Annual Report 1999

REPUBLIC OF CYPRUS

ANNUAL REPORT 1999

AUDITOR GENERAL OF THE REPUBLIC

AUDIT OFFICE

OF THE REPUBLIC 1406 LEFKOSIA

Auditor General of the Republic

File No. 1.3.0.6(99)

20 November 2000

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 1999.

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 I INTRODUCTION 9 PART 2 SUMMARY OF MAIN FINDINGS 11 2.1 Performance Audits 11 2.2 Previous Performance Audits 11 2.3 General Audit Observations 11 2.4 Ministries and Departments 11 2.5 Local Authorities 23 2.6 Statutory Bodies 25 PART 3 PERFORMANCE AUDITS 29 3.1 Capital Gains tax 29 3.2 Previous Performance Audits 32 PART 4 AUDIT OBSERVATIONS 49 4.1 General Audit Observations 49 4.2 Independent Offices 52 4.3 Presidency 52 4.4 Relief Fund for Affected Persons 52 4.5 Judicial 52 4.6 Central Bank of Cyprus 55 4.7 Ministries and Departments 57 4.8 Ministry of Defence 57 4.9 National Guard 57 4.10 Ministry of Agriculture, Natural Resources and Environment 61 4.11 Dept of Water Development 61 4.12 Dept of Geological Survey 65 4.13 Dept of Forests 65 4.14 Dept of Agriculture 67 4.15 Land Consolidation Department 67 4.16 Mines Service 68 4.17 Ministry of Justice and Public Order 68 4.18 Police 68 4.19 Fire Service 76 4.20 Rents Subsidy Fund for Displaced and Affected Persons 77 4.21 Prisons 77 4.22 Ministry of Commerce, Industry and Tourism 77 4.23 Registrar of Companies and Official Receiver 84 4.24 Cyprus Handicraft Service 86 4.25 "Philoxenia" Hotel 87 4.26 International Conference Centre 88 4.27 Ministry of Labour and Social Insurance 89 4.28 Dept of Labour 89 4.29 Social Insurance Services 90 4.30 Social Insurance Fund 91 4.31 Central Holidays with Pay Fund 93 4.32 Redundancy Fund 93 4.33 Higher Technical Institute 93 4.34 Higher Hotel Institute of Cyprus 94

Page 4.35 Productivity Centre 94 4.36 Welfare Services 94 4.37 Ministry of Interior 97 4.38 District Administrations 99 4.39 Nicosia 101 4.40 Limassol 103 4.41 Pafos 103 4.42 Dept of Land and Surveys 104 4.43 Dept of Town Planning and Housing 107 4.44 Press and Information Office 109 4.45 Service for the Administration of T/C Properties 110 4.46 Service for the Care and Rehabilitation of Displaced Persons 112 4.47 Migration Office 113 4.48 Ministry of Foreign Affairs 114 4.49 Ministry of Finance 119 4.50 Treasury 120 4.51 Relief Fund for Displaced and Affected Persons 122 4.52 Dept of Government Purchasing and Supply 123 4.53 Dept of Inland Revenue 125 4.54 Dept of Customs and Excise 134 4.55 Dept of Information Technology Services 140 4.56 Fund for Travelling Expenses of Invalid Persons 140 4.57 Ministry of Education and Culture 141 4.58 Education "A" Fund 145 4.59 School Committees 145 4.60 Nicosia 149 4.61 Larnaka 149 4.62 Geri 150 4.63 Armenian 150 4.64 Ministry of Communications and Works 151 4.65 Dept of Antiquities 151 4.66 Dept of Public Works 152 4.67 Dept of Merchant Shipping 160 4.68 Dept of Electrical and Mechanical Services 163 4.69 Dept of Road Transport 168 4.70 Dept of Civil Aviation 171 4.71 Dept of Postal Services 173 4.72 Ministry of Health 174 4.73 Medical and Public Health Services 179 4.74 Pharmaceutical Services 184 4.75 Government Industrial Personnel Medical Treatment and Welfare Scheme 188 4.76 General Laboratory 188 4.77 Local Authorities 189 4.78 Municipalities – General Observations 189 4.79 Nicosia 192 4.80 Limassol 193 4.81 Larnaca 198 4.82 Pafos 199 4.83 Strovolos 199

Page 4.84 Agios Dometios 201 4.85 Athienou 202 4.86 Aradippou 202 4.87 Poli Chrysochous 203 4.88 Paralimni 204 4.89 Agia Napa 205 4.90 Lefkara 206 4.91 Geroskipou 206 4.92 Pegeia 206 4.93 Mesa Gitonia 207 4.94 Germasogeia 209 4.95 Kato Polemidia 209 4.96 Agios Athanasios 212 4.97 Aglantzia 212 4.98 Enkomi 214 4.99 Latsia 215 4.100 Idhalion 216 4.101 Lakatameia 217 4.102 Community Boards – General 217 4.103 Agios Tychonas Community Board 220 Public Corporations and other Organisations 221 4.104 Industrial Training Authority 221 4.105 Electricity Authority of Cyprus 224 4.106 State Fairs Authority 236 4.107 Cyprus Ports Authority 238 4.108 Cyprus Telecommunications Authority 241 4.109 Cyprus Grain Commission 252 4.110 Nicosia Water Commission 254 4.111 Cyprus Theatrical Organisation 255 4.112 Youth Board 257 4.113 Cyprus News Agency 257 4.114 Cyprus Sports Organisation 258 4.115 Cyprus Land Development Corporation 265 4.116 Cyprus Tourism Organisation 267 4.117 Agricultural Insurance Organisation 272 4.118 Cyprus Dairy Industry Organisation 274 4.119 Housing Finance Corporation 281 4.120 University of Cyprus 282 4.121 Cyprus Broadcasting Corporation 284 4.122 Vine Products Commission 294 4.123 Nicosia Sewerage Board 295 4.124 Limassol Amathus Sewerage Board 297 4.125 Famagusta Sewerage Board 298 4.126 Larnaka Sewerage Board 299 4.127 Pafos Sewerage Board 300 4.128 Paralimni Sewerage Board 301 4.129 Agia Napa Sewerage Board 302 4.130 Council for the Registration and Control of Contractors for building and Technical Works 303

Page 4.131 Cyprus Olive Products Marketing Board 304 4.132 Cyprus Table Grapes Export Board 308 4.133 Cyprus Potato Marketing Board 308 4.134 Central Slaughter House Board 313 4.135 Water Boards – General 317 4.136 Nicosia Water Board 318 4.137 Limassol Water Board 320 4.138 Famagusta Water Board 323 4.139 Larnaka Water Board 323 4.140 Fund for the Erection of Cyprus Museum 324 4.141 Public Loans Fund 325 4.142 Cyprus Children's Assistance Fund Committee 326 4.143 Game Fund 326 4.144 Provident Lottery Fund 326 4.145 Advocates Pensions Fund 327 4.146 Christos Steliou Ioannou Foundation 327 4.147 Central Agency for Equal Distribution of Burdens 329 4.148 Cyprus Foundation for Muscular Dystrophy Research 329 4.149 Cyprus Stock Exchange 331 4.150 Securities and Exchange Commission 333 4.151 Technical Chamber of Commerce 333 4.152 Institute of Technology 334 4.153 Clinical Laboratories Fund 335 4.154 State Scholarships Foundation 336 4.155 E.O.K.A. Struggle 1955–1959 Historical Memory Fund 337 4.156 Bank of Cyprus Oncological Centre 337 4.157 Karaiskakeio Foundation 339 4.158 Tax Tribunal 340 4.159 Cyprus Radio–Television Authority 340 PART 5 STATE BUDGETS AND FINAL ACCOUNTS 343 5.1 Approval of State Budgets for 1999 343 5.2 Ordinary Budget 343 5.3 Development Budget 345 5.4 Budget of the Relief Fund for Displaced and Affected Persons 345 5.5 General 346 5.6 Final Accounts 353 5.7 Assets 354 5.8 Liabilities 357 PART 6 AUDIT OFFICE OF THE REPUBLIC – ORGANISATION AND PLANNING 363 PART 7 APPENDICES 369 APPENDIX I Budgetary Results 369 APPENDIX II Arrears of Revenue as at 31 December 1999 376 APPENDIX III Statement of Permanent Posts (Ordinary and Development Budgets) 379

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

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.

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

PART 2 – SUMMARY OF MAIN FINDINGS

2.1 PERFORMANCE AUDITS The main findings and recommendations relating to the performance audit on Capital Gains Tax are noted in paragraphs 3.1 – 3.1.4 of the Report.

2.2 PREVIOUS PERFORMANCE AUDITS The Report includes a brief review of previous performance audits carried out from 1988 to 1998 and of subsequent developments (3.2 – 3.2.30)

2.3 GENERAL OBSERVATIONS

2.3.1 Outstanding government guarantees for the repayment of debts. The system procedure of follow up of government guarantees issued by Government Services for loans secured by third parties is not satisfactory (4.1.15).

2.4 MINISTRIES AND DEPARTMENTS

2.4.1 Ministry of Defence (a) National Guard (i) Compensation. The Ministry of Defence pays considerable compensations to individuals for damages caused by the National Guard and I pointed out the need for the necessary precautionary measures to be taken (4.9.3). (ii) Scheme for the transportation of National Guardsmen. The cost of the scheme amounted to £465.400 in 1999, compared to £431.542 in 1998. For the operation of the scheme the tender procedure has been waived under the authority of the Ministry of Finance, provided that the relevant annual cost would be in the region of £110.000 (4.9.11).

2.4.2. Ministry of Agriculture, Natural Resources and Environment (a) Water Development Department (i) Dhekelia desalination unit – Quantity increase in the purchase of water by Government from 20.000 cubic meters to 40.000 cubic meters daily. The ad hoc committee appointed to examine the issue of the selling price of the extra quantity of water, concluded that this should be 7.5 cents per cubic meter cheaper than the price agreed with the contractor. The annual overpayment by Government amounts – as per the Committee's conclusion – to £547.500 (4.11.1). (ii) Extension of Larnaka Desalination Unit. The contractor claimed, for the extra quantity of water of 11.666 cubic meters daily, the price of 35 cents per cubic meter. The Central Committee for Variations and Claims decided to propose to the contractor the price of 33 cents. My Office evaluation was that the price of the extra quantity of water should be even lower. The contractor finally agreed to the price of 32 cents per cubic meter (4.11.2). (iii) Main Water Pipe from Tersefanou to Nicosia. In the Civil Engineering Works a delay of 132 days was observed and the Department suggested the payment of compensation of

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

£164.081. In October 1999 the contractor submitted further claims and as a result total claims amounted to £1.17 m. (4.11.3). (iv) Arrears of revenue. At 31.12.1999 arrears of revenue amounted to £ 32 m., out of which £14.5 m. was due by Water Boards (4.11.8). (v) Final Reports – Final Accounts of projects. Final Reports and Final Accounts are not always prepared and as a result the communities concerned have no knowledge of the actual expenditure incurred for the projects (4.11.14). (b) Geological Survey Department (i) Idleness of Government Borehole plant. Borehole plant remained largely idle with substantial running expenses incurred. (c) Department of Forests (i) Long term lease agreements of forest land. Most of the agreements were signed several years ago and in most cases the amounts charged were insignificant. According to the Forests Laws of 1967 to 1999, Regulations should have been issued, on the approval of the Council of Ministers, which would regulate the criteria for long term leasing (4.13.1). (ii) Licences for the 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 (4.13.2). (iii) Agreement for the leasing of forest land to "Agia Napa Nissi Developments Ltd". On the 30th September 1999 a supplementary document has been signed, on the basis of the Council of Ministers decision No. 50237, dated 25.8.1999, providing that for the lease period 11.3.1997–10.3.2003 a 6% charge on the gross income has been set (4.13.3).

2.4.3. Ministry of Justice and Public Order (a) Police (i) Supply of Police telecommunication equipment. When it was realised that the prices of wireless spare parts, purchased directly from the only supplier, were high, the ad hoc committee appointed by the Accountant General suggested the withdrawal of the monopoly regime, for the supply of Police telecommunication network, which was in force since 1991. The wireless equipment purchased in 1998 following the open tenders procedure, as per the suggestions of the committee, were of cost value U.S. $320 each compared to U.S. $2.280 each, purchased without calling for tenders in 1993 (4.18.1). (ii) Purchase of Coastline Radar System. In August 1999, although the Tender Board decided that the evaluation of tenders by the appointed ad hoc technical committee should proceed, the committee delayed, due to disagreements of its members, to submit its report. As the report had not been submitted by 8.7.2000, as provided by the Public Tenders Regulations, the tenders were withdrawn (4.18.2). (iii) Maintenance of Police vehicles. A performance audit carried out by my Office revealed that the cost of the maintenance carried out by Police technicians amounted, in 1996, to 7.61 cents per kilometre. In a public tender called in 1999 for the purchase of 100 Police

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vehicles, the price submitted by tenderers for undertaking the maintenance of the vehicles was in the region of 1.2 cents per kilometre. Contrary to my, opinion the maintenance of the 100 vehicles was allocated to the Police (4.18.3). (iv) Three–year plan for the renewal of the Police fleet. As a result of a delay in the implementation of the plan, 58 vehicles which had been purchased in 1993, and could, under a relevant clanse in the contract, be sold back to the suppliers were not returned to them, even though the agreed prices were beneficial for the Government (4.18.5). (v) Weaknesses/deficiencies in the tender procedure. It has been observed that for a number of tenders the specified Public Tender procedure Regulations had not been followed (4.18.6). (vi) Overtime. The amount of overtime paid in 1999 amounted to £1.10 m. The Council of Ministers decided that no overtime shall be paid and no credits shall be allowed to members of the force for overtime which had not been approved by the Chief of Police and that all accumulated overtime without the previous approval of the Chief of Police, approximately amounting to £3.7 m., be written off (4.18.7). (vii) Compounding offences. On my suggestion for compounding traffic offences, Law 47(1)/97 was enacted and put into force with effect from 1.7.97. The administrative cost saving for the Government is estimated to be in excess of £6 m. annually (4.18.9). (viii) Leave prior to retirement of members of Police. Members of the Police Force accumulate leave of 1 to 2 years, which is taken just before their retirement (4.18.10). (b) Prisons (i) Overtime. The expenditure for 1999 amounted to £208.875, compared to £98.398 in 1998. The increase is mainly due to the cost of guarding prisoners during hospitalisation and to the increased number of sick leave taken by the staff (4.21.3).

2.4.4 Ministry of Commerce, Industry and Tourism (a) Ministry (i) Arrears of revenue. At 31.12.99 the arrears of revenue amounted to £1.135.000 (4.22.2). (ii) Internal control on payments of subsidies. Weaknesses and deficiencies were observed in the system of internal control covering the payment of subsidies under the various schemes of the Ministry (4.27.2). (iii) Government loan guarantee schemes. At 31.12.99 there were government guarantees of £2.6 m., is respect of loans amounting to £3.9 m. The outstanding loan instalments amounted to £2.5 m. Weaknesses and deficiencies were observed in the internal control exercised on these Schemes (4.22.14). (iv) Loans. At 31.12.99 the balance of loans to displaced and affected businessmen was £1.0 m. The overdue instalments amounted to £0.9 m. (4.22.14 (ii)). (v) Utilization of Government Industrial areas. No study has been carried out to assess the degree of utilization of industrial land in Government Industrial Areas (4.22.15).

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

(vi) Standards and Quality Control Organisation of Cyprus. The preparation of Regulations, which will contribute to the correct application of the law and the improved operation of the Organisation, is still outstanding (4.22.17). (vii) Weights and Measures Service. The equipment and the staff of the Service are not adequate, and as a result it is impossible to meet the required objectives (4.22.18). (viii) Competition and Consumers' Protection Service. The Service has not yet been properly staffed, and does not possess the technical equipment to carry out specialised examinations (4.22.19). (b) Department of Registrar of Companies and Official Receiver (i) Submission of accounts by foreign companies. Several foreign companies delayed to submit their annual accounts for the years 1988–1999 (4.23.7). (ii) Reclaiming of expenses. Expenses amounting to £255.390, which represent inspectors' expenses paid by Government for the investigation of two companies, are still outstanding (4.23.9). (iii) Submission of annual reports by companies. A considerable number of companies delayed to submit their annual reports for the years 1980–1999, and as a result fees amounting to, approximately, £4.3 m. were not collected (4.23.3). (c) Cyprus Handicraft Service (i) Action Plan for the reorganisation of the Service. Although the Action Plan for the reorganisation of the Service and the relevant budget have been approved, a delay is observed, because of organisational problems faced by the Service (4.24.3). (d) "Philoxenia" Hotel (i) Cost of studies and architectural plans. Amounts in excess of £315.000 have been spent for studies and architectural plans, which have never been utilized. The Council of Ministers decided, on 3.6.98, to decline all proposed expenditure for renovations, and in 1999 terminated the Hotel's operations.

2.4.5 Ministry of Labour and Social Insurance (a) Social Insurance Fund (i) Amounts due to various Funds. At 31.12.99 a total amount of approximately £14.9 m., which were awarded to the various Funds by the court, was outstanding (4.30.2). (ii) Unemployment Benefit Account Reserve. At 31.12.99 the reserve of the above Account showed a debit balance amounting to £2.8 m., compared to a credit balance of £3.7 m. shown at 31.12.98 (4.30.3). (b) Redundancy Fund (i) At 31.12.99 5521 applications for redundancy pay were outstanding, out of which 4580 (83%) are expected to be approved, for an amount of about £14.7 m. (4.32.2). (c) Social Insurance Services (i) Nea Eleousa Shelter. It was again observed that many changes are made on the programmes of work of the staff, after their preparation, because of the increased sick

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leave taken by the staff or because of the inclination of several officers to work on a continuous time schedule (4.36.5). (ii) Strovolos Shelter for Girls. As I stated in my Report for the previous year, the Council of Ministers approved the operation of a Young Girls Shelter in the ex Nicosia Students Boarding House, for providing care and protection to seven girls. In 1997 the amount of £18.463 was spent, without offering hospitality to any person. In 1998 one person stayed in the Shelter, and the expenditure amounted to £39.749, plus £56.245 for the emoluments of the permanent employees. In 1999 one person stayed in the Shelter until October 1999 and two persons until the end of 1999 and the expenditure amounted to £37.665, plus £63.087 for the emoluments of the permanent employees (4.36.6).

2.4.6 Ministry of Interior (a) Ministry (i) Rural roads. For the improvement and maintenance of rural roads, the policy followed by District Administrations is not uniform. Furthermore the execution of the above works does not appear to be done in the most economical way (4.37.6). (b) Service for the repair of damages due to earthquakes (i) Until the end of 1999 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 4000 were examined. The total expenditure for the above three earthquakes amounted to £7.000.000 (4.37.4). (c) District Administrations (i) Planning and execution of projects. The procedures regarding the planning, execution and control of projects are not properly followed by all District Administrations (4.38.7). (ii) Licences for petroleum products stores. An audit carried out at the District Administrations revealed that there are difficulties in locating all petroleum products storage spaces, resulting in the loss of revenue, and in a high risk due to uncontrolled storage (4.38.2). (d) Lands and Surveys Department (i) Delay in the collection of land rentals. Delay is observed in the collection of annual land rentals, which at 31.12.99 amounted to £301.592 (4.42.2). (ii) Allocation of work after office hours. The problem of work accumulation continues, in spite of the fact that since 1995 and until the end of 1999 an amount of £4.5 m. was spent for overtime, contrary to the initial estimate that the problem would have been solved within 15–18 months, at a cost of £3.5 m. (4.42.9). (iii) Leasing of Government coastal land at Neo Chorio Pafos. During the period 1978– 2011 Government coastal land was rented for tourist purposes. The tenants violated substantial terms of the contract and gained realisation rights on the rented Government land. The Department is taking legal action to regain custody of Government land (4.42.10). (iv) Interventions on Government land. After the realisation of interventions by individuals on Government land at Agia Napa area, the matter was settled with the Council of

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Ministers decision to sell or hire the land for the amount of £1.081.500, payable in four interest free instalments, from February 1997. At 31.12.99 the total amount due amounted to £726.400. The cases for which no instalments have been paid will be submitted to the Council of Ministers for annulment of the relevant decision, whereas legal action will be taken for all cases of instalments due (4.42.11). (v) Unified land information system. The computerisation of the system started in 1987 and it is expected to be completed in the middle of 2001. Until 31.12.99 the total expenditure for the project amounted to £5.5 m. (4.42.12). (vi) Government agricultural sites at Pafos. No revision of the rents was made resulting in the loss of £200.000 annually. The Attorney General of the Republic ruled that the next revision can take place in 2004 (4.42.15). (vii) Immovable property re-evaluation. The general re-evaluation of immovable property in the free areas of the Republic was completed in 1992. Since then no permanent procedure was adopted for the re-evaluation of buildings in the cases of erection of new buildings, changes of housing zones etc. Because of this omission, a considerable amount of revenue has been lost, both for Government and Local Authorities, since the market value on 1.1.80, which formed the basis for the estimation of the various taxes and fees, remains the same (4.42.16). (e) Department of Town Planning and Housing (i) Delay in the payment of compensation for land expropriations. The payment of compensation due to the owners of land expropriated for the purpose of development projects is pending. The delay is due to the delay by Limassol Municipality to pay its part of the compensation amounting to over £433.000 (4.34.4). (f) Press and Information Office Overtime. To a number of employees of the Office a considerable number of hours of free time is due, in lieu of overtime. As the allowance of free time appears to be practically impossible, I suggested that the matter be referred to the appropriate Service, for determining the relevant policy (4.43.3). (g) Service for the Administration of Turkish Cypriot properties (i) Illegal acquisition and custody of T/C property, 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 (4.45.6 and 4.45.7). (ii) Revision of rents. Although the T/C Regulations of 1992 provide that the amount 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, the rents payable, continue to remain, for a considerable length of time, at the same level and not conforming with the market rents (4.45.16).

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

(h) Service for the Care and Rehabilitation of Displaced Persons.

(i) Revision, legalisation and codification of criteria, for providing housing assistance. The final bill, which was examined by the Law Office and forwarded to the Minister of Interior, has not yet been submitted to the House of Representatives (4.46.2).

(ii) Computerisation of work. With regard to the computerisation of applicants' records the Information Technology Department informed the Service that it will be connected with the "Population Archives" of the Ministry of Interior, within the year 2000 (4.46.3).

(j) Migration Service

(i) Revision of Legislation. The relevant Laws and Regulations require to be amended and modernised, while at the same time the enactment of legislation for the issue of passports and travel documents, is pending (4.47.2).

2.4.7 Ministry of Foreign Affairs

(i) Purchase of the Embassy building in Berlin. The purchase and the repairs of the building were carried out without the necessary planning and techno-economical study, while the cost of the required work was not estimated properly and timely. I suggested that for the purchase/erection of buildings abroad the services of local consultants should be secured (4.48.8).

(ii) Cairo Embassy/Special investigation. An investigation was carried out with regard to allegations/reports against the Ambassador serving at that period. My relevant report was submitted to the Minister of Foreign Affairs. The Attorney General informed me that my Report was submitted to the Chief of Police for further investigation and evaluation as to the existence of criminal offences (4.48.5).

2.4.8 Ministry of Finance

(a) Treasury

(i) Pension benefits. The pension benefits paid in 1999 amounted to £94.6 m., compared to £84.5 m. in 1998 (4.50.7).

(b) Inland Revenue Department

(i) Collection of income tax. The total collections for 1999 amounted to £349.2 m., compared to £300 m. in 1998 (16,4% increase) (4.53.1).

(ii) Assessments under objection. At 31.12.99 62164 assessments were under objection for a total tax amount of £168.881.564 (4.53.3).

(iii) Arrears of taxes. Total taxes in arrears at 31.12.99 amounted to £167.20 m., compared to £158.28 m. at 31.12.98 (5,6% increase) (4.53.4).

(iv) Objections and arrears of a large hotel company in Pafos. The income tax liability of a large hotel company in Pafos for the years 1992–1995 amounts to £615.132, plus interest. The same company submitted objections for the taxation for the years 1989– 1993 for a total amount, under objection £562.562 (4.53.5).

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(v) Estate duty

• The Department approved the release of property valued at £1.090.000, for the purpose of selling it to settle tax amounting to £740.215. Although the property was sold, tax amounting to £334.533, plus interest, has not yet been settled. With regard to the same case an amount of £198.470 which was deposited in a joint account with the wife of the deceased and which was withdrawn without the clearance of the Estate Duty Registrar, was accepted by the estate administrator and has been taxed.

• In another case, following my recommendations, the Director carried out an investigation which showed that the wife of a deceased person collected a life insurance amounting to £1.000.000. This amount was taxed and an additional tax was imposed of £498.402, plus interest. An objection was raised by the heiress, which created a legal problem for which the advice of the Attorney General was sought.

• In another case, the audit, evidence justified further investigation. On my suggestion the Director carried out an investigation, which proved the existence of an additional property valued at £380.282, which was not declared by the Administrator. The total of taxes and fines on the above amounted to £223.338, which was collected on 5.11.99 (4.53.6 and 4.53.7). (vi) Assessment of income from overseas investments. A company invested £3.300 in a foreign company and received dividends amounting to £3.070.913 (4.53.26). (c) Department of Customs and Excise (i) Duty free shops at Pafos and Larnaca Airports. The Department does not exercise satisfactory control to verify that the terms of approval for the operation of the shops are observed. At a stock count carried out by the licensee company, deficiencies were observed of a total value of £307.591,35 (4.54.1). (ii) Special private bonded warehouses (duty free shops) operating at the ports. There are weaknesses in the system of internal control, and there is a risk of replacing goods of high value with other goods of lower value, and I expressed the view that a modern system of stock administration could be followed so that control will be possible at all times (4.54.4). (iii) Larnaca Free Industrial Zone. It was again observed that the entrances/exits of the Free Industrial Zone are open on a twenty four hour basis (4.54.5). (iv) Bonded Warehouses. Weaknesses and delays have been observed in the control of Bonded Warehouse closed files, which could lead to losses of duties and taxes. Furthermore, surprise surveys at several warehouses carried out by my Office, in the presence of Customs Officers, revealed serious differences and weaknesses (4.54.6). (v) Clearance of saloon vehicles in the "Van" category. It was again observed that, contrary to the relevant Regulations, a number of saloon vehicles had been registered in the "VAN" category paying lower duties and taxes (4.54.7). (vi) Clearance value of used vehicles. My suggestion for amendment of the Law, so that the invoice value should be considered only for the calculation of import duty, whereas the calculation of excise duty should be based on the estimated value of the vehicle at the

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time of registration, was accepted by the Department. A relevant Bill was prepared which was rejected by the House of Representatives on 28.5.98 (4.54.9). (vii) Value Added Tax – Control visits. The number of Control visits carried out by the department during 1999 covered only 2% of the registered entities. I expressed the view that the limited number of control visits increases the risk of loss of revenue (4.54.18 (f)).

2.4.9 Ministry of Education and Culture (a) Ministry (i) Project execution. A number of projects included in the budget were not executed, whereas other projects not provided for in the budget were executed (4.57.1 (b)). (ii) Delays in the printing of books. Delays have been observed in the execution of book printing contracts (4.57.9 (a)). (iii) Cyprus Library. Several books have not been recorded in registers, while other books have been already destroyed or will be destroyed, because of unsuitable storage spaces (4.57.12). (iv) Government Educational Institutes. In several Institutes deficiencies and weaknesses were observed regarding the keeping of registers, and the application of Financial Instructions and Stores Regulations (4.57.10). (b) School Committees (i) Regulations under the School Committees Law of 1997. The enactment of Financial Instructions as well as Regulations providing and regulating staff matters, such as schemes of service, salary scales etc. is pending (4.59.4).

2.4.10 Ministry of Communications and Works (a) Department of Antiquities (i) Carpentry – Casts and antique copies workshop. It was again observed that proper procedures and Stores Regulations are not followed (4.65.2 and 4.65.3). (ii) Stock of antiquities. The computerisation of these stocks is still pending (4.65.5). (iii) Archaeological site at Pafos • The parking place, which was constructed at a considerable cost cannot be exploited financially. • As a result of vague provisions and deficiencies in the construction plans, the contractor claimed compensations and it was decided to pay him, as compensation, the amount of £925.000 (4.65.6). (b) Public Works Department (i) Weaknesses in the planning/coordination of projects. In large development projects substantial weaknesses have been observed in the planning and coordination of projects, resulting to in delays and expenditure increases. Amongst the projects where such weaknesses were observed are the Dhekelia–Famagusta highway, the new building of the House of Representatives, the new Nicosia Hospital, the new Famagusta Hospital and the new Government Offices in Nicosia (4.66.7).

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(ii) Errors and omissions in Project studies. During the execution of projects errors and omissions in the studies were observed, which caused delays in the progress of works and amendments to plans, with financial implications. Considerable weaknesses were observed in the contracts of Dhekelia–Famagusta highway, the Limassol–Pafos highway, the Timi–Nata–Pentalia road and the Nikoklia–Arminou–Filousa road (4.66.8). (iii) Weaknesses in the administration of contracts. In various road works weaknesses have been observed in the administration of the contracts by the Resident Engineers, which resulted in deviations from the provisions of the contracts, delays and extra charges. Such cases have been observed in the contracts for the periodic maintenance in the Districts of Nicosia, Larnaka, Famagusta, for the improvement of Nikoklia–Mamonia– Agios Nicolaos road, for Agia Triada – Kavo Greko road and for the construction of Kerbs and guiters in Famagusta District (4.66.10). (iv) Independent tests by the Central Laboratory. The tests carried out by the Central Laboratory are insufficient, due to the gradual reduction of the staff (4.66.9 (a)). (v) New Limassol–Pafos road (Timi–Geroskipou section). The land expropriation where a tile factory was situated was delayed, and a compromise was reached with the owner who was paid compensation amounting to £325.000, compared to £120.000, which was the assessment of the Lands and Surveys Department (4.66.9 (b)). (vi) Archaeological site at Kato Pafos. The plans presented substantial omissions, and as a result a delay of 20 months was observed in the completion of the project. The contractor submitted financial claims for compensations and finally the amount of £925.000 was paid to him (4.66.9 (c)). (vii) Limassol–Pafos highway (Petra tou Romiou–Aspros section). The geological study for the construction of a bridge in the area of Petra tou Romiou was wrong, and as a result the contractor submitted claims for delays and compensations. It was further decided to speed up the construction of the bridge, with an additional expenditure of £275.000 (4.66.9 (d)). (c) Department of Merchant Shipping (i) Reports by foreign authorities for deficiencies on ships. A considerable delay has been observed in the examination of the reports resulting in the loss to loss of public revenue. There is also delay in the collection of fines and the updating of the accounting records (4.67.7). (ii) Weaknesses in the computerised system. Due to various weaknesses in the computerised system, delays are observed and the accumulated work has to be carried out by hand (4.67.13). (d) Department of Electrical and Mechanical Services. (i) Weaknesses/omissions in the preparation/handling of tenders. As a result of the above weaknesses and omissions various tenders were cancelled by the appropriate Tender Board (4.68.4). (ii) Weaknesses/omissions in contract management. In several cases serious changes/extensions had to be effected in contracts, which should have been foreseen at the evaluation stage and which resulted in a considerable increase of the cost and delay in completion of the projects (4.68.5).

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(iii) Changes/Defective work in projects. In various projects there were changes in the equipment installed or the equipment did not conform to the specifications. These have a negative implication on the cost, the quality and the operational effectiveness of the installations (4.68.5 (b) and (c)). (e) Road Transport Department (i) Driving school vehicles. According to the Motor Vehicles and Traffic Law of 1972, all driving school vehicles pay reduced registration and circulation fees as non-private. I repeated my suggestion that this privileged treatment is terminated (4.69.6). (ii) Tare of motor vehicles. As the accurate determination of the unladen weight of vehicles presents difficulties, I suggested that the engine capacity of vehicles be the basis for determining the registration and circulation fees (4.69.8). (iii) Modification of motor vehicles after Customs clearance and before registration. Several vehicles are registered in a different category than the one cleared, because of changes after customs clearance. The Department prepared an amendment bill, so that it will be possible to collect additional duties and taxes if necessary (4.69.9). (iv) Registration of saloon vehicles in the category of "VAN". I repeated my suggestion that the relevant Law and Regulations be strictly enforced, in order not to register in this category vehicles, which as per their design, cannot be considered as commercial (4.69.10). (v) Reduced circulation licence fees. Private vehicles, which are solely used by their owners for the transportation of their employees, are charged with reduced circulation licence fees, because according to the law, these are considered non private (4.69.11). (f) Department of Civil Aviation (i) Ground service to aircraft. No charges are imposed for ground service, contrary to the policy followed by European countries. Revenue from the imposition of such fees could amount to several millions of pounds per year (4.70.8). (g) Department of Postal Services. (i) Purchase, installation and operation of a stamp affixing machine. The above machine, which was received by the Department without being tested, presents serious operational problems (4.71.1).

2.4.11 Ministry of Health (a) Ministry (i) Internal control. Weaknesses and omissions are observed in the systems of internal control of the Ministry and the relevant Services (4.72.1). (ii) Arrears of revenue. The arrears of revenue of 31.12.99 amounted to £1.697.705 (4.72.4). (iii) Organisational Structure of the Ministry of Health. Medical personnel is transferred from Hospitals to the Ministry or the Health Services for non medical duties and in positions not provided for in the budget (4.72.7).

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(iv) National Health Scheme. No notable improvements have been effected in the infrastructure of the Ministry's Services, and it will not be possible for the National Health Scheme to become operational when the relevant Bill is passed (4.72.8). (v) Quality of medical treatment to patients. The system of quality control of the medical treatment to patients presents, according to a relevant study, serious weaknesses (4.72.9). (vi) Procurement and use of medical and other equipment. A considerable delay was observed in the purchase of the necessary equipment and it was further observed that the equipment purchased remains idle (4.72.5). (vii) Bank of Cyprus Oncological Centre. The operational regime of the Oncological Centre and its relation with the Government remain undetermined because the renegotiation of the existing agreement between the Republic of Cyprus and the Medical Institution of the Bank of Cyprus is pending (4.72.18). (viii) Co-operation between the Ministry of Health and the Cyprus Muscular Dystrophy Research Fund. In relation to the Memorandum on the above co -operation which was signed in October 1999, I stated that various matters remain unresolved and should be considered. I suggested further that legal advice should be sought as to whether the agreement could be contrary to the Public Tenders Law and Regulations (4.72.20). (ix) Laboratories operational quality control. The suggestions of the consultant for upgrading quality of the laboratories have not been implemented (4.72.14). (x) Oxygen deficiency in Hospitals. The problem of oxygen deficiency in Hospitals continues for a long time (4.72.15). (b) Medical Services and Public Health Services. (i) Delay in payment of emoluments of staff employed on a 15day basis. A great delay is observed in the payment of emoluments of the above staff (4.73.1). (ii) Medical charges. As a result of the weakness in veritying the income stated by the patients, a considerable number of them secure free treatment without being eligible (4.73.2). (iii) In–patients medical fees. Patients receive treatment and are allowed to leave without the relevant fees being paid, resulting in the increase of loss of revenue, as no measures are taken for their collection (4.73.3). (iv) Inventory Registers. Although the cost of immovable property is significant, the relevant registers are still not properly updated (4.73.5). (v) Idle equipment. There are weaknesses in identifying idle equipment, and as a result this is not properly utilized (4.73.7). (vi) Computerisation. Delay is observed in the computerisation of important sections of Hospitals (4.73.9). (c) Pharmaceutical Services (i) Purchase orders not covered by available funds. Medicines, pharmaceutical supplies and other items valued at £0.6 m. were ordered and received without the necessary funds being secured.

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(ii) Deficiencies in pharmaceutical supplies. In many cases deficiencies are observed, which are mainly due to the serious weaknesses presented by the system of planning and control of medicines, the delay observed between calling and award of tenders and the delay in the execution of orders (4.74.3). (iii) Purchase of drugs under special authority. The above purchases in 1999 amounted to £1.575.829 (4.74.5). (iv) Purchase of drugs with short expiry period. It was again observed that some of the drugs supplied had a shorter expiry period, than the period specified in the tender specifications (4.74.6). (d) General Laboratory (i) Laboratory tests costing. A study undertaken for determining the cost of the tests and fixing the fees charged, has not been completed, because of a shortage of staff in the Accounts Department (4.76.4). (ii) Destruction of dangerous chemical substances. Chemical substances which are dangerous for humans and the environment are still kept at the Laboratory (4.76.7).

2.5 LOCAL AUTHORITIES

2.5.1 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 (4.78.3). (ii) Upgrading of posts. As a result of deviations from relevant Regulations and provisions, wrong placements have been observed in upgraded salary scales (4.78.17). (iii) Collective agreements. Collective agreements have been signed, the provisions of which are contrary to the Regulations of 1995 (S.L.175/95) (4.78.18). (iv) Schemes of service of municipal employees and Powers of the Municipal Councils. Municipal Councils placed employees in higher salary scales or granted additional annual increments, contrary to the schemes of service (4.78.19). (v) Accounts and audit. With the exception of the Municipalities of Nicosia, Athienou and Dherynia, all Municipalities did not submit their financial statements for 1999 for audit, by 30th April as provided in section 81 (1) of the Municipal Corporations Law (4.78.2). (vi) Internal audit. In almost all Municipalities weaknesses and omissions were observed in the systems of internal control covering the various activities of the Municipalities (4.78.4). (vii) Matters repeatedly raised during the audit of the accounts of Municipalities. Several matters are repeatedly raised during the audit of the accounts of Municipalities, without any corrective measures taken (4.78.24). (a) Limassol Municipality (i) Criminal investigation. Following a Council of Ministers decision the Attorney General of the Republic appointed four criminal investigators, including two officers of the Audit office, to investigate reports of unlawful enrichment of an officer of the Municipality, and irregularities in the issue of building permits. The investigation regarding the issue of building permits was completed and my report was submitted to the Attorney General,

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

while the investigation regarding the unlawful enrichment of the officer of the Municipality is still under way (4.80.1). (ii) Renewal of collective agreement – reorganisation: • Retrospectiveness of reorganisation. The renewal of the collective agreement for the period 1998–2000, with retrospective effect from 1.9.96 with respect to placement and 1.9.98 with respect to payment of arrears, had negative financial implications for the Municipality and led to favourable treatment of certain officers. The expenditure for arrears from 1.9.98 shall exceed by far the original amount estimated (4.80.6 (a)). • Pensionable emoluments. The inclusion of allowances in the pensionable emoluments of the employees is contrary to Municipal Regulation 192 (4.80.6 (b)). • Salary placements pursuant to reorganisation. Due to wrong placements the salaries of most of the employees of the Municipality are wrong (4.80.6 (f)). (b) Kato Polemidhia Municipality (i) Special Investigation. The Audit Office carried out an investigation of the accounts of the Municipality, covering the period 1.1.96–8.9.99 and a cash deficit amounting to £148.689 was noted. The results of the investigation were submitted to the Police, for examining whether any criminal offence were committed (4.95.1). (ii) Audit report under reservation. Due to weaknesses in the systems of internal controls, and the resulting cash deficit, as well as the serious irregularities noted during the investigation, a qualified audit report was issued (4.95.2).

