Sector Development Strategy document.


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6.1. Proposed actions under the 1st Priority: “Competitive TCc economy”

The 1st priority includes actions to improve the efficiency, productivity and competitiveness of the TCc economy, by supporting SMEs business development and institutionalization.

In this respect the following table demonstrates the main actions foreseen under this priority and under each intervention area:

Thematic Priority

Intervention areas Actions

Competitive TCc economy

Identification and promotion of the most competitive productive sectors of the TCc economy that will bring value added to the services sector and the capacity to be exported in international markets

Design additional measures to strengthen the linkages between the local industry and services sector

Conduct regular market researches in order to diversify and direct local production and services according to the market needs at local and international level

Design and implementation of cluster projects between SMEs at domestic level

Supporting entrepreneurs and SMEs by creating incubation centres

Support SMEs to modernize their services and production processes, including purchasing of new machinery and introducing CE marking and EU standards

Launch of Grant Schemes for SMEs on funding the necessary restructuring of the company to achieve standardization (e.g. CE marking)

Launch of Grant Schemes for SMEs on modernizing the machinery and expanding the services and the production processes

Launch of Grant Schemes for SMEs on trade expansion (transportation, equipment, infrastructures, marketing etc)

Launch of Grant Schemes for SMEs and entrepreneurs in agrifood (farm and processing) sector


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Thematic Priority


Launch of Grant Schemes for SMEs and entrepreneurs in the tourism sector (e.g. alternative tourism, ecotourism, health tourism etc)

Raising awareness on organic farming and organic products and support SMEs to practice it professionally, by funding actions such as getting EU certificates, training in organic techniques etc

Reformation of the banking system with focus on supporting SMEs access to finance, especially for infrastructure and construction investments

Reengineering of the banking loan –credits system

Amendment of the banking law in line with international standards (e.g. BASEL system)

Promotion of the TCc export policy by informing SMEs about international standards and channelling them to exporting

Capacity building to SMEs on access to international markets, export marketing, sales management and networking

Promotion campaigns for networking the TCc market to foreign markets (e.g. conferences, tours, fairs etc)

Promotion of clustering between local and international SMEs, including SME matchmaking activities and establishment of permanent cooperation schemes

Improvement of the SMEs skills and competencies, especially the ones regarding the production processes and financial management and planning

Development and delivery of training programmes on SMEs in the fields of business growth and management, financial administration – accounting, laws and regulations, marketing, sales, standardization – CE marking etc

Delivery of consultancy services to SMEs on Business Plan and Marketing Plan preparation & implementation, Management Systems, Costing Systems, Loan Support, Strategic partner


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Thematic Priority


identification for joining clusters, etc

Promotion of natural and cultural heritage as a vital factor of the TCc’s economic growth

Development of services related with natural and cultural heritage to promote regional values

Promote cooperation between the public and the private sector in services related with natural and cultural heritage

Capacity building and awareness raising to relevant public and private actors on marketing regional values


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6.2. Proposed actions under the 2nd Priority: “Institutional framework”

The 2nd priority includes actions to upgrade the institutional environment in line with adopting the EU acquis, to simplify the business regulatory framework, to increase efficiency in governance and proceed to an essential modernization of the public sector at all administration levels.


Thematic Priority


Institutional framework

Enhancement of Public Administration efficiency and improvement of the quality of delivered work and services in specific sectors of public action, of crucial importance

Development and implementation of a Decision Making and Performance Management System in Public Sector

Restructuring or privatization of inefficient public institutions

Institutionalization of the SME Development Centre (KOBIGEM)

Further mobilization of the Steering Committee created to work on and monitor the “SME Strategy and Action Plan”

Institutionalization of public legal structures, who will coordinate and monitor actions undertaken to improve the TCc economy competitiveness

Restructuring of the health care system by strengthening the relation between the public and private sector and reviewing the role of insurance funds


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Thematic Priority


Modernization of the TCc institutional framework by using Information Communication Technologies

