REPUBLIC OF

ANNUAL REPORT 2001

AUDITOR GENERAL OF THE REPUBLIC

AUDIT OFFICE OF THE REPUBLIC 1406 LEFKOSIA

Auditor General of the Republic

File No.: 1.3.0.6(01)

22 November 2002

Your Excellency,

In accordance with the provisions of paragraph 4 of Article 116 of the Constitution of the Republic, I have the honour to submit herewith my Annual Report on the exercise of my functions and duties, for the year ended 31st December 2001.

With the assurance of my highest consideration,

(Chrystalla Georghadji) Auditor General of the Republic

His Excellency Mr. Glafcos Clerides President of the Republic of Cyprus Lefkosia

TABLE OF CONTENTS

Page PART 1 INTRODUCTION 9 PART 2 SUMMARY OF MAIN FINDINGS 11 2.1 Ministries and Departments 11 2.2 Local Authorities 22 2.3 Public Corporation 24 PART 3 PERFORMANCE AUDITS 31 PART 4 AUDIT OBSERVATIONS 37 4.1 General Audit Observations 37 4.2 Independent Offices 40 4.3 Presidency 40 4.4 Relief Fund for Affected Persons 40 4.5 Judicial 41 4.6 Central 44 4.7 Treasury 45 4.8 Ministries and Departments 47 4.9 Ministry of Defence 47 4.10 National Guard 47 4.11 Ministry of Agriculture, Natural Resources and Environment 50 4.12 Dept of Water Development 51 4.13 Dept of Geological Survey 54 4.14 Dept of Forests 55 4.15 Dept of Agriculture 56 4.16 Land Consolidation Department 56 4.17 Mines Service 57 4.18 Ministry of Justice and Public Order 57 4.19 Police 57 4.20 Fire Service 64 4.21 Prisons 65 4.22 Ministry of Commerce, Industry and Tourism 66 4.23 Registrar of Companies and Official Receiver 69 4.24 Cyprus Handicraft Service 71 4.25 International Conference Centre 71 4.26 Ministry of Labour and Social Insurance 72 4.27 Dept of Labour 72 4.28 Social Insurance Services 72 4.29 Social Insurance Fund 73 4.30 Central Holidays with Pay Fund 75 4.31 Redundancy Fund 76 4.32 Higher Technical Institute 77 4.33 Higher Hotel Institute of Cyprus 77 4.34 Productivity Centre 77 4.35 Welfare Services 78 4.36 Dept of Labour Inspection 80 4.37 Ministry of Interior 81 4.38 District Administrations 83

Page 4.39 83 4.40 83 4.41 84 4.42 Pafos 84 4.43 Dept of Land and Surveys 84 4.44 Dept of Town Planning and Housing 86 4.45 Press and Information Office 92 4.46 Service for the Administration of T/C Properties 93 4.47 Service for the Care and Rehabilitation of Displaced Persons 96 4.48 Dept of Civil Registry, Aliens and Electoral 97 4.49 Ministry of Foreign Affairs 97 4.50 Ministry of Finance 99 4.51 Dept of Government Purchasing and Supply 100 4.52 Dept of Inland Revenue 101 4.53 Dept of Customs and Excise 109 4.54 Dept of Information Technology Services 115 4.55 Fund for Travelling Expenses of Disabled Persons 116 4.56 Ministry of Education and Culture 117 4.57 Education "A" Fund 124 4.58 School Committees 125 4.59 Nicosia 127 4.60 Larnaka 127 4.61 Polis Chrysochous 128 4.62 Armenian 128 4.63 Ministry of Communications and Works 128 4.64 Dept of Antiquities 128 4.65 Dept of Public Works 129 4.66 Dept of Merchant Shipping 138 4.67 Dept of Electrical and Mechanical Services 139 4.68 Dept of Road Transport 142 4.69 Dept of Civil Aviation 145 4.70 Dept of Postal Services 147 4.71 Ministry of Health 149 4.72 Medical and Public Health Services 156 4.73 Pharmaceutical Services 159 4.74 Medical Treatment and Welfare Scheme for Government Labourers 161 4.75 General Laboratory 161 4.76 Local Authorities 162 4.77 Municipalities – General Observations 162 4.78 Nicosia 165 4.79 Limassol 170 4.80 176 4.81 Larnaka 177 4.82 Pafos 180 4.83 185 4.84 Agios Dometios 187 4.85 190 4.86 192 4.87 Poli Chrysochous 196

Page 4.88 199 4.89 Agia Napa 200 4.90 Dherynia 204 4.91 Lefkara 204 4.92 207 4.93 210 4.94 Mesa Gitonia 213 4.95 216 4.96 219 4.97 Agios Athanasios 220 4.98 Aglantzia 223 4.99 Enkomi 225 4.100 226 4.101 Idhalion 229 4.102 Lakatameia 229 4.103 Community Boards – General 231 4.104 Agios Tychonas Community Board 238 4.105 Community Board 239 4.106 Kalopanayiotis Community Board 240 4.107 Community Board 240 4.108 Housing Estates Community Board 241 4.109 Public Corporations and other Organisations 241 4.110 Industrial Training Authority 241 4.111 Electricity Authority of Cyprus 245 4.112 State Fairs Authority 255 4.113 Cyprus Ports Authority 257 4.114 Cyprus Telecommunications Authority 260 4.115 Cyprus Grain Commission 273 4.116 Nicosia Water Commission 274 4.117 Cyprus Theatrical Organisation 274 4.118 Youth Board 275 4.119 Cyprus News Agency 276 4.120 Cyprus Sports Organisation 277 4.121 Cyprus Land Development Corporation 284 4.122 Cyprus Tourism Organisation 286 4.123 Agricultural Insurance Organisation 292 4.124 Cyprus Dairy Industry Organisation 293 4.125 Housing Finance Corporation 296 4.126 University of Cyprus 297 4.127 Cyprus Broadcasting Corporation 299 4.128 Vine Products Commission 306 4.129 Nicosia Sewerage Board 307 4.130 Limassol Amathus Sewerage Board 309 4.131 Famagusta Sewerage Board 310 4.132 Larnaka Sewerage Board 310 4.133 Pafos Sewerage Board 310 4.134 Paralimni Sewerage Board 312 4.135 Agia Napa Sewerage Board 314 4.136 Council for the Registration and Control of Contractors for building and 316

Page Technical Works 4.137 Cyprus Olive Products Marketing Board 316 4.138 Cyprus Table Grapes Export Board 327 4.139 Cyprus Potato Marketing Board 328 4.140 Central Slaughter House Board 333 4.141 Water Boards – General 336 4.142 Nicosia Water Board 338 4.143 Limassol Water Board 339 4.144 Famagusta Water Board 341 4.145 Larnaka Water Board 341 4.146 Fund for the Erection of Cyprus Museum 342 4.147 Public Loans Fund 342 4.148 Cyprus Children's Assistance Fund Committee 343 4.149 Game Fund 343 4.150 Provident Lottery Fund 344 4.151 Advocates Pensions Fund 344 4.152 Christos Steliou Ioannou Foundation 345 4.153 Central Agency for Equal Distribution of Burdens 345 4.154 Cyprus Foundation for Muscular Dystrophy Research 346 4.155 Cyprus Stock Exchange 347 4.156 Capital Market Committee 351 4.157 Technical Chamber of Commerce 351 4.158 Institute of Technology 352 4.159 Cyprus State Scholarships Foundation 352 4.160 E.O.K.A. 1955–1959 Historical Memory Fund 353 4.161 Bank of Cyprus Oncological Centre 353 4.162 Karaiskakeio Foundation 355 4.163 Tax Tribunal 356 4.164 Cyprus Radio–Television Authority 356 4.165 Government Regular Employees Provident Fund 358 4.166 Research Promotion Foundation 358 4.167 Cyprus Stock Exchange Employees Provident Fund 358 PART 5 STATE BUDGETS AND FINAL ACCOUNTS 359 5.1 Approval of State Budgets for 2000 359 5.2 Consolidated Fund 359 5.3 Operating Results 359 5.4 Revenue 359 5.5 Payments and Amounts Due 360 5.6 General 364 5.7 Final Accounts 365 5.8 Assets 366 5.9 Liabilities 370 PART 6 AUDIT OFFICE OF THE REPUBLIC – ORGANISATION AND PLANNING 378 PART 7 APPENDICES 382 APPENDIX I Budgetary Results 382 APPENDIX II Arrears of Revenue as at 31 December 2000 386 APPENDIX III Statement of Permanent Posts (Ordinary and Development Budgets) 388

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

PART 1 – INTRODUCTION 1.1 This Report is submitted to the President of the Republic who, under article 116(4) of the Constitution, shall cause it to be laid before the House of Representatives. 1.2 The Auditor General is the Head of the Audit Office of the Republic, which is an Independent Office not coming under any Ministry. 1.3 Pursuant to article 116 of the Constitution, the Auditor General, assisted by the Deputy Auditor General, shall control, on behalf of the Republic, all disbursements and receipts and audit and inspect all accounts of monies and other assets administered, and of liabilities incurred, by or under the authority of the Republic. 1.4 In addition to the audit of the public accounts, the Auditor General is responsible for the audit of the financial statements of Public Corporations, Special Funds and Local Authorities, as provided by special legislation or by administrative arrangement. 1.5 The powers and duties of the Auditor General are exercised either by herself or by her officers who act according to her directions. 1.6 The constitutional and statutory provisions envisage that the Auditor General shall examine the financial and other activities of Government Services, Public Corporations and Local Authorities, in order to satisfy herself that: • All necessary measures are taken to secure collection of all public monies and all revenues are collected in accordance with the Laws, Regulations and other directions; • the expenditures are incurred in the most economic and effective way; • all sums appropriated are spent for the services and purposes for which they have been approved by the Legislature and in accordance with the authority given; and • all assets are properly maintained, physically inspected and verified. 1.7 For presentation purposes, matters relating to the current year are included in Part A of the Report for each Service, while outstanding matters relating to previous years are included in Part B.

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

PART 2 – SUMMARY OF MAIN FINDINGS 2.1 MINISTRIES AND DEPARTMENTS 2.1.1 Ministry of Defence (a) National Guard (i) Payment of compensations. The Ministry of Defence pays considerable amounts to individuals for damages or destructions caused by the National Guard and I pointed out the need for the necessary precautionary measures to be taken for their limitation. (4.10.8). (ii) Tender for the supply of camouflage cloth (rip stop) valued at £566.000. The specimens received by the Department of Government Purchasing and Supply presented deviations from specifications during their macroscopic and laboratory tests. The Central Committee for Variations and Claims decided for the deduction of the amount of £94.076 from the value of the cloth which was made from the bank guarantee of the tenderer. (4.10.5). (iii) Scheme for the transportation of National Guardsmen. The cost of the scheme for 2001 amounted to £565.665, compared to £534.070 for 2000. For the operation of the scheme the tender procedure has been waived under the authority of the Ministry of Finance, given in 1991, provided that the relevant annual cost would be in the region of £110.000 (4.10.11). 2.1.2 Ministry of Agriculture, Natural Resources and Environment (a) Water Development Department (i) Arrears of revenue. At 31.12.2001 the total arrears of revenue amounted to £44,3 m., out of which £29,9 m. was due by Water Boards (4.12.9). (ii) Final Reports – Final accounts of projects. Final reports and final accounts are not always prepared and as a result the communities concerned are not aware of the actual expenditure incurred for their projects (4.12.12). (b) Department of Geological Survey. - Idleness of Government drilling machines. Drilling machines continue to present high percentage of idleness with substantial running expenses (4.13.2). (c) Department of Forests (i) Long term lease agreements of forest land. Most agreements were signed several years ago and in many cases the rents receivable are extremely low. According to the Forests Laws, Regulations should have been issued, with the approval of the Council of Ministers, governing the criteria for long term leases (4.14.1). (ii) Licences for use of forest land. The licences are issued for agricultural purposes on a token amount of rent contrary to the relevant Regulations which provide that the current market prices should be taken into consideration and without applying detailed criteria and allocation terms (4.14.2). 2.1.3 Ministry of Justice and Public Order. (a) Police (i) Overtime work. The amount paid for overtime work during 2001 amounted to £1,42m. The Council of Ministers decided that no overtime shall be paid and no credits shall be made in

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the members cards for overtime not approved by the Chief of Police and that all accumulated overtime for which the prior approval of the Chief of Police has not been obtained, to be written off. The total amount for accumulated overtime, approved or not is estimated at £3,7 m. (4.19.4). (ii) Compounding offences. On my suggestion for compounding traffic offences, Law 47(i)/97 was enacted and put into force with effect from 1.7.97. The administrative cost saving for the Government is estimated to be more than £4 m. annually (4.19.6). (iii) Leave prior to retirement of members of Police. Until 1.1.99, when the maximum accumulated leave was determined, under the relevant Police Order, members of the Police Force accumulated leave of 1 to 2 years, which is taken prior to their retirement (4.19.7). 2.1.4 Ministry of Commerce, Industry and Tourism (a) Ministry (i) Arrears of revenue. At 31.12.2001, the arrears of revenue amounted to £957.758. The arrears represent, mainly, rents for industrial estates (4.22.2). (ii) Subsidies – Degree of materialization. It appears that, the approved subsidised Schemes (£11,8 m for 2001) are not implemented fully (£5,5 m. for 2001) (4.22.3). (iii) Schemes for loans granted under government guarantee. At 31.12.2001, the government guarantees amounted to £2 m. for outstanding loans amounting to £2,5 m. The loan instalments in arrear amounted to £1,7 m. (4.22.9). (iv) Weights and Measures Service. The Service is not properly equipped and staffed, with the result not to respond fully to its assignment (4.22.6). (v) Utilization of Government industrial areas. No investigation was carried out for ascertaining whether the industrial areas are used according to the relative lease agreements (4.22.7). (b) Department of Registrar of Companies and Official Receiver. (i) Submission of annual reports by companies. Many companies have not submitted their annual reports until 31.12.2001, with the result the relevant fees amounting about to £3,6 m. not to be collected (4.23.3) (ii) Submission of accounts by foreign companies. There is a delay in the submission of the annual accounts for the years 1988-2000 (4.23.6). (iii) Recovery of expenditure. The recovery of the amount of £255.390, representing the expenses of inspectors paid by Government, for the investigation of two companies, is still pending (4.23.8). (iv) Encumbrances – Mortages. No legal action is taken against those who fail to register the mortgage on immovable (4.23.9). (c) Cyprus Handicraft Service. - Action Plan for restructuring the Service. Despite the fact that the Action Plan for restructuring the Service has been approved and the relevant credits were granted, there is a delay in the implementation of the Plan due to organizational problems (4.24.2). (d) International Conference Centre. The legal regime of the Centre continues to be pending (4.25.2).

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2.1.5 Ministry of Labour and Social Insurance. (a) Social Insurance Services. (i) Government revenue from Social Insurance Fund resulting from the payment of social pension. With the operation of the new computerized system, at the beginning of 2000, it is not possible to verify the amount which should be deposited to public revenue by Social Insurance Fund, concerning recipients of social pension who were dependents of pensioners because the relevant programme was not delivered by the company which undertook the computerization (4.28.1). (ii) Supplement of minimum social insurance pension. Under the existing computerized system the supplement of minimum pension, payable by the Consolidated Fund of the Republic to the Social Insurance Fund, is not possible to be accurately calculated (4.28.2). (b) Social Insurance Fund. (i) Amounts due to various Funds. At 31.12.2001 the total amount of approximately £22,4m. was due to the various Funds, for cases adjudicated by courts (4.29.2). (ii) Unemployment Benefit Reserve Fund. At 31.12.2001 the Fund showed a debit balance amounting to £9,4 m., compared to £9,1 m. at 31.12.2000. According to section 69(6) of the Social Insurance Law, the debit balance should have been covered from the Consolidated Fund of the Republic or through a special contribution (4.29.3). (iii) Computerized system for Grants. With the introduction of the new computerized system, as from 1.1.2000, errors and weaknesses were observed in the relative programmes (4.29.5). (iv) Payment of sickness benefit to Municipal employees. Despite the fact that the employees of most Municipalities are allowed sickness benefit, under their collective labour agreements, cases were observed where applications were submitted to the Social Insurance Fund for the payment of sickness benefit. As a result the Fund is charged with payments which should have been made by the Municipalities (4.29.6). (c) Redundancy Fund. - Applications and payments. At 31.12.2001, 1771 applications for redundancy payments were pending, out of which 1420 (80%) are expected to be approved for total amount of about £5,7 m. (4.31.2). (d) Welfare Services. (i) Public assistance. Most of the problems, deficiencies and weaknesses observed relating to the keeping in the files of sufficient information pertaining to movable and immovable property of applicants, the correct and uniform application of legislation and procedures and the prevention of overpayments continue to exist (4.35.1). (ii) Payment of public assistance to foreigners. In many cases of foreigners public assistance is paid for a long time, resulting to additional charge of Services (4.35.3). (iii) “Nea Eleousa” Home. It was again observed that many changes are made in the programmes of works of the staff, after their preparation and approval because of the increased sick leave taken by the staff or the desire of several employees to work on a continuous time schedule (4.35.5).

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(iv) Stovolos Youth Hostel for Girls. The cost of operation of the Hostel is extremely high, because the number of girls accommodated is far below seven, approved by the Council of Ministers for the operation of the Hostel (4.35.6). (v) Government grants to voluntary Organizations. The criteria and the way of calculation of government grant, paid under the Scheme are very general and the possibility should be explored for their revision (4.35.7) (e) Department of Labour - Delays in the repayment of loans. At 31.12.01, the balance of installments in arrear for the repayment of loans relating to the Self-Employment Scheme for Tertiary Education Graduates, at 31.12.2001, amounted to £682.159 (4.27.1). 2.1.6 Ministry of Interior. - Service for the repair of damages due to earthquakes. Until the end of 2000 the examination of 14000 applications was completed for the 1995 and 1996 earthquakes. With regard to the earthquake of August 1999, 10000 applications were submitted out of which 9001 were examined. The expenditure for 2001 amounted to £1.341.000, while the total expenditure for the above three earthquakes amounted to £9.582.643 (4.37.6). (a) District Administrations. - Licences for the storage of petroleum products. From a special investigation carried out by District Administrations it was revealed that there are difficulties in locating all petroleum products storage spaces. As a result the relevant licences are not issued for all the cases and there is a loss of revenue. Furthermore there is a risk from the uncontrolled storage of these products. For the revision/harmonization of relevant legislation with Acquis Communantaire, an expert was engaged who has submitted a relative report, which is being considered by a Technical Committee (4.38.2). (b) Department of Lands and Surveys. (i) Delay in the collection of rent for government land. Delay is observed in the collection of the annual rent for government land, which at 31.12.2001 amounted to £278.394 (4.43.2). (ii) Allocation of work after office hours. The problem of the accumulation of work in arrear continues, despite the fact that during 2001 the amount of £1.405.622 was spent for overtime work (4.43.5). (iii) Scheme for the re-survey of the free area of Cyprus. The Council of Ministers approved the Scheme for the re-survey of the free area of Cyprus, which is expected to be completed in seven years (2000-2006), at a total cost of about £27,5m. The relative provision in the Budget for 2001, amounting to £2,7 m. was not utilised (4.43.6). (iv) Government farms at Pafos. So far, the rents receivable have not been revised resulting in the loss of revenue of £200.000 annually. It was also observed that in several cases no lease agreements have been signed, while the Department collects the relative rents (4.43.11). (v) Compensations for land expropriations for purposes of development projects in Pafos District. In seven cases compensations amounting to £241.270 were paid to affected farmers, which were higher by £98.000 from the respective valuations of the Department whereas the revenue collected by Government under the relevant lease

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agreements, for the period 1980-1997, was only £8.656. It has to be noted that 18 other lawsuits against the Republic are pending (4.43.12). (vi) Leasing of government coastal land at Neo Chorio Pafos. For the period 1978-2011 government coastal land was rented for tourist purposes. The tenants violated substantial terms of the agreement and gained realization rights on the rented government land. The Department is taking legal action to regain possession of government land (4.43.16). (vii) Interventions on Government land. After the realization of interventions by individuals on government land at Agia Napa, the Council of Ministers decided either to sell or lease the land for the amount of £1.081.500 payable in four interest free installments from February 1997. At 31.12.2001 the total amount due was £591.975 (4.43.17). (viii) Re-evaluation of immovable property. The general re-evaluation of immovable property in the free areas of the Republic was completed in 1992. Since then no firm procedure has been adopted regarding the re-evaluation of immovables in cases of erection of new buildings, changes of townplanning zones etc. Due to this omission, a considerable amount of revenue is lost, both for Government and Local Authorities, since the market value of 1.1.80, which formed the basis for the evaluation and is taken into account for the determination of various taxes and fees, remains the same (4.43.18). (ix) Revision of fees and charges. The fees and charges which are collected by the Department do not respond to the actual cost for the provision of services. The draft bill for the revision of fees and charges is pending at the Ministry of Interior (4.43.3). (x) Valuation of leases of government land. The valuation of leases of government land (except for Limassol) has not yet been made resulting in the loss of significant revenue for Government and Local Authorities (4.43.10). (c) Department of Town Planning and Housing. (i) Abandonment of houses in Government Housing Estates. According to an investigation carried out by the Department, in several Government Housing Estates, there are housing units, which have either been abandoned by their residents without being delivered back to the Department or stay there periodically, or are occupied illegally by non- eligible persons (4.44.11). (ii) Weaknesses in the planning and supervision of project. Serious weaknesses were observed in the planning and supervision of the following projects, resulting to delays and increase of cost: Construction of bicycle lane at Aglantzia, formation of pedestrian road at Oroklini, construction of parking place at Lefkara and the general maintenance of government housing estates (4.44.3 – 4.44.5). (d) Press and Information Office. - Overtime. A large number of time-off hours are due to several employees of the Office, in lieu of overtime (4.45.2). (e) Service for the Administration of Turkish Cypriot Properties. (i) Computerisation of the accounts and registers. Only a small part of the work has been completed so far, despite the suggestion made in 1991 for the computerization of the Fund, resulting to additional expenditure and depriving the Service from essential information to be used for the proper administration of T/C properties and of the revenue.

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As I was informed, a special committee has been established for the follow up of the matter (4.46.9). (ii) Illegal acquisition and custody of T/C properties, and illegal extensions/alterations to existing buildings. Without the approval of the Guardian, displaced persons and others, illegally take custody of T/C property or proceed to illegal alterations and additions (4.46.11 and 4.46.12). (iii) Revision of rents. Although the T/C Properties Regulations of 1992 provide that the rent payable for T/C properties shall be in the case of non-displaced persons the market rent and in the case of displaced persons, approximately the market rent, yet the rents payable continue to remain for a considerable time, at the same level and not in line with market rents (4.46.15). (f) Civil Defence. - Supply, installation and maintenance of the network of electronic alarm sirens. The relevant agreement was signed in May 2000 and provided for the completion of works within a period of 9 months. Due to substantial alterations/additions, which were not foreseen, as well as to extensions of time, the works were completed in January 2002, with a delay of about one year. The evaluation of the financial implication of the alterations/additions is still pending (4.37.8). 2.1.7 Ministry of Finance. (a) Department of Inland Revenue. (i) Collection of Income tax. The total collections for 2001 amounted to £454,6 m., compared to £408,9 m. for 2000, (11,18% increase) (4.52.1). (ii) Assessments under objections. At 31.12.2001 there were 55.748 assessments under objection for a total tax amount of £181,9 m. (4.52.3), (iii) Arrears of taxes. The total taxes in arrear at 31.12.2001 amounted to £204,72 m. compared to £182,67 m. at 31.12.00 (12,07% increase) (4.52.4). (iv) Capital statements – Demand for submission of capital statements. For a specific category of self-employed (doctors), the Department failed to demand the submission of capital statements particularly from those taxpayers who declare very low income, in order to ascertain their actual income, whereas in other cases no capital statements were asked for submission for a long period of time. I hold the view that for certain categories of professionals, who undoublty, have a high income, the Department should demand the submission of capital statements, for ascertaining their income (4.52.6). (v) Loans to directors of companies. According to section 47A of the Income Tax Laws, there is no restriction about the amount of loan or of the financial facility which a company may give to their directors. Due to this omission a violation is made of the aforesaid section of the legislation by the directors of the companies who are showing a great part of their salaries as loans from the company, instead of payment of income tax on their actual salaries (4.52.8). (vi) Capital gains tax – Transfer of shares. Section 17(2) of Capital Gains Tax Laws provides that the capital gains tax should be paid before the transfer of ownership. It has been observed that the above provision is not applied in cases where shares of the company are

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transferred, instead of the immovable, resulting in the non payment of capital gains tax (4.52.7(a)). (b) Department of Customs and Excise. (i) Duty-free shops at Pafos and Larnaka Airports. The operating system of the shops presents problems and weaknesses, with the result the exercise of control to be difficult. During the stock taking, carried out during the year and at the year end significant deficits were observed in the items of high risk (4.53.1). (ii) Special private bonded warehouses (duty free shops) operating at the ports. Weaknesses are observed in the internal control system and there is the risk of replacing goods of high value with goods of lower value. I expressed the view that a modern system of stock administration should be introduced for better control. Efforts are made by the Department for the modernization of the whole system of Internal Control, covering the operation of warehouses (4.53.2). (iii) Import declarations. Serious delays are observed in the examination of import declarations at Customs. The final examination of the declarations of the period of 1995-1998 has not yet been carried out and the files for the year 2001 have not yet been prepared with the result their interim examination not to be made (4.53.8). (iv) Bonded Warehouses. The final examination of the closed files of the Bonded Warehouses continue to present serious delays, and there is the risk for the loss of customs duties and taxes (4.53.10). (v) Import of unassembled vehicles. The Department proceeded with the confiscation of a luxurious car when it was ascertained that it was imported unassembled in the form of spare parts, and later it was illegally assembled, the chassis number was changed and the plates of other car were used, which was out of circulation. The amounts collected from the owner of the car for customs duties and taxes and offences were considerably low, having in mind the seriousness of the offences committed (4.53.11). (vi) Overtime work. Due to shortage of staff, some employees are occupied on overtime work for much more hours than their normal working hours. This is contrary to the European Union legislation, which provides that the maximum working hours per week are 48 hours (4.53.7). (vii) Value Added Tax – Spot inspections. The spot inspections carried out during 2001, by the Department, covered only 2% of the registered entities, and there is the risk for loss of revenue (4.53.12(d)). 2.1.8 Ministry of Education and Culture (a) Ministry. (i) School athletics. Despite the significant provisions included in the Budget for the promotion of athletics in the schools, yet the actual amount spent during the last 3 years were less than 50% (£3,2 m. in the Budget for 2001 – Actual Expenditure £1,6 m.) (4.56.2). (ii) Internal control. The internal control exercised in the Services of the Ministry was not effective with the result omissions and weaknesses to the observed (4.56.3). (iii) Weaknesses in the administration, supervision and examination of contracts. Weaknesses were observed in the administration, supervision and examination of contracts of several projects by the supervisors, resulting to deviations from the provisions

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of contracts and delays. The most important cases were those of B´ Technical School of Limassol, of Maronites School at Anthoupolis, of the Lyceum, Gymnasium and Elementary School of Polemidhia and of Olympic Gymnastic Hall at the Lyceum of Apostolos Barnabas at Strovolos (4.56.14, 4.56.17 and 4.56.19). (iv) Insufficient contract period. For several projects the specified period for their execution was extremely small, with the result the prompt completion of works not to be possible, the quality of the projects to be affected and the construction costs to be increased (4.56.9). (v) Delays in the printing of books. Delays were again observed in the implementation of agreements for the printing of books (4.56.7). (vi) Cyprus Library. Several books have been destroyed or run the risk of being destroyed, due to the unsuitability of the storage spaces (4.56.28) (b) Cultural Services. (i) Evaluation of programmes. No evaluation is carried out of the programmes and schemes, either on an annual basis or at the completion of each Strategical Development Scheme (4.56.25). (ii) State Gallery. The arts at the storehouse of the Gallery are kept in unsuitable spaces, under adverse climatic conditions and run the risk of being destroyed. The expected rehousing of the storehouse is still pending. (4.56.26). (c) School Committees. (i) Regulations under the School Committees Law of 1997. The enactment of Financial Instructions as well as of Regulations governing staff matters, the way of operation and the procedure to be followed for meetings etc. is pending (4.58.4(a)). (ii) School Committees’ staff. Weaknesses are still observed in the keeping of books and the preparation of accounts due to the assignment of duties to non specialised and suitably trained staff (4.58.4(b)). (iii) School canteens. Cases were again observed where the initial amount of the tender was modified (4.58.8) (iv) Immovable property. The search for ascertaining the immovable property and the issue of proprietorship certificates has not yet been completed in several School Committees (4.58.11). (d) Nicosia School Committee. (i) Internal control. The system of internal control covering the various activities of School Committee and the management of legacies present weaknesses and deficiencies (4.59.2). (ii) Administration of legacies. The purposes of most legacies have ceased to exist or are not in line with present realities (4.59.3). 2.1.9 Ministry of Communications and Works. (a) Department of Antiquities. (i) Breakings and burglaries. Several incidents of breakings and burglaries occurred. I pointed out the need for taking measures to secure public revenue (4.64.2).

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(ii) Stocks of antiquities. The computerization of the antiquities registers presents delays due to vast volume of work (4.64.3). (b) Department of Public Works. (i) Weaknesses in the planning/coordination of projects. In major projects weaknesses have been observed in their planning and coordination, resulting to delays and expenditure increases. Amongst the projects where such weaknesses were observed are the new building of House of Representatives, the new Nicosia Hospital, the new Famagusta Hospital and the traffic network of Limassol Municipality (4.65.2). (ii) Errors and omissions in projects studies. During the execution of projects errors and omissions in the studies were observed, which caused delays in the progress of works and alterations to plans, resulting to financial implications. The most significant weaknesses were observed in the contracts of Dhekelia-Famagusta Highway, the Limassol coastal road, roadworks, Nicosia South By-pass, the Timi-Nata-Pentalia road and Phini By- pass (4.65.3). (iii) Independent laboratory tests by Central Laboratory. The tests carried out by the Central Laboratory are insufficient due to gradual reduction of staff (4.65.4(c)). (iv) Weaknesses in the administration of contracts. In various road works weaknesses were observed in the administration of contracts by the Resident Engineers, resulting to deviations from the provisions of contracts, delays and additional cost. The most important cases were observed in the contracts for New Government Offices in Nicosia, the New Nicosia Hospital, the Supreme Court building, and the Polis-Steni-Lysos road (4.65.5). (c) Department of Merchant Shipping. - Weaknesses in the computerized system. Due to various weaknesses in the computerized system, delays are observed and backlog of work, with the result this to be carried out manually (4.66.3). (d) Department of Electrical and Mechanical Services. - Weaknesses/omissions in contract managements. In several cases serious variations/ additions were made in contracts, which should have been anticipated during the study, resulting to substantial increase in the cost and delay in completion of works. In other cases, the provisions of the contracts for the maintenance of equipment, regarding the submission of reports for the preventive maintenance/tests were not implemented (4.67.2). (e) Department of Road Transport. (i) Modification of motor vehicles after customs clearance and before registration. Several vehicles are registered in a different category than the one cleared due to changes after customs clearance. An amendment bill has been prepared by the Department, so that to collect additional duties and taxes (4.68.4). (ii) Registration of saloon vehicles in the category of “VAN”. I repeated my suggestion that the relevant Legislation and Regulations should be strictly enforced so that the vehicles which cannot be considered as commercial not to be registered in this category. For the radical solution of the problem I suggested that the duties and taxes for these vehicles to be the same with those of saloon vehicles (4.68.5).

19 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

(iii) Tare of motor vehicles. Due to existing difficulties in the determination of the accurate weight of vehicles, I recommended that the engine capacity of vehicles be taken as the basis for fixing the registration and circulation fees. The relevant amendment bill is being prepared by the Department (4.68.6). (iv) Exhibition/test of motor vehicles. The relevant Legislation governing the use of non- registered vehicles for exhibition/test purposes is not implemented. In various cases the vehicles are used for private purposes for long periods (4.68.7). (v) Replacement of the chassis of vehicles. My previous suggestion for the amendment of legislation, so as to preclude the replacement of the chassis of vehicles or such replacement to be considered as a new vehicle and be subject to excise duties, has not yet been implemented (4.68.10). (f) Department of Civil Aviation. - Ground service to aircraft. No fees are imposed for ground service, contrary to the policy followed by European countries, resulting to substantial loss of revenue (4.69.7). (g) Department of Postal Services. (i) Sorting/Distribution of mail. Problems were encountered in the sorting of mail resulting to delay in their distribution (4.70.1). (ii) Issue and disposal of postal cards. Until 31.12.01 there were about 575395 postal cards in the strongroom and post offices (4.70.4). 2.1.10 Ministry of Health (a) Ministry. (i) Arrears of revenue. The arrears of revenue as at 31.12.2001 amounted to £5.176.349 (4.71.3). (ii) Internal control. Weaknesses and deficiencies are observed in the systems of internal control of the Ministry and its Services (4.71.2). (iii) Organisational structure of the Ministry. The organisational structure of the Ministry has not yet been prepared. Medical personnel is transferred from Hospital to the Ministry or the Health Services to perform non medical duties (4.71.11). (iv) National Health Scheme. No notable improvements have been effected in the infrastructure of the Services of the Ministry and there is the risk for further delay in the implementation of the scheme (4.71.12). (v) Quality of medical services. According to a relevant study, the system of quality control of the services rendered to patients, presents serious weaknesses (4.71.13). (vi) Supply and use of medical and other equipment. Considerable delay has been observed in the purchase of equipment, despite the great need which is observed, with the result 52% of the available funds not to be expended (4.71.5). (vii) Bank of Cyprus Oncological Centre. The operational regime of the Oncological Centre and the relation of the Centre with Government have not yet been determined, because the consultations carried out in connection with the agreement to be signed by Government and the Medical Institution have not yet been completed. The Budgets of the Centre, for the years 1999-2001, have not yet been approved by the Council of Ministers (4.71.17).

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(viii) Co-Operation between the Ministry of Health and the Cyprus Muscular Dystrophy Research Fund. The Memorandum for above co operation was signed in October 1999. There are still however, some matters which have not been clarified and should be considered further. I suggested that a legal advice should be sought as to whether the Memorandum is in line with the Public Tenders Law and Regulations (4.71.19). (ix) Laboratories operational quality control. The significant suggestions of the consultant for upgrading the quality of laboratories have not all been implemented (4.71.16). (x) Computerisation of the Ministry of Health. Serious weaknesses and delays were observed in the implementation of Information Health System, which is considered as obsolete (4.71.6). (xi) Cooperation arrangements with various Hospitals and companies abroad. The Ministry has not yet completed the collection of information from Hospitals and companies abroad, with the result the relevant agreements not to be signed (4.71.14). (xii) New Nicosia Hospital. Due to major additions and alterations, which were subsequently decided, an extension of time for 130 weeks was granted to the contractor, for the completion of the project, as well as for the payment of compensations amounting to £5 m. (4.71.8). (xiii) New Famagusta Hospital. There was a delay of 30 months in the study and invitation of tenders, while the contract amount was increased to £10,5 m., from £7,5 which was the estimated cost (4.71.9). (b) Medical Services and Public Health Services. (i) Internal control. Serious weaknesses and omissions are observed in the internal control system operating in Hospitals (4.72.1). (ii) In-patients medical fees. Patients receive treatment and are allowed to leave Hospital without payment of relevant fees, resulting to the increase of loss of revenue, as no measures are taken for the collection of fees (4.72.3). (iii) Inventory Registers. These have not yet been properly updated, although the cost of movable property is significant (4.72.6). (iv) Computerisation. Delay is observed in the computerisation of important sections of Hospitals (4.72.2). (c) Pharmaceutical Services (i) Expenditure and consumption of drugs. The expenditure (2001 : £19,5 m.) and the consumption (2001 : £21,5 m.) are showing a rising trend. Suggestions have been made for the computerization of pharmacies and the introduction of medical control, with a view to reducing the above (4.73.1). (ii) Purchase orders without the existence of available funds. Medicines, pharmaceutical supplies and other items valued at £5,3m. were requisitioned and received without the existence of necessary funds (4.73.3). (iii) Tender performance guarantees. No suitable system exists for the follow up of guarantees (4.73.5).

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(d) General Laboratory. - Laboratory tests costing. The study which has been undertaken for fixing the collectible fees on a rational basis has not been completed due to shortage of staff in the Accounts Section (4.75.3). 2.2 LOCAL AUTHORITIES 2.2.1 Municipalities – General Observations (i) Financial position. Almost all Municipalities face serious financial problems and in consequence they are unable to meet all their current liabilities (4.77.3). (ii) Upgrading of posts. As a result of deviations from relevant Regulations and provisions, wrong placements have been observed in upgraded salary scales (4.77.10). (iii) Collective agreements. Collective agreements have been signed, the provisions of which are contrary to the Regulations of 1995 (S.L.175/95) (4.77.11). (iv) Schemes of service of municipal employees and powers of the Municipal Councils. Municipal Councils placed employees in higher salary scales or approved additional annual increments, contrary to the schemes of service (4.77.12). (v) Accounts and audit. With the exception of the Municipalities of Nicosia, Pafos, Athienou Dherynia, , and Larnaka, the rest of Municipalities did not submit their financial statements for 2001 for audit, by 30th April of 2002 as provided by section 81 (1) of the Municipal Corporations Law (4.77.2). (vi) Internal control. In almost all Municipalities weaknesses and omissions were observed in the systems of internal control covering the various activities of the Municipalities (4.77.9). (a) Nicosia Municipality. (i) Payment of compensation for accumulated leave of absence. Pursuant to Municipal Council decision dated 29.11.2001, the amount of £5.475 was irregularly paid to Municipal Engineer, for the purchase of 46 days leave of absence in excess of 70 days, accumulated during the period 1986-2000. The Municipality has adopted the existing Public Service Leave Regulations which do not permit the transfer of leave of absence in excess of 70 days (4.78.8). (ii) Computerisation of services. The computerisation of the Municipal services, which started in 1992, has not yet been completed, resulting to serious problems which affect the operation of the Municipal Services, particularly of Financial Services (4.78.10). (b) Limassol Municipality. (i) Financial loss from the operation of the municipal kindergartens. From the operation of three municipal kindergartens during the years 2000 and 2001, the Municipality suffered a loss of £415.357 and £434.931, respectively. The total loss suffered by the Municipality for the years 1997-2001 amounted to £1.982.863 (4.79.13). (ii) Deficit from the operation of refuse collection service. From the operation of above service, during the years 2000 and 2001, there were deficits amounting to £634.068 and £556.114, respectively (4.79.14).

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(c) Pafos Municipality - Entertainment tax. From a physical counting of the stocks of entrance tickets in cinemas, kept at the Municipal store, a deficit of a great number of tickets was ascertained, representing an amount of £42.547 (4.82.11). (d) Athienou Municipality - Cash deficit. During the audit of the accounts a cash deficit of £31.333,46 was ascertained, for which there are serious suspicions that was stolen by a Municipal employee (4.85.1). (e) Aradippou Municipality - Industrial area. Before the hiring of government land by the Municipality, to be used for the construction of industrial area, building sites were allocated to industrialists by the Municipal Council, without signing any agreement and determining the way of allocation of building sites. It was also observed that estates were allowed to be constructed at the industrial area, without the submission of designs for building permits (4.86.8). (f) Agios Dometios Municipality - Cash deficit. From two investigations carried out separately by my Office and the Municipality. it was ascertained that the amounts of £1.525 and £15.499 respectively collected during the years 1990-2001 were not lodged to the Municipal Fund (4.84.1). 2.2.2 Community Boards – General Observations. (b) Ex. Improvement Boards. (i) Financial Statements. In the financial statement of many Community Boards there are errors and omissions, resulting to delay in their audit (4.103.2(a)). (ii) Budgets The annual budgets of many Boards are not approved promptly, before the commencement of the financial year, contrary to the provisions of the Law and General Financial Instructions. Also, the budgets of several Boards are showing a deficit contrary to the relevant Law (4.103.2(b)). (iii) Immovable property of the Boards. In many cases the immovable property of the Boards is not registered in their names (4.103.2(c)). (iv) Assets. The assets, movable and immovable, of most Community Boards are not recorded in appropriate registers, with reference to the year of acquisition, the value, description and title of ownership (4.103.2(d)). (v) Schemes of Service and Staff Regulations of Community Boards. Many Community Boards have not yet prepared Schemes of Service and Staff Regulations, resulting to wrong emplacements on higher salary steps or the concession of additional increments irregularly (4.103.2(g)). (vi) Deviation from tender procedure. In several Boards the proper tender procedure for the procurement of services and stores is not always followed (4.103(2)(h)). (vii) Pensions and Gratuties Fund. The contribution of the Boards to Pensions and Gratuities Fund is low. As a result the establishment of a sufficient reserve to cover future obligations is not possible (4.103.2(i)).

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(c) Ex. Village Authorities. (i) Annual budget. Some of the Boards have not prepared their budget for the year 2001 (4.103.3(a)). (ii) Cash and bank balances. A great number of Community Boards present in the Cash Book, under the same column, in one amount, all their cash balances, with the result the balance of the bank and cash not to be shown separately (4.103.3(b)). (iii) Wrong postings in Cash Book. Although the accounting system which is followed is based on actual receipts and payments of a financial year, yet many postings are made of revenue and expenditure which refer to following year (4.103.3(c )). (iv) Delay in the updating of accounting books and the preparation of accounts. In several Boards delay is observed in the updating of accounting books and the preparation of final accounts. As a result the accounts for the year 2000 were not prepared until August 2002 (4.103.3(d)). (v) Non-imposition of additional charge of 25%. As a rule the additional charge of 25% on arrears of taxes, dues and fees is not imposed (4.103.3(f)). (vi) Tender procedures not legally regulated. In many cases the tender procedure for the execution of projects or procurement of services, is not followed because the ex. Village Authorities had not prepared Regulations governing the principles/tender procedures (4.103.3(g)). (vii) Cash deficits. In a small number of Community Boards cash deficits were observed, for which the chairman of village authority was asked to give explanations and take the necessary action (4.103.3(ib)). (viii) Differences in cash balances of 9.7.99. In some Community Boards differences were observed in the cash balances of 9.7.99 and I asked from the respective District Officer to reexamine and notify to my Office the correct balances (4.103.3(ic)). (ix) Enactment of Regulations. For the more effective and smooth operation of the Boards, Regulations have been approved and published, under the provisions of relevant Legislation, by a small number of Community Boards. It is expected that the above Regulations will be adopted by all the Boards (4.103.4). 2.3 PUBLIC CORPORATIONS (a) Industrial Training Authority - Multi-business Programmes abroad. There was no uniformity in the handling of programmes and omissions were observed in justificatory or supporting documents submitted by organizers and measures were not taken in cases where the participants had not completed the programme (4.110.9). (b) Electricity Authority of Cyprus (i) Disciplinary investigation against an employee of the Authority. In a specific case, after a report was made by a company, an investigation was carried out for possible involvement or interest of an employee of the Authority, in a tender award to a company, registered in the name of his wife (4.111.9(a)). (ii) Disciplinary investigations against employees of the Authority in a particular Area – Interventions to power meters / theft of power. After a report was made by a group of

24 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

employees of the Authority, against a Senior Officer, that he intervenes in the power meters of his house and his apartments for stealing power, a disciplinary investigation was carried out by the Authority, which was subsequently suspended, after the commencement of Police Criminal investigation. The case was referred to the Attorney General (4.111.9(b)). (iii) Internal Control System on the revenue of the Authority. Several weaknesses are observed in the recording and follow up of electricity consumption, some of which were referred in my previous Reports. These relate to the non-satisfactory or the non-existence of a system for the follow up of the statements prepared by the computer regarding the billing, the failure of non carrying spot examinations of power meters or at rare intervals, the inability for ascertaining of thefts by the employees who are carrying spot examinations etc. (4.111.11). (iv) Weaknesses in the system SAP-Procedure for the receipt of materials. Omissions and weaknesses were observed in the procedure covering the receipt of materials through the computerized system (4.111.12). (c) State Fairs Authority. - Building permits. The building permits for several pavilions erected at the exhibition area have not yet been secured from the appropriate authority (4.112.10) (d) Cyprus Ports Authority (i) Loans. The Authority received a loan for Stg £37 m., for the consolidation of existing loans. The greater part of the loan was not used and was invested in Government stock securities, bearing interest lower than the rate of the loan received and of other loans of the Authority (4.113.9). (ii) Provision of pensions benefits. No actuarial study was carried out for many years. Therefore, it cannot be ascertained whether the provision made for pensions benefits is sufficient (4.113.12). (iii) Container terminal at Limassol Port. The terminal has not yet been fully utilised. The Authority informed me that this is attributed to the negative attitude from the part of some associates involved in the port operation, in their efforts for the exploitation of the terminal on a rational basis (4.113.14). (d) Cyprus Telecommunications Authority (i) Financial position. Under the existing legislation the charges for telecommunication services provided by the Authority should be determined in such a way so as the income to cover the current liabilities and to create a reserve for depreciations, extensions etc. The above legal provision is not applied as the accumulated reserves are steadily increasing as a result of the annual surpluses of the Authority. The Competition Protection Commission, after carrying out an investigation, on its own initiative, against the Authority for possible violation of Competition Protection Law, imposed a fine of £20 m. on the Authority on the grounds of improper exploitation of its dominated position in the sector of telecommunication services (4.114.3). (ii) Cash and bank balances and government stocks. The cash and bank balances at 31.12.2001 amounted to £218 m., the greater part of which is deposited in commercial

25 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

banks. According to the Public Corporate Bodies (Investments) Law of 1991 these balances should be gradually invested in government stocks (4.114.4). (iii) Investments – Participation of the Authority in EAST Satellite Programme. After the writing off of the amount of £1,2 m. invested in the EAST Satellite Programme, it was decided for taking legal measures by the Authority, for the recovery of the amount, the cost of which is estimated at £500.000 (4.114.6). (iv) Subsidiary company Digimed Communications Ltd – Compensations to Executive Director of the company for the termination of his contract employment. After the termination of the four years contract of employment of the Executive Director, compensations amounting to £99.500 were paid to him, following an out of court settlement (4.114.7(b)). (v) Network of Synchronism Digital hierarchy. The award of tender for the supply of synchronism digital hierarchy equipment was made by the Authority in 1996, for the amount of £3.500.000. Until May 2002 the actual expenditure for the above contract amounted to £8.095.616, i.e. there was an increase of 131%, in comparison with the initial amount of the contract. The Authority approved the total expenditure of £9m. (4.114.9(c)). (vi) Upgrading of antiseismic protection of the Central Offices of the Authority. A study is being carried out by the Authority for the upgrading of antiseismic protection, to the factor 0,25. The relative cost will be £0,9 m. and the total cost will be £8,5m., including all the alterations, additions and renewals. Due to the very high estimated cost, I recommended that the proposed upgrading or other alternative solutions to be reconsidered (4.114.10). (vii) Advertisements and promotion of services and products of the Authority. The expenditure for advertisements and promotion of services of the Authority was considerably increased in 2001 and amounted to £3,13m., compared to £0,77 m. for 2000 (4.114.13). (f) Cyprus Sports Organisation (i) Internal control. The Organisation has not yet introduced a suitable internal control system, with the result serious weaknesses and omissions to be observed (4.120.5). (ii) Budget excesses. Excesses were again noted without securing the prior approval for a supplementary budget (4.120.3(b)). (iii) Tenders. Weaknesses were observed in the tender procedure and the follow up of execution of tenders (4.120.6). (iv) Development Budget. No analysis is given in the Budget or the explanatory memorandum of the projects which will be executed (4.120.8) (g) Cyprus Tourism Organisation (i) Court decision for the selection of advertising firm for the years 2000-2001. The Supreme Court decided on 31st December 2001, for the annulment of the decision of the Organisation for the award of the tender to a particular advertising firm, on the grounds that the procedures governing the submission and evaluation of tenders were not followed. Such observations were also made by my Office.

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In the light of above decision of Supreme Court, two recourses were filed against the Organisation by the two successful tenderers, under which compensations amounting to £1.350.000 are claimed (4.122.6(b)). (ii) Tenders for the construction, installation and decoration of pavilions of the Organisation at International Tourist Fairs. Due to the prolonged procedure for the preparation of terms and conditions and the proclamation of tenders, the award was made on 6.12.2001, only some weeks before the opening of fairs of 2002. As a result, it was not possible to be included in the tender the fairs which were organised at the end of 2001 (4.122.9). (iii) Licences for the operation of hotels. A number of hotels are operating illegally. The Organisation is not able to issue the operating licence because of illegal extensions/ alterations (4.122.10). (h) Cyprus Dairy Industry Organisation. - Payment of surplus cow milk to producers for 1998. The producers were paid in August 2001, at the clearing price of 11 cents per litre, instead of 2,56 cents which was the price under which the relevant provision was made in 1998 accounts, amounting to £62.656, resulting to the additional payment of the amount of £206.500 by the Organisation (4.124.8). (j) University of Cyprus. (i) Research programmes. Certain Rules governing the planning, execution and follow up of research programmes are not followed.(4.126.7). (ii) Salaries of personnel. Weaknesses are observed in the way of operation of the salaries of personnel system (4.126.6). (iii) Terms of employment of the Academic Staff. Some of the terms of employment of the Academic Staff have not yet been regulated by the Rules (4.126.11). (i) Cyprus Broadcasting Corporation. (i) Financial position. The financial position of the Corporation continued in 2001 to be problematic, and its operation depended to a considerable extent on the continuation of the financial support provided by Government, the continuation of credit facilities provided by the Pensions Funds of the employees of the Corporation and the non payment of the amount due for staff fringed benefits. The liability of the Corporation to the above Funds at 31.12.2001 amounted to £9 m. (£9,7 m. for 2000) and £2,5 m. for fringed benefits (£2,3m. for 2000) (4.127.2). (ii) Tenders. Weaknesses were observed in the procedure governing the submission, evaluation and award of tenders (4.127.10). (k) Nicosia Sewerage Board (i) Examination of tenders. After the issue of a report by my Office in April 2002, the Police is investigating whether the Director General of the Board, who has been interdicted, has any particular relationship with a certain tenderer, who was the successful tenderer in most of the tenders during the last years, for the supply of covers for wells and steps (4.129.5). (ii) Tenders for consultancy services for Greater Nicosia Sewerage System. In August 2001 I observed that the procedure followed for the award of the tender to a certain

27 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

tenderer was vulnerable. As a result, there was a great possibility for the remaining tenderers to succeed in their law suits, filed in the Supreme Court. As I was informed, the Supreme Court accepted their law suits, in March 2002, and there is the possibility for the payment of compensations to these tenderers (4.129.6). (iii) Tenders for consultancy services for Greater Nicosia Sewerage System. Serious delay has been observed in the execution of the project as well weaknesses in the whole study for designs. Furthermore, it was identified that overpayments amounting approximately to £150.000 were made, in several cases, by the Board to the consultants (4.129.7). (iv) Purchase of building for the housing of the Services of Nicosia Sewerage Board. The previous Board decided at the last meeting, held on 20.12.2001, prior to the end of its service on 31.12.2001, to purchase certain immovables, within the Walls of Nicosia, for the housing of the Board’s Services. I expressed the view that it would have been in the interest of the Board, before taking the above decision, to have a complete picture of the total cost (including the cost for repairs, which is expected to be more than £1,7 m.), so as to conclude whether the housing of the Board in above immovables was in the interest of the Board (4.129.3). (l) Cyprus Olive Products Marketing Board. (i) Power and jurisdictions of the Board. The Board has lost to a great extent the control of the market of olive products, due to inability to perform adequately its powers and functions provided in the Law, such as the taking of measures against the violators and for increasing the sales. As a result of the above, approval was given for the export of olive oil surpluses at low prices, by subsidizing losses through State Budget (over than £1,8 m.)(4.137.6). (ii) Internal control system. The system of internal control covering the receipt, storage, processing and disposal of olive oil continues to present serious weaknesses (4.137.7). (iii) Distribution of olive oil. In May 2002, the Board decided for the award of the tender to the higher of three tenderers, based on criteria not included in the terms of the tender. The percentage of commission included in the agreement finally signed, is about 56% and 82% higher from that of the second and third tenderer (4.137.8). (iv) Disposal of olive oil surpluses of 2000 – 2001 crop. For most exports there is no documentary evidence that the olive oil was actually exported, as well as a written sale agreement. • For the sale of 496192 kilos of olive oil “extra” to a certain company, for export to Italy, commission was paid, as in the case of agent and the amount of £10.000 was irregularly refunded to the company due to increased acidity and for 5322 kilos no invoices were issued (4.137.10). (v) Disposal of olive oil of inferior quality, of crop 2000 – 2001. Although the stocks of olive oil, of crop 2000 – 2001, were 248617 kilos, out of which only 67237 kilos were of inferior quality at the specific period, yet approval was given, on the request of the Board, for the increase of the quantity approved by the Council of Ministers, for subsidising the export of olive oil of inferior quality of crop 2000 – 2001, from 300 to 400 tonnes (4.137.11).

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(vi) Disposal of the amount of £80.000 for advertising purposes and promotion of Cyprus olive oil. The invoices submitted to the Ministry of Finance by the Board, for the payment of the subsidy for advertisements, included an invoice for £40.000, for which there are serious reservations about its validity and genuineness (4.137.12). (vii) Tenders. The appropriate procedures, relating to tender matters are not followed (4.137.13). (viii) Advertisements. The amount of £21.387 was paid for advertising purposes, without invitation of tenders and the approval of the Board (4.137.14). (m) Cyprus Potato Marketing Board. (i) Cultivation of many varieties of potatoes. During 2001, 24 varieties of potatoes were cultivated. The results for several varieties are negative, because the net trading income is not sufficient for the payment of producers. I suggested that the Board should evaluate the trading results and to study whether it is justified to cultivate only the most productive varieties (4.139.4). (ii) Ring Rot disease of potatoes. The Board suffered losses for £219.289 as a result of the above disease. The Council of Ministers decided for the partial compensation of the Board and to compensate the affected producers with the amount of £453.467. The losses which will result from the non cultivation of affected fields, for the next 3 years, are estimated at £2,5 m. (4.139.6). (iii) Import of potato seed by the Board. I suggested to explore the possibility for the import of potato seed by the Board, instead of by third persons, as it happens (4.139.9). (iv) Tenders. In various cases the tender procedures followed are not in line with the Tender Regulations of the Board and the principles of proper administration (4.139.12). (n) Central Slaughter House Board. (i) Liguidity problem. The Board is facing a very serious liquidity problem, resulting to difficulties in the settlement of its current liabilities and depends to a great extent on the continuation of Government financial support (4.140.1(a)). (o) Water Boards – General. (i) Irregular sale of water. During 2001, the irregular sale of water was continued, in areas outside the water supply limits of the Boards, at prices higher from those charged to consumers (4.141.4). (ii) Early retirement and concession of additional increments. Two additional increments are granted to members of the staff of the Boards who submit an application for early retirement, above the top of their salary scales, without a legal cover (4.141.5). (iii) Permanent posts. For the establishment of new posts and the formulation of schemes of service the approval of the Council of Ministers is not always secured, on the justification that these posts are included in the collective agreements which are approved by the Council of Ministers (4.141.9). (p) Limassol Water Board (i) Liquidity/viability. The financial position of the Board is continually deteriorated, with acute liquidity problem. The current liabilities amounted at 31.12.2001 to £3 m. (£10 m. for 2000) (4.143.1(d)).

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(ii) Upgrading of salary scale and change of title. The Ministry of Interior refused to submit to the Council of Ministers, for approval, the placement of the Head of Information Technology Service to the initial step of the salary scale A12+2 and pointed out the need for the adoption of upgrading Rules applicable in Public Service (4.43.3(b)). (iii) Computerisation of services-contract 3/94. The completion of the above contract, for which the amount of £177.391 has been expended up to 31.12.2001, presents for some years a delay and problems are encountered in the implementation and operation of the programmes (4.143.9). (q) Cyprus Foundation for Muscular Dystrophy Research (i) Memorandum of Scientific Co-operation between the Foundation and the Ministry of Health. The Memorandum does not provide for the method of calculation of the cost of services rendered by Foundation to eligible patients for free medical treatment, for which an annual state subsidy is paid (4.154.5). (ii) Personnel. So far, employment agreements have not yet been signed for 40% of the staff (4.154.2). (iii) Defects in building. The contractor was paid the amount of £250.000 for final settlement of his claims, before repairing the defects presented in the building (4.154.4). (r) Cyprus Stock Exchange. (i) Erection of new building. For the said building, which had to be erected, in the first instance, at the area of the old stadium (ΓΣΠ), architectural competition was invited on 16.2.2002, which was not suspended, despite the decision taken for the erection of the building in other area, with the results prizes to be given for the designs, amounting over than £160.000 (4.155.5). (ii) Building programme. In the building programme for the erection of the new building, for the housing of the Stock Exchange, the provision made for the area to be used by the staff was excessive. The area specified for certain posts of senior officers was exceeding, up to 40% of the standards applicable in the Government for corresponding posts (4.155.6). (s) Bank of Cyprus Oncological Centre. - Approval of Budget. The Budgets of the Centre for the years 1999-2001 have not yet been approved (4.161.1). (t) Government Regular Employees Provident Fund. - Investment policy. Due to the fall in prices of shares in the Cyprus Stock Exchange, the Fund suffered a loss of £6.567.716, based on the revaluation of investments at 29.12.2000, in comparison with their prices shown in the accounts of previous years (4.165.2).

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PART 3 – PERFORMANCE AUDITS 3.1 COMPUTER MASTER PLAN OF GOVERNMENT SERVICE 3.1.1 Choice of subject. The Computer Master Plan for Government Service was prepared in 1987, and according to the initial programme this should have been completed within 10 years. Due to the great delay and the problems observed in the implementation of the Plan, which have adverse effects on the productivity and the effectiveness of Public Service, and moreover they cause a considerable increase in cost of implementation, the Audit Office approved this performance audit and was carried out during the first six months of 2002. The preliminary report was submitted, in July 2002, to the members of the Executive Council of the aforesaid Plan, and their views and comments were invited before the finalisation of the report. As I have not yet received the comments/views of the Services involved, I append below the findings and suggestions of my Office, included in the preliminary report. 3.1.2 Summary of main findings. The international experience on the development of computer plans, as disclosed in relative reports, is considered persistent with many problems, due to the unknown environment, the rabid development of technology and the very specialized expertise required by the sector of computerisation. From the findings of the performance audit carried out by the Audit Office, it is deduced that Cyprus is not an exception from the international experience, as similar problems and weaknesses have been identified, the most significant of which are briefly set out below. • There was a great delay in the commencement and implementation of the projects included in the plan, with adverse effect on the economic and effective operation of the Public Service, and on quality of services rendered to the public. Weaknesses were also observed in the support of the Plan by the services under computerization the training of users, the prompt and effective operation and support of systems, as well as in the evaluation of the operation of the projects. • The most serious delays and other problems relating to the management of the Plan are attributed to the fact that the Management Unit of the Programme was not established and not operated according to the suggestions made by the consultant appointed in 1994 for the organization of the Programme. The consultant suggested the establishment and operation of a Management Unit independent from the Department of Information Technology Services and the staffing of the Unit with specialized staff, but finally, due to reactions, it was decided the Unit to come under the Department, where it operates imperfectly. Furthermore, the Department failed to pursue the proper organization and management of the Unit with specialized staff and to introduce a training programme of the staff, on the basis of the suggestions made by consultant. • The follow up of the Plan by the Executive Council for Computerization and the processing of the implementation of strategic targets, approved by the Council of Ministers, were not the expected. The Executive Council did not investigate the deviations from the targets and had not discussed with the parties involved, especially with consultants of the measures suggested to be taken for facing the weaknesses arising from the management of the Plan and for attaining the targets set. 3.1.3 Summary of suggestions. The Ministry of Finance is required to provide more substantial support to the Plan, for the purpose of application of the suggestions, pertaining to the implementation of the Plan, particularly for the proper management and operation of the Plan, according to the suggestion made by the consultant. For the sake of the proper

31 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 management of the Plan, a continuous training programme should be introduced for the staff responsible for the development of the projects and of users and to evaluate the effectiveness and the problems of completed projects, for purposes of taking preventive/corrective measures for the projects under execution and future projects. The Executive Council is also required to carry out more effective follow up and examination of the Plan, to investigate the deviations from the expected targets, to take the necessary corrective measures and to observe their implementation. 3.2 QUALITY OF THE STUDIES FOR ROAD WORKS OF THE DEPARTMENT OF PUBLIC WORKS 3.2.1 Choice of subject. The decision for the conduct of the specialised performance audit in relation to the correctness of the studies for road works, which are prepared/supervised by the Department of Public Works, was taken as a result of the frequent and significant alterations in the designs, effected during the execution of works, and the consequential extensions of time and financial implications in the contracts, as well as to the fact that the methods and materials used for the construction of road works remained the same for many years without any significant revision or improvement. 3.2.2 Objectives of the audit. The main objectives were: (a) To examine the road works executed during the period 1995-2000, for ascertaining the reasons for causing the alterations and the consequential delays in the completion of works, as well as the respective financial implications. (b) To investigate whether the existing procedures regarding the preparation, co-ordination and examination of studies by the Department of Public Works are satisfactory; and (c) to submit suggestions for improved and more economic studies, with the minimum of alterations and modifications. 3.2.3 Summary of findings. The more significant findings are the following: (a) No independent and effective examination of the studies is carried out. (b) During the study of a road work, the evaluation of the soil / or geological survey is not always complete and the conclusions and observations of the evaluation are not recorded. (c) The co-ordination between the parties involved (designers, Services, Local Authorities) is insufficient. (d) The effective implementation of the scheme for the professional insurance of private designers has not been pursued, so as the Public to be compensated in cases of weaknesses/errors in studies. (e) No specific and reasonable time is specified for the completion of studies and also there is no mechanism for facing delays. (f) There is no mechanism in the Department for investigation and consideration of behavior/effectiveness of materials and methods for the adoption of new technology, so as to secure the most economical and of good quality constructions. 3.2.4 Summary of suggestions. An effective examination should be carried out by an independent designer for all the road works studies. It is also necessary to adopt a system for the effective evaluation of the productivity of designers and to pursue the proper staffing of the Unit for Studies of the Department, with appropriate education and continuous training of staff,

32 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 and the establishment of a framework for the investigation of materials and methods and the adoption of new technology. 3.3 POLLUTION OF SEAS FROM SHIPS 3.3.1 Conduct of audit. During 2001, my Office conducted Performance/Environmental Audit for the pollution of seas from ships. The audit was at the same time carried out by eight Supreme Audit State Institutions of European Countries, within the framework of the programme of EUROSAI Environmental Group (European Organization of Supreme Audit Institutions). Cyprus is one of the international major shipping centres and has signed all the International Conventions for the safety of shipping activities and the protection of sea environment. The Cyprus Legislation contains the relative provisions for the adoption of Conventions and the fulfillment of obligations emanating from them. Also Legislation has in the most part been harmonized with the relevant Directives of European Union. During the audit it was examined as to whether the International Conventions, the Legislation and Regulations of the Republic are duly observed and that all appropriate measures are taken by the Competent Authority for the prevention of sea pollution from ships under Cyprus flag, the prompt and effective fighting of possible sea pollution within the Cyprus national waters and the imposition of severe punishments to those who are responsible for the pollution. Also, it was examined whether the relative procedures followed by the competent Departments (Department of Merchant Shipping and Department of Fisheries and Marine Research) are satisfactory, as compared with the procedures and practice followed by the developed countries (European Union, North America, Japan). 3.3.2 Major observations (a) Surveys of ships. The surveys of ships constitute and important measure for the prevention of sea pollution. During the survey, the general condition of the ship is examined, and especially is confirmed whether all the appropriate procedures are followed and the various papers specified in the International Convention MARPOL 73/78 (International Convention for the Prevention of Pollution from Ships 1973). The most Important element in connection with the prevention of sea pollution is the confirmation that the rejects of lubricants are not thrown in the sea, but they are collected in suitable tanks, recorded and delivered to the following port, which must keep a proper substructure (Reception Facilities) for the receipt of lubricants. The surveyors of the Department of Merchant Shipping may survey ships of Cyprus flag either in Cyprus or abroad (survey state flag) and ships of foreign countries at their visits to Cyprus ports (survey state port). Also the ships of Cyprus are subject to “survey state port”, on their visit to foreign ports. The performance audit revealed that there has been a progress in this area during the last years and there was an increase in the number of surveys from 166 in 1998 to 593 in 2001. the surveys are carried out according to the “Guide Surveys State Port” issued by the Organisation IMO and include, inter alia, the survey of: - ships certificates - fire-fighting equipment of the ship - the general condition of the ship - the technical training of the crew - the procedures provided by international conventions, including MARPOL 73/78.

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The “surveys State flag” are carried out in the same way, but in more detail. For each survey a relative report is prepared. In cases where omissions or irregularities are identified, fines are imposed according to Law and the relative instructions of the Minister. It has to be noted that most of surveys are carried out by foreign independent surveyors at foreign ports, who have been appointed by the Department on contract basis, for this purpose. The increase in surveys has a positive result, having in mind the reduction in the retentions of Cyprus ships at various ports abroad. From data collected regarding the retentions of ships at the ports of United States, European Union and Japan, it appears that there is a continuous improvement during the last 3-4 years and there is the prospect, for the limitation in the percentage of retentions, in the near future, under the total average of retentions, and the Cyprus flag to be deleted form the “black list” of those countries. The surveys of ships will be increased more during the following years, with the appointment of 11 new permanent surveyors and the gradual increase of the independent surveyors on contract, from 35 to 50. The objective is for all ships under Cyprus flag to be subject to an annual survey. With regard to the “survey state port” (survey of foreign ships on their visit to Cyprus ports) this is carried out at satisfactory levels. Cyprus is a member of the Mediterranean Memorandum of Understanding according to which the member-countries are obliged to survey at least 15% of the ships on their visit to their ports. The percentage of these surveys was applicable until the beginning of 2001, when labour disputes arose between the surveyors of the Department and the employer, with the result the surveys to be discontinued. The duties of surveyors, as specified in the relevant schemes of service, do not include the “survey state port” and the surveyors decided not to carry out such survey, until the solution of problem. It has also to be noted that the “survey state flag” has been limited to the minimum, for the same reason, because, under the schemes of service the surveyors have no obligation to carry out such survey of Cyprus ships, on their visit to Cyprus ports, although most of these ships do not visit Cyprus ports. The criteria specified by the competent authority for the registration of ships in Cyprus register form the basis for the “survey state flag”. More strict criteria have been adopted since 1.1.2000, particularly for old ships, for which a full survey should be carried out before their registration. Also, the maximum age of a ship has been reduced from 17 to 15 years, for registration purposes. A significant element of the survey is the proper choice of ships for survey that is the location of ships of high risk which should be subject to frequent survey. For this purpose, the necessary information should be kept for the history of each ship (type, age, date of last survey, survey results etc) in special registers, in electronic form, so as to facilitate the selection of ships for survey. At present, the selection is made on the basis of the register of surveys, which is kept by the Department, which, however, does not give a full picture of the ships under Cyprus flag. It is expected that with the computerization of the Department which will be completed soon, there will be the possibility for keeping detailed and trustworthy information. A positive development, with regard to the survey of Cyprus ships, is the adoption of the International Safety Management Code. The Code was prepared by the International Maritime Organisation, which suggested to the state-members its adoption the soonest possible. This Code provides general instructions and suggestions for the improvement of the management of ships, with the main objective of upgrading of the safety of ships and the protection of sea environment. The maritime companies are urged: - To provide safe working conditions on ships.

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- To carry out surveys for prevention of all the possible risks. - To provide the necessary means for a safe operation and management of ships. - To comply fully with the relative regulations and directions. - To adopt a policy for the safety and protection of environment. - To issue instructions and to adopt procedures for the safe operation of ships and the protection of environment, according to the national and international legislation. - To define responsibility levels and channels of communications between the seamen and between the ships and the centre. - To adopt procedures for the report of accidents, in cases of urgent need and for internal control matters and the evaluation of the management of ships. The Code has been adopted for oil tankers, the ships “pell-mell” and the passengers ships with effect from 1998, and for the rest ships from July 2002. The ships are subject to survey for ascertaining as to whether they fulfill the above provisions and for the issue of relative certificate. The influence of the Code is expected to be increased gradually, for the reason that a ship must secure the said certificate, so as to be allowed to operate. (b) Reception Facilities. The Cyprus ports do not provide Reception Facilities, provided by the International Convention MARPOL 73/78 and Law 57/89. According to the provisions of above Convention and the Law, all the ports and stations for unloading petroleum products should have the appropriate substructure (Reception Facilities) for providing service to the ships. The ships on their visit to ports, anchorages and other stations in Cyprus are obliged to deliver the rejects of lubricants and others rejects to the Reception Facilities. During the last years some minor facilities are provided. The said rejects are collected by tankers trucks, which are allowed to enter in the ports, on the basis of a licence issued by Ports Authority and the rejects are conveyed to a private unit for processing. The practice is to collect the rejects from the ships, on their request, and no examination is carried out for ensuring the cases where the rejects are not delivered. The Competent Authority (Department of Merchant Shipping) is not carrying out any examination for locating and prevent the throwing of such rejects in the sea. On the basis of above procedures, service is provided to the ships, on their request, but there are no incentives for all the ships to use the service provided by ports. According to European Directive No. 2000/59/EC, all the ships, on their visit to Community ports, are required to deliver the petroleum rejects and other rejects to the Reception Facilities, otherwise to pay some fines. Therefore, the necessary measures should be taken by the Competent Authority for the full adoption of this Directive. (c) Locating of sea pollution. The responsibility for locating of cases of sea pollution rests with the Department of Fisheries and Marine Research. This is succeeded with the close cooperation with the coastguards. The Department is carrying out its own examination, through laboratory analysis of seawater specimens, collected at regular intervals from various coasts. The Department has also the main responsibility for the fighting of pollution and has, for this purpose, sufficient means (small boats, equipment for the confinement of oil and its absorption, dissolving substances etc.) for facing small pollution incidents. There is also the National Contingency Plan with predetermined procedures and allocation of responsibilities, for the prompt facing of such incidents. The Department has at its disposal the services of other

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Government Departments, which are considered necessary, as well as the services of non- governmental organizations, like the Ports Authority, the Cyprus Petroleum Refinery, the Cement Companies of Vasilikos and Moni, the Electricity Authority, the petroleum companies, the coast Municipalities and private companies, which may offer specialised services. In serious cases of pollution the cooperation of neighboring countries is necessary and for this purpose a relative agreement has already been signed with Egypt and Israel. In this respect, exercises were made in these three countries, with satisfactory results. Such regional cooperations are provided by the Protocol of the Convention of Barcelona, which has been signed by Cyprus (the Convention for the Protection of Mediterranean Sea from Pollution and the related Protocols Law of 1979). During the last years several small incidents of pollution were occurred within Cyprus seawaters, which were successfully faced by the Department. In most cases the trespassers were identified and the fines specified by Law were imposed and the expenses for the fighting of pollution were recovered. According to Law, the Directors of the Department may impose fine up to £10000 and in court cases fine up to £30000. (d) Harmonization with Acquis Communautaire. The Department of Merchant Shipping has done a lot of work pertaining to the harmonization of Legislation with the corresponding Community Legislation and the Chapter of Sea Communications was concluded from the middle of 2001. The Department will be however in a position to implement effectively the Legislation only when changes will be made in the surveys procedures of the Cyprus Shipping Registers and the measures for the protection of environment. The most significant is the increase of the surveys of ships, with the objective for all ships to be surveyed annually and the upgrading of Reception Facilities in the ports and the stations for unloading of petroleum products. For this purpose, the Department should cooperate with all parties involved. Those ships which do not fulfill the criteria for remaining in the Cyprus Shipping Register should be deleted, so as the percentage of retention of ships by foreign authorities to be reduced and the image of Cyprus flag to be improved in the international maritime circles.

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PART 4 – OBSERVATIONS 4.1 GENERAL OBSERVATIONS 4.1.1 Internal control. In several Departments/Services omissions and weaknesses in the systems of internal control are observed. The objective of the systems is to safeguard the smooth and efficient operation of Departments/Services, by applying fully the Laws and Regulations and Management Directions, the proper use of assets, the prevention and locating of errors and irregularities, the correct keeping of accounting books and the prompt issue of trustworthy financial reports. The responsibility for the existence of satisfactory internal control systems rests with Management of each Department/Service, which must be sure for the suitability and adequacy of above systems, on continuous basis. Therefore, the Management should perceive the need for the development and operation of effective internal control systems, as an integral part of the system, which should be adopted by each management for the control and Management of the operation of the Service and to have a reasonable assurance that the relative objectives are achieved. We hold the view that the personal commitment of each Management is required for the effectiveness of the Internal Control systems of each Service. 4.1.2 Computerized systems. A great delay has been observed in the commencement and implementation of the projects included in the Computer Master Plan of Government Service, with adverse effects on the financial and efficient operation of Government Service and the quality of the services rendered to the public. Moreover there is an increase in the cost for the implementation of the plan. Usually, the time schedules decided and the dates included in the terms and conditions of the tenders for the completion of the projects of computerization are not observed and serious delays are presented, in several cases, resulting to the delay in the of modernization of various systems and to additional cost, due to the changing conditions and needs which should be satisfied. The necessary staffing and training of personnel who are operating the computerized systems, presents delay, with the result the efficient operation of the systems to be seriously affected or to underoperate for long time intervals, after the completion of the projects. The system for planning and follow up of projects presents weaknesses, while a complete evaluation of the operation of the projects is not carried out, so as to locate any deviations from the anticipated objectives, for purposes of taking preventive measures for future projects. 4.1.3 Insufficient coordination between Departments, Services and Ministries. Delay is observed in the implementation of projects or other matters, which is attributed to the insufficient coordination between Departments, Services and Ministries, resulting to the increase of relative cost. 4.1.4 Outstanding government guarantees for the repayment of debts. The system of control and follow up of government guarantees issued by the various Government Services, for loans secured by third parties, is not satisfactory. After my suggestion a central system of control was introduced by the Treasury Department, so that all government guarantees will be codified and recorded in the register, for follow up by the Treasury Department.

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4.1.5 Delay in the enactment of Legislation and Regulations. In several cases bills, which are prepared to regulate various issues, are delayed, either at the stage of preparation by the Departments, or at the stage of legal processing at the Law Office or even at the stage of consideration and approval by the House of Representatives. Furthermore the various suggestions made by my Office for the amendment of Legislation/Regulations aiming at regulating weaknesses/omissions observed during audit are not promptly pursued. For these cases reference is made in my Report. 4.1.6 Inventory registers. According to Stores Regulations all Government Services should keep inventory registers for all their movable assets and should submit to the Accountant General and the Auditor General of the Republic year-end physical stock taking certificates. Some Services had failed to comply with the Regulations. 4.1.7 Use of official vehicles. In my previous Reports, I stated that in many cases, the arrangements which are made to satisfy official transportation needs, were not the most appropriate or economical. As a result official vehicles were not fully utilized and their operating cost, in many cases was high. I also stated that official vehicles are used for private purposes, without the approval of the Council of Ministers, as provided by the Budget Law. As a result of my above observations, improvement has been noted in the whole situation. 4.1.8 Duty relief certificates (form C6c). In several Government Services the copies of the above certificates are not attached to the respective counterfoil books, in spite of the fact that the goods recorded have been cleared long before and there is a risk for misappropriations to be concealed. 4.1.9 Surprise surveys. During the year, my Office and the Internal Audit Section of the Treasury carried out surprise surveys on the accounting records and cash in the hands of cashiers, collectors and imprested officers. In addition to the above, the Heads of Departments are required, under the Regulations, to carry out surprise cash counts at least once a year. Some Departments have not complied with the above Regulations. 4.1.10 Consumable stores. Pursuant to Stores Regulations, the Accountant General is responsible for carrying out full stocktaking of major stores and 10% of minor stores. The Accountant General informed me that in 2001, 54 major stores, out of a total of 153, i.e. 35%, were examined. No stocking was carried in the 189 minor stores. The Regulations provide that Departments should carry out inspections of their stores and physical stocktaking at least once a year. It was observed that some Departments did not comply with the above Regulations. Further to the above inspections, surprise surveys of stores are carried out by my Office to verify compliance to Stores Regulations. 4.1.11 Lack of staff. Significant observations raised by my Office, are attributed by audited agencies, to lack of staff. This matter is not considered, in several cases, by the Department/ Services involved, for purposes of solution or for finding alternative solutions. 4.1.12 Staff working on fifteen days basis and casual staff. A lot of work in Government, is carried out by staff employed on fifteen days basis or on casual basis. In several cases, where collections are made by casual staff, the necessary guarantee is not deposited.

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4.1.13 Hourly paid employees. Hourly paid employees continue to be employed in clerical duties, contrary to Regulations and the Council of Ministers decision dated 29.10.99 and the relevant circular of the Ministry of Finance dated 29.11.99. 4.1.14 Unspent amounts of Development Budget. In several Departments, Services and Ministries the Budget execution is not considered satisfactory, with the result significant amounts not to be spent, out of several votes. 4.1.15 Execution of projects other than those included in the Explanatory Memorandum of the Budget. In several cases, projects are executed other than those included in the Explanation Memorandum of the Budget, with the approval of Planning Bureau. 4.1.16 Budget excesses. During 2001, excesses over budgeted amounts without the required prior approval, were again incurred, in spite of repeated warnings by the Ministry of Finance that controlling officers would be held personally and pecuniarily responsible for such excesses as specified in the Budget Law. Until the beginning of May 2002, covering approval was sought and granted for these excesses. It has to be noted, that according to the Financial Administration Law, no authority is given by the Controlling Offices for any payment, unless there is the respective provision and is made within the limits of existing Budget Votes or the amount was allocated under a departmental provision. Irrespective of the civil and disciplinary responsibility, the officer authorizing the payment, in breach of the provision, commits a criminal offence, under section 105 of Criminal Code and each responsible officer for such authorization will be charged accordingly. 4.1.17 Outstanding liabilities. Until 1.7.2002, payments amounting to £10.157.631 were charged to 2001 Budget, representing liabilities for 2001, contrary to the Financial and Accounting Instructions which provide that these liabilities should be settled promptly and statements showing the outstanding liabilities as at 31st December to be submitted to the Accountant General by 31st January of the following year. 4.1.18 Arrears of revenue. The total arrears of revenue at 31.12.2001, amounted to £308,20m., compared to £271,17 m. at 31.12.2000. Out of the total arrears, the amount of £145,6 m. represents arrears for income tax, compared to £122,5 m. for 2000. Details of these arrears are shown in Appendix II of my Report. Weaknesses are observed in the system for the follow up of the collection of arrears of revenue in many Departments/Services. The measures taken for their collection are not effective, with the result the arrears of revenue not to be collected for years and for this reason these are considered as bad debts and are written off. 4.1.19 Public Tenders Law. The Public Tenders Law was put in force on 19.1.1998. The purpose of the Law was to regulate the principles and framework for the award of tenders for projects and the procurement of goods and services for the Public, on the basis of the principles and procedures followed by Acquis Communautaire. For the full harmonization of legislation with Community Directives, and for covering all Government Services, Local Authorities and Public Corporations, a bill was prepared, in May 2002, in which all Directives were embodied. The bill provides that the Treasury will be the competent Authority with the jurisdiction of the follow up of the adoption of European Directives and the submission to the European Union of necessary information. The bill also provides for the establishment and operation of a Revisory Committee for Tenders with the jurisdiction of examining objections against decisions taken by competent authorities. The enactment and adoption of the new legislation is expected to be done during the first semester of 2003.

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4.1.20 Acquisition of property by civil servants. (a) Declaration of property. In accordance with section 66 of the Public Service Law 1/90, no civil servant is allowed to acquire, either directly or indirectly, any movable or immovable property, taking advantage of his position, or to have such property when his personal interest is in conflict with his duties. Furthermore, the Law provides that a civil servant has to file a declaration every three years, in March, of any changes in his, his spouse's or dependent children's property. The first declaration should have been submitted the year following the passing of the Law, i.e. in March 1991. A nil return is required when there are no changes in property. The competent Authority has the right, properly justified, to request an additional declaration at any time during the three– year period. It may also request the clarification of any details of the declaration and check the accuracy of the information supplied. Incorrect or false information declared calls for disciplinary action against the civil servant. No directives have been issued and no declaration forms have yet been prepared, for the implementation of the provisions of the Law. (b) Investigation. The same section of the Law provides that, in case of reasonable doubt regarding a civil servant's financial sources, an investigation in the prescribed manner may be carried out. If the results of the investigation provide proof that the civil servant's sources of income constitute, under the circumstances, criminal or disciplinary offence, then the appropriate measures are taken by the competent Authority. The Service of Public Administration and Personnel prepared, in cooperation with the appropriate Parliamentary Committee and the Law Office, the Regulations provided by the Law, which were approved by the Council of Ministers on 5 November 1998 and on the 19th of the same month were laid before the House of Representatives. Since then, these were withdrawn and were repeatedly resubmitted but were finally withdrawn on 8.7.2002. 4.1.21 Financial Administration Law. A bill was prepared and was laid before the House of Representatives in October 1989, for regulating public financial administration and related matters, as specified in articles 165-168 of the Constitution. The relative bill was revised recently and was enacted to a Law and was published on 12.7.2002. 4.1.22 Replies by audited agencies to observations raised by the Auditor General of the Republic. A number of audited agencies were again late in replying my letters or queries. In cases where no reply is received from the audited agencies, within six months a statement of unreplied letters is prepared and submitted to the President of the Republic for information and appropriate action. Under this procedure significant improvement has been noted. 4.1.23 Working space for auditors. In several cases, the Audit Officers are facing the problem of securing a space, at the audited agencies, to be used for audit work. In spite of the efforts made, in several cases, the available space was not suitable. 4.2 INDEPENDENT OFFICES 4.3 PRESIDENCY 4.4 RELIEF FUND FOR AFFECTED PERSONS Part A – Operating results. The receipts and payments of the Fund amounted to £6.775.200 and £8.260.672, respectively, compared to £6.320.000 and £6.331.355 for 2000. All the income is

40 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 represented by the state subsidy. The Fund at 31.12.2001 presented an accumulated deficit of £1.476.537. 4.5 JUDICIAL Supreme Court Part A 4.5.1 Advocates practice. Pursuant to the provisions of Advocates Law No. 42/61 no advocate is allowed to practice unless he is holding a practice licence, as prescribed by the Supreme Court, otherwise he is guilty of an offence. From a test examination of the Advocates Annual Licence Register, kept at Supreme Court, cases were observed where advocates delayed to renew their licence for the years 2000 and 2001. The Chief Registrar of Supreme Court informed me that a statement, showing the names of all advocates who failed to renew their licence is submitted to the District Courts and the Pancyprian and Local Advocates Associations. He also informed me that with the amendment of relevant legislation, all advocates who failed to renew their annual licence until the 31st March of each year, will pay, in the form of fine, an amount equal to that of the licence, on the renewal of their licence. 4.5.2 Advocates annual licence. Pursuant to the provisions of Advocates Law all the amount for the issue of the annual licence is collected by the Chief Registrar and part of it is paid to the Council of Pancyprian Advocates Association and the rest to the respective Local Advocates Associations. I suggested that the possibility should be considered for the Pancyprian Advocates Association to undertake the control and follow up of the renewal of advocate’s licence. The matter will be considered by the Supreme Court. 4.5.3 Publication of Supreme Court decisions. Delay is observed in the publication of Supreme Court decisions (recourses are dated from 1992). As a result a person willing to study a previous years decision should refer to loose decisions kept at the publication section. In spite of the fact that store ledgers have been updated with all outstanding issues of publications for previous years, no physical stock taking was carried out, for verifying accounting balances. During a spot inspection at a store, where part of publications are kept their counting was not possible because these ware scattered in various files, not properly classified. The Chief Registrar informed me that measures will be taken for the prompt printing of the decisions of Supreme Court and the classification of publications. 4.5.4 Inventory Registers. As I stated in my 2000 Report, the inventory registers had not been updated with the receipts and issues of equipment since 1996. Following my recommendation, the approval of Ministry of Finance was obtained on 10.1.2001 for the opening of new inventory registers on the basis of a physical stock taking, but so far no significant improvement has been effected. In the meantime, the defined procedures have been pursued for the disposal of assets and computer equipment which are out of use or obsolete. As I was informed, all the arrangements have now been made, for the disposal of all the obsolete assets and equipment and for the rest a physical stock taking will be carried out and new registers will be opened. 4.5.5 Stamping of court applications, books and other documents. The procedure followed for stamping various court applications and documents, as well as of orders and decisions books is costly and time consuming. Moreover it includes the risk of removal and misappropriation of affixed stamps as was done in the past. I recommended the abolition of

41 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 present procedure and the introduction of a new one under which a certain amount will be collected at the first recording of the claim, with the appropriate amendment of Procedural Rules and other relevant Regulations. The Chief Registrar of Supreme Court informed me that the matter is being studied by the Revisory Committee for the Laws and Civil Legal Procedure. Part B 4.5.6 Allowances to Bailiffs. As It was stated in my previous Reports, Bailiffs are drawing, since 1992, commuted allowances for overtime and travelling, which should have been revised when the delivery of Judicial documents was assigned to public individuals, with effect from 1.5.96. Due to non revision of above allowances, there is the possibility for payment of incorrect allowances in relation to the time spent and the kilometres covered by the Bailiffs for the delivery of judicial documents. As I was informed there is a divergence of opinion on the above matter, which is expected to be discussed by all interested parties. District Courts Part A 4.5.7 Arrears of revenue. The arrears of revenue of the District Courts at 31.12.2001 amounted to £4.736.571, compared to £3.682.890 for the previous year, i.e. there was an increase of £1.053.681, or 28,61%. I recommended that efforts should be made for their collection and, all amounts not collectible, to be written off, as provided by the Regulations. In the meantime, relevant instructions were issued to the District Courts by the Chief Registrar of the Supreme Court, who informed me that the matter was discussed at various meetings held at the Ministries of Finance and of Justice and Public Order, with the main suggestion of establishment of a judiciary Police Unit for the execution of warrants. He also informed me that instructions were given for the writing off of warrants for which the possibility of collection is very remote. 4.5.8 Delay in the issue of criminal warrants. At the District Court of Nicosia considerable delay is observed in the issue of criminal warrants with a consequent delay for their receipt and execution by the Police. Although no detailed records are kept, it is estimated that on 19.12.2001 about 3700 warrants were pending for issue, for the collection of an approximate amount of £260.000. As I was informed, in other District Courts, the situation has been improved considerably, after the employment of casual staff and efforts are being made, in cooperation with Public Administration and Personnel Service for the allocation of necessary staff. 4.5.9 Return of unexecuted warrants. Over 33000 criminal warrants, which were returned by the Police unexecuted, are kept in carton boxes, without being recorded in registers or properly classified, and consequently they cannot be located. According to the Police, these warrants cannot be executed, as the accused persons cannot be located because of unknown new address or they are abroad or they were declared bankrupt or they are aliens who left Cyprus. The Chief Registrar informed me that during a meeting, held at the Ministry of Finance, it was decided for the receipt of all warrants by the Police, for execution by Police members, with payment of overtime allowance, if necessary. 4.5.10 Register of criminal warrants. The register of criminal warrants used for recording all warrants delivered for execution to the Police by District Court of Nicosia, is not properly

42 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 updated with all necessary details and signature of Police members receiving the warrants, with the result their follow up not to be possible. As I was informed, instructions have been given for the signing of the registers by the Police members receiving the warrants. 4.5.11 Notice from the Office of Registrar for the payment of adjudicated amounts. With the objective of improving the procedure relating to the issue and execution of Warrants, I suggested to the Chief Registrar of Supreme Court the amendment of relevant legislation, so as the Registrars of District Courts, on the receipt of Courts decisions, to send a written notice to the condemned persons for the payment of adjudicated amount within a specific period, otherwise the relative warrant will be issued immediately, and the condemned person will be charged with all the expenses for the issue and execution of warrant. Although the amendment of relative legislation has not been made, my suggestion has been adopted by the District Court of with positive results. 4.5.12 Inventory registers of District Court Nicosia. The registers have not been updated with the receipts and issues of equipment, since 1990. I suggested for the recording of all outstanding entries and if this is not possible, to seek the approval of the Ministry of Finance for the opening of new registers, on the basis of physical stock taking. I was informed that my suggestion for the opening of new assets registers will be pursued. Part B 4.5.13 Incomplete updating of cases registers. It was again observed that the cases registers of the District Courts were not updated with respective reference number of the criminal warrants register, and, consequently, it was not possible to verify whether criminal warrants have been issued for all court cases. The Chief Registrar informed me that the matter will be regularized with the allocation of necessary staff by the Public Administration and Personnel Service. 4.5.14 Delay in the execution of arrest warrants. Several court warrants continued to remain unexecuted either at the courts or the Police, resulting to delays in the court proceedings of the relevant cases. It is mentioned that at District Court of Limassol, and Larnaka over than 3500 and 1400 arrest warrants were pending for execution respectively. As I was informed, instructions have been given by the Supreme Court for the prompt issue and delivery of warrants to the Police for execution and the establishment of a system for the follow up of execution. 4.5.15 Delay in the execution of writs of movable property. Delay continues to be observed in the execution of a large number of writs of movable property by the Bailiffs. It is mentioned that at the District Courts of Larnaka and Famagusta there were, at the end of 2001, over than 600 unexecuted writs, and at the District Courts of Nicosia and Limassol about 1060 and 530 writs respectively. In view of the fact that most of the writs of movable property represent civil cases, I suggested to the Chief Registrar of Supreme Court to consider the possibility for assigning the responsibility for their delivery to private individuals. The Chief Registrar of Supreme Court informed me that the number of unexecuted writs is small and these are not pending more than three months. 4.5.16 Court Orders and Decisions Books. In the respective book a stamp of £2,50 is affixed for each application made for the issue of a court order or decision for the first time plus £0,25 for each copy. With a view to modernizing and simplifying the procedures followed and for the more efficient utilization of time spent by the personnel, I suggested that a study should be

43 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 made for the abolition of above books, with a corresponding increase in the fees collected for filing a lawsuit and for covering the respective expense for the issue of a court order or decision for the first time and for certain number of copies. The Chief Registrar informed that the matter is under consideration by the Revisory Committee for Laws and Civil Legal Procedure. 4.6 CENTRAL BANK OF CYPRUS Part A 4.6.1 Accounts and audit. The approved Final Accounts of the Bank for the year under review were submitted for audit in June 2002. According to section 57 of the Central Bank of Cyprus Law of 2002, in future all annual financial statements of the Bank should be prepared within three months from the end of financial year. 4.6.2 Operating results. The net profit of the Bank amounted to £14,37 m., compared to £17,81m. for 2000, i.e. there was a decrease of £3,44 m., which was mainly due to the increase of the net interest charges by £7,73 m. Interest received for 2001 amounted to £95,7m., compared to £93,7 m. for 2000, whereas interest payable amounted to £76,0 m., compared to £68,3 m. for 2000. In accordance with section 55 of the Central Bank Laws of 1963-2001, the total profit amounting to £14,37 m. is transferred to the Consolidated Fund of the Republic. 4.6.3 Personnel. The Central Bank employed 296 persons, of which 272 were permanent and 24 temporary officers. The total cost for salaries, allowances, overtime, employer's contributions and other benefits amounted to £8.057.000, compared to £7.683.350 in 2000, i.e. there was an increase of 4,86%. The average cost per employee in 2001 amounted to £27.020. 4.6.4 Other employees benefits. Housing, educational, personal, special etc. loans are issued to the permanent personnel under favourable terms. The outstanding balance of these loans at 31.12.01 amounted to £10,490 m., compared to £9,937 m. for 2000. 4.6.5 Central Bank Premises – Contractors claims. As I stated in my previous Report, significant claims were pending, submitted by the contractor who undertook the construction of the building, amounting to £6 m. it was finally agreed and paid, in March 2002, on the suggestion of the Consulting Architects, the lump sum of £2.650.000, by the Bank to the contractor, for final settlement of all the claims, including those of sub-contractors. This amount covers all the claims submitted by the contractor, including the claims for interest, due to long delay observed in the settlement of the matter. It is noted that my Office agreed with the above arrangement, after taking into consideration all the provisions of contract, the recommendation of consulting Architects and the uncertainty and risk, pertaining to the arbitration proceedings. 4.6.6 Investments evaluation and follow up of market risks. In my previous Reports, I pointed out that, the method used for the evaluation of investments may not be the appropriate one for all types of investments (stocks, deposits in foreign currencies etc). Comparisons should also be made on the basis of indexes which are relevant to each type of investment and not only to use LIBID (London Interbank Bid Rate). The Bank informed me that the measurement of the return of investments, as is done to day, reflects the objectives and restrictions pertaining to the management of international reserves. Nevertheless, the Bank accepts that there are margins for improvement of the yardstick used for the comparison of the return of portfolio, with the formation of one “benchmark portfolio”, the return of which must be compared with the return of the actual portfolio. For this purpose meetings were held with the Central Bank of Europe, and experts were invited from the International Central Bank, who submitted the relative report on this matter, which is being evaluated.

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4.6.7 Alterations/corrections entries effected after the closing of accounts. It has been observed that the computerised accounting system affords the possibility for alterations to be effected to the accounts, even after their signing by the Governor, their audit and publication. The Bank stated that all the necessary measures will be taken for safeguarding that the corrective entries after the closing of accounts will be carried out under strict controlled conditions and in no case after the approval and signing of accounts. 4.6.8 Application of International Accounting Standards. The proper application of International Accounting Standards for the preparation of the accounts of the Bank and the design of new accounting system as to disclose all necessary information, were raised in the past. As I am informed, the directives of the Central Bank of Europe, regarding the preparation of accounts are being considered, for adoption, the soonest possible. 4.7 TREASURY Part A 4.7.1 Arrears of revenue. As it is stated in the Financial Report for 2001, the total arrears of revenue at 31.12.2001 amounted to £2,3 m. An amount of £2,3 m. representing interests in arrear out of which £2 m. are due by the Cyprus Broadcasting Corporation, out of which £0,8 m. is outstanding since 1974, is not included in above arrears. Therefore, the total amount of arrears are £4,6 m. as at 31.12.2001, compared to £4,8 m. for previous year. 4.7.2 Central Bank of Cyprus. In 2001 the amount of £17,81 m. was deposited to the Consolidated Fund of the Republic, representing the net profit of the Bank for 2000. 4.49.3 Government Lottery. The net profit of the Government Lottery for 2001 was £21,7 m., compared to £17,4 m. for 2000. The increase by £4,3 m. (24,7%) was, mainly, due to the increase in sales of all types of automatic lottery tickets. There was also an increase in LOTTO, PROTO and TZOKER. 4.7.4 Subsidies. The subsidies paid for the last two years are as follows: 2001 2000 £m. £m. Vine Products 16,11 9,80 Cereals 37,48 23,00 Sundries 0,01 -- Interest subsidy 0,26 0,26 53,86 33,06 4.7.5 Contribution for the United Nations Peace Force in Cyprus. The Cyprus Government contribution for 2001 was £9,4 m. 4.7.6 Pension benefits (a) According to the Pensions Law, pension benefits are paid to civil servants (pension and gratuity) on their retirement date. The pension benefits that each retiring officer is eligible are calculated by the Pensions Branch of the Treasury, for which, a pre audit is carried out by my

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Office before the relevant amounts are paid from the Consolidated Fund of the Republic, so that mistakes and omissions are promptly corrected. The pension benefits paid in 2001 amounted to £108,9 m., compared to £112,0 m. for 2000, i.e. there was a decrease of £3,1 m. or 2,77%. The decrease is due to the fact that in 2000 were paid retrospectively gratuities of 1998 and pensions increases of 1999. During 2001 calculations for 856 cases were made, for the retirement of civil servants and for 138 cases of pensions to widows/widowers and children. From the audit of the above, it arose that calculations had to be corrected in 53 cases of retirements and 9 cases of widows’ pensions. Out of the above 63 cases, 14 cases regarding pension benefits should have been increased for a total amount of about £23.814 in annual pension and about £21.678 in lump sums or gratuities. For the remaining 39 cases the pension benefits should have been decreased for a total amount of about £25.167 in annual pension and about £122.638 in lump sums and gratuities. Out of the 9 cases for widows’ pensions, in 5 cases the annual pension should have been increased for a total amount of about £2.281 and in the remaining 4 cases to be decreased for a total amount of about £448. The Accountant General informed me that with the operation of the new computerised system and the improvement of the relevant programmes is expected that there will be a further substantial reduction in the number of alterations/corrections of pensions benefits. (b) As I stated in my previous Reports, for the implementation of section 88 of the Social Insurance Law, which provides the set off of Government and Social Insurance Pension, practical problems are presented, due to omission or delay in the notification of the Pensions Branch of the Treasury by the Services of Social Insurance, regarding the recoverable part of the supplementary pension of the Social Insurance Fund, paid to eligible government pensioners. As a result substantial overpayments occur in government pensions, which are recovered by monthly deductions from the government pension. The Accountant General informed me that all the overpayments are now located by the new computerized system. 4.7.7 Compensations and legal costs. During 2001 the amount of £2,8 m. (£3,2 m. for 2000) was paid as compensations and legal costs for lawsuits against the Republic. 4.7.8 Social Insurance Law No. 80(I) of 1998. According to the Social Insurance Law No. 80(I) of 1998, when a pensioner is drawing a lower amount from the maximum amount of the basic pension, the difference is transferred from the supplementary pension to the basic pension. With this amendment, the Professional Pensions Scheme should reduce the amount which corresponds to the supplementary pension deducted from the pensions. The Treasury has not implemented the above Law, for the government pensioners because as I was informed, a bill was laid before the House of Representatives for re-introducing the previous method of calculation of pensions with retrospective effect. The bill was enacted into Law (98(I)(2000), as from 7 July 2000, without retrospective effect, and therefore the Treasury Department is not legally covered for the amounts deducted from the supplementary pension. The Treasury has not yet refunded the amounts due to eligible persons. As I was informed by the Accountant General, the procedure regarding the identification of affected pensioners and the calculation of the amounts due, is in progress. It is noted that the procedure is time consuming, having in mind the involvement of other services and the need for the collection of necessary information, from the records of past years.

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4.7.9 Statement of Outstanding Guarantees, at 31.12.2001, for the repayment of loans. As it was also stated in my Report for 2000, no suitable register is kept, which will be used for the follow up of Government guarantees, for loans given to third parties. 4.7.10 New computerized pensions system of Treasury. The contract signed on 19.3.98, between the Ministry of Finance and NETU Company Consultants Ltd, for the development of the new computerized pensions system of civil servants, provided for the completion of the project within six months, that is, by 26.10.98. The project has not yet been completed. 4.7.11 Preparation of Financial Report. Pursuant to the Constitution, the Financial Report should be prepared each year by the 31 March of the year following the year under review. Contrary to the above provision, the Financial Report is not prepared within the specified limit. 4.8 MINISTRIES AND DEPARTMENTS 4.9 MINISTRY OF DEFENCE Part A 4.9.1 Internal control weaknesses. Errors and omissions were observed during the audit of payments, attributed to weaknesses in the internal control system. I understand that the internal control is studied within the framework of strengthening the Internal Control Unit of Treasury. 4.9.2 Project No. T.Y.44/95, Fuel Pipe of Tank No.10. In April 2001, the Main Board assigned the award of tender for the amount of £312.215 and the successful tenderer was informed in writing in May 2001. About one month later, the Tender Board, on the suggestion of the Ministry of Defence decided to revoke the award of the tender, for reasons of public interest. The contractor submitted claims for payment, amounting to £88.948, representing expenses incurred, as a result of above decision, and the Director General of the Ministry of Defence appointed a committee of three members to examine the contractor’s claims. The committee, after examining the contractor’s claims, suggested the payment of compensation amounting to £3.122. The suggestion of the committee was subsequently approved in April 2002, by the Central Committee for Variations and Claims, and was notified to the contractor, who did not accept it. 4.10 NATIONAL GUARD Part A 4.10.1 Writing off of costing invoices. At 31.12.2001, the settlement of outstanding costing invoices, amounting to £371.780 (£165.550 at 31.12.2000) was pending, out of which £225.915 relate to 2001. During the year costing invoices for £29.430 were settled, through payment or other way, while costing invoices for previous years amounting to £9.745, were presented for first time. For information purposes it is stated that the amount of £14.204 was collected during the year under review. In a certain National Guard Unit two costing invoices were issued, the one for bad handling of material and the other for damage to the system, during the maintenance, for the amounts of £52.640 and £142.258, respectively. 4.10.2 Extensions of time for delivery of stores. In two cases, extension of time was given by the Department of Government Purchasing and Supply, for the delivery of stores, to National Guard (supply of waterproof overcoats and camouflage pullover), without securing the approval of the Central Committee for Variations and Claims, provided by Public Tender Regulations.

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The Director of the Department of Government Purchasing and Supply holds the view that the approval for the extension of time for the delivery of stores is coming under his jurisdiction. 4.10.3 Supply of uniforms for Navy and Airforce. Tenders were invited by the Government Department for Purchasing and Supply for the supply of uniforms for Navy and Airforce, without the existence of approved specifications by the Technical Committee for Cloths and Dressing Items, established by the Main Tender Board. The total amount of supplies was about £161.000. The Accountant General Chairman of the Main Tender Board pointed out that in future no tenders will be examined, without approved specifications by the Technical Committee. The Directors of the Department of Government Purchasing and Supply stated that the practice of purchasing uniforms for Navy and Airforce, without approved specifications by the Technical Committee for Cloths and Dressing Items, was followed for many years and is mainly due to the fact that it was not possible for the introduction and operation in the Department of an effective internal control system. 4.10.4 Payment of compensations for lawsuits filed by tenderers against the Republic. Compensations were paid to certain tenderers, who had filed lawsuits against the Republic, either after adjudication of the case or out of court settlement in connection with cases of delay in payment, of respective invoices. 4.10.5 Tender for the supply of camouflage cloth (rip-stop). During the audit of the tender, the following were observed: (a) On 21.9.2000, the Department o Government Purchasing and Supply placed a definite order with the successful tenderer for the supply of 300.000 metres of above cloth, of a total value of about £556.000, before securing the relative approval of the Parliamentary Committee of Defence, for the de-daggering of the necessary amount, provided by the Budget Law of 2000. (b) There were four deliveries for a quantity of 366.456 metres of cloth, valued at £691.534, that is 66.456 metres valued at £125.402, in excess of the order made. The Department, proceeded with the payment of the four invoices for £94.546 on 10.4.2001, £204.176 on 1.6.2001, £211.160 and £181.652 on 7.9.2001, before the final delivery of the cloth, which was made on 8.2.2002. The payment was made against the lodgement of three bank guarantees of £100.000, £200.000 and £100.000, respectively, having a validity until 2.7.2001, 28.8.2001 and 30.11.2001 (the last was renewed up to 28.2.2002) and the lodgement of a bank guarantee for the faithful performance of the tender terms and conditions, for £52.850, valid until 30.8.2001. it is noted that according to the tender terms and conditions the payment should have been made after the final delivery of the cloth. On 8.2.2002, date of final delivery of the cloth only one bank guarantee was in force, for the amount of £100.000, with expiry date 28.2.2002. (c) The Central Committee of Variations and Claims, approved on 29.1.2002 the delivery of the cloth, taking into consideration the observations of the technical committee, and imposed the following deductions: • 2% on the value of the cloth, due to deviation from the tearing resistance of the cloth specification (£13.831). • £30.245 for the quantity of defective cloth which will be deducted. • £50.000 for the defective cloth, not identified, which will be used for the sewing of uniforms, with reduced life.

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For the settlement of the above deductions, the valid bank guarance of £100.000 was confiscated by the Department of Government Purchasing and Supply and the balance was remitted to the tenderer. The Director of the Department of Government Purchasing and Supply informed me that in cases where a great delay is observed in the completion of the procedure, from the delivery up to the final receipt of stores, the suppliers are paid the amounts due, against the deposit of a bank guarantee of equal amount. This practice was followed for the encouragement of the wide participation of tenderers, in the tenders invited by the Department. He also stated that the above practice was discontinued, after the observation raised by my Office. 4.10.6 Consumption of fuel by National Guard Units (a) From a sample check carried out in the statements of fuel products kept by the Fuel Units of National Guard, delays were again revealed in certain cases, in the submission of completed fuel statements, as well as omissions and errors in the updating of statements, regarding the consumption, receipt and supply of fuel. It appears that no actual stocktaking of fuel reserves is carried out by the Finance Departments of the Units, contrary to the Standing Order of the National Guard. Instructions have been given to the Units, by the Service for Equipment/Transport of National Guard for the improvement of the situation. (b) The application of the computerised system for the control and processing of fuel consumption statements presented serious functional problems and weaknesses during the tests carried out in November 2000, and as a result there is a delay in the processing and the examination of fuel consumption statements. As I was informed by the Director General of the Ministry of Defence, the Information Technology Department assured him that with the appointment of new personnel, he will be able to solve the functional problems and weaknesses of the system. The matter is still pending. 4.10.7 Arms and ammunition. The stocks of arms and ammunition at 31.12.2001 were not verified by my Office or by the Treasury. The General Staff of the National Guard submitted to my Office, a certificate stating that after stocktaking carried out by the National Guard , stocks were in agreement with the balances shown in the store records, with the exception of those of one Unit for which an inquiry is carried out. 4.10.8 Payment of Compensations. Compensations are paid through out of court compromises, court decisions or Council of Ministers decisions. During 2001 the amount of £831.365 was paid, compared to £553.929 for 2000, for lawsuits (£650.161) or compensations to individuals for losses or damages caused by the National Guard (£57.406). Also several ex gratia payments were made to the families of the National Guardsmen, who died during their military service (£93.969) or injured in traffic accidents (£29.829.). It is noted that for a lawsuit, filed by guardsman who was injured on 2.8.95 during training, the amount of £360.391 was paid, under a court decision of 10.4.2001. I pointed out the need for the taking of preventive measures for the minimization of these payments. 4.10.9 Food Supplies. Cases were again observed where the suppliers did not comply to the specified food specifications, violating special terms of their contracts. Although fines were imposed to the suppliers, as in the past, these do not seem to prevent repetition of the offences. The Ministry informed me that most of these deviations are of minor importance and do not affect the suitability of food supplies and in view of the small number of the interested suppliers

49 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 for this tender, the probable exclusion or imposition of higher fines will create negative consequences in the participation of tenderers in future competition and for securing favourable prices . 4.10.10 Delay in the execution of orders. It was again observed that in several cases the suppliers delay in the execution of orders, either for the whole or part of the quantity, resulting to possible problems for the National Guard. 4.10.11 National Guardsmen transportation scheme. (a) As I stated in my previous Reports, the above scheme was operating, pursuant to the Council of Ministers Decision No. 34.334 of 25.10.90, in deviation of the tenders procedure, for an approved cost of £100.000, with the main objective of the welfare of the National guardsmen. Following the application of the Public Tenders Law and the increase in the relative expenditure, as compared to the initial amount of £100.000, which for 2001 amounted to £565.665, the Main Tender Board at its meeting of 19.12.2001, after taking into consideration the views expressed by the Ministry of Finance, the Road Transport Department and the Committee for the Protection of Competition, decided the continuation of the operation of the existing transportation scheme for specific predetermined routes, with the payment of a lump sum, specified by the Department of Road Transport. (b) From the audit of the scheme the following were observed: (i) The total expenditure for 2001 amounted to £565.665, compared to £534.070 for 2000, including the amount of £24.448, representing additional charge of 5% on the total amount of invoices, which is charged by the buses association, for covering the increases in costs for routes effected on public holidays and Sundays. On the basis of the decision of the Minister of Communications and Works, for the revision of fares, these were revised as from 1.8.2001 by the Department of Road Transport. (ii) The transport cards, which were completed by several Units for a number of routes for a specific bus, were showing 47 persons, while the bus has a licence for 16 passengers, resulting to the payment of increased fares. The amount of £1.878 was deducted by the Ministry of Defence, representing the difference of fares paid for routes which were effected in the period 1996-2000. I asked the Ministry to inform me whether this matter was investigated, having in mind that the responsible officers of certain Units, were certifying the transportation of guardsmen in excess of 16 and up to 47, by bus of 16 seats, as well as the measures taken for the more efficient and economic operation of the scheme. 4.11 MINISTRY OF AGRICULTURE, NATURAL RESOURCES AND ENVIRONMENT Part B 4.11.1 Management of used machine-oils. The Council of Ministers decided on 29.9.93 to carry out a technical and financial study for the gathering, disposal or recycling of the used machine-oils, in order to solve the problem caused by using them so widely. The relevant agreement for the above study was signed on 18.9.95 and the study was completed with a delay of 18 months, in July 1997. After a suggestion from the Ministry, in consultation with other involved parties, the Council of Ministers decided on 11.11.1998 to assign to the Minister of Agriculture, Natural Resources and Environment the establishment of a «team for the used machine-oils», in which representatives from other Ministries will also participate. The team

50 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 based on the results and suggestions of the study, will form and implement a complete scheme for the gathering, disposal, or recycling of used machine-oils in Cyprus. For the implementation of the study’s suggestions, a factory for the recycling of part of the quantity of machine-oils gathered is operating at the area of Vasilikos. The rest quantity of machine-oils will be burnt, on a trial basis, for about a year in the Vasilikos Cement factory. At the same time, an effort is made for lending the company which will undertake the gathering of used machine-oils, including those of the ships, for their export. A relative bill and Regulations have been prepared for the legal regulation of the matter. The Council of Ministers has already approved the Regulations and as soon the bill is also approved these will be laid before the House of Representatives. 4.12 DEPARTMENT OF WATER DEVELOPMENT Part A 4.12.1 Internal audit. As a result of my recommendations for the establishment of an internal audit unit the Director General of the Minister of Agriculture, Natural Resources and Environment approved on 24.4.2001 the composition and the mandate of the unit, which is operating since 1.6.2001. With the operation of the unit, the systems of internal control are expected to improve significantly. 4.12.2 Execution of Contributory Schemes. From a sample audit carried out on Irrigation Schemes and Improvement Projects of Villages Water Supply, it was revealed, once again, that the appropriate procedures required for the planning, execution and keeping of records are not followed, resulting to considerable differences between the financial records kept by the Technical Services and those kept by the Accounts Branch. No reconciliation of expenditure of the various projects is carried out and progress reports, interim reports and final reports are not prepared for all projects, and as a result the Communities concerned are not properly informed. 4.12.3 Construction of Biological Station at Platres. The works for the construction of above station commenced in September 2001, by a private contractor, for the amount of £229.590. In March 2002, the works were discontinued, because the town planning licence was not issued for this project. In May 2002, the Directors General of the Ministries of Interior and Agriculture, Natural Resources and Environment, decided for the construction of the station in another area, after they concluded that the continuation of works in the initial area was not possible. I observed that the Public suffered a damage of £40.000, as a result of the whole handling of the matter, (£30.000 for the construction cost and £10.000 for the compensation paid to the contractor for damages caused, as a result of the suspension of works). Furthermore, it was observed that, although the District Officer of Limassol and the Departments of Water Development and of Geological Survey, were involved in the handling of the matter, for the selection of the space to be used for the construction of the station, from February 1995 to May 2002, yet this was not solved. Due to the seriousness of the matter, I asked that an investigation should be carried out, in connection with the wrong handling, the responsibilities of parties involved, and the damage caused to the Public. In June 2002, the Directors General of the Ministries of Interior and Agriculture, Natural Resources and Environment, decided for the establishment of an Investigating Committee, to

51 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 investigate the matter and submit a report on the reasons for the delay as well for the problems observed during the construction of the project. 4.12.4 Diarizos, Ezousa and Pafos Irrigation – Major Water Supply Schemes – Consultants claims. As I stated in my Report for 2000, in August 1991, a five-year contract was signed with a firm of foreign Consultants, for a scheduled study and execution of the projects. The contract of a total amount of $1,5m. provides also for other monthly payments to resident and other Engineers. The progress of the Scheme presented considerable delay and in January 1999, the Consulting Engineers requested renegotiation of the contract. As a result of this delay and for other reasons, the Consultants submitted further claims of about £430.000. The claim of the Consultants was evaluated by the Department and it was submitted in November 1999, to the Attorney General of the Republic for legal advice. His views were received in March 2001. As I was informed by the Director, the matter is now before the Departmental Committee for Variations and Claims and is expected to be decided soon which claims are justified and which are not. In the meantime, the Department prepares the counterclaims in relation to the study for Souskiou dam and the time spent by the Department for examination of the studies of the consultants which were not considered satisfactory. 4.12.5 Main Water Pipeline from Tersefanou to Nicosia – Contractor’s claim for financial compensation. As I stated in my Report for 2000, the contractor who executed the above project, for the amount of £2.040.916, submitted claims for financial compensation amounting to £1.430.897, which was subsequently increased to £1,8 m, for delays and expenses incurred, mainly due to the Department’s failure to indicate in the tender designs the underground services (E.A.C., CYTA etc), as well as to the supply of faulty spare parts and valves, which was effected through separate tenders. The Central Committee of Variations and Claims authorized the Department to evaluate the claims for their settlement. The Department evaluated the claims and submitted a report under which the amount of £480.000 was justified to be paid to the contractor, which he did not accept. Finally, after negotiations of the Central Committee of Variations and Claims with the contractor, the latter accepted in July 2001 the payment of the amount of £790.000 for final settlement of all his claims. After the above settlement, the contractor is claiming the amount of £150.000, which was initially paid to him against his claims, on the grounds that this was not included in the sum of £790.000, which was subsequently agreed. In June 2002, the Central Committee for Variations and Claims rejected the above allegation of the contractor. 4.12.6 Diarizos – Ezousa major water supply schemes – Irrigation Networks. As I stated in my Report for 2000, in March 2000 I requested the Director General of the Ministry to inform me whether re-evaluation was made of the viability of the above irrigation networks, the total expenditure of which was estimated to about £28,7 m. In June 2001, the Director General of the Ministry informed me that no study for the viability of the project was made, because of the uncertainty involved in the extension of the areas which would be irrigated. With regard to the water cost, the Department calculated that for the Ezousa Valley, it will be 75 and 61 cents per cubic meter, with compound interest of 8% and 6% respectively. For the Diarizos Valley the water cost was calculated to 45 and 37 cents per cubic meter. The Department suggested that, in the Diarizos Valley, the irrigated areas should be reduced, at least to the level on which it was included in the initial plan, so that a higher percentage of water supply to be allocated for domestic purpose. The cost of water supply is

52 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 considerably high in the Ezousa Valley and a study for the viability of the project should have been preceded. The Department now proceeds with the design of Diarizo’s Irrigation Network. With regard to Ezousa Valley, a committee was appointed by the Director General of the Ministry, to re-examine the areas which will be irrigated. The Committee reviewed the irrigated areas and recommended to the Ministry for their reduction by 60%. 4.12.7 Asprokremmos Water Treatment Plant – Project No. C5. In my Report for the year 2000, I stated that, according to the provisions of the contract, the date of completion of the project was 31.1.2001. The contractor delayed to complete the project for about 40 weeks and the Resident Engineer did not approve any extension of time. I asked to be informed about the measures taken for this delay as well as the possible consequences to the other contracts which are executed simultaneously. The reason for the delay in applying the liquidated damage clause, was the expected reply from the Consulting Engineers as to whether or not the contractor is entitled to an extension of time. On the 19th of September 2001, the Consulting Engineers decided to recommend and was approved an extension of time of 9 days only, out of the 47 weeks which was the total delay. In the meantime, the amount of £345.000 was deducted, as liquidated damages, according to tender contract. The contractor, on the advice of his advocates, rejected the aforesaid deduction and claimed the refund of this amount. 4.12.8 Deposit Accounts. The balance of these accounts at 31.12.01 amounted to £2,73 m. and includes £1,46 m. for tender guarantees and £0,86 m. for amounts deposited for water supply and irrigation projects. In several cases, after completion of the projects, deposit balances of Irrigation Authorities are not returned by the Department and remain in the deposit account for future maintenance of the projects or for compensations regarding land acquisitions. 4.12.9 Arrears of Revenue. The arrears of revenue at 31.12.2001 amounted to £44,3 m., compared to £35,5 m for the previous year, i.e. there was an increase of £8,8 m. During 2001 the collections of arrears amounted to £4,5 m., whereas the arrears for 2001, at the end of year, amounted to £ 13,4 m. and represent 30% of total arrears. In spite of the decisions taken and the efforts made for the collection of the arrears, no substantial progress was observed. At 31.12.01 the amount of £3,6 m. was due by 22 Municipalities and Community Boards, which refused to sign the relevant agreements for the payment of the amounts due. Up to now 27 agreements were signed, for the total amount of £1,03 m. Furthermore, the Water Boards of Nicosia and Larnaka, which are indebted for £9,0 m. and £5,8 m respectively, do not recognize the amount of £6,2 m. and £2,1 m., respectively, for the reason that they represent the increase in selling price of water, without at the same time and for the same period to increase the rates of sales of water to consumers. Also the Water Board of Limassol has not paid the amount of £1,4 m., which represents water-pumping rights from Germasogia area for the years of 1987-2001, because it does not accept the selling prices determined by the Council of Ministers. I recommended the acceleration of procedures for the preparation and approval of Regulations, which will govern the imposition, and collection of fees of irrigation projects, and also the matter of Alassa springs. 4.12.10 Utilization of Government Boreholes. The procedures followed for the costing of boreholes, for the purpose of their utilization, have caused serious problems, between the Department of Water Development and the Department of Geological Survey. As a result, the amounts due for 266 boreholes have not yet been settled, the costing of which was made

53 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 during the period 1980 until 30.6.2002, for an amount of £2.268.980. This amount included the cost for 71 boreholes, of £635.719, which was utilized a few years ago. As I am informed by the Director of the Department ways are considered for securing the necessary funds and the collection of the respective contribution from each Community, for which the boreholes were utilized. A meeting was held, on 27.6.2002, at the Department of Geological Survey, at which the future procedures to be followed and the way of regularizing the matter, with the objective for the best possible settlement, were determined. Part B 4.12.11 Staff and operation of Irrigation Schemes. In various projects the number of staff employed continues to be disproportionately high, compared to the other projects, and also to the number of consumers. 4.12.12 Final Reports – Financial Statements of Projects. It was again observed that no final reports and financial statements are prepared for all projects executed for the various Communities, Irrigation Associations etc., and in consequence these are not informed of the real cost of the projects. 4.12.13 Warehouse and storage areas. Large quantities of materials continue to be kept in open unprotected storage areas. 4.12.14 Hourly paid staff engaged in clerical duties. Contrary to the existing Regulations, hourly paid staff continues to be engaged in clerical duties and their wages are charged to the expenditure votes of the various projects. 4.13 DEPARTMENT OF GEOLOGICAL SURVEY Part A 4.13.1 Drilling of Boreholes. Tenders were invited for the drilling of several boreholes and the award was made in 2001 to a private individual, who is the successful tenderer for six consecutive years. According to the records kept by the Report, there is a difference in the cost of drilling, between the government drilling machines and those of private sector. For purposes of comparison and extraction of accurate figures, I recommended that the presentation of the budget should be modified, so that a separation be made between the expenses for drilling and the expenses for maintenance or repair. The Director of the Department informed me that a study is in progress, for the separation of the various expenses, with the objective of finding an acceptable costing method, for adoption after the approval of the Ministry of Finance. 4.13.2 Idle drilling equipment. During 2001, nine drilling machines were used, the productive time of which was 57%, while the remaining time represents idle time due to maintenance, operators vacation leave, weather conditions and waiting time for instructions. 4.13.3 Cost of borehole drillings for the Department of Water Development – Arrears of revenue. The total cost of 266 boreholes, on the basis of records kept by the Department until 30.6.02, amounted to £2.268.980. This amount includes the cost for the drilling 71 boreholes, which were utilized in the past by the various Communities, of £635.719, accepted by the Department of Water Development, as the actual amount due to the Department of Geological Survey. This amount is not included in the statement of Arrears of Revenue, contrary to Financial Instruction No. 42. A meeting was held on 27.6.02, of all the parties involved, during

54 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 which the future procedures to be followed for the prompt settlement of the cost of boreholes, on the account of the Department of Water Development, were determined. 4.14 DEPARTMENT OF FORESTS Part B 4.14.1 Long term lease agreements for lease of forestland. According to the Forest Laws of 1967 to 1999, the Council of Ministers has power to lease and generally allow the use of state forestland. Also according to section 14 (1) (k) of the above Law, the Council of Ministers is the competent authority to approve Regulations, governing each case of lease of forestland. Up to now no Regulations have been approved pursuant to section 14(1) (k) which would govern matters concerning the lease of forest land and specifically to determine clear criteria, according to which long term leasing will be based. I recommended the amendment of the existing Regulations or the preparation of new ones, for the settlement of the matter. I also recommended the examination of all long term agreements with regard to the following: (i) To verify whether the reasons for which the agreements were signed are still valid, and (ii) whether any substantial terms of the agreements have been violated. As I was informed, draft Regulations were prepared by the Department, under section 14(1) of the Forests Law, which was submitted to the Attorney General of the Republic for technical legal processing and all long term agreements have been examined and measures are taken in cases of violation. 4.14.2 Licences for use of forestland. From the examination of the annual Licences under which forestland is conceded for agricultural purposes, the following were observed: (i) The farmers exploit a much larger area than the one provided in the relevant licences, because there are no detailed designs and maps of forestland specifying the boundaries of the plots. (ii) Several tenants, contrary to the provisions of the licences, sublet the land charging very high rent. (iii) The existing Regulations approved under section 14 of the Forests Law, do not cover the issue of licences for the use of forest land, such as detailed criteria, concession terms etc. The result of this omission in the Regulations is the non-implementation of uniform criteria for the issue of licences and probably the unequal treatment of the persons concerned. Indicative is the fact that land is conceded to the same persons for many years. Furthermore, under section 32 of the Regulations under the title “Licences Fees” the Director of the Department has the authority to determine the fees payable and the issue of licences ‘….taking into consideration the current market prices….’. The fees imposed are not in accordance with this provision and deprive Government of considerable revenue. I recommended the following: (i) The approval of Regulations, governing the issue of licences for the use of forestland and the fees payable.