2.5.2 Community Boards – General (i) Establishment of Community Boards. With the enactment and application of the Communities Law 86(1)/99, as from 9.7.99, and the renaming of the Improvement Boards and Village Authorities to Community Boards, the Auditor General of the Republic, pursuant to article 71 of the above Law, undertook in addition to the audit of the accounts of the ex Improvement Boards, the additional audit of 281 ex Village Authorities (4.102.1). (ii) Schemes of Service and Staff Regulations of Community Boards. In many Community Boards there are no schemes of service or Staff Regulations, resulting in wrong placements of staff on higher salary grades or in the allowance of additional annual increments (4.102.5). (a) Agios Tychonas Community Board (i) Bank accounts of the Board with the Co-operative Credit Society of Agios Tychonas. The Board did not act properly and did not take appropriate measures, including court procedures, to withdraw frozen deposits, due to embezzlement at the Co– operative Credit Society of Agios Tychonas, which, according to the records of the Board, amounted to £242.189 (4.103.1). (ii) Amounts due to various Community Boards and ex Village Authorities as a result of the dissolution of Amathus Community Board. The Community Board of Agios Tychonas is disputing its obligation for the refund of income collected amounting to £214.284, to various ex Improvement Boards and ex Village Authorities, and as a result some of the above took legal measures against the Board (4.103.2).

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

(iii) Irregular employment of staff. Cases of employment of staff were observed contrary to the provisions of the Law and without following the approved employment of staff procedures. The Attorney General of the Republic expressed the opinion that the above appointments were legally flawed and requested their annulment. The matter has been referred to the Director General of the Ministry of the Interior, for consideration as to the existence of criminal responsibilities, or for a decision by the Minister of Interior, according to the provisions of the Law (4.103.4).

2.6 PUBLIC CORPORATIONS AND OTHER ORGANISATIONS (a) Cyprus Ports Authority (i) Utilization of the new terminal at Limassol Port. Since the commencement of operations in 1996, the terminal, the cost of which amounted to approximately £75 m., is not fully utilized (4.107.5). (ii) Transfer of property. The relevant agreement, for the transfer of assets and liabilities from Government to the Authority, provided under section 16(2) of the Law, has not yet been signed (4.107.8). (iii) Container terminal at Limassol Port. The terminal has not yet been fully utilized. The Authority informed me that this is attributed to the negative attitude of some of the parties involved in the port operations, towards the efforts made for the appropriate use of the terminal (4.107.9). (iv) Handling of containers at Limassol and Larnaka ports. The handling of containers at Limassol and Larnaka ports was undertaken by the Licensed Porters Association as from 2.1.91. The relevant agreement between the Authority and the Association has not yet been signed, resulting to loss of revenue for the Authority (4.107.10). (b) Cyprus Telecommunications Authority (i) Stock of equipment/materials. Stock levels are too high. Part of the stocks refers to development projects and the Authority is proceeding with their separation for better control and follow up (4.108.6 (a)). (ii) Investments – Participation of the Authority in the EAST Satellite programme. The Authority has invested £1.1 m. in the EAST Satellite programme, which has been frozen (4.108.7). (c) Cyprus Sports Organisation (i) Internal audit. No proper system of internal control has been adopted, resulting to serious weaknesses and omissions with regard to financial management (4.114.4). (ii) Budget excesses. Considerable expenditure excesses were observed, without a previous supplementary budget approval (4.114.2 (b)). (iii) National Development Sports Programme • For the above Programme, with budgeted expenditure of £1 m., no financial statements were prepared. • The employment of staff in the above programme presents weaknesses (4.114.8).

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(iv) Pensions and Gratuities Fund. The accounts of the above fund have not yet been submitted for audit (4.114.18). (d) Cyprus Land Development Corporation Utilization of land held for development. The significant delay in the development of land, results in a significant increase in the costs of the Corporation (4.115.6). (e) Cyprus Tourism Organisation (i) Tenders for the selection of an advertising firm for the C.T.O. world campaign for the years 2000 and 2001. A special investigation carried out by my Office revealed deviations from the approved procedure of publication, receipt, keeping and opening of tenders, as well as the checks to ensure that the terms of the tender are fulfilled and the evaluation is property documented (4.116.6). (ii) Advertising campaign in foreign countries. The co-operation of the Organisation with advertising firms, which undertook the advertising campaign in the United Kingdom, Germany and the Northern Countries, presented problems. One of the above firms has taken the matter to court (4.116.8). (f) Agricultural Insurance Organisation (i) Financial Viability. Despite the increase of the government subsidy to the Organisation, it seems that its sources of income will continue to be limited and the continuation of its operation will depend, to a great extent on government support (4.117.5). (g) Cyprus Dairy Industry Organisation (i) Payment of an amount of £16.626 to a producer for surplus cow's milk given to the Organisation. A specific producer gave to the Organisation in 1999 his surplus quantity of milk, exceeding his annual quota by 141.705 litres. For the above he was paid, after relevant decisions of the Board, the amount of £16.626, contrary to the Council of Ministers decision No. 44301 dated 22.5.96, which approved, inter alia, measures for the stabilisation of production, which provide that for the surplus quantity of milk given to the Organisation, a fine of 4 cents per surplus litre of milk is paid (4.118.11). (ii) Payment of refrigerating expenses amounting to £13.895. The above amount was paid by the Organisation, in my opinion, irregularly, as the above was for arrears due by a specific Cattle Breeders Association for the period 1.1. – 30.11.96, which had nothing to do with the Organisation (4.118.14). (h) University of Cyprus (i) Research programmes. It was observed that the Rules governing the planning, execution and generally the administration of research programmes are not followed, and the necessary records are not kept (4.120.9). (j) Nicosia Sewerage Board. (i) Retrospective promotion. The Sewerage Systems law 1/71 and the Regulations approved according to the above Law do not provide for the retrospective appointment or promotion of an officer. The Board, however, approved the retrospective promotion of an

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officer, with effect from 1.1.93, contrary to the advice of both the Legal Adviser of the Board and the Attorney General of the Republic (4.123.4). (k) Limassol–Amathus Sewerage Board (i) Arrears of Sewerage fees. The total amount of arrears of fees at 31.12.99 amounted to £4.873.797, out of which £2.430.538 is due by hotels (4.124.4). (ii) Fees for the use of the sewerage system. Germasogeia Municipality continues not to pay the fees for the use of the sewerage system, and does not submit analytical statements of the fees collected, contrary to the relevant agreement with Limassol– Amathus Sewerage Board (4.124.6). (iii) Capital expenditure. The budgeted capital expenditure amounted to £9.596.500, whereas the actual amount spent was £1.337.502. The unspent balance amounted to £8.258.998 or 86% (4.124.8). (l) Cyprus Potato Marketing Board (i) Discounts due to quality problems and reduction in prices. The discounts due to quality problems and the reduction in prices in the United Kingdom amounted to £0.8 m. (11.96% of the sales) and in Continental Europe to £0.2 m. (1.16% of the sales). I suggested to the Board that careful consideration should be given to the high percentage of the United Kingdom discounts allowed (4.133.3). (ii) Unsold potatoes given to buyers free of charge. After the end of the marketing season a quantity of about 4200 tones of potatoes of the NICOLA variety which had been reserved by a certain buyer from the United Kingdom remained unsold. The potatoes were finally given free of charge to various buyers (4.133.6). (m) Central Slaughter House Board (i) Liquidity problem. The Board faces a very serious liquidity problem, resulting to difficulties in meeting its current liabilities. The Board depends to a large extent on the continuation of Government financial support (4.134.1 (a)). (ii) Appointment of Investigating Officer. On the recommendation of the Board, an Officer was appointed by the Minister of Interior to investigate offences allegedly committed by high-ranking employees (4.134.6 (a)). (iii) Police investigation. For financial offences which appear to have been committed a police investigation is being carried out against senior members of the staff. Meanwhile two high–ranking officers were placed under suspension as from 2.6.2000 (4.134.6 (b)). (iv) Appointment of a Consultant/Supervisor. As the Board of Management ascertained that the Slaughter House is not managed properly, a Consultant/Supervisor was appointed on a temporary basis, for the purpose of supervising the functions of the Slaughter House. The Board of Management appointed the Consultant and as Acting General Manager with effect from 2.6.2000 (4.134.6 (c)). (n) Water Boards – General (i) Internal audit. Due to the continually increasing volume of work of the Boards, the improvement and enhancement of the work program is imperative, in order to cover all sections and activities of the Boards (4.135.2).

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(ii) Irregular sale of water. The irregular sale of water in areas outside the Water Board boundaries continued in 1999 (4.135.4). (iii) Early retirement with additional increments. Members of staff of the Water Boards who apply for early retirement, are granted two additional increments, over and above the top of their salary scale, contrary to the relevant Law (4.135.5). (iv) Permanent posts. For the creation of new posts and schemes of service the approval of the Council of Ministers is not always sought on the grounds that the Council of Ministers approves the collective agreements, which include provisions for the creation of such posts (4.135.9). (o) Limassol Water Board (i) Application for the water supply of building plots. The total budgeted expenditure for the water supply of building plots of a company amounted to £257.640, whereas the amount deposited was only £129.600. The difference of £128.040 has not been collected and the expenditure regarding the construction of the new Limassol–Fassoula water pipe, amounted, up to 31.12.99 to £45.631 (4.137.10). (ii) Limassol Water Board Staff Provident Fund. Contrary to the provisions of section 14 and 15 of the Water Supply (Municipal and Other Areas) (Pensions and Gratuities) Regulations of the Board, the Board of Management recognised the previous service of a senior officer in another Public Corporation. The Board of Management of the Provident Fund paid on 23.6.2000 to a member of the Provident Fund, who retired on 30.4.2000, his retirement benefits based on the Stock Exchange index at 31.12.99, contrary to the existing Regulations (4.137.11). (p) Cyprus Stock Exchange (i) Suspension of operations of the Stock Exchange. In 1999 the Stock Exchange suspended its operations four times, a fact that caused a serious blow to the trustworthiness of the institution and resulted in the enclaving of the funds of investors and their exposure to possible exploitation, and the unfair enrichment of others (4.149.6). (ii) Computerisation. The computerisation of the Stock Exchange, which would help the dematerialisation of stock transactions, and which a specific foreign company undertook to complete by 31 January 1998, has not yet been completed (4.149.7). (iii) Office accommodation. The Board of Management of the Stock Exchange has signed a contract for renting a building at the outskirts of Nicosia for moving the SE offices, without calling a tender and without an independent study and evaluation of the appropriate rent to be paid (4.149.8). (q) Cyprus State Scholarships Foundation (i) Establishment and Operation. In spite of the enactment of the relevant legislation, with effect from 1.1.99, regarding the operation of the foundation, the previous operational regime of the Scholarships Committee was not differentiated, resulting to the non operation of a separate Fund for the Foundation, the non keeping of administration accounts and the non preparation of financial statements for audit (4.154.1 and 4.154.4).

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

PART 3 – PERFORMANCE AUDITS Part A

3.1 CAPITAL GAINS TAX 3.1.1 Choice of subject. The Capital Gains Taxation Law was effective from 1.8.80 on publication of the basic Law No. 52 of 1980, which was amended with five new Laws (135/1990, 70(1)/1994, 80(1)/1997, 48(1)/1999 and 79(1)/1999 and is referred to as the Capital Gains Taxation Laws of 1980 to 1999. The purpose of the Law is to impose tax on gains emanating from the disposal (sale) of immovable property, which includes the disposal of shares to companies who own immovable property, with factor 20%, after certain deductions. Responsible for the enforcement of the above Law is the Director of the Department of Inland Revenue. This subject was chosen for detailed examination because: • Through the annual audits of the Department of Inland Revenue and the Department of Lands and Surveys weaknesses in the relevant Law were observed, which could possibly result to loss of revenue, hardship and expenses to the public, considerable delay in the collection of taxes due or increased possibility for the creation of bad debts. • The administrative cost for imposing the tax, compared to the relevant revenue, appears to be high. 3.1.2 Objectives and scope of audit. The objective was to establish whether: • The existing legislation is adequate, is fully applied and does not allow tax evasion. • There are alternative ways of imposing and collecting this tax with a smaller administrative cost and the minimum possible hardship and expenses for the public. The audit was carried out on a sample basis and was, mainly, based on the analysis of records kept at the Department of Inland Revenue and the Department of Lands and Surveys. There were, furthermore, extensive personal interviews with officers of the above and other Departments involved in the administration procedures of these taxes. 3.1.3 Summary of findings (a) Summarised financial results (i) For the period 1.8.1980–31.12.1998 the total tax imposed amounted to £87.3 m. and the relevant collection was £67.2 m. The current direct cost for the administration of this tax, as well as the Immovable Property Tax, which represents the salaries of the employees occupied with the imposition and collection of these taxes, amounts to about £1 m. annually (1998 values). (ii) On the basis of the analysis of the records of the ten year period 1989–1998, it emanates that, on the average, tax in the region of 3,1% is imposed on the value of the available immovable property. For the year 1998 this percentage was reduced to 2,2% (2,1% for 1997), as compared to 4,3% for the period 1989–1991, i.e. there is a reduction of 50%, while the value of the land sold is increasing.

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(iii) The total of arrears due was increased from £8.3 m. at 1.1.89 to £20.3 m. at 31.12.98. Tax arrears represent 28,4% of the total tax imposed during the period 1989–1998. The total of arrears due (£20.3 m. at 31.12.98) included £6.18 m. due under objection or pending at the Supreme Court and £6.94 m. due by ecclesiastical authorities or monasteries, the collection of which is doubtful, considering the legal allegation advanced that the tax imposed is unconstitutional. (iv) The annual collections of capital gains tax, about £7.3 m. annually, ranged between 30,8% and 41,3% of the average of the annual amount due. The system of collection presents difficulties, because of weaknesses of the Law, which, in short, are summarised to court cases time wasting procedures and other measures taken against debtors, the non-implementation of court cases decisions and the lack of coordination between the various Government Departments. All above, however, will be waived with the Capital Gains Taxation Law amendment passed in March 1999, which provides that the tax will be paid before the transfer of ownership. (b) Declaration of lower selling price than the respective evaluation of the Department of Lands and Surveys. The selling prices declared by taxpayers are by 42%, on the average, lower than the respective evaluation of the Department of Lands and Surveys. According to the provisions of section 9(1) of the Capital Gains Taxation Law, the Director of the Department of Inland Revenue has very limited power to question the selling prices declared for purposes of establishing capital gains, since, according to this section, he has to prove that the taxpayer's declaration was false, something practically difficult to prove. Assuming that the evaluation of the Department of Lands and Surveys regarding the value of immovables sold are approximately representative of the conditions prevailing in the market of immovables, and were adopted, for purposes of establishing the relevant capital gains tax, then for the period 1989–1998, the extra revenue from taxation would be in the region of £53 m., in total, or £5 m., annually, on the average. Furthermore, from a detail analysis of a number of cases, it emanates that the differences between the declared values of immovable property at the Department of Inland Revenue and the evaluations of the Department of Lands and Surveys, deviate, in some cases, by far from the average of last ten years, and is estimated to be 42% to over 500%. There are even cases where the selling price declared is so low, in relation to the value at 1.1.80, as revised considering the inflation, that results to tax loss, which is transferred against future profits. The Department of Lands and Surveys evaluates the specific immovable property up to six times higher, than the taxpayer's declaration. (c) Additional evaluation by the Department of Lands and Surveys. The general evaluation of the immovable property of the whole area controlled by the State was completed with the publication of the last villages on 9.10.92. For the changes effected in the immovable property (erection of buildings, demolitions, new plots etc.), the re-evaluation is limited to cases where "updating" of title ownership is requested. There is not, however, systematic re-evaluation of immovable property by the Evaluation Branch of the Department of Lands and Surveys. For those cases where owners do not apply to the Department of Lands and Surveys, and as a result the values used to establish capital gains, transfer fees etc., are in several cases lower than the real value of the immovables at the time of sale. Cases were also observed where immovable property declarations did not include building or other additions and improvements, resulting again to lower calculation of capital gains tax, transfer fees, municipal fees, taxes etc.

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(d) Tax imposition procedure. The capital gains taxation system is directly related to the respective immovable property system and the relevant transfer procedure at the Department of Lands and Surveys. For all cases, except those free of charge, whether taxed or not, owner and buyer have to follow the whole procedure fixed, in order to secure all the required certificates, which will be presented to the Department of Lands and Surveys, for the acceptance of the transfer declaration. These procedures cause much hardship to the public, loss of time, expenses and result to the accumulation of a great volume of records in tax files, increasing the management cost of administration of the two taxations to about £1 m. annually. 3.1.4 Summary of recommendations (a) Use of the evaluated price of the Department of Lands and Surveys when a lower price is declared. The facility of the parties (seller and buyer) to declare a lower instead of the real price, and the Director of the Department of Inland Revenue having no power to question the declared price, with the exception of cases where proof of false declaration can be documented, makes imperative, in my opinion, the amendment of Legislation, so as to allow the Director of Inland Revenue, in the cases where the declared value of property is lower than the evaluation specified by the Department of Lands and Surveys, for the purpose of transfer fees, to use the evaluation of the Department of Lands and Surveys. (b) Collection of tax. The responsibility for the collection of the tax should continue to be under the Department of Inland Revenue, which can utilize the respective departments, operational structure and procedures. At the same time ways and procedures should be sought, so as to be possible to pay this tax (as other taxes administered by the Department of Inland Revenue) at the Commercial Banks or the Co-operative Credit Societies. (c) Examination of payment at the time of transfer. On the submission of the transfer declaration to the Department of Lands and Surveys, to be possible to verify that the taxes concerning the immovable property have been paid, with direct connection of land information technology systems of the Department of Lands and Surveys and the Collections Branch of the Department of Inland Revenue. (d) Tax percentages and non-taxable amounts. The tax factors could be on an increasing scale specifying the lowest limits of non-taxable amounts, so that a higher charge should burden those realizing greater profits from the sale of immovable property and also preserve the principle of a fairer taxation treatment. (e) Arrears due. The legality or not of the amounts due by ecclesiastical authorities and monasteries amounting to £6.94 m. should be determined, which are included in the total arrears of £20.3 m. at 31.12.98. It is also necessary to extend the measures to be taken for the collection of all old amounts due. (f) Systematic re-evaluation of immovable property. The Department of Lands and Surveys should arrange and carry out, with the co-operation of Local Authorities, the systematic re- evaluation of immovable property, in cases where substantial additions and improvements are made which increase considerably the value of immovables. Arrangements should also be made, so that the Department of Lands and Surveys supplies the Department of Inland Revenue with new re-evaluation catalogues, for examination of correctness /reasonableness of the various tax payers' declarations, and for the calculation of the correct amount of the relevant taxes.

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Part B

3.2 PREVIOUS PERFORMANCE AUDITS Performance audits extend for beyond financial audit and cover sections of economy, performance and efficiency of staff. A short review follows of the previous performance audits, carried out during the period 1988– 1998 and was included in my Annual Reports. It is furthermore stated that the Council of Ministers decided, on 22.7.98, to approve the establishment of working units in all Ministries/Departments and Independent Offices, to conduct internal performance audits, adopt and promote new recommendations and, take all the necessary measures for more effective performance of government operations. 3.2.1 Management and Use of Government Plant and Machinery. The main findings and recommendations of this performance audit, which was the first one carried out by the Audit Office, are stated in paragraphs 3.6.4 and 3.6.5 of my Report for 1986. My recommendations are, briefly, the following: (a) Responsibility to be taken over by the Department of Electrical and Mechanical Services for tender invitation for the hiring of plant and machinery from the private sector. (b) The appointment of a coordinator in every Government Department, who will be responsible for planning the use and idleness control of plant and machinery. (c) The charge for plant and machinery use according to the actual working days. (d) The replacement of plant and machinery in appointed spans of time. (e) The completion of the required documents, based on correct, complete and accurate information and facts. The Cyprus Development Bank, which was appointed by the Council of Ministers to study the whole matter, prepared and submitted, in May 1997, a report suggesting the conversion of the existing system of charging fees to a costing system of government plant and machinery, which would cover all Departments. The Council of Ministers adopted this suggestion and on 15.5.2000, after a trial test application of the recommended system in various Departments, approved the introduction of the new system of management of government mobile plant and machinery in all Government Departments and Services and the transfer of ownership of plant and machinery from the Department of Electrical and Mechanical Services to the Departments using them. 3.2.2 Maintenance and Repairs of Government Buildings and Installations. The main findings and recommendations of this performance audit are stated in paragraphs 2.10–2.45 of my Report for 1987. In short, I suggested the determination of a central policy regarding the criteria for quality and financial maintenance control and the setting of a uniform procedure for the preparation of maintenance programmes. No substantial measures have yet been taken for the adoption of my recommendations. In December 1998, a committee was formed for the examination of tender documents regarding the assignment to consultants of the study of the system for the maintenance of

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government buildings and installations. Until June 2000 the tender documents and the terms of reference of the Consultants, had not been completed. 3.2.3 Overtime work. The main findings and recommendations are stated in paragraphs 2.6– 2.25 of my 1988 Report. Briefly, with the objective of exercising substantial control for the reduction of overtime work, in cases where it was not absolutely necessary, I recommended the adoption of a uniform policy according to which the decision to authorise overtime work could be based, the appropriate expenditure budget, the specific determination of works to be included under the term "overtime work" and the uniform way of calculation of overtime paid. The Council of Ministers decided the adoption of the "Overtime Register" by all Government Services and the appointment of Special Three Member Committees in every Ministry/Independent Office, for purposes of exercising better control over the overtime work. The Working Group that was also established submitted its recommendations to the Minister of Finance, which are, now, under consideration. 3.2.4 Building permits. The main findings and recommendations of this performance audit are stated in paragraphs 2.2.5–2.2.48 of my 1989 Report. Briefly, I suggested the improvement of the relevant legislation, simplification/ clarification of the provisions governing the issue of building permits, the supervision by the Appropriate Authorities of building constructions, in order to avoid faits accomplis, and the determination of criteria for the relaxations allowed. Meanwhile the legislation for the issue of building permits has been improved and recent legislation enacted provides for the mandatory supervision of building constructions. In 1999 Law 142(1)/99 was enacted regarding deviations and with the approval of Regulations (S.L.309/99) the Deviations Examination Board was established. 3.2.5 Special Contribution for Defence. The main findings and recommendations are stated in paragraphs 2.3.4–2.3.9 of my 1989 Report. Briefly, the most important recommendations of my Report concerned the correct application of legislation governing the imposition and collection of contributions, so as to secure the revenue of the Defence Fund. The Audit Office submitted specific recommendations for the final solution of the problem, some of which have been adopted, such as the imposition of an additional fee for delays, the classifications of shareholders of private companies in the employee category etc. 3.2.6 Medical Treatment under the State Health System. The main findings and recommendations are stated in paragraphs 2.3.4–2.3.9 of my 1990 Report. In summary, I suggested the amendment of the existing criteria, which define the various categories of eligible persons, in order to be consistent with the present situation, the abolition of the issue of "poverty" and "reduced fees" certificates, the determination of a fixed amount for the eligible persons for the supply of drugs. I further suggested the complete abolition of the above certificates, the study for the reallocation of the operating theatres, according to the anticipated needs in hours instead of days, of the various specialities, for maximum usage and the shortening of the waiting time. I also recommended the improvement of management of the medical equipment, the speeding up of studies and plans pending, the computerisation of systems, the introduction of a health booklet and the issue of a patients guide book.

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Action was taken on various matters and improvements were observed on various matters, such as the outpatients medical centres operation, visits by appointment at the hospitals, the imposition of a charge for examination and drugs to eligible persons, the introduction of a different colour card for the various types and needs of outpatients and the introduction of a computerised system for the registration of outpatients. New Regulations have, recently, been approved for the revision of fees and income criteria for those eligible or not for free medical treatment. The implementation, however, of several of my suggestions, such as the proper use of operating theatres and the operation of a satisfactory system for finding, registering and using idle equipment, as well as anything that concerns the planning for the purchase of new medical equipment, are still pending, in spite of the small improvement observed. Delay is also observed in the introduction of complete computerised systems, resulting to difficulties faced in the operations of hospitals and the application of the necessary control systems. 3.2.7 Bonded Warehouses. The issues observed under this performance audit are stated in paragraphs 2.1–2.5.14 of my 1991 Report. The main issues and recommendations were the following: (a) Updating of the relevant legislation and approval of Regulations which will cover all issues concerning bonded warehouses, which will be within the framework of the specified government policy in this field. The Department of Customs and Excise, as a first step towards harmonisation with the European Union, prepared draft Regulations which were submitted to the Minister of Finance, together with a bill for the amendment of Law 82/67, so that the Council of Ministers could have the power to approve such Regulations. (b) Determination of strict criteria and specifications for the approval of new storage spaces, which will be included in the Regulations. Specifications and criteria were prepared, but due to difficulties observed, the Department decided to allow relaxations with regard to specifications for the dimensions of warehouses. (c) To consider as separate warehouses that are not adjacent and to determine the maximum number of expansions in each case. The Department stated the reasons for the non-application of the pre supposition that approval for expansions should be given in adjoining cases only, for which I have my reservations. With regard to the number of expansions it was determined that those could not exceed five for each bonded warehouse. (d) To disallow the operation of a number of warehouses as retail markets. The Department's view is that the approval of operation should be withdrawn only in cases where the operation of a warehouse is facing serious problems. (e) Weaknesses were observed in matters of audit, closing of files, control of closed and audited files, and in keeping and destruction of files. For these issues specific recommendations were made, which have not been adopted.

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The Department adopted several of my recommendations and relevant work has been processed, so that with the computerisation of procedures of bonded warehouses, they will be fully implemented. 3.2.8 Subsidy of Students Travel Expenses. The main findings and recommendations are stated in paragraphs 2.2.1–2.2.6 of my 1992 Report. In short I recommended the following: (a) The coordination of routes, (b) Service given by private initiative, e.g. parents or communities, or by direct grants to eligible students, where the cost per student is very high, (c) The continual check of the catalogues of eligible persons, whether actual use of public transport is made, the follow up and control of all contractual obligations (e.g. time tables, suitability of buses etc.), and (d) Addition of the scheme for the towns, a view with which the Ministry of Finance is in agreement. With regard to my recommendations for termination and coordination of routes and the adoption of alternative solutions for the transfer of students, these have been implemented. However, no examination is yet being carried out on the contractual obligation of the transport companies, and no study has been undertaken on the abolition of the scheme for the towns. Recently, the Ministry of Education and Culture submitted a proposal to the Council of Ministers for a complete re-examination of the whole scheme. 3.2.9 Refuse collection by Municipalities and Improvement Boards (now Community Boards). The main findings and recommendations are stated in paragraphs 3.1.9–3.1.26 of my 1993 Report. In summary, my recommendations included the creation, where possible, of other refuse complexes, the preparation and implementation of uniform Regulations and the imposition of refuse fees according to uniform criteria, the revision of sectors and sub sectors, the determination of a uniform working schedule of the casuals and a number of employees of the crews. I recommended further the carrying out of a study to establish whether it is more beneficial if repairs and maintenance of vehicles are assigned to the private sector, the correct use of refuse vehicles and the amendment of legislation, so as to allow the collection of refuse fees through Water Boards or Electricity Authority invoices. Since the submission of my Report the following developments were observed: (a) Sectors and Sub Sectors. The sectors and sub sectors, as the various regions of Municipalities and Improvement Boards are divided, are revised according to the development of the regions, the needs created and the volume of work. As a result the distribution of work is rationally based, and the staff employed as well as machinery and equipment are properly used. (b) Regulations – Refuse charges. Following the amendment in 1996 of the Municipalities and Village Authorities Law (Administration and Improvement) (General Regulations) of the Improvement Board of Pedhoulas, which were adopted by all Improvement Boards, the Municipalities and the Improvement Boards implemented uniform Regulations. These Regulations determine the various categories of estates, the maximum fees charged as well as the relevant criteria. It is expected that similar Regulations will be approved after the enactment

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of the Community Boards Law of 1999, which will be implemented by all Community Boards (ex Improvement Boards and ex Village Authorities). (c) Tender invitation for Refuse Collection. The municipalities of Lakatameia and Athienou, as well as several Improvement Boards, have assigned, after tender invitation, the refuse collection to the private sector, which proved to be of much lower cost. The Municipalities and Improvement Boards which continue to use their own crew informed me that the assignment of refuse collection to the private sector is, for the time being, impossible, because of difficulties in the productive utilization of the existing staff and equipment, as well as the anticipated reaction of staff and Unions. 3.2.10 Idle time of Machine Operators/Drivers and Technicians of Machinery Vehicles of the Department of Electrical and Mechanical Services. The main findings and recommendations are stated in paragraphs 3.2–3.2.11 of my 1993 Report. My recommendations were, briefly, the following: Determination of policy for the purchase/lease of vehicles and machinery for proper utilization of machine drivers and technicians, transfer of machine drivers and technicians to other Departments where needed, the taking of measures to minimise delays during repairs of machinery/vehicles and the securing in time of the required funds, in order to avoid delays in the execution of projects. The developments observed after the preparation and submission of my Report are the following: The Council of Ministers appointed on 15.2.95 a Ministerial Committee, which examined the matter of redundant machine drivers and decided that this should fall within the general plan for the employment of the hourly paid staff by other Government Services. The Council of Ministers decided, on 15.5.2000, the transfer of machine drivers, now under the Department of Electrical and Mechanical Services, to various Departments. 3.2.11 Planning and Execution of Development Projects. The main findings and recommendations, in this performance audit are stated in paragraphs 2.1.1–2.1.30 of my 1992 Report. Briefly, I recommended the need for a timely improved financial planning of the projects, including tender procedure. Most of my recommendations have been adopted. An instructions manual was prepared for the planning and execution of each project, the Council of Ministers decided the appointment of a responsible officer/coordinator in big projects, the transfer of savings has been terminated, the Department of Public Works procedures have been partly computerised and annual programmes are prepared by the Research Branch. During the period 1997–1998 manuals were adopted for the supervision and coordination of studies and execution of development projects, in the preparation of which the contribution of my Office was significant. 3.2.12 Drivers' Schools. The main findings and recommendations in this performance audit, which are stated in paragraphs 3.3.1–3.3.11 of my 1993 Report are the following: (a) About 20% of the drivers' schools are possibly fictitious and the purpose of their establishment was to secure to the owners eligibility for a duty free vehicle.

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(b) About 14% of the duty free vehicles were luxury vehicles, which are not compatible to the needs of trainees. (c) Over 60% of the duty free vehicles were mostly used for private rather than instructional purposes. (d) Several schools used duty paid vehicles of lower cubic capacity and value for instruction purposes, instead of their duty free vehicles. The Ministries of Finance and Communications and Works agreed with my recommendation for the abolition of the duty free privilege and an amendment of the Law was passed in 1994. The remaining issues concerning, mainly, the control and follow up of the operations of drivers schools, were examined by the Departments concerned and corrective measures have been taken. Some drivers' schools operating illegally have ceased operations and have paid the respective duties for their duty free vehicles. 3.2.13 Licences for the Sale of Intoxicating Liquors. The main findings and recommendations are stated in paragraphs 3.2–3.2.16 of my 1994 Report. Briefly, I recommended the amendment of legislation, so that the issue of licences for premises situated in improvement areas be assigned to the respective Improvement Boards, the revision of the fees charged, uniformity on the issue of certificates by the District Councils, according to which liquor licences are issued, the supervision and control of all those failing to renew their licences and the computerisation of the whole system. In October 1995 an amendment bill was prepared for the revision of fees for the issue of licences, which was finally approved on 6.11.98 (Law 83(1)/98). The fees have been revised and are now consistent with the present state of affairs. District Administrations, in cooperation with the District Police Authorities follow a new programme of supervision and follow up of all cases failing to renew the licence for the sale of liquor. Pending materialisation, is my recommendation for computerisation of the system, which will facilitate the whole supervision procedure, by providing the necessary information promptly. 3.2.14 Amusement and Game Machines Licences. The main findings and recommendations are stated in paragraphs 3.1–3.1.16 of my 1994 Report. In summary, I recommended the strict enforcement of the Law which governs the control, issue and supervision of the licences for the use of game machines, the revision of the fees for the use of the machines, the maintenance of the necessary registers and records for their collection and the proper signage and control of the premises where game machines are installed. Following the preparation and submission of my Report, in March 1996, the Amendment and Game Machines Law 32(1)/96 was passed, which abrogates the existing Laws and regulates the entire system of granting amusement and game machines licences and other relevant issues. Under this Law the licence fees are also revised. After the passing of the Law some defects were observed on application and the Attorney General, as requested by the Ministry of Interior prepared, in July 1996, an amendment bill which was passed on 26.6.98 (Law 50(1)/98) and Regulations were approved (S.L. 159/98). On 9.7.99 Law 90(1)/99 was also passed which provides for free registration of all game machines that will be re-registered up to 31.12.99.

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On the instructions of the Ministry of Interior District Administrations are already cooperating with the Police, for the full enforcement of the Law and Regulations. 3.2.15 Criminal Warrants. The main findings and recommendations are stated in paragraphs 3.3–3.3.20 of my 1994 Report. Briefly, the most important of my recommendations concerned the precipitation of the criminal warrants, the prompt issue and registration of warrants in the relevant registers and the non surcharge of the public in cases where the summons process was not successful. I further recommended the securing of the collection of adjudicated amounts due by private companies the Directors of which liquidate to establish new companies, the prompt execution of warrants, the extension of out of court settlement processes for other, mainly traffic offences, the computerisation of all procedures and offender notification by the Court Registry, after the issue of the court decision and before the issue of the warrant, to settle the amount due. Substantial improvement has been observed in the preparation of charge warrants, as well as the registration and execution of warrants. After the enactment of legislation on 1.7.97, for out of court settlement of traffic offences, a substantial reduction of charge warrants was observed, resulting to savings in excess of £3 m. annually, considering only the cost of preparation and execution of warrants. In the case of the court process being included, then the savings will exceed by far the amount of £6 m. annually. Still pending is the computerisation of works concerning the preparation of the offence charge and the issue, registration, and execution of warrants, as well as the security of the collection of the adjudicated amounts due by private companies, which the shareholders liquidate and establish new ones. 3.2.16 Quarry Materials. The main findings and recommendations are stated in paragraphs 3.5–3.5.6 of my 1994 Report. Briefly, my recommendations were the following: (a) Amendment of the Mine and Quarry Regulations Law, in order to provide for the immediate confiscation of the machinery used for illegal quarrying, provision for the immediate suspension of the operation of legal quarries which violate the law by producing materials below the required standard levels. The regulation and operation of grit trading warehouses (yards) through the issue of a special permit. (b) The taking of the necessary measures by all Departments responsible for the implementation of the relevant decisions of the Council of Ministers and mainly the prohibition of the production and disposal of materials below standards without a special permit. (c) The upgrading and control in all sections and by all parties involved, with more frequent inspections by Government Departments which would not be confined to working hours only, the preparation of legislation governing the licences and operational control of ready mix concrete units, by taking samples for laboratory examination. The securing of competent staff and suitable equipment for Government Laboratories. The exercise of quality control on materials by the quarriers themselves and implementation of Civil Standards provisions, i.e. CYS 14, CYS 64, CYS 99, for the issue of a "suitability certificate", which shall always accompany all materials to their final use. Systematic control of the terms for issuing research permits and quarry privileges, as well as Town Planning permits.

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(d) Promotion of the preparation and legal regulation of Construction Regulations, according to which Engineers, users etc. will bear the responsibility for the quality control of materials at the time and place used. (e) Amendment of the Town Planning and Surveys Law, so as to provide for the immediate suspension of operations of illegal quarry operations. (f) Implementation of clear criteria to be considered for the issue of quarry privileges. Also the application of criteria according to which suspension of operation will be decided for quarries that produce materials below Standards, and also criteria for lifting suspension of operations. (g) Revision of the procedures of issue/renewal of town planning permit, which will be issued for a longer period of time, with the terms of issue being closely followed up. (h) Maintenance of complete and correct records of quarrying inspections, reports, for illegal quarrying and sale of materials below Standards and other information necessary for the control and supervision of quarries, the keeping of monthly statements regarding quarry works and the proper completion of the required form of quarrying and selling materials (YM 35) by the quarriers and the computerisation of all the above records. (j) Amendment of the Law and Regulations, so as to make possible the collection of fees in all cases of quarrying and selling materials. The prohibition of the issue and use of explosives to illegally operating quarries. The requirement of environmental study for the issue of a quarry privilege or research permit. The setting up of criteria according to which the environmental study should be prepared and evaluated. The immediate suspension of all illegal operations affecting the environment. The taking of measures for the strict implementation of the terms regarding environmental protection and the restoration of the area involved to its original form within a specified period of time. Since the date of submission of my Report, the following developments have taken place: • In November 1995 a Law was enacted, providing, inter alia, for the immediate confiscation of plant used in illegal quarrying. • In July 1998 the Standards Control Commission for grit was established in a new flexible form and expansion of the terms of reference for the control of the whole production system. • With regard to ready mix concrete units, the law enacted on 1.1.99 provides for more frequent inspections and sampling. • Measures are taken for the suspension of operations in cases where the materials produced are below standards. • More frequent inspections take place in quarries and crushing plants. • A special committee representing the Department and the quarriers, is preparing Regulations, according to which the quarriers themselves will undertake, the exercise of quality control over the materials produced. • The criteria for the issue of quarry privilege and for the suspension of operations of quarries have been prepared. • The Law was amended to provide for the collection of fees in all cases of quarrying, and prohibition of the issue of explosives to illegally operating quarries.