Development of a database for SME-related statistical data, including the adoption of NACE4 classification

Development and implementation of an E-Governance programme

Digitize public sectors operations that are of service to the private sector (e.g. taxation)

Reformation of legislation in priority areas in line with adopting the EU acquis

Conduct of Regulatory Impact Analysis on specific laws that need amendment in priority areas5

Amend legislation in priority areas in line with adopting the EU acquis

Attract investors in TCc by improving the institutional framework and supporting structures (i.e. incentives)

Reduction of administrative burdens in priority areas regarding TCc business environment

Measurement of administrative costs and reduction of administrative burdens on businesses in priority areas6 in order to improve the business climate

4 NACE stands for "Nomenclature Generale des Activites Economiques dans I'Union Europeenne" (General Name for Economic Activities in the European Union) and is based on the European

standard for classification of economic activities in the EU. The first four digits of the code are the same in all European countries. The fifth digit might vary from country to country and further digits are sometimes placed by suppliers of databases. The 16 markets (manufactures, agriculture, etc.) are denoted by letters from A to Q.

5 According to the report entitled: PROGRAMME FOR THE FUTURE ADOPTION OF THE ACQUIS, JANUARY 2009 – NICOSIA, 11 areas are presented as the priority areas for TCc, namely: Free

Movement of Capital, Public Procurement, Company Law, Competition Policy, Financial Services, Agriculture and Rural Development, Food Safety, Veterinary and Phytosanitary Policy, Transport Policy, Statistics, Social Policy and Employment, Environment and Consumer and Health Protection. Additionally the following areas- chapters of the Acquis communautaire are of a high importance to be addressed: Intellectual Property Law, Information Society and Media, Energy, Taxation, Science and Research and Enterprise and Industrial Policy

6 The EU baseline measurement focuses on the most burdensome information obligations in 13 priority areas: agriculture and agricultural subsidies, annual accounts/company law, cohesion policy,

environment, financial services, fisheries, food safety, pharmaceutical legislation, public procurement, statistics, tax law (Vat), transport and working environment/employment relation


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Thematic Priority


Development of the Public Administration and the Business Support Organizations human resources capabilities

Provision of capacity building services to the Business Support Organisations, including Chambers and Professional Associations

Develop an institutional framework for staff management in public administration bodies, including the provision of incentives so that the employees can participate in education and certification schemes

Capacity building to public servants on ICT

Delivery of training programmes on tourism to public servants of the Tourism public Administration

Improvement of the administrative structures and mechanisms of public authorities, in the framework of promoting good governance

Design modern mechanisms for planning and implementing public policies, including the promotion of active participation of citizens and social consensus


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6.3. Proposed actions under the 3rd Priority: “Knowledge society and innovation”

The 3rd priority includes actions to promote innovation, technology, entrepreneurship, research and development, as well as well as links between them.


Thematic Priority


Knowledge society and innovation

Improvement of productivity and quality of life through the use of ICT, new technologies and best

Launch of Grant Schemes for SMEs regarding the introduction of ICT, new technologies and best practices in their operation

Launch of Grant Schemes for ICT companies on enhancing their competitiveness

Delivery of training programmes to SMEs on ICT issues (e.g e- Commerce, web production etc)

Turn R&D into innovative products, processes and services, and assist the transfer of technology and know-how to SMEs, through cooperation schemes with Universities

Support the development of Technological Parks and their linkage to the private sector

Creation of sectoral poles of Research and Technological Development through cooperation between SMEs and Universities

Introduction of incentives and tools for SMEs to utilize in their businesses Universities‘ know how, technologies and expertise

Support technology transfer from abroad regarding materials, products, processes and services, by utilising local Universities to connect SMEs to International networks and institutions

Support innovative entrepreneurship in sectors Launch of Grant Schemes for entrepreneurs in sectors presenting a competitive


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Thematic Priority


presenting a competitive advantage advantage

Delivery of training programmes on entrepreneurship and best practices with the cooperation of Universities