55 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

(ii) The revision of the fees so as to be in line with the fees concerning state land, as provided by the respective Regulations of the Immovable Property (Possession, Registration and Evaluation) Law. (iii) The mapping of the area and the establishment of a real estate registry, so that the boundaries of the rented land can be specified. On 22.11.00 and 10.5.01, the Director of the Department requested the Attorney General to pursue the amendment of section 14 (1) of the law, with the addition of a new subsection, which will regulate every subject which concerns the issue of licence for use of forestland, and to rule whether new Regulations should be issued under the new subsection. With regard to the fees payable for the lease of forestland, these have been revised, under the Council of Ministers decision No. 51083 of 20.1.2000. These fees will also be revised on 1.1.2004, under the same decision, so as to be in line with the fees for the hiring of state land. With regard to the mapping, and the preparation of a Forest Land Registry for the free area of Famagusta, the Director General of the Ministry informed me that this has been completed for Sotera forest and is continued for Xylophagou forest. The whole work is expected to be completed in four years. With the completion of the mapping, the boundaries and the area of all lease agreements of forest land will be specified accurately and clearly. 4.15 DEPARTMENT OF AGRICULTURE Part B 4.15.1 Arrears of revenue. The value of seeds sold to farmers through the Central Cooperative Bank, which is included in the annual arrears of revenue at 31st December, is collected with a 5% interest on 30 June of the following year, as provided under a relevant agreement. The arrears of revenue also include the amount of £44.579 which is due since 1995 by two tenderers, regarding the sale of agricultural products. As I was informed, one of the above cases has been adjudicated and the Law Office is considering ways for the collection of the amounts due, whereas the other is still pending at the Law Office. 4.16 LAND CONSOLIDATION DEPARTMENT Part A 4.16.1 Consolidation Schemes – Evaluation/Development. According to records kept by the Department, 50 irrigated and 7 dry cultivation schemes were completed up to 31.12.01, of a total area of 13909 hectares. At the same time 23 new consolidation schemes are in process and 38 under consideration for development, of a total area of 17930 hectares. The Director of the Department informed me that the evaluation results of the completed consolidation schemes are considered satisfactory and the objective is their continuation and extension, taking into consideration social and other factors. 4.16.2 Contributory Schemes – Implementation of Land Consolidation Schemes. The revision of the accounting procedures and the keeping of advances accounts, approved by the Accountant General, for each scheme separately affords the possibility for the immediate allocation of expenses, according to approved percentages, and contribute to the simplification of the system of settlement of expenses of the various projects executed.

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4.16.3 Interest subsidy. The general deposit account for the service of loans was charged up to 31.12.01, with the amount of £928.979 (£910.438 for 2000) as an additional difference between interest received and interest paid. After the Council of Ministers decision No. 54.930 of 17.1.2002, the Government undertook the full payment of interests, amounting to £126.672, for the road network of Pano Arodes consolidation area, which would have been charged to the owners of land up to 30.6.2001, because of the great delay observed in the completion of the project, for which the Community is not responsible. 4.16.4 Loan installments in arrear. The total of loan installments due by landowners at 31.12.01 was £700.203 (£615.967 for 2000) and represent capital £475.668 and interest £224.535. I pointed out the need for taking appropriate measures for the settlement of all arrears. 4.16.5 General deposit account for the service of loans. At 31.12.2001 the balance of the above account was £297.100 and represents the installments which were collected from the various communities/land owners for payment to the Loan Commissioners. 4.17 MINES SERVICE Part A 4.17.1 Arrears of revenue. The arrears of revenue at 31.12.01 amounted to £170.932 and include the amount of £101.439, which is due by a company under liquidation. The Official Receiver and Registrar expressed reservations as to whether there will be any surpluses of the company under liquidation to satisfy the claims of the Service. The rest amount represents fees and fines due by companies, against which legal proceeding have been instituted. 4.17.2 Quarrying fees. According to records kept by the Service, collections until 31.12.01 amounted to £10.797.978, out of which £8.098.485, representing 75% of the collections, was paid to the Communities affected directly or indirectly, to be used for development projects as compensation for the annoyance caused by quarry operations. The remaining amount of £2.699.493, which represents 25% of the collections, was deposited in the consolidated Fund of the Republic. Until 31.10.01 the total amount of £2.742.662 was spent for the restoration of environment. 4.18 MINISTRY OF JUSTICE AND PUBLIC ORDER 4.19 POLICE Part A 4.19.1 Tender D’60/2000 for the supply of Police Headquarter Tower. The approval of the specifications was given by the Tender Board, based on the assurances of the Police, that at least five manufacturers were fulfilling the specifications, and the estimated cost was £30.000. Tender documents were purchased by ten tenderers and six of them submitted, in February 2000, nine tenders. None of the five tenderers who were declared by Police that they were fulfilling the specifications had submitted a tender. According to the tender evaluation report of the Police, there was only one tender which was within specifications – which was recommended for the award – the price of which was about 57% higher than the estimated cost (£47.000). In view of the above, I suggested to the Tender Board, the appointment of an ad-hoc committee to investigate the matter. The Tender Board accepted my suggestion and appointed in September 2001, an ad-hoc committee of three members, which submitted a report in

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October 2001. According to the report, the tender which was recommended for award by the Police was out of specifications while other essential omissions of the evaluation committee were noted. In the light of the above, the Tender Board decided, in November 2001, for the annulment of tenders, because the terms/specifications were not clear. The Tender Board requested the amendment of the terms/specifications by the Police, and new tenders to be invited after their approval of the Board. 4.19.2 Repurchase of vehicles – Tender D’ 1/94. According to the tenders for the purchase of 15 vehicles, the supplier should have repurchased them, in December 2000, for the sum of £97.500 plus V.A.T. As the vehicles were presenting abnormal damages, the supplier asked for the deduction of the respective cost of repair. The agreement/approval of the final amount for deductions, including the repairs made in the Police Workshop – lasted for about 14 months, with the result the supplier to submit new claims, on the grounds that there was an increase in the age of the vehicles, with adverse effect on their prices, due to the long time that elapsed. In view of the above, the Police requested, in July 2002, the advice of the Attorney General for the further handling of the matter. 4.19.3 Tender D’. 85/2000 for the supply of Forgery Detection Equipment for the Police. From a spot examination, carried out in June 2001, it was revealed that while the award of the tender by the Tender Board was made in January 2001, and the signing of the tender agreement should have been made within one month, the signing of tender agreements by the two successful tenderers was made after 2½ and 3 months, respectively. It was also observed that, while the period for the delivery/installation of the equipment, provided in the tender had expired, part of the equipment was not delivered, and most of the part which was delivered was not installed. Finally, it was observed that the relative agreements for the maintenance, full support and the upgrading of software for the period of five years, were not signed, contrary to the terms of the tenders, while all the amount, of about £17.000, relating to the above works was prepaid to the contractor. The Director General of the Ministry of Justice and Public Orders, in reply to my observations, he informed me, in September 2001, that the delay in the signing of agreements was due to errors observed in the amounts of award, as well as to the procedures for the de daggering of funds. He also stated that the delay in the installation of the equipment was due to the omissions and problems at the spaces, due to the inability of Police to prepare promptly the necessary infrastructure. As I was informed, all the works were completed by the end of July 2001, and the system is in full operation. With regard to the prepayment of the tender amount for the five years maintenance/support/ upgrading of equipment, no reply has been given. 4.19.4 Ovetime work. The following amounts were paid to members of the Police Force for overtime work in the years 1996-2001. 1996 1997 1998 1999 2000 2001 £ m. £ m. £ m. £ m. £ m. £ m. 2,72 1,33 0,88 1,10 1,24 1,42 The amount of £2,72 m. paid in 1996 included an amount of about £1,0 m., for overtime for the period 1989-1993.

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The Council of Minister decided on 14.10.98 that overtime shall not be paid and the cards of the members will not be credited with any hours for overtime work, without the prior approval of the Chief of Police, and that all accumulated overtime without the prior approval of the Chief of Police, be written off. The total of accumulated overtime, approved or not, is estimated at, about, £3,7 m. For the ascertainment of the degree of implementation of the decision taken at a meeting held on 19.2.99, at the Ministry of Justice and Public Order, for the purpose of determining the hours of overtime work during public holidays and for statements of witnesses in courts, for which the prior approval of the Chief of Police was not necessary, a sample test check was carried out, by a specially appointed team of officers, on a number of cards of members of the Force. The results of the test check were extensively discussed at a meeting on 25.8.2000, with the participation of all parties involved, and the following were decided: (a) Strict adherence to the Council of Minister’s decision dated 14.10.98. (b) Updating, keeping and follow up of overtime cards, according to the appropriate orders and directives of the Chief of Police. (c) Examination of accumulated overtime for the period 1.6.93-30.6.00 and preparation of analytical statement every six months for the purpose of submission of a proposal to the Council of Ministers for taking a new decision. (d) Resubmission of a proposal to the Council of Ministers for the implementation of the procedure of commuted overtime allowance to members of the Force serving at specific departments/services. According to the above decisions, the Police issued orders for the measures which should be taken for the final settlement of the matter, and as I was informed, six monthly analytical statements have been prepared, showing the accumulated overtime and the relative cost, for the period 1.6.93-30.6.2000. Additionally, statements showing the members who were employed on overtime basis during the period 1.1.-30.6.2000, were prepared and submitted to the Ministry of Justice and Public Orders for study and formulation of the relative proposal for submission to the Council of Ministers. 4.19.5 Execution of criminal warrants. The warrants received and executed by the Police during the last three years are shown in the following statement: 2001 2000 1999 Balance 1.1 49.338 41.171 34.782 Received during the year 122.521 119.817 123.973 171.859 160.988 158.755 Executed during the year 75.452 79.511 83.542 Unexecuted 96.407 81.477 75.213 Return to Court Registries 33.289 32.139 34.042 Balance 31.12 63.118 49.338 41.171 According to the above records, during 2001, 75452 criminal warrants were executed by the Police, compared to 79511 in 2000, i.e. there was a decrease of 4059 or 5,1%. The unexecuted warrants were 96407, compared to 81477 in 2000, i.e. there was an increase of 14930 warrants or 18,32%. Out of unexecuted warrants, 33289 were returned unexecuted to

59 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the Court Registrars, a number which is considered extremely high, while the remaining 63118 were in the hands of the Police for execution in 2002. In view of the constant increasing trend of unexecuted warrants, the Chief of Police, addressed a letter on 30.10.2001, to the Director General of the Ministry of Justice and Public Order, with suggestions for the taking of measures to accelerate execution of warrants. As I was informed, the matter is considered by the Ministry. On 18.12.2001, a meeting was held of representatives of the Ministry of Justice and Public Order, the Supreme Court, and the Police. It was decided that a study should be carried out for ascertaining as to whether a separate Judiciary Police Unit must be established for the execution of warrants or to seek the cooperation of the private sector, or to strengthen the Police with Auxiliary Policemen. It was also decided that the Police shall assess the expenditure needs for overtime work, so that the accumulated work in arrear to be performed within a certain period of time (up to 6 months). Also, the Commission of Legislation, submitted a letter, dated 19.12.2001, to the Attorney General of the Republic, the Director General of the Ministry of Justice and Public Order, the Chief of Police, the Director of Prisons, for the amendment of sections 118, 119 and 128 of Criminal Code. Cap. 155, for the instant payment of the monetary punishment up to £225, by the condemned persons, so as to alleviate the problem of the accumulation of so many unexecuted warrants. 4.19.6 Compounding offences. As I stated in my previous Reports, for the purpose of reducing court cases and the number of warrants issued, I recommended the out of court settlement of a large number of traffic offences and for this reason Law 47 1)/97 was enacted which was put into force with effect from 1.7.97. Pursuant to the Provisions of this Law, 116991 out of court warrants were issued by the Police in 2001, out of a total of 117780 traffic reports, and the total amount of fines imposed was about £3,4 m. Out of these warrants 101021 have been settled and a total amount of £2.902.515 m. was collected. The remaining warrants were referred to the Courts for criminal prosecution. Under the above settlement, the saving for Government, considering alone the cost for the preparation of prosecution and the execution of the warrant, exceeds by far the amount of £ 2m. annually. In case of addition to the saving of the cost of the courts (case recording, hearing and issue of warrant), then the saving exceeds the amount of £4 m. annually. Considering the saving for Government from out of court settlement of traffic offences, as well as the substantial number of prosecutions which are still prepared by the Police (50.429 for 2001), I recommended that the Police, in cooperation with the Government Departments involved, examine the possibility of extending the out of court settlement, in order to cover other offences also. As I was informed, an order was issued by the Council of Ministers on 15.3.2002 (S.L.133/2002), according to which the out of court settlement is extended to other offences as well. 4.19.7 Leave prior to retirement of members of the Police Force. In my previous Reports I stated that, as a result of accumulation of leave, members of the Police Force leave the service 1 to 2 years before retirement date. During the years 1995-2001, the number of members who were on leave prior to retirement and their emoluments were as follows:

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Year Members Expenditure £ m. 1998 145 2,39 1999 183 2,75 2000 206 2,82 2001 199 2,44 As I stated in my previous Reports, the large accumulation of leave on the retirement of a member, which was credited when the member was serving at lower ranks, leads to further increase of the expenditure involved, as the calculation is made according to the last salary received. The Council of Ministers decided, on 14.10.98 that the balance of vacation leave of members of the Force to be granted gradually, on a time schedule basis, specifying at the same time the maximum limit of such accumulations. In the relevant Regulations which have already been submitted, it is provided, inter alia, that the maximum limit of accumulation of vacation leave of the members of the Force will not exceed 100 and 83 days, in case of six day week and five day week of work, respectively. Directives have in the meantime been issued by Police Headquarters that, as from 1.1.99, no accumulation is allowed beyond the above numbers. As a result, leave of absence was granted during the year 2001, in excess of the normal annual leave, to 846 members (1190 members for 2000 and 1107 members for 1999) and consequently the accumulated leave was reduced by 1,9% (2% for 2000 and 4,3% for 1999). In the meantime, the Chief of Police, has issued a circular on 25.2.02, under which the maximum accumulated leave of absence for the members of the Police Force was fixed to 90 days. 4.19.8 Special Constables. Pursuant to section 30 of the Police Law, from 1992 to 2001, 482 new Special Constables were appointed, increasing their total number to 512, as stated below: Year Special Constables Basic Salaries £ 1992 30 33.527 1993 50 45.801 1994 58 57.990 1995 100 96.845 1996 318 222.824 1997 481 675.556 1998 471 550.994 1999 375 537.447 2000 491 553.572 2001 512 598.635 Included in the Special Constables are 38 persons who are posted for guarding the installations of the Electricity Authority of Cyprus and 40 persons for guarding CY.T.A., and 15 persons for guarding the installations of Cyprus Petroleum Refinery Ltd and their salaries are reimbursed to Government by the above Authorities.

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During 2001, 131 Special Constables were appointed, after the publication of the posts and written examinations. Their appointment was necessary for the replacement of 110 Special Constables who were appointed in 2001 as Constables or Regular Special Constables, as well as for the filling of 21 vacant posts. In the Budget Law of 2001, it is provided that no new appointment of Special Constable will be made, before the approval of Regulations, governing the terms and procedures for their appointment. It is clarified that in cases of urgent need, the posts will be published and filled only after succeeding in written examinations. As I was informed, the procedure of publication of posts and of written examinations is followed since the above date. It is also stated that the Regulations governing the Terms and Procedures of Appointment of Special Constables have been prepared by the Ministry of Justice and Public Order and laid before the House of Representatives on 27.5.99, and their approval is still pending. 4.19.9 Police houses. The Police houses all over Cyprus are 183 and are used as follows: • 101 houses are used as residence by members of the Police who are in service, • 8 houses are accommodated illegally by retired members of Police, • 31 houses are used for official purposes, • 3 houses are temporarily used for the accommodation of Medical Services at Kofinou • 3 houses are used for the accommodation of the Administration Station of EMAK at Kofinou, • 1 house is used as a country house by members of Divisional Police Limassol, • 36 houses are empty. During 2001 no expenses were incurred for the maintenance of police houses, which are used for the accommodation of Police members, who are still in the service. Expenses were only incurred for the cleaning of sewerage systems, amounting about to £20.000 annually, while the revenue from rents and the saving from rent allowance amounted about to £54.000, as compared to £61.000 for 2000. The Council of Ministers decided on 14.10.98 for the more appropriate use of Police houses and the need to balance rent collections and maintenance expenditure. On 19.2.99, at a relevant meeting at the Ministry of Justice and Public Order, it was decided that it would be inappropriate to increase the rents, as the 112 houses in the area of Police Headquarters are going to be demolished, pursuant the town planning scheme prepared by the Department of Public Works. Until the implementation of the scheme, the Chief of Police, in his letter to the Director General of the Ministry of Justice and Public Order, suggested, inter alia, that the rent deducted from the salaries of the tenants of Police houses be equal to the rent allowance they would be eligible for if they resided in an own or rented house. Finally, this measure was not implemented either. The Ministry of Justice and Public Order decided, on 17.1.2000, not to rent again the houses that are left by the tenants. It was also decided that the legal aspect of the matter with regard to the standing rent agreements and the Rents Law to be considered. In a new meeting dated 28.8.00, it was decided that the Police should prepare a time schedule for emptying the houses, the Department of Public Works should give an analytical estimate of the expenditure for their maintenance and after the submission of the above, a new meeting to be held for taking a decision and to inform the Council of Ministers accordingly. The matter is still pending.

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In relation to this matter, the following were stated by the Ministry. (a) No house has been allocated to new tenants since 1.10.99. (b) Regarding the time schedule for emptying the houses, the Police indicated the difficulty in determining the exact time for emptying the houses. It is noted that in the case of the one house, out of the eight houses which are accommodated illegally by retired members of Police, the court decided that the defendant may stay in the said house until 31.12.2002, provided he will pay increased rent as from 1.12.2001. The respective Minister stated that the decision for non-disposal of emptying houses is causing several problems and for this reason the Chief of Police suggested that this decision should be reconsidered. He also stated that he asked the Chief of Police to prepare, in cooperation with the Law Office, a “Concession Agreement”, for houses, which will include all the appropriate terms, for safeguarding the recovery of houses, on the retirement of their tenants, terms for their maintenance by the tenants and other terms which will be considered necessary by the Chief of Police. 4.19.10 Policing of football matches and other games. As I stated in my previous Reports, in spite of the Council of Ministers decision No. 42.718 dated 14.6.95, that the expenditure for policing of football matches and other games should be paid by the Cyprus Sports Organization, with the imposition of a relevant fee on the ticket price of athletic meetings, no compliance was, however, shown on the part of the Organization. As a result of this omission, the Ministry of Finance proceeds every year to the deduction of the amounts due by C.S.O. from the annual subsidy given to the Organization and deposits the amounts to the relevant Police Revenue Vote. In July 2001, the Ministry of Finance deducted the amount of £392.164 from the annual subsidy, representing the financial obligation of C.S.O., for the policing of football matches and other games during the period December 2000 – March 2001. The Council of Ministers, at a new meeting held on 10.10.2001, decided (decision 54.411) to cancel the previous decision 42.718 on 14.6.95. The new decision provides for the deduction of the amount of £525.000 for the payment of overtime fees for the policing of football matches of the respective period 2000- 2001 (£400.000) and the period September-December 2001 (£125.000). If the total claim for the payment of overtime fees for the policing of 2001 is in excess of £525.000, then the difference will be deducted from the state subsidy of C.S.O. According to the Police records, the total obligations of C.S.O. for 2001, amounted to £749.823, compared to £583.884 for 2000. An amount of £392.164 had been deducted from the state subsidy, and was paid to the Police, and therefore C.S.O. is still indebted in the sum of £357.659, which is still pending. At the same meeting of the Council of Ministers (10.10.2001) it was also decided that in the new budgets of C.S.O., a provision of £400.000 to be included, for the policing of football matches and other games, provided that the expenditure not to exceed the budgeted amount of £400.000. The Minister of Justice and Public Order states that the matter of Policing of football matches and other games, has not yet been solved and after the above decision of the Council of Ministers, dated 10 October, 2001, several problems have been created. He also stated that he will call a meeting of the Ministers of Finance and of Education and Culture for the radical solution of the problem. PART B 4.19.11 Replacement of Police personnel performing clerical and accounting duties, with civil staff. In my previous Reports it was stated that the Council of Ministers approved, on 16.6.1998, under decision No. 30309, the replacement of 122 members of the Police Force performing clerical and accounting duties in sections where security problems are not expected

63 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 to arise, with civil personnel and the transfer of 151 women Special Constables to Clerical staff, and their replacement with new Police Constables (men). With regard to the implementation of the above decision it was observed that the Departments involved have not proceeded up to now to any relevant arrangements. I recommended the reconsideration of the whole matter, in the light of the present situation and state of affairs, and also the needs of the Police Force. The matter is considered by the Department of Public Administration and Personnel of the Ministry of Finance. 4.19.12 Copy of firearm registration certificate. In my previous Reports I stated that Divisional Police Stations issue copies of firearm registration certificates, without collection of any fees, because there is no such provision in the relevant legislation. My recommendation to examine the possibility for the amendment of the Law to allow the collection of specified fees was accepted. The Ministry of Interior, under the jurisdiction of which this issue comes, is taking steps towards the amendment of the relevant legislation, for final settlement. 4.19.13 Connection of automatic systems for tracing fire/burglary with Police Stations. In my previous Reports I stated that, according to the initial plan, the connections were undertaken by CY.T.A., after the approval of the applications by the Chief of Police and the payment of the relevant fees. Subsequently, however, with the introduction of advanced technology machinery and equipment, it was technically possible to proceed with the connection, without the knowledge of the Police, which knew about it only after an alarm call. For the solution of the problem, amendment Regulations have been prepared which have not yet been approved. 4.19.14 Arms and ammunition. During the year a sample test check was carried out by my Office, on the registers and a physical stocktaking of the stocks of arms and ammunition kept in all Divisional Police stores and Athalassa headquarters Stores. The Chief of Police submitted at the end of the year a certificate of confirmation that a full examination was carried out on the stocks of arms and ammunition and that these agreed with the balances shown in the registers, with the exception of those declared stolen or lost. 4.20 FIRE SERVICE Part A 4.20.1 Fire protection. As I stated in my previous Reports, for purposes of fire protection, the Service provides various services such as the examination of architectural drawings for the issue of licences, the inspection of building for final approval etc., without collecting any fees. I suggested that the possibility of amendment of legislation should be examined for collection of fees, to cover, at least, the actual expenses incurred for the services provided. At a meeting held at the Ministry of Justice and Public Order on 10.7.2000, the Fire Service undertook the carrying out of a study and the preparation of new Fire Protection Regulations. The Minister of Justice and Public Order informed me that the preparation of Fire protection Regulations is at an advanced stage and these are expected to be completed and submitted for legal processing until 1.6.03. The Regulations provide for the collection of fees for the fire protection services rendered. 40.20.2 Calls. The following statement shows, for the last three years, the number of calls for extinguishing fires and for special services provided by the Fire Service, the number of Fire

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Service personnel, the number of vehicles used by the Force and the cost of damages caused by the fires. 2001 2000 1999 Calls for extinguishing fires 4771 3945 4857 Calls for special services 6149 5121 4281 Fire Service Personnel 652 602 602 Vehicles 152 146 152 Damages £11.601.517 £3.109.480 £12.697.183 Part B 4.20.3 Vehicles repair/assembly workshop. At the workshop of the Service, 15 persons are employed on a full time basis, dealing with the repair of fire fighting vehicles and other equipment, as well as the maintenance of the old vehicles. Until 1998, the workshop undertook the part assembly of fire fighting vehicles. On the recommendation of my Office, fully equipped vehicles are now being purchased from the private sector. As a result of the reduction of activities in the workshop, I requested the carrying out of a study in order to ascertain whether the employment of 15 persons at the workshop is necessary. As I was informed by the respective Minister, a workshop and a machine-shop are operating in the Fire Service, on a twenty-four hour basis. In the machine-shop, 10 persons are employed, and is fully operated, either for the repair of the maintenance and mechanical inspection of the great number of fire fighting vehicles used by the Fire Service. In the workshop, 5 persons are employed and its activities cover the repair of damaged vehicles, and their painting, the repair and maintenance of metallic constructions, the construction of towers for training and the construction of sheds for the protection of fire fighting vehicles and equipment. 4.21 PRISONS Part A 4.21.1 Prisoners-Detainees. The number of prisoners and detainees at 1.1.2001 was 296. During 2001, 1991 persons were imprisoned and 2023 were released. At 31.12.01 there were 264 prisoners and detainees. The prisoners and detainees are engaged in various construction works relating to the improvement of security conditions and their standard of living. They are also engaged in various other activities, such as the kitchen, the coffee shop, and the farm, in the cleaning of the internal and external areas of Prison etc. Additionally, 187 prisoners, according to their specialities and interests, were engaged in various prison training workshop programmes. During 2001 lectures were organized on eleven different topics, which were attended by 152 prisoners. 4.21.2 Food cost. The total cost for prisoners and Police detainees, who are held in Prison areas allocated to the Police by the Prisons, amounted to £181.848, compared to £181.778 for 2000. On average 323 prisoners and detainees were catered per day, at an average daily cost of £1,54, compared to 312 and £1,60, respectively, for 2000.

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4.22 MINISTRY OF COMMERCE INDUSTRY AND TOURISM Part A 4.22.1 Development Budget – Unspent balances. Out of the total budgeted expenditure of £17,9 m., only the amount of £10 m. was spent, i.e. the amount of £7,9 m. or 44% remained unspent (37,7% for 2000). 4.22.2 Arrears of revenue. The arrears of revenue mainly due for industrial rents, at 31.12.2001, amounted to £957.758, compared to £1.068.364 for 2000. Out of total arrears the amount of £558.483 or 58,3% represents arrears for previous years, whereas the amount of £399.275 or 41,7% represents arrears of the current year. Several cases of arrears refer to tenants who delay the payment of their annual rent for more than five years. For these cases the Ministry has taken measures for the termination of the relevant lease agreements and several cases, however, are pending at the Law Office of the Republic. 4.22.3 Subsidies. • Degree of materialization. It was again observed that the approved subsidized schemes are not implemented at the expected degree. Specifically, while the budgeted expenditure for 2001 was £11,8 m., only the amount of £5,5 m. was expended. It has to be noted that, according to the Commissioner for the Public Aid, several of these Schemes should be either revised or terminated until 30.4.2003. The following are some indicative examples: (i) Scheme for granting loans and subsidies for technological upgrading of the industrial sector. For the year 2001 the budgeted amount was £ 4,5 m. whereas the actual expenditure amounted to £2,2 m. The implementation of the Scheme commenced in November 1996 and it was extended until the end of 2003. The examination of applications submitted until 31.12.00 continued in 2001 and 690 applications for subsidies and 354 applications for interest subsidy were approved up to 31.12.01. The amounts paid are £13.111.183 for 629 units and £2.367.804 for 353 units, respectively. At 31.12.01, the examination of 172 applications for subsidies and 6 applications for interest subsidy was still pending. After the introduction of the Law for the Control of Public Aid, the Scheme for Grants for Technological upgrading of Industry was declared to the Commissioner for Public Aid as Scheme De-minimis, for covering the investments of 2001, after the decision taken by Council of Ministers. For the investments of the period 2002-2003, a scheme was prepared and submitted to the Commissioner, which after approval by the Council of Ministers, was put into force. The applications for investments of the period 2002-2003 may be submitted until the end of 2003. (ii) Schemes for New Industrial Policy. The budgeted expenditure amounted to £2,5 m., whereas the actual was only £0,3 m. (iii) Grants to Manufacturing industries for the installation of Pollution Control Systems. – Implementation and Criteria of the Scheme. During the year 2001, no expenditure was incurred against the budgeted amount of £250.000. The grants for the four applications which were examined in 2001 were paid in 2002. The implementation of the Scheme commenced in 1995 and for the years 1995-2000 the total expenditure of £830.260 was paid for 27 units, while the examination of another 8 units is still pending. The Council of Ministers decided on 7.8.98 for the extension of the Scheme until 31.12.2003. On 8.10.01 the Commissioner for Public Aid decided for the termination of the Scheme until 30.4.03 for manufacturing industries which are not producing agricultural, stock-breeding and fisheries products, of first conversion.

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4.22.4 Export Credit Guarantee Service. At 31.12.01 the contingent liabilities of Government for outstanding guarantees issued for purposes of encouragement, assistance and development of trade with other countries, amounted to about £4,05 m. In addition there was an outstanding amount of £10.6 m. for compensations paid by Government for exports to Libya (£0.2 m.), Iraq and Kuwait (£7.2 m.), Russia (£2.6 m.) and other countries (£0.5 m.), which remains debited in an advance account. The Ministry informed me that efforts were made for the recovery of compensations paid for the exports to Iraq, Kuwait and Russia and the collection of the amounts involved will be possible as soon as the existing problems and difficulties are overcome. I suggested that the matter of charging these amounts to the above advance account for so long time, to be reconsidered in cooperation with the Ministry of Finance. 4.22.5 Development of cruise tourism and construction of marines. The Council of Ministers approved in March 1994 the strategic plan for the development of cruise tourism and, among others, decided to assign to the private sector, the study, construction and management of marines at various coastal areas. During 1996 the tender documents were prepared by Cyprus Tourism Organization, but the processing of the tender procedures was significantly delayed due to arising problems mainly attributed to the surveying and hiring of the necessary areas to private individuals. In view of the fact that various Services, such as the Ministry of Communications and Works, the Ministry of Commerce, Industry and Tourism and Cyprus Tourism Organization were involved in the handling of the matter, the Council of Ministers, in August 2000, authorized the Ministry of Commerce, Industry and Tourism as the “Interested Service” for the invitation of tenders. In December 2000, in my letter to the Minister of Commerce Industry and Tourism, I suggested the appointment of a responsible coordinator and a supervising committee, under appropriate terms of reference, which I notified to the Ministry, for purpose of proper planning and coordination of the works. In January 2002, the Ministry submitted a proposal to the Council of Ministers, under which approval was given for the establishment of a supervising Committee and for the employment of a coordinator. Finally, after further delays, which were attributed to the decision taken for the translation of the tender terms in English, tenders were invited, in July 2002, for the construction of marines. Tenders were also invited, in August 2002 for the appointment of a Supervisor for marines. 4.22.6 Weights and Measures Service. The equipment and staff of the Service are still inadequate. Although sections 17-19 of the Weights and Measures Laws of 1974-2000, provide that the Service should possess weights and measures, the use of which will secure the accuracy of measurements, yet it was observed that the Service is not in a position to fulfill a significant part of its objectives, due to lack of suitable equipment and staff. In several cases the Service has failed to respond to the requests for the examination of specialized instruments both in the private and public sector, with the result various industries of the conversion sector, to apply to private sector for the examination and verification of the accuracy of measurements of various specialised instruments. It is noted, that for most of the standards of weights and measures used for the examinations, no test was carried out for ascertaining their accuracy, from the date of their purchase, contrary to the provisions of section 18(2) of Weights and Measures Laws, which provide for the periodic certification of their accuracy, by the International Office of Weights and Measures. In view of this omission, there is the risk for all the tests and the various certifications carried out by the Service to be considered of not having legal validity.

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My Office having in mind that the operation of the Service, is closely related with the protection of consumer, and for purposes of harmonization of Cyprus with European Union, recommended the taking of appropriate corrective measures, the soonest possible. The Director General of the Ministry, with a letter dated 12.7.02, informed me that, within the framework of harmonization of Cyprus with Acquis Communautaire, in the sector of metrology (weights and measures) the European Union approved the concession of technical assistance to the Weights and Measures Service, through the Twinning Programme. It is expected that with the provision of above assistance, which will be given as from the next November, the creation of the necessary metrology infrastructure will be possible and the Service will be in a position to implement the existing relevant legislation, in harmonization with Acquis Communautaire. Part B 4.22.7 Use of Government Industrial Estates for proposes other than those provided in the lease agreements. In my previous Reports, it was stated that, despite the assurances given by the Ministry since May 1996 no investigation was carried out for ascertaining whether the industrial plots in the Government Industrial Estates are used according to the lease agreements, although cases were ascertained in the past where several buildings were used for purposes other than specified in the lease agreements. Additionally, it was observed that only few visits are carried out in the Government Industrial Estates with the result the several problems not to be identified promptly, such as the use of the buildings as shops for retail sale, arbitrary intervention in Government land, sub-let of part of buildings without the approval of the Ministry and other, which do not coincide with the terms of lease agreements. The Ministry informed me that the carrying out of few visits in due to lack of staff. 4.22.8 Sewerage fees of the industrial estates in Limassol and Agios Athanassios. As it was stated in my previous Reports, the tenants of the industrial plots in the aforesaid estates, do not pay the annual sewerage fees to the Sewerage Board of Limassol – Amathoundas, as it is required under the relative lease agreements. As a result the Ministry of Commerce Industry and Tourism, on the basis of legal advice of the Attorney General of the Republic, dated 12.2.96, commenced the payment to the Board, of the relative fees, with effect from 1996. The Ministry follows their collection through the advances account, and as it was stated, all the tenants are called to pay their obligations, and those who refuse to respond are submitted to the Attorney General, for taking legal measures. Despite the measures taken, the amount due was increased to £498.767 at 31.12.2001, as compared to £423.938 at 31.12.2000. 4.22.9 Schemes for loans granted under government guarantee. According to the statements submitted to my Office, the total loans granted under government guarantee amounted to £6.710.247, while the government guarantee was £2.150.256. At 31.12.2001, the loan installments in arrear amounted to £1.698.453. Until 31.12.2001, the Government paid the amount of £363.451, as guarantor. The efforts made by the Ministry for the follow up of outstanding cases were intensified and it is expected that there will be improvement in the whole situation. Analytically, the various Schemes are as follows: (a) Scheme of Government Guarantees (90%) for loans issued to displaced and affected businessmen. During the years 1983-1989, in 74 cases, loans/current accounts were provided

68 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 by banks, for the total amount of £446.001, with government guarantee, covering 90% or £401.400. At 31.12.2001, the balance of loans and current accounts, according to bank certificates, was £21.995, and the whole amount represents installments in arrear. The Government obligation is for £19.795. Until 31.12.2001, the Government paid the amount of £130.698, as guarantor, for nine cases (£76.347 until 31.12.2000). (b) New Scheme of Government Guarantees (75%), according to the Council of Ministers decision 23436 of 21.7.83. Until 1998, in 4 cases, loans were issued for the amount of £773.500. At 31.12.2001, the balance of loans/current accounts, according to bank certificates, was £366.591. The Government obligations estimated by the Ministry of Commerce, Industry and Tourism, was £214.155. (c) Old Scheme of Government Guarantees, according to Law 44 of 1974. During the years 1975-1983, in 36 cases, loans were issued for £1.291.350, with government guarantee, covering 75% of the amount, i.e. for £968.512. At 31.12.2001, the balance of the loans (all the amount is in arrear) was £334.939, and relates to five cases. The Government obligation, estimated by the Ministry of Commerce, Industry and Tourism, was £217.914. Until 31.12.2001, the Government paid, as guarantor, the amount of £210.663, for nine cases (£186.748 until 31.12.2000). (d) Scheme of Government Guarantees (90%) for Industry – Council of Ministers decision 35.748 of 27.6.91. During 1991-1999, in 23 cases, loans were issued by banks for £4.199.396, with government guarantee covering 90%, i.e. for £3.779.456. At 31.12.2001, the balance of the loans was £1.897.273 and the government guarantee was £1.698.392. The Government paid, as guarantor, the amount of £22.090, for one case. According to the bank certificates, the total of installments in arrear for the loans, at 31.12.2001, was £974.924. This includes three cases with total amount due for £820.317. The Ministry informed me that legal measures were taken against two companies, and for third company, the bank of the company will be requested to release the Government guarantee otherwise, legal measures will be taken. 4.23 DEPARTMENT OF REGISTRAR OF COMPANIES AND OFFICIAL RECEIVER Part A 4.23.1 Registrations, bankruptcies, voluntary liquidations and write offs. The registrations of companies, the voluntary liquidations and write off of companies, as well as bankruptcies of individuals, were, for the last three years, the following:

2001 2000 1999 Registrations: Cyprus companies with equity participation { { 6866 Off-shore Companies { 9432* { 9362* 369 Shipping Companies { { 1366 Partnerships and Trade Names 1618 1355 1330 Foreign Companies 205 240 147 Total 11255 10957 10078

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Bankruptcies and liquidations: Individuals 407 462 475 Companies 139 147 150 Total 546 609 625 Voluntary Liquidations: Companies 122 99 83 Write-offs: Cyprus companies with equity participation, { 2391 { 3131 Shipping and Off-shore Companies { { Partnerships { 24 { 29 *8000 Trade Names { 178 { 134 Foreign Companies { 45 { 16 Total 2638 3310 8000 *No details were given 4.23.2 Backlog of work. The backlog of work continues to be considerable in the sections of Companies, Trade Marks, Liquidations/Bankruptcies, and Charges and Mortgages. As I pointed out in my previous Reports, the increasing backlog of work does not contribute to the smooth operation of the Department, the prompt provision of service to the public and the collection of public revenue. 4.23.3 Submission of annual returns by Companies. As I stated in my previous Reports, many companies delayed in submitting their annual reports for many years, without any measures taken against them. The Department applied a series of measures to face the problem and has already notified all companies to respond to their obligations. The results of the above actions were positive and the revenue of the Department was increased by £0,2 m, compared with previous year, due to the increased number of annual reports submitted. However, the revenue from returns, which were not submitted up to 31.12.01, is estimated at about £3,6 m. 4.23.4 Overtime. The expenditure for overtime work amounted to £94.676, compared to £125.949 for 2000, i.e. there was a decrease of £49.423 or 39%. The amount of £94.676, includes £18.150 for 2000. 4.23.5 Computerization . The final delivery of the project, was made in November 2000, with a delay of about 4 years. The system covered the new entities (limited companies, trade names, partnerships, foreign companies) which were registered since October 2000 and afterwards. For entities which operated before the introduction of the computerized system, the system is only partially implemented, because the relative details and information from the files have not yet been recorded in the system. Due to the absence of interest for the participation in tenders for the updating of the system, with all details for the above entities, approval was secured for the appointment of 11 casual employees.

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Part B 4.23.6 Submission of annual accounts by foreign companies. It was again observed that many foreign companies delayed to submit their annual accounts for the years 1988-2001, resulting to delay in the collection of substantial amounts and the risk for loss of revenue. 4.23.7 Security system. The installation of a security alarm and fire alarm systems has not been effected for all the building. I expressed the view that, due to the importance of documents in the building, the installation of security and fire alarm systems is imperative. 4.23.8 Recovery of expenses. Despite the relevant decisions of the Council of Ministers to recover the amount of £255.390, which represents inspector’s expenses paid by Government for the investigation of two companies, the procedure for recovery has not been commenced. The Department informed me that the matter has been referred to the Law Office. 4.23.9 Surcharges – Mortgages. It was again observed that no legal measures are taken against those who do not respond to the relevant notifications of the Department for the registration of mortgages on immovables, resulting to loss of revenue. The Department stated that no legal measures are taken due to shortage of staff. 4.24 CYPRUS HANDICRAFT SERVICE Part A 4.24.1 Operating results. According to the unaudited accounts of 2001 the operating results are as follows: 2001 2000 £ £ Cost of sales 697.141 676.609 Less: Sales 352.482 337.320 Gross Loss 344.659 339.289 Plus: Administrative and trade expenses 303.302 286.997 647.961 626.286 Less: Other Income 6.659 6.530 Total Loss (641.302) (619.756)

The expenditure includes the salaries of the monthly paid civil servants employed by the Service, amounting to £368.083, compared to £367.352 for 2000. 4.24.2 Financial position. It was again observed that the Service incurred losses. Although the objective of the Service is not the realization of profit, but the development of production of traditional items, for the preservation and promotion of our cultural inheritance, it is expected that, with the implementation of the Action Plan for the reorganization of the Service, which, inter alia, provides that consideration must be given to market needs, so that the Service will be able to develop commercially, the situation will improve. 4.25 INTERNATIONAL CONFERENCE CENTRE Part A 4.25.1 Receipts and Payments. The receipts and payments of the Centre, according to the unaudited accounts, amounted to £564.139 and £551.497, respectively, compared to £486.986

71 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 and £535.769 for 2000. The receipts for 2001 include government subsidy amounting to £66.000, compared to £29.025 for 2000. Part B 4.25.2 Management and Operation of the Centre. As I stated in my previous Reports, the legal regime of the Centre continues to remain pending. This is due to the fact that Law 101 (1)/98, which refers to the Transfer of the International Conference Centre and the Philoxenia Hotel to a Company cannot be implemented, because Philoxenia Hotel which would be one of the two constituent parts of the Company, terminated its operation. In view of the above, the official status of the staff of Centre is pending. 4.26 MINISTRY OF LABOUR AND SOCIAL INSURANCE 4.27 LABOUR DEPARTMENT 4.27.1 Self-Employment Scheme for Tertiary Education Graduates. • Delays in the repayment of loans. According to records provided to the Department of Labour, by the Treasury on 7.10.2002, the installments in arrear for the repayment of loans, received for the above Scheme, amounted to £682.154, at 31.12.2001. I was informed that this matter will be considered at the following meeting of the Committee for the Evaluation of applications of the Scheme for Self-employment. 4.28 SOCIAL INSURANCE SERVICES Part A 4.28.1 Government revenue from Social Insurance Fund resulting from the payment of social pension. As I stated in my previous Reports, since 1995, at the commencement of payment of social pension, the Social Insurance Fund, in cases where the recipients of social pension are dependents of Social Insurance pensioners, deducts from the pension the amount that corresponds to the dependent, which is deposited by adjustment voucher at the end of each month, to Revenue Vote “Contribution for Social Pension” according to Section 59(6) of the Social Insurance Law. With the operation of the new computerized system at the beginning of 2000, it is impossible to calculate the above amount, because the relevant programme which provides for the transfer of the amount from the Social Insurance Fund to the Consolidated Fund, has not yet been delivered by the computer company. The Director of the Social Insurance Services informed me that the preparation of the above programme will take a long time and is not expected to be prepared before the second semester of 2002. Because of the above, the amount transferred to the Consolidated Fund in 2001 was the same as that of previous year, increased by the rate of increase on the basic pensions of 2001. 4.28.2 Supplement of the lowest level of Social Insurance pension. According to the Social Insurance (Amendment) Law, the lowest pension was increased as from 1.1.99 and 1.7.2000 by 10% respectively, and the supplement amount of this increase shall be paid out of the Consolidated Fund to the Social Insurance Fund. The supplement amount, which should have been automatically extracted and presented separately, under the existing computerized system, is not, however, possible to be calculated exactly. As I was informed, in order to make any amendments in the computerized systems, the structure of the programmes is needed to be changed completely, something which is difficult to

72 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 be done. For this reason, the calculation of this amount is approximately made. For the years 1999, 2000 and 2001 the Consolidated Fund was charged with the amounts of £1.857.400, £3.202.096 and £4.707.000, respectively, while for the year 2002 the amount is expected to be £4.952.234 without including any increase in the basic pensions, which will be given within the framework of the tax reform. At the meeting, it was agreed that the possibility for the amendment of the Law should be considered, so that the supplement amount needed, due to the increase in the minimum pension, to be paid out from the Consolidated Fund of the Republic, in the form of the lump sum or state subsidy, as a percentage on the annual amount paid for pensions. The Director of Social Insurance Services informed me that the possibility for the amendment of the Law will be considered after the submission of the Report of the Actuary, in connection with the basic pension, because there is the possibility for the change of the existing practice followed. 4.29 SOCIAL INSURANCE FUND Part A 4.29.1 Operating results. During the years 2001 and 2000 the Fund showed the following movement:

2001 2000 (£m.) (£m.) Balance as at 1st January: General Grants 351.1 330,2 Supplementary Grants 1.639.0 1472,3 Unemployment Benefit (9.1) (2,8) 1.981.0 1.799,7 Receipts: General Grants 244.2 218,9 Supplementary Grants 236.9 218,0 Unemployment Benefit 20.3 501.4 18,0 454,9 2.482.4 2.254,6 Payments: General Grants 209.3 197,9 Supplementary Grants 57.6 51,4 Unemployment Benefit 20.6 287.5 24,3 273,6 Balance as at 31st December 2.194.9 1.981,0

4.29.2 Outstanding amounts due to various Funds. At 31.12.2001 the outstanding amounts were about £22,4 m. (£19,5 m. at 31.12.00), as a result of court decisions in favour of the Funds, as follows:

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£ Social Insurance Fund 13.275.428 Holidays with Pay Fund 2.804.756 Redundancy Fund 838.479 Industrial Training Fund 411.825 Defence Fund 5.034.682 22.365.170 During 2001, 4279 new cases were adjudged by the Courts for approximately, £5,9 m., and the amount of about £3,1 m. was collected. The amounts written off due to liquidation or bankruptcy of debtors amounted to about £ 2,5 m. It is pointed out that with the adjudgement of the cases, the employees are credited with the relevant contributions and the Fund undertakes all its obligations in their favour, irrespective of whether the amounts are finally collected or not. This procedure is correct and fair, as the responsibility for the payment of contributions rests completely with the employer. The amounts written off include also the employees’ contributions already collected by the employers. 4.29.3 Reserve Fund of the Unemployment Benefit Account. At 31.12.2001 the above Account showed a debit balance amounting to £9,4 m., compared to £9,1 m. at 31.12.00, because the expenditure exceeded revenue. In such a case, in accordance with the provisions of section 69(6) of the Social Insurance Law, the difference is paid from the Consolidated Fund of the Republic or covered through a special contribution imposed as per relevant Regulations. So far, no decision has been taken for covering such deficit. The Director, informed me that despite the fact that this matter was discussed by the Advisory Labour Committee, no measures have been taken, in view of the new Actuarial Study which is being prepared for the year 2000. 4.29.4 Internal control. Weaknesses continued to be observed in the system of internal control which covers the movement of substantial amounts through corrective adjustment vouchers, as well as the short-term and long-term grants. The Director of the Social Insurance Services informed me that the weaknesses observed in the control of the movement of substantial amounts, with corrective adjustment vouchers prepared by the Accounts Section of the Services, were located long time ago by the Accounts Section and for this purpose a request for an additional Accounting Officer was submitted, which has not yet been satisfied. With regard to the grants, he stated that the insufficient control is wholly due to the short staff of the Department. He also stated that with the implementation of the new organizational structure, of the Department, approved recently by the House of Representatives, an Internal Control Section, will be established, where 9 Officers will be employed, who will be responsible for the control of all the Department’s activities, and not only of grants, as it is done. 4.29.5 Computerized System of “Grants”. With the implementation of the new computerized system since January 2000, errors and weaknesses were observed in the computer programmes. Although many errors were rectified yet the correction of about 400 incident reports and about 50 change control notes is still pending, as well as the delivery of three computer programmes, a fact which, combined with the above, hinders the smooth operation of the system.

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The Director of Social Insurance Services stated that the computerized system of “Grants” continues to present problems and pointed out that the continuous undertaking of new schemes by Social Insurance Services, as well as the implementation/modification of existing legislation/plans, slow down the solution of the problems. 4.29.6 Payment of sickness benefit to municipal employees. Although most of the Municipalities under their labour collective agreements, are applying the existing Government Regulations for sick leave, according to which the employees are eligible for the payment of full emoluments for sick leave, yet on the submission of the applications for sick leave, by municipal employees, to the Social Insurance Fund, the employers (Municipalities), at the completion of that part of the relative application, they conceal the fact that their employees are entitled, under the labour collective agreement, for the payment of sick leave by the employers, on full emoluments. As a result of the above, the Social Insurance Fund is charged with the payment of benefit to the municipal employees, which is finally collected by the employers (Municipalities), either by cheques of Social Insurance Fund or by deducting the relevant amounts from the salaries of the employees. It is noted, that in the case of Municipal labourers, the relative agreement provides that the labourers are entitled for the payment of full emoluments, for a specified number of days of sick leave, after the deduction of the sickness benefit payable by the Social Insurance Fund. Such cases are also observed in the Community Boards, the Water Boards and probably in big companies, where their employees have secured rights. I suggested that, on the submission of application, the Fund to request copy of the collective labour agreement. The Director informed me that the matter is considered serious and is examined in depth, for ascertaining whether the Municipalities and other employers are violating the legislation of Social Insurance. With regard to the suggestion for the submission of copy of the collective labour agreement, he stated that, in the first instance, this cannot be accepted, because there will be a lot of work in the Department. 4.29.7 Refund of contributions. The amount of £3.370 was refunded to a certain person, who was classified as self-employed, representing contributions to the Social Insurance Fund and Defence Fund, which were deducted, because he was considered as an employee, due to an oversight, without deducting the contributions due, as a self employed person. It is worth mentioning, that unexecuted criminal warrants were pending, against him, for the payment of contributions due from adjudged cases. The Director of the Social Insurance Services stated that the above amount should not have been refunded, because for a specific period, there was an obligation for the payment by him of contributions, as a self employed person. With regard to the criminal warrants, he informed me that the Chief of Police will be requested for their prompt execution. 4.30 CENTRAL HOLIDAYS WITH PAY FUND Part A 4.30.1 Operating results. The accounts of the Fund for 2001, showed a surplus for £2 m., compared to £1,3 m. for 2000.

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The revenue of the Fund for 2001 was £27,6 m. and the expenditure £25,6 m., compared to £24,5 m. and £23,2 m., respectively, for the previous year. The balance of the Fund as at 31.12.01 was £33,9 m., compared to £31,8 m. at 31.12.00.

4.30.2 Scheme for subsidizing employees holidays. According to the Scheme, employees, under certain terms, are eligible, with their dependants, for a subsidy for a seven-day holiday at hotels. The amount spent for this purpose during 2001 was £1.193.545, compared to £1.098.660 for the previous year.

4.30.3 Scheme for subsidizing camping sites of Unions. A subsidy amounting to £480.000 was paid in 2001 for the operation of camping sites of Unions and an amount of £1.163.400 for the construction of camping installations of Unions, compared to £462.000 and £61.900, respectively, for the previous year. 4.31 REDUNDANCY FUND Part A 4.31.1 Operating results. The accounts of the Fund for 2001, showed a surplus of £5,9 m., compared to £5,7 m., for 2000.

The revenue of the Fund for 2001 was £26,4 m. and the expenditure £16 m., compared to £23,3 m. and £17,6 m., respectively, for the previous year. (The amount of £4,5 m. was transferred to the Fund for the Protection of Rights of Employees in case of Bankruptcy of Employer out of the receipts for 2001). The increase in revenue is, mainly, due to the increased contributions (£2,8 m.) and interest from investments (£292.060). The balance of the Fund at 31.12.01 was £33,4 m., compared to £27,4 m. at 31.12.00.

4.31.2 Applications and Payments. The total number of applications for 2001 for redundancy payments was 6498 (3505 new applications and 2993 outstanding applications at 1.1.01), out of which 4727 were examined, 3786 were approved (80%) and 941 rejected (20%). The total amount of redundancy payments for 2001 was, approximately, £15,1 m.

At 31.12.01 there were 1771 outstanding applications for compensations, out of which, approximately, 1420 (80%), are expected to be approved, for an amount of about £5,7 m. Although the delay observed in processing the applications was reduced significantly from 11 months to 7-8 months, the operating results are still affected and this results to the late satisfaction of applications of the insured.

It is pointed out that since 1997 a decrease is observed in the number of applications submitted, while there is an increase in the number of applications approved for payment, because of the above diminution in the time of processing, and the increase in the corresponding annual expenditure.

The Director of Social Insurance Services informed me that the delay in the examination of applications cannot be reduced under six months, because many applications for redundancy payments are investigated by the District Social Insurance Offices. He also stated that the period of six months is considered necessary for verifying whether the employer proceeded to the appointment of new personnel in replacement of dismissed personnel, during this period. In such case, the dismissal may not be attributed to redundancy.

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4.32 ΗΙGHER TECHNICAL INSTITUTE Part A 4.32.1 Computer Equipment. It was observed that no Stores Requisition Vouchers (GEN.32A) were issued for the computer equipment allocated to the Institute through the Department of Information Technology Services, during the last years. Therefore, the recording in the inventory registers of the Institute, of above equipment is not possible. Part B 4.32.2 Leave of absence and working hours of the members of academic staff. As I stated in my Report for the previous year, the leave of absence granted to the members of academic staff of the Institute, who are appointed by the Public Service Commission and enjoy the same benefits granted to civil servants, is not in line with their terms of employment, but the Regulations governing leave of absence of Secondary Education teachers are followed. Also they do not follow the Public Service working hours and do not use the electronic system for recording staff attendance. On 6.8.99 the Higher Technical Institute Law of 1999 was approved by the House of Representatives, which provides for the preparation of Regulations for the settlement of the above matters. The Acting Director of the Institute informed me that the draft Regulations are pending before the Administrative Board, and it is expected that they will be considered soon. He also stated that, under the relative decision of the Council of Ministers for upgrading the Institute to a University of Applied Sciences and Arts, the teaching staff will adopt the Regulations governing the operation of the University of Applied Sciences and Arts. 4.33 HIGHER HOTEL INSTITUTE OF CYPRUS Part A 4.33.1 Legal arrangement and Regulations for the operation of the Institute. As I stated in my previous Report, the legal processing of the bill was completed by the Law Office and was submitted to the Director General of the Ministry of Labour and Social Insurance for onward transmission to the Council of Ministers. The Ministry of Labour and Social Insurance informed me that the bill has not been submitted for enactment into Law, in view of the developments regarding the establishment of the University of Applied Sciences and Arts, which will include the Institute. 4.34 PRODUCTIVITY CENTRE Part A 4.34.1 Activity Programmes. During 2001, 79 activity programmes were scheduled to take place for a duration of 4353 hours, out of which 25 (or 20%), for a duration of 855 hours, were cancelled, mainly due to lack of interest by the employees and the enterprises. 4.34.2 Productivity/Studies/Research. The provision included in the Budget for a productivity campaign and for studies and research in specific fields of economy, for ascertaining problems, which affect productivity in primary industrial sectors, was not utilized. For this reason, I requested to be informed how the Centre’s objective is achieved for the sensitiveness of the Public in the emphasis given for the improvement of productivity and for increased interest in the fields of advisory services and research, according to the explanatory note of the Budget.

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4.35 WELFARE SERVICES Part A 4.35.1 Public Assistance. The amounts paid in 2001 for public assistance were £35,6 m. compared to £32 m. for 2000, i.e there was an increase of £3,6 m. or 11,2%. At the end of 2001 the number of persons and their dependents receiving public assistance were 22028, compared to 21346 for 2000. The monthly allowance for basic needs was increased by the Council of Ministers, with retrospective effect from 1.1.2001, from £123 to £150 and from £54 to £75 for each dependent. The allowance payable to a dependent under the age of 14 was reduced to £45. A performance audit was carried out in 1997 for public assistance grants. Most of the problems, deficiencies and weaknesses observed during the performance audit, regarding the matters of keeping sufficient records in the files, the investigation of movable and immovable property of the applicants, the correct and uniform application of legislation and procedures as well as the prevention of overpayments, continue to exist, despite the fact that relevant circulars were sent to District Welfare Officers for compliance. The Director of the Services informed me that the above problems, deficiencies and weaknesses are due to the insufficient staffing of the Social Welfare Services. 4.35.2 Assistance to inhabitants of occupied areas. The public assistance payable to above persons in 2001 amounted to £540.146, compared to £505.187 for 2000, i.e there was an increase of £34.959 or 6,9%. The monthly allowance was increased on 28.2.2001, with retrospective effect from 1.1.2000, from £125 to £130 and for each dependent from £60 to £63. It is noted that, under the Council of Ministers decision, a monthly allowance is paid to all inhabitants of occupied areas, having income from pension or work, equal to 50% of the allowance payable to inhabitants of occupied areas. 4.35.3 Payment of public assistance to aliens. Public assistance is payable to several categories of aliens for long time intervals, resulting to additional charge of Services. Some of such categories are the following: (a) Immigrants seeking political asylum, until the investigation of their application. (b) Stealthy immigrants, until a decision is taken for their deportation or for their status of residence. (c) Aliens who were called as witnesses in court. (d) Political refugees. (e) Aliens waiting for the investigation of a complaint against their employer. I expressed the view that the above categories should be coded, so as their follow up to be more effective and that a uniform policy to be followed by all District Offices. 4.35.4 Development of a new computerized system. As I stated in my previous Reports, the procedures for the development and application of the new computerized system, which will cover all the activities of the Welfare Services, including those of public assistance, community programmes, staff matters etc., commenced on 3.5.95 and the project should have been completed in February, 1996. I stated also, that considerable delays were observed, and the project has not yet been completed.

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As I was informed, the computerized system of public assistance, was put into effect as from February 2001 and the issue of cheques through the system commenced in March 2002. Until today, 75% of the project has been completed. 4.35.5 “Nea Eleousa” Home. It was again observed that many alterations are made in the working schedules of the staff, after their preparation, because of the increased sick leave and leave of absence presented at a later stage or because of the desire of certain officers to work only in the morning or in the afternoon shift. During 2001, a total of 4235 days of leave and sick leave were granted to 92 officers of the Home, which correspond to 46 days for each officer. The Director of the Home informed me that the alterations in the working schedules of the staff and the increased sick leave are matters of great concern for the Home. She stated further that the reasons contributing to this phenomenon is the type of work carried out at the Home, which, by its nature, is tiring and demanding, the stage at which children come of age which makes the care more difficult, the institutionalization of the staff, as well as the exploitation of sick leave by the staff, for personal reasons, presenting, however, medical certificates, which cannot be questioned. 4.35.6 Strovolos Youth Hostel for Girls. As I stated in my previous Reports, under the Council of Ministers decision No. 45.647, dated 26.2.97, approval was given for the establishment and operation of a Girls Hostel at the premises of ex Boarding House of Nicosia, for granting care and protection to seven girls, for a total cost (besides the expenditure for the permanent staff), of £36.653 for 1997. The actual expenditure for 2001 amounted to £18.463, without offering hospitality to any person. The expenditure for the operation of the Hostel for the years 1998-2001, as well as the number of girls accommodated annually, are shown in the following statement: Year Budgeted Actual Salaries and Total No of No of Expenditure Expenditure Overtime Expenditure Girls Girls (without (without allowance of expected accommo- salaries) salaries) permanent to be dated staff accommo- dated £ £ £ £ 1998 42.145 39.749 56.245 95.994 7 1 1999 54.180 37.665 63.087 100.752 7 2 2000 54.560 42.880 47.877 90.257 5 3 2001 61.040 44.446 54.355 98.801 7 4 I stated that the decision of the Council of Ministers was taken on the assumption that seven girls would be accommodated, and I expressed the view that the whole matter should be submitted again to the Council of Ministers, and efforts to be made for finding more economical ways for the settlement of the above problems. Under this procedure it will be easier to use the staff in other institutions of the Services where additional staff is needed. The Director of the Services informed me that the operation of the Youth Hostel for Girls is under serious consideration, both for the relevant expenditure, and for the discontinuation of the Hostel, which is not justified, since it is the only solution for difficult cases of youths suffering from psychological and psychiatric problems.

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4.35.6 Government Grants to voluntary Organizations • Criteria for the provision of grants. In the relevant Vote of the Budget for 2001, there is a provision of £3.500.000, which was granted to voluntary Organizations, in accordance with the existing Scheme for Government Grants. I expressed the view that the existing criteria and the method applied for the calculation of the government grants, are very general and should be revised, so that the grants allowed will be more objective. The Director of the Services informed me that there were reservations for the revision of the Scheme for Government Grants and for this purpose, a relative study was assigned to the Development Bank and the University of New York, which was completed in 1998 and suggestions were submitted for the revision of the procedure and criteria. The Services had some reservations for certain provisions of the study, and proceeded to the preparation and submission of a complete proposal to the Ministry of Labour and Social Insurance on 7.7.2000. The relative draft bill for the revised scheme was submitted on 16.11.2000, to the Ministry of Finance and the Planning Bureau for views. The revised scheme which was subsequently prepared by the Services, in the light of the views submitted by the Ministry of Finance and the Planning Bureau, was considered on 21.11.01, and certain amendments were made. The final text of the revised scheme was submitted to the Ministry of Labour and Social Insurance, on 29.1.2002. The finalization of the Scheme is awaited, as well as the consideration of the matter pertaining to the establishment of the Advisory Committee, for government grants. 4.36 LABOUR INSPECTION DEPARTMENT 4.36.1 Inspection of Plant and Machinery and Estates / Working Spaces. (a) Inspection of plant and machinery, according to the Factories Law. The predetermined inspections of plant and machinery, provided by the above Law (such as of air chambers, cranes, lifting machines, hydraulic elevators, moving lifting machines, electric lifts etc.), are not carried out. The Director is attributing this omission to the short of staff. Specifically, during 2001, 1478 inspections of plant and machinery were carried out, compared to 14021 inspections, which should have been made. (b) Inspection of estates. During the last eight years (1994-2001), significant reduction in the total number of inspections, carried out in the various working spaces, is observed, although there was a substantial increase after 1.1.97, in such spaces, after the enforcement of the Law for the Safety and Health at Work. Reduction in the inspections of estates is also observed in the cases coming under the provisions of Factories Law. The Director informed me that the existence of so many new and complicated provisions in the new Law for Safety and Health and Work, imposes the need for the change of the way and method of inspection, particularly, for spending of more time in each inspection. 4.36.2 Inspection fees. The revenue derived from the inspections carried out in 2001, amounted to £23.604, compared to £26.791 for 2000, i.e. there was a decrease of £3.187 or 12%, which is an indication that all the predetermined inspections by Law, are not carried out.

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The Director stated that this is attributed, mainly, to the understaffing of the Registry of Plant and Machinery, of the Department. The relative debit invoices, for certain inspections, were not submitted to the persons concerned, for the payment of relative fees. 4.36.3 Engagement of Labour Medical Officer and General Practitioners in occupational health matters. As I stated in my previous Reports, although the engagement of these Officers is specified in sections 41 and 42 of the Safety and Health at Work Law No. 89(i) of 1996, yet their appointment has not yet been made, because the Attorney General of the Republic has ruled that these sections of Law should be amended. The Director informed me that the matter is expected to be finally settled, with the enactment of the new bill into Law, for the amendment of sections 41 and 42 of the aforesaid Law, which has been approved by the Council of Ministers and laid before the House of Representatives recently. 4.37 MINISTRY OF INTERIOR Part A 4.37.1 Weaknesses and problems in the planning and execution of projects by District Administrations. In 1998, a Performance Audit was carried out by my Office, in connection with the above subject, during which serious observations arose and suggestions were made for the improvement of the planning of execution of projects. Although the situation has been considerably improved, no measures have been taken for the improvement/solution of the following matters: (a) The annual budget provides for the execution of a great number of minor projects, almost, the Communities. Consequently, there is a waste of significant amounts for the movements of workshop crews of District Administrations and the proper planning, the effective supervision and control of expenditure of so many minor projects is not possible. Moreover, the projects are executed departmentally and therefore they remain incomplete for many years. (b) The District Administrations do not operate their own small and specialised workshops to carry out the normal tests, with the result, delays are observed, during the examination and the execution of projects. 4.37.2 Housing Loans Scheme for young couples in the demilitarized zone. The implementation of the above scheme commenced in 1989 and up to 31.12.01 the amount of £13.575.000 was disposed from the Relief Fund for Displaced and Affected Persons to the Housing Finance Corporation for issuing loans to eligible persons. Up to 31.12.01 loans amounting to £13.144.528 were issued and instalments were collected for a total amount of £3.922.716. 4.37.3 Housing Scheme for the revival of green line areas in Nicosia. The loans and grants issued to eligible persons up to 31.12.01, amounted to £5.466.400 and £4.701.454, respectively, and loan instalments repaid amounted to £2.026.573 4.37.4 Relocation of Alassa village. As a result of the construction of Kourris Dam, Government decided, in 1984, the relocation of Alassa village to a new safe area and the building of 56 new houses, at the total cost of £914.000. At a later stage, the increase in the number of houses to 81 was decided, for a total amount of about £3 m., including infrastructure

81 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 works. Up to the end of 2001, a total amount of £4.702.144 was spent, predominately for the building of houses, 76 of which were completed. The building of the remaining 5 houses and the completion of the infrastructure works are still in progress. 4.37.5 Loans for the re-activation of displaced small businesses. The overdue loan instalments, at 31.12.01 amounted to £428.719. As I stated in my previous Reports, no measures are taken for their collection, as directed by the Ministry of Finance. I was informed that, the Ministry of Interior holds the view that the uncollected amount should be written off, while the Ministry of Finance adopts the view that no action should be taken for the collection of overdue loans. 4.37.6 Service for the restoration of damages from earthquakes. For the restoration of damages to houses and premises from the earthquakes of 1995, 1996 and 1999, the applications submitted were 3500, 10500 and 10000, respectively. Until the end of 1999, the examination of all applications for the earthquakes of 1995 and 1996 was completed. Regarding the August 1999 earthquake, up to date, 9001 applications have been examined. For 103 applications, there are no sufficient records for the identification of the applicant or the building. There is also a small number of churches/monuments, the repair of which will be undertaken by the respective Holy Bishopric and the Department of Antiquities. So far, the works for 6100 cases have been completed, while for the rest, the works are carried out by the owners of the houses. The total expenditure for 2001 was £1.341.000, out of which £1.149.30 relate to Limassol, while the total expenditure for all the above earthquakes amounted to £9.582.643. 4.37.7 Civil Defence Part A 4.37.8 Supply, installation and maintenance of the network of electronic alarm sirens. As I stated in my Report for 2000, the award of tender was made in April 2000, for the amount of 4.649.473 Deutch Marks (about £1.370.000). The relevant agreement was signed in May 2000, with completion period of nine months. The works were completed and their delivery was made in January 2002, with delay of about one year, which is attributed to the substantial variations/additions/deductions, effected during the execution of works, as well as to the investigation carried out, for the correct designing of the network and the effective operation of the system. The delivery was made, on the condition that the great number of omissions/defects which were considered by the respective committee as immaterial, to be rectified/completed within six weeks. Until July 2002, the completion of some of these omissions was pending, as well as the preparation of the final account, including the additions/deductions in the initial amount of the contract and the complete examination/evaluation of the delays. It is also noted that some of the sirens (18 out of 153) were not installed, until July 2002, due to the change in the installation area, which was initially selected. The need arose as a result of the findings of the investigation and the problems encountered at the initial installation areas. 4.37.9 Stores conversion vouchers. The conversion vouchers, provided by the Stores Regulations are not prepared. Specifically, it is stated that during 2001, 2.833,7 metres of winter and summer cloth, was used for the sewing of trousers, uniforms etc. without preparation of the relative conversions vouchers, with the result the number of finished trousers/uniforms and the recipients not to be disclosed.

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4.38 DISTRICT ADMINISTRATIONS Part A 4.38.1 Arrears of revenue. The arrears of revenue of District Administrations, which mainly represent overdue plot hire-purchase instalments, rents from shops in self-housing estates and demolition expenses amounted, at 31.12.01 to £297.029, compared to £215.332 for 2000. For the collection of the above arrears, which include the amount of £133.625 for previous years, no effective measures have been taken. 4.38.2 Petroleum products storage licences. A performance audit carried out at the District Administrations revealed that there are difficulties in locating all petroleum products storage places, resulting to the non issue of licences in all cases and to loss of revenue, as well as the risk from the uncontrollable storage, due to serious weaknesses presented in the legislation. The Ministry of Interior recalled an expert, for the revision of relevant legislation, who has already submitted his reports and a Technical Committee was appointed, consisting of the District Officer Nicosia and Officers from the Ministry Labour and Social Insurance and the Department of Electrical and Mechanical Services, for the consideration of the report. 4.38.3 Deposit Accounts. A number of deposit accounts kept by District Administrations show debit balances, contrary to the Regulations. This is mainly due to charges made by the Department of Water Development for the execution of community projects, before the necessary funds are deposited. 4.39 DISTRICT ADMINISTRATION NICOSIA Part A 4.39.1 During a surprise survey carried out by my Office, it was observed that the collections of the District Fund for the Administration of T/C Properties in Nicosia, were not promptly and frequently lodged, and not always recorded in the Fund Book, contrary to the relative Financial and Accounting Instructions. Due to the seriousness of the case and the possibility of commitment of criminal offences, this specific matter was referred to the Attorney General and is being investigated by the Police. 4.40 DISTRICT ADMINISTRATION LIMASSOL Part A 4.40.1 Maintenance of rural/vineyards roads and cleaning of roads, through tenders. The average price per current metre of tenders assigned for the year 2001 was lower by 51,3% from that of 2000. It is evident that the prices of 2000 were abnormal, without excluding the possibility for collusion, having in mind that in all cases there were only two tenderers. I expressed the view that in such cases, it is preferable, to cancel the tenders and to invite new ones. Part B 4.40.2 Licences for piers, quays and breakwaters. At the coastline there are about 80 constructions in the sea, for which the annual licence fee of £50, provided by section 8 of the Law, cannot be collected, because the relevant permit for their construction has not been secured. In most cases court orders for their demolition were issued, several years ago, without being implemented.

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The District Officer Limassol informed me that court orders were not executed until today, because the relevant studies were not completed and Government has not concluded (which are pending for several years) to a definite policy regarding such projects, which aimed, inter alia, at the protection of the coastline from sea-surges and corrosion. 4.41 DISTRICT ADMINISTRATION LARNAKA Part A 4.41.1 Game and amusement machines. In the city and Larnaka District, various amusement centers are operating, which are not registered by their owners and for which no licence has been secured for the use of game and amusement machines. I recommended the coordination of efforts between the District Administration and the Divisional Police Larnaka, for the location and report of all the owners of game and amusement machines, for which there is no registration certificate, as well as the owners of estates, used for the operation of game or amusement machines without licence. 4.42 DISTRICT ADMINISTRATION PAFOS Part A 4.42.1 Game and amusement machines. Only 53 licences were issued for the operation of game machines, while no licence was issued for amusement machines. I recommended the coordination of efforts between the District Administration and the Divisional Police Pafos, so that the provision of the relevant Law, governing the issue of game and amusement operation licences to be observed and trespassers to be reported. Part B 4.42.2 Expenditure for Lifeguard units. Various Municipalities, ex Improvement Boards and Village Authorities failed to pay to the District Administration Pafos their contribution for their lifeguard units, operating in their region. The total of arrears of contributions at 31.12.01 amounted to £8.437 (£12.615 for 2000). I understand that pressure is exercised towards the Municipalities, to pay their contributions promptly. 4.43 DEPARTMENT OF LANDS AND SURVEYS Part A 4.43.1 Arrears of revenue. At 31.12.01, the arrears of revenue amounted to £929.244, compared to £1.020.515 for 2000. An amount of £591.975 is due by various persons for the purchase of government land at , under a Council of Ministers decision. With regard to the revenue arrears due by the various persons to the Government, for the sale of land at Ayia Napa, the Director of the Department informed me that his Department prepared and submitted a relative report to the competent Ministerial Committee, in which he suggested the following: (a) In cases where no amount was paid, the decision of the Council of Ministers to be revoked and legal measures to be taken against the responsible persons, for raising the interventions. (b) In the cases where some instalments were paid, a final notice to be given, for the full repayment of the amounts due, (60 days) and if the interested persons fail to comply, the instalments paid by them to be refunded. The handling of these cases to be the same with that of other cases above, i.e. legal measures to be taken.

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On 23.7.2002, the Ministerial Committee considered the report and will submit suggestions to the Council of Ministers, for taking a final decision. 4.43.2 Delay in the collection of rents for the lease of government land. In several cases, considerable delays are observed in the collection of annual rents, without taking any legal measures or the annulment of the lease agreements. At 31.12.01, the arrears amounted to £278.394, for a period up to 10 years. Some indicative examples are stated below. (a) For a certain individual in Nicosia, whose lease agreement expired in 1993, and owes the balance of £5.485, of the lump sum imposed for the period prior to the lease, when he used the land illegally, no measures have been taken against him, although he continues to use the land. It is noted that he submitted an application for a new licence for the use of sections of Pedieos river, of an area of 43 hectares and 580 sq. meters. The Director informed me that the new application is under consideration and the matter will be submitted to the Council of Ministers for taking a decision. (b) To a certain individual in Nicosia, who owes rents for the lease of government land, amounting to £6.732 for the period 1991-2001, additional government land was allocated to him in 1992, without signing the lease agreement, for the respective land and the payment of relative rents. The Director stated that the case for the rents due will be submitted to the Attorney General. With regard to the Council of Ministers decision for the lease of additional land, his Department will proceed with the signing of the lease agreement. 4.43.3 Revision of fees and charges. It was observed that the fees and charges collected by the Department, under Law (Cap. 219 and Laws 1965-1999) do not respond to the actual cost, for the provision of services, taking into account the salaries, allowances and other relative expenses. The last revision of fees and charges was made under Law 66/79. The Department submitted to the Director General of the Ministry of Interior, under letters dated 23.11.98 and 10.5.2001, a draft bill for the revision of the fees and charges, without any development to be effected so far. The Director informed me that his Department, with regard to the amendment of Land and Surveys Law (Fees and Cahrges), Cap. 219, will proceed with the preparation and the submission of the new amended draft Bill, to the Director General of the Ministry. 4.43.4 Delays in the execution of writs for the sale of immovable property. A great delay is observed in the execution of writs for the sale of immovable property for the collection of taxes in arrear. The Director informed me that instructions have been issued, for priority to be given to all applications, submitted by the Director of the Department of Inland Revenue, relating to the execution of writs for the sale of immovable property, for purpose of the collection of arrears of taxes. 4.43.5 Allocation of work after office hours. The execution of work by employees of the Department outside normal office hours, at a piece-meal work compensation basis, continued during 2001, while a volume of accumulated work still continues to exist in the Department. Specifically, on 31.12.01, 13678 cases were pending in the Sections of Local Research, Survey, Cartography and of Examiners of the Department, compared to 13576 for 2000 and 14284 for 1999. The total overtime allowance for service outside normal office hours paid to employees of the Department, amounted to £1.405.622 in 2001, compared to £758.761 for 2000 and

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£763.313 for 1999. The substantial increase is mainly due to the overtime work, in 2001, in the Computer Section. 4.43.6 Scheme for the re-survey of the free areas of Cyprus. The Council of Ministers, under decision dated 13.10.99, approved the implementation of the scheme for the re-survey of the free areas of Cyprus and the replacement of all the existing graphic real estate designs with new digital ones, of high accuracy and fidelity. The completion of re-survey was expected to be completed in a period of seven years (2000-2006), at a total cost of approximately £27.500.000. In the Budget of 2001, a total provision of £2.674.445 was included, while the actual expenditure amounted to £201.553. I asked to be informed of the reasons for the non- realization of the respective provisions of funds and whether the re-survey is expected to be completed within the time schedule approved by the Council of Ministers. 4.43.7 Lease of government land. In several cases problems are encountered in the leases of government land, such as delay in the payment of rents, non compliance of the tenants with the relative terms of the lease agreements etc. I asked for a closer follow up of the leases and the taking of necessary measures for the better management of government land. The Director informed me, that letters were sent to the tenants owing arrears of rents, inviting them to pay these immediately, otherwise their cases will be submitted to the Attorney General, without any delay. 4.43.8 Illegal intervention on government coastal land at Larnaka, by an individual. A certain individual in Larnaka, whose lease agreement expired in 1987, and since then was not renewed, continues to use/intervene on the government land and he has recently made some other illegal interventions, without securing the relative licences. The Council of Ministers, under the respective decisions, dated 18.2.1993 and 24.1.1999, rejected his application for the renewal of the lease. Additionally, the Council of Ministers decided for the payment by this individual of charges for the use of the camping area (illegal possession and use of coastal land) since 1986, until the raising of intervention and the taking of legal measures against him, both by the Department of Lands and Surveys for the illegal intervention on government land and the District Officer Larnaka for the erection of a building without licence from the appropriate Authority. I observed that the Department has not yet made the necessary arrangement for the implementation of the Council of Ministers decisions. The Director informed me that the case was submitted to the Attorney General of the Republic for filing a lawsuit, for the collection of the amounts due and the raising of intervention. 4.43.9 Lease of government land in Limassol. An agreement was signed with a certain company for the lease of government land in Limassol (Tsiflikoudia area), for the period 9.12.72-8.12.94, for an annual rent of £150. The tenant owes rents for the years 1986-1994. I observed that there are no developments in the taking of measures for the termination of the agreement and the collection of amounts due, while there is no indication as to whether the said company continues the use/possession of the specific piece of government land. As I was informed, the Director of the Department asked, in May 1989, for the termination of the agreement by the Attorney General. The matter is still pending. 4.43.10 Valuation of leases for government land. In view of the fact that the Director of the Department of Inland Revenue should take into consideration the valuation of leases of government land (industrial zones, leases of land for the erection of hotels ect), I requested the Director of the Department of Lands and Surveys, to proceed with the above valuations for all the District Administrations, with the exception of Limassol, where the valuation was carried out

86 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 some years ago. The annual revenue from immovable property tax amounts to £40.000 – £50.000. The Director of the Department informed me that despite the great volume of work, priority will be given to the valuations of industrial areas and hotels. 4.43.11 Government farms at Pafos. In Pafos District there are government farms in five areas, the management of which was initially assigned to the Ministry of Agriculture, Natural Resources and Environment and as from 1993, pursuant to Article 18 (1) of Real Estate (Possession, Registration, and Evaluation) Law, their management was assigned to the Minister of Interior through the Department of Lands and Surveys. My Office observed the following: (a) The agreements for the lease of government farms in Pafos which were signed in 1980, include the term that, the rents will be subject to revision every eight years, i.e. in 1988 and 1996. Up to this day, no revision of the rents was made, and no measures, whatsoever, have been taken against those violating substantial terms of the agreements, resulting to the loss of revenue, amounting to, approximately, £200.000 per annum. According to the Attorney General’s ruling, as the lease agreements specifically provide for the revision of rents every eight years, at specific dates, i.e. 1988,1996 and 2004, and as the Republic has not exercised this right in 1988 and 1996, the next time that the right of revision can be exercised is in 2004. (b) In 81 cases, no lease agreements have been signed, whereas in other 38 cases, the signing of agreements, as specified in the Council of Ministers decision dated 24.1.02 is still pending. The Department receives rents from the entitled persons. (c) In 4 cases the lease agreements between the Republic of Cyprus and Cooperative Societies, were cancelled by 31.12.97, without new agreements to be signed, up today, between the Department and the entitled farmers, who had agreements with the related Cooperative Societies (Subleases). It is pointed out that rents in arrear, of a total amount of £7.300, were due by the Cooperative Societies. (d) In some cases, where possessors of lots have died, the lots came to the possession of their heirs, without investigating whether the terms of the related agreements are fulfilled. The Director of the Department informed me that, because of the complexity involved in all the problems mentioned above, the legal advice of the Attorney General of the Republic was sought, on 25.6.2001. 4.43.12 Compensations for land expropriations for purpose of development projects in Pafos District. Because of the execution of various development projects, such as the construction and extension of Pafos airport and the new Limassol-Pafos highway, 62 farm lots were affected, and as a result some lessees/owners of lots have taken legal action against the Republic of Cyprus, claiming for significant compensations. In 7 cases of lawsuits, there was a compromise decision, by Pafos District Court, and the related compensations amounting to £241.270 were paid, which exceed by £98.000 the relative valuations of the Department, while the revenue collected by Government for the lease agreements, for the period 1980-1997, was £8.656. It is pointed out, that before the Pafos District Court, other 18 lawsuits are pending against the Republic of Cyprus, filed by affected possessors of lots. As I was informed, other development projects are also expected to be constructed, which will affect significant areas of farms, and consequently, the Government will be called to pay the relevant compensations. I suggested that coordination and cooperation

87 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 should exist between the Government Departments involved, and all the necessary measures should be taken for better management of government land. The Director of the Department informed me that the appropriate instructions were given for exercising every possible effort for the better management of government land, and the absolute cooperation and coordination with the other Government Departments. 4.43.13 Torn books and registers/microfilming of registers. Some important books and registers of the Department, which were torn, in such extent, running the risk of losing important information, have been photographed with a digital photo camera, while the micro filming of the rest is still pending, and the risk for losing important information, still exists. I observed that the registers which were already photographed do not bear any indication/declaration that they are true copies of the original registers, while these are used for the recording in them of all the relevant documents and transfers of immovable property. The Director informed me that instructions were given for the insertion in all the photocopies of the torn registers the relative indication/declaration that these are true copies of the original registers. 4.43.14 Departmental Storehouse. Since 14.2.00. when the storekeeper of the Department of Government Purchasing and Supply was removed from the Storehouse, several and serious problems were encountered in the smooth operation of the Storehouse, the management of which has been undertaken by an unspecialized labourer, in contravention of relative Regulations. The Director of the Department informed me that the multiple problems encountered in the Storehouse will be solved with the transfer of a storekeeper from the Department of Government Purchasing and Supply. 4.43.15 Investigations for possible irregularities in the issue of payment orders, in cases of land acquisitions of immovables. After a report was submitted to the Director of the Department, against an Officer employed in the Land Acquisitions Section of District Lands Office Nicosia, a preliminary investigation was carried out by the Department, from which falsifications of relative documents and possible financial irregularities were observed, in the first instance. The Director of the Department continued the investigation of the matter in cooperation with the Police and overpayments amounting to £429.801 were observed. During the investigation of the case by my Office, omissions or/and weaknesses in the internal control procedures were revealed and I suggested that a thorough study of the internal control systems of the Department to be carried out by the Accountant General of the Republic. The relative report was submitted to the Minister of Finance (Chairman of the Board of Internal Control) and the Minister of Interior on 12.7.02., for further action. With regard to the irregularities observed, the aforesaid officer was prosecuted and the case is pending before the Court. Part B 4.43.16 Lease of government coastal land at Neo Chorio, Pafos. An agreement was signed with an individual for the lease of 670sq. m. of coastal land for the period of 15.3.78 – 14.3.2011, for £22,50 per annum. The leased land would be used, according to the agreement, as a tourist beach, and as a pass through to the sea, for the service of customers of tourist quarters, which would have been constructed in a neighbouring piece of land, owned by the tenant. In my letter to the Director of the Department, I stated the following:

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(a) The provision of the agreement, for the construction of tourist quarters was not implemented. (b) The rent was not revised on 15.3.88, as required by the agreement, and after that, every five years, and, furthermore, no payment of rent was ever made. In view of the above, and as the basic obligation of the tenant, according to the terms of the agreement, was the construction of tourist quarters within 5 years, which was not fulfilled, I pointed out to the Director of the Department that the terms of the agreement should be implemented, which provide for the immediate recovery of the land and parallel termination of the agreement. As I was informed, the tenants secured the right of possession of the above government land, the annulment of which requires the issue of a court order. The Department in consultation with the Attorney General is taking the necessary action for the recovery of the government land. 4.43.17 Interventions on government land at the housing area of Agia Napa. Site inspections of the Department in 1989, in Agia Napa, revealed 92 cases of interventions of individuals on government land. The Council of Ministers, directed that, in most cases, the land be sold or leased, to those who had settled their obligations, while for the remaining cases the necessary action should be taken for the termination of the intervention. The total collectible amount from the sale or lease, according to the Council of Ministers decision, was £1.081.500, which, with the approval of the Minister of Interior in February 1997, should be collected in 4 equal annual interest free instalments. At 31.12.01 the total amount due amounted to £591.975, plus 9% interest. I requested the Director of the Department to take measures for the implementation of the Council of Ministers decision, and for the collection of the amounts due. As I was informed, the Department prepared a proposal for submission to the Council of Ministers, under which a suggestion is made for the transfer of the land to the individuals who have already settled their relative obligations and the rest cases, for which no payment was made, to be cancelled. Also, in cases where a delay is observed, in the payment of instalments, legal measures to be taken against those who do not pay the amounts due, within the new period which will be specified. The Director of the Department informed me that he prepared a relative proposal, which was discussed by the Ministerial Committee on 23.7.2002, and is expected that this will be approved by the Council of Ministers. 4.43.18 Re-evaluation of immovable property. In my previous Reports I stated that the re- evaluation of immovable property under the Government controlled area commenced in 1982 and was completed in 1992. Since then no firm procedure was adopted for re-evaluation of immovables in cases of new buildings, additions, changes in town planning zones etc. In my letter to the Director of the Department I stated that, as a result of this omission Government and Local Authorities are losing a significant amount of revenue, as the market value of 1.1.80, which was taken as the basis for the evaluation, for the determination of the immovable property tax, the Municipal and improvement rates and the sewerage fees, remains the same. The Director of the Department informed me that despite the few measures taken, the problem will be definitely resolved with the computerization and the introduction of new evaluation system. 4.43.19 Rural Archbishopric estates and government aid to rural clergy. The bill regulating the above issue, which was laid before the House of Representatives on 15.6.73, has

89 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 not yet been approved. The Government expenditure for the salaries of the rural clergy in 2001 amounted to £2.055.696, whereas the revenue from the lease of ecclesiastical land amounted to £17.411. The arrears of revenue for the lease of ecclesiastical land amounted to £3.925, at 31.12.01. 4.44 DEPARTMENT OF TOWN PLANNING AND HOUSING Part A 4.44.1 Development Budget. The Development Budget includes an amount of £17.665.700, which, mainly, concerns Town Planning Development Schemes. Out of this amount only £9.584.668 or 54% was spent. It is noted that in the Budget for the year 2001, an amount of £4.500.000 relates to the Scheme for Revitalization of the Old Town of Nicosia, the execution of which depends on Nicosia Municipality. During 2001, only the amount of £842.463 was expended for this scheme, representing 18,7% of the budgeted amount. 4.44.2 Deposits Accounts – Deposits of Municipalities and Community Boards for town planning projects. It was observed that by the end of 2001, there were debit balances, in some accounts, amounting to £1.923.622, some of which are pending for a long time. It was asked, that the necessary arrangements should be made, so that the amounts due to be deposited to the Department. 4.44.3 Construction of bicycle lane at Avenue in Aglantzia (A’ Phase, from Limassol Avenue to Academy Avenue). The expenditure for the A’ Phase of the project was estimated by the Designers of Aglantzia Municipality at £300.000. After the award of tenders, it was ascertained that the expenditure will amount approximately to £600.000. Consequently, the Aglantzia Municipality requested the approval of the Minister of Interior for receiving a supplementary loan for £300.000, to be used for the financing of the project, having in mind that the said project, as a town planning project, is executed with a Government Contribution (4/5) and (1/5) by Anglantzia Municipality. I asked to be informed of the reasons for the increase in expenditure and the arrangements made by the Department for this matter. 4.44.4 Formation of coastal pedestrian road at Oroklini. From a site inspection, it was observed that, during the execution of the project, alterations were made in the designs, for the approval of which the appropriate procedure was not followed (Departmental Committee for Variations and Claims and Central Committee for Variations and Claims). As a result of these alterations, substantial delay, in the progress of works was observed, about 6 months, which was not evaluated by the Coordinator of the project, for taking measures, so as the project to be completed promptly. Similar observations, for the non compliance with the provisions of the Tenders Legislation, as well as, for the insufficient management of contracts, were repeatedly raised by my Office. The Director of the Department informed me that the removal of sections of the project was decided, at the meeting held under the Chairmanship of District Officer, and the decision was communicated to the Ministry of Interior. It was considered that the variation was within the jurisdiction of the Departmental Committee for Variations and Claims and for this reason this was not submitted to the Central Committee for Variations and Claims 4.44.5 Creation of parking place at Lefkara. From a spot inspection, it was observed that there was a substantial delay in the completion of the project, about 7-8 months. While the private Designers, informed the Department, in writing, that they approved an extension of time for 5 months, the necessary arrangements were not made by the Department, for the evaluation and approval of the delays, according to the approved procedures.

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The Director of the Department informed me that the Department is awaiting the final report of the Designer, and after carrying its own evaluation, it will submit it to the Central Committee for Variations and Claims, for approval. 4.44.6 Government Housing Estate of Tsiakilero. ● Phases E & Z – Complex S3. From a spot inspection, it was observed, that after the award of tender by the Main Tender Board and oral agreement, between the Department and the contractor, it was decided that the new completion date will be 8.5.01 instead of 8.11.1, specified in the contract. This arrangement of the Department, is contrary to the terms of the tender, which provided that the period of the contract would be 18 months and was given without the approval of the Central Committee for Variations and Claims. According to the new time schedule of 12 months a substantial delay was observed in the completion of the project, of about 5 ½ months. The Director of the Department informed me that, after the signing of the agreement, consultations were made between the Department and the contractor, for the completion of the project in 12 months, so as the rehousing of the displaced persons to be made the soonest possible. The variation was made after the signing of the agreement and was initialled by the contractor. During the execution of the project it appeared that the contractor could not complete the project within the reduced period of 12 months and it was considered that the variation in the period of completion of the project was not indicated. 4.44.7 Installation of private sewers and other related works at the self-housing estates at Levadhia Larnaka – Final Account. From the test examination of the above Final Account, it was revealed that a greater quantity of outlet drop pieces in 500-1000 m.m. inspection chambers was estimated, as compared with the actual quantity placed by the contractor. I asked for the remeasurement of the quantity and the correction of the bill of quantities of the Final Account. The Director of the Department submitted to my Office, a copy of the Final Account, in which the necessary corrections were made, arising from the remeasurement of the quantities. 4.48.8 Contract for the General Maintenance of Government Housing Estates in Larnaka – Famagusta Districts – Final Account. From a test examination of the above Final Account, it was observed that the final quantity of works included in the Final Account, amounting to £17.667,70, was much more than the quantity provided in the contract (£2.865). Basically, this increase was due to the cleaning works of houses, in the Housing Estates, which were not provided in the contract. The examination of the bills of works, revealed that no proper planning was made for the execution of works, resulting to the substantial increase of working hours and of the hours of plant and machinery, which were used. The Director of the Department informed me that, at the preparation stage of the tender documents for the agreements of General Maintenance, the works to be performed were not known. He also stated that the new contracts will include also the quantities for cleaning of houses and their yards. Part B 4.44.9 Loans received by Local Authorities for the execution of town planning projects. (a) In many cases overdue interest is paid for loans received by Local Authorities, for the execution of projects, for the repayment of which a contribution is made by Government. This is mainly, attributed to the lack of prompt coordination, with Local Authorities regarding the repayment of loans.

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(b) The relative agreements for above loans are about 90, and for purposes of their effective follow up, I suggested the computerization of the system the soonest possible, in view of the liberization of interests and the contracting of loans in Euro currency. Also, I suggested that instructions should be given to the Local Authorities for notifying promptly, the Department, of the loans received, and for the inclusion in loan agreements of the term that the Local Authorities are responsible for the payment of overdue interests, which may be attributed to their own responsibility. 4.44.10 Special Conservation Fund. In my previous Reports I stated that, contrary to the provisions of section 23 of Law 68(1)/92, the above Fund has not been established, the purpose of which is the subsidization of maintenance expenditure for preservable buildings. Up to now, the relevant expenditures are covered from a Vote of the Development Budget and, for the years 1992–2000, the amount of £3.905.218 was spent for subsidizing maintenance expenditure and interest. I understand that, all the necessary actions have been made so that the Fund will operate under the provisions of the Law, when it will be amended, on the basis of the Bill, which was prepared by the Department, and is pending before the House of Parliament. 4.44.11 Abandonment of housing units in housing estates. In some government housing estates there are still houses, which, according to a Department search, have either been abandoned by the residents, without returning them to the Department or stay there periodically, non-eligible persons. The Director of the Department informed me that his Department has prepared a list of all the empty housing units, and after examining each case, is taking the appropriate measures, for the recovery of the units, where it is justified. 4.44.12 Assignment of the study and supervision of town planning projects to private consultants. In my Report for 2000, it was stated that in December 1995, I pointed out the need for specifying the procedure regarding the coordination and administration of the execution of projects, assigned to private consultants. As a result of this omission, there is no uniformity in the existing procedures and serious loopholes in the safety controls are observed, during the execution of the projects. I suggested that the Department should prepare a manual, on the basis of the related model manual of the Department of Public Works, which, inter alia, provides for the use of specified contracts for assigning service to private consultants and for the follow up and examination of the studies, carried out by private consultants, by official committees. The Director of the Department submitted to my Office, in April 2002, the relative manual, prepared by his Department, on the basis of the manual of the Department of Public Works, outlining the procedure, regarding the coordination and management of the study and the execution of projects, assigned to private designers. 4.45 PRESS AND INFORMATION OFFICE Part A 4.45.1 Production of cinema films. Due to existing difficulties, relating to omissions and ambiguities in the production agreements, or the non compliance of producers with the terms of relative agreement (such as presentation of agreements signed with the rest of producers, submission of the agreement for the exploitation of the film), several payments are pending, for a number of films produced, of small and long length. In view of the above, I suggested that for the financing of the production of new cinema films, new completed agreements should be made, containing full and clear terms and specifying the procedures, governing the examination, certification of compliance with terms and the computation of the amount of finance.

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4.45.2 Overtime. In my Reports for the years 1997-2001, I stated that to a number of employees of the Office, a great number of time off hours are due, about 2680 hours, against overtime. The efforts which were made towards the Ministry of Finance, for securing additional funds, for the purpose of settlement of the free time due, were not successful. As a result, the free time due, at 31.12.01, to the employees of the Office, was 7572 hours. Having in mind that the schemes of service of the post of Photographer, and that of Assistant Photographer A’, provide that “The nature of the duties of the post, requires for the employment outside the normal working hours, and that the total working hours will not exceed the approved number of working hours per week”. I suggested that, for purposes of reducing overtime, the possibility should be explored for the apportionment of the working hours, outside normal time schedule, where this is possible. Part B 4.45.3 The Cinematograph films Law of 1935 In my previous Reports I stated that the above Law should be amended and modernized, in order to be in line with the present state of affairs, with regard to the collectible fees and its operation in general, due to the large imports of films and video tapes, and that, in spite of the considerable period of time since then, the amendment of the Law was not made possible. Finally, on 29.5.2000 the “Classification of Cinematograph Films Law of 2000” and the “Cinematograph Films (Classification) Regulations of 2000” were laid before the House of Representatives, where they are still pending. 4.46 SERVICE FOR THE ADMINISTRATION OF TURKISH CYPRIOT (T/C) PROPERTIES Part A 4.46.1 General. According to the provisions of the Turkish Cypriot Properties (Administration and Other Matters) Law 139/91, section 11, the special fund under the name “Turkish Cypriot Properties Fund” was established. According to the Law, the Fund is under the administration of the Guardian, who is the Minister of Interior, and is also responsible for the accounting administration of the Fund. 4.46.2 Accounts of the T/C Properties Fund. The accounts of the Fund for the year 2001 were submitted to my Office for audit in July 2002 whereas, according to the provisions of the Turkish Cypriot Properties Law, these should have been ready for audit by the end of March 2002. 4.46.3 Operating results. The receipts of the Fund for 2001, including the subsidy from the Relief Fund for Displaced and Affected Persons, amounted to £4.247.049 and the expenditure to £3.697.709. The accumulated reserve of the Fund at 31.12.01 was £1.233.261. 4.46.4 Arrears of revenue. According to a statement prepared by the Service, the arrears of revenue at 31.12.01 amounted to £1.248.455, compared to £1.003.211 for 2000. In addition

93 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 there were arrears for the T/C boreholes of -Akaki, amounting to £32.158. It was observed that the direction given for taking legal action in all cases of rents due for more than three months, is not applied in time, due to the volume of work, as explained. Also, it appears that some owners of the shops when they are pressed to pay the arrears are signing agreements for the gradual payment of the amounts due, which they never enforce, resulting to the perpetuation of the problem. It is expected that, with the computerization of the system, which is still pending, the situation will be improved. 4.46.5 Cash in hand. At 31.12.01. the cash in hand, amounting to £1.879.403, was deposed at the Treasury, in a non-interest bearing account. As I have stated in my previous Reports, these amounts should be transferred promptly to the interest bearing account, which is kept for this purpose at the Central Bank. 4.46.6 Exploitation of T/C properties, without the approval of the Guardian. During audit, it was observed that there are many cases for the use and exploitation of T/C properties, without the approval/agreement of the Guardian, such as: (a) Lease agreement and licence for the use of T/C immovable property by a non- displaced company. A non-displaced company, is possessing for many years an area of 638 acres, at Mari Village, which is a T/C property, consisting of storage spaces and/or quarries, without this case being shown in the relative registers of T/C properties. This land was used before the enforcement of Law 139/31, without payment of rent to the Service for the Administration of T/C Properties, and without this company to be entitled to use T/C property, as it is not a displaced. On the instructions of the Guardian it was decided for a relative lease agreement to be prepared, for a period of three years, which may be renewed, from year to year. The market rent was fixed for £53.811, per annum. According to the legal advice of the Attorney General, the existing legislation should have been amended before the signing of the relative lease agreement and for this purpose a draft bill has been prepared, which has not yet been submitted to the Council of Ministers. This matter is pending for a long time, resulting to the loss of substantial revenue for the Fund. (b) Evcaf land plots at Byron Avenue in Nicosia, opposite the building of Greek Embassy, which is T/C property, and as from 1.7.91 is coming under the administration of the Guardian, according to the provisions of Law 139/91. The use and exploitation of this property is made by a non-displayed company, without the existence of a relative approval/agreement and the payment of any amount to the Fund, although this company is receiving a lot of revenue from the exploitation of the property. As there is the possibility for the existence of similar other cases, I suggested that a comparison should be made, between the registers of rents from T/C properties with the statements of ownership of T/C properties, for locating and recording in a separate register all the pieces for which there is no lease agreement and for ascertaining whether the exploitation of such property is made in accordance with the Law and Regulations. 4.46.7 Uniform policy for the imposition of rents. In cases, where alterations or additions are made to the shop, by the tenant, for which the licences of CTO or the Municipality are required, an evaluation is made of the market rent and a new agreement is signed. It was observed that in such cases, the tenants do not pay the revised rents, on the grounds that there is no uniformity in the determination of rents of similar enterprises in the same area. It is also noted that the aforesaid tenants, do not respond to their contractual obligations and the relative court decisions, while they are not deprived from the income, derived from the use of T/C properties.

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4.46.8 Lease of T/C conservative building as gallery. T/C conservative building was hired to an entitled person, to be used as gallery, at the monthly rent of £25 only. Moreover, the Service paid the amount of £50.000, to the tenant, for repairs, in contravention of the term (4)(h) of the agreement and of the existing practice regarding the hiring of T/C estate, to be used as a professional lodging, under which the tenant is undertaking all the repairing expenses. Furthermore, it was observed that the relative rent was not revised after the repairs, so as to be in line with the 80% of the market rent. Part B 4.46.9 Computerization of accounts and registers. My Office suggested the computerization of the Fund since 1991. The application started in 1998, but only a small part of the whole process has been completed until today. Due to the delay additional expenditure incurred for the replacement of the equipment which has not been used, and the Service is deprived from information for more effective administration of T/C properties and revenue. I understand that the matter is being considered by a Special Committee, for the completion of the project in Nicosia and Larnaka. 4.46.10 Compensations and advocates fees-Write off of amounts due. In several cases for which lawsuits were filed, because the tenant of T/C property failed to pay the rent, provided by the relative agreement, these were finally withdrawn from the court, due to the defendant’s death, resulting to the write off of the amounts due and the payment of legal expenses. Other amounts due, may have the same outcome, because in many lease agreements, the obligation for the payment of the rent due rests with the very old-age tenant of T/C property, whereas the management/exploitation of the property is carried out by the children or other persons. 4.46.11 Illegal extensions/alterations to existing premises. Several tenants of T/C premises proceed to illegal additions/alterations to existing premises, without any measures taken for the settlement of the problem, despite the fact that the erection or alteration of any building institutes a serious offence. 4.46.12 Illegal acquisition and custody of T/C properties. Cases were observed where the legal tenants of T/C properties, for various reasons, leave the premises, and others, displaced or not, illegally and without the approval of the Guardian, take custody, paying sometimes, goodwill to the leaving tenant, contrary to section 2(3) and (4) of Law 7(1)/96. Additionally, there are persons who occupy more than one shop/house. 4.46.13 Custody of T/C properties by non-displaced. This matter has been repeatedly raised and the Service has given the reply that, with regard to the cases of illegal custody, every possible effort is made for the recovery of properties and that the District Officers will be requested to submit a list of non-displaced persons who are possessing, either legally or illegally T/C properties. I understand that these lists have not yet been submitted. I expressed the view that priority should be given to the matter, regarding the illegal custody of T/C properties, both by the District Administrations and Legal Advisors. 4.46.14 Infertile – Unclaimed land. In Pafos District there are areas around 117.600 acres of infertile and unclaimed land. I expressed the view that this land is quite significant and that studies should be carried out for development purposes. I was informed that the matter is now under consideration.

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4.46.15 Revision of rents. Although the T/C Properties Regulations of 1992 provide that non- displaced tenants should pay market rent and displaced tenants approximate market rents, yet the rents payable continue to remain at the same level for a long period of time, and far below market rents. Only in cases where there is a change in possession or recovery of T/C property, a revision of the rent is made. 4.46.16 Arrears of rents for restaurants at “Makenzy” area, erected on T/C land. The tenants of the above restaurants continue to delay payments of rents amounting to £22.037. For these amounts court decisions were issued, which, however, were not executed. I requested the taking of effective measures for the settlement of the amounts due. 4.46.17 Apartments Block at Yilmazoglou street in Larnaka. Since the date this apartment block was leased (1.10.94), the tenant paid only the first month’s rent and £1.000 as part of the second month’s rent and since then he has paid nothing, resulting to the accumulation of rents in arrear amounting to £81.000. I expressed the view that measures should have been taken for his immediate eviction and collection of the rents in arrear. In 1999, the Minister of Interior, as Guardian, decided the write off of this amount, and a new agreement was signed with a lower rent. 4.47 SERVICE FOR THE CARE AND REHABILITATION OF DISPLACED PERSONS Part A 4.47.1 Revision of criteria and procedures. Often, the approvals for self-housing do not agree with the decisions of the Council of Ministers, resulting to the provision of assistance to not entitled persons or higher from that provided under the existing criteria. As I was informed, the Bill which has been prepared for the settlement of above matters, had been reconsidered during 2002, and was resubmitted to the Law Office for legal processing. 4.47.2 Parcellation of building plots for the housing needs of displaced persons. The C.C.S.C. proceeded with the approval of applicants for the provision of specific building plots, before a decision is taken by the Council of Ministers for the parcellation of new building plots for self-housing in government plots, and before the publication in local press. I observed that this procedure is not correct, as it does not provide an equal treatment to all interested displaced persons, to be informed about the possible parcellation of building plots, and consequently, some of them do not submit an application promptly (the parcellation however, may not finally be made in the specific area). I also pointed out that generally the whole procedure results to monetary and social cost in view of the fact that usually, there is a delay in the parcellation of building plots and in the meantime the criteria for the financial assistance are revised and new Council of Ministers decisions are required to be taken. Part B 4.47.3 Reduction of financial assistance for self–housing in owned plots of land. In the cases where a displaced person applied for assistance for self–housing in an owned plot of land and commenced construction works before his application was approved by the C.C.S.C., a proportion is deducted from the financial assistance, according to the progress of works. It appears, however, that there is no such provision in any of the Council of Minister's decisions or of the C.C.S.C. This measure seems to create a feeling of unequal treatment between displaced persons, because, in the cases where they purchase a flat, they receive the whole amount of the financial assistance, without reductions.

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4.48 CIVIL REGISTRY, ALIENS AND ELECTORAL DEPARTMENT Part A 4.48.1 Short term performances by foreign artists. A great number of foreign artists including Greeks, who are coming to Cyprus for short term performances (at musical halls, hotels, concerts or other events) do not submit the required application by the internal Regulations and Instructions for the issue of a temporary visit licence and work permit and for the relative tax certificate, issued by the Director of Inland Revenue Department, that they have settled their tax. There is the possibility that most of them to come to Cyprus as visitors and therefore, the issue of a visit licence is limited to those who are residents of countries for which a visa is required for their arrival. Consequently a great number of them are working without a permit, resulting to the loss of revenue. 4.48.2 Expenses for the repatriation and deportation of aliens. Most of the cases relate to aliens who were granted a temporary visit permit, on their arrival to Cyprus and do not leave Cyprus on the expiration of the permit until they are detected and seized by Police, and then they are deported and the relative expenses are paid by Government. Part B 4.48.3 Revision of legislation. In my 1999 and 2000 Reports, it was stated that the Aliens and Migration Law and the relevant Regulations need to be amended and modernised, a matter which is expected to be regulated in cooperation with the Law Office. The Service informed me that the matter relating to the amendment and modernization of the Aliens and Migration Law and the relevant Regulations is expected to be regulated in cooperation with the Law Office, within the framework of harmonization of Cyprus legislation with Acquis Communautaire. 4.48.4 Aliens Branch – Computerised system. The upgrading of the computerised system of the Police has not yet been effected, which will assist the Aliens and Migration Office to be in a position to have direct access to all functions of the system and to obtain directly the necessary information, resulting to: (a) delay in the detection of aliens whose permit has expired, and (b) weakness in the verification of the correctness of the purpose of stay and type of employment of the aliens. The Service stated that, in view of the difficulties which are observed, with regard to the prompt and smooth running of work, and the delay observed in the upgrading of the Computerised System of Police, is proceeding, in cooperation with the Department of Information Technology Services, with the development and application of its own independent Computerised System. 4.49 MINISTRY OF FOREIGN AFFAIRS Part A 4.49.1 Audit of the Accounts of Diplomatic Missions. The audit of the accounts of Diplomatic Missions is carried out at the Ministry and is supplemented by site inspections, usually, carried out every three to five years, according to the available funds. During 2001 site inspections were carried out of the Embassies in Moscow, Budapest, Helsinki and the Permanent Mission in Brussels. A report was prepared for each Diplomatic Mission, which was submitted to the Ministry. 4.49.2 Audit of the Accounts of Honorary Consulates. Some Consulates have not submitted for audit their accounts for 2001. Most of these, have also failed to submit their accounts for

97 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 previous years. As I was informed, the Ministry has sent reminders to all Honorary Consuls for compliance with the Financial and Accounting Instructions, and submission of their accounts the soonest possible. In addition the Diplomatic Missions have been notified to pursue the submission of the accounts of the Consulates that come under their jurisdiction. 4.49.3 Telephones. The expenditure for telephones of the Ministry and Diplomatic Missions exceeded the initial provisions of the relevant Votes. As I was informed, new Instructions were given in July 2001 to the Heads of Diplomatic Missions, for further reduction of expenditure. Part B 4.49.4 Rent allowance abroad. Specific provision of the Scheme for Rent Allowance Abroad, constitutes a motive to those eligible for acquiring houses with very high rent, which in some cases corresponds to 70%-80% of their emoluments. I suggested that the amendment of the Scheme should be considered. The whole matter is under consideration by the Ministry of Foreign Affairs, in cooperation with the employees Union of the Ministry, with the objective of eliminating the weaknesses observed. The preparation of a new scheme will be pursued. The total rent allowance paid, in 2001, to member of the Foreign Services amounted to £479.457 (£445.561 for 2000 and £376.825 for 1999). 4.49.5 Purchase or/and construction of buildings. As I stated in my 1999 Report, the Ministry agreed with my suggestion that instead of leasing, a programme for the purchase/ construction of buildings should be prepared, according to priorities specified. I also pointed out the need for the acceleration and more effective procedures for the purchase/construction of buildings through better planning and coordination of procedures. The matter was discussed at the meeting which was convened in November 2000, by the Director General of the Ministry, in which the representatives of the Ministries and Services involved were present. The meeting adopted the recommendations of my Office, for the establishment of a committee, consisting of the heads of Ministries and Services involved with the terms of reference to examine the needs and determine the approved procedure for the purchase/construction of buildings. The committee will also decide for the time schedule and programme of work and will take decisions for the solution of problems. In February 2001, an Administrative Officer was posted in the Ministry, who will be responsible for the coordination of the procedures for the purchase/ construction of buildings abroad. 4.49.6 Athens Embassy -Buildings – Housing of Government Services. In my previous Reports, I stated that, apart from the Embassy and the Ambassador’s residence, which are accommodated in two freehold buildings, the other Government Services operating in Athens are accommodated in separate rented buildings. I expressed the view that considerable savings could be achieved, as well as improved service provided to the public, through better coordination, if all Public Services are accommodated in a single freehold building. I stated further that, despite the efforts made for the housing of all Public Services in suitable premises, freehold or leasehold, in the centre of Athens, it has not been possible yet to resolve the problem. In July 2000, the Main Tender Board decided for the cancellation of the tender, for the purchase of a building because this was invited without proper planning, that is, without the preparation of tender terms and specifications and detailed building requirements.

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In the meantime, it was not possible to secure a suitable plot for the erection of the building and in June 2001, the Advisory Committee, mentioned in the above paragraph of my Report, decided for the invitation of tender either for the purchase of a building plot or a building plot with a building under construction, or a ready building which will meet the building requirements and the specifications. From the proposals submitted, only one was considered suitable, which provided for the construction of a new building at a plot in the center of Athens. Subsequently, a tender was submitted by the interested company and in July 2002, an agreement was signed for the study and construction of a building, within a period of 24 months (including ten years maintenance), for the total amount of £9 m. 4.49.7 Cairo Embassy - Special investigation. This investigation was carried out after a written request of the Minister of Foreign Affairs, who at the same time submitted to me a number of documents consisting of allegations/reports against the former Ambassador, at that time, in Cairo. The investigation was carried out by an officer of my Office, who visited, for this purpose, the Cairo Embassy during the period 9-12/8/99, and continued in Cyprus. After the evaluation of information and documents, a report was prepared which was submitted to the Minister of Foreign Affairs on 16.9.99. At the same time a disciplinary investigation was carried out by the Director General of the Ministry regarding the allegations/reports against the former Ambassador in Cairo. The Attorney General of the Republic informed me on 7.4.2000 that my report was submitted to the Chief of Police for further investigation for any criminal offences. With the completion of the Police investigation it was decided for criminal prosecution against the former Ambassador in Cairo and in March 2001, the District Court submitted the case for trial by the Criminal Court, in September 2001. In view of the above the Public Service Commission decided for the suspension of disciplinary procedure, until the conclusion of the criminal procedure. 4.50 MINISTRY OF FINANCE Part A 4.50.1 Scheme for the provision of government guarantees for the financing of working capital to be used for the execution of orders for the export of industrial products. The Council of Ministers decided on 10.11.94 the termination of the operation of the Scheme, under which loans were issued by commercial banks, with government guarantee amounting to £34,9m. and the Ministry of Finance undertook the handling of all pending cases. The Ministry of Finance had not submitted to my Office the statements of guarantees in arrear, at 31.12.01. The guarantees in arrear at 31.12.00 amounting to £1,8 m. include the amount of £1.330.578, plus interest, due by a certain company, for which Administrators/Receivers have been appointed, as well as the amount of £284.689, plus interest, due by a second company. It is noted that the commercial banks filed a lawsuit against the Government for the payment of the loans, issued to the above two companies, with government guarantee. On the instructions of the Attorney General of the Republic, a committee was set up from representatives of the Ministries of Finance and Commerce Industry and Tourism, the Police and my Office, which investigated the cases and prepared reports, which were submitted to the Law Office. Recently, one of the above lawsuits was adjudged and rejected, but the interested bank has filed a recourse against the decision, which is pending. The District Court assigned the responsibility to the defendant for his failure to comply with the substantial terms under which separate accounts should have been kept and for the use of the

99 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 amounts of guarantees exclusively, for the payment of sale orders. It was also stated, by the court, that the loans were used for purposes other than from those for which they were issued, and this constitutes a substantial deviation of the agreement resulting to the rejection of the lawsuit. 4.51 DEPARTMENT OF GOVERNMENT PURCHASING AND SUPPLY. Part A 4.51.1 Closing stock. At 31.12.2001, the total value of the 26.900 items held at the Department of Government Purchasing and Supply was £4,77 m., compared to £4,48 m. for 26.850 items for 2000. 4.51.2 Advances – Unallocated Stores Account. The balance of the advance account, at 31.12.2001, was £4,78 m. The movement of the "Advances – Unallocated Stores Account" for the last five years was as follows: Year Purchases Issues Stocks Stocks to Stocks to Stock purchases issues turnover £000 £000 £000 % % 1997 9.525 9.293 4.409 46 47 2,18 1998 9.427 8.581 5.072 54 59 1,81 1999 7.975 8.361 4.762 60 57 1,70 2000 8.880 9.341 4.428 50 47 2,03 2001 9.413 9.051 4.766 51 53 1,97 4.51.3 Excesses in purchases and stocks. During the last years significant excesses are observed in the approved amounts for purchases, as well as the advance account, which represents the value of stocks. Total purchases as well as the balance of the advance account, in 2001, exceeded the amount of £9,4 m. and £4,8 m., respectively, while the amounts approved were £6,5 m. and £3,5 m. As I also stated in my previous Reports, the relevant limits are in force since 1991 and the excesses constitute usual practice and I suggested the revision of existing limits, so as to respond to the actual needs of the Departments. I understand that the Ministry of Finance will review, in 2002, the approved amounts, both for the purchases and the advances account. 4.51.4 Quality control for items of continuous supply. For several items of continuous supply, which are received gradually, no interim laboratory tests are carried out, for ascertaining whether they comply in quality with specifications and the terms of the relative agreements. As a result of this omission, certain items which are received after the tender award present deviations from the specifications. The Director of the Department informed me that the matter will be considered in cooperation with my Office. 4.51.5 Terms/tender documents. From the examination of a number of tenders, it was observed that substantial provisions of the general terms were not in line with the provisions of the general terms approved by the Main Tender Board, running the risk of not safeguarding the public interests, adequately. In May 2002, I submitted my observations to the Accountant General, who agreed with them, and requested the Director of the Department to amend the tender documents for future tenders, according to my suggestions and his own suggestions, which was finally done.