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• An environmental study is now a prerequisite for the issue of a quarry privilege. • Submission by quarriers of monthly statistical statements regarding production and disposal of materials. • The Cyprus Standards Organisation and Quality Controls promoting the accreditation of laboratories for the improvement of the system of self control in quarries. • Legislation enacted provides for obligatory supervision in constructions. In spite of the improvement observed, as almost all my recommendations were adopted, unsuitable materials continue to be available in the market. This is because dissuasive measures are not taken when illegalities are detected and the unsatisfactory supervision of the production and disposal of materials by the Mines Department, partly due to insufficiency of staff. 3.2.17 Government Farms. The main findings and recommendations are stated in paragraphs 3.4.1–3.4.23 of my 1994 Report. The most substantial of my recommendations concerned the unification or abolition of veterinary agricultural experimental farms, of the Department of Agriculture and the Agricultural Research Institute. The veterinary units of the Department of Agriculture at Athalassa have already been abolished. A new policy was also adopted in 1996, regarding forest nurseries, through which a considerable reduction in the production of trees was effected and emphasis given to the field of imports and trial testing of new types and varieties. Still pending is the materialisation of the decision for the creation of a new veterinary farm at Oreites, in spite of the decision taken a few years ago, for the termination of operations of Acheleia veterinary farm and the transfer of the basic programme to the new veterinary farm at Oreites. The Department of Agriculture is now at the stage of tender invitation towards the creation of the required infrastructure. Approval has already been secured for the farm's electricity supply and the improvement/reorganisation of the existing premises. 3.2.18 Issue of Passports. The main findings and recommendations are stated in paragraphs 3.4.1–3.4.8 of my 1995 Report. The developments observed are the following: (a) The weaknesses and deficiencies observed in the computerised system have been examined and resolved. (b) Passports are now issued by all District Administrations, but the issue of passports by Diplomatic Missions abroad has not yet commenced for technical reasons. I understand that the issue of passports will, first, be undertaken by eight Diplomatic Missions, after a proper connection with the Archives Population System is achieved. The first test connection will be tried with the Embassy in Athens in the beginning of 2001. (c) Radical changes have been made in the Passports Issuing Office and the matter of storage space has been resolved. It appears, however, that, due to the nature of their construction, the premises do not provide adequate security for the various documents, equipment and the staff of the Department. This is why the necessity for the removal of the Offices has been raised at the Ministry of Interior.

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The whole matter has at present been resolved after a series of improvements, already effected, which will be completed with the erection of a fence and the installation of a control entrance within the year 2000. (d) Still pending is the enactment of legislation and Regulations that would govern the issue of passports and travel documents. I was informed that in the draft of the Population Archives Law, which has been submitted to the Law Office for examination, relevant provisions have been included for the purpose of regulating the above matters. 3.2.19 Rural Veterinary Stations. The main findings and recommendations concerning this performance audit are stated in paragraphs 3.5.1–3.5.7 of my 1995 Report and, briefly, include the following: (a) Examination of the possibility of abolition or integration of certain under utilized stations. (b) Examination of ways of more appropriate utilization of personnel. (c) Evaluation of the use of the services of private veterinary officers and extension of this measure to all rural areas. The developments observed until the end of 1999 are the following: (i) Nine Rural Stations have already closed down, out of 16 operating in 1995, and their staff has been transferred to other Stations or District Offices of the Veterinary Services. (ii) The Private Veterinary Officers Subsidy Scheme continues, which at this phase includes 17 private veterinary officers, and it is expected that within 2000 new contracts will be signed. The subsidy cost ranges between £200–£250 monthly per veterinary officer and the total expenditure for 1999 amounted to £47.121. 3.2.20 Supply of Books to Schools. The main findings and recommendations are stated in paragraphs 3.3.1–3.3.5 of my 1995 Report. Briefly I recommended the following: (a) Better planning so that all books to be available at the commencement of the School year. (b) The proper staffing of the Services of Development Programmes and the securing of the necessary mechanical equipment, which will facilitate operational activity. (c) Better coordination and planning in tender procedure, so that weaknesses and omissions will be avoided. (d) Improved operation of the Books Store of the Ministry, in order to achieve prompt receipt and dispatch of books to schools. (e) Close supervision of budget execution and better coordination between the Accounts Department of the Ministry and the Development Programme Services. In spite of the long period of time since the submission of my Report and although the Books Store of the Ministry of Education and Culture has been transferred to another suitable building, problems are again observed in the receipt, storage and dispatch of books to schools. There is still no long term planning of the needs in books, whereas the three Development Services of the Ministry have not been provided with the appropriate staff and necessary equipment. Furthermore, there are still weaknesses and omissions in tender procedures. 3.2.21 Import duty relief on motor vehicles, allowed to Repatriates. The main findings and recommendations, which are stated in paragraphs 3.2.3–3.2.4 of my 1995 Report, are the following:

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(a) Clear determination in the legislation as to whether interruptions of the ten year period abroad should be taken into account or not, in the calculation for the eligibility period. (b) Whether the National Service period shall be considered as a temporary interruption or not, of the permanent residence of the applicant abroad. (c) The amendment of the Law to regulate the cases of students working during their studies and for civil servants serving at Diplomatic and other Missions abroad. (d) The computerisation of the whole system, the strengthening and improvement of the control exercised by the Department of Customs and Excise and the reconsideration of the allowance of duty free vehicles as a motive for repatriation. The Department of Customs and Excise has requested legal advice and interpretation of the Law, whereas in the case of allowances to civil servants, a draft bill has been submitted in 1991 which is still pending. A similar amendment of the Law is under consideration regarding the cases of students abroad. 3.2.22 Inland Registered Mail. The main findings and recommendations are stated in paragraphs 3.6.4–3.6.8 of my 1995 Report. Briefly, I recommended the possible amendment of the Law, for the restriction of registered mail to cases of absolute necessity only, and encouragement of the public for prompt receipt. Also corrective measures for the return of registered mail, because of wrong addresses, and personal delivery as provided by the Law. My recommendations have been considered by all the Government Departments covering the majority of registered mail, but have not been adopted because of practical or legal difficulties and where amendment of the Law is necessary. 3.2.23 Estate Duty. The main findings and recommendations are stated in paragraphs 3.1.1– 3.1.34 of my 1995 Report. Briefly, the most substantial of my recommendations included in the Report, refer to the need for simplicity of the procedures for the imposition of the existing eight different property taxes and their merge into one Law, as well as a suitable amendment of the Law, where omissions are observed, for the efficient imposition of the relevant taxes. After the issue of my Report, no developments were noted on any of the findings and recommendations, because radical amendments would have to be made in the existing legislation regarding the Immovable Property Tax, the Improvement Fee, the Immovable (Urban) Property Tax (Schools), the Municipal Immovable Property fee, the Sewerage Fees, the Income Tax for the value of the estate, the Lands and Surveys Transfer Fees and the Health Tax. 3.2.24 Maintenance and Repair of Electromechanical Equipment. The main findings and recommendations are stated in paragraphs 3.1.1 – 3.1.6 of my 1996 Report. In short, I recommended the registration and follow up of the electromechanical equipment/spare parts and the recording/evaluation of the maintenance expenditure, for purposes of determination of the correct policy for maintenance/repairs by the State or/and the private sector. Since the day of submission of my Report the following developments are observed.

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• After a ministerial decision a relevant programme was prepared by a private firm. The movable equipment and the Limassol Hospital equipment were recorded. As the programme prepared, however, was not on–line and records from other Districts had to be submitted periodically, it was decided to be used for vehicles only. Finally this programme was abandoned, as it could not serve the new needs, which appeared after the Council of Ministers decision, in May 2000, for a change in the system of management of government vehicles. For the medical equipment, the purchase of a special programme was decided, which would also be used for other categories of immovable equipment. The Department of Electromechanical Services undertook the test use and evaluation of the programme in order to facilitate the decision as to whether it could be applied, or not, on a nationwide basis. • For the keeping/evaluation of expenditure records, the Department of Electromechanical Services undertook the processing/verification of the information included in my Report, before reconsideration of the policy of maintenance undertaken by the Department or by the private sector. The procedure of verification of the information and records has not yet been completed by the Department. It is expected that after the completion and implementation of computerisation, these records will be recorded and utilized. • The Public Accounts and Development Projects Committee of the House of Representatives has been informed of this performance audit during two of its meetings in 1998. 3.2.25 Inspection of Motor Vehicles. The main findings and recommendations which are stated in paragraphs 3.2.1–3.2.4 of my 1996 Report are the following: (a) The inspection of motor vehicles had been insufficient and was terminated in 1996. Although substantial amounts had been spent for the erection and equipment Units for Motor Vehicles Inspections, these were not suitably staffed and their operation was unsuccessful. (b) Road security campaigns carried out by the Police proved that a considerable percentage of vehicles present mechanical and other problems. (c) The uncontrolled exhaust emissions and also the inferior quality of fuel used, have a negative effect on environment. The above have been discussed in the Communications Committee of the House of Representatives, in the presence of representatives from all Services involved. It was decided that arrangements should be made, so that inspections of motor vehicles could commence as soon as possible and also for measures to be taken for the improvement of the quality of fuel used. The Department of Road Transport has informed me that the necessary arrangements have been made for the re-commencement of vehicles inspections, while measures are also taken for the improvement of the quality of fuel used. 3.2.26 Maintenance Workshops for Police Vehicles. The main findings and recommendations are stated in paragraph 3.3.1–3.3.6 of my 1996 Report. Briefly, the most substantial of my recommendations referred to the need for adopting a long term strategy for the type of maintenance of the vehicles, the use of the services of the private

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sector and the restoration of the system of repurchase and maintenance by the suppliers/agents of the vehicles. This issue was discussed in the Public Accounts Committee of the House of Representatives on 26.3.98, in the presence of representatives from all Services involved. The Chief of Police recently informed me that measures were taken for the reduction of the maintenance cost from 7,61 cents per kilometre, in 1996, to 3,71 cents in 1998, basically due to the reduction by 40 persons of the relevant staff employed during the above period. In view of the scheduled supply of 600 new vehicles during the next three years, for the renewal of the Police fleet of vehicles, I expressed the view, in a relevant letter to the Director General Ministry of Justice and Public Order, that: • In the new tenders to be invited for the purchase of motor vehicles, the relevant terms should include Government's option to assign the maintenance of vehicles to the authorised workshops of the agents–importers. • The current cost of maintenance of the workshops is high, even though the calculations of the Police are correct. According to recent tenders invited for the purchase of vehicles for the Police, which include the term for maintenance "according to the manufacturer's maintenance manual", the maintenance cost is about 2 cents per kilometre, for a period of 5 years, compared to 7,6 cents of the Police, 3,43 cents paid by the Cyprus Telecommunications Authority, and 4.01 cents paid by the Electricity Authority of Cyprus (for 1996). The view of the Police that maintenance carried out at the workshops includes works done over and above those recommended in the manufacturer's manual, is not substantiated. It is recommended that a condition is included in the new tender documents for the financing of new purchases by importers, provided that: • Government has the right of option between the purchase of the vehicles by itself and the financing of the purchase by the importers, and • In case of implementation of the finance method, a parallel provision should be made that all maintenance should be undertaken by the successful tenderer and the relevant cost will be included in the total finance amount. The condition for the assignment of maintenance to the private sector was included in the tender documents for the purchase of the first 100 vehicles (out of the 600) for 1999. Although the maintenance cost given by the tenderers was comparatively low (0.9–1,9 cents per kilometre), the Main Tender Board did not decide for the assignment to the private sector, because the tenders submitted referred to maintenance according to the "Manufacturer's manual" and not according to the increased requirements of the Police. In July 1999 it was decided to include in the tender documents, for the purchase of the remaining 500, a condition that would allow Government to assign their maintenance to the private sector. Tenders were invited in August 2000, but without the condition for the financing of the purchase of the vehicles by the importers, because the latter declared that they do not accept this condition. 3.2.27 Welfare Services – Public Assistance Grants. The issues observed in this performance audit are stated in paragraphs 3.1–3.5.11 of my 1997 Report.

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Briefly, my recommendations were the following: • Amendment of the Public Assistance and Services Law, for the clarifications of misinterpretations emanating from the generality of the Law, and the approval of Regulations governing the examination, approval, provision and monitoring of public grants. • Systematic follow up for the correct and uniform application of the Law and procedures, in order to end the inconsistency observed in the application of legislation by District Welfare Offices. • Determination in the relevant Regulations of the grant allowances. • The keeping of full records in the applicants' files. • The issue of a new manual into which all written and oral directives of Management should be included. • Revision of the examination of applications procedure, for the purpose of reducing the time spent. • Annual visits by the appropriate Welfare Officer for follow up and verification of possible changes in the recipient's state of affairs. • Prompt renewal of medical certificates in cases of public grants, as a result of inability to work. • Investigation as to the ownership of movable or immovable property of all applicants. • Improvement of the procedures for the examination, approval and provision of public grants and the adoption of a suitable system of internal control, so that overpayments should be avoided, as well as the prompt collection of amounts already overpaid. • Acceleration of the process for completion and implementation of the new computerised system. The Director General of the Ministry of Labour and Social Insurance informed me that the Ministry decided the setting up of an Official Committee, in which a representative of my Office would participate, for the examination of the findings of the report, and recommend methods for dealing with the weaknesses observed in the system of Public Assistance Grants. • In the meantime a draft bill has been prepared for the amendment of the Public Assistance Grants Law, which is expected to be submitted for approval, after some pending issues are examined. • The determination of the allowances paid through the Regulations is under consideration. • With regard to the issue of keeping adequate records in the files, the investigation of movable and immovable property of applicants, the correct and uniform implementation of the Law and procedures and the securing of prevention of overpayments, relevant directives have been sent to all District Welfare Officers • The issue of the revision of the applications examination procedures is under consideration, along with the forms computerisation process.

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3.2.28 Overtime Work of Medical Personnel. The main findings and recommendations are stated in paragraphs 3.1.1–3.1.3 of my 1998 Report. Briefly, the most substantial of my recommendations were the following: Over 70% of the expenditure for overtime work refers to compensations to medical staff working under the "on call" system. Although an agreement was reached in 1987 for the implementation of the active duty system, the "on call" system, which presents serious weaknesses and the audit of which is almost impossible, still continues to be followed. As a result of the weaknesses observed, I stated that, in many cases, overtime work cannot be documented, and the possibility that, in some cases, the system may be exploited by several Medical Officers, cannot be ruled out. It was further observed that almost 30% of the operations are performed after office hours, calls for medical personnel of certain specialities are minimal, and while overtime work by other medical personnel is considerable. Finally it was verified that the administration cost of the system is substantial and the accounting system followed has to be simplified. In view of improvements for the whole system of overtime control, the following recommendations were submitted: (a) Immediate decision for the adoption of the active duty system. (b) Upgrading and strengthening the internal control system, so that overtime paid be fully documented. Specifically I recommended the following: (i) Applications for overtime allowance should be submitted on the day immediately following overtime work performed. (ii) For work executed after office hours, which will be paid according to the actual time worked, the system of internal control should secure the correctness of payment and the documentation of work performed. (iii) Overtime work should be obligatory for all staff of each clinic under the "on call" system, unless the approval of the Ministry of Health has been secured. (iv) Overtime work should be documented only through calls by the responsible duty officer, who has to be specified. (v) A counterfoil book should be issued (call voucher) for the recording of overtime work by each medical officer separately, in which all the necessary information should be contained. (vi) The operations registers should be revised, to facilitate the recording of all operations performed. (vii) Instructions should be issued for uniform waiting time schedules, assigning the relevant responsibility to the Accounts Department. (viii) Operations waiting lists should be prepared in special forms, which must be kept for future reference. (ix) Medical personnel hardly called or not called at all, not to be included. (c) Clarification of provisions of the agreement and introduction of new provisions, which will allow the uniform implementation of the agreement for all the staff and supplement omissions of the existing agreement.

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(d) Preparation of reports, which will facilitate follow up of the system and the taking of the necessary corrective measures. (e) Improvement of the accounting system and introduction of computerised systems for the recording and follow up of overtime work. The Director General of the Ministry of Health agreed with my observations and informed me that the final settlement of the problems presented will take place after the implementation of the active duty system which was discussed with the Medical Officers' Union, without a decision, however, being reached. With regard to the existing system the Director General informed me that efforts would be made for better control, and that a working team was set up for the purpose of carrying out surprise surveys. He further stated that my recommendations for the improvement of internal control systems would be under consideration aiming at their adoption. In spite of the above assurances, no substantial improvement has yet been observed in the present system of internal control, and no surprise surveys were carried out, as referred to above. I informed the Director General of the Ministry that, although the implementation of several of my recommendations for improvements is not considered difficult, no measures, whatsoever, were taken for improvement, and consequently several of the weaknesses observed still exist. 3.2.29 Technical Services of District Administration. The main findings and recommendations are stated in paragraphs 3.2.1 and 3.2.2 of my 1998 Report. Briefly, I recommended the following, for purposes of better planning, increase of productivity and corrective changes of the system: • The appointment of the respective District Officers as Controlling Officers of the various votes of the three budgets, • the abolition or, at least, reduction to the minimum of the unallocated Votes, • the establishment of an "Advances Fund" for financing projects in cases where Communities request loans from the Loan Commissions, and • commencement of the tender procedure from November of the previous year for the projects included in the budget. For the increase of productivity: • The gradual reduction of the labour force and the parallel increase of the supervising staff, • avoiding allocation of funds to a large number of minor projects, • the absolute minimisation of non–scheduled assignments of projects by Ministries and Services, • the restriction of changes requested by Communities, to those absolutely necessary only, • the adoption of systematic quality control over works, • the absolute implementation of the procedure of not paying the contractors prior to the notification of laboratory results,

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• the quantity surveying and control, in all cases, of materials used, prior to the final payment, • the establishment of an Internal Audit Unit at the Ministry of Interior, • the preparation of the budget on a five year plan basis for development and execution, • the establishment of Community complexes in each District in groups of 6–12 neighbouring villages, and execution of all projects for each complex through one contract, and • the maintenance of a small number of workshop crews for emergency cases only. In May 2000, the Director General informed me that my views and recommendations are seriously under consideration and, as far as the Ministry is concerned, efforts are made for their adoption. During the discussion of this performance audit in the Public Accounts Committee of the House of Representatives, the Minister of Interior stated that certain of my recommendations have already been adopted and most of the remaining are in the process of adoption. 3.2.30 Value Added Tax (V.A.T.). The main findings and recommendations are stated in paragraph 3.3 of my 1998 Report. Briefly, my recommendations were the following: (a) Intensified efforts for the verification of persons/entities appearing to avoid registration in V.A.T. registers. (b) Strengthening of measures for the collection of arrears due, through prompt criminal prosecutions and civil court proceedings. (c) Considerable increase of control visits to Tax Entities/Persons and especially to high risk Persons. Control visits form the only way to control and follow up Tax Entities/Persons. (d) Improvement of the computer system for better data processing and improvement of the system of internal control. The V.A.T. Service informed me that all the appropriate measures are taken for the settlement of the problems and that efforts are made for better utilization of the available funds of the Service, through modern ways of control and follow up of Tax Entities. Furthermore, these problems and weaknesses will be, to a great extent, settled after the harmonisation of legislation and the new Law enacted by the House of Representatives in July 2000 (95(1)/2000).

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PART 4 – OBSERVATIONS

4.1 GENERAL OBSERVATIONS 4.1.1 Public Tenders (a) Public Tenders Law. After a Council of Ministers decision a draft bill was prepared which, after examination by the Public Accounts Committee and relevant amendments introduced, it was enacted to a Law with effect from 19.1.98. After that draft Tender Regulations were prepared, which were finally approved by the House in May 1999. My Office pointed out that, for the efficient operation of the Main Tender Board and the securing of public interest, the Law and Regulations should be revised. For this purpose the Treasury prepared, in cooperation with my Office, in April 2000, a list of proposed amendments, which was submitted to the Attorney General for legal processing. (b) Purchase of buildings for the accommodation of Government Services. In January 1998, consequent to the proposed intention for the purchase of a building to cover the needs of the Department of Lands and Surveys, with a letter to the Director General of the Ministry of Finance, I expressed the view that the purchase of buildings directly from the private sector does not safeguard public interest and is contrary to the tender legislation enacted on 19.1.98. I recommended that the possibility of invitation for tenders should be considered, under the system Build Operate Transfer (B.O.T.), and in accordance with an architectural programme based on the requirements of the Service to be accommodated, so as to assign, with competitive tender prices, the erection of a modern operational building, which will serve the specialised needs of the Department. Contrary to the above recommendation, in August 1998 the Department of Lands and Surveys declared its intention to acquire a building, which would satisfy its accommodation, needs, resulting to only one valid proposal. The evaluation of the proposal, due to problems presented by the proposed building, required a period of over 12 months. Finally the intention to purchase a building was withdrawn and the erection of a new building was decided under the method of design and construct, as recommended by my Office. The total delay, as a result of the procedure followed, was 20 months. (c) Lease of buildings to accommodate Government Services. In April 1999 I informed the Director General of the Ministry of Finance that, according to the Public Tenders Law of 1997, the tender procedure should be followed for the lease of buildings to accommodate Government Services. I expressed the view that the best procedure is the submission of two dossiers (technical and financial) and the selection of the most profitable tender. The Ministry of Finance agreed with my recommendation and undertook to promote the lease of buildings through the tender procedure. 4.1.2 Civil Servants' private property (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.

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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 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 month were submitted to the House of Representatives, pending their approval. 4.1.3 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, collector 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 this provision of the Regulation. 4.1.4 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 1999, 50 major stores, out of a total of 139, i.e. 36%, and 5 minor stores, out of a total of 202, i.e. 2,5%, were examined. 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. 4.1.5 Arrears of revenue. The total arrears of revenue at 31 December 1999 amounted to £239,1 m., compared to £221,74 m. in the previous year. Out of the total arrears £111,1 m. represent arrears of income tax, compared to £101,3 m. in 1998. Details of the arrears appear in Appendix II of my Report. 4.1.6 Excess expenditure. During 1999, 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. Until the beginning of June 2000, covering approval was sought and granted for these excesses.

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4.1.7 Hourly paid employees. Hourly paid employees continue to be engaged in clerical duties, contrary to the Regulations and the Council of Ministers decision dated 29.10.99 and the relevant circular of the Ministry of Finance dated 29.11.99. 4.1.8 Inventory registers. According to Stores Regulations all Government Services should keep inventory registers of all their movable assets, and should submit to the Accountant General and Auditor General of the Republic year–end physical stock taking certificates. Some Departments did not comply with the Regulations. 4.1.9 Financial Administration Law. A draft bill 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. Due to delays in the approval of this bill, its withdrawal was decided in May 1995 for reconsideration by the appropriate Services, which, after being redrafted, to be submitted again to the House of Representatives. In 1998 a new bill was prepared and submitted to the Council of Ministers, which on 5 November 1998 decided its postponement for further consideration. The Treasury Department prepared a revised up to date bill, in accordance with the European Union directives and the provisions of the unified Budgets. This bill was submitted on 7 July 2000 to the Ministry of Finance for consideration and submission to the Council of Ministers for approval. 4.1.10 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 relevant statement is submitted to the President of the Republic for information and appropriate action. Under this procedure significant improvement has been achieved. 4.1.11 Computerisation. Several Government Services and Public Corporations have, in recent years, proceeded to upgrade their computerised systems, or to the introduction of new ones, in replacement of traditional handwritten systems. Usually the predetermined schedules and completion dates included in the tender terms are not adhered to. The above is the cause for significant delays, which result to further delays in updating the various systems and additional administration cost due to the continuous operational needs that have to be satisfied. 4.1.12 Use of official vehicles. In my Report for 1998 I stated that, in many cases, the arrangements made to satisfy official transportation needs were not the most appropriate or economical. As a result official vehicles were not fully utilized and their cost of use was in many cases high. I stated further that official vehicles are used for private purposes, without the approval of the Council of Ministers, as provided under the Budget Law. As a result of my observations improvement was noted on the whole matter in 1999. 4.1.13 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 the legal processing at the Law Office, or even at the stage of consideration and approval by the House of Representatives. Furthermore, the various recommendations made by my Office for the amendment of Legislation/Regulations for the purpose of regulating weaknesses/omissions observed during audit, are not promptly

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processed. For these cases reference is made in the relevant paragraphs for each Department in my Report. 4.1.14 Internal audit. In several Departments/Services omissions and weaknesses in the systems of internal control continue to be observed. 4.1.15 Outstanding government guaranties 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. I recommended the introduction of a central system of control, so that all government guarantees will be codified and recorded in a central register, for follow up by the Treasury Department. 4.1.16 Duty relief certificates (form C6c). In several Government Services the copies of the above certificates are not attached to the respective counterfoil copies, in spite of the fact that the goods recorded have been cleared long before and running the risk of misappropriations being concealed. For purposes of control, the yellow copies of the duty relief certificates should be returned by the Department of Customs and Excise and attached to the respective counterfoil copies, after the completion of the Customs clearance of the goods for which they were issued.

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 £6.604.200 and £6.631.482, respectively, compared to £5.631.134 and £5.636.161 for 1998. All the income is represented by the state subsidy. The balance of the Fund at 31.12.99 was £20.290.

4.5 JUDICIAL Supreme Court Part A 4.5.1 Advocates annual licence. It was again observed that several advocates have not renewed their annual licence, as provided under section 11(2) of the Advocates Law. I recommended that these cases should be investigated, to verify whether these advocates were not practising according to section 11(1) of the same Law. The Chief Registrar of the Supreme Court submitted, in June 1999, to the Presidents and Registrars of the Courts, as well as to the Pancyprian Advocates Association, a list of Advocates who have not renewed their licence, so that they will not be allowed to appear before the Courts. 4.5.2 Removal of revenue stamps. As I stated in my Report for 1998, in a District Court revenue stamps were removed from certain documents. A police investigation was instituted against a specific person for criminal offence commitment, followed by a criminal court case, which was finally dismissed. I recommended that the Chief Registrar should issue directives to all Courts, for the safe keeping of the relevant forms onto which revenue stamps are affixed

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and also the way of cancelling revenue stamps so that they cannot be used again. A relevant circular has been sent by the Chief Registrar to all Courts. 4.5.3 Inventory Registers. The inventory registers have not been updated with the receipts and issues of equipment since 1996. Assets and computer equipment have become obsolete or non operational, for which no appropriate action has been taken for their disposal. I recommended that, either the registers should be updated or the approval of the Ministry of Finance should be sought for the creation of new registers, through a physical stocktaking. 4.5.4 Publications of decisions of the Supreme Court. The keeping of the Store Ledger and the stocks of publications of the decisions of the Supreme Court, present omissions (e.g. the stocks are not classified in a specific area and the store ledger is not updated with all sections) and I recommended that appropriate corrective measures should be taken. Part B 4.5.5 Allowances to Bailiffs. As I stated in my Report for 1998, Bailiffs receive, since 1992, commuted allowances for overtime and travelling. In the case of transfer of the responsibility for the movement of judicial documents to the private sector, the amounts of the above allowances would have been reconsidered. The process of delivery of judicial documents by the private sector commenced on 1.5.96, without reconsideration of the amounts paid for these allowances, resulting to the possibility of payment of incorrect allowances, in relation to the time spent and the kilometres covered by the Bailiffs for the distribution of judicial documents. District Courts Part A 4.5.6 Arrears of revenue. The arrears of revenue of the District Courts at 31.12.99 amounted to £2.883.760, compared to £2.799.796 for the previous year, i.e. there was an increase of £83.964 (3%). 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. 4.5.7 Delay in the issue of criminal warrants. At the District Court of Limassol considerable delay is observed in the issue of criminal warrants and a consequent delay for their receipt and execution by the Police. Although no detailed records are kept, it is estimated that about 9000 warrants for an approximate amount of £550.000 are pending collection. As I was informed, the problem of delays, in other District Courts, has shown considerable improvement after the employment of casual staff. Improvement was also observed at the District Court of Limassol within the year 2000. 4.5.8 Internal audit. A sample audit carried out at the District Courts of Nicosia, Larnaka and Limassol revealed that warrants were issued by casual employees with the fine amount different than the judgement amount. It is obvious, from the above, that no appropriate internal control is exercised over the issue of warrants. As I was informed, the warrants, which refer to the District Court of Limassol, have been corrected. 4.5.9 Returned unexecuted warrants. Over 30000 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 are almost impossible to locate. According to the Police,

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these warrants cannot be executed, because the accused persons cannot be located because of unknown new address, they are abroad, they have declared bankruptcy or they are aliens who left Cyprus. It was further observed that most of the unexecuted warrants are not accompanied by the form Pol. 45 (date of action taken), contrary to the relevant directive by the Chief of Police to all District Police Headquarters. 4.5.10 Collection of movable property warrant up to £500. It was observed that the Bailiffs of the District Court of Limassol, when collecting movable property warrants up to £500, do not deposit the relevant amount to the specified Deposit Account, but deliver the amount directly to the appropriate advocate on the issue of a receipt or properly stamped signed statement of collection at the back of form F.102 (Bailiff receipt) under which the collection of the warrant was effected. I observed that this procedure is contrary to the Accounting and Financial Instructions. 4.5.11 Court Orders and Decisions Books. The petition for the issue of a court order or decision for the first time is revenue stamped in the respective book with the amount of £2,50 plus £0,25 for each copy. I recommended, for purposes of modernisation and simplification of procedures and more efficient utilization of personnel time, that the possibility of abolition of orders and decisions books be considered, with respective increase of the fees for law suits, to cover the expenses for the issue of order or decision, both for the first time and for a specified number of copies. Part B 4.5.12 Inventory registers. The inventory registers of the District Courts of Larnaka– Famagusta have not yet been updated with the receipts and issues of equipment effected during the period 1996–1999. On my recommendation the approval of the Ministry of Finance was sought for carrying on stocktaking of the movable property and the creation of new registers, which was granted on 6.7.2000. 4.5.13 Incomplete updating of cases and criminal warrants 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 decisions. 4.5.14 Delay in the execution of arrest warrants. Several court warrants continue to remain unexecuted either at the courts or the Police, resulting to delays in the court proceedings of the relevant cases. It is pointed out that at the District Court of Limassol, on 16.2.2000, about 300 arrest warrants for the year 1994–1999 were pending. 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 pointed out that at the District Courts of Larnaka and Famagusta there were, at the end of 1999, over 3000 unexecuted writs and at the District Court of Nicosia about 1500. 4.5.16 Revision of court fees. Contrary to the provisions of the Ministry of Finance circular dated 30.3.98, court fees have not yet been revised. As I was informed the matter is under consideration. 4.5.17 Criminal cases for amounts due for V.A.T. Court decisions against those who do not comply with the provisions of the Value Added Tax Law, are confined only to the imposition of a fine, without any reference made to the amount of tax due, because according to section 55 of

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Law 246/90, the tax due can be collected only through a law suit at the District Court and not as a monetary penalty. Industrial Disputes Court Part B 4.5.18 Court Decisions – Publication. In my Report for 1998 I stated that Court decisions had not been published since 1992. During 1999 the volumes for the decisions of 1992, 1993 and 1994 have been published, whereas pending is the publication for the remaining years.

4.6 CENTRAL BANK OF CYPRUS Part A 4.6.1 Operating results. The net profit of the Bank amounted to £14,08 m., compared to £8,74 m. for 1998, i.e. there was an increase of £5,34 m., which was mainly due to the increase of the net income from interest received amounting to £5,4 m. Interest received for 1999 amounted to £69,8 m., compared to £72,8 m. for 1998, whereas interest payable amounted to £48,7 m., compared to £57,1 m. for 1998. In accordance with section 55 of the Central Bank Laws, the total profit amounting to £14,08 m. is transferred to the Consolidated Fund of the Republic. 4.6.2 Accounting ratios. The following accounting ratios give a general picture of the financial situation of the Bank: 1999 1998 % % Foreign Reserves to Assets 64,67 47,34 Commercial Banks Deposits to Liabilities 39,97 37,43 Loans to Government and Public Corporations to Assets 20,87 21,98

Foreign Reserves to Currency in Circulation 313,86 226,97 Currency in Circulation to Liabilities 20,60 20,86 4.6.3 Personnel. The Central Bank employed 303 persons, of which 279 were permanent and 24 temporary officers. The total cost for salaries, allowances, overtime, employer's contributions and other benefits amounted to £7.312.455, compared to £7.074.119 in 1998, i.e. there was an increase of 3,4%. The average cost per employee in 1999 amounted to £24.134. 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 31.12.99 amounted to £9.405 m., compared to £8.587 m. for 1998. 4.6.5 Recording of cashed Bonds. The equipment purchased for the recording and authenticity control of cashed bonds is not used, while at the same time the procedures followed before the purchase of the above equipment have been terminated, and as a result these bonds have not been recorded during the last years. The Governor of the Bank informed me that the required amendments to the software system and the revision of procedures have been completed and it is expected that this equipment will be put into operation before the end of 2000.

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4.6.6 Central Bank Premises. There are claims amounting to £5,7 m. by the contractors who undertook the construction of the building, for which no note is made in the accounts for 1999. The Bank has not yet submitted counter claims. I recommended the immediate acceleration of the Bank's processes for the settlement of outstanding matters and the inclusion of the relevant note in the Final Accounts. Furthermore, the hearing of the case regarding the legal action at the District Court Nicosia, which was filed by the architects, with regard to the building and their architectural work, has been completed. The court decision is pending. 4.6.7 Government Funds under the administration of the Central Bank of Cyprus. The interest deficit of the above Funds for 1999, which represents the difference between the guaranteed interest rate of 7% and the 6% interest rate granted to Treasury Bills amounting to £17,74 m. (£15,85 m. for 1998), has been charged to the Consolidated Fund of the Republic as in the years 1994–1998. In previous years this deficit was charged to the Profit and Loss Account. According to a relevant agreement the Ministry of Finance has paid to the Bank the cost difference between the guaranteed interest rate and the interest rate granted for Treasury Bills. I understand that the issue of the reduction of the guaranteed interest rate, in view of the general reduction in interest rates, is still pending at the Ministries of Finance and Labour. I recommended further that appropriate action should be taken by these Ministries, for the settlement of this issue the soonest possible. 4.6.8 General emergency plan. As I was informed an action plan has been prepared to deal with emergencies regarding earthquakes, fires and robberies. Efforts, however, should continue for the completion of the plan, in order that this would cover all possible cases of emergencies. 4.6.9 Tenders and planning for reprinting of paper money and savings bonds. It was observed that reprinting of paper money took place, without invitation to tenders, of £10 and £1 notes, for which the amount of £413.270 was paid in 1999, after renegotiating the price with the successful tenderers of the previous printing, to meet emergency needs. The same procedure was followed in some cases of reprinting of savings bonds in 1998. I hold the view that with proper follow up of stocks and relevant planning, the necessity for reprints without invitation to tenders will be avoided. The Commissioner informed me that new reprinting will be carried out after invitation of international tenders. 4.6.10 Tenders. The specified written tender procedure instructions, which have not been revised since 1984, present omissions and weaknesses. For strengthening internal control and proper follow up of tenders, I recommended that these instructions be revised on the same lines and principles governing the new Legislation for public tenders, which has recently been brought up to date and is in line with European Standards. As I was informed, the revision of the Instructions will be completed by the end of 2000. 4.6.11 Internal instructions. The preparation of complete instructions for the Bank's procedures, such as the operation of the Bonds Service and other Departments, is pending, although instructions have already been given by the Governor for the codification and completion of the existing procedures which cover all the Bank's operations. The Governor informed me that the internal instructions for the Swift operation have been completed and implemented with effect from 1 September 2000.

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4.6.12 Repurchase of vehicles. Four motor vehicles, which, according to the relevant contract signed, should have been repurchased by the supplier at a specific price, were repurchased at a price 30% lower, and the Bank suffered the relevant loss. According to the Bank's evaluation, the price offered represented the price of the motor vehicles at the time of repurchase. 4.6.13 International Accounting Standards. The whole issue of presentation of the Bank's accounts, in relation to the International Accounting Standards and procedures adopted by other Central Banks of developed countries, has to be considered soon and followed up on a permanent basis. Sufficient justification should be presented whenever the International Accounting Standards are not followed. It is pointed out that, according to the Bank's directives issued in December 1999, the commercial banks are obliged, within the framework of the effort of harmonisation with the European Union, to follow since 1999 the International Accounting Standards. 4.6.14 New accounting system. In 1999 commenced the implementation of the Bank's new accounting system, which, however, presents certain weaknesses, such as these relating to the procedures followed, which have not been recorded, the necessary statements with regard to the parts of the users and the control spots recorded in the system. I understand that efforts are made for the strengthening of the system as soon as possible, but there is no time schedule for full implementation in all sections.

4.7 MINISTRIES AND DEPARTMENTS

4.8 MINISTRY OF DEFENCE Part A 4.8.1 Internal Audit. Certain wrong expenditure charges were observed under the wrong subheads of the Budget showing the exercise of insufficient internal control, resulting, in some cases, to excesses in specific Voles being covered with savings from other Voles, contrary to the Budget Law and relevant directives. The Ministry informed me that the wrong charges referred to isolated cases.