Awareness campaigns on entrepreneurship initiatives

Support young and women entrepreneurs to access the market


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6.4. Proposed actions under the 4th Priority: “Employment and Social Cohesion”

The 4th priority includes actions to create more and better jobs and enhance access to employment, in line with ensuring greater social cohesion


Thematic Priority


Employment and Social Cohesion

Reinforcing the adaptability of the young and women labour force

Development of an integrated system for analyzing Labour Market conditions and needs at regular periods (e.g. annually)

Development of lifelong counselling services and vocational guidance, to match up with the enterprises’ needs, according to the EU standards

Improvement of workforce skills and promotion of lifelong learning

Introduction of SME incentives for investments regarding improvement of employee skills and use of modern techniques for developing lifelong learning within enterprises

Establishment of a system for the certification of lifelong training programmes

Improving quality and productivity at work Raise awareness and support the establishment of a safe and hygiene working environment within all SMEs


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6.5. Proposed actions under the 5th Priority: “Attractiveness of TCc as an area to invest, work and live in”

The 5th priority includes actions to enhance attractiveness of the TCc as an area to invest, work and live in by developing infrastructures in a sustainable manner.


Thematic Priority


Attractiveness of TCc as an

area to invest, work and live

in

Improvement of the TCc industrial zones Modernization of the industrial zones, in terms of infrastructures

Promotion of investments in the fields of environment protection and renewable energy sources

Establishment of renewable energy sources units

Grant schemes for SMEs on introducing environmentally sound practices (use of renewable energy, reduction of water consumption, decreasing environmental pollution, elimination of by-products or waste etc )

Awareness campaigns on the benefits from using renewable energy sources and environmentally sound practices

Regeneration of the TCc physical infrastructures

Development of construction infrastructures in a way that will attract investors to start up a business in TCc

Development of public urban transport infrastructures

Development of ICT network infrastructures

Modernization of roads, ports and free zones infrastructure

Establishment of an integrated transportation system for internal and external


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Thematic Priority


commerce and trade

Development of infrastructures to host public entities delivering social and administrative public services

Implementation of solid waste and water waste management projects

Improvement of the educational infrastructure in terms of expanding its capacity

Further establishment of infrastructures to cover technical education needs

Modernization of infrastructures in pre-school, primary and secondary education


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Chapter 7. Strategy Monitoring Mechanism

It is important that the Sustainable Economic Development in TCc - Private Sector Development Strategy be institutionalised and implemented as an ongoing process rather than a one-off activity. For this reason, the strategy needs to be coordinated, monitored, efficiently implemented and suitably promoted.

In this respect, a permanent structure, appropriately staffed and funded, should be established to coordinate, monitor, revise and promote the Sustainable Economic Development in TCc - Private Sector Development Strategy among all stakeholders. Such a structure should be placed under the direction of the Highest Authority of TCc, with the principal remit of:

coordinating the activities of the PSDS;

acting as watchdog to ensure that legislation reflects the Strategy for Sustainable Economic Development objectives;

ensuring that TCc Public Authorities departments and other relevant bodies adequately undertake their share of implementing the strategy;

updating the strategy as and when required in accordance with other national strategies that are issued from time to time;

informing all relevant bodies, public or private, about specific aspects of the strategy so that these are incorporated in any strategies that are prepared by such bodies;

communicating with the public to promote participation and foster ownership of the strategy;

developing methods for evaluating and monitoring the PSDS foreseen activities;

ensuring consistency among the various Public Authorities and stakeholders when presenting TCc’s position at an international level; and

It is also important to ensure coherence and to avoid duplication of effort, between the different sectors, layers and actors in public authorities departments, the private sector and civil society, during the implementation of the strategy.

Furthermore, the effective monitoring of the PSDS requires the establishment of targets based on appropriate indicators, to assess the extent to which these targets are being reached. In this framework a system of national reporting and monitoring relating to those indicators should be set up, in order to present findings in a manner that can be easily understood and interpreted by all relative stakeholders.

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