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4.51.6 T ender No. 2001 T108 for folding knives. In January 2001, the Department invited tenders for the supply of folding knives at an estimated cost of £80.000. The report on the evaluation of tenders was submitted to the Main Tender Board, in October 2001, while the validity of tenders expired since September 2001, resulting to the cancellation of tenders. In the evaluation report, it is mentioned that the renewal of the validity of tenders was not asked, because the evaluation committee was asking their cancellation. The handling of this case, is contrary to the provisions of Tender Regulations, which provide that the cancellation/award of a tender is made by the Main Tender Board. 4.51.7 Tender No. 2001 T1103 for the supply of intercommunication apparatuses. From the examination of tender documents and the procedures followed, it was observed, that the Department failed to apply the specified procedures, provided by the Tenders Regulations, for the supply of equipment, of estimated value of over £100.000. My observations/identifications were submitted in September 2001, to the Accountant General, with copy to the Director of the Department. In October 2001, the Director of the Department, requested the Accountant General for the cancellation of the tender procedure, because, as he stated, during the examination of the specifications by the Technical Committee, which were sent after the invitation of tenders, it was ascertained that these they needed substantial alterations. He also stated that, new tenders will be invited by his Department, soon after the completion and approval of the necessary alterations in the specifications. In view of the above, the Accountant General approved the cancellation of the tender. Part B 4.51.8 Computerisation. As I stated in my Reports for 1998-2000, the existing computerized system of the Department, is old and impedes tender control and the monitoring of stocks by the Department. I recommended that immediate priority be given for the introduction of a suitable modern system. 4.52 DEPARTMENT OF INLAND REVENUE Part A 4.52.1 Income tax. The collections of income tax by taxpayer category, as classified by the Department, are as follows: 2 0 0 1 2 0 0 0 £m. % £m. % Government employees 75,8 16,7 77,2 18,9 Private employees 111,9 24,6 94,7 23,1 Tax on dividends 16,2 3,6 22,2 5,4 Deduction of tax on interest remitted from abroad 0,5 0,1 0,3 0,1 Companies 218,0 48,0 187,0 45,7 Self employed 23,4 5,1 21,2 5,2 According to sections 30-32 of the Income tax 2,0 0,4 1,5 0,4 Laws 1961-2000 Off shore companies employees 6,8 1,5 4,8 1,2 454,6 100,0 408,9 100,0

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4.52.2 Refunds of income tax. The refunds of income tax amounted to £16,4 m., compared to £15,0 m. for 2000. 4.52.3 Assessments under objection. At 31.12.2001 there were 55.748 assessments under objection, for a total tax amount of £181,9 m. The assessment of income tax under objection were reduced by 11,3%, while there was an increase of 2,8% in the corresponding collectible amount of tax. It is noted that the assessments under objections relating to years of taxation up to 1991, were reduced from 18.689 to 14.147 or 24,3%, while the collectible amount of tax, from £84.269.019 to £70.699.890 or 16,1%. The Director of the Department expressed the view, that, with the simplification of taxation system, following the taxation reform, it is expected that there will be a significant reduction in the number of objections. 4.52.4 Arrears of taxes. The total amount of taxes in arrear as declared by the Department, was £204,74 m., compared to £182,67 m. for the previous year, i.e. there was an increase of £22,05 m. or 12,7%. It has to be noted that the taxes in arrear relating to the assessments of 2001 correspond to about 44% of the total arrears of income tax. The following table shows arrears of taxes by category.

20001 2000 Increase/ (Decrease) £m. £m. % Income tax 145,57(i) 122,53(i) 18,8 Income tax (P.A.Y.E.) 8,17(i) 8,09(i) 1,0 Immovable property tax (Law 24/80) 5,61 5,66 (0,9) Capital gains tax 20,82 22,93 (9,2) Estate duty 3,27 4,18 (9,1) Tax on Services 0,21(iii) 0,21 Other taxes 2,21(ii) 2,07(iii) Special contribution 5,71 5,90 Special contribution for Defence 13,18 11,10 204,75 182,67

(i) It includes the amount of £68 m. representing assessments of 2001. (ii) It includes the amount of £555.290 due by Turkish Cypriots. (iii) The tax on Services has been abolished, as from 1.1.93, while there is a collectible amount of £208.478, representing assessments for previous years. Notes: (a) The above arrears do not include interest. Αt 31.12.2001, the interest due amounted to £43.805.794 for income tax, £5.057.299 for temporary tax, £61.716 for dividends, £8.024.528 for special defence contribution and £3.807.208 for PAYE.

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(b) The arrears of income tax by category are as follows: £m. Government employees 3,32 Other employees 16,17 Self employed 31,77 Companies 93,80 Other 0,21 145,27 Income tax for assessments up to 31.12.78 0,30 145,57

(c) The total amount of £153.74 m. which was due at 31.12.01 for income tax and PAYE includes the amount of £84,99 m. which represents the following: £m.

Amounts for which legal action was taken 31,25 Amounts payable by instalments 13,08 Non-collectible amounts due to bankruptcies, deceased, 10,61 unknown persons etc. Temporary tax of 2001 mainly collected in January 30,05 84,99 (d) The amount of £20,82 m. due at 31.12.01 for capital gains tax includes the following: £m.

Amounts for which legal measures were taken 0,95 Amounts due by churches and monasteries 6,63 Bankruptcies 0,45 8,03 (e) The amount of £5,71 m. due at 31.12.01 for refugees special contribution includes the following: £m.

Objections/Legal recourses 0,87 Amounts for which legal measures were taken 1,72 Assessments received after 31.12.2001 0,22 Non-collectible amounts due to bankruptcies, deceased, 1,73 unknown etc. 4,54

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(f) The amount of £3,27 m. which was due at 31.12.2001 for estate duty, includes the amount of £0,25 m. relating to assessments prior to 1974 for properties in the occupied area of Cyprus, as well as Turkish Cypriot cases. The estate duty has been abolished for persons who died on or after 1.1.2000. The amounts due relate to assessments of persons who died prior to 1.1.2000. In order to deal effectively with the problem of taxes in arrear, the Department has taken a series of measures for the improvement of the organisation of the Collections Office, and has implemented new procedures for monitoring all its functions, which resulted to better service for the public and the prompt collection of taxes in arrear. 4.52.5 Stamp duty. ● Agreement for the purchase of an insurance company. An insurance company was sold to a Cyprus bank, under a relative agreement. At first, the Department requested the payment of stamp due for £93.950, plus a fine (on the agreement amount of £47 m.). The bank filed a recourse, but before the trial, an out of court settlement was made, under which the amount of £1.950 plus a fine (on the amount of agreement of £1 m.) were paid. As the financial statements of the Bank, were showing that the amount of purchase was £43,3 m. I requested the Director of the Department to state the reasons for the above differentiation. The Director of the Department stated that the bank produced evidence that under the agreement only £1 m was paid in cash, while the balance was settled in shares, through the Cyprus Stock Exchange which is exempted from the payment of stamp duty. 4.52.6 Capital Statements–Demand for submission of capital statements. Section 5(3) of the Verification and Collection of Taxes Laws, provides that each physical person, subject to taxation (after the legal reliefs, deductions and credits), should produce, to the Director, a statement with full details of his assets and liabilities, of his personal and professional property (capital statement), as at 31st December every five years, starting from 31st December 1989. Also, section 27 of the aforesaid Laws, gives power to the Director, to demand the submission of information, by any person, regarding his income tax. However, it was observed that, despite the above provisions, the Department failed to demand the submission of Capital statement, from certain category of self employed (doctors), who declared very low income and had not submitted capital statements, for ascertaining their actual income. In some other cases, no capital statements were demanded for a very long period. I also expressed the view that, for certain categories of professionals, who are earning high income, the Department must demand capital statement for ascertaining the income. The Director of the Department informed me that the demand for the submission of capital statements is applying in cases where this is justified, and usually in cases where there is a report or suspicion for tax evasion of a substantial amount of tax or during the examination of such cases. 4.52.7 Capital gains tax (a) Transfer of shares. Section 17(2) of the Capital Gains Tax Laws, provides that the capital gains tax is payable, independently of any objection or recourse and always before the transfer of the property. It has been observed that, the same practice is not always adopted, for the payment of the tax before the transfer, in the cases where, instead of the transfer of the immovable, the shares of

104 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the company, the owner of the immovable, are transferred. In a specific company, operating in the sector of development of land and immovables, the majority of the shares were transferred from the main shareholder to another company, without the payment of tax, according to the above section. The Director of the Department informed me that a study will be carried out for finding ways to solve those cases, in cooperation with the Office of the Registrar of Companies. (b) Supplementary/revised assessments. It was observed that no supplementary assessments are made by the Department according to section 14 of the Capital Gains Tax Law No. 52/80, in cases where the valuation carried out by the Department of Lands and Surveys is considerably exceeding the value given by the seller of the property, resulting to the payment of lower capital gains tax, by the taxpayer. The Director of the Department informed me that the Ministry of Finance has already submitted a bill, for the amendment of the relevant legislation, to regulate this matter. The bill was submitted on 14.1.02 to the Law Office for legal processing. 4.52.8 Loans to the directors of companies. According to Section 47A of the Income Tax Laws, there is no restriction in the amount of the loans or the monetary facility, which may be given by the company to the directors. As a result, the directors of certain companies declare a very lower salary and at the same time they draw considerable amounts from their current accounts, creating great debit balances for the company, which is usually owing taxes. It is noted that, the directors, by using this method, are relieved from the payment of income tax on their salaries, since these amounts drawn from the company are actually salaries, and are considered as personal loans, on which interest of 9% is paid, and is considered as income of the company. It is evident, that a violation is made of the aforesaid section of the Legislation, since the directors are allowed to present a great part of their emoluments as loans from the company. The Director of the Department informed me that this matter was considered in the past by the Department and the Ministry of Finance, and is still being examined within the framework of taxation reform. With regard to the general matter of loans given to the directors, a study is being carried out by the Department, aiming at regularizing this matter, through the PAYE Regulations which will be prepared under the new legislation. Part B 4.52.9 Audit of stamp duty section. During a test examination, it was revealed that considerable amounts are lost, mainly, due to the non-stamping or the insufficient stamping of the documents subject to stamping, according to the Stamping Law. The Director of the Department assured me that every possible effort is made by the Department for the best implementation of the legislation. He also pointed out that it is not possible to be aware for all the documents which were issued, if these are not produced before him, by the issuing persons. The following are some indicative examples: (a) Loans from oversea banks. The documents for a foreign loan of £10 m., received by a Cyprus bank, were not produced for stamping. As I was informed, these were produced, after a written notice was sent. The Director informed me that after the study of the relevant documents, it was deduced that these were not subject to the provisions of Stamping Law.

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(b) Issue of convertible bonds and stocks. In four cases, the stamping fees for convertible bonds, which were not produced to the Registrar for stamping, amounted to £1.1 m., the payment of which was asked by the Registrar. The issuing companies filed recourses. (i) One of the recourses was rejected by the court and the interested parties submitted an appeal. On the advice of the Deputy Attorney General, the payment of the amount of £100.000, by the issuing company, was accepted, against the amount of £240.000 which, was the initial claim. (ii) Another of the other recourses, was accepted by the court, and a revisional appeal was submitted by the Registrar of Stamp Duties. (iii) The other two recourses are pending. (c) Signing of agreements abroad. The relative documents which are prepared abroad should be stamped so as to be valid in Cyprus. In two such cases the collectible fees amounted to £88.000. In the one case the agreement was not finalized and was terminated. Therefore, the claim for the payment of stamp duties for £57.815 was withdrawn. In the second case, details of the agreement were sent to the Registrar, by the interested parties and the relative decision is awaited. (d) Issue and transfers of shares. The issue or transfer of shares outside the Stock Exchange, is subject to stamping. From the relative correspondence, it is deduced that no list exists for these transactions. (e) Contract agreements. Contract agreements amounting to million of pounds are not stamped, due to ambiguities in the respective provisions of the Law. As I was informed, the Department prepared specific suggestions, which were submitted to the Ministry of Finance, so that the ambiguities observed to be eliminated. 4.52.10 Tax payable by self-employed foreigners. Difficulties and weaknesses were observed in ascertaining foreigners, for tax purposes mainly, of foreign famous artists who are working in Cyprus for few days only and are leaving, without asking them on their departure to produce a certificate for the payment of their tax liabilities. With a view to resolving this problem, I suggested the amendment of the relative section of the Law, so that all foreigners or their representatives in Cyprus, to be enforced to produce the employment agreements to the Department of Inland Revenue and dissuasive punishments to be imposed on those who fail to comply. The Director of the Department informed me that a relative provision was included in the Law for the taxation reform, approved by the House of Representatives in July 2002. 4.52.11 Assessment files and updating of the system for new companies. It has been observed that, since 1994, the practice of opening new assessment files for new companies has been terminated on the grounds that with the computerization of the Department of Inland Revenue, these information will be transferred on magnetic tape from the register of the Registrar of Companies to the computerized system of the Department of Inland Revenue. This innovation has not yet been applied. From the examination of a sample of 409 new companies (local and foreign) which were registered during the years 1995 – 1998 by the Registrar of Companies, it has been ascertained that about half of them (47%) were not recorded in the computerized system of the Department of Inland Revenue.

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I suggested that efforts should be made in co operation with the Department of Registrar of Companies, for ensuring that the necessary information is obtained for the opening of the assessment file, on the registration of each company. The above will assist in the prompt ascertainment and assessment, mainly of those companies which are operating for many years. The Director informed me that the matter is under consideration by the Registrar of Companies and the Information Technology Department, for the purpose of preparation of the relevant programmes, and the adoption of my suggestion. 4.52.12 Difference between the amounts of employer´s declaration (E.Πρ.7) and emoluments certificate (E.Πρ.7). Although the system provides information about the employer´s declaration and the certificates of employees emoluments/salaries, yet no automatic examination is carried out for ascertaining as to whether the salaries declared by employers are in agreement with those declared by the employees or whether the employer, declared by the employee, is a registered employer. As a result of the above, there is the possibility for a file not to be kept for an employer, at the employers section, and a certain employee to declare a lower income from that which is included in the employer´s declaration. In a specific case the company was showing in the employer´s declaration that an employee was paid the amount of £9.358, for the year of assessment of 1998, whereas the employee declared that his enoluments amounted to £5.726. I suggested that the system should have the capability for the automatic comparison of the above information. The Director informed me that the programme for the comparison of such information will operate as soon as the problems encountered in the computer programme are resolved in cooperation with the Information Technology Department. I suggested that the system should be used for the automatic comparison of the above details. The Director informed me that the new computerized programme was put into operation, as from 11.10.02 and a comparison is made automatically, of the details given by the taxpayer with those declared by the employer. Additionally, the amount of tax deducted by the employer is shown in the provisional assessment, before the final assessment is prepared. 4.52.13 Special contribution. The collections of special contribution amounted to £0,7 m. (£0,9 m. for 2000). In addition interest was collected amounting to £0,5 m., for 2001, and £0,6 m. for 2000. These amounts have been deposited to the Relief Fund for Displaced and Affected Persons. The Special Contribution Law was abolished on 1.7.92 and the collections refer to previous years. 4.52.14 Special contribution for Defence. The Department is responsible for the implementation of the provisions of the Law, which relate to income from shares, interest, rents, profits of companies and Organisations with or without legal status, as well as for the final settlement of the amounts collected from self employed. The collections of the Department amounted to £58,9 m., compared to £58 m. for 2000, i.e. there was an increase of £0,9 m. (1,5%). This amount was deposited to the Defence Fund of the Republic. According to the Special Contribution amended Law No. 94(I)/2002, which was put into effect as from 1.7.2002, the defence contribution on interests received or credited, from any source, was increased from 3% to 10%. 4.52.15 Delays in the submission of accounts and income tax returns. It was again observed that, in spite of the great efforts made by the Department, several companies and other taxpayers delay systematically to submit the relevant accounts and tax declarations, as well as other documents, resulting to delays in the imposition of the final assessment. The

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Director of the Department informed me that taxpayers' compliance varies to about 75%. He also informed me that his Department, in an effort to solve the problem, has established Units in all District Offices, for the enlightment and the provision of service/assistance to the taxpayers. Moreover, is locating those who do not comply and the appropriate measures are taken against them. 4.52.16 Computerised system for tax administration. The primary objective of the new computerised system is to develop and implement a real–time system, capable of providing the Department of Inland Revenue with the required means and information, for providing better service to the public and more effective imposition and collection of taxes, as well as prompt decision-making. Within the above guidelines all the procedures of the Department of Inland Revenue will be computerised, from the submission of income tax declaration forms to taxpayers up to tax assessments and imposition of tax, and follow up and collection of taxes. The work for the implementation of the project commenced in 1987, at an estimated cost of £3 m., with completion date December 1993. The study, the preparation and implementation of the computerised system was assigned to a foreign company after international tenders, and the Department of Information Technology is responsible for the follow up and coordination of works. The system commenced implementation gradually since 1992. With the completion of the project and the expiration of the 12 months period of guarantee at 31.12.1997, the Department of Information Technology undertook the maintenance, operational support and the expansion of the system. The revised total expenditure, for the maintenance, operational support and expansion of the system amounts to £5,3m., while up to 31.12.2001 the amount of £3,3m. was spent. Since 1992, nine basic subsystems were put into operation. As I was informed, with these subsystems, the installation of the new system (Information System) is made, which will assist in the prompt and easier access of the user to information. The Department has completed the preparation and submission of income tax assessments for individuals for 1999 and now is proceeding with the preparation and submission of income tax assessments for 2000, whereas the assessments for companies have been completed up to 2000. Refunds of income tax are made through the new computerised system shortly after the issue of the relevant assessment. 4.52.17 Sales of immovable property by a company at fictitious prices. A great number of sales of immovables, made by a specific company to subsidiary companies, are considered fictitious, because the values of the immovables are much lower than the values of 1.1.80, as evaluated by the Department of Lands and Surveys. I requested that an investigation be carried out, which will cover all these sales, and the Director informed me that he will proceed to an in– depth examination after 31.12.97, which was the deadline for the submission of their accounts. As I was informed, the company submitted accounts for 1996 on 16.5.99. At the same time the Department proceeded to preliminary evaluations of the above immovables. The investigation was concluded, with the imposition of additional tax and interests, amounting to £500.000. 4.52.18 Advance account for cheques returned/uncashed. It was observed that the balance of the above account at 31.12.2001 was £894.350, compared to £540.494 at 31.12.2000 i.e. there was an increase of 65,5% and I asked that measures should be taken so that the amounts due for cheques returned, to be collected the soonest possible. The Director informed me that there is a system for the continuous follow up of all cheques returned and the appropriate measures are taken.

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4.52.19 Immovable property tax for leases of government land. With the exception of leases of government land at Limassol District, for which the relative assessments were imposed, no tax has yet been imposed on the value of the benefit derived for the tenants of government land in other Districts on which factories, hotels e.t.c. have been erected, contrary to the provisions of section 2 of the Immovable Property Tax Law 24/80. As I was informed this is due to the fact that the Department of Lands and Surveys has not yet made the evaluation of the land in these Districts, which is necessary for the determination of tax. According to court rulings, the Director of the Department of Inland Revenue should carry out his own evaluation taking at the same time, into consideration the evaluations of the Department of Lands and Surveys. In view of the fact that, Government is losing a substantial amount of income, derived from the immovable property tax for leases of government land in other Districts, I asked the Director of the Department of Lands and Surveys to proceed, without any delay, with the evaluation of relative leases, so as to enable the Director of the Department of Inland Revenue to prepare the relevant assessments. During a meeting held, on 12.2.2002, at the Department of Lands and Surveys, it was decided for the commencement of the evaluation of the leases in industrial areas, the government land used for the erection of hotels and of other essential leases of government land. 4.52.20 Taxes due by ecclesiastical authorities. It was again observed that the ecclesiastical authorities do not pay the tax on immovable properties, special contribution e.t.c. With the enactment of Law 48(I)/(99) on 28.5.99, the ecclesiastical authorities pay the capital gains tax. It is noted that on 31.12.2001 the accumulated amounts due by the ecclesiastical authorities for capital gains tax for previous years for which there was no obligation to be paid prior to the transfer of immovable property, amounted to £6,6 m. For the other taxes there are no details of the amount due. 4.53 DEPARTMENT OF CUSTOMS AND EXCISE Part A 4.53.1 Duty-free shops at Pafos and Larnaka Airports. The above shops, which operate under the Council of Ministers decision No. 43247 of 27.10.95 as special bonded warehouses and are subject to the provisions of the Law regarding bonded warehouses, were assigned to the Cyprus Airways Duty Free Shops Ltd, since 1.5.96, for a period of five years. With the expiration of the period of five years, the operation of the shops by the said company is not legally covered, because the relative agreement has not been renewed. The Department continues to provide approval for the operation of the shops. For purposes of exercising an effective customs control, the Department prepared an analytical programme of control. With the implementation of the programme it appeared that the management system of the shops presents serious weaknesses and problems, which hinder the exercise of control. The managing company, requested that the monthly examination of the goods of high risk, provided in the programme, not to be carried out, due to the overloading of the system, with the result, reliable information not to be available. The request was not accepted. Also, during surprise surveys, no reliable information may be extracted, without closing the shops for a certain period of time. During the monthly stock-taking, carried out during the period January – June 2001, according to the programme, the high risk goods presented deficiencies, with corresponding customs

109 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 duties and taxes for a total amount of £145.780, which was collected. Also, during the annual stock-taking carried out in the period 4.12-6.12.01, deficiencies of customs value of £284.716 were observed, and customs duties and taxes, amounting to £99.981, were collected. The Department, is of the opinion that these deficiencies are within the international acceptable limits. Nevertheless, continuous and intensive efforts are made for the minimization of deficiencies. 4.53.2 Special bonded warehouses (duty free shops) operating at the Ports. The system of control of the stocks presents weaknesses, because, with the introduction of the goods in the shops, these lose their identity and are classified in groups, according to their selling price, which is determined at the absolute judgement of the owner. The above procedure leaves open the possibility of covering deficiencies of high value products with products of lower value, resulting to loss of duties and taxes. The Department holds the view, that, despite the existing weaknesses, the possibility for the replacement of goods is very remote. The Department, also informed me that, on the basis of my suggestions, a decision was taken for the modernization of the whole system of control and follow up of the above shops and that the committee of Customs Officers, which was set up, proceeded with the design of a new control system, which has not yet been put into operation. During the examination of a Special Bonded Warehouse, it was not possible to extract the accounting and stock balances, because most of the goods were removed for the supply of a passengers ship of a foreign company and aircrafts of other company, without the goods to be recorded in books, while other goods were transferred from other bonded warehouses, for the completion of orders. The above transactions created a vast volume of work and therefore, the physical stock taking was not possible. I suggested that the whole matter be considered for finding ways to solve it. It is noted that no examination was carried out in the stocks of the above shops, since 1999, by the Department. The Department informed me that strict instructions where given for carrying out random checks in the shops. 4.53.3 Customs clearance of tobacco with preferential factor. It was observed that, while the tabacco is imported as raw material by a tobacco company, from Switzerland, which is a country – non member of European Union, a great part of it is cleared with a preferential factor. This is done, because the tobacco company is producing documents showing that the tobacco is a mixture of tobacco, produced in the European Union. The accuracy of the documents produced cannot, however, be confirmed, because there is no official certification for the origin of tobacco (the effort made for securing such certification from the Custom Authorities of Switzerland was unsuccessful). For this matter there is a legal advice of the Law Office, according to which, for the imposition of excise duty with preferential factor, reliable documents should be produced, showing the origin of tobacco. In view of the above, I expressed the view that this whole quantity of tobacco is subject to excise duty, with the general factor, which is double from the preferential factor. The difference in excise duty for the years 2001 and 2000 is estimated at £1.819.219 and £1.313.630, respectively. The Department informed me that detailed information was given on this matter to the Ministry of Finance, and the views of the Ministry are awaited. 4.53.4 Duties reliefs to Cyprus Airways Ltd, according to the 4th schedule of Customs and Excise Duties Law. The Cyprus Airways Ltd are entitled to customs and excise duties

110 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 reliefs for any items or materials used for the operation, maintenance or service of aircrafts or their passengers. For this purpose, substantial quantities of materials and foodstuffs are cleared during the year. It was observed that, no satisfactory control is exercised by the Department, for ascertaining whether all the goods cleared are used absolutely for the needs of the company. For purposes of strengthening of control, I suggested that, the special books issued to the company for the clearing of goods, to be returned to the Department after their completion, for examination purposes. Also, instructions should be given by the Department to the company for the opening of a register, in which to record all the books issued to the responsible officer, gradually, according to the needs for the replenishment of stores. As I was informed, the above relief is considered as a subsidy, which is contrary to the provisions of the Public Aid Control Law of 2001, which will be abolished by 30.4.03. 4.53.5 Public auction of Government vehicles. It was observed that, during the disposal of official vehicles, through public auction, the competent Department (of Government Purchasing and Supply) determines the safety prices of vehicles, without taking into account the corresponding duties and taxes, with the result in several cases, the selling prices not to cover the duties and taxes, on the basis of their customs clearance. This practice is contrary to the Customs and Excise Duties Law No. 82/67 and the Customs and Excise Duties Law No. 22(I)/02 and is not in line with the practice followed by the Department of Customs, for its own public auctions. I suggested that the matter be considered by the respective Ministry and the two Departments for the formulation of a uniform policy, according to existing Laws. The Department informed me that it submitted to the Ministry, its views and suggestions, for purposes of formulation of a uniform policy. 4.53.6 Overtime fees. The expenditure for overtime work of Customs employees amounted to £2.689.461, compared to £2.668.072 for 2000, i.e. there was an increase of £21.397, whereas the revenue for overtime fees was £2.022.315, compared to £2.072.100 for 2000, i.e. there was a decrease of £49.315. Out of the above, it emanates that the expenditure for overtime work in the years 2001 and 2000, exceeded the revenue for overtime fees by £667.150 and £643.711, respectively. The difference observed between the amounts paid and the amounts collected is, mainly, due to the services provided at the airports of Larnaka and Pafos, for which no overtime fees are collected as well as to preventive examinations. According to the relative circular of the Ministry of Finance, the fees for the services rendered, should cover at least the direct and indirect cost of each service. It was observed that the collectible overtime fee does not cover the compensation and the relative administrative cost. I repeated my suggestion, for the inclusion in the Regulations of a provision, under which the fees should be revised, at the same time, with general salaries increases and cost of living allowance increases/decreases. The Department holds the view that the continuous increases of fees will adversely affect the economy and pointed out that, the cost of overtime is substantially reduced, with the deductions made for income tax and for various funds. 4.53.7 Overtime work. It was observed that the overtime working hours of several employees of the Department were exceeding the normal working hours. During 2001, an amount of more than £20.000 was paid to each one of 30 Customs Officers for overtime work. The main reason for so many overtime working hours is the great number of vacant posts, in the Department. I suggested that measures should be taken for the reduction of overtime working hours, in view

111 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 of the harmonization with Acquis Communautaire Union, which provides for 48 hours as the maximum working hours per week (the relevant bill is before the House of Representatives). The Department informed me that there was an increase in the staff employed in airports, and at the same time representations were made, through the Ministry of Finance, for exemption from the restrictions, provided in the bill. 4.53.8 Import declarations. Serious delays are observed in the examination of import declarations kept at the District Customs Office of Limassol. The relative files of import declarations of 2001, have not yet been prepared and the preliminary examination for ascertaining whether all customs documents have been returned, has not yet been made. Also, the final examination of the declarations for the period 1995-1998 has not been made, while the examinations of the declarations of a subsequent period was completed. The Department attributes the problem to the short staff of the Branch and to the great volume of work and expects that this will be solved finally with the full computerization of the Department. It was also observed that the follow up and the examination of documents, submitted to other Districts together with the goods, present weaknesses. In several cases It was revealed that the documents were charged to other District, while the documents which are not returned are not being sought promptly. I suggested that all customs documents, which are submitted to the Customs stations, to be charged carefully and their return to be followed. Documents which present a delay over 15 days to be sought. As I was informed by the Department instructions were given to the officers, for taking all necessary measures, to avoid repetition of such mistakes in future! 4.53.10 Bonded Warehouses (a) Claim notices Several claim notices, prepared by the District Customs Offices were submitted to Customs Head Office for taking legal measures, for the recovery of the amounts due. The relative legal papers regarding these cases have not yet been prepared, for onward submission to the Law Office. It is noted that these relate to deficiencies in the files of bonded Warehouses, which were declared as closed, several years ago and any further delay would render the claim of the amounts due very difficult. The Department informed me that the delay is attributed to the time consuming procedure, for the preparation of claims. (b) Final examinations of closed files. It was observed that, the final examination of several closed files is pending, and there is the risk of the loss of duties and taxes. In one case, he closed files of stocks, of a specific warehouse, were not examined for many years, while the warehouse, in the meantime, terminated its operations and a liquidation order was issued. Consequently, the possibility for the collection of the duties and taxes in arrear is very remote. It is noted that the problem for several stock files was identified a very long time ago, but no claim notices were prepared, because it was considered necessary that a special investigation be carried out for finding the missing documents. The Department is attributing the problem to the great volume of daily work and the short staffing of the Branch. 4.53.11 Importation of unassembled vehicles. The Department proceeded with the confiscation of a luxurious vehicle, which was involved in a road accident, when it was ascertained that certain irregularities were made, at the importation of the vehicle, in order to avoid the payment of the duties and taxes. The vehicle was imported unassembled and duties and taxes were paid only for spare parts, which are much lower from duties and taxes payable for a complete vehicle. Later, when the vehicle was assembled, an illegal intervention was

112 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 made in the chassis number and plates were placed of another vehicle, which was out of circulation. The Department asked the owner of the vehicle to pay the amount of £11.458, representing duties and taxes, based on the customs value of the vehicle, as well as the amount of £1000 for settlement of offences committed. Subsequently, these amounts were reduced to £2454 and £230 respectively, due to the reduced market value of the vehicle, which was estimated at £1500, in 2000. I asked to be informed of the reasons for the modification of the basis for the calculation of duties and taxes and for taking into consideration the estimated value of 2000, while the importation was made in 1996. Also, I expressed the view that the fine of £230 is disproportionately low, having in mind the seriousness of the offence, which was committed. The Department informed me that the evaluation was based on the provisions of the Agreement for the application of section VII of the General Agreement of Duties and Trade of 1994, due to the “extensive circumstantial peculiarities” of the specific case. The matter relating to the importation of chassis, engines and other spareparts, which are assembled and used for the replacement of other registered vehicles which for various reasons were put out of circulation, resulting to the loss of substantial amounts of revenue in the form of excise duties and import duties, was subsequently raised in my previous Reports. For the settlement of the matter, I suggested the amendment of legislation, in a way that any change in the chassis of the vehicle to constitute a new vehicle and the corresponding excise duties to be collected. 4.53.12 Value Added Tax Service Part A (a) General. The revenue from value added tax amounted to £374,2m., compared to £320,5m for 2000 i.e. there was an increase of £53,7m or 16,7%. Refunds of tax amounted to £29,5 m., compared to £23,9 m. for 2000, i.e. there was an increase of £5,5 m. or 23,1%. (b) Arrears of taxes. At 31.12.2001, the arrears of taxes, including surcharges and interest amounted to £35,8 m., compared to £29 m. for 2000. The amount of £3,7m is due by 776 persons, who submitted “tax declarations” but had not paid their debts. Also, the amount of £5,6m represents arrears due by 4305 persons, who submitted their declarations with delay and paid only the amount of tax. The fact that these amounts represent only the surcharges, reduces the possibility for the institution of legal proceedings, for their collection. I suggested that in such cases, priority should be given for the collection of the surcharges, before the tax. It is noted that, with the application of Law 95(I)2000, as from 1.2.2002 the payment of amounts due is made in the following sequence of priority: interest, free interest amounts and amounts bearing interest. The amount of £5,6m is due by 607 persons, who were declared bankrupt and £15,9m by 4333 persons, whose VAT registration was cancelled. The Service takes various measures for the collection of arrears of taxes, such as, submission of letters for the payment of debt, confiscation of goods, liquidations of companies, and civil lawsuits. The effectiveness of these measures is however, limited while the procedures followed are time consuming. The Service also has the possibility, in cooperation with the Law Office, to institute criminal prosecutions, against the persons who do not settle their debts. Until 31.12.01, 3730 prosecutions were instituted, out of which 304 were pending. In 854 cases, the debts were settled and the prosecution was withdrawn, while the rest were adjudged. The effectiveness of criminal prosecutions is also limited, due to the fact that the court imposes a fine for the criminal

113 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 offence, and does not decide for the payment of the debt, because this is not provided in the Law. It is stated, that this weakness does not exist, after the implementation of Law 95(I)/2000 with effect from 1.2.2002. (c) Non submission of tax declaration. At 31.12.01, there were arrears for £39,8 m., representing estimated assessments (£32,5 m. in 2000) for more than 2500 persons, who failed to submit their tax declarations. The estimated assessments are made by the Service, on the basis of existing documentation and surcharges and interests, are imposed according to the Law. These assessments are deleted when tax declarations are submitted. I repeated my suggestion for the investigation of these cases and for taking measures for the collection of debts. (d) Spot inspections. During 2001, 775 spot inspections were carried out by the Service, to registered persons, subject to tax (2% of registered persons). The total of spot inspections from 1.7.92 up to 31.12.01 is 4589 (7,5% of the registered persons), with total tax of £24,2 m. Also, from 1.7.92 until to day, 3602 spot inspections were carried out, for purposes of refunds of tax, amounting to £7 m. I expressed the view that the very limited number of inspections, hinders the risk for the loss of revenue, because in most cases, verification of tax is proved, and according to the Law, the keeping of accounting books and documents by the registered persons, is obligatory for a period of seven years only. The selection of registered persons, for spot inspection, is made by the Heads of District Offices of the Service. For the improvement of the existing procedure and the proper use of limited human resources, a special programme has been prepared, containing all the basic criteria, such as the risk for each business, the size of the business, the previous experience for similar businesses etc. The programme has not yet been implemented because the computerisation of the programme is still pending. (e) Establishment of Declarations Investigation Branch. For the improvement of the examination, I suggested that the possibility should be considered for the establishment of Declarations Investigation Branch, for the purpose of finding cases, which, from the first instance, it appears that they should be further investigated. From the audit, carried out by my Office, several cases were ascertained, where the nature of business does not justify sales with zero factor, the purchases are always higher from sales, declarations are always submitted with zero factor, there are errors in declarations etc. Part B 4.53.13 Under invoicing of used importer vehicles. In cases where there was a difference between the invoice price of the vehicles and the indicative price which was determined, the Department was asking the lodgment of a cash deposit, before the clearing of the vehicles. The importers of these vehicles, as well as the importers who initially accepted the clearing of their vehicles on the basis of indicative prices, have applied to the court and claimed for the acceptance by the Department of the prices of the invoices produced. The Supreme Court accepted, on 15.10.02 their recourses. I expressed the view that the procedure of cash deposit was not effective, because the possibility for the investigation of the cases was limited. In the meantime, the amount of cash deposit was finally charged to the consumers and the recovery of this amount by the importers, is an additional profit for them. I suggested to the Director of the Department, the amendment of section 8 of the Customs and Excise Duties Law, so that the invoice price to be taken only for purposes of customs duties and

114 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 for purposes of excise duty a valuation of the vehicles to be made, on their registration. My suggestion was accepted and a relative amended bill was prepared (part of the taxation package of 1998), which was finally rejected by the House of Representatives. The Department informed me that efforts are made to eliminate the risks for under invoicing of vehicles and that the suggestion for the amendment of the Law was resubmitted to the Ministry of Finance. 4.54 DEPARTMENT OF INFORMATION TECHNOLOGY SERVICES Part A 4.54.1 Performance Audit. For the Computer Master Plan of Government Service, in which the Department of Information Technology Services is extensively involved, a Performance Audit was carried out by my Office. The provisional findings and suggestions of my Office, emanating from this Performance Audit, are referred in Part 3 of my Report. 4.54.2 Administration and Financial Information System of Treasury Department. (i) Delays in the completion of the project. The project commenced in September 2000 and was expected to be completed in August 2002. Due to problems, encountered during the process of confirmation of the users needs, delays were observed, with the result a new time schedule to be prepared for the execution of works, under which the project was expected to be completed in October 2003. During the preparation and approval of the document of detailed design, new additional delays were observed, with the result a new time schedule to be prepared under which the works are expected to be completed in June 2004. The matter is expected to be submitted to the Central Committee for Variations and Claims for the relative approval. (ii) Application of a decentralized system. It has been noted that, in anticipating the problems, encountered during the initial state of development of the system, a suggestion was made by the successful tenderer for the application of a decentralized system, instead of introducing the centralised accounting system, which was initially selected, on the assumption that the functional capability of the whole system, provided by the relevant agreement, will not be affected. The matter was approved by the Central Committee for Variations and Claims and its functional capability is expected to be examined during the next phase of the project. (iii) Management of the project and quality control. The Central Committee for Variations and Claims, will also consider and approve the change in the role of the company – member of the joint venture, which was responsible for the management and quality control of the project. The management of the project has now been undertaken by a member of the joint venture, which is also responsible for the development of systems. My Office expressed reservations for the assignment of the management of the project to the same company, which is also responsible for the development of applications, as well as for the effective control of the quality of the project. The Director of the Department stated that the management of the project and the quality control, carried out by the company-member of the joint venture, are matters concerning the joint venture. The responsibility for the management of the project, from the part of Government, and for the completion of the project, rests with the Department of Information Technology

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Services, which has appointed the Director of the project. With regard to the quality control exercised in accordance with the standards/methodology followed by the above Department, the finished goods are subject to quality control, by Government, before their acceptance. (iv) Preparation of a model system. It has been observed that, the provision of the agreement, relating to the obligation of Joint Venture, for the preparation of a model system/pilot application, were not applied. According to the agreement, the purpose of the development of the model system was to indicate the way of satisfying the needs of the Treasury Department by the system under development, so that suggestions will be made for the development of the system or the locating of procedures, which should be developed. My Office holds the view that, the omission for the preparation of a functional model system, for certain main parts of the project or/and procedures, was the reason for the non identification of problems, promptly, which were encountered during the process of the development and application of the project. The most indicative example is the procedure to be followed for the preparation of accounts, on the basis of the receipts and payments (cash basis), as well as on the accrual basis of revenue and expenses. The Director of the Department stated that during the design of the system, model systems were prepared for the following: - Preparation of chart of accounts. - Establishment of code analysis. - Automation in the procedure for updating the Data Bases. - Management of purchases. - Receipts. - Management of materials. I hold the view that, the above are few examples of the main parts of the project, for which a model system should have been prepared. (v) Accrual accounting basis of revenue/expenditure and receipts and payments (cash basis). During the examination of the procedures, described in the detailed design documents, weaknesses were observed by my Office, including the defined procedures for the recording of documents and the preparation of accounts under the accrual basis of revenue/expenditure and the receipts and payments basis (cash basis). For this matter, the Joint Venture rejected the solution, proposed and included in the tender documents. A second solution was proposed by the Joint Venture, for inclusion in the detailed design document, which presented serious weaknesses and limitations. Finally, a new solution was proposed, which is expected to be evaluated during the examination of the system. 4.55 FUND FOR TRAVELLING EXPENSES OF DISABLED PERSONS. Part A 4.55.1 Operating results. All income of the Fund represents state subsidy. The receipts and payments for the year 2001 amounted to £84.136 and £86.083 respectively, compared to £84.300 and £82.353 for 2000. At 31.12.01, the Fund was not showing any balance.

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4.56 MINISTRY OF EDUCATION AND CULTURE 4.56.1 Execution of Budget. (a) Unspent amounts. During the year, amounts remained unspent in a number of Budget Votes. I suggested that the reasons for which the amounts of certain Votes of the Budget remained unspent for several years, to be investigated. I also stated that while the financing of the execution of many projects is made from loans received by the School Committees, the Budget presents only the payments of loans. (b) Execution of projects. As a total, the Development Budget of the Ministry is utilised to a great extent each year. Some projects, however, concerning the improvement and extension of schools or the construction of athletic rooms were not executed during 2001, but some other projects not provided in the Budget, were executed. The alterations in the execution of the projects were made with the approval of the Ministry of Finance and the Planning Bureau. From the analysis of specific Votes it was ascertained that about 50% of the new projects are executed, whereas the remaining percentage, mainly, relates to projects of the previous year Budget, which have not yet been completed. In view of this, I suggested that the Budget for each year, should include a provision for the projects of the previous year which remained unexecuted and their execution is considered feasible. For this purpose, I suggested the adoption of a system for the continuous follow up of the execution of projects, included in the annual Budget. Furthermore, I stated, that weaknesses are observed in the execution of projects, which are, mainly, due to the great number of projects undertaken for execution by the Technical Services of the Ministry, whose staffing presents problems, the inability of the School Committees to undertake the execution of projects, the lack of staff in the Ministry, which will undertake the planning of needs and their materialization, as well as the delays observed in submitting proposals to the Ministry, regarding the execution of projects by other Ministers involved. The Director General informed me that measures are taken so that the non-execution of projects within the time limits to be substantially reduced. (c) Heating of school buildings. A number of projects, included in Budget for 2001, relating to the installation of heating in the schools of Elementary, Secondary and Technical Education, remained unexecuted. Specifically, for the year 2001 the percentage of execution of those projects was 25% for the Elementary Education, 14% for the Secondary Education and 0% for the Technical Education. It has to be noted that some of the projects which were under execution in previous year were completed. The Director General informed me that, with the provision of services by private designers, the problem is expected to be resolved. 4.56.2 School athletics. Although substantial amounts are included in the Budget, for the promotion of school athletics, yet the amounts spent, during the last 3 years were under 50% (Budget for 2001: £3,2 m., Expenditure: £1,6 m.). 4.56.3 Internal control. It has been observed that no adequate intrernal control is exercised in all the activities sectors of the Services of the Ministry. As a result omissions and weaknesses are observed in the execution of the Budget, the achievement of the targets, the compliance with the decisions of the Executive Power, and the provisions of the Laws and relevant

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Regulations. The Director General informed me that the Ministry of Education and Culture despite the existing serious staffing shortage, during the last two years, has established a small internal control unit, with the secondment of two teachers, for the school buildings works, and efforts are made for the strengthening of this unit, for covering also other activities sectors of the Ministry. 4.56.4 Working hours of seconded teaching staff. Although instructions were given that, the teaching staff employed by the Ministry and other Services of the Ministry, should follow, the time schedule of Public Service, yet it was observed again, with the exception of some cases, that the necessary records are not kept, regarding the arrival and departure time, and in several cases the seconded officers are absent from their work, without he completion of the application for leave of absence, contrary to the provisions of the relevant circular of the Ministry. I pointed out that, this practice is due to the fact that some of the seconded officers, continue to consider that they are entitled to follow the time schedule of teaching staff, as it is deduced from the letters submitted to the Ministry of Education and Culture, by their lawyers. I asked the Director General of the Ministry to inform me whether the advice of the Law Office was sought for the clarification of the matter. The Director General informed me that the matter is expected to be settled, after the issue of the relative circular. 4.56.5 Insurance of school buildings. The settlement of claims by insurance companies, amounting to £126.224, for damages caused to the buildings, since 1992, is still pending, due to disputes between the parties, regarding the insurance value of the buildings. The amount of £68.750 is accepted by the insurance company, against the above claims. In 7 cases, for which the claims were accepted amounting to £15.010, no collection has yet been made. 4.56.6 Information technology in the Education. Until 31.12.01, loans, amounting up to £4.5m., were received for this purpose, and the actual amount spent was £0,83 m. The actual expenditure up to July 2002, was £2,1 m. Weaknesses were observed in the system for the follow up of the receipt and issue to the schools of the equipment. As a result, it is not possible to verify, in several cases, whether the payments made to the suppliers, are relating to the equipment, which was delivered to the schools. 4.56.7 Delays in the execution of contracts for printing of books. Cases were again observed, where there was delay in the execution of a number of contracts for printing of books. The Director General informed me that for solving the problem, the terms for the invitation of tenders, are reviewed. 4.56.8 Excursions of students of C’ classrooms of Gymnasiums to Greece. Omissions and weaknesses were observed and non-compliance with the provisions of Regulations, governing the organization of excursions, the procedures for the preparation of documents, specifications, terms, evaluation and award of tenders and the signing of relative agreements. Also, non compliance with the relative circular letters, addressed to the Management of Gymnasiums, governing the procedures and the way of management of funds for the excursions were observed. 4.56.9 Programme for the construction of school buildings. In my letter, addressed to the Minister of Education and Culture, relating to the programme for the construction of school

118 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 buildings in 2001, I stated that, the time for the construction of projects, which was determined by the Ministry of 9-11 months is insufficient as compared to the estimated of 15-18 months, which is the logical period of execution. As a result, my Office observed that tenders were overestimated by about 10%, compared with other public tenders, as well as the gradual decrease in the number of tenderers, and the possibility for collusion between the tenderers cannot be excluded. I also pointed out that a serious problem is anticipated in the management and supervision of the aforesaid projects, for which the appointment of a responsible coordinator and supervisor for each project is required, due to the magnitude of the projects. Consequently the needs for the employment of qualified staff, by the Ministry, are increasing. I suggested that the planning of the construction of new school buildings should be reviewed, so as to be gradually implemented, in a way, under which, the possibility of the contractors and the Technical Services of the Ministry, for the management/coordination of execution of projects, to be taken into consideration. In October 2001, the Council of Ministers decided that the Ministry of Education and Culture should pursue promptly, the planning for the erection of school buildings so that, in cases of the acceleration of the completion of buildings, within a time period of less than 18 months the approval of the Minister of Finance to be obtained, after the recommendation of the Planning Bureau. 4.56.10 Preparation of Model Manual for Studies. With a review to avoiding the non uniformity and the problems observed in the studies for school buildings, prepared by private consultants, I pointed out the need for the preparation of a manual by the Ministry, specifying the standards/criteria, to be used for the design of school buildings. Also, I suggested that these standards, to be included in the agreements, signed with private Designers and their adoption to be observed by the responsible Coordinators of the projects. The Director General of the Ministry informed me, in July 2002, that a technical committee was appointed for the study of the matter and preparation of standards for the design of school buildings and until their preparation this omission will be covered by the private Consultants and Coordinators. 4.56.11 Execution of building projects, without bills of quantities – Payments. As I stated in my Report for 2000, for several schools, the provisions of the contract agreement which specify that the contractor should submit to the Engineer of the project an analysis of the quantities and unit prices, required for the preparation of the monthly payment certificates are not implemented by the Technical Services of the Ministry. Instead of the above, the payments are made on the basis of a draft analysis of the contract amount, which is not based on quantities and unit prices and is prepared by the officers of the Technical Services of the Ministry. In view of the fact that this procedure does not safeguard the payment of works, within acceptable and accurate limits, I suggested to the Ministry, that a relative circular be issued to the engineers/coordinators of the projects to ensure compliance with the provisions of the contract. The Director General of the Ministry informed me that instructions were given to the Head and the staff of Technical Services for full compliance with the above. 4.56.12 Exclusion of prospective suppliers or contractors due to the non settlement of their debts/obligations to Government. It was observed that the provisions of the Accountant General circular which specify that each prospective supplier or contractor should submit together with his tender the certificates for the settlement of his debt to Government (income

119 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 tax, social insurance contributions and value added tax) are not always implemented. I asked that a departmental instruction be issued for the adoption of above circular. The Director General of the Ministry informed me that instructions were given to the Directors and Heads of Services of the Ministry, for strict compliance with the provisions of above circular, as well as of all the other circulars, regulations and legislation for tenders. 4.56.13 Contract for the extension of Elementary School of Palechori-Examination of Final Account. The examination of the final account of the above project, revealed that the steel quantity was approximately estimated, without the preparation of bending schedules. As this method does not secure the accuracy of the calculation of the quantity of steel reinforcement, I asked that the relative bending schedules to be prepared and submitted to my Office for examination. For the practical application of the measurement of steel, I suggested that in future tenders, a term should be inserted, under which the contractor will prepare bending schedules for any variations, which will be submitted to the Technical Services of the Ministry for examination. The Director General of the Ministry informed me that, the Head of the Technical Services, submitted a circular to the personnel of his Services, notifying them that where variations are made, during the execution of works for the payment of a lump sum, bending schedules of steel should be prepared. Additionally, he pointed out to the personnel that, in future agreements, a paragraph should be inserted, in the technical terms of the agreement, providing that for any variations the contractor will prepare bending schedules of the steel and submit them to the Technical Services for examination. 4.56.14 Erection of a Maronite School in Anthoupolis. As I stated in my Annual Report for 2000, pursuant to a relative Council of Ministers decision, taken in July 1998, the procedure for the acquisition of a building plot in Anthoupolis to be used for the erection of an elementary school for Maronites commenced. According to the building programme of the project, which was based on the standards applicable for elementary schools erected by the Ministry of Education and Culture, and on the current prices of projects for 1999, the budget of the project, amounting to £673.750, was prepared by the Technical Services of the Ministry. In June 2000, 11 tenders were submitted the prices of which were fluctuating from £1.104, 400 to £1..497.275. Due to the great deviation of tender prices from the estimated cost, the Ministry issued instructions to the designers for alterations to be made in the designs and specifications with the result the price of the lower tender to be £894.587. In January 2001, the Council of Ministers, after taking into consideration the view of the Main Tender Board, that, under the existing Public Tenders legislation, no alterations are allowed to be made in the designs for reducing the tender price, decided for the award of the tender for the amount of £1.104.400, to the lower tenderer. My Office was authorised by the Council of Ministers to consider the matter of responsibilities regarding the resulting difference from the initial estimate of £673.000. My conclusions about the difference were the following: (i) The use by the Architect of the project, during the design study, of specialized architectural features and specifications, which added to the cost of about £195.000. (ii) The additional cost for foundations and external works, due to the clayish soil (£75.000). (iii) The additional area of 550 c.m. (£110.000), approved by the Ministry during the design stage.

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(iv) The increase in current market prices (around 7%), in relation to 1999 prices, when the initial estimate was prepared (£50.000). The Council of Ministers decided to authorise the Minister of Education and Culture to submit a letter to the Architect, in which explanations will be asked to be given, for the inclusion in the designs study of specialized architectural features and specifications, which added to the cost of about £195.000. Additionally it decided for the Minister of Education and Culture to investigate further the responsibilities of the Services of his Ministry, in relation to the incompetent approval of the additional area of 550 c.m., which added by £110.000 to the cost. 4.56.15 Final Account of Ipsonas new Gymnasium. As I stated in my Report for 2000, there was a total delay of 77 working days, which was evaluated and approved by the private Architect, of the project. I observed that the Ministry had neither examined the above evaluation of the private Architect nor submitted suggestions to the Central Committee for Variations and Claims for approval, contrary to the existing procedures. I also observed that due to the removal of the axis of the road and the alterations in the altimeter of the level of the road, there was a considerable increase in the quantities of earthworks, the accuracy of which was not verified by the coordinator of the project and that this variation was not approved, contrary to existing procedures. Furthermore, I observed that no soil/geological survey was carried out prior to the preparation of the study and that irregular alterations and variations were made in the designs for which the necessary approvals were not secured. The Head of the Technical Services of the Ministry of Education and Culture informed me, in December 2001, that the Ministry agreed with the above evaluation and justification, for delay in the completion of works, but without payment of any expenses. He also informed me that the removal of the axis of the road and the variations were made, because in the meantime, certain errors in the altimeter, which was carried out by the Chairman of the School Committee for purposes of saving of time, were revealed by the Designer. The Technical Committee of the project raised observations against the Designer of the project for the variations which were made and approved by him and the matter was subsequently submitted to the Central Committee for Variations and Claims, for relative approval. 4.56.16 Paralimni B’ Elementary School. From a site inspection of the project, carried out, in July 2001, low resistance was observed in the concrete of the sub-columns of the ground floor and in one section of the slab. The need arose for the amendment of the relative provision of the Agreement so that a soil/geological survey to be carried out, before the preparation of the study, in order that the static survey to be based on trustworthy figures and any amendments, during the construction to be avoided. The Ministry of Education informed me that with regard to the resistance of the concrete, it was decided for deductions to be made from the payments to the contractor, because the quality of the concrete affects the safety of the building. With regard to the soil survey, the Ministry stated that this survey will be carried out for the new schools which will be constructed in the future. 4.56.17 Construction of playing grounds and fencing in the Lyceum, Gymnasium and Elementary School of Polemidhia. From a spot inspection, carried out in December 2001, it was observed that there was an initial delay of 3½ months, in the commencement of works, due to the awaiting decision for the demolition of the building of Polemidhia Lyceum and the installation of prefabricated rooms, although the space of Gymnasium was not affected by this

121 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 decision and the contractor’s works. Weaknesses were also observed in the management of the contract mainly, in matters pertaining to the delay and the laboratory tests. The Director General of the Ministry informed me that his Ministry is taking all necessary measures for compliance with my observations and the non-repetition of similar cases in future. 4.56.18 Formation of parking place and improvement of the room for multiple uses in H.T.I. In my Report for 2000, I stated that the measurement records regarding the type of excavations were not maintained, before covering the underground works, as well as other records required for the verification of payments. It was also observed that no accurate valuation of the auxiliary works, executed by the contractor was made, so as to safeguard the correctness of the payments. The Director General of the Ministry informed me that, for the excavations a diary was kept, in which the relative observations were recorded and that the supervising officers have no reservations about the accuracy of the quantities of excavations and payments. He also stated that for the evaluation of the auxiliary works, the contractor was requested and submitted an analysis of the quantities and unit prices of his tender. 4.56.19 Erection of a room for Olympic Gymnastic at Strovolos Apostolos Barnavas Lyceum. During a site inspection, carried out in October 2001, a substantial delay in the progress of works was observed, which was expected to be increased, due to the delay in the invitation and award of tenders for the space truss of the roof and the floor of the multiple uses room. With regard to the ambiguities observed in the tender documents, I suggested that in future tenders, the provisional sums and the basic cost amounts to be recorded in the schedule showing the tender analysis, in order to avoid any possible misinterpretations, as to whether these amounts were included in the tender submitted by contractors. I also suggested the stamping of the document agreement on the day of signing, so that any problems relating to the contractual date of the commencement of works, to be avoided. 4.56.20 B´ Technical School Limassol. During a site inspection it was observed that the contractor was not paid for several months, for the alterations and additional works assigned to him. It was also observed that in the documents for the invitation of tenders there was an ambiguity as to whether the contractor was responsible for certain works. At the same time, many significant alterations were made during the construction of the project, with the result the programme of work and the progress of the project to be affected. These alterations were irregular, because the necessary approval of the Department and of the Central Committee for Variations and Claims was not secured. In my letter, I observed that these ambiguities and omissions in the design of the project, should have been identified by the appropriate committee which examined and approved the tender documents and that with better planning the alterations in the designs during construction would have been avoided. The Director General of the Ministry stated that the problem was due to the fact that the project was supervised by a seconded educational officer, who replaced another seconded educational officer, and instructions were given for the recording of all additional works and their submission to the Departmental Committee for Variations and Claims, for approval. He also stated that the variations in the project were considered necessary for the better operation and safety of the school and strict and clear instructions were given for the implementation of the Regulations and procedures relating to the variations and claims.

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4.56.21 Tender documents. It was observed that the documents for the invitation of tenders, instead of being submitted to my Office at the time of their publication, as provided by Tender Regulations, in several cases there were submitted with delay, with the result these to be received by my Office after the expiration of tenders. As a result of the delay observed in the submission of tenders, my Office is not able to express any comments/suggestions before the date of invitation of tenders. It is noted that, similar cases were also observed in the past. The Director General of the Ministry informed me, in February 2002, that the delay in the submission of the documents was due to the sickness of the responsible Officer, as well as to the delay in the submission of the estimated cost, by the private Designers. 4.56.22 Government Educational Institutes. (a) The revenue from the operation of the Institutes during 2001 amounted to £1.304.097, whereas the corresponding expenditure amounted to £2.898.425 resulting to a deficit of £1.594.328. (b) In several Institutes omissions and weaknesses are observed regarding the keeping of registrers as well as the implementation of Financial Instructions and Stores Regulations. The Ministry attributes these problems to the fact that the School Clerks are part time casual employees. 4.56.23 Cultural Services 4.56.24 Budget execution – Unspent amounts. Substantial amounts were not spent out of several Budget Votes relating, mainly, to infrastructure works, as observed in previous years. In view of the substantial increase in unspent amounts, during 2001, as compared to 2000 (2001: 29% and 2000: 14%) my Office suggested that the Budget should be prepared, on the basis that the respective projects or other schemes will be executed. 4.56.25 Evaluation of programmes. It was observed that no evaluation of the programmes and schemes of Cultural Services, is carried out, annually and on the completion of each Strategical Development Scheme. I stated that such evaluation is considered necessary, for the revision of predetermined objectives where necessary, and to be used as a subsidiary tool for future planning. I also stated that, according to the Strategical Development Scheme of 1999-2003, the measures which should have been taken for the improvement of the situation and resolving the existing problems, encountered in the Cultural Services, which were not finally implemented, are: (a) Improvement of the organizational structure of Cultural Services. (b) Improvement of the mechanisms for the promotion of cultural activities and projects, including projects of cultural substructure. 4.56.26 State Gallery (a) Storehouse of Gallery. The arts in the storehouse of the Gallery are placed in unsuitable spaces and under adverse climatologic conditions, and run the risk of being destroyed. The anticipated rehousing has not yet been made. (b) Insurance of arts. The computerization and valuation of arts have been completed, but the invitation of tenders for their insurance, on the basis of new valuation, is still pending. I pointed out that this matter should be considered as urgent, due to the great value of the arts and the running risk for their loss.

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Part B 4.56.27 Arrears of revenue. Despite the efforts made, the amount of £657.435 is still due by the Board of Management of Mitsis Commercial School, representing salaries and pension contributions of the teachers, seconded to the school. Also pending is the collection of rents for the operation as the canteen of the A’ Technical School Nicosia (£11.992), of Dianellos Technical School Larnaka (£79.629) and of Technical School Agios Lazaros (£12.813). The matter of delay in the collection of above rents, is pending before the courts. 4.56.28 Cyprus Library. Several books have not been recorded in the relevant registers. There are also some books which have already been destroyed or run the risk of being destroyed, due to the unsuitability of the storage spaces. The Ministry informed me that efforts are made for the recording of books and that with the rehousing at the building of “Philoxenia” hotel, many problems will be resolved, taking into consideration that the new purchases of books are about 2000 volumes, annually. 4.56.29 Scientific Research Centre. Due to weaknesses in the keeping of the library registers and in the system of lending of books before 1996, there is the possibility for many books which were not recorded or given on loan not to be returned. Many books have a considerable historical value. 4.57 EDUCATION “A” FUND Part A 4.57.1 Operating results. The accounts for the year ended 31.8.2001 showed a deficit of £76.488, compared to £80.113 for the previous year (1990/2000) 4.57.2 Revenue. The revenue amounted to £8.677.493, compared to £8.054.879 for the previous year. These include government subsidy amounting to £7.920.935 and school tax £579.339, compared to £7.292.773 and £570.855 for the previous year, respectively. 4.57.3 Expenditure. The total expenditure was £10.090.530, compared to £9.813.148 for the previous year (1999/2000). These include subsidies to School Committees for operational expenses amounting to £4.294.796, compared to £4.100.293 for the previous year (1999/2000), and for capital expenditure £5.024.273, compared to £4.913.733 for the previous year. In addition £750.675 has been spent for interest on loans, compared to £779.926 for the previous year (1999/2000). 4.57.4 Books store. The books store showed a profit of £82.751, compared to £85.038 for the previous year (1999/2000). 4.57.5 Computerisation. For several years now my Office recommends the introduction of a computerized system for keeping the books of the Fund. The matter is still pending. Part B 4.57.6 Arrears of taxes. The amount of £171.735 is included in the accounts, for taxes imposed up to 1974, in villages in the occupied area of Cyprus. On my recommendation, the approval of the Minister of Finance was requested to write off this amount, but the request was rejected. The Ministry of Finance suggested that the matter be referred to the Law Office, as to whether the above amount can be written off according to the Law for write off of debts. This recommendation was not implemented.

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4.57.7 Lease of Potamos Germasogeia Elementary School building. Although the lease agreement expired on 30.9.88, the tenants continue to occupy the building, without signing a new agreement and without revision of the rent. After a relevant ruling of the Attorney General of the Republic, instructions were given, in February 1997, to the Chairman of Germasogeia School Committee, for taking the necessary action for the collection of amounts due, which according to the contract, is £12 daily, since 17.8.88. On 12.1.2000 the Director General of the Ministry of Education and Culture applied to the Law Office and asked to be informed of the further action and legal measures, to be taken against the above tenant. Until to day, the Law Office has not responded to the letter of the Ministry of Education and Culture. In the mean time, the Director General of the Ministry, on 7.6.02, informed in writing the Chairman of Potamos Germasogeia School Committee that the responsibility for taking legal measures, rests with the School Committee, for eviction or for any other necessary measure. 4.58 SCHOOL COMMITTEES Part A 4.58.1 Financial position. The financial position of School Committees depends, mainly, on Government subsidies. Government also raises loans on behalf of School Committees, for the execution of various projects, such as the erection of school buildings and the addition of classrooms. The repayment of these loans is undertaken by Government. 4.58.2 Regulations. The Law, which provides for the establishment and operation of School Committees, was enacted into Law, by the House of Representatives and was published on 31.12.97 (Law 108(I)/97). Until to day, no Regulations have been approved by the Council of Ministers for the better application of the provisions of the Law and the regulation of various matters, according to section 17 of the Law. 4.58.3 Final Accounts. According to the new Law, the accounts of School Committees should be prepared in accordance with the Financial Regulations applied for School Committees. These Regulations have not yet been issued. I have pointed out that their approval must be accelerated, so that, besides the serious matter of preparation and presentation of the financial statements, other matters also regarding accounting procedures and financial administration will be regulated. 4.58.4 Staff of School Committees. (a) Regulations. The procedures for the approval of Regulations, governing the staff matters, have not yet been completed. As a result, there is no uniformity in the terms of employment and claims are submitted for the revision and upgrading of salaries scales, for purposes of equal treatment. The Director General informed me that draft Regulations were submitted to the Attorney General for legal processing. (b) Staffing of School Committees. The duties relating to the financial management of School Committees are mainly, performed by School Clerks, who are permanent employees of the Ministry. As it was stated in my reports, on the accounts of School Committees, weaknesses are observed in the keeping of books, the preparation of accounts and the compliance with the provisions of existing legislation, Regulations and Instructions.

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As it was stated in the past, this is basically, due to the assignment of duties to unspecialized and not suitably trained/educated staff, in related multiple duties and responsibilities for the financial management of School Committees. With the enactment of the Law of 1997, and the assignment of more responsibilities to the School Committees, the problem will become more acute. 4.58.5 Service records, personal files, leave files and attendance books. In several School Committees, the above records and files are not kept or are not duly updated, relating to the appointment, service, salary increase etc. of the staff of School Committees. 4.58.6 Preparation of Budgets and Final Accounts of School Committees. The Budgets and Final Accounts of Secondary Education do not disclose the receipts and payments made directly by the Ministry of Education and Culture on behalf of School Committees and consequently, they do not present a complete picture of their affairs, whereas those of Secondary Education, although not included in the Budgets are incorporated in the accounts of School Committees and are shown in “A” Fund. With the enactment of the School Committees Law of 1997, I suggested that the matter be regulated with the preparation and approval of the Budgets of School Committees. Although the Ministry informed me that, as from 2000/2001, the receipts and payments effected by the Ministry, will be included in the Budgets of the Secondary and Elementary Education, this has not yet been applied. Part B 4.58.7 Provident Funds. In my previous Reports it was stated that, the operation of Provident Funds by the School Committees is not covered by Regulations. As I was informed draft Regulations have been prepared and submitted to the Attorney General for legal processing. 4.58.8 Canteens (a) Management of school canteens. Cases were observed where the initial tender amount was subsequently modified, or where the terms of the tender agreement were not fully implemented, resulting to the loss of substantial amounts of revenue for School Committees. (b) Operation of cantees. The School Canteens Law of 2000, (60(i)/2000), provides for the establishment and operation of a Central Committee for the Control of School Canteens, which will carry out relevant examinations. Section 22 of the above Law, provides for the issue of Regulations by the Council of Ministers, the issue of which is being pursued. 4.58.9 Computers registers. As a result of the installation of a large number of computers in Schools and the Offices of School Committees, I suggested in my previous Reports that appropriate registers should be kept, suitably devised in which to record details of their purchases for purpose of follow up and location. It is also necessary that a system for the follow up of their maintenance to be introduced on the basis of relevant contracts. My suggestion has not yet been adopted by all School Committees. 4.58.10 Inventory registers. Weaknesses continue to be observed, regarding the proper keeping of inventory registers. 4.58.11 Immovable property. Several School Committees are not keeping the appropriate registers of immovable property or they have not made the necessary arrangements for ascertaining their immovable property and for the updating, or the issue of new registration certificates, in their names, according to Section 10 of the Schools Committees Law of 1997.

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4.58.12 Libraries. In several libraries, the physical inspection of books is not carried out, due to insufficient staffing of the Schools, with librarians. 4.58.13 Displaced School Committees – Cash balances. The displaced School Committees have at their disposal cash balances in co operative societies and banks, which are under their administration. All the above School Committees have failed to submit for audit the necessary documents. 4.59 NICOSIA SCHOOL COMMITTEE Part A 4.59.1 Accounts. It was again observed that, there was a delay in the preparation and submission for audit of the accounts for school year 2000/2001. As a result, it was not possible for my Office to carry out the audit, promptly. The accounts were received by my Office on 5.8.2002. The following matters are pending from previous audit. 4.59.2 Internal control. The system of internal control, covering the activities of School Committees and the management of legacies, presents weaknesses and omissions. Specifically, weaknesses are observed in the organizational structure and the allocation of duties, the follow up of the cost of projects executed by the Ministry of Education and Culture, the clearing of advances accounts and the keeping of appropriate registers and other records for the follow up of legacies. As from the school year 2000/2001, the School Committee has secured the services of a financial consultant and the situation is expected to be improved. 4.59.3 Administration of legacies. As the revenue of the School Committee from legacies is considerable, my Office suggested the amendment of the terms of many legacies, the purposes of which have ceased to exist or are not in line with present realities, so that their income to be better utilised. I was informed that a legal advice will be sought from the legal advisers of the School Committee for the amendment of the terms of legacies. Part B 4.59.4 Government loans for Elementary Education. Considerable delay was again observed in the repayment of government loans amounting to £990.000, received by the School Committee since 1986 to cover Budget deficits. The installments in arrear at 31.8.2001 amounted to £990.000, compared to £956.468 for 2000. The matter was referred to the Ministry of Finance for the settlement of loans. Recently (July 2002), the Ministry of Finance decided that the matter should remain pending, until the amendment of the terms of legacies, for the increase of income and the repayment of part or of all the amounts due to the Government. 4.59.5 Inventory register (General). The register has not yet been prepared, contrary to Store Regulation No. 5, resulting to difficulties in the preparation of the accounts and the follow up and control of assets. Also, no sufficient records are kept for the land and buildings, under the possession and administration of the School Committee. Although a computer programme has been purchased, for the purpose of keeping the inventory register, and the training of staff was made yet no substantial improvement has been noted, due to existing problems. 4.60 LARNAKA SCHOOL COMMITTEE Part A 4.60.1 Inventory registers and computer equipment. The registers were not examined at the end of school year 2000/2001 and no physical stock taking was carried out. As a result, the

127 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 relative certificate for the accuracy of the documents and of the physical stock existence was not submitted. Part B 4.60.2 Shares of Bank. In my previous Report, it was stated that the School Committee, is the registered owner of 16299 shares of a bank, having a nominal value of 50 cents each. From an investigation, it was ascertained that the shares derived from a donation of 45 shares, received in 1948, which were subsequently increased to 16299, as a result of bonus shares issues and new purchases, made from time to time. As the purpose of the original donation is unknown, these shares are not considered as a legacy for specific purposes. My Office suggested that, in cooperation with the Ministry of Education and Culture, a decision to be taken, for the further management of the shares. So far, no relative decision was taken. In the meantime, the Ministry of Finance, during the consideration of the matter regarding the repayment of loans and advances issued to School Committees, has pointed out that the legacies and/or cash balances of School Committees should be used for the repayment of part or of all balances of loans. 4.61 POLIS CHRYSOCHOUS SCHOOL COMMITTEE. Part B 4.61.1 Upgrading of staff salaries. The School Committee decided on 14.1.99 for the salary upgrading and emplacement in new salary scales of two members of the staff, with effect from 1.1.99. Despite the refusal of the Ministry of Education and Culture and the non-approval of the above upgrading through the Budget, the School Committee continues to pay the upgraded salaries. 4.61.2 Utilisation and administration of immovable property. The School Committee is the registered owner of the kaisidion house, which is under lease during the last 10 years to a private individual under an annual licence for use as a kindergarten, at a nominal rent of £1.505 annually. According to the valuation, made by the Department of Lands and Surveys, the value of the land and building, for purposes of rent, is estimated at £8.800 annually, and in case of long term lease at £12.000 annually. My Office expressed the view that there is room for better exploitation of the building, for the benefit of School Committee. 4.62 ARMENIAN SCHOOL COMMITTEE Part A 4.62.1 Delay in the submission of accounts for audit. As it was stated in my previous Reports, the audit of the accounts for the years 1995-1996 and afterwards, was not possible, due to serious weaknesses and omissions. Recently, in July 2002, the new Chairman of the School Committee submitted to my Office new final accounts for the school years 1995/96- 2000/01, but it was not possible to be audited, because the necessary documents were not produced for audit. 4.63 MINISTRY OF COMMUNICATION AND WORKS 4.64 DEPARTMENT OF ANTIQUITIES Part A 4.64.1 Budget execution – Unspent amounts. Substantial amounts under various Budget Votes remained unspent, relating, mainly, to execution of projects. I pointed out that better

128 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 planning of the needs should be made, so that the budgeted amounts to correspond to the possibilities for the implementation of projects. The Director of the Department informed me that, with the appointment of the necessary staff, of one Architect, one Civil Engineer and one Quantity Surveyor, the problem is expected to be resolved. 4.64.2 Burglaries. During the year, a lot of incidents of burglaries occurred. In the Budget for 2002, there is a provision for the installation of security alarm system in the Museums and Ancients Monuments. Part B 4.64.3 Stocks of antiquities. In my previous Reports I recommended the computerization of the antiquities registers for purposes of better control and follow up. The recording of stocks in the computerized register, commenced in September 2001, but as I was informed this will be completed after several years, due to the great volume of work. 4.64.4 Casts and transcripts workshop. In view of the many weaknesses observed in the operation as the workshop, an investigation is being carried out by the Ministry of Communications and Work, after a suggestion was made by my Office, for taking a decision, regarding the necessity and usefulness of the operation of the workshop. 4.64.5 Carpentry workshop. At the carpentry workshop, operating at the Nicosia Airport area in the buffer zone, the appropriate procedures regarding the receipt and disposal of timber are not followed and the Stores Regulations are not implemented. I pointed out the need for compliance with Stores Regulation and the carrying out of periodical examinations. Even though the Director of the Department informed me in the past that strict directions were given for full compliance with my recommendations, from spot examination it has been observed that no improvement has been made. 4.65 DEPARTMENT OF PUBLIC WORKS Part A 4.65.1 Deposits account. At 31.12.2001 the balance of the account was £11.649.319. included in the above is the amount of £9.471.225, representing deductions and guarantees for contracts executed or are in progress, as well as unspent balances of deposits made by third parties, for the execution of various works. Many of these balances are pending for long periods of time and should be investigated and settled accordingly. 4.65.2 Delays and surcharges due to weaknesses in the planning of the execution of projects. (a) Development of Larnaka and Pafos Airports. The technical and financial feasibility study and the General Scheme for the Development of Larnaka Airport, which was prepared in June 1991 by a firm of consultants, did not satisfy the Ministry of Communications and Works and in February 1993 a new study was assigned to a joint venture of two French firms, for the amount of £2,9 m. Due to alterations in the plans decided by the Ministry, these were completed with a delay, in February 1999, at an extra cost of about £1m. the total expenditure for the execution of development projects of the airports of Larnaka and Pafos is estimated at £150m. and £50m., respectively, at 1999 prices. In the meantime, the Council of Ministers decided, in May 1998, the autonomisation and the involvement of the private sector in the development and the administration of the new airports of Larnaka and Pafos, whereas in March of 1999 approved the action plan, according to which

129 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the new airports will operate in 2005, with a delay of about ten years from the initial estimates. The study for the autonomisation of the airports was assigned in December 1999 to a Joint Venture of Consultants, for the amount of £894.000. Later, due to disagreements between the Government and the House of Representatives, regarding the model of autonomisation of the airports in Cyprus, a new serious delay was observed in the time schedule for the development of airports. In June 2002, the Main Tender Board approved the selection of 5 tenderers and in July 2002, these were requested to submit their final tenders, in October 2002. Finally, only 3 tenderers submitted their tenders. (b) New building of the House of Representatives. The Council of Ministers decided in July 1993, with the consent of the House of Representatives, that the new building of the House be erected in the development area of Nicosia Stadium and the Ministry of Communication and Works. In accordance with the project execution programme, construction works would commence in September 1997, the proclamation of tenders, however, was postponed due to the non completion of archaeological excavations and the discovery of antiquities, which, in the department of Antiquities view, were important. In January 2000 it was decided, due to the discovery of archaeological antiques, that the construction of the new building of the House of Representatives be moved to a new site and the necessary alterations to be made in designs. In January 2002, the House of Representatives decided that the building be erected at the area which was initially selected. Up to June 2002, the payments to designers/consultants amounted to £1030.000 and include the amount of £376.000, representing compensations, for the settlement of their claims submitted for delay and the revision of designs. In the meantime, due to delays in the execution of project, it was decided that improvements and extensions to the existing building of the House to be made at the cost of £3 m. (c) Construction of Government Offices Complex in Nicosia. In March 1998, the construction of the project was assigned for the amount of £16,5m., with completion in August 2001. During the execution of the project, considerable delay was observed in the progress of works, mainly due to delay in the appointment by Government of the sub contractor for mechanical works. The Central Committee for Variations and Claims approved an extension of 30 weeks, with monetary compensation and nine weeks without monetary compensation. In March 2001, I observed that a lot of alterations were made, the cost of which has not been calculated, but it is estimated at £1m. Some of the alterations were decided by the consultants without obtaining the approval of Government, required under the existing Regulations. The project was delivered on 7 June 2002, and contractor’s claims are pending for arbitration, regarding compensations for £1,8m. The use of the offices in time was not possible, due to delay observed in the supply of furnitures. The tenders for the supply of the furnitures were invited, with delay, on 20.5.2002, and their purchase is expected to be made until the year end. (d) Dhekelia – Protaras highway – Direction of the highway. In April 1992 the Council of Ministers decided for the design of the Highway, according to the direction specified by the technical and financial study and the recommendations of appropriate Services. After the reactions of the affected communities and of the Municipal Council of Famagusta, the Council of Ministers proceeded to repeated alterations of the direction of the highway. Finally in September 1996 the Council of Ministers decided that the construction be made south of Xylophagou community, towards the tourist area of Paralimni – Agia Napa. Up to the end of June 2002 the amount of £616.000 was paid to the Consulting Engineers, for studies prepared according to the contract, and the amount of £314.000 for additional studies, and

130 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 compensations for delays. In addition the Consulting Engineers claim the amount of £150.000, for new delays and suspensions of works. In October 1996 the construction of the project commenced and was completed in July 2002, for an amount of about £35m. In the meantime, the Council of Ministers decided in December 2001,for the upgrading of the highway from Xylotymbou – Ayia Napa, so as to permit maximum speed of 100 kilometers per hour, at the cost of about £4m. My Office observed that for the execution of the works, for upgrading the sections Ormidhia – Xylotymbou – Ayia Napa, additional works will be carried out in the sections of the highway, which have already been completed and were delivered to traffic, during 2000-2001, something which would have been avoided with better planning. (e) New Nicosia Hospital. After invitation of tenders, the construction of the project was assigned for the amount of £37,5m., with commencement in May 1997 and completion in February 2002. In June 2002, the project presented delays, approximately of 176 weeks. The 79 weeks were attributed to the contractor and the rest (97), mainly, to alterations and additions. The revised cost of the project is about £51m., and the contractor submitted claims for £11m., regarding delays and surcharges, for which, he has the view, that he is not responsible. In October 2002, a supplementary agreement was signed, after negotiations were made between the Central Committee for Variations and Claims which provides for the completion of the project until July 2004 and the payment to the contractor of compensation amounting to £5m. (f) New Famagusta Hospital. The design study of the project, the cost of which is estimated at £7,5m., was assigned to private architects in July 1997, with completion in March 1998. The study as well as the invitation of tenders present a delay of about 30 months, part of which is due to the architects and part to delays in decision making by Government. The contract for the execution of the project was signed in May 2001, with completion time until June 2004, at the cost of £10,5m. The increase in the cost of the project is due to significant additional works, such as, for a gynaecological intensive care unit, a revision of the cost of electromechanical works and increases in the prices of materials and wages. (g) Round about No. 6 in Limassol – Intersection of roads Griva Digeni – Linopetra. The contract for the construction of the round about was signed with a private contractor in September 1997, for the amount of £240.000. In July 1998 the Department of Public Works suggested to the Central Committee for Variations and Claims the annulment of the contract, because of the objections raised by the Municipalities of Limassol and Agios Athanasios, which were due to the fact that the constructions which were to be carried out according to the existing contract were temporary until the preparation of the final regulatory scheme of the Department of Planning and Housing. In May 1999 the Central Committee for Variations and Claims decided to cancel the contract, and in January 2002 approved the payment of compensation, amounting to £100.000, to the contractor. I observed that the annulment of the contract is due to insufficient planning and coordination between the Government Departments involved, resulting to considerable financial compensations. In October 2002, the Department of Public Works informed me that, departmental workshops teams were used for the execution of necessary works so as to secure the traffic movement of the round about. (h) Round about at Makedonitissa avenue with Eleonon road in Strovolos – Contract No. PS/C/304. During a spot inspection of the above project, delay was observed for a period about of 2 months, due to the problems encountered in the movement of existing services of E.A.C., CY.T.A. and Water Board Nicosia, which prevented the execution of works. Also, a suspension of works was given by the Department, until the consideration of the possibility for

131 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the laying of the central pipe of the Water Board Nicosia, which was not included in the contract. Finally, the project was completed with a delay of 4 months, while the contractor intends to raise a claim for financial compensations. I pointed out that the delays and surcharges would have been avoided, with the proper coordination of Authorities involved, during the design of the project. (i) Construction of four parallel breakwaters in Limassol – Contract No. PS/C/311. During a meeting, held in April 2001, a decision was taken, by the appropriate authorities, for the alteration of the time schedule, provided in the tender documents, regarding the suspension of works during the tourist period. The Department informed in writing the contractor for the alteration of the time schedule, although the alteration was not included in the tender documents, at the time of signing the agreement, which was accepted by the contractor without any financial claims. After the commencement of works, the contractor applied for an extension of time of 10 weeks, considering the alterations as a variation in the terms of the tender. I pointed out that with better planning, the suspension of works would have been included in the tender documents or, as this was not done, to be considered by the Department after the award of tender and approval to be sought for the alteration of the time schedule, according to the appropriate procedures. The Director of the Department informed me that this weakness is attributed to the inability of the Municipalities involved, to secure, promptly, the loans for the financing of the project, and that the Department has acted preventatively, so that the contractor not to raise subsequently, financial claims, as a result of the suspension of works. 4.65.3 Delays and surcharges due to errors and omissions in studies. (a) Construction of Coastal Limassol Road. Section Myria Court – Amathus Hotel. At a meeting of the Services involved, held in March 2000, it was decided that the project should have been completed before the tourist period of 2001. In view of the delay in the payment of contribution, by the Agios Tychonas Board, for the financing of the project, the invitation of tenders was not made promptly, and the completion of the project was extended to 31.7.2001. During the execution of the project, there was a delay of two months, mostly attributed to the contactor. At the end of May 2001, after complaints were raised by the affected hotels and the intervention of the Minister of Communication and Works, it was decided and agreed with the contactor, for the acceleration of works, for covering the serious delay observed. In my letter to the Director of the Department, I observed that, due to the absence of the necessary provisions in the contract, such as for the right of employer to suspend the works without conditions, or the payment of dissuasive compensations by the contractor, the Central Committee for Variations and Claims was finally obliged to approve the payment of the additional amount of £215.000, to the contractor, for the completion of the project until 14.8.2001. (b) Construction of pavements and drainage water system in Klirou – Contract No. PS/C/170. (i) The construction of the project commenced in March 2000, and was expected to be completed in December 2000, but finally was completed in July 2001. The delay of 7 months is due to alterations in the designs and additional works, assigned to the contractor, mainly, relating to the improvement of the network of CY.T.A. I observed that, the delays were not examined promptly by the Department, with the result the contractor to

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complete the works, in a period chosen by him, with all consequential repercussions. The Director of the Department informed me that instructions were given to the supervising engineers to examine, promptly, the delays observed, in the projects. (ii) In March 2001, the Department decided for the exclusion from the contract of all asphalting works, which were considered inadequate. Also, it was decided that a study be carried out, for the reconstruction of the road pavement, on the basis of a new contract agreement. I observed that, while the existing road pavement was presenting serious defects prior to the invitation of tenders, the Department had not taken into consideration the need for the reconstruction, but was based on the findings of the study carried out in February 1996. The Director of the Department informed me that, during the study, the road pavement was presenting minor defects, which, until the commencement of execution of the project, were increased considerably, due to the passing of heavy vehicles, carrying quarry materials. My Office does not accept the explanations given by the Department.

(c) South By-Pass Nicosia - Construction Acropolis Round About - Contract No.PU/104/2. After the commencement of works, the Water Board Nicosia informed the Department of Public Works that intends to install a new central pipe line of long length, to cover the water needs of Latsia Municipality and of New General Hospital of Nicosia. Due to this work, which was not provided in the contract agreement, there was a delay of 2 months in the completion of works and the contractor is intending to claim financial compensations. I observed that, the non- inclusion of the aforesaid pipeline in the tender documents constitutes a serious omission, as the pipeline is an extension of the existing, which was placed since 1998, to the other section of the same road. The Director of the Department informed me that the construction of the round about is a temporary traffic solution (the final solution provides for the construction of an overfly round about) and in view of this, the needs of the services involved were not taken into consideration for the new development programmes. (d) Construction of bypass road at Phini and improvement of the roads of Phini village. In the contract designs, the bends of slopes excavations, of the road, were different from those of the design study. As a result, there was a serious problem in the execution of works and the contractor suspended the earthworks until a final decision is taken by the Department. Additionally, there was a sliding in the part of slopes excavations resulting to further delay. The project was completed with 15 months delay and the contractor’s claims were evaluated by the Project Engineer and were submitted to the Departmental Committee for Variations and Claims. In November 2001, the Committee requested the Director of the Department to submit a report on the omissions and delays observed in the above project. So far, the aforesaid report has not been submitted to the Committee. (e) Timi – Nata – Pentalia – Panagia road. As a result of negative soil conditions presented during the execution of the project, the Department requested the approval of the Central Committee for Variations and Claims for alterations in the contract, valued at £211.000, which represented 32% of the contract amount. Furthermore, due to the proposed changes, it was suggested that an extension of the contract time for 50 working days to be allowed with an estimate of the financial claims of the contractor for compensations of about £20.000. I observed that the need for changes resulted because three geological reports were ignored by the consultants, which were made during the study, and in which an exceptionally unstable formation of the ground was pointed out, as well as the existence of fountains along the axis of the road. Due to the seriousness of the matter I recommended the carrying out of an investigation, for the purpose of assigning responsibility, regarding omissions observed in the

133 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 study. In May 2000 the Ministry of Communications and Works appointed an investigating officer, who submitted his report to the Appropriate Authority, and the Law Office, for legal advice. Finally, the Law Office replied that, it is not possible, to substantiate any offence. (f) Construction of Lefkara - Vavatsinia road – Phase I – Contract No. PS/C/151. During a spot inspection in the above project, it was observed that, due to incorrect calculations at the stage of study, the quantities for the construction of supporting walls, will exceed considerably those which were included in the contract agreement. I pointed out that the correct measurement of the quantities is necessary for the verification of the cost of projects, the evaluation and award of tenders and for avoiding of financial claims and delays by contractors. (g) Construction of Sheds for National Guard at Aplanta – Contract No. 23/2000. According to the terms of the contract agreement, the space for the construction of sheds should have been delivered to the contractor, flat, and ready for the commencement of foundation works. It was ascertained that the earthworks, carried out by National Guard, for the levelling of space, were improperly made. For this reason, instructions were given to the contractor for the execution of the necessary earthworks, as well as additional rock excavations in one of the sheds. As a result of these works, valued at £35.000, a delay of 4 months was observed in the completion of the project, resulting to the payment of compensation to the contractor, amounting to £10.000. The Director of the Department informed me that the problems encountered, are due to the fact that the spaces of sheds were not correctly specified, prior to the invitation of tenders, for the project. Also, the Commander Engineer of National Guard informed me that the unsuitability of the earthworks is attributed to the fact that the National Guard is not possessing the necessary machinery, equipment and experience, for the execution of such works. (h) Handria – Agros road. The road was completed with a delay of 20 months, due to problems, encountered during the execution of works, such as land acquisitions, removal of services, increase in contract quantities, and adverse weather conditions. As a result, the Central Committee for Variations and Claims decided, in April 2001, for the concession of justified extension of time for 315 days and compensation for £95.774. The contractor did not accept the decision and submitted the matter to arbitration, while efforts are being made for compromise. 4.65.4 Weaknesses in the organisation/procedures for the examination of projects. (a) Evaluation of financial contractors claims. My Office observed that the supervisors and coordinators of projects, as well as the Departmental Committees for Variations and Claims, accept and evaluate contractors claims submitted with delay and out of specified time limits. As a result, the employer is not in position to take measures, promptly, to resolve the problems, which, according to contractors, affect the progress of works, assigning responsibility to the Government side, as well as to examine promptly, the correctness of such claims. In February 2002, the Law Office, in reply to my letter, confirmed that the time limits for the submission of claims by contractors are considered as an essential term and any violation of these limits by the supervisors constitute them responsible for any damage that may be caused to Government. As a result of the above, I requested the Accountant General to issue a relevant circular, under which the strict compliance with of the contractual obligations by the responsible officers to be observed. In October 2002, the Director of the Department informed me that the circular was issued to all responsible Officers for adoption, according to the legal advice of the Law Office.

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(b) Defects in the asphalting road surfaces. In 1985, I suggested to the Department of Public Works to launch a searching programme for the suitability of materials and methods of execution of asphalting road surfaces, for the purpose of formulation of correct specifications, so as to prevent defective works. I observed that the Department had not adopted any searching programme, with the result the defects and unjustified damages in the road works to be treated spasmodically and occasionally and responsibilities to be assigned exclusively to the contractors. For the radical solution of the problem, I suggested that the Department should take all necessary measures, such as, for the preparation of specifications for materials and methods for construction and supervision etc.. Indicative examples of such unjustified defects are the overlay of asphalt premix at the highways Aradippou Dhekelia and Nicosia – Larnaka (section – Aradippou), where the maintenance works were completed recently. The Director of the Department informed me, that at present, the necessary searching programmes cannot be implemented by the present staff. For this reason, the primary objective will be the accrediting of the Laboratory, which will contribute to the proper staffing and training of staff, which will enable the Main Laboratory to be in a position to launch the searching programmes. (c) Independent laboratory tests for projects by the Main Laboratory. From a sample audit of the files of the Main Laboratory of the Department, kept for the large contracts, it was observed that the test carried out by the Main Laboratory is not sufficient and systematic, because of the gradual reduction of the staff of the Laboratory. As a result of the existing situation, the quality control system of projects is considered inadequate for securing that the projects fulfil the specifications, whereas the building installations and the equipment of the new Main Laboratory are not fully utilized. In his reply letter, the Director of the Department informed my Office that all necessary action is taken for the employment of suitable and qualified staff, so that the laboratory’s potentialities to be fully utilized. From a new audit carried out by my Office, it was observed that, despite the above assurances, the laboratory was further weakened due the transfer of a number of experienced employees to site supervision of road projects. (d) Final accounts of contract agreements for road and technical projects. From a random examination of the contract agreements of the Department, it was observed that the provision relating to the periods of preparation of Final Accounts are not followed. Specifically, the contract agreements provide that within 4 months from the temporary delivery of the projects the contractor should submit to the Department the Preliminary Final Account and within 3 months from its submission, the Engineer of the project to examine and certify the Accounts. I pointed out, that the implementation of above provisions is of vital importance because the examination should be carried out when the facts and records are recent and the responsible officers are not involved in other duties. The Director of the Department informed me that my suggestions have been accepted and were notified to all District Engineers and Project Engineers for strict compliance with the relative provisions of contract agreements. (e) Tender Documents – Submission of suggestions by prospective suppliers or contractors. From the study of the tender documents for road and technical projects, I observed that, there is no provision in the instructions to tenderers, for compliance with section 5 of the Government Tender Regulations, of 1999. This section provides that the prospective tenderers or contractors may submit suggestions, comments and observations on the technical specifications and the terms of the tenders. The Director of the Department informed me that the above provision has now been included. (f) Construction of bicycle lane and pedestrian road at Peyia – Agios Georghios road – Contract No. PS/C/339. Due to the inclusion in the Bills of Quantities, of wrong quantities, for

135 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the earth works and for the construction of the borders and pavements, there was an increase in the cost of the project, of about £11.000 (12% of contract amount) and a relative delay in the completion of the works. In my letter to the Director of the Department, I asked to be informed whether he quantities were examined by a second person, according to the specified procedure. With regard to this matter, the Director General of the Ministry of Communications and Works requested the Director of the Department to issue a relevant circular to all the branches and units, responsible for studies, so that the examination to be carried out independently of the volume of work of each employee. (g) Calculation of quantities and payments for road works. From a random examination of the payments for road works, it was observed that, while the contractors are drawing the intersections of the roads and calculate the quantities of earthworks by the use of computer programmes, the Department, in most cases examines the intersections and quantities by applying the method of measurement, without using any computer programmes. My Office suggested that, for the more effective management and examination of payments, the Department should secure similar programmes used by the contractors. The Director of the Department informed me, in May 2000, that the Computer Unit of his Department is making arrangements for securing the appropriate computer programmes, to be used by the supervising Engineers. The arrangements of the Unit were completed and in 2002, the training of Engineers in the use of the programmes commenced. (h) Extension of Heros Avenue in Nicosia. The commencement of the execution of the project was in January 2001 and the completion in January 2002. The contract agreement provided also for the reconstruction of the surface of asphalting layer of 28th October Avenue. In April 2001, the Department decided for the deduction of the above work from the agreement, because the predetermined works of Public Corporations were not taken into consideration during the design study of the project. Despite the reduction in works considerable delay was observed in the progress of works, which is, mainly, due to the contractor. The Department proceeded to the interim evaluation of the performance of the contractor, which was not considered as satisfactory. The matter was considered by the Central Committee for Variations and Claims, without taking so far any decision. 4.65.5 Weaknesses in the administration of contracts. (a) New Government Buildings in Nicosia – Phase “A”. During the execution of the project, I observed that the Architect failed to take the appropriate measures, for purposes of safeguarding the interests of employer, with regard to the defective insulation of the roof of ground slab, at Z section, which presents water leakage, without deducting from the payments to the contractor of the cost of such work. The Department of Public Works submitted the matter to the Central Committee for Variations and Claims, which decided for the deduction from the payments to the contractor, of the cost for the construction of the above slab. The contractor did not accept this decision and the employer asked the “decision” of the Architect. The Architect failed to give his “decision” and the employer submitted the matter for arbitration. (b) New Building of Supreme Court in Nicosia. (i) The commencement of the execution of the project was in October 2001, and the completion was in February 2004. During the first 6 months, there was a delay of about 3 months, mainly, due to the slow progress of work, of the contractor. In March 2002, the contractor submitted the programme of work, for which there is no written approval, by the Architect of the project, as provided by the terms of the contract agreement. In view of this

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delay, and the fact that 8 months elapsed from the commencement of the works, I pointed out that the private Architect should have taken the necessary measures, including written notice to the contractor, according to the repeated directions given by the Department of Public Works, for the acceleration of the progress of works. In the meantime, the contractor submitted two claims for extension of time, which have not yet been evaluated by the Architect. (ii) During the audit significant differences were observed, between the records shown in the diary of the workshop, kept by the contractor and the records kept by the supervisors of the project. I pointed out that the necessary corrections of the records were not made by the Architect with the result the interests of the employer not to be safeguarded. (c) New General Hospital Nicosia–Supply of accessories for sanitation spaces. In October 2001, the Main Tender Board appointed an ad-hoc Committee for the study of the Evaluation Report, submitted by the Department of Public Works in relation to the above tender, in order to ascertain whether there was a fair competition between the tenderers. The main observations on the findings of the Committee are: • Section 6(1) of Government Tender Regulations, which provides that the specifications and terms of the tenders, will be prepared in a way that will secure the possible wide participation of tenderers, was not implemented. • Regulation 4(3), which provides for the publication/notification of the intentions of the interested Service, before the finalisation of tender documents, for the submission of suggestions, comments or observations, by prospective suppliers, was not implemented. • Regulation 8(2), which does not permit the provisions in the tender terms and specifications, for favourable treatment of certain goods, was not implemented. • The handling of the whole matter by the Architect, was not the proper and the procedures followed were vulnerable. The specifications were photographing specific goods and precluded fair competition. On the basis of the above, the Committee suggested for the cancellation of tenders and the invitation of new tenders. The Main Tender Board adopted the suggestion of the Committee for the cancellation of tenders. (d) Poli – Steni – Lysou road – Contract No. PS/C-85. After representations made by affected land owners, the axis of road was changed three times by the Department, resulting to justified delays from the part of contractor, for which he received compensation, amounting to £100.000. The first two changes were approved under the existing procedure, without financial repercussions for the delay observed, to be noted by the Department. The third change was decided, at the meeting held, in April 1998, at the Ministry of Communications and Works, after the completion date of the project provided by the contract agreement. This change was also decided, without the financial repercussions to be noted, and was made without the appropriate procedures to be followed for its approval. In view of the above, the Central Committee for Variations and Claims considered that the above changes, for which the amount of £100.000 was paid, were not justified. Finally, the Committee approved the payment of the amount of £100.000 to the contractor, for the settlement of his claims, because, under the circumstances, there was no any other alternative solution. (e) Periodic maintenance of roads in , Contract No. PS/C331. From a spot inspection, carried out in October 2001, my Office observed that, according to laboratory tests,

137 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 carried out in the Main Laboratory, the material of concrete foundation, which was used with the approval of the project Engineer, was not fulfilling the appropriate specifications of the project. After instructions, given by the Engineer, sand was added to the material and from new laboratory tests, carried out in the laboratory of the workshop, it was ascertained that this was within specifications. Subsequently, it was ascertained, from new laboratory tests carried out in the Main Laboratory, that the material continued to be out of specifications. With regard to this matter, the Ministry of Communications and Works informed the Director of the Department that, in case of disagreement for the results of the tests, carried out by the Main Laboratory and by any other non governmental laboratory, the results of the first laboratory should be considered as correct, unless new tests in the Main Laboratory will indicate different results. In July 2002, the Director General of the Ministry informed me that, in this specific case, other tests were subsequently made which proved that the materials used were within specifications. 4.66 DEPARTMENT OF MERCHANT SHIPPING Part A 4.66.1 Arrears of revenue. The arrears of revenue as at 31.12.2001 amounted to £933.641, compared to £912.305 for the previous year, showing an increase of £21.336 or 2,3%. The arrears include the amount of £763.660 for tonnage tax, £32.005 for inspection fees, £626 for crew fees and £31.761 for wireless licences. The amount of £205.686 representing surcharges on overdue tonnage tax is not included because this is payable at the time of payment of the tax. I recommended the investigation of all arrears for the purpose of their collection or write off. With the Ministry of Finance approval, the amount £1.039.322 was written off during the years 1995-2000. 4.66.2 Performance audit on the pollution of seas from ships. During 2001, a performance/ environmental audit was carried out by my Office, in relation to the above subject. This audit, was at the same time, carried out by eight Supreme Audit State Institutions of European countries, within the framework of the programme of EUROSAI Environmental Group. Details for this audit are given in the Part 3 of this Report. Part B 4.66.3 Computerisation. (a) There is still a delay in the computerisation of ship charges. I recommended the acceleration of computerisation process so as the updating of relevant records to be carried out promptly and the relative charges to be effectively collected. It is pointed out that the day observed will have an adverse effect on the cost of computerisation, which is constantly increasing. (b) I reiterated that the imposition of tonnage tax through the computerised system continues to present problems and a lot of work, due to the limited potentiality of the programme, is carried out manually. For the computerisation of the Department, tenders were invited on 8.3.98 by the Department of Information Technology Services and the award was made by the Main Tender Board on 26.2.2000.

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4.67 DEPARTMENT OF ELECTRICAL AND MECHANICAL SERVICES Part A 4.67.1 Tenders. In several cases, where delay was observed in the execution of tenders, the bank guarantees for their faithfull performance were not renewed promptly. In one case, it was observed that the monetary compensation for the delay in the execution of tender, was not imposed. 4.67.2 Weaknesses/omissions in the handling of tenders. From the audit of the departmental tenders and agreements, the following were observed: (a) Tender for mechanical installations of Larnaka International Airport – “Check-in Hall”. As I stated in my Report for 2000, in February 2001, the Department submitted to the Central Committee for Variations and Claims, for approval, the decision of the Departmental Committee, of the payment to the contractor of the additional amount of £47.895 representing additional works and overtime. From the audit, it was observed that, for the calculation of the above amount, the following were not taken into consideration: (i) The instruction of the Architect for overtime work was not issued. (ii) The cost of works not executed. (iii) The cost of equipment not installed. (iv) The cost of substantial variations in works and materials. In March 2002, the Departmental Committee, after reconsideration of the matter, had revised its previous decision and suggested the payment of the total additional amount of £7.203. The above suggestion was subsequently approved by the Central Committee for Variations and Claims. (b) Tender No. 154/01 for the maintenance of 205 vehicles. The vehicles were purchased, after invitation of tenders in 1996. The purchase agreement provided for their maintenance by the supplier for a period of 5 years, which was the useful life of the vehicles, according to the Department. After the expiration of the maintenance agreement, it was ascertained that most of the vehicles were in good condition and could be used for some more years. In view of this, the Department requested the approval of the Tender Board for invitation of tenders, under the negotiation procedure, for assigning to the supplier the maintenance of vehicles, for another 4 years. The prices of the only tender, given by the supplier, were higher by 152%-212% (depending on the type of each vehicle) from the corresponding prices of the initial tender, and after negotiations, the award of tender was made, with 5% reduction in prices. With a view to avoiding similar problems, which were encountered in the past and for the safeguarding of public interests, the Department, with the approval of my Office, proceeded in 2000, with the amendment of the tender terms, so that the agreements for the purchase of vehicles, to provide for their maintenance, for the period of 4 years, with the right of renewal by the Department for another 4 years. (c) Reformation of terrestrial area of Ayia Napa Fishing Shelter. The Department of Town Planning and Housing was the appropriate Department for the reformation of the terrestrial area of the fishing shelter, while the responsibility for electrical installations rests with the Department of Electrical and Mechanical Services. The project was divided into three phases and the study for the electrical works of Phase “A” was assigned, in September 1997, to private consultants, under the method of drawing. While the building works were completed in March 2000, the

139 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 tenders for the electrical works of Phase “A”, were invited in November 2000, were submitted in December 2000 and the evaluation report was prepared in June 2001. Finally, the award of tender was made in July 2001, for the amount of £320.000, for main contract, while the building works were already completed. For the purpose of better coordination of works, the uniformity in equipment and for avoiding delays in the building contract, the electrical works of Phase “B” were assigned in April 2002 directly to the contractor of Phase “A” for the amount of £28.348. The electrical works were completed in June 2002, while the building works were completed in 2001. The building contract provided for the completion of works of Phase “C” in August 2002, and the Department, in April 2002, requested the approval of the Tender Board for assigning the electrical works (estimated at £79.000) to the contractor of Phase “A” and “B”, under the negotiation method. The approval was given was given in May 2002, but the electrical works were not assigned until the end of June. The Director of the Department informed me, in May 2002, that there was a delay in securing approval for assigning the works of Phase “B”, and his Department was not fully aware about the progress and time schedule of building works. (d) Tender No. 5/01/178/A/HMY for the supply of video – introspection systems. In March 2001, the Medical Services requested the Department to prepare specifications and to invite tenders for the supply of one Video-introspection system. In view of the fact that the needs for this system were subsequently increased to 6 and their cost would be more than £100.000, the Department, after a publication was made according to Tenders Regulations, requested, in July 2001, the submission of comments/suggestions from prospective suppliers, on the provisions of tender documents. On the basis of the comments received, the final specifications were prepared and the tender was invited in November 2001. According to the terms, the award of the tender was to be made to the lower tenderer. After the publication of the tenders, the Department requested one tenderer to submit a list of the technical/operational advantages of this equipment, prior to the expiration of tenders, something, which caused reactions from the part of the tenderer. In January 2002, the Department requested the amendment of the tender terms, so that the award to be made to the best financial tender, with the addition of criteria/advantages and marking. It is noted that, this suggestion was submitted to the prospective tenderers, during he preparation of specifications, but was not accepted. The Director of the Department, to whom I submitted my observations for the handling of tender, informed me, in February 2002, that the reasons for the amendment of the terms for the award were the new developments which were made in the meantime. In February 2002, the Main Tender Board, decided for the cancellation of the tender and the preparation of amended terms/specifications, which will be published, for receiving comments from prospective tenders. (e) Tender No. 180/00 for the supply and maintenance of portable searchers of drugs and explosives. In November 2000, the Department invited tenders for the supply of portable searchers of drugs and explosives. According to the terms of the tender, the searchers should have the possibility to search, under the method of absorption of air from the environment of substance, without the support of other means. At the delivery of the equipment, it was ascertained that the searchers supplied by the successful tenderer were not fulfilling the above terms for the searching of all the substances. This omission was not identified during the evaluation of tenders, because the tenderer declared that his tender was within the specifications. Finally, after the suggestion of the Committee, which was responsible for the receipt of searchers, approval was given by the Central Committee for Variations and Claims for the receipt of searchers, with the deduction of 10% from their value.

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It is noted that for above tender there was a limited participation. Tenders documents were purchased by nine tenderers, but finally only three companies, submitted a tender, out of which the two companies had related interests. (f) Maintenance agreements for equipment. In October 2001, the Department invited for the submission of separate tenders, by the only one tenderer, for the maintenance of equipment of the Government General Laboratory. Because, (i) the aforesaid separate tenders were relating to the maintenance of equipment of similar type, (ii) the equipment was installed in the same building, (iii) the tenderer was the same person, (iv) the above tenderer was responsible for the maintenance of other equipment of the General Laboratory installed in the same building (v) the provisions for preventive maintenance, in most cases, required for the employment of only some hours, in each agreement, I requested the Director of the Department that the matter of the maintenance of the equipment of the General Laboratory to be reexamined, so that the equipment to be classified in groups and single agreements to be singed with each contactor, which will include all the equipment of each group for which he will be responsible, so as the maintenance cost and the relative administrative expenses to be reduced. Furthermore, from a random examination, carried out by my Office, of two agreements, for the maintenance of similar equipment, it was observed that, according to the records kept by the Department, the amounts of the agreements were considerably high, compared to the works and the spare parts which were used. Specifically, the corresponding remuneration was £1.466 per day, while the spare parts used were trivial. The Director of the Department informed me, in February 2002 that effort will be, in future, for the combination of the maintenance agreements of the same contractor but he does not agree that the reduction in cost will be considerable. With regard to the high cost of maintenance, of the private sector, as deduced from the records kept, in March 2002, he stated that this is due to the fact that the contractor does not keep records for all the corrective works/spare parts, despite his obligation emanating from the most agreements. A comparative study about the maintenance cost, of the private sector with that of the Department is not possible to be carried out, because the records kept by the Department are insufficient, due to volume of work, of the technical employee responsible for the follow up of relative agreements. (g) Tender No. 5/02/062/A/HMY for the supply of digital photocopy machines. In May 2002, tenders were invited by the Department for the purchase/maintenance of photocopy machines. From the study of tender documents, it was ascertained that the maintenance of the great part of photocopy machines (100 machines of 15 copies per minute, and 30 machines of 30 copies per minute) will be undertaken by the Department, whereas the maintenance of the remaining part (30 machines of 30 copies per minute and 10 machines of 55 copies per minute), will be assigned to private sector (suppliers), under the method of “cost per copy”. The maintenance of the electromechanical equipment of the Public was the subject selected for performance audit, the main findings and suggestions of which are referred in my Annual Report for the year 1996. In the Report it is stated that the cost of maintenance of photocopy machines, by the private sector was much lower from that of the Department. Also, according to the maintenance agreement, which was signed recently, for 130 photocopy machines of 15

141 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 copies per minute, the total annual maintenance cost for the year 2001, including materials, spare parts and consumables and labour was £11.700. This is considered very satisfactory, if it is taken into consideration that only the cost of labour of the Department, for the maintenance of the same number of machines, is considerably higher from the above amount. During the meeting, held in July 2002, convened by the Accountant General, the representative of the Department stated that, for reasons of “policy” his Department will continue the maintenance of a number of photocopy machines and that with the proper keeping of maintenance records/costs, better conclusions may be extracted in future. The matter is pending before the Tender Board for final decision. (h) Tender No. 12/02/Σ/ΗΜΥ for the maintenance of street lighting. From the study of the tender documents, several omissions were observed, as well as terms, which, in my opinion, restrict competition. In view of the fact that in the past there was no wide participation in the tender for above works, in March 2002, I suggested to the Director of the Department, for the amendment of tender terms. The Director proceeded to the amendment of tender documents, in which there were omissions, but not of the tender terms, because the latter were prepared in accordance with the suggestions made by prospective tenderers. Finally, only two tenderers submitted their tender, who were the same tenderers for the previous tender, although tender documents were purchased by eight prospective tenderers. The award was made to the lower tenderer, who was the successful in the previous tender. (i) Mechanical installations in the building of the Department of Road Transport in Limassol. In February 2000, the tender for mechanical installations in above building were invited, on the basis of the study prepared by a private consultant. In April 2000, the Tender Board decided for the cancellation of the tender, because all the tenders submitted were out of specifications. In order to avoid serious delays in the main contract, which was under construction since March 2000, the Department proceeded with the alteration of the initial study and assigned the execution of works to the District Office. The central air conditioning system, provided by the initial study was modified to split units. As a result of the delay, the main contractor of the project was paid compensation for £1.300. Another amount of £3.500 was paid to the consultant, for the preparation of the initial study, which was finally abandoned. 4.68 DEPARTMENT OF ROAD TRANSPORT Part A 4.68.1 Renewal pf circulation licences of motor vehicles. According to the records kept at the Department, the number of motor vehicles for which the circulation licences have not been renewed for 2001, was 61 093, compared to 60 856 for 2000. During 2001 a total of 461 759 circulation licences were issued and the fees collected amounted to £36,7m., compared to 446 554 licences and £35 m. fees for 2000. During 2001, 22 206 vehicles were written off the register, because of the non-renewal of their licences for the last three continuous years. From the above it emanates that 2% of the registered vehicles have not renewed their circulation licences, which corresponds to £5,1m. which should have been collected, provided the above vehicles were in circulation. 4.68.2 Collection of wrong fees for circulation licences and delay in the collection of differences. Cases were again observed where wrong fees were collected for circulation licences, and as a result the amount of £34.188 was outstanding at 31.12.2001. The greatest part relates to arrears of fees for previous years, which, according to the Department, is very difficult, if not impossible, to be collected.

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4.68.3 Reduced registration and circulation fees. According to Motor Vehicles and Road Traffic Law of 1972, all drivers training vehicles pay reduced registration and circulation fees, as non-private motor vehicles. Out of the 452 training vehicles, 240 were not presented for the examination of drivers, during 2001, (53,1%). As this tax relief is allowed to a small group of persons and is of no service to the wider social public, and some of these vehicles may not be used for training purposes, I recommended, for several years now, the abolition of this privilege. The Department has recently prepared, as per my recommendation, an amendment bill, which after legal processing was submitted to the Ministry of Finance. 4.68.4 Modification of motor vehicles after clearance and before registration. In the case where a motor vehicle is modified to a different type or category, after clearance and before registration, the Department of Motor Transport proceeds with the registration of the said vehicle, according to existing practice applied by the Department, and the Department of Customs and Excise is subsequently, being informed accordingly. In such case, the Department of Customs and Excise has no power to collect any difference in tax or duty, since this is not provided in the Regulations. With a view to regularize the matter, I repeated my previous recommendation for the amendment of Regulation 55(1) of the Motor Vehicles and Road Transport Regulations of 1984, under which, in case of modification of a registered motor vehicle to a vehicle of other type or category, the respective taxes and duties applicable for the new vehicle to be collected. The Department of Road Transport adopted my recommendation and on 11.4.2000 submitted to the Attorney General of the Republic a draft bill for legal processing. On 25.7.2002, the Law Office expressed the view that the Department of Customs has the power and the possibility to claim any amounts due for customs duties and/or excise duties, under the provisions of section 39(b) of Customs and Excise Duties Law, independently of the registration of the aforesaid vehicles by the Departments of Road Transport. The Law Office, also, requested the views of the two Departments, before a final decision is taken, as to whether the amendment of Regulation 55 or of any other legal provision, is actually needed. After this development, the Department of Road Transport expressed the view that the amendment of Regulation 55 is not necessary. The Law Office is in contact with the two Departments for final settlement of the matter. 4.68.5 Custom clearance and registration of saloon vehicles in the van category. During the year, the registration of vehicles, which by construction cannot be considered as commercial (van), continued, resulting in the considerable loss of registration and circulation licence fees. Since 1990 and up to 2001, 20 938 motor vehicles of saloon type have been irregularly registered as van. After my recommendation, the Director of the Department, addressed a letter to the Associations of Vehicles Importers, under which they were informed that, all vehicles imported as from 5.6.2000 and afterwards, which due to their construction cannot be considered as commercial (van), will not be registered under this category. It has been observed that the situation continues to be the same, because the importers are presenting a relative certificate from the manufacturers, stating that the aforesaid motor vehicles are considered as commercial (van). I recommended the imposition of the same duties, taxes, and registration and circulation licence fees for van vehicles applicable for private saloon vehicles for a radical solution of the problem. The amendment of legislation is being pursued by

143 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the Department, for purposes of application of a uniform system, under which the registration and circulation fees will be determined on the basis of cubic capacity, independently of the type of vehicle. 4.68.6 Tares of motor vehicles. In my previous Reports, I pointed out that at various cases, motor vehicles of same type and model were registered with different tare, usually smaller than the regular resulting in payment of reduced registration and circulation fees. As continued shortcomings are observed in the system, I recommended to the Ministry of Communications and Works the amendment of the Law, so that the criterion for registration and circulation fees will be the cubic capacity of the vehicles and not the tare, which presents serious weaknesses. The relative amendment of the legislation is being pursued by the Department. 4.68.7 Exhibition and test of motor vehicles. The relevant legislation (Law 56(I)/00) inter- alia, provides: (a) Section 10(1): Each registered dealer should keep an analytical statement, showing the vehicles in circulation with plates, in which the type of vehicle, the number of chassis and engine, customs clearance details, distinctive signs of plate etc., to be given. (b) Section 6(2): The use of the same plate, in the same vehicle, by the same purchaser, for a period over fifteen days, is not allowed. During a spot visit to several dealers, carried out by Customs Officers, in cooperation with an Officer of my Office, the following were observed: • Most of the dealers do not keep the relative statement, provided by the above section of the Law. A fine up to £1000 may be imposed for this violation. • The owners/directors of companies are using vehicles with exhibition plates, for long periods, for private purposes. As a result, the corresponding fees for registration and circulation of vehicles are not collected by Government and the possibility for the sale of vehicles as new, cannot be excluded. 4.68.8 Out of use vehicles. A great number of vehicles (some are luxurious) are declared by their owners as out of use vehicles. The Department has not carried any spot examination for ascertaining as to whether these vehicles are out of use. I suggested that spot examinations should be carried out, as well as for the compulsory recording of kilometres on the immobilization certificate, so as to be verified whether the vehicle was illegally in circulation. 4.68.9 Establishment of prosecution unit. As a result of the suggestion, made by my Office, for the more active participation of the Department, in the verification of the proper implementation of legislation, the prosecution unit has been established, with the objective of the reduction of irregularities observed in the immobilization of vehicles, the use of exhibition plates e.t.c. 4.68.10 Preplacement of the chassis or the chassis in combination with the frame of vehicles. In my previous Reports I stated that, with the replacement of chassis or the chassis in combination with the frame of vehicles, the opportunity is given for the revival of destroyed or unfit vehicles, resulting to the loss of considerable amounts of public revenue, in the form of taxes and excise duties. In fact, the Regulations and existing procedures permit the assembling of new vehicles, through the importation of basic and other spare parts by using the registration numbers of old or destroyed registered vehicles. These alterations/modifications cannot be

144 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 easily identified by the appropriate authorities and Government collects only the customs duties, for the spare parts used for the assembling of the new vehicles, while the excise duties, which represent the significant part of taxation of vehicles are not collected. In this respect, I suggested and was accepted for the amendment of legislation, in such a way, so as to preclude the replacement of chassis or the chassis in combination with the frame, at least for the vehicles which may be used for the transportation of up to 8 passengers and of light freight cars with tare up to 2 tonnes or the change of the frame of vehicle to be considered as a new vehicle, subject to excise duty. I also suggested that until the completion of the amendments, the Department should claim the submission of an application, by the interested persons, for the replacement of chassis, so as the Department to be able to inspect the vehicles whether they are fit for road circulation. Any changes or alterations in the vehicles, without the prior approval of the Registrar, to be considered as irregular rendering the registration of the vehicle, under the respective Regulation, as invalid. My suggestion was accepted and implemented, but for unknown reasons, the amendment of legislation, was not pursued. Part B 4.68.11 Tourist vehicles – Registration and circulation licence. According to Regulation 25(3)(c)(iii) (the Motor Vehicles and Road Traffic Regulations of 1984), the temporary circulation licence is issued for a period not exceeding 12 months. After the period of 12 months, the regular circulation fee is collected. In the case, however, of registration, according to section 12(c)(3) of the above Regulations, the Registrar issues a temporary registration certificate, at a fee of £17 only, and the Law does not provide for the issue of a regular registration certificate after the period of 12 months. I recommended that a respective amendment of Law should be made, so that after the period of 12 months, provided the vehicle remains in circulation in Cyprus, to be registered only on the payment of the specific registration fees. The Department informed me that an amendment bill has been prepared, according to my suggestion, which after legal processing was submitted to the Ministry of Finance for onward transmission to the House of Representatives. 4.68.12 Payment of reduced circulation licence fees for private motor vehicles. In my previous Reports, I stated that, according to the relevant legislation, private motor vehicles, which are used solely for the transportation of persons employed by the owners of the vehicles, are not considered as private motor vehicles and, therefore, are charged with reduced circulation fees, up to £330 per annum, according to the tare, for each vehicle. As the administrative cost for the implementation of the above Law is considerable, which could possibly be violated, with consequential loss of substantial public revenue, I recommended the abolition of reduced fees or their limitation to bus type vehicles. As I stated in my previous Report, an amendment bill has been prepared, which was submitted for approval to the House of Representatives, according to which the reduced fees for private vehicles are abolished. 4.68.13 Registration of buses. The registration of buses with one, instead of two passengers doors on the left hand side, is continued. As I was informed, the matter will be settled with the adoption of European Directive No. 2001/85/EE. 4.69 DEPARTMENT OF CIVIL AVIATION Part A 4.69.1 Arrears of revenue. At 31.12.2001 the arrears of revenue were £2.248.997, compared to £3.844.740 for the previous year, i.e. there was a decrease of £1.595.746 or 41,5%. The

145 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 arrears include the amount of £624.684 for airport fees (out of which £303.239 relate to invoices of December 2001), £819.561 for rents, £428.538 for passenger fees and £222.310 for over flying fees (for the period 1970-1990, before Cyprus joined the European Organisation for Air Shipping Security). The arrears of rents include the amount of £297.012, representing interest for the period 1989- 1999, due by Cyprus Airways. The company refuses to pay this amount, because, as it supports, this was not provided in the relative decision of the Ministerial Committee. The matter was referred to the Attorney General, on 11.1.2001, for taking legal measures. For the amount of £421.496 a lawsuit is pending since 1995, against the tenant of giftshops in the airport, for rents due. On 20.3.2002, a court decision was issued in favour of Government for the amount of £314.054, representing rents due and interests. The Department, on the instructions of the Law Office, applied to other Government Services, for ascertaining the property of the defendant and the collection of the amount due. The amount of £93.028 is due by an advertising company since 1998. The case was submitted to the Law Office for taking legal measures. 4.69.2 Use of space by Cyprus Airways at the airports of Larnaka and Pafos. The relative agreement for the use of open spaces has not yet been signed, because of the dispute over the interest payable on the arrears of rents for the years 1989-1999. The matter was submitted to the Attorney General of the Republic for legal advice. 4.69.3 Passenger fees – Airport fees – Interest. Several airport companies have not settled certain old balances for passenger fees and airport fees. Most of these balances are due by companies no longer flying to Cyprus and therefore, their collection is difficult. It is stated that the amount of £131.732 is due by one company for airport fees. The Department requested the Attorney General, on 29.6.95 to take legal action against the company and submitted a report on 18.11.96, but there is no development, since then. 4.69.4 Overtime. During 2001 the amount of £765.931 was paid for overtime work to the employees of the Department, compared to £684.484 for 2000, i.e. there was an increase of £81.447 or 10,6%. It is noted that the amount paid in 2001 for overtime work represents 30,9% of total salaries of staff employed in overtime work. Also, it is stated that, 17 employees were paid the amounts of £15.000 to £23.000 each for overtime work. The Department submitted specific suggestions to the Service of Public Administration and Personnel for the reduction of overtime. Part B 4.69.5 Travelling expenses of Larnaka Airport employees. The employees of Larnaka Airport, who before 1974 were working at the airport of Nicosia, continue to be paid travelling expenses and overtime for their daily transport from Nicosia to Larnaka, because Nicosia is still considered their working place. This settlement was made in 1975, due to the conditions prevailing at the time, which could not allow their transfer to Larnaka, and which was considered as a temporary settlement. The matter is pending since 1994 before the Joint Personnel Committee for final decision. 4.69.6 Aircraft towing vehicles at the Airports of Larnaka and Pafos. The two towing vehicles of the Department, one in each Airport continue to be used by Cyprus Airways for towing aircrafts, without payment of any fees. One of the reasons for their non-utilization by the Department is the lack of properly trained staff, for their operation and their maintenance. I

146 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 recommended a long time ago, that the Department should study ways for the utilization of the towing vehicles, and the collection of fees on the basis of Regulations. The Department informed me that, in view of the assignment of the administration of airports to a strategical investor, the matter will remain at standstill. 4.69.7 Aircraft ground service. It has been observed that for the ground service provided to aircraft (Ramp Handling) no fees are imposed, whereas in European airports these fees vary from £900 - £1.800 for large aircrafts and £600 - £1.700 for small aircrafts. The Department informed me that a study was carried out for keeping separate accounts for the aircraft ground service, and with the adoption of the relative European Directive, the relative charge will be made for each service. 4.69.8 Collection of airport fees by the traffic control offices of the Airports. For some airline companies, the collection of airport fees at the movements offices of the airports is made in cash. The calculation of the fees for landing, staying etc. is carried out by manually, in some cases, wrong collection of fees are observed. For avoiding the above and for purposes of better internal control, I recommended that the procedure of calculation and collection of fees from the movements offices be computerized, as it was done at the Department’s Headquarters. As I was informed the Department has taken the necessary action from 1998 for the computerization of the system, which is still pending. 4.69.9 Damages due to accidents in Airports. At Larnaka and Pafos airports several accidents are occurred and damages are caused to government and private property. For the purposes of better follow up of these incidents as well as of the compensation claims, submitted to the insurance company, I suggested the keeping of a register for accidents. 4.70 DEPARTMENT OF POSTAL SERVICES Part A 4.70.1 Sorting/distribution of mail. Within the framework of the development programme of the Department, the new automatic Sorting Centre of mail, is operating, since April 2001. The total expenditure for the building and equipment amounted to £4,68m. According to the technical and financial study of the project, with the use of the automatic machine, it was expected that it would be possible for the delivery of 90% of the mail in Cyprus within 24 hours and for the rest 10% within 48 hours, and at the same time a reduction in staff by 47 persons, to be made. From a relative investigation, carried out by a private company, it was revealed that only 14% of the mail is delivered within 24 hours, and that the staff, occupied in the sorting, was not reduced. According to the explanations given by the Director of the Department, the above is attributed to the unforeseen increase of the mail (21% over the study forecast). With regard to the delay observed, in the delivery of mail, this is mainly attributed to the short staffing of the unit of postal distributors. 4.70.2 Purchase of electronic machines and other equipment. In August 2000, the Main Tender Board, approved the invitation of tenders from ten tenderers, under the negotiation method. Subsequently, the Department invited tenders from the nine tenderers only. In

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December 2000, the tenders were cancelled by the Main Tender Board, on the grounds that tenders were not invited from all the ten approved tenderers, as well as to the invitation and submission of tenders within the month of August, contrary to the provisions of the relative circular of the Accountant General, which specify that no tenders should be invited and submitted within this period. Finally, tenders were submitted by three tenderers only. The Department invited new tenders and while the tenders evaluation report was before the Main Tender Board for award, the validity of the tenders expired in July 2001, because the Department had failed to apply in time for their renewal. In view of the above, the Main Tender Board decided in July 2001, for the cancellation of the tender procedure. In August 2001, new tenders were invited for a third time and the award was made in November 2001, except for one item which was excluded. It has to be noted that, such problems were encountered in previous tenders for the supply of similar equipment, resulting to difficulties in the smooth operation of the Department, due to the delay observed in securing the necessary equipment. 4.70.3 Renovation of postal offices. The expenditure for the renovation of postal offices for 2001, amounted to £102.312 (£50.552 for 2000 and £34.162 for 1999). During the years 1999- 2001, furniture and fittings were manufactured in the carpentry workshop of the Department of Public Works in Larnaka, for above offices, at a total cost of £62.073. It was observed that for the manufacture of furniture, cherry-tree wood was used, the cost of which varies from £1.050 to £1.500 per c.m., according to the thickness, which is considerably high. I expressed the view that, due to the nature of the wok of post offices and the serious damage which is caused to the furniture, other materials should have been used, which are more resistant and cheaper. 4.70.4 Issue and disposal of postal cards. The Department proceeded with the issue of 600.000 postal cards, which were put into circulation on 9.5.2000. The public demand was not the expected and on 31.12.2001 the stocks at the strong room were 432.395 cards and about 80.000 cards in the various post offices. The quantity of 6.000 cards was issued free of charge, in various cases, after relative approval. On 16.1.2002, with the approval of the Director, 120.000 cards were destroyed and the remaining quantity will be destroyed gradually. At the same time, the Department proceeded in 2001, with the printing of 67.500 cards, of new series, which were put into circulation on 9.7.2001. Until 31.12.2001, there were 63.000 cards, in the strongroom and post offices, while 2.250 were issued fee of charge, after relative approval. From the above, it is deduced that there was no proper planning and the possibility for the disposal of cards was not correctly estimated. Part B 4.70.5 Purchase of a stamp affixing machine. The above machine was purchased for the amount of Stg.£64.407. Due to serious operational problems, it was not possible for the machine to operate properly and instructions were given by the Accountant General to the Department for the removal of the machine by the manufacturer and for the recovery of the amount paid to him, something not yet done, and the machine is still in the Department. As I was informed, legal measures have been taken, on 12.4.2002, and the case is pending at Nicosia District Court.