4.9 NATIONAL GUARD Part A 4.9.1 Losses and damages caused to National Guard assets. At 31.12.1999 the settlement of damages, amounting to £349.957 since 1990, was still pending. During the year the amount of £20.658 was collected, whereas the amount of £30.437 was written off. Cost invoices of considerable value, relating to damages in materials and systems, usually remain pending for long periods of time, contrary to the relevant Standing Order. There were cases of lawsuits where the persons charged did not comply with the court decision, which was in favour of the Republic. The Ministry informed me that most cases of cost invoices pending refer to cases under court proceedings or at the stage of the required investigations, and requested the General Staff of the National Guard to accelerate the procedures of settlement. 4.9.2 Arms and ammunition. The stocks of arms and ammunition at 31.12.99 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, stocks were in agreement with

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the balances shown in stores records, with the exception of certain cases, which are under investigation. 4.9.3 Compensations paid. Compensations are paid through out of court compromises of court decisions or Council of Ministers decisions. During 1999 the amount of £587.440 was paid, compared to £285.986 for 1998, for lawsuits (£410.671) or compensations to individuals for losses or damages caused by the National Guard (£114.487). Also several ex gratia payments were made to the families of National Guardsmen who died during their military service (£40,000) or injured in traffic accidents (£22.282). An increase of compensations for losses and damages during exercises has been observed and I pointed out the necessity for the taking of precautionary measures for their minimisation 4.9.4 Food supplies. In some cases it was observed that suppliers did not conform 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 the non conformity of suppliers to its recommendations refer to minor deviations from the Cyprus Standards of specific foodstuffs, such as fat and humidity, which do not influence their suitability for human consumption. 4.9.5 Fuel (a) A sample test check carried out in the statements of fuel products submitted by the Units to the Fuel Branch of the Ministry, it was revealed that, further to the problems of delays in the submission of improperly completed monthly statements, in several cases deviations were observed in the averages of kilometres run per litre of fuel, for the same vehicles/machinery. It was, furthermore, observed that actual stocktaking of fuel reserves were not carried out at the end of each month by the Finance Departments of the Units, contrary to the Standing Instructions of the National Guard. With regard to deviations on the average of kilometres run per litre of fuel of certain vehicles/machinery, the Ministry of Defence believes that this is due to their operation in stable condition during alert or servicing, as well as their use on uneven grounds. Also, regarding delays in the submission of improperly completed fuel statements, the Ministry informed me that directions were issued to all Units for compliance with the provisions of the relevant Standing Instructions. (b) The computerisation of the fuel processing system, which is developed in cooperation with the Information Technology Department, is delayed, mainly due to weaknesses observed in the coordination function and the exchange of information between the Government Services involved and the General Staff of the National Guard. The Ministry of Defence informed me that the General Staff of the National Guard has prepared the relevant information records and the completion and implementation of the system by the Information Technology Department is expected. 4.9.6 Supply of undergarments (a) The Department of Government Purchasing and Supply requested the supplier to replace 2240 sets of vests and shorts, of a total value of £7.392, which did not conform to specifications, due to changes in size after being washed at 50o C. The supplier proceeded to their replacement and, in spite of the fact that the relevant laboratory tests proved again deviations in size, the Department proceeded to the acceptance of the products and to the issue of the relevant certificate of examination/receipt. The Department's view is that the

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deviations from specifications were not considered substantial by the Receiving Committee, and, therefore, according to the Regulations, the items received could be accepted. (b) The Technical Committee for Cloth and Clothing items decided to reject 1890 sets (vests and shorts) and 1500 vests, of total value of about £8.300, delivered by the supplier for the completion of the order, due to serious deviations from specifications. The supplier was requested to receive the rejected quantities and replace them, something with which he did not comply until the time of audit. The Department informed me that the Supplier has, in the meantime, replaced the above clothing items and their final receipt has been completed. 4.9.7 Deviation from the approved procedure of receipt of materials by the National Guard. In sum cases the approved procedures for the receipt of materials were not followed, contrary to the Public Tenders Regulations of 1999. Specifically, in two orders for the purchase of clothing sacks for the Navy and pullovers for the Navy and the Air force, of total value of about £18.000, the minutes for examination and receipt were not prepared, and there is no indication that laboratory tests were carried out before the relevant receipt. On the contrary a microscopic test was carried out for the above, which were received because of immediate needs. It is pointed out that for the clothing sacks and the pullovers, purchased for the infantry with the same orders, laboratory tests were carried out, according to which a large quantity of pullovers was rejected, as a result of changes in size after being washed. Also, a large quantity of clothing sacks was accepted, with a reduction in value of 1%, due to deviation from specifications on one parameter. The Department of Government Purchasing and Supply agreed that the approved procedures for the receipt of the above materials were not observed and stated that the receipt was effected in order to serve public interest in the best possible way. 4.9.8 Supply of powder (toner) for photocopying machines. The successful tenderer submitted two alternative tenders, one for the supply of authentic toner and another for equivalent toners, and the final award was for the supply of 56 different authentic toners. The tenderer delivered, in some cases equivalent instead of authentic toners, whereas he was paid for the whole quantity at authentic toner prices. This resulted to an overcharge for Government amounting to £1.371,88 (difference in price between the authentic and equivalent toners received). As I was informed the receiving committee accepted the equivalent toners on the advice of the Department of Electromechanical Services and the Department of Government Purchasing and Supply. 4.9.9 Delay in the execution of orders. It was again observed that suppliers delay in the execution of orders, either for the whole or part of the quantity, resulting to possible problems for the National Guard, without any measures taken as provided by the relevant tender Regulations. The Department of Government Purchasing and Supply informed me that several tenderers have already delayed in the execution of their orders, whereas in two cases the relevant guarantees were confiscated. 4.9.10 Non renewal of guarantees for pending orders. In some cases the guarantees deposited by the tenderers had expired and no measures were taken for their renewal, as provided under the relevant Regulations, in spite of the fact that the orders had not been completed. As a result it was not possible to confiscate guarantees in cases where tenderers

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were unable to execute the orders or declined to replace materials, which could not meet specifications. Part B 4.9.11 National Guardsmen transportation scheme. As I stated in my previous Reports, with regard to the implementation of the National Guardsmen transportation scheme, the following are observed: (a) Whereas the approval of the Ministry of Finance, dated 1.7.91, for deviation from the tender procedure, was based on the assumption that the annual expenditure for the operation of the schemes would be in the region of £110.000, this amounted to about £465.400 for 1999, compared to £431.542 for 1998. (b) An additional charge of 5% is made on the total invoice amount charged by transport companies, under the justification of covering increased costs for routes on holidays and Sundays. It is pointed out that the additional charge for 1999 was £22.162, compared to £20.550 for 1998. (c) After the meetings at the Ministry of Defence on 29.5.98 and 18.12.98, where the improvement of the existing routes and the strengthening of internal control procedures were agreed, the following were submitted in January 2000 by the General Staff of the National Guard: (i) Statement of routes on a unification/merge basis, (ii) five new routes for which the distance and determination of fares was requested from the Department of Road Transport, and (iii) a system for the strengthening of internal control procedures. The audit of specific routes operating in 1999 and 1998, revealed considerable deviations of expenditure between the two years. It was further observed that, in spite of the efforts for the upgrading of the scheme, complaints continue to be received by National Guardsmen regarding their transportation. The Ministry of Defence informed me the following: The increase of the annual expenditure is due to the implementation in 1995 of the revised Scheme for the Transportation of National Guardsmen, with the inclusion of new routes to accommodate guardsmen serving in mountainous and distant areas, the inclusion in the above Scheme of the soldiers of the Greek Force in Cyprus, as well as the imposition of V.A.T. and the increase in the number of National Guardsmen using transportation under the Scheme. The additional charge of 5% for routes on holidays and Sundays was approved by the Ministry of Finance. At a meeting which took place on 12.9.2000, the need for the improved implementation of the Scheme was reconfirmed, including the merge and creation of new routes, better planning and coordination with parallel strengthening of internal control procedures, for the improved operation of the Scheme and reduction of the relevant expenditure. With regard to the fluctuation of expenditure for specific routes during 1998 and 1999, this, according to the Ministry, is due to the staff differentiation of the Units. 4.9.12 Supply of cloth. As I stated in my previous Reports, cloth for officers' summer uniforms of total value of about £25.000, delivered by the successful tenderer was not according to

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specifications and due to his weakness to replace it, the Department of Government Purchasing and Supply, purchased in 1997, cloth from another supplier, paying an additional amount of £3.500. The supplier's guarantee of £2.000 was seized, while the remaining amount of £1.500 is still due. The Department of Government Purchasing and Supply filed a lawsuit against the supplier for the amount of £1.500.

4.10 MINISTRY OF AGRICULTURE, NATURAL RESOURCES AND ENVIRONMENT

4.11 DEPARTMENT OF WATER DEVELOPMENT Part A 4.11.1 Dhekelia water desalination unit – Increase of water purchased by Government from 20000 c.m. to 40000 c.m. daily. As I stated in my previous Report, on my recommendation, a committee was set up consisting of officers of the Treasury, the Planning Bureau and Water Development Department, in order to examine the real cost of production of the extra quantity of water and prepare a report regarding the reasonableness of the purchase price agreed. In September 1999, the committee submitted its report, which concluded that the extra quantity of water should have been sold by 7,5 cents per c.m. cheaper, i.e. £547.500 annually. The Director of the Department, in January 2000, sought the advice of the Attorney General, as to the possibility of negotiating with the contractor, for the immediate reduction of price of the extra quantity of water by 7,5 cents per c.m. The Attorney General suggested, in February 2000, to propose to the contractor that, as there are changes in the initial factors for price determination, and then the unit price of the extra quantity of water must be changed. In case the contractor declines the proposal, the Attorney General proposed the implementation of the relevant provisions of the contract for referring the matter to arbitration. The Director of the Department, in June 2000, informed the Director General of the Ministry that, according to the relevant sections of the contract, there are no grounds either for a price change or reference of the matter to arbitration, and suggests other ways of settlement, given the contractor's position that no difference exists. 4.11.2 Extension of Larnaka Desalination Unit. The Council of Ministers decided, in February 2000, the future increase of production of the Unit by 11666 c.m. of water daily. The Department undertook to negotiate the selling price of the extra quantity of water with the contractor and, in June 2000, presented the matter before the Central Committee for Variations and Claims, stating that the contractor insists on the price of 35 cents per c.m., which the Department considers high, considering the initial offer and the cost of the extensions The Committee decided to propose to the contractor the price of 33 cents per c.m. of water, but my Office, evaluating the data of the initial contract and those of the extension, expressed the view that the price of water of the extension should be lower. Finally, after negotiations, the contractor accepted in July 2000 the price of 32 cents per cubic meter of water. It is pointed out that the contract price for the initial quantity of the 40000 c.m. daily is 42,2 cents per cubic meter. 4.11.3 Main Water Pipeline from Tersefanou to Nicosia. As I stated in my previous Reports, there was a delay of 132 days in Civil Engineering works and the Department asked the Accountant General to pay to the contractor the amount of £164.081, as compensation for expenses incurred due to the delay. The financial claims of the contractor are mainly due to the

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Department's failure to include in the tender plans the underground services (E.A.C., CY.T.A. etc.), and also the serious problems and delays observed as a result of the supply of faulty spare parts and valves, which was effected through separate tenders. In his relevant reply the Director of the Department informed me that, since 1992, when the study of the project began, the direction of the pipeline was, for technical reasons, changed several times, the Department did not request the Electricity Authority and the Telecommunications Authority to identify their underground services. With regard to the inferior quality of the spare parts, the Director informed me that the suppliers contractors have been warned that the Department will proceed to deductions from the amounts due to the contractor. Although the matter was discussed with the contractor in several meetings, with no decision taken, in October 1999 the contractor submitted further claims, resulting to a total amount of £1.17 m. 4.11.4 Diarizos, Ezousa and Pafos Irrigation – Major Water Supply Schemes. As I stated in my Report for 1998, 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 total value of $1.5 m., 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. 4.11.5 Diarizos – Ezousa major water supply schemes – Irrigation Networks. As I stated in my Report for 1998, the Director General of the Ministry, in reply to my observations, informed me, in July 1998, that, in view of the new hydrological information, the considerable construction cost of the irrigation network and other reasons, the Ministry was planning the re- evaluation of the project and possibly the reversion of the total area of land to be irrigated. In March 2000 I requested the Director General to inform me whether re-evaluation of the viability of the above irrigation networks, the total expenditure of which was estimated to about £28,7 m. With regard to this issue the Planning Bureau expressed the view that, under the circumstances (continued drought, high cost), there is no justification, at the present stage, to proceed with the irrigation projects, and that priority must be given to water supply projects, in order to overcome the consequences of the drought. 4.11.6 Contributory Schemes. A sample audit carried out on Irrigation Schemes and Projects for the Improvement of Water Supply of Villages, revealed once again the serious weakness in the execution of the various works. The appropriate procedures required for the planning, execution and records kept 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 committees concerned are not properly informed. 4.11.7 Deposit Accounts. The balance of these accounts at 31.12.99 amounted to £2,3 m. and includes £0,86 m. for tender guarantees and £0,97 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

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account for future maintenance of the projects or for compensations regarding land acquisitions. 4.11.8 Arrears of revenue. The arrears of revenue at 31.12.99 amounted to £32 m., compared to £27 m. for the previous year, i.e. there was an increase of £5 m. During 1999 the collection of arrears amounted to £4,5 m., whereas the arrears for 1999 revenue amounted, at the end of year, to £9,2 m. which amount represents 28,93% of total arrears. In spite of the decisions taken and the efforts made for the collection of the arrears due, no substantial progress was observed. At 31.12.99 the amount of £3,8 m. was due by nineteen Municipalities and Community Boards, which refused to sign the relevant contracts for the amounts due. Up to now twenty repayment contracts were signed, for a total amount of £0,99 m. Furthermore, the Water Boards of Nicosia and Larnaka, which owe the amounts of £4,6 m. and £1,6 m., respectively, do not recognise their debts, for the reason that they represent the increase in selling price of water, without at the same time and for the same period increase of the rates of sales of water to consumers. Also the Water Board of Limassol has not paid the amount of £1,1 m., which represents water-pumping rights from Germasogeia area for the years 1987–1999, 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. 4.11.9 Xilouriko – Major Irrigation Projects. The total expenditure of the period 1991–1998 for the above project amounted to £237.454 and represents expenditure for designs, studies and preliminary works. In July 1998, the Ministry of Agriculture, Natural Resources and Environment decided the termination of further final study for one of the lake reservoirs, in view of the concluding results of the technical and financial study, according to which the project is not viable. Out of the total provision of £250.000 of the 1999 Budget, no expenditure was incurred. In the Budgets for 2000 a token provision of £10.000 is included, for commencement of constructions, in case of decision to execute the project for social or other purposes. 4.11.10 Utilization of Government Boreholes. According to the records kept by the Department of Geological Survey, at 31.12.98 the total cost of 256 boreholes, evaluated for the Water Development Department, was £2.134.754. The procedure of follow up, verification and prompt settlement of the obligations of the Department of Water Development to the Department of Geological Survey was implemented in 1998, and as a result the problems created for the appropriate follow up and execution of the annual budgets were reduced. As I was informed by the Director of the Department, for 85 boreholes of a total cost of £770.985, which were utilized a few years ago, the relevant amounts due have not yet been settled. Ways of securing the necessary funds are under consideration and also the respective share of contribution by each community, for which the borehole was utilized. 4.11.11 Construction and Maintenance Workshops. The main functions of Construction and maintenance workshops are the following: (i) The construction of pieces of pipelines, which are used for the construction of water networks of the various irrigation projects, or for the maintenance of existing sections. (ii) The maintenance of, mainly, electrical–mechanical and pumping equipment, as well as special equipment for water meters and telemeters projects.

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(iii) The supervision and installation of mechanical and electrical equipment of, mainly, large water supply projects (e.g. desalination factory, Tersefanou refinery, Vathia Gonia sewerage processing unit etc.) and the study, planning, and installation of pumping units. Similar to these activities are the preparation, examination of specifications and evaluation of tenders for the supply of electromechanical equipment of large water supply projects. The construction and maintenance workshops have, recently, undertaken the installation of chloride supply apparatus in water supply systems of villages. Services are also provided to other Government Departments, Water Boards and Local Authorities, when requested, which mainly consist in the construction of specialised pieces of pipelines for the needs of water networks. As the operational expenses of the workshops in recent years appears to be high, and the number or staff employed, in comparison with the work done, is considered large, my Office is examining as to whether the reasons for the establishment and operation of these workshops, to serve the needs of large water supply/irrigation schemes, continue to exist, or reconsideration of the whole matter should be made, based on the present state of affairs and the real needs of the Department. The completion of the performance audit, undertaken by my Office, is expected soon and the relevant findings will be submitted to Ministry of Agriculture Natural Resources and Environment. Part B 4.11.12 Staff and operation of Irrigation Schemes. In various projects the number of staff employed continues to be unproportionately high, compared to other projects, and also to the number of consumers. 4.11.13 Internal audit. It was again observed that the systems of internal control covering the various functions of the Department did not operate, in all cases, satisfactorily, resulting to errors and omissions. I repeated my recommendation that, due to the increased volume of work, the establishment of an internal audit section should be considered. 4.11.14 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. 4.11.15 Warehouses and storage areas. Large quantities of materials continue to be kept in open unprotected storage areas. The Director of the Department informed me that a special committee is reconsidering the whole matter, on the basis that only the absolutely necessary warehouses and storage spaces will operate. 4.11.16 Computerisation. A great delay is observed in the computerisation process of the services of the Department and especially of the invoicing system for the water supplied by the various Government schemes for purposes of irrigation/water supply. As I was informed the preparation of the necessary software package was assigned to the Department of Information Technology Services a long time ago.

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4.11.17 Hourly paid staff engaged in clerical duties. Contrary to the existing Regulations, hourly paid staff continue to be engaged in clerical duties and the wages of which are charged to the Funds of the project.

4.12 DEPARTMENT OF GEOLOGICAL SURVEY Part A 4.12.1 Drilling of boreholes. A number of borehole drillings was assigned in 1999, through tenders, to the private sector. According to the records kept by the Department, the cost of drilling with government drilling machines is very high and amounts to £17,51 per foot, on the average, compared to £3,85 of the private sector. I recommended that a study should be carried out in order to verify the reasons for the big difference observed in the cost and the efficiency of government drilling machines, compared to those of the private sector, and on which the necessary action taken will be based. The evaluation report of the results for borehole drilling through tenders, compared to those undertaken by the Department, along with proposals that would facilitate decision making, has not yet been submitted, despite the fact that 1999 was the fourth year running that the Department has been using the services of the private sector. 4.12.2 Idle drilling equipment. During 1999, nine drilling machines were used, the production time of which was 58%, while the remaining time (42%) represents idle time due to maintenance, operators vacation leave, weather conditions and waiting time for instructions. 4.12.3 Cost of borehole drillings for the Department of Water Development – Arrears of revenue. The total cost of 256 borehole drillings for the Department of Water Development amounted, until 1999 to £2.134.754. This amount which is still pending is not included in the arrears report for 1999, contrary to Financial Instruction No. 42. As I was informed an ad hoc committee has been set up, consisting of officers of the two Departments involved, to examine the matter and submit a relevant report for its final settlement. 4.12.4 Settlement of amount due by the Department of Water Development. An amount of £770.985, which represents the cost of 85 borehole drillings which were utilized by various communities and which amount is accepted by Water Development Department as an actual liability to the Department of Geological Survey, has not yet been settled. As the Director of the Department informed me, ways are examined for the securing of the necessary funds and the share of contribution of each community, according to the benefit received, for final settlement.

4.13 DEPARTMENT OF FORESTS Part B 4.13.1 Long term 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.

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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. Pursuant to the results of the examination, appropriate measures should be taken, including the annulment of agreements, wherever this is legally possible. 4.13.2 Licences for use of forestland. Through the annual "Licences to Use" under which forestland is conceded for agricultural purposes, the following were observed: (i) The farmers make use of a much larger area than the one provided in the relevant licences, because there are no detailed drawings 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 rents. (iii) The existing Regulations approved under section 14 of the Forests Law, do not include 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, in paragraph 31 of the Regulations under the title "Licence to Use" the Director of the Department has the authority to determine the fees payable of, inter alia, licences to use ".... 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, which would regulate the licences to use forestland and the fees payable. (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.

4.13.3 Agreement for the lease of forest land to "Agia Napa Nissi Developments Ltd. Under decision No. 50.237, dated 25.8.89, the Council of Ministers approved the amendment of section 13(1)(C) of the agreement, so that the rent is determined to 6% on gross income, for

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the period 1997–2003. The original agreement has been amended and the document of the supplementary agreement was signed on 30 September 1999.

4.14 DEPARTMENT OF AGRICULTURE Part B 4.14.1 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 on a 5% interest charge on 30 June of the following year, as provided under a relevant agreement. The arrears of revenue also include the amount of £49.000 which is due since 1995 by three tenderers, regarding the sale of agricultural products and, as I was informed, legal proceedings for one case have been completed and the collection process commenced, whereas the other two cases are still pending before the court. 4.15 LAND CONSOLIDATION DEPARTMENT Part A 4.15.1 Consolidation Schemes – Evaluation/Development. According to records kept by the Department, up to 31.12.99, 49 irrigated and 5 dry cultivation plans were completed, totalling an area of 12920 hectares. At the same time 18 new consolidation plans are in process and 45 under consideration for development, totalling the area of land to 17757 hectares. I requested to be informed whether an evaluation was made of the results of completed schemes, if the areas developed are systematically used by professional farmers and if these results represent safe criteria for future planning. The Director of the Department informed me that the up to date results of the consolidation schemes are satisfactory and the objective is their continuation and extension, taking into consideration social and other factors. 4.15.2 Contributory Schemes – Implementation of Land Consolidation Schemes. The revision of the accounting procedures and the advances accounts approved by the Accountant General, were implemented in 1999, resulting to the immediate allocation of expenses, according to approved percentages, and to the simplification of the system of settlement of expenses of the various projects executed. 4.15.3 Interest subsidy. The general deposit account for loan instalments was charged, up to 31.12.99, with the amount of £820.453 (£131.985 for 1998) as an additional difference between interest received and interest paid. 4.15.4 Loan instalment in arrear. The total of loan instalments due by landowners at 31.12.99 amounted to £507.705 (£409.561 for 1998) and represent capital £341.619 and interest £166.086. I pointed out the need for taking appropriate measures for the settlement of all arrears due. 4.15.5 General deposit account for loan instalments The balance of the account at 31.12.99 was £466.444 and represent instalments collected from various communities – landowners, to be returned to the Loan Commissioners.

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As the Director of the Department informed me, the reconciliation of loans issued by the Loan Commissioners with those due to the Department by landowners, in conjunction with the balance of the account, is at the final stage and its settlement is expected soon.

4.16 MINES SERVICE Part A 4.16.1 Arrears of revenue. The arrears of revenue at 31.12.99 amounted to £143.653 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. 4.16.2 Quarrying fees. According to records kept by the Service, collections, up to 31.12.99, amounted to £7.535.090, out of which £5.651.318, 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. Out of the remaining amount of £1.883.770, which represents 25% of the collections, the amount of £1.651.164 was used, up to 31.12.99, for the restoration of environment.

4.17 MINISTRY OF JUSTICE AND PUBLIC ORDER

4.18 POLICE Part A 4.18.1 Supply of Police telecommunication equipment. As I stated in my previous Report, after it was realised that the prices of wirelesses and spare parts purchased from the sole Police supplier, were high, an ad hoc committee was appointed to examine ways of removal of Police telecommunication network from the monopoly regime existing since 1991. The committee recommended the replacement of the whole secret conversation system, after it was realised that the present system was inferior, compared to the modern systems, regarding the level of security, operation and compatibility performance of wirelesses of other manufacturers. The evaluation of the Committee is that the savings to be achieved within the next five years, according to its recommendations, will amount to about £700.000, compared to the cost of expansion of the present system. The Tender Board adopted the recommendations of the committee and, through open tenders invited at the end of 1998, for the purchase of wirelesses, there was wide participation and the price of award was lower than the estimated expenditure and much lower than the purchase price of Police wirelesses in the last years. Specifically, whereas the 1993 purchase price – without tenders – of wirelesses from the only supplier was US$2.280 each, in the 1998 tender they were offered – exactly the same wirelesses – at the price of US$800 each. The price of wirelesses finally purchased from another supplier was US$320. With regard to the secret conversation system, tenders were invited in October 1999, through negotiations procedure, and the tender was awarded in December 1999 for a total amount of US$1.243.105. The installation of the new system has not yet been completed. 4.18.2 Purchase of Coastal Radar System. As I stated in my previous Report, the purchase procedure of the system commenced in 1990. Through a series of procedures and events, which are stated in detail in my previous Report, the Main Tender Board decided, in August 1999, that the technical committee appointed should proceed with the evaluation of the tenders and submission of the relevant report.

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As the preparation of the evaluation report and the tender award decision had not been completed by 8.7.2000, being the date specified in the Public Tenders Regulations (para 16(2)) as the last extension for tenders pending before the effective date of the above Regulations, the Attorney General, whose advice was sought on 31.7.2000, expressed the view that the tender procedure had expired on 8.7.2000. In view of the above, it was decided that tenders should be invited again, under an award time schedule until December 2001. It is pointed out that the Ministry of Defence, on the recommendations of the General Staff of the National Guard, proceeds to the materialisation of armament programmes and under structure installations, following the initial programme of delivery of the system, and possible delay in its delivery would cause serious operational implications to the National Guard. 4.18.3 Maintenance of Police vehicles. According to the results of the performance audit carried out by my Office, which are included in my Report for 1996, the average cost of maintenance carried out by Police workshops amounted, in 1996, to 7,61 cents per kilometre, whereas the respective average of CY.T.A. and, E.A.C., using the services of the private sector, is approximately half of that. Included in my recommendations was that, by the use of the service of the private sector, savings of about £1 m. annually could be achieved. In view of the above on the recommendation of my Office, a provision for the maintenance cost was included in the tender documents of January 1999, for the purchase of 100 Police vehicles. The prices given by the tenderers for precautionary maintenance was about 1.2 cents per kilometre. The Tender Board, in September 1999, decided to award the tender for the purchase of vehicles and, regarding maintenance, to allow the Police the option to select, either own workshops maintenance or assignment to the private section. At the meeting of the Tender Board my Office expressed the view that the assignment of maintenance to the private sector appears to be most beneficial to Government. The Police finally selected the option of assignment of maintenance to its own workshops. During the preparation of tender documents for a further purchase of 500 vehicles within 2000–2001, the Police requested that the condition for maintenance of vehicles by the private sector be excluded, because, for security reasons, the maintenance of vehicles should be carried out by its own workshops. The Minister of Finance in November 1999, adopted the views of my Office and those of the Accountant General, and decided that the relevant provision for maintenance by the private sector should be included, for purposes of comparison of the cost, and the final Government decision will be taken in consideration of security of the vehicles. The invitation for the new tenders is still pending. 4.18.4 Police vehicles – Repurchase agreements. In July 1999 I observed that according to the purchase agreements for 58 vehicles supplied to the Police in 1993 and 1994, these vehicles should have been returned to the suppliers either on kilometres run or time use criteria. The Police failed to return 8 such vehicles, which had exceeded the specified kilometres limit. As a result the provision of the agreements for repurchases by the suppliers at predetermined prices, beneficial to Government, could not be implemented. The Director General of the Ministry informed me in October 1999 that, as a result of delays in the orders/delivery of the new Police vehicles, and in order to overcome problems caused in the execution of Police duties, he agrees with the recommendation of the Chief of Police that the remaining 50 vehicles should not be returned to the suppliers. 4.18.5 Three year plan for the renewal of Police vehicles. Pursuant to a Council of Ministers decision, for the renewal of Police mobile fleet, tenders would have been invited for 600

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vehicles, with gradual delivery, i.e. 100 vehicles in 1998 and 500 vehicles – in equal numbers – in the next three years. Finally for the first 100 vehicles tenders were invited and awarded in 1999, while for the remaining 500 tenders have recently been invited. Delays were mainly due to differences of opinion during evaluation/award of the first tender and the preparation of specifications for the second tender, and as a result the Police was unable to return to the suppliers the 58 vehicles referred to in the previous paragraph, and the repurchase price of which would be beneficial to Government. Previously – in October 1999 – for meeting the immediate needs of the police, because of the delay observed in the implementation of the renewal plan of its fleet and its obligations to deliver 39 of the 58 vehicles referred to above up to 31.12.99, the approval of the Accountant General was sought, for the purchase of 40 more vehicles, under the negotiations procedure from the suppliers of the first 100 vehicles. The approval of the Accountant General was given in November 1999 and, as the award process of the additional vehicles was completed in March 2000, the Police did not proceed to return the 39 vehicles. 4.18.6 Weaknesses/omissions in the tender procedure (a) Tenders for the supply of special equipment for Police needs. In December 1999 I observed that the Police had requested the approval of the Accountant General for the purchase of equipment valued £94.500, which was sought contrary to proper procedures and without the approval of the technical specifications by the Tender Board. The Accountant General, to whom I submitted my observations, informed me in January 2000 that instructions were given to the Police, for preparation of specifications and their submission to the Tender Board for approval, before reproclamation of tenders. (b) Tenders for the supply of steel cupboards for the needs of the Immediate Action Mobile Unit. In March 2000 I observed that, whereas the above tenders had been submitted on 7.1.2000, their opening and initialling was done on 20.1.2000, i.e. after 13 days, instead of the soonest possible, as provided by the Tender Regulations. 4.18.7 Overtime work. The following amounts were paid to members of the Police Force for overtime work in the years 1996–1999:

1996 1997 1998 1999 £ m. £ m. £ m. £ m. 2,72 1,33 0,88 1,10

The amount of £2,72 m. paid in 1996 included an amount of about £1,0 m., for overtime for the period 1989–1993. The Council of Ministers 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 previous approval of the Chief of Police, and that all accumulated overtime without the previous approval of the Chief of Police, be written off. The total of accumulated overtime, approved or not, is estimated to, about, £3,7 m. For the ascertainment of the degree of implementation of the decision taken at a meeting 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, and for which

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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 Ministers decision dated 14.10.98. (b) Recording, 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 periods 1.6.93–31.12.98 and 1.1.99– 30.6.2000, for the purpose of submission of a proposal to the Council of Ministers for payment of the actual hours worked and the write off of the remaining hours. (d) Alteration of the charge procedure and overtime payment to members after 30.6.2000. (e) Implementation of the procedure of commuted overtime allowance to members of the Force serving at specific departments/services. In a relevant circular of the Chief of Police dated 31.8.2000, directives are issued specifying measures for the settlement of overtime problems. 4.18.8 Execution of criminal warrants. The warrants received and executed by the Police during the last three years are shown in the following statement:

1999 1998 1997 Balance 1.1 34.782 23.287 13.723 Received during the year 123.973 127.898 129.721 158.755 151.185 143.444 Executed during the year 83.542 93.822 102.312 Unexecuted 75.213 57.363 41.132 Returned to Court Registries 34.042 22.581 17.845 Balance 31.12 41.171 34.782 23.287

According to the above records, during 1999 83542 criminal warrants were executed by the Police, compared to 93822 in 1998, i.e. there was a decrease of 10280 warrants or 11%. The unexecuted warrants were 75213, compared to 57363 in 1998 i.e. there was an increase of 17850 warrants or 31,1%. Out of unexecuted warrants, 34042 were returned unexecuted to the Court Registrars, a number which is considered extremely high, while the remaining 41171 were in the hands of the Police for execution in 2000. 4.18.9 Out of court settlement of 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 implemented with effect from 1.7.97. Pursuant to the provisions of this Law 144841 out of court warrants were issued by the Police in 1999 out of a total of 145703 traffic reports, and the total amount of fines imposed was about £3,6 m.

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Out of these warrants 125255 have been settled and a total amount of about £3.208.885 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 £3 m. annually. In case of addition to the saving the cost of the courts (case recording, hearing and issue of warrant), then the saving exceeds the amount of £6 m. annually.

Considering the saving for Government from out of court settlement of traffic offences, as well as the substantial numbers of prosecutions which are still prepared by the Police (48551 for 1999), 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.

4.18.10 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 1995–1999, the number of members who retired and their emoluments, were as follows:

Year Members Expenditure £ m. 1995 205 1,83 1996 148 1,44 1997 101 1.54 1998 155 2,39 1999 196 2,75

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 be granted, on a time schedule basis, specifying at the same time the maximum limit of such accumulations. The Chief of Police, with a relevant circular, determined the maximum limit of accumulation of vacation leave, the amendment, however, of the relevant Regulations is still pending. 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 cases of six day week or 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, resulting, according to Police Headquarters, to the allowance, whenever possible, of leave of absence beyond the annual leave eligible, to 1107 members and so achieving a reduction of 4,3% of the total accumulated vacation leave.

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4.18.11 Special Constables. Pursuant to section 30 of the Police Law, from 1993 to 1999, 325 new Special Constables were employed, increasing their total number to 375, as stated below:

Year Special Constables Basic Salaries £ 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

It is pointed out that during the period 3–5.1.2000 106 Special Constables were employed, who, as I was informed, had either taken in the past written examinations for Permanent Special Constables and Constables or succeeded grades 75% and 40% and above, respectively, or expressed interest, in writing, for employment as Special Constables, who had specialised qualifications. Their employment aimed at the replacement of an equal number of Special Constables who were appointed in 1999 in the Police as Constables or Permanent Special Constables. The process of employment of the 106 Special Constables was discussed at a meeting of the Parliamentary Committee of Statutes, Values and Ombudsman on 27.3.2000, in relation also to section 3(2) of the Supplementary Appropriation No. 4 of 1998 (38(II)/98), to cover, inter alia, the salaries of 40 Special Constables for guarding the installations of the Cyprus Telecommunications Authority, where it is pointed out under a relevant note that the intended appointments of Special Constables will be made in accordance and on the basis of appointments of Constables. It is pointed out that the same note is also repeated in the Budgets for the years 1999 and 2000. With regard to the interpretation of the explanatory notes and whether these referred only to the intended appointments of the 40 Special Constables or all the appointments of Special Constables, my Office requested the advice of the Attorney General of the Republic, and according to which the notes referred to above concerned only the intended appointments of the 40 Special Constables for guarding CY.T.A. installations. It is pointed out that in the Supplementary Appropriation No. 9 of 2000, which was published on 21.7.2000, which includes, inter alia, additional funds to cover the salaries of already serving Special Constables, it is stated that no new Special Constable appointment will be made, before the approval of Regulations by the House of Representatives, which will govern the terms and procedures of their appointment. It is also clarified that in case of immediate need, the vacancies will be published and selection will be made after successful written examinations. Included in the Special Constables are 27 persons who are positioned for guarding the installations of the Electricity Authority of Cyprus, the salaries of which is reimbursed to Government by E.A.C. The appointments of the 40 Special Constables for guarding CY.T.A.

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installations are expected to be made in 2000 and their salaries will be reimbursed by the Authority, through revenue credits. It is noted that the Regulations providing for 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, the approval of which is pending. 4.18.12 Police houses. The expenditure for the maintenance of 183 Police houses used as residence by members of the Police Force, amounted in 1999 to £165.215, compared to £193.136 for 1998, whereas the revenue from rents received and the saving from rent allowances was about £68.000, compared to £72.000 in 1998. The Council of Ministers decided on 14.10.98 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 to a planning scheme prepared by the Department of Public Works. Until the implementation of the plan, the Chief of Police, in his letter to the Director General of the Ministry of Justice and Public Order, suggested, amongst other things, that the rent deducted from the salaries of the residents 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 is also decided the consideration of the legal aspect of the matter with regard to the standing rent agreements and the Rents Law. It was further decided that a new meeting should be held, after the study and submission of the records, for final decision and the up dating of the Council of Minister. 4.18.13 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 Organisation, with the imposition of a relevant fee on the ticket price of athletic meetings, no compliance was, however, shown on the part of the Organisation. 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 Organisation and deposits the amounts to the relevant Police Revenue Vote. According to Police records, the total obligation of C.S.O. for 1999 amounted to £539.063, compared to £531.453 for 1998. The whole amount due for 1999 has been deducted from the subsidy and paid to the Police. According to the Ministry of Finance, the above procedure shall continue for as long as C.S.O. refuses to impose the fees agreed. 4.18.14 Arms and ammunition. During the year a sample test check was carried out 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. 4.18.15 Audit of collections. A spot examination carried out revealed a deficit amounting to £419,50, which was deposited to the bank the following day. In another case an amount of £140, although collected on dates much earlier than the date of audit, it was not, however,

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deposited at the District Administration, or found in the hands of the cashier and was deposited after it was pointed out by my Office. The above cases are the result of serious weaknesses in the system of internal control, which was pointed out by my Office, without, however, any corrective measures taken. 4.18.16 Supply of foodstuffs for the Police Academy. For the purpose of reducing the expenses for proclamation and award of tenders and securing better prices through the invitation of a unified tender, I suggested that the possibility be examined so that the needs of the Police Academy in foodstuffs be included in the tenders invited by the Medical Services and Prisons, instead of inviting separate tenders. As I was informed my suggestion is under consideration by the Police Academy. 4.18.17 Fuel. As I stated in my previous Reports, certain Police vehicles presented problems, which, according to the Workshop, were due to inferior quality fuel. Samples of gas oil were taken, which were sent to the Government General Laboratory for examination, where the existence of water in fuel was revealed. The Treasury with a letter to the Police dated 5.5.98, taking into consideration the negative results of the tests carried out at the General Laboratory, specified the measures to be taken for securing the quality of fuel, which, inter alia, include sample taking during delivery of fuel, which must be undertaken by a committee in the appropriate way and in the presence of a representative of the supplier. Such sample takings were carried out only for some deliveries of fuel. Part B 4.18.18 Replacement of Police personnel performing clerical and accounting duties. The Council of Ministers approved, on 16.6.88, 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 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, under the light of the present situation and state of affairs, and also the needs of the Police Force. 4.18.19 Excesses of the 1994 Budget. As I was informed, no covering approval has yet been secured for the excess expenditure amounting to £90.163, which was observed in 1994 under the Vote "Government Employees Emoluments". A relevant Bill has been submitted to the House of Representatives since 22.2.96. The Director General of the Ministry of Justice and Public Order, with a letter dated 8.3.2000 to the Director General of the Ministry of Finance, requested to be informed of the steps to be taken for the settlement of the excess. 4.18.20 Copy of firearm registration certificate. In my previous Reports I stated that Divisional Police H.Qs. 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 of 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 lies, is taking steps towards the amendment of the relevant legislation, for final settlement.

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4.18.21 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 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 settlement of the problem relevant amendment Regulations have been prepared, the approval of which is still pending.

4.19 FIRE SERVICE Part A 4.19.1 Fire protection. As I stated in my Report for 1998, 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 buildings 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. The Director of Fire Service requested, on 17.5.2000, the Director General of the Ministry of Justice and Public Order to call a meeting for the examination of the whole matter. At a meeting, which took place 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 Fire Protection Regulations. 4.19.2 Calls. The following statement shows, for the last three years, the number of calls for help provided by the Fire Service, the number of vehicles used by the Force and the cost of damages caused by the fires.

1997 1998 1999 Calls 3.408 4.124 4.857 Fire Service Personnel 602 599 602 Vehicles 137 145 152 Damages £4.517.497 £2.955.473 £12.697.183

4.19.3 Compensation claims. For two cases, the handling of which has been undertaken by the Attorney General of the Republic, claims were filed for damages, which, according to the claimants, were caused by the Fire Service. The claims are estimated to exceed £4.000. Part B 4.19.4 Law suits against the Republic. In two cases legal action was taken against the Republic, with the allegation of damages caused due to the negligence of the Fire Service. The hearing of the cases is still pending. 4.19.5 Vehicles repair / assembly workshop. A total of 17 persons are employed on a full time basis at the Service's workshop, dealing with the repair of fire fighting vehicles and other equipment. 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

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out of a study in order to be ascertained whether the employment of 17 persons at the workshop is necessary. The acting Director of Fire Service informed me that the workshop's activities have increased, as a result of the increase of the number of fire fighting vehicles, the increased maintenance and the multiplied problems due to increased incidents.

4.20 RENTS SUBSIDY FUND FOR DISPLACED AND AFFECTED PERSONS Part A 4.20.1 Operating results. The expenses of the Fund are covered by state subsidy, which, in 1999, amounted to £1,87 m., compared to £1,81 m. for 1998. According to records kept at the Fund, the number of persons subsidised in 1999 were 3561, compared to 3350 for 1998. The monthly average of rent allowance was £62,41, compared to £54,90 for 1998.