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4.70.6 Administration of the Philotelic Museum. The lease of the building for the accommodation of the Philotelic Museum commenced on 1.6.98 and the rent was fixed at £6.000 per annum. The administration of Museum was assigned, through tenders, to a private administrator, for the amount of £205 per month as from 1.2.99. Later, however, after representations by the administrator that the attendance of visitors was minimal, the Central Committee for Variations and Claims decided to reduce the rent to the token amount of £10 monthly. As a result the Department is bearing, almost, the whole amount of the rent for the premises. 4.71 MINISTRY OF HEALTH Part A 4.71.1 Development Budget Expenditure. As it is deduced from the table below, the available provisions were increased in 2001, while the actual expenditure remained in the same level of the previous year, with the result the unspent amount of the budget, in comparison with the significant improvement noted in 2000, to be increased.

Budget Actual Unspent Year amount amount amount £m £m £m % 2001 19,1 13,3 5,8 30,36 2000 15,9 12,6 3,3 20,75 1999 15,1 11,1 4 26,49 The unspent amounts represent, mainly constructions, improvements and extensions of buildings and supply of medical equipment. The Ministry informed me that the non materialization of the Budget is due, to a great extent, to factors, out of the control of the Ministry, because various other Government Departments are involved, as well as to delays observed in the invitation and award of tenders. 4.71.2 Internal Control. Weaknesses and omissions continue to be observed in the internal control systems, covering the activities of the Ministry and of its Services. The computerisation of accounting activities which aimed at the saving of time and the part solution of the problem of insufficient staffing has not been introduced. I pointed out that, due to the non-solution of many problems, mainly, those relating to the operation of Hospitals, and the lack of sufficient internal control system, there is the risk for the transfer of these problems to the new Nicosia General Hospital, which will prevent the smooth operation and efficiency of the project. The Ministry informed me that, with the application of the computerised system, which will be introduced by Treasury to all Government accounting sections and with the proper staffing of the accounts sections of Hospitals, the existing weaknesses in the internal control systems will be reduced. 4.71.4 Arrears of revenue. The total arrears of revenue of the various Departments and Services of the Ministry, according the statements of arrears of revenue, amounted to £5.176.349 at 31.12.2001, compared to £3.153.970 for the previous year. Included in this amount are arrears for previous years, amounting to £2.881.552. The arrears are due by subsidised patients (£271.357), amounts due to Hospitals (in-patients) (£932.619),

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Pharmaceutical Services (£3.923.749), Government Laboratory (£1.811) and amounts due by Public Corporations, Local Authorities (£46.813). The amount due to Pharmaceutical Services represents the value of drugs and medical supplies issued to the Oncological Centre of the Bank of Cyprus, up to 31.12.2001. The Ministry informed me that this amount will be written off, as a result of the negotiations carried out between the interested parties and the decision taken for the settlement of all amounts due by Government to the Centre. The increase in the arrears due to Hospitals is attributed to the new medical fees and are mainly, due by aliens, who after medical treatment, they are discharged without payment of the relative fees. The taking of legal measures against them is almost impossible and the matter has taken serious dimensions. For the improvement of the situation, and in order to enable the Ministry to enforce the new Regulations I recommended, inter alia, the strict implementation of Regulations, the collection of medical fees before the discharge of inpatients and the write off of the amounts which cannot be collected. Recently, it was agreed that for all aliens who are employed in Cyprus legally, a compulsory insurance will be made, under which their employers will be responsible for covering the expenses for their medical treatment. My Office recommended that instructions should be given to the Hospitals, for the recovery of the expenses for the medical treatment of aliens from the respective insurance companies, on their admission to Hospital. The Ministry informed me that, for the improvement of the situation, the amendment of Regulations is being pursued, under which the patients will pay an amount on their admission to Government medical institutions. The Ministry also stated that, a computerised system will be introduced, for the issue of relative bills, which will be given to the patients on their release from Hospitals, so as to reduce the time needed for the preparation of bills. With regard to the arrears of revenue, which are pending for a very long time and the possibility for their collection is very remote, their write off is being pursued. 4.71.4 Sponsored Patients Scheme. The expenditure for the Scheme during the last three years were as follows:

Patients sent Amount Amount Year abroad spent recovered £ £ 2001 998 8.714.180 767.316 2000 1396 9.485.325 982.279 1999 1315 8.737.574 965.055 According to the new Regulations of the Sponsored Patients Scheme, the patients or their families are charged with part or the treatment expenditure or are fully relieved, depending on their financial position. It was again observed that there is a great delay in the calculation of the financial obligation, resulting to the delay in the collection of respective amounts. The Ministry stated that the delay is attributed to the difficulties observed for the preparation of the report on the financial position of the patients, on the basis of which, their financial obligation is calculated.

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4.71.5 Supply and use of medical and other equipment. It was again observed that, although the needs for the purchase of medical equipment are great and in many cases urgent, yet, during the last three years, as shown in the table below, the available funds were not completely utilised, despite the fact that the heads of Hospitals submit requests, for a number of years, for the inclusion of equipment in the approved lists and for their purchase.

Approved Actual Unspent Year Budget expenditure amount £m £m £m % 2001 2,1 1,0 1,1 52,38 2000 1,4 0,7 0,7 50,00 1999 1,7 1,3 0,4 23,52 In my previous Reports I stated that, in view of the great delays, which are observed in the preparation and approval of specifications and the tendering procedure, I recommended the preparation of a long term programme, on the basis of Hospital needs, which will take into consideration the time needed for the various purchases, as well as for the establishment at the Ministry of Health of a Supply Unit, the staff of which will consist of technical officers, who will be responsible for the procurement and utilisation of medical equipment, as well as for the disposal of idle equipment. The Ministry proceeded with the establishment of a team of officers, which at the first stage, will undertake the completion of the procedure for the purchase of equipment, but for a limited number only. As I was informed by the Ministry, this team has recently been strengthened with additional staff and is expected that there will be an acceleration in the procedures for the purchase of medical equipment. 4.71.6 Computerisation of Ministry of Health – Implementation of the Medical Information Technology System (Π.Σ.Υ.). The programme has been introduced in all town Hospitals (except for Nicosia General Hospital due to the construction of the New Nicosia Hospital). The implementation of the programme in the Rural Medical Centres of Paralimni, Kyperounda and Polis Chrysochous is still pending, although the licence fees, for the use and maintenance of the programme are paid since 1996 and the necessary computer equipment has already been installed. Due to the great delay observed, from the pilot application until the final delivery of the system, as well as to rapid technological development, it seems that this programme does not satisfy the present needs of the user. The Ministry informed me that will proceed with the assignment of the follow up of the implementation of the information systems of Hospitals to project managers, who are possessing the necessary experience in the administration of such systems, and will undertake the revision of existing programmes, so as to respond to the new demands. 4.71.7 Agreement for the maintenance of software of Medical Information Technology System. The maintenance of the software of Medical Information Technology System was assigned in 1991 to a company, under an agreement, which expired in July 1998. After the expiration of the agreement, the company continued to provide its services, because as I was informed, a decision was taken for the renewal of the agreement, but there was no written approval of the Main Tender Board. Furthermore, the original agreement was not kept in the file, while in the draft agreement; which was submitted to the Ministry of Health by the

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Information Technology Services Department on 11.1.2000, for signing, the prices shown there in were lower by Stg£41.600, from those included in the copy of the agreement. At the same time in the agreement for the maintenance of software were included the Hospitals of Polis, Kyperounda, and Paralimni, although these Hospitals have not yet been connected with the Medical Information Technology System. The Council of Ministers, under decision No. 54.045 of 18.7.2001, assigned the investigation of above matters to an investigation committee. According to the Ministry, in the findings of the Committee, there is no blame and after the approval given by the Main Tender Board, for signing new maintenance agreement, with retrospective effect from 26.7.1998, for a period of seven years, the matter was settled. 4.71.8 Nicosia New General Hospital. After invitation of tenders, the award for the execution of the project was assigned for £37,5 m., with commencement in the month of May 1997 and completion in February 2002. In June 2002, the project presented delays of about 176 weeks, which were, mainly, due to the significant alterations and additions decided and partly to the contractor. For the delays which were attributed to Government, the contractor submitted claims, in February 2002, for extension of time until August 2007 and compensations, amounting to £17,5 m. After negotiations between the Central Committee for Variations and Claims and the contractor, a supplementary agreement was signed in October 2002, which provides for the completion of the project in July 2004 and for the payment of compensation to the contractor, amounting to £5 m. In January 2001, I pointed out that alterations continued to be made in the areas of installations and equipment, for which, in my opinion, the views of those who will manage/operate the project should have been secured and I asked to be informed of the arrangements made by the Ministry, regarding the prompt organisation of the New Hospital. The Director General of the Ministry informed me that the several alternative solutions have been considered for the rehousing/removal of the old General Hospital of Nicosia to the New General Hospital, including the appointment of consultants for the monitoring of the team of officers which has been established for the planning of ways and methods to be used for the rehousing/removal, from the old to the new Hospital. Several meetings were held and an action plan has been prepared for this purpose. 4.71.9 Famagusta New Hospital. The design study of the project, the estimated cost of which is £7,5 m., was assigned to private Architects in July 1997 and this should have been completed in March 1998. The study and the invitation of tenders, delayed for about 30 months, due to the Architects and partly to the delay observed in taking decisions from the part of government side. The agreement for the execution of the project was signed in May 2001 and provides for the completion of the project until June 2004 at a total cost of £10,5 m. The increase in the cost of the project is due to considerable additions, including the gynecologist and intensive units, as well as, to the revision of the cost for electromechanical works and in the increase of prices of materials and labour. 4.71.10 Famagusta New Hospital – Medical equipment. In March 1997, the respective Ministerial Committee, decided for the assignment of the study for the medical and hotel equipment, to a private consultant, for the amount of £23.000. The study was delivered, in May 1999, and the consultant was paid the amount of £18.400 against his remuneration. In January 2002, the Director of Medical and Public Health Services suggested that the equipment for

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Famagusta New Hospital to be purchased at the same time, with that of New Hospital of Nicosia, by applying the same tendering procedures and coding, for purposes of saving of time and funds. In this respect, he asked that the documents/study of equipment, which were in greek language to be translated in english and to be coded. On the submission of the above suggestions, by the Ministry of Health to the consultant, the latter requested the payment of the additional amount of £30.000 for the coding/translation of study, as well as for the modification of specifications, according to the recent trends in medical diagnosis and the additions which were made since the initial design of 1997. In June 2002, the Central committee for Variations and Claims approved the additional amount of £22.000 for the translation/coding of study, as well as the amount of £25.000 for the evaluation of tenders and the delivery and supervision of the installation of equipment. As it is deduced from the above, the Public was charged with the additional amount of £18.400 for work which was abandoned, due to ambiguities in the agreement for the language to be used for writing the specifications, as well as to the long time that elapsed (5 years) from the date of assignment. Part B 4.71.11 Organisational Structure of the Ministry of Health. In my previous Reports I stated that, according to studies carried out in the past by foreign consultants, and in view of the fact that the existing health system in Cyprus is expected to be replaced soon, it is imperative that the organizational structure of the Ministry and its Services be accordingly reformed, so that to respond to the new demands. For the utilization of the studies a committee was set up, to work out the suggestions of the consultants and several meetings were held for this purpose. The committee is expected to reach to some decisions about the organizational structure of the Ministry, its Departments and Hospitals, taking into consideration, as I was informed, the enactment of the Law for the National Health Scheme. In the meantime, the medical staff continued to be seconded to the Ministry and Medical Services, to perform non medical duties. The Ministry informed me that the study for the reorganization and upgrading of the Ministry of Health is at the final stages of completion. 4.71.12 National Health Scheme. The relevant Bill for the National Health Scheme was enacted into Law by the House of Representatives. My Office expressed the view that no significant improvements were effected in certain sections, such as the organizational structure and human resources, so as to form the necessary infrastructure for its proper implementation. As a result, there is the risk for further delay in the implementation of National Health Scheme. The Ministry stated that, the team which was set up in the Ministry, for the implementation of procedures, which will facilitate the implementation of the Scheme, has been further strengthened, with the secondment of another two persons from the Medical Services, who are working in cooperation with the Administrative Board of the Scheme and the foreign consultants, for the implementation of the provisions of the relevant legislation. 4.71.13 Provision of quality medical service to patients. In my previous Reports I stated that, according to a study carried out in 1997 for the above matter by an expert of the World Health Organisation, the system of control of the provision of services to patients presented serious weaknesses, which do not allow the uniform and to acceptable levels provision of services by all medical officers of each speciality. Consequently, as it was stated, the implementation of such a system, as it happened in other countries where it was implemented, besides the upgrading of the medical services provided to patients, it is expected to effect substantial savings (drugs, use of beds in hospitals, surgical operations etc.), it was suggested

153 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 that the Ministry should proceed with the implementation of such a system, at least, on a partial basis. It was also stated that the implementation of such a system is considered necessary for the introduction of the National Health Scheme. It has been ascertained that some arrangements were made by the Ministry, regarding the training of officers abroad, and the organisation of seminars, as well as the signing of a cooperation agreement with a certain University, which will assist in the formulation of procedures for the provision of quality medical services to patients. The Ministry informed me that a committee was appointed, with the agreement of the Pancyprian Doctors Association, to work out protocols, which will coincide with those of European Union, and that the procedure for the provision of quality medical services to patients is in progress. 4.71.14 Co operation arrangements with various Hospital and Companies abroad. In my previous Report I stated that the Ministry, in its effort to faciliate Cypriot patients sent abroad for medical treatment, proceeded to cooperation arrangements with various Hospitals and companies abroad, without invitation of tenders, contrary to the provisions of Public Tenders Law. For the proper management of expenditure and for resolving the cooperation problems observed, it was suggested that, for securing the above services, the Ministry should proceed to invitation of tenders. It has to be noted that the Accountant General, Chairman of the Main Tender Board, had pointed out, in the past, the need for the adoption of tendering procedure, under the negotiations method, for purposes of signing agreements with Hospitals abroad. The Ministry of Health, has not yet collected all the necessary information, regarding Hospitals of various countries, with the result the relative agreement not to be signed. I repeated my recommendation for the acceleration of necessary arrangements, so that my suggestions to be adopted. Due to the long delay observed, problems are encountered in the Ministry and the audit of payments by my Office. The Ministry stated that, instead of signing written agreements with certain Medical Centres aboard, in pursuance of the provisions of Public Tenders Law, it decided to adopt some criteria, for the selection of Medical Centres abroad, due to the peculiarity of health sector. These criteria, as it was stated, are based on the quality of services rendered by various Medical Centres, the cooperation of medical staff with specific centres, the patients service, etc. 4.71.15 Overtime work of medical staff. With regard to the on call system, a performance audit was carried out by my Office, the findings of which are referred in Part 3 of my Report for 1998. During 2001, the Regulations governing the implementation of the on call system were revised, and it is expected that there will be improvement in the whole situation. Once again, my Office expressed the view that, the active duty system should be adopted. The Ministry informed me that the matter of overtime work of the medical staff, is expected that it will be reconsidered, by the Ministry of Finance and the Government Doctors Pancyprian Trade Union, for finding appropriate solutions. 4.71.16 Laboratories operational quality control. In November 1995, a special study was carried out for the operation of Laboratories, by an expert of the World Health Organisation, who submitted specific suggestions for their quality improvement. The Ministry informed me that all the recommendations have not yet been implemented, because additional staff is needed, and efforts are made for the further upgrading of the quality control for the operation of Laboratories. I suggested for the implementation of the most important recommendations, for the purpose of the partial upgrading of the Laboratories of Hospitals. Furthermore, I suggested for the implementation of procedures, which will facilitate the establishment of necessary infrastructure

154 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 of Laboratories, which will allow them to be accredited by recognised Councils. The Ministry informed me that, for the quality improvement of Laboratories, arrangements are made for the appointment of scientific staff and microbiology doctors in all Hospitals, who will assist in the upgrading of the quality of services rendered by the Laboratories, as well as for the better control of their operations. 4.71.17 Oncological Centre of the Bank of Cyprus. (a) With the Council of Ministers decision No. 48.753 dated 2.12.98, the negotiation of the existing agreement was decided between the Republic of Cyprus and the medical institution of the Bank of Cyprus, without, however, any final decision to be taken, up to this day, and, therefore, the operational regime of the Oncological Centre and its relation with the Government remain unclarified. In the meantime government continues to supply the Oncological Centre with drugs, foodstuffs and other items, without payment. At 31.12.2001 the value of drugs supplied amounted to approximately £3.923.749. (b) In 2001, a meeting was held in the Office of the Minister of Health, at which the decision was taken for the payment to the Centre of the amount of £2.227.917, in full settlement of the debt of £3.065.935 (excluding depreciation) due by Government to the Centre. It was also decided that the cost of drugs, amounting to £838.018 until 31.12.99, as well as the cost of drugs issued to the Centre by the Pharmaceutical Services up to 30.6.2001 to be considered as being settled. The amount of £2.227.917 has already been paid to the Centre. As I was informed, the amounts due by Government to the Centre for the year 2000, will be treated in the same way, and the amount of £2.510.119 will be paid to the Centre. The cost of drugs issued to the Centre during 2000, amounted to £1.380.894. Recently, the Director General of the Ministry of Health, in his letter to the Director of Pharmaceutical Services requested him, to submit an application to the Ministry of Finance, for securing approval for the writing off of the revenue arrears, representing drugs issued to the Oncological Centre. (c) My Office having in mind the magnitude of the operational expenses of the Centre and the fact that similar services continue to be provided by Government Medical Institutions, expressed the view that, the operational regime of the Centre should be decided the soonest possible. In case where Government will undertake the payment of operational expenses of the Centre, I stated that Government should have the power to approve/control them, before payment. I also expressed the view that the renegotiation of the agreement should be made, in such a way, so as not to be in conflict with the Public Tenders Law. The Ministry informed me that a draft agreement has been prepared which was submitted to the Under Secretary to the President, the Director General of the Ministry of Finance and the Planning Bureau for their views and comments. As I was informed the draft agreement was considered at a meeting held at the Ministry of Health, at which the Directors General of Ministries of Health and Finance, representatives of Planning Bureau and of the Service of Public Administration and Personnel were present. The final form of the agreement, which will be subject to renegotiation, will be in line with the Public Tenders Law and moreover, Government will have, under this agreement, the power to examine in advance the magnitude of the expenditure of the Centre. My Office observed that the Budgets of the Centre for the period 1.4.99-31.12.99 and for the years 2000 and 2001 were not submitted to the Council of Ministers for approval, prior to their implementation. Section 2(b) of the Agreement of 6.11.92 provides that the expenditures

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(annual operational expenses of the Centre) will be subject to the consent of Government, after taking into consideration the recommendations of the Board of Management of the Centre. The relative paragraph (iii) of the letter of the Chairman of the Medical Institution of Bank of Cyprus, dated 28.12.1994, addressed to the Minister of Health, which forms an integral part of the Agreement, provides inter-alia, that the matter of annual subsidy, will be presented to the Council of Ministers, by the Minister of Health. As the annual Government subsidy is included in the Budget of the Centre, my Office expressed the view that, for purposes of preparation and approval of the State Budget, the operational expenses of the Centre to be approved in advance by the Council of Ministers. The Ministry informed me that the draft of the new agreement is being considered by the Services involved and the final agreement will be in line with the Public Tenders Law. 4.71.18 Operation in Cyprus of two Archives of Bone Marrow Donors. Considering that Cyprus is a small country, my Office expressed again the view that the operation of two Archives for Bone Marrow Donors (Paraskevaidio and Karaiskakio) is financially disadvantageous. A suggestion was again made for consideration of their unification. The Ministry stated once again, that the two Archives eventually will be unified, and for this purpose, consultations are being made between the parties involved. 4.71.19 Cooperation between the Ministry of Health and the Cyprus Muscular Dystrophy Research Fund. The Fund is supported by Government subsidy paid every year, the amount of which for 2001 was £1.977.250, compared to £1.477.715 for 2000, on the condition that the above cooperation will be regulated through a relevant agreement. Furthermore, it is stated that, as from 2002, a provision is made in the annual Budget of the Ministry of Health, for the amount of £500.000, under Vote “Research”, for carrying out scientific research by the Institution of Neurologic and Genetic. The relative memorandum of cooperation between the Ministry of Health and the Cyprus Muscular Dystrophy Research Fund was signed in October 1999. As certain matters of the memorandum of cooperation, such as the way of calculation of the amount of the annual subsidy payable to the Institution, remain unclarified, my Office recommended that these matters should be further considered between the parties, for full clarification, so that the memorandum can be implemented. In addition, I stated that the opinion of the Attorney General should be sought, as to whether the above agreement, is not in conflict with the Public Tenders Law and Regulations. The Ministry informed me that consultations are being carried out with the Fund, in order to clarify certain ambiguities contained in the memorandum of cooperation, as well as for finding the best way of financing the Fund and the method to be used for its calculation. 4.71.20 Library register. In my previous Report, it was stated that the library register was lost and since December 1999, a new register is being prepared. For the settlement of the matter, a suggestion was made for securing the relative approval of the Ministry of Finance, for carrying out a physical stocktaking and the recording of books in a new register and the submission to my Office of the relative certificate. My above suggestion has not yet been adopted. The Ministry informed me that arrangements are being made for the appointment of a casual employee, who will undertake the stock taking and recording of books in registers. 4.72 MEDICAL AND PUBLIC HEALTH SERVICES Part B 4.72.1 Internal control. Weaknesses and omissions continue to be observed in the internal control systems covering the activities of Hospitals, mainly, in the collection of fees, the

156 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 operation of stores, the calculation of overtime allowance, the follow up of the time schedule of the staff, the issue of drugs and the keeping of appropriate registers. The Ministry informed me that the matter will be settled, with the sufficient staffing of the accounts sections and the computerisation of various departments. 4.72.2 Computerisation. The first face, the completion of which delayed considerably, covered the computerisation of the basic records for the in and out patients of the Hospitals of Limassol, Larnaka, Pafos and Archibishop Makarios III in Nicosia. I pointed out that the delay observed in the computerisation of the Accounts Sections and of other activities of Hospitals, constitutes a weakness which hinders the smooth operation. The Ministry informed me that the computerisation of the accounting work of Hospital is expected to be covered partly after the completion of the computerisation of Treasury, while for the other functions of Hospitals, a new computerised system will be introduced on the basis of the strategical study which was carried out. 4.72.3 In-patients treatment fees. According to the Regulations, the fees payable by inpatients should be calculated and collected in advance and any difference to be collected before the release of patients from Hospitals. It was again observed that the Regulations are not implemented and inpatients after treatment are released, without collection of the relevant fees. As a result several amounts which are pending for years are finally written off. The Ministry informed me that the matter will be settled, with the computerisation of procedures for the issue of invoices. 4.72.4 Hospital expenses for medical treatment of persons injured in traffic accidents. The provisions of the Motor Vehicles (Third Party Insurance) Law, Cap. 333 (Section 4(2)) have been adopted by all Hospitals. As a result, fees are claimed from insurance companies for persons who receive medical treatment, for their injuries in traffic accidents. Problems are, however, encountered in the implementation of above provisions, which are due to the non- cooperation of patients, the difficulties in ascertaining the names of insurance companies, as well as the late response of these companies in the payment of relevant fees because, as stated, the legal procedures followed, are time consuming. 4.72.5 Oxygen shortage in Hospitals. In my previous Reports it was stated that Hospitals are facing an acute problem of oxygen shortage, especially during the non working days, because of the insufficient number of bottles kept. It was also stated that the Ministry, for the temporary settlement of the matter, secured the approval of the Accountant General for the supply of oxygen during the non working days also. My Office pointed out that this settlement requires additional expenditure for transport and other expenses and suggested the acceleration of the actions for the purchase of a satisfactory number of bottles. As I was informed, for the radical solution of the problem, arrangements have been made for the installation of liquid oxygen tanks. 4.72.6 Inventory registers. The inventory registers of the Hospitals, with the exception of Limassol Hospital, continue not to be properly updated, and as a result the physical existence of the movable property, the cost of which is considerable, cannot be made. 4.72.7 Library registers. The library registers continue not to be updated with all books received, with the result the relative examination cannot be carried out. At the Hospital of Nicosia, due to lack of space, several books are kept unutilised in boxes. In addition, equipment and training material which form part of the library and for which substantial amounts

157 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 are spent every year, besides donations of considerable value provided each year by the various foreign Health Organisations, remain unutilised. 4.72.8 Lack of storage space. Once again, it was observed that drugs and pharmaceutical materials, as well as other equipment, are often stored in the corridors of Hospitals, with other items intended for disposal, instead of being kept in a separate room, for security reasons, and being recorded in a separate register, as provided by the Regulations. 4.72.9 Delay in the payment of staff employed on a 15 days basis. There is still a delay in the payment of staff employed on a 15 days basis, although there is a reduction in the number of above staff, after the employment of staff on six months contracts. The Ministry informed me that efforts are made for the payments to be made promptly. Nicosia General Hospital Part A 4.72.10 Inventory registers. In my previous Reports, it was stated that the inventory registers of the Hospital were not updated with the receipts and issues of movable assets (medical, office and other equipment), since 1.1.85. Due to this omission, it was not possible to certify the physical existence of the movable assets, as well as the write off of equipment, which is useless and is either destroyed or transferred to the Department of Government Purchasing and Supply, for disposal. In 1998, the Ministry of Finance approved the opening of new registers, on the basis of physical stock taking. The physical stock taking was completed and inventory registers were prepared for 7 sections of the Hospital, after approval was given for overtime work. My suggestion for the posting of an officer to utilise the results of the stock taking and to undertake the keeping of registers, has not yet been implemented. As a result, the whole work performed cannot be utilised and the preparation of remaining registers is pending. 4.72.11 Unused equipment in the Cardiosurgical Clinic. In order to cope with the increased incidents of heart operations, a second operating room, has been established, in the Cardiosurgical Clinic, fully equipped with the necessary medical equipment. As it was observed the operating room is not working and the medical equipment is not utilised. The Ministry informed me that as from September 2002, the operating room is used for other operations and the equipment is utilised accordingly. 4.72.12 Stores (a) Due to lack of storage spaces, several items were not properly arranged, with the result their counting not to be possible, as there is no easy access to them. Furthermore, several specialised items, such as catheters, X Ray items etc. are not recorded in the Store Ledgers, and are issued to the medical rooms directly, with the result, their disposal not to be followed, as well as the collection of medical fees, from patients, who received some of them. Also, some items remain unused for many years, in the Operating Room No. 2, due to change in the technology. A suggestion was made for their utilisation. (b) The updating of the store cards was not completed. (c) In the store, there are slow moving stocks and unused equipment, which for several years had not shown any movement, without taking measures for their utilisation or disposal.

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(d) Several items, which will be destroyed, are scattered in various storage spaces, without being recorded in the appropriate register. Larnaka Hospital Part B 4.72.13 Lack of storage spaces. The problem of lack of storage spaces is becoming year by year more acute, resulting to lasting problems in the storage of various materials and pharmaceutical items, and the keeping, sorting and movement of patients files. An indication of this situation is the use of kitchen spaces for the keeping of patients files. Paphos Hospital Part A 4.72.14 Amounts due for cast scan tomographies made by a private Medical Examination Centre. It was observed that the appropriate tendering procedures were not followed for the cast scan tomographies made by a private Medical Examination Centre for patients referred to the Centre by Pafos Hospital. It was also observed that the tomographies made by the Centre during 2001 and from 1.1.2002 until the end of March 2002, the cost of which is £19.580, according to the relative invoices submitted by the Centre to the Ministry of Health are still unpaid and legal measures were taken by the Centre for the payment of the amounts due. I suggested that the Ministry should make the necessary arrangements for the payment of the amounts due to the Centre. I expressed the view that such cases should be avoided, as they are showing that the State is unable to settle its obligations and the latter is charged with legal and other expenses. The Ministry informed me that arrangements have been made for the settlement of above obligations. 4.72.15 Unused equipment. It was observed that the automatic Analyst “Eliza” which was allocated to Pafos Hospital, since May 2001, has not yet been put into operation. Part B 4.72.16 Depressurisation chamber. The depressurisation Chamber, which was transferred from Larnaka Hospital to Pafos Hospital on 6.10.97 and was never put into operation, has now been considered as unsuitable, and the procedure for its condemnation is pursued. Consequently the Pafos Hospital is unable to render services in this sector. Paralimni Hospital Part B 4.72.17 Computerisation. The introduction of the computerised system is still pending. Consequently, the hardware which was purchased, since April 1999, remains unused, and at the same time, considerable amounts are being paid for the licences for the use of software, hiring of lines and the maintenance of the system. 4.73 PHARMACEUTICAL SERVICES Part A 4.73.1 Expenditure and consumption of drugs. The expenditure for the supply of drugs and the consumption of drugs during the last three years, is showing an increasing trend, as indicated below:

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2001 2000 1999 £m. £m. £m. Expenditure 19,5 15,4 14,7 Consumption 21,4 16,4 13,4

The Ministry stated that this is attributed to the daily increasing needs for chronic diseases and the standing policy for the provision of free medical treatment to patients, suffering from chronic and costly diseases. 4.73.2 Problems arising from the management of drugs. With a view to reducing the expenditure my Office suggested in the past, the introduction of Medical Audit as well as the computerisation of the system for the receipt and issue of drugs in pharmacies, so as to be possible to exercise control, on a continuous basis, over the stock of each drug and the issue of drugs to patients. The Director of Pharmaceutical Services informed me, recently, that, the relative specifications for the software and hardware have been prepared, and the invitation of tenders by the Department of Information Technology Services is awaited. 4.73.3 Placing of orders without available funds. Several quantities of drugs, of a total value of about £5,3m. (£2,6 m for 2000), were ordered and received in 2001, without securing the necessary funds in advance. This amount was charged to 2002 Budget Votes. 4.73.4 Storage of drugs and other materials. It was again observed that, due to lack of storage spaces, drugs and other materials of considerable value continue to be kept in the corridors of the Pharmaceutical Stores. The Pharmaceutical Services have proceeded to the lease of a warehouse at Strovolos Industrial Estate, but due to the distance between the Pharmaceutical Stores and the leased premises, there are additional operational problems and costs for the transportation of drugs. It is expected this mater will be finally settled with the construction of Pharmaceutical Warehouses in the area of the New Hospital of Nicosia. 4.73.5 Performance guarantees. It was again observed that there is no suitable internal control system for the follow up of guarantees, relating to two or more tenders. 4.73.6 Fire protection system. In the Pharmaceutical Laboratory there is no fire protection system. The Director of Pharmaceutical Services informed me that, although his services had made the necessary arrangements in 1999, for the installation of fire protection system, the estimated cost was not submitted in time, by the Ministry of Communications and Works, with the result the installation to be made in 2003. 4.73.7 Costing of drugs. The introduction of costing system for the medical supplies produced in the Laboratory, is pending. In view of the fact that some medical supplies are issued to private clinics on payment, my Office expressed the view that the costing of these medical supplies is considered necessary. The Director of Pharmaceutical Services informed my Office that, arrangements have been made, in cooperation with the Senior Supervisor of Accounts, for the costing of these medical supplies in 2002. The Ministry informed me that due to lack of staff and the transfer of accounts staff, the costing of medical supplies has not yet been made, and arrangements will be made for expediting this work in 2003.

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4.74 MEDICAL TREATMENT AND WELFARE SCHEME FOR GOVERNMENT LABOURERS. Part A 4.74.1 Operating results. According to the audited accounts, the revenue of the Scheme for 2001, amounted to £3.281.190 and the expenditure to £2.564.950, i.e. there was a surplus of £716.240, compared to £485.083 for 2000. At 31.12.01, the balance of the reserve account of the Scheme was £1.431.248, compared to £1.078.820 at 31.12.2000. 4.75 GENERAL LABORATORY Part A 4.75.1 Improvements and extensions to the building installations of the Laboratory. In the Budget for 2001, the amount of £318.000 was provided for improvements and extensions to the building installations of the Laboratory. It has to be noted that in the Budgets for 2000 and 1999, the amount of £275.000 was also provided. These works were assigned to the Departments of Public Works and Electromechanical Services. Once again, it was observed that there is considerable delay in the execution of works, with the result the operation of the Laboratory to be affected. 4.75.2 Tender No. 13.25.05.2000.15 for the supply of electronic microscope. While the technical specifications were approved by the Tender Board in March 2001, the invitation of tenders was made eight months later. From the study of tender documents, copy of which was submitted to my Office, after the invitation of tender, ambiguities/omissions/contradictions were observed, as well as provisions, which were not in line with the circulars of the Accountant General. It was also observed that the period of delivery of two months, was in my opinion, restrictive for such type of equipment. In November 2001, after the invitation of tenders, I submitted my observations to the Accountant General, together with specific suggestions for the improvement of tender terms, so as to secure a wide participation and the objective evaluation of tenders. Although the Director of the General Laboratory, in her letter dated December 2001, prior of the expiration of the tender, had informed the Accountant General of her agreement with most of the suggestions, and submitted the alterations/improvements which should have been made in the tender documents, the General Laboratory had failed to issue the supplementary tender documents to the tenderers, with the result the tenders to be submitted without the necessary amendments in the tender terms. The evaluation report was submitted in June 2002, to the Tender Board, and while it was pending for examination and decision, the validity of the tenders expired, because the General Laboratory had failed to apply promptly, for their renewal. In view of the above, the Tender Board decided in August 2002, for the cancellation of the tenders. Part B 4.75.3 Costing of laboratory tests. As it was stated in my previous Reports, for the purpose of determination of the fees for laboratory tests on a correct basis, a study was carried out, in cooperation with the Ministry, which did not proceed, due to the replacement/transfer of Accounting Officers, who were employed by the General Laboratory and the Ministry. After the suggestion of my Office, for the consideration of the possibility of securing the services of a

161 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 special consultant, the Accountant General approved the invitation of tenders, but the decision taken has not yet been implemented, with the result the costing of laboratory tests to remain pending. 4.76 LOCAL AUTHORITIES 4.77 MUNICIPALITIES – GENERAL OBSERVATIONS Part A 4.77.1 Up to the end of 2001, 33 Municipalities had been established, out of which 9 are displaced, after the occupation of their territories by the Turkish occupation forces. The staff of the displaced Municipalities is temporarily seconded to various Government Services and Public Corporations. The income of these Municipalities is derived, mainly, from salaries paid by the various Services, which employ municipal employees, as well as from government subsidy. The Municipalities continued to pay their employees all their emoluments from this revenue. 4.77.2 Accounts and audit. (a) The accounts of the Municipalities are audited by the Auditor General of the Republic and are submitted, together with the relevant reports, to the Municipal Councils. With the exception of the Municipalities of Nicosia, Larnaka, Pafos, Athienou, , Aglantzjia and Lakatamia, the remaining Municipalities have not submitted their final accounts for audit by the 30th April of the following year, as provided by section 81(1) of the Municipal Corporations Law. With a relevant letter I requested the Mayors to give instructions for the prompt preparation and submission of their accounts for the required audit. I reiterated that the non-prompt preparation and submission for audit of the accounts, does not contribute to the smooth operation of the Municipalities and at the same time reduces to a considerable degree the potential of utilization of the accounts, for purposes of planning, or otherwise, by the Municipal Councils. In addition, it deprives the House of Representatives and the citizens from the right of timely information about the affairs of the Municipalities. (b) Final Accounts. According to the provisions of the Municipal Corporations Law, the final accounts should be prepared under the accrual concept. Contrary to this provision, the Municipalities of Limassol, Polis Chrysochou, Lefkara, Athienou, Agios Dometios, Pegeia, Agia Napa, Deryneia, Geroskipou, Germasogeia and Idalion, continue to prepare Receipts and Payments Account, showing only their cash position. 4.77.3 Financial position. Even though the Ministry of Interior, in consultation with the Ministry of Finance, reserves the right for not releasing the amount of the general subsidy, which corresponds to each Municipality, in case the Municipalities, during the grace period do not comply with the relevant criteria (balancing of budgets, amounts of instalments and debts), almost all Municipalities are facing serious financial problems and liquidity problem, and therefore, they are unable to meet their liabilities. In order to avoid possible financial breakdown, I reiterated my suggestion that the Municipalities must prepare a plan for the measures to be taken for the reduction or elimination of deficits and the balancing of their annual Budget. 4.77.4 Financing of Municipal Fund from the loans account. Because of their financial problems, certain Municipalities continue to use, irregularly, the loans account for the financing of the Municipal Fund, instead of financing development projects, contrary to the loan agreements and the provisions of the Law.

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4.77.5 Loans instalments in arrear. Due to their financial problems, several Municipalities do not pay or delay the payment of loans instalments resulting in the accumulation of arrears and charges of overdue interest. 4.77.6 Bank overdraft. Contrary to section 85(2)(a) of the Law, the amount of the overdraft at 31.12.2001, in some Municipalities, exceeded considerably the specified proportion of 20% of the budgeted income of the Municipalities for the current period. 4.77.7 Budgets. (a) Ordinary Budget. The Ordinary Budget of a great number of Municipalities was showing a deficit. Once again I suggested to the Municipal Councils, that efforts should be made for the balancing of the Ordinary Budget, so that after the completion of the period of grace, set by the Council of Ministers, to comply with the terms of approval of the Budget, for the balancing or showing a surplus to be used for the financing of capital expenditure. (b) Development Budget. The Development Budget of most of the Municipalities is not prepared on a rational and realistic basis and, therefore, its execution is not possible and the deviation between the budgeted and actual expenditure is considerably high. (c) Expenditure excesses. Cases were again observed where the actual expenditure of some Municipalities was in excess of the budgeted, contrary to Section 66 of the Law. For these excesses no covering approval can be secured. 4.77.8 Weaknesses in the operation of the Services of Municipalities. Serious weaknesses are observed in the smooth operation of certain Services of Municipalities, particularly of the Finance Service. These are mainly, attributed to the non proper organisational structure, the non implementation of Laws, Regulations and of the approved procedures, the weaknesses in internal control systems, the non-completion of computerisation, the problems encountered in software programmes and the inadequate organisation/management of the Registry. My Office paid particular attention to the weaknesses observed in the operation of the various Services of the Municipalities and submitted specific suggestions, so as, these Services to become more effective and to contribute positively, to the improvement of the financial position of the Municipalities. 4.77.9 Internal control. In almost all Municipalities weaknesses and omissions are observed in the system of internal control, which cover the various activities of the Municipalities, such as: i. The non-imposition and collection of taxes, fees and tolls. ii. The non-prompt collection of taxes in arrear. iii. The non-preparation of reconciliation statements of taxes. iv. The non-keeping of the approved registers. v. The non-reconciliation and inefficient control of salaries. vi. The deviation from tender procedure. vii. The non-verification of assets. viii. The non-correct completion of payment vouchers and the non-attachment of necessary supporting documents. 4.77.10 Upgrading of posts. In several Municipalities wrong salary emplacements were observed in upgraded posts due to the non-application of relative Regulations and provisions.

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Most of the above Municipalities did not comply with my suggestions for the necessary corrections of the wrong salaries. I informed the Municipal Councils that my Office will be unable to certify the correctness of the calculations of the pensionable benefits of these municipal employees on their retirement. 4.77.11 Collective agreements. Despite the decision taken for the adoption and application of Public Service (Emoluments, Allowances and other Financial Benefits of Civil Servants) Regulations of 1995 (S.L. 175/95), several Municipalities signed and continue to sign collective agreements, the provisions of which are contrary to the above Regulations, and without obtaining the approval of the Ministry of Interior and the consent of the Ministry of Finance as provided by the Council of Ministers decisions No. 40.835 of 6.9.94 and No. 52.362 of 6.10.2000. 4.77.12 Schemes of service of municipal employees and powers of Municipal Council. In several Municipalities, it was observed that, the Municipal Councils granted additional increments, or emplacements at higher salary steps, actions which are not provided in the schemes of service. In addition, cases were observed where salary increments were granted beyond salary scales, on the basis of collective agreements and general salaries increases. According to a relevant ruling of the Attorney General, the Municipal Councils should act within the provisions of the schemes of service and any action over and above or in abuse to the schemes of service, in force, is unacceptable. 4.77.13 Approval of schemes of service of municipal employees. The Municipalities are not submitting their schemes of service to the Council of Ministers for approval, as provided by section 53(1) of the Municipal Corporations Law. The Ministry of Interior, addressed a letter, on 28.11.2000, to the Union of Municipalities as well as to Municipalities inviting the Municipal Councils to comply with the decision of the Supreme Court dated 22.9.2000, which provides that the schemes of service may be prepared by the Municipalities without any intervention or influence of the Council of Ministers, but for their implementation the approval of the Council of Ministers is required. The Union of Municipalities, addressed a letter on 30.11.2000, to the Municipalities, inviting them not to undertake any commitment towards the Ministry of Interior, in order to avoid any precedent, in connection with the procedure to be followed for the schemes of service of municipal employees. 4.77.14 Early Retirement Scheme. The Municipalities of Nicosia, Limassol and Pafos have introduced an Early Retirement Scheme, with the approval of the Ministry of Finance and the enactment of relevant Regulations. The Ministry of Finance did not approve on 27.6.2000 the introduction of a similar Scheme in Larnaka Municipality, because it was observed, from the implementation of the Scheme in other Municipalities, that the basic purposes for its adoption are not served. The aforesaid Municipality insists for the approval of the Scheme by the Ministry of Finance, and on 31.5.2002 addressed a letter to the Attorney General requesting him to state, whether there is any legal impingement for the implementation of Early Retirement Scheme, after the inclusion of a relative provision in the Budget of the Municipality. The Municipalities hold the view that with the introduction of the Early Retirement Scheme, there is a saving in the financial resources, due to the reduction of high salary staff, the abolition of certain posts and personal salary scales and the appointment of new staff with lower salary. My Office has its reservations on this matter, having in mind the method of application and the results of the Scheme, as to whether the objectives have been attained.

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4.77.15 Regulations – Employees Terms of Service. In several Municipalities the Regulations governing the employees terms of service and the financial administration and operation of the Municipalities as provided by sections 53(2) and 87(1) of Municipal Corporations Law, have not yet been approved. 4.77.16 Computerisation of services. In the Municipalities of Nicosia, Agios Dometios, Polis Chrysochous, Peyia and Geroskipou, the computerisation presents delays or weaknesses, resulting to the creation of operational problems in their financial and other services of the Municipalities. 4.77.17 Arrears of taxes. Delays are observed in the collection of taxes for previous years. As I stated in my previous Reports, the registers of arrears should be carefully examined, for verifying the amounts which cannot be collected, and effective measures to be taken for the collection of the remaining amounts and those which are considered as bad debts to be written off according to the provisions of section 85(2)(i.e.) of the Municipal Corporations Law. I also pointed out that measures should be taken for the prompt collection of taxes and arrears, otherwise the risk for their non-collection will increase considerably, with the lapse of time. 4.77.18 Pensions and Gratuities Funds. Due to financial difficulties, most of the Municipalities do not contribute to the above Funds and continue to pay the pensions and gratuities of the staff out of their annual revenue. 4.77.19 Advertisements fees. Contrary to the Regulations issued under section 7 of Exhibition of Advertisements Law, the Municipalities of Limassol, Aradippou, Paralimni, Idalion, Aglandjia, Peyia, Poli Chrysochou and Derynia, do not collect fees for the advertisements boards posted within their boundaries, resulting in the loss of revenue. 4.77.20 Deviation from tender procedure. In several Municipalities the procedure of invitation and award of tenders for the procurement of services and goods was not followed. 4.77.21 Inventory Registers. Certain Municipalities failed to update the inventory registers with the purchases of furniture and equipment during the last years. Consequently, they have not submitted the assets stock-taking certificate, provided by the Regulations. 4.77.22 Financial Instructions and Stores Regulations. As I stated in my previous Reports, on my recommendation, a special committee was set up, consisting of representatives of the Municipalities and my Office, which undertook the revision and preparation of new Financial Instructions and Stores Regulations. Most Municipalities have already adopted the above Instructions and Regulations and their adoption is expected by the remaining Municipalities. 4.78 NICOSIA MUNICIPALITY Part A 4.78.1 Accounts and audit. The audit of the accounts for 2001 will be carried out in 2002. The following matters relate to the accounts for the year 2000. 4.78.2 Financial position. (a) Operating results. The accounts for the year 2000 showed a surplus of £157.760, compared to the deficit of £301.210 for 1999. (b) Revenue. The revenue of the Municipality for 2000 amounted to £10.414.005, compared to £9.470.426 for 1999, i.e. there was an increase of £943.579 or 10%, which is mainly due to professional licences (£340.505), fines (£155.909), advertisements (£107.638) and state

165 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 subsidy (£143.219). The total state subsidy for 2000 amounted to £811.813, compared to £668.594 for 1999. (c) Expenditure. The expenditure of the Municipality for 2000 amounted to £10.256.245, compared to £9.771.636 for 1999, i.e. there was an increase of £484.609 or 5% which is mainly, due to pensions and gratuities (£100.938), electricity (£183.341), administrative expenses (£102.259) and interests (£82.011). (d) Long term/current liabilities. The long-term liabilities of the Municipality amounted to £9.536.393 at 31.12.2000, compared to £9.759.154 for 1999. The current liabilities at 31.12.2000, amounted to £5.271.283 and include loan installments payable within 12 months, amounting to £2.091.457 (£1.751.889 for 1999). (e) Liquidity. The cash balances of the General Account at 31.12.2000, include the amounts of £529.210, £85.800 and £58.596, representing unspent loan amounts, and balances of the special Funds of Chrysaliniotissa and Publications, respectively. Therefore, the actual overdraft of the General Account was £2.610.585 and not £1.936.976, as disclosed in the Financial Statements for 2000. The fact that amounts are transferred, irregularly, from the loans account and from other accounts to the General Account, for covering current needs, it is an indication that the financial position of the Municipality is not satisfactory, and there is the pressing need for finding ways, for the improvement of the financial position and the liquidity of the Municipality as well as, for the preparation of the long term strategical programme for covering or reducing the accumulated deficits. The Mayor informed me that the amount of £85.800, representing the balance of the Special Fund of Chrysaliniotissa, has already been transferred from the General Account to the Fund. With regard to the other amounts, these are transferred gradually to the appropriate accounts. 4.78.3 Budgets. (a) Ordinary Budget. The Budget was showing a deficit for £839.751. I pointed out to the Municipality Council that efforts should be made for the balancing of the Ordinary Budget, so that, after the expiration of the period of grace granted by the Council of Ministers, to comply with the terms of Budget approval, which specify for the balancing or showing a surplus in Ordinary Budget, to be used for the financing of capital expenditure. (b) Development Budget. While the budgeted expenditure for 2000 was £9.495.566, the actual amounted to £1.300.794, i.e. there was a deviation of £8.194.772 or 86,3%, mainly, due to the non execution or non completion of projects. I recommended to the Municipal Council that the Budget should be prepared on a more rational and realistic basis, so that the execution of projects to be possible. The Mayor informed me that every effort is made for the proper staffing of Technical Services, so as to be able to execute the projects which are included in the Budget. 4.78.4 Internal control. As it appears, the Internal Audit Section is not properly staffed with the result, the internal control exercised, to be, mostly, arithmetical, without carrying, at the same time management or performance audit. Moreover, no investigations or studies are carried out, for various serious matters, while the internal control on the implementation of procedures and Regulations is minimal. I pointed out to the Municipal Council that the Internal Audit Section has to play an important role for the upgrading of Municipal Services and therefore, its further organization and strengthening, as well as the training of staff, are necessary.

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The Mayor informed me that he agrees with my observation for the Internal Audit Section, and stated that the main objective is the further organization and training of staff, employed by the Section, so as to respond fully to their mission. 4.78.5 Personnel. The following table is showing the personnel employed by the Municipality during the years 1999-2000 and their relative emoluments.

2000 1999 Permanent Staff 181 173 Labourers 287 273 468 446

Expenditure for salaries, allowances and employer’s contributions £5.919.555 £5.892.538 4.78.6 Collective labour agreement (a) Contrary to the Council of Ministers decisions No. 40.835 of 6.4.1994 and No. 52.362 of 6.10.2000 which provide that Local Authorities receiving subsidy through the State Budgets, should not be committed for staff matters or collective labour agreements without the prior approval of the Ministry of Interior, and the consent of the Ministry of Finance, the Municipality, without obtaining such approval, proceeded with the signing of the collective labour agreement for the years 1999-2001, which provides, inter alia, the following: • Establishment of new promotion posts. • Upgrading – change of post titles • Transfer of hourly paid employees to permanent staff. • Fringed benefits, such as Medical Treatment Fund, Welfare Fund, staff insurance and others. (b) The establishment of new promotion posts and the upgrading/change of posts titles, provided in above agreement, were included in the Budget for the year 2002, of the Municipality, with retrospective effect from 1.1.2001, despite the condition set for the approval of the Budget, that such approval does not cover the establishment of new posts or upgrading of salary scales, unless these matters are examined and approved by the respective Ministries of Finance and Interior. The Mayor informed me that my observations will be taken into consideration and the appropriate procedures will be followed in the future. (c) Schemes of service. The new schemes of service of the staff, included in the collective labour agreement for the years 1999-2001 were put into effect as from 1.1.2001, without being approved by the Municipal Council and without obtaining the Council of Ministers approval for their implementation, contrary to section 53(1) of the Municipal Corporations Law. The recent decision of the Supreme Court, dated 22.9.2000, on the recourses No. 170/98 and 298/98, under which the Court decided for the annulment of the appointment of the Municipal Secretary, on the grounds of not securing the approval of the Council of Ministers for the implementation of the schemes of service, is relevant to this matter. 4.78.7 Transfer of hourly paid employees to permanent staff. Pursuant to paragraph 4 of part B of the collective labour agreement, for the years 1999-2001, the Municipality proceeded

167 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 with the appointment of 4 hourly paid employees to the permanent staff, placing them at the initial step of the salary scale of the post (A2 or A5) independently of their wages, which they were drawing, as hourly paid employees. All the above appointments were made without the establishment and publication of the new posts, as provided by the appropriate procedures, for first entry posts. The same practice was adopted in the past, when the Municipality proceeded with the appointment to the permanent staff of 13 hourly paid employees, on 1.1.1998. The Mayor informed me that my observations will be taken into consideration and the appropriate procedures will be followed in the future. 4.78.8 Payment of compensation for accumulated leave of absence. The Municipal Council decided on 29.11.2001, for the payment of the amount of £5.475 to the Municipal Engineer, for the purchase of his leave of absence of 46 days, accumulated in excess of 70 days, during the period 1986-2000. According to the collective labour agreements the Municipality is applying the existing Government Regulations (except for the post of Municipal Secretary), which do not permit the transfer of leave of absence in excess of 70 days. In view of this, the above payment is irregular. Since the Municipality is applying the existing Government Regulations, any exceptions or payments like the above case, are not justified and are contrary to the principles of equal treatment of employees. Also, I pointed out that the accumulation and purchase of leave of absence of many years by the Municipal Engineer, as well as by the Municipal Secretary, who was paid the amount of £37.363 for the purchase of 298½ days of leave of absence, earned when they were serving in lower salary scales, are increasing further the expenditure of Municipality, during a period in which serious financial problems are encountered, since the payment of leave is based on the last salary. The Mayor informed me that my observation has been noted and the proper procedures will be followed in the future. 4.78.9 Scheme for Early Retirement. The Nicosia Municipality, with the approval of the Ministry of Finance and with the enactment of Regulations (S.L. 284/97, S.L. 154/2001) introduced in 1997 a Scheme for Early Retirement, which was terminated on 6.1.2002. The Municipality holds the view that with the introduction of the Scheme, there was a saving in the financial resources, due to the reduction of high salary staff, the abolition of certain posts and personal salary scales and the appointment of new staff with lower salary. Since the introduction of the Scheme compensations amounting to £728.077 were paid in addition to pensions benefits for early retirement of 29 employees. Out of the 29 vacancies, the permanent posts of the Financial Manager and Municipal Engineer were filled, while the post of Municipal Secretary is at the final stage of filling. Also, another 8 lower posts were filled and out of the remaining posts, 8 were abolished and 10 are still vacant. As I stated in my previous Reports, the early retirement of senior officers to whom, besides their pension benefits, an additional compensation is paid, the amount of which is up to £30.000, does not contribute towards the achievement of the objective for savings in the financial resources, because, for the smooth and proper operation of the Municipality, the filling of permanent posts is legally required. The Mayor informed me that, my observations were noted and will be taken into consideration for future purposes. 4.78.10 Computerisation of services. The computerisation of the Municipality services, which started in 1992, has not yet been completed, resulting to serious problems which affect the

168 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 smooth and efficient operation of the services, particularly of the Financial Services of the Municipality. The Municipality, within its efforts to solve the continuous problems, due to the computerisation of services, assigned to a company the preparation of a strategic study, which proved that the upgrading/modification of existing systems is not feasible. In the study a suggestion was made for the Municipality to enter into an agreement, with the supplier of the systems, for solving the problems presented in the existing programmes. On 22.6.2000, the Municipal Council assigned, directly, to the, same company, the implementation of the suggestions made in the study, for the amount of £15.000 (plus VAT). The assignment of the above work was made, without signing a relative agreement, in which the duties and obligations of the company to be clearly stated, as well as the time schedule for the completion of work and without the lodgement of the relative guarantee by the company. Although the company informed the Municipality under letter dated 5.6.2000, that in case of assignment of above works, these should have been completed until December 2001, the following works were pending in July 2002. • Evaluation and recommendation for the award of tender for software. • Supervision of the installation of software • Definition of needs of the Technical Service, except for Registry. The Mayor informed me on 25.10.2002, that an agreement was signed with the successful tenderer for the substitution of the software of the Financial Section. With regard to the non- signing of agreement and the lodgement of the relative guarantee by the company, which undertook the implementation of the study for the computerisation, he stated that, in future, all the appropriate procedures will be followed. For the delay observed in the completion of works, assigned to the above company, he stated that this is attributed to the study carried out for finding alternative solutions, for the substitution of the software of the Financial Section. 4.78.11 Industrial area. (a) The Municipality decided for the establishment of an industrial area to accommodate all estates which were operating in built in areas and were causing annoyance. Out of the 111 estates, which were erected in the industrial area, (temporary delivery on 23.10.2000) until 31.7.2002, only 44 were disposed, something which causes additional financial problems and difficulties in the repayment of loan, received for the establishment of the industrial area. Specifically, for the instalment of £1.068.265 which was payable on 21.4.2002, only £200.000 were paid, with the result, the Municipality to be charged with overdue interests, which according to the Revised Budget for 2002, will amount to £50.000. (b) After a relative report was made, for bad workmanships in the construction of the estates of industrial area, an investigation was carried out by my Office, in April 2002, during which several bad workmanships were observed, which however, are not rendering the buildings as dangerous for the residents. In the report, prepared in October 2002, by the ad hoc Committee, which was set up by the Municipal Council for investigating the matter thoroughly, it is stated that the initial estimations for the viability of the project were not only incorrect but on the opposite, there were very strong indications about the anticipated problems of the project. Also, it was stated that specific political decisions were not implemented and concluded that the disposal of additional estates will be possible in the near future, provided the suggestions of the Committee are implemented.

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With regard to the bad workmanships the Committee agreed with my observations and stated that there is responsibility, since these were not rectified promptly, and some of them are still pending, with the result the project to be defamed. 4.78.12 Building permits / town planning permits. From a preliminary investigation of a specific report, submitted to my Office in November 2001, it was ascertained that the provisions of the Roads and Buildings and Town Planning Laws, as well as of the Local Town Plan of Nicosia, were not implemented. In my letter to the Minister of Interior, in May 2002, I requested that an investigation should be carried out of the licences issued for a certain file, and to be examined whether the General Principles of Proper Administration were adopted. The Director General of the Ministry of Interior in his letter dated June 2002, he informed me that due to the seriousness of the matter, a legal advice was sought from the Law Office, with regard to the way of exercising the powers vested to the Town Planning or other competent Authorities. The Mayor informed me that licences were issued by the Technical Committee, under unanimous decisions, which were not subject to the Municipal Council approval, according to the decision, dated 15.12.90. He also informed me that, a new practice has been adopted as from 2.4.98, under which all the applications for town planning licences are presented to the Municipal Council for decision. Part B 4.78.13 Premises of the Popular Neighbourhood. A legal impediment prevents the transfer of ownership of the Popular Neighbourhood premises to the Municipality. I was informed that the Director General of the Ministry of Interior referred the matter to the Attorney General for advice, as to whether the legal impediment could be overcome, so that the transfer of ownership to be possible. The Mayor informed me that the matter is under consideration by the Legal Adviser of the Municipality, after the submission of the letter of the Ministry of Interior, according to which the transfer of ownership of the premises of the Popular Neighbourhood, in the name of the Municipality, is not possible, as it contradicts to the provisions of Constitution and the Compulsory Acquisitions Law. 4.79 LIMASSOL MUNICIPALITY Part A 4.79.1 Accounts and audit (a) Submission of accounts. The Municipality has not yet submitted for audit the final accounts for 2001, whereas those for 2000 where submitted, with delay, on 5.9.2002, instead of being submitted by the 30th April of the year following the respective financial year, as provided by section 81(1) of the Municipal Corporations Law. The matters referred below, are relating to the accounts for the year 2000. The Mayor informed me that efforts are made for the prompt submission of the final accounts. (b) Final accounts. According to the Municipal Corporations Law, the final accounts should be prepared under the accrual basis of revenue and expenditure. Instead of the above, the Municipality continues to prepare receipts and payments account, showing the cash position only. The Mayor informed me that the final accounts for the year 2001 are being prepared under the accounting policy of accrual basis.

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4.79.2 Financial position (a) Operating results. The accounts for the year 2000 showed a deficit of £790.473, compared to £1.581.908 for 1999. (b) Receipts. The total receipts of the Municipality for the year 2000, amounted to £14.786.387, compared to £9.063.943 for 1999, i.e. there was an increase of £5.722.444 or 63,1%, which is, mainly, attributed to the collections from the sale of immovable property (£3.966.301) and the state subsidy, which for 2000 amounted to £1.995.940, compared to £624.892 for 1999. (c) Payments. The total payments of the Municipality for the year 2000, amounted to £15.576.860, compared to £10.645.851 for 1999, i.e. there was an increase of £4.931.009 or 46,3% which, mainly, is attributed to increased payments of salaries (£611.025), external services (£371.887), other obligations (£661.070) and loan installments (£2.594.956). (d) Liquidity. The overdraft of the General Account at 31.12.2000, amounted to £3.781.088. During the years 1993-2000, transfers were made, irregularly, to the General Account, from the Loans Account, the Pension and Gratuities Fund, and the Cultural Service Account, which at 31.12.2000, amounted to £5.718.412, £1.915.000 and £10.000 respectively. The irregular transfer of amounts, from the loan accounts and from other Funds to the General Account, for covering current needs, is an indication that there is a need for the improvement of the financial position and of the liquidity of the Municipality, as well as for the preparation of a long term plan, for covering or reducing the accumulated deficits. The Mayor informed me that, for resolving the financial problem, several meeting were held at the Ministries of Interior and Finance and proposals were submitted through the Municipalities Union. He also stated that tender terms are being prepared of a study, relating to the improvement of the financial positions of Municipality and the utilization of the municipal property. 4.79.3 Loans (a) Loans account. The balance of the loans account at 31.12.2000, amounted to £1.020.603, instead of £6.739.015, which is the correct balance. The difference of £5.718.412, is due to the irregular transfer of amounts to the General Account for covering current needs of the Municipality. (b) Repayment of loans. The balances of loans received by the Municipality, from the Loan Commissioners and commercial banks, amounted to £32.691.652 at 31.12.2000, compared to £33.001.847 at 31.12.1999. Considerable delay has been again observed in the repayment of loan installments, resulting to the payment of overdue interest by the Municipality. The total of installments in arrear, for 2000, amounted to £8.892.979. (c) Loan of £500.000 from the contracting company A. Panayides. It was observed that the Municipality received the above loan for the financing of the project, of Franklinou Rousvelt road, without the prior approval of the Council of Ministers, as provided by section 85(1)(a) of the Municipal Corporations Law. The Mayor informed me that the above loan was received, in order to avoid the termination of the contract agreement for the project of Franklinou Rousvelt road, and the payment of considerable compensations by the Municipality.

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(d) Development stocks of £5.000.000. Despite the instructions given by the Minister of Interior in his letter No. 79/98 of 19.4.99, the sinking fund investment account, has no yet been established for the repayment of the above stocks. This omission is due to the liquidity problem of the Municipality. 4.79.4 Budgets. (a) Ordinary Budget. The Budget of the Municipality was showing a deficit of £3.679.409. I suggested that efforts should be made for the balancing of the Ordinary Budget, after the expiration of the period of grace granted by the Council of Ministers, for compliance with the terms of Budget approval, which specify that the Ordinary Budget should be balanced or showing a surplus, for the financing of part of capital expenditure. The Mayor informed me that the Budget for 2003 is almost balanced. (b) Development Budget. While the budgeted expenditure for the year 2000, amounted to £21.193.000, the actual was for £2.946.062, i.e. there was a deviation of £18.246.938 or 86%, mainly, attributed to the non execution or the non completion of projects. I suggested that the Budget should be prepared on a more rational and realistic basis, so that its execution to be possible. The Mayor informed me that efforts are made, so that the Budget to be prepared on a more realistic basis. (c) Expenditure excess. During the year 2000, expenditure excesses were noted, which exceeded the 20% of the approved amounts of the Budget, which is the limit up to which the Municipal Council is allowed to incur expenditure, without any further approval, as provided by section 66 of the Law. 4.79.5 Internal control. It appears, that the Internal Audit Section, is not properly staffed, with the result the examination carried out to be almost arithmetical, without carrying at the same time management or performance audit. Furthermore, no investigations or studies are being carried out, in relation to serious matters of the Municipality, while the examination for ascertaining the implementation of procedures and Regulations is minimal. I pointed out to the Municipal Council that the Internal Audit Section has to play an important role for the upgrading of the services of the Municipality and its further organization and strengthening, as well as the training of staff, is considered necessary. The Mayor informed me that ways are being considered for the improvement of the internal control system. 4.79.6 Personnel. (a) The following table presents the staff employed by the Municipality, during the years 2000 and 1999, and the relative cost. 2000 1999 Permanent staff 385 283 Labourers (Regular and Casual) 113 292 498 575 Expenditure for salaries, allowances and employer’s contribution £7.024.711 £6.414.383

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(b) The following table presents the pensioners of the Municipality, for the years 2000 and 1999, and the relative cost: 2000 1999 Pensioners employees 92 94 Pensioners Mayors 3 3 Widows and Orphans 29 26 124 123 Total amount of pensions and gratuities 1.087.685 £982.376 4.79.7 Renewal of collective agreement for the period 1998 – 2000 - – Reorganisation. (a) As it was stated in my 1999 and 2000 Reports, the renewal of the collective agreement for the period 1998-2000, with retrospective effect from 1.1.96, for purposes of the emplacement in salaries scales as from 1.9.98, and the payment of arrears, resulted to financial implications for the Municipality. With regard to the transfer of the labourers to the permanent personnel (salary scales A1-A3- A4), as from 1.1.2000, for which no study was carried out, I expressed my reservations as to whether any benefits will accrue in the long term to the Municipality. The Municipal Council insists that the above transfer, which is a leading arrangement, will be fruitful. I also pointed out that in the collective agreement there are various omissions and ambiguities or contradictions, in relation to the existing Regulations which leave room for misinterpretations and that the decision taken for the incorporation of the various allowances to the pensionable emoluments of the employees, whose posts were upgraded, is in my opinion, contrary to the term “emoluments”, as specified by the Municipal Regulation No. 192. The Mayor reiterated that the retrospectiveness of the agreement concerns only the reorganisation and not the collective agreement. He also stated that the discussions for the reorganisation started before 1996, but there was considerable delay in the finalisation of the agreement. He also supported that there are no omissions or ambiguities in the collective agreement and that with the enactment of the Municipal Service Regulations (S.L. 370/2000) all the pending matters are regularised. With regard to the incorporation of all the allowances to the pensionable emoluments of the Municipal employees, he expressed the view that this is not contrary to the Regulations and this contributed to the abolition of the allowances. (b) Establishment of new posts, upgradings and change in title posts. In the collective agreement there was a provision for the establishment of new posts, upgradings, and changes in title posts, which were included in the Budget for 2001, without these matters being examined by the Ministries of Interior and Finance, as provided by the terms for the approval of the Municipality Budgets. 4.79.8 Schemes of service. The schemes of service present serious deficiencies and omissions and I suggested their revision so as to cope with present realities. After the completion of the revision, these should be submitted to the Ministry of Interior for onward transmission to the Council of Ministers, for securing the approval for their implementation, as provided by section 53(1) of the Municipal Corporations Law. The Mayor informed me that several schemes of services have been approved by the Council of Ministers.

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4.79.9 Revision of salary posts and scales for certain employees, after the reorganisation. After the reorganisation, which was effected under the collective agreement for the period 1998-2000, new upgraded posts or salary scales, personal salaries and allowances were granted, selectively, to certain employees, in addition to the initial provisions of the agreement. The selective upgradings, emplacements, appointments etc. which are contrary to the Laws and Regulations, and not fall within the powers of the Municipal Council, are in violation of the principles of equal treatment and proper administration and do not serve, in my opinion, the bests interests of the Municipality, but rather, they contribute to the increase of the existing serious financial problems. The Mayor informed me that the concession of posts or salary scales were made for covering services needs and for satisfying additional requests, for the purpose of avoiding appointments or/and encouraging retirements, without new appointments. 4.79.10 Scheme for early retirement. The Municipality introduced in 1999 a scheme for early retirement, which was terminated on 10.6.2002. During the period of operation of the scheme, the amount of £478.422 was paid for the early retirement of 19 employees, in addition to their pensions benefits. Out of the 19 vacant posts, only the posts of the Municipal Secretary and Agricultural Officer were published and filled, whereas the remaining posts were filled from the existing staff, permanent or casual, within the framework of the reorganisation. I expressed the view that the early retirement of employees, holding permanent posts, who are paid, besides their pensions benefits, an additional compensation, amounting up to £30.000, does not contribute to the saving of financial resources, because for the smooth and efficient operation of the Municipality, the filling of permanent posts is legally required. The Mayor expressed the view that the early retirement was justified and the Municipality, in addition to the financial benefit, was taking into consideration the qualitative upgrading of staff. 4.79.11 Upgrading of Municipal Park theatre. In April 2000, the Municipal Council accepted a proposal, made by a private company, for the restoration and upgrading of the Municipal Park theatre, which provided for the relative cost to be covered from various grants and the contribution of £30.000 by the Municipality. Finally, for the execution of the project, the additional amount of £64.000 was paid by the Municipality, which has not yet been recovered. Also, the Municipality was charged with the cost of wages of labour staff, which is not possible to be calculated. It was also observed that, while it was agreed that, the management of the project should be undertaken by the Municipality, the coordination and control of works were finally exercised by the company. Indicative examples for the insufficient management and control, exercised by the Municipality, were the non preparation of construction designs, and specifications for works, and the assignment of works by the company without invitation of tenders. The Mayor informed me that the amount paid by the Municipality for the execution of project, which is much higher of the initial amount, is due to bad impression from the publicity of the investigation, in relation to the project, resulting to the withdrawal of most sponsors. 4.79.12 Payment of additional gratuity to an employee on his resignation. The Municipal Council decided on 21.10.99, for the payment of the amount of £8.000, in addition to the pensions benefits, to a Municipal employee on his resignation, without this payment to be

174 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 covered by the Pensions and Gratuities Regulations of the Municipality and the Municipal Corporations Law. 4.79.13 Financial loss from the operation of Municipal Kindergartens. From the operation of three kindergartens during 2000 and 2001, there was a financial loss of £415.357 and £434.931 respectively. As a result, the accumulated losses for the years 1997-2001, amounted to £1.982.863. During the years 2000 and 2001, 208 children were attending three kindergartens and the loss for each child corresponds to £1.822 and £1.908, respectively. The Mayor informed me that a study is being carried out by the Social Welfare Committee of the Municipality and the matter was submitted to the Minister of Interior, for consideration. He also informed me that, after the suggestion of the above Committee, the Municipal Council decided for the termination of operation of one kindergarten, during the following period. 4.79.14 Deficit from the operation of refuse collection service. From the operation of above service, during the years 2000 and 2001, there was a deficit of £634.068 and £556.114, respectively. The Mayor informed me that efforts are being made for the reduction of deficit, with the freezing of new appointments and better control of overtime. 4.79.15 Theodosion Warehouses. The District Court of Limassol, on 11.3.2002, decided for the payment by the Municipality, of the amount of £23.693, plus 9% interest on the amount of £3.065 as from 1.12.72, and 8% on the amount of £20.637, as from 29.11.96, as well as surveyor expenses for £1.500, to the owner company of the warehouses, which were acquired under a compulsory acquisition order, which was pending since 1972. The lawsuit against the Municipality was lodged in 1995, after the company had collected the initially specified by the Department of Lands and Surveys value of the property, with reservation of its rights. The court also adjudged all legal expenses against the Municipality. 4.79.16 Arrears of taxes, fees and tolls. The arrears of taxes, fees and tolls amounted, according to the accounts of the Municipality, at 31.12.2000, to £5.105.333, compared to £2.971.809 at 31.12.1999. The arrears of 2000, include, for first time, all the amounts due for immovable property tax (£1.257.035) and cemetery tax (£403.509). The above arrears include amounts due for the years 1990-1994, for professional licences, licences for professional premises and refuse fees, which during the last years were not showing substantial movement (1% - 6%). I requested that the lists of arrears should be carefully examined, for ascertaining those amounts which may be collected and the taking of effective measures for their collection. The amounts which are considered as bad debts to be written off, according to section 85(2)(ie) of the Municipal Corporations Law. The Mayor informed me that Municipal employees are dealing with the old cases of arrears and those which cannot be settled will be submitted to the Municipal Council for write off. 4.79.17 Licences for the use of pavements and other public spaces. Despite my repeated observations, the Municipality has not yet prepared a list of the shops which use, since 1996, pavements and other public spaces, for the issue of licences and the collection of relative fees, with the result no fees to be collected in 2000, by the Municipality.

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The Mayor informed me that the recording of shops, operating in the central roads of the city, has been completed and notices were sent for the issue of the respective licence. 4.79.18 Contribution to the Defence Fund. No declarations are submitted, since 1984, to the Department of Inland Revenue for rents collected by the Municipality, which are liable to defence contribution. During the year 2000 the rents collected amounted to £88.727. The Mayor informed me that, an application was submitted to the Government for the write off of the amounts due for above contributions. Part B

4.79.19 Criminal investigation. Following a Council of Ministers decision, the Attorney General of the Republic appointed, in December 1998, four criminal investigators, including two members of my Office, to investigate reports against a Municipal Officer for illicit wealth, and also the findings of the investigating committee appointed by the Municipality, regarding the issue of building permit/permits. The investigations were completed and the relevant reports were submitted to the Attorney General. For the case of illicit wealth, criminal proceedings have been instituted against a certain officer, and two other persons and the trial of the case started before the District Court of Limassol, while the case of issue of building permit/permits is still under consideration by the Law Office. 4.80 FAMAGUSTA MUNICIPALITY Part A 4.80.1 Financial position. The following statement presents the receipts and payments of the Municipality, the state subsidy, the surplus and the cash balances of the General Account for the years 1996-2000.

2000 1999 1998 1997 1996 £ £ £ £ £ Receipts: State Subsidy 743.679 634.273 571.716 605.128 696.585 Services rendered 166.623 158.431 177.545 175.815 206.814 Other receipts 46.784 45.378 48.364 41.061 52.494 957.086 838.082 797.625 822.004 955.893 Payments: Salaries 378.158 388.534 380.242 380.996 454.683 Pensions 436.865 329.513 292.198 338.108 409.591 Other payments 123.233 113.599 113.296 71.126 80.516 938.256 831.646 785.736 790.230 944.790 Surplus 18.830 6.436 11.889 31.774 11.103 Balance of General Account 234.834 216.004 209.568 197.679 165.905

4.80.2 Personnel (a) The following table presents the personnel employed by the Municipality during the years 1996-2000, and the relative cost:

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2000 1999 1998 1997 1996 Permanent Staff 19 22 23 23 25 Labourers (regular and casual) 3 4 4 4 4 22 26 27 27 29 Expenditure for salaries, allowances and employer’s contributions £378.158 £388.534 £380.242 £380.996 £454.683

(b) The following table presents the pensioners of the Municipality for the years 1996-2000, and the relative cost. 2000 1999 1998 1997 1996 Pensioners/widows 70 69 67 68 69

Total pensions and gratuities £436.865 £329.513 £292.198 £338.108 £409.591 4.81 LARNAKA MUNICIPALITY Part A 4.81.1 Accounts and audit. The Municipality submitted with delay, on 5.10.2001, 22.12.2000 and 2.3.2000, the final accounts for the years 2000, 1999 and 1998, respectively, for audit, instead of until the 30th April of the year following the financial year, as provided by section 81(1) of the Municipal Corporation Law. The final accounts for the year 2001 were submitted promptly on 30.4.2002 and the audit will be carried out in 2002. The following matters relate to the accounts for the years 1998, 1999 and 2000, The Mayor informed me that the delay observed in the submission of the accounts, is due to the volume of work in the accounts section as well as to the computerization problems regarding the immovable property fax and assured me that in the future every possible effort will be made for the submission of the accounts within the time limits provided by the Municipal Corporations Law. 4.81.2 Financial position (a) Operating results. The accounts showed a surplus of £18.162 for 1998, a deficit of £124.398 for 1999 and a surplus of £319.376 for 2000, compared to the deficit of £229.913 for 1997. (b) Revenue. The revenue of the Municipality for the years 1998, 1999 and 2000 amounted to £5.390.493, £5.461.686 and £6.484.936, respectively, compared to £4.941.953 for 1997, i.e. there was an increase of £448.540 or 9,1%, for 1998, an increase of £71.193 or 1,3% for 1999, compared to 1998, and an increase of £1.023.250 or 18,7% for 2000, compared to 1999. The revenue of the Municipality includes state subsidy for £453.074 for 1998, £312.495 for 1999 and £969.813 for 2000.

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(c) Expenditure. The expenditure of the Municipality for the years 1998, 1999 and 2000 liquidity amounted to £5.372.331, £5.586.084 and £6.165.560, respectively, compared to £5.171.866 for 1997, i.e. there was an increase of £200.466 or 3,9% for 1998, £213.753 or 4% for 1999, compared to 1998 and £579.476 or 10,4% for 2000, compared to 1999. (d) Current liabilities and deficit in working capital. The Municipality is still facing a serious problem for covering the current liabilities, resulting to a deficit in working capital, as shown in the table below: Year Current Current Deficit in Assets Liabilities working capital £ £ £ 1998 3.753.354 5.670.243 1.916.889 1999 4.250.195 6.820.271 2.570.076 2000 4.441.857 7.763.448 3.321.591 (e) Long term/short term liabilities. The long term liabilities of the Municipality at 31.12.98, 31.12.99 and 31.12.2000, amounted to £5.488.022, £5.709.652 and £4.844.983, respectively, compared to £4.092.935 for 1997, whereas the current liabilities were £4.335,125 for 1998, £5.220.183 for 1999 and £6.292.697 for 2000. The current liabilities include the loan installments, payable within 12 months, amounting to £447.813, £792.513 and £1.104.070 for 1998, 1999 and 2000, respectively. (f) Repayment of loans. It was observed that the loan installments are not paid promptly, with the result the installments in arrear at 31.12.98, 31.12.99 and 31.12.2000 to be £3.887.312, £4.427.670 and £5.188.627 respectively, and the Municipality to be charged with overdue interest amounting to £35.353, for 1998, £48.317 for 1999 and £39.329 for 2000. The Mayor informed me that due to serious financial problems the Municipality is not in a position to pay promptly the loan installments, but every possible effort is made, so that the installments in arrear to be settled. 4.81.3 Budgets (a) Ordinary Budget. The Budgets for the years 1998, 1999 and 2000 were showing a deficit of £898.045, £895.496 and £1.009.830, respectively. I suggested to the Municipality that efforts should be made for the balancing of the Ordinary Budget, so that, after the expiration of the period of grace, granted by the Council of Ministers, to comply with the terms of approval of the Budget, which specify that the Ordinary Budget should be balanced or to show a surplus, to be used for the financing of capital expenditure. (b) Development Budget. During the years 1998, 1999 and 2000 considerable amounts, which were included in the Development Budget, remained unspent, mainly, due to the non execution or the non completion of projects, as shown below:

Year Budget Actual Unspent Deviation expenditure amounts £ £ £ % 1998 4.060.000 382.373 3.677.627 90,6 1999 8.490.000 932.028 7.557.972 89,0 2000 5.297.000 906.568 4.390.432 82,9

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I pointed out to the Municipal Council that the Development Budget should be prepared on a more rational basis, so that its execution, to be possible. (c) Expenditure excesses. During 1998, 1999 and 2000 expenditure excesses were noted, which were exceeding the 20% of the budgeted and approved amounts, a limit up to which the Municipal Council is allowed to spend, without any further approval, as provided by section 66 of the Law. The Mayor informed me that clear instructions were given, so that the procedure provided by section 66 of the Municipal Corporations Law, to be strictly followed. 4.81.4 Internal Control. Weaknesses were observed in the internal control systems, covering the various activities of the Municipality. The following are some indicative examples: (a) The weakness in the system for the follow up of taxes in arrear, resulting to the non taking of the appropriate measures for their prompt collection. (b) The non keeping of the appropriate registers (for agreements, rents, theatre etc.). (c) The non certification of the assets of the Municipality. (d) The non prompt preparation and signing of the agreements for the use of coastal space. The Mayor informed me that, efforts are made by the Municipality, within the existing procedures, for the strengthening of the internal control system. 4.81.5 Personnel. The following table presents the staff employed by the Municipality in the years 1998-2000, and the relative cost:

2000 1999 1998 Clerical staff: Permanent 117 117 114 Casual 17 19 19 Labourers: Regular 139 140 153 Casual ------273 276 286

Expenditure for salaries, allowances and employer’s contributions £3.428.247 £3.297.694 £3.086.203 4.81.6 Upgrading/revision of posts and salary scales. The Municipality, in cases of upgrading/revision of posts and salary scales, does not follow a uniform procedure for all the staff, due to the absence of relative Regulations. For the sake of uniformity, I suggested that the Municipality should adopt the same practice followed in the Public Service, by applying the relative Government Regulations, governing the above matters. 4.81.7 Accumulation of leave of absence in excess of 70 days. The Municipal Council approved by exception the transfer/accumulation of leave of absence in excess of 70 days, for 4 employees, in violation of the collective labour agreements, under which the Municipality has

179 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 adopted the Public Service (Leave of Absence) Regulations which do not permit the accumulation of leave in excess of 70 days. The Mayor informed me that the Municipal Council decided that in the future no leave will be transferred in excess of 70 days and for this purpose, a relative circular has been issued to the staff. 4.81.8 Larnaka Festival. From the following statement, it is deduced that there was a deficit of £262.742 from the Larnaka festival events, of the period 1996-2000, without taking into account the salaries of the staff of the Municipality employed during the years 1996-2000. It has also been noted that the number of tickets issued for the festival, was small, which is an indication that the public response was not the expected one.

1996 1997 1998 1999 2000 Total £ £ £ £ £ £ Expenses 87.797 60.869 74.341 69.970 143.638 436.615 Income 45.825 15.858 22.136 22.426 67.628 173.873 Deficit 41.972 45.011 52.205 47.544 76.010 262.742 Tickets sold 6.843 3.402 3.267 3.616 4.098 21.226 I suggested that the Municipal Council should study and find ways for the reduction or the elimination of the deficits. The Mayor informed me that my suggestions will be considered seriously by the Municipal Council, in the formulation of policy to be adopted for this matter. 4.81.9 Arrears of taxes, fees and tolls. The arrear of taxes, fees and tolls, according to the accounts of the Municipality, at 31.12.98, 31.12.99 and 31.12.2000, amounted to £2.582.125, £2.823.200 and £3.252.348, respectively, compared to £2.008.011 at 31.12.97. The above arrears include the amounts due, for the period 1990-1996, for professional tax, licences for professional estates, and refuse fees, the collection of which was fluctuating between 0,4%-4,4% during the last years. I requested that the statements of arrears to be examined carefully, for ascertaining the amounts, which may be collected, and the taking of effective measures for their collection. Those amounts which are considered as bad debts, to be written off, according to section 85(2)(1e) of the Municipal Corporations Law. The Mayor informed me that the statements of arrears are subject to a careful examination, for ascertaining the collectible arrears and the taking of measures for their collection, as well as of the amounts which must be written off, according to the Municipal Corporations Law. 4.82 PAFOS MUNICIPALITY Part A 4.82.1 Accounts and audit. The audit of the accounts for 2001 will be carried out in 2002. The following matters relate to the audit of the accounts for 1998, 1999 and 2000. 4.82.2 Financial position (a) Operating results. The accounts for the years 1998, 1999 and 2000 presented a surplus of £383.218, £137.175 and £563.654, respectively, compared to the deficit of £357.440 for 1997.

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(b) Revenue. The revenue of the Municipality for the years 1998, 1999 and 2000 amounted to £5.496.262, £5.760.441 and £6.867.172, respectively, compared to £4.695.501 for 1997, i.e. there was an increase of £800.761 or 17,1% for 1998, £264.179 or 4,8% for 1999, compared to 1998 and £1.106.731 or 19,2% for 2000, compared to 1999. The revenue includes state subsidy for £238.432 for 1998, £160.424 for 1999 and £511.720 for 2000. (c) Expenditure. The expenditure of the Municipality for the years 1998, 1999 and 2000 amounted to £5.113.044, £5.623.266 and £6.303.518, respectively, compared to £5.052.941 for 1997, i.e. there was an increase of £60.103 or 1,2% for 1998, £510.222 or 10% for 1999, compared to 1998 and £680.252 or 12,1% for 2000, compared to 1999. (d) Cash balances. The balance o the General Account, at 31.12.2000, includes the amount of £668.263, representing cash deposits, of citizens of the Municipality, bank guarantees, retentions of money, and other deposits for the execution of projects. Consequently the actual balance was an overdraft of £575.143 and not £93.120, as shown in the Financial Statements for 2000. I pointed out to the Municipal Council to study ways for the further improvement of the financial position of the Municipality. (e) Long term and short term liabilities. The long term liabilities of the Municipality at 31.12.98, 31.12.99 and 31.12.2000, amounted to £9.074.497, £11.328.958 and £11.184.388, respectively, compared to £9.256.433 for 1997. The short term liabilities amounted to £2.901.072 for 1998, £2.459.250 for 1999 and £2.014.552 for 2000. The short term liabilities include the loan instalments payable within 12 months, amounting to £1.150.726, £1.451.724 and £1.165.167 for 1998, 1999 and 2000, respectively. 8.82.3 Budgets (a) Ordinary Budgets. The Ordinary Budget of the Municipality for the years 1998, 1999 and 2000 was showing a deficit of £220.177, £20.177 and £379.870, respectively. I pointed out to the Municipal Council that efforts should be made for the balancing of the Ordinary Budget, so that, after the expiration of the period of grace, granted by the Council of Ministers, to comply with the terms of the approval of the Budget, which specify that the Ordinary Budget should be balanced or even to show a surplus, to be used for the financing of capital expenditure. The Mayor informed me that the Budget of the Municipality for the year 2003 will show a surplus. (b) Development Budget. During the years 1998, 1999 and 2000, considerable amounts, which were included in the Development Budget, remained unspent, mainly, due to the non execution or the non completion of projects, as follows: Year Budget Actual Unspent Deviation expenditure amounts £ £ £ % 1998 4.351.168 412.165 3.939.003 91 1999 3.256.000 1.146.721 2.109.279 65 2000 2.884.317 536.109 2.348.208 81 I pointed out to the Municipal Council that the Development Budget should be prepared on a more rational basis, so as the possibility for its execution to be possible.

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The Mayor informed me that the deviation in the Development Budget is mainly, due to the complicated and time consuming procedure of approval and the execution of town planning projects, the implementation of which is mostly not depended on the Municipality, but on the respective Government Departments. (c) Expenditure excesses. During the years 1998, 1999 and 2000, expenditure excesses were observed, which exceeded the 20% of the budgeted and approved amounts, a percentage up to which the Municipal Council has power to incur expenses without any further approval, as provided by section 66 of the Law. The Mayor informed me that instructions were given for the better follow up of the Budget. 4.82.4 Internal control. The internal control system, covering the various activities of the Municipality, presents weaknesses and omissions, as follows: • The non exercise of satisfactory control at the delivery of collections to the General Cashier. • The non follow up of the proper implementation of the agreements signed by the Municipality. • The weakness of the system in the follow up of the arrears of taxes and other revenue, resulting to the non taking of measures for their collection. • The non verification of the existence of assets. • The non keeping or the non proper keeping of the appropriate registers (registers of nights hotels, lawsuits and EAC invoices). The Mayor informed me that he agrees fully with my observation, that the system of internal control should be modernised and strengthened, and for this purpose the new post of Internal Auditor was included in Budget for the year 2003. At the same time, he stated that arrangements are being made, for the follow up of all financial agreements, through the computerised system. 4.82.5 Personnel. The following table presents the personnel of the Municipality, employed during the years 1998, 1999 and 2000, and the relative cost. 2000 1999 1999 Permanent Staff 91 109 107 Labourers 148 134 145 239 243 252 Expenditure for salaries, allowances and employer’s contributions £2.927.188 £2.933.566 £2.814.867

4.82.6 Transfer of labourers to permanent Staff. The Municipal Council, at its meeting dated 1.9.98, decided for the appointment of 12 labourers, as from 1.10.98, to the permanent posts, (2 Traffic Officers, 2 Clerks and 8 Office Assistants), without the publication of the posts, although these are first entry posts, and without the implementation of the appropriate procedure, for the filling of new posts. I pointed out to the Municipal Council that, as a result of the implementation of above irregular procedure, other interested persons were precluded from the submission of applications, for appointment to the aforesaid new posts, violating the principles of equal treatment and proper administration.

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The Mayor informed me that the deviation, by exception, from the appropriate procedure, regarding the filling of new posts, was considered by the previous Municipal Council as inevitable, and the respective Ministries where informed accordingly. Furthermore, the Municipal Council decided on 22.6.99, without having such jurisdiction, for the concession of five increments to the Traffic Officers, and the Clerks and seven increments to the Office Assistants, with effect from the date of their appointment. 4.82.7 Scheme for early retirement. The Municipality with the approval of the Ministry of Finance and the enactment of relevant Regulations (S.L. 130/99), introduced since 1999, a Scheme for early retirement. Since the operation of the Scheme, the amount of £120.210 was paid to 7 employees, in addition to their pensions benefits, on their retirement. The Mayor informed me that, with the introduction of the Scheme, incentives were given by the Municipality to the municipal employees, having a long service to retire, within the framework of the reorganisation and modernisation of Municipal Service. In his view, the benefit to be derived in the long term, will be higher from the cost, charged to the Municipality. 4.82.8 Collective labour agreement. Contrary to the Council of Ministers decision No. 40.835 of 6.4.94, and No. 52362 of 6.10.2000, the Municipality signed the collective labour agreement for the years 1997-1999, which provided for the establishment of new posts, upgrading of posts and the concession of fringed benefits, without the approval of the Ministry of Interior and the consent of the Ministry of Finance. The Mayor informed me that the intention of the Municipality is to comply, in future, with the procedure approved by the Council of Ministers, regarding the collective labour agreement. 4.82.9 Pafos Aphrodite Festival Cyprus Ltd. This company was registered in 1998 by the Municipalities of Pafos, Yeroskipou, Peyia and Paphos Chamber of Commerce and Industry, and certain entrepreneur, with the main purpose of the organisation/management of an international artistic event. The Municipal Council approved, on 28.7.2000, the covering of the expenses of the company by the Municipal Fund, at 8% interest. In addition to the payments, the Municipality undertook all the collections of the company and from 1999, when the company was put into operation, until October 2001, a deficit of £475.422 arose, which is included in the debtors accounts of the Municipality. I requested the Municipality to inform me how this amount will be recovered by the Municipality, in view of the fact that the issued share capital of the company is only £15.000 (15000 shares of £1 each). The Mayor informed me that he submitted the matter to the Board Management of the company, which intends to receive a loan for covering the deficit, and for the financial autonomy of the company. 4.82.10 Municipal Slaughter House. During 2001, the Municipal Slaughter House showed a deficit of £214.392 (£195.275 for 2000), which is expected to be fully covered by Government subsidy, pursuant to the Council of Ministers decision No. 51465 of 22 and 23.3.2000, which provides for the covering of annual deficit, from the year 2000 and afterwards, until the liberalisation of Slaughter Houses. From the operation of the Slaughter House until 1999, there was a total deficit of £1.575.597, after deducting Government subsidy, amounting to £816.635. I suggested to the Municipal Council to find ways for the reduction of deficits or even for their elimination. The Municipal Council and the Board of Management of the Central Slaughter

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House of Kofinou, assigned to a firm, the study for a possible agreement of joining together of the two Slaughter Houses, or their amalgamation, under common acceptable terms, which was delivered to the Municipality on 13.6.2002. The Mayor informed me that a meeting was held on 30.10.2002., under the chairmanship of the President of the Republic and it was decided for the urgent study of the matter regarding the upgrading, modernization and the viability of the Municipal Slaughter House, in a way, that the European Union specifications to be satisfied. 4.82.11 Entertainment tax (a) Contrary to section 85(2)(I)(ii) of the Law, the owner company of three cinemas, operating within the Municipal boundaries, failed to receive the entrance tickets and pay to the Municipality the respective entertainment tax, for the period 1.1.2000 – 31.7.2001. In view of the complete absence of internal control on the entrance tickets, and due to the omission of the responsible employee for the keeping and issue of tickets and for the collection of entertainment tax, to report this incident, this serious omission was revealed by the Director of Financial Services, in May 2001. From the examination of the statement of sales of tickets, kept by the owner company, it was ascertained that entertainment tax for £54.478 was not paid to the Municipality. The tax due was claimed and collected on 22.6.2001 (£45.808) and on 31.7.2001 (£8.670). (b) From a stock taking of the tickets kept at the storehouse of the Municipality, it was ascertained that a considerable number of tickets printed by the owner company of cinemas and delivered to the Municipality for stamping, storage and issue, with the payment of the relative entertainment tax, were not presented for audit, although, it appears, from tickets register, that they were not issued to cinemas. The corresponding tax for missing tickets, is estimated at £42.547. The responsible employee stated that the missing tickets were destroyed, without the approval of the Municipal Council, and without the Director of Financial Services and the Internal Auditor to be informed for the preparation of the relative destruction certificate. It was also observed that some of the tickets numbers which were recorded in the tickets register and are missing, are shown in the statements of sales of tickets of the company, which were submitted to the Director of Financial Services for examination, after the above omission of the owner company was revealed. In view of the seriousness of the case, I requested the Municipal Council to carry out a further investigation and to consider the possibility for assigning responsibilities to the above Municipal employee, for his omission to perform his duty. The Mayor informed me that the matter was considered by the Municipal Council, and a decision was taken for the necessary arrangements to be made, so that to avoid repetition of such case and for the assignment of responsibilities. He also stated that instructions were given for carrying out an internal investigation against the above Municipal employee. (c) Refund of entertainment tax. Contrary to section 85 (2)(I)(iv) of the Law, the Municipal Council decided for the refund of 10% of the entertainment tax, from the 20% collected from cinema shows, as well as for the refund of all the tax collected from football matches and theatrical performances, despite the fact that these were not made for charitable or educational purposes.

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The Mayor informed me that the matter, regarding the refund of part of the tax, collected from cinema shows, will be put before the Municipal Council, very soon, with the suggestion for the revision of the relative decision. 4.82.12 Arrears of taxes for previous years. According to the financial statements, the debtors of the Municipality as at 31.12.98, 31.12.99, 31.12.2000, amounted to £2.464.040, £2.467.184 and £2.667.716, respectively, compared to £2.098.316 at 31.12.97. The above debtors, include arrears of taxes for previous years, the percentage collection of which is low. I requested that the statement of arrears should be examined carefully, for ascertaining amounts which may be collected and the taking of effective measures for their collection. The amount which are considered as bad debts to be written off, according to section 85(2)(ie) of the Law. Also, I pointed out that measures should be taken promptly, otherwise the risk for their non collection will be considerably increased, with the lapse of time. 4.82.13 Writing off of revenue. Contrary to section 85(2)(ie) of the Municipal Corporations Law, the Municipal Council decided for the writing off of amounts in excess of £50, without obtaining the prior approval of the Minister of Interior. The Mayor informed me that the appropriate procedure will be followed. 4.82.14 Non imposition of surcharge. Contrary to section 134, of the Law, no surcharge is imposed, equal to the maximum legal interest rate, to the citizens of the Municipality who fail to pay, within the specified period, the water rates. 4.82.15 Loss of water. During 1999 and 2000, the percentage of loss of water was 35,2% and 33,3% respectively, and was exceeding considerably the normal permissible limit which may be accepted by the Department of Water Development and the Water Boards. I requested that the reasons for this considerable loss to be investigated and the necessary corrective measures to be taken. The Mayor informed me that the considerable loss of water is attributed to the very old water network, of the town, and for the radical solution of the problem, the possibility for securing specialised services, from the private sector, will be considered. 4.83 STROVOLOS MUNICIPALITY Part A 4.83.1 Accounts and audit. The Municipality has not yet submitted for audit the final accounts for 2001. The accounts for 2000 were submitted with delay on 6.12.2001, instead up to the 30th April of the year following the respective financial year, as specified by section 81(1) of the Municipal Corporations Law. Consequently, the audit of the accounts for the years 2000 and 2001 was not carried out by my Office. The Mayor informed me that the delay observed in the submission of the final accounts is attributed to the problems encountered from the introduction of the new software and the rehousing of the services of the Municipality to the new Municipal building. Part B 4.83.2 Salaries. In my Reports for 1999 and 2000, I stated that due to the non application of the Public Service (Emoluments, Allowances and Other Financial Benefits of Civil Servants)

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Regulations of 1995 (S.L. 175(95), during the revision of salary scales/upgrading of posts provided for in the collective agreement of the period 1.1.95-31.12.97, as well as to the concession of additional increments not covered by the schemes of services, the salaries of most employees, were wrong and consequently the Municipality was charged with additional cost. I requested that the necessary corrections be made in the salaries of employees. Although the Municipality informed me that my observations will be taken into consideration and will be put before the Municipal Council for study and decision, it was observed that the Municipal Council instead of proceeding to the correction of the wrong salaries of employees, approved on 12.10.98 and 6.5.99 the concession of additional increments to five employees of the Municipality, whose salaries were wrong and their emoluments higher. I pointed out to the Municipal Council that the decisions taken were contrary to the Municipal Corporations Law and Regulations of 1995 (S.L.175/95) and if the necessary corrections are not made, my Office will be unable to certify the correctness of the pensions computations on the retirement of the employees. The Mayor informed me that the settlement of the above matter was the result of lengthy negotiations between the Municipality and the Trade Staff Unions and that my observations will be taken into consideration in future cases. So far no instructions were given for the correction of the wrong salaries of above employees. 4.83.3 Establishment of nine posts of foremen. In my 1999 and 2000 Reports, I stated that the Municipal Council approved the establishment of nine permanent posts of «Foreman» (A2- A5-A7), against the abolition of an equal number of posts of «Head Supervisor» and the posting of certain persons to these posts, as from 1.7.99, without carrying a study for ascertaining the actual needs of the Municipality and the additional cost. The Mayor informed me that the above were decided after serious study and consideration, having in mind the interest of the Services of the Municipality and that no additional cost will result. I pointed out that I insist on my views, regarding the procedure followed and I stated that the posting of «Supervisors» to salary scales A2-A5-A7 of the post «Foreman» was irregular. Although the right way of recalculation of salaries was explained, the necessary corrections of wrong salaries of the above employees have not yet been made. 4.83.4 Schemes of service. After the revision of the salary scales of the posts of Municipality, the new schemes of service of the employees have not been prepared. I suggested to the Municipal Council the preparation of new schemes of service and their submission to the appropriate Ministries of Interior and Finance for approval, as provided by section 53(1) of Municipal Corporations Law. The Mayor informed me that the procedure regarding the preparation of new schemes of service for certain posts is being pursued. 4.83.5 Amount due to the Pensions and Gratuities Fund. According to an actuarial study, the Municipality was indebted at 31.12.97 to the Pensions and Gratuities Fund, for the amount of £849.769, representing deficient contribution, which should be paid in 20 annual installments of £77.122 each, including interest. It was observed that the Municipality has not, so far, paid any amount to the above Fund. The Mayor informed me that, as from 2002, the Municipality will pay the amount of £50.000, annually, to the Pensions and Gratuities Fund, for covering the accumulated deficit, in addition to the annual contribution to the Fund.

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4.84 AGIOS DOMETIOS MUNICIPALITY Part A 4.84.1 Cash deficit. During the investigation, carried out by my Office, of the arrears of taxes for professional licences and refuse collection, for the years 1990-1999, it was observed that the amount of £1.526, collected by the Municipality, during the period 1993-2000, was not lodged to the Municipal Fund. The investigation covered 51 cases, where the notices of initial assessment, were returned by the citizens of the Municipality, bearing the stamp of payment, of the Municipality. Due to the seriousness of the findings, these were submitted to the Attorney General and the Police, for carrying a relative investigation to ascertain any criminal offences. My Office requested the Municipal Council to investigate further this matter, for ascertaining the actual cash deficits, because there were serious suspicions, that other sums collected by the Municipality, were not lodged to the Municipal Fund. The Municipal Council accepted my suggestion and on 9.5.2002, after public tenders, assigned to two former Senior Auditors, who retired from my Office, the investigation of 271 notices of initial assessment (professional licence, refuse collection fees, cases referred to section 17), which were returned to the Municipality, bearing the stamp of payment of the Municipality, but in the accounts were shown as uncollected. From the investigation of above notices, it was ascertained that total amounts for £15.499, collected by the Municipality during the years 1999-2001, were not lodged to the Municipal Fund. The Mayor, in his letter dated 11.7.2002, submitted to my Office the findings of the above investigation and informed me that a relative letter was also submitted to the Attorney General. On 17.1.2002, a Municipal employee was interdicted, pursuant to the Municipal Council decision. The Mayor informed me that the above cases are being further investigated by the Police Investigation Branch, where all the relative documents were delivered. 4.84.2 Internal control. Due to the absence of internal control over the revenue collections and the various other activities and sections of the Municipality, there was a cash deficit, which was not traced promptly. I pointed out to the Municipal Council the important role, which the internal control has to play, in the safeguarding of the assets of the Municipality, and I requested the Council to ensure about its existence and proper operation. 4.84.3 Accounts and audit. The Municipality has not submitted for audit, the final accounts for the years 2000 and 2001, which should have been submitted by 30.4.2001 and 30.4.2002, respectively, as specified by section 81(1) of the Municipal Corporations Law. Consequently, the audit of the accounts for the years 2000 and 2001, was not carried out by my Office. As I was informed, the Municipal Council, assigned the preparation of these accounts to a private audit firm, due to existing operational problems, in the financial services of the Municipality. 4.84.4 Special investigation. In my Reports for the years 1999 and 2000, it was stated that, the Municipal Council decided on 12.10.99, for humanitarian reasons, the suspension of the payment of installments, for the repayment of the amount of £10.103,54 due by the former

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Mayor, which was spent during the years 1995-1996 and was not covered by section 69 of the Municipal Corporations Law, without specifying the period of the suspension of the payment of installments and the date for the recommencement of the repayment of the amount due. The Mayor informed me that, two letters were sent to the former Mayor, for the payment of the installments without any response. 4.84.5 Formation of the old town of Agios Dhometios. From the investigation of a relative report, made by a member of the Municipal Council, it was ascertained that the cost of the formation of the old town, will be £1.159.000, compared to the initial estimate of £680.000. The increase is due to the inclusion in the final study of works, after the approval of the Department of Town Planning and Housing, which were not provided in the initial study. I observed that, with proper planning, these works should have been included during the stage of assigning the study, for securing better prices from the designers. I expressed the view that the Municipality should negotiate the amount to be paid to the designer, on the basis of the prices shown in the catalogue of the Department of Public Works, which provides for the reduction in prices where there is an increase in the cost of projects. The Mayor informed me that there was a compromise in the settlement of the other claims of the designer, and there is a possibility for the reduction of his prices. Part B 4.84.6 Final accounts. Although the Law provides that the final accounts should be prepared under the accounting policy, of accrual basis of revenue of expenditure, the Municipality continues to prepare receipts and payments account, showing only the cash position. The Mayor informed that the final accounts will be prepared under the accounting policy of accrual basis of revenue and expenditure, with the completion of the computerized system. 4.84.7 Salaries – Agreement for the early retirement of a Clerk. The Municipality came to an agreement with a Clerk for his early retirement, as from 8.12.2000, after the completion of 400 months of service and the concession of eight additional increments, contrary to section 53(1) of the Municipal Corporations Law, which provides for the implementation of the schemes of service which were prepared by the Municipal Council with the approval of the Council of Ministers. On 31.12.2000 the above Clerk retired from the service and the Municipality submitted to my Office the computation of his pensions benefits for certification, which was prepared on the basis of the increased annual basic salary and my Office refused to certify it. In spite of the above, the Municipality proceeded with the payment, on 5.2.2001, to the above Clerk, of his gratuity of £39.401 and his monthly pension of £752,73 as from March 2001, on the basis of the wrong calculations, instead of £30.998 and £562,68 respectively. It is noted that the monthly pension, is subject to revision, at the time of payment of pension increases, to pensioners. The Mayor informed me that the Municipal Council, had signed an agreement with the aforesaid Clerk, after the consent of the Adviser for labour matters was received and it is estimated that there will be a relative saving of £26.000, during the next three years. 4.84.8 General Steward. The Municipal Council decided on 28.7.98 for the appointment on a permanent basis of the General Steward who was employed on a contract basis, in the Department of Cultural and Social Services, without securing the approval of the appropriate Ministries of Interior and Finance, for the establishment and filling of the new post and without

188 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the approved procedure for the filling of new posts to be followed. I also noted, from the minutes of the meeting held on 28.7.98, that the Municipal Council was aware that the above decision was irregular. The Mayor informed me that the Municipal Council decided for the employment of above General Steward, on the basis of an agreement, of indefinite period, instead of on an annual basis, after the evaluation of her duties and qualifications. 4.84.9 Concession of additional increments. Despite the irregular concession of additional increments to three Municipal employees, the Municipal Council still insists on the decisions taken. I pointed out to the Municipal Council that, according to the legal advice of the Attorney General of the Republic, the Municipality should act within the provisions of the schemes of service and any action which is in abuse or contrary to the schemes of service in force, at any specified time, is unacceptable. The Mayor informed me that the concession of increments to the one employee, was made, on the basis of a request submitted by the labour unions, for purpose of equal treatment with the Clerk. The concession of one additional increment to the other two employees was made on the basis of the general agreement for the harmonisation of the conditions of service of the employees of the Municipalities of Greater Nicosia. 4.84.10 Upgrading of posts. The Municipality has not get secured the approval of the Ministry of Interior for the agreement signed with Trade Unions, for purposes of harmonisation with the permanent posts of Municipalities of Greater Nicosia. According to the Council of Ministers decisions No. 40.835 dated 6.9.94 and No. 52.362 dated 6.10.2000, the Local Authorities receiving finance from the Government Budgets should not undertake any commitment for staff matters or collective agreements, without securing the prior approval of the Ministry of Interior. In spite of the above, the Municipality has signed the collective agreement for the years 1997-1998 without securing such approval. 4.84.11 Application of information technology systems. (a) During the application of computerised systems, delays and problems were observed in their smooth operation. The follow up of the application of systems and the taking of measures for the improvement of their effectiveness, to the benefit of the services of the Municipality, as well as the specific allocation of duties to the Municipal employees, for the proper follow up of the systems and the solution of various problems is necessary. (b) So far, no time schedule has been prepared, in cooperation with the company which supplied the computer software, showing the obligations of the two sides for the completion of the computerisation of the Municipality, with the result some works to be performed by the staff instead of by the computerised system. (c) There is no specified policy, with regard to the access in the spaces of information technology. Consequently, there is no satisfactory security for the software and hardware equipment. Furthermore, it was observed that the hardware and software equipment were not recorded in the analytical registers.

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The Mayor agreed that there were delays and operational problems during the introduction of the computerised systems and expressed the view that the final settlement of this matter will be made, with the strengthening of staff. With regard to the security of the system, he informed me that a solution is being pursued. 4.85 ATHIENOU MUNICIPALITY Part A 4.85.1 Cash deficit (a) During the audit of the accounts of the Municipality, for the years 2000 and 2001, a cash deficit of £31.333,46 was revealed, and there are serious suspicions for the embezzlement of this amount by a Municipal employee, during the period 22.1.97 – 13.11.2001. It appears that the amount was retained from the state subsidy of £37.500, which was given to the Municipality on 18.1.90, under the Council of Ministers decision No. 31.091 of 15.12.88, for the subsidisation of interest by 2% of the loans received from the Co-Operative Credit Society of Athienou by 31 stock-farmers, for the movement of their stables to the animal breeding area. The above subsidy was deposited in various accounts of the Cooperative Credit Society of Athienou. (b) On 18.4.2002, while the audit was carried out by Office, the aforesaid Municipal employee, had lodged the amount of £21.000 to the account of the Municipality, kept with the Cooperative Credit Society of Athienou. The Mayor, in his letter dated 25.6.2002, informed my Office that the Municipal Council decided unanimously, on 11.4.2002, to accept the resignation of the said employee, for medical reasons, and requested my Office, to inform him about the pensions benefits and the 13th salary payable to the employee. I expressed my reservations about the correctness of above decision and I pointed out that, from the time when the Mayor and members of Municipal Council were informed by my Office, for the existence of the cash deficit and for the submission of the audit findings to the Attorney General of the Republic for further action, no decision should have been taken before the study of the matter by the Attorney General. 4.85.2 Qualified audit report. In view of the cash deficit which was revealed and the seriousness of matters, arising from the audit, qualified audit reports on the accounts for the years 2000 and 2001 were issued. 4.85.3 Internal Control. Due to the complete absence of internal control over the receipts, payments, cash balances and in various other activities of the Municipality, there was, inter alia, a cash embezzlement of £21.333,46. I pointed out to the Municipal Council the important role which the internal control has to play for the safeguarding of assets and I requested the Municipality to ensure for its existence, proper operation and further strengthening. 4.85.4 Financial statements. According to section 80 of the Municipal Corporations Law, the final accounts should be prepared under the accounting policy, of accrual basis, of revenue and expenditure. Contrary to this provision, the Municipality, as in previous years, continues to prepare receipts and payments account, showing only the cash position. 4.85.5 Regulations. The Regulations governing the general conditions of service of the employees, the financial management and operation of the Municipality, provided by sections 53(2) and 87(1) of the Law, have not yet been approved. The Municipal Council should adopt

190 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the Financial Instructions and Stores Regulations, prepared by a special committee, consisting of representatives from the Municipality Union and my Office. 4.85.6 Financial position (a) Operating results. The accounts for the years 2000 and 2001 showed a surplus of £23.708 and £91.906 respectively, compared to the deficit of £117.541 for 1999. (b) Receipts. The receipts for the years 2000 and 2001 amounted to £806.419 and £654.138 respectively, compared to £439.894 for 1999, i.e. there was an increase of £366.525 or 83,3% for £2000 and a decrease of £152.281 or 18,9% for 2001, compared to 2000. The receipts of the Municipality for the year 2000, include a loan for £93.000, for the road asphalting, donations for £83.000 and state subsidy for £277.588. The receipts of the Municipality for the year 2001, include the amount of £229.665, representing special state subsidy. (c) Payments. The payments for the years 2000 and 2001 amounted to £782.711 and £562.232, respectively, compared to £557.435 for 1999, i.e. there was an increase of £225.276 or 40,4% for 2000 and a decrease of £220.479 or 28,2% for 2001, compared to 2001. The increase in 2000, is mainly attributed to the increase of expenditure for development projects and the transfer of £93.000 to the General Account, while the decrease in 2001 is, mainly, attributed to the reduced payments for development projects. 4.85.7 Budgets (a) Ordinary Budget. The Ordinary Budgets for the years 2000 and 2001, were showing a deficit of £33.690 and £13.688, respectively. I pointed out to the Municipal Council that efforts should be made for the balancing of the Ordinary Budget, so that, after the expiration of the grace period granted by the Council of Ministers, there will be compliance with the terms of approval of the Budget, which specify that the Ordinary Budget should be balanced or showing a surplus, for the self financing of part of capital expenditure. (b) Development Budget. During the years 2000 and 2001, considerable amounts included in the Development Budget, remained unspent, mainly, due to the non execution or non completion of projects, as shown below: 2001 2000 £ £ Budgeted expenditure 847.000 800.000 Actual expenditure 108.974 252.401 738.026 547.599 Deviation 87,1% 68,4% I pointed out to the Municipal Council that the Development Budget should be prepared on a more rational and realistic basis, so that its execution to be possible. (a) Expenditure excesses. During the years 2000 and 2001 excesses were noted, which exceeded the 20% of approved budgeted amounts, a limit up to which the Municipal Council may incur expenditure, without further approval, as provided by section 66 of the Law. 4.85.8 Personnel. The following table presents the staff employed by the Municipality during the years 2000 and 2001, and the relative cost.

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2001 2000 Permanent Staff 5 5 Casual on contract 1 3 Labourers: - Regular 4 - - Casual - 3 10 11

Expenditure for salaries, allowances and employer’s contributions £112.200 £99.696 4.85.9 Schemes of service. The schemes of service of the Municipal employees have not been submitted to the Council of Ministers for approval, as provided by section 53(1) of the Law. The decision of the Supreme Court for recourses No. 170/88 and 298/98 under which the schemes of service should be prepared by the Municipalities and submitted to the Ministry of Interior, for onward transmission to the Council of Ministers for approval of their implementation, is relevant. 4.85.10 Collective labour agreement. Contrary to the Council of Ministers decision No. 40.835 of 6.4.94, which was reconfirmed under decision No. 52362 of 6.10.2000, which provides that the Local Authorities receiving subsidy through the Government Budget, should not be committed for staff matters or collective agreements, without the prior approval of the Ministry of Interior, the Municipality, without securing such approval, proceeded to the signing of the collective agreement for the years 1999-2000. 4.85.11 Collection of fees not legally covered. It has been observed that the collectible fees for water supply, slaughter house, weighing and the entertainment tax are higher from those provided by the existing Regulations, which were approved several years ago. I suggested the approval of the new Regulation which will coincide with present realities. 4.85.12 Non-imposition of surcharge. Contrary to sections 78(2) and 134 of the Municipal Corporations Law, no surcharge is imposed, equal to the maximum legal interest, on the municipal tax for immovable property and on water rates, not paid by the specified date. 4.86 ARADHIPPOU MUNICIPALITY Part A 4.86.1 Accounts and audit. The Municipality has not yet submitted for audit the accounts for the year 2001, whereas those for 2000 were submitted with delay on 30.8.2001, instead of up to the 30th April of the year following the respective financial year, as specified by section 81(1) of the Municipal Corporations Law. The matters referred below are relating to the audit of the accounts for 2000. Cases were again observed, where the accounting policies of accrual basis of revenue and expenditure and of historical cost, under which the financial statements are prepared, were not correctly applied. Several arrears of revenue and outstanding liabilities of 31st December 2000, were not disclosed in the accounts. 4.86.2 Financial position (a) Operating results. The accounts for the year 2000, showed a surplus of £46.896, compared to a deficit of £120.037 for 1999. The surplus is mainly attributed to the increase of state subsidy by £218.126.

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(b) Revenue. The revenue of the Municipality for the years 2000 was £1.707.156, compared to £1.317.351 for 1999, i.e. there was an increase of £389.805 or 29,6%. The revenue includes state subsidy for £368.032, compared to £149.906 for 1999. (c) Expenditure. The expenditure of the Municipality for 2000 amounted to £1.660.260, compared to £1.437.388 for 1999, i.e. there was an increase of £222.872 or 15,5%. (d) Deficit in working capital. At 31.12.2000, the current assets amounted to £1.175.364 and the current liabilities to £1.707.465, i.e. there was a deficit in working capital of £532.101. (e) Repayment of loans. Due to financial difficulties the loan instalments are not paid promptly by the Municipality, with the result the instalments in arrear, at 31.12.2000, to be £505.009, and overdue interests to be paid. 4.86.3 Budgets (a) Ordinary Budget. The Budget of the Municipality for the year 2000 was showing a deficit of £642.080. I pointed out to the Municipal Council that efforts should be made for the balancing of the Ordinary Budget, so that after the expiration of the period of grace, granted by the Council of Ministers, there will be compliance with the terms of approval of the Budget, which specify that the Ordinary Budget should be balanced or showing a surplus, for the self financing of part of capital expenditure. (b) Development Budget. While the budgeted expenditure for 2000, amounted to £2.810.000, the actual were £375.293, i.e. there was a deviation of £2.434.707 or 86,6% mainly, due to the non execution or non completion or projects. It was also observed that the amount of £101.126 was paid to the execution of projects not provided in the Budget. I suggested to the Municipal Council that the Budget should be prepared on a more rational and realistic basis, so as its execution to be possible. (c) Expenditure excesses. During the year 2000 expenditure excesses were noted, over the 20% of the budgeted and approved amounts, a limit up to which the Municipal Council has power to incur expenditure without any further approval, according to section 66 of the Municipal Corporations Law. 4.86.4 Internal Control. Weaknesses and omissions were observed in the internal control system, covering the various activities of the Municipality, as follows: • The non keeping of the appropriate registers, such as the registers for lawsuits, remittances, tenders, contracts etc. • The deviation from the tenders procedure, in several cases of purchase of goods/services. • The inability of the system to follow up the arrears of taxes, resulting to the non taking of measures for their collection. • The non exercise of satisfactory control on the purchase of fuels and the movement of the vehicles of the Municipality. • The non exercise of sufficient control on the attendance and departure of the staff. • The absence of control in the storehouse and library. 4.85.5 Weaknesses in the operation of Municipal Services. As it was stated in my Report for 2000, the Municipality is facing serious operational problems, which are due to the non- implementation of approved procedures and Regulations. It is also mentioned that, certain

193 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 decisions of the Municipal Council do not comply with the provisions of the Municipal Corporations Law. For the improvement of the situation I suggested to the Municipal Council that corrective measures should be taken and for full compliance with the provisions of the relevant legislation and Regulations. Despite my observations no measures have been taken for the improvement of the situation. 4.86.6 Personnel. The following table presents the personnel employed by the Municipality during the years 1999 and 2000, and the relative cost: 2001 2000 Permanent Staff 19 19 Labourers 16 7 35 36

Expenditure for salaries, allowances and employer’s contributions £491.513 £433.626 4.86.7 Salaries (a) Establishment of new posts. Despite my observations, the Municipality has not yet applied for obtaining the approval of the Ministries of Interior and Finance, for the establishment of the 3 posts of Municipal Engineer, Civil Engineer and Clerk, which were filled in 1998 and 1999. (b) Concession of additional annual increments. The salaries of the employees, who were granted irregularly additional annual increments, have not yet been rectified despite my observations. As it was stated in my Report for the year 2000, the Municipal Council decided on 8.2.96 and 19.2.98, irregularly, for the concession of three additional increments to four Municipal employees. Two additional annual increments were also granted to another two employees without the approval of the Municipal Council. I pointed out to the Municipal Council that the concession of additional annual increments is not covered by the relevant schemes of service and according to the advice given by the Attorney General, on 10.5.93, the Municipal Councils should act within the provisions of the approved schemes of service and any action or decision in abuse or in contradiction of the schemes of service, in force, is unacceptable. (c) Salary emplacement due to upgrading/revision of the salary scale of Municipal Treasurer. On 19.11.98 the Municipal Council decided for the upgrading of the salary scale of the Municipal Treasurer from A5-A7-A8 to A7-A8-A10 and the concession of six additional increments as from 1.1.98, placing him at £3.271 of the salary scale A8, contrary to the Regulations governing the revision of the salary of an employee whose post is upgraded (S.L. 175/95). (d) Schemes of service. For most of the posts of the Municipality there are no schemes of service, while the existing schemes present serious omissions. The schemes of service are revised by the Municipal Council according to the needs of each post, without securing the necessary approval of the Council of Ministers, as provided by section 53(1) of the Municipal Corporations Law. The decision of the Supreme Court, dated 22.9.2000, for recourses 170/98 and 298/98, which provides that the schemes of service are prepared by the Municipalities and are submitted to the Ministry of Interior, for the purpose of securing the approval of the Council of Ministers for their implementation, is relevant.

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4.86.8 Industrial area. The Municipality, addressed a letter, on 19.12.97, to the District Office of the Department of Lands and Surveys in Larnaka, requesting the lease of a piece of government land, for the establishment of an industrial area, to be divided into plots for hiring to third persons. Despite the fact that the relative lease agreement has not yet been signed, and the method of allocation of plots had not been determined, the Municipal Council proceeded to the allocation of plots to industrialists. It was also observed that at the industrial area estates were erected without the submission of designs for approval and the issue of building permit and without the preparation of a technical/financial study, by the Municipality, for the cost of infrastructure works (construction of roads, water supply etc.) as provided in the plan for the establishment of industrial areas, approved by the Council of Ministers, under decision No. 36.309, dated 25.10.91. 4.86.9 Deviation from tenders procedure. As I stated in my Annual Report for 2000, the Municipality does not follow in all cases the tenders procedure for the execution of important projects and the purchase of materials and services, contrary to the principles of proper administration and the equal treatment of citizens. Specifically, several important projects were assigned to two local contractors without tenders. I suggested that the Municipal Council should consider seriously this matter and to ensure full compliance with the tenders procedure. 4.86.10 Construction of cemetery. The contract amount was £412.187 (without V.A.T.) and the project was completed in 1996, and a quantity surveyor was appointed for the preparation of the final account. Whereas, according to the final account, prepared by the quantity surveyor, the total revised amount of the contract was £517.370, the contractor was paid £675.665, i.e. £158.295 more. 4.86.11 Construction of roads. The completion of the project was planned in three phases. For phase A tenders were invited, whereas phases B and C were assigned to the same contractor, without tenders, at the same prices, and without signing new contract agreements and the submission of a guarantee. The contractor was paid until 31.12.2000 the total amount of £214.818 for works of Phase B, completed in 1996 and £471.755 for works of phase C, which were not completed until May, 2002. Despite the assurances of the Municipal Council, that efforts will be made for the signing of contract agreements and the submission of guarantees, these matters are still pending. 4.86.12 Road network «Zapata». The construction of the project was assigned without tenders, at the same unit prices, which were charged by the same contractor for the construction of municipal roads. It was also observed that contract agreements were not signed, no guarantee was deposited, and lump sums were paid to the contractor not based on the work executed. Until March 2001, the amount of £82.240 (including V.A.T.) was paid to the contractor. The Municipality informed me that the construction of the project was assigned to the above contractor, following the instructions given by the Department of Public Works, but no document was presented, to confirm the above. 4.86.13 Loan of £50.000, received from Aradhippou Cooperative Credit Society. Contrary to section 85(1) of the Municipal Corporations Law, the Mayor and Vice Mayor signed on 12.8.2000, a loan agreement for £50.000, between the Municipality and the Cooperative Credit Society, without the approval of the Council of Ministers and the Municipal Council. It was observed that on the relative promissory note the Mayor and the former Vice Mayor are shown as debtors, instead of the Municipality, as it happens in other cases.

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4.86.14 Debtors – Taxes in arrear imposed before 1992. Due to the non keeping of the appropriate registers, the taxes in arrear, imposed before 1992, cannot be ascertained. Taxes in arrear, amounting to £28.490, for the period 1982-1991, which were sent to the lawyer for taking legal action for their collection, are still shown as outstanding. Despite my observations, the lawyer was not asked to provide details about the cases for which legal action was taken and for the amounts collected. 4.86.15 Non-imposition of surcharge. Contrary to section 134 of the Municipal Corporations Law, no surcharge is imposed, on the consumers who fail to pay within the specified date the water supply fees. 4.86.16 Loss of water. During 2000 the percentage of loss of water was 31,7% and was exceeding considerably the maximum percentage (20%) which is acceptable by the Department of Water Development and the Water Boards. I requested the Municipality to investigate the reasons for the high percentage of loss of water. 4.85.22 Regulations. The Regulations governing the terms of service of the employees and the financial administration and operation of the Municipality, provided by sections 53(2) and 87(1) of the Municipal Corporations Law, have not yet been approved. 4.87 POLI CHRYSOCHOUS MUNICIPALITY Part A 4.87.1 Accounts and audit. The Municipality has not yet submitted for audit the final accounts for the year 2001, where as those for 1998, 1999 and 2000 were submitted with delay on 2.3.2000, 16.1.2001 and 1.3.2002, respectively, instead of up to the 30th April of the year following the respective financial year, as specified by section 81(1) of the Municipal Corporations Law. The following matters are relating to the audit of the accounts for the years 1999-2000. 4.87.2 Final accounts. According to the Municipal Corporations Law, the final accounts should be prepared under the accounting policy of accrual basis of revenue and expenditure. The Municipality continues to prepare receipts and payments account, showing only the cash position. 4.87.3 Financial position. (a) Operating results. The accounts for the years 1998 and 1999 presented a deficit of £61.169 and £237.899, respectively. The accounts for 2000, presented a surplus of £102.239, compared to a deficit of £124.621 for 1997. (b) Receipts. The receipts of the Municipality for the years 1998, 1999 and 2000 amounted to £515.972, £508.417 and £703.251, respectively, compared to £436.310 for 1997, i.e. there was an increase of £79.662 or 18,3% for 1998, a decrease of £7.555 or 1,5% for 1999, compared to 1998 and an increase of £194.834 or 38,3% for 2000, compared to 1999. The receipts include state subsidy for £172.671 for 1998, £69.365 for 1999 and £307.457 for 2000. (c) Payments. The payments of the Municipality for the years 1998, 1999 and 2000, amounted to £577.141, £746.316 and £601.012, respectively, compared to £560.931 for 1997, i.e. there was an increase of £16.210 or 2,9% for 1998, an increase of £169.175 or 29,3% for 1999, compared to 1998 and a decrease of £145.304 or 19,5% for 2000, compared to 1999. The decrease in the payments for 2000, is mainly attributed to the non payment of amounts for development projects.

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(d) Liquidity – Overdraft of bank account. Contrary to section 85(2)(a) of the Municipal Corporations Law, the balance of the overdraft of the General Account, at 31.12.1998 and 31.12.1999 was £244.203 and £432.276, respectively, and was exceeding the specified percentage of 20% of the total revenue of the Budget of the Municipality. Although in 2000, approval was given by the Minister of Interior for the increase of the percentage to 35%, it was again observed that the overdraft at 31.12.2000, was £331.044, and was exceeding the new percentage. It appears, that the financial position of the Municipality is not satisfactory and there is a serious liquidity problem. 4.87.4 Loans. The balances of loans, received by the Municipality from the Loan Commissioners and the Cooperative Central Bank, at 31.12.98, 31.12.99 and 31.12.2000, amounted to £1.553.690, £1.557.748 and £2.314.959, respectively, compared to £1.476.322 for 1997. The significant increase of the loan balances during 2000, compared to 1999, is due to the two new loans of the total amount of £717.000, received, with government contribution for their repayment. 4.87.5 Repayment of loans. Due to existing financial problems, the loan installments for 1998, 1999 and 2000 were not paid by the Municipality. As a result the Municipality was charged with overdue interest, for the period 1998-2000, amounting to £15.416. 4.87.6 Budgets (a) Ordinary Budget. The Ordinary Budget of the Municipality for the years 1998, 1999 and 2000 was showing a deficit of £357.038, £258.434 and £271.633, respectively. I pointed out to the Municipal Council that efforts should be made for the balancing of the Ordinary Budget, so that after the expiration of the period of grace, granted by the Council of Ministers, to comply with the conditions of approval of the Budget, under which the Ordinary Budget should be balanced, or even showing a surplus, for the self financing of capital expenditure. (b) Development Budget. During the years 1998, 1999 and 2000, considerable amounts of the Development Budget remained unspent, mainly, due to the non execution or the non completion of projects, as shown below:

Year Budget Actual Unspent Deviation expenditure amounts £ £ £ % 1998 3.318.000 93.245 2.224.755 96 1999 2.357.000 187.262 2.169.738 92 2000 1.323.000 -- 1.323.000 100 I pointed out to the Municipal Council that the Budget should be prepared on a more rational and realistic basis, so that its execution to be possible. (c) Expenditure excesses. During the years 1998-2000 expenditure excesses were noted, exceeding the 20% of the budgeted and approved amounts, a limit up to which the Municipal Council has power to incur expenses, without any further approval, according to section 66 of the Municipal Corporations Law.

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4.87.7 Internal Control. (a) The system of internal control covering the various activities of the Municipality, presents weaknesses and omissions. Some indicative examples are given below: (i) The non completion of the payment vouchers, with the necessary details and the non attachment of the necessary supporting documents. (ii) The weakness of the system to follow up the arrears of taxes with the result the necessary measures for their collection not to be taken. Specifically, the arrears are not followed systematically, notices are not always sent to debtors, the relative registers are not followed and no reconciliation is carried out of the statement of arrears with the debtors account. (iii) The non keeping, or the non proper keeping of the appropriate registers, such as the registers for tenders, contract agreements, remittances, plant and machinery, cracks, assets, library and lawsuits. (iv) The non verification of the assets of the Municipality. (v) The absence of control in Municipal Library. (vi) The non completion of the computerization of the services of the Municipality. (b) Weaknesses in the operation of Municipal Services. Serious operational problems are encountered, which are mainly, due to the non implementation of the appropriate procedures and Regulations, such as the non keeping of appropriate registers, the inability of the system to follow up the arrears of taxes and the insufficient implementation of tenders procedures. For the improvement of the situation I suggested that the Municipal Council should take all the corrective measures and to comply fully with the provisions of the legislation and the relevant Regulations. 4.87.8 Personnel. The following table presents the personnel employed by the Municipality during the years 1998-2000, and the relative cost: 2000 1999 1998 Permanent Staff 9 9 10 Labourers 21 22 17 30 31 27

Expenditure for salaries, allowances and employer’s contributions £282.965 £283.406 £255.551 4.87.9 Concession of additional increments. The Municipal Council decided on 12.7.1999 and 7.8.2000, irregularly, for the concession of six and three increments to two Municipal employees, respectively, without a relative provision to be included in the schemes of service. I pointed out to the Municipal Council, that according to the legal advice of the Attorney General of Republic, dated 10.5.93, the Municipal Councils should act within the limits of the schemes of service and any act or arrangement, in excess or in abuse of the schemes, applicable at the specified time, is unacceptable. 4.87.10 Computerisation of Municipal Services. On 17.1.2000, the Municipal Council decided for the award of tender, for the supply of software, to a company whose tender was not the lower, and the relative agreement was signed on 10.2.2000. The above decision was taken

198 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 without a technical evaluation to be carried out, by the consultant, of the 5 tenders submitted, and without being fully justified. A recourse was filed against the above decision by a company which participated in the tenders, which was finally accepted by the Supreme Court, on 19.2.2002, on the grounds that the composition of the Municipal Council was not the proper and the decision taken was not fully justified. 4.87.11 Arrears of taxes, fees, tolls and licences. According to the accounts of the Municipality, the arrears amounted to £185.992, £244.996 and £359.202, at 31.12.98, 31.12.99 and 31.12.2000, respectively, compared to £129.032 at 31.12.97, The above arrears include taxes, relating to the period 1975-1997, the percentage collection of which is low (0-10,9%). I requested the Municipality, that the statements of arrears to be carefully examined for ascertaining the amounts which may be collected and the taking of effective measures for their collection. 4.87.12 Licences for the operation of professional estates. Contrary to section 103 of the Law, during the years 2000 and 2001, no fees were imposed, for the operation of professional estates, while for the years 1998 and 1999, fees were collected from several estates only. 4.87.13 Non-imposition of surcharge. Contrary to section 134 of the Municipal Corporations Law, municipal fees for immovable property, refuse fees and professional licence fees, were collected on 3.1.2001, for previous years, without the imposition of the relative surcharge. The municipal fees for immovable property are collectible, according to section 78(3) of the Law, by the 30th September, the refuse fees by 1st September, according to section 4 of Regulation 81 and professional licence fees by the 31st December. It was also observed that no surcharge is imposed on the arrears of fees for hotel nights. 4.87.14 Amount due for V.A.T. Contrary to Value Added Tax Law 246/90 and the Regulations of 1991 (S.L. 207/37), the VAT due for the services rendered by the Municipality since 1992, was not paid. As a result, there was an outstanding amount of VAT for £33.532, at 31.3.2002, including additional surcharge and interest, amounting to £2.603 and £6.703, respectively. 4.87.15 Contribution to the Defence Fund. Contrary to the Special Contribution for the Defence of the Republic Law, the Minicipality does not submit promptly the statements for the rents collected. Specifically the last statement was submitted in 1996 for the period 1988-1993, whereas pending is the submission of statement for the following years, and I requested that this be submitted as soon as possible. It is further stated that due to the non-prompt submission of the statement, the Municipality is charged with interest. The Mayor informed me that he studied my Reports for the years 1998, 1999 and 2000 and the relative observations and recommendations contained therein, aiming at improving the picture and the efficiency and effectiveness of the Municipality. 4.88 PARALIMNI MUNICIPALITY Part A 4.88.1 Accounts and audit. The Municipality submitted for audit, on 20.6.2001 and 1.8.2002, with delay, the accounts for the years 2000 and 2001, respectively, instead of up to the 30th April of the year following the respective financial years, as specified by section 81(1) of the Municipal Corporations Law. The audit of the accounts for the years 2000 and 2001 will be carried out in 2002.

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4.88.2 Paralimni Local Plan. In June 2002, the Municipality requested the views of my Office, regarding the revision of the agreement, between the Municipality and the private consultant, which was in force since 1993, for the preparation of the Local Town Planning Scheme of Paralimni. I informed the Municipality that, in my opinion, the new assignment, to the same consultant, for the completion of the scheme, is not favourable for financial and practical reasons, such as the extremely high earnings and the conditions of employment, as well as the fact that the subject matter of this work, should have been completed under the 1993 agreement. 4.88.3 Competitions and Public tenders. In July 2001, the Municipality assigned to a private consultant the study of various projects, without invitation of tenders or competition. My Office informed, repeatedly, the Municipality that the assignment of services by Public Corporations and Authorities should always be made by tenders/competitions. I pointed out that under the tender method, provided by the principles of proper administration, the interests of the Corporations are better served, through the selection of the best tenders, from technical and financial aspect. The Mayor informed me that the Municipal Council decided that in future Public tenders will be invited for the construction of infrastructure works. Part B 4.88.4 Repair of the fence of the stadium. As I stated in my previous Reports, in October 1996, the Municipal Council assigned the repair/improvement of the fence of the stadium to the contractor, who, at that time, was carrying the execution of the contract for the seats. In December 1996, the work was completed and the Municipality paid to the contractor the agreed amount (£50.000 plus V.A.T.), which, was again paid in 1999, under the final account of the contract for the seats. A criminal investigation was carried out, but no criminal responsibilities arose and a disciplinary investigation is now in progress. A claim was raised by the Municipality for the recovery of the overpayment, but so far the amount has not been collected. 4.88.5 Immovable property tax. The Municipality continues not to impose the municipal immovable property tax, which could have been imposed under section 74 of the Municipal Corporations Law, resulting to considerable loss of revenue. The Mayor informed me that the Council decided not to impose the municipal immovable property at this stage, based on the legal advice, which provides that the Municipal Council has the discretionary power to impose or not to impose the above tax. Although I agree that the imposition of the municipal immovable property tax rests within the discretionary power of the Municipality, I pointed out that Paralimni Municipality is the only Municipality which does not impose this tax. I also stated that, with the imposition of this tax, the financial position of the Municipality would have been improved and any deficits to be avoided. 4.89 AYIA NAPA MUNICIPALITY Part A 4.89.1 Accounts and audit (a) Submission of accounts. The Municipality submitted for audit the accounts for 2000, with delay on 15.10.2001, instead of up to the 30th April of 2001, as specified by section 81(1) of the Public Corporations Law.

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The Mayor informed me that the delay observed in the submission of the accounts for 2000, is mainly, due to the volume of work in the accounts section. At the same time, she stated that the accounts for 2001 were submitted promptly, and that the whole problem is expected to be resolved with the appointment of new staff and the computerization of the services of the Municipality. (b) Final accounts. According to the Municipal Corporations Law, the final accounts should be prepared under the accounting policy of the accrual basis of the revenue and expenditure. In spite of the above provision, the Municipality continues to prepare receipts and payments account, showing only the cash position. The Mayor informed me that, under the circumstances, it is not possible to prepare accounts under the accounting policy of accrual basis, of revenue and expenditure. 4.89.2 Regulations. The approval of Regulations, governing the staff matters and the operation of Municipality, provided by sections 53(2) and 87(1) of the Law, is still pending. I recommended the preparation and approval by the Municipal Council, of Financial Instructions and Stores Regulations, specimen of which may be obtained from the Municipalities Union. The Mayor informed me that the Regulations for staff matters, and the Financial Instructions and Stores Regulations are now being considered by the Municipal Council and their approval is expected soon. 4.89.3 Financial position (a) Operating results. The accounts for the years 2000 and 2001 showed a deficit of £247.508 and £596.780, respectively, compared to the surplus of £34.363 for 1999. (b) Receipts. The receipts of the Municipality for the years 2000 and 2001 amounted to £4.563.192 and£5.919.910, respectively, compared to £3.242.064 for 1999, i.e. there was an increase of £1.321.128 or 40,7% for 2000 and £1.356.718 or 29,7% for 2001, compared to 2000. The receipts include state subsidy for £584.513, for 2000 and £639.898 for 2001. (c) Payments. The payments of the Municipality for the years 2000 and 2001 amounted to £4.810.700 and £6.516.690, respectively, compared to £3.207.701 for 1999. i.e. there was an increase of £1.602.999 or 50% for 2000 and £1.705.990 or 35,5% for 2001, compared to 2000. The payments include expenditure for development projects, amounting to £1.434.969 for 2000 and £2.367.435 for 2001. 4.89.4 Repayment of loans. The Municipality does not pay the installments for the loan of £1.000.000, received from the Central Cooperative Bank, with the results the installments in arrear at 31.12.2000 and 31.12.2001 to be £1.039.846 and £985.142, respectively, and the Municipality to be charged with overdue interests, amounting to £82.712 for 2000 and £85.296 for 2001. The Mayor informed me that the installment for the repayment of the loan, received from the Central Cooperative Bank, are not paid by the Municipality due to the renegotiation of the period of repayment of the loan and for the signing of the new loan agreement. 4.89.5 Budgets (a) Expenditure excesses. In several Expenditure Votes of the Ordinary Budget for the years 2000 and 2001, excesses were noted which exceeded the 20% of the budgeted and approved amounts, a limit up to which the Municipal Council has power to incur expenditure without any further approval, as provided by section 66 of the Law.

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The Mayor informed me that instructions were given for compliance with section 66 of the Municipal Corporations Law. (b) Development Budget. During 2000 and 2001 considerable amounts included in the Development Budget remained unspent, mainly, due to the non execution or non completion of projects, as shown below: Year Budget Actual Unspent Deviation expenditure amounts £ £ £ % 2001 3.078.000 2.367.435 710.565 23,1 2000 2.772.000 1.434.969 1.337.031 48,2 I recommended to the Municipal Council for the preparation of the Budget on a more rational and realistic basis, so that its execution to be possible. The Mayor informed me that the non execution of projects, included in the Development Budget, is attributed to the fact that, during the summer months, usually, the works are suspended for not causing any annoyance to the visitors of the area. 4.89.6 Internal Control. The internal control system covering the various activities of the Municipality, presents weaknesses and omissions, as follows: (i) The non taking of effective measures for the collection of arrears of taxes. (ii) The non proper keeping of the appropriate registers. (iii) The violation of tender procedures, in several cases of purchase of materials. (iv) The non certification of the assets. The Mayor attributes the weaknesses of the internal control system, mainly, to lack of staff and states that these will be eliminated with the appointment of the necessary staff. At the same time, he informed me that instructions were given for compliance with my suggestions. 4.89.7 Personnel. The following table presents the personnel employed by the Municipality during the years 2000 and 2001 and the relative cost: 2001 2000 Permanent staff 25 25 Casual (Assistant kindergarten Teachers) 7 6 Labourers: Regular 45 47 Casual (seasonal) 120 90 197 168 Expenditure for salaries, allowances and employer’s contribution £1.454.942 £1.252.750 4.89.8 Schemes of service. All the schemes of service of the Municipal posts, should be submitted to the Council of Ministers for approval of their implementation, as provided by section 53(1) of the Municipal Corporations Law. The decision of the Supreme Court dated 22.9.2000, on the recourses No. 170/98 and 298/98, according to which the schemes of service should be prepared by the Municipalities without any intervention or involvement of the Council

202 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 of Ministers, but for their implementation the approval of the Council of Ministers is required, is relevant. The Mayor informed me that instructions were given for the submission of the schemes, of service to the Council of Ministers, for approval of their implementation, according to my recommendations. 4.89.9 Arrears of taxes for previous years.

Assessment Arrears on Collections Arrears at Percentage Year 1.1.2001 during 2001 31.12.2001 collection £ £ £ % 1991 31.359 -- 31.359 0 1992 18.574 -- 18.584 0 1993 19.053 -- 19.053 0 1994 23.672 -- 23.672 0 1995 32.337 1.390 30.947 4,2 1996 29.205 801 28.404 2,7 1997 35.342 1.616 33.726 4,5 1998 43.213 5.126 38.087 11,8 1999 80.774 13.668 67.106 16,9 From the above statement, it appears, that the percentage collection of arrears of taxes is considerably low and in my opinion, this is due to the non taking of effective measures against the debtors. I requested that the arrears of taxes to be investigated and in cases of bad debts to be written off, according to section 85(2)(ie) of the Municipal Corporations Law. I also stated that the measures for their collection to be taken promptly, otherwise the risk for their non collection will be increased considerably, with the lapse of time. The Mayor informed me that instructions were given for taking, promptly, legal measures for the arrears of taxes. He also stated that the Council of Ministers decided for the enchainment of property of those who are indebted for amounts over £1.000, as a measure for exercising pressure, for prompt payment. 4.89.10 Non-imposition of surcharge. Contrary to section 134 of the Municipal Corporations Law, no surcharge, is imposed on the consumers who fail to pay their water supply bills within the specified period. The Mayor informed me that instructions were given for the imposition of 9% surcharge, on the amounts due, as soon as the new computerized programme for water supply is introduced. 4.89.11 Amount due to the Department of Water Development. Although the Municipality has paid to the Department of Water Development a small part of the amount due for the water supply, the outstanding balance is considerable. At 31.12.2000 and 31.12.2001, the outstanding liabilities amounted to £945.059 and £882.598, respectively, compared to £977.342 for 1999. The Mayor informed me that instructions were given to the accounts section for the gradual payment of the amounts due by the Municipality.

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4.89.12 Loss of water. During 2001, the quantity of 2.077.752 c.m. of water was purchased, and the consumption was 1.430.579c.m., i.e. there was a loss of 647.173c,m. or 31%. The percentage of loss of water is much higher from the acceptable loss by the Department of Water Development and Water Boards. I requested the Municipal Council to investigate the reasons for the high percentage of loss of water. The Mayor attributes the loss of water to the cutting off and leakages of water which affect the water supply network. 4.90 DERYNIA MUNICIPALITY Part A 4.90.1 Accounts and audit. The audit of the accounts for the years 2000 and 2001 will be carried out in 2002. Part B 4.90.2 Licences for the operation of petroleum products stations. The Municipality failed to issue the licences for the operation of the two petroleum products stations, for the years 1995-2000, and to collect the relevant fees, contrary to the Regulation of the Operation of Petroleum Products Law 101(i)/94. The responsibility for the issue of licence for the operation of petroleum products stations was assigned to the Municipalities, as from 1994. 4.90.3 Regulations. No Regulations have yet been approved governing the terms of services of municipal employees and financial administration and operation of the Municipality, as provided by sections 53(2) and 87(1) of the Municipal Corporations Law. 4.90.4 Final Accounts. Contrary to the Municipal Corporations Law, the final accounts present only the cash position of the Municipality instead of being prepared under the accrual accounting policy or revenue and expenditure. 4.90.5 Pensions and Gratuities Fund. The Municipality has not yet prepared new Pensions and Gratuities Regulations and continues to apply the Regulations of the former Improvement Board of Derynia (S.L. 35/91). I requested the approval of the new Regulations, because the existing do not cover the female employees, who contribute 0,75% on their pensionable emoluments for the transfer of the pension, to the Pensions and Gratuities Fund. The Mayor informed me that the new Municipal Council is studying carefully my observations and every effort is made for compliance with the relevant Laws and Regulations. 4.91 LEFKARA MUNICIPALITY Part A 4.91.1 Accounts and audit (a) Submission of accounts. The Municipality submitted for audit the accounts for the years 2000 and 2001, with delay on 22.9.2002, instead of up to the 30th April of the year following the respective financial year, as specified by section 81(1) of the Law. (b) Final accounts. According to section 80 of the Law, the final accounts should be prepared under the accounting policy of accrual basis of revenue and expenditure. Instead of the above, the Municipality continues to prepare receipts and payment account, showing the cash position only. (c) Outstanding liabilities – arrears. The final accounts for the years 2000 and 2001 do not disclose the outstanding liabilities and the arrears of taxes and fees of the Municipality, relating to previous years.

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4.91.2 Financial position (a) Operating results. The accounts for the years 2000 and 2001 showed a deficit of £8.982 and £49.451, respectively, compared to £91.759 for 1999. (b) Receipts. The receipts of the Municipality for the years 2000 and 2001 amounted to £566.336 and £337.542, respectively, compared to £429.395 for 1999, i.e. there was an increase of £136.941 or 31,9% for 2000 and a decrease of £228.794 or 40,4% for 2001, compared to 2000. The receipts include state subsidy, amounting to £342.058 and £215.009 for 2000 and 2001, respectively. (c) Payments. The payments of the Municipality for the years 2000 and 2001 amounted to £575.318 and £386.993 respectively, compared to £521.154 for 1999, i.e. there was an increase of £54.164 or 10,4% for 2000 and a decrease of £188.325 or 32,7% for 2001, compared to 2000. The payments include expenses for development projects amounting to £313.453 for 2000 and £129.421 for 2001. (d) Liquidity. The financial position of the Municipality was not satisfactory, with the result considerable current liabilities not to be settled and a delay to be observed in the completion of development projects. The bank balances at 31.12.2000 and 31.12.2001 were presenting an overdraft amounting to £109.634 and £159.085 respectively, which is an indication that the Municipality is facing a liquidity problem. I suggested to the Municipal Council to consider ways for the improvement of the financial position of the Municipality and to prepare a long-term strategic programme for covering the accumulated deficits. (e) Bank overdraft. Contrary to section 85(2)(a) of the Law, the bank balances are showing an overdraft, which exceeds the 20% of the budgeted revenue of the Municipality, for the current period, as shown below: Year Budgeted Total overdraft Revenue £ £ % 2000 281.645 138.720 49,3 2001 297.145 175.875 59,2

4.91.3 Budgets (a) Ordinary Budget. The Ordinary Budgets of the Municipality for the years 2000 and 2001 were showing a deficit of £121.340 and £251.625, respectively. I suggested to the Municipal Council that efforts should be made for the balancing of the Ordinary Budget, so that after the expiration of the period of grace granted by the Council of Ministers, to comply with the conditions of approval of the Budget, which specify that the Ordinary Budget should be balanced or even showing a surplus, to be used for the self financing of part of capital expenditure. (b) Development Budget. During the years 2000 and 2001 considerable amounts, included in the Development Budget, remained unspent, mainly, due to the non execution or non completion of various projects, as follows:

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Year Budget Actual Unspent Deviation Expenditure amounts £ £ £ % 2000 811.000 313.453 497.547 61,3 2001 603.000 129.421 473.579 78,5 I suggested to the Municipal Council that the Development Budget should be prepared on a more rational and realistic basis, so that its implementation to be possible. (c) Expenditure excesses. During the year 2001 expenditure excesses were noted, which exceeded the 20% of the budgeted and approved amounts, a limit up to which the Municipal Council has power to incur expenditure without any further approval, as provided by section 66 of the Law. 4.91.4 Internal control. Weaknesses were observed in the internal control systems, covering the various activities and sectors of the Municipality, such as: (i) The receipts and payments, the updating of cash book and the keeping of counter foil receipt books by the same person. (ii) The non keeping or the non proper keeping of the appropriate registers. (iii) The non verification of assets. (iv) The inability of the system to follow up the arrears of taxes and the non taking of measures for their collection. (v) The non completion of the payment vouchers with the necessary details and the non attachment of all supporting documents. 4.91.5 Personnel. The following table presents the personnel employed by the Municipality during the years 2000 and 2001 and the relative cost: 2001 2000 Clerical Staff – Permanent 3 3 Labourers – Regular 5 5 8 8 Total Expenditure for salaries, allowances and employer’s contribution £79.314 £73.816 4.91.6 Staffing of Municipal Services. As I stated in my Report for 2000, for the smooth and efficient operation of the Municipality, I recommended the staffing of services with the required personnel. Up to now no schemes of service have been approved and the permanent posts of Municipal Engineer and Municipal Treasurer, which are provided by section 54(1)(a) of the Municipal Corporations Law, are still vacant. 4.91.7 Collective labour agreement. Contrary to the Council of Ministers decision No. 40835 of 6.4.94, which was reconfirmed, under the decision No. 52362 of 6.10.2000, according to which the Local Authorities receiving financing through State Budget, should not be committed for staff matters or collective agreements, without the prior approval of the Ministry of Interior, the Municipality proceeded with the renewal of the collective agreements for the years 2000 and 2001, without securing such approval.

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4.91.8 Computerisation of services. Although the Municipality received in 1999, the necessary hardware and software, only the computerized programme for taxes was put into operation, which, however, presents serious weaknesses and does not issue the necessary computerized statements. 4.91.9 Regulations. No Regulations have yet been approved, governing the terms of service of the employees and the financial administration and operation of the Municipality, as provided by sections 53(2) and 87(1) of the Municipal Corporations Law. 4.91.10 Financial Instructions and Regulations. The Municipality has not adopted the above Instructions and Regulations which were prepared by a special committee, consisting of representatives of the Municipalities and my Office. 4.91.11 Licences for the operation of professional estates. Contrary to section 103(1) of the Municipal Corporations Law, no fees are collected for the licences for the operation of professional estates. 4.91.12 Amounts due to the Department of Water Development. The Municipality, for several years, does not pay the amounts due, for the purchase of water, from the Department of Water Development. Consequently, the outstanding amounts at 31.12.2000 and 31.12.2001 to be £186.879 and £207.917, respectively, compared to £168.889 for 1999. 4.91.13 Loss of water. During 2001, the quantity of 80.689 c.m. of water, was purchased, while the consumption was for 44.122 c.m., i.e. there is a loss of water of 36.567 c.m. or 45.3%, which is exceeding considerably the acceptable percentage, by the Department of Water Development and Water Boards. I requested the Municipal Council to investigate the reasons for the high percentage of loss of water. 4.91.14 Violation of tender procedure. In several cases, the tender procedure for the construction of projects and supply of goods and services, is not followed by the Municipality. 4.91.15 Provident Fund. The enactment of Regulations, governing the operation of the Provident Fund, is still pending. 4.92 GEROSKIPOU MUNICIPALITY Part A 4.92.1 Accounts and audit. The Municipality submitted for audit, the accounts for the years 1998 and 1999, with delay on 26.9.2000, whereas those for 2000, on 17.5.2001, instead of up to the 30th April of the year following the respective financial years, as specified by section 81(1) of the Municipal Corporations Law. The following matters relate to the audit of the accounts for the years 1998-2000. The Mayor informed me that in future the final accounts will be submitted promptly. 4.92.2 Final accounts. According to the Municipal Corporations Law, the final accounts should be prepared under the accounting policy of accrual basis of revenue and expenditure. Contrary to the above, the Municipality continues to prepare receipts and payments account showing only the cash position. The Mayor informed me that the Municipal Council approved on 16.7.2002, the proposal for the purchase of computerized programmes, which will operate in the following six months.

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4.92.3 Financial position (a) Operating results. The accounts for the year 1998 were showing a deficit of £102.302. whereas those for 1999 and 2000 presented a surplus of £129.984 and £300.881, respectively, compared to the surplus of £109.962 for 1997. (b) Receipts. The receipts of the Municipality for the years 1998, 1999 and 2000 amounted to £886.401, £1.056.863 and £1.557.230, respectively, compared to £951.402 for 1997, i.e. there is a decrease of £65.001 or 6,8% for 1998 and an increase of £170.462 or 19,2% in 1999, compared to 1998 and in increase of £500.367 or 47,3% in 2000, compared to 1999. The receipts include state subsidy of £120.566, for 1998, £89.309 for 1999 and £294.419 for 2000. (c) Payments. The payments of the Municipality for the years 1998, 1999 and 2000 amounted to £988.703, £926.879 and £1.256.348, respectively, compared to £841.440 in 1997, i.e. there was an increase of £147.263 or 17,5% in 1998, a decrease of £61.824 or 6,3% in 1999, compared to 1998 and an increase of £329.470 or 35,5% in 2000, compared to 1999. 4.92.4 Budgets (a) Development Budget. During the years 1998, 1999 and 2000 considerable amounts, included in the Development Budget, remained unspent, mainly, due to the non execution or the non completion of projects, as shown below:

Year Budget Actual Unspent Deviations expenditure amount £ £ £ % 1998 1.262.500 120.073 1.142.427 90 1999 1.492.400 146.603 1.345.797 90 2000 2.429.150 377.250 2.051.900 84

I pointed out to the Municipal Council that the Budget should be prepared on a more rational and realistic basis, so that its implementation to be possible. The Mayor informed me that he agrees with the above deviations most of which are due to delays in the construction of town planning projects for which various Government Departments and Corporations are responsible. (b) Expenditure excesses. During the years 1998, 1999 and 2000, expenditure excesses were noted which exceeded the 20% of the budgeted and approved amounts, a limit up to which the Municipal Council has power to incur expenses without any further approval, as provided by section 66 of the Law. The Mayor informed me that all the expenditure excesses were approved by the Municipal Council and does not agree for the existence of such excesses. I observed that some of the excesses were beyond the maximum limits provided by the Law, for which the Municipal Council has no power of approval. 4.92.5 Internal Control Weaknesses were observed in the internal control systems, covering the various activities and sections of the Municipality. The following are some indicative examples:

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(i) The non keeping or non proper keeping of the appropriate registers. (ii) The non completion of the computerisation of Municipality services and the existence of omissions and weaknesses in the computerized system. (iii) The non verification of the Municipality assets. (iv) The non preparation of the reconciliation statement of the basic salaries of each month with those of the previous month. (v) The non recording in the registers of the salaries cheques, issued by the computer each month, and the cancelled cheques. (vi) The non follow up of arrears of taxes, resulting to the non taking of measures for their collection. (vii) The non reconciliation of revenue collections with the relative registers. The Mayor informed me that he agrees with my observations and expects that these will be eliminated with the application of new computerised systems and the proper staffing of the accounts section. 4.92.6 Personnel. The following table presents the personnel employed by the Municipality during the years 1998, 1999 and 2000 and the relative cost. 2000 1999 1998 Permanent Staff 11 10 10

Labourers (regular and casual) 28 29 28 39 39 38 Expenditure for salaries, allowances and employer’s contributions £451.063 £406.656 £357.884 4.92.7 Salaries. It has been observed that, due to the non implementation of the Public Service (Emoluments, Allowances and Other Financial Benefits of Civil Servants) Regulations of 1995 (S.L. 175/95) for the revision/upgrading of posts, as well as to the concession of additional increments not covered by the schemes of service, the salaries of several Municipal employees are wrong and I asked for the necessary corrections to be made. The Municipal Council instead of giving instructions for the correction of salaries, proceeded to the concession of some other additional increments, during the years 1998, 1999 and 2000 as well as to the upgrading of salary scales of employees, whose salaries are wrong and their emoluments are higher from those for which they are eligible. The Mayor expressed the view that the Government Regulations of 1995 (S.L.175/95) are not applicable to Municipal Corporations. Although I agree with his view, I pointed out that the Municipality for purpose of equal treatment and uniformity, should have adopted the above Regulations, something which is acceptable by the Mayor, who stated that he intends to submit a proposal to the Municipal Council for their adoption and publication. With regard to the concession of additional increments, the Mayor was referred only to two cases, in which the increments were granted on the basis of legal advice, something for which I do not agree. For the remaining cases no mention is made.

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4.92.8 Cultural and Public Relations Officer. The Municipal Council appointed, on 8.5.2001, to the post of Cultural and Public Relations Officer, a casual contributor, employed since 6.7.98, without the publication of the post and the follow up of the appropriate procedures, for the filling of the post. I pointed out to the Municipal Council that, due to the non implementation of the appropriate procedures other interested persons were precluded from the submission of an application resulting to the violation of the principles of equal treatment and of proper administration. 4.92.9 Collective labour agreement. Contrary to the Council of Ministers decision No. 40835 of 6.4.94 and No. 52362 of 6.10.2000, the Municipality proceeded with the signing of the collective labour agreement for the years 1998-2000, which provides, inter alia, for the upgrading of posts, without securing the prior approval of the Ministry of Interior and the consent of the Ministry of Finance. 4.93 PEGEIA MUNICIPALITY Part A 4.93.1 Accounts and audit. The Municipality has not yet submitted for audit the accounts for the year 2001, whereas those for the years 1998-2000 were submitted on 20.2.2002 instead of up to the 30th April of the year following the respective financial year, as specified by section 81(1) of the Municipal Corporations Law. The following matters are relating to the accounts for the years 1998-2000. The Mayor assured me that after the year 2001, the accounts will be submitted according to section 81(1) of the Law. 4.93.2 Final Accounts. According to the Law, the final accounts should be prepared under the accounting policy of accrual basis, of revenue and expenditure. Despite of the above legal provision, the Municipality continues to prepare receipts and payments accounts, showing only the cash position. The Mayor informed me that, as soon as the computerisation is completed and the accounts section is suitably strengthened with appropriate staff, the final accounts will be prepared under the accounting policy of accrual basis, of revenue and expenditure. 4.93.3 Financial position (a) Operating results. The accounts for the years 1998 and 1999 were showing a surplus of £276.376 and £173.910, respectively, and those for 2000 a deficit of £83.572, compared to the deficit of £12.145 for 1997. (b) Receipts. The receipts of the Municipality for the years 1998, 1999 and 2000 amounted to £928.009, £1.002.890 and £1.333.315, respectively, compared to £813.137 for 1997, i.e. there was an increase of £114.872 or 14,1% for 1998, an increase of £74.881 or 8,1% for 1999, compared to 1998 and an increase of £330.425 or 32,9% for 2000, compared to 1999. The receipts include state subsidy amounting to £210.726 for 1998, £71.323 for 1999 and £277.327 for 2000. 4.93.4 Budgets (a) Development Budget. During the years 1998, 1999 and 2000, considerable amounts, included in the Development Budget, remained respent, mainly, due to the non execution or non completion of projects, as follows:

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Year Budget Actual Unspent Deviation Expenditure amounts £ £ £ % 1998 1.280.000 111.942 1.168.058 91,3 1999 2.050.000 376.397 1.673.603 81,6 2000 2.310.000 422.263 1.887.737 81,7 I recommended to the Municipal Council the preparation of the Budget on a more rational and realistic basis, so that its implementation to be possible. The Mayor informed me that efforts will be made for the preparation of the Budget on a realistic basis. (b) Expenditure excesses. During the years 1998-2000, expenditure excesses were noted which exceeded the 20% of the budgeted and approved amounts, a limit up to which the Municipal Council has power to incur expenses without any further approval, as provided by section 66 of the Municipal Corporations Law. The Mayor informed me that every effort will be made, so as to avoid any excesses over the 20% of the budgeted and approved amounts, and if this is not succeeded the approval provided under section 66 of the Law will be sought. 4.93.5 Internal Control. Weaknesses were observed in the internal control systems, covering the various activities and sections of the Municipality, such as: • The unsatisfactory control, on the delivery of the collections to the General Cashier. • The non proper completion of the payment vouchers and the non attachment on them, of the necessary supporting documents. • The weakness of the system to follow up the arrears of taxes, resulting to the non taking of measures for their collection. • The non reconciliation of the immovable property fees. • The non reconciliation of the water rates. • The non verification of the assets of the Municipality. • The non proper keeping of the appropriate registers, such as for tenders, agreements, cleaning of building plots etc. • The absence of control in Municipal Library. The Mayor informed me that with the improvement of the computer programmes and the proper staffing of the accounts section the existing weaknesses in the internal control system will be eliminated. 4.93.6 Personnel. The following table presents the personnel employed by the Municipality, during the years 1998-2000 and the relative cost: 2000 1999 1998 Permanent Staff 9 9 9 Labourers (regular and casual) 9 7 6 18 16 15 Expenditure for salaries, allowances and employer’s contribution £177.722 £165.853 £135.071

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4.93.7 Concession of additional increments. The Municipal Council decided on 29.10.98 and 25.2.99, irregularly, for the concession of additional increments to 6 Municipal employees, although this is not covered by the schemes of service. I pointed out to the Municipal Council that, according to the Attorney General of the Republic, legal advice, dated 10.5.93 the Municipal Councils should act within the limits of the schemes of service and any action or arrangement, in abuse or in violation of the schemes of service in force, at the specified time, is unacceptable. The Mayor informed me that the Municipal Council after taking into consideration seriously, the contribution of the employees, in discharging their multible duties, and due to their limited number, decided to proceed with the concession of additional increments, so as to give them an incentive, to increase their productivity, something which, in his opinion, has been achieved. Nevertheless, I wish to repeat that the Municipal Council has no such power to grant these additional increments. 4.93.8 Collective labour agreement. Contrary to the Council of Ministers decision No. 40835 of 6.4.94, which was reconfirmed under decision No. 52362, of 6.10.2000, which provides that the Local Authorities receiving finance, though the State Budgets, should not be committed for staff matters or collective agreements, without the prior approval of the Ministry of Interior, the Municipality, without securing such approval had signed the collective labour agreement for the years 1996-1998, and 1999-2001. 4.93.9 Computerisation of services. It was observed that the company which undertook the computerization of the Municipal services, did not respond to the obligations, emanating from the tender terms and conditions, with the result the computerization of Municipal services not to be completed and the computer programmes, which were put into operation, to present problems. According to the terms of the agreement the programmes should have been delivered and operated until 31.12.99. Although the company failed to respond to the above obligations, the Municipality did not apply the paragraph 8 of the agreement, which provides for the termination of the agreement and the confiscation of bank guarantee, amounting to £6.352, which expired on 23.11.2001, without being renewed. The Mayor informed me that the Municipal Council proceeded to the award of a new tender, for the computerisation of Municipal services, after many weaknesses, in the existing programmes, were revealed and due to the inability of the programmer to respond to his obligations. 4.93.10 Deviation from tender procedure. The Municipality does not follow, in all cases, the tender procedure for the execution of major projects and the purchase of goods and services, contrary to the principles of proper administration and equal treatment of citizents. The Mayor informed me that tenders are not invited only in very exceptional cases, and effort will be made to avoid such cases in future. 4.93.11 Arrears of taxes. According to the financial statements of the Municipality, the arrears of taxes at 31.12.98, 31.12.99 and 31.12.2000, amounted to £39.714, £52.472 and £68.698, respectively, compared to £28.837 at 31.12.97. These amounts do not include the arrears of the period 1994-1996, for the reason that these have not been extracted. I repeatedly asked the Municipality for the careful examination of the statement of arrears, for ascertaining the amounts which may be collected and the taking of effective measures for their collection, including legal measures. Those arrears which are considered as bad debts to be

212 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 written off, according to section 85(2)(ie) of the Municipal Corporations Law, and the measures for the collection of arrears, to be taken promptly, because the risk for their non collection will be increased, with the lapse of time. The Mayor informed me that efforts will be made so that the statements of arrears to be examined, for ascertaining any amounts which may be collected, and effective measures will be taken for their collection. Those amounts which are considered as bad debts will be written off, according to the Law. 4.93.12 Arrears of Water rates. The arrears of water rates at 31.12.98, 31.12.99 and 31.12.2000, amounted to £53.949, £74.692 and £79.450, respectively, compared to £50.949 for 1997. The debtors include consumers, owing considerable amounts (over £1000) and I requested that effective measures to be taken, for their collection. 4.93.13 Hotel nights fees. Contrary to section 85(2)(1a) of the Law, the Municipality does not collect the hotel nights fees from 14 tourists farms B. class, resulting to the loss of revenue. The Mayor informed me that the Municipal Council is considering the matter for the collection of hotels nights fees from the 14 tourists farms. 4.93.14 Non imposition of surcharge. Contrary to section 134 of the Law, no surcharge is imposed on citizens who failed to pay, by the specified period, the water rates and hotel nights fees. The Mayor informed me that instructions were given for the imposition of the surcharge of 9%, on the arrears of hotel nights fees, according to section 134 of the Law, but no mention is made for the non imposition of surcharge on the arrears of water rates. 4.93.15 Regulations. The approval of Regulations, governing the conditions of service, of employees, the financial management and the operation of the Municipality provided by sections 53(2) and 87(1) of the Municipal Corporations Law, is still pending. 4.94 MUNICIPALITY Part A 4.94.1 Accounts and audit. The Municipality submitted for audit the final accounts for the years 2000 and 2001, with delay on 2.7.2002, instead of until the 30th April of the year following the respective financial year, as specified by section 81(1) of the Municipal Corporations Law. 4.94.2 Financial position (a) Operating results. The accounts for the years 2000 and 2001 showed a deficit of £168.751 and £313.112, respectively, compared to £326.824 for 1999. (b) Revenue. The revenue of the Municipality for the years 2000 and 2001 amounted to £1.073.356 and £1.045.586, respectively, compared to £759.241 for 1999, i.e. there was an increase of £314.115 or 41,4% for 2000 and a decrease of £27.770 or 2,6% for 2001, compared to 2000. The revenue includes state subsidy for £385.658 for 2000 and £343.102 for 2001. (c) Expenditure. The expenditure of the Municipality for the years 2000 and 2001 amounted to £1.242.107 and £1.358.698, respectively, compared to £1.086.065 for 1999, i.e. there was an increase of £156.042 or 14,4% for 2000 and £116.591 or 9,4% for 2001, compared to 2000.

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(d) Bank Overdraft. Contrary to section 85(2) of the Law, the overdraft of the General Account at 31.12.2000 and 31.12.2001 amounted to £375.378 and £419.144, respectively and was exceeding the 20% of the revenue of the Municipal Budget. (e) Deficit in working capital. At 31.12.2000 and 31.12.2001, the working capital was £861.050 and £926.584, respectively, whereas the current liabilities amounted to £1.077.045 and £1.295.006, respectively, i.e. there was a deficit in the working capital of £215.995 and £368.422, respectively. It is evident that the financial position of the Municipality is not satisfactory and there is a problem of liquidity. I recommended to the Municipal Council to study ways for the improvement of the financial position of the Municipality and to prepare a strategic programme for covering the accumulated deficits. (f) Long term / shorterm liabilities. The long term liabilities of the Municipality at 31.12.2000 and 31.12.2001 amounted to £571.695 and £659.829, respectively, compared to £420.331 for 1991, while the short term liabilities amounted to £1.077.045 for 2000 and £1.295.006 for 2001. The short term liabilities include the loan installments payable within twelve months, amounting to £267.506 and £332.356, for 2000 and 2001, respectively. 4.94.3 Repayment of loans. The balance of the loans received by the Municipality from the Loan Commissioners and the commercial banks at 31.12.2000 and 31.12.2001, amounted to £839.201 and £991.585, respectively, compared to £553.617 for 1999. Considerable delay has been observed in the payment of loan installments with the result the Municipality to be charged with overdue interests. The total arrears of loan installments for the years 2000 and 2001 amounted to £172.152 and £168.981, respectively. 4.94.4 Budgets (a) Ordinary Budget. The Ordinary Budget of the Municipality for the years 2000 and 2001 was showing a deficit of £429.860 and £443.050, respectively. I suggested to the Municipal Council that efforts should be made for the balancing of the Ordinary Budget, so that, after the expiration of the period of grace, granted by the Council of Ministers, to comply with the conditions of approval of the Budget, which provide that the Ordinary Budget should be balanced or even to show a surplus, for the self financing of part of the capital expenditure. (b) Development Budget. During the years 2000 and 2001, almost all the amounts included in the Development Budget, remained unspent, mainly, due to the non execution or the non completion of projects, as follows: Year Budget Actual Unspent Deviation Expenditure amounts £ £ £ % 2000 10.083.647 215.208 9.868.439 97,9 2001 10.917.647 104.517 10.813.130 99 I suggested to the Municipal Council that the Development Budget should be prepared on a rational and realistic basis, so that its execution to be possible. (c) Expenditure excesses. During the years 2000 and 2001, expenditure excesses were noted, over the 20% of the budgeted and approved amounts, a limit up to which the Municipal

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Council has power to incur expenses without any further approval, as provided by section 66 of the Law. 4.94.5 Internal control. The internal control system, covering the various activities of the Municipality, presents weaknesses and omissions, such as: (i) The non verification of the physical existence of the assets. (ii) The non keeping or the non proper keeping of the appropriate registers, such as for tenders, agreements, assets and computer equipment. (iii) The inability of the system to follow up the arrears of taxes and other revenue, resulting to the non taking of measures for their collection. (iv) The non reconciliation of tax collections with the relative registers. 4.94.6 Personnel. The following table presents the personnel employed by the Municipality during the years 2000 and 2001 and the relative cost:

2001 2000 Permanent Staff 33 33 Labourers (Regular and Casual) 37 35 70 68 Expenditure for salaries, allowances and employer’s contributions. £778.514 £734.910

4.94.7 Upgrading of posts. In my Report for 2000, I observed that the placing of an employee, in his post which was upgraded, was not made according to the Public Service (Emoluments, Allowances and Other Financial Benefits of Civil Servants) Regulations of 1995 (S.L. 175/95) and I asked that the necessary corrections to be made. In spite of the above, the Municipal Council decided on 20.12.1999, the upgrading of the salary scale of the post of Municipal Engineer, from A8-A9-A11 to A9-A11+2, by applying the same incorrect practice. 4.94.8 Schemes of Service. The Council of Ministers, under its decision No. 29864 of 25.2.88, approved the application of the schemes of service of the Municipality. Since then, some amendments were made in the schemes of service, which were agreed and included in the collective labour agreements, after they were approved by the Municipal Council but without the approval of the Council of Ministers for their implementation. The amended schemes of service are required to be submitted to the Council of Ministers for approval, as provided by section 53(1) of the Municipal Corporations Law. The Supreme Court decision, dated 22.9.2000, on the recourses No. 170/98 and 298/98, according to which the schemes of service should be prepared, without any intervention or involvement of the Council of Ministers, but for their implementation the Council of Ministers approval is required, is relevant. 4.94.9 Collective labour agreement. Contrary to the Council of Ministers decision No. 40835 of 6.4.1994 and No. 52362 of 6.10.2000, which provide that Local Authorities receiving subsidy through State Budgets, should not be committed for staff matters or collective agreements, without the prior approval of the Ministry of Interior, the Municipality, without securing such

215 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 approval, had signed the collective labour agreement for the years 1997-2000, which provided for the concession of staff benefits, such as the 14th salary and the accidents and life insurance. 4.94.10 Debtors. According to the financial statements, the debtors for taxes, fees and for other revenue of the Municipality, at 31.12.2000 and 31.12.2001, amounted to £338.688 and £360.462, respectively, compared to £297.334 for 1999, i.e. their was an increase of £41.354 or 14% for 2000 and £21.774 or 6,4% for 2001, compared to 2000. The debtors include arrears for previous years for which no considerable collections were made during the last years. I requested the Municipality for the statements of arrears to be examined carefully, for ascertaining any collectible amounts and the taking of measures for their collection and the bad debts to be written off, pursuant to section 85(2)(ie) of the Law. 4.95 GERMASOGEIA MUNICIPALITY Part A 4.95.1 Accounts and audit. The Municipality submitted with delay on 20.1.2000, 22.1.2001, 6.7.2001 and 7.5.2002 the final accounts for the years 1998, 1999, 2000 and 2001, respectively, for audit instead of up to the 30th April of the year following the respective financial year, as specified by section 81(1) of the Municipal Corporations Law. In view of the above, the audit of the accounts for the year 2001 will be carried out in 2002. The following matters, relate to the audit of the accounts for 1998-2000. The Mayor informed me that instructions were given for the prompt submission of the accounts, as specified by the Municipal Corporations Law. 4.95.2 Final accounts. The Municipality continues to prepare receipts and payments accounts, showing only the cash position, instead of preparing final accounts under the accrual accounting policy, which will include income and expenditure account. They Mayor informed me that, it is not possible with the present organizational structure of the Municipality, to prepare accounts under the accounting policy of the accrual basis of revenue and expenditure, but it is expected that this matter will be settled with the filling of the post of the Municipal Treasurer. 4.95.3 Financial position (a) Operating results. The accounts for the years 1997, 1998 and 2000 presented a deficit of £345.095, £144.999 and £98.697, respectively, whereas those for 1999 showed a surplus of £5.344. (b) Receipts. The receipts of the Municipality for the years 1998, 1999 and 2000 amounted to £1.503.985, £1.695.537 and £1.895.792, respectively, compared to £1.305.708 for 1997 i.e. they showed an increase of £198.277 or 15,2% for 1998, £191.552 or 12,7% for 1999, compared to 1998 and £200.255 or 11,8% for 2000, compared to 1999. (c) Payments. The payments of the Municipality for the years 1998, 1999 and 2000 amounted to £1.648.984, £1.690.193 and £1.994.489, respectively, compared to £1.650.803 for 1997, i.e. they showed a decrease of £1.819 or 0,1% for 1998, an increase of £41.209 or 2,5% for 1999, compared to 1998 and an increase of £304.296 or 18% for 2000, compared to 1999. The considerable increase in 2000 is attributed to the increase in salaries and wages of £113.300 and of the water supply expenses of £107.800.

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(d) Liquidity. The financial position of the Municipality is not satisfactory, as there is an acute problem of liquidity. The General Account was showing at 31.12.98 and 31.12.99 an overdraft of £268.573 and £362.479, respectively. The overdraft of this account at 31.12.2000 should have been £396.711, instead of £366,711, as shown in the accounts. The difference represents the irregular transfer of the amount of £30.000 from the Deposits Account to the General Account. I suggested to the Municipal Council to study ways for the improvement of the financial position of the Municipality and to prepare a long term strategic programme for covering or reducing the accumulated deficits. The Mayor informed me that serious efforts are made and ways are studied so that the accumulated deficits to be covered or reduced. (e) Loans. The balances of loans, received by the Municipality from the Loan Commissioners and Commercial banks, at 31.12.98, 31.12.99 and 31.12.2000 amounted to £5.431.127, £5.341.169 and £4.160.953, respectively, compared to £886.135 for 1997. The loan installments in arrear, amounted to £558.342, £921.366 and £1.264.520, respectively. The considerable increase in loan balances is due to the loan of £5.000.000 received in 1998, for the improvement of a coastal road, with 4/5 government contribution against repayment. (f) Repayment of loans. Due to financial problems, the loan installments were not paid by the Municipality, with the result to be charged with overdue interests, amounting to £2.280, £6.047 and £11.301, during the years 1998, 1999 and 2000, respectively, for the loans received from the Loan Commissioners. 4.95.4 Expenditure excesses. During the years 1998, 1999 and 2000, excesses were noted, over the 20% of the budgeted and approved amounts, a limit up to which the Municipality has power to incur expenses without any further approval, as provided by section 66 of the Law. 4.95.5 Internal control. Weaknesses were observed in the system of internal control covering the various activities and sections of the Municipality, such as: (i) The non keeping or the non proper keeping of the appropriate registers, such as for contracts, tenders, plant and machinery, municipal stadium, advertising boards. (ii) The non proper completion of the payment vouchers, with the necessary details. (iii) The non exercise of sufficient control, in the verification of the assets, during their physical stock taking. (iv) The non carrying of periodical surveys in the storehouse by a responsible Municipal employee. (v) The non preparation of reconciliation statements for the water supply. (vi) The non application of the procedures for the receipts and issues of store materials. The Mayor agrees that there is no satisfactory internal control, and attributes this omission to the fact that there is no responsible employee to perform such duties. 4.95.6 Personnel. The table below, presents the personnel employed by the Municipality, during the years 1998, 1999 and 2000 and the relative cost:

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2000 1999 1998 Clerical Staff – Permanent 32 28 28 Labourers – Regular 29 30 30 61 58 58 Expenditure for salaries, allowances and employer’s contributions £876.853 £763.554 £696.928 4.95.7 Purchase of a refuse vehicle. Pursuant to the Municipal Council decision, dated 11.5.2000, a refuse vehicle with pressure system was purchased from a certain company, for the amount of £32.800 (without V.A.T.), after invitation of public tenders. From the study of the relative file the following were observed: (a) No clear terms and technical specifications of the vehicle were prepared, with the result, the proper technical evaluation not to be made by a person possessing specialised knowledge. (b) The award was not made to the lower tenderer, without justifying the decision. (c) No agreement document was signed between the Municipality and the company. The Mayor informed me that the award was made to the above company, after taking into consideration, by the Municipal Council the evaluation report and the characteristics of the vehicle. With regard to the non assignment of the award to the lower tenderer, he stated that, according to the evaluation report, above tenderer failed to include in his price, a specific part of the vehicle. 4.95.8 Amount due for water pumping. The Municipality has failed, sine 1.2.86, to pay any amount for the pumping of water from the water reserves of Germasogeia, and as a result the amount due at 31.12.2001, to the Department of Water Development was £598.797. The Municipality, informed the Department of Water Development in writing, that it does not recognize any debt and the Department stated that the matter was submitted to the Attorney General for taking legal measures against the Municipality. 4.95.9 Debtors. The arrears of taxes, fees and other charges, according to the accounts of the Municipality, at 31.12.98, 31.12.99 and 31.12.2000, amounted to £566.312, £696.762 and £723.199, respectively, compared to £533.633 for 1997. The arrears at 31.12.2000, include amounts due for the period 1985-1996, for £169.368, representing, professional licences and refuse fees, the collection of which was lower than 5%. The Mayor informed me that a detailed statement and report on the arrears of the period 1985- 1996 are being prepared, which will include the amounts which may be collected, for submission to the Municipal Council, for taking a decision. 4.95.10 Building permit B485/85. From the examination of the file, for the above building permit, it was revealed that the Municipal Council proceeded to the issue of a renewal permit, after the submission of an overdue application, by the owners. In my letter to the Minister of Interior, in August 2001, I requested for the study of this case and the taking of corrective measures. The Director General of the Ministry asked the renunciation of the permit, in January 2002, stating in his letter that «no explanation or excuse or view may be justified in taking decisions which are contrary to the Law». The Municipal Council decided on 7.2.2002, for the renunciation of the renewal permit and for the non renewal in future.

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The Mayor informed me that the above decision of the Municipal Council was communicated to the owners, who were called to bring back all the relative documents for cancellation. At the same time, he informed me that no works are carried out in the building and the matter is followed up by the Technical Services of the Municipality. 4.96 KATO POLEMIDIA MUNICIPALITY Part A 4.96.1 Accounts and audit. The Municipality submitted for audit the accounts for the years 1999, 2000 and 2001, with delay, on 1.7.2002, instead of up to the 30th April of the year following the respective financial year, as specified by section 81(1) of the Municipal Corporations Law. The audit of the above accounts will be completed in 2001. The Mayor informed me that every effort is made for the submission of the accounts within the period specified by the Law. Part B 4.96.2 Investigation. (a) My Office carried out an investigation in the accounts of the Municipality, which covered the period 1.1.96 – 8.9.99 and verified a cash deficit amounting to £148.689, which resulted from the non-deposit to the Municipal Fund of amounts collected by the Municipality. The results of my investigation were submitted to the Police, which commenced investigations for possible commitment of offences. As I was informed, the Police investigation was completed in 2001 and the relative report was submitted to the Attorney General of the Republic. (b) The Municipal Treasurer submitted his resignation on 8.9.99, after a report was made against him by an officer of the Municipality for financial irregularities, and refunded to the Municipality the amount of £100.000 (£20.000 on 8.9.99 and £80.000 on 17.9.99). 4.96.3 Internal control. The absence of internal control in the receipts and payments and other activities and fields of the Municipality, resulted to the concealment of the cash deficit and the non implementation of the Regulations and the appropriate procedures. I pointed out to the Municipal Council the importance of internal control in the safeguarding of the assets of the Municipality and the correct implementation of the appropriate procedures. Serious weaknesses were also observed in the system of internal control in computerised systems. The Mayor informed me that the Municipality is taking measures for the improvement of the internal control, according to the relative suggestions made by my Office, and every effort is made for the implementation of Laws, Regulations and the appropriate procedures. 4.96.4 Liquidity. The financial position and administration of the Municipality are not satisfactory, resulting to serious liquidity problem. The Mayor agrees with my observations and stated that every possible effort is made for the improvement of the financial position of the Municipality. 4.96.5 Salaries. The salaries payable to the staff are in most cases wrong, due to incorrect emplacements, ex-gratia increments and non payment of the whole increment or of the cost of living allowance. Until today, all necessary corrections have not yet been made.

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Although the Mayor informed me that the necessary corrections of salaries have been made, according to the suggestions made by my Office, it was observed, during an examination carried out recently, that the Municipal Secretary and other employees continue to be paid their wrong salaries. 4.96.6 Schemes of service. The schemes of service have not been amended accordingly, after the approval of section 2(a) of the collective labour agreement, for the period 1996-1997. 4.96.7 Appointment of labourers to permanent posts. During 1996, eight labourers were promoted and placed to permanent posts of the Municipality, without obtaining the approval, for the establishment and filling of the post, from the Ministries of Interior and Finance. The Mayor informed me that the Municipality submitted an application to the Ministries of Interior and Finance for obtaining the relative approval. 4.96.8 Road works. Despite the fact that the Technical Services of the Municipality are sufficiently staffed, the preparation of architectural designs and the supervision of the execution of road works, undertaken by contractors, are assigned to a private firm, without invitation of tenders, resulting to the Municipality being charged with additional expenses. The Mayor informed me that the Technical Services have undertaken the preparation of designs and the supervision of the execution of works for the years 2000 and 2001, as well as for 2002- 2003. 4.96.9 Licences for the operation of petroleum stations. The Municipality failed to issue the licence for the operation of petroleum stations for the year 1999 and to collect the relative fees, provided by the Law. 4.97 AGIOS ATHANASIOS MUNICIPALITY Part A 4.97.1 Accounts and audit. The Municipality submitted on 27.6.02 for audit the final accounts for the year 2001, instead of until 30.4.2002, as specified by section 81(1) of the Municipal Corporations Law. The Mayor informed me that efforts are made for the prompt settlement of all outstanding matters, relating to the annual accounts, so as to be submitted for audit within the specified period. 4.97.2 Financial position (a) Operating results. The accounts for the year 2001, showed a deficit of £177.885, compared to 41.680 for 2000. (b) Revenue. The revenue of the Municipality for 2001, amounted to £1.277.277, compared to £1.325.849 for 2000, i.e. there was a decrease of £48.572 or 3,7%. The state subsidy for 2001, amounted to £311.954, compared to £277.539 for 2000. (c) Expenditure. The expenditure of the Municipality for the year 2001, amounted to £1.455.162, compared to £1.367.529 for 2000, i.e. there was an increase of £87.633 or 6,4%. (d) Bank overdraft. Contrary to section 85(2) of the Law, the bank overdraft at 31.12.2001, of the General Account, amounted to £366.338 and was exceeding the 20% of the budgeted revenue. The Mayor informed me that efforts are made so that the bank overdraft to be reduced within the limits, specified by the above section of the Law.

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(e) Deficit in Working Capital. At 31.12.2001, the current assets amounted to £1.889.771, whereas the current liabilities were £2.059.477, resulting to a deficit of £169.706 in the working capita. It appears that the financial position of the Municipality is not satisfactory, as there is a serious liquidity problem. I recommended to the Municipal Council to study ways for the improvement of the financial position of the Municipality and to prepare a strategic plan for covering the accumulated deficits. (f) Long term/short term liabilities. The long term liabilities of the Municipality at 31.12.2001 amounted to £1.691.810, compared to £1.543.133 for 2000. The short term liabilities amounted to £2.059.477 and include loan installments for £1.004.471, payable within one year. (g) Repayment of loans. The balances of the loans received by the Municipality from the Loan Commissioners and the commercial banks amounted to £2.696.281, at 31.12.2001, compared to £1.850.704 for 2000. Considerable delay was again observed in the payment of loan installments, with the result, the Municipality to be charged with overdue interests. The arrears of loan installments for 2001 amounted to £711.478. 4.97.3 Budgets (a) Ordinary Budget. The Ordinary Budget was showing a deficit of £738.016. I suggested to the Municipal Council that efforts should be made for the balancing of the Ordinary Budget, so that after the expiration of the grace period granted by the Council of Ministers, to comply with the terms of approval of the Budget, which provide that the Ordinary Budget should be balanced or even to show a surplus to be used for the self financing of part of capital expenditure. The Mayor informed me that efforts were made for the balancing of the Ordinary Budget and that the Municipal Council, during the execution of the Budget, is taking into consideration the liquidity of the Municipality, in setting the priorities. At the same time, it ascertains the increasing needs of the Municipality and the current difficulties for the increase of revenue from taxes, due to the existence of two refugees housing estates. (b) Development Budget. The budgeted expenditure for the year 2001, amounted to £2.011.238, whereas the actual was £629.000, i.e. there was a deviation of £1.382.238 or 68,7%, mainly due to the non execution or the non completion of projects. I suggested to the Municipal Council that the Budget should be prepared on a more rational basis, so that its execution to be possible. The Mayor informed me that the deviation, observed in the Development Budget, is attributed to the delay in the construction of projects, approved as town planning projects, because their designs were not completed, as well as to delays observed in securing the respective loans. 4.97.4 Personnel. The following table presents the personnel employed by the Municipality during the years 2000 and 2001 and the relative cost: 2001 2000 Permanent Staff 33 32 Labourers 15 14 48 46

Expenditure for salaries, allowances and employer’s contributions £667.352 £621.719

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4.97.5 Salaries. In my Report for 2000, it was stated that due to the non implementation of the Public Service (Emoluments, Allowances and Other Financial Benefits of Civil Servants) Regulations of 1995 (S.L.175/75) for the upgrading/revision of salaries scales as well as to wrong posting, made as a result of the Municipal Council decisions, in case of new posts and the revision of schemes of service, the salaries of most employees were wrong, with the result, the Municipality to be charged with additional cost. Although the Municipality informed me that my observations would have been taken into consideration, so far, the necessary corrections of the salaries have not been made and most of the employees are paid higher salaries, from those for which they are entitled. The Mayor informed me that the upgrading of posts, promotions and revisions of salaries scales were the result of negotiations with the trade staff unions and of the relevant decisions, taken by the Municipal Council, for each case. He also stated that the Municipality applied to the Public Administration and Personnel Service for the correction of certain schemes of service. 4.97.6 Collective labour agreement. Contrary to the Council of Ministers decision No. 40835 of 6.4.94, which was reconfirmed by decision No. 52.362 of 6.10.2000, and provides that the Local Authorities receiving subsidy through State Budgets, should not be committed for staff matters or collective agreements, the Municipality, without obtaining such approval, had signed the collective agreement for the years 2001-2003, under which the salary scales of permanent posts are upgraded, new posts are established, and staff benefits are allowed, such as the 14th salary, the life insurance, and insurance for accidents. The Mayor informed me that he does not agree that the Municipalities should secure the prior approval of the Ministry of Interior for the signing of a collective labour agreement, and was referred to the relevant legal advice of Attorney General, on this matter. Nevertheless, I wish to observe that the above upgradings and new posts were not approved by the Council of Ministers, during the approval of the Budget of the Municipality, as required under the aforesaid legal advice. 4.97.7 Amount due to the Water Board of Limassol for the purchase of water. Due to financial difficulties the Municipality failed to settle its obligations to the Water Board of Limassol for the purchase of water amounting to £204.787 for 2001, compared to £161.839 for 2000. The Mayor informed me that negotiations are carried out between the Municipality and the Water Board of Limassol, for the accession of Municipal boundaries within the water supply area of the Water Board. He also stated that he asked for a meeting to be held in the Department of Water Development for discussing the increase of about 300% imposed on water supply, which, in his opinion, has affected adversely the financial position or the Municipality. 4.97.8 Loss of water. During 2001, the percentage of loss of water was 36,3% and was exceeding considerably the maximum limit which may be accepted by the Department of Water Development and the Water Boards. I requested the Municipal Council to investigate the reasons for this high percentage of loss of water. The Mayor informed me that the loss of water is closely related with the absence of modern systems for ascertaining the water leakages, and is due to losses, during water supply for new parcellations and fires extinction. 4.97.9 Regulations. No Regulations have yet been approved by the Ministries of Interior and Finance, governing the terms of service of the employees and the financial administration and operation of the Municipality, as provided by sections 53(2) and 87(1) of the Law. Due to the non-approval of the above Regulations, the Municipality is unable to impose a disciplinary

222 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 punishment to a municipal employee, who was sentenced on 28.5.99, by the Court to 8 years imprisonment for criminal offence. The Mayor informed me that the Regulations, provided by sections 53(2) and 87(1) of the Law, were approved by the Municipal Council and submitted to the respective Government Departments for legal processing and publication. 4.98 AGLANTZIA MUNICIPALITY Part A 4.98.1 Accounts and audit. The audit of the accounts for 2001 will be carried out in 2002. The following matters are relating to the audit of the accounts for 1999 and 2000. 4.98.2 Financial position. (a) Operating results. The accounts for the year 1999 and 2000 showed a deficit of £106.058 and a surplus of £209.237, respectively, compared to a deficit of £2000 for 1998. (b) Revenue. The revenue of the Municipality for the years 1999 and 2000 amounted to £1.692.886 and £2.133.470, respectively, compared to £1.781.447 for 1998, i.e. there was a decrease of £88.561 or 5% for 1999, compared to 1998, and an increase of £440.584 or 26% for 2000, compared to 1999. The revenue include state subsidy of £170.386 for 1999 and £568.200 for 2000. (c) Expenditure. The expenditure of the Municipality for the years 1999 and 2000 amounted to £1.798.944 and £1.924.233, respectively, compared to £1.783.456 for 1998, i.e. there was an increase of £15.488 or 1% for 1999 and £125.289 or 7% for 2000, compared to 1999. (d) Long term/short term liabilities. The long term liabilities of the Municipality at 31.12.1999 and 31.12.2000, amounted to £6.744.322 and £8.139.049 respectively. The short term liabilities amounted to £1.987.090 and £2.013.806 and include loan installments payable within 12 months, amounting £1.147.500, respectively. 4.98.3 Budget (a) Development Budget. The budgeted expenditure for the year 1999 amounted to £3.339.000, whereas the actual were £1.631.717, i.e. there was a deviation of £1.707.283 or 51,1%, mainly due to the non execution or the non completion of projects. I recommended to the Municipal Council for the preparation of the Budget on a more rational and realistic basis, so that its execution to be possible. The Mayor informed me that the non execution or the non completion of the projects was due to insuperable technical difficulties in the preparation of studies, which were not possible to be overcome. (b) Expenditure excesses. During 1999 and 2000, expenditure excesses were noted which exceeded the 20% of the budgeted and approved amounts, a limit up to which the Municipal Council has power to incur expenses without any further approval, as provided by section 66 of the Municipal Corporations Law. The Mayor stated that instructions were given for the systematic follow up of the expenditure votes and to be informed promptly, so as to ensure compliance with the Law and any expenditure excesses to be avoided in the future.

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4.98.4 Internal control. Weaknesses and omissions were observed in the internal control system covering the various activities of the Municipality, such as: (a) The inability o the system to follow the arrears of taxes, resulting to the non taking of measures for their collection. (b) The non reconciliation of the bank accounts. (c) The non proper keeping of the appropriate registers, such as for tenders, agreements, restoration of roads etc. (d) The non reconciliation of the deposits accounts of citizens with the respective registers. The Mayor agrees that there are weaknesses and omissions in the internal control system and for this reason, a provision was included in the Budget of the year 2003, for the purchase of services of an Internal Auditor. He expects that in 2003, with the employment of the Internal Auditor and the strengthening of the Financial Service of the Municipality, with one additional Clerk, these weaknesses and omissions will be eliminated. 4.98.5 Personnel. The following table presents the personnel employed by the Municipality during the years 2000 and 1999, and the relative cost. 2000 1999 Clerical Staff: Permanent 20 20 Casual 3 3 Labourers: Regular / Casual 33 33 Total 56 56

Expenditure for salaries, allowances and employer’s contributions £681.444 £654.412 4.98.6 Lease agreement for industrial area. As it was stated in my Report for 2000, basic provisions of the agreement for the lease of estates in the industrial area, regarding the method of payment of rent, are not implemented. As a result, the arrears of rent at 31.12.1999 and 31.12.2000 amounted to £467.487 and £577.934, respectively, compared to £224.064 for 1998, i.e. there was an increase of £243.423 or 109% for 1999, compared to 1998 and an increase of £110.447 or 24% for 2000 compared to 1999. As I was informed, the Municipality had signed an agreement with a commercial bank and as from 1.3.2000, the collection of rent is made through the service “factoring”. I suggested to the Municipality that the “factoring” service should undertake also the collection of the arrears, as provided in the relevant agreement. The Mayor informed me that legal measures have been taken for the collection of arrears and the situation has been improved. It was, however, observed that this has not been achieved, with the result the arrears to be steadily increasing, year by year. The Mayor informed me that the Municipal Council repeatedly informed the industrialists, who are delaying the payment of rents that legal measures will be taken against them. It has already been decided for the filing of lawsuits against 17 industrialists, while 6 industrialists proceeded to the payment of rents due, amounting to £108.700. The Mayor assured me that the whole situation will be followed up and measures will be intensified, so that the arrears to be reduced considerably.

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4.98.7 Debtors–Arrears. The arrears of taxes, fees and charges at 31.12.1999 and 31.12.2000 amounted to £551.215 and £583.397, respectively, compared to £504.489 for 1998. The arrears include amounts due for previous years, which during the last years, are not showing any collections or their percentage of collection is low. With regard to the arrears of the period 1987-1991, amounting to £112.279, no amount was collected during the years 1999-2000, as well as in previous years. For the arrears for refuse fees and professional licence of the period 1992-1998 amounting to £133.164 and £76.666, respectively, the amounts of £12.794 and £4.674, or 9,6% or 6,1% respectively, were collected. I requested the Municipal Council that the arrears for the previous years, to be investigated, for ascertaining amounts which may be collected and those amounts which are considered as bad debts to be written off, according to section 85(2)(ie) of the Law. 4.99 MUNICIPALITY Part A 4.99.1 Accounts and audit. The Municipality submitted the accounts for the year 2000, for audit, with delay, on 13.6.2001, instead of up to the 30th April of the year following the respective financial year, as specified by section 81(1) of the Municipal Corporations Law. The final accounts for the year 2001 were submitted promptly, on 29.4.2002 and their audit will be carried out in 2002. The following matters relate to the audit of the accounts for the year 2000. 4.99.2 Financial position (a) Operating results. The accounts for the year 2000 showed a deficit of £879, compared to the surplus of £62.261 for 1999. (b) Revenue. The revenue of the Municipality for 2000 amounted to £1.688.484, compared to £1.407.367 for 1999, i.e. there was an increase of £281.117 or 20%. The revenue includes state subsidy, amounting to £353.111, (£150.639 for 1999). (c) Expenditure. The expenditure of the Municipality for the year 2000 amounted to £1.689.363, compared to £1.345.106 for 1999, i.e. there was an increase of £344.257 or 25,6%. The expenditure includes reductions and deletions of professional tax, amounting to £110.803 (£10,906 for 1999). (d) Long term/short term liabilities. The long term liabilities of the Municipality at 31.12.2000, amounted to £1.491.670. The short term liabilities amounted to £1.318.561 and include loan installments payable within one year, amounting to £152.568. 4.99.3 Budgets (a) Ordinary Budget. The Ordinary Budget of the Municipality was showing a deficit of £1.124.030. I suggested to the Municipal Council that efforts should be made for the balancing of the Ordinary Budget, so that, after the expiration of the period of grace, granted by the Council of Ministers, to comply with the terms of approval of the Budget, which specify that the Ordinary Budget should be balanced, or even showing a surplus, for the self financing of part of capital expenditure. (b) Development Budget. The budgeted expenditure for the year 2000, amounted to £4.159.700, whereas the actual was £504.492, i.e. there was a deviation of £3.654.758 or 88%, mainly, due to the non execution or the non completion of projects. I suggested to the Municipal

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Council that the Budget should be prepared on a more rational basis, so that its execution to be possible. 4.99.4 Internal Control. Weaknesses were again observed in the internal control systems covering the various activities and sections of the Municiapality. 4.99.5 Personnel. The following statement shows the staff employed by the Municipality, during the years 2000 and 1999, the respective cost and the average cost per employee and labourer. 2000 1999 Clerical Staff: - Permanent 25 22 - Casual 1 2 26 24 Total expenditure for salaries, allowances and employer’s contributions £372.339 £333.663 Average cost per employee £14.321 £13.903 Labourers - Regular 42 40 - Casual 2 10 44 50 Total expenditure for wages, allowances and employer’s contributions £483.180 £494.606 Average cost per labourer £10.981 £9.892

4.99.6 Arrears of taxes. According to the register of court cases, arrears of taxes, amounting to £56.114, for the years 1994-1996, which were sent to the lawers and lawsuits were filed in 1997, are shown as outstanding, despite the elapse of long time. I requested the Municipal Council to ascertain whether court cases are still pending, as well as the reasons for which they were not adjudged. 4.100 LATSIA MUNICIPALITY Part A 4.100.1 Accounts and audit. The Municipality has not yet submitted for audit the final accounts for the year 2001. The accounts of the year 2000 were submitted with delay on 26.11.2001, whereas those for 1997-1999 were submitted on 6.7.2001, instead of up to the 30th April of the year following the respective financial year, as specified by section 81(1) of the Law. The following matters relate to the audit of the accounts for the years 1997-1999. 4.100.2 Financial position (a) Operating results. The accounts showed a surplus of £106.736 for 1997, whereas for the years 1998 and 1999 were showing a deficit of £46.086 and £198.960, respectively, compared to the surplus of £143.536 for 1996. (b) Revenue. The revenue of the Municipal for the years 1997, 1998 and 1999 amounted to £1.064.483, £1.179.079 and £1.145.029, respectively, compared to £1.177.566 for 1996, i.e.

226 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 there was a decrease of £113.083 or 9,6% for 1997, an increase of £114.596 or 10,8% for 1998, compared to 1997 and a decrease of £34.050 or 2,9% for 1999, compared to 1998. The revenue includes state subsidy of £100.387 for 1997, £161.132 for 1998 and £114.160 for 1999. (c) Expenditure. The expenditure of the Municipality for the years 1997, 1998 and 1999 amounted to £957.747, £1.225.165 and £1.343.989, respectively, compared to £1.034.030 for 1996, i.e. there was a decrease of £76.283 or 7,4% for 1997, an increase of £267.418 or 27,9% for 1998, compared to 1997 and an increase of £118.824 or 9,7 for 1999, compared to 1998. (d) Liquidity. The balance of the General Account for the years 1997, 1998 and 1999, includes the amounts of £27.984, £42.969 and £265.092, respectively, representing unspent loans amounts. Consequently, the actual balance of the General Account at 31.12.97 was £40.282 and at 31.12.98 and 31.12.99 there was an overdraft of £41.977 and £74.677, respectively, and not £68.226, £992 and £190.415, as shown in the financial statements of the Municipality. It appears from the above, that the financial position of the Municipality is not satisfactory, and I pointed out that measures should be taken by the Municipality for improvement. 4.100.3 Budgets (a) Ordinary Budget. The Ordinary Budgets of the Municipality for the years 1997, 1998 and 1999 were showing a deficit of £238.400, £280,560 and £285.680, respectively. I pointed out to the Municipal Council that efforts should be made for the balancing of the Ordinary Budget, so that after the expiration of the period of grace, granted by the Council of Ministers, to comply with the terms of approval of the Budget, which specify that the Ordinary Budget should be balanced or even showing a surplus, to be used for the self financing of part of capital expenditure. (b) Development Budget. During the years 1997, 1998 and 1999 considerable amounts, included in the Ordinary Budget, remained unspent, mainly, due to the non execution or the non completion of the projects, as shown below: Year Budget Actual Unspent Deviation expenditure amounts £ £ £ % 1997 1.424.000 153.437 1.270.563 89 1998 1.543.000 209.373 1.333.627 86 1999 2.218.000 195.562 2.022.438 91 I suggested to the Municipal Council that the Development Budget should be prepared on a more rational and realistic basis, so that its execution to be possible. (c) Expenditure excesses. During the years 1997-1999 expenditure excesses were noted, which exceeded the 20% of the budgeted and approved amounts, a limit up to which the Municipal Council has power to incur expenses without any further approval, as provided by section 66 of the Law. 4.100.4 Internal control. Weaknesses and omissions are observed in the internal control system covering the various activities of the Municipality, such as: (a) The inability of the system to follow up the arrears of taxes, resulting to the non taking of measures for their collection.

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(b) The reduction in water rates, without the preparation of a relative report by the examining officer. (c) The non keeping of he appropriate registers. 4.100.5 Personnel. The following table presents the personnel employed by the Municipality during the years 1997-1999 and the relative cost: 1999 1998 1997 Permanent Staff 22 22 21 Labourers 27 27 27 49 49 48

Expenditure for salaries, allowances and employer’s contributions £688.716 £641.892 £591.376 4.100.6 Salaries. Due to the non implementation of the provision of S.L. 175/95, in cases of revision of salaries of employees, whose post was upgraded or there was a change in the title, as well as to the decision of the Municipal Council for the concession of irregular additional increments and for the changes in incremental dates, the salary of several Municipal employees is wrong and I pointed out that the necessary corrections should be made. The Municipality has not taken into consideration the observations of my Office, with the result the emoluments of several employees to be higher and the Municipality to be charged with additional cost. 4.100.7 Schemes of service. The schemes of service, which were agreed and included in the collective labour agreement for the years 1996-1997, and put into force since 1996, were only approved by he Municipal Council on 11.12.96, without obtaining the approval of the Council of Ministers for their implementation, contrary to section 53(1) of the Municipal Corporations Law. The Supreme Court decision of 22.9.2000, on the recourses No. 170/98 and 298/98, according to which the schemes of service should be prepared by the Municipalities and submitted to the Ministry of Interior for approval and onward transmission to the Council of Ministers for approval of their implementation, is relevant to this matter. 4.100.8 Debtors – Arrears of taxes, fees and charges. The debtors for taxes, fees and other income of the Municipality, according to the financial statements, amounted to £207.436, £292.279 and £369.221 at 31.12.97, 31.12.98 and 31.12.99, respectively, compared to £210.769 for 1996, i.e. there was a decrease of 1,6% for 1997 and an increase of 40,9% or 1998, compared to 1997 and 26,3% for 1999, compared to 1998. The above amounts include debtors balances, outstanding since 1980 and debtors for rents due, for the years 1980-1985, when Latsia was an Improvement Board. It is indicated that no collection of arrears of taxes for the period 1980-1991 was made during the years 1997-1999. I suggested to the Municipal Council to investigate all arrears of taxes, for ascertaining amounts which may be collected and those which will be considered as bad debts to be written off, according to section 85(2)(ie) of the Law. I also pointed out that the measures for the collection of taxes, fees and charges, as well as of the arrears, should be taken promptly, otherwise the risk for their non collection will be increased considerably, with the lapse of time. 4.100.9 Licences for the operation of petroleum stations. No licences were issued by the Municipality since 1995, for the operation of the three petroleum stations, resulting to the non

228 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 collection of the relative fees, provided by the Regulation of the Operation of Petroleum Products Law 101(I)94. 4.101 IDALION MUNICIPALITY Part A 4.101.1 Accounts and audit. The Municipality has not yet submitted for audit the final accounts for the year 2001. According to section 81(1) of the Municipal Corporations Law, the above accounts should have been submitted until the 30th April 2002. As a result of the delay observed, the audit of the accounts for 2001 was not carried out by my Office. 4.101.2 Amount due to the Department of Water Development for the supply of water. The Municipality fails to pay all the amounts due for the supply of water by the Department of Water Development, with the result the amounts due at 31.12.199, 31.12.200 and 31.12.2001 to be £76.705, £113.840 and £156.843, respectively. Part B 4.101.3 Final accounts. The Municipality continues to prepare final accounts showing the cash position, instead of preparing accounts under the accounting policy of the accrual basis of revenue and expenditure, as provided by the Municipal Corporations Law. 4.101.4 Schemes of service. The schemes of service of the employees have not been submitted to the Council of Ministers for approval of their implementation, contrary to section 53(1) of the Law. The decision of the Supreme Court, dated 22.9.2000, on recourses 170/98 and 298/98, under which the appointment of the Municipal Secretary was declared void, on the grounds that the Municipality failed to secure the approval of the Council of Ministers for the implementation of schemes of service, is relevant. 4.101.5 Financial Instructions and Stores Regulations. The Municipality has not yet adopted the above Instructions and Regulations, which have been prepared by a special committee, consisting of representatives of the Municipalities and my Office. 4.101.6 Entertainment tax. Contrary to section 85(2)(ι)(i) of the Municipal Corporations Law, the Municipality does not impose entertainment tax for cinema shows, artists amusement activities, and football matches. 4.101.7 Non-imposition of surcharge. Contrary to section 134 of the Municipal Corporations Law, which provides for the imposition of a general surcharge on fees, tolls and taxes not paid in time, the above surcharge is imposed selectively only on the arrears for refuse fees, professional licences and municipal tax on immovable property. 4.102 LAKATAMEIA MUNICIPALITY Part A 4.102.1 Accounts and audit. The audit of the accounts for the year 2001 will be carried out in 2002. The following matters relate to the accounts for the year 2000. 4.102.2 Financial position. (a) Operating results. The accounts for the year 2000 showed a surplus of £323.243, compared to the deficit of £217.603 for 1999. (b) Revenue. The revenue of the Municipality for the year 2000 amounted to £2.533.368, compared to £1.905.942 for 1999, i.e. there was an increase of £627.426 or 33%, which is,

229 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 mainly, attributed to the collection of the amount of £200.191 for the future development of Municipal parks and the increase of state subsidy by £303.712. The state subsidy for the year 2000 amounted to £486.445, compared to £182.733 for 1999. (c) Expenditure. The expenditure of the Municipality for the year 2000 amounted to £2.210.125, compared to £2.123.545 for 1999, i.e. there was an increase of £86.580 or 4%. (d) Liquidity. The actual bank overdraft of the General Account at 31.12.2000, should have been £715.975 and not £625.410, as shown in the Financial Statements for the year 2000. The difference of £90.565 represents cash deposits of citizens, against road damages. It is evident that the financial position of the Municipality is not satisfactory, resulting to the transfer of amounts, irregularly, to the General Account, from other Funds, for covering current commitments. (e) Bank overdraft. Contrary to section 85(2)(a) of the Law, the bank overdraft of the General Account amounted to £625.410 and was exceeding the approved limit of 20% of the total budgeted revenue. The Mayor informed me that, due to an oversight, the necessary approval for the increase of the percentage of the overdraft over the 20% limit, was not secured in 2000, whereas for 2001 and 2002 such approval has been obtained. (f) Long term/short term liabilities. The long term liabilities of the Municipality, at 31.12.2000, amounted to £3.009.770, compared to £2.510.235 for 1999. The short term liabilities amounted to £1.525.333 and include loan instalments, amounting to £536.576, payable within one year. 4.102.3 Budgets (a) Development Budget. The budgeted expenditure for the year 2000 amounted to £2.314.500, where as the actual were £583.628, i.e. there was a deviation of £1.730.872 or 75%, which is, mainly, due to the non execution or the non completion of projects. I suggested to the Municipal Council that the Budget should be prepared on a more rational and realistic basis, so that its execution to be possible. (b) Expenditure excesses. During 2000, excesses were noted over the 20% of the budgeted and approved amounts, a limit up to which the Municipal Council has power to incur expenses, without any further approval as provided by section 66 of the Law. I was informed, that covering approval for the above excesses was sought by the Municipality. 4.102.4 Internal control. Weaknesses were observed in the internal control systems, covering the various activities and sections of the Municipality, such as: (a) The non proper completion of the payment vouchers with the necessary details. (b) The non carrying of periodical examinations in the warehouse by a responsible Municipal employee. (c) The non keeping of the lawsuits register and the non follow up of cases, submitted to the lawyers for taking legal measures. (d) The non keeping of appropriate registers, such as for building permits and land parcellations and for cleaning of building sites. The Mayor informed me that with the appointment of the Administrative Officer, the internal control system, covering the various activities and sections of the Municipality, has been strengthened.

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4.102.5 Personnel. The following table presents the personnel employed by the Municipality during the years 2000 and 1999 and the relative cost: 2000 1999 Clerical staff: Permanent 34 30 Casual 1 1 Labourers Regular 23 26 Casual 6 4 Total 64 61 Expenditure for salaries, allowances and employer’s contributions £722.501 £629.917 4.102.6 Debtors – Arrears of taxes. The balance of the debtors account at 31.12.2000 was £668.872, compared to £660.981 for 1999, i.e. there was an increase of £7.891. The above debtors include arrears of taxes for the period 1980-1994, amounting to £80.164, which during the last years were not showing any collections, while for the arrears of the period 1995-1998, amounting to £51.030, the percentage of collection was 1,5%-12,7%. I pointed out to the Municipal Council that measures should be taken promptly, for the collection of arrears, otherwise the risk for their non collection will be considerably increased with the lapse of time. I also requested the investigation of arrears of taxes, for ascertaining the amounts which may be collected and those which are considered as bad debts to be written off, according to section 85(2)(ie) of the Law. 4.102.7 Non imposition of surcharge. Contrary to section 134 of the Law, no surcharge is imposed on the citizens who failed to pay, by the specified period, the water rates. 4.103 COMMUNITY BOARDS – GENERAL OBSERVATIONS Part A 4.103.1 Establishment of Community Boards. With the enactment and implementation of the Communities Law 86(I)/99, as from 9.7.99, the Villages (Administration and Improvement) Law, the Villages Authorities Law, the Public Health (Villages) Law and the Villages Water Supply (Domestic Purposes) Law were abolished and the Improvement Boards and Village Authorities were renamed to Community Boards. According to section 71 of the Communities Law, the audit of all Community Boards has been assigned to the Auditor General of the Republic. Consequently, the Auditor General undertook, in addition to the audit of the accounts of the ex Improvement Boards, the audit of the accounts of 281 ex Villages Authorities. 4.103.2 Ex Improvement Boards. The following were observed from the audit of the accounts of the ex Improvement Boards: (a) Financial statements. The financial statements of many Community Boards present mistakes and omissions, such as the non-agreement of the final year end balances with the opening balances, unrecorded collections and payments, bank balances and loans balances for which no reconciliation statements are prepared, the non-inclusion of capital expenditure for

231 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 fixed assets or the execution of development projects through loans, resulting to delay in the commencement and completion of the audit. (b) Budgets (i) Preparation and execution of Budget. For the purpose of better disclosure of the financial possibilities of the Community Boards and for ascertaining their capabilities for the execution of the various projects included in their annual budgets, it is necessary for the preparation on the basis of a specific action plan, outlining their real needs and the possibility for their execution. Through this way, the significant deviations between the budgeted and actual expenditure will be eliminated. (ii) Approval of budgets. The Budgets of several Community Boards are not approved promptly, prior to the commencement of the respective financial year, contrary to the provisions of Law and the General Financial Instructions. Also the revised budgets are not prepared and approved promptly, during the year. (iii) Budgets deficits. Several Community Boards prepare and approve budgets which are showing a deficit, contrary to the provision of the Law and the General Financial Instructions. (iv) Budgets excesses. Considerable excesses have been noted on several expenditure Votes, which exceeded the specified percentage of 20% of each approved Vote. These include also the expenditures which were not budgeted. The covering approval of the District Officer has been secured for several excesses, whereas for other cases, the necessary approval of the District Officer, provided by the relevant legislation, has not yet been secured. (c) Registration of the immovable property of the Community Boards. In many cases the immovable property of the Community Boards is not registered in their names. I requested the Community Boards to submit an application to the District Lands and Surveys Office for the registration or updating of existing registration certificates of immovable property, according to sections 59 and 60 of the Communities Law. (d) Assets. All the assets, movable and immovable should be recorded in appropriate registers, with reference to the year of acquisition, the value, description and title of ownership. (e) Execution of projects by District Administrations or other Government Departments, with a contribution of Community Boards. With regard to the amounts deposited to District Administrations or other Government Departments, by the Community Boards, for development projects, I requested that an annual financial report as well as the final account on the completion of each project to be submitted to each Community Board. I also suggested the keeping of a register by the Boards for the recording of all the above deposits and the corresponding payments, according to relative reports. This will facilitate the follow up by the Boards and the audit by my Office, of the actual expenditure and the refund of any unspent balance for which reference should be given in the register of the relative collection receipt. (f) Cash in the hands of Inspectors. The cash balances at 31st December 2000, were considerably exceeding the maximum approved limits. From the lodgements made in January 2001, it appears that in certain Boards, collections of taxes were made after the year end but dated 31.12.2000, without collection of the additional charge of 25%, contrary to the provisions of the Law.

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(g) Schemes of Service and Staff Regulations of Community Boards. Cases were observed where Community Boards irregularly emplace employees to salary scales steps higher than the initial or pay additional annual increments or/and emplace employees to new salary scales in a wrong way. In my opinion, this is due to the fact that many Community Boards operate without schemes of service and staff Regulations. (h) Deviation from tenders procedure. In certain Boards the approved tenders procedure for the purchase of goods or services has not been followed. (i) Pensions and Gratuities Fund. According to section 5 of the Pensions and Gratuities Regulations (S.L. 209/95), the contribution of the Boards to the Pensions and Gratuities Fund is 15% on the pensionable emoluments of the staff holding pensionable posts. In view of the fact that the percentage contribution, under present circumstances, is considered very low, and the establishment of sufficient reserve is not possible, certain Boards are obliged to pay a lump sum every year, as contribution to the above Fund. I suggested that section 5 of the Regulations should be revised so that the percentage contribution to be in line with present realities. (j) Employment of casual employees. Several Boards often employ labourers for various works, without deduction from their emoluments any amounts for their contributions to the various Funds. (k) Loans instalments in arrear. Some Boards do not pay their loans instalments at the specified dates, resulting to the payment of overdue interest. (l) Reconciliation of purchase and sale of water. With a view to exercising better control over the water supply, I suggested that the quantity of water purchased or pumped from private boreholes, to be recorded and reconciled with the quantity of water conveyed through the water supply system as well with the quantity of water sold to consumers. Any substantial deviations should be investigated and justified. (m) Water supply – Arrears. In several Boards considerable amounts are due by consumers, without taking measures for their collection. (n) Purchase of water. Certain Boards use their collections of water supply for other purposes and consequently they cannot settle their commitments to the Department of Water Development or/and Government Water Projects. (o) Imposition of taxes lower from those provided by the Regulations. In certain Boards, cases were observed where the taxes imposed were lower from those provided by the Regulations. (p) Approval of pensionable posts. Certain Boards approve pensionable posts, without the prior approval of the Minister of Interior. The Ministry of Interior informed me that instructions were given to the District Officers to ensure that the Community Boards operate in accordance with the provisions of relevant legislation. (q) Central Community Boards Service. In each District a Central Community Boards Service is operating, which provides services to the Boards. Although I suggested to the District Officers that each Service should keep separate accounts and prepare a financial statement of income and expenditure at the end of each year, for submission to my Office for audit, yet the Central Service of the Community Boards of Famagusta, has not submitted the accounts, whereas the Central Service of Limassol submitted in August 2000, accounts for the years 1988 – 1990 only.

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Furthermore the Central Service of Community Boards of Nicosia has not submitted accounts for the years 1988-1994 and, therefore, the audit of the accounts for the following years, which were submitted, could not be carried out. (r) Provident Funds. The Provident Funds of certain Boards are operating without approved Regulations. (s) Collection of fees without Regulations. It was again observed that certain Boards collect various fees which are not covered by Regulations. (t) Additional charge. According to the Communities Law, each Board imposes 25% additional charge on the arrears of taxes, fees, rents, tolls and other charges. it was observed that certain Regulations do not specify the date of payment of the above obligations and consequently the additional charge cannot be imposed. In view of the above, I recommended the amendment of the Regulations. (u) Arrears of taxes. it was observed that there are still arrears of taxes amounting to several thousands of pounds and I requested that appropriate measures be taken for their collection or for their write off. (v) Professional tax. Once again, it was observed that certain Boards do not provide information regarding taxpayers emoluments, which is necessary for purposes of verification of the professional tax. (w) Training of staff of Community Boards. With the undertaking of the handling of the financial matters, by the Boards, such as the preparation and execution of the annual budgets, the preparation of annual reports, the salaries and pensionable benefits of the staff, the follow up of loans, the tenders procedures and generally the proper implementation of Law and General Financial Instructions, it is imperative for the training of the staff of the Boards. My Office expressed the willingness and readiness to assist in this effort. (x) Computerisation of statements of tax assessments, water supply and collections. In view of the fact that the various computerised systems, present omissions and weaknesses, I pointed out the need for their amendment/improvement, so that any interventions to the initial statements not to be allowed, for the addition of supplementary tax assessments and for recording any reductions or/and deletions. The systems should provide the necessary information for the processing of any assessment, on the basis of the initial statement (assessment amount, collection receipt, assessment reduction and amount of reduction, and assessment deletions). (y) Verification certificates of assets and cash balances at 31st December. Several Boards do not submit to my Office verification Certificates for their assets and cash balances at the year end. This certificate is considered very important for audit purposes. 4.103.3 Community Boards Ex Village Authorities. From the audit of the Community Boards ex Village Authorities the following were observed: (a) Preparation of annual Budget. According to the Law, each Board should prepare an annual Budget of income and expenditure, which is approved by the respective District Officer. The Budget should be balanced and any deviation is not allowed, except with the approval of the Minister of Interior. Many Boards have not prepared their Budget for 2001 and consequently their expenditures were not subject to the predetermined provision of the approved Budget. According to the reservation of section 64 of the Law, each Board may expend every year an amount which does not exceed the 20% of any vote, without any further

234 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 approval, provided that there are savings from other Votes of the Budget. Cases were observed where the expenditure excesses were exceeding the 20% of the approved Budget, without securing the necessary approval of the District Officer, provided by the law (section 66). In other cases, the approval of the Minister was not secured for the non-balancing of Budgets. (b) Cash and bank balances. Many Community Boards present in the same column of their cash book all the cash and bank balances with the result the available balance of the cash and of the bank account not to be known at any moment. (c) Incorrect postings in the Cash Book. The existing accounting system is based on the actual receipts and payments relating to a financial year. Many cases were observed, however, where the postings in the cash book were made in the following year, and consequently the financial results of each year are not accurate. (d) Delay in the updating of accounting books. In many Boards, considerable delay is observed in the updating of the accounting books and the preparation of the final accounts, despite the fact that the Law provides for the preparation of the final accounts by the 31st March of the following year. In some cases, the accounts of the Boards for the year 2000 were not prepared until August 2002. (e) Government subsidies. Cases are observed, where no receipts are issued for the subsidies received by Boards, and consequently no postings are made in the cash book, although the cheques are lodged to the bank accounts of the Boards. Cases were also observed, where, due to an oversight, double postings of the payments were made in the cash book. As a result of these omissions and double entries, surpluses are observed, the identification of which is problematic and time consuming. (f) Non-imposition of the additional surcharge of 25%. As a rule, the additional surcharge of 25% is not imposed on the payment of arrears of taxes, fees charges etc., as provided by Law, where as in most cases, the collections receipts are dated for the year ended, while the collection was made in the next year. As a result of this irregular practice, considerable cash balances shown at the year end are fictitious. The above is confirmed from the dates of the lodgements made at the Co-operative Societies/Banks within the following year. (g) Non-keeping of current accounts. Although the legislation provides that no amounts will be withdrawn from the bank account, without the issuing of a cheque, many Boards are not keeping bank current accounts. (h) Issue of cheques. In several cases the cheques are signed only by the Chairman of Village Authority, whereas according to the Law, these should be signed also by a second member of the Board. (i) Tender procedures not covered by approved Regulations. In several cases the tender procedures regarding the execution of projects or purchase of services are not followed, because the ex. Village Authorities have not enacted Regulations governing the tender principles/procedures. I recommended that the Community Boards to adopt the tender procedures which were followed by the ex. Improvement Boards, properly adapted to present realities, until the enactment of relevant Regulations. My Office has prepared a draft of the Terms and Tender Procedures, which was submitted to the Ministry of Interior for consideration and submission to the Community Boards for adoption. So far, there is no development in this matter.

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(k) Payments for School Committees. Cases were observed where the bank accounts of the Boards were used for the payment of expenses relating to the School Committees, without keeping the necessary documentation, with the result the cash balances of the Boards to present significant differences. (l) Payments for Sewerage Boards. During the lasts years, payments were made by a Community Board for the Sewerage Board of the Community, without keeping the necessary documents/records, with the result a considerable difference to be observed in the cash balances of the Community Board. Despite the relative provisions, provided in the Sewerage Systems Law, for the keeping of proper accounts by the Sewerage Boards so far, the annual financial statements of a certain Sewerage Board have not been prepared. I requested the respective District Officer, Chairman of the Sewerage Board, to prepare and submit to my Office, the annual accounts for audit. Also, I requested for the computation of the amount due to the Community Board, which must be paid the soonest possible. (m) Cash deficits. As a result of information given by the respective District Officer, relating to certain irregularities in the financial matters of a specific Board, a surprise survey was carried out by my Office, during which a deficit of £7.798 was revealed. The Chairman of the Village Authority refused to pay this amount and the case was reported to the Police. In August 2002, the respective District Officer informed me that the former Chairman of village Authority had paid the amount of cash deficit to the District Administration, which was subsequently transferred to the Community Board. From the audit of the accounts of a certain Board, for the year 2000, carried out in July 2001, a difference of £40.580 was revealed between the bank account and the corresponding balance of the cash account at 31.12.2000. Specifically, the cash book was showing a balance of £88.291, whereas the corresponding balance of the Bank account was only £47.111. In view of the seriousness of the matter, the updating of the cash account and the preparation of the monthly cash and bank balances for the following months, were asked, so as to ascertain the monthly differences. During a surprise survey carried out on 19.10.2001, after the completion of the posting of entries, it was ascertained that the difference was reduced to £12.564, after the lodgments of the amount of £10.369, on 14.9.2001, to the bank account of the Board, by the Chairman of the Village Authority. From the scrutiny of the monthly statements prepared, the cash deficit, from month to month, for the period January – August 2001, was fluctuating from £21.486 to £34.160. In my letter to the District Officer Limassol, in November 2001, I submitted the audit findings and I pointed out that the Chairman of the Village Authority should be called to settle the cash deficit within a specified period and to give explanations for the cash deficit which was shown in the accounts of the Board for so long time. As there was no response, I pointed out in my letter, in May 2002, that the audit findings to be put before the Community Board for consideration and taking a decision, because the responsibility for the receipts and payments of the Board, as well as the keeping of proper accounts, rests with the Board. So far, there is no response.

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It has to be noted that the cheques of the Board were signed only by the Chairman, although the relative section of the Law provides that these should be countersigned by another member of the Board. In view of the great delay which was observed in the preparation of the final accounts, by a certain Board, for the period 9.7.1999 – 31.12.1999, my Office requested the Chairman to produce the receipts and payments of the Board, from 9.7.1999 to the date of the examination, on 14.8.2001, for ascertaining the correct balance of the cash book. According to the records produced, the cash deficit on 14.8.2001 was £8.974. In my letter to the respective District Officer, I pointed out that the Chairman should be called to explain and justify the cash deficit and any amount which is not justified to be lodged to the Board. Until to day, the situation is not clarified. (n) Differences in cash balances of 9.7.1999, when the audit of the Community Boards was assigned to my Office. Some of the differences revealed, during the audit, were due to the balances of 9.7.1999, as shown in the accounts, which were examined by the respective District Officers. I asked for the reexamination of the accounts and to be informed of the correct balances of 9.7.1999, which will be taken into account for the completion of my audit. The most significant cases are stated below: (i) The financial statements of a specific Community Board, examined by the District Administration, were showing on 9.7.1999 a cash deficit of £1.926. In view of the significant differences observed during the audit, the Chairman assigned to a private accountant the investigation of the matter and the preparation of a revised cash book, for the period 1993-2000, according to which, on 9.7.99, the cash deficit was £12.305, instead of £1.926. In reply to my letter, the respective District Officer stated that «after the examination of the receipts and payments of the Community Board… I certify that the debit balance, on 9 July, is £12.305». (ii) For a specific Community Board, the reexamination of the accounts was requested, due to significant differences which were observed at the closing of the accounts on 31.12.1999. From the reexamination of the accounts for the period 1992 – until 9.7.1999, carried out by the District Administration, various differences were revealed, and the cash balance of 9.7.1999 was revised from £6.472 to £10.259. (o) Cash surplus. In several Boards, cash surpluses were revealed, for which explanations were asked to be given. It was pointed out that, in cases where there is no sufficient justification, these should be lodged to cash account of the Board. (p) Payment vouchers. In several cases, the payment vouchers are not prepared and the payments are made on the basis of invoices/receipts issued by payees. I pointed out that payment vouchers should be prepared for all cases, which should be signed by authrorised members of the Board. In other cases where payment vouchers were prepared these were not signed by the authorised members of the Board. (q) Amounts due to the Department of Water Development for the supply of water from the water project “Erimis – Kolossiou”. From the above water project water is supplied to the Communities of Erimis, Kolossiou, (Apostostle Andreas parish) and Kolossiou (Apostostle Loucas). According to the letter of the Department of Water Development, dated 19.9.2001, the outstanding debt due, on 1.9.2001, by the three Community Boards, was £193.471, out of which the amount of £56.861 is pending since 4.6.99. In reply to my observation, the District Officer Limassol, informed me that, at the meeting held on 21.9.2001, the affected Boards, undertook

237 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 to settle their debts, as soon as the amount due by each Board is defined separately, according to predetermined ratios, and the issue of the relative invoices by the Department of Water Development. He also stated that in future separate accounts will be prepared for each Board, on the basis of the predetermined ratios. (r) Execution of development projects. With regard to the expenditure for above projects, I pointed out that copies of the payment certificates issued by the supervising Architects/Engineers, should be secured, and be attached to the relative payment vouchers. For the projects which are directly executed by Government Departments, such as the District Administrations and the Department of Water Development, I pointed out that the Boards should be notified in writing for the progress of works and the amounts spent by the year end and to be supplied with the relative documents and the final delivery certificates on the completion of projects. (s) Arrears of taxes and water rates. Considerable amounts were not collected and I pointed out that the Boards should exercise promptly and effectively, their powers, provided by the Laws and Regulations, for the collection of the amounts due. (t) Professional tax. Several Boards do not impose the professional tax. In other Boards the tax imposed was lower from that specified in the Law. (u) Control over the quantities of water sold. For the purpose of ascertaining significant losses of water, I pointed out that records should be kept showing the indications of the main water meter and the total quantity of water sold to consumers, so that the losses over the acceptable limits to be investigated. (v) Delay in replying to my reports and observations. According to the Law, the audited accounts together with my report and observations are submitted to the District Officer. In many cases, there is a great delay in the reply given to my observations. 4.103.4 Enactment of Regulations. As I stated in my Report for 2000, for the more effective and smooth operation of the Boards, several sections of Law provide for the enactment of Regulations. In view of the seriousness of the matters, especially those relating to the determination of fees and rates, and also for purposes of uniformity, I requested the Director General of the Ministry of Interior to inform me as to whether for the enactment of the above Regulations will be pursued. The General Regulations and the Regulations of Community Service which were approved and published in the Official Gazette of the Republic, on 21.6.2002 and 7.6.2002, for the Community Boards of and Soteras, respectively, should be adopted by all the Community Boards. As I was informed, the above Regulations have already been adopted by another 11 Community Boards. The Minister of Interior informed me that he agrees with my general observations and for this purpose instructions were given by his Ministry to the respective District Officers, to ensure that the Community Boards are acting within the provisions of the Law and to comply with any observations/suggestions. 4.104 AYIOS TYCHONAS COMMUNITY BOARD Part A 4.104.1 Renewal of building permit B351/90 and of land parcellation licence D153/81. In March 2002, in my letter to the Director General of the Ministry of Interior, I submitted my

238 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 observations regarding the decisions of the Community Board to renew the above licences and I asked that the Ministry should act accordingly. The Director General in his letter to the Chairman of the Community Board, in March 2002, suggested the revocation of the licences. The Chairman of the Community Board, in his letter to the Director General of the Ministry, informed him that the renewal of the building permit B351/90 was revoked, but the Board was unable to take corrective measures for the land parcellation licence D153/81, because the final approval was given and titles of ownership were issued. In May 2002, the Director General of the Ministry of Interior, has pointed out to the Chairman of the Community Board that the decisions should be taken according to the provisions of the Law and any other factors or circumstances, which are out of the Law, should be ignored. Part B 4.104.2 Bank accounts of the Board at the Cooperative Credit Society of Agios Tychonas. The balances of the bank accounts of the Board at 31.12.2001, kept at the Cooperative Credit Society of Agios Tychonas, amounted to £263.486 (£124.322 in current account and £139.164 in deposit account), according to information provided by the Board. The withdrawal of all the amounts is still not possible, due to the embezzlement in the above Cooperative Credit Society, revealed in 1998. During 2001, the total amount of £10.000 was only withdrawn. 4.104.3 Amounts due to various Community Boards, as a result of the dissolution of Amathus Improvement Board. With regard to the difference, which arose between the Community Board of Agios Tychonas and the Community Boards of Pareklisia and Pyrgos, an Order was issued by the District Court of Limassol, on 9.2002, for the settlement of the case, with the payment of the amount of £50.000 to the Community Board of Pareklisia and £85.000 to the Community Board of Pyrgos, plus interest, from the date of issue of the Order. 4.104.4 Amount due to Amathous Government Water Supply Project. At 31.12.2001, the amount of £301.798 was due by the Board to the above Government Water Supply Project. 4.104.5 Irregular appointment of staff. As it was stated in my previous Report, the method used for the appointment of certain persons in the Board, in my opinion, was not in line with the provision of the Law, and during the appointments the appropriate procedures for the appointment of staff, were not adopted. The Attorney General of the Republic, in his legal advice submitted to the Director General of the Ministry of Interior, considered the above appointment as null and void and asked for their revocation. The Board decided not to proceed with the revocation of the decision taken, in the light of the legal advice given by the legal adviser of the Board, who is in touch with the Law Office, for discussing the two opposite legal advices (of Law Office and legal adviser of the Board). In view of this, the Ministry of Interior decided, not to take a final decision until the outcome of the discussion, of the matter between the legal adviser of the Board and the Attorney General, is known. 4.105 KAKOPETRIA COMMUNITY BOARD Part A 4.105.1 Liabilities. At 31.12.2000, the total amount of £882.050 was due by the Board to the Loan Commissioners and the Cooperative Credit Society Kakopetria-Galata. 4.105.2 Improvement tax. Pursuant to the Board’s decision dated 27.9.1999 the immovable property tax was fixed to 15%o. This decision is contrary to section 75 of the Communities Law

239 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 and the decision taken on 7.2.2001, at the Ministry of Interior, under which the maximum limit of immovable property tax should not exceed the 5%o . 4.105.3 Construction of parking places. The amount of £520.436 was expended, during the period 1996-2000, for the construction of parking places, and for this purpose seven pieces of land of total area of 5990 sq.m. valued at £310.771, were acquisitioned. Until 31.12.2000, titles of ownership were secured for the t hree pieces of land only, of a total area of 3749 sq.m. 4.105.4 Deviation from tender procedure. The appropriate tender procedures were not followed for the refuse collection, the printing of advertising papers and the purchase of furniture. 4.106 KALOPANAYIOTIS COMMUNITY BOARD Part A 4.106.1 Liabilities. At 31.12.2000, the amount of £265.180 was due to the Loan Commissioners and commercial banks. 4.106.2 Upgrading of the salary of Secretary. So far, the necessary approval of the Minister of Interior, provided by section 49(1) of the Law, has not yet been secured, for the upgrading of the salary of the Secretary, as from 1.1.1997. 4.106.3 Loans account. The expenses incurred during the period 1998-2000 for the purchase of fixed assets and the execution of various development projects, amounting to £267.742 were not shown in the annual financial statements, because these include only the payments made from the General Account. For purposes of better disclosure and proper updating through the financial statements, I recommended for the lodgement of the amounts of the loans to the General Account of the Board and the keeping of all relative records, for the execution of each project, in a separate register. 4.106.4 Deviation from tender procedure. The appropriate tender procedures were not followed for the preparation of architectural designs and the study and supervision of the formation of the external area of Lampadistis church. 4.107 LYTHRODONTAS COMMUNITY BOARD Part A 4.107.1 Liabilities. At 31.12.2000, the total amount of £309.802 was due to the Loan Commissioners and the Cooperative Credit Society of Lythrodontas. Another amount of £5.311, was due to the Department of Water Development, for the supply of water. It appears that, the Community Board is facing a financial problem, resulting to delays in the settlement of liabilities and the repayment of loans, which are not paid regularly and cover only the annual interests. 4.107.2 Immovable property tax. The Board continues not to impose immovable property tax. On 18.1.2000 has fixed a zero factor, with the justification that the existing valuations are those which were fixed in 1926. The decision is contrary to the provision of section 75(1) of the Communities Law, as it was amended by Law 5(I)/2001. 4.107.3 Budget excesses. In various budget votes considerable excesses were noted in the years 1998-2000, for which the necessary approval, provided by the respective Law and Regulations, has not yet been secured.