4.21 PRISONS Part A 4.21.1 Prisoners – Detainees. The number of prisoners and detainees at 1.1.99 was 246. During 1999, 1599 persons were imprisoned and 1574 were released. At 31.12.99 there were 271 prisoners and detainees. The prisoners and detainees are occupied in various construction works relating to the improvement of security conditions and their standard of living. They are also occupied in various other activities, such as the kitchen, the coffee shop, and the farm, in the cleaning of the internal and external areas of the Prisons etc. Additionally, 361 prisoners, according to their specialities and interests, worked on various prison training workshop programmes. During 1999 lectures were organised on twelve different topics, which were attended by 170 prisoners. 4.21.2 Food cost. The total food cost for prisoners and Police detainees who, as from 28.4.99, are held in Prison areas allocated to the Police, amounted to £170.238, compared to £140.261 for 1998. On average 294.4 prisoners were catered per day, with an average daily cost per prisoner of £1,58, compared to 241,3 and £1,59, respectively, for 1998. 4.21.3 Overtime. The expenditure of £90.000, initially budgeted for 1999, was revised to £157.698, whereas the actual expenditure amounted to £208.875, compared to £98.398 for 1998. The considerable increase of the expenditure incurred of £110.477 or 112,3%, compared to 1998, is attributed to the cost of security guarding provided during prisoners hospitalisation, guarding of the newly established Prison's medical wing and to the increased number of sick leave days allowed to the staff, resulting to overtime replacements. For the reduction of overtime, the Director of Prisons suggested that arrangements should be made at the new General Hospital, now under construction, for a security chamber to be included, so that the guarding of hospitalised prisoners will be provided with less staff. He recommended further that immediate appointments must be made with regard to vacant posts.

4.22 MINISTRY OF COMMERCE, INDUSTRY AND TOURISM Part A 4.22.1 Development Budget – Unspent Balances. A significant part of the development expenditure remained unspent. Specifically, out of the total of budgeted amount of £16,34 m., the amount spent was £10,76 m. i.e. an amount of £5,58 m. or 34,15% remained unspent.

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I pointed out that the planning and preparation of the budget should be within the Ministry's spending capabilities. The Ministry informed me that the non-execution of the Budget is due to shortage of staff, and also to delays in the execution of work by other Departments/Services regarding the Ministry's projects. 4.22.2 Arrears of revenue. The arrears of revenue at 31.12.99 amounted to £1.135.000, compared to £1.034.722 for 1998. Out of total arrears the amount of £694.801 or 61,2% concerns arrears for previous years. 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 should have proceeded to measures for the termination of the relevant lease agreements. Several cases, however, under the process for the termination of the agreements, are pending at the Law Office of the Republic. 4.22.3 Organisation and administration of Industrial Estates. The above matter is pending since 5.9.91, when the Council of Ministers appointed a Ministerial Committee to examine the whole matter, which further appointed a working group with the objective of finding ways for the allocation of maintenance to Local Authorities. The recommendations of the working group were submitted in January 1997, without, however, a consensus of the Ministerial Committee achieved. The Ministry stated that this objective has been abandoned, because of the unwillingness of Local Authorities to undertake their administration and maintenance. In October 1998 the tenants of the Industrial Estates to be allowed to pay to Government the cost of the estates, with payment of a nominal rent. The Ministry stated that this request is under consideration, there are, however, difficulties in compromising the views of Government and industrialists with regard to the value of the estates, which the tenants will have to pay, and the responsibilities of the Industrialists Associations on taking over themselves the administration of Industrial Estates. 4.22.4 Sewerage fees of the industrial estates of Limassol and Agios Athanasios. After a relevant legal advice of the Attorney General of the Republic dated 12.2.96, the total amount of £342.377 was paid, up to 31.12.99, to the Sewerage Board of Limassol–Amathus for sewerage fees and charges for the years 1996–1999, which the tenants of the industrial estates of the above industrial areas refuse to pay to the Board, which according to the relevant lease agreements signed, have to pay. My Office recommended that the necessary measures should be taken for reclaiming the above amount. The Ministry stated that all tenants are requested to pay and those who refuse to do so are referred to the Attorney General for court proceedings. 4.22.5 Energy Application Centre. On 30.12.98 the Council of Ministers approved the participation of the Energy Application Centre of the Ministry to the network of Organisations for the promotion of Energy Technology, as cooperating member (FEMOPET–CYPRUS), and the establishment of a management committee for its financial administration. On 29.12.98 an agreement was signed between the Energy Application Centre and General Management for Energy of the European Union, amounting to 260,000 Euros, for the establishment of an Organisation for studies, for defining the limits of energy saving in the Industrial and Tourist Sector, with a European Union contribution, which was specified to 50% of total cost.

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The total expenditure at the completion of the agreement on 31.12.99 amounted to only 128.875 Euros, whereas the remaining amount of 131.125 euros remained unspent. 4.22.6 Financial obligations to the Foundation of Technology. An agreement was signed between Government and the Foundation of Technology for rendering services and subsidisation of studies in industry for the period 1.1.96–31.12.98. The agreement was revised on the part of Government, after a decision of the Directors General of the Ministry of Commerce Industry and Tourism and the Planning Bureau on 5.2.98, retrospectively from 1.1.96, when it was decided that Government would cover deficits of the Foundation up to a maximum amount of £120.000 annually. Despite the revision of the agreement, the Foundation continued to charge the Ministry on the basis of the previous agreement, and consequently, on 31.12.99, according to its charges, the Foundation demands the amount of £566.175, whereas the Ministry, according to its own calculations, appears to owe the amount of £110.806 only. On 29.12.99 the Council of Ministers decided the granting of an annual subsidy to the Foundation for the implementation of its development programme, which will be estimated on the basis of subsidies paid by the Foundation to those benefited by the subsidy scheme, as well as the deficit resulting from operational expenses, with maximum subsidy amount of £120.000 annually. 4.22.7 Internal control on subsidy payments (a) General. Weaknesses and omissions were observed in the system of internal control regarding the payment of subsidies on the basis of operation of the various schemes of the Ministry. For the improvement of the system of internal control, I recommended that a second examination should be carried out on the payments of subsidies by authorised members of the accounts branch of the Ministry. The Ministry informed me that the accounts branch is unable to carry out a complete examination, because of shortage of staff. (b) Examination visits on machinery or/and equipment for which subsidy was paid. The visits by officers of the Ministry at the premises of industrial units, for supervision of the machinery and equipment, which have been subsidised under the various Subsidy Schemes, are limited. It must be taken into consideration that, in case of termination of operation of the unit, or in case of alienation of machinery or/and equipment, or even in the case of moving them, within a period of five years from the date of purchase, the industrial unit is obliged to return the percentage of subsidy which is equivalent to the value of machinery or/and equipment, after deduction of depreciation, for which subsidy was paid. I pointed out that the visits, after the payment of subsidies are necessary. The Ministry informed me that its objective is for a second visit to take place in each unit, which secured subsidy before the completion of five years from the date of purchase of the machinery. (c) Annual progress report and keeping of register. With a view to an improved evaluation of the results of each scheme I recommended the preparation of an annual report for each Scheme separately. In addition I recommended that, due to the increase of the Schemes, the keeping of a register for each Scheme, into which the applications together with other relevant follow up documents would be recorded. 4.22.8 Scheme for granting loans and subsidies for technological upgrading of the manufacturing sector. The implementation of the Scheme commenced in November 1996

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and was completed on 31.12.98. The examination of applications submitted until 31.12.98 continued in 1999 and until 31.12.99 439 applications for subsidies and 253 applications for interest subsidies had been approved. The amounts paid are £9.115.976 for 409 units and £1.593.554 for 245 units, respectively. At 31.12.99 pending was the examination of 319 applications for grants of subsidies, which were submitted during the years 1997 (31) and 1998 (288) and 188 applications for interest subsidy, which were submitted during the years 1996 (1), 1997 (13) and 1998 (174). On 2.6.99 the Council of Ministers approved the New Industrial Policy, which includes the Scheme for Granting Subsidies for the Technological Upgrading of the Conversion Industry, which is a continuation of the initial Scheme, but with amendments, especially regarding percentages and the maximum limit of subsidies. Under the same decision the Council of Ministers terminated the operation of the loans Scheme for the technological upgrading of the conversion sector. Furthermore, on 17.12.99 the Council of Ministers approved subsidy grants equal to 50% of that provided in the Scheme, and maximum amount per application £50.000 in all cases of applications submitted during the years 1996–1998 and secured or will secure grades from 55 and under 60 units. The cost involved was estimated to about £565.000. 4.22.9 Scheme for the establishment of district associations for the trade of fruit, vegetables and meat. The implementation of the Scheme commenced in 1994 and up to 31.12.99 the expenditure amounted to £135.515 for 10 units. The Council of Ministers appointed on 26.11.97 a Ministerial Committee to examine further the enlargement and improvement of the Scheme, but there was, however, weakness in finding common ground, and the Council of Ministers decided on 28.4.99 to refer the matter for further consideration and decision to the Ministers of Commerce, Industry and Tourism and Finance, without re- emergence to the Council, unless they disagree between them. On 9.7.99 the competent Ministerial Committee decided the enlargement and improvement of the motives of the above Scheme, which was renamed to Motivation Scheme for the Establishment/Expansion of District Associations for the Trade of Agricultural/Livestock and Fishery Products (Producers Associations), the total cost of which is estimated to amount to £2,2 m. With this decision provided, inter alia, is the establishment of a Second degree Coordinating Association for Gardening Products, the objective of which is to plan production and coordinate trade and disposal of products of all Associations on a Pancyprian basis, the establishment of which is still pending. At 31.12.99 the total of loans under government guarantee, according to the Scheme, amounted to £1.736.400. 4.22.10 Scheme for the technological upgrading of canning units for the export of fresh fruit and vegetables. The Scheme was initially approved for a three year period and, until its completion (4.6.99), the total expenditure amounted to £131.125 for subsidies granted to 5 units, compared to about £1 m. which was the estimated cost of operation of the Scheme. At the same date pending was the examination of two applications for subsidies and two applications for loan interest subsidy. On 14.7.99 the Council of Ministers, in view of the fact that the largest part of the budget (£900.000) for the operation of the Scheme remained unspent, approved an extension of the Scheme for a further period of two years, i.e. until 4.6.2001, and cancellation of the interest subsidy. At the same time the scaling of subsidy paid was approved, so as to be possible for as much a greater number of canning units to benefit through the motives offered by the Scheme.

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4.22.11 Government Scheme for strengthening the competitiveness of the export industry. The Scheme was originally approved to operate in 1997 only. On 29.1.98 the Council of Ministers decided the validity period of the Scheme for one year and the relevant expenditure amounted to £2.933.436 for 237 units, compared to £2.863.435 for 238 units for 1997. On 17.2.99 the Council of Ministers decided the extension of the Scheme for a third year, with different criteria and the relevant expenditure amounted to £2.538.126 for 242 units. 4.22.12 Grants to manufacturing industries for the installation of pollution control systems (a) Implementation and criteria of the Scheme. The implementation of the Scheme commenced in 1995 and the total expenditure for the years 1995–1999 amounted to £661.841 for 18 units, while the examination of 20 more applications was still pending. The initial period of the Scheme expired on 17.2.98, without implementation, however, to a large extent, of the basic objectives of the Scheme, which include assistance to conversion manufacturing units to install pollution control systems, for which the Council of Ministers approved an expenditure of £6,75 m. The reasons for the limited success of the Scheme are mainly due to the very slow implementation of the relative legislation and the installation of the above systems by the manufacturing units and to the weakness of applicants to secure and submit all the required documentation. The Council of Ministers decided on 7.8.98 the extension of the Scheme up to 31.12.2003. Still pending is the amendment of the relevant terms and criteria, which were agreed at the Advisory Grants Committee of the Scheme and for which a relevant proposal to the Council of Ministers is expected to be submitted. (b) Industrial pollution control systems. It was observed that no control is exercised over the compliance of companies to the relevant terms and conditions set for the approval of the grants. I recommended the keeping of a register into which every industry which received a grant, the time of visit of the responsible officer at the unit, and whether the entire system is operating satisfactorily or not, will be recorded. 4.22.13 Export Credit Guarantee Service. At 31.12.99 the contingent liabilities of Government for outstanding guarantees issued for purposes of encouragement, assistance and development of trade with other countries, amounted to about £2.6 m. In addition there was an outstanding amount of £10,6 m. for compensation 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 with regard to compensations paid for exports to Iraq, Kuwait and Russia, collection of the relevant amounts is very probable, once the existing problems and difficulties are overcome. 4.22.14 Schemes for loans granted under Government Guarantee. According to statements submitted to my Office, the total of loans issued amounted to £7.765.680. At 31.12.99, the total of loan balances under government guarantee amounting to £2.610.702 was £3.918.865. It was observed that in several cases, persons or companies to whom guarantees were issued fail to fulfil their obligations to Banks and Government runs the risk to undertake repayment. It is pointed out that instalments in arrears for these loans amounted to £2.500.848 and include significant amounts due by companies for which an investigation was carried out by the Law Office.

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As I stated in my previous Reports, serious weaknesses and omissions were observed in the internal control exercised over the Schemes, especially regarding the follow up and the taking of measures against those who are not consistent with their obligations. On my recommendation the Ministry of Commerce, Industry and Tourism prepared and submitted a system of internal control of the Schemes to the Accountant General, who requested that the frequency of the spot visits should be specified, of officers of the Ministry at the operations area of companies which received loans under government guarantee, and classification of the measures to be taken by the Guarantees Committee, in the case of non compliance of debtors. The measures taken, however, were not enough and the situation continues to deteriorate, and as a result Government is expected to pay an amount of £500.000 over and above the amount of £263.695, which has already paid as guarantor. My Office expressed the view that the involvement of various Ministries in the matter, at different stages each, hinders decision-making and final settlement and recommended the consideration of each case separately. Analytically the various Schemes are presented as follows: (a) Outstanding guarantees (i) Schemes of government guarantees for loans or/and credit facilities. At 31.12.99 the balance of loans issued under government guarantee were £712.848 for the Old Scheme (75%), £519.143 for the New Scheme (75%) and £2.123.991 for the Scheme of Government Guarantees for the Industry (90%). It was again observed that several debtors fail to pay to the banks the loan instalments due, resulting to the increase of the arrears. The instalments in arrear at 31.12.99 included the whole balance of loans for the Old and New Scheme (75%) amounting to £1.231.991 (£712.848 and £519.413 respectively and an amount of £705.974 for the Scheme for the industry (90%). The financial condition of some debtors is not good and there is considerable risk for Government to be charged with the amounts of the guarantees. Until 31.12.99 Government has paid, as guarantor, the amount of £186.748 for 8 debtors of the Old Scheme. (ii) Scheme of guarantees for loans issued by Commercial Banks to affected persons or displaced businessmen. The Scheme operated during the years 1983–1989 and loans and bank facilities were approved amounting to £440.001, under 90% guarantee. At 31.12.99 the balance of outstanding loans was £82.940, which has already been payable. Up to 31.12.99 Government has paid as guarantor the amount of £76.947 for 6 debtors. (iii) Scheme for financing small industrial units. The Scheme operated until the end of 1982, according to the agreements signed by the Development Bank with the International Bank during the year 1976 and 1979, which provided, inter alia, government guarantee to the Development Bank for 75% of the loans issued according to the 1976 agreement, and 50% of the loans issued according to the 1979 agreement. Later, pursuant to Council of Ministers decision No. 24263 dated 29.2.84, the extension of the Scheme was approved for the years 1983 and 1984, by granting government guarantees covering 50% of the loans issued. At 31.12.99 delay was observed in the repayment of loans amounting to £479.943 due by 22 businesses and the government liability being £205.809. The Development Bank is responsible for the collection of the loans, but as it

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was observed, most of the businesses have closed down and the Bank claimed, since 1992, the relevant guarantee from Government for 14 of the above. (b) Scheme for the issue of loans to displaced and affected businessmen. The Scheme operated during the years 1987–1993, and loans amounting to £1.145.939 were issued, through the Cyprus Development Bank. At 31.12.99 the balance of loans was £1.016.819, which included outstanding instalments amounting to £896.012. The Cyprus Development Bank is responsible for the follow up and collection of loans. Part B 4.22.15 Utilization of Government Industrial Estates. Despite the assurances of the Ministry, since May 1996 no investigation has been carried out to verify the degree of utilization of industrial estates at the Government Industrial areas, although it has been observed in the past that various premises have been used for purposes other than those specified in the lease agreements. It has been further observed that very few visits take place at the Government Industrial Estates, and as a result the various problems, such as the use of premises as shops for retail sale, arbitrary intervention of government land, sub letting of premises without the approval of the Ministry and other, which do not conform to the terms of lease agreements, are not promptly traced. My Office recommended the increase of visits to these areas on a scheduled regular basis, so as the various problems can be tracked down promptly and proper measures taken. The Ministry informed me that my recommendations are under consideration. It stated, however, that the examination of about 500 tenants of industrial estates is impossible, because of the limited staff available. 4.22.16 Handling of used lubricants. On 29.9.99 the Council of Ministers decided that a technical and financial study should be carried out for the collection, disposal and recycling of used lubricants, for the purpose of solving the problem created through their uncontrolled disposal. The relevant agreement for carrying out the study was signed on 18.9.95 and the study was completed after a delay of 18 months, in July 1997. The implementation of the relevant recommendations is since then pending and, on the recommendation of the Ministry in conjunction with other parties involved, the Council of Ministers decided on 11.11.98 to assign to the Minister of Agriculture Natural Resources and Environment the setting up of a "team for used lubricants", in which representatives of other Ministries would participate, and which, according to the results and recommendations of the study, to form and implement a complete plan for the collection, disposal and recycling of used lubricants in Cyprus. 4.22.17 Cyprus Organisation for Standards and Quality Control. The preparation of Regulations which will contribute to a better implementation of the law and the operation of the Organisation, is still pending. The relevant bill, which provided for the full independence and autonomy of the Organisation, was rejected by the House of Representatives on 20.4.2000. The Ministry informed me that, recently, the Council of Ministers decided the separation of the functions of the Organisation and part of them to be taken over by a private company for the processing of the relevant certification. As the Ministry has already informed me, the implementation of the legal framework of the Organisation is in process, in order to cover the new needs, while at the same time a study is carried out for the efficient taking over of responsibility for certification by the newly established company.

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4.22.18 Weights and Measures Service. The Service is still inadequately equipped and staffed and, therefore, it cannot fully respond to requests for examination of equipment in both the private and public sectors. The carrying out of a detailed study by E.U. consultants regarding the measures that should be taken for rendering the Service capable to meet its objectives effectively is still pending. 4.22.19 Competition and Consumers Protection Service. Despite the increase of work, the Service has not yet been staffed and equipped adequately, in order to carry out specialised inspections. The Ministry informed me that, for the time being, the needs of the Service for tests or/and examinations of products are satisfied by other Services and that, in very few cases it was necessary to send samples abroad for tests/examinations.

4.23 DEPARTMENT OF REGISTRAR OF COMPANIES AND OFFICIAL RECEIVER Part A 4.23.1 Registrations, bankruptcies, voluntary liquidation and write offs. The registrations of companies, the voluntary liquidation and write offs of companies, as well as bankruptcies of individuals, were, for the last three years, the following:

1999 1998 1997 Registrations: Companies with mixed equity participation 6866 6077 6544 Partnerships and Trade Names 1330 1212 1110 Shipping Companies 369 395 497 Off-shore Companies 1366 1238 1265 Foreign Companies 147 80 67 Total 10078 9002 9483 Bankruptcies and liquidations: Individuals 475 444 286 Companies 150 121 87 Total 625 565 373 Voluntary Liquidations: Companies 83 122 95 Writes off: } Companies with mixed equity participation, Shipping } 1195 1570 and Off-shore Companies Partnerships *8000 } 13 20 Trade Names } 37 42 Foreign Companies } 10 10 Total 8000 1255 1642

* No details were given. The campaign undertaken, i.e. to request the companies to submit their documents in arrear, and those companies, which do not respond to be written off, resulted to a considerable

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increase in the write offs of companies. The number of companies to be written off is expected to increase in the year 2000. 4.23.2 Backlog of Work. The backlog of work continues to be considerable in the sections of Companies, Trade Marks and Liquidations/Bankruptcies, as well as Charges and Mortgages. As I pointed out in my previous Reports, the increasing backlog of work does not contribute to the normal operations 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, several 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 for 1999 was increased by £1 m. The revenue, however, from returns, which had not been submitted up to 31.12.99, is estimated to about £4,3 m. 4.23.4 Overtime. The expenditure for overtime work amounted to £133,111, compared to £90.535 for 1998, i.e. there was an increase of £42.576 or 47,03%. Despite the intention of the Ministry of Finance to provide additional funds in order to meet the increased volume of work, it proved impossible for these to be utilized because the number of staff employed remained the same. 4.23.5 Purchase of Services. Funds amounting to £54.370 for purchase of services remained unspent, because the relevant hiring of services did not occur. 4.23.6 Computerisation (a) The full implementation of the agreement signed for the above purpose presents a delay of about 4 years. (b) According to a report of the Department of Information Technology, it appears that the Department's personnel is not adequate for the implementation and normal operation of the system. I recommended that all necessary arrangements should be made regarding human recourses, so that no further delays be observed on the implementation of the project, which is expected to be completed in September 2000, as well as the computerisation of all other works which are now carried out by hand. Part B 4.23.7 Submission of annual accounts by foreign companies. It was again observed that many foreign companies delayed to submit their annual accounts for the years 1988–1999, resulting to delay in the collection of substantial amounts and the risk for loss of revenue. It is expected that with the recent completion of computerisation, improvement will be observed. 4.23.8 Security system. The installation of a security alarm and fire alarm has not been carried out for all the building. I expressed the view that, considering the importance of documents in the building, the installation of security and fire alarm systems is imperative. 4.23.9 Recovery of expenses. Despite the relevant decisions of the Council of Ministers to recover the amount of £255.390, which represents inspectors’ expenses paid by Government for the investigation of the cases of two companies, the procedure for recovery has not commenced. The Department informed me that the matter has been referred to the Law Office.

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4.23.10 Tele–information Service. The agreement for the provision of tele–information service for applications for registrations of names, which was signed by the Department and the Cyprus Telecommunication Authority on 28.8.97, continues to remain idle, while, since then, the payment of the monthly subscription of £48,60, continues. 4.23.11 The Copyrights Law. In 1994 a legal study was carried out by the Law Office regarding the Copyrights Order, which provides for the need to stamp the works protected by copyrights. The Order has not yet been published in the Official Gazette, because of unresolved issues in other pertinent legislation and of problems connected with the type of the special stamp. The Department informed me that a study is carried out for the amendment of the relevant provision regarding the use of the special stamp, because it was ascertained that the process of its printing and disposal would be very expensive and inapplicable. 4.23.12 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 of immovables, resulting to loss of revenue. 4.23.13 Revision of fees. The revision of fees and charges for companies, partnerships and trade names is still outstanding. I was informed that the new Regulations have been prepared and it is expected that they will soon be submitted to the Council of Ministers for approval and processed to the House of Representatives.

4.24 CYPRUS HANDICRAFT SERVICE Part A 4.24.1 Operating results. According to the unaudited accounts of 1999 the operating results are as follows: 1999 1998 £ £ Cost of sales 689.695 622.712 Less: Sales 375.253 320.328 Gross loss 314.442 302.384 Plus: Administrative and trade expenses 255.455 242.740 569.877 545.124 Less: Other income 5.677 3.853 Total Loss (564.200) (541.271)

The expenditure includes the salaries of the monthly paid civil servants employed by the Service, amounting to £343.829, compared to £339.138 for 1998. 4.24.2 Financial position. It was again observed that the Service incurred losses. Although the objective of the Service is not the realisation 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 reorganisation 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. 4.24.3 Action Plan for restructuring the Service. In my previous Reports it was stated that on 19.9.96 the Council of Ministers appointed a Committee consisting of representatives of the

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Ministries of Commerce, Industry and Tourism, Finance and the Planning Bureau, in order to formulate an Action Plan for the restructuring of the Handicraft Service and for submitting to the Council of Ministers a report with relevant suggestions, which would also include an estimate of the required cost. The Council of Ministers on 8.1.98 under decision No. 47144 approved the Action Plan for the restructuring of the Service, with estimated cost amounting to £444.000, which is required for the implementation of the Plan, for a period of 5 years. In addition it approved the setting up of a committee with representatives from the above Services and authorised the Minister of Finance to provide the necessary funds for the implementation of the Plan. Although the funds were secured amounting to £112.000 for 1999 (£162.000 for 1998), no expenditure was, however, incurred for this purpose. The Ministry of Commerce, Industry and Tourism informed me that the implementation of the Action Plan has delayed, because of a number of problems, relating to the organisational structure of the Service, and because of the existence of a considerable number of vacant posts, which could not be filled, due to the incomplete process for the approval of the scheme of service, and that, in spite of all the above, the Service commenced the implementation of some of the provisions of the Plan, as well as some actions which in future will facilitate the achievement of the objectives of the Plan, such as the introduction of a complete computerisation system, the repair of the shops of Nicosia and Limassol and the training of staff in computer systems. At the same time educational programmes were organised for the improvement of craftsmen techniques and the establishment of complete craftsmen archives is in process.

4.25 PHILOXENIA HOTEL Part A 4.25.1 Pursuant to the Council of Ministers decision No. 49.055 dated 20.1.99, the Hotel ceased to operate as from 30.6.99. With a new decision of the Council of Ministers No. 49.360 dated 17.3.99, the possibility of leasing the Hotel to the private sector was under consideration. Later on, the previous decision was revoked, the tenders for lease were cancelled and the matter was assigned to a Ministerial Committee to examine the possibility of using the building for the housing of Government Services. Up to date, however, the Hotel remains closed and unutilized. 4.25.2 Income and Expenditure. According to statements prepared, without these being audited and verified, up to 30.6.99, when the Hotel ceased to operate, the income and expenditure amounted £180.673 and £615.312, respectively, showing a deficit of £434.639. It is pointed out that the decision for closing down the Hotel on 30.6.99 was taken January 1999 and, naturally, the operation of the Hotel had considerably slowed down. 4.25.3 Personnel. The expenditure for personnel emoluments up to 30.6.99, according to records given to my Office, amounted to £515.949. Included in this amount are compensations amounting to £265.119, which were paid to the staff, as a result of the termination of their services, in accordance to the Council of Ministers decision, as well as an amount of £99.304, regarding payment for the balance of vacation leave of the staff, including the respective percentages for 13th and 14th salaries. 4.25.4 Debtors. The debtors of the Hotel amounted to £79.745, compared to £139.978 for 1998. I understand that efforts are made for the collection of the above amount.

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4.25.5 Cost for studies and architectural designs. As I stated in my Report for 1998, an amount of more than £315.000 was expended for studies and architectural designs, which were never used or materialised. Initially an amount of £210.750 was spent for studies and architectural designs for the purpose of upgrading and expanding the Hotel and for its integration with the International Conference Centre, a project later abandoned. Later on with the downgrading of the Hotel to three stars, by the Cyprus Tourism Organisation, the Committee decided to proceed to renovations of the commonly used areas, under a budget of £350.000. For this purpose an architectural design competition was proclaimed. The judging committee, assisted by two consultants of the Architects Association, declared the winner of the competition, an architectural office, whose initial estimate for the construction, based on the calculations of the quantity surveyors, was £798.300. The management of the project, contrary to tender procedure, was assigned to the Development Bank. The Development Bank suggested further renovations, under a construction budget exceeding £1.5 m. On the approval of the appropriate committee, tenders were invited for the constructional part. As the tender procedure reached the point of evaluation of the "technical part" and before the evaluation of the "financial part", which would form the basis for the determination of the architectural fees, the Council of Ministers, under decision No. 47.904 dated 3.6.98, rejected all proposed expenditure for renovations. Later on, it proceeded to the shutting down of the Hotel and the payment of compensations to the staff, which was dismissed. For the above reasons, the provisions of Law 101(1)/98 for the transfer of management of the International Conference Centre and of the Hotel to a company, were not implemented. Meanwhile, a fee of £99.990 was paid to the architectural office, plus £7.999 for V.A.T., which was based on the estimated amount of £1.465.000. The correctness of the above payment cannot be verified, because the estimated expenditure which included consultants fees, E.A.C. licences, price increases, unforeseen expenditure etc., which by the date the Council of Ministers revoked all renovations expenditure, had not been incurred. In addition the payment of the fees to the manager of the project, amounting to £10.000, is still pending. The Chairman of the Official Committee, under his letter dated 9.11.99, requested the Architects Engineers to return the amount of £5.170, which resulted through the Interim Account for the Payment of the Consulting Engineers. The Consultants did not accept the above and the settlement of the matter is still pending. 4.25.6 Renewal of the employment contract of the Manager of the Hotel. The employment contract of the Manager of the Hotel was renewed for three years, from November 1998 up to 31.10.2001. In view of the Council of Ministers decision for the closing down of the Hotel, my Office requested that the matter of continuation of employment of the Manager, be reconsidered. The Ministry of Commerce, Industry and Tourism informed me that his services were terminated on 8.1.2000. Since then and up to this day he continues to stay at the hotel. 4.26 INTERNATIONAL CONFERENCE CENTRE Part A 4.26.1 Receipts and payments. The receipts and payments of the Centre, according to the unaudited accounts amounted to £447.752 and £443.526, respectively, compared to £390.795

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and £410.807 for 1998. The receipts for 1999 include government subsidy amounting to £70.000, compared to £90.000 for 1998. 4.26.2 Computerisation. For the purpose of prompt and effective processing of works and the strengthening of controls, it was suggested that computerisation should be introduced in the systems of receipts, charges and other works of the Conference Centre. My Office was informed that the computerisation of the system was completed and as from January 2000, all above works are carried out under the computerised system. Part B 4.26.3 Reserve electric generator. The reserve electric generator, which was installed during the construction of the Centre in 1988, was received by the Department of Electrical and Mechanical Services, despite the fact that it continued to present operational problems. The space where the installation was made is not appropriate, and basic installation principles have not been observed, as provided by the manufacturers resulting to the risk of possible cause of fire from the high temperatures through the overheat created. My Office was informed that, for the purpose of overcoming the electric generator's problems, the case was examined by an expert, who submitted a relevant report and, according to his observations, the appropriate corrective measures are being taken. Approval is also expected for the supply of the necessary spare parts, for its smooth operation. 4.26.4 Management and Operation of the Centre. As I stated in my previous Report, 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 different procedures were undertaken for Philoxenia Hotel which would be one of the two constituent parts of the Company.

4.27 MINISTRY OF LABOUR AND SOCIAL INSURANCE

4.28 LABOUR DEPARTMENT Part A 4.28.1 Inspection of Machinery and Premises/Working Spaces (a) Inspection of machinery pursuant to the Factories Law. The desired inspections of machinery, as provided by the above Law, are not carried out (e.g. air chambers, cranes, lifting machines, hydraulic lifts, movable carriers etc.). Indicatively, it is stated that for 1999, while for the movable carriers and the electric lifts 9080 inspections should have been made, finally only 589 or 6,5% were carried out. (b) Inspection of premises. During the last 6 years (1994–1999) a considerable reduction is observed in the total number of inspections, which are carried out at the various working premises, despite the fact that these premises have increased considerably after 1.1.97 when the Safety and Health at Work Law was implemented. Reduction of inspections of premises is also observed in the cases, which fall within the provisions of the Factories Law, which are included in the high-risk category. 4.28.2 Engagement of Medical Officer–Labour and General Practitioners on matters of Occupational Health. As I stated in my Report for the previous year, although the engagement

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of Medical Officer–Labour and General Practitioners on matters of Occupational health are specified in sections 41 and 42 of the Safety and Health at Work Law No. 89(1) of 1996, up to date, however, no appointments were made, resulting to delays in the implementation of the provisions of the Law. I was informed that the amendment of the above is under consideration, after a legal omission was noted regarding the hiring of the services of a Medical Officer– Labour from the private sector, and for this purpose a proposal was submitted to the Council of Ministers for the creation of the post of Medical Officer–Labour. 4.28.3 Scheme for the Occupational Rehabilitation of Repatriated Cypriots. The provision amounting to £200.000 in the Development Budget for 1999 remained unutilized because of the non-implementation of the Scheme. I was informed that, pursuant to a decision by a Ministerial Committee which was appointed by the Council of Ministers, a draft of the new Scheme was prepared for the self employment of returned Cypriots, which was submitted, on 7.4.2000, to the Ministry of Labour and Social Insurance. 4.28.4 Spare parts register/Stores register for consumables (a) Keeping of records in registers. As I stated in my Report for the previous year, the spare parts register and the stores register kept at the Department are not properly updated as provided by the relevant Stores Regulations, resulting to difficulties in the relevant follow up and audit. Specifically in the spare parts register only the receipts of the various items continue to be recorded, while for the corresponding issues no issue voucher is used, and the register is not updated. As a result of the above it is not possible to know, at any time, the stock of the various spare parts, unless a physical stocktaking takes place. With regard to the stores register, into which the various perishable items are recorded, it was observed that this was not properly updated with the items initially issued and not used, and as a result the actual stocks do not agree with the balances shown in the register. (b) Keeping of various spare parts and other stores items. It was again observed that the keeping of spare parts and stores items at the various storage spaces of the Department is not safe, while several items are not properly arranged. Specifically at the storage spaces there is still free entrance for all the staff and it appears that a responsible storekeeper has not yet been appointed. 4.28.5 Computerisation. Although the process for computerisation commenced in 1995, it is observed that the final receipt of equipment from the Department of Information Technology Services has not yet taken place. Also pending is the final receipt of the software for the Factories Inspection Branch. 4.28.6 Annual certificate of examination of assets on inventory register for 1999. The certificate of examination of assets on inventory register for 1999 has not been submitted to my Office, as provided by Stores Regulation No. 110.

4.29 SOCIAL INSURANCE SERVICES Part A 4.29.1 Application for social pension. A person eligible for social pension submitted two applications, with different identity card numbers, receiving two cheques and collecting illegally the amount of £4.344. This amount was refunded when the deception was discovered by the

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Department. For avoiding such occurrences in the future, I suggested that, a copy of the applicant's identity card should be submitted with the application. 4.29.2 Tenders. A cheque submitted by a specific company for the faithful execution of the contract, to which two tenders were awarded for the supply of envelopes, for a total amount of £21.610, was dishonoured, and when it failed to execute the contract, the Department remained exposed and was burdened with additional cost, awarding the tender to the second tenderer. In addition, contrary to the Accountant General's circular No. 1441, forms T.82 were not submitted to the Registrar V.A.T. and the Commissioner of Income Tax, regarding all contracts signed with the successful tenderers. Part B 4.29.3 Social pension (a) Reconciliation of social pension payments. As I stated in my Report for the previous year, the reconciliation statements prepared every month present each time a difference, which cannot be reconciled and which at 31.12.99 amounted to £15.946. A difference is also observed in the reconciliation of rent allowance, where the difference at 31.12.99 was £26.584. The difference is, mainly, due to the fact that the Social Pension Department submits to the accounts branch of the Service only part of the cheques cancelled during the month and not the complete list. The Director of Social Insurance Services informed me that during the audit of previous years reconciliation of the amounts of cheques issued and cheques cashed, a difference was observed and that the matter is under investigation, on the completion of which I will be informed accordingly. He stated further that the problems observed, regarding the reconciliation of social pension cheques, are expected to be finally settled with the full implementation of the new computerised system. (b) Government revenue from Social Insurance Fund resulting from the payment of social pension. As I stated in my Report for 1998, since 1995, at the commencement of payment of social pension to persons who reached the age of 68 years old, in cases where the recipients of social pension are dependents of Social Insurance pensioners, the Social Insurance Fund 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". The audit of this amount was not possible, because the monthly statements of cheques for Social Insurance Pensioners are prepared on a different system basis than the one followed for the monthly statements of cheques for social pensioners. For purposes of control and verification of the correctness of this revenue, I stated that the necessary amendments must be made to the monthly programme of payment of social pension, so that the number of recipients of social pension where a deduction is made for dependents should be presented separately. The Director of the Department of Social Insurance informed me that the matter will be finally settled with the full implementation of programmes concerning Social Insurance pensions in the new computerised system.

4.30 SOCIAL INSURANCE FUND Part A 4.30.1 Operating results. During the years 1999 and 1998 the fund showed the following:

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1 9 9 9 1 9 9 8 (£ m.) (£ m.) Balance as at 1st January: General Grants 302,8 266,0 Supplementary Grants 1.314,3 1.170,9 Unemployment Benefit 3,7 6,8 1.620,8 1.443,7 Receipts: General Grants 202,9 199,9 Supplementary Grants 204,6 184,7 Unemployment Benefit 16,9 424,4 16,5 401,1 2.045,2 1.844,8 Payments: General Grants 175,5 163,0 Supplementary Grants 46,5 41,3 Unemployment Benefit 23,5 245,5 19,5 223,8 Balance as at 31st December 1.799,7 1.620,8

4.30.2 Outstanding amounts due to various funds. At 31.12.99 the outstanding amounts due were about £14,9 m. (£13,7 m. at 31.12.98), as a result of court decisions in favour of the Funds, as follows:

£ Social Insurance Fund 8.818.037 Holidays with Pay Fund 2.083.582 Redundancy Fund 577.026 Industrial Training Fund 280.269 Defence Fund 3.187.271 14.946185

During 1999, 5968 new cases appeared before the courts for amounts, approximately, £7,2 m., and the amount of about £4,7 m. was collected. The amounts written off due to liquidation or bankruptcy of debtors amounted to about £1,2 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 lies completely with the employer. The amounts written off include also the employees’ contributions already collected by the employers. 4.30.3 Reserve fund of the Unemployment Benefit Account. At 31.12.99 the reserve fund of the above Account showed a debit balance amounting to £2,8 m., compared to a credit balance of £3,7 m. shown at 31.12.98, since expenditure exceeded revenue, including the initial

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balance. In such a case, in accordance with the provisions of section 69(6) of the Social Insurance Law No. 41/80, the difference is paid from the Consolidated Fund of the Republic or covered through a special contribution imposed as per relevant Regulations.

4.31 CENTRAL HOLIDAYS WITH PAY FUND Part A 4.31.1 Operating results. The revenue of the Fund for 1999 was £23,6 m. and the expenditure £23,0 m., compared to £23,6 m. and £22,3 m., respectively, for the previous year. The balance of the Fund at 31.12.99 was £30,5 m., compared to £29,9 m. at 31.12.98. 4.31.2 Scheme for subsidising employees holidays. According to the Scheme, employees, under certain terms, are eligible, with their dependents, for a subsidy for a seven-day holiday at hotels. The amount paid for this purpose during 1999 was £1.035.963, compared to £961.235 for the previous year. 4.31.3 Scheme for subsidising camping sites of Unions. A subsidy amounting to £350,000 was paid in 1999 for the operation of camping sites of Unions and an amount of £107.100 for the construction of camping installations of Unions, compared to £320.000 and £74.000, respectively, for the previous year.