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4.107.4 Cash in hand of Secretary. The cash balances in the possession of the Secretary, during the period 1998-2000, were extremely high, contrary to section 68 of the Law and the relevant Regulations. I pointed out that the collections should be lodged promptly, the cash balance in hand not to be excessive, and the cash payments to be reduced considerably, and to cover only small amounts. 4.107.5 Authorisation of payments. A great number of payments relating to the year 2000, were not authorised contrary to section 67 of the Communities Law. 4.107.6 Loss of water. The percentage of loss of water, between the quantity of purchase and sale, during 2000, was 25,79%. As a result of the suggestion made by my Office, for the installation of a water meter at the entrance of the water reservoir of the Board, for exercising control over the quantity of water which is shown on the water bills, the Department of Water Development, has undertaken the responsibility for the loss of water observed in the water pipe, the maintenance of which is carried out by the Department, as well as the settlement of any overcharges. 4.108 COMMUNITY BOARD OF ANTHOUPOLIS HOUSING ESTATE. Part A 4.108.1 Loss of water. The percentage of loss of water between the quantity of purchase and sale, during the last two years was fluctuating between 31,02% and 35,46% which is higher from the acceptable limit. This is attributed to the old network, the bad quality of water pipes and the construction of the sewarage system. The replacement of the water supply network and the water pipes at the total cost of £434.150, approved by the Ministerial Committee, which was appointed on 7.7.1999, under Council of Ministers decision No. 49.985, is still pending, due to the consultations carried out for the possible accession of the system of water supply to the Water Board of Nicosia. The Chairman of the Community Board informed me that the Board, on 27.8.2002, rejected the proposal for joining the Nicosia Water Board and efforts are made for the commencement of works for the replacement of the water supply network. 4.109 PUBLIC CORPORATIONS AND OTHER ORGANISATIONS 4.110 INDUSTRIAL TRAINING AUTHORITY Part A 4.110.1 Financial position. (a) Operating results. The accounts of the Authority for 2001 showed a surplus of £1.448.519, compared to £851.765 for 2000. (b) Income. The income of the Authority for 2001 amounted to £7.915.773, compared to £7.056.720 for 2000, i.e. there was an increase of £859.053 or 12,27%. The income does not include the amount of £411.825, representing industrial training fees and fines due by employers, against whom a court decision has been issued. (c) Expenditure. The expenditure amounted to £6.467.254, compared to £6.204.955 for 2000, i.e. there was an increase of £262.299 or 4,2% mainly, due to staff emoluments. 4.110.2 Personnel. The permanent posts of the Authority at 31.12.2001 were 84, out of which 7 were vacant. The total emoluments of the staff, including the employer’s contributions to the various Funds, amounted to £2.119.042, compared to £1.911.177 for 2000, i.e. there was an

241 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 increase of £207.865 or 10,9%. The increase is due to the payment of arrears, under the collective labour agreement for the years 1998-2000, as well as to the filling of vacant posts and the increase of cost of living allowance. It has to be noted that the total emoluments for 2001 and 2000 include the amount of £285.500, respectively, representing the deficient contribution payable to the Pension Funds, on the basis of an actuarial study. The average cost per employee, excluding the payment of £285.500, for covering the deficient contribution to the Pensions Fund, is about £23.800. 4.110.3 Budget. (a) Approval. The Budget of the Authority for 2001 was submitted to the Minister of Labour and Social Insurance on 14.6.2000. It was approved by the Council of Ministers on 26.10.2000 and was laid before the House of Representatives, pursuant to section 3 of Public Corporations Law (Approval of Budget). The Budget was enacted to Law, published in the Official Gazette of the Republic on 16.2.2001 (28(II)/2000. For the months of January and February 2001 duodecimals were approved. (b) Execution of Budget. The approved Budget of the Authority for 2001 was showing a deficit of £0,8 m., whereas according to the actual revenue and expenditure, there was a surplus of £1,5 m. This is mainly attributed to savings effected in various expenditure votes, such as, for Training, Personal Emoluments and Training of Staff. 4.110.4 Continuous Training Programmes – Multi Business – Ordinary and of Vital Importance in Cyprus. (a) Programmes withdrawn or cancelled/terminated by the Institutions. It was observed that during the first half of 2001, out of the 888 Multi Business Programmes – Ordinary and Vital Importance, in Cyprus, which were approved by the Director General, 304 or 34% were cancelled or terminated by the Institutions, while 12 programmes or 1,3% which were initially submitted to the Authority were withdrawn before their final approval. For the second half of 2001, out of 894 approved programmes 300 or 34% were cancelled or terminated by the Institutions, while 5 programmes or 0,6% were withdrawn by the Institutions before their final approval. The Authority informed me that the cancellation or withdrawal of certain programmes is considered normal, because there are factors, which affect the degree of their implementation, which are not exclusively depended on the Institutions or the Authority. It is however, recognised that there are possibilities for further reduction of such cases. (b) Programmes of first and second half of 2001, not cleared. Despite the significant improvement which has been noted, it was again observed that 130 programmes of the first half of 2001, or 15% of the approved programmes, and 241 programmes of the second half of 2001, or 27%, have not yet been completed, while other were cancelled by the Institutions, without updating the computerized system of the programmes. Furthermore, it was observed that 843 programmes of the period 1996-2000 have not yet been cleared. I recommended that the necessary measures should be taken so that the Institutions to submit immediately, after the expiration of the six months period, the statement of training activities, in order to avoid any delay for the updating of the computerised system with the cancellation of programmes, made by the Institutions.

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The Authority informed me that the efforts for the prompt submission of the statements by the Institutions, will be intensified, so that there will be no delay in the updating of the computerised system. Also, with the proposed revision of the Regulations for the Payment of Grants, the Authority will specify a period of six months from the last day of the month in which each programme expires, for the submission of the application for the payment of grant. 4.110.5 Scheme for the Strengthening of the Infrastructure for Training. Cases were observed where Institutions or businesses delayed the repayment of their loans granted by the Authority under the Scheme for the Strengthening of Infrastructure for Training. The delay is due to the non-implementation by the Institutions of the training programmes included in the agreement signed with the Authority, which they undertook to implement, in return, for the refund of part of the amount they received from the Authority. I expressed the view that this is a violation of an essential term of above agreement and gives the right to the Authority to terminate the agreement and claim for the return of the whole amount paid by the Authority to the Institution or business. The Authority informed me that all the cases of the Scheme for the Strengthening of the Infrastructure for Training are closely followed and the provisions of the Agreements which were signed are strictly complied. In cases where there is a delay in the implementation of programmes and for the refund of the amounts due, the Authority follows the procedure, which has been prepared by the Legal Adviser of the Authority. 4.110.6 Surprise surveys for ensuring the implementation of programmes. During 2001, 330 surprise spot visits were carried out by officers of the Authority, for ensuring the implementation of the programmes. Out of the 330 programmes, 44 were not implemented or 13%. It appears that no measures are taken in cases where the programmes are not implemented, whereas the surprise survey, to be carried out, is determined by the officer who is responsible for the examination and approval of the programme. The Authority informed me that in cases where, during the survey, it is ascertained that the programmes are not implemented, explanations are sought from the organisers and the actions to be taken are subsequently decided according to the explanations given. With regard to the surprise surveys carried out, the Authority informed me that each officer has the possibility to carry out a visit and survey of the programmes for which he is not responsible. Finally, the Authority agrees that the criteria set for the selection of programmes to be surveyed, should be revised, with the objective of covering at least all the Institutions. 4.110.7 Policy for the subsidisation of programmes abroad – Minimum period. I observed that from 1996 to 2000, the period of training, for programmes abroad, was only one day and since 2001 two days. According to policy approved by the Board of Management in 1994, for purposes of subsidization, “the minimum period of training is one week and only in exceptional cases programmes of smaller period are examined”. Having in mind that the period of training, of 63% of the programmes abroad, organised and paid during the period 1/1/ - 29/11/2001, was only two to four days, I asked for explanations to be given, for the smaller period. The Authority informed me that on 9/10/2000, the Board of Management approved the Guide of Policy and Procedures, regarding the organisation of Programmes for single business, abroad,

243 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 under which the period of each programme should not be smaller of 2 days and not greater of 30 days. The Authority also stated that the purpose of subsidisation of programmes abroad, during the period 1996-2000, of a smaller period of one week, was to satisfy specific and essential needs of training of enterprises, and that: • The programmes were attended by senior officers, who are not allowed to be absent from their duties for a long period, particularly of senior directors. • In view of the above, the Organisations and Training Centres abroad, are organising programmes of small duration, usually of few days. 4.110.8 Single business Programmes abroad. From the audit of these Programmes the following were observed: (a) In several cases, the necessary supporting documents are not submitted by the enterprises, together with the applications for the payment of subsidy. In view of the above, delays are observed in the examination and payment of subsidy, resulting to the increase of administrative cost, until the submission of documents and the reexamination/ reevaluation of the programme. (b) Some of the enterprises submitted their applications for the payment of subsidy after 2-3 years from the implementation of the programme, whereas the specified period for the submission of the application is only 6 months after the implementation of the programme. (c) It has been observed that 211 programmes, organised during the period 1996-2000, have not yet been cleared. The expenditure, estimated during the examination and approval of the applications, for the implementation of the programmes, is £164.668. In relation to the above, the Authority informed me that, in the Guide of Policy and Procedures for the Singlebusiness Programmes Abroad, it is specified that the application for the payment of subsidy, should be submitted together with the other supporting documents, at least within six months from the last day of the month, in which the programme has been completed and that this obligation is written in the letter of approval of the programme and in the application for the payment of subsidy. The Authority also stated that, despite the fact that the relevant Regulations have not yet been approved, efforts are made for the enforcement of the above. With the approval of Regulations all the necessary measures will be taken for clearing of all the pending programmes. 4.110.9 Multi-business Programmes abroad–Implementation of programmes, omissions, weaknesses. During 2001, 5 programmes were implemented, out of which the 3 were completed at the total cost of £51.888, until the day of the audit. The audit of the programmes files revealed the following: (a) Non uniformity in the handling of programmes, during the approval stage, the search for the need of organising the programme, and the collection of information required for the examination and evaluation of the ability of the prospective organisations to undertake the organisation of the programme. (b) Omissions in the explanatory or supporting documents submitted by the foreign organisation, in connection with the assignment of the organisation, the payment of expenses, the details about the programme (e.g. seminars, trainers, training material, duration).

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(c) Non taking of measures, in cases where the participants do not complete the programme, and therefore, they do not comply with the terms of payment of subsidy. I suggested that with the approval of the Guide of Policy and Procedures for above programmes, and after taking into consideration the aforesaid omissions and weaknesses, the requirements of the Authority towards the prospective organisers to be specified, which will include, inter alia, the submission of a detailed preliminary analysis of the cost and the programme, with reference to the trainers (qualifications / experience), the educational training means, the lectures, duration etc. The Authority informed me that, within the framework for the revision of the Schemes of the Authority for purposes of harmonisation with the legal requirements for the control of Public Aids, certain provisions were included, relating to the prepositions and criteria to be used for the approval of programmes, participants and subsidy. Thereafter, the Guide of Policy and Procedures for Multi-Business Programmes Abroad will be prepared. 4.111 ELECTRICITY AUTHORITY OF CYPRUS Part A 4.111.1 Audit of the accounts. The accounts of the Authority for 2001 have been audited by a private firm of auditors appointed by the Authority, with my approval, as provided by section 3(1) of the Public Corporate Bodies (Audit of Accounts) Law No. 40 of 1983 and Law No. 73 of 1984. In accordance with the provisions of the same Laws, additional financial and management audit was carried out by my Office. 4.111.2 Budget (a) Approval. The Budget of the Authority for 2001 was submitted to the Minister of Commerce, Industry and Tourism on 6.7.2000, and after consultations made with the Ministry of Finance, it was approved by the Council of Ministers on 7.2.2001 and was submitted to the House of Representatives, pursuant to section 3 of the Public Corporate Bodies (Approval of Budgets) Laws. According to the provisions of the aforesaid Laws, the Budget should have been submitted to the House of Representatives until 30.9.2000. The Budget was enacted to a Law and was published in the Official Gazette of the republic on 23.3.2001 (No. 23(II)/2001). For the months of January and February 2001 duodecimals were approved, but for the period of 1-22/3/01 expenditure was incurred without authority. (b) Supplementary Budget. On 9.5.02, the Ministry of Commerce, Industry and Tourism submitted to the Attorney General a bill, for the amendment of the Budget Law of 2001, of the EAC, for covering expenditure excesses for the following votes: Vote Ordinary Supplementary Total Budget Budget £ £ £ 2-217 “Publications, Publicity and Advertisement” 327.200 600.000 927.200 2-269 “Subsidies for the Implementation of agricultural Policy” 2.000.000 1.250.000 3.250.000

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The charges to the above Votes, for the period 1.1-31.12.2001, are as follows: Vote Item Expenditure Excess £ £ £ 2-217 470.411 143.241 2-269 Domestic 520.762 Commercial 37.495 Rural 2.274.711 2.832.968 832.968 The Chairman of the Authority informed me that a new Bill has been prepared, which will be submitted to the Minister of Commerce, Industry and Tourism, which includes only the total excesses on the above Votes. (c) Unspent amounts of Development Budget. The budgeted expenditure for development projects of the Authority, for the year 2001, amounted to £68,3 m., whereas the actual was £36,3 m. The unspent amount of £32 m. or 47% is mainly, due to the non execution or the non completion of the following projects: Vote Budget Actual Unspent Expenditure amounts £m. £m. £m. 4-507 Vasilikos Station Water 18,0 - 18,0 Desilination Unit 4-512 Improvement and Extension of 17,7 13,3 4,4 Transport Network 4-518 Improvement and Erection of 9,3 2,6 6,7 Buildings and Premises 4-528 Information System 1,9 0,3 1,6 The Chairman of the Authority informed me that the differences between the budgeted and actual expenditure are due to various incidents arising, during the long period needed, from the preparation until the execution of the Budgets. (d) Expenditure Budget excesses. Expenditure excesses have been noted in several Votes, which may be covered with the transfer of funds from other Votes, according to the Budget Law, but so far, these excesses have not been approved by the Board of the Authority. The Law also provides for the submission of the expenditure excesses to the House of Representatives, for approval, within three months, by the Minister of Commerce, Industry and Tourism. The Chairman of the Authority informed me that the excesses have been approved, on 29.5.2002, by the Board of the Authority. (e) Procedure for the follow up of Budget. During the year, there was a weakness in the follow up of the Budget, through the computerized system (SAP), for ascertaining whether the actual expenditure was within the budgeted limits. As I was informed, the problem was solved on 1.1.2002. 4.111.3 Financial position. - Operating results. The audited accounts showed a surplus of £39,19 m., before tax. Briefly, the operating results for the last two years were as follows:

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2001 2000 £m. £m. Income 189,83 189,12 Expenditure 150,64 151,54 Surplus 39,19 37,58 4.111.4 Personnel - Salaries, allowances and employer’s contributions. The Authority employed 2,194 persons (2,112 for 2000), out of which 1.975 (1.920 for 2000) were holding permanent posts and 219 temporary posts. The expenditure for salaries, allowances, overtime and employer’s contributions for the last two years was as follows: 2001 2000 £000 £000 (a) Permanent employees Salaries and cost of living allowances 25.886 24.357 Other allowances and overtime 3.386 3.076 Employer’s contributions 2.764 2.660 Employees’ benefits (para. 6) 2.552 2.440 Contributions to Pensions Fund (para. 5) 8.104 6.050 42.692 38.583 (b) Temporary employees 1.113 1.056 43.805 39.639 On the basis of the above, the average cost of the permanent employees, without taking into consideration the deficient contribution to the Pensions Fund, was as follows: 2001 2000 Increase £ £ % 20.357 19.755 3 4.111.5 Pensions Schemes (a) The Authority’s contribution to the employees Pensions Schemes for the last two years was as follows: 2001 2000 £000 £000 For current service 5.618 5.397 For past service 2.486 653 8.104 6.050 According to the last actuarial study, carried out in January 1998, the Authority’s liability for past service, at 31.12.97, was £11 m. The above amount will be settled in five annual instalments of £2.485.560, beginning on 1.1.98. It has to be noted that the Authority failed to pay promptly the fourth instalment of deficient contribution, amounting to £2.485.560, which was payable on 1.1.2001. The amount of £1.350.000 was paid on 20.4.2001 and at 31.12.2001 was pending the payment of the amount of £1.135.560, without interest.

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(b) Selection of Pensions Scheme. With the amendment of the Regulations of the Pensions Scheme effected in 1990, the employees had the right, either to join the non-contributory Pensions Scheme, or remain with the Authority’s contributory Pensions Scheme. The majority of employees selected the non-contributory Pensions Scheme, while with the contributory Pensions Scheme remained 16 employees, who reserve the right to change over to the non- contributory Pensions Scheme at the time of their retirement. 4.111.6 Personnel benefits. The personnel benefits for the last two years were as follows: 2001 2000 £ £ Medical Fund 1.199.112 1.151.816 Welfare Fund 523.677 500.337 Benevolent Fund 213.609 204.384 Scholarships Scheme 156.150 146.500 Canteens Subsidy 145.167 139.630 Interest subsidy on educational loans 118.430 97.871 Collective Life Insurance 163.776 168.014 Personal Accident Insurance 32.513 31.424 2.552.434 2.439.976 4.111.7 Scheme for accelerated retirement. After the enactment of Amendment Regulation 29A, of the Regulations of 1986-1996 (Terms of Service), the Authority may decide to allow the accelerated retirement to an employee who has reached the age of 50 years and has, at least, 25 years actual service in the Authority. On the accelerated retirement, the employees are drawing as compensation, the smallest of the amounts referred below: (a) 70% of the difference between the salary which would have been paid until the normal retirement and the pension which would have been paid until then, prepaid at 7% (values at the retirement date). (b) The total of 25 monthly salaries, calculated on the last monthly salary. (c) The lump sum of £30.000 Since the date of publication of this Regulation, (19.4.96) until the end of 2001, 146 persons retired at a total additional cost of £2.418.534. The following table presents the number of retirements by year, and the relative cost: Year Number of Expenditure retirements £ 2001 27 501.793 2000 26 506.358 1999 31 500.849 1998 25 398.653 1997 28 414.138 1996 9 96.743 146 2.418.534

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During 2001, 27 employees retired and were paid a total compensation of £501.792,66. Amongst them are employees who were 58-59 years old, with a remaining service of about 1- 1½ year, until their normal retirement. Having in mind the anticipated objectives of the Scheme, I hold the view, that for the approval of retirement under the above Regulation, the age and the remaining service of the employee, must be taken into consideration seriously. The Chairman of the Authority informed me that a committee was appointed for the preparation of the new Scheme for accelerated retirement and my observation will be taken into consideration. 4.111.8 Overtime. During the year under review the amount of £1.613.423 was paid to the staff of the Authority, compared to £1.317.600 for 2000, i.e. there was an increase of 22,4%. The following have been observed: (a) Overtime payment to certain employees. A great part of the overtime is paid, systematically, to a certain number of employees, who in several cases, are paid for an excessive number of overtime working hours. Specifically, the total amount of £298.084 was paid to 45 employees (scale A5 – A11), at the annual average cost of £6.625 per employee. (b) Overtime payment to senior officers. The amount of £142.817 was paid to senior officers, holding salary scale A13 and above, at the annual average cost of £1.680. Specifically, the Authority paid the total amount of £46.626 to 7 officers, holding salary scales A13 and A14, at the annual average cost of £6.661, per employee. Up to now, no Regulations have yet been enacted, specifying the conditions, under which the overtime allowance will be paid, as recommended in my previous Reports. The absence of Regulations led in the past to convictions against the Authority for overtime relating to former Managers or Directors General. In the relative legal advice of the Legal Adviser of the Authority, file No. EAC/1193/KS, dated 17.11.98, it is clearly stated that “… only with the relative amendment of the Regulations some limits may be imposed in the exercise of the right for overtime allowance…”. The Chairman of the Authority informed me again that the amendment of the relevant Regulation for the non payment of overtime allowance to officers holding the salary scale A13 and above is included in the counter claims of the Authority towards the labour union side, for the renewal of the collective labour agreement. 4.111.9 Investigations for possible disciplinary offences by the staff of the Authority. In various cases, investigations were carried out by the Authority regarding possible disciplinary offences by the staff of the Authority. Below are given some indicative cases: (a) Disciplinary investigation against an employee. After a report from a specific company, an investigation was carried out against a certain employee of the Authority regarding his involvement and/or interest in the award of the tender 163/2001 to a company, which is registered in the name of his wife (amount of tender U.S.$ 256.704). The Board of Management of the Authority, at its meeting of 25.4.02, acting as Disciplinary Council, imposed a fine to the above employee, on the grounds that he acted in violation of the Disciplinary Code of Authority, Reg. 2(1)(b) of the Regulations of 1985 (S.L. 109/85) and Regulation 57 of the EAC (Conditions of Service) Regulations (S.L. 291/86).

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On the basis of the charges raised before the Disciplinary Council, which were accepted by the employee, in my opinion, this case should have been submitted to the Attorney General for taking the appropriate legal measures. The Chairman of the Authority informed me that the case was submitted to the Attorney General for legal advice. (b) Disciplinary investigations against employees of the Authority, in a certain District - Intervention to power meters/theft of electricity power. In January 2001, a report was made against a Senior Officer employed in a certain District, by a group of employees, regarding his intervention to the power meters of his house and apartments, for a number of years, resulting to the theft of electricity power. A disciplinary investigation was carried out by the Authority, which was subsequently suspended after the commencement of a Police criminal investigation. A Police file was opened for the above employee, for possible misappropriation of electricity power, and after the completion of the investigations, the file was submitted to the Attorney General for study and further instructions. After the examination of the power meters of all the employees of the Authority, in a certain District, disciplinary investigation was carried out against 9 employees, regarding possible theft of electricity power and intervention/damages to the power meters of the Authority, installed at their estates. In two cases, no disciplinary offence was substantiated, while in six cases, the Attorney General requested the Chief of Police to carry out the necessary inquiry, for ascertaining any possible criminal offence against the above employees. 4.111.10 Investigation of cases of theft of electricity power. After the oral reports, made by a specific consumer and their investigation by the Authority, a suspect person was arrested, on 19.12.2001, by the Police, for illegal intervention to the electricity power meters of certain consumers of the Authority. The Police investigated 141 cases until 15.2.2002. In case where the calculation for the loss of power were made, registered letters were submitted to the consumers concerned, including there in the relative claims of the Authority, amounting to about £1,5 m. Until 15.4.2002, no amount was collected. 4.111.11 Internal control system for the income of the Authority. Several weaknesses are observed in the recording and follow up of the electricity consumption, some of which were mentioned in my previous Reports, regarding the unsatisfactory or/and non follow-up of the statements prepared by the computerized system, for electricity bills, the non carrying out of spot inspections of power meters or the carrying out of few inspections only, the non tracing of thefts, by the examining officers, the incompatibility of the computer programme used by the Section of Recorders, for the year 2000, the non taking of corrective measures, promptly, by the responsible Section, for the problems identified by the recorders, the non replacement of all the old meters and the non frequent change of the rotation of recorders, in the areas (zones) where they are posted. 4.111.12 Weaknesses in the system SAP - Procedure for the receipt of materials. Omissions and weaknesses were observed in the procedure for the receipt of materials, through the computerized system. Below are given some indicative examples:

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(a) There is no relative instruction, specifying the procedure for the receipt of stores, through the computerized system, resulting to problems for the correct and prompt updating of the system. (b) In several cases, the updating of the system with the receipts of stores is not carried out promptly. Particular problems are observed in cases where the stores are not received in the storehouses but are directly issued to their destination (e.g. the development projects of the Authority). It is mentioned that, in several cases where the stores were received and invoices were issued, their receipt through the system, is still pending, with the result, the relative agreements to show a wrong picture. The follow are some indicative examples. • Agreement 346/98, order 4500000723. In December 1999 stores of value £78.393,85, were received and invoices were issued without the system, to be updated so far. • Order 4500000503. In January 2000, the relative receipts and invoices were issued for stores of value £21.715,86, without updating the system, accordingly. • Agreement 335/98, order 4500000130, Replacement of the Earthwire of 132 KV Transmission Lines. In January 1999, the relative invoices were issued, for £12.649,03, without updating of the system with the receipts. In total, there are stores valued at £3,03 m., for which invoices were issued by the Authority and were almost received (with the exception of few cases where stores were prepaid), without updating the system with relative receipts. (c) In several cases, the storekeepers are informed through telephone for the receipts of stores, on the basis of agreements/orders and proceed to the updating of the system, without obtaining the necessary documents, and without participating in the process of receipt of the stores, e.g. the receipt of office supplies under an order of the Department of Purchasing and Supply. The Chairman informed me that the issue (harmonization) of the general instructions of the Authority has not yet been completed, regarding the SAP system, because several changes are being made out and its upgrading is awaited. With regard to the updating of the system with the receipts of stores, the procedure to be followed was again explained to the users and for the cases which were referred in my Reports, the necessary postings were made in the system, for the receipts of stores. The problem for the updating of the account GR/IR has been identified and effort is made for the correction of differences. 4.111.13 Approval of payment, given by Limassol District Manager, to a local radio/ television station, for services not rendered to the Authority. After investigating of a relative complaint, submitted to my Office, it was revealed that invoices of the radio/television station were submitted for payment without the supporting documents, showing the services rendered to the Authority valued at £8.665. in reply to my letter, the Director General of the Authority informed that the radio/television station was asked to cancel the above invoice and to issue a new one for £3.767. The Chairman informed me that the Authority does not intend to take measures against the above officer, because no payment was made and the said officer has retired. He also stated that with the specified general policy, no such incidents will be observed in the future.

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4.111.14 Subscription of EAC to K.E.B.E. and O.E.B. The Board of the Authority decided for the payment to the Association of Employers and Industrialists (£10.000) and to Cyprus Chamber of Commerce and Industry (£8.000). Having in mind the legal framework, in which the Authority is operating, I suggested for the reconsideration of the purpose and usefulness for the payment of the above annual subscriptions. The Chairman of the Authority informed me that the matter will be reconsidered, after taking into consideration of the liberalization of the market. 4.111.15 Supply of crude oil. (a) Laboratory tests of some components of crude oil, which cannot be carried out by Dhekelia Power Station. From the audit of the tests, carried out by the laboratory of the above station, it was revealed that the above laboratory is not in position to carry out tests for the 3 components of crude oil, specifically for ash, sodium and vanadium. The agreement for the supply of crude oil provides for the payment of compensation for the one component only (vanadium), in case where its comprehensiveness is greater from 0,015%. I suggested that the possibility to be considered for the above tests to be carried out by the laboratory of the Vasilikos Power Station, until the laborary of Dhekelia Power Station is in a position to carry out such tests. The Chairman informed me that my above suggestion was accepted and in cases where the results of the independent analyst are high and are closed to the limit, specified for the revision of the price of crude oil, the specimens will be submitted to the laboratory of Vasilikos Power Station or of Moni. (b) High percentage of asphalt in the crude oil. In previous years, prior to 2001, and in the agreement for the supply of crude oil in 2002, a provision is made for the payment of fine by the supplier, in case where the asphalt exceeds the specified maximum percentage. In the agreement for the year 2001 however, no provision was made, with the result for several quantities received in 2001, presenting percentages of asphalt higher from those specified (5th delivery for Dhekelia Power Station and Moni Power Station from Banias and 3rd and 4th delivery for Vasilikos Power Station from MarcRich 2001) no amounts to be deducted from the suppliers. It is noted that if there was a clause in the agreement, for the payment of fine, in case where the asphalt is exceeding 4% (such as for the agreement with Glencore for 2002), then the Authority would have collected a fine of about U.S.$ 378.000. It is also mentioned that the high percentage of asphalt is causing problems to the boilers and burners of Power Station, resulting to the payment of considerable amounts of about £500.000 annually, for maintenance and repair. The Chairman informed me that, due to an oversight, the relative clause was not included in the agreement for 2001, but this does not mean that the Authority has lost any money, because the suppliers, in calculating their price, are taking into account all the relative clauses accordingly. 4.111.16 Storehouses (a) Materials not recorded in the system. As it was stated in my previous Report, a great number of materials, valued at about £1.051.619, until the end of 2000, were not recorded in the system and the store cards. The recording of materials was completed in 2001, and accumulated deficits amounting to £332.432, in all Districts, have been ascertained. The

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Finance Section submitted an application, for obtaining approval from the Board, for their write off. The Chairman informed me that the Board approved the write off of the above deficits. (b) Physical stock takings. According to the International Accounting Standards and the financial instruction issued in 1983 (FIN/20/83), the stores and generally all the materials of the Authority should be examined at least once every year. It was observed that, in several storehouses – Offices of EAC (e.g. at Pafos, Vasilikou, Kakopetrias, Polis Chrysochous), no physical stock taking was carried out during the year. The Chairman informed me that written instructions were given to all Districts and Electricity Power Stations, to carry out systematically the stock taking of materials kept at storehouses, and that the matter will be closely followed by the Management of the Authority. (c) Theft of stores valued at £21.740,26. During a stock taking, carried out in the storehouses of Famagusta – Larnaka District, on 30.1.2001, deficits of total value of £22.389,38 were observed, out of which £21.740,26 represent the value of conduits stolen from the storehouse. The case is investigated by the Police. The Authority has not carried out any investigation for this matter, or a study, for the non repetition of such cases, in the future. It is noted that, the insurance agreements of the Authority do not provide for compensation in case of theft. The Chairman informed me that the Authority considers ways, so that similar incidents of thefts to be avoided in the future. He also stated that, from a special investigation carried out by the Authority, it was ascertained that it is not in the interest of the Authority to maintain an insurance for theft. Part B 4.111.17 Credibility of Laboratories of the Authority. Following the recommendations made by my Office and the Internal Auditor of the Authority for the upgrading of Laboratories, the Authority appointed a working group, which, inter alia, submitted the suggestion for the adoption of method ASTM D 2622, by the laboratories of the Authority, regarding the composition of sulphur, a method used by independent analysts instead of method IP61. In the reply given by the Authority, for this matter, relating to the accounts for the year 2000, it was stated that specifications were being prepared for the purchase of an instrument to be used for laboratory tests, for the composition of sulphur, according to method ASTM D 2622. The purchase of this instrument has not yet been made. The Chairman informed me that the above instrument is expected to be received within July 2002, and will be put into operation soon after the delivery. 4.111.18 Development Programme of the Authority for 1995-2003. After the disagreement with Development Bank (former Social Development Fund) of the Council of Europe, as to the interpretation by the appropriate body of E.U. regarding a specific term of the directive (88/609/E.E.C.) the Authority secured the approval of the Council of Ministers for overdraft facilities amounting to £15m. from local banks. At the same time preliminary approval was secured from the Parliamentary Committee for the Budget and Finance for the raising of a loan up to 50m. Euros. In January 2000, the Authority submitted a third application to the Development Bank of the Council of Europe, for the withdrawal of 37m. Euros in pro-rata to the

253 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 approved loan for the Development Programme and the expenditure of the Authority regarding Transport and Distribution projects, which is still pending. Finally, the application for withdrawal of 37 m. Euros, was cancelled and a new application was submitted in July 2001, for the withdrawal of 10 m. Euros, which were received in August 2001. 4.111.19 Exploitation of aeolian potential of Cyprus. (a) Pursuant to international agreements, Cyprus is obliged to reduce dioxide coal emissions in aerospace and to cope with European Community directives, providing for the increase in production of power energy from renewable sources (air, sun, biomass, rubbish etc) by 12%, at least, up to 2010. Consequently, the Authority decided for the exploitation of aeolian power energy and for the establishment of aeolian park at Kourris dam of a capacity of 6MW. The Board decided on 13.6.2000, under decision 8446, to approve the recommendations made by Management, for the installation of wind generators. Within the framework of the decision, the Authority proceeded with land acquisition at Kantou Village (Kourris area). It was also decided for the installation of a wind generator at the Vassilikos Power Station, at an estimated cost of about £350.000. At the aeolian park of Kourris, it is estimated that 10 units will be installed at a total cost of £3,5m., approximately. During 2001, tenders were invited for the purchase and installation of a wind generator at Vassiliko, but the tender was subsequently cancelled because the Department of Town Planning and Housing refused to grant the town planning licence. In April 2002, new tenders were invited, No. 418/2002, for the purchase and installation of four wind generators at Kantou village. As I was informed, the relative town planning licence has not yet been secured. (b) Within the framework of harmonisation of Authority’s policy with that of European Community, in relation to renewable sources of energy (APE), the Board approved on 26.10.99 the establishment of a subsidiary company (in the name of “Electriki Ltd”), the memorandum and articles of association of which was approved on 25.4.2000, under decision 8403. Although the Legal Adviser of the Authority, expressed the view, on 28.7.1999, that the Authority may form a subsidiary company under the existing legislation, I have my serious reservations as to whether the Public Corporations may form private companies, which will undertake part of their functions. If this is desirable, I suggested that a specific provision should be inserted in the Law, specifying clearly that the Authority will have such power. In relation to the above, it is stated that under the technical and financial study, the cost will be high, and the project should be subsidised by 40%, approximately, so as to be viable. Furthermore, a political decision should be taken by Government for the implementation of the above project. (c) The Board of Management, under decision No. 8447 of 13.12.2000, approved, inter alia, the market price of APE at 3,7 cents per Kwh. I expressed the view that the above matter should have been submitted to the House of Representatives for the amendment of relevant Regulations, something which has not yet been done. The Chairman informed me that the Law Office will purse the amendment of relevant Regulations.

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4.112 STATE FAIRS AUTHORITY Part A 4.112.1 Financial position (a) Operating results. The accounts for the year 2001 showed a surplus of £202.234, compared to £160.047 for the previous year, i.e. there was an increase of £42.187 or 26,36%. The surplus arose after the deduction of corporation tax, amounting to £86.807 (£66.970 for 2000). It is noted that, the accounts for the years 2000-1998 do not include a provision for deferred tax, because the relative calculations for the four years were not completed up to the date of preparation of my Report. (b) Working capital. At 31.12.2001, the current liabilities of the Authority amounted to £628.599, where as the current assets were £973.348, i.e. there was a working capital of £344.749 (£173.662 at 31.12.2000). (c) Revenue. The revenue of the Authority, excluding the Government subsidy for interest on loans, amounting to £35.626 (£44.121 for 2000), was £1.842.977, compared to £1.786.578 for 2000, i.e. there was a surplus of £56.399 or 3,16%, which is mainly, due to the collection of registration fees (£29.200), the increase of participation fees (£33.890) and the increase of interest receivable (£10.385). It is noted that the revenue from entrance tickets amounted to £148.579, compared to £172.131 for 2000, i.e. there was a decrease of £23.552 or 13,7%. (d) Expenditure. The expenditure amounted to £1.589.559, compared to £1.603.682 for 2000, i.e. there was a decrease of £14.123. (e) Long term liabilities. The long term liabilities of the Authority, at 31.12.2001, amounted to £409.294, compared to £547.547 for 2000. (f) Government subsidy for interest. For 2001, the Government subsidy for interest on loans, amounted to £35.623, compared to £44.121 for 2000. (g) Government guarantees. At 31.12.2001, the Government guarantees amounted to £491.790, out of which £106.046 were given for loans received from the Bank of Cyprus and £385.744 for loans from the Central Cooperative Bank. It is noted that at 31.12.2001, the amount of £155.000 was due to the Government, for the repayment of the old loan, by the Ministry of Finance, received by the Authority from the Popular Bank. 4.112.2 Approval of Budget. The Budget of the Authority for the year 2001 was approved by the Board of Management on 19.9.2000 and was submitted to the Ministry of Commerce, Industry and Tourism on 20.9.2000. According to the Public Corporate Bodies (Approval of Budgets) Law, the Budget of the Authority should have been submitted to the House of Representatives until 30.9.2000, whereas it was submitted on 30.1.01 and was enacted to Law on 1.3.2001. 4.112.3 Personnel. The Authority employed 20 persons on permanent posts and 8 labourers, compared to 22 and 8 for 2000, respectively. Additionally, 57 persons were employed (54 persons for 2000), during the various exhibitions. The total expenditure for salaries and wages, after deducting of wages charged to third persons and Special Exhibitions, amounted to £603.572, compared to £635.994 for 2000, i.e. there was a decrease of £32.422 or 5%. The expenditure includes the amount of £28.329, representing overtime allowance paid to permanent staff (£28.963 for 2000).

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4.112.4 Debtors. At 31.12.2001, the debtors amounted to £401.270, compared to £303.029, at 31.12.2000, i.e. there was an increase of £98.241 or 32,42%. The great part of the increase is, mainly, attributed to exhibitors rents, for their participation in 2001, which according to the Regulations, should have been settled promptly. It is noted that no amount was collected in 2001 for the old debtors balances. For some of these debtors court decisions were issued for the payment of debts, without any positive result. 4.112.5 Doubtful debtors. The provision for doubtful debts amounted to £121.806 in 2001, representing 30,4% of total debts. A great part of the provision for doubtful debts is relating to debtors, against whom court decision were issued for the collection of amounts due, without, however, any positive result. Once again, I recommended that, in cooperation with the legal advisers of the Authority, actions should be taken for the collection of the amounts due and legal measures to be taken for cases, which have been adjudged. 4.112.6 Formation of green parks. The formation of green parks, for the period 1.9.2001 – 31.8.2002 was assigned to the Adviser, for the gardens of the Authority, without tenders, at the total amount of £17.000 plus V.A.T. It is noted that, while the assignment was relating mainly to the upgrading of the green park, for the organization of the 26th International Fair, during May 2001, the agreement which was finally signed, was for the period 1.9.2001-31.8.2002. The Chairman of the Authority informed me that, the Board of Management decided for the assignment of the formation of green parks to the Adviser for gardens, without tenders, after taking into consideration his experience for such work, and the fact that the knowledge and experience cannot be assessed, through tenders and assured me that in future he will consider the possibility for assigning this specialised work through tenders. He also informed me that the Authority requested the Department of Forests to undertake the maintenance of the gardens of the Authority and the formation of the green parks, but the offer made by the Department, was for £30.000, and was not favorable. 4.112.7 Scheme for Supplementary Medical Treatment. Since the establishment and operation of the Fund, for the above Scheme, no accounts and financial statements have been prepared, with the result the necessary examination not to be carried out. Part B 4.112.8 Participation fees. Once again, I observed that the provisions of Regulations for Participation, are not followed in all cases, regarding the collection of rents and the charge of interest in case of delay. 4.112.9 Assets. (a) Leasehold land. The leasehold land used for the exhibitions has not yet been registered in the name of the Authority. Although the legal adviser of the Authority ruled that there is no problem for the registration of the lease, the Board of Management decided not to proceed with the registration, mainly, for financial reasons. (b) Physical stocktaking. No physical stocktaking was carried on the movable property of the Authority for several years. I understand that the stocktaking of movable assets and their comparison with the registers is in progress. 4.112.10 Building permits. For a number of pavilions erected at the exhibition area, no building permits have yet been secured from the Appropriate Authority.

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4.112.11 Staff benefits. As I stated in my previous Reports, several of the staff benefits are granted according to the provisions of the collective labour agreement, without these being covered by the Regulations of the Authority. 4.113 CYPRUS PORTS AUTHORITY Part A 4.113.1 Delay in the submission of the accounts for the year 2001. According to the Cyprus Ports Authority Law No. 38 of 1973, section 23(3), the accounts of the Authority should have been ready for audit by the end of February of the year following the respective financial year. Section 23(4) of the Law, also provides that the Auditor General should submit to the Board of the Authority the audited accounts, together with the report, not later than the 31st May. The Authority submitted the accounts for 2001 for audit in June 2002. 4.113.2 Approval of annual Budget. The annual Budget of the Authority should be submitted to the House of Representatives for approval until the 30th September of the previous year. The Budget for the year 2001 was submitted to the Ministry of Public Works on 28.9.2000 and to the House of Representatives on 22.12.2000 and was approved on 9.3.2001. 4.113.3 Financial position (a) Budgetary results. The operating surplus, after the deduction of interest and the provision for pensions benefits, amounted to £5.548.102, compared to £2.362.260 for 2000, i.e. there was an increase of £3.185.842 or 134,9%. After the deduction of the loss of exchange amounting to £915.840 (£2.208.445 loss for 2000), resulted from the conversion of loans to foreign currencies, there was a net profit of £4.632.262, compared to £153.815 for previous year. (b) Revenue. The total revenue for the year 2001, amounted to £22.821.871, compared to £19.397.807 for 2000, i.e. there was a surplus of £3.424.064 or 17,7%. (c) Expenditure. The total expenditure, including interests for long term liabilities and the provision for pensions benefits for previous years, amounted to £17.273.769, compared to £17.035.547 for 2000, i.e. there was an increase of £238.222 or 1,4%. (d) Long term liabilities. At 31.12.2001, the long term liabilities of the Authority amounted to £58.276.587, including the amount of £4.358.271, which is due to the Government for the transfer as assets at the time of establishment of the Authority in 1976. For the remaining liabilities of the Authority, amounting to £53.918.316, there are government guarantees. 4.113.4 Personnel and emoluments. The permanent posts of the Authority were 396, out of which 125 were vacant. Also 29 persons were serving on hourly basis and 9 on casual basis. The personal emoluments, including overtime, 13th salary and contributions of the Authority to the various Funds, amounted to £7.750.710, compared to £7.613.905 for 2000. On the basis of the above, the average annual cost per employee was £25.083. 4.113.5 Expenditure for overtime work in the Operations Department. The expenditure for overtime work in the Operations Department, amounted to £1.282.295, compared to £1.306.674 for 2000, i.e. there was a decrease of £24.379. The respective revenue from overtime work, for ships service, amounted to £935.489, compared to £837.201 for 2000. 4.113.6 Introduction of shift system. The system which was agreed and provides for two shifts, from Monday to Friday, was not implemented in 2001. The overtime work for 2001 was as follows:

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Number of Actual hours employees for overtime work 40 501-750 20 751-1000 18 1001-1300 21 1301-1500 14 1501-1800 Having in mind the provisions of the Bill, “for the Organisation of Time Work”, which will be put into effect as from 1.1.2003, I hold the view that there will be a problem for the Authority, for covering the necessary overtime work. The Bill, provides, inter alia, the following: (a) For every twenty four hours, each employee is allowed a minimum period of eleven continuous hours for rest. (b) Each employee is allowed a minimum period of 24 continuous hours for rest per week. (c) The time of work per week should not exceed the 48hours, on the average, including the overtime work, (unless the employee agrees to work more hours). I expressed the view that the Authority should consider the possibility to extend the shift system during the whole period of 24 hours, so as to achieve the smooth operation of the Authority, after the enforcement of the above Law. 4.113.7 Rent/Licences for use of spaces. (a) Multi-uses hall at Pafos Port. The Authority issued a licence to the Pafos Municipality for the use of the hall, for the period 1.1.2000 – 31.12.2004, at the annual rent of £10.000, payable in advance, with 9% interest on arrears. It has been observed that the amount of £10.000 was paid for the year 2000 only until the day of my audit. (b) Construction and operation of a small harbour at Vassiliko by Archirodon Company. The above Company entered into an agreement with Vassilikos Cement Company Ltd for the construction of a small harbour at Vassiliko port area, which is registered in the name of the Authority. This agreement is irregular, because the Vassilikos Cement Company Ltd is the tenant of the area of the Authority and the lease agreement does not give the right to sub-let the area to third parties. The Authority made out representations to the above two interested parties and asked for all “rents” received from the beginning of the agreement to be paid to the Authority, with 8% interest (£12.000 annually for 1998 and 1999 and £14.400 for 2000 and 2001, annually). (c) Collection of supervision and agent fees from Vassilikos Cement Company Ltd. The Authority made a proposal to the aforesaid company for the payment as from 1.11.99 of the annual amount of £5.000, representing supervision and agent fees in connection with operations of the company at Vassilikos harbour. The total amount which must be paid to the Authority is £15.000, plus 8% interest. Negotiations are being carried out between the Authority and the interested parties for the settlement of the matter. 4.113.8 Claims submitted by the contractor for extension works at Limassol port. The project was completed by a private contractor at the end of 1996, at a total cost of £38,5m. The contractor submitted claims for £8.633.000 and in September 1998, a proposal was made by

258 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 him for the payment of the amount of £5.063.000, in full settlement of the claims. During consultations, the Authority submitted, in September 2000, a counter proposal for the payment of the amount of £1.050.000, but this was not accepted by the contractor. It was decided, at a later stage, that the dispute should be referred to arbitration, but in the meantime efforts are being made for a friendly settlement of the matter. In September 2002, the two sides agreed for the amount of £3,2 m., including interest for £1,07 and exchange difference for £0.4m. 4.113.9 Loans. In June 2000, the Authority received a loan of Stg £37 m., from a foreign finance organization, for the reconstruction of the existing loans. It was observed that a great part of the loan was not used and was invested in Government stock securities, at a lower interest, from that of above loan and or other loans of the Authority, with the result to be charged with the difference of interest and be subject to exchange risks. I expressed the view that the Authority should consider the possibility for the repayment of loans, bearing a higher interest from the Government stock securities. 4.113.10 Investments. (a) Government stocks. At 31.12.2001, the investments in Government stock securities amounted to £18,3 m. During the year the return on investments was fluctuating from 4,5% to 6% and the revenue derived amounted to £1.227.462. I expressed the view that this amount could have been invested in a more profitable way e.g. to be deposited in a fixed deposit account bearing interest from 6% to 7%, with an additional income of over £200.000, annually. (b) Cyprus Shipping Bureau (C.B.S). Since 1989, the Authority participates in the capital of above entity with 12% (45.000 shares of £1 nominal value). I suggested that the Authority should consider the possibility for the disposal of above investment, which is not earning any income. From a relative investigation it was ascertained that the above entity was amalgamated with a company, as from 1.1.2001, without the Authority to be informed or to concede for this amalgamation, as provided by the relative agreement. (c) Loan to a company. In 1994, a company which received a loan of £40.000 from the Authority, repayable in quarterly instalments of £1.500 each, beginning from 31.3.95, has failed to respond to its obligations, with the result the amount of £46.766 to be due on 30.6.2001. The case was submitted to the court and the company was obliged to pay the amount of £15.485, whereas for the remaining amount 8 post-dated cheques were issued, which have not yet been cleared. It has to be noted that these cheques which were issued for the amounts due for licences, for the use of space, were returned by bank as dishonoured. 4.113.11 Debtors. I observed that various debit balances for which lawsuits were filed and a favourable court decision was issued for the Authority, still remain uncollected. The measures taken by the Authority, for the collection of debts, are not effective, resulting to the loss of revenue or the amount to remain uncollected for a long period of time. Specifically, it is stated that an out of court settlement was made for the payment of the amount of £20.000, in full repayment of the amount of £85.721 due by a company. In another case no court order was issued for the confiscation of the movable and immovable property of the company, which was indebted in the sum of £15.999. In another two cases the amounts of £28.940 and £4.287, due by two companies will be written off, because these companies were declared bankrupt. There are also cases where legal or other measures (cancellation of licence, removal from the port e.t.c.) are not taken by the Authority, for the collection of the amounts due.

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4.113.12 Provision for pensions benefits. According to the actuarial study carried out in 1989, the Authority should have contributed for pensions benefits, as from 1.1.90 and for a period of 10 years, the amount of £460.000, annually, plus 8% interest, on the accumulated balance of provision, for covering the deficient contributions. Although the period of 10 years expired on 31.12.99, a provision of £460.000 was made for the years 2000 and 2001, without any interest. Consequently, the balance for the provision of pensions benefits at 31.12.2001, may presents a deficit. In view of the above, and the general principle, that an actuarial study should be carried out at constant time intervals, I hold the view that a new actuarial study is necessary. Part B 4.113.13 Transfer of assets. Although the assets and liabilities have been transferred from the Government to the Authority many years ago, yet the relevant agreement, provided under section 16(2) of the Law, has not yet been signed. A draft agreement, as provided under section 16 of the Law, was prepared by the Authority and submitted to the appropriate Ministry a long time ago, and efforts are being made for the signing of the agreements. 4.113.14 Container terminal at Limassol Port. As I stated in my previous Reports, the above area has not yet been fully utilised, because the required plant and machinery, provided for in the feasibility study, has not yet been acquired. As a result the capital expenditure, which includes the cost of construction of the terminal, as well as other related projects (quay, equipment etc.) does not yield the anticipated benefit to the Authority. The Authority informed me that the terminal operates to day with the existing arrangements and that the problem observed is attributed to the negative attitude of some of the parties involved, towards the efforts made for the proper use of the terminal. 4.113.15 Handling of containers at Limassol and Larnaka Ports. As I stated in my previous Reports, as from 2.1.91, the Licenced Porters Association has undertaken the handling of containers at Limassol and Larnaka Ports, after consultations between the Minister of Communications and Works and the Association. Despite the long period of time since then, the relevant agreement between the Authority and the Association has not yet been signed, because the porters did not accept the draft prepared regarding the licence to be issued and requested several amendments which the Authority did not accept. The Authority must take all appropriate action to ensure its revenue from the handling of containers, which, according to the previous regime (1990) amounts to about £550.000 per annum. Since 1991 the Authority has no revenue at all from the above. 4.114 CYPRUS TELECOMMUNICATIONS AUTHORITY Part A 4.114.1 Accounts and audit. The accounts of the Authority for the year 2001 were audited by a private Audit Firm appointed by the Authority, with my approval, in accordance with section 3(1) of the Public Corporate Bodies (Audit of Accounts) Law of 1983. In accordance with the same section of the Law, my Office had carried out additional financial and performance audit. 4.114.2 Budget (a) Approval of Budget. The Budget of the Authority for the year 2001 was approved by the Authority on 24.10.2000 and by the Council of Ministers on 20.12.2000. Pursuant to the Public Corporate Bodies (Approval of Budgets) Laws, the Budget should have been submitted to the House of Representatives until 30.9.2000, whereas this was submitted on 21.12.2000 and was

260 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 approved on 15.2.2001. The expenditure incurred during the period 1.1.2001 to 15.2.2001 was approved by the House of Representatives, with the enactment of duodecimals. (b) Development Budget Expenditure. The budgeted expenditure for 2001 amounted to £68,3 m., whereas the actual expenditure was £59,5 m. Expenditure excesses were noted in various notes, which were covered from savings in other votes, under the same Head, which were approved by the Board of Management on 26.3.2002. The most significant excesses were noted on the Vote “Mobile Telecommunication GSM” (£3,3 m.), and Access Network (£2,4m.). I repeated my previous suggestions that, on the submission of a proposal to incur expenditure a statement should be submitted to the Board of Management about the existence of available funds in the Budget or for any possible expenditure excess. The Chairman of the Authority stated that my suggestion will be adopted. The statement below presents the execution of the Budget, during the last years. Actual Year Budget Unspent amounts expenditure £m £m £m % 1997 51 34 17 33 1998 58 46 12 20 1999 55 49 6 12 2000 61,3 62,7 -- -- 2001 68,3 59,5 8,8 13 4.114.3 Financial position – Operating results. The net surplus, before tax, amounted to £78,1 m., compared to £91,4m. for the previous year. Briefly, the operating results for the last two years were as follows: Increase/ 2001 2000 (Decrease) £000 £000 % Operating revenue 215.692 184.710 16,8 Investments Income 13.074 11.990 9,0 Foreign exchange profit 607 254 -- Profit from sale and revaluation of investments -- 12.008 -- 229.373 208.962 9,8 Operating expenses 136.887 110.906 23,4 Finance and other expenses 1.666 3.767 -- Interest and Pensions Fund deficits 12.700 2.862 -- 151.253 117.535 28,7 Surplus before Corporation Tax 78.120 91.427 (14,6)

As it is deduced, the surplus was reduced by £13,3 m., although the operating revenue was increased by £31 m. The above is attributed to the considerable increase of expenditure by £33,7 m., which includes a higher provision of £14,9 m. for the depreciation of fixed assets, compared to that of 2000. The higher provision is due to the revision of percentages of various categories of fixed assets (reduction in their useful life). The increase in expenditure is also due

261 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 to the additional deficit of Pensions Scheme and Pensions Account, amounting to £10,9 m., resulting from the actuarial study, carried out on 31.12.2001. The decrease in surplus, is also due to the fact that there was an increase in the revenue for 2000, of £12 m., arising from the sale/revaluation of investments. In the operating revenue, several increases were noted, compared with the previous year, the most significant of which are the following: • Increase in telephone service rentals by £10,1 m. (39,2%), compared to £3,1 (13,4%) for 2000. • Increase in local calls revenue by £14,4m. (22,4%), compared to £13 m. (24,5%) for 2000. • Increase in revenue from digital network of combined services by £4,8 m. (77,7%) compared to £4 m. for 2000. On the opposite, the revenue from international calls was reduced by £3,3 m. (compared to the decrease of £7,1 m. for 2000) due to the reduction in fees. As I stated in my previous Reports the charges for the telecommunication services rendered by the Authority, should be fixed at such rates, so that the revenue to cover the operating expenses, the repayment of loans and interest on loans, and for the creation of a reserve to be used for depreciations, extensions, renewals etc., as provided by section 19 of Telecommunications Service Law, Cap. 302. As a result of the annual surpluses, the accumulated reserves are increasing constantly and in my opinion, the above provision of the Law does not appear to be enforced. The Chairman of the Authority stated that the financial results of the Authority are duly considered and the necessary revision of fees is made, with the exception of basic fees, which are specified by Law. With regard to the cash balances, he stated that these are required for the financing of the medium term development programmes of the Authority. After the publication of the Financial Statements of the Authority for the year 2000, and the submission of my Annual Report for the same year, the Competition Protection Commission had carried out an investigation, on its own initiative, against the Authority for possible violation of the Competition Protection Law. The Committee, after taking into consideration the financial results and the surpluses of the Authority for the period 1998-2001, as well as of the Budgets for the same period, and having in mind the development programme and the capital expenditure required by the Authority for the years 2002-2005, has reached to the conclusion that with the existing pricing policy, the reserves of the Authority will overcover the capital expenditure and there will be a surplus of at least £150 m. The Committee has also taken into consideration the financial results and margins of profits of other Organisations operating under the same legal regime in Cyprus and Greece. Having in mind the above, the Committee concluded on 27.8.2000, (decision No. 8/2002) that the Authority accumulated super profits, during the period July 2000 – December 2001, by exploiting its dominant position in the market of telecommunications and applying illicit and/or unreasonable prices, especially for the international telephone calls and mobile telephony. The Committee imposed a fine of £20 m. to the Authority, for improper exploitation of its dominant position in the telecommunications service sector, in violation of section 6(2)(a) of the Law 207/89. The Committee also recommended for the taking of all necessary measures, up to 1.1.2003, for raising the above violation of the Law.

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The Authority filed on 30.8.2002 a recourse to the Supreme Court against the above decision. In the meantime, the Authority announced on 9.9.2002, significant reductions in the various fees. 4.114.4 Cash and bank balances and government stocks. At 31.12.2001 the cash and bank balances and government stocks amounted to £218 m., compared to £178,9 m. for 2000. The cash and bank balances amounted to £157,4 m., compared to £121,8 m. for 2000, and their greater part is deposited in three commercial banks, in fixed deposit accounts of one year notice, bearing 5,25% interest. The fixed deposit bank accounts, with 12 months notice, and the other fixed deposits accounts, include the amount of £850.000, invested in 2000 with a guarantee capital, but with floating return, depended on the yield of foreign stock exchanges. So far, the yield from this investment is nil. As I stated in my previous annual Report, the cash and Bank balances in excess of the annual needs of the Authority should be gradually invested in government stocks, in pursuant to the provisions of the Public Corporate Bodies (Investments) Law. The Chairman of the Authority stated that efforts are made for the purchase of greater number of stocks, through public auction, and that the management of cash and bank balances, generally, within the new finance and credit environment, with fluctuating interest is aiming at securing higher return, in acceptable risks levels. 4.114.5 Personnel (a) At 31.12.2001 the Authority employed 2426 persons. The total expenditure for salaries, allowances, overtime and employer’s contributions amounted to £47,6 m., compared to £45,3 m. for 2000. The expenditure for interests and deficits in the Pensions Scheme and Pensions Fund amounted to £12,7 m., compared to £2,9 m. for 2000. It is noted that at the end of 2001, there were 47 vacant permanent posts. Based on the above, the annual average cost per employee, excluding the deficient contribution to the Pensions Scheme of £12,7 m., was about £19.605 (£18.875 for 2000). Since 2000, casual staff is employed by the Authority, paid on an hourly basis. At 31.12.2001, 124 casual employees were employed by the Services 191/192 and CYTANET, at a total cost of £378.295. (b) Other employees benefits. The following amounts were paid in the years 1999 – 2001: 2001 2000 1999 £ £ £ Financial assistance to staff 420.640 332.396 347.644 Personnel functions 206.856 27.256 33.841 Subsidy to Welfare Fund 567.148 534.630 674.945 Subscriptions to Cyprus Theatrical 7.600 7.800 Organisation Personnel and Pensioners collective insurance 335.864 288.163 229.822 1.338.108 1.190.245 1.286.252

The contribution to Welfare Fund Association and the collective insurance for employees and pensioners are paid under the collective labour agreement. The financial assistance to staff (for

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Provident Fund, for children studies, to needy employees, to excellent students etc.), is paid under the relative decision of the Board. (c) Compensation for early retirement. The Scheme for early retirement continued in 2001 and for this purpose a total amount of £2.455.000 was paid to 73 employees as compensation, in addition to their pensions benefits. Since the implementation of the Scheme in 1988, the total amount of £15.104.939 was paid to 608 employees as compensation for their early retirement. During the same period 467 employees retired normally, while the new appointments were 1.442. Therefore, the staff was increased by 367 employees and at 31.12.2001 the total number was 2.426 persons. (d) Overtime. The overtime expenditure amounted to £2,19 m., compared to £2,4 m. for 2000, i.e. there was a decrease of 8,7%. This amount consists of £0,34 m. for shift allowance, £1,85 m. for overtime work on Sundays and public holidays (88.560 hours for 2001, compared to 92.594 for 2000) and the remaining amount for overtime work, in the other days of week (100.955 hours for 2001, compared to 108.688 for 2000). 4.114.6 Investments – Participation of the Authority in EAST satellite programme. In the accounts for the year 2000, a provision of £1.292.000 was made for the whole investment in the above satellite programme (which was made through the subsidiary company Digimed Communications Ltd). During 2001, consultations were made by the Authority (through Digimed) with the partners in the programme (Matra Marconi Space (UK) Ltd) for securing its rights provided in the Agreement, which were not successful. The Authority, in cooperation with the legal advisers, considered the possibility for taking legal measures against its partners and it was decided for taking such measures in United Kingdom, the cost of which is estimated at £500.000. 4.114.7 Subsidiary company Digimed Communications Ltd (a) Company operations. As a result of the failure of the satellite programme EAST, mentioned above, the company operations were restricted considerably. As shown in the financial statements for 2001, there is no income for this year. During 2001, the company proceeded with the formation of the following new subsidiary and associated companies:

3 Participation Investment % £ Cytacom Solutions Ltd 100 100.000 Emporion Plaza Ltd 100 150.000 Cyta U.K. Ltd (in U.K.) 100 1 Bestel Communications Ltd 50 32.500 + 282.501

+ (+) (50% is owned by the Chinese company ZTE) The investments were made after the dedaggering of the relative amount of £1 m., from the Budget of the Authority for 2000, which was deposited in October 2000, in the account of the company. The dedaggering was made for small investments and with the condition that for expenses over £200.000, the approval of the Ministers of Communications and Works and Finance, must be secured, through the Board of the Authority.

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(b) Compensations to the Executive Director of the company for termination of his contract of employment. The Board of the company decided on 3.9.1999 for the termination of the contract, of four years, (9.1.98 – 21.6.2002) of the Executive Director, due to the non approval by the House of Representatives of the necessary funds, in the form of capital, from the Authority to the Digimed Communications Ltd, for operating expenses, as well as to the fact that the company operations were not justifying the employment of a high rank employee, since the EAST programme and the other projects, for which the company was interested were inactive. A lawsuit was filed by the Executive Director, which was subsequently withdrawn, following an out of court settlement, on 26.1.2001, between the two parties and the payment of compensation to him for £99.500 (£27.500 for pensions benefits and £72.000 as compensation). 4.114.8 Stores (a) Stocks of equipment/materials. At 31.12.2001, the Stocks of materials for operation and maintenance amounted to £3,4 m., compared to £4,3 m. for 2000. The stocks of materials for projects under construction at 31.12.2001, amounted to £10,5 m., compared to £8,07 m. for 2000. Below is an analysis of these stocks: £ m. Transport Network 1,68 Mobile Telephone Services 2,03 Constant Telephone Services 2,00 Electromechanical Services 0,21 Access Network 4,60 10,52 It has been observed that, in several cases the stocks remain in the storehouses for long time, before their installation to the projects. (b) Spot inspections. During spot inspections carried out in various storehouses the following were observed: (i) Stock of software for the upgrading of Telephone Centres AXE CY2. As it was stated in my previous Reports, the above software, valued at £109.283, purchased on 22.7.98, for the upgrading of telephone centres, remains unused. (ii) Mobile Telephone Service. In the Stocks of this Service, there are antennas of old technology valued at £88.159, purchased in 1997. The Chairman of the Authority informed me that some of these items are expected to be installed again, whereas the remaining will be condemned and will be sold. (iii) Telephone poles. In the stocks of materials for the operation and maintenance of the Access Network, there are 2.744 telephone poles, of a total value of £159.648. In view of the new policy for placing the network of the Authority underground, which has been adopted as from 2000, I repeated my suggestion for considering the possibility to dispose of the stock of telephone poles to interested buyers, either in Cyprus or abroad. As I am informed tenders will be invited for their disposal in 2002.

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(iv) Equipment/materials returned to Storehouse. In the Central Storehouse there is a stock of equipment of mobile telephone service, valued at £290.000, approximately, (Code 25777 – Cabinet ESM, Mstand, Code 27385 – Radio Cabinet GRN), which was returned from Telephone Centres, as a result of technological developments. The investigation for ascertaining as to whether the equipment is obsolete is still pending. From a spot inspection in the Mobile Telephone Centre in Aglantzia it was ascertained that equipment of total value of £1.684.283, approximately (Controller Base Station, equipment of Transport Centre), was put out of operation in November 2001, as it cannot respond to the increasing needs of network. The Main Tender Board, under decision No. 84/2001 of 17.12.2001, suggested that the possibility to be considered for the sale of the equipment as used. So far, the efforts made for finding a buyer have not been successful. (c) Stores computerised system. The weaknesses observed in the system, regarding the preparation of various statements (slow moving stores, maximum and minimum limit of stock, valuation of cost, analytical statement and date of purchase) continue to exist. As I stated in my previous Reports, the necessary improvements in the programmes should be made, so that the above statements to be prepared promptly and correctly. (d) Software “EPOS”. This software is used for the management of sales and stocks of telecommunications terminal equipment (terminals, constant and mobile telephones, time renewal cards, etc) by the Offices of Customers Service. All these Offices have an access to the System. It was observed that the system presents various operational problems. 4.114.9 Tenders (a) Tender AT10/2001–Fiber to the Cabinet System–Cancellation of tender. On 12.6.2001, tenders were invited by the Authority for the supply of the Fiber to the Cabinet system, for use in the various Telephone Centres, under the method of two envelopes, at an estimated cost of £2,8 m. The period for the supply agreement was for two years and 10 years for the maintenance/support agreement. During the specified period, eleven tenders were submitted. The Evaluation Committee, asked for various explanations to be given by tenderers, during the evaluation of tenders, and when the relative answers were given, the Committee proceeded with the marking of all tenders. Finally, only four tenders were technically within specifications and the Committee suggested, on 9.1.2002, the opening of the financial envelopes, and their evaluation. At the same time, the Committee suggested for an extension of time to be given, of one month, until 15.3.2002, of the tender period. The Main Tender Board, at its meeting No. 4/2002 of 16.2.2002, decided for the further examination of the tenders by the Evaluation Committee and approved the proposed extension of the period of validity of tenders. On 22.1.2002, the Main Tender Board decided for the cancellation of the tenders, on the grounds that the specifications were absolute with an immaterial criterion, with the result some tenders to present between them, minor differences and to be excluded. At the same time the Tender Board decided for the invitation of new tenders, with improved specifications. From the whole procedure followed before and after the report of the Evaluation Committee as well as from the relative correspondence, the following were observed: (i) The evaluation method and criteria were approved by the Main Tender Board, under decision No. 457/2001 of 1.8.2001, without any observation/reservation.

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(ii) The tenderers submitted their tenders without any observation/reservation on the terms/criteria. (iii) None of the members of the Evaluation Committee expressed any reservation on the tender terms/criteria. (iv) The tenderers were allowed to ask for explanations for all the specifications and the necessary answers were given, according to term 36 (Part I) of technical specifications. (v) In the Main Tender Boards decision no reference is given about the criterion, which was absolute and immaterial. (vi) The above decision of the Main Tender Board was not submitted to the Board of Management of the Authority, which according to the Specified Procedure for the Purchase of Stores and Services “…reserves and has the power for the invitation, examination and award or cancellation of tenders for the purchase of stores or services of value over £500.000, and such power is exercised on the advice of the Main Tender Board”. The Chairman of the Authority informed me that the Main Tender Board identified the strict specification for an immaterial criterion before the completion of the technical evaluation and decided for the cancellation of the tender and for the invitation of new tender. (b) Tender AT49/99 (Motor Vehicles) – Recourse by an unsuccessful tenderer. The Board of Authority, under decision No. 308/99 (meeting 26/99 of 23.11.99), decided for the award of the above tender, for the purchase of 23 vehicles of type 4WD, for the total amount of £205.344 and the payment of the amount of £25.070 for their maintenance, during the period of 7 years. Against the above decision, a recourse (409/2000) was filed by an unsuccessful tenderer. On 15.5.2001, under the Supreme Court decision the decision of the Authority was annulled, on the grounds that no justification was given for the exclusion of the unsuccessful tenderer (he was excluded due to the absence of stabilizer bar). In the evaluation report it is stated that “certain liftings need the stabilizer bar during the lifting, in order to guarantee the stabilization of the vehicle for the transport of the load or movement in bends”. In the court decision, it is stated that the stabilizer bar is not required for all lifting systems, but only for few of them. It is also stated, that, no reference is made by the Authority of any justification, to support that the lifting system of the vehicle of the unsuccessful tenderer was one of the systems which need the stabilizer bar. Mention is made, that the relative term of technical specification, provides that the vehicles should have “anti roll/stabilizer bar or equivalent or better”. According to the court decision, the system of stabilizer bar was not the only one which could satisfy the needs of the Authority and any other system, which could have the equivalent or better effectiveness, in relation to that of the stabilizer bar, should have been within specifications. I expressed the view that the specifications and the evaluation procedure were presenting weaknesses, for which reference is made in the court decision, and I suggested that more attention should be given to the procedures followed, so that similar cases to be avoided in future. (c) Tender AT15/25 – Network of Synchronism Digital Hierarchy (SDH) – Extension of Agreement. On 15.2.96 the Board of the Authority decided for the award (5/96) of tender, for the supply of equipment of synchronism digital hierarchy (SDH), to a company for the amount of £3.500.000, in the period 8.3.96 – 31.12.99. On 16.3.99, the Board approved the extension of the validity of existing agreement, until the end of 2002.

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Until January 2002, the actual expenditure for above tender, amounted to £8.095.616, i.e. there is an increase of 131%, compared with the initial price. Part of the expenditure relates to new equipment and works, which were not included in the tender agreement, while some of the prices of new equipment were agreed, after consultations. It has to be noted that the above expenditure was included in the approved Budget. The Board, under decision No. 2/2001 of 25.1.2001, approved the additional expenditure of £9 m. The Chairman of the Authority informed me that the placing of orders, for long term agreements, under the actual needs of the Authority, on the basis of the demand of services and goods, is a very successful practice, which is followed for years. The relative expenses are within the budget limits and are approved by the Board of Authority. (d) Tender for the construction of the new Telephone Centre in Limassol – AT71/95 – Compensation claims. In my Reports for the audit of the accounts for the years 1998-2000, it was stated that due to delays on the part of the contractor, the Authority suffered damages amounting to £222.734. On my recommendations the Authority exercised the right for the imposition of monetary compensations, by withholding / cashing the guarantee, and retaining of amounts due to the contractor. There is still, however, an amount of £75.424 which must be claimed/collected from the contractor. The Authority has not yet taken legal action, due to the delay observed from the part of contractor to submit his counter claims. According to a legal advice, the contractor expressed his intention for the appointment of an arbitrator, under the provision of the terms of the contract agreement. (e) Tender AT42/2001 – Supply and installation of equipment for the new Air Flights Control Centre Nicosia (project LEFCO). The Authority decided, on 24.4.2001, for the cancellation of tender and the invitation of new tender, because of the various weaknesses and problems encountered in the tendering procedure, and the delay observed, as well as to the revised needs of the Department of Civil Aviation. The invitation of tender was made on 10.8.2001, with revised specifications and terms, after an agreement was reached, between all parties involved (Department of Civil Aviation, EUROCONTROL, European Investments Bank and CYTA). The tender is at the stage of evaluation, and as I am informed, explanations were asked from tenderers, and the relative answers are still awaited. 4.114.10 Upgrading of Earthquake Protection of CYTA Central Offices. From the relative correspondence exchanged between the Authority and the Cyprus Technical Chamber, it appears that the first thoughts for the upgrading of the Central Offices of the Authority were made in 1997. The Main Tender Board decided (meeting 28/2000) for the payment of the amount of £14.500 to the Cyprus Technical Chamber for consultancy services, regarding the upgrading of earthquake protection of the Central Offices and 13 other buildings of the Authority. In the final report of the Chamber, which was submitted on 28.6.2001, no specific suggestions were made regarding the need and extent of upgrading. Nevertheless, the Board of Management of the Authority, at the meeting 4/2001 of 27.2.2001 (before the submission of the above report) assigned to an Architectural Office the predesign and completion of the upgrading of the earthquake protection for the amounts of £70.100 and £26.000 respectively. Under the

268 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 same decision, approval was given for an educational trip to USA (San Fransisco), for studying modern methods for earthquake protection “with seismic insulation”. It was also decided to assign the geotechnical analysis of earthquake behaviour to a professor of Metsobiou Polytechnic, through the Chamber, in order to specify the earthquake risk for design purposes. For these studies no agreements were signed (for duties, obligations, etc). As I am informed at the present stage, a study is being carried out for the earthquake protection upgrading, with accelerated seismic factor 0,25 under the seismic insulation method. The cost of earthquake protection will be £0,9 m. and the total cost for the alterations additions, renewals and maintenance is estimated at £8,5 m. After taking into consideration the proposed upgrading of earthquake protection and the proposed extensive renewals and extensions of Central Offices as well as the initial construction cost of buildings of £5 m., and the fact that the buildings are very well maintained (for the period 1997 – 2000 the relative expenses amounted to £650.000, approximately) and that the site of buildings is not in an area of high risk, I suggested the following: (i) A report should be given by the initial designer of the building in connection with the resistance of the building against earthquake (up to what seismic acceleration may resist). (ii) A cost benefit analysis to be prepared, justifying the earthquake protection upgrading and extensions/renewals to existing building, in comparison with the construction cost of a new building. (iii) Alternative solutions to be considered, taking into consideration that the construction cost of the new building, of an area of 16.000 sq.m. (which is for the building with proposed alterations), is estimated at £8 m, at current prices of £500 per sq.m. (iv) The importance of the Central Offices of the Authority to be considered, whether is so great which will justify the proposed increase in the accelerated seismic factor. Also, the need for the additional new area, to be considered, in combination with the anticipated new regime of the Authority. The Chairman of the Authority informed me that the above will be taken into consideration for the preparation of the report, on the final decision for the project and the related expenditure. With regard to the assignment of the study before the submission of the report by the Chamber, he stated that this was made on the basis of a relative report, in which reference was made of the letter of the Chamber, outlining the need for earthquake protection upgrading of the building in accordance with the modern perceptions and legal provisions. 4.114.11 Doubtful debtors. The annual provision for doubtful debts was £1,3 m., compared to £0,89 m. for previous year. At 31.12.2001, the accumulated provision for doubtful debts amounted to £10,43 m., compared to £10,25 m. for 2000. During 2001, the amounts of £1.173.675 was written off against bad debts, out of which the amount of £491.664 represents an old debt due by a country member of the Commonwealth. Within the efforts made for exercising better control over the debtors, legal measures were taken in 84 cases, for the total amount of £59.820. 4.114.12 Revision of fees. During 2001, the Authority proceeded to the revision of fees, within the framework of the pricing policy, in the light of new international development in telecommunications and the harmonization with Acquis Communautaire. The revision covers the basic fees (connection fees and subscription for constant telephony, local telephone calls

269 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 and service fees for yellow pages), which were increased and the overseas telephone calls which were decreased. The revision was necessary, as a result of the increasing competition in international telecommunications and the subsidization of local calls by the overseas calls, which is contrary to Acquis Communautaire. According to the study, carried out by the Authority, for the profitability of 2000, the local calls service presented a deficit of £22,05 m., in 2000, (revenue: £38,10m., Cost: £60,15 m.). The cost represents operating expenses and the capital. For the calculation of capital cost, a study was carried out in 1998, with the support of special consultants and this was fixed to 16,2%. With regard to the local constant telephone service, the capital cost was estimated at £15,0 m. It has to be noted that the cost of capital does not represent the actual expenses but it is a nominal cost, representing the investment return, which is expected to be derived from an organisation like CYTA. Although this is an acceptable cost for private companies operating under competitive conditions, this cost may not be covered by the Law, which provides that the actual operating expenses should be taken into account for the calculation of fees. The revised fees were approved by the House of Representatives in December 2000 (S.L. 355/2000). According to the approved Regulations, the first phase of the revision was put into effect as from 1.1.2001, the second phase as from 1.8.2001 and the third phase as from 1.3.2002. 4.114.13 Advertisements and promotion of services and products of the Authority. The expenditure for advertisements and promotion of services of the Authority were increased considerably in 2001 and amounted to £3,13m., compared to £0,77m. in 2000. The corresponding expenditure for the last five years was as follows: Years Budgeted Actual Increase expenditure expenditure £ £ £ % 1997 400.000 221.502 1998 400.000 317.206 95.704 43 1999 400.000 349.465 32.259 10 2000 1.000.000 770.527 421.062 120 2001 3.700.000 3.137.176 2.366.649 307 The reasons for the considerable increase of expenditure according to the explanatory budget memorandum, are the increase in promotion expenses for new services, the enlightment campaign for the new numbering system and the promotion of the image of the Authority, and the celebrations for the anniversary of 40 years of the Authority. The expenditure includes the following: • Grants (£445.489). Represents grants given for various cultural events (concerts, theatrical performances, dancing ballets, opera), conferences, hiring of box in a football stadium etc. The amounts for above grants are fluctuating from £100 o £45.000. it was observed that no uniform procedure was followed for the evaluation of each case and the approval of the expenditure. I suggested the formulation of a procedure for the approval of grants, under specific criteria, and the appointed of a competent person, to be responsible for the final approval of the grants, according to the amount of payment for each case.

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• Advertisements for the anniversary of 40 years of the Authority (£147.135). Represents various grants, for the total amount of £92.109, given for theatrical performances and ballets and £55.026 for advertisements, social activities and promotion gifts. It is stated that an additional amount of £176.282 was given, on the occasion of the anniversary of 40 years, for various social activities and receptions, which was charged to a separate Vote. • Advertisements for the new numbering (£170.700). Represents expenditure for the advertisement campaign, for the new numbering. • Advertisements of so easy service (£521.438). Represents value of free time for telephone calls allowed to prepaid soeasy cards of mobile telephony, in various periods, within the framework of pricing policy of the Authority (Decision 337/2000 of the Board), • Advertisements for International Rally in Cyprus (£28.160). Represents various advertisements, including free telephones for £13.976. • Design / tree planting of public parks (£12.470). Represents design of parks (including £8.070 for consultants studies). The Board of Management, under decision No. 67/2001 of 13.2.2001, approved the disposal of revenue from the sale of telephone directories (estimated at £200.000) for the design and treeplanting of public parks. The Legal Advisers of the Authority expressed the view that the keeping of a separate account, for the lodgement of the collections from the sale of the directory, to be used for a specific purpose, was not possible. In view of the above and the fact that the total proceeds from the sale of directory were only £4.375, payments were made for above purpose, out of the Vote for advertisements. The Chairman of the Authority informed me that the expenditure for advertisements is approved by the Director General or the Board of Management, according to the amount of payment. The promotion of products in the new environment is necessary and the new trends and practices are followed by the Authority. It is expected that in a competitive environment this expenditure will be increased. 4.114.14 Telephone directories. For the printing of the directories for 2000/2001 the amount of £943.445 was expended (£799.782 for printing expenses and £143.663 for distribution expenses). The above amount does not include various other expenses relating to the printing of directories, such as staff salaries, incentives and allowances, training expenses, promotion expenses, administrative and operating expenses. During 2001, was the first time for the distribution of telephone directories to the consumers’ houses. The distribution was made by a private company against the payment of the amount of £120.000. The following problems were observed from the distribution of directories: • Telephone directories were delivered to non dwellings and to persons not interested for such directories, resulting to extravagance. • Difficulties were observed in the delivery of directories to businessmen, as specified in the terms of the agreement, due to the fact that the delivery was not made during working hours. • Practical problems were observed in the distribution of the telephone directories issued in English language, with the result 89,23% of these directories not to be delivered by the 31.12.2001.

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The stocks of telephone directories kept in the storehouses of the printing agency and the Offices of the Authority are shown below. The high percentage of stocks of directories, issued in English, is attributed to distribution problems, as well as to the delay observed in their printing. Quantity provided in Actual Stock of directories at the tender quantity AT21/2000 31.12.2001 22.4.2002 % % Directories by name and “yellow pages” – in Greek 813.000 690.740 115.495 16,72 104.970 15,20 Directories by name and “yellow pages” – in English 154.000 157.700 136.248 89,23 127.283 83,35 Pursuant to Board’s decision No. 129/2000 of 9.5.2000, the telephone directories of other districts are sold at £1 each. The anticipated revenue from the sale of directories was £200.000, whereas the actual was only £4.735. The Chairman of the Authority informed me that the new procedure for the distribution of directories and the number of which were issued were based on market research, which was finally not correct. Part B 4.114.15 Tender Regulations. The Tender Regulations of the Authority continue to present certain omissions and weaknesses, such as, the non deposit of a participation guarantee for amounts under £100.000. In my previous Reports, I recommended that in the new Regulations, new appropriate provisions to be included. As I am informed, the legal processing of the revised tender procedure, which will be in line with the provisions of Law 29(I)/02, is at the last stage of completion. 4.114.16 Immovable property purchased, for which no ownership titles have been issued. Immovable property valued at £154.900, which was purchased/acquisitioned long time ago, has not yet been registered in the name of the Authority, and the relevant ownership titles have not been issued, due to problems in land parcellations. As I was informed, some part of this property, has now been registered in the name of the Authority. 4.114.17 Disciplinary Regulations. With the decision of the Supreme Court for recourses 502/87 and 584/87, issued on 15.7.88, the Regulations relating to the setting up of disciplinary committees were declared null and void. Since then they fell into disuse and the handling of disciplinary cases is made by the Board of Management of the Authority. The matter was submitted to the Attorney General for legal processing and is still pending. 4.114.18 Agreement for Satellite Station SIRIUS II. The installation expenses for this satellite station were paid by the Authority for the account of Government (Ministry of

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Communications and Works). The relevant agreement, between the Authority and Government has not yet been signed and the expenses of the Authority, amounting to £920.000, have not yet been recovered. 4.115 CYPRUS GRAIN COMMISSION Part A 4.115.1 Financial position (a) Operating results. The accounts for the financial year 1.5.2000 – 30.4.2001 showed a deficit of £29,2 m., compared to £23,7 m. for the previous year, i.e. there was an increase of the deficit by £5,5 m. or 23,2%, mainly due to the increase of the cost of sales. (b) Long term liabilities. The long term liabilities of the Commission at 30.4.2001, amounted to £3,5 m., compared to £3,6 m. at 30.4.2000. (c) Government guarantees and bank overdraft. At 30.4.2001, the Government guarantees for credit facilities granted to the Commission, amounted to £5,6 m. and the bank overdraft was £5 m. 4.115.2 Personnel. The permanent posts were 83, out of which 10 posts were vacant. In addition there was one supernumerary post, against which a casual was employed. The expenditure for salaries, allowances, overtime and employer’s contributions for the last two years amounted to £2.184.311 and £2.179.335, respectively. 4.115.3 Staff benefits. The staff benefits for the last two years were as follows: 2001 2000 £ £ Medical Fund 119.973 111.833 Welfare Fund 67.030 48.971 Staff Insurance 1.762 1.911 Training of staff 6.888 6.606 195.653 169.321 4.115.4 Compensations from cereals purchase agreements. During the unloading of cereals, deficits were observed in all the agreements signed with a company, as well as deviations from quality parameters (damaged grains, foreign substances, other grains etc.). Pursuant to the agreement signed between the Commission and the said company, it was decided that the Commission’s claims for above problems to be written off against the amounts due by the Commission to the company. It is noted that the amount due to the Commission was higher by about U.S.$ 23.000, from the amount due to the company, which was finally written off. Due to the repeated write offs of the relative claims of the Commission, I recommended for the investigation of the matter. The Commission informed me that the main reason for the non acceptance of the settlement, were some problems presented by the one of the two automatic weighing delivery machines. Part B 4.115.5 Financial Regulations and Stores Regulations. The approval of these Regulations, which are necessary for the smooth operation of the Commission is still pending. With regard to tender procedures, I recommended that the relevant Regulations of the Commission be

273 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 strengthened, by the adoption of corresponding provisions of the Public Tenders Laws and Regulations. As I am informed, a specimen of the new legislation is being prepared, which will be in line with the Acquis Communautaire and is expected to be submitted to the Law Office, in February 2003. 4.116 NICOSIA WATER COMMISSION Part B 4.116.1 Transfer of rights and obligations. Pursuant to the Council of Ministers decision No. 43044 of 14.9.95, all the rights and obligations of the Nicosia Water Commission have been transferred, as from 1.1.95, to Nicosia Water Board, for an annual amount of £1.000. The net assets of the Commission, valued at £247.407, on 1.1.95, whose value at 31.12.2001 was £248.954, are shown in the accounts of Nicosia Water Board, but their ownership continues to remain with the Commission. Pursuant to Council of Ministers decision No. 54228 of 5.9.2001, the amount of £70.328 plus interest, was paid by Government, representing state subsidy, for covering the tax liabilities of the Commission for the years 1988-1994. Additionally, the amount of £5.453 was paid by Nicosia Water Board, representing corporation tax and defence contribution for the years 1995- 2000. 4.117 CYPRUS THEATRICAL ORGANISATION Part B 4.117.1 Operating results. The income and expenditure of the Organisation for the year 2001 amounted to £3.000.692 and £2.978.917, respectively, compared to £2.755.667 and £2.717.542 for the previous years, i.e. there was a surplus of £21.775, compared to £38.125 for 2000. The income includes state subsidy for £2.690.950 and other grants and contributions, amounting to £16.111. As I stated in my previous Reports, the Organisation depends to a large extent on government subsidy and I recommended that ways must be sought for the increase of income and the decrease of the expenditure of the Organisation. It is also noted that the current liabilities of the Organisation for 2001 were exceeding the current assets by £9.034, compared to £3.959 for 2000. 4.117.2 Budget. The Budget of the Organisation for 2001 was approved by the Board of Management of the Organisation on 3.10.2000, and by the Council of Ministers on 7.2.2001. The Budget was enacted to a Law on 30.3.2001. The House of Representatives approved duodecimals for the months of January and February 2001, only, whereas the expenditure for the period 1.3 – 29.3.2001 was not legally covered. 4.117.3 Personnel. The Organisation employed 36 persons, holding permanent posts, 23 on a temporary basis and one on contract, with total emoluments amounting to £1.272.722, compared to £1.144.146 for 2000. The personal emoluments include the amount of £142.311, representing the contributions of the Organisation to the Pensions Fund and Provident Fund, the amount of £106.173 representing contributions to Social Insurance Fund, Redundancy Fund etc., the amount of £87.036 for medical treatment, the amount of £35.233 for overtime and allowances and the amount of £31.451 for arrears of salaries, for years 1999-2000.

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Additionally, the amount of £28.835 was paid for insurance and indirect benefits of the staff and the amount of £88.486 for compensations to actors, whose services were terminated. According to the above, the annual average cost per employee was £21.168 for 2001, compared to £19.532 for 2000, excluding the arrears of salaries and compensations. The resulting difference is attributed, inter alia, to the basic salary increases of 1% and 2% paid to the staff, for the years 1999 and 2000, respectively, with effect from 1.1.2001. Additionally, 8 labourers were employed by the Organisation, with total wages of £59.862 and casual actors, on part time basis, with total emoluments of £302.033 4.177.4 Tickets Sales. During 2001, 67.147 entrance tickets were sold, compared to 60.280 for 2000, i.e. there was an increase of 6.867 tickets or 11,4%, which is, mainly, due to the increased attendance of theatrical performances in Cyprus. 4.117.5 Independent theatre subsidy. To the independent theatres “SATIRIKO”, “ENA”, “ETHAL” and “SKALA”, an annual subsidy is paid according to specified terms and criteria. The subsidy which was paid to the four theatres, for 2001, amounted to £119.000, £113.000, £112.000, and £102.000, respectively, compared to £115.000, £109.000, £108.000 and £98.000, respectively, for 2000. Additionally, the Board of Management of the Organisation approved the payment of the amounts of £8.000 and £3.000 to “ETHAL” and “ENA” respectively, for the year 2001. On the request of Minister of Education and Culture and the written consent of the four theatres, my Office carries out an annual audit for verifying that the subsidy is used for the purposes for which it was approved. The audit was not completed at the time of preparation of my Report. Part B 4.117.6 Administrative and Financial Regulations. As I stated in my previous Report, although a draft of the above Regulations has been prepared, its submission to the Council of Ministers is pending since 1982, because the relevant amendment of both the draft and section 19 of the Cyprus Theatrical Organisation Law No. 71/70, were not pursued by the Organisation, as recommended by the Attorney General. 4.117.7 Expenditure excess. In my previous Report, it was stated that there was an expenditure excess of £31.605 on Vote “Production and Promotion of Theatrical Performances” of the Budget for the year 2000, for which no supplementary Budget was submitted to the House of Representatives. The Chairman of the Board of Management informed me that a supplementary Budget will be submitted for covering the expenditure excess. 4.118 YOUTH BOARD Part A 4.118.1 Operating results (a) Revenue. The revenue of the Board for the year 2001, amounted to £999.656, compared to £968.098 for 2000. The revenue includes state subsidy amounting to £953.334, upon which the operation of the Board is based. It includes also the amount of £1.713, granted by the European Union for the programme “Youth for Europe” and the amount of £40.271 derived from the “Youth Card”. (b) Expenditure. The expenditure of the Board for 2001 amounted to £1.074.245, compared to £907.199 for 2000. The expenditure does not include the emoluments of the permanent government employees who have been seconded to the Board.

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4.118.2 “Youth Card”. The Council of Ministers on 28.11.95 assigned to the Youth Board the management of the “Youth Card”. The revenue from the “Youth Card” amounted to £40.271 and the corresponding expenditure to £25.673, compared to £18.162 and £29.146, respectively, for 2000. 4.118.3 Personnel. The Budget of the Board provides for 17 permanent posts, out of which 10 were filled by persons employed on contract basis, with total emoluments amounting to £91.800, compared to £81.791. It is noted that during the years two employees resigned and one employee was on leave without payment. Part B 4.118.4 Regulations. In my previous Reports it was stated that the preparation of Regulations, governing the various matters, relating to the structure, terms of service of the staff, and other matters, provided by sections 11 and 33 of Law 33(i) of 1994, is still pending. On the instructions of the Board of Management, draft Regulations were prepared by the Legal Adviser of the Board, governing the structure and the terms of service of the staff, which were submitted to the Ministry of Justice and Public Order, for further necessary action. 4.119 CYPRUS NEWS AGENCY Part A 4.119.1 Financial position (a) Operating results. The accounts showed a deficit of £82.302, compared to the surplus of £30.133 for 2000. The deficit is mainly due to the decrease of the state subsidy, as stated below. (b) Revenue. The revenue amounted to £426.815, compared to £513.201 for 2000. The revenue includes state subsidy amounting to £356.816 (£446.339 for 2000). It appears that the operation of the Agency depends to a great extent on the continuation of the financial assistance provided by Government. (c) Expenditure. The expenditure amounted to £509.117, compared to £483.068 for 2000, i.e. there was an increase of £26.049 or 5,4%, which is mainly due to the increase observed in the Votes ”Personal Emoluments” (£14.594), “Subscriptions” (£16.266) and “Payments to Contributors/Correspondents” (£7.159). 4.119.2 Delay in the approval of the Budget. The Budget for 2001 was approved by the Board of Management of the Agency on 19.9.2000, and by the Council of Ministers on 16.11.2000. The Budget was submitted to the House of Representatives on 24.11.2000 and was enacted to a Law on 25.1.2001. According to the Public Corporate Bodies (Approval of Budgets) Law, the Budget should have been submitted to the House of Representatives up to 30.9.2000. 4.119.3 Personnel. The Agency employed 14 persons on permanent posts and 9 contributors on casual basis, with three months contracts. The total emoluments amounted to £282.159, compared to £267.565 for 2000, i.e. there was an increase of £14.594 or 5,45% which is mainly due to the increase of expenditure for the employment of casual staff (£15.226). The personal emoluments include £20.615 for overtime work, (£15.834 for 2000) and the amount of £12.592 for contributions to the Medical Treatment and Welfare Funds (£23.494 for 2000). Additionally,

276 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the amount of £33.203 (£26.044 for 2000) was paid for the employment of contributors/ correspondents in Cyprus and abroad. 4.119.4 Staff pensions benefits. Although the Regulations for the operation of Pensions and Gratuities Scheme have been approved by the House of Representatives in November 2001, yet the operation of the Scheme is still pending. The Chairman of the Board of Management stated that, according to the advice given by the Treasury, the Regulations governing the operation of the Scheme should be amended, so as to permit the establishment of a reserve and the Agency should secure that the state subsidy will continue to be paid under the community legislation for public aid. 4.120 CYPRUS SPORTS ORGANISATION Part A 4.120.1 Delay in the preparation of accounts. The financial statements of the Organisation for the year 2001 were submitted for audit on 10.5.2002, instead of up to the end of February 2002. The Chairman of the Organisation informed me that the delay was due to the short staffing of the Accounts Section, after the early retirement of the Accountant, as well as the preparation and approval of the new scheme of service of the post of Accountant, the filling of which is in progress. 4.120.2 Financial position (a) Operating results. The Organisation showed a surplus of £3.165.194, compared to a deficit of £2.989.904 for 2000, i.e. there was an increase of £175.290, which is attributed to the increase of revenue and the decrease of expenditure, as shown below: (b) Revenue. The revenue of the Organisation amounted to £19.573.485, compared to £15.300.820 for 2000, i.e. there was an increase of £4.272.665 (28%), which is mainly due to the increase of state subsidy by £4.490.350 (31%). The revenue does not include state subsidy amounting to £392.164 (£577.357 for 2000) retained by the Ministry of Education and Culture for payment to the Police, in connection with the cost of policing of athletic events. (c) Expenditure. The expenditure of the Organisation amounted to £16.408.291, compared to £18.290.724 for 2000, i.e. there was a decrease of £1.882.433 (10%), which is mainly due to the reduction in expenditure for the construction and improvement of private athletic installations by £1.889.354 (33%) and in the subsidy by £494.469 (6%). Increases of expenditure were noted in personal emoluments by £84.010 (10%), in the operation of private and other athletic spaces by £111.835 and interests payable and depreciations. (d) Government guarantees. The loan which was received by the Organisation from the Central Cooperative Bank, the balance of which at 31.12.2001, was to £1,03 m., as well as the loan in stocks for £9,6 m. (nominal value £10 m. at 6,85%) are guaranteed by Government. (e) Current liabilities. At 31.12.2001 the current liabilities of the Organisation amounted to £1,26 m., compared to £2,24 m. for 2000, whereas the current assets were £2,73 m., compared to £1,93 m. for 2000, i.e. there was a working capital of £1,47 m., compared to the deficit of

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£0,31 m. for 2000. The improvement is attributed to the payment of additional state subsidy to athletic clubs amounting to £1,3 m., which was due at 31.12.2000, (f) Debtors. At 31.12.2001, the debtors amounted to £0,56 m. compared to £1,55 m. for 2000. The decrease in debtors is, mainly, attributed to the receipt of additional state subsidy of £1,3m., approved on 29.12.2000, which was received by the Organisation for payment to football athletic clubs. 4.120.3 Budget (a) Delay in the approval of Budget. According to the Public Corporate Bodies (Approval of Budgets) Laws, the Budget for 2001 should have been submitted to the House of Representatives up to 30.9.2000. The Organisation submitted the Budget to the Ministry of Education and Culture on 4.10.2000 and was laid before the House on 12.2.2001 and approved on 1.3.2001. (b) Budget excesses. Budget excesses were noted on various Votes, amounting to £107.902, which were not approved by the Minister of Education and Culture. The Chairman of the Organisation informed me that a statement of expenditure excesses has been prepared for approval by the Board of Management and submission to the Ministry of Education and Culture, which will be laid before the House of Representatives. It is noted that the approval of supplementary Budget, for covering the expenditure excesses of 2000, amounting to £428.444, is still pending. The relative bill is pending at the Law Office, where it was recently submitted by the Ministry of Education and Culture. 4.120.4 Personnel. (a) Salaries, allowances and employer’s contributions for permanent and casual employees. At 31.12.2001 the Organisation employed 32 permanent employees (out of 42 permanent posts) and 3 casuals. The expenditure for salaries, allowances, overtime and employer’s contributions to the various Funds was £780.198 Based on the above data, the average annual cost per employee was £22.291, compared to £19.907 for 2000. (b) Regular employees. At 31.12.2001 the Organisation employed also 36 regular employees, for a total expenditure of £299.750, which was allocated to the athletic spaces. (c) Other labour force. The Organisation is also charged annually with the amount of £17.930, representing allowances payable to 9 conservators/stewards of various sporting installations, most of them employed by School Committees. (d) Physical Training Teachers on contract. During the year the Organisation employed at various periods, under special agreement, 75 physical training teachers for the programme “Sports for All” for a total amount of £266.269. Another 10 physical training teachers were employed, under a special agreement, by National Guard for a total amount of £105.725. (e) Trainers and special coordinators. The Organisation paid the salaries of about 348 trainers, who were employed by Sports Clubs for the programme “National Scheme for the Support of Sports Development”. For the same programme allowances were also paid to 25 coordinators and to one administrative officer, which vary from £300 to £800 per month. (f) Agreement for termination of service and early retirement. After long discussions and consultations and the inclusion of a special provision in the Budget of the Organisation, the

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Board of Management decided to propose to four employees the signing of an agreement for the termination of their services and early retirement, against payment of the amount of £30.000, in addition to their pensions benefits, without taking into consideration of their age, service, post, e.t.c., for each one of them. The proposed agreements were accepted and signed on 27.3.2001. I pointed out that a criminal case was pending against the one of the above four employees, for abuse of power and for this reason, any decision of the Organisation should have been taken for this person after the trial of his case, which is still pending. Also, I pointed out that the service needs and the consequential operational problems of the Accounts Section, which will be observed after the retirement of the Accountant, were not taken into consideration, resulting to the purchase of his services during his retirement leave, for the amount of £6.800. Due to the non early completion of the procedure for the appointment of the new Accountant, the Organisation proceeded to the purchase of services, for the preparation and submission of the financial statements for 2001, which is an indication that the services of the former Accountant were needed until his replacement. The Chairman of the Organisation informed me that the retirements were made for the interest of the Organisation, as shown by the financial study approved by the Ministry of Finance, the Council of Ministers and the House of Representatives. With regard to the criminal case, which is pending against the one of the above employees, there was an oral legal advice, by the Legal Adviser of the Organisation, that this matter could not be combined with the early retirement of the employee. 4.120.5 Internal control. The Organisation has not yet adopted a suitable system of internal control to cover both revenue and expenditure, resulting to serious omissions and weaknesses, in the financial administration, as well as in the implementation of the decisions of the Board of Management and the provisions of Laws and relevant Regulations. In view of these weaknesses, I was not able to verify the correctness of certain payments and therefore, my report on the financial statements for 2001, was qualified. The procedure for the purchase of services for internal control, which was expected to strengthen and improve the system of internal control, has not yet been completed, although this started long time ago. Additionally, the incomplete computerisation of the Accounts Section, does not contribute to the prompt and proper performance of the accounting transactions, as well as to the utilisation of the accounting records for better financial management. The Chairman of the Organisation informed me that the matter of purchase of services for internal control and for the employment of a special consultant for the computerisation, are at the final stage. The following are some examples of insufficient internal control: (a) The unsatisfactory control of subsidies payable to associations and clubs. (b) The unsatisfactory documentation of payment vouchers. (c) The non-keeping or the existence of weaknesses in the keeping of suitable registers, such as for tenders, property, maintenance of projects and library. (d) The inadequate control on salaries payable to the staff employed by special agreements. (e) The insufficient system of payment of allowances to ΕΣΥΑΑ.

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(f) The inadequate control on salaries payable to physical training teachers for the programme “Sports for All” and their failure to lodge a guarantee. 4.120.6 Tender matters and agreements (a) Makarios Athletic Centre – General formation of the surrounding area. From the audit of the tenders for above project, carrying out for purposes of verification of the final account, the following serious observations were observed: (i) The tender box was opened 6 days after the submission of tenders. (ii) The tender proposal and the bill of quantities, submitted by the lower tenderer, were signed only by the Chairman, instead of being signed also by the Director General of the Organisation. (iii) In the bill of quantities submitted by the lower tenderer there were numerous corrections of minor amounts, as well as of the total amount of the tender. (iv) Despite the fact that the legal adviser of the Organisation expressed the view that the two lower tenderers were out of specifications and the cancellation and invitation of new tenders should have been made, the Organisation assigned the award to the lower tenderer. Copy of my relative letter was submitted to the Attorney General for taking any necessary action. (b) Makarios Athletic Centre – General formation of area – Final Account. From a test examination of the final contract account of the above project, carried out in November 2001, it was revealed that the supervising Consultants had not evaluated the total delays of the project, with the result the justifying delay and the delay for which the contractor was responsible as well as the respective contractual compensations not to be calculated. It was also observed that the discount allowed percentage for the various works, which were included in the final account, was 9,16% instead of 12,21%. Finally, my Office suggested some corrections to be made in the bills of quantities of works executed. The Director General of the Organisation informed me, in February 2002, that after the evaluation of all parameters of the contract agreement, it was decided, between the employer and the contractor, not to raise any claims by the two sides, including the delays. With regard to the other observations, these were accepted and a revised final account was prepared. (c) Subsidy paid by the Organisation for the upgrading of stadium. On the request from the Organisation, my Office examined whether the amounts paid by the Organisation were responding to the actual works. From the audit, it was revealed that the value of various works– metallic seats, lighting of subsidiary stadium, air condition units – was much lower of the actual amount paid by the Organisation. The Director General of the Organisation informed me that as a result of my observations the Committee of Finance and Projects of the Organisation, decided to recalculate all the works which were subsidised by the Organisation and in cases of overpayments, the amounts overpaid to be recovered by the Organisation. (d) Limassol Closed Athletic Centre – Project budgeted expenditure. After the submission of tenders for the construction of the project, my Office observed that the lower tender was exceeding the initial budgeted expenditure for the project (£4.500.000), by £2.460.000 (55%) and pointed out that the proper assessment of cost was not made by the Organisation and the consultants, so as to restrict the expenditure within the Budget limits. It was also observed that

280 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the cooperation between the consultants and the employer during the design stage was not continuous and consistent so as to secure the accuracy of the cost. The Organisation expressed the view that, at this stage, it was not possible to effect any changes in the designs, and efforts will be made for the restriction of expenditure, where possible. Finally, the Organisation decided for the award of the tender to the lower tenderer, on the basis of relative evaluations made by the consultants of the Organisation, because the tender price was considered competitive and favourable. (e) Tender No. 5/2001 – Installation of a closed TV circuit (CCTV) in the new ΓΣΠ stadium, in Nicosia. With regard to the above tender, which was assigned on 12.6.2001 for the amount of £148.517,60, the following were observed. (i) While 10 tenders were submitted, only 8 were opened on 20.2.2001. The other two tenders were left in the safe of the Director General and were opened subsequently. (ii) The agreement signed by the Organisation and the successful tenderer is not bearing the date and the signatures of witnesses. Also, the full names are not shown under the signatures “for employer” and “for sub contractor”. The Organisation informed me that the above is due to the fact that the tender box of the Organisation was small and could not accept bulky tenders. For this matter a minute was prepared and the Chairman of the Organisation was informed accordingly. The Organisation has the view that such problems will be eliminated after the installation of a bigger tender box. (f) Agreements for the supply/installation of equipment for the suppression of violence in stadiums. As I stated in my Report for 2000, the amount of £200.000, relating to agreements, which were signed, in connection with the issue of tickets in five stadiums and the supply of electronic computers/printers and the follow up of the system from the Central Offices of the Organisation was paid without these being operated and tested sufficiently. In June 2001, the Chairman of the Organisation informed me that the payment of the full amount of the agreement was made because the systems were operating fully and without problems. Recently, it was, however, observed that the system of issuing tickets was not operating, with the exception of a trial operation in one of the five stadiums and the Organisation considers that its operation/application is not possible, under the present circumstances. It is noted that the amount of £40.000 was also paid for the maintenance of above equipment for a period of five years. (g) Tender No. Λ/2001 for the supply of athletic uniforms, valued at £3.446 for ΕΣΥΑΑ. The invitation of tenders presents the following omissions and weaknesses: - It is not dated, with the result the commencement date for the submission of tenders not to be known. - The time of expiration of the period of submission of tenders is not given, but only the respective date. - The period or date for the delivery of uniforms is not specified. - The submission of specimens was not asked, although it was ascertained, from the relative correspondence, that such specimens were submitted.

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- It was asked for the delivery of the tenders to the Offices of ΕΣΥΑΑ, instead of being placed in the tender box of the Organisation, as provided by Tenders Regulations. There was no decision in the minutes for the delivery of tenders to the Offices of ΕΣΥΑΑ. - The tenders were not published, but were invited through telephone, contrary to the Tenders Regulations of the Organisation. - The tenders were received in closed envelopes, were stamped on 25.4.2001 and were opened on 26.4.2001, although the submission period expired on 12.4.2001. 4.120.7 National Scheme for the support of Sports Development (ΕΣΥΑΑ) (a) The approved budgeted expenditure for 2001, for the above Scheme, amounted to £1.200.000, compared to £1.350.000 for 2000. The actual expenditure for 2001 amounted to £1.165.511. So far no account was submitted for the operation of the Scheme in 2001. (b) The employment of staff by the Scheme, seconded from the Organisation or Government Departments/Services, is continued. As I stated in my previous Reports, it is possible for the above staff to neglect their official duties in the Public, due to their additional duties and the considerable volume of work with the Scheme. It also appears that no employment permit has been secured for Government employees. (c) The employment of 25 coordinators/scientific contributors and the Clerk of the Scheme is contrary to the Casual Employees Appointments in the Public Corporate Bodies Service Law No. 169 of 1985. The Chairman of the Organisation stated that the purchase of specialised services, from interested persons, will be made on the basis of the method of “expression of interest”, according to the relative decision of the Board of Management. (d) Deductions and contributions to Social Insurance Fund and Defence Fund. From the salaries of trainers, special coordinators and other personnel payable by the Organisation, within the framework of the programme ΕΣΥΑΑ, no deductions or contributions are made to above Funds, contrary to the provisions of Laws and Regulations. The Organisation holds the view that these persons are not considered as employees of the Organisation, since they are engaged by Clubs and Associations, irrespective of the fact that their salaries are paid by the Organisation. A tax declaration has been submitted to the Department of Inland Revenue for the salaries paid to coordinators. It is also noted that the Organisation does not pay the social insurance contributions for the Head of Youth Support Service and the Clerk, despite the fact that the District Labour and Social Insurance Office has pointed out that social insurance contributions should be paid for the above persons, after an examination was carried out by the above Office for the year 2000. This practice is followed, because the salaries of above persons are paid by the Organisation through the Swimming Associations and Badminton, although their duties are not related to the above Associations. (e) Employment of coordinators and trainers. (i) Trainers’ agreements. With the exception of football, the necessary experience of trainers is not substantiated although this is one of the criteria required for joining the ΕΣΥΑΑ. It was also observed that there are no supporting records for all the trainers, about their success in the examinations of the respective school, which are required for

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their employment in ΕΣΥΑΑ and for fixing their salary. The Chairman of the Organisation agreed and stated that the Organisation will respond positively. (ii) Salaries of trainers who undertook two teams of the same club. In such cases, the trainers are drawing all the amount, specified by the existing criteria, plus 50% of the amount or £100 for the second team, provided the training of the two teams is carried simultaneously. I pointed out that I was not able to verify whether the above are based on written decisions. The Chairman of the Organisation stated that their salary will be specified as from this year. (iii) Coordinators employment agreements. The audit revealed that the coordinators employment agreements are not renewed. The agreements which were signed for 1998- 1999 were valid only for this period and not for the following periods. The Chairman of the Organisation agreed with above and stated that the Organisation will respond positively. (f) Evaluation of ΕΣΥΑΑ. It appears that no evaluation is made by the Organisation of ΕΣΥΑΑ, either in total or by sport, about the attainment of its objectives, so that, in cooperation with ΕΣΥΑΑ, to define the specific objectives, for each year, and the appropriate measures to be taken for the solution of existing problems and difficulties. The Chairman of the Organisation stated that the objectives of ΕΣΥΑΑ were the enhancement of active athletic potentiality of Cyprus, something which has been achieved to a great extent. Indeed, there are problems which must be solved by specialists and every effort is made for taking corrective measures. Part B 4.120.8 Development Budget. The capital expenditure of the Organisation together with subsidies given for the construction and improvement of non-owned sports facilities are presented under the heading “Creation and Improvement of Sports Facilities”, without giving an analysis of the projects planned to be executed, either in the Budget or in the explanatory memorandum. For purposes of transparency and better presentation and follow up, I recommended that the Development Budget be analysed to expenditure for owned and non owned facilities giving analysis of each expenditure either in the Budget or in the explanatory memorandum. It is implied that the total expenditure in the explanatory memorandum must be equal to the approved budgeted amount. My recommendation has not yet been implemented (2002 Budget). The Ministry of Finance is in agreement with this matter. 4.120.9 Management of self-owned and other sports facilities by the Organisation. From the management of the above, there was a net deficit of £670.699, compared to £586.110 for 2000, i.e. there was an increase of £84.589 or 14%. All the sports facilities were operating at a loss. The total revenue showed an increase of 45% and the expenditure 17%. 4.120.10 Olympic Museum. The Museum, for which the amount of £325.500 was expended by the Organisation, for its construction, has not yet been utilized. The Cyprus Olympic Committee, which undertook the operation of the Museum since 1996, proceeded to the appointment of a Museum Officer, for whom, the greater part of his salary is paid by the Organisation. The Chairman of the Organisation informed me that the Museum is coming under the jurisdiction of the Organisation and not of Cyprus Olympic Committee, and consultations are made with the Committee for the operation of the Museum.

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4.120.11 Physical stock taking of assets. It was again observed that no physical stock taking was carried out at the end of the year of the assets at the owned sports facilities. I pointed out that the persons in charge of every sports facility should verify the assets, at least once every year, and prepare a physical stock taking certificate, which should be submitted to the Organisation for verifying whether the results of stock taking is in agreement with those of the Organisation. 4.120.12 Insurance premiums. The existing insurance agreements do not cover a significant part of the value of the assets. The Chairman of the Organisation informed me that a valuation of all the sports facilities will be carried out by an insurer and the Organisation will proceed with the insurance of all sports facilities, which will cover their actual value. 4.121 CYPRUS LAND DEVELOPMENT CORPORATION Part A 4.121.1 Financial position - Operating results. The accounts of the Corporation showed a surplus of £321.064, compared to £459.967 for 2000 (the surplus disclosed in 2000 was for £507.767). The difference is due to the correction of amounts of previous years, relating to interests and repayment of stock securities. 4.121.2 Personnel. The Corporation employed 19 persons. Their total emoluments, including the contributions to the various Funds and to Pensions Scheme, amounted to £388.463, excluding the deficient contribution to Pensions Scheme, amounting to £75.000. On the basis of the above, the annual average cost per employee was £20.445, compared to £21.294 for 2000. 4.121.3 Cash position. While for 2001, the estimated collections amounted to £13.178.500, the actual, including the collections from the issue of stock securities and the state subsidy, amounted to £4.721.498, i.e. there was a decrease of £8.457.002. The main reasons for the decrease are the non collection of installments in arrear due by various buyers, the non disposal of all housing units and the non collection of all the state subsidy for the housing of low income earners, due to the delay observed in the approval of the Scheme by the Council of Ministers. 4.121.4 Unspent amounts of Development Budget. The following statement presents the unspent amounts for projects included in the Development Budget for the Years 1998-2001. Year Budget Actual Unspent Deviation expenditure amounts £ £ £ % 1998 8.035.000 3.055.417 4.979.583 61,97 1999 6.721.000 3.243.369 3.477.631 51,74 2000 5.159.000 1.460.036 3.692.964 71,58 2001 4.795.500 1.934.313 2.861.187 59,67 The main reason for the non spending of budgeted expenditure for the construction of projects are the delay in securing the relative building permits and the fluctuations in the demand of housing units. 4.121.5 Housing units disposed up to 31.12.2001. Since the date of establishment of the Corporation until to date, 3.094 housing units (building plots, houses and flats) were disposed.

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During 2001, 164 units were completed, all of which were disposed (34 in 2000 and 131 in 2001).

4.121.6 Instalments in arrear. At 31.12.2001, the total instalments in arrear, due by various buyers, amounted to £500.552. Out of this amount £54.850 represents cases of long delays, which have been referred to the legal advisers of the Corporation and in some cases legal action has been taken for their collection. At the same date, instalments in arrear, amounting to £163.889, were also due by hire purchasers of housing units at “Zenon” Larnaka, the management of which was assigned to the Corporation. The responsibility for the collection of above amount rests with the Corporation, pursuant to a Council of Ministers decision. During 2001, the Corporation proceeded to the termination of agreements, relating to hire purchasers who were not responding to their obligations and decided to file lawsuits for the repossession of the housing units. 4.121.7 Utilization of land for development. At 31.12.2001, the value of land for development was £5.354.985. The amount of £1.587.776 relates to the cost of financing of the land and the amount of £2.147.450 relates to various pieces of land, which cannot be developed for the time being, either because the land is not withing the housing zones or is under acquisition by third parties or because of other practical problems. The value of land therefore, which the Corporation can immediately develop is £1.619.757. The Corporation attributes the delay to the involvement of many Government Services for securing the required permits for land development. 4.121.8 Construction of road works at Frenaros. From a site visit, carried out in July 2001, considerable delay was observed in the progress of works, which is attributed to the contractor. It was also observed that the contractor failed to submit the programme of work and the Engineer of the project had not informed the contractor in writing for the delay observed and for taking measures to complete the project promptly. The Director General of the Corporation informed me that the contractor was requested to submit the time schedule for the completion of project. He also stated that with the cooperation of the contractor and the Local Authority the various problems were solved. 4.121.9 Insurance of houses sold and repaid by monthly installments. As it was stated in my previous Reports, no verification is carried out by the Corporation for ensuring that the houses, which are repaid by monthly instalments, are insured by the buyers as provided by the relative agreement. 4.121.10 Scheme for the housing of families with low income. Pursuant to the Council of Ministers decision of 19.6.2001, approval was given for the introduction of the new government Scheme for the housing of families with low income, the implementation of which was assigned to the Corporation. The financing of the purchase of land and of the construction of houses/flats, which will be disposed to the buyers according to the Scheme will be undertaken by the Government, according to the progress of works. For this purpose, a provision of £6 m. was made in the Budget of the Corporation for 2001. A relative provision was also included in the Budget for the year 2002. For the commencement of the Scheme, the amount of £518.500 was paid by Government. Until 31.12.2001, the amount of £167.250 was paid as subsidy to 24 buyers of houses/flats, who were approved under the Scheme. The amount of £380.000 was expended for the purchase of land and the construction of housing units, to be disposed under the Scheme.

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The implementation of the Scheme is in progress and the construction of various housing units is continued. As I was informed, the amount of £1,75 m. was paid by Government recently, for the financing of the Scheme, and it is expected that this amount will be increased to £3 m. by the end of 2002. 4.121.11 Establishment of sinking fund investment account for the repayment of stock securities of 3rd issue. Pursuant to the Council of Ministers decision of 6.10.2000, approval was given for the issue and disposal by the Corporation of stock securities valued at £3 m., for which the Corporation should lodge, to a sinking fund investment account, sufficient amounts for their repayment, on their expiration, in December 2008. Although, a decision was taken, on 30.1.2001, by the Board of the Corporation, for the lodgement of the amount of £350.000 to the sinking fund investment account, at the end of each year, yet until the day of my audit, no amount has been lodged. In the same Board’s decision, it is stated that the Corporation, may withdraw amounts from the sinking fund investment account, which will be refunded with interest, when the liquidity of the Corporation, permits to do so. I expressed the view that the Board of Management of the Corporation cannot decide for the use of the sinking fund investment account for purposes other than those for which it was established. The Corporation holds the view that there is sufficient liquidity for the needs of this account, although a separate account is not kept. 4.121.12 Establishment of a Staff Pension Fund. With a view to covering the financial obligations of the Corporation, for the payment of pensions to the staff, the Board of Management of the Corporation decided for the establishment of a Pensions Fund, in which all necessary amounts to be lodged by the Corporation. According to an actuarial study, carried out in 1999, the obligations of the Corporation for the annual contribution on salaries will be £44.500, and the accumulated deficient contribution up to July 2001, is about £730.000. Additionally, the obligation of the Corporation for the accumulated deficient contributions of the staff to the Fund, for purposes of transfer of pensions, amounted to about £20.000, by the end of December 2001. On 18.4.02, the Board decided for the lodgement of the amount of £10.000 to a bank account, against the above obligations. The deficient contributions of the Corporation to the Pensions Scheme, according to the actuarial study, amounted to £172.000, approximately, on 1.1.1999, plus interest. For covering the deficient contributions, an annual provision of £75.000 was made in the accounts for the years 20001 and 2000. The Corporation holds the view that, despite the non keeping of a separate account for the Fund, consideration is made of the required liquidity, so as to meet its obligations. 4.122 CYPRUS TOURISM ORGANISATION Part A 4.122.1 Preparation of accounts. According to the Regulations the accounts of the Organisation for 2001, should have been prepared up to 30.4.2002, whereas these were prepared, with delay, in June 2002.

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4.122.2 Financial position (a) Operating results. The accounts showed a surplus of £1.099.355, compared to a deficit of £6.326.312 for 2000, i.e. there was an increase of £7.425.667, which is attributed to the increase of revenue, as stated below. (b) Revenue. The revenue of the Organisation for 2001, amounted to £22.076.926, compared to £10.945.698 for 2000, i.e. there was an increase of £11.131.228 or 101,7%, which is, mainly, attributed to the increase of collections, from the 3% on the accounts of hotels, recreation centers and restaurants, by £7.732.240, reinstated as from 1.7.2000, as well as to state subsidy of £3 m. received in 2001. (c) Expenditure. The expenditure of the Organisation for 2001 amounted to £20.977.571, compared to £17.272.010 for 2000, i.e. there was an increase of £3.705.561 or 21,5%, which is mainly attributed to the increase of expenditure for “Promotion and Publicity” (£3.101.105), “Organisation and Development of Tourism” (£156.512) and “Other Expenditure” (£248.424). (d) Government guarantees. At 31.12.2001, the government guarantees for the loan received by the Organisation, amounted to £1,83 m. 4.122.3 Delay in the approval of Budget. According to the Public Corporate Bodies (Approval of Budgets) Law, the Budget of the Organisation should have been submitted to the House of Representatives until 30.9.2000, whereas this was submitted on 7.2.2001, and was enacted to a Law (No. 15(II)/2001) on 22.2.2001 and was published on 2.3.2001. The Chairman of the Board of Management informed me that the Budget was approved by the Board on 12.9.2000 and was submitted to the Minister of Commerce, Industry and Tourism on 13.9.2000. On the instructions of the Minister, the Budget was amended by the Board, and was submitted to the Ministry on 8.12.2000, with the result the Budget to be submitted with delay to the Council of Ministers and the House of Representatives. 4.122.4 Execution of Budget. Considerable amounts remained unspent, under Chapter 5 of the Budget of the Organisation, for Organisation and Development of Tourism. The Chairman of the Board stated that the main reason for the non implementation of several projects is the absence of interest from Local Authorities or/and the delay observed in the planning of projects and activities which may be subsidized, so as to utilize the available funds for subsidies, as well as to the transfer of studies to the following year, due to volume of work and the non acceptance of the methodology proposed by the contributors of the Organisation (University of Cyprus). 4.122.5 Personnel. The Organisation employed 210 persons on permanent posts and one on contract (211 persons and one on contract at 31.12.2000), with total emoluments of £4.388.662, compared to £4.397.588 for 2000. As it appears, there was a decrease of £8.926, in the personal emoluments, compared to 2000, despite the increases on basic salaries and allowances of £172.569. A decrease has been noted in the contributions to Pensions Schemes of £162.975, compared to 2000 (the contributions for 2000 included the amount of £190.214 for covering a deficit for previous years). Also there was a decrease of overtime and other allowances by £18.520. The personal emoluments include £724.687, representing the contributions of the Organisation to the Pensions and Provident Funds and £369.993 for the contributions of the Organisation to Social Insurance Fund, Redundancy Fund etc.