4.32 REDUNDANCY FUND Part A 4.32.1 Operating results. The revenue of the Fund for 1999 was £21,3 m. and the expenditure £15,8 m., compared to £20,2 m. and £16,0 m., respectively, for the previous year. The increase in revenue is, mainly, due to the increased contributions (£0,9 m.) and interest from investments (£254.225). The balance of the Fund at 31.12.99 was £21,8 m., compared to £16,3 m. at 31.12.98. 4.32.2 Applications and payments. The total number of applications for 1999 for redundancy payments was 11424 (5616 new applications and 5808 outstanding applications on 1.1.99), out of which 5903 were examined, 4999 were approved (85%) and 904 rejected (15%). The total amount of redundancy payments for 1999 was, approximately, £15,0 m. At 31.12.99 there were 5521 outstanding applications for compensations, out of which, approximately, 4580 (83%) are expected to be approved, for an amount of about £14,7 m. The delay of about 11 months observed in processing the applications affects the accounts and results to the late satisfaction of applications of the insured. It is pointed out that during the last five years an increasing tendency is observed in the number of applications submitted, and as a result the relevant expenditure, in conjunction of the increase of the top limit of the weekly wages amount, is increased. It is, furthermore, pointed out that the number of applications submitted increased from 4759 in 1994 to 5616 in 1999 and the respective expenditure increased from £7,4 m. to £15,0 m.

4.33 HIGHER TECHNICAL INSTITUTE Part B 4.33.1 Leave of absence and working hours of the academic staff. As I stated in my Report for the previous year, the leave of absence granted to the academic staff of the Institute,

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which is 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 apply 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.

4.34 HIGHER HOTEL INSTITUTE OF CYPRUS Part B 4.34.1 Arrears of revenue. Despite the efforts made, the collection of £130.000 due by a foreign country since 1983, for the training of its students, is still outstanding.

4.35 PRODUCTIVITY CENTRE Part A 4.35.1 Activity programmes. During 1999, 96 activity programmes were scheduled to take place, out of which 24 or 18,6%, were cancelled, mainly due to lack of interest by the employees and the enterprises. 4.35.2 Productivity/Studies/Research. In spite of the provision included in the Budget for a productivity campaign and for studies and research in specific fields of economy, for the determination of problems, which influence productivity in important industrial areas, this was not utilized. For this reason, I requested to be informed how the Centre’s objective is achieved, for increased interest in the fields of advisory services and research, according to the explanatory note of the Budget. Part B 4.35.3 Preparation and application of programmes. As I stated in my Report for the previous year, up to 1991 the policy for the preparation and application of the activity programmes was defined by a three number Management Board. In January 1997 the Director of the Centre, in his letter to the Director General of the Ministry of Labour and Social Insurance suggested the establishment and operation of the Management Board, because it is considered useful. At a meeting of the Advisory Board for Determination of Policy on 13.7.99, the re- establishment of the Management Board was decided.

4.36 WELFARE SERVICES Part A 4.36.1 Public assistance. The amounts paid in 1999 for public assistance were £29,4 m., compared to £25,5 m. for 1998. At the end of 1999 the number of persons and their dependents receiving public assistance were 21029, compared to 19721 for 1998. The monthly allowance for basic needs was increased, in 1999, from £106,50 to £118 and from £47 to £52 for each dependent.

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4.36.2 Performance audit. A performance audit was carried out in 1997 for public assistance grants by Welfare Services, and a summary of the most important recommendations is stated in part 3 of my Report. 4.36.3 Assistance to enclaved persons. Public assistance paid to enclaved persons in 1999 amounted to £445.473, compared to £311.000 for 1998. The monthly allowance paid to enclaved persons was increased in 1999 from £113 to £125 and for each dependent from £54 to £60. 4.36.4 Development of a new computerised system. As I stated in my previous Reports the procedures for the development and implementation of the new computerised system commenced on 3.5.95 and the project should have been completed in February 1996. I stated further that considerable delays were observed, and the project has not yet been completed. After a recent audit carried out it was ascertained that an effort is made for the completion of computerisation of Public Assistance before the end of the year, which represents 50% to 60% of the whole project. With regard to the remaining Branches of Operations, the equipment is expected to be installed before the end of the year and put into operation in 2001. 4.36.5 "Nea Eleousa" Home. It was again observed that many alterations are made to 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 on a continuous time schedule. During 1999, a total of 3260 days of leave and sick leave were granted to 63 officers of the Home, which correspond to 51 days for each officer. The Director of the Service informed me that the alterations in the working schedules of the staff and the increased sick leave are matters of great concern for the Service. 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 institutionalisation 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. 4.36.6 Strovolos Youth Hostel for Girls. As I stated in my Report for the previous year, the Council of Ministers decision No. 45647 dated 26.2.97, provided for the establishment and operation of a Girls Hostel at the premises of the 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 cost amounted to £18.463, without offering hospitality to any person. The expenditure for 1998 was estimated to £42.145, for the accommodation of seven girls at the Hostel, which corresponds to £6.020 for each person. The actual expenditure amounted to £39.749, plus £56.245 for salaries and overtime allowance of the permanent staff, but for only one person accommodated at the Hostel. At the Hostel, apart from the five permanent officers, there are, also 4 hourly paid employees. The expenditure of the Hostel for 1999 was estimated to £54.180 for seven girls. Finally only one person was accommodated until October 1999, and two until the end of the year. The actual expenditure amounted to £37.665, plus the expenditure for the salaries of the permanent staff amounting to £63.087. For 2000 the expenditure was estimated to £54.560 for the

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accommodation of five girls, plus the salaries and overtime allowance of the permanent staff. During 2000 three persons were accommodated at the Hostel, while other accommodations of minor importance also occurred. I stated that the decision of the Council of Ministers was taken on the presumption that seven girls would be accommodated, and I expressed the view that the whole matter should be presented 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 Service where additional staff is needed. The Director of the Service informed me that the issue of the operation of the Girls Youth Hostel is under the serious consideration of the Service, both for the relevant expenditure, and also regarding the fact that the suspension of operations of such a service would be wrong, which, at a given time, is the only solution for specific cases, and that the whole matter is under consideration by the Ministry, to which it has been submitted. 4.36.7 Government grants to voluntary Organisations 4.36.8 Criteria and documentation for grants. In a relevant Vote of the Development Budget for 1999, there is a provision of £3.250.000, which was granted to voluntary Organisations, in accordance with the existing Scheme of Government Grants. I expressed the view that the criteria and the method of estimate of the amounts paid, based on the Scheme, are very general and should be revised, so that the grants allowed will be more objective. After the audit carried out on the individual files of the grants, it was further observed that these do not contain a report from the appropriate officer of the Service, which will confirm that the grant has been properly utilized and for the purpose for which it was granted, as well as other required information and documentary evidence for payments. The Director of the Service informed me that the Services have already considered the revision of the Government Scheme for Grants. For this purpose the carrying out of a study was assigned to the Development Bank and the University of York. The study was completed in 1998 and recommendations were made for changes in procedures and criteria. The Services, due to reservations for certain provisions of the study, undertook the submission of a complete proposal, which was submitted to the Ministry of Labour and Social Insurance on 7.7.2000. Part B 4.36.9 Moving to new premises of the District Welfare Office Nicosia – Removal of air conditioning units. As I stated in my Report for the previous year, during the moving of the District Welfare Offices Nicosia to new premises, which were rented on 1.7.97, 33 air conditioning units remained at the old premises. For these units, which were installed in 1995 at a cost of £17.000 and belong to Government, no measures were taken in time for their removal, before moving to new premises. As a result the owner of the old premises, since 1.7.97 and up to date, does not allow the detachment of the units, which she claims as compensation for alleged damages to her premises and for which she blames Government. The whole matter was presented before the Attorney General of the Republic, who on 22.4.99 was informed about the present value of the units, in order to proceed and take legal measures against the owner.

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4.36.10 Fire extinction/Fire protection Plan. (a) District Welfare Office Limassol. The building housing the Office, does not have an emergency exit in case of fire or other emergency, endangering the safety of the Welfare Office personnel and of other Services that are housed in the same building, as well as the safety of the public. Due to the above serious omission, it is not possible for an action plan for fire extinction/protection to be prepared. The Director of the Services informed me that the matter is under serious consideration and that the Ministry of Labour and Social Insurance was relevantly informed. She stated further that moving to other premises is being considered, and the Office will be housed with the Services of Social Insurance and the District Labour Office in a building under construction, which belongs to Limassol Municipality. (b) District Welfare Office Pafos: The necessary measures referred to in the letters of the Director of Fire Service to the Director of the above District Office and to the Director of Social Services, have not yet been taken. As a result it is not possible for a complete action plan for fire extinction/protection to be implemented, endangering the staff in case of fire. The Director of the Service informed me that the owner of the building where the District Office is housed, was informed about the arrangements that must be made, regarding fire protection, through a letter of the District. Welfare Office Pafos dated 25.6.96. The owner did not reply in writing. However, from relevant discussions with the District Welfare Officer Pafos, it appears that she is not willing to accept the recommendations of the Director of Fire Service.

4.37 MINISTRY OF INTERIOR Civil Defence Part A 4.37.1 New Central Warehouse. The equipment materials of the Force in the warehouse, which had flooded, have been transferred to a safe and suitable place, which was rented, on 1.11.99. On a spot examination visit it was observed that due to the massive quantity of materials and the non-securing promptly of the necessary warehouse equipment, several items were piled up on the floor, in a disorderly state. The inventory registers were not, up to date, recorded and no certificate of delivery/receipt was issued when the previous storekeeper left, as provided by Stores Regulations 104–106. Part B 4.37.2 Supply, installation and maintenance of the network of electronic alarm sirens. The above tenders of an estimated expenditure of £1.800.000 were submitted in February 1998. I observed that in the evaluation report, which was submitted with considerable delay, in November 1998, the tender, which was recommended for award, contained ambiguities/deviations, which would have to be cleared/corrected, in order to safeguard public interest. The Accountant General to whom I submitted my observations, appointed, in April 1999, an ad hoc committee for the re-evaluation of the tenders and the preparation of a report. As I was informed the tender was awarded on 17.4.2000 and on 26.5.2000 the relevant contract was signed containing several commitments, which had been accepted by the successful tenderer.

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4.37.3 Flood damages. The main store of Civil Defence at Akropolis suffered flood damages the amount of which has not yet been estimated. On my recommendation, Civil Defence requested the Attorney General to examine the matter of responsibilities of third parties, for the purpose of compensation claims. As I was informed, the amount of flood damages amounted to £1.346. The Attorney General of the Republic replied that there is no case for compensation claims. Finally the moving of the store to a safe place has been settled. Service for the restoration of damages from earthquakes Part A 4.37.4 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, 4000 applications have been examined and the remaining 6000 applications are scheduled to be examined until the beginning of 2001. The total expenditure, up to this day, for the three above earthquakes amounts to £7.000.000. 4.37.5 Funds allocated for purposes other than those for which they were approved. Cases were again observed where funds from various Votes of the Budgets, were used for purposes other than those for which they were approved, or for projects falling within the jurisdiction of other Ministries or Organisations. The Ministry of Interior recently expressed the view that the relevant Votes are of a general nature providing the facility and flexibility to the Ministry to deal with the various requests and cases presented, in its wide and complicated social work that has to be carried out. Such cases are the submission of requests for unspecified projects, emergency cases for non-provided projects, as well as many other cases. The Ministry believes that the creation of specialised Votes, will not serve any useful purpose, because the demands and needs that arise are not predetermined and therefore cannot fall into categories. 4.37.6 Rural roads. It seems that for the improvement and maintenance of rural roads no uniform policy is followed by all District Administrations, and it appears that the most economical way of execution of the projects is not secured. Specifically, in some cases payments are made on the basis of kilometres, in other on the basis of time, sometimes there are written tenders and sometimes not, while a considerable variance in prices is observed, from £25 to £60 per kilometre. Differences in prices were observed between District Administrations, up to 50% lower, when tenders in writing are invited through the Main Tender Board, in groups of villages, instead of quotations for each village. As the cost of the maintenance of rural roads is considerable, the Ministry of Interior agrees with my recommendation for the determination of a uniform policy in process and procedures, and the grouping of villages of each District is under consideration for the invitation of the relevant tenders through the Main Tender Board. It is pointed out that, regarding rural roads, the Budget for 2000 includes an amount in excess of £2 m., out of which more than £1 m. refers to their improvement and maintenance. 4.37.7 Amusement and game machines licences. For the above issue a performance audit was carried out, which was included in my Report for 1994, a summary of which can be found in Part 3 of my Report.

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Following the enactment of the relevant Law in 1996 which regulates the operation and issue of licences for amusement and game machines, District Administrations experience difficulties in the implementation and interpretation of the Law, resulting to the suspension, to a considerable degree, of the relevant licences, and the loss of revenue. With the enactment of Laws 50(1)/98 and 90(1)/99 on 26.6.98 and 9.7.99, respectively, which regulate the operation and issue of amusement and game machines licences, the revenue amounted to £73.530, compared to £27.615 and £51.915 for 1997 and 1998. 4.37.8 Housing Loans Scheme for young couples in the demilitarised zone. The implementation of the above scheme commenced in 1989 and up to 31.12.99 the amount of £9.655.000 was allocated from the Relief Fund for Displaced and Affected Persons to the Housing Finance Corporation for issuing loans to eligible persons. Up to 31.12.99 loans amounting to £9.483.321 were issued and instalments were collected for a total amount of £2.644.354. 4.37.9 Housing scheme for the revival of green line areas in Nicosia. The loans and grants issued to eligible persons up to 31.12.99, amounted to £4.477.731 and £2.186.262, respectively, and loan instalments repaid amounted to £1.229.917. 4.37.10 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 a cost of £914.000. At a later stage, the increase in the number of houses to 81 was decided, for a total cost of about £3 m., including infrastructure works. Up to the end of 1999, a total amount of £4.515.501 was spent, predominantly for the building of houses, 71 of which were completed. The building of the remaining 10 houses and the completion of infrastructure works are still in progress. 4.37.11 Loans for the re–activation of displaced small businesses. The overdue loan instalments, at 31.12.99, 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 must be written off, while the Ministry of Finance has adopted the view that no action should be taken for the collection of overdue loans. Part B 4.37.12 Interest bearing loan instalments. In some cases of loan repayments, the interest bearing instalments are not paid promptly by the Ministry, resulting to an additional cost for overdue interest. I was informed that efforts are made for the keeping of records, so that this phenomenon is not repeated in future.

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 31.12.99, to £152.569, compared to £158.421 for 1998. For the collection of the above arrears, which include the amount of £109.914 for previous years, no effective measures appear to be taken.

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All District Officers stated that more effective measures will be taken for the collection of the amounts due, and the reduction to the minimum possible of the arrears of revenue. 4.38.2 Petroleum products storage licences. A special audit carried out at the District Administrations revealed that there are difficulties in finding 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 uncontrolled storage, due to serious weaknesses presented in the legislation. The Ministry of Interior requested all District Officers, in 1999, to find and record all petroleum products storage places for which a licence is required to be issued and collection of the relevant fees, and to submit their views for the revision of legislation. The investigation revealed that the tracing of all crude oil storage places of 250 gallons capacity each, where a storage licence is required, is practically impossible, due to the wide use of crude oil in meter pumps, house heating, hotels, factories and the industry. According to the provisions of the relevant legislation, a licence is required for the storage and custody even for one ordinary gas cylinder, even though this is not intended for sale. The decision taken by the Ministry of Interior for the engagement of an expert, under the European Union – Cyprus Fourth Financial Protocol, for the revision of legislation regarding petroleum products has not been implemented. Furthermore, regarding petroleum products storage fees, which remained unchanged for several years, and far from present values, the matter was settled in 1999, with the revision of the fees (S. L. 33/99, 26.2.99) 4.38.3 Amathus Water Supply Project. A total amount of £224.066 was due to Amathus Water Supply Project by Agios Tychonas Improvement Board for supply of water for the years 1997–1999. I pointed out that these amounts have already been collected from consumers and that Agios Tychonas Improvement Board has no right to withhold the above amount. Part B 4.38.4 Licences for the operation of petroleum products stations. During the 1998 audit it was observed that no action was taken for the collection of arrears of fees, due to Government for the issue of licences for the operation of petroleum products stations, after the amendment of legislation in 1994. I have been informed that the matter has been settled at the District Administrations of Pafos, Larnaka and Famagusta. Also District Administration Limassol takes legal measures against those violating the Law, although some of which have proceeded towards securing the necessary licence, while at the District Administration Nicosia the amount of £2.550 was collected from Nicosia Municipality, and the District Administration is in cooperation with the remaining Municipalities of the region for the final settlement of the matter. 4.38.5 Polemidhia (Garyllis) and Germasogeia Water Supply Project – Debtors. The accounts show amounts due of £728.298, mainly from the sale of water, and I suggested that measures must be taken for their collection. The District Officer Limassol stated that the amount of £222.994 has been written off pursuant to the Council of Ministers decision No. 48323, dated 9.9.98. For the remaining amount legal measures are expected to be taken.

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4.38.6 Pissouri bay Water Project. At the end of 1998 an amount of £107.428 was due from the communities of Pissouri, Archimandrita and Alektora, for the sale of water. The District Officer Limassol stated that the amount of £56.500 has been collected and that efforts are made for the collection of the remaining amount. 4.38.7 Planning and execution of projects. It was again observed that the procedures regarding the planning, execution and monitoring of projects are not systematically followed by all District Administrations. Specifically, bills of quantities are not always prepared for all projects, final reports are not prepared or/and checked and the reconciliation of expenditure with the registers of projects and Accounts records is not carried out. District Administrations expressed the view that the problem emanates from the improper staffing of the relevant technical services. 4.38.8 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. 4.38.9 Sotera Government Water Project – Loss of water. During the years 1993–1997 a quantity of about 61000 cubic meters of water, valued at £50.000, was lost, which corresponds to 43% of the total quantity of water channelled through the Water Supply Project. The Department of Water Development informed me that the variance is probably due to faulty pipes, thefts, illegal connections and inaccurate meter indications, and in cooperation with the Committee of the Water Supply Project, will proceed to an investigation to verify the actual causes for the loss. On my recommendation, I understand that three main water meters have been installed, one in the water supply pipe (Water Development Department) and two in the main pipes for supply of water to consumers. In a main pipe for water supply to consumers a substantial difference was observed and, after investigation, an illegal connection and theft were detected. I understand that the investigation will be continued by the Government Water Supply Project and by the Department of Water Development. Recently a special workshop crew of Larnaka Water Board with specialised personnel, using modern special equipment, commenced an on spot check of the entire irrigation network and it is estimated that soon, the points and causes of loss of water or/and inaccurate meter indications, will be detected.

4.39 DISTRICT ADMINISTRATION NICOSIA Part A 4.39.1 Asphalting of Kykkos–Stavros tis Psokas–Pyrghos road. An investigation carried out between July and September 1999 by my Office, in cooperation with the District Administration Nicosia and the Department of Public Works, overpayments were observed in 8 contracts for the supply and application of asphalting mixture. In 5 of the 8 contracts the quantity paid for is greater than the quantity applied by 18% to 109%. The total overpayment for all contracts amounts to £247.054. As the matter was considered serious, I notified all details to the Attorney General of the Republic for any action he deemed appropriate. The Attorney General directed that a criminal investigation should be carried out, for the determination of criminal responsibilities against all parties involved. It is also pointed out that the weighing vouchers for the receipt of the

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asphalting concrete mix paid for had been lost from the Offices of the District Administration. The loss of the receipt vouchers was reported by the District Officer to the Chief of Police. Interrogations were finally made for one project only regarding one of the contracts, because the examiners of the case were able to secure, from the District Officer's Office, only part of the documents concerning this project. In August 2000 the Attorney General of the Republic ruled that, criminal offences were committed for one of the contracts, which, however, according to the evidence secured, cannot constitute a criminal charge against any specific person. The Attorney General of the Republic stated further that the construction company involved, without accepting any responsibility, but for purposes of keeping good relationship with Government, was willing to cover the overpaid amount, regarding all relevant contracts (£234.502,97), as estimated by the Audit Office, plus 9% interest from 1.6.98 until payment. The company paid by cheque, dated 8.9.2000 the amount of £281.989,82. 4.39.2 Lympia–Psevdas road. After a spot examination carried out in August 1999, it was observed that the laying of asphalting concrete mix was of inferior quality, resulting to unjustified damages and deterioration. A preliminary audit revealed that the quantities of materials paid for were for greater than the quantities used. The District Officer Nicosia, on my request, investigated the above and informed me that, in May 2000, ordered the carrying out of a departmental investigation as to the existence of disciplinary offences or omissions. He informed me further, that there was an actual overpayment for the premix amounting to £7.369, and that he referred the matter to the Chief of Police. 4.39.3 Execution of projects After a sample audit carried out by my Office in a number of projects executed in 1999, it was observed that, in spite of the fact that there was considerable improvement, various weaknesses were, however, observed in the follow up and control of projects, and, therefore the efforts for the improvement of the weaknesses observed must be intensified. As I stated in my previous Report, weaknesses and omissions in the follow up of projects are, mainly, due to the unsatisfactory number of staff of the Technical Services. (a) Supply of aggregate. For an aggregate delivered in 1998, due to non-available funds, payment was irregularly made through 1999 funds. (b) Supply of ready mix aggregate. The tenderer did not comply to the terms of the contract and the District Administration assigned the tender to the next tenderer, directly, for immediate delivery of materials, without notifying the Main Tender Board to handle the case, and without following procedures (i.e. signing of contract, bank guarantee etc.). 4.39.4 Examination of materials. In some cases no endurance tests of mix aggregate are carried out at specified intervals, and as a result cases of unsuitable materials are not promptly detected. The case of supply of ready mix aggregate C20 is indicative. Part B 4.39.5 Parcellation of building plots for poor families at Kokkinotrimithia. As I stated in my Report for 1998, an overpayment occurred of £11.600, in the supply and use of ready mix aggregate for the above project. Also the quality of the ready mix aggregate used was not according to specifications.

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The Attorney General of the Republic investigated the matter, and in September 1999, charged the Senior Technical Officer of the District Administration of Nicosia and individuals involved, for commitment of criminal offences. 4.39.6 Analyontas rural roads, laying of the ex Improvement Board Kokkinotrimithia and Peristerona–Katzilos–Avlona road. As I stated in my previous Reports, after an audit carried out by my Office in 1997, it was observed that, for the above projects, an overpayment occurred amounting to £5.951, regarding the quantity of crusher run supplied by the contractor. For this case the Attorney General ruled that no criminal offences could be instituted, while disciplinary offences could probably exist. The District Administration Nicosia examined the disciplinary offences and in January 2000 imposed the penalty of severe reprimand to two hourly paid foremen. 4.39.7 Agios Sozomenos Sewerage Disposal and Treatment Project. It was observed that substantial amounts are, for a considerable time, due for sewerage disposal at the above project, and I suggested that measures should be taken for their collection. As I was informed the Attorney General has taken legal measures against the debtors. 4.39.8 Inspections of projects. As I stated in my previous Reports, from site inspections of technical projects executed by the District Administration, it was established that, mainly, due to the lack of suitable staff at the Village Roads Branch, the required quality and quantity control of the works is not carried out, resulting to weaknesses. The Ministry of Interior agrees with the fact that the staffing of the Technical Services with qualified personnel is directly in line with the proper performance of quantity and quality control of the projects.

4.40 DISTRICT ADMINISTRATION LIMASSOL Part B 4.40.1 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 those being implemented. In 1998 a revised report was submitted by the Minister of Interior to the House of Representatives, without, however, any measures taken yet. The District Officer Limassol informed me that court orders were not executed until today, because studies were not completed and Government has not concluded 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 PAFOS Part A 4.41.1 Expenditure for lifeguard units. Various Municipalities, ex Improvement Boards and Village Authorities failed to pay to the District Administration Pafos their contribution for the lifeguard units, which operated in their regions. The total of arrears of contributions at 31.12.99 amounted to £10.385 (£14.414 for 1998).

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I understand that pressure is exercised towards the Municipalities, to pay their contributions promptly.

4.42 DEPARTMENT OF LAND AND SURVEYS Part A 4.42.1 Arrears of Revenue. At 31.12.99 there were arrears of revenue amounting to £1.079.264, compared to £873.102 for 1998. An amount of £726.400 is due by various persons from the sale or lease of government land at Agia Napa, after a Council of Ministers decision. 4.42.2 Delay in the collection of rents for the lease of government land. Considerable delays are observed in the collection of annual rents, without any legal measures taken or annulment of the lease agreements. At 31.12.99 there were arrears of rents amounting to £301.592, for a period up to 10 years. It has been observed that for a specific individual, whose lease agreement has expired since 1993 and the amounts due are £34.620, as well as for illegal use of other government land, without a lease agreement, no measures, whatsoever, have been taken. The Director of the Department informed me that every effort will be made for compliance with my recommendations. 4.42.3 Mortgage of immovable property for a higher amount than the evaluated purchase price. On 2.4.99 a specific company purchased two immovables in Limassol, at the declared sale/purchase price of £510.000. The same price was evaluated by the Department for purposes of transfer fees. As on the same day the two immovables were mortgaged for the amount of £700.000, I requested to be informed whether a substantial investigation was carried out regarding the difference between the evaluation and the mortgage amount. The Director of the Department informed me that the mortgage price does not commit the Department in the determination of the purchase price of immovables. 4.42.4 Declaration of sale of a tourist block. On 5.7.99 a declaration of transfer of a tourist block at Germasogeia was submitted at a declared sales price of £300.000, in accordance with a relevant sales contract of 1992. For purposes of payment of title transfer fees, the purchase price evaluated by the Department of Lands and Surveys Limassol was £360.000. In the above contract it was stated that the building (without furniture) was covered by insurance for about £440.000. In my opinion, this amount should have been taken into consideration in arriving at the evaluated price. 4.42.5 Sale of immovables by auction. The procedure of sale by auction presented weaknesses and it was not uniform between District Lands and Surveys Offices. On my recommendation new directions have been issued, under which, almost, all weaknesses were covered, except in the case of determination of a minimum sale price, in order to avoid the sale of immovables at extremely low prices. 4.42.6 Torn books and registers. An inspection of books and registers revealed that important books and registers have been torn to such a degree, running the risk of losing important information regarding properties. The Director of the Department informed me that the matter is under the serious consideration of the Department and that measures are taken for the protection of the above books.

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4.42.7 Evaluation of hotels at Paralimni. A specific hotel at Paralimni was evaluated in 1998, for purposes of 1.1.80 value, to £5.000.000. In 1999 it was re-evaluated at the specified amount of £2.500.000. A similar case had been presented previously, where another hotel, which was initially evaluated at £5,7 m., it was later re-evaluated at £3,4 m. In view of the fact that the difference in re-evaluation was considerable, and with consequent payment of reduced taxes and fees (immovable property tax, municipal tax, sewerage fees etc.) which are based on the evaluated price, I requested the Director of the Department to explain the reasons for the considerable difference between the two amounts, and that directions should be issued so that evaluations are carried out with due care. The Director of the Department informed me that the re-evaluation was made for purposes of correction of mistakes, which occurred at the initial evaluation. 4.42.8 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. The main reason for the delay is the fact that the Law allows the designation of a minimum reserved price, as recorded in the deeds of ownership, which is based on very old land evaluations, regarding periods as far back as 1909–1929. The owners or mortgaged creditors, submit, as a rule, an objection for the re-evaluation of this price. I recommended that the possibility of amendment of the relevant provisions of the Law should be examined, in such a way as to secure the use of realistic evaluated prices, in cases of compulsory sales. The matter of reserved sale price will be regulated with the amendment of the relevant legislation. 4.42.9 Assignment of work outside working hours. As a result of the large volume of work accumulated at the Department, the Council of Ministers decided on 14.9.94 to allow Departmental employees to work outside normal office hours at a piece–meal work compensation basis. The whole task, which commenced on 1.4.95, was estimated to be completed within a period of 15–18 months, at a cost of £3.500.000. The Director of the Department informed me in 1998 that the largest part of the work had been completed and that the objective of the scheme had been achieved. The overtime work, however, continued and the total cost up to 31.12.99 amounted to £4.580.388. As I was informed the reasons for the continued accumulation of work, which is impossible to be dealt with within the ordinary procedures of the Department are the following: (a) The deployment of staff in the computerisation process of the Department's archives, (b) The continued assignment of new priority work by Government Departments, and (c) The non-appointment of lower paid staff, for a considerable period of time. Part B 4.42.10 Lease of government coastal land at Neo Chorio, Pafos. A contract was signed with an individual for the lease of 670 sq. m. of coastal land for the period of 15.3.78–14.3.2011, for £22,50 per annum. The leased price of land would be used, according to the Contract, 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 contract, for the construction of tourist quarters was not implemented. (b) The rent was not revised on 15.3.88, pursuant to the provisions of the contract, 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 contract, 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 contract should be applied, which provide for the immediate recovery of the land and parallel termination of the contract. As I was informed, the tenants acquired the right of possession of the rented 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. 4.42.11 Intervention 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 in a relevant decision, directed that, in most cases, the land be sold or leased, 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, could be collected in 4 equal interest free instalments. At 31.12.99 the total amount due amounted to £726.400, plus 9% interest. I requested the Director of the Department to take measures for the implementation of the Council of Ministers decision, for the collection of the amounts due. The Director of the Department informed me that the cases for which no instalments were paid will be submitted to the Council of Ministers, for cancellation of the relevant decision, while for the cases of delayed repayment of instalments, legal measures will be taken. 4.42.12 Establishment of a unified complete system of land information. The general computerisation of the Department commenced in 1987, with the assignment of a study to foreign consultants. In 1989 a "strategic plan" was prepared by a foreign company and in 1995 tenders were awarded for the implementation of the system. The completion of the system is expected to be completed in the middle of 2001, while the Department is using an interim temporary system for the processing of works. Up to the end of 1999, the total expenditure of the project amounted to £5.500.198. 4.42.13 Lease of government land in Limassol. A contract was signed with a specific 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 to 1994. As I was informed, the Director of the Department requested the Attorney General to take action for the termination of the contract. The matter is still pending at the Attorney General's Office. 4.42.14 Writs for the sale of immovable property. In my previous Reports I stated that a great delay had been observed in the execution of writs for the sale of immovable property for the collection of taxes in arrear. I pointed out to the Director of the Department that priority should be given to writs concerning tax arrears, so that public revenue would be promptly secured. The same situation continued also in 1999.

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4.42.15 Government farms in Pafos. In my previous Reports I stated that the contracts for the lease of government farms in Pafos were signed in 1980. Under the terms of the lease agreements the rents were subject to revision every eight years, i.e. in 1988 and 1996. It was further observed that in some cases there was sub letting of the farms to other farmers, contrary to the terms of the contracts and at much higher prices. 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 contracts, resulting to the continued loss of revenue, which amounts 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 1994, the next time that the right of revision can be exercised is in 2004. 4.42.16 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, since 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, remain the same. The Director of the Department informed me that despite the few measures taken, the problem will be definitely resolved with the computerisation and the introduction of new evaluation system. 4.42.17 Declaration of transfer of immovable property -District Lands and Surveys Office Famagusta. In my previous Reports I stated that an immovable property declaration was submitted at a sale price of £60.000, which the Department did not accept and specified the value to £100.000. On my observation, an investigation was carried out for this case, and the Department re-evaluated the price of the immovable to £400.000. In consequence an additional transfer fee of £24.000 was claimed, which, however, the buyer refused to pay and referred the case to the Supreme Court. As I was informed the case was dismissed by the Supreme Court on 15.10.96. The buyer filed an appeal against the above decision, which was also dismissed. The additional amount of transfer fees was paid by the buyer on 28.2.2000. 4.42.18 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 not yet been passed. The Government expenditure for the salaries of the rural clergy in 1999 amounted to £1.808.473, whereas the revenue from the lease of ecclesiastical land amounted to £21.672.

4.43 DEPARTMENT OF TOWN PLANNING AND HOUSING Part A 4.43.1 Development Budget. The Development Budget includes an amount of £14.116.638, which, mainly, concerns Town Planning Development Schemes. Out of this amount only

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£6.645.072 or 47% was spent, i.e. the degree of materialisation of the 1999 Budget was very low. Measures should be taken so that Budgets are prepared on a more realistic basis. 4.43.2 Government Housing Estate of Pano Lakatameia (Anthoupoli). Pursuant to the Attorney General's ruling, the Department, as the owner of the premises of the housing estate should pay the arrears of fees due to the sewerage system of the period 1994–1999, amounting to £44.000, and the ex Improvement of the Housing Estate to proceed to the necessary arrangements, so that for 2000 and after that, these fees to be paid by the persons eligible for the premises, once these are included in the invoices for water supply. I understand that the ex Improvement Board does not agree with the above arrangement. 4.43.3 Construction of official roads – Area of Water Supply Scheme of Meneou, Pervolia, Kiti, Mazotos (Phase A – Roads Section in Meneou–Pervolia–Kiti area). The ex Improvement Board of Kiti withholds from its loans the amount of £201.550 and declines to pay it to the Department of Planning and Housing, with the argument that this amount represents compensations for acquisitions of the main road, which falls within the administrative boundaries of Kiti. As a result, the existing financial implications pending, regarding this project cannot be settled. I understand that the Department is acting for the settlement of the matter the soonest possible 4.43.4 Delay in the payment of compensations for acquisitions • Improvement of the extension of Limassol–Saittas road up to Makarios III Avenue (N. Pattichis Avenue). • Improvement of Franklin Roosevelt Avenue in Limassol. • Construction of Macedonia Avenue in Limassol. • Improvement of road from Makarios III Avenue in Limassol to Mesa Gitonia and Agios Athanassios. The payment of substantial compensations due to the owners of acquisitioned plots for the purposes of the above projects is pending. In spite of the repeated notifications which are sent by the Department of Planning and Housing for depositing the amounts required for the settlement of the amounts due, Limassol Municipality continues to decline the payment of its share amounting to more than £433.000, resulting to multiple problems caused by this delay. Part B 4.43.5 Tenders. In some cases purchases were made without following the tender procedure and the relevant directions of the Accountant General, and as a result no payments have yet been effected. 4.43.6 Special Preservation Fund. In my previous Reports I stated that, contrary to the provisions of section 23 of Law 68(1)/92, the establishment of the above Fund has not been carried out, the purpose of which is the subsidisation of maintenance expenditure for preserved buildings. Up to date the relevant expenditures are covered from a Vote of the Development Budget and, for the years 1992–1999, the amount of £1.971.653 was spent for subsidising maintenance expenditure and interest. The Minister of Interior informed me that the establishment of a Special Preservation Fund, in accordance with the provisions of this Law, was not considered as the most efficient process and that the Department of Planning and Housing has prepared a proposal for the amendment

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of the relevant section of the Law, so that the expenditure for subsidising expenses for maintenance and interest, be made from the provision of the relevant Vote of the Budget. 4.43.7 Abandonment of houses in government housing estates. In some government housing estates there are still 187 houses, which, according to a Departmental search, have been either abandoned by the residents, without returning them to the Department, or stay there periodically, or are occupied illegally by non- eligible persons. As I was informed, the Department, in consultation with the Law Office, has proceeded to the leasing of a storage space, for the keeping of the furniture and assets found in the houses to be recovered, and proceeds to evictions, for the recovery of all the units illegally occupied. In case of lack of storage space, as per the Attorney General's ruling, the tenants will be informed to receive their assets and in case of no response at a specified deadline, the Department will proceed to the sale of their assets. 4.43.8 Extension of Danai Avenue (southern by–pass of Pafos). In my previous Reports I stated that, although the extension of the Avenue was completed in 1991, some problems continue to be unresolved with regard to this project. Amongst other problems, Geroskipou Municipality refuses to pay its contribution for the project, on the grounds that this is not a Town Planning project and it does not serve local residents. Also a private company refuses to construct part of the road across its land, which is being divided into building plots, in spite of its obligation, pursuant to the provisions of the permit granted for the division of building plots. As I was informed, the case of the private company was pending up to 1998. In 1999 the court decided in favour of the Municipality. The matter of Geroskipou Municipality contribution is pending at the Ministry of Interior.

4.44 PRESS AND INFORMATION OFFICE Part B 4.44.1 Fees for certified translations. In my Report for 1998 I stated that in several cases the interested parties fail to receive their translations, resulting to the non-collection of the relevant fees. I suggested that the possibility of collection of the relevant fees in advance, should be examined in cases where the actual number of pages can be determined, whereas in other cases an estimated amount could be collected, so that the translators fees should always be covered, and thus a motive will be instituted for interested parties to collect their documents. With the approval of the Ministry of Finance a new procedure was implemented as from 1.7.99, for the collection of translation fees in accordance with my suggestion, resulting to a considerable improvement of the situation. 4.44.2 Purchase of photographic archives. In my previous Reports I stated that on a Council of Ministers decision, the photographic archives of an individual photographer was purchased in 1995, for the amount of £40,000, and that until then the above archives remained unutilized in boxes, because of the non existence of the necessary, for this purpose, technical equipment. In Autumn 1998 the recording and registration of part of the photographic material in computerised archives was completed. The remaining part of the work, regarding about three quarters of the above archives, was recently completed. Additionally the arrangement, commenced, of about 25000 negatives of photographs and the printing of samples, which are being evaluated.

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4.44.3 Overtime. In my previous Reports I stated that a considerable number of time off hours, amounting up to 1000, have been credited to a number of employees of the Office for overtime accumulated during the last five years. As the allowance of free time due appears to be practically impossible, I suggested that the matter be referred to the Service of Public Administration and Personnel for regulation and determination of the relevant policy. I understand that the matter is under consideration by the Service of Public Administration and Personnel and the Ministry of Finance (Budget Division). I asked to be informed whether any decision has been taken for the settlement of time off due, and for the measures to be taken so that, in future, such accumulation of time off, which will be practically impossible to be granted, will be avoided. Efforts made towards the Ministry of Finance for securing additional funds, for the purpose of settlement of the free time due, as well as the differentiation of the way of payment of overtime, so that 75% of overtime to be paid in cash, instead of 50% was not fruitful. As a result, the free time due to 20 employees of the Office, at 31.12.99, was 5846 hours. 4.44.4 The cinematograph films Law of 1935. In my previous Reports I stated that the above Law has to be amended and modernised, in order to be in line with the present state of affairs, with regard to the fees collected 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) Regulation of 2000" have been laid before the House of Representatives, where they are still pending.

4.45 SERVICE FOR THE ADMINISTRATION OF TURKISH CYPRIOT (T/C) PROPERTIES Part A 4.45.1 General. According to the provisions of the Turkish Cypriot Properties (Administration and other matters) Law 139/91, section II, 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, which is the Minister of Interior, who is also responsible for the accounting administration of the Fund. 4.45.2 Accounts of the T/C Properties Fund. The accounts of the Fund for the year 1999 were submitted to my Office for audit on 8.6.2000, whereas, according to the provisions of the Turkish Cypriot Properties (Administration and other matters) (Temporary Provisions) Law of 1991, should have been ready for audit by the end of March 1999. 4.45.3 Budget. It was again observed that the 1999 Budget of the Fund was not submitted to the Council of Ministers and the House of Representatives for approval, as provided by the relevant Law. 4.45.4 Operating results. The receipts of the Fund for 1999, including the subsidy from the Relief Fund for Displaced and Affected Persons, amounted to £3.772.776 and the expenditure to £3.484.034. The accumulated reserve of the Fund at 31.12.99 was £455.280. 4.45.5 Arrears of revenue. According to a statement prepared by the Service, the arrears of revenue at 31.12.99 amounted to £781.061, compared to £692.286 for 1998. In addition there were arrears for the T/C boreholes of Peristerona–Akaki, amounting to £31.704. Cases were

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again observed where no legal action was taken for rents in arrear, contrary to the decision of the Management Committee for the Administration of Turkish Cypriot Properties that legal action should be taken in all cases of arrears outstanding for more than three months. In the cases of Evkaf properties, the Service proceeded to the signing of agreements with the persons involved, with effect from 1.7.91. I understand that measures are taken by the Guardian for effective settlement of such problems. 4.45.6 Illegal extensions/alterations to existing premises. It appears that 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. 4.45.7 Illegal acquisition and custody of T/C properties. It has been observed that 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 shops/houses. 4.45.8 Cash in hand. At 31.12.99 the cash in hand amounting to £2.228.157, were deposited 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. 4.45.9 Sewerage fees. The amount of £144.819 was still due, in 1999, to the Sewerage Board Nicosia, for sewerage fees up to 30.5.96 plus 20% surcharge, for T/C properties within the jurisdiction of the Board. In 2000, after a relevant agreement with the Sewerage Board, the amount due was paid, without the surcharge (£118.277). Part B 4.45.10 Financing of the T/C Properties Fund. In order to meet the expenses relating, mainly, to repairs of T/C properties, the Fund received in 1998, a subsidy of £111.317, from the Relief Fund for Displaced and Affected Persons. 4.45.11 Infertile – Unclaimed land. In Pafos District there are areas around 117.600 acres of infertile and unclaimed land. I expressed the view that the area of unused land is quite significant and that studies should be carried out for development purposes. I was informed that the matter is now under consideration. 4.45.12 Dividends of T/C shareholders in wine industries. In my Report for 1996, I stated that the Service requested the wine industries to submit statements of dividends due to T/C shareholders. Only one wine industry submitted statements and dividends, which belong to Turkish Cypriots. I requested that efforts should be made for the collection of the remaining dividends from the wine industries. It is further understood that publications were made in the daily press, for the purpose of finding Turkish Cypriot shareholders, regarding all wine industries, banks and other companies. Fifty six cases have already been found of shareholders of Cyprus Airways, who possess a total of 165807 shares. 4.45.13 Computerisation of accounts and registers. Although the software programmes have been prepared and the necessary mechanical equipment purchased, the computerised system has not yet been put into full operation. I believe that the completion of computerisation

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must be accelerated, for the utilization of the equipment purchased and the improvement of the administration of properties. 4.45.14 T/C Properties occupied by non–displaced persons. Certain non–displaced persons continue to occupy T/C houses, shops, land and open spaces, without any legal measures taken, in all cases, for their eviction. 4.45.15 Employment of staff on contract – Legality – Appointment of staff. In my Report for 1996 I stated that, according to the provisions of section 6 of Law 139/91, which empowers the Guardian to appoint staff to assist him in the exercise of his duties, 13 registration officers were employed on contract, month to month, and which are still in the Service. Given that the above section of the Law has been amended by the amendment Law 99(1)/92 dated 11.12.92, which stipulates that the Guardian, in carrying out his duties, should be assisted by civil servants, the continued employment of the 13 registration officers is not legally covered. I was informed that the Council of Ministers approved the establishment of 13 new permanent posts of Assistant Registration Officers for the Administration of T/C Properties, and that the process for completion is in progress. 4.45.16 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. The position of the Guardian is that the Government had difficulties, in the first years after the invasion, to impose even low rents for the T/C shops/premises, because of the strong reaction of political parties and the displaced persons organisation. His position further is that, with the recent reactivation of the Consultative Committee for T/C Properties, an effort will be made for the consensus of organised groups for the imposition of higher rents, with parallel legislative amendment of procedures for custody/use of T/C properties. 4.45.17 Arrears of rents for restaurants at "Makenzy" area, erected on T/C land. The tenants of the above restaurants continue to delay payment of rents amounting to £22.037. For these amounts court decisions were issued, which, however, were not executed. I requested the taking of drastic measures for the settlement of the amounts due. 4.45.18 Apartments Block at Yilmazoglu street 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. In my previous Report I expressed the view that measures should have been taken for his immediate eviction and collection of the rents in arrear due. In 1999, the Minister of Interior, as Guardian, decided the write off of this amount, and a new contract was signed with a lower rent. The Accountant of the Ministry informed me that a relevant study is being prepared, on the Minister's directions.

4.46 SERVICE FOR THE CARE AND REHABILITATION OF DISPLACED PERSONS Part A 4.46.1 Reduction of 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 assistance amount, according to the progress of works. It

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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 assistance, without reductions. 4.46.2 Revision, legalisation and codification of criteria. My Office suggested, since 1990, the codification of criteria for housing assistance to displaced and affected persons, in order to have a complete series of criteria, for easy reference. The final bill, which was processed by the Law Office and was submitted to the Minister of Interior, but has not yet been submitted to the House of Representatives, is very general, including a provision for the preparation of Regulations for dealing with the details. Part B 4.46.3 Computerisation. In my previous Reports I stated that the Service keeps special cards on which the details of each applicant and the financial assistance granted are recorded, and I suggested that the computerisation of these records should be expedited. In June 1995 the supply and installation of the hardware equipment was completed and the testing of the relevant software began, for the purpose of regulating certain problems presented. I understand that the completion of computerisation is still pending. With regard to the computerisation of the applicant's records, the Department of Information Technology informed my Office that the Service will be connected with the "Archives Population" of the Ministry of Interior, in 2000.

4.47 MIGRATION OFFICE Part A 4.47.1 Arrears of revenue due by repatriated Cypriots. At 31.12.99 the amounts due for the repatriation of various persons amounted to £5.720, compared to £5.440 for 1998. It is pointed out that out of the above expenditure, only £62 could be collected in 1999. 4.47.2 Revision of legislation. The Aliens and Migration Law (CAP 105) and the relevant regulations go as far back as the period of colonial rule, and it is imperative that these be amended and modernised, in order to be in line with the present state of affairs and the European Standards. Omissions in legislation were also observed regarding the issue of passports and travel documents. As I was informed, for the settlement of the first matter a relevant bill is being prepared by the Law Office, while for the second one a draft of the Population Archives Law has recently been submitted to the Law Office for legal processing, which includes special provisions regulating the whole matter. Part B 4.47.3 Aliens Branch – Computerised system. The upgrading of the computerised system of the Police has not yet taken place, so that the Aliens and Migration Office will be in a position to have access to all the functions of the system and to obtain directly all the necessary information, resulting to, (a) The non–immediate detection of aliens whose permit has expired, and

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(b) The weakness in the verification of the correctness of the purpose of stay and kind of occupation of aliens.

4.48 MINISTRY OF FOREIGN AFFAIRS Part A 4.48.1 Audit of the Accounts of Diplomatic Missions. The audit 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 1999 site inspections were carried out of the Embassy in Rome and the Permanent Mission in Brussels. A report was prepared for each Diplomatic Mission, which was submitted to the Ministry. 4.48.2 Audit of the Accounts of Honorary Consulates. Some Consulates have not submitted for audit their accounts for 1999. Most of these, delay to submit their accounts for previous years also. 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. 4.48.3 Insurance of household and motor vehicle of members of the Foreign Service transferred. The above insurance continues to be carried out with the same insurance company, to which the tender was awarded by the Departmental Tender Board of the Ministry on 4.1.86. In November 1998 the Main Tender Board, in reply to the Ministry's request for increase of the insurance premium for certain items insured, after a corresponding request of the above insurance company, pointed out that new tenders should be invited, with new terms. In October 1999 draft specifications were prepared by the Ministry, which were submitted to the Main Tender Board, which, however, pointed out the need for certain additional amendments. In view of the considerable time lapse, I pointed out that the preparation of final specifications should be processed without further delay, so that the invitation to tenders will be possible. 4.48.4 Telephones. Despite the directions issued by the Ministry in August and October 1998 to the Director of Divisions of the Ministry and to the Heads of Diplomatic Missions, for taking certain measures, for the purpose of exercising efficient control for the reduction of telephone expenditure, the expenses, however, of the Ministry and the Diplomatic Missions have exceeded the initial provisions of the relevant Votes. Specifically, while the initial provision of the Votes "Telephones" of the Ministry was £40.000 and of the Diplomatic Missions £152.500, the actual expenditure amounted to £52.735 and £166.400, respectively. In certain Diplomatic Missions the increase of expenditure for telephones, compared to the initial provision, varies between 30%–120%. The Director General of the Ministry informed me, in October 2000, that the increase of expenditure for telephone charges is, mainly, due to the increase in the number of Diplomatic Missions, the enormous increase of functions and activities, due to the Cyprus problem and the European Union negotiations, as well as the increase of telephone fees in certain countries. 4.48.5 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 Ambassador, at the time, in Cairo. The investigation was carried out by an officer of my Office, who visited, for this purpose, the Cairo

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Embassy for 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 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 as to the existence of any criminal offences. I understand that Police investigations, commenced in May 2000 and are still continued. The Director General of the Ministry informed me, in October 2000, that, regarding the disciplinary investigation, the Attorney General instituted the procedures for trial of the case, by the delivery of the relevant charge. With regard to the criminal side of the case, he informed me that Police investigations have not been completed yet. 4.48.6 Vienna Embassy -Purchases of medicines by the ex Ambassador. The above expenses for the purchase of medicines, made during the period 5.2.99–31.3.99, for a total amount of £1.601,24, and were charged to Votes of the Ministry of Health, were not accepted by the Ministry of Health and the above amount was charged to the personal advance account of the ex Ambassador who has retired on 1.4.99. In the meantime the Ministry of Finance, with a letter dated 6.4.2000, authorised the Accountant General to proceed to the relevant deductions from the pension of the ex Ambassador for the settlement of the above amount. The Director General of the Ministry informed me, in October 2000, that the settlement of the above amount was made in August 2000. He also informed me that the above officer referred the matter to the Ombudsman who is carrying an investigation. 4.48.7 Canberra High Commission (a) Purchase of computer equipment. It was observed that purchases of various computer spare parts/parts were made from the same company, for a total amount of A. $4.047 (£K1.471,63), without securing the approval of the Services of Information Technology, under the control of which is the relevant Vote, and without following the tender procedure. The above expenditure was wrongly charged to various Votes of the High Commission and of the Press Office, the provisions of which do not include such expenses. It was further observed that the charge of the amount of £717,09, out of the above expenditure, to the Vote "Expenses of Press Offices Abroad" was not accepted by the Press and Information Office, resulting to the transfer of the charge to the Advances account of the Ministry of Foreign Affairs, and requested to be informed of the action taken for its settlement. It was further observed that with the above spare parts/parts purchased a computer was set up, which was placed in the Ambassador's house, for which action I requested the necessary explanations. The Director General of the Ministry informed me, in October 2000, that my observations have been sent to the Ambassador, and his reply is expected. (b) Renewal of lease agreement of the Ambassador's residence. The renewal of the above agreement for a new five year period, from 11.9.99 to 10.9.2004, and increase of the monthly rent from A. $3.200 to A. $3.400 (£71 monthly increase) and the owner's commitment to repair/renovate the building, was carried out by the High Commissioner without the required prior approval of the Ministry of Finance, which was sought and granted later in December 1999, and of the Main Tender Board.

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The Director General of the Ministry informed me in October 2000 that, in July 2000, with his circular to the Heads of Diplomatic Missions, requested that they should take necessary action promptly for securing the required approvals, regarding the lease of buildings. 4.48.8 Berlin Embassy -Purchase of Ambassador's residence. After a Council of Ministers decision, a committee consisting of representatives of the Ministries of Foreign Affairs, Finance and Communications and Works, recommended, in June 1996, the purchase of a building in Berlin, for £1,75 m. for the residence of the Republic's Ambassador. The Council of Ministers with a new decision in July 1996 approved the purchase of the recommended building, which was effected in 1997. A representative of the Department of Public Works visited Berlin, repeatedly, from October 1997 to November 1999 and prepared successive reports for repairs/renovations of the building. The Ministry of Finance expressed reservations for the magnitude of the repairs/renovations and recommended, in December 1999, that a new visit should take place of the representative of the Department of Public Works to Berlin, for carrying out a new study. My Office expressed the view that the purchase and procedures for the repairs of the building were made without the appropriate planning and technical and financial study, whereas the Department of Public Works had neither studied nor costed promptly and correctly the required works. As a result, four years after the purchase of the building, this was entirely unsuitable for the purpose for which it was purchased, and the Ambassador stayed at a hotel. The value of the building, according to evaluations made, in the efforts to sell it, was in the region of £1,2 m. –£1,4 m. In view of the above, my Office recommended that, for the purchase/construction of immovables abroad, the services of resident consultants should be used, who will be responsible for the costing and submission of alternative proposals, which to be in line with the minimum and maximum requirements of the Republic. The Director General of the Ministry informed me in October 2000, that he fully agrees with my recommendation and that every effort will be made for its implementation. 4.48.9 Purchase/construction or lease of buildings for Diplomatic Missions and Ambassadors' residences. A relevant investigation carried out by my Office revealed the following: (a) Housing of Diplomatic and other Missions. At the end of 1999, 38 Diplomatic Missions were in operation (25 Embassies, 5 High Commissions, 3 permanent Missions and 5 Consulates General) in 37 cities abroad, the housing of which, as well as the Ambassadors, is made in either owned or leased for this purpose buildings. Operating also were other Missions abroad (Trade Centres, Tourist Offices, Press Offices, Merchant Shipping Offices etc.), some of which are housed together with the Diplomatic Missions, while for the others separate buildings are leased. (b) Purchase of buildings. At the end of 1999 the Republic was the owner of 17 buildings (8 buildings for Diplomatic Missions Offices and 9 Ambassadors' residences) in the countries of 11 Diplomatic Missions abroad, which were acquired during the period 1961–1997, for a total cost of £7.773.004. (c) Lease of buildings. At the end of 1999 the Republic had under lease 53 buildings, i.e. 28 for the housing of Diplomatic Missions and other Missions, which are housed together, and 25

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Ambassadors' residences. The total amount for the rents paid in 1999 for the above leases amounted to £1.369.746 (£1.232.692 for 1998). Also for the lease of buildings for the housing of other Missions, which are not housed with the Diplomatic Missions, the amount paid in 1999 for the above leases amounted to £573.000 (£493.540 for 1998). It is pointed out that the total expenditure for the lease of buildings abroad for the period 1994– 1999 amounted to £9.178.627. (d) Purchase or/and construction of buildings, instead of lease. In view of the substantial amounts paid for the lease of buildings abroad, which, however, is continually increasing, I expressed the view that the purchase/construction of buildings is more appropriate and constitutes a suitable investment, contrary to the payment of rents, which in the long run proves anti- economical, because from the purchases made up to now, it appears that the purchases of buildings is to the interest of the Republic. I suggested an in depth study to be carried out for this purpose by the Ministry of Foreign Affairs, in cooperation with other Ministries or/and Services with Missions abroad and, in consultation with the Ministry of Finance and the Planning Bureau, for the determination of the actual housing needs of all the Services operating abroad. In the study, consideration must be given to the present and future needs, the needs in Ambassadors' residences, provision for the co-housing of all Services operating in the same city or/and country (where possible) in a unified owned building, as well as the adequacy/suitability of the existing owned buildings. Pursuant to the results of the study a detailed list of all needs should be prepared, and determination of specific criteria regarding the buildings to be acquired. Furthermore, a programme for the purchase/construction of buildings should be prepared, according to priorities specified, the implementation of which will be carried out in accordance with the Government's financial capabilities and in accordance with the Public Tenders Law and Regulations. The Director General of the Ministry informed me, in October 2000, that the Ministry of Foreign Affairs agrees with my view that the lease of buildings abroad is not to the interest of the Republic. At the same time he expressed the view that the procedure provided in the new Public Tenders Law and Regulations proved complicated and time wasting, regarding the purchase/construction of buildings abroad. Having in mind the above, as well as the Council of Ministers decision dated 29.10.99 for housing with the Diplomatic Missions the other Services of the Republic operating abroad, plans to convene a meeting of all the Republic's Services involved, for the consideration of the following issues: • Efficient and legal procedure for the purchase/construction of buildings of the Ministry of Foreign Affairs in countries where Diplomatic Missions operate. • Determination of a plan and criteria for the acquisition of buildings, as recommended by my Office. • Determination of criteria for the lease of buildings for the housing of Embassies and Ambassadors' residences abroad. Part B 4.48.10 Rent allowance abroad. In my letter to the Director General of the Ministry of Finance I stated that specific provisions 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

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70%–80% of their emoluments and I suggested that the amendment of the Scheme should be considered. The above were communicated to the Ministry of Foreign Affairs, and additionally, with relevant letters, I recommended that adequate documentary evidence should be sought confirming the validity of contracts and of other parameters considered for the determination of the allowance. On 13.10.98, 6.9.99 and 28.9.99 relevant circulars were issued by the Ministry, under which compliance to the above recommendations of my Office, is requested. Furthermore, the Ministry of Finance suggested to the Ministry of Foreign Affairs a new formula for the calculation of rent allowance abroad, and requested that a new meeting should be convened for specific decisions to be taken. The whole matter is still under the consideration of the Ministry of Foreign Affairs, in cooperation with the employee's Union, while the Ministry of Finance, under new letters dated 27.11.98 and 26.4.99, requests that a new meeting be convened, as soon as possible, for the modification of the existing Scheme, in such a way as to lift the weaknesses and problems that continue to be presented. The total amount of rent allowance paid, in 1999, to members of the Foreign Service amounted to £376.825 (£339.828 for 1998 and £305.196 for 1997). The Director General of the Ministry informed me, in October 2000 that, with the consent of the Minister of Foreign Affairs, the employees Union, in March 2000, assigned to a private Firm of Auditors the study of various allowances of the Ministry of Foreign Affairs, including also the rent allowance. The study of the above Firm was submitted to the Union in June 2000 and it is expected to be examined in common by the Ministers of Finance and Foreign Affairs. 4.48.11 Athens Embassy -Buildings – Accommodation 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 were 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 rented, in the centre of Athens, it has not been possible yet to resolve the problem. In November 1998, the Main Tender Board requested, through the local press in Athens, the submission of written manifestation of interest, from interested parties who could satisfy the needs of the Embassy for the acquisition of an existing building, for the accommodation of all the Services operating in Athens. By the expiration of the relevant deadline on 4.12.98, 24 manifestations of interest were submitted, which were evaluated by the Evaluation Committee. According the Committee's final report, only ten of those meet the specified criteria. The main Tender Board, having taken into consideration, inter alia, that tender invitation was proclaimed without proper planning, i.e. without the preparation of terms, specifications and detailed building requirements, finally decided in July 2000, the cancellation of the above tender (written manifestation of interest), and the proclamation of tenders for the construction of the Embassy building under the "design–construction" method, and the procedure of two envelopes (technical and financial proposal). The new tenders will be invited from the pre-selected tenderers of the November 1998 competition, the tender of which referred to suitable plots of

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land. The appointment of an individual Project Manager was also decided, who will prepare the building requirements of the Embassy and the terms and specifications of the tenders.

4.49 MINISTRY OF FINANCE Part A 4.49.1 Purchase of official vehicles for state officials. As I stated in my Report for 1998, in March 1998 tenders were invited for the purchase of 5–7 vehicles of an engine capacity exceeding 2450 c.c., for the replacement of an equivalent number of ministerial vehicles. In October 1998 the Main Tender Board decided to cancel the tenders, due to omissions or/and ambiguities in the tender invitation documents. As the lowest tenderer referred the case to the Supreme Court, which decided in his favour, the Main Tender Board reconsidered the issue in March 1999 and decided to award the tender to the above tenderer, for vehicles of 2500 c.c., for £8.875 each. In May 1999, the Council of Ministers considering that, (a) the possible purchase and concession of vehicles to officials for whom the tender was invited (Ministers) was considered as unequal treatment between them and other officials, to whom a bigger cubic capacity vehicle would be granted, (b) to the officials, eligible for official vehicles of 2000 c.c., new vehicles should be granted in September 1999, according to the government procedure and the terms of the contract for the previous purchase, decided to approve the purchase of a total of 17 vehicles of 2500 c.c. at the price of £9.775 each and granting them, by exception, to those eligible officials. Finally 25 vehicles were purchased. For the replacement of vehicles for the Ministers, new tenders were invited in March 1999, which were awarded in May 1999, for vehicles of 2800 c.c., for £13.300 each. While the tender was awarded for 5–7 vehicles, 12 vehicles were purchased. In both cases where more vehicles were purchased than the tender provision, the approval of the Main Tender Board was not sought as provided by the relevant Regulations. 4.49.2 Duty-free shops at Larnaka and Pafos airports. Government has assigned the administration of the duty free shops to Cyprus Airways, as per the Council of Ministers decision dated 27.10.95. In the effort to strengthen the capital status of the Company, as the basic fee for the first year of implementation of the agreement, it was specified that shares of the company would be given to Government. For the remaining 4 years of the agreement, the basic fee was determined as follows: 50% of the 1995 fee in cash, in favour of the State Budget, and 50% in shares. Pursuant to the above, an obligation was created up to 31.10.99 for purchase by Government of 25.878.514 shares, of nominal value of £12.939.257. This obligation remained pending, because it was contrary to the Cyprus Stock Exchange Regulations, which specifically provide that no shareholder of a public company can control directly or indirectly a percentage greater than the 70% of the share capital of the company and, in addition, that the 25% of the share capital must be widely and satisfactorily spread out to the public. It has been decided that the settlement of pending matters, emanating from the above agreement, be carried out within the effort for the reduction of Government percentage in the company's share capital.

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I understand that outstanding matters have been settled, in the process of increase of the company's share capital, which was completed in May 2000.

4.50 TREASURY Part A 4.50.1 Arrears of revenue. The arrears of revenue at 31.12.99 amounted to £2,2 m., compared to £2,0 m. for the previous year. An amount of £1,3 m. represents interest in arrear due by the Cyprus Broadcasting Corporation, out of which £0,7 m. is outstanding since 1974. 4.50.2 Central Bank of Cyprus. In 1999 the amount of £8,74 m. was deposited to the Consolidated Fund of the Republic, which represents the net profit of the Bank for 1998. 4.50.3 Government Lottery. The net profit of the Government Lottery for 1999 was £20,8 m., compared to £24,5 m. for 1998. The decrease by £3,6 m. (14,77%) was, mainly, due to the decrease in sales of the weekly lottery tickets and of the automatic ones of the "gold", the "super" and the "mini" type. There was also a decrease in LOTTO and PROTO. 4.50.4 Printing of Government Lottery. During the year the company which signed the agreement with Government for the printing of lottery tickets, has printed, for the automatic type "super", a larger number of winning tickets than the number provided in the relevant Regulations. The amount which Government has paid for the above surplus tickets and which amounts to about £353.000, has been almost completely refunded to Government by the company. 4.50.5 Subsidies. The subsidies paid for the last two years are as follows: 1999 1998 £m. £m. Vine Products 9,24 11,23 Cereals 19,70 35,13 Interest subsidy 0,36 0,58 29,30 46,94

4.50.6 Contribution for the United Nations Peace Force in Cyprus. The Cyprus Government contribution for 1999 was £8,3 m. 4.50.7 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 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 1999 amounted to £94,6 m., compared to £84,5 m. for 1998, i.e. there was an increase of £10,1 m. or 11,95%, due to new pensioners and the granting of cost of living increases. During 1999 calculations for 941 cases were made, for the retirement of civil servants and for 151 cases of pensions to widows/widowers and children.

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From the audit of the above, it was verified that calculations had to be corrected in 39 cases of retirements and 14 cases of widows’ pensions. Out of the above 39 cases, 17 cases regarding pension benefits should have been increased for a total amount of about £6,676 in annual pension and about £30.175 in lump sums or gratuities. For the remaining 22 cases the pension benefits should have been decreased for a total amount of about £34.098 in annual pension and about £40.735 in lump sums and gratuities. Out of the 14 cases for widows’ pensions, in 6 cases the annual pension should have been increased for a total amount of about £3.385 and in the remaining 8 cases to be decreased for a total amount of about £3.413. (b) 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, the recovery of which is difficult. (c) According to a population report of the Department of Statistical Services for 1999, the average length of life for men is 75 and for women 80 years, whereas the composition of the population, with regard to sex, is 49,9% and 50,1%, respectively. On the basis of the above statistical information, it is concluded that the average length of life of a Cypriot citizen today is 77,5 years, and, therefore, from the preventive audit of the Audit Office, for the correctness of pension and other benefits for 1999, a saving is observed for a total amount of about £488.642, which would have been paid if the Audit Office did not exercise preventive audit. (d) According to the Pensions (Amendment) Law No. 3(1) of 1998, civil servants who retire to undertake a public office, contrary to their post/position, on their retirement from Government Service, over and above the pension benefits calculated on their actual service, they receive, as per Council of Ministers decision, additional pension benefits, which correspond to a period of service up to 10 years. According to the amendment, this additional pension is paid immediately with the appointment in the office in question. Previously, and specifically from 29 May 1962 up to 30 January 1998, from the period of service which was taken into consideration for the additional pension benefits, the months of service the ex civil servants had in the public office, were deducted, so that double pension benefits would not be paid for the same period. Furthermore, this additional pension commenced being paid to those eligible, as soon as they left the public office and not immediately on their appointment. The matter of double pension benefits and payment immediately on the appointment to a public office was submitted to the Minister of Finance, who is the competent authority on matters of pensions. (e) "Ex gratia" grants by the Council of Ministers. Up to July 1999 the Council of Ministers approved in various cases "ex gratia" grants. In August of the same year my Office requested the Law Office to reply to the question whether the Council of Ministers can increase ex gratia the pension or grants, since the Pensions Law

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contains specific provisions regarding the amount of pension or grant paid. For this matter it appears that different rulings have been issued by former Attorneys General. The Attorney General of the Republic, in reply to my question, stated that he adopts the ruling of the former Attorney General Mrs. Stella Soulioti, in which it is stated that "As the pensions Law or any other Law containing specific provisions regarding the amount etc. of the pension or grant which any person is eligible, the Council of Ministers cannot increase "ex gratia" this pension or grant. If Government believes that the relevant provisions are not enough, then a bill must be introduced for their amendment. The matter of "ex gratia" grants by the Council of Ministers was submitted to the Minister of Finance, who is the competent Authority for pension benefits and other grants, for necessary action. 4.50.8 Compensations and costs in action. The amount of £0,8 m. was paid in 1999 (£0.9 m. for 1998) for compensations and legal costs for law suits against the Republic.

4.51 RELIEF FUND FOR DISPLACED AND AFFECTED PERSONS Part A 4.51.1 Balance Sheet. At 31.12.99 the Balance Sheet of the Fund showed the following:

1 9 9 9 1 9 9 8 £000 £000 £000 £000 ASSETS: Loans 48.539 34.497 Revolving Fund: Loans to Organizations 2.732 2.994 Cash with Treasury - 2.732 43 3.037 51.271 37.534 LIABILITIES: Deficit on 1st January (276.971) (215.972) Deficit for the year (72.077) (69.448) Transfer to Revolving Fund 304 (348.744) 961 (284.459) Revolving Fund for the Housing of Displaced Civil Servants 2.733 3.037 Amount due to Treasury 397.282 318.956 51.271 37.534

Details are stated in Part 5.4 of my Report. 4.51.2 Receipts and Payments Account The Receipts and Payments Account of the Fund for the year ended 31 December 1999 was as follows:

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1999 1998 £000 £000 Contributions 1.509 1.723 Other Receipts 4.549 4.682 6.058 6.405 Less Payments 78.135 75.853 Deficit for the year 72.077 69.448

4.52 DEPARTMENT OF GOVERNMENT PURCHASING AND SUPPLY Part A 4.52.1 Tender No. 2000T0016 for the supply of Electric Contact Units, Minor Automatic Switches and Automatic Leakage Switches. I observed that in the evaluation report of the Department, the recommendation was for the award of the items of category 1 of the tender to the most expensive tenderer, who, taking into consideration the provision for the protection of the local industry, became the cheapest. An investigation carried out by my Office revealed that no tenderer had referred to this provision in his tender, or submitted the required certificates/confirmations, according to the terms of the tenders. The Department, after the opening of the tender, had requested the tenderer, who was recommended for the award of the tender, to submit the certificates/confirmations required for the implementation of the provision for the protection of the local industry, while from the second lower tenderer no request for their submission was made. I also observed that the two tenderers are known companies occupied with the assembly of such products and that the prices of the tender, the award of which was recommended by the Department, were by 40%– 50% higher than the previous purchase, without any comments for this difference in the evaluation report. In view of the above I requested, in June 2000, the Director of the Department to investigate the matter and inform me accordingly, with regard to the handling of the tender and the possible responsibilities of the members of the Evaluation Committee. 4.52.2 Sale of scrap materials under public auction. I observed that in the statements of useless materials, which were submitted to my Office for comments, there were ambiguities, omissions and inadequate information or/and documents, which, at first sight, did not justify their sale. Furthermore on a site inspection of the vehicles which had been transferred to the Department's disposal area, damages, omissions and changes were observed, which were not included in the observations of the relevant statements. In view of the above, I suggested, in March 2000, to the Director of the Department that he should call a meeting, with the participation of all Services/Departments involved, for the re-examination of procedures for the inspection/sale of unsuitable materials. 4.52.3 Closing stock. The total value of stock of the 26635 items held at the Department of Government Purchasing and Supply, at 31.12.99, was £4,75 m., compared to £5.07 m. for 26678 items for 1998. 4.52.4 Advances – Unallocated Stores Account. The balance of the advance account, at 31.12.99, was £4,75 m. The movement of the "Advances – Unallocated Stores Account" for the last five years was as follows:

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Year Purchases Issues Stocks Stocks to Stocks to Stock purchases issues turnover £000 £000 £000 % % 1995 7.826 8.182 3.549 45 43 2,17 1996 8.324 7.738 4.129 50 53 2,02 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 4.52.5 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 1999, exceeded the amount of £7,9 m. and £4,7 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. Management, however, during the last year, made an effort to deal with the problem, which appears to be successful. It is imperative, however, that the effort is continued, for the purpose of study and introduction of new methods/systems (such as "virtual stores), which are expected to contribute positively towards the increase of productivity. 4.52.6 Computerisation. As I stated in my Report for 1998, the existing computerised system of the Department, is old fashioned and impedes tender control and the monitoring of stocks by the Department. I recommended that immediate priority be given for the acquirement of a suitable modern system. 4.52.7 Increased slow moving stocks. As I stated in my Report for 1998, it was observed that for certain items increased stocks are kept. Specifically for 5 machinery of the same type, 1800 different types of spare parts were kept, valued at £100.938. In 1999 1538 types of spare parts were kept for the same machinery valued at £83.979. Also for another type of machinery, out of which only three were in use, 1476 different spare parts were kept, in 1998, valued at £91.923, whereas in 1999, the respective numbers were 1222 items of spare parts, valued at £87.402. For the stocks kept at the stores of the Department of Government Purchasing and Supply, a special study has been carried out, on the basis of which the following are recommended: (a) Stocks of a total value of about £338.000 are disposed by public auction. (b) Various types of spare parts, which, although, remain idle or show very little movement in the last 3–4 years, it is recommended that these be kept until the end of the useful life of the machinery for which they were purchased. (c) In future, the purchases of products on behalf of other Departments to be done only in the cases where the Heads of these Departments submit written confirmation that the required departmental funds are available and which must be promptly allocated, whereas the products to be supplied must not remain unclaimed in the stores of the Department of Government

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Purchasing and Supply for a period of more than six months from the date of delivery, except for few very special cases.

4.53 DEPARTMENT OF INLAND REVENUE Part A 4.53.1 Income tax. The collection of income tax by taxpayer category, as classified by the Department, are as follows: 1 9 9 9 1 9 9 8 £m. % £m. % Government employees 81,1 23,2 67,5 22,5 Private employees 82,8 23,7 81,3 27,1 Tax on dividends 7,5 2,1 9,2 3,0 Deduction of tax on interest remitted abroad 0,2 0,1 0,3 0,1 Companies 151,9 43,5 118,8 39,6 Self employed 19,8 5,7 17,7 6,0 According to sections 30-32 of the Income tax 1,7 0,5 1,4 0,4 Laws 1961-1999 Off shore companies employees 4,2 1,2 3,8 1,3 349,2 100,0 300,0 100,0

4.53.2 Refunds of income tax. The refunds of income tax amounted to £15,3 m., compared to £14,3 m. for 1998. 4.53.3 Assessments under objection. At 31.12.99 there were 62164 assessments under objection, for a total tax amount of £168.881.564. The following table shows the movement of objections: 1999 1998 Objections for: Income Tax 42889 38998 Special Defence Contribution 15433 12469 *Immovable Property Tax 12.11.99 2723 2861 *Capital Gains Tax 12.11.99 1119 1398 62164 55726 The assessments under objection have increased by 9,9%. * The old computerised systems for the Immovable Property Tax and the Capital Gains Tax were not in operation in November 1999, whereas the new systems have been put into operation in June 2000. As a result, the relevant information regarding arrears at 31.12.99, were not available. The computerisation of most of the works of the Department has positively contributed towards the processing and completion of the new and the old tax assessment cases. There is still, however, a substantial number of objections outstanding for several years. The main reasons for the outstanding cases are the following:

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(a) Non–compliance of the taxpayers to the requirements of the Department for submission of the necessary documents and statements. (b) In cases where legal measures are taken against taxpayers for submission of the necessary documents, several of these do not comply with court orders. (c) The Department, due to volume of work, is unable to deal promptly with the documents submitted by taxpayers. 4.53.4 Arrears of taxes. The total amount of taxes in arrear as declared by the Department, but without being fully verified, was £167.206.428, compared to £158.287.096 for the previous year, i.e. there was an increase of £8.919.332 or 5,6%. The following table shows arrears of taxes by category. Increase/ 1999 1998 (Decrease) £m. £m. % Income tax 111,11 101,31 9,7 Income tax P.A.Y.E. 7,13 6,44 10,7 Immovable property tax (Law 24/80)* 6,05 5,60 8,0 Capital gains tax * 20,10 20,35 (1,2) Estate duty 4,45 3,71 - Tax on Services 0,21 0,21 - Other taxes 2,01 1,99 1,0 Special contribution 6,55 8,25 (20,6) Special contribution for Defence 9,59 10,42 (8,0) 167,20 158,28 5,6 * Arrears up to 12.11.99 Notes: (a) The above arrears do not include the relevant interest. Interest in arrear, at 31.12.99, was £34.717.507 for income tax, £3.873.195 for temporary tax, £14.389 for shares and £4.843.956 for special contribution for defence. (b) The arrears of income tax by category are as follows: £m. Government employees 3,03 Other employees 12,40 Self employed 27,20 Companies 68,06 Public Corporations, Cooperative Institutions 0,11 Taxpayers for Immovable Property and Capital Gains Tax only 0,01 110,81 Income tax for previous years 0,30 111,11

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(c) The total amount of £118,24 m. which is income tax due for 1999 includes the amount of £85,97 m. which represents the following: £m. Amounts for which legal action was taken 27,75 Amounts payable on instalments 23,49 Amounts under objection not processed by 31.12.99 5,00 Amounts collected but not credited, due to technical 0,50 problem in the computerised system (estimated) Non-collectible amounts due to bankruptcies, deceased, 8,48 unknown persons etc. Temporary tax of 1999 mainly collected in January 20,75 85,97

(d) The amount of £20,10 m. due for 1999 capital gains tax includes the following: £m. Amounts for which legal measures were taken 1,42 Amounts due from churches and monasteries 6,97 Bankruptcies 0,28 8,67

(e) The amount of £6,55 m. which is due for 1999 refugee special contribution includes the following: £m. Objections/Legal recourse 1,16 Amounts for which legal measures were taken 1,52 Assessments received after 31.12.99 0,24 Non-collectible amounts due to bankruptcies, deceased, unknown etc. 1,44 4,36

(f) The amount of £4,4 m. which is due for 1999 estate duly 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. 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. 4.53.5 Objections and arrears of a large hotel company in Pafos. The amount of £615.132 plus interest is due by a large hotel company in Pafos for income tax for the years 1992–1995. In January 1998 an agreement was reached for the gradual repayment of the above amount, which, however, was not complied with.