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Additionally, the amount of £423.316 was paid by the Organisation for medical treatment, insurance and indirect staff benefits. 4.122.6 World advertising campaign of C.T.O. for the years 2000-2001. (a) Reward of advertising firm. According to the terms of the agreement, the Organisation should have pay to this firm, for the first year, 7%, cooperation charges, on the amount of £4 m., i.e. £280.000, irrespective of the cost of advertising campaign. The Organisation asked for the change of the commencement and completion dates of the cooperation agreement, from 20.1.2000 – 30.12.2001 to 1.5.2000 – 30.4.2002 and the firm accepted the change but at the same time submitted claims for the payment of the amount of Stg £84.450, for expenses and services rendered up to 1.5.2000. The Organisation agreed for the payment of the amount of Stg. £66.406 for full settlement of the claims, although the summer advertising campaign for 2000, was not implemented. The total cost of the advertising campaign, implemented by the advertising firm, during the period 1.5.2000 – 3.4.2001, amounted to £3.906.188. According to the provisions of the relevant agreement, the Organisation will pay charges to the advertising firm at 7% on the amount of £4 m. and not on the actual cost of advertising campaign for this period, amounting to £3.906.188. Consequently, the Organisation will pay the amount of £280.000, which includes charges on the amount of £93.812 (£4.000.000 - £3.906.188), amounting to £6.567. The Chairman of the Board of Management informed me that the cost of advertising campaign for the period 1.5.2001 – 30.4.2002 is about £6,3 m., on which charges of 5% will be paid by the Organisation, according to the relevant agreement. (b) Court decision for the selection of advertising firm for the years 2000–2001. Following a request by the Parliamentary Public Accounts Committee, and the submission to my Office, of written reports by unsuccessful tenderers, a special investigation was carried out by my Office, for the purpose of the evaluation of the procedure followed by the Organisation, until the final selection of the advertising firm, which was made, on 5.10.99, by the Board of Management. From the above special investigation, deviations from the appropriate procedures were observed, regarding the publication, delivery, keeping, opening, compliance with terms and substantiation of tender evaluation. The Board of Management of the Organisation, requested the legal advisers to study my report and to express their opinion, as to whether the tender was correctly assigned to the advertising firm. The legal advisers expressed the view that the tender award should not be revoked. With regard to the lawsuits filed by the unsuccessful tenderers, the legal advisers expressed the opinion that the court should be left to decide, as to whether the award of tender was properly made and was in agreement with tender specifications. In view of the above the Board of Management decided on 9.12.99 for the non-revocation of tender. The Supreme Court, decided on 31.12.2001, for the annulment of the decision of the Organisation to award the tender to the specific advertising firm, for the world advertising campaign, for the years 2000 – 2001, on the grounds that the procedures governing the submission and evaluation of tenders were not followed. Following the about decision of the Supreme Court, two recourses were filed against the Organisation by the successful tenderers, under which the payment of compensations amounting to over £1.350.000 were claimed. The Organisation decided to continue the cooperation with above advertising firm until 30.4.2002, date of expiration of the agreement, after taking into consideration the above court decision and the legal advice, that the agreement

288 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 between the Organisation and the advertising firm constitutes a contractual relation, which was not cancelled under the above decision. 4.122.7 Selection of new advertising firm for the years 2002-2003. On 15.1.2002, the Board of Management decided for the non renewal of the agreement with the advertising firm, which was due to expire on 30.4.2002, and new tender to be invited. On 9.7.2002 and 23.7.2002, the tender documents for the selection of the new advertising firm for a period of two years, were approved by the Board of Management and on 31.7.2002, tenders were invited, for submission up to 2.9.2002. Subsequently, the Organisation decided for the extension of period of submission of tenders, until 11.9.2002, after complaints were raised by advertising firms about the period of submission of tenders from 31.7.2002 until 2.9.2002, on the grounds that this summer period was not sufficient for the preparation and submission of tenders. In view of the delay observed in the preparation and invitation of tenders and the time needed for their evaluation, it seems that there is no ample time for the implementation of the winter advertising campaign, for the period 2002/2003 by the new advertising firm, which will be selected. I understand that this problem was identified by the Organisation, which will undertake alone the implementation of the above campaign, which will include, basically, advertisements in professional papers and of general use as well as in television. 4.122.8 Tenders for the purchase of space and time (Media Buying) for the advertising campaign of “Summer 2002”. The above tenders were invited on 25.10.2001, with last submission date 13.11.2001, and the award was made on 27.11.2001 and 4.12.2001. The response from interested tenders was limited. Specifically, no tenders were submitted for the countries Russia, Oukrania and Lefkorossia and new tenders were invited, while for Germany, Tsehia and Hungary only one tender (for each country) was submitted, and the award was made, despite the previous Board’s decision that, unless two tenders are submitted for each country, at least, no award will be made. As it appears, the limited response is due to the non-prompt invitation of tenders. In view of this I recommended to the Organisation to take the following action: (i) The invitation of tenders should be made promptly, so that the prospective tenderers to have ample time to secure the Media Buying space and time in each country. (ii) The simplification of the terms of tenders, where this is possible and within the Financial Regulations of the Organisation, so that more interest to be shown by prospective tenderers. 4.122.9 Tenders for the construction, installation and decoration of pavilions of the Organisation at International Tourist Fairs. The terms for the invitation of above tenders were approved by the Board of Management, on 4.5.2001, were supplemented on 28.8.2001 and the invitation of tenders was made on 28.9.2001 and the last date of submission was 29.10.2001. (a) Due to the delay observed for the approval of the terms and the invitation of tenders, the award was made on 6.12.2001, i.e. few weeks before the commencement of the fairs for 2002. Furthermore, it was not possible to include in the tenders the fairs which were organized by the end of 2001.

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(b) Pursuant to the terms of the tenders, the tenderers were allowed to submit tenders either for all the fairs or for a group of countries or for a specific fair, for which they were interested, giving prices for each fair separately. At the same time the Organisation had the right to deduct from each tender up to 25% of the proposed number of fairs and to assign the award to another tenderer. In view of the fact that the tenders submitted provided for various choices/groups of fairs, it was not possible to make comparison by group for the award of tender. Consequently, it was not possible for the Organisation to exploit the maximum benefit for possible discounts or lower prices, resulting from the grouping. I understand that the above weaknesses were also identified by the Organisation and the terms of the tenders were modified accordingly, after a decision was taken by the Board on 23.7.2002. 4.122.10 Licences for the operation of hotels. At 31.12.2001, the amount of £20.707,87 wad due to the Organisation, representing licences fees for the operation of hotels, relating to the period 1993-2001. The above amount includes arrears due by hotels, for which illegal extensions/alterations were made, with the result no licences to be issued by the Organisation, and consequently, they operate illegally. An indicative case is that of a hotel in Limassol, which is operating since 1993 without licence and is indebted for the amount of £5.152, representing licences fees. 4.122.11 Delay in the submission of declarations and the collection of 3%. According to the records kept by the Organisation, a great number of hotels, restaurants and recreation centers have not submitted the relative declarations, resulting to the delay in the collection of 3%. It is noted that the accounts for 2001 include debtors, amounting to £3.222.194, representing the 3%, additional surcharge, fines and interests, which were calculated on the basis of the collections made in 2002, without including the amounts, which may be due by recreation centers and hotels, which have not submitted declarations for the calculation of 3% on their takings. The Chairman of the Board of Management informed me that legal measures are taken against the enterprises, which do not submit the declaration for their takings or/and do not pay the 3%, together with respective charges, with satisfactory results, although this procedure is time consuming. 4.122.12 Spot examination. For the verification of the accuracy of declarations, submitted by enterprising persons, in relation to the calculation of 3% charge, it is necessary for a spot examination of the relative records, which according to the relevant legislation, each enterprising person is obliged to keep and present for examination. As from 1.7.2000, date of imposition of the 3% charge, until the date of my audit, no spot examination was carried out and I suggested that such examinations should be carried out the soonest possible. The Chairman of the Board of Management informed me that this omission is attributed exclusively to the insufficient staffing of the Accounts Section. 4.122.13 Use and exploitation of Larnaka Marina premises. The licence for the operation of Larnaka Marina premises expired in 1997 and the former licensee has not yet delivered to the Organization the free possession of the premises. The Organisation suggested to the former licensee the signing of a new agreement but the latter refused to do so, without any measures taken against him. It has to be noted that after the expiration of the relevant agreement, the above former licensee proceeded to extensions/renewals in the existing premises, for which an

290 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 application was submitted, on 5.1.2000, in the name of the Organisation, for securing a building permit. With regard to the other four cases, in which lawsuits were filed against the former licencees, there was an out of court settlement. Part B 4.122.14 Staff medical treatment. As I stated in my previous Reports, the staff of the Organisation enjoys the same medical treatment, which is provided to civil servants, with the payment to the Ministry of Health of the specified fees. In addition a Supplementary Medical Treatment Scheme was established with a contribution of 3,85% by the Organisation, on the gross emoluments. The total cost for the staff medical treatment for 2001, for the above two Schemes, amounted to £270.705 (£246.919 for 2000). On 28.4.99 the Board of Management of the Organisation decided to cooperative with an insurance company for covering the staff medical treatment, after invitation of tenders. I pointed out, once again, that before the completion of the whole procedure, a study should be carried out for ascertaining whether the proposed cooperation with the insurance company is financially favourable, by comparing the insurance premiums with the average annual cost of the existing Medical Treatment Scheme. The Chairman of the Board of Management of the Organisation informed me that the terms of tenders have been prepared, but before the submission of the matter to the Board for final decision this will be discussed with the Ministry of Health, for ascertaining whether the specified fee for each employee may be reduced, for the reason that it includes the cost of services rendered through the Supplementary Medical Treatment Scheme of C.T.O. staff. 4.122.15 Use and exploitation of the Anchorage at Larnaka Marina. In my Report for 1998, I stated that the tender for the use and exploitation of the Anchorage for the period 1.1.98 – 31.12.99, which was assigned by the Board of Management to a company, was not possible to be implemented, due to the refusal of the former licensee to delivery free possession and use of the Anchorage. The new licensee was using and exploiting the Anchorage since March 1998, while the former licensee continued to occupy the premises / office. After the expiration of the agreement, on 31.12.99, the new licencee delivered to the Organisation the free possession and use of the Anchorage, while the payment of the amount of £24.508, representing licence fees for the operation of the Anchorage, was still pending and for the collection of this amount a lawsuit was filed by the Organisation. The first former licencee proposed an out of court settlement of all cases pending before the court, but his proposal was not accepted by the Board of Management, at the meeting of 22.11.99. On the advice of the legal adviser of the Organisation, the Board of Management decided, in June 2000, for the invitation of tenders for the use and exploitation of the Anchorage, as well as for the exclusion of the two former licencees to participate in the tenders of the Organisation, for a period of one year, due to their failure to comply with the terms of their agreements. For the above tenders, which expired on 2.8.2000, there was no interest and the Organisation invited new tenders, expiring on 20.9.2000, but again no interest was shown. The Board of Management decided, on 4.12.2000, not to invite new tenders.

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It is noted that the Organisation informed the owners of boats that, as from 1.1.2000, any company, which provides services for handling up, launching, transport and support of boats, may use the Anchorage, if requested by the owners of the boats and a permission is granted by the administration of Larnaka Marina. The adjudgement of all pending cases, regarding the Anchorage, is continued. 4.123 AGRICULTURAL INSURANCE ORGANISATION Part A 4.123.1 Financial position. (a) Operating results. The accounts showed a surplus of £608.357, compared to the deficit of £1.988.279 for 2000. (b) Revenue. The revenue amounted to £4.312.854, compared to £13.697.757 for 2000. The decrease of £9.384.903 is attributed mainly to the reduced government subsidy. (c) Expenditure. The expenditure amounted to £3.704.497, compared to £15.686.036 for 2000. The increase of £11.981.539 is mainly attributed to the payment of reduced compensations, due to the lower damages caused to producers, as well as to the non payment of “ex gratia” financial assistance to them, by Government, through the Organisation, as was made in previous years. (d) Compensations. The compensations, which were paid in 2002, amounted to £2.508.817, compared to £7.777.345 for 2000. Also, during the years 2001 and 2000 additional financial assistance was paid, amounting to £199 and £6.575.463, respectively. 4.123.2 Personnel. The Organisation employed 37 persons and the expenditure for salaries and employer΄s contributions to the various Funds was £912.843, compared to £913.720 for the previous years. The cost of employment of casual staff amounted to £73.497, compared to £166.154 for 2000. 4.123.3 Guaranteed loans. The Government paid to the Central Cooperative Bank, through the Organisation, the amount of £6,2 m., representing instalments of guaranteed loans, received by the Organisation. 4.123.4 Insurance premiums in arrear. The insurance premiums in arrear at 31.12.2001 amounted to £332.195, compared to £390.212 for 2000. Up to 30.6.2002 insurance premiums in arrear amounting to £109.500 were collected and I suggested that measures should be taken for the collection of the remaining arrears, and all amounts, which cannot be collected, must be investigated and written off. 4.123.5 Economic viability of the Organisation. At 31.12.2001 the reserves amounted to £5,7 m., after the Organisation settled most of its liabilities for compensations to producers for damages suffered in 2001. Despite the increase of government subsidy since 1.1.98 from 75% to 100% on the insurance premiums, pursuant to a Council of Ministers decision, it seems that its sources of income will continue to be limited and the continuation of its operation depends to a great extent, on government support. For the economic viability of the Organisation an actuarial study was carried out by a foreign consultant, under which the relative bill and amended Regulations have been prepared, which were submitted to the House of Representatives, and provide, inter alia, the increase of insurance premiums, which will be based on the anticipated production and will fluctuate, with an increase from 3% to 4% for cereals and forage and potatoes.

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4.123.6 Internal control system. I pointed out the need for the assessment and evaluation of all internal control procedures, which must be applied in each case, especially in the field of evaluations/compensations and at the same time, for the extension and improvement of the various systems and the preparation of suitable programmes of work, which will cover all the activities of the Organisation. On the basis of the study for human resources, carried out in 2001, a decision was taken for the preparation of an internal control manual, for each sector of activity, separately. The confirmation of the task of each insured person will be made in cooperation with the Department of Agriculture, which recently, is preparing new or improved registers for cultivations/producers. 4.124 CYPRUS DAIRY INDUSTRY ORGANISATION Part A 4.124.1 Financial position. The Organisation showed a deficit of £556.064 for the year 2001, compared to a surplus of £227.823 for 2000. The deficit is, mainly, due to the following reasons: (a) The payment to the cow milk producers on the basis of the quality of milk, which was improved during 2001, and the collection of the value of milk, on the basis of quality, only from the cheese-makers, since the value of the milk sold to milk-bottlers is on a fixed basis. (b) The losses arising from the distribution of goad milk in Pafos District, which were increased to £234.826, compared to £157.060 for 2000. (c) The losses arising from the trade of meat, amounting to £123.513, compared to profit of £107.868 for 2000. 4.124.2 Guarantees. (a) Guarantees granted for the Organisation. At 31.12.2001, the guarantees granted by the Organisation, amounted to £83.060, as shown below: £ Transporters 24.855 Producers 2.670 Ministry of Defence (National Guard) 54.800 Cyprus Airways 735 83.060 (b) Government guarantees. The Government renewed the guarantee granted to the organisation for credit bank facilities provided by the Central Cooperative Bank, amounting to £900.000, up to 31.8.2002. It is noted that, according to the books of accounts, the overdraft at 31.12.2001 was £1.169.119 (the balance of the bank statement was £768.452). 4.124.3 Liquidity of the Organisation. The Organisation in order to face the increasing liquidity problem was obliged to renew the loan/credit facility of £900.000, granted by the Central Cooperative Bank Ltd, as it was done in 1999. The bank overdraft, from £554.805 at 31.12.2000, was increased to £1.125.337 at 31.12.2001, i.e. it was increased by £570.532. The Chairman of the Organisation informed me that the increase of the bank overdraft is, mainly, due to the significant improvement of the quality of milk, during the last three months of 2001, resulting to the increase of the purchase cost of milk, the payment of higher clearing price for the milk received in 1998, the losses arising from various meat schemes and the storing of

293 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 meat, for which there is a delay for its disposal/sale. He also stated that there was an improvement in the liquidity of the Organisation, in 2002, after the introduction of the system for the payment of milk, on the basis of quality, delivered to milk-bottlers. 4.124.4 Budget – Approval. The Budget for 2001 was approved by the Board of Management of the Organisation on19.12.2000 and was submitted, in pursuance of section 37(1) of the Cyprus Dairy Industry Law, to the Minister of Commerce, Industry and Tourism on 20.12.2000, for information. The Board, at the meeting No. 723 of 29.11.2001, approved supplementary appropriations for £577.295, without the Minister of Commerce, Industry and Tourism to be informed accordingly. It is noted that, according to the provisions of the Public Corporate Bodies (Approval of Budget) (Amendment) Law of 1987, the Organisation is exempted from the submission of the Budget to the House of Representatives for approval. 4.124.5 Personnel. The Organisation employed 37 permanent employees, with total emoluments of £691.039, including the employer’s contributions to various Funds, at an average annual cost of £18.677 per employee. Also, 19 labourers were employed with total wages of £202.028. At 31.12.2001, there were 4 vacant permanent posts. 4.124.6 Credit policy of the Organisation. (a) Provision of guarantees to the Organisation by industrialists As I stated in my previous Reports, for the credit facility of 45 days provided by the Organisation to the industries (on the average 23 days only) for the payment of the milk they receive, no guarantee or other security is secured from all the industrialists. The Chairman of the Organisation informed me that, although most of the processors of milk have already submitted their relative guarantees, some of them, mainly, the largest processors continue to refuse to deposit their guarantees, taking advantage of the surplus milk produced in the last years, and having in mind that the non supply of milk to them is difficult or even impossible, because of possible financial loss to the Organisation. He also stated that, in 2002, the industrialists submitted guarantees for the additional quantity of milk received by them. (b) Delay in the payment of the value of milk to the Organisation. In some cases considerable delay is observed in the payment of the value of milk received by the dairy industries, resulting to the deterioration of the liquidity problem of the Organisation. The Chairman of the Organisation informed me that, in cases where delays are observed, measures have been taken with the result a significant improvement to be noted in the payment of debts, due to the Organisation, with only 2-3 exceptions, relating, mainly, to small milk processors. (c) Interest on debts of industrialists. Under a decision of the Board of Management, taken on the basis of legal advice, interest is imposed on the outstanding debts of industrialists. During 2001, interest amounting to £84.727 was imposed, compared to £51.815 for 2000, which was collected in 2002, as I was informed by the Chairman of the Organisation. 4.124.7 Dumping of surplus milk. During 2001, a quantity of 1,8 m. litres of cow milk and 0,4m. litres of goat milk, valued at £331.993 and £92.268, respectively, on the basis of the weighted average price of the year, were destroyed, compared to 1,9 m. litres of cow milk valued at £344.199 for 2000.

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Additionally, the Organisation was charged with the amount of £15.407 for the transportation of the surplus milk to the dumping area. The Chairman of the Organisation informed me that the dumping of surplus milk is, due to the production of milk by certain producers in excess of the individual quotas approved by the Organisation, as well as to the fact that some industries did not receive all the quantities of milk during holidays. 4.124.8 Payment of surplus cow milk to producers for 1998. The Board, at the meeting No. 711 of 8.8.2001, decided for the payment to the cattle breeders of the total amount of £269.223, which corresponds to 11 cents per litre of surplus milk, regarding 2,4 m. litres of surplus milk, which was delivered in 1998 and for which a provision was made in the accounts for 1998, for the amount of £62.656, which corresponds to 2,56 cents per litre. I observed that the decision taken for the payment of surplus milk is contrary to the provisions of the measures approved by the Council of Ministers, on 22.5.96, for the support of cattle breeding and the stabilization of production, which provide for the delivery of surplus milk at zero price and the imposition of a fine of 4 cents for each surplus litre. It was also observed that the Organisation was charged with an additional amount of £206.567, because the price at which the surplus milk was paid was much higher of the clearing price, despite the assurance of the Chairman of the Organisation, given in 1998, that the surplus milk will be paid at the clearing price, without any additional charge on the Organisation. The Chairman of the Organisation informed me that the decision of the Board for the price of 11 cents per litre was based on the fact that the producers were asked by the Organisation to increase the production of milk, on the promise that they will be paid at the clearing price, which was expected to be higher, but finally was not secured, due to the importation of cheese, imitation of EDAM, resulting to the refusal of processors to receive the respective quality of milk. 4.124.9 Transfer of quotas. In my previous Report it was stated that consolidated Regulations should be prepared, the soonest possible, based on the existing legislation and the supporting measures approved by the Council of Ministers, which will regulate in a clear manner all the matters and include such provisions which will safeguard the best interests of cow breeders, the stability of production at acceptable levels and the production of first quality milk and dairy products. The Chairman of the Organisation informed me that the relevant Regulations have been prepared, which are in line with those of European Union, and will be submitted to the Ministry for further necessary action. 4.124.10 Distribution of sheep and goat milk. (a) The distribution of sheep and goat milk by the Organisation is still made only in Pafos District, while in the Districts of Larnaka and Famagusta the distribution will continue to be carried out by a private individual. From the distribution of sheep and goat milk in Pafos District, of a total value of £1.273.524, there was a loss for the Organisation, amounting to £234.826, compared to £15.892 for 2000. The Chairman of the Organisation informed me that the loss from the distribution of sheep and goat milk in Pafos District, was partly, expected before the commencement of the distribution, because of the peculiarities presented in this District (small units, distant areas, long distances, limited quantities of milk distributed etc.).

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He also stated that the distribution of sheep and goat milk in other Districts is not possible to be carried out, after taking into consideration the reformation of the Organisation and the termination of distribution of all types of milk, as a result of Cyprus accession to the European Union. (b) Idle equipment. As I stated in my previous Reports, for the distribution of milk in Larnaka and Famagusta Districts, equipment of total value of £66.923, mainly refrigerators, were purchased, out of which, equipment valued at £18.009 was transferred and installed in 1998 and 1999 at the freezing centers of Pafos District for purposes of distribution of sheep and goat milk in this District, while the remaining equipment continues to remain idle, without being utilized. The Board, at the meeting No. 721 of 14.11.2001, authorised the Director of the Organisation to study this matter and find out whether part of this equipment may be utilized for the needs of the Organisation and the remaining to be disposed, according to existing procedures. On 12.5.2002, tenders were invited for the sale of 8 brand new and used refrigerators, which were published in local press. The Chairman of the Organisation informed me that new tenders will be invited for the disposal of the remaining, idle equipment. 4.124.11 Revenue and expenditure account for meat. During 2001, the following four Meat Trading Schemes were operating: (a) Scheme for slaughtering and deboning of cows on account of Government (b) Scheme for slaughtering of calves on account of the Organisation (c) Scheme for slaughtering of lambs and kids on account of the Organisation (d) Scheme for slaughtering of lambs and kids on account of Government. The financial results of these Schemes are as follows: Scheme Revenue Expenditure Deficit £ £ £ Cows Scheme for Government 1.670.947 1.730.759 59.812 Calves Scheme for Organisation 1.308.266 1.353.607 45.341 Lambs and kids Scheme for Organisation 1.789.413 1.806.244 16.831 Lambs and kids Scheme for Government 2.887 4.416 1.529 4.771.513 4.895.026 123.513

The Organisation suffered a loss of £123.513, as shown above, from the trading of meat, compared to a profit of £107.868 for 2000, during which only three Schemes were operating (the Scheme for lambs and kids for Government was not operating in 2000). 4.125 HOUSING FINANCE CORPORATION Part A 4.125.1 Financial position (a) Operating results. The Corporation showed a surplus of £3.524.150 for 2001, compared to £2.911.239 for 2000.

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(b) Deposits. At 31.12.2001, the deposits amounted to £308,75 m., compared to £253,71 m. for 2000, i.e. there was an increase of £55,04 m. or 21,69%. (c) Loans. At 31.12.2001, the loans amounted to £298,19 m., compared to £234,63 m. for 2000, i.e. there was an increase of £63,56 m. or 27,10%. 4.125.2 Personnel. At 31.12.2001, the Organisation employed 54 persons, with total employments, of £1.166.137, including the provision for pensions, compared to £976.528 for 2000. The average annual cost for each employee was £21.595. 4.125.3 Loan instalments in arrear. At 31.12.2001, the loan instalments in arrear amounted to £7,2 m. or 2,43% of the total loans, compared to £5,5 m. or 2,36% at 31.12.2000. 4.126 UNIVERSITY OF CYPRUS Part A 4.126.1 Submission of financial statements for audit. It was again observed that there was a considerable delay in the submission of the financial statements of the University to my Office for audit. Draft financial statements were submitted in the middle of August 2002, with the result the audit not to be completed. I pointed out that the financial statement should be submitted to my Office for audit until the 30th April of each year, as provided for all Public Corporations. 4.126.2 Financial position. The financial position of the University according to the non audited financial statements for 2001, was as follows: (a) Operating results. For 2001 there was a deficit of £2.315.191, compared to £1.057.348 for 2000. The increase of the deficit was, mainly, attributed to the increase in salaries and allowances. The deficit was covered from previous years revenue and for this reason equivalent amount was transferred to the deferred revenue. (b) Revenue. The revenue amounted to £12.327.963, compared to £11.826.907 for 2000. It includes general government subsidy for £3.908.789 and tuition fees for £5.591.489, compared to £3.629.915 and £5.596.650, respectively, for 2000. (c) Expenditure. The expenditure amounted to £14.643.154, compared to £12.884.255 for 2000. The increase is mainly attributed to the increase of salaries and allowances (£1.061.521), general administrative expenses (£348.236), depreciations (£150.501) and research activities/ programmes (£316.814). (d) Government Subsidy. The total government subsidy paid to the University for 2001, amounted to £11.522.230, compared to £9.498.000 for 2000. Out of this amount, £7.613.441 (£5.868.085 for 2000) was spent for the purchase of fixed assets. As it appears, the operation of the University is depended to a great extent on the continuation of the provision of government subsidy. 4.126.3 Unspent amounts. Out of the budgeted amount of £27.889.655 for 2001, the amount of £5.425.308 (£6.568.637 for 2000) or 19,45% (27,71% for 2000) remained unspent at the year end, which represents, mainly, capital expenditure for the University Campus (£5.477.750). 4.126.4 Delay in the approval of Budget. The Budget of the University for 2001 was submitted on 31.7.2000 and was approved by the House of Representatives on 30.3.2001. It was observed that no duodecimals were approved, and consequently, the expenditure incurred until the approval of the Budget was without authority of the House.

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4.126.5 Personnel. The University employed 163 members of the Academic staff, 32 members of the Special Education Staff, 26 Postgraduate Associates and 41 Visiting Professors, as well as 166 members of the Administrative Staff and 19 hourly paid employees, with total salaries and allowances of £9.386.625. This amount includes pensions and gratuities, amounting to £101.926. 4.126.6 Staff salaries. Several weaknesses were again observed in the operation of salaries system. It is expected that there will be considerable improvement, with the operation of the computerized programme for the human resources management. 4.126.7 Research programmes. During 2001, the revenue from research programmes amounted to £693.740, compared to £865.166 for 2000. The corresponding expenditure amounted to £1.136.667 for 2001, compared to £819.853 for 2000. With regard to the management of the research programmes, I pointed out that some Rules, governing the planning, execution and monitoring of research programmes, have not yet been implemented. The new Rules, which were approved, present some weaknesses and they need to be revised. 4.126.8 Internal Audit Department. Recently, the Department has been strengthened with additional staff. It is expected that this will contribute to the adoption of my previous recommendations, regarding the planning of activities of the Department, at the commencement of each year, and the exercise of internal control on a continuous basis. I suggested that the conclusions and findings or a narrative report, to be submitted to the Board and Senate of the University, for information. 4.126.9 University’s Campus. The works for the construction of the first phase (for 5200 students) of University’s Campus, commenced at the beginning of 1999, and it is expected that they will be completed by the end of 2010. The estimated total cost, including the cost of designs, is about £96 m. The works under construction and completed works by June 2002, were the following: (a) Infrastructure works. The construction works commenced in May 1999, and were to be completed in November 2000, at the cost of £5,7 m. The works were finally completed with a delay of 13 months. The contractor submitted a claim for extension of time, due to alterations and additional works. The Board of Management of the University approved an extension of six months and the payment of compensation to the contractor, amounted to £175.000. With regard to the remaining period of delay, consideration is made of the new reasons given by contractor for extension of time, and effort is made for the settlement of the matter on a “mutual settlement”. (b) Science and Technology building installations. The construction agreement provides for the commencement of works in January 2000 and the completion in May 2002, at the cost of £8,4 m. The progress of works presents a delay of about 10 months, which is, mainly, attributed to the slow progress of works of the contractor and the problems which were encountered during the initial stages of the project, during the laying of foundations of the buildings. So far, an extension of time for 31 working days was granted to the contractor, for adverse weather conditions and the Architect of the Project is examining contractor’s claims for an additional extension of time. Various alterations were made, with the approval of the University, at a total estimated cost of £850.000, the greater part of which is relating to electromechanical installations, due to changes in the use of workshops. (c) Operational support buildings. The construction of the project commenced in January 2000, at the cost of £700.000. The project was completed in July 2001, with a delay of 4

298 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 months, part of which is due to the contractor and the other part to the employer. The matter of delays is being considered by the Consultants. (d) Students Residence (Phase 1A). The project was assigned to private consultants, after architectural competition. The construction commenced in November 2000, and was expected to be completed in July 2002, at the cost of £3,5 m., compared to the estimated cost of £2,4 m. The difference in the cost is attributed to the special elements and materials used for the design of the project, as well as to price increases during the period 1999-2000. The project presents a delay of 8 months, which is attributed to the contractor. Bad workmanships have been observed in the reinforcement bending schedules of the concrete. The Consultants proceeded to the deduction of the amount of £10.000, from the payments to the contractors, in connection with above bad workmanships. 4.126.10 Terms of agreements for constructional works of University Campus. From the study of the terms of agreements for constructional works of University Campus, prepared by private consultants, I observed that they do not include basic provisions for safeguarding the employer’s interests. The most important is the provision, which refers to the contractor’s obligation for the submission of any claims for time extensions of financial compensations within reasonable time limits, so that the employer to have ample time to solve the problems, promptly, and evaluate objectively to contractor’s claims. The Director for the Development of University’s Campus, in reply to my observations, he informed me that instructions were given for the amendment of the terms of future agreements, so that the contractor’s claims to be submitted within reasonable time limits. Part B 4.126.11 Terms of employment of the Academic staff. Certain matters, such as the vacation leave of the Special Education Staff and of the Postgraduate Associates, continue not to be regulated by the Rules which have been issued for the leave of absence of the members of the Academic Staff. 4.127 CYPRUS BROADCASTING CORPORATION Part A 4.127.1 Audit of accounts. The financial statements of the Corporation for 2001 have been audited by a firm of private auditors, appointed by the Corporation with my approval, in accordance with section 3(1) of the Public Corporate Bodies (Audit of Accounts) Laws. Under the same section of the Law, my Office has carried out additional financial and performance audits. 4.127.2 Financial position (a) Deficit in working capital. The current liabilities of the Corporation at 31.12.2001 amounted to £18,72 m. compared to £17,57 for 2000, while the current assets were £4,33 m. (£4,05 m. for 2000), i.e. there was a deficit in working capital amounting to £14,39 m., compared to £13,52 m. for 2000. The financial position of the Corporation continued in 2001 to be problematic and its operation depended to a considerable extent on the continuation of the financial support provided by Government, the continuation of credit facilities provided by the Pension Funds of the employees of the Corporation, as well as the non payment of the amount due for staff fringed benefits. It is pointed out that the liability of the Corporation to the above Funds at 31.12.2001 amounted to £9 m. (£9,7 m. for 2000) and £2,5 m. (£2,3 m. for 2000) for

299 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 staff fringed benefits. It is noted that under the Cyprus Broadcasting Corporation (Imposition of Contribution) (Amended) (No.2) Law No. 64 (i)/2000, any deficit in the approved, by the House of Representatives, annual Budget of CBC, is covered by state subsidy. According to the last actuarial study, carried out in 2000, the amount due to Pensions Fund was £8.135.136, at 31.12.99, and the repayment is made, as from 1.1.2000, by 10 equal annual instalments of £1.082.486 each, plus interest. At 31.12.2001, the balance of the amount due was £6.900.584 and is not included in the liabilities of CBC, shown in the balance sheet. As it is stated in note 20 of the Financial Statements, the CBC has not adopted the Revised International Accounting Standard No. 19, which provides, either for the immediate recognition in the financial statements of the outstanding liability to the Pension Fund or the recognition of such liability in a period up to five years, under the fixed depreciation method. In case of application of the above standard, the liability to the Pensions Fund, on the basis of the actuarial study, will be increased either to £15,9 m., if it is immediately recognised or to £9,5 m., if recognised in a period of 5 years. (b) Operating results. The Corporation showed for 2001 a deficit (before taxation) of £1 m., compared to a surplus of £0,1 m. for 2000. The difference is mainly due to the increase of expenditure, as shown in paragraph (d) below. It is noted that if the liability to the Pensions Fund was recognised in the financial statements, either in total in current year, or in a period of 5 years, the above deficit would have been increased by £6.900.584 or by £493.338, respectively. (c) Revenue. The revenue amounted to £16,79 m., compared to £16,76 m. for the previous year, i.e. there was an increase of £0,03 m. The most significant increase was noted on Vote “Government Subsidy” (£7.286.812 or 112%) and this is due to the fact that, according to section 2 of the Cyprus Broadcasting Corporation (Imposition of Contribution) (Amended) (No. 2) Law No. 64(I)/2000, the contribution to C.B.C. was terminated on 30.6.2000, as stated above, and any deficit in the annual Budget of C.B.C., approved by the House of Representatives, is covered, as from 1.7.2000 by state subsidy. A deficit was also noted on Votes “Commercial Advertisements” (£637.091 or 21%) and “Lottery – Happy Saturday night” (£120.644 or 45%). (d) Expenditure. The expenditure, excluding interests and financing charges, amounted to £17,1 m., compared to £16,1 m. for the previous year, i.e. there was an increase of £1 m. or 6,2%. It is noted that the above expenditure includes depreciations (£624.847 for 2001 and £870.856 for 2000). The interest and financing charges, amounted to £738.618 (£573.538 for 2000). The most significant increase was noted on Votes “Salaries and Staff benefits and of contributors” (£489.700) or 5,8%, “Programmes Expenses” (£212.929) or 3,8% and “General Expenses” (£531.551) or 47%. Increase was also noted on interests payable (£165.080) or 28,8%, for the reason that the C.B.C., as from 1.1.2001, when the Law for the Liberazation of Interest, was put into effect, is calculating the interest on loans and advances for which the capitalized interest was equal to the amount of capital. (e) Government guarantees. At 31.12.2001, the government guarantees for the loans of the Corporation amounted to £3,21 m. and for bank overdrafts to £2,85 m. 4.127.3 Personnel. At 31.12.2001, the Corporation employed 221 permanent employees, (231 for 2000) and 33 labourers (27 for 2000). The expenditure for personal emoluments and staff benefits amounted to £8,9 m., compared to £8,4 m. for 2000.

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On the basis of the number of permanent employees, employed on 31.12.2001, the annual average cost per employee, excluding the deficient contribution to the Pensions Funds, the compensation for early retirement and the contributions to the Funds for Holiday Pay, Industrial Training and Social Insurance, for contributors, amounted to £27.948 (£27.071 for 2000, after deducting the personal emoluments of employees who retired during the year, as was made in 2001). 4.127.4 Employment of contributors. During 2001, the Corporation employed 663 contributors, according to salary register, 134 out of them were permanent contributors, (625 for 2000). The above number does not include the contributors who were secured through companies, and their salaries were paid direct to the companies. The total expenditure, including the contributions to the various Funds, amounted to £3.268.290 (2.859.341 for 2000) and was charged, basically, to the relative programmes, with the exception of the amount of £130.358, which was charged to personal emoluments vote. 4.127.5 Budget (a) Approval. The Budget for the year 2001, was approved by the Board of Management of the Corporation on 26.9.2000 and by the Council of Ministers on 16.11.2000. According to the Public Corporate Bodies (Enactment of Budgets) Laws, the Budget should have been laid before the House of Representatives until 30.9.2000, whereas this was laid on 12.12.2000 and was enacted to Law on 23.2.2001. The House approved duodecimals for January and February 2001. (b) Expenditure excesses. Excesses, amounting to £267.219, were noted on various votes, which were subsequently covered by transfers of savings from other votes and from the Contingencies and Reserves, on the approval of the Board of Management of the Corporation, dated 23.4.2002. it is also noted that the bill for Supplementary Budget, for covering the excesses of the Budget for 1995, amounting to £995.700, has not yet been submitted to the House. The Acting Director General of Corporation, under his letter dated 11.4.2000, requested the Director General of the Ministry of Interior to pursue further the matter of approval for the excesses. 4.127.6 Revenue (a) Lottery – Happy Saturday night. The net revenue from the Lottery amounted to £145.083, compared to £265.727 for 2000, i.e. there was a decrease of £120.644 or 45%. The revenue from the sale of tickets was reduced, due to the declining trend, observed in the sale of tickets during the last years. (b) Advertisements (i) Revenue from advertisements. The revenue from advertisements for the year 2001, was reduced by £637.091 or 20,75%, compared to 2000 (£2.443.107 for 2001 and £3.080.198 for 2000). I pointed out that the declining trend of advertisements should be considered seriously by the Board, in combination with other directly related matters, such as the exchange of advertising time with materials or services and the concession of special discounts. The Chairman of the Corporation informed me that the declining trend of advertisements is seriously considered by the Board and apart from competition, this is due to the economic crisis of 2001.

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(ii) Barter Agreement. During 2001, there was an exchange of advertisements, under a barter agreement for 3225 spots, for a total amount of £526.139. For these advertisements, invoices are issued, but the relative amounts are not included in the revenue and expenditure of the Corporation, and only a relative note is included in the Accounts. The Chairman of the Board of Management informed me that, as from 1.1.2002, there was a change in the procedure and all invoices are recorded in the accounts properly. 4.127.7 Debtors (a) Advertisements debtors. At 31.12.2001, the advertisements debtors amounted to £2.086.891, compared to £2.213.192 for 2000, i.e. there was a decrease of £126.301 or 5,7%, although the advertisements were reduced by £637.091 or 20,7%. It is noted that the amount of £893.344 is included in above debtors, representing invoices for advertisements, for the months of October-December 2001, which were not overdue at 31.12.2001. I was referred to outstanding debts due for a period of over 12 months, amounting to £605.633, or 29% of the total advertisements debtors, compared to £366.043 or 17% for 2000, and I suggested that measures should be taken for their collection. (b) Sundry debtors for services. The sundry debtors, which at 31.12.2001, amounted to £262.135, compared to £194.527 at 31.12.2000, continue to include old balances and I reiterated that the efforts for their collection to be intensified. (c) Debtors subscribers to C.B.C. At 31.12.2001, the balance of the above debtors amounted to £742.843 (£831.149 for 2000) and included the amount of £495.187, representing debts over £80, the collection of which was undertaken by the Corporation. It included also the amount of £247.656, for debtors which continued to be shown in the statements of subscribers of EAC. The Chairman of the Board of Management informed me that, until 30.6.2002, the procedure for the mailing of letters to all outstanding debtors, which commenced in 2001, will be concluded. Nevertheless, the response is very low. Subsequently, all outstanding debts, for amounts due to C.B.C., will be assigned to lowers for collection. 4.127.8 Programmes not projected. At 31.12.2001, the value of programmes/films not projected, which were paid, amounted to £733.857 (£247.422 for 2000). It was observed that, there is no indication for the projection of these programmes, because the relevant computer programme does not provide basic and relevant information, such as: • Whether the programme (film) exists or projected. • The date of termination of the right of projection. It is noted that due to the absence of equipment, for the copying of programmes, there is the risk for the non projection of the paid and secured programmes, within the specified time limits. The Chairman of the Management Board informed me that efforts will be made for the introduction of a new software, for the better follow up of the movement of films. 4.127.9 Films Archives. It was again observed that there is no safekeeping of the films, which are kept in the Archives. Also, I stated in my letter for the accounts of 2000, that there are cases where films are used for the recording of other programmes, without obtaining approval for the deletion of existing programmes and in view of this, there is the risk for the destruction of programmes which have not yet been projected.

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For above reasons and in order to facilitate the location of these films, and the verification of their existence and safekeeping, I recommended the following: (a) A physical stocktaking to be carried out and a reconciliation with the computer statements. (b) To be classified in specially arranged and numbered spaces, with parallel keeping of special cards. (c) The procedure for the issue and receipt of films to be formulated. The Chairman of the Board of Management informed me that the whole matter is connected with the computer programme, referred to in the above paragraph. 4.127.10 Tenders (a) Sub-committee for tenders. It was observed that, in cases where tenders are invited for purchases of services, for amounts from £3.001 to £5.000, no provision is made for their placement in the tender box. As the procedure for the invitation, submission and award is the same with that for tenders of over £5.000, this should be adopted without deviations. The Chairman of the Board of Management informed me that instructions were given for the relative procedure to be followed systematically. (b) Tenders registers. In my report on the accounts for 1999, I recommended, inter alia, the keeping of a tenders register. My recommendation has not yet been adopted. (c) Tenders box. The keys of the tenders box are in the possession of two employees of C.B.C. I suggested that the possibility to be considered for the keeping of one of the keys by the Chairman of the Tenders Committee and the other by a senior officer of the Accounts Section, a practice which is followed for public tenders. (d) Opening of tenders. It was observed that the opening of tenders is not made soon after the expiration of the date of submission of tenders, but later. The tenders are received from the tenders box, at the time of expiration of each tender, and are delivered to the acting Director General without the preparation of a minute, for their keeping until the meeting at which will be opened. I pointed out that there are loopholes in this procedure, as in the case of tender 19/2001 “Renewal of Offices”, where three tenders were evaluated, and after 20 days the Acting Director General has traced a fourth tender, which due to an oversight, was left in the filing cabinet. According to the legal advice, given by the Legal Adviser of the Corporation, this tender should have been taken into consideration, because the responsibility for the mistake rests with the C.B.C. In view of the above, the tender was opened and was the lower tender by £3.670, and was finally awarded for £191.330. The Chairman of the Board of Management informed me that instructions were given for the adoption of my recommendations regarding the tenders register, the keys for tenders box and the opening of tenders. (e) Tender 2/2001 “10 KW F.M. Transmitters” (£203.732). The tender was for the supply of 5 transmitters F.M. 10KW, and 15 tenders were submitted. The award was made to a specific company for the amount of £185.881. The suggestion of Tenders Committee (of 6.4.2001) and the Board’s decision (of 10.4.2001) were based on the evaluation report of tenders, submitted by the Director of Studies and Installations, for which the following were observed: (i) According to the tender terms, nine tenders were within specifications. (ii) For the calculation of the price of each tender, the annual cost of electricity consumption was taken into account, a criterion which should not have been taken into consideration,

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because this was not included in the terms and specifications, resulting to the modification of the evaluation and the award of tender to the third lower tenderer. The Chairman of the Board of Management informed me that, for the evaluation of the above tender, the Technical Services of C.B.C. have not taken into consideration the electricity consumption, which is a vital factor for ascertaining the most favourable tender for C.B.C. (f) Tender 16/2001 “VHF Transmitter System”. On 21.1.2001, tenders were invited for the supply of one transmitter 20KW for Troodos Central Station, for the replacement of the old transmitter. The Tenders Committee recommended on 5.7.2001, the award of tender for the amount of £200.530. On 15.10.2001, all the tenderers were informed that the tenders were cancelled. New tenders were invited on 14.10.2001 and eight tenders were submitted, which were delivered, on 13.11.2001, for evaluation. I observed that the evaluation was not completed until the day of my audit, and I asked to be informed of the reasons for the cancellation of the first tenders, as well as about the delay observed in the evaluation of new tenders. The Chairman of the Board of Management informed me that, the necessary funds were not available for the supply of the above transmitter, and for this reason the decision for the purchase was postponed for 2002. 4.127.11 Five Year Action Plan. With the completion of the period for the implementation of the Five Year Action Plan (1997-2001), I expressed the view that there is the need for the general evaluation of the results, for ascertaining as to whether the anticipated objectives have been attained. The following deviations or objectives not attained were observed. 4.127.12 Structure, staffing and operation of New C.B.C. (a) New organizational structure. According to the Five Year Action Plan, the number of the staff was expected to be reduced to about 220 persons (from 354 in 1997), whereas the number of regular contributors to fluctuate at the same levels (about 72). With the implementation of the New Organisational Structure, the number of the permanent staff was reduced to 221 persons, at 31.12.2001, (out of them 8 retired early by 1.1.2002), whereas the number of regular contributors was increased to 134. The Chairman of the Board of Management informed me that, with the increase of regular contributors to 134, there was an increase in the production and productivity. Specifically, he stated that the total performance hours were increased to 35.860, compared to 15.104 for 1980 and the productions of C.B.C. were increased by eight times (from 597 to 4.782). (b) Merger of Departments. In view of the fact that the proposed merger of the Departments/ Services, provided by the New Organisational Structure has not yet been made and the early retirements have adversely affected the Departments of the Corporation, some Departments are not operating properly. As I am informed, the merger of all Departments involved will be made in 2002. (c) Planning and assessment of staff needs of C.B.C. As I stated in my Report for 2000, the Corporation should plan and assess the actual needs for its smooth operation, after taking into consideration the full utilization of the permanent staff and the introduction of new technology

304 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 and equipment, aiming at reducing the appointments of contributors and their non employment, as well as of the permanent staff, beyond the normal working hours. (d) Financial aspect. (i) Revenue and expenditure. Although the expenditure for 2001, was fluctuating within the projected levels, provided in the Five Year Action Plan, the actual revenue was only £16,8m., compared to £20,2 m. estimated in the Action Plan. The reduction by £3,4 m. is mainly, due to the decrease of government subsidy by £0,8 m., of advertisements by £0,8 m., of radioprogramme advertisements by £0,4 m., due the suspension of publication, and of the revenue from the Lottery of Happy Saturday night, by £0,9 m. (ii) Accumulated deficit. At 31.12.2001, the accumulated deficit was £18 m.m whereas the Five Year Action Plan provided that the deficit would be £8,6 m., on the above date. (e) Consultancy Programmes Committees. For the purpose of preservation and improvement of the level of programmes of the Corporation, a provision was made in the Five Year Action Plan, for the establishment of a Pancyprian Advisory Programmes Committee and Special Advisory Committees, so that the opportunity be given to specialists and representatives of associations to make comments on the programmes of C.B.C. and contribute to their further improvement, by submitting their suggestions. The aforesaid Committees have not yet been established. The Chairman of the Board of Management stated that the Management has not proceeded with the establishment of the Pancyprian Advisory Programmes Committee but has carried out Television-attendances Searches and discussions, at directors level, with the participation of members of the Board, for the continuous upgrading of the programmes of C.B.C. 4.127.13 Fixed Assets. No physical stocktaking of the fixed assets is carried out, and no statements are kept showing the location of fixed assets. I suggested that all fixed assets should be recorded with all necessary details, in appropriate registers, which should be updated with any additions, deletions and transfers of assets. Additionally a reconciliation should be made of the fixed assets shown in the registers with stocktaking statements, and the necessary corrections to be effected in the registers and the General Ledger. 4.127.14 New loan. In 2001, a new loan of 1.735.000 Euros (£1.000.000) was received from the Bank of Cyprus Ltd (U.K. Branch), without securing the approval of the Council of Ministers, provided by section 23 of the C.B.C. Law. As I was informed, an application was submitted in time by C.B.C., to the Ministry of Interior, but there was a delay for the reply and C.B.C. proceeded to the signing of the loan agreement, for which a provision is made, in the Budget of C.B.C. for 2001, for its repayment. Part B 4.127.15 Organisation and operation of Registry. Weaknesses continue to be observed in the keeping, sorting and filing of correspondence and documents. The Chairman of the Board of Management stated that my recommendations for the Registry, will be reconsidered by the Management. 4.127.16 Implementation of working time schedule and electronic control/concession of free time. No significant improvement has been noted in the procedures and the keeping of relative records, regarding the above matters, which were raised in my letter dated 30.5.2000.

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The Chairman of the Board of Management informed me that all necessary measures are taken for the implementation of working time schedule. 4.127.17 Staff benefits. The legal regulation of this matter is still pending, despite the replies given by C.B.C., regarding the previous accounts, that this matter was expected to be settled within the framework of the Five Year Action Plan, in which a provision is made under the head: “Vested Employees Rights and Restrictive Practices”. It is noted that that above rights, include the transfer of holidays, the shift allowances, the overtime, the medical treatment and special agreements. The Chairman of the Board of Management informed me that C.B.C., is the only Organisation, the Management of which has succeeded to terminate vested rights (shift allowance) for the persons appointed after 1.1.2001 and consultations are being made with Staff Union, for other allowances and benefits of the staff. 4.127.18 Films Registry. Until the date of my audit, no improvement was made on this matter, although a Special Committee was set up, for the study of the matter and the submission of a relative report. The Chairman of the Board of Management informed me that, with regard to the Film Registry, a supplementary Budget will be prepared by the Board for the final settlement of the whole matter. Additionally, a provision was made in the Budget for 2003 for the supply of a new software. 4.128 VINE PRODUCTS COMMISSION Part A 4.128.1 Financial position (a) Operating results. The accounts showed a deficit of £913.461 (before government subsidy), compared to £961.588 for the previous financial year. (b) Government subsidy. The government subsidy amounted to £958.592, compared to £1.031.874 for the previous year. In addition the following subsidies were paid by Government through the Commission: 2001 2000 £ £ Subsidy on grapes 2.343.372 2.968.379 Subsidy on vineyards 4.127.139 3.127.094 Subsidy on commandaria 37.229 31.421 Subsidy on vine products for export 2.296.253 1.360.238 Subsidy on raisin to producers 27.281 28.120 Subsidy of interest on loans raised by wine industries 9.693 6.787 Financial assistance for improving commandaria produce installations 22.500 7.500 Subsidy on dumped grapes 3.797 767.381 Compensation under the Scheme for Uprooting and Reformation of certain problematic white vine varieties 1.475.227 Compensation under the Scheme for Uprooting the Redemption of rights by the Commission for plantation of certain white vine varieties and of sultan quality. 3.828.917 14.171.408 8.296.920

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4.128.2 Government guarantees. The bank overdraft of the current account of the Commission is guaranteed by Government up to the amount of £2,5 m. At 30.9.2001 the bank overdraft was £1,05 m., compared to £1,16 m. at 30.9.2000. 4.128.3 Personnel. The Commission employed 27 permanent employees (31 in 2000). The expenditure for personal emoluments, including employer’s contributions to the various Funds, amounted to £568.408, compared to £599.792 for the previous year. 4.128.4 Budget. The Budget for the financial year 1.10.2000 – 30.9.2001 was approved by the Commission on 27.7.2000 and by the Council of Ministers on 17.1.2001, i.e. it was again approved after the commencement of the financial year. 4.129 NICOSIA SEWERAGE BOARD Part A 4.129.1 Financial position - Operating results. The accounts showed a surplus of £307.727, compared to £541.213, for 2000, i.e. there was a decrease of £233.486. The revenue amounted to £2.381.608 and the expenditure to £2.073.881, compared to £2.402.277 and £1.861.064, respectively, for 2000. The increase in the expenditure is, mainly, due to the increase in the administration expenses and depreciations. 4.129.2 Personnel–Salaries and employer’s contributions. The Board employed 27 permanent employees, 1 employee on contract, 2 casual employees and 14 labourers. The expenditure for salaries and employer’s contributions amounted to £1.048.656, compared to £1.006.690 for 2000, i.e. there was an increase of £41.966 or 4,2%. 4.129.3 Purchase of buildings for the housing of the Services of Nicosia Sewerage Board. The previous Board decided at the last meeting, held on 20.12.2001, for the purchase of certain immovables, situated within the Nicosia Walls, for the housing of the services of the Board, for the amount of £745.000. According to the minutes of the Board, the Director General stated that the cost for maintenance/replacement of the existing buildings will be about £500.000, reference of which is made in the relative proposal, submitted to the Council of Ministers. On the basis of the records kept by the Department of Antiquities, for the cost of renewal of the preservable buildings and the records kept by the Department of Public Works for the cost of maintenance/demolition and erection of new buildings, it appears, however, that the cost will exceed considerably the estimated cost of £500.000 and will be over £1 m., according to the estimate made by my Office. After taking into consideration the purchase price (£745.000) and the cost of additions/ alterations, it is deduced that the cost for the new buildings will be £1.745.000, i.e. at a much higher price from the current market purchase price, in Nicosia area. I expressed the view that, it would be in the interest of the Board, to have a complete picture of the total cost (including the repairs) before taking the decision for the purchase of the building. In view of the above, I suggested that an independent quantity surveyor to be employed for the calculations of the cost of repairs/additions, with greater accuracy, after taking into consideration that needs of the Board and the condition of the preservable buildings and other buildings, so as to ascertain whether the rehousing of the Board to these specific immovables is in the interests of the Board.

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The Chairman informed me that he accepts the estimations of the cost for the utilisation of the space prepared by my Office, and he added that, on the basis of a thorough study, the final cost will be £1,7 m., approximately, which is not dissuasive, for the housing of the Services of the Board in the old town. 4.129.4 Approval for the establishment of new posts or the upgrading of salary scales for Sewerage Boards. According to the legal advice of the Attorney General of the Republic, the establishment of any new post or the upgrading of salary scales of existing posts, in the Sewerage Boards, should be subject to the approval of the Minister of Interior, and the consent of the Minister of Finance. The Board’s decision for the upgrading of the salary scale of the Director of the Board (from A15+2 to A16) as well as of the post of Telephone Operator (from A1-2-5 to A2-5-7) was taken, without securing the approval of the Minister of Interior. The Chairman informed me that the Board will take the necessary action. 4.129.5 Examination of tenders. In my letter to the Chairman of the Board, dated April 2002, I observed that the tender for the supply of covers of wells and steps, during the last years, was assigned to the same tenderer, without any real competition, since in most cases, he was the only tenderer within specifications. From the investigation of the matter, it appeared that the Director General of the Board who was involved in the tendering procedure, had a particular relationship with the above thenderer. Copy of my letter was submitted to the Attorney General, for any necessary action. As I was informed, the Attorney General submitted the case to the Police, for further investigation, for ascertaining whether there is any criminal offence. 4.129.6 Tenders for the provision of consultancy services for Greater Nicosia Sewerage System. As I stated in my Report for 2000, the award of tender was not made by the Board to the best evaluated tenderer, on the basis of a combined evaluation of technical and financial proposals, as provided by the tender terms, but the Board applied different methodology, giving particular weight to the tender prices, and assigned the tender to the consultancy firm, which submitted the third lower tender. In August 2001, after an investigation of the matter, I reached to the conclusion, for the reasons stated in my report to the Chairman of the Public Accounts Committee of the House of Representatives, that there was a great possibility for the unsuccessful tenderers who submitted a recourse to the Supreme Court, to succeed in their cases, because of the decision taken by the Board. As I was informed, in March 2002, the Supreme Court accepted the recourses of the three unsuccessful tenderers, and there is the possibility for lawsuits to be filed against the Board for the payment of considerable damages. 4.129.7 Agreement for the provision of consultancy services for Greater Nicosia Sewerage System. In May 2002, my Office observed that there was a serious delay of 10-12 months in the implementations of the agreement. It was also established that many observations were made by the Board to the Consultants, regarding the documents submitted by them for omissions and weaknesses in the architectural study. Furthermore, it was observed, from the examination of payments, that for various works, the Consultants were overpaid by the Board, for a total amount of £150.000. I requested that for purposes of proper planning and management of the project, the Director of the Project and the Committee for the follow up of the project to be appointed.

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The Chairman of the Board informed me, in September 2002, that he agrees with my observations and assured me that these will be duly considered by the Board. He also stated, that the Board proceeded to the appointment of the Director of the Project, as suggested by my Office. Part B 4.129.8 Fees – Loss of revenue. (a) The existing fees are based on the registration carried out by the Department of Lands and Surveys, during the period 1980-1994, with estimated value of 1980. Due to the considerable development observed after the last registration, the present fees are not calculated on the correct value of immovables. (b) The Department of Lands and Surveys did not respond to applications submitted by the Board, for the revaluation of certain plots, for which considerable development has been observed, resulting in the loss of considerable revenue. 4.130 LIMASSOL – AMATHUS SEWERAGE BOARD Part A 4.130.1 Financial position (a) Operating results. The accounts showed an operational surplus, before the exchange differences, of £2.090.650, compared to £2.236.337 for 2000. After the deduction of exchange loss, amounting to £202.367 (£793.410 for 2000), the surplus was £1.888.283, compared to £1.442.927 for the previous year. (b) Revenue. The revenue amounted to £7.528.522, compared to £7.724.395 for 2000, i.e. there was a decrease of £195.873 or 2,54%, which was due to the reduction of additional housing connections with the system, as well as to the non imposition of surcharge on the arrears of fees, due by Government, for the year 2001. (c) Expenditure. The expenditure amounted to £5.437.872, compared to £5.488.058 for 2000, i.e. there was a decrease of £50.186 or 0,91%. 4.130.2 Personnel. The Board employed 25 permanent employees, 12 casuals and 16 labourers. The total emoluments, including the employer’s contributions to the various Funds, amounted to £1.088.549, compared to £774.716 for 2000, i.e. there was an increase of £313.833 or 40,5%, which is mainly attributed to the increase of payments for pensions benefits, as a result of the actuarial study. 4.130.3 Overtime. The expenditure for overtime amounted to £40.386, compared to £38.817 for 2000, out of which, £22.594 was paid for overtime work in the Administration Department. 4.130.4 Sewerage fees debtors. The sewerage fees in arrear, amounted to £4.445.816, compared to £4.445.900 for 2000. I suggested that the efforts for the effective collection of arrears to be continued. 4.130.5 Fees for the use of sewerage system. Although separate agreements were signed with the Limassol Water Board, Germasogeia Municipality and Agios Tychonas Community Board, relating to the charge and collection of above fees, the necessary records were not kept for purposes of recognition of such revenue under the accrual concept, at the preparation of the accounts.

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4.131 FAMAGUSTA SEWERAGE BOARD Part A 4.131.1 Operation and audit of accounts. As a result of the Turkish occupation of Famagusta, the Board is under functioning and for this reason, no accounts were prepared and submitted for audit, for the years 1992-2001. 4.132 LARNAKA SEWERAGE BOARD Part A 4.132.1 Financial position (a) Operating results. The accounts showed a deficit of £96.871, compared to £907.208 for 2000, i.e. there was a decrease of £810.337 or 89,32%. This is mainly attributed to the increase of sewerage fees for £348.537, as a result of the imposition of additional fees for rainwaters and the reduction of exchange loss by £339.067. (b) Revenue. The revenue amounted to £3.282.515, compared to £2.750.885 for 2000, i.e. there was an increase of £531.630 or 19,33%. The increase was mainly attributed to the increase of sewerage fees by £348.537, as a result of the imposition of fees for the rain waters, as stated above. (c) Expenditure. The expenditure amounted to £3.282.004, compared to £3.221.644 for 2000, i.e. there was an increase of £60.360 or 1,87%. 4.132.2 Personnel. The Board employed 16 permanent employees and 15 hourly paid employees. The total personal emoluments including employer’s contributions, amounted to £425.123, compared to £368.968 for 2000, i.e. there was an increase of £56.155 or 15,2%. 4.132.3 Debtors. As I stated in my previous Reports, more efforts should be made for the follow up and prompt collection of the amounts due to the Board and the taking of effective measures. It is indicatively stated, that sewerage fees are pending for collection since 1992. 4.132.4 Inflow of rain water in the sewerage network. In August 2001, there was an inflow of rain water in the sewerage network, resulting to damages in the system and additional expenses for the processing of rejects. I expressed the view that the cost of damages to be calculated and compensations to be claimed from the contractor and the Consultants, in cases where the responsibility rests with them. The Director General of the Board informed me that the problem of inflow of rain water in the sewerage network is under investigation, for ascertaining the reasons and for the assignment of responsibilities. 4.133 PAFOS SEWERAGE BOARD Part A 4.133.1 Delay in the approval of Budget. The Budget for the year 2001 was approval by the Board on 13.11.2000 and by the Minister of Interior on 13.8.2001, whereas, according to the Law, it should have been approved before the commencement of the financial year. 4.133.2 Financial position–Operating results. The accounts showed a surplus of £1.472.800, compared to £1.719.146 for 2000, i.e. there was a decrease of £246.346. The revenue amounted to £2.222.443 and the expenditure to £749.643, compared to £2.071.509 and

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£352.363, respectively for 2000. The increase in revenue was due to the revision of sewerage fees and interests receivable, whereas the increase in expenditure was mainly attributed to the loan interests payable as well as to administrative expenses paid to the Municipality, for services rendered to the Board, in previous years. 4.133.3 Personnel and employer’s contributions. The Board employed 10 permanent employees, 1 casual, 3 employees seconded from Pafos Municipality and 3 labourers. The total personal emoluments, including employer’s contributions, amounted to £162.110. 4.133.4 Debtors. At 31.12.2001, the sewerage fees in arrear amounted to £2.258.341, compared to £2.166.172 for 2000. It is noted that the fees were imposed and were submitted to the public at the end of the year and an extension of time was given for their payment up to 15.1.2002, including facilities, without additional surcharge, for amounts in excess of £3.000 up to 15.4.2002. I pointed out that the fees should be imposed promptly, preferably during the first six months so as sufficient time to be given for their submission and collection. Also, the Board should take measures against those who have not paid any amount at all particularly in cases where considerable amounts are due. 4.133.5 Tender for the construction of Biological Station. The award of tender for the construction of above Station, was made to a company, which is also the main contractor of the project. The sub-contractors of building works, submitted a report to the Council for the Registration and Control of Contractors Buildings and Technical Works, against the company, which was the successful tenderer, on the grounds that the company was not registered and holder of relative contractors licence or holder of a special licence issued under the provisions of the Law for the Registration and Control of Contractors Buildings and Technical Works. They also informed that they will raise claims for compensations, according to the terms of the relative agreement. I expressed the view, that the award of tender should not have been made to the aforesaid company, due to violation of a substantial term. 4.133.6 Contract agreements C2A andC2B. (a) Administrative expenses and margin profit of the contractor. The audit revealed that for new works, for which there were no unit prices, the contractor was paid for administrative expenses and 43,78% margin of profit on above cost. I observed that according to international practice and the experience of my Office for similar agreements, the above margin of profit is extremely high and unreasonable. The Director of the Board informed me that the margins of profit which will be paid to the contractors are those which were included in their tender, i.e. 31,58% for C2A and 32,87% for C2B and any overpayments will be recovered. (b) Method of payment of foundation material placed in the road cracks for sewerage pipes. I observed that the method of payment of above material is not the appropriate resulting to the overpayment of £199.748 to the contrctor. The Director of the Board informed me that he agrees with my observation and a revised method of payment will be adopted. 4.133.7 Contract Agreement 3 – Biological Unit. The construction of the Biological Unit commenced on 20.2.2000 and was expected to be completed, according to the contract agreement, on 20.8.2001, for the amount of £4.730.787. During the execution of works, alterations were made in the study, due to geological conditions, different from those which

311 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 were taken into consideration in the study for the place of Biological Station. Problems were also observed in the survey of the area and the construction of certain pumping stations. The contractor was paid the additional amount of £464.963 for extra works and £254.255 as compensation for justified delays. Additionally, claims were submitted by the contractor for the payment of the amount of £209.483 for extra works and £213.628 for the specific justified extension of time. Part B 4.133.8 Enactment of Regulations. The enactment of the following Regulations, which will facilitate the smooth and efficient operation of the Board, is still pending. • Structure, Terms of Service and Employee’s Discipline. • Tenders. • Keeping and Operation of Stores. • Accounting and Financial Procedures. 4.134 PARALIMNI SEWERAGE BOARD Part A 4.134.1 Financial position. (a) Operating results. The accounts for 2001 showed a surplus of £794.259, compared to £915.719 for 2000. (b) Revenue. The revenue of the Board amounted to £1.054.095, compared to £1.096.379 for 2000, i.e. there was a decrease of £42.284 or 3,9%. (c) Expenditure. The total expenditure amounted to £259.836, compared to £180.660 for 2000, i.e. there was a decrease of £79.176 or 43,8%. (d) Long term liabilities. The long term liabilities of the Board at 31.12.2001, amounted to £12.887.525, compared to £11.729.207 for 2000, whereas the short term liabilities were £1.534.899. The short term liabilities include the loan instalments which were payable within one year, amounting to £1.013.618. 4.134.2 Personnel. The following table presents the staff employed by the Board and the respective cost: 2001 2000 Clerical Staff: Permanent 6 4 Casual 2 3 Labourers: Regular 5 1 Casual 1 2

14 10 Total expenditure for salaries, allowances and employer’s contributions £187.582 £126.034

The Financial Manager of the Board is employed in common with Agia Napa Sewerage Board.

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4.134.3 Approval of staff appointments. On 21.2.2002, the Board requested the approval of the Minister of Interior for the appointment of employees, engaged by the Board since 1992, as provided by section 15 of the Law. The Minister of Interior submitted the matter to the Attorney General, who stated, in his legal advice dated 25.7.2002, that the approval of the Minister, with retrospective effect cannot legalize the appointments which were made many years ago. I requested the Board to inform me about the actions which will be taken by the Board for the legalization of the appointment of above employees and I suggested that the possibility should be considered for the adoption of section 7(f) of the General Principles of the Administrative Law of 1999, which provides for the adoption of administrative actions with retrospective effect. The Chairman of the Board informed me that the matter will be considered in future meeting, as to whether the above section may be adopted. 4.134.4 Regulations. The Regulations, governing the organisational structure of the Services of the Board, the posts and the way for their filling, as well as the general conditions of service, provided by section 15A of the Law, have not yet been prepared and approved. The Chairman of the Board informed me that the above Regulations are being prepared and will be submitted soon for approval. 4.134.5 Fee on the basis of water consumption. Although, 80 hotels were gradually connected with the sewerage system since April 2002, no fee is imposed on the basis of water consumption (10 cents per c.m. of water), contrary to Regulations 35. I pointed out to the Board, for signing an agreement with Paralimni Municipality, for the imposition and collection of above fee, which will be deposited to the Paralimni Sewerage Board. The Chairman of the Board informed me that the Board decided for the imposition of above fee as from 1.1.2003. He also stated that a relative decision will be taken soon by the Paralimni Municipality, which is the Water Supply Authority, for the imposition of such fee. 4.134.6 Debtors for sewerage fees. At 31.12.2001, the debtors for sewerage fees amounted to £2.059.767 compared to £1.877.087 for 2000. The amount of £2.059.767 includes the fees for 2001, which were notified to consumers by the end of 2001. The arrears include amounts due since 1993. In view of this, I suggested that the appropriate measures should be taken, including legal measures, for their collection. My suggestion has not yet been adopted, with the result the percentage of collection of arrears to be low. The Chairman of the Board informed me that letters will be sent, through the lawyers, to all debtors owing amounts over £100. for the settlement of their debts and legal measures will be taken against those who will not respond. 4.134.7 Joint Venture of Paralimni Agia Napa Sewerage Boards – Sewerage Treatment Plant. As it was stated in my Report for 1999, the project should have been completed in July 2000, for the amount of £9,5 m. according to the terms of the contract. The contractor submitted claims for extension of time up to July 2001, for delays caused by Consulting Engineers and the employer. So far, a justified extension up to February 2001 was approved. In August 2001, the contractor submitted a financial claim for £1,15 m., representing compensations for the period of justified delay. My office requested the Joint Venture to assess the damages which were caused, as a result of the unjustified contractor’s delay and to deduct the respective amounts from the payments to the contractor.

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Also, I reminded that, in June 1999, I informed the Board that the proper and prompt handling of the various matters was necessary, in order to avoid any financial claims, from the part of contractor. 4.134.8 Paralimni Sewerage system – Agreements 1-P-1 and 1-P.2. The above agreements were signed for the construction of the sewerage network by a private contractor. The amount of the contract 1-P-1, was £2,99 m. and £3,09 m. for 1-P-2 with period of execution from December 1996 to December 1998. In view of the fact that the suspension of works in tourist areas was extended for a longer period, from that provided in the contract agreement, it was agreed, as counterbalance, for the assignment to the contractor of the extension of the sewerage network in future areas. The payment for the extensions of network, which were based on the unit prices of the initial contract agreement 1-P-1, amounted to £1,5 m. and the period of contract was extended until May 2000. It is noted that the contractor submitted claims, amounting to £3,37 m. for agreement 1-P-1 and about £3,45 m. for 1-P-2. These claims, represent, inter alia, extension of time, unforeseen soil difficulties, measurement method and pricing of space truss and problems encountered during the tourist period. Although the evaluation of such claims have not yet been completed, it appears that these are extremely high. 4.134.9 Paralimni sewerage system – Pumping stations. As I stated in my previous Report, the Sewerage Board did not deliver, promptly, the worksite and proceeded to serious alterations after the signing of agreements, giving the right to the contractor to submit his claims for extension of time and financial compensations. The additional works amounted to £440.000, approximately, and the contractor submitted claims amounting to £0,6 m. The Chairman of the Board informed me that all necessary measures are taken for the limitation of contractor’s claims, which are considered, however, excessive. 4.135 AYIA NAPA SEWERAGE BOARD Part A 4.135.1 Financial position (a) Operating results. The accounts showed a surplus of £701.346, compared to £667.165 for 2000. (b) Revenue. The revenue of the Board amounted to £813.124, compared to £759.653 for 2000, i.e. there was an increase of £53.471 or 7%. (c) Expenditure. The expenditure of the Board amounted to £111.778, compared to £92.488 for 2000, i.e. there was an increase of £19.290 or 20,9%, which is basically due to the personal emoluments and staff benefits.

(d) Long term liabilities. The long term liabilities of the Board, at 31.12.2001, amounted to £7.926.226, compared to £5.495.448 for 2000, whereas the current liabilities were £1.448.173, including loan instalments payable within one year amounting to £602.885.

4.135.2 Personnel. The following table presents the staff employed by the Board, and the respective cost:

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2001 2000 Clerical Staff Permanent 3 3 Casual 1 1 4 4 Total expenditure for salaries, allowances and employer’s contributions £72.923 £56.075

The Financial Manager of the Board is employed in common by the Agia Napa and Paralimni Sewerage Boards. 4.135.3 Approval of appointments. Contrary to section 15 of the Law, the approval of the Minister of Interior for the appointment of employees, some years ago, was not secured. According to the legal advice of the Attorney General dated 25.7.2002, the approval of the Minister with retrospective effect, cannot legalize the appointments, which were made many years ago. I asked the Board to inform me of the necessary actions which will be taken for the legalization of the appointments of the staff. I suggested that the possibility to be considered whether section 7(f), of the General Principles of Administrative Law of 1999, which provides for the implementation of administrative actions, with retrospective effect, may be applied. The Chairman of the Board informed me that the Board will consider the above matter and I will be informed accordingly, the soonest possible. 4.135.4 Regulations. The Regulations governing the structure of Services of the Board, the posts and the way of filling them, as well as the general conditions of service of the staff, provided by section 15A of the Law, have not yet been prepared and approved. The Chairman of the Board informed me that the above Regulations are being prepared and will be submitted for approval the soonest possible. 4.135.5 Debtors for sewerage fees. At 31.12.2001, the debtors for sewerage fees amounted to £1.314.798, compared to £1.250.683 for 2000. The amount of £1.314.798 includes sewerage fees for 2001, for £678.106, imposed at the end of 2001. As the arrears include amounts due since 1992, I recommended that the appropriate measures should be taken for collection of arrears, including legal measures. The Chairman of the Board informed me, that a decision was taken, for the submission of letters, through lawyers, to all debtors, inviting them to settle their debts within one year, and legal measures will be taken against those who will not respond. 4.135.6 Agia Napa Sewerage Board – Agreements 1-AN-1 and I-AN-2. The above agreements were signed for the construction of the sewerage network by a private contractor. The amount of the agreement for I-AN 1 was £4.147.519 and £1.258.790 for I-AN-2, with period of execution from December 1996 to December 1998, for the first agreement and January 1998 – March 1999 for the second agreement. During the construction of the project, the suspension of works was extended for a longer period, from that provided in the agreement. As a result, the Board assigned to the contractor

315 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the extensions of network in future areas. The payments for the extensions of network which were based on the unit prices of the initial contract agreement AN-1, amounted to £887.831, and the period of agreement was extended until June 2000. The contractor submitted claims for £845.000 for AN-1 and £450.000 for AN-2. These claims, are relating, inter alia, to the problems of tourist period, the traffic, the delay in the commencement of agreement and the non prompt delivery of constructional designs. I recommended that the services of a special consultant, to be secured for the handling of the contractor’s claims. Although the evaluation of the claims has not yet been completed, it appears that these are very high. The Chairman of the Board informed me that the Board is taking all necessary measures for the limitation of the contractor’s claims, which are considered excessive. 4.135.7 Joint Venture of Paralimi – Agia Napa Sewerage Boards – Sewerage Treatment Station. As I stated in my Report for 1999, the project should have been completed in July 2000, for the amount of £9,5 m., according to the provisions of the construction agreement. The contactor submitted claims for extensions of time until July 2001, due to delays, caused by the Consulting Engineers and the employer. So far, a justified extension of time was approved up to February 2001. In August 2001, the contractor submitted a financial claim for £1,15 m., representing compensations for the period of justified extension of time. My Office requested the Joint Venture to assess the damages, which were caused, as a result of the unjustified contractor’s delay and to deduct the respective amounts from the payments to the contractor. Also, I reminded that, in June 1999, I informed the Board that the proper and prompt handling of the various matters was necessary, in order to avoid possible financial contractor’s claims. Finally, the project was completed in December 2001. 4.136 COUNCIL FOR THE REGISTRATION AND CONTROL OF CONTRACTORS FOR BUILDING AND TECHNICAL WORKS. Part A 4.136.1 Operating results. The revenue and expenditure of the Council amounted to £172.128 and £220.827, respectively, i.e. there was a deficit of £48.699, compared to £36.370 for 2000. 4.136.2 Personnel. The Council employed 12 persons, with total emoluments of £164.026, including employer’s contributions to the various Funds, compared to £166.160 for 2000. The annual average cost for each employee was £13.669. Part B 4.136.3 Enactment of Regulations. No Regulations have yet been prepared and approved, governing the structure and the conditions of service of the staff. 4.136.4 Taxation. No provision for taxation has been made in the accounts of the Council, contrary to legal advice of Law Office, that the income of the Council is not exempted from the payment of taxation. It is noted that the Department of Inland Revenue, secured a court decision for the collection of tax amounting to £190.866 for the years 1986-1996. 4.137 CYPRUS OLIVE PRODUCTS MARKETING BOARD 4.137.1 Qualified audit report. Contrary to the accounting policies of the Board and the International Accounting Standards, the stocks of olive oil at 31.12.2001, were valued at cost price instead of selling price, which was lower, resulting to their disclosure in the accounts, at a higher value of £898.122, with a corresponding decrease in deficit. It is noted that, according to

316 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 the Council of Ministers decisions, the losses arising from the sales abroad at prices lower to the cost, will be covered by state subsidy. The Chairman of the Board informed me that the stocks were valued under this method, after taking into consideration that the exports of olive oil surpluses will be subsidised by Government, according to the decision of the Council of Ministers. 4.137.2 Financial position (a) Operating results. According to the accounts, there was a deficit of £8.232, compared to the surplus of £73.443 for 2000. If the stocks were valued at selling price, the deficit would have been £906.354. The deficit is mainly attributed to the reduction in sales of olive oil, the increase in cost of sales by 4% and the increase in interest payable for bank overdraft. (b) Sales of olive products. The following statement shows the sales of olive oil and olives during the last five years: Year Olives Olive Oil Total £ £ £ 1997 30.112 1.902.234 1.932.346 1998 9.371 1.432.658 1.442.029 1999 4.045 1.571.307 1.575.352 2000 3.268 1.039.270 1.042.538 2001 9.246 968.050 977.296 4.137.3 Liquidity of the Board. At 31.12.2001, the available cash and bank balances were showing a credit balance (overdraft) of £955.186, compared to a debit balance of £395.882 for the previous year, i.e. there was a decrease of £1.351.068, which is mainly attributed to the greater quantities of olive oil delivered in 2001. 4.137.4 Budget. The Budge for 2001 was submitted to the Board of Management on 23.11.2000 and was approved on 7.12.2000. Pursuant to section 55A of the Cyprus Olive Products Marking Law, the Budget was submitted on 14.12.2000 to the Minister of Commerce, Industry and Tourism, and was approved, on 30.1.2001, as stated in the letter of the Ministry. According to the Financial Instruction of the Board the Budget should have been submitted to the Board for approval until the 31 October of the previous year. On 28.11.2001, a revised Budget was submitted to the Minister, without this to be approved before by the Board. On 21.1.2002, approval was given by the Minister, as stated in the letter of the Ministry. It is noted that, according to the Public Corporate Bodies (Enactment of Budgets) (Amendment) Law of 1987, the Board is exempted from the submission of the Budget to the House of Representatives, for approval. 4.137.5 Personnel. The Board employed 5 employees and 4 labourers in 2001. The expenditure for salaries, allowances and employer’s contributions to the various Funds, for the permanent staff, amounted to £134.589 and the average annual cost per employee was £26.918. The expenditure for wages amounted to £55.581. 4.137.6 Power and jurisdictions of the Board (a) According to the Cyprus Olive Products Marketing Law (1968-1992), the Board has the power:

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(i) To ask from the producers to submit an application for their registration in the producers register, providing details about the olive trees area, the number and type of olive trees, average production for each olive tree, average production of olive oil for each kilo of olives etc. (Section 27). (ii) To take legal measures against the producers, who disposed their olive products not to the Board or through the Board (Section 30), without a written licence. (iii) To demand the submission of an application, for the registration and issue of licence, under the terms specified by Board (Section 42), by the persons or enterprises engaged in the trade of olive products. (iv) To authorise an employee to carry inspections at the estates used for the production of olive products (Section 50). (v) To issue instructions or orders for the regulation and control of the olive products industry (Section 53). (vi) To take legal measures against those who purchase olive products out of the Board (Section 31). The Board has never exercised, fully, the above powers and jurisdictions, resulting to the loss, to a great extent, of the control of the olive products market, receiving only 25%-30% of the total production. The Chairman of the Board informed me that he agrees with the above, because all the efforts and legal actions taken, were not successful, for reasons beyond the power of the Board. (b) The measures taken by the Board against the violators of the Law were not sufficient, without any effective and direct result, as shown in the following cases. (i) After a lawsuit was filed against a specific company individual, the Board secured an order from the District Court of Nicosia on 31.5.2000, under which the above company was obliged to withdraw from the market all olive products until the final trial of the lawsuit or a new order of the court, without this being executed. The application for the non execution of the order was submitted by the Board after 1 ½ year, on 9.11.2001. (ii) After a lawsuit was filed against a specific individual, the Board secured an order, issued by the District Court Larnaka, on 20.12.2000, under which he was obliged to withdraw from the market all olive products, until the final trial of the lawsuit or a new court order, without this being executed. The application, for the non execution of the order was filed by the Board, after about 11 months, on 9.11.2001. The Chairman informed me that the necessary action was taken promptly, but there was a delay in the legal processing. (c) The Board has failed to take the necessary action under sections 26 and 47 of the Law, for the promotion and increase of sales. (i) No tender was submitted by the Board, for the supply of 55.000 litres of olive oil to the National Guard, for the period 1.2.2001-31.1.2002, with the result, the National Guard to be supplied with imported olive oil. It is also noted, that in the agreement signed with the distributor, there was a provision, under which the Board was allowed to supply the National Guard, with olive oil directly.

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(ii) For the supply of 45.000 litres of Cyprus olive oil to the National Guard, for the period 1.2.2002 – 31.1.2003, the Board submitted a tender without producing all the necessary documents. As a result, a negotiation was made with another tenderer, who was not authorised by the Board, in writing, to sell olive oil, and the award of tender was finally assigned to the two tenderers, on equal basis. (iii) The Board had never submitted a tender for the supply of olive oil to the Central Prisons and the Hospitals, which need about 10.000 – 11.000 litres every year, with the result the award of tenders to be assigned to bottlers, who are not holding a licence. The Chairman informed me that the Board holds the view that it is not required to submit tenders to public corporations. (d) In view of the above, as well as to the overproduction of olive oil, during the last few years, there were considerable surpluses, with the result, the Council of Ministers, under various decisions, to approve the export of olive oil at low prices, and the payment of subsidy to the Board for the damages sustained (over £1,8 m.) Although, the Board, is duty bound, under section 26 of the Law, to take all necessary measures for the regulation and control, so as to secure, for the interest of the olive producers, the most favourable and economical arrangements, for the upgrading, packing, transport, trading, export, loading and sale of olive products, and generally to take any action for the promotion of the stability and industrial production of olive products, after taking into consideration the public interest, there is an unwillingness in taking effective measures. 4.137.7 Internal control system (a) It appears that, the appropriate tenders procedures relating to the matters of sales/exports and negotiations/signing of agreements are not followed. (b) In the Registry of the Board, the relative procedures for the receipt, stamping, recording and movement of documents are not followed. (c) In many files which are not bearing any number, there are letters, in loose form, without any reference to pages and minute sheets. (d) Certain documents and agreements were not kept in the files, resulting to unjustified delays in their examination. (e) Sales invoices. The existing computerised system continues to provide the possibility to the user to effect deletions instead of cancellations of invoices and to print copies of invoices, without writing on them the indication of “copy”, which is extremely risky. Additionally, the date is not automatically printed on the invoice, but it is recorded by the user. (f) Bills of lading. Cases were observed where the bills of lading were not bearing the signature of the “buyer or receiver” of the products and the signature of the “driver” who received the products for transport. (g) Laboratory tests specimens. As it was also stated in my previous Report, the postings of laboratory tests in the computerised system of the Board, under which the producers will be paid, are not verified by a second person, even on a test basis. (h) Measuring of quantity transferred from one tank to another tank. Despite of the positive reply given by the Board, no effective measures have been taken for the recording of the actual quantity, which is transferred from the one tank to another tank.

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(i) Bottling of olive oil and reconciliation of the quantity transferred from the tanks with the final product. In my previous Reports I recommended the placing of meters in the tanks for measuring the quantities, received and issued, and the taking of necessary measures for the reconciliation of the quantity used for bottling with the final product etc. So far, no measures have been taken. (j) Payment vouchers (i) No details are given on the vouchers of the items which are purchased and the services rendered to the Board. (ii) No reference is given on the vouchers of the approval of expenditure by the Board, as well as of the tender, if any. (iii) The vouchers are not signed by the Accountant and the Director General. The Chairman informed me that the Board is studying the revision and upgrading of software, for covering the above deficiencies. 4.137.8 Distribution of olive oil. (a) The Board, decided, on 26.10.2000, for the award of tender, for the distribution of olive products, for the period 1.1.2001 – 31.12.2003, to a certain company. On 12.3.2002, the company informed the Board that another distributor was involved in the distribution of the olive oil of the Board, resulting to problems and confusion in the market, and in view of this, the cooperation of the company with the Board was subsequently, terminated. It is relatively stated that, approval was given by the Board, to the previous distributor, to continue the distribution of the olive products until 30.6.2001, so as to enable him to collect the amounts due by supermarkets. At the same time, great quantities of olive oil were issued to him, with the result to continue the supply of supermarkets until the end of November 2001. Indicatively it is stated that in June 2001, the previous contributor received from the Board 43336 kilos of olive oil. The Chairman informed me that the action taken by the Board until 30.6.2001 was in line with the agreement signed by the aforesaid company and the previous distributor and as from 1.7.2001, when the agreement was assigned exclusively to the said company no olive oil was given, except to the company. (b) On 22.11.2001, the Board decided to make a proposal to an individual to undertake the promotion of sales at 5% commission. The proposal included the securing of orders from buyers who were not covered by the Distribution Agreement, the transport of products, the provision of assistance for the collection of amounts and survey of the market for prompt supply. The following were observed in relation to this matter: (i) After the acceptance of above proposal by the individual, no agreement was signed, although wholesales were made at 5% and 7½% commission. (ii) No details were given about the buyers/customers of the individual, for ascertaining whether these are not covered by the Distribution Agreement and are not customers of the official distributor, because the sales were directly made to him. (iii) No bank guarantee was produced by the individual, who at 31.12.2001 was indebted for £3.569.

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The Chairman of the Board informed me that the above individual was not the official distributor of the Board, and he was undertaking the execution of orders, of the Board, for customers who were not covered by the Distribution Agreement, something which I do not accept because there are no details about his buyers/customers, as stated above. (c) Violation of distribution agreement by the previous distributor. As it was stated above, the aforesaid distributor was the official distributor of the Board until 30.6.2001. On 4.1.2001, the Main Tender Board assigned to the above distributor the award for the supply of olive oil to the National Guard, for the period 1.2.2001 – 31.1.2002, which constitutes a violation of the term 5(b) of his agreement, without the termination of his cooperation by the Board, on the basis of the term 9 of the agreement and the confiscation of the relative guarantee, under term 12 and without claiming further compensations. The Chairman informed me that the legal adviser of the Board expressed the view, orally, that there was no legal case and for this reason no prosecution was made by the Board against the aforesaid distributor. (d) In March 2002, tenders where invited for the distribution of olive oil to hotels/ restaurants and retail shops. In April 2002, the Board of Management decided for the invitation of new tenders, with revised terms, because according to the evaluation tender committee, the details which were submitted for tenders were not uniform and clear. The new tenders were invited from the five tenderers who participated in the previous competition, but finally only three tenders were received. The tender committee prepared a minute for the three tenders, which were received and submitted them to the Management Board for a decision, without doing any evaluation/ recommendation. The Board decided in May 2002 for the appointment of a three member committee, which will ask explanations from the two tenderers only without giving justification for the exclusion of the third, who was the lower tenderer. At the next meeting of the Board, it was decided, by majority, to assign the award to the higher tenderer, after justifying the exclusion of the third tenderer. From the study of the minutes, it was revealed that the decision was based on criteria, which were not included in the terms of the tender and that the successful tenderer was higher by 56% from the second tenderer and by 82% from the third, who was excluded. The Chairman of the Board, informed me, in June 2002, that the selection of the higher tenderer was made, because he has a superiority in negotiations and access to sales market, with better prospects for increasing sales. It is noted that the above criteria were not specified/included in the terms of the tender and no specific methods or weight was given for their evaluation. It was also observed that, under the agreement which was signed, credit facilities for 45 days were granted instead of one month, provided by the terms of tender. 4.137.9 Selling of olive oil. The examination of selling prices of olive oil was difficult and in several cases impossible, because there were no approved price lists, by item, showing the effective date of new prices. In several cases the prices of new packings of olive oil, shown in the price lists were not in agreement with the prices approved by the Board.

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Cases were also observed, where the sales of olive oil to various buyers were made, on the instructions of the Director General, at whole sale price less 5% commission, as it is applicable for the distributor of the Board. In view of the above, I suggested that a revised price list to be submitted to the Board for approval or for each case, where an increase or decrease in the price of olive oil or for the approval of new packing, so that the follow up and examination of debtors to be possible. 4.137.10 Disposal of surpluses of olive oil for 2000–2001 crop. On 20.2.2002, the Council of Ministers approved, under decision 55163, the subsidy for the export of 470 tonnes of olive oil to United States and Italy, which would be sold at U.S.$ 1488 per tonne less 5% commission for the agent, on the basis of the preliminary agreement with buyers, which was not, however, produced for audit. Until the completion of the audit, it appears that exports for 677968 kilos of olive oil were made, by the Board and other, to various countries. Although, in my opinion, the Council of Ministers decision possibly provided, that the exports should have been made by the Board, for purposes of securing and verification of the accuracy of exports and for securing better price, through the payment of 5% commission to the agent, yet only 146002 kilos of olive oil, out of 677.969 kilos, were exported by the Board. For most of the above exports, there are no available documents, to support that all the quantities of olive oil were actually exported. Also, there is no written sale agreement, and no approval of the Board, for cases where the initial agreed selling price or the approved selling price by the Board was subsequently reduced. With regard to the sale of 496.192 Kilos of “extra” olive oil, to a specific company for export to Italy, the following were observed: (a) The above company was paid 10% commission, amounting to £51.771, on the value of olive oil sold, whereas the Council of Ministers decision provided for 5%, which would have been paid to agents. For the above export, there was a profit of £90.000, for the company, which is an indication that no commission should have been paid to the company, as it was not acting as an agent. It is noted that no commission was paid to this company for previous exports. (b) The Director General, in his letter, dated 1.3.2002, addressed to the company, had fixed the selling price of £1.075 per tonne and included in the agreement the term, that in cases of acidity of more than 0,7% the price would be reduced accordingly, despite the fact, that the company had not, negotiated the selling price, with any condition. Finally, the total value of sales was reduced by £9.979, because the results of laboratory tests, of specimen received from the ship- tanker, were showing that the acidity was 0,82%. (c) While the bills of lading No. 019051-019075 were showing that 496192 kilos of olive oil were delivered to the company, the invoice No. 3960, which was issued by the Board on 29.3.2002, was showing 492.123 kilos only. (d) The cheque which was produced on 12.4.2002 by the company, for the payment of the value of olive oil, was for 490.870 kilos, instead of for 496.192 kilos. Therefore, the value for 5.322 kilos of olive oil is still pending for payment. I suggested to the Board the following: • To claim the payment of the value of 5.322 kilos of olive oil, which was delivered, according to bills of lading.

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• To claim the refund of commission for the amount of £51.771, because the company was not acting as agent, but as exported, with additional profit of £90.000, approximately. • To claim the refund of the amount of £9.979, because no condition was set by the company, for the reduction in selling price, in case of increased acidity, since there was no problem for the acidity of the olive oil. The Chairman informed me that the Board decided to negotiate with the tenderer, better exports terms due to the inferior quality of the olive oil sold and because the final selling price, irrespective of the above, given by the company was higher from the other tenders. He also stated that, as a result of the stock taking carried out on 29.3.2002, it was proved that the preliminary charge made by the Storekeeper, included all the content of each tank, without deducting the sediment and coagulated olive oil in each tank and that the actual deficit after weighing at Limassol port, was 1.253 kilos, a difference which is justified between the scales and the remains left in the inner walls of tankers. In reply to the above, I stated that the payment of commission and the reduction in selling price, due to increased acidity are not justified. With regard to the olive oil, with 0,7% acidity, I stated that this cannot be considered of inferior quality. 4.137.11 Disposal of olive oil of inferior quality of 2000 – 2001 crop. On 27.2.2002, the Council of Ministers approved, under decision No. 55205, the payment of subsidy, for the export of 300 tonnes of high acidity and peroxide of virgin olive oil at U.S.$ 1000 per tonne. The Ministries of Finance and Commerce, Industry and Tourism, approved on 12.4.2002 and 18.4.2002, respectively, the request of the Board, submitted under letter File Y.4.2, of 3.4.2002, for the increase of the quantity of 300 tonnes to 400 tonnes, for the reason that the buyer, whose price was higher and was U.S.$1.370 per tonne, insisted that the transport of a quantity, lower than 400 tonnes, by a ship-tanker, was not profitable. The Board, stated in above letter that the proposed price for degraded oil is very satisfactory and will relieve the Board from the remaining quantity of previous year. According to the information collected and submitted to the Board, from the exchange of relative correspondence, the stock of olive oil, for 2000-2001 crop, was 248.617 kilos, out of which only 67.237 kilos was degraded. It is easily deduced that the request of the Board for the sale of 400 tonnes of degraded olive oil is not duly substantiated and I asked for the necessary explanations to be given. The Chairman of the Board informed me that the surplus of current crop, which is equal to the previous crop and the greater part of which is degraded, was added to stock, of previous crop, thus creating unacceptable conditions, resulting to the termination of delivery for current crop, due to lack of storespace. 4.137.12 Subsidization of the selling price of olive oil “A” and payment to the Board of the amount of £80.000 for purposes of advertisement and promotion of Cyprus olive oil. On 14.6.2001, the Ministerial Committee appointed by the Council of Ministers, under decision No. 53.748 of 30.5.2001 decided the following¨ (a) To approve the subsidization of the selling price of olive oil “A” at 50 cents per litre, so as to be sold at retail price £2,60 per litre, in the local market. In the above decision, it is stated that, with this subsidy, about 400 tonnes of olive oil “A” will be sold.

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(b) To allocate to the Board the amount of £80.000 for purposes of advertisement and promotion of Cyprus olive oil, in the local market (quality “A”) and the international markets (quality “extra”), so as to enable the Board to dispose of most of stocks, provided the necessary details will be submitted to the Ministry of Finance. From the audit of sales of olive oil “A” the following were observed: (i) For the period June 2001 – February 2002 only 80 tonnes of olive oil “A” were sold, a quantity which is much lower of estimated quantity of 400 tonnes. (ii) While the decision was for the payment of subsidy of 50 cents per litre, in the case of the sales for the period August – December 2001 the Board, in the letter dated 18.1.2002, requested approval for the payment of subsidy of £19.395 in kilos (38.791 kilos at 50 cents) instead of £21.174 in litres (42.348 litres at 50 cents). (iii) The quantity of olive oil “A” which, was sold in the local market during the period June- December 2001, as shown in the Sales Book, does not agree with the quantity for which the subsidy was paid, not with the total quantity for which the total subsidy was paid, which is shown in the accounts. From the audit of the subsidy, which was paid for the advertisement of the Board, the following were observed: (i) Under letter dated 3.8.2001, addressed by the Board to the Ministry of Finance, approval was requested for the amount of £61.387, representing subsidy for advertisements through T.V. channels, through the submission of invoices o specific advertising firm. One of the invoices, No. 5271 for £40.000, which was not bearing the signature of the receiver, was not including V.A.T. and was not providing details of the services rendered. (ii) While all other invoices of this advertising firm were either being paid or included in the creditors, the aforesaid invoice was not paid and was not included in the creditors. (iii) When the Ministry of Finance asked for explanations to be given about the aforesaid invoice, then the Board requested for the withdrawal of the invoice. In view of the serious queries which were raised, in connection with the validity and genuineness of above invoice, as well as of the reasons for its submission for payment, for services not rendered, I suggested that an investigation should be carried out for ascertaining the circumstances under which the invoice was issued, in the name of the Board, and why this was submitted to the Ministry of Finance for purposes of subsidy, and the relative findings to be furnished to the Attorney General. With regard to the payment of subsidy in kilos instead of litres, the Chairman informed me that this was due to an oversight, according to assurance given by the Accounts Section, in the letter dated 18.1.2002, addressed to the Ministry of Finance. With regard to the subsidization of the advertising expenses, it was ascertained by the Board, after the investigation of the matter, that the Director General, in his effort to increase the sales of olive oil in local market, he discussed with the advertising firm the cost for the new advertising programme, and submitted to the Ministry of Finance and the Board of Management a proforma invoice for information purposes. Finally, the Board decided not to proceed with the advertising campaign, after the demand for export and the assessment made, that the advertisement of the disposal of olive oil in the local market, would not have any spectacular results.

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In view of the above, the proforma invoice was withdrawn from the Ministry of Finance, as was stated by the Director General. In relation to the above, I wish to point out that the aforesaid document, of the advertising firm was an invoice and not a proforma invoice, which was bearing the stamp, for the proposed date of payment, after which interest would be paid. Additionally, this invoice was submitted to the Ministry of Finance for the payment of subsidy and not for information purposes and was withdrawn when explanations were asked by the Ministry. 4.137.13 Tenders (a) Construction of storage space. On 26.3.2001, the award of above tender was assigned to a certain company for the amount of £2.600. It was observed that the amount of £5.775 was paid, including VAT, under payment voucher No. 7536. The Board, at its meeting No. 587 of 17.5.2001, approved at a later state the above payment, which included additional work for £2.650, without tenders. It is worth mentioning, that the above works were subsequently demolished, at the cost of £3.500, in the same year, for the erection of some other buildings. The Chairman of the Board informed me that, tenders were invited for the two above cases, but due to the urgency of the project, the Board approved the additional expenditure. He also stated that after the assessment of the need for the extension of storage spaces and for their modernisation, so as to be in line with the Acquis Communautaire, the Board proceeded with the construction of iron/steel tankers which were placed in the above storage space, which was the most suitable. (b) Construction of bases for olive oil tanks. The audit of the relative records revealed that no proper planning and study were made by the Board and the appropriate procedure for the invitation and award of tenders was not followed, with the result the Board to be charged with additional cost and a delay to be observed in the completion of works. Specifically, no public tenders were invited and the amount of successful tender was increased from £16.000 to £33.000 and another amount of £8.500 will be paid for additional works. It was also observed that the successful tender was not complete, according to the initial evaluation, carried out by the Consultant, who suggested the award to another tenderer. After explanations and additional informations were asked from the tenderers, a second evaluation was made and the Consultant recommended the assignment of the award, to the above successful tenderer. It is noted that, while the initial tender was for £15.350, this amount was increased to £16.000, after explanations were given, which should not have been accepted. The Chairman of the Board informed me that he does not accept my observation that no proper planning and study were made by the Board and stated that the Board has seriously taken into consideration the recommendation of the Consultants. He also stated that the difference in the final cost was due to the fact that the Board decided for the extension of the supporting wall, at the same unit price, after the raising of an obstacle by Latsia Municipality. (c) Tender No. 10/2001 for the construction and supply of 10 metallic tankers for the storage of olive oil. From the audit and the study of the relative file, the following were observed:

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(i) For the preparation of the study, the terms/specifications and the supervision of the project, the services of the Technical Consultant were used, who as it appears from the relative correspondence, is an employee of a certain company. The same Consultant was engaged in another tender without showing in the records kept in the tender file, the method and the procedure followed for his assignment and the amount paid to him. It is noted that, for the purchase of services the tender procedures should be followed and the relative agreement should be prepared/ signed, in which the specific terms, duties, time schedule and remuneration should be outlined. The assignment of such specialized services should be made, in my opinion, to private consultants, who will undertake the responsibility for the sufficiency of the study. (ii) The two original tenders which were submitted were not kept in the relative file, but only copies of some pages. From these records it is not possible to ascertain: • Whether the amount of £7.900, which was paid for installation expenses and for the commencement of works and was added to the tender amount of the lower tenderer and included in the final contract amount (£171.000), was not included in the initial tender amount (149.490). • The manufacturer, the type, the technical characteristics and the efficiency of the freezing unit, which is included in the agreement. (iii) The tender documents presented serious omissions, the most important of which were: • The terms of payment were not specified, with the result these to be specified at a later stage. • It was not specified whether VAT was included or not in the amount of tender, with the result this to be included at a later stage. • The technical specifications and the efficiency of the freezing unit and of the pumps were not specified, and was left to the tenderers to make their own calculations. • There were no detailed specifications of the electronic control/follow up system. In view of the above, significant alterations were made in the initial tender of the contractor, at a later stage, which were included in the contract amount. As a result, the contract amount was increased to £171.000 plus V.A.T., while the initial amount of the successful tenderer was £149.490 and his alternative tender £156.240 (according to the report of the Board). The Chairman informed me that the Board secured the services of the above Technical Consultant, who was an expert in the operation of a similar system. 4.137.14 Advertisements. The amount of £21.387 was paid, under payment voucher No. 7581, to an advertising company, for advertisement purposes, without the invitation of tenders and the approval of the Board. 4.137.15 Olive oil issued free of charge for advertisement. In my previous Reports I recommended that the olive oil, issued free of charge for advertisement, to be approved by the Board, and special advertising bottles, instead of trading bottles, to be used for its disposal. Despite my recommendation, olive oil valued at £5.054 was issued, during 2001, free of charge, for advertisement without the approval of the Board. I also pointed out that, according to the Stores Regulations, all products issued free of charge should be recorded in a special register. The Chairman informed me that my recommendation has been accepted.

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4.137.16 Trading of olives. In my previous Reports it was stated that the disposal of olives by the Board was problematic because of the liberasation of the marketing of olives, with the result, the trading of olives, during the last years, not to be profitable for the Board. Below are given the receipts and sales of olives during the last four years:

Sales Stock 1.1 Receipts Value Stock 31.12 Year Metric tonnes Metric tonnes £ Metric tonnes Metric tonnes 1998 10 17 9,371 9 18 1999 18 8 4,045 3 23 2000 23 1 2,959 3 21 2001 21 -- 8,949 13 8 Despite of the improvement, which was noted in 2001, the appropriate measures were not taken promptly, resulting to the destruction of olives, as shown below:

Date Destruction Quantity Certificate (kilos) 24.10.2001 34 1.384 15.1.2002 35 2.217 It appears that the above destruction certificates were not approved by the Board. It is also stated that my suggestion, for the keeping of separate accounts for each tank, in which to record all the receipts and issues of olives, for purposes of control and follow up of the stocks of olives, was not taken into consideration by the Board. The Chairman of the Board informed me that, despite the intensified efforts which were made for the disposal of the stocks of olives, yet due to competition, these were not disposed and some quantities were destroyed. He also stated that my suggestions will be adopted, if a decision is taken in future for the trading of table olives. 4.138 CYPRUS TABLE GRAPES EXPORT BOARD Part A 4.138.1 Operating results. The revenue of the Board amounted to £8.606, whereas the expenditure was £7.727, i.e. there was a surplus of £755, after tax, compared to the deficit of £2.853 for 2000. The revenue represents fees from annual licences issued to exporters and for exports. 4.138.2 Dissolution and liquidation of Board. The Board at its meeting on 21.1.2002, decided to recommend to the Minister of Commerce, Industry and Tourism, the dissolution and liquidation of the Cyprus Table Grapes Export Board, under section 57 of the Law 61/91, after taking into consideration that its activities were drastically reduced, and that its operation under present legal regime, is not in line with Acquis Communautaire. The Minister decided for the dissolution of the Board and appointed the Audit Firm Price Waterhouse as a temporary receiver, under order dated 30.8.2002, which was published on 6.9.2002 in the Official Gazette of the Republic.

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4.139 CYPRUS POTATO MARKETING BOARD Part A 4.139.1 Financial position (a) Operating results. The sales of potatoes amounted to £24,51 m., compared to £19,39 m. for the previous year. The increase is mainly attributed to the selling prices, which, in the average, were higher from those of the previous year (£324 per tonne for 2001, compared to £259 per tonne for 2000). The selling expenses were £9,32 m., compared to £8,86 m. for previous year, which represent 38% of the sales, compared to 46% for the previous year. The packing tonnes were 76.156 for 2001, compared to 75.328 for 2000. The selling expenses per packing tonne for the two years were £122 and £118, respectively. The producers were paid the total amount of £14.812.708, out of which the amount of £14.718.891, represents 60% o the value of potatoes sold, compared to £9.729.181 (50%) for the previous year and £93.817 from the General Reserve of the Board. The total sales of potatoes for 2001 and 2000 were briefly as follows:

Crop 2001 2000 Tonnes £m. £/tonne Tonnes £m. £/tonne Winter 8.252 2,57 311 8.657 2,94 340 Spring 67.331 21,94 326 66.299 16,45 248 75.583 24,51 324 74.956 19,39 259

(b) Price Stabilisation Fund. Pursuant to section 27(1A) of the Cyprus Potato Marketing Board’s Law, the Board has power to administer and operate the Price Stabilisation Fund, according to principles and criteria and in a way determined by the Board, with the approval of the Minister, for the stabilisation of potatoes prices. The balance of the Fund was £1.095.159 at 30.9.2001, compared to £1.154.062 at 30.9.2000. This amount was deducted from the payments made to producers, during the years 1998 – 2000, for the repayment of the loan of £1,6 m. and interests of £155.576, as was stated in my Report for 2000. The Council of Ministers approved the payment of the amount of £1.755.576 to the above producers, without deducting the amounts due by them for social insurance contributions. According to the deliveries of potatoes, made during the years 1998 and 1999, the amounts of £5 and £8 per tonne, respectively, should be refunded to potato producers. (c) Cash and bank balances. The balances at 30.9.2001 and 30.9.2000 were as follows: 2001 20000 Bank balances 2.159.732 2.426.762 Cash 19.638 2.312 2.179.370 2.429.074

The above high balances are mainly, attributed to the loan of £1,6 m., referred to above, which was beyond the actual needs of the Board and remained unused, as well as the reduction of stocks of packing materials during the lasts years.

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4.139.2 Personnel (a) During the financial year under review, the Board employed 24 permanent employees, with total emoluments of £536.344, including the employer’s contributions to the various Funds, such as the Provident Fund, Defence Fund, Social Insurance Fund and Medical Fund, at an annual average cost of £22.348, per employee. Additionally, 2 persons were employed, as local staff, by the London Office, with total emoluments of £44.589, excluding the overseas allowances and rent allowance, payable to the permanent staff of London Office. The Board also employed 398 seasonal labourers, at various time intervals, with total wages of £904.080. (b) On 23.4.2001, the Director of London Office, resigned without being replaced. The Board employed a Quality Supervisor for a period of six months, who was paid the amount of £13.033. 4.139.3 Budget. The Budget for the financial year was approved by the Board, with considerable delay, on 7.8.2001, with the result, most of the actual revenue and expenditure, for the year, to be included in the Budget. It is noted that, in the Cyprus Potato Marketing Board Law No. 59 of 1964, there is no provision for the preparation, approval and execution of the Budget. My previous recommendation for the amendment of the Law, to regulate this matter, was not pursued. 4.139.4 Trading of potatoes of spring crop for 2001, by quality. For the spring crop of 2001, 24 varieties of potatoes were cultivated, excluding those for experimental purposes. The potatoes for salads include 10 varieties, those for general use include 7 varieties, including also those for experiments, the Bakers include 4 varieties and the Babies 3 varieties. It has been observed that the trading results for some varieties, were showing a deficit, because the payments to producers were higher from the trading income. Their analytical results are briefly stated below: (i) Potatoes for salads. Seven varieties present a deficit, fluctuating from £11 to £46 per tonne and two varieties present a surplus, fluctuating from £1 to £4 per tonne, with an average deficit of £3 per tonne. The variety “Velox” presents a deficit of £135 per tonne (total quantity of 47,5 tonnes), due to Ring Rot disease. The most important variety is “Nicola” (26.574 tonnes), which presents a surplus of £1 per tonne. (ii) Potatoes for general use. Two varieties present a deficit, fluctuating from £11 to £35 per tonne, and eight varieties present a surplus, fluctuating from £1 to £40 per tonne, with of an average deficit of £16 per tonne. The most important variety is “Spouda” (7.928 tonnes) and presents a deficit of £35 per tonne. (iii) “Bakers”. All the varieties present a surplus, fluctuating from £4 to £49 per tonne, with an average surplus of £25 per tonne. The most important variety is “Kara” (9.672 tonnes) and presents a surplus of £33 per tonne. (iv) “Babies”. Two varieties present a deficit, fluctuating from £1 to £36 per tonne and one variety presents a surplus of £15 per tonne, with an average deficit of £22 per tonne. The most important variety is “Nicola” (223 tonnes) and presents a deficit of £36 per tonne. The discounts allowed to potato buyers, of spring crop for 2001, due to quality problems, are briefly stated below: • Potatoes for salads. In United Kingdom (U.K.) the discounts allowed are fluctuating from £1 to £25 per tonne, for some varieties, with the higher discount for variety ”Ntitta”. In

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Europe these are fluctuating from £1 to 5 per tonne, with the higher discount for variety “Ivoba”. For the variety “Velox” the discount is £30 per tonne, due to Ring Rot disease. • Potatoes for general use. In U.K. the discounts allowed are fluctuating from £1 to £43 per tonne for some varieties, with the higher discount for “Spounda”. For the varieties of Agricultural Research Institute, sold in U.K., discounts of £85 per tonne were allowed. In Europe these are fluctuating from 1 to £3 per tonne, with the higher discount for “Timate”. • “Bakers”. In U.K. the discounts allowed are fluctuating from £2 to £9 per tonne, with the higher discount for variety “Marfona”. In Europe these are fluctuating from £3 to £18 per tonne, with the higher discount for variety “Slaney”. • “Babies”. No discounts were allowed. I recommended to the Board to evaluate and study the above results and to consider whether the potato production should be confined to the profitable varieties only. The production of so many varieties leads to the increase in the cost of production and trading, with adverse financial effects. 4.139.5 Discounts due to quality problems and price reductions. The discounts due to quality problems and price reductions in the United Kingdom amounted to £207.411 (3,18% of sales) compared to £361.141 (5,3%) for 2000, and in Continental Europe to £120.435 (0,68% of sales) compared to £169.084 (1,03%) for 2000. As it has been stated in the past, this is due to the different features of the two markets, such as the marketing system of potatoes, the pricing policy, the different varieties of potatoes supplied to the two markets, and the storage conditions. Out of the discounts allowed in U.K., the amount of £113.199 represents reductions in prices and discounts allowed to potato buyers, which presented quality problems due to their long period of storage, for examination purposes, for ring rot disease. Also, in various cases, special prices were given, to specific customers, which were not taken into consideration for the calculation of discounts. 4.139.6 Compensations for ring rot disease. According to the report of the Director General, the Board suffered damages, amounting to £219.289, as a result of the presentation of ring rot disease in a specimen of potatoes, of spring crop for 2001. The Board applied to the Government for covering these damages. Under the Council of Ministers decision No. 54689 of 6.12.2001, the amount of £77.000 was paid to the Board, representing the value of potatoes destroyed in U.K., by the competent authorities. Under the same decision, compensations amounting to £453.467 were paid, through the Ministry of Agriculture, to affected potato producers, for 2001. In the same decision, it is stated that a legal advice should be secured from the Law Office, in relation to the legal obligations of Government towards the producers, for the payment of compensations amounting to £2,5 m. during the next three years, when they will not be allowed to use their fields for the plantation of potatoes. No compensations were claimed from the supplier of potatoes seed, because the Legal Adviser of the Board expressed the view that it would be difficult to prove, at a later stage, that the potato seed was infectious, before its arrival to Cyprus, in view of the existence of the relative certificates of the competent authorities of Germany and Cyprus, that the seed was not infectious. It is noted that there is no contractual relation of the buyer-seller, between the Board and the supplier of potato seed, because the importation and sale of seeds to the potato producers are directly made by the Central Cooperative Bank, which has not suffered any damage.

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4.139.7 Delay in the issue of sales invoices for spring crop in United Kingdom. It was observed that for a quantity of 3.740 tonnes or 22,24% of potatoes sold, of spring crop for 2001, in United Kingdom, there was a delay of 3 months from their delivery, for the issue of the relative invoices. The defined practice is to issue invoices at the next day, after the delivery or within the following week and the payment to be made with 4-6 weeks from the date of invoice. The Acting Director of the Board informed me that the delay is due to the method used by prepackers, who are doing the packing according to the specifications of supermarket. The prepackers insit that the invoices should be issued after the resorting and packing, so that the actual quantities to be determined after possible losses or damages. 4.139.8 Secured Provident Fund / Establishment of Pensions Scheme. The Staff Union, has repeatedly submitted a claim for the establishment of a Pensions Scheme, similar to that of Public Service and other Public Corporations. The reply of the Management of the Board was always negative, because of the consequential cost for the Board. During the negotiations, which were carried out, for the revision of the Collective Agreement, which expired on 31.12.97, a proposal was made by the Board for securing the Provident Fund, instead of satisfying the claim for the establishment of a Pensions Scheme. After the preparation of an actuarial study, and while the Ministries of Commerce, Industry and Tourism and Finance, were studying the draft agreement and particularly the estimated cost for the Secured Provident Fund and in the light of the damage caused to the Fund from the investments in Cyprus Stock Exchange (£231.408 until 25.7.2001) the Board proposed a Pensions Scheme, with the right of selection from the part of personnel, and asked for the Government to undertake the total cost of the Pensions Scheme. According to the study, the deficient contribution at 31.12.2001 amounted to £1.886.000, plus the annual cost for current contributions to the Scheme. The estimated obligation for the operation of Secured Provident Fund, to be undertaken by Government amounted at 31.12.2001, to £360.000, plus the annual secured cost. The matter is pending, with the result the Collective Labour Agreement for the period 1.1.1998- 31.12.2000 not to be signed. 4.139.9 Import of potato seed by the Board. At the meeting of the Board, No. 1479 of 27.11.2001, the matter of importation of potato seed by the Board was discussed, instead of by the Central Cooperative Bank, with a view to reducing the costs, for the interest of producers. The relative study has not yet been prepared and I suggested that the matter to be considered by the Board for the following reasons: (i) A great part of the work is already performed by the Board. (ii) The producers will not be charged with the profit of 10% received by the Central Cooperative Bank. Indicatively, it is stated that the relative profit of the Central Cooperative Bank for 2002 was £225.000. (iii) The producers will be charged with the actual costs of importation and disposal of the potato seed (these costs are charged by the Bank on an estimated basis). Also, the costs will be reduced further, as a result of the engagement of the staff and the use of the installations of the Board. (iv) The Board will exercise the necessary control on the invitation, submission and opening of tenders.

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4.139.10 Unloaders of the Board at Ziprouke Port in Belgium. During the discussion of the tenders terms and specifications for the transport of potatoes by ships for the year 2002 (meeting No. 1491 of 7.2.2002), the matter relating to the deletion of the term, under which the ship owners and the Board are obliged to use a specific company for the unloading and storing of potatoes at Ziprouke Port in Belgium, was considered. This term was included in the relative tenders of previous years. The Board decided that the above term should also be included in the tenders for 2002 and the matter to be considered in future, after the submission of the relative study. It is noted that such term is not included in the tenders for other ports, either of United Kingdom or of Continental Europe, and the question is, therefore, arising for the inclusion of this term for the above port. 4.139.11 Harmonisation with Acquis Communautaire. The Board is not coming under the European Common Market Union and therefore, is not subject to the special provisions relating to the Common Agricultural Policy. Nevertheless, is subject to the general provisions, under which the trading of potatoes is carried out in competitive conditions. For purposes of harmonization of the Board with Acquis Communautaire, a special study has been prepared by a firm of Consultants, appointed by the Board. The study provides for securing the services of Special Consultant who will undertake the implementation of the programme for harmonization and the follow up of the time schedule, under which, until 11.7.2002 the relative bill will be enacted by the House of Representatives, so that the implementation of new legislation to start as from 1.1.2004. So far, the above Special Consultant has not yet been appointed, because the request of the Board for the payment by Government of relative expenses has not yet been approved. 4.139.12 Tenders. From the audit of tenders, cases were observed where the tender procedures followed by the Board, are not in line with the Tender Regulations of the Board and the principles of proper administration and management of the tenders such as: (i) The evaluation of tenders is carried out usually by one person, instead of by a three member committee, as provided by the Regulations. (ii) In most cases, the certificates showing the origin and suitability of materials received are not submitted, contrary to the Regulations. (iii) In various cases, the time schedules provided in the terms of tenders or/and agreements for the delivery of materials are not followed by the tenderers, without any action to be taken against them. (iv) In several cases the performance guarantees are not submitted or amounts are subsequently retained against the delivery of materials, as guaantee. (v) In several cases, agreements are signed, containing different terms from those of tenders, particularly for the quantities and the date of delivery. This is a favourable treatment for tenderers who are unable to execute their tenders according to the relative terms, which, possibly, were considered as dissuasive for other prospective tenderers. 4.139.13 Bad debts of H.&J.M. Bennet (Import Export) Ltd. The Board decided on 7.2.2002, with the approval of the Minister of Commerce, Industry and Tourism, for the disposal of the amount of £50.000, for taking legal measures against the former director of the group of companies BENNET and other persons or companies, for preferential payments few days,

332 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 before the holding company of the group, was declared bankrupt, as well as against the directors who authorised such payments. So far, no legal measures have been taken. The Acting Chairman of the Board informed me that an effort is made for covering the expenses by the liquadors and if this is not possible, the legal expenses will be covered by the Board. 4.139.14 Board’s claims from ship owners of ship STROFADES II (May 2000). The Legal Adviser of the Board, expressed the view that the Board has lost the right to claim damages from the ship owners of above ship, amounting to £29.693, resulting from the freighting of the ship in May 2000, because the claim was not submitted within the period of 12 months from the date of the damages. 4.139.15 Amounts due by producers for personal loans received in 1992. At 30.9.2001, the total amount of £52.743 was due by eight potato producers, representing personal loans received from the Board in 1992. Although legal measures have been taken and court decisions were issued in 1997 and 1998, the amounts due have not been collected. Out of the total amount, the amount of £35.250 is due by a potato producer, who was granted on extension of time for the settlement of his debt, without payment of any amount. The same producer is indebted for the amount of £7.260, representing potato seed sold to him in 1993, for which a court decision was issued on 2.7.97, against him. 4.139.16 Amount due by a potato buyer in Cyprus. The amount of £11.896 is due by a buyer, representing the value of potatoes sold to him by the Board in 2000, without any legal measures to be taken against him. Part B 4.139.7 Income tax and defence contribution. No final decision has been taken by the appropriate Government Services, as to whether the Board is exempted from the payment of above taxes. 4.140 CENTRAL SLAUGHTER HOUSE BOARD Part A 4.140.1 Financial position. (a) Liquidity. The Board continues to face serious liquidity problems, resulting to its inability to meet the current liabilities, which at 31.12.2001 amounted to £3,4 m. while the current assets were £2 m., i.e. there was a deficit in working capital of £1,4 m. Consequently, the operation of the Board depends to a large extent on the continuation of financial assistance provided by Government, either in the form of subsidy or guarantees. (b) Operating results. The accounts for 2001 showed a deficit of £618.823, compared to £1.109.107 for 2000. The accumulated deficit at 31.12.2001 amounted to £9,23 m., compared to £8,61 m. for 2000. (c) Revenue. The revenue amounted to £3,58 m. compared to £3,40 m. for 2000, i.e. there was an increase of £0,18 m. This is mainly attributed to the increase of collections from slaughterhouse fees, from £2,98 m. in 2000 to £3,12 m. in 2001. The revenue includes state subsidy amounting to £0,2 m., the same as for the previous year, for providing service to 62 rural communities, according to the Council of Ministers decision of 19.3.97.

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(d) Expenditure. The expenditure amounted to £4,20 m., compared to £4,51 m. for the previous year, i.e. there was a decrease of £0,31m., which is mainly due to the decrease of personal emoluments. (e) Long term liabilities. The long term liabilities at 31.12.2001 amounted to £7,61 m., compared to £2,28 m. for 2000. 4.140.2 Personnel. At 31.12.2001, the Board employed 37 permanent employees (40 in 2000). The personal emoluments of permanent employees amounted to £666.587, compared to £664.593 for 2000. It is noted that 3 employees resigned during the year and 2 other employees were interdicted as from 2.6.2000, and were drawing half emoluments, since the date of their interdiction. The Board also employed 163 regular and casual labourers (179 in 2000), with total wages of £2.163.696, compared to £2.424.070 for 2000, i.e. there was a decrease of £260.374 or 10,7 %. The total emoluments of the permanent staff include the amount of £75.870 (£78.535 for 2000) representing overtime work, and £28.472 for pensions benefits. The total wages include the amount of £268.964 (£259.435 for 2000) representing overtime work and £57.679 for gratuities paid to labourers who resigned voluntarily or their services were terminated due to redundancy. On the basis of the above, the average annual cost, for each permanent employee and labourer, excluding the personal emoluments of those who resigned, the pensions benefits and the gratuities of labourers, was £16.756, and £12.920, respectively, compared to £15.456 and £12.631 for 2000. It is noted that, as from 1.11.2001, revised emoluments are paid to 27 employees, according to the provisions of the collective labour agreement for the period 1998-2000. As I was informed, the Board adopts the policy for the non appointment of staff and for the reduction of staff, the number of which was 37 permanent employees and 158 labourers, in October 2002. 4.140.3 Criminal prosecutions. After specific reports were made against two senior officers of the Board, a police investigation was carried out for possible offences, relating to financial matters and abuse of power. Pursuant to the decision of the Board of Management, dated 2.6.2000, the above officers were interdicted. A criminal prosecution was instituted and as I was informed, the charges against them were subsequently withdrawn on 25.4.2002 by the Law Office, because the accused were found innocent. With regard to a possible disciplinary prosecution against the above officers, the Chairman of the Board of Management informed me that the matter is being considered in consultation with the Ministry of Interior. 4.140.4 Disciplinary case. The Board of Management at its meeting held on 29.6.2001, after taking into consideration the decision of the Larnaka Court, dated 15.5.2001, for the condemnation of an employee of the Accounts Section of the Central Slaughter House, who was involved in the misappropriation of cheques for sick leave, issued to the staff of the Central Slaughter House, amounting to £8.081,28, decided for the termination of her services. 4.140.5 Appointment of Consultant/Supervisor. The Board of Management decided for the appointment of a Consultant/Supervisor on a temporary basis to supervise the operations of Central Slaughter House, after it was ascertained that this was not properly supervised. As from 2.6.2000, the above person is also carrying out the duties of the Director General, under a decision of the Board of Management.

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4.140.6 Outstanding loan instalments. Due to existing financial problems, the Board was unable to pay, since 1989, the loan instalments to the banks and the Government, amounting to £5.092.242. Under Council of Ministers decision No. 51.465 of 22 and 23.3.2000, approval was given for the consolidation of all loans, amounting to £8.3 m., approximately, and the issue of a new loan for the same amount by the Loan Commissioners, at lower interest, repayable in 20 years. Under the new Council of Ministers decision No. 54499 of 31.10.2001, it was clarified that, for the implementation of the previous decision, a long term loan up to £5,5 m. will be issued by the Loan Commissioners, under a government guarantee. On the basis of above decision, a loan for £5,5 m. at £6% interest, repayable up to 30.11.2021, by annual instalments, was issued to the Central Slaughter House by the Loan Commissioners, which was used for the settlement o all outstanding loan instalments, which were due to the banks and the Government. 4.140.7 Delay in the payment of social insurance contributions and income tax. At 31.12.2001, the total amounts due to Social Insurance Services and the Department of Inland Revenue were £2.162.742 and £572.527, respectively, including surcharges amounting to £250.994 and £55.318, respectively. As I was informed, legal measures have been taken by the Social Insurance Services against the Board for the non payment of contributions promptly. I understand, that the non payment of above arrears is due to the liquidity problem and I suggested that this matter should be seriously been considered by the Board. The accumulated fines, which were paid until 31.12.2001, to Social Insurance Services and the Department of Inland Revenue, amounted to £64.320 and £181.904, respectively. As I was informed, the current obligations of the Board are being paid regularly as from September 2001, to the Social Insurance Services and the Department of Inland Revenue, after the increase of fees for the services rendered by the Board. With regard to the payment of the instalments in arrear, the Chairman informed me that an agreement was reached with the Department of Inland Revenue for the monthly payment of the amount of £39.000, whereas the settlement of amounts due to the Social Insurance Services is still pending. 4.140.8 Debtors (a) Agreement for the sale of slaughter sub products. At 31.12.2001, the amount of £188.316 was due to the Board, by the buyer of slaughter sub products. After the issue of the order S.L.28/2001, by the Minister of Agriculture, Natural Resources and Environment, published in the Official Gazette on 12.1.2001, under which the processing of animal rejects, used for the production of animal food, were prohibited, the buyer requested the Board to relieve him from his obligations, emanating from the relative agreement, and refuses to pay the amount of £75.000, representing the value of slaughter sub products, received by him after the publication of the above order. I suggested that this matter should be considered by the Board, so as a decision to be taken, regarding the above agreement and the measures to be taken for the amounts due. In the meantime, the relative guarantee, amounting to £65.000, was confiscated on 15.3.2001, by the Board and instructions were given to the Legal Advises of the Board, to file a lawsuit for the collection of arrears. (b) Agreement for the sale of intestines. At 31.12.2001, the amount of £147.596 was due to the Board by the buyer, representing the sales for the periods 12/96 – 8/97 (£58.580) and 4/99 – 8/99 (£40.933), and interests for the period 1991-2001 (£48.083). The above amounts have

335 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 not yet been settled and the relative agreement expired on 31.7.99. In view of the above, a lawsuit was filed on 1.9.2000, which is pending before Larnaka Court. 4.140.9 Upgrading of installations. Under the Council of Ministers decision No. 51465 of 22 and 23/3/2000, approval was given for the payment of the amount of £1.066.000 to the Central Slaughter House, to be used for the upgrading of its installations for purposes of harmonization with Acquis Communautaire, as well as of the amount of £300.000 for solving the problem of environmental pollution. Until December 2000, the amount of £500.000 was paid for above purposes and the remaining amount of £866.000 was paid in December 2001. The Board decided on 18.9.2001 for the award of tender for the technological upgrading of its installations. In the meantime the installation of the new plant and machinery was made in 2002, and in July 2002 the line for slaughtering of cattle was operating and in November 2002, the line for slaughtering of pigs is expected to operate. 4.140.10 Resignation/early voluntary retirement of Mechanical Engineer. On 27.12.2001 the Board of Management approved the agreement, between the Management and the staff union, for the payment of the amount of £50.000 to the Mechanical Engineer of the Central Slaughter House, in case of his resignation/voluntary early retirement, subject to the approval of the Ministry of Interior. I pointed out to the Board of Management that the pensions benefits of the above employee, should be calculated according to the existing relative Regulations. 4.140.11 Sick leave allowances. According to the collective labour agreement for the period 1.1.98 – 31.12.99, in case of sick leave, full emoluments are paid to the staff, provided the sickness benefits payable by the Social Insurance Fund are deposited to the Board. From an investigation carried out by the Board, it was revealed that during 2000 and 2001, 39 cheques were issued by the Social Insurance Services to the labourers of the Central Slaughter House, representing sickness benefits for the amount of £4.652,54, which were not deposited to the Board, out of which 30, for the amount of £4.168.11, were encashed by the entitled persons. The Chairman of the Board, informed me that, an agreement was reached with labour union, for the method of payment to the Board of the amounts due, which has been adopted as from February 2002. Part B 4.140.12 Tenders. As the Tender Regulations, approved by the Board of Management, present several omissions and weaknesses, I recommended their revision, in order to be in line with the Public Tenders Law and Regulations. The Chairman of the Board informed me that, the Board of Management, under decision dated 3.9.99, has upgraded the Tender Committee, so as to consists of three members, and the new Tender Regulations of Nicosia Municipality are now being considered for adoption. 4.141 WATER BOARDS – GENERAL Part A 4.141.1 Income tax and special contribution. The Water Boards fully comply, since 1995, with their taxation obligations provided by the existing legislation. 4.141.2 Internal control systems. As a result of the increasing volume of activities of the Water Board, it is necessary for the establishment of well organised Internal Audit Units, with suitable, experienced and qualified personnel and the preparation of the relative programmes of work.

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4.141.3 Purchase of water from the Department of Water Development (a) Outstanding liabilities. The total debts due by Water Boards to the Department of Water Development amounted, at 31.12.2001, to £29,9 m. An amount of £11,8 m. is not included in the respective accounts of the Boards, because it represents the increase in the purchase price of water from 27 cents per c.m. to 33,5 cents per c.m., which the Boards do not accept. An amount of £11,7 m. is shown in the accounts, but this is not acceptable, for the following reasons: (i) The water supplied by the Limassol Refinery (£10,3 m.) to the Water Board Limassol was invoiced at 33,5 cents per c.m., whereas the approved selling prices for the consumers are much lower. (ii) Water valued £1,4 m., which was pumped from eleven boreholes at Germasogeia, was invoiced up to 31.5.98 at 3,7 cents per c.m. and from 1.6.98 at 33,5 cents per c.m., charges which are not accepted by the Water Board Limassol. Furthermore, the Board claims that Government should provide this water free, as a counterbalance for the losses caused from the loss of water supply sources, as a result of the construction of Kourris Dam at Alassa. (b) Writing off of amounts due by Nicosia and Larnaka Water Boards. Pursuant to the Council of Ministers decision No. 55.739 of 30.5.2002, a Ministerial Committee was appointed, consisting of the Ministers of Interior, Finance and Agriculture, Natural Resources and Environment, in which the Attorney General of the Republic was participating, to study the matter relating to the write off of the amounts due by Nicosia and Larnaka Water Boards, representing the difference between the purchase price of water supplied by the Department of Water Development and the selling price charged to consumers. 4.141.4 Irregular sale of water. The sale of water in areas outside water supply limits by the Boards, as specified in the Law, continued in 2001. I expressed the view that such actions are irregular, because these areas are outside the water supply limits of the Boards and the selling price is higher than the price charged to their consumers. I recommended that the possibility of accession of these areas in the boundaries of the Boards, to be considered, under an appropriate legal regulation. As I was informed, the Council of Ministers, under decisions No. 53.440 of 28.3.2001 and No. 53.577 of 25.4.2001 approved the water supply and the management of two areas by the Board and consultations are carried out for the remaining areas. 4.141.5 Early retirement and concession of additional increments. The members of the Provident Fund, who exercise the option for early retirement, under the Pensions Scheme, are allowed two additional increments, on their salary scale, even if these are over and above the top scale of their salary scale. The payment of pensions benefits, on the basis of increased salaries, is contrary to section 14(1) of the Water Supply (Municipal and Other Areas) Law and section 36(1) of S.L. 111/96, which provides that “the salary of each post in the service of the Water Board is that which is specified in the approved scheme of service”. Since the implementation of Section 2 of the collective labour agreement of 1998-2000, it appears that the exercise of the option for early retirement is frequently made, with the result the Water Boards to be charged with additional significant amounts. In several cases, the period of time between the early retirement and the normal retirement is only one month. I recommended that the possibility for specifying a minimum period for early retirement to be considered, so that a uniform policy to be adopted by all the Water Boards and the maximum possible financial saving to be attained.

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4.141.6 Appointments/promotions to first entry and promotion posts. Contrary to the provisions of the existing Regulations and the Schemes of Service, of appointments or/and promotions to first entry and promotion posts, are made without these posts being previously published. 4.141.7 Loss of water. The percentage of loss of water between the quantity which was purchased with that which was sold, was fluctuating between 18,60% and 36% compared with that of the previous year which was 12,87% and 16% respectively. These percentages are beyond the acceptable limits of loss of water and should be, immediately, investigated. Part B 4.141.8 Establishment and operation of Funds. No Regulations have yet been approved, governing the establishment and operation of Funds for Medical Treatment, Welfare etc., as provided by section 14(3) of the Water Supply (Municipal and Other Areas) Law (Cap. 350). 4.141.9 Organisational posts. Cases were again observed of non implementation of the provisions of section 14(1) of the Water Boards (amendment) Law 172/88), which specifies that new posts and schemes of service must be approved by the Council of Ministers. The justification provided is that the new posts are included in the respective collective agreements, which are approved by the Council of Ministers. I pointed out that any arrangements and contractual obligations emanating from the collective agreements should be in line with relevant legislation. 4.141.10 Financial Instructions and Stores Regulations. The Stores Regulations and Financial Instructions, which were adopted and implemented by the Boards, have not yet been submitted to the Council of Ministers for approval, contrary to section 40(1)(g) and (2) of Water Supply (Municipal and Other Areas) Law (Cap. 350). 4.142 NICOSIA WATER BOARD Part A 4.142.1 Financial position (a) Operating results. The accounts showed a deficit of £576.561, compared to £256.370 for 2000. (b) Revenue. The revenue amounted to £6.243.678, compared to £5.578.324 for 2000, i.e. there was an increase of £665.354, which is attributed, mainly, to the increase of quantity of water sold and the rendering of services to consumers. (c) Expenditure. The expenditure amounted to £6.820.239, compared to £5.834.694 for 2000, i.e. there was an increase of £985.545, which is attributed, mainly, to the increase of the cost of sales, personal emoluments and the repair and maintenance expenses of fixed assets. 4.142.2 Personnel. The Board employed 135 persons and the expenditure for salaries, allowances and employer’s contributions to the various Funds was £2.592.257, compared to £2.506.997 for 2000. 4.142.3 Long term liabilities. At 31.12.2001, the long term liabilities, for loans received from the Loan Commissioners amounted to £586.793. 4.142.4 Loss of water. The percentage of loss of water between the quantity which was purchased and the quantity sold was 20,45%, compared to 12,87% for 2000. The increase is attributed to the existing problems in the network, due to the frequent and for long time

338 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 restrictions in water supply. As I was informed by the Chairman of the Board, efforts are made for reducing the percentage to acceptable limits and for this purpose specialised equipment has been secured and the results from the use of the equipment are considered satisfactory. 4.142.5 Appointments/promotions. During 2001, appointments to first entry posts were made without being published, contrary to existing Regulations and the relative schemes of service. 4.142.6 Medical treatment and welfare. During the year, the amount of £147.240 was spent for the operation of the medical treatment scheme, representing an annual average cost of £1.090 for each employee. The annual contribution of the Board to the Welfare Fund is 3,24% on the personal emoluments, and for 2001, was £50.881. These schemes/funds are operating without approved Regulations, contrary to section 14(3) of the Water Supply (Municipal and Other Areas) Law (Cap. 350). As I was informed by the Chairman of the Boards, the necessary arrangements are made for the preparation and submission of relative Regulations, for approval. 4.143 LIMASSOL WATER BOARD Part A 4.143.1 Financial position (a) Operating results. The accounts showed a deficit of £2.852.858, compared to £2.169.286 for 2000. (b) Revenue. The revenue amounted to £2.648.668, compared to £2.381.318 for 2000, i.e. there was an increase of £267.350. (c) Expenditure. The expenditure amounted to £5.501.526, compared to £4.550.604 for 2000, i.e. there was an increase of £950.922, which is attributed, mainly, to the cost of sale of water. (d) Liquidity/viability. The financial position of the Board is continuously deteriorated, with an acute liquidity problem. As a result, the Board is unable to settle its current liabilities, which at 31.12.2001, amounted to £13 m. (£10 m. for 2000). 4.143.2 Personnel. The Board employed 101 persons and the expenditure for salaries, allowances and employer’s contribution to the various Funds amounted to £2.156.281, compared to £2.131.947 for previous years. 4.143.3 Collective labour agreement for the period 1.1.98 – 31.12.2000 (a) Establishment of new posts against abolition of other. In my previous Report, I pointed out that the approval of the Council of Ministers is needed for the establishment of new posts, the fixing of salary scales and the preparation of schemes of service and that all first entry posts should be published. The Board of Management proceeded with the upgrading of existing posts, the approval of salary scales and schemes of service and offered appointments to existing staff, contrary to restrictive provisions of Section 14(1) of the relevant Law, under which the Council of Ministers is empowered to take such decisions. (b) Upgrading of salary scale and change of title of the post. The Board of Management decided for the upgrading of the salary scale of the Computer Officer from A8-A9 to A10-A12+2 and for the change of the title of the post to Officer in charge of Computer Section. He also decided, by majority, for the posting of this officer at the initial step of the salary scale A12+2, contrary to section 89 of the terms of service of the staff which is in line with the upgrading rules

339 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 of the Government Service. For the above case, the Board of Management requested, on 21.3.2002, the covering approval of the Council of Ministers. The Ministry of Interior refused to submit the case to the Council of Ministers, after taking into consideration the views expressed by my Office and the Public Administration and Personnel Service and on 29.4.2002 has pointed out that the revision of the salaries of affected employees should be made according to the Regulations, governing the revision of salaries in cases of upgrading of posts, applicable in the Public Service (S.L. 175/95, Reg. 18(1)). 4.143.4 Long term liabilities. At 31.12.2001, the long term liabilities amounted to £143.781, representing loans received from the Loan Commissioners. 4.143.5 Loss of water. The loss of water during 2001, was 2,12 m. cub. meters or 18,60% compared to 1,35 m. cub. meters or 13,87% for 2000. 4.143.6 Pensions and Gratuities. (a) A considerable number of employees who retired after 1.1.82, date of implementation of the Pensions and Gratuities Regulations, have not paid their contributions to the Widows and Orphans Fund for the period of their service from 1.1.82 up to their retirement, which is considered as a period of compulsory contributions, according to section 6 of the relevant Regulations. (b) Under the Board’s of Management decision the amount of £0,5 m. was transferred, on 16.2.2000, from a fixed deposit account kept with the Bank of Cyprus to a bank account, with the same bank, for a scheme which provides for a direct connection with the shares prices index of “Dow Jones Euro Stoxx 50”, which will expire on 8.3.2002. The return of the index is the difference between the average closing prices for each quarter, and the closing price of 6.3.2000. Until the date of expiration, there was no return from the above investment, as the average prices of the index were showing a loss, with the result the Pensions and Gratuities Fund not to earn any income. I expressed the view that such high risky investments should be avoided or at least a low return to be secured, with a bank guarantee. 4.143.7 Provident Fund of the staff of Limassol Water Board. The Management Committee of the Provident Fund had purchased in 1999 shares of public companies, contrary to section 16(2) of the Regulations, which provides that the available cash balances of the Fund should be invested in stocks, to be decided by the Committee. The above investment showed a loss of £190.205, during 2001, due to the continuous fall in the share prices of the Stock Exchange. 4.143.8 Medical treatment and welfare. During the year the amount of £119.525 was spent for the operation of the Medical Treatment Scheme, which corresponds to the annual average cost of £1.183 for each employee. The annual contribution of the Board to the Welfare Fund is equal to 3,24% of the staff emoluments and for 2001 was £42.982. The above Schemes/Funds continue to operate without approved Regulations, contrary to section 14(3) of the Water Supply (Municipal and Other Areas) Law (Cap. 350). 4.143.9 Computerisation of services – Agreement 3/94. As I stated in my previous Reports, a delay is observed in the completion of above agreement and problems are encountered in the implementation and operation of the relative computerised programmes. As a result of the delay observed and for satisfying the existing needs in computerised systems, the Board secured the services of local firms, for the computerisation of various services.

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The Board in its effort to secure the proper utilisation of the expenditure, amounting to £177.391, had reached to an agreement on 29.12.2000, after consultions were made with the supplier, for the signing of a new agreement. The basic provisions of the new agreement have not yet been implemented. Nevertheless, the Board continues to receive the services of the supplier, free of charge. 4.143.10 Consultancy services – Garyllis study – Construction of water refinery station. The expenditure for the above study amounted to £40.189. I asked to be informed of the scope and results of the study and the anticipated benefit for the Board, taking into consideration that tenders will be invited by Government for the construction in Limassol area of a water desalination unit. 4.144 FAMAGUSTA WATER BOARD Part A 4.144.1 Operating results. The revenue of the Board amounted to £323.636, compared to £320.574 for 2000. This amount includes the government subsidy from the Budget of the Fund of Displaced and Affected Persons, amounting to £226.761, and income from the employment of the staff of the Board in other Services, amounting to £95.917. The respective expenditure amounted to £323.636. 4.144.2 Assets and liabilities. The assets and liabilities shown in the Balance Sheet at 31.12.2001, include only the balances of the accounts after 14.8.74, because the relevant books and accounts for the period before the 14.8.74 have been abandoned in Famagusta, as a result of the turkish invasion. 4.144.3 Personnel. The Board employed eight employees. Besides the Accountant who spends about 50% of his time for the Board’s activities, while for the remaining time he is employed at the Water Board Larnaka, the remaining seven employees are seconded to the Water Boards of Limassol and Larnaka and to various Government Services. The expenditure for salaries, employer’s contributions to the various Funds and other benefits of the above employees amounted to £188.417. 4.145 LARNAKA WATER BOARD Part A 4.145.1 Financial position (a) Operating results. The accounts showed a deficit of £735.008, compared to £668.871 for 2000. (b) Revenue. The revenue amounted to £1.830.069, compared to £1.497.563 for 2000. (c) Expenditure. The expenditure amounted to £2.565.077, compared to £2.166.434 for 2000. (d) Cash liquidity. The financial position of the Board is continuously deteriorated. As a result, there is an acute liquidity problem, and the Board is unable to settle the current liabilities which, at 31.12.2001, amounted to £4 m. I suggested that a viability study be carried out. 4.145.2 Personnel. The Board employed 54 persons and the expenditure for salaries, allowances and employer’s contributions to the various Funds amounted to £1.087.680, compared to £1.063.845 for 2000. 4.145.3 Loss of water. The percentage of loss of water between the quantity purchased and the quantity sold was 36%, which is considered as very high (it is double from the percentage of

341 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 loss of water of Nicosia and Limassol Water Boards), compared to 16% for 2000 and 14,36% for 1999, and this should be investigated. The Chairman of the Board informed me that the reasons for the increase have been identified and efforts are made for the reduction of the percentage of loss of water. 4.145.4 Medical treatment and welfare. During the year, the amount of £58.473 was spent for the operation of the Medical Treatment Scheme, which corresponds to the annual average cost of £1.083 for each employee. The contribution of the Board to the Welfare Fund was equal to 3,24% of the staff emoluments and for 2001 was £21.892. Despite my repeated observations, the above Schemes/Funds continue to operate without approved Regulations, contrary to the provisions of the relative legislation. 4.146 FUND FOR THE ERECTION OF CYPRUS MUSEUM Part A 4.146.1 Financial position. The receipts of the Fund for 2001 amounted to £1.334.326, compared to £1.301.218 for 2000. The receipts represent revenue derived from LOTTO/PROTO (£500.000), entrance fees to Museums and archaeological areas (£423.742) and interests from deposits or investments (£407.379). At 31.12.2001, the accumulated balance of the Fund was £11.527.693, compared to £10.193.367 for 2000. 4.147 PUBLIC LOANS FUND Part A 4.147.1 Financial results. The accounts for the year 2001 were submitted in June 2002 and the audit has not yet been completed. The accounts showed a surplus of £2.903.726, compared to £2.941.158 for 2000, i.e. there was a decrease of £37.432, which was attributed, mainly, to the decrease of interests received and the increase in the interests for prepayments. During the year, loans amounting to £11,2 m. were issued, compared to £9,0 m. for 2000. At 31.12.2001 the balance of the Reserve Account amounted to £61,4 m., compared to £58,5 m. for 2000. 4.147.2 Cash surplus. At 31.12.2001 the Public Loans Fund showed a cash surplus of £4.783.994, compared to £8.138.293 for 2000. 4.147.3 Statement of outstanding loans. The following statement shows the balances of the outstanding loans, by economic sector, due to the Fund at 31 December 2001 and 2000: 2001 2000 £000 £000 Water Development 3.883 4.195 Agricultural Development 14.013 15.890 Rural Development 14.307 13.992 Fisheries Development 355 360 Education and other Services 11.177 10.513 Tourism Development 6.831 7.314 Public Corporations 24.360 17.337 Commerce and Industry Development 180 243 Agricultural Credits 77 137

Fund for the Cultivation of T/C Land 949 949 76.132 70.930

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4.147.4 Outstanding loan instalments. At 31.12.2001 the outstanding loan instalments amounted, according to the accounts, to £27 m., after deduction of the provision of £4,6 m., for doubtful debts and £2,0 m. for debts written off. The provision for doubtful debts includes the amount of £3,0 m., which represents loans to Turkish Cypriots (capital and interest), additional interest in arrear amounting to £0,7 m., which exceeds the capital issued, and a general provision of £0,7 m. The provision for the write off of debts includes an amount of £1,2 m., which should have been written off since 18.11.94, according to the provisions of the Debtors Relief (Temporary Provisions) Laws, which was due by refugees and affected persons as a result of the Turkish invasion. It includes also an amount of £0,9 m., which represents loans, which will possibly be written off, pursuant to court decisions. The greater part of the remaining balance of the outstanding amount is due by Turkish Cypriots and other debtors, who have paid no amount for several years, mainly because of the prevailing conditions after the Turkish invasion in 1974. It is observed that the greater percentages of arrears relating to the schemes which were operating at 31.12.2000, are due by the Water Associations, the Selfemployed and the District Public Road Transport Companies. With regard to the schemes which are not operating, high percentages of arrears are due by hotels, School Committees, Municipalities, fishermen and the farmers, who received loans for the irrigation of T/C property, etc.. 4.148 CYPRUS CHILDREN’S ASSISTANCE FUND COMMITTEE Part A 4.148.1 Operating results. The accounts for the year 2001, were submitted to my Office, with delay, in July 2002, with the result their audit not to be completed. The accounts showed a surplus of £1.176, compared to a deficit of £6.974 for 2000. During the year 2001, financial assistance amounting to £107.644 was granted to needy children, compared to £105.303 for 2000. 4.149 GAME FUND Part A 4.149.1 Receipts. The receipts of the Fund for the year 2001, amounted to £1.888.332, compared to £1.798.994 for 2000. Most of the receipts represent fees for the issue of game and fire arms licences. 4.149.2 Payments. The payments amounted to £2.005.601, compared to £1.897.897 for 2000. For a third consecutive year, the payments of the Fund were exceeding the receipts and there is the possibility that the future obligations of the Fund, regarding the payment of pensions and gratuities, to create serious financial problems. 4.149.3 Accumulated Fund Reserve. At 31.12.2001, the balance of the Accumulated Fund Reserve Account was £1.990.534, compared to £2.107.803 for 2000. 4.149.4 Agreement with the Central Cooperative Bank for the renewal of game licences, through the Cooperative Credit Societies. To the Central Cooperative Bank, 41.500 stamps/security tickets, valued at £1.452.500, were issued by the Game Fund. Until the end of November 2001, under relative agreement, all the unused stamps should have been returned and the collections to be lodged to the Central Cooperative Bank, in the General Government Account for the account of Game Fund. Until 12.8.2002, the amount of £902.020 (value of 25.772 stamps) was lodged and 15.113 stamps were returned. During the audit, it was

343 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 observed that 615 stamps valued at £21.525, were pending for delivery, and the Central Cooperative Bank was requested to arrange for settlement. 4.150 PROVIDENT LOTTERY FUND Part A 4.150.1 Operating results. The actual collections of the Fund for 2001, amounted to £82.174, whereas the actual expenditure was £133.260, compared to £82.532 and £86.074 for 2000, respectively. The balance of the reserve account, at 31.12.2001 was £2.508, compared to £53.594 for the previous year. 4.150.2 Not issue of Provident Lottery. During the years 1997 – 2001, the Provident Lottery was not issued and the expenses of the Fund were covered, mainly, by state subsidy. 4.150.3 Financial assistance to disabled persons. During 2001, financial assistance, amounting to £115.260, was paid to disabled persons. This amount is exceeding considerably the percentage of 80% of the revenue, which is specified by section 4 of the Provident Lottery Law. 4.151 ADVOCATES PENSIONS FUND Part A 4.151.1 Financial position and operating results. The revenue and expenditure of the Fund amounted to £1.331.768 and £480.828, respectively, compared to £1.239.840 and £403.481 of the previous year, i.e. there was a surplus of £850.940, compared to £836.359 for 2000. At 31.12.2001, the cash and bank balances amounted to £5.773.295, compared to £5.320.109 for 2000. 4.151.2 Arrears of members contributions. At the end of the year, the arrears amounted to £169.662, compared to £118.200 for 2000. The arrears include amounts due by members for many years, since 1977. I recommended that the necessary action should be taken for their collection and a decision to be taken for the writing off of those amounts which could not be collected, provided the relative Regulations are duly amended. 4.151.3 Members and pensioners. The members and pensioners of the Fund were 1702 and 78, respectively, compared to 1.611 and 68 for 2000. 4.151.4 Investments. During 2001, the Fund invested the amount of £249.884 in shares of Cyprus Banks, registered in the Cyprus Stock Exchange, after the amendment of the Regulations of the Fund, which was approved by the House of Representatives on 9.6.2000. 4.151.5 Lawsuits filed by members of the Fund. The Fund rejected certain applications of its members for the payment of gratuity, because they could not comply with the provisions of the Regulations, resulting to the filing of two lawsuits at the Nicosia District Court, against the Fund. In case of a favourable decision for the plaintiffs, the financial cost for the Fund will be considerable, as other members, whose applications for the payment a gratuity was rejected, may possibly apply to the court. Part B 4.151.6 Law Officers. The Board of Management of the Fund decided that the Law Officers, who have been or will be appointed at the Law Office of the Republic after the 14.9.66, will cease to be contributors to the Fund. Against the above decision a lawsuit was filed at the Court, which was accepted. The Board of Management of the Fund appealed to the Supreme

344 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Court but the recourse was rejected and I asked to be informed of the actions to be taken for the settlement of the matter. 4.152 CHRISTOS STELIOU IOANNOU FOUNDATION Part A 4.152.1 Operating results. The accounts showed a deficit of £74.231, compared to £63.534 for 2000. The revenue amounted to £958.192 (£984.666 for 2000) and includes state subsidy for £849.312, compared to £870.591 for 2000. The expenditure amounted to £1.032.423 (£1.048.200 for 2000) and includes salaries, wages, and allowances of the staff, amounting to £808.049, compared to £820.870 for 2000. 4.152.2 Personnel. The Foundation employed 36 permanent, 6 casual, 2 on secondment and 21 weekly paid employees. At 31.12.2001, there were 3 vacant posts (one Boarding House Officer, one Special Paedagogical Officer and on Speech Curer). 4.153 CENTRAL AGENCY FOR EQUAL DISTRIBUTION OF BURDENTS Part A 4.153.1 General. The Agency was set up by Law 141 of 1989 with the main objective to bring about the equal distribution of the financial burdens that resulted from the Turkish invasion and occupation and, to restore, as far as possible, the pre-war financial credit-worthiness of the entitled persons. The Council of Ministers appointed the Chairman and the Members of the Board on 10.11.93, while the Agency announced commencement of operation on 24th November 1995. It is noted that the relevant Law does not provide for the period of service of the Chairman and Members of the Board of Management, and an amendment bill was submitted to the House of Representatives, for regulating this matter. 4.153.2 Accounts. During 2001, the amounts of £523.673 and £523.170 were paid by Government to the Agency for covering the operating expenses and the interest subsidy, respectively. At 31.12.2001, the receivable and payable loans were £27.086.738 and £27.669.350, respectively, whereas the deposits amounted to £582.612. It is noted that the accounts for 2001 were not submitted promptly, with the result their audit not to be completed. The matters referred below, are relating to the audit of the accounts for 2000. 4.153.3 Delay in the approval and issue of loans. Considerable delay continues to be observed in the examination and approval of loan applications. Specifically, the applications for educational, professional and for new couples loans, are examined after 2½ years about, from the submission of the relative application. This is attributed, in my opinion, to the great increase of new applications, and the re-examination of a large number of old applications submitted up to 2000, as well as to lack of available funds, while a delay is observed for the approval of Supplementary Appropriations. In view of the above, there are reactions from the part of the applicants. 4.153.4 Commission payable to Financing Organisations. The commission payable by the Agency to the Financing Organisations (Housing Finance Corporation and Central Cooperative Bank) for the issue of loans approved by the Agency, is considerably high, having in mind that the period of repayment extends up to 25 years and the above Organisations do not undertake any risk, for the reason that the loans are guaranteed by Government. I suggested that efforts should be made for the reduction of the commission payable.

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The Chairman of the Agency informed me that, after my above observation, the Organisations which issue loans under government guarantee, were requested to accept a reduced commission. In the mean time, the Housing Finance Corporation informed the Agency that the commission may be reduced from 0,5% to 0,25%. 4.154 CYPRUS FOUNDATION FOR MUSCULAR DYSTROPHY RESEARCH Part A 4.154.1 Financial position (a) Operating results. The unaudited accounts showed a surplus of £160.383, compared to £128.756 for 2000. (b) Revenue. The revenue amounted to £2.884.587, compared to £2.481.211 for 2000. The revenue includes state subsidy for £1.962.530, compared to £1.477.715 for 2000 and collections from rendering of services, amounting to £540.269, compared to £381.214 for 2000. The net proceeds from TELETHON amounted to £328.126, compared to £291.292 for 2000. Part of these proceeds, amounting to £24.335 for 2000, compared to £224.099 for 1999, were included in the Income and Expenditure Account. (c) Expenditure. The expenditure amounted to £2.748.539, compared to £2.576.554 for 2000. The increase is mainly, attributed the personal emoluments, which amounted to £1.294.484, compared to £1.149.972 for 2000. 4.154.2 Personnel. The Foundation employed 108 permanent employees, 96 on a full employment basis and 10 on a part-time basis, with total emoluments of £1.294.484. 4.154.3 TELETHON. The right for carrying out the TELETHON was assigned to the Foundation by the Cyprus Association of Muscular Dystrophy Persons and the latter is receiving an annual grant of £25.000, from the proceeds of TELETHON. The Foundation assigned to a Bank the carrying out of TELETHON, which has the responsibility for the collection of proceeds and the payment of expenses. During the last four years the expenses for TELETHON were showing a rising trend, while the collections remained at the same levels, and considerable amounts are paid for advertisements regarding the relative events and for the participation of foreign artists. Part B 4.154.4 Defects in the building. In my previous Report I stated that the building of the Foundation presented defects, such as settlement, cracks in the external paving and serious cracks in the partition walls. Although these defects were not repaired, the contractor was paid the amount of £250.000, on the recommendation of the legal adviser of the Foundation, for final settlement of his claims. I expressed the view that no payment should have been made to the contractor before the repair of the defects. As I was informed the relevant report from the Technical Chamber of Cyprus, regarding the defects of the building, which was requested in 1998, has been received, and is examined by the Board of Management, but the matter is still pending. The Chairman of the Foundation informed me, in 2002, that with the Architects guidance, certain repairs were made and it is expected that the remaining defects will be rectified. 4.154.5 Memorandum of Scientific Cooperation between the Foundation and the Ministry of Health. As it was stated in my previous Report, the agreement of cooperation between the Foundation and the Ministry of Health, for the provision of services to Government, was signed

346 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 on 26.10.99. While the agreement provides for the payment of an annual government subsidy, in return to the provision of medical and laboratory services to patients eligible to free medical treatment, as well as the part financing of research and educational programmes, their way of calculation is not specified. With a view to clarifying any ambiguities in the Memorandum of Cooperation and for finding the best way of financing the Foundation and calculating the subsidy, consultations are carried out between the Ministry and the Foundation, which have not yet been completed. 4.155 CYPRUS STOCK EXCHANGE Part A 4.155.1 General. The Cyprus Stock Exchange was established under Law 14(I) of 1993 as a public corporate body, with the main objective the exercise of activities relating to the development and control of stock market. The Cyprus Stock Exchange commenced its official operation on 29.3.1996, after the approval of the relevant Regulations by the House of Representatives in July 1995. Until June 2001 was under the supervision of the Minister of Finance, through the Capital Market Committee. The new legislation governing the establishment and jurisdictions of the Capital Market Committee, which is a public corporate body was put into effect in June 2001. 4.155.2 Financial position (a) Operating results. The accounts showed a surplus, after taxation, of £1.021.800, compared to £5.784.624 for 2000. (b) Revenue. After the deduction of the operating expenses of the Capital Market Committee, the revenue amounted to £4.500.626, compared to £9.913.350 for 2000. The decrease of £5.412.724 is mainly attributed to the annual subscriptions. (c) Expenditure. The expenditure for 2001 (excluding taxation) amounted to £3.726.658, and includes the operational expenses of the Capital Market Committee, amounting to £503.108, compared to £3.504.812 and £1.104.896, respectively for 2000. The increase of £221.846 is attributed, mainly, to the administration expenses. 4.155.3 Personnel – Salaries and allowances. The Cyprus Stock Exchange employed at 31.12.2001, 136 employees, 63 on permanent posts, 70 casual and 3 hourly paid. The total emoluments, including salaries, allowances and employer’s contributions to the various Funds, amounted to £1.424.299, compared to £1.207.156 for 2000. The resulting increase of 17,99% was due to the increase of staff, the cost of living allowance and the annual salary increments. The total remuneration of the members of the Board of Management amounted to £10.020, compared to £10.040 for 2000. 4.155.4 Viability of the Stock Exchange. On 5.4.2002, the Board of Management submitted to the Ministry of Finance two studies, showing the estimated operating results for the years 2002-2006 and the financing for the erection of the new building of the Stock Exchange. According to the study, relating to the estimated operating results for the years 2002-2004, the Stock Exchange is expected to present a total deficit of £1.816.718, whereas for 2005-2006 it is expected to show a surplus of £582.447. It is also shown that, until 2006, there will be a cash deficit of £8.821.448 and that the capital expenditure, for the years 2002-2006, will be £18.800.000 (including the introduction of the Remote Trading System and the cost of erection of the new building of the Stock Exchange).

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The facts on which the study was based are not in line with the actual facts, because, since then, there was a declining trend in the Stock Exchange index and the volume of transactions was considerably reduced, in comparison with estimated. In the study for the financing of the erection of the new building, a suggestion is made for the financing of 2/3 of the cost of erection from lending and the remaining 1/3 from the reserves of the Stock Exchange. It is also noted that the estimated expenditure for 2006, estimated at £7,6 m., includes also the replacement of the computerised system of the Stock Exchange which was recently completed, with the new system, the cost of which was estimated at £2 m. For the better handling of the anticipated deficits and for securing the viability of the Stock Exchange, I suggested that the expenditure to be confined within the absolutely necessary, so as in the long term the Stock Exchange to be self-supporting. The Chairman of the Stock Exchange stated that the study relating to the projections for 2002- 2006, was prepared in the first three months of 2002 and was based on the parameters of that period, which, since then, were modified considerably and consequently the study should be revised so as to disclose the actual present facts. He also stated that the Management and the Board of Stock Exchange are maintaining a conservative line, with regard to the proposed capital expenditure and the operating expenses are confined to the absolute necessary, as a preventive measure against the possible problems, which may arise, as a result of the reduced volume of transactions and profitability of the Stock Exchange. 4.155.5 Erection of new building. The Council of Ministers, under decisions No. 49.545 and 52.684 of 28.4.99 and 16.4.2000, respectively, approved the erection of the building of the Stock Exchange at the area of the old stadium, as well as, the action plan and the relative time schedules, which provided that the invitation of tenders was to be made in June 2001. Finally, the architectural competition for the erection of the new building was invited on 16.2.2002. According to the terms of the competition, prepared by the Technical Chamber of Cyprus, the reward of the successful Architect was 7,5% on the final cost of the project, which is considered very high, as it exceeds by of 1,5% – 2% the limit which is specified for similar competitions in the Public. It is noted that the Board of Management of the Stock Exchange, at its meeting of 14.2.2002, decided not to include in the terms of the architectural competition, the term for the payment of compensation to the tenderers, in cases of annulment or revocation of the competition. On 21.3.2002, the Parliamentary Committee of Interior, addressed a letter to the Technical Chamber of Cyprus, to consider, in cooperation with Nicosia Municipality, other alternative sites for the erection of the building of the Stock Exchange, within Nicosia Municipal boundaries. Nevertheless, the architectural competition has not been cancelled and the Stock Exchange delivered the prizes and the monetary rewards to the members and the consultants of the selection committee, amounting to over £160.000, for the designs of the building which will not be erected on the site which was specified in the competition. 4.155.6 Building programme. From the study of the building programme which was delivered to the Architectural Offices which participated in the architectural competition, I observed that the provision which was made for the staff, was exaggerated, having in mind the new

348 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 requirements of the Stock Exchange and that the additional percentage of 40% of useful area (for services and spaces for common use), is also considered as excessive. I suggested that for the Sections of Production and Parallel Market a special study should be carried out for ascertaining whether these Sections will be needed and if so to calculate the necessary area. It was also observed that the area for certain posts of senior officers is up to 40% greater from the standards, applicable in the Government for similar posts. In view of the above I suggested that a feasibility study should be carried out for ascertaining the needs in services and staff, under which the programme to be revised. I also stated that it would not be proper to commence the procedure for the architectural competition before a final decision is taken for the space to be used for the erection of the building. In reply to my letter, it was stated by the Stock Exchange, that all the relative decisions and instructions of the Council of Ministers were fully adopted, according to which the new building should have been erected at the area of the old stadium and arrangements were made for the implementation of the action plan and time schedules and the invitation of the architectural competition. It was also stated that despite the reactions, which were raised at the meeting of the Parliamentary Committee of Interior, the Stock Exchange received directions from the Minister of Finance for the completion of the competition, because in case of termination of the competition, there was the possibility for the payment of compensations to the 47 Architectural Officers, which received the competition documents. With regard to the proposed area for the staff, the Stock Exchange stated, that the development programmes were taken into consideration, which must be implemented, so that the Stock Exchange to comply fully with the requirements of developed Stock Exchanges, in activities/services, and to be in a position to provide to the investors a big variety of products and services. It also pointed out that the reduced number of transactions at present, must not be taken as the basis for the design of the new building of the Stock Exchange and that the necessary staff is required in case of application of modern technology and rendering of extensive services. The Chairman of the Stock Exchange informed me that the Board, without any doubt, will take into consideration the new requirements, as soon as the additional information is received about the new space to be used for the erection of the building, in connection with the stock market, the services and staff needs and the development programmes and alterations will be made in the building programme. 4.155.7 Computerisation of the Stock Exchange (a) General. The computerization was completed in July 2001, with a delay of 3 ½ years, at the total cost of over £1,8 m. It is noted that, according to the relative agreement, the computerization should have been completed until 31.1.1998, at the total cost of £520.000. The company which undertook the computerisation supports that part of the responsibility rests with the Stock Exchange, which is not, however, accepted by the latter. I suggested that a statement should be prepared showing an analysis of the delays, under which the resulting damages to be calculated, on the basis of the terms of relative agreement. (b) Dematerialisation system. Until 31.7.2002, 82 companies were introduced in the dematerialisation system. The remaining companies will be introduced according to an internal plan, which has been prepared and it is estimated that the full application of dematerialisation will be completed in November 2003.

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The Chairman of the Stock Exchange informed me that the relative report of my Office was considered by the Board, with particular reference to the delay of 3 ½ years observed in the dematerialisation and the relative cost (from £520.000 to £1,8 m.) and decided to prepare and submit to my Office a note on the history of Dematerialisation and the cost of the project. 4.155.8 Examination for the acceptance of the software. The amount of £105.680 was paid by the Stock Exchange, representing transport and lodging expenses for an employee of the company which undertook the project of computerisation, for the examination of the acceptance of the software, as well as for the Consultancy Services and the support provided, before the operation of the Clearing System of Dealings for the stock exchange dematerialisation transactions. This amount was agreed and paid without invitation of tenders. I expressed the view that for the consultancy services and the support provided before the operation of the system, no additional amount should have been paid and the examination for the acceptance of the system should have been carried out by an independent person. 4.155.9 Welfare Fund of Stock Exchange employees (a) Stock Exchange contribution. On 3.8.2000, the collective agreement between the Stock Exchange and the Staff Union was signed, under which the Stock Exchange undertook to pay to the Welfare Fund, with retrospective effect from 1.1.1997, the contribution of 1% on the salaries for the month of December of the previous year, multiplied by 13. It was however, observed that the contribution, which was paid by the Stock Exchange to the Welfare Fund, was calculated on the total salaries, which included also the salaries of the casual employees, engaged on six months basis, contrary to the regulations of the Welfare Fund. (b) Payment of additional subsidy. The amount of £50.000 was paid by the Stock Exchange to the Welfare Fund, in addition to the amounts provided by the collective agreement of 2000, for the strengthening of the Fund, as stated in the explanatory memorandum of the Budget. The additional amounts of £51.274 and £95.071 were also paid in 2001 and 2002, respectively, for the above purpose, which were not provided by the collective agreement. It is noted that no reference is made in the explanatory notes to the Budgets for 2001 and 2002 for these additional subsidies, which were equal to 244,5% for 2000 and 181,9% for 2001, of the agreed contribution, respectively. The Chairman of the Stock Exchange informed me that the additional subsidy will not be paid as from 2000. Part B 4.155.10 Re-housing of Stock Exchange. As I stated in my previous Report, the Board of Management of the Stock Exchange signed on 8.3.2000 a lease agreement for space at IMC building, without invitation of tenders. The period of the lease agreement is for six years at an annual rent of £340.164. The amount of £295.487 was paid in advance to the owners of the above building, representing rent plus 8% interest, in order to enable them to carry out the necessary alterations in the building, before the re-housing of the Stock Exchange. The relative lease agreement provided that the expenses for the re-housing and formation of spaces would have been paid by the owners of the building. It was observed, however, that considerable amounts were paid, by the Stock Exchange, for expenses which were relating to the re-housing and formation of spaces. Additionally, the Stock Exchange was charged with expenses for the repair of the old building, which, according to the lease agreement, should have been paid by the owners of IMC building. The Chairman of the Stock Exchange informed me that the expenses which were not paid by the owners of IMC building, are relating to expenses which were incurred at a later stage for

350 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 works not provided in the agreement or for which the approval of the Board of Management of the Stock Exchange was secured. 4.156 CAPITAL MARKET COMMITTEE Part A 4.156.1 General. Until June 2001, the Capital Market Committee was operating under the Cyprus Stock Exchange Law. According to Law, which was in force at that time, the general supervision of the Stock Exchange was assigned to the Ministry of Finance and was exercised by the Minister through the Committee. Since June 2001, the new legislation, governing the establishment and powers of the Cyprus Capital Market Committee, which is a statutory public body, was put into force. 4.156.2 Submission of accounts for audit. The Committee submitted the accounts for the year 2001, with delay, in June 2002, with the result, their audit not to be completed. It is noted that the accounts for 2000, were also submitted with delay, in June 2001. 4.156.3 Financial position. The accounts for 2001, showed: (a) Operating surplus. The accounts for 2001 showed a surplus of £99.467, compared to £888.608 for 2000. The decrease is, mainly, due to reduced revenue, as stated below. (b) Revenue. The revenue amounted to £726.196, compared to £1.178.422 for 2000, and was, mainly derived from the 10% charge on the income of the Stock Exchange (£503.108 for 2001 and £1.104.896 for 2000). (c) Expenditure. The expenditure amounted to £626.729, compared to £289.814 for 2000. The increase is mainly due to personal emoluments and the purchase of services. 4.156.4 Personnel. The Committee employed 25 employees (12 in 2000), excluding the Chairman and Vice Chairman of the Committee. The total expenditure for salaries, allowances and employer’s contributions to the various Funds, amounted to £254.671, compared to £135.344 for 2000. 4.157 TECHNICAL CHAMBER OF CYPRUS Part A 4.157.1 Financial position. (a) Operating results. The accounts for 2000 showed a surplus of £25.112, compared to a deficit of £3.249 for 1999. (b) Revenue. The total revenue of the Chamber for 2000, amounted to £452.888, compared to £429.505 for 1999, i.e. there was a surplus of £23.383 or 5,4%. (c) Expenditure. The total expenditure of the Chamber for 2000 amounted to £427.776, compared to £432.754 for 1999, i.e. there was a decrease of £4.978 or 1,1%. 4.157.2 Personnel. The Chamber employed 12 permanent employees. The expenditure for salaries, including the contributions of the Chamber to the various Funds, amounted to £170.770, compared to £156.233 for 1999. The annual average cost for each employee was £14.231 for 2000, compared the £12.018 for 1999. 4.157.3 Budget. The Budget for 2000 was approved by the Board of Management on 22.12.1999, was submitted to the Minister of Communications and Works on 30.12.1999 and was approved on 9.3.2000.

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There are no provisions in the legislation, governing the expenditure excesses, the savings, the transfer of funds and the writing off of revenue. The relative approval for these matters is given by the Board of Management or the Management of the Chamber. 4.157.4 Organisation of Accounts Section and Internal control system. As it was stated in my previous Reports, in view of the continuous increase in the activities of the Chamber the need arises for the improvement of the organisation of the Accounts Section and the introduction of a suitable internal control system. 4.157.5 Members dues. According to the accounts, the members dues, at 31.12.2000, amounted to £513.994, whereas the register of members was showing £532.896, i.e. there is a difference of £18.902. It was not possible to ascertain the reason for this difference. It is noted that the accounts books are automatically updated with all entries made in the registers and therefore, such differences should have not been arisen. Similar differences were also noted in previous years and were referred in the Annual Reports. 4.157.6 Tax liabilities. The legislation does not provide for the exemption of the Chamber from the payment of income tax and stamp duties. Therefore, all the revenue receipts should be stamped and audited accounts with tax computations should be submitted to the Department of Inland Revenue for income tax and defence contribution purposes. 4.157.7 Defence contribution and emoluments declaration. During 2000, no deductions were made for defence contribution, from the representation allowance and the remuneration of the Chairman, and the remuneration of the members of the Board, the Management Committee, the Disciplinary Council and of other Committees, with the result, the personal emoluments certificates (I.R. 63) not to be submitted to the Department of Inland Revenue. Although this matter was discussed by the Management Committee, it has not yet been settled. 4.158 INSTITUTE OF TECHNOLOGY Part A 4.158.1 Accounts and audit. The accounts for the years 2000 and 2001 were not submitted to my Office, with the result not to be audited. 4.159 CYPRUS STATE SCHOLARSHIPS CORPORATION Part A 4.159.1 Establishment. The Cyprus State Scholarships Corporation (Establishment and Operation) Law No. 109(I) of 1997 was approved by the House of Representatives and published on 31.12.97. Under the amendment Law No. 67(I)/98), dated 17.7.98, the Scholarships Committee ceased to exist and the Law for the operation of the Cyprus State Scholarships Corporation was put into effect as from 1.1.99. 4.159.2 Budget. The Budget of the Corporation for 2001, was submitted by the Board of Management to the Ministry of Finance and subsequently to the Council of Ministers. It was approved by the Council on 14.2.2001 and on 15.2.2001 was laid before the House of Representatives and was enacted to Law on 30.3.2001. According to section 9 of the Law, which was amended under Law No. 133(I) of 2000, the Budget should have been submitted to the House of Representatives for approval, at least three months before the commencement of the financial year.

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4.159.3 Submission of financial statements for audit. Contrary to section 25 of the relative Law, the financial statements have not yet been submitted to my Office, with the result the necessary audit not to be carried out. 4.159.4 Expenditure for State Scholarships Programmes. The scholars who were granted scholarships by the previous Scholarships Committee, through the State Scholarships Programme, until the academic year of 2000, whose agreements are managed by the Corporation, continue to draw the respective amounts through the special Vote of the Ministry of Education and Culture, after a suggestion was made by the Corporation. The total expenditure for the year 2001, amounted to £731.720. Additionally the Corporation paid the amount of £631.675 for 2001, to new scholars. 4.160 EOKA 1955-59 HISTORICAL MEMORY FUND Part A 4.160.1 Financial position. The financial position of the Fund, according to the non audited accounts for 2001, was as follows: (a) Operating results. The receipts of the Fund during 2001 amounted to £490.480 and the payments to £400.754, compared to £372.021 and £354.202, respectively, for 2000. The cash balances at 31.12.2001 were £140.530, compared to £50.804 for 2000. (b) Revenue. The greatest part of the revenue of the Fund is derived from government subsidy, through the Ordinary Budget, which for 2001 amounted to £470.000. (c) Expenditure. The main categories of expenditure during 2001 were as follows: Erections/Improvements/Maintenance of Monuments and other Historical Places (£259.391), Employment of Casual Assistants (£14.836), Events (£15.302), and Publications (£24.008). 4.161 BANK OF CYPRUS ONCOLOGICAL CENTRE Part A 4.161.1 Approval of Budget. The Budget of the Centre for 1998, which includes provisions for payments effected during the years 1996 and 1997, was approved by the Council of Ministers on 20.5.98 and the Budget for the period 1.1.99 – 31.3.99 was approved on 13.1.99. For the remaining period of 1999 and for the years 2000-2001, the Budgets were prepared and submitted to the Ministries of Finance and Health in January 1999, in March 2000 and in December 2000, respectively, without, however, being pursued for approval. 4.161.2 Financial position. The financial position of the Centre, according to 2000 accounts was as shown below. (a) Operating results. The financial statements for the year 2000 showed a surplus of £437.768 compared to £424.878 for 1999. The income and expenditure of the Centre for the years 1999 – 2000 were as follows:

2000 1999 £ £ Income 5.056.792 3.546.007 Expenditure 4.619.024 3.121.129

353 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

4.161.4 Establishment and operation of the Centre. (a) Establishment. The cofounders of the Bank of Cyprus Oncological Centre, which was established on 16.5.97 as a legal entity, according to the Charitable Institutions Law, Cap. 41, are the Government and the Medical Institution of the bank of Cyprus. On 27.2.92 the Republic of Cyprus, under a Council of Ministers decision, accepted the donation of the Medical Institute of the Bank of Cyprus and approved the concession of government land for the erection of the Centre. On 3.1.95 the trust declaration was signed between the two parties, under which the Medical Institution of the Bank of Cyprus undertook to provide the funds for the erection and equipment of the Centre and the Republic of Cyprus, besides the concession of the land for the erection of the Centre, to cover, perpetually, the annual operational expenses of the Centre, under the method of an annual specified subsidy through the Government Budget. (b) Financial support of the Centre. The Centre commenced its operation in September 1998. Its operation is based, mainly, on Government financial support, which, according to the trust declaration and the agreement signed with the Medical Institution of the Bank of Cyprus, undertook to cover the operational expenses of the Centre. The amounts which were due by Government until 31.12.99 were paid to the Centre, after a decision was taken by the Ministries of Finance and Health, in December 2001, whereas the amounts due up to 31.12.2000, were paid recently. Taking into consideration the amount of operational expenses of the Centre, which according to the agreement are paid by Government, and the fact that similar services offered by the Centre are also offered by Government Hospitals, my Office expressed the view that the operational regime of the Centre must be decided as soon as possible. Among the alternative solutions that could be examined and not be excluded is the possibility for the Centre to be placed under the jurisdiction of the Medical Services, as the Government Hospitals and the taking over of its operation and all its expenses by the Medical Institution of the Bank of Cyprus or any other intermediary solution which could secure the public interest. My Office expressed the view that the renegotiation should end to an agreement, which will not be contrary to the Public Tenders Law and Regulations. (c) Loans. As a result of the non-payment to the Centre of its operational expenses by Government, these were initially paid out of a temporary bank account, which was opened with the Bank of Cyprus. In order to face the liquidity problem presented in 1998, the Centre received a loan, amounting to £975.000, from the Bank of Cyprus, under Government guarantee. Additionally, during 1999 and 2000, the Centre received loans, amounting to £3.860.000, from the Bank of Cyprus, without any guarantee. At 31.12.2000 the balance of the loans including interest, was £5.236.091, compared to £2.411.066 for the previous year. 4.161.5 Amount due by Government. In the accounts of the Centre, Government is shown as a debtor. At 31.12.2000 the amount due by Government was £4.738.036 compared to £2.227.917 for 1999. The Ministry of Health informed my Office, that in a recent meeting held at the Ministry, it was decided for the full settlement of the amounts due by Government and that the amount due until 31.12.99 to be paid to the Centre. It was also decided for the settlement of any other debts, due by Government to the Centre against those due by the Centre to the Government, for drugs supplied until 30.6.2001. The value of drugs supplied to the Centre by the Pharmaceutical Services, until 31.12.99, was £838.038 and £1.380.874 for 2000 and these amounts are not included in the amounts of £2.227.917 and £4.738.036, respectively. The amount which was due until 31.12.2000, has already been paid. It was also agreed that any

354 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 amount of depreciation for fixed assets will be paid by the Medical Institution of the Bank of Cyprus. It is noted that the depreciations amounted at 31.12.2000 to £717.961. 4.161.6 Amount due by the Medical Institution of the Bank of Cyprus. The Medical Institution of the Bank of Cyprus is shown as a debtor in the accounts of the Centre. At 31.12.2000, the amount due was £1.147.813, compared to £619.211 for previous year, and was recently being paid. 4.161.7 Services provided by Government to the Centre (a) The food for the patients of the Centre is provided by Makarios Hospital and up to May 1999 the laboratory tests were carried out at the laboratory of the General Hospital. According to records kept by the Centre, for 2000, the value of food was £50.000. (b) Supply of drugs. Government provides to the Centre drugs and pharmaceutical supplies. According to the records kept by the Pharmaceutical Services, up to 31.12.2000, the cost of drugs and pharmaceutical supplies provided to the Centre amounted to £2.218.912. Until 31.12.2001, the cost of drugs was £3.923.672. 4.161.8 Personnel and benefits. At 31.12.2000, the Centre employed 112 persons (99 in 1999), with total expenditure of £1.562.964, compared to £1.185.679 for 1999. The increase of £377.285 or 31,82% is attributed to the appointment of new staff, the concession of salary increments and the operation of Provident Fund, with 5% contribution, by the Centre. 4.162 KARAISKAKION FOUNDATION Part A 4.162.1 Financial position. The financial position of the Foundation, according to the unaudited accounts for 2000 (the accounts for 2001 have not yet been submitted) was as follows: (a) Operating results. The accounts showed a surplus of £309.771 for 2000, compared to £530 for the previous year. The summarised results are as follows: 2000 1999 £ £ Income 957.875 225.223 Expenditure 648.104 224.693 Surplus 309.771 530

The surplus of 2000 includes state subsidy for £200.000, paid to the Foundation by the end of 2000, which was expended in the following year. (b) The revenue of the Foundation is mainly derived from contributions and subsidies. The government subsidy for 2000 amounted to £775.000, compared to £200.000 for the previous year. The contributions amounted to £174.066, compared to £22.319 for the previous year. 4.162.2 Operation of the Foundation. The continuation of the operation of the Foundation is based, mainly, on state subsidy. In order to secure additional financial resources, the Foundation, as from 2001, renders services on payment to private laboratories, doctors and abroad. The revenue delivered from such services, during 2001, amounted to £261.737.

355 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

4.162.3 Preparation of Budget. The Foundation continues not to prepare a Budget, which is necessary for purposes of better planning and management. The Foundation informed me that for 2003 an annual Budget has been prepared, which will be laid before the Board of Management. 4.162.4 Personnel. During 2000, the Foundation employed 6 persons, with total expenditure for salaries, allowances and employer’s contributions to the various Funds of £55.691, compared to £30.942 for 1999. 4.162.5 Regulations. For the smooth operation of the Foundation I suggested again that Regulations should be prepared, according to section 29, of the establishment act, governing the financial administration of the Foundation, such as the collection of revenue, the payment of expenditure, the tenders e.t.c. as well as Regulations, governing the staff conditions of service, benefits, duties and responsibilities. The Foundation informed me that the Regulations will be prepared by a sub committee, which was set up for this purpose. 4.163 TAX TRIBUNAL 4.163.1 General. The Tax Tribunal was established pursuant to section 4A of Law 80(I) of 1999, and has the authority to examine hierarchy appeals against decisions of the Director of the Department of Inland Revenue, which are taken according to sub section (5) of section 20 of the Verification and Collection of Taxes Laws. The Council of Ministers appointed the Chairman and eight Members of the Board on 2.1.2000. The Chairman is drawing a salary equal to the initial salary of the Director General of the Ministry whereas, the salary of the members is equal to that of the Director of Government Department. The Law under which the Tax Tribunal was established, specified the 2.1.2000 as the date of enforcement of the Law. 4.163.2 Expenditure. During 2001, the total amount of £341.624 was expended, compared to the budgeted expenditure of £349.132. If the additional amount of £120.000 is added, representing the cost of government employees seconded or posted to the Tribunal, then the operating cost for 2001 would be about £460.000. 4.163.3 Personnel. In addition to the Chairman and the 8 members, of the Tribunal, 5 permanent Government employees, 4 casual Clerks and 2 hourly paid employees were also employed at 31.12.2001. 4.163.4 Hierchy appeals. During 2001, 24 appeals against the decision of the Director of the Department of Inland Revenue were submitted regarding income tax objections raised by legal or physical persons, compared to 20 appeals submitted in 2000. The Tribunal examined 15 appeals (12 of 2000 and 3 of 2001) and a decision was issued. In view of the above, it appears that the cost for the operation of the Tribunal, compared to the number of appeals submitted and examined, is disproportionately high, and I suggested that ways should be considered for the reduction of the operating cost. The Chairman of the Tribunal informed me that 46 appeals were submitted until the end of September 2002 and it is expected that the number of appeals will be triple, within a period of three years. 4.164 RADIO TELEVISION AUTHORITY Part A 4.164.1 Submission of accounts for audit. The accounts for the year 2001 were not submitted to my Office for audit until the date of preparation of my Report. The Chairman of the Authority informed me that the preparation of the accounts for 2001 is in progress and very

356 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 soon will be submitted for audit. The following matters are relating to the audit of the accounts for 2000. 4.164.2 Financial position (a) Operating results. The accounts showed a surplus of £356.798, compared to £261.060 for 1999, i.e. there was an increase of £95.738 or 36,67%. The surplus for 1999 arose after the inclusion in the accounts of the amount of £36.321, representing advertising expenses for 1999, which, due to the absence of supporting documents, were not taken into consideration at the preparation of the 1999 accounts. (b) Revenue. The revenue amounted to £552.954, compared to £398.938 for 1999, i.e. there was an increase of £154.016 or 38,61%, which is, mainly, attributed to the commencement of collection of fees for the examination of applications for radio and television stations licence, as from 2000, (£107.600) and the increase of fines (£36.400). (c) Expenditure. The expenditure amounted to £196.156, compared to £137.878 for 1999, i.e. there was an increase of £58.278 or 42,27%, which is, mainly, attributed to the increase in votes “Personal Emoluments” (£42.717) and “Hiring of Services of Specialised Staff and Consultants” (£10.881). 4.164.3 Personnel. At 31.12.2000, the Authority employed 8 permanent employees (3 at 31.12.1999). The personal emoluments amounted to £94.847 (£52.130 for 1999) and include the amount of £6.663 for hiring of the services of one consultant (£17.360 for 1999) and £9.056 for the hiring of services of 4 persons for clerical work (£32.019 for 1999). 4.164.4 Advertising fees. Despite the efforts made by the Authority for the collection of fees, weaknesses are still observed in the enforcement of the provisions of the Law and Regulations, regarding the imposition and prompt collection of above fees. Specifically, several radio and television stations had not submitted the statements, provided by the Regulations, showing the revenue and the price lists of advertisements and the subsidies received for their programmes, while other have not paid the percentage charge specified by Law. In cases where the stations do not submit the above, no calculations are made by the Authority for ascertaining the revenue, contrary to Regulations 45(4) (S.L. 10/2000) which provides that in such cases the Authority should calculate the revenue on the basis of the price lists of other stations. The Chairman of the Authority informed me that the Authority has already implemented the provisions of the relative Regulation and submitted, for this purpose, letters to all stations, which have failed to comply with the above, resulting to the payment of relative fees by a great number of stations. He also stated that the Authority, in cooperation with special consultants considers alternative and more effective ways for the examination of the financial records submitted by the stations and for the collection of fees promptly. Part B 4.164.5 Pensions staff benefits. According to Regulations No. 23 (S.L. 35/99), the pensions benefits of the staff of the Authority are governed by the existing provisions for government employees. The Authority has not yet introduced/implemented Pensions and Gratuities Scheme (specifying the method of operation, the establishment of Reserve Fund, the actuarial study e.t.c.). The Chairman of the Authority informed me that the relative Regulations, governing the operation of above scheme, will be completed soon.

357 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

4.165 GOVERNMENT REGULAR EMPLOYEES PROVIDENT FUND Part A 4.165.1 Preparation and submission for audit of the accounts of the Fund. The final accounts of the Fund for the year 2001 were submitted in June 2002, with delay, with the result their audit not to be completed. From the audit of the accounts for the year 2000 the following were observed. 4.165.2 Investment policy. As a result of the continuous fall in prices of the shares introduced in the Cyprus Stock Exchange, the Fund suffered a loss of £6.567.716, according to the revaluation of investments made on the basis of their value of 29.12.2000, in relation to that of the previous year. 4.165.3 Computerisation of Provident Fund. The award of tender for the computerisation of the Provident Fund was assigned by the Management Committee on 21.12.99, to a company for the amount of £47.206 plus VAT, with completion period of 11 months. Due to various problems and of new requirements, the amount of £53.836 was paid to the company until 31.12.2001, without the project being completed. 4.166 RESEARCH PROMOTION FOUNDATION Part A 4.166.1 Accounts and audit. The audit of the accounts for the year 2001 has not yet been completed. The following matters are relating to the audit of the accounts for 2000. 4.166.2 Schemes of service. The scheme of service for the staff employed by the Foundation have not yet been prepared. As I was informed, the preparation of the schemes of service and of the relative salary scales was assigned to a specialised firm. 4.166.3 Establishment of reserve. It was observed that during the four years of the operation of the Foundation, a reserve for £612,000 was established from the annual surpluses, because the predetermined programmes, which are subsidised in advance, were not fully implemented, with the result the state subsidy to overcover the actual expenditure and obligations of the Foundation. I suggested that, the possibility to be considered for the deduction of surpluses on the payment of future subsidy. 4.167 CYPRUS STOCK EXCHANGE EMPLOYEES PROVIDENT FUND 4.167.1 Accounts and audit. The audit of the accounts for the year 1998-2000 has been completed. The accounts for the year 2001 have not yet been submitted. (a) Revision of employer’s and employee’s contribution to the Provident Fund. Although the respective contributions were revised, with the approval of the Registrar, yet the relevant Regulations have not yet been amended accordingly. (b) Investment in shares. A great part of the reserves of the Fund (60%) was invested in companies shares. I expressed the view that this percentage is high and for the better protection of the interests of the members, any available funds should, in future, be invested in various portfolios. The Chairman of the Management Committee of the Fund informed me that he agrees with my suggestion for the investment of funds in different portfolios and for this purpose, it was decided that the investments in shares should not exceed the 30% of the available funds.

358 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

PART 5 – STATE BUDGET AND FINAL ACCOUNTS 5.1 APPROVAL OF STATE BUDGET FOR THE YEAR 2000

The State Budget for 2001 (which includes Ordinary and Development Expenditure) was submitted to the House of Representatives on 28.9.2000 and, after its enactment to a Law, was published in the Official Gazette of the Republic on 26.1.2001. 5.2 CONSOLIDATED FUND.

The Consolidated Fund of the Republic showed in 2001 the following movement, in relation to the Budget. It is noted that, in the Consolidated Fund, were transferred, after the consolidation of the Budgets, the balances of 1.1.2000 of the loans issued form the Relief Fund (R.F.) and the balances of investments of the Development Fund and of the Defence Fund of the Republic (DFR) which was abolished under the provisions of Law No. 9(I)/2000.

£000 Debit balance at 1.1.2001 3.983.110 Add: Expenditure 2.364.275 6.347.385 Less: Revenue 2.120.379 Debit balance at 31.12.2001 4.227.006

5.3 OPERATING RESULTS. The deficit for the year 2001 was £243,9 m., compared to the estimated of £623,8 m., as follows:

Budget Actual

£000 £000

Revenue 1.983.526 2.120.379

Payments and amounts due 2.607.324 2.364.276 Deficit (623.798) (243.897)

5.4 REVENUE. The total revenue for 2001 was £2.120,4 m. After the decution of the revenue for development expenditure (£407,5 m.), which is not included in the Budget for 2001, the collections amounted to £1.712,9 m., compared to the budgeted of £1.576,0 m. i.e. there was an increase of £136,9 m. or 8,69%. The actual revenue for the last two years, as shown in the Financial Report for 2001 was as follows:

359 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

2 0 0 1 2 0 0 0 REVENUE £000 % £000 % Collections of Taxes 1.665.192 78,53 1.561.012 85,61 Direct Taxes 523.997 24,72 484.508 26,57 Indirect Taxes 708.406 33,41 633.952 34,77 Revenue from Services and Sales of Goods 80.658 3,80 108.169 5,93 Interest, Dividends, Rents and Royalties 76.956 3,63 34.879 1,91 Transfers 93.961 4,43 82.132 4,51 Other Revenue not otherwise Classified 13.027 0,61 47.564 2,61 Defence Revenue 168.187 7,93 169.808 9,31 Loan Proceeds 455.187 21,47 262.380 14,39 Grants 2.480 0,12 2.521 0,14 Loans Repayments 5.333 0,25 3.412 0,18 Revenue from Loans for Ordinary Expenditure 39.866 1,88 47.931 2,63 Revenue from Loans for Development Expenditure 407.508 19,22 208.516 11,44 Total Revenue 2.120.379 100,00 1.823.392 100,00 5.5 PAYMENTS AND AMOUNTS DUE. The total payments and amounts due for 2001 amounted to £2.364,3 m. compared to the budgeted of £2.607,3 m. i.e. there was a decrease of £243 m. or 9,32%. The actual payments and amounts due for the last two years, as shown in the financial Report of 2001, were as follows: 2001 2000 £000 % £000 % PAYMENTS AND AMOUNTS DUE A. Current Payments and Amounts Due 1.845.030 78,41 1.643.995 78,41 Staff Emoluments 722.489 30,56 692.140 33,01 Maintenance and Operation 101.531 4,29 95.253 4,54 Social Welfare 332.289 14,06 272.333 12,99 Subsidies 99.309 4,20 84.253 4,01 Grants, Defence, Enlightment 262.808 11,12 180.394 8,61 Public Loan Interests 326.604 13,81 308.794 14,73 Various Schemes ------10.828 0,52 B. Investments and other Capital Expenditure 229.653 9,71 212.535 10,04 C. Loans to Third Parties and Repayments 238.724 10,10 197.259 9,40 D. Expenditure to Revenue 50.869 2,15 42.990 2,05 Total Payments and Amounts Due 2.364.276 100,00 2.096.779 100,00

360 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Receipts of 2001 Budget

8% 1% 33% 4%

21%

4% 4% 25%

Indirect Taxes (33%) Direct Taxes (25%) Transfers (4%) Revenue from Sale of Goods and Services (4%) Loan Proceeds (21%) Dividends, Rents,and Royalties (4%)

Defence Revenue (8%) Other Receipts (1%)

Payments of 2001 Budget

9% 0% 31% 2% 4% 4%

11%

10% 14% 14%

Staff Emoluments (31%) Public Loan Interest (14%) Social Welfare (14%) Loans to 3rd Parties and Repayments (10%) Grants, Defence and Enlightment (11%) Subsidies (4%) Maintenace and Operation (4%) Expenditure to Revenue (2%) Various Schemes (0%) Investments and Other Capital Expenditure (9%)

361 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Comparison of the Budget Receipts

700.000 2001 = £2.120.379 ths 2000 = £1 823 392 ths 600.000

500.000 2001 2000

400.000

300.000

200.000

100.000

0 Indirect Taxes Direct T axes Transfers (4%) Revenue from Loan Proceeds Dividends, Defence Revenue Other Receipts (33%) (25%) Sale of Goods (21%) Rents,and (8%) (1%) and Services Royalties (4%) (4%)

Comparison of the Budget Payments 700.000

600.000 2001 = £2.364.277 ths

2000 = £2 096 778 ths

500.000 2001 2000

400.000

300.000

200.000

100.000

0 Staff Public Loan Social Welfare Loans to 3rd Grants, Subsidues Maintenace Expenditure to Various Investments Emoluments Interest (14%) (14%) Parties and Defence and (4%) and Operation Revenue (2%) Schemes (0%) and Other (31%) Repayments Englightment (4%) Capital (10%) (11%) Expenditure (9%)

362 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Total Direct Taxes 2001 £523,997 m

£41.059,0 m £30.346,0 m 6% 8% £217.946,0 m 42%

£234.646,0 m 45%

Employees Income Tax (42%) Companies (45%)

Other Direct Taxes (8%) Estate Duties (6%)

Indirect Taxes 2001 Total £15.484,0 m £708,406 m £17.143,0 m £374.187,0 m £68.988,0 m 2% 9% 2% 53% £71.587,0 m 10%

£163.021,0 m 23%

Value Added Tax (53%) Excise Duties (23%)

Import Duties (10%) Other Indirect Taxes (9%) Land and Survey Duties (2%) Excise Duties (Other) (2%)

363 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

5.6 GENERAL 5.6.1 Budgetary Excesses. Budgetary excesses, were again effected, for which the approval of the Ministry of Finance was sought. Pursuant to section 4 of the Budget Law, the Minister of Finance issued 53 Special Warrants for a total amount of £215.756.103. These are analysed as follows:

No. of Net S.W. Categories S.W. Amount Revotes amount £ £ £ Direct charge to the Consolidated Fund 2 14.372.750 ― 14.372.750 Under the Law 7 166.852.158 ― 166.852.158 Other 44 34.531.195 (2.098.740) 32.432.455 Total 53 215.756.103 (2.098.740) 213.657.363

The category Other Special Warrants is analysed as follows:

Description Amount £ Allocation from 18.30.2.00.348 Budget: Ordinary Expenditure – Contingencies and Reserve 2.277.773 Allocation from 18.30.3.00.348 Budget: Development Expenditure – Contingencies and Reserve 567.357 Allocation from 18.26.2.02.349 Budget: Ordinary Budget – Contractual Liabilities not Otherwise Provided 216.539 Allocation from 18.26.3.00.349 Budget: Development Budget – Contractual Liabilities not Otherwise Provided 879.413 Allocation from 19.01.3.99.999 Budget: Planning Bureau – Harmonization Programme with Acquis Communautaire 5.190.085 Allocation from savings from subheads of the same Head 23.301.288 Total 32.432.455

The total of funds transferred either from savings from Subheads of the same Head, or from the Heads "Contingencies and Reserve" of the Ordinary Expenditure and the Development Expenditure, amounted to £26.146.418 and 1811 Subheads were involved (if one Subhead was involved more than once by different Special Warrants it was counted only once). In the year 2002 sixteen (16) Special Warrants were issued to cover the excesses for 2001, out of which one was referred to direct charge to the Consolidated Fund. For the remaining 15 which were

364 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 referred to transfers of funds, either through savings from Subheads of the same Head, or from the Heads "Contingencies and Reserve", 922 Subheads were involved. The last Special Warrant issued was dated 29 April 2002. The Special Warrants issued under the Law are analysed as follows:

S/N Law Description Amount S.W. £ 5 16(II)/2001 Supplementary Budget (No. 1) 293.369 7 22(II)/2001 Supplementary Budget (No. 2) 6.073.844 10 33(II)/2001 Supplementary Budget (No.3) 44.029.536 13 37(II)/2001 Supplementary Budget (No. 4) 12.284.000 13 38(II)/2001 Supplementary Budget (No.5) 31.370.799 22 40(II)/2001 Supplementary Budget (No. 6) 970.000 24 42(II)/2001 Supplementary Budget (No. 7) 48.882.610 26 45(II)/2001 Supplementary Budget (No. 8) 22.948.000 Total 166.852.158

5.6.2 Outstanding liabilities According to the Financial and Accounting Instructions, Government liabilities must be settled promptly and definitely before the end of the financial year to which they refer. This provision was not always applied, resulting to payments effected up to 1.7.2002 from the 2002 Budget, for 2001 liabilities, of a total amount of £10.157.631. The above Instructions provide further that the returns for outstanding liabilities should be submitted not later than the 31st January of the following year. 5.7 FINAL ACCOUNTS 5.7.1 Certification of Final Accounts The Final Accounts of the Republic for the financial year ended 31st December 2001 have been audited in accordance with the provisions of section 116 of the Constitution. Except for the comments contained in this Report, in my opinion, the Accounts present fairly the financial position of the Republic. It has been generally noted that considerable improvement has been made in the systems of internal control of public revenue and expenditure, resulting to the minimisation of arithmetical mistakes. The introduction of management internal control systems, is imperative, however, which will provide specific objectives and measurable criteria with performance indexes under which the management, as well the public to be able to evaluate the efficiency and achievement of the targets set by each Ministry, Department and Service. It is also imperative for the extension of the application of computerised systems in all fields, with appropriate training of the staff for the use and utilisation of technology, for the provision of prompt and efficient service to the public with the minimum possible cost. Still pending, however, is the enactment and amendment of legislation, which will contribute towards the limitation of weaknesses and

365 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001 omissions observed in certain fields, particularly, in the imposition and collection of public revenue. 5.7.2 Submission of Final Accounts Pursuant to article 81(2) of the Constitution, the Final Accounts must be submitted to the House of Representatives for approval within three months from the end of the financial year. It was again observed that the Final Accounts for the financial year ended 31st December 2001 have not been submitted within the above time limits. 5.7.3 Statement of Assets and Liabilities. The following statement shows the Assets and Liabilities of the Republic as at 31st December 2001 and 31st December 2000. 2001 2000 £m. £m. ASSETS Cash and Short-term Deposits 13,3 13,2 Investments and Deposits: Special Funds 18,5 35,1 Advances and Debit Balances 77,1 112,8 108,9 161,1 LIABILITIES Special Funds - Table 36,2 24,0 Central Bank of Cyprus – Government General A/c 603,2 633,7 Public Loans Fund 4,8 8,1 Deposits and Credit Balances 58,8 85,3 Treasury Bills in the Republic 3.053,1 2.821,4 Treasury Bills Abroad 579,8 571,7 4.335,9 4.144,2 (4.227,0) (3.983,1) CONSOLIDATED FUND Accumulated Deficit on 1.1.2000 (3.983,1) (3.522,6) Transfer of Debit Balances - (187,1) Deficit for the year (243,9) (273,4) (4.227,0) (3.983,1) 5.8 ASSETS 5.8.1 Cash and Bank balances etc. at 31.12.2001 £000 Imprests, Cash in hand etc. 13.325,9 Deposits at short notice 11,9 13.337,8

366 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Analytical statement of Imprests, cash in hand etc.:

£000

Imprests, Cash in hand and Special Accounts 11.936,9 Embassies Revenue Accounts 802,0 Cash with Post Office 576,6 Cash with Crown Agents 10,4 13.325,9

The above balances have been verified from certificates submitted by boards of surveys and banks. 5.8.2 Special Funds - £ 18,5 m. This amount represents the balances of various Funds administered by Government. Separate accounts for each Fund are shown in the Financial Report. 5.8.3 Advances and debit balances £77,1 m. This amount includes the balances of the following advances, some of which may be finally charged to the Consolidated Fund. The advances, which were issued many years ago, must be settled or converted into loans the soonest possible. Following the enactment of the Advances Law of 1985 and the issue of the relevant Regulations, efforts are made by the Accountant General for the settlement of the advances. (a) Advances, Treasury (sundries) -Cyprus Broadcasting Corporation £3,6 m. This amount represents advances issued during the years 1973–1977 and 1996, at 6% interest, to facilitate the Corporation to meet its deficits and current liabilities. -Cyprus Development Bank £2,6 m. This amount was issued to the Bank, free of interest, during the years 1976–1982, for the issue of loans to private enterprises. This advance is non- interest bearing. -School Committees £1,1 m. This amount was issued during the years 1983–1985 as a loan to various School Committees, in order to cover their deficits. -Hellenic Chemical Industries Ltd. £1 m. This amount was paid in 1983, to enable the company to continue its operation. -Cyprus Tourism Organisation £6,5 m. -Nicosia Municipality (Popular Neighbourhood) £0,1 m. -Cyprus Sewerage Boards £5,8 m. (b) Miscellaneous Advances -Turkish Communal Chamber and Turkish Board of Education £169.014. These advances were issued prior to 1963 to the Turkish Communal Chamber and the Turkish Board of Education.

367 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

(c) Guarantee payments - Famagusta Sewerage Board £1,7 m. This amount was issued during the years 1976– 1995 to enable the Board to pay the loan instalments due to the International Bank for Reconstruction and Development and amounts due to the contractors for work executed in 1974. - Hellenic Chemical Industries £16,6 m. This amount was paid during the years 1984– 1989 for the repayment of company loans, which were guaranteed by Government. - Miscellaneous payments £1,7 m. This amount represents settlement of loans and liabilities of Public Corporations and private companies, which are guaranteed by Government. - Payments by Ministry of Commerce, Industry and Tourism £10,6 m. This amount was paid by the Ministry of Commerce, Industry and Tourism during the years 1991– 1998, for compensations, to industrialists for exports to Libya, Iraq–Kuwait and for certain other isolated cases. 5.8.4 Assets not included in the Balance Sheet (a) Shares. Government has the following shareholdings, which are shown as a footnote to the Balance Sheet:

Share Government Name of Company Capital Shareholding £000 £000 %

Cyprus Development Bank Ltd 12.440 10.948 88,01

Cyprus Petroleum Refinery Ltd 2.991 1.944 65,00

Cyprus Forest Industries Ltd 3.060 1.562 51,06

Cyprus Immovable Property Development Ltd 421 348 82,66

Cyprus Pipes Industries Ltd 25.000 2,5 0,10

Hellenic Chemical Industries Ltd 8.000 2.201 27,51

Cyprus Airways Ltd 55.519 38.652 69,62

Pancyprian Bakers Company Ltd 1.833 286 15,58

Bank of Cyprus Ltd 216.181 5 0,00

(b) Loans from Public Funds. The outstanding loans at 31 December 2001, due by Municipalities, Public Corporations, Loan Commissioners etc. amounted to £185,2 m. During the year, the amount of £38,0m. was collected for the repayment of capital and interest. The arrears amounted to £6,1 m. These loans are shown in the footnotes to the Balance Sheet.

368 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

5.8.5 Statement of outstanding loans at 31st December 2001 and 2000 2001 2000 £000 £000 Loan Commissioners 16.731 18.036 Municipalities and Community Boards 524 528 Cyprus Grain Commission 3.433 3.515 Cyprus Ports Authority 4.766 5.395 Housing Finance Corporation 471 540 Land Development Corporation 1.186 910 Cyprus Broadcasting Corporation 246 246 Cooperative Central Bank Ltd. 66.237 66.237 Civil Servants Cooperative Building Society Ltd. 80 80 Evcaf High Council 14 14 Intergovernmental Committee for European Migration 24 24 Hellenic Chemical Industries Ltd. 2.561 2.561 School Committees 3.267 3.267 Nicosia Water Board 342 498 Nicosia Sewerage Board 2.122 2.156 Electricity Authority of Cyprus 75 92 Cooperative Society “Aigialousa Ltd.” - 150 Cooperative Society of Deaf Ltd. 60 60 Liquidator of the Company “The Cyprus Asbestos Mines Ltd” 228 228 Cypriot Community of Brisbane 51 53 Laiki Investment Ltd. 349 349 Cyprus Investments and Shares Organizations Ltd. 810 810 Cyprus Development Bank Ltd. 611 735 Popular Bank - “Premier Chemical Ltd” - 163 Popular Bank - “Yiannoplast Ltd” 141 170 Popular Bank – Georghios Tsappis 190 217 Ayios Sozomenos Sewerage Committee 20 20 Hellenic Bank - Dhalico Enterprises Ltd 195 223 Popular Bank - G. & M. Ioannides Ltd 45 52 Popular Bank - Trikoza Knitting Industry Ltd 126 151 Popular Bank - Nicobutton Enterprises Ltd 49 59 Bank of Cyprus - A. Epiphaniou Industries Ltd 75 90 Larnaka Sewerage Board 5.036 5.100 Limassol Sewerage Board 4.075 4.177 Miscellaneous 52 52 Special Relief Fund 69.453 - Displaced Civil Servants Housing Scheme 1.594 - 185.239 116.958

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5.9 LIABILITIES 5.9.1 Special Funds £36,2 m. This amount represents the balances of various Funds administered by Government. In the Financial Report separate accounts are shown for each Fund. 5.9.2 Deposits and other credit balances £58,8 m. This amount represents the balances of the various departmental and other deposit accounts, and includes the following account: - International Monetary Fund £4,8 million. This amount represents the balance of facilities provided to Cyprus since 1974 by the International Monetary Fund to member–countries whose Balance of Payments was adversely affected by the substantial increase in oil prices and the reduction of exports. 5.9.4 Liabilities not included in the Balance Sheet. (a) Public Debt. The following statement shows the movement of the Public Debt for the years 2001 and 2000.

2001 2000 £m. £m. Balance 1st January 1.371,4 1.188,8 Collections from new loans 452,4 268,9 1.823,8 1.457,7 Repayment of loans 144,5 92,7 1.679,3 1.365,0 Increase/(Decrease) due to exchange fluctuations 1,4 6,4 Balance 31st December 1.680,7 1.371,4

The Sinking Fund Account, kept for the repayment of Public Debt for the years 2001 and 2000 was £507,7 m. and £394,7 m., respectively. (b) Outstanding liabilities. The outstanding liabilities at 31.12.2001 amounted to £10,1 m. These are shown in the footnotes to the Balance Sheet. (c) Other liabilities. Government has deposited with the Central Bank non–negotiable interest free notes, payable to international organisations. The value of these notes, at 31.12.2001, was £92,8 m. as follows:

£000 International Monetary Fund 84.235 International Bank for Reconstruction and Development 7.509 International Development Association 943 International Investment Guarantee Agency 113 92.800

370 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

(d) Statement of Outstanding Guarantees. The contingent liabilities for loans and credit facilities amounted to £616,1 m. at 31.12.2001, for government guarantees issued to the following: £000 Electricity Authority of Cyprus 106.480 Cyprus State Fairs Authority 492 Cyprus Ports Authority 53.918 Agia Napa Municipality 3.514 Agios Athanasios Municipality 2.045 Agios Dometios Municipality 264 Aglantzia Municipality 10.143 Athienou Municipality 86 Aradipou Municipality 3.576 Kato Polemidhia Municipality 2.203 Germasogeia Municipality 3.297 Latsia Municipality 314 Geroskipou Municipality 840 Deryneia Municipality 791 Dali Municipality 1.336 Engomi Minicipality 2.164 Lakatameia Municipality 1.684 Larnaka Municipality 19.819 Limassol Municipality 14.982 Lefkara Municipality 271 Nicosia Municipality 5.357 Mesa Geitonia Municipality 734 Paralimni Municipality 4.823 Pafos Municipality 7.770 Pegeia Municipality 150 Polis Municipality 2.663 Strovolos Municipality 11.366 Cyprus Grain Commission 3.883 Cyprus Theatrical Organization 42 Cyprus Airways Ltd. 38.107 Cyprus Development Bank Ltd. 78.194 Cyprus Sports Organization 11.283 Cyprus Land Development Corporation 5.030 E.O.K.A. Struggle 1955-1959 Historical Memory Fund 373 Cyprus Tourism Organisation 1.827 Agricultural Insurance Organization 29.645 Cyprus Dairy Industry Organization 786 Cyprus Agency for Equal Distribution of Burdens 26.280 Cyprus Broadcasting Corporation 3.758 Agia Napa Sewerage Board 8.258

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£000 Dali – Pera Horio Nissou Sewerage Board 711 Larnaka Sewerage Board 13.976 Limassol – Amathous Sewerage Board 27.510 Pano Platres Sewerage Board 194 Paralimni Sewerage Board 13.888 Pafos Sewerage Board 8.487 Kyperounta Sewerage Board 2.890 Pelendri Sewerage Board 1.033 Agros Community Board 89 Achna Community Board 127 Dromolaksia – Community Board 318 Empa Community Board 207 Episkopi Community Board 4 Community Board 1.401 Kiti Community Board 1.030 Kyperounta Community Board 1.078 Leivadia Community Board 31 Moniatis Community Board 22 Ormideia Community Board 198 Pano Platres Community Board 11 Pachna Community Board 155 Pelendri Community Board 353 Agios Theodoros Community Board 203 Pervolia Community Board 2.020 Pissouri Community Board 270 Tala Community Board 79 Xylofagou Community Board 133 Agios Tyhonas Community Board 4.051 Tsada Community Board 9 Ipsonas Community Board 62 Frenaros Community Board 218 Agia Varvara Community Board 118 Kofinou Community Board 30 Potamia Community Board 90 Sounio – Zanatzia Community Board 12 Statos – Ayios Fotios Community Board 111 Stroumpi Community Board 37 Trimiklini Community Board 29 Choletria Community Board 60 Choulou Community Board 14 Avgorou Community Board 135 Parekklissia Community Board 883

372 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

£000 Sotera Community Board 587 Chloraka Community Board 79 Louvaras Community Board 62 Kalavassos Community Board 8 Oroklini Community Board 726 Lofou Community Board 60 Peristerona Pafos Community Board 113 Pera-Pedhi Community Board 25 Akroterio Community Board 47 Community Board 87 Xyliatou Community Board 96 Trachoni Community Board 82 Sykopetra Community Board 32 Finikaria Community Board 36 Limnatia Community Board 28 Apaisia Community Board 24 Pyrga Larnaka Community Board 156 Agios Ioannis Agrou Community Board 172 Agios Therapontas Community Board 70 Agia Anna Community Board 7 Moutagiaka Community Board 134 Community Board 161 Kalo Chorio Community Board 79 Konia Community Board 30 Community Board 36 Pyla Community Board 340 Tersefanou Community Board 25 Kato Amiantos Community Board 23 Anogyras Community Board 36 Avdimou Community Board 75 Agia Marina Kelokadharon Community Board 17 Asgata Community Board 91 Mazotos Community Board 12 Kathikas Community Board 48 Eptagonia Community Board 56 Troulli Community Board 10 Community Board 134 Koilani Community Board 76 Lania Community Board 21 Mathikoloni Community Board 172 Vouni Community Board 82 Drymou Community Board 25

373 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

£000 Geriou Community Board 166 Palodia Community Board 131 Fassoula Community Board 42 Community Board 125 S.O.D.A.P. Ltd. 4.636 SE.DI.GE.P. Pelendri – Kato Amiantos Ltd. 45 SE.DI.GE.P. Stroumpi – Polemi Ltd. 388 District SE.DI.GE.P. Agros Ltd. 277 SE.DI.GE.P. Chloraka Ltd. 377 SE.DI.GE.P. Argaka Ltd. 131 SE.DI.GE.P. Ltd. 47 District SE.DI.GE.P. Maroni Ltd. 317 SE.DI.GE.P. – Odou Ltd. 79 SE.DI.GE.P. Agia Manina Chrysochous Ltd. 75 District SE.DI.GE.P. Ltd. 87 Cooperative Deaf Society Ltd. 373 Cooperative Credit Society Liopetri 18 Cooperative Credit Society Sotera 12 SE.DI.GEP. Agros 50 SE.DI.GE.P. Statou Agiou Fotiou Ltd 135 SE.DI.GE.P. Kyperountas, Dymon and Chandrion 36 SE.DI.GE.P. Parekklesias 30 SEGEP 980 Cooperative Credit Society Xylophagou 7 Cooperative Credit Society Avgorou 474 E.T.K.O Ltd. 6.871 K.E.O. Ltd. 2.070 LOEL Ltd. 6.134 Audit Office of the Cooperative Societies 244 Marine Agents Association 109 Vine Products Commission 1.511 Central Slanghter House 7.810 Cyprus Association for Muscular Dystrophy Research 333 Cyprus Potato Marketing Board 13.010 Various Cooperative Establishments 9.569 Various Persons 3.257 Labertas Fisheries 320 Pittas Dairy Industry 473 Wines Industry Nicolaides Ltd. 78 Vassos Charalambides 246 616.079

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PART 6 – AUDIT OFFICE OF THE REPUBLIC – ORGANISATION AND PLANNING 6.1 ORGANISATIONAL STRUCTURE The organisational structure of the Audit Office for the year 2001, was as follows:

AUDITOR GENERAL OF THE REPUBLIC

DEPUTY AUDITOR GENERAL

ADMINISTR. REGISTRY ACCOUNTS

A C B DIVISIONS

1 2 3 S.P.T. S.P.T. 4 5 6 BRANCHES

3 4 8 C.A.S 10 6 12 1 2 9 11 5 7 SECTIONS

6.1.1 Personnel. The approved permanent posts of the Audit Office are 102. In addition 12 persons are employed as auxiliary personnel and 6 casual assistants, totalling 120 employees. During 2002, were filled 6 posts of audit staff, out of the 19 vacancies at 31.12.2001. 6.1.2 Divisions. The Office is divided into three Divisions, A, B and C. Divisions A and B are, mainly, responsible for the financial and performance audit. Each of these Divisions is headed by a Director of Audit. The Computer Audit Service is coming under Division B. Division C, headed by the Director Technical Audit, incorporates Branches and Sections carrying out, mainly, technical audit of development and other projects. 6.1.3 Branches and Sections. There are 6 Branches and 12 Sections under Divisions A and B. Each Branch of Division A and B is headed by a Senior Principal Auditor and each Section by a Senior Audit Officer or Audit Officer A’. There are also 2 Branches under Division C, which are headed by a Senior Principal Technical Audit Officer. 6.2 EXPENDITURE AND REVENUE OF THE AUDIT OFFICE. -Expenditure. The budgeted expenditure for 2001 under Head 05.01.2 "Audit Office of the Republic" was increased from £1.877.232 to £1.915.329 and the actual expenditure amounted to £1.736.237. -Revenue. The budgeted revenue for 2001, under Vote 3/127 "Audit Office – Fees for Audit Services", was £200.000 and the actual revenue amounted to £179.520.

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6.3 PROGRAMMES OF WORK. For each audit year, which covers the period from 1st July to 30th June of the following year, programmes are prepared, specifying the audit work to be carried out during the year and the major construction projects, which will be inspected by the Audit Office. 6.4 SAMPLE AUDIT. Over the years, the volume and complexity of government activities have grown considerably. Under these circumstances, it is now impossible for the Auditor General, who is the head of a small Service, to carry out a full and all embracing regularity and financial audit at all levels of Government. Full audit has become much less important as a primary function of the Auditor General, because internal control within the various administration units has been extended and improved considerably. Now, planned sample audit is carried out with greater emphasis on the examination of the scope and efficiency of internal controls. The Auditor General is interested in the development and adoption of new auditing guidelines and techniques, whereby he can carry out his functions more expeditiously, economically and effectively. Sample audit techniques have been developed and applied with satisfactory results for many years. This kind of approach is required not only to cope with the growth in volume of public accounts, but also to give the Auditor General sufficient time to embark on performance audits and to cover significant areas of public revenue and expenditure. 6.5 PERFORMANCE AUDIT. In addition to the financial and regularity audits, which aim at the verification of conformity to the Law, the Budget and all relevant accounting, financial and administrative Regulations, in recent years the Audit Office also conducts performance audit, in order to ascertain the economy, efficiency and effectiveness of the decisions and actions of the auditees. This innovation is in conformity with current international practice and the requirements of both Government and the House of Representatives. Details of the performance audits, conducted during the last years are given in Part 3 of my Report. 6.6 AUDIT OF CAPITAL PROJECTS. The audit of capital projects continued throughout 2001 by the technical staff of the Audit Office of the Republic in a planned and systematic manner. The results of this audit have been very beneficial towards an orderly public financial administration. The most serious findings, revealed during the audit of capital projects, are stated in other parts of my Report. The purpose of this audit is to verify that the execution of the various projects is carried out in accordance with the technical conditions, the specifications and, in general, in the most economical and effective way. This audit includes, inter alia, the examination of the feasibility studies, the technical specifications and designs, the terms of the contracts and the procedures for the invitation and award of tenders. The audit work also includes site inspections of the various projects and the audit of interim and Final Account payments. Through the technical audit, as in other forms of audit, the Auditor General's objective is not to substitute or minimise the jurisdiction and responsibility of the audited agencies. These remain, as in the past, entirely responsible for the execution and supervision of the capital projects. The Auditor General's task is confined to auditing duties as defined in the Constitution.

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6.7 TRAINING OF STAFF. Special emphasis and importance is given to the continual training of staff, aiming at the quality improvement of audit work for the best possible provision of service to the public. Within the framework of the financial limitations of the Budget, and the priorities and needs of the Audit Office, officers participate in suitable training programmes, seminars and conferences, both in Cyprus and abroad. During 2001, 81 officers participated in educational programmes or/and seminars organized in Cyprus. In addition, 13 other officers participated in seminars and educational programmes abroad. 6.8 VISITS IN CYPRUS OF AUDITORS GENERAL AND REPRESENTATIVES OF SUPREME AUDIT INSTITUTIONS. Within the framework of the efforts made for the briefing of the Auditors-General of the Supreme State Audit Institutions of the13 candidate countries under accession to the European Union and the European Board of Audit, a meeting was held in Cyprus, during the period 25-27 November 2001, for discussing and adoption of the necessary actions to be taken, in view of the accession course. The meeting was attended by more than 20 Auditors-General, together with their delegations, State-Members of European Union, and by candidate countries under accession to the European Union, as well as from other European countries. In the meeting were invited and participated the Commissioner of the European Union for the Budget, the Member and Chairman of the Public Accounts Committee of European Parliament, the Auditor General of United Kingdom and Chairman of the Working Group of European Union for the countries under accession, the Auditor General of Russian Federation, the Chairman of the Austrian Board of Audit and General Secretary of International Association of Auditors General, as well as other personalities. The Auditor General of Cyprus and the Chairman of the European Court of Audit, presided the meeting, during which the following main subjects were discussed: • The relationship of the Heads of Supreme State Audit Institutions with their Parliament. • The cooperation of Supreme State Audit Institutions in audit activities. • The preparation of audit manuals. • The criteria used for the evaluation of Supreme State Audit Institutions. The meeting contributed to the strengthening of cooperation between the European Court of Audit, on the five Legal Bodies of European Union and the Supreme State Audit Institutions of the countries under accession to the European Union. 6.9 ADVISORY SERVICES OF THE AUDITOR GENERAL OF THE REPUBLIC. (a) The Auditor General assists the Executive Authority in the public financial administration of the Republic, through the provision of consultancy services for the formulation of new accounting procedures and systems, as well as for the revision of General Orders, Financial Instructions, Tenders and Stores Regulations and other matters. She also participates in several committees as an observer.

377 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

(b) Within the framework of government policy, for the provision of technical assistance to State Audit Agencies of developing countries, the Audit Office organised from 5 to 30.3.2001 the training programme for 5 scholars members of the State Audit Office of Georghia. 6.10 Tender Boards. The Auditor General of the Republic, or her representative, attends, as an observer, the meetings of the Main Tender Board and the Special Main Tender Board, set up and operating in accordance with the Public Tenders Law 102(I)/97. Experience so far has shown that the Auditor's General presence has proved most beneficial and constructive. 6.11 ANNUAL REPORT. In her Annual Report the Auditor General reports whatever, in her opinion, should be brought to the attention of the Executive and the House of Representatives, regarding the public financial administration of the Republic. The Auditor General endeavours to have the highest degree of objectivity, accuracy and professional standards in her Report. Her findings, together with her comments and recommendations, are initially reported to the audited agencies and her Annual Report is based upon the reports submitted. The draft paragraphs of the Annual Report are sent, before finalisation, to the Ministers, the Heads of Independent Services, the Chairmen of Public Corporations or other Organisations and Local Authorities for comments. 6.12 ANNUAL REPORT FOR 2000. Pursuant to article 116(4) of the Constitution, my Annual Report for 2000 was submitted to the President of the Republic on 22 November 2001, who laid it before the House of Representatives. The House of Representatives under circular dated 10.12.2001 to the Directors General of the Ministries and the Planning Bureau, submitted the request of the Public Accounts Committee, that, for purposes of facilitating the study of the Report, notes to be prepared and submitted, with proposals and recommendations for the settlement of the problems stated in the Report. 6.13 QUARTERLY REPORTS OF THE AUDITOR GENERAL OF THE REPUBLIC. During 2001, quarterly reports were submitted to the Ministers on the major issues raised by my Office, as a result of the audit of the accounts and activities of the various Departments and Services. Copies of these reports are submitted to the President of the Republic and the House of Representatives. In this way, both the Executive and the House of Representatives are briefed promptly on the most important matters raised during the audit of the accounts of Government, Local Authorities and Public Corporations. 6.14 AUDITOR GENERAL OF THE REPUBLIC. The Auditor General of Cyprus Mrs Chrystalla Georghadji accepted an invitation from the Auditor General of Russia and visited Moscow, from 22.3.01 to 24.3.01, as a head of delegation. The Auditor General also represented Cyprus at the Conference of the Heads of Supreme State Audit Institutions of candidate countries under accession to the European Union, held in Budapest from 9.5.01 to 11.5.01 as well as at the Seminar for the audit of State Budget execution, organised by the European Organisation of Supreme State Audit Institutions, held in Warsaw from 25.9.01 to 26.9.01. She also participated in the 17th International Congress of Auditors General held in Seoul, from 24.10.01 to 26.10.01, as well as in the conference for the efficient and effective use of Public Funds of European Union, held in Brussels from 7.11.01 to 9.11.01.

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6.15 DEPUTY AUDITOR GENERAL OF THE REPUBLIC. The Deputy Auditor General of the Republic, Mr George Kyriakides, is a member of the Audit Council for the external audit of EUROCONTROL, of which Cyprus is a member. He participated in the Conference of the External Auditors of West European Organisation, held in Strasbourg from 2 until 3.4.2001 and in the 18th Meeting of Intertgovernmental Group of Experts on International Accounting Standards and Reporting of the United Nations, held in Geneva from 10 to 12.9.2001.

379

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

PART 7 - APPENDICES APPENDIX I BUDGETARY RESULTS

Actual Original Final

Expenditure Appropriation Appropriation Unspent Amounts H E A D £ £ £ £ % Presidency and Presidential Palace 1.309.843 1.734.285 1.726.442 416.599 24,13 Council of Ministers 527.272 528.867 528.667 1.395 0,26 House of Representatives 5.246.558 4.189.558 5.597.391 350.833 6,27 Judicial 6.826.543 6.933.940 7.041.212 214.669 3,05 Law Office 2.595.953 2.597.832 3.019.424 423.471 14,02 Audit Office 1.736.237 1.887.232 1.915.329 179.092 9,35 Public Service Commission 313.308 317.891 327.471 14.163 4,33 Educational Service Commission 274.032 268.567 279.704 5.672 2,03 Office of the Commissioner of Administration 245.047 262.440 283.849 38.802 13,67 Competition Protection Commission 79.693 0 117.462 37.769 32,15 Ministry of Defence - Administration 1.385.016 1.467.716 1.554.789 169.773 10,92 Cyprus Army 31.339.057 31.202.169 32.195.538 856.481 2,66 National Guard 42.494.529 44.500.000 43.800.000 1.305.471 2,98 Defence 128.044.114 135.210.010 135.210.010 7.165.896 5,30 Ministry of Agriculture, Natural Resources and Environment - Administration 24.367.717 21.414.114 26.055.957 1.688.240 6,48 Agriculture 12.943.165 13.685.075 15.427.929 2.484.764 16,11 Agriculture – Animal Husbandry 1.597.141 1.825.700 1.825.700 228.559 12,52 Veterinary Services 5.362.793 4.057.592 6.747.911 1.385.118 20,53 Forests 10.227.239 12.826.695 13.119.695 2.892.456 22,05

Water Development 45.151.913 50.920.888 52.710.970 7.559.057 14,34

381 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Actual Original Final

Expenditure Appropriation Appropriation Unspent Amounts H E A D £ £ £ £ %

Geological Survey 2.173.162 2.562.464 2.860.853 687.691 24,04 Meteorological Service 1.521.467 1.778.619 1.780.119 258.652 14,53 Land Consolidation 2.041.894 2.764.165 2.765.495 723.601 26,17 Mines 156.589 178.076 203.357 46.768 23,00 Agriculture Research Institute 3.244.949 3.493.605 3.510.120 265.171 7,55 Department of Fisheries and Marine Research 2.733.900 1.930.814 2.992.492 258.592 8,64 Ministry of Justice and Public Order – Administration 4.079.326 4.147.012 4.400.507 321.181 7,30 Prisons 3.708.768 3.756.676 3.938.671 229.903 5,84 Police 72.989.481 77.494.256 80.359.801 7.370.320 9,17 Fire Service 8.902.833 8.955.317 9.519.557 616.724 6,48 Ministry of Commerce, Industry and Tourism - Administration 1.827.674 1.287.058 2.313.131 485.457 20,99 Commerce and Industry Services 14.840.382 20.802.911 23.589.399 8.749.017 37,09 Cooperative Development 821.930 898.165 898.165 76.235 8,49 Registrar of Companies and Official Receiver 1.083.386 1.052.417 1.137.833 54.447 4,79 Ministry of Labour and Social Insurance - Administration 335.966 520.768 522.941 186.975 35,75 Labour 3.248.881 3.294.632 3.415.219 166.338 4,87 Social Insurance Services 62.292.868 54.813.200 63.340.824 1.047.956 1,65

Welfare Services 50.156.227 50.143.220 55.919.674 5.763.447 10,31 Productivity Centre 914.480 1.106.413 1.108.623 194.143 17,51 Higher Hotel Institute, Cyprus 759.920 897.728 910.809 150.889 16,57 Higher Technical Institute 2.158.698 2.374.998 2.394.257 235.559 9,84 Industrial Relations Service 108.853 131.155 131.655 22.802 17,32 Labour Inspection Department 721.136 690.800 937.358 216.222 23,07

382 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Actual Original Final

Expenditure Appropriation Appropriation Unspent Amounts H E A D £ £ £ £ % Ministry of Interior – Administration 40.871.367 38.055.898 52.533.192 11.661.825 22,20 District Administrations 4.050.751 4.623.894 4.636.150 585.399 12,63 Town Planning and Housing 23.587.809 34.584.283 34.568.961 10.981.152 31,77 Civil Registry and Migration 4.484.240 4.283.371 4.710.104 225.864 4,80 Lands and Surveys 16.677.664 19.519.858 20.708.331 4.030.667 19,46 Press and Information Office 4.672.555 5.609.907 5.639.907 967.352 17,15 Rural Development 18.192.380 21.586.000 21.680.344 3.487.964 16,09 Service for the Care and Rehabilitation of Displaced Persons 338.499 408.975 408.975 70.476 17,23 Service for the Protection and Administration of T/C Properties 3.211.484 3.300.000 3.300.000 88.516 2,68 Self – Help Housing Schemes 20.890.101 32.949.000 32.949.000 12.058.899 36,60 Ministry of Interior – Other Services 4.578.808 5.500.000 5.620.000 1.041.192 18,53 Ministry of Foreign Affairs - Administration 2.446.805 2.404.585 2.502.649 55.844 2,23 Foreign Services 12.616.724 12.288.502 12.811.291 194.567 1,52 Ministry of Finance - Administration 14.526.314 12.596.201 15.996.759 1.470.445 9,19 Treasury 3.874.368 4.261.126 4.359.122 484.754 11,12 Customs and Excise 44.645.781 42.598.865 45.781.257 1.135.476 2,48 Inland Revenue 25.863.773 35.666.025 35.800.353 9.936.580 27,76 Statistics and Research 1.464.835 1.547.588 1.577.174 112.339 7,12 Government Purchasing 2.629.098 2.500.866 2.832.986 203.888 7,20 and Supply 14.526.314 12.596.201 15.996.759 1.470.445 9,19 Public Administration and Personnel Service 430.184 495.290 600.817 170.633 28,40 Printing Office 2.328.794 2.570.781 2.567.781 238.987 9,31 Department of Information Technology Services 1.497.885 2.006.975 2.203.617 705.732 32,03

383 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Actual Original Final

Expenditure Appropriation Appropriation Unspent Amounts H E A D £ £ £ £ % Public Debt Services 552.023.744 575.944.800 585.302.009 33.278.265 5,69

Pensions and Gratuities 108.865.853 112.800.000 115.829.383 6.963.530 6,01 Subsidies 73.131.736 37.700.010 73.567.010 435.274 0,59 Long-term Loans and Advances 0 60 60 60 100,00 Subventions/Contributions 209.431.160 191.836.820 213.466.610 4.035.450 1,89 Miscellaneous 31.076.685 27.870.792 36.413.615 5.336.930 14,66 Contingencies and Reserve 0 3.250.000 904.870 904.870 100,00 Planning Bureau 7.830.887 19.227.880 14.064.892 6.234.005 44,32 Ministry of Education and Culture - Administration 40.172.129 27.380.700 42.708.056 2.535.927 5,94 Education 208.237.624 213.691.957 218.635.727 10.398.103 4,76 Culture and Other Services 6.336.459 7.959.590 8.011.518 1.675.059 20,91 Ministry of Communications and Works – Administration 5.163.604 7.806.301 8.231.949 3.068.345 37,27 Public Works 8.177.721 9.629.729 9.719.463 1.541.742 15,86 Public Works Expenditure 12.959.778 17.351.500 17.351.500 4.391.722 25,31 Road Development 34.966.195 53.085.000 56.281.775 21.315.580 37,87 Airports 9.125.779 5.959.000 9.959.000 833.221 8,37 Public Buildings 11.045.095 17.865.000 18.695.627 7.650.532 40,92 Antiquities 3.875.224 5.553.342 5.807.970 1.932.746 33,28 Civil Aviation 21.284.746 22.945.019 22.824.974 1.540.228 6,75 Merchant Shipping 2.395.664 2.589.511 2.777.204 381.540 13,74 Postal Services 8.927.499 8.983.131 9.710.177 782.678 8,06 Road Transport 2.233.429 2.338.296 2.472.946 239.517 9,69 Electrical and Mechanical Services 9.732.921 9.754.452 10.464.433 731.512 6,99 Ministry of Health– Administration 14.550.984 12.200.005 15.862.355 1.311.371 8,27

Medical and Public Health Services 70.508.019 68.786.190 72.672.010 2.163.991 2,98 Mental Health Services 8.762.046 9.266.461 9.243.205 481.159 5,21 Dental Services 1.628.220 1.734.224 1.740.938 112.718 6,47

384 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Actual Original Final

Expenditure Appropriation Appropriation Unspent Amounts H E A D £ £ £ £ % Pharmaceutical Services 30.783.832 23.985.424 31.283.715 499.883 1,60 General Laboratory 1.818.448 1.570.983 1.981.735 163.287 8,24 Health 13.302.088 16.874.080 19.075.965 5.773.877 30,27

General Categories of Staff 39.157.910 39.896.195 40.038.619 880.709 2,20 TOTAL 2.364.275.640 2.426.099.482 2.607.324.390 243.048.750 9,32

385 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

APPENDIX ΙΙ

ARREARS OF REVENUE AS AT 31ST DECEMBER 2001

Total Amount For previous Ministry/Department For 2001 31.12.2001 31.12.2000 years £ £ £ £ JUDICIAL 2.892.484 1.968.082 4.860.566 3.857.430 MINISTRY OF AGRICULTURE, NATURAL RESOURCES AND ENVIRONMENT Water Development 30.951.064 13.366.681 44.317.745 35.493.387 Forests 22.588 6.645 29.233 68.578 Agriculture 59.341 1.400.126 1.459.467 1.710.886 Mines 150.062 20.870 170.932 154.289 Other Departments/Services 259 43.979 44.238 2.934 MINISTRY OF COMMERCE, INDUSTRY AND TOURISM Ministry 558.580 398.973 957.553 1.068.364 Registrar of Companies and Official Receiver 1989 150 2.139 4.031 MINISTRY OF LABOUR AND SOCIAL INSURANCE Higher Hotel Institute of Cyprus 131.954 19.121 151.075 139.194 Other Departments/Services 484.847 296.077 780.924 629.426 MINISTRY OF INTERIOR Ministry 428.719 --- 428.719 428.719 Town Planning and Housing 251.558 16.504 268.062 261.913 District Administrations 133.625 163.404 297.029 215.332 Lands and Surveys ------*929.244 *1.020.515 Other Departments/Services 3.802 3.272 7.074 6.943 MINISTRY OF FINANCE Ministry --- 462.866 462.866 --- Treasury 1.533.514 754.232 2.287.746 4.806.910 Customs and Excise 353.948 258.886 612.834 651.579 VAT Service ------*35.810.498 29.008.690 Inland Revenue Estate Duty ------*3.266.029 4.180.369

386 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Income Tax ------*145.573.377 122.526.708 Capital Gains Tax ------*20.824.493 22.935.299 Immovable Property Tax Law 30/77 ------*21.323 21.802 Immovable Property Tax Law 24/80 ------*5.611.257 5.662.840 Special Contribution ------*5.713.682 5.899.732 P.A.Y.E. ------*8.165.203 8.094.501 Defence Fund Contribution ------*13.177.044 11.100.282 Tax on Services ------*208.019 208.478 Other Taxes ------*2.191.152 2.053.153 MINISTRY OF EDUCATION AND CULTURE 545.087 254.331 799.418 577.820 MINISTRY OF COMMUNICATIONS AND WORKS Civil Aviation 1.390.710 858.287 2.248.997 3.844.740 Merchant Shipping 578.067 355.574 933.641 912.305 Other Departments 83.045 323.449 406.494 461.143 MINISTRY OF HEALTH 2.881.552 2.294.797 5.176.349 3.153.970 OTHER SERVICES 479 3.706 4.185 3.821 43.437.274 23.270.012 308.198.607 271.166.083

*No distinction has been made between arrears of revenue for 2001 and previous years.

387 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

APPENDIX III STATEMENT OF PERMANENT POSTS OF THE GOVERNMENT BUDGET Approved Filled in Posts for Posts Vacant 2001 31.12.2001 Posts Presidency and Presidential Palace1 6 5 -- Council of Ministers 12 12 -- House of Representatives 50 45 5 Planning Commission 44 35 9 Judicial2 267 245 22 Law Office 91 56 35 Audit Office 102 83 19 Public Service Commission 6 6 -- Educational Service Commission 5 5 -- Administration Commissioner’s Office 14 10 4 Ministry of Defence - Administration 106 86 20 Cyprus Army 3542 2161 1381 Ministry of Agriculture, Natural Resources and Environment Administration 20 9 11 Agricultural Research Institute 109 99 10 Agriculture 354 278 76 Veterinary Services 180 126 54 Forests 294 272 22 Water Development 350 326 24 Geological Survey 70 57 13 Meteorological Service 72 62 10 Land Consolidation 83 76 7 Fisheries 59 48 11 Mines 12 7 5 Ministry of Justice and Public Order Administration 12 11 1 Prisons 259 189 70 Police and Fire Service 4943 4859 84 Ministry of Commerce, Industry and Tourism Commerce and Industry Services 177 145 32 Cooperative Development 45 29 16

1 In the Budget there were 6 posts, but the one post has been abolished 2 Two additional Senior District Judge posts

388 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Registrar of Companies and Official Receiver 56 47 9 Ministry of Labour and Social Insurance Industrial Relations Service 8 3 5 Labour 131 100 31 Social Insurance 241 185 56 Welfare Services 402 367 35 Productivity Centre 43 33 10 Higher Hotel Institute 34 25 9 Higher Technical Institute 91 81 10 Ministry of Interior Administration 114 80 34 District Administrations 6 4 2 Town Planning and Housing 234 219 15 Migration Services 1 1 - Lands and Surveys 682 514 168 Press and Information Office3 99 89 11 Ministry of Foreign Affairs Administration4 20 11 7 Foreign Services 149 107 42 Ministry of Finance Administration 44 26 18 Treasury 230 192 38 Customs and Excise 376 289 87 Value Added Tax 5 186 130 57 Inland Revenue 373 313 60 Statistics and Research 85 72 13 Government Purchasing and Supply 106 91 15 Public Administration and Personnel Service 32 18 14 Printing Office 99 78 21 Information Technology Services 6 130 73 47 Ministry of Education and Culture 9846 9352 494 Ministry of Communications and Works Administration 20 14 6 Public Works 377 321 56 Antiquities 72 66 6

3 1 post supernumerary 4 1 post abolished, 1 appointment covers 2 organic posts: 1 Permanent Secretary post and 1 Ambassador post 5 1 post with secondment 6 5 posts have been abolished and 5 were transferred under another employee category

389 AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 2001

Civil Aviation 265 171 94 Merchant Shipping 60 31 29 Postal Services 391 307 84 Road Transport 91 68 23 Electrical and Mechanical Services 117 107 10 Ministry of Health Administration 67 49 18 Medical and Public Health Services 2669 2378 291 Mental Health Services 452 414 38 Dental Services 83 77 6 Pharmaceutical Services 131 116 15 General Laboratory 77 54 23 Other Services: General Administrative Staff 238 193 45 General Duties Clerical Staff 2394 2133 261 General Auxiliary Staff 306 256 50 TOTAL 32912 28597 4304

390