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The same company has submitted objections for the assessments of the years 1989–1993, for a total amount, under objection, £562.562. I requested the Director that priority should be given to the settlement of the above objections, which represent about 50% of the assessment amounts under objection in Pafos. The Director of the Department informed me that the objections of the above company have been settled with the revision of the relevant amounts and a new agreement reached for the gradual repayment of the amount agreed. 4.53.6 Estate duty – File No. R.1050. According to the evaluation of the Estate Duty Office, the property of the deceased, at the time of death, amounted to £1.682.144. (a) The tax imposed on 4.12.97 was £740.215. On 10 and 16 December 1997 approval was granted for the release of property of a total amount of £1.090.000, for the purpose of sale and payment of tax. Although the property was sold, tax amounting to £334.533 plus interest, has not yet been settled. The Director of the Department informed me that commitment of property was secured the value of which covers the tax liability plus interest. (b) On 11.9.97, the amount of £198.470, which was deposited in a joint account with the wife of the deceased, in a Cooperative Institution, was withdrawn without the permission of the Registrar of Estate Duty. The Director of the Department informed me that, despite the fact that the above amount was withdrawn without his knowledge, finally this amount has been fully taxed. 4.53.7 Estate Duty (a) Legislation. Under the Law 74(1)/2000 approved by the House of Representatives on 16.2.2000, the above tax was abolished as from 1.1.2000. (b) Audit of estate duty files. A sample audit of the above files revealed significant information for which, the Director, on my suggestion, carried out an investigation. (i) In a specific case information was produced justifying further investigation, in order to verify whether certain property items of the deceased, such as shares, immovables etc., declared in the property statement, should be re-evaluated, or other movable property, such as cash, given as gifts by the deceased, within a period of three years before his death, should be taken into consideration for the calculation of tax. An investigation carried out by the Director, revealed that property valued at £380.282 was not declared by the administrator. The total of taxes and fine on the above sum amounted to £223.338, which was collected on 5.11.99. (ii) In a statement of account of a deceased, a payment appears of the amount of £4.655, as insurance premium to an insurance company. From the insurance premium, the compensation for death, which appeared to be considerable, was not included in the property assets of the deceased. I suggested the carrying out of an investigation regarding the amount of compensation paid on the basis of the above insurance premium. After an investigation of the Director it was proved that the wife of the deceased collected insurance amounting to £1.000.000, which the Director considered taxable and imposed, on 31.3.2000, additional tax of £498.402, plus interest since 24.4.97. On 27.4.2000 an objection was raised by the heiress. During the examination of the case, a legal problem came up and the opinion of the Attorney General was sought. (c) Unblocking of assets of a deceased. For the purpose of unblocking the assets of a deceased, two types of documents are issued to the heirs. Form I.R.238 for immovable

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property, addressed to the Lands Office and form I.R.247 addressed to Banks, Cooperative Institutions etc., for the unblocking of deposits and other credit balances. In the past I had suggested that, for better follow up of the above certificates, there should be controlled counterfoil books, with the required number of copies, one of which would remain in the book for audit purposes. As I was informed, the Director of the Department accepted my suggestion and the relevant counterfoil books have already been issued. 4.53.8 Assessments of immovable property. It has been observed that several assessments carried out by the Income Tax Office differ considerably from those of the Lands Office, resulting to a negative effect on Government revenue. In a specific case, for purposes of estate duty, immovables were assessed by the Department for £60,000, whereas the Lands Office assessment was £105.000, resulting to the collection of additional tax on the difference of £45.000. In my letter to the Director of the Department of Inland Revenue, I suggested that, in cases where it is difficult for an assessment to be made under the present state of affairs, or during specific periods, the matter be referred to the Director of the Lands and Surveys Department, as the appropriate Department. As I was informed, whenever necessary, officers of the Inland Revenue Department are in consultation with officers of the Lands and Surveys Department. 4.53.9 Deduction of income tax from the emoluments of employees (P.A.Y.E.). The system of deduction of income tax from the emoluments of employees presents several problems. Several employers either do not deduct tax from the emoluments of their employees, or withhold considerable amounts from the tax deducted. At 31.12.99 the total amount of tax deducted, but not paid to Government amounted to £7,13 m. Part of this amount refers to taxation years before 1990 and there are increased possibilities for losses. I requested to be informed of the measures to be taken and the Director informed me that the Department is proceeding to the investigation of the cases and, where necessary, legal measures will be taken. He stated further that, with the computerisation of the system in April 1999, the follow up process has been considerably improved. 4.53.10 Agreements for settlement of taxes due. Pursuant to the authorities granted under Section 40 of the Verification and Collection of Taxes Law, the Director, in several cases, proceeds to agreements with taxpayers, for the settlement by instalments of taxes and arrears due. Cases have been observed where taxpayers do not comply with the agreements, resulting to delays in the collection of revenue and the taking of legal measures against the above taxpayers. As I was informed, in cases where taxpayers do not comply with the agreements, and provided that satisfactory explanations are given, the Department proceeds to new agreements for the repayment of taxes due. 4.53.11 Execution of writs for sale of immovable property. Several writs for the sale of immovable property are not executed, resulting to delays for several years of the collection of the taxes due. Cases have also been observed where the Department proceeds to the freezing of the execution of writs or in the temporary withdrawal of the charges on property (memos) to facilitate settlement of taxes by instalments, but several agreements are not complied with.

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As I was informed, in the cases where the agreement for the repayment of taxes due, after the withdrawal of the writ for sale of the immovable property, are not complied with, the Department recommences the procedure for the sale of the property. I recommended that, in consultation with the Director of the Department of Lands and Surveys, efforts be made for the acceleration of procedures for the execution of writs for the sale of immovable property. My recommendation was accepted by the Director of the Department. Part B 4.53.12 Services tax. The Services Tax Law has been abolished since 1.1.93, but there are still collectible amounts totalling £208.478, relating to taxes for previous years. The collection of the above amount, however, is very difficult, almost impossible, because most taxpayers are foreigners, or persons who changed addresses etc. The Director of the Department stated that the efforts for finding the taxpayers in question are continued. 4.53.13 Special contribution. The collection of special contribution amounted to £1,5 m. (£2 m. for 1998). In addition interest was collected amounting to £0,9 m., for 1999, and £0,9 m. for 1998. 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. 4.53.14 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, projects of companies and Organisations with or without legal status, as well as for the final settlement of the amounts collected for self employed. The collections of the Department amounted to £52 m., compared to £38,3 m. for 1998, i.e. there was an increase of £13,7 m. (35,8%). This amount was deposited to the Defence Fund of the Republic. 4.53.15 Tax assessments of the ex Director of the Department of Water Development. In my letter dated 17.8.98 to the Director of the Department of Inland Revenue, I requested that a detailed assessment examination be carried out for the above taxpayer. I requested that the examination should include information, which had already been submitted by him, as well as the contents of my detailed report, in order to be verified whether the increase of property is justified, or additional tax must be levied on income, which has not been declared. The Director informed me that the investigation is continued. 4.53.16 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 Director of the Department informed me that taxpayers' compliance varies to about 75%. 4.53.17 Work in arrear. As I stated in my pervious Reports, despite the efforts made by the Department, a huge volume of work is still in arrear. Specifically, it was observed that, besides delays for assessments under objection, there were a considerable number of persons with taxable income, for whom no income tax files had been prepared. In tax returns the examination of which is delayed, cases are included relating to substantial amounts of tax, and I suggested that priority should be given to the examination of these cases. The Director of the Department informed me that, with the new procedures that have recently been adopted and the completion of computerisation of the works of the Department, it is expected that there will be a substantial reduction of work in arrear. He stated further that the

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Department has set a policy for dealing with such a number of files, as it is possible to process, giving priority to the most important cases. 4.53.18 Taxes due from ecclesiastical authorities. It was again observed that ecclesiastical authorities do not pay tax for immovable property, capital gains, special contribution etc. For capital gains only the tax due amounts to £7,0 m. For the other taxes there are no records as to the amount due. With the enactment of Law 48(1)/99 on 28.5.99, the ecclesiastical authorities pay capital gains tax. 4.53.19 Taxation of foreign betting companies and their agents in Cyprus. -Foreign companies. According to records kept by the Treasury, the total legal bettings for the last five years amounted to £93,3 m. out of which the amount of £23,3 m. was the tax collected. After a study and investigation of the matter of taxation of these companies, it was decided that, the companies that have permanent residence in the Republic, are subject to taxation in Cyprus, and the agents of these companies were asked to submit audited accounts and income assessments for the years 1991–1996. Tax assessments have been submitted to all companies for the years 1992–1996. Objections were raised against the assessments and the companies were asked to submit their accounts. The companies did not submit their accounts and the Department proceeded to the examination of the cases. The matter is pending before the Director of the Department of Inland Revenue for final decision. I have been informed that some cases have been settled, while the remaining are still pending. 4.53.20 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. and 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. The revised total expenditure, which includes maintenance, operational support and expansion of the system amounts to £3,4 m., while up to 31.12.99 £3,2 m. have been spent. As a result of the complicated system and other unforeseen factors, the agreed dates of completion of the various phases of the project were not complied with and the foreign consultants were warned in writing of the implications of the delays observed. The subsystems for the imposition of tax for special defence contribution and income tax have been completed and put into operation. The subsystem for income tax P.A.Y.E. was put into operation in April 1999, whereas the system of comparison of information of income tax declaration with information from other sources commenced operation at the end of 1998. The procedure of implementation of subsystems for the immovable property tax and the capital gains tax commenced in October 1999, and were put into full operation in June 2000. The Department has almost completed the preparation and submission of income tax forms for individuals for 1997 and the preparation and submission of income tax for 1998 is expected,

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whereas the assessments for companies have been completed up to 1998. Refunds of income tax are made through the new computerised system shortly after the issue of the relevant assessment. 4.53.21 Capital gains tax (a) The arrears of capital gains tax at 12.11.99 amounted to £20,10 m. and were, mainly, due to two reasons: (i) The amendment Law No. 135/90 provided that the capital gains tax should be paid before transfer of ownership. The relevant legislation, however, of the Department of Lands and Surveys, did not forbid the transfer of ownership of immovable property because of non- payment of capital gains tax. Consequently a basic provision of the Capital Gains Tax Law was not applied, resulting to the continued increase of the amounts due for this tax. With the new amendment of the Law on 28.5.99 (Law 48(1)/99) the previous ambiguity has been replaced with a provision specifying that no transfer can be made, before payment of the tax due. The short-term stabilization is expected and the long-term reduction or wiping off of arrears due. (ii) According to section 9 of the Capital Gains Tax Law, the product of disposal of property is the amount, which the parties declare to the Department of Inland Revenue. The Director has the authority, however, in case of a questionable declaration, to carry out an investigation and, if the declaration is proved false, to demand payment of the relevant tax. Also section 14 of the same Law empowers the Director, without any time limit, to impose additional tax, if the low taxation is due to fraud or wilful tax evasion. A comparison of the documents of the Departments of Inland Revenue and Lands and Surveys, often shows a considerable difference between the price declared, for purposes of capital gains tax, and the evaluation of the Lands Office, for purposes of transfer fees, which results to substantial loss of revenue. The high number of revisions of sale price, which the Department of Lands and Surveys makes, prove that in most cases the parties declare low prices for purposes of transfer of ownership, to evade the payment of tax. My Office carried out a performance audit with regard to the whole problem, the findings of which are included in Part 3 of this Report. (b) In some cases there are outstanding assessments relating to the sale of shares of companies, the examination of which delays, mainly, due to the weakness of the Estate Duty Branch to proceed to the evaluation of the immovable property of the companies. The Director of the Department informed me that, with the abolition of the estate duty, the situation is expected to improve. 4.53.22 Sale of property at Kouklia, Pafos. With a Lands Office transfer declaration an immovable (land) was transferred on 23.11.98 at Kouklia, of an area of 54 acres, for the amount of £50.000. For purposes of transfer fees the Department of Lands and Surveys evaluated the immovable for £180.000. The same parties, on 24.6.99, transferred ownership of a plot of land of 79 acres, for the amount of £230.000. The Department of Lands and Surveys, for purposes of transfer fees, evaluated the land to £800.000. It is pointed out that in both the above cases the re-evaluation of the Department of Lands and Surveys was accepted by the parties concerned.

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The revised re-evaluated prices were not declared to the Department of Inland Revenue, for purposes of capital gains tax, as these were determined by the Department of Lands and Surveys, i.e. £180.000 and £800.00, but the prices declared were £50.000 and £230.000, respectively. On my recommendation, the Department of Inland Revenue proceeded to detail examination of the sales in question, but it was not proved that the declarations of the parties were false, so that the Department could proceed to the revision of the fees imposed. As I was informed the Department will proceed to the investigation of the above cases, for purposes of income tax. 4.53.23 Immovable property tax for leases of government land. With the exception of leases of government land at Limassol District, no tax has yet been imposed, in other Districts on the value of the benefit derived for the tenants of government land, on which factories, hotels etc. 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 made its evaluations for these Districts, which are necessary for the determination of the tax. According to court rulings, the Director of the Department of Inland Revenue should proceed to his own evaluation, taking, at the same time, into consideration the evaluations of the Lands Office. 4.53.24 Sales of immovable property by a company at fictitious prices. A considerable number of sales of immovables, made by a specific company to subsidiary companies, are considered fictitious, because the values of the immovables were 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 would cover all these sales, and the Director informed me that he would 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 proceed to preliminary evaluations of the above immovables. The matter is still under investigation. 4.53.25 Court memos for immovable property. A specific group of companies in Pafos, which owes to the Republic various taxes, mainly withheld taxes, of a total amount of £274.583, systematically avoids settlement. Almost all the immovable property of the group is burdened with court memos at the Department of Lands and Surveys and, in some cases, writs for sale have been issued, which remain unexecuted, whereas in other cases the court memos are withdrawn, for the purpose of transferring the immovables to the buyers, after the payment of minimum amounts in advance of the total debt. The Director of the Department informed me that the above procedure is to the interest of public revenue. 4.53.26 Determination of a company's foreign investment income. A company which invested the amount of £3.300 in a foreign company operating abroad, imported in Cyprus dividends during the years 1991–1992 amounting to £3.070.913 and claimed 90% discount, on the allegation that the above income was derived from its operations abroad. Due to the non- proportionate amount of the income, in relation to the amount invested, I requested the Department to carry out an investigation for this case. The matter is under investigation in relation to the examination of the personal tax affairs of the manager/shareholder of the company. 4.53.27 Agents of foreign companies. Certain omissions and weaknesses were observed in the examination and acceptance of the accounts of the above agents, for taxation purposes. On my recommendation, directions were issued to the staff, regarding the way of operation of

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these companies, for the purpose of facilitating the staff during the examination of the accounts of the above agents. As I was informed the investigation of the above is continued. 4.53.28 Advance account for returned/non-cashed cheques. It was observed that the balance of the above account at 31.12.99 was £358.808, compared to £143.492 at 31.12.98, i.e. there was an increase of 150%, and I requested that the necessary measures be taken, so that the amounts due for cheques returned, to be collected as soon as possible.

4.54 DEPARTMENT OF CUSTOMS AND EXCISE Part A 4.54.1 Duty-free shops at Pafos and Larnaka Airports. The above shops operate since 1.5.96 as special bonded warehouses and fall under the provisions of the Law regarding bonded warehouses, as well as to the additional terms set by the Department with the approval of operations granted. It was observed that the Department has not carried out any examination, for the verification of compliance to the above terms. Furthermore no examination has been carried out for the verification of correctness of the stocks. Stocktaking was carried out by the licensed company on 8.12.98, during which accumulated deficiencies were observed, of total value £317.591,35, with corresponding duties and taxes amounting to £236.511, which were collected on 29.9.99. It is pointed out that in the results of the stocktaking high percentages of losses were observed in liquor products and cigarettes (12,7% and 11% respectively). A sample audit was carried out by my Office and several problems occurred, as a result of which the correctness of stocks could not be verified. The computerised system presented problems with no accounting balances of stocks, which would be compared with actual stocks counted. Also, in some cases, the arrangement of stocks was not satisfactory, resulting to difficulties in counting. It was further observed that a Customs Officer is not on duty for 24 hours, at Pafos Airport and deliveries of products are examined at a later stage, on paper only. I pointed out to the Department that frequent examinations should be carried out during deliveries of products from the shops, in order to verify that there is no possibility of conveyance of products to the local market. This is extremely important, because, as it appears, there is no separation of duties regarding the receipt of goods and the use of the cash register machine, resulting to the possibility of conveyance of goods to the local market, which are presented as sales of duty free items. 4.54.2 Private bonded warehouse 6.113. The above warehouse operates at Larnaka Airport since 1.5.96, under the management of Cyprus Airways, aiming at serving the needs of the company. It was observed that in the warehouse goods are kept which belong to the subsidiary company Eurocypria Airlines, which are used for the replenishment of its aircrafts. The keeping of goods, which do not belong to the owner company, constitutes a violation of the conditions for the operation of the warehouse. Despite the repeated observations of the Department, Cyprus Airways as occupant of the warehouse, as well as the subsidiary company Eurocypria, failed to submit statements for the movement of goods of Eurocypria Company in this warehouse. The Department of Customs and Excise verified the absence of control for the deficiencies of duty free items sold in the aircrafts and, after representations to Cyprus Airways, payment was settled of the corresponding duties and taxes for these deficiencies, which occurred since

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1.1.99. In my letter to the Department I observed that no investigation was carried out to verify deficiencies for the period 1.5.96–31.12.98 and that Cyprus Airways have not officially notified the Department of the amounts involved for these deficiencies. Also I expressed the view that the acquittance of Cyprus Airways from the above obligations for the above period is not legally covered. 4.54.3 Duty free shops "Good Buy Shop Ltd". From a sample stocktaking in the above warehouses differences were observed. The corresponding, to the deficiencies, duties and taxes, amounting to £1.407, were collected, whereas the surpluses were recorded in the relevant Ledger. 4.54.4 Special bonded warehouses (duty free shops) operating at the Ports. The system of control of these 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. For example, in group 15.9 watches valued at £500 and above are classified, which means that watches of this group are considered the same, independent of value. Exception to the rule is spirits (liquor), which are grouped according to the contents of the bottle, and cigarettes. 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. Several meetings took place for the study and improvement of the system, without any meaningful outcome. I expressed the view that for the management of stocks, a modern system could be implemented, e.g. the use of a barcode for each product, so that the movement of stocks shall be automatically recorded with analytical stock balances, which could be audited at any time. The Department agrees with my views, stating that the whole matter will be considered within the wider plans of the computerisation of its activities. 4.54.5 Free Industrial Zone, Larnaka – Customs control. It was again observed that the supervision of the Free Industrial Zone by Customs is non–existent. The entrances/exits of the Free Zone are open 24 hours a day, whereas in the Free Zone the owner of a company and his family are residing. Generally control of the Free Zone presents weaknesses for the following reasons: • Several documents are not found in the respective files of the industrial units. • No control statements are kept for receipts/issues of each unit, so that the balance can be verified at any moment. • For the conversion units there are no production standards, showing the efficiency factor, the tare in the processing of raw materials etc., so that the audit of stocks will be facilitated. • In several cases the warehousing value on the documents of issues/sales is not correct. The Department stated that the relevant legislation and the control procedures of the Free Zones are under consideration within the framework of harmonisation of the Customs Legislation with European acquis communautaire 4.54.6 Bonded Warehouses (a) Monitoring of closed files. The audit of Bonded Warehouse files revealed again various weaknesses in the system of follow up of the files, with the possibility that files, for any reason

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missing from the archives, not to be looked for. Recommendations were made for the improvement of the system of internal control. (b) Examination of bonded warehouse files and ships' manifests at the District Customs Office Limassol. It was observed that in the Bonded Warehouse Branch of the Station there is still considerable delay in the examination of closed files, resulting to difficulties in the collection of duties and taxes, which might emanate from the examination. (c) Surprise surveys. Out of the surprise surveys on the various warehouses, carried out by the Department and my Office, several weaknesses and problems were observed, which are partly due, to weaknesses and omissions of the examination carried out by the Department. The following indicative examples are stated below. (i) In several cases considerable deficiencies or surpluses were observed in stocks. In one case stocks were not properly arranged and marked, and, as a result sample audit could not be carried out. It was decided to carry out a full examination of stocks, which is time consuming, out of which deficiencies were observed of total value £7.411, with corresponding duties and taxes amounting to £4.140. (ii) In many cases the relevant regulations and the licence terms for the operation of warehouses, were not observed: • Items, which had been cleared, were found at warehouses spaces. • Duty free items were outside the approved areas or were transferred from one warehouse to another without the Department's permission. In most cases an out of court settlement is reached with the imposing of a compromising amount by the Director of the Department. (iii) In one case, where it was revealed, since 5.4.99, that the owner had left Cyprus, and that an illegal movement of stock was made, no investigation was carried out and, on my observation, the Department proceeded to a full examination of the warehouse and for the differences observed the corresponding duties and taxes have been claimed. On the other hand, in the case of Bonded Warehouse 5.122, it was again observed that the amount due of £33.694 is still pending. It is pointed out that this amount is the balance of amounts due from differences observed during the surprise surveys carried out on 25 and 26 January 1995. 4.54.7 Clearance of saloon type vehicles in the "VAN" category. A relevant investigation revealed that more than 60% of the registrations of new vehicles, saloon type, are wrongly cleared and registered in the "VAN" category, because these vehicles are not "VAN" by construction, but are modified later with various minor additions. Since 1990 16399 saloon type vehicles have been unlawfully cleared as vans. As a result, Government does not collect substantial amounts of taxes and excise duties, which would have been collected if the above vehicles were cleared in the correct saloon category. The difference in taxes and excise duties varies from £3.500 to £9.000 per vehicle. The total losses in taxes and excise duties, since 1990, provided these vehicles were cleared in the saloon category, are estimated to exceed £90 m. For the solution of the problem I suggested that, due to the reduction of import duty from 71,7% on 1.1.80 to 10% on 1.1.98 for non European Union countries, the Department of Customs and Excise and the Department of Road Transport cooperate for the full and uniform application of

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the Law, so that only vehicles of type VAN by construction to be classified in this category. I suggested further that the possibility should be considered for equalising the excise duty for VAN type vehicles with those for private saloon type vehicles. The Director of the Department of Road Transport, in his letter to the Associations of Importers of vehicles, informed them that, for vehicles that will be ordered as from 5.6.2000 onwards, the relevant Regulation will be strictly applied and many vehicles will not be registered as commercial. The Director General of the Ministry of Finance informed me that the matter of taxation of the VAN type of vehicles is under consideration, within the general framework of the taxation of passenger vehicles, which forms part of the general tax reforms declared by Government. 4.54.8 Examination of ships and aircraft manifests. From the audit carried out by my Office at the Department of Customs & Excise in Nicosia and Limassol, it was observed that a considerable number of closed files of ships and aircraft manifests (inward manifests) had not been examined and were pending for several years, and as a result the collection of taxes and duties which would probably occur through the examination, will be very difficult, if not impossible. 4.54.9 Customs value of used vehicles. As a result of the considerable increase in the registrations of used vehicles, which represent more than 65% of new registrations, and the change of the basis of clearance of these vehicles, from the evaluated price to the invoice price, which resulted to loss of Public revenue of about 38% of taxes and duties collected under the previous system, I suggested to the Director of the Department the amendment of section 8 of the Customs and Excise Law, so that the invoice price to be taken into consideration for purposes of import duty only, whereas for excise duty an evaluation to be made of the vehicles, when these are ready for registration. The Director of the Department informed me that my suggestion was accepted and on 26.1.98 he suggested the amendment of the Law. The relevant amendment bill, which was submitted as part of the taxation package of 1998, was rejected by the House of Representatives on 28.5.98 and the Department informed me that efforts are made with all available means, for the interception of the risk of possible under invoicing. 4.54.10 Under invoicing of used imported motor vehicles from Japan. The District Office in Pafos confiscated a number of used vehicles imported from Japan by a company, for purposes of investigation as to whether the prices declared are correct. According to official records, which have been submitted by the Japanese Customs Authorities, serious under invoicing was observed for at least four cases of imports of used motor vehicles, of the same importer, for a total of 93 motor vehicles, and under invoicing of the region of 50% to 58%. Out of the above motor vehicles 63 have been cleared at various dates, with the payment of the corresponding duties and taxes, as per the invoice price and, at the same time, on the importer's request, with the deposit of cash or bank guarantee, until an investigation is carried out as to whether the prices declared are correct. One motor vehicle was sold to a visitor, to whom it was conceded under the temporary importation regime. It was further observed that, after the confiscation of the above motor vehicles, other importers of used vehicles submitted declarations, accepting the settlement of their outstanding cases, where they had cash deposits, according to the indicative prices of the Department of Customs and Excise.

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The Director of the Department informed me that the total amount of under invoicing for the 63 motor vehicles cleared with payment of duties and taxes was £138.583 and the total difference in duties and taxes amounted to £135.324. As the clearance of most motor vehicles was permitted on a cash deposit or bank guarantee covering a total amount of £104.902, which was collected, a collectible balance of £30.422 remained. 4.54.11 Use of computers in the Clearance of Imported Goods Branch. In the above Branch 13 computers have been installed for the examination of clearance documents for imported goods. The number of documents varies between 8000 and 11000 monthly. It has been observed that the utilization of this equipment is very low, as only 18% of the clearance documents is examined through computer. The Senior Customs Officer Limassol stated that the Examination branch has been properly staffed since the beginning of 2000, and the problems and weaknesses presented will be overcome and that the full utilization of computer equipment is expected. 4.54.12 Overtime fees. The expenditure for overtime work of Customs employees amounted to £2.415.084, compared to £2.066.077 for 1998, i.e. there was an increase of £349.007, whereas the revenue for overtime fees was £1.859.612, compared to £1.475.477 for 1998, i.e. there was an increase of £384.135. Out of the above it emanates that the expenditure for overtime work in the years 1999 and 1998, exceeded the revenue for overtime fees by £555.472 and £590.630, respectively. The difference observed between the amounts paid and the amounts collected are, mainly, due to the services provided by the Department for passengers’ movement at the airports of Larnaka and Pafos, for which no overtime fees are collected. It is pointed out that the amounts paid during the years 1999 and 1998 for overtime work are equivalent to 35,8% and 32,7%, respectively, of the salaries and other allowances paid to the staff. Part B 4.54.13 Demand notes. It was again observed that a considerable proportion of demand notes for payment of duty (regarding deficiencies of stocks in bonded warehouses) at the District Offices of Nicosia and Limassol are pending. Several of these have been submitted to Customs Headquarters for the taking of legal measures. 4.54.14 Duty reliefs for vehicles and other assets, to companies with international activities (off shore companies). It was again observed that offshore companies whose licence of operation was revoked by the Central Bank, the vehicles and other assets have not been settled with regard to duties. 4.54.15 Excise duty for cigarettes. With the liberalisation of the retail price for the sale of cigarettes (S.L. 277/97 dated 18.9.97), basic provisions of the Customs and Excise Duty Law, Third Schedule, where the relevant duty is specified, full implementation is not possible. I observed that the amendment of the Law is imperative, in order to be in line with the new state of affairs, as any variation in the retail price affects enormously the respective duty. The Director of the Department informed me that my recommendation was accepted and he tried to amend the Law through the taxation package, which was submitted to the House of Representatives on 28.5.98, which, however, was not approved, and that he expects the re- pursuing of the matter by the Ministry of Finance. 4.54.16 The Temporary importations Regulations of 1968. Several products, which were temporarily, imported pursuant to the temporary importations Regulations of 1968, such as "private vehicles and aeroplanes", "Trade Samples", "Goods for Exhibitions", "Commercial

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Vehicles and Aeroplanes" and "Processing Products", continue to remain in the Republic for a long period after their temporary importation. According to the Department, the weaknesses and omissions observed in the system of follow up and control of goods imported temporarily, will be overcome to a large degree, when the new improved software programme, which, now, is at the initial stage of implementation, is put into operation. I was informed that part of the new software programme was put into operation, problems, however, are presented, resulting to weaknesses and omissions being continued. 4.54.17 Concession of a second duty free vehicle to foreigner employees of offshore companies. The Supreme Court decided in favour of an offshore company and annulled the decision of the Department for the non-concession of a second duty free vehicle to the wife of foreigner employee, who had Cypriot nationality. As the above decision of the Department was based on Notification 41, in which the matter of nationality is no object, I recommended that specific criteria be set for concession of a second duty free vehicle and that the whole matter be regulated by law. The Department prepared a bill relating to Class 01.18 of the Fourth Schedule of the Customs and Excise Duties Law, in which the legal settlement is, inter alia, provided. As I was informed, the conclusions of the Special Committee for Harmonisation in the field of offshore companies are that the customs duty motives offered are contrary to Acquis Communautaire and that the matter has been submitted to the Ministry of Finance for further consideration. 4.54.18 Value Added Tax Service Part A (a) General. The revenue for value added tax amounted to £254,3 m., compared to £245 m. for 1998, i.e. there was an increase of £9,3 m. or 3,8%. Refunds of tax amounted to £18,2 m. compared to £19,2 m. for 1998, i.e. there was a decrease of £0,99 m. or 5,2%. (b) Arrears of taxes. At 31.12.99 the total of taxes in arrear, including surcharges and interest, due by persons who submitted tax declarations, was £21,4 m., compared to £18 m. for 1998. For the collection of arrears, where necessary, legal prosecutions, confiscation of goods, as well as liquidations of companies take place. The arrears include an amount of £3,2 m., which is due by 363 persons who have gone bankrupt, and an amount of £5,9 m., which is due by 2722 persons, whose registration in the V.A.T. register has been cancelled. (c) Measures for collection of arrears due. The Service applies various measures for the collection of arrears due, such as letter of demand for settlement of arrears due, confiscation of goods, liquidation of companies and civil suit. As it appears from the up to date experience, the efficiency of these measures is limited, whereas the procedures followed are time consuming. (d) Criminal prosecutions. The Service has the power to take criminal action against persons who fail to settle their debts. Up to 31.12.99 2411 prosecutions took place. In 635 cases the amounts due were settled and the prosecutions were withdrawn. It must be pointed out that the number of criminal prosecutions is very small, in relation to the number of persons presenting arrears due. (e) Delays in the submission of tax returns. Delay was again observed by several persons to submit their tax returns. In these cases the Service proceeds to the preparation of assessments based on the existing documents and imposes the surcharges and interest

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provided by the Law. At 31.12.99 the amount of those assessments was £39,2 m., compared to £32,5 m. for 1998. (f) Control visits. The number of control visits carried out by the Service in 1999 covered only 2% of the registered persons. This is mainly due to the unsatisfactory staffing of the Service. It is expected that with the appointments made at the end of the year, and the continued training of the staff, the situation will be improved. The total of site inspections since 1.7.92 is 3091 (8,3% of the registered persons), with total verification of tax £14,6 m. I expressed the view that the very limited number of inspections carries an increased risk for loss of revenue, as in most cases verification of tax is proved, and also because, according to the Law, the keeping of accounting books and documents by the tax related persons is obligatory for a period of seven years only. Since 1.7.92 and up to date 2978 site inspections for tax refunds were carried out by the Service, which produced verifications of tax amounting to £4,9 m. 4.54.19 Performance audit. For V.A.T matters a performance audit has been carried out, the conclusions of which are stated in Part 3 of my Report for 1998. A summary of my recommendations, together with the measures taken up to now are stated in Part 3 of this Report (Previous Performance Audits).

4.55 INFORMATION TECHNOLOGY SERVICES Part A 4.55.1 Purchase of computer equipment, software and services. Several projects costing more than £0,5 m., which were included in the budget, e.g. V.A.T. Service System, Computerisation of Planning Licences, Development of WebPages in the Internet etc., for various reasons have not been implemented. With regard to the General Computerisation System, out of the amount of £7.450.000, the amount of £5.280.000 was spent only, i.e. about 29% of the amount remains unspent. 4.55.2 Needs for microcomputers. In most cases the Department is unable to satisfy promptly the needs of Government Services in microcomputers, because several Departments do not submit, when requested to do so, their needs, and as a result the correct and prompt planning for their purchase is difficult, besides the increase in administrative cost. 4.55.3 Acceptance of equipment. The certificates of acceptance of equipment are not completed in a uniform way and do not always include all the necessary information, and as a result it is very difficult if not impossible, to verify what actually was received from the supplier and, consequently, what has to be paid by the Department. Furthermore, as the Director of the Department stated, there are cases where the Department has considerations as to which equipment has to be paid, as the supplier delivers equipment, which is different from the one, ordered.

4.56 FUND FOR TRAVELLING EXPENSES FOR DISABLED PERSONS Part A 4.56.1 Operating results. All income represents state subsidy. The income of the Fund for 1999 amounted to £80.833 and the payments to £83.866, compared to £52.507 and £59.687 for 1998, respectively. At 31.12.99 the balance of the Fund was nil.

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4.57 MINISTRY OF EDUCATION AND CULTURE Part A 4.57.1 Budget Execution (a) Unspent amounts. Significant amounts remained unspent in a number of Budget Votes and I pointed out that better planning should be made of the needs, in order to correspond to actual realisable requirements. The Ministry attributes the deficient execution of its programmes to unforeseen factors. (b) Execution of projects. A number of projects regarding the improvement and expansion of schools or the construction of sports halls, although included in the Budget, were not executed in 1999. Other projects, however, were executed for which there was no relevant provision in the Budgets. Some of the projects, which were included in the Budget and were not executed, are the following: • Gymnastics hall at Apostolos Varnavas Lyceum (£80.000), • Multiple use sports hall at B' Technical School, Limassol, A' Phase (£100.000), • Reformation of soccer grounds, A' Phase, of the Hotel and Catering School, Limassol (£20.000), • Construction of two soccer fields, surfacing of existing soccer fields and improvement of gymnastics hall at Linopetra Gymnasium (£30.000), • Improvements and construction of b' staircase at A' Elementary School Strovolos (£50.000), • Reinforcement of the electrical installation and construction of b' staircase at Agia Marina Elementary School (£30.000) and, • The construction of two teaching rooms at Kalogeropoulos Gymnasium. The changes in the execution of projects were made with the approval of the Ministry of Finance and the Planning Bureau. The Director General of the Ministry informed me that, in the effort for execution of the Budget, unforeseen and insurmountable problems appeared. (c) Expenditure for school sports. The Vote for School sports, which refers up to 80%, to constructional works, was again included in the Ordinary Budget, whereas, for better Budget presentation, the expenditure for these projects should be included in the Development Budget. The same procedure has been followed for the Budget of 2000, despite the unification of the three Budgets. 4.57.2 Limited time for the preparation and submission of tenders. For the supply and installation of space frame at Kition Elementary School and at Agios Spyridonos Lyceum, separate tenders were invited. One tender only was submitted, for both projects, by the same tenderer. I requested the Accountant General to appoint an ad hoc committee to examine the reasons for the limited participation. The ad hoc committee recommended that the time for preparation/submission of tenders be specified at 6 weeks instead of 3 provided by the tender documents of the case under examination, a reason for which the limited participation was probably due. I observed that the tender for the construction of a space frame at the B' Elementary School of Agios Athanassios, which was proclaimed after the recommendations of the ad hoc committee, the time specified for the preparation/submission of the tenders was again 3 weeks and the terms of the tender, regarding the right of participation, were more strict than in previous tenders, and consequently the competition was again limited. Whereas the tender documents

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were purchased by 7 tenderers, only 2 submitted a tender, while one of the remaining 5 who did not submit a tender, complained in writing for the alteration of the terms for participation in the tenders. 4.57.3 Contracts for the installation of central heating and electrical works in existing Government school buildings. For the above contracts, which usually last for 3 months, a time period of 1–2 months is allowed, from the date of award to the date of signing the contracts, which is the date of commencement of works. Due to the nature of the works, which requires strict planning so that problems in the operation of the schools will be avoided, I requested, in May 2000, the Director General of the Ministry that ways must be examined for the acceleration of the process of signing contracts and that measures must be taken for the prompt renewal of the validity of guarantees for the faithful execution of contracts, because in several cases the validity of guarantees had expired before the completion of the project, and the Government, in consequence, remained exposed. 4.57.4 Episkopi Gymnasium. In February 1999 the Supreme Court decided in favour of a tenderer for the construction of the above project and cancelled the award of the tender to the lowest tenderer. The decision of the Court was based on the fact that the Ministry assigned the execution of the project to the lowest tenderer, without requiring from him to present his upgraded registration licence, which formed a prerequisite of the tender terms. The Accountant General in his letter to the Director General of the Ministry requested the carrying out of an administrative investigation and for this purpose an investigative officer was appointed in May 1999. According to the conclusion of the investigation, responsibility lies with the Technical Services of the Ministry, and mainly to the Coordinator of the project who was responsible for the implementation of the terms of the contract. 4.57.5 Paliometocho–Kokkinotrimithia Lyceum. In paragraph 4.58.4 of my Report for 1997, I stated that, on my recommendation, an administrative investigation was carried out, for the purpose of imputation of responsibility for serious omissions/weaknesses in the management of the contract, and that the Ministry relieved from his duties the coordinator of the project. After the submission of the administrative investigation two officers of the Ministry were appointed for carrying out a new administrative investigation, for possible disciplinary offences against the Manager and one officer of the Technical Services of the Ministry. As I was informed, the conclusion of the investigative officer was that no disciplinary offence could be documented for the Manager of the Technical Services, whereas for the officer of the Technical Services disciplinary proceedings are in progress through the Public Service Commission. 4.57.6 Fees and rights for the evaluation of titles of studies of private Colleges of Education. The accounts branch of the Ministry does not keep the necessary records (registers, statements and accounts) for purposes of confirmation of the correctness and prompt collection and accounting settlement of the collectible fees and rights, which are considered substantial. The Director General of the Ministry informed me that my recommendations would be adopted. 4.57.7 Emoluments of teaching staff (a) Omissions, mistakes and some weaknesses were observed in the procedure followed for the payment of salaries of teachers, causing delays, wrong placements and in some cases overpayments.

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(b) I recommended ways for the improvement of the procedures and that efforts should be made for the recovery of the amounts overpaid. The Director General of the Ministry informed me that the necessary measures will be taken for the non–repetition of what was observed in the past. 4.57.8 Control of the working time schedule of the staff. The electronic system of recording the arrival and leaving of the staff presents, very often, problems, resulting to the non–issue of the weekly statements and, consequently, the hours due for each employee. 4.57.9 Books Store of the Ministry of Education and Culture (a) Delays in the execution of contracts for printing of books. The execution of several contracts for printing of books presents delays. In most cases no fine is imposed, because the Services of Programme Development hold the view that responsibility lies with the Service and not the printers. As the prompt delivery of books to schools is directly linked with the prompt arrival of the books at the Store, it is imperative that the Store is in cooperation with the Services of Programme Development, for facing the problem of delays. I have been informed that such measures are under consideration. (b) Computerisation of Store Ledger. The computer programme could not fully respond to the needs of the store and for this reason the parallel use of the hand written Ledger was continued. This was terminated in March 2000, without any improvements, however, observed in the programme. I pointed out the need for taking measures for the necessary improvements or its replacement with a new, more complete and modern programme. I have been informed that such measures are under consideration. (c) Physical stocktaking and verification of stocks. I pointed out the necessity for compliance to Stores Regulations, which provide that the Services carry out periodical examinations and an annual verification of stocks. (d) Internal control. It was observed that no system of internal control is in operation, and as a result the Stores Regulations are not always applied with consequent mistakes and omissions. 4.57.10 Government Educational Institutes (a) The revenue from the operation of the Institutes during 1999 amounted to £1.435.220, and the respective expenditure to £1.833.346, resulting to a deficit of £398.526. (b) In several Institutes omissions and weaknesses are observed regarding the keeping of registers as well as the application of Financial Instructions and Stores Regulations. The Ministry attributes these problems to the fact that School Clerks are part time casual employees. Part B 4.57.11 Transfer of funds to deposits account. Cases were again observed where unspent amounts were transferred from Votes, which referred to improvement/maintenance and expansion of Elementary Education school buildings, to a Deposit Account of Fund "A", to be used for the execution of projects. This procedure is contrary to the existing Regulations and the principles governing the execution of the Budgets and I suggested the transfer of funds only according to the progress of the projects. I suggested further the creation of a special Vote for the execution of continued projects, a procedure that is followed in other

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Ministries/Departments. The Ministry informed me that transfer of funds is made in the case of awarded tenders. 4.57.12 Cyprus Library. Several books have not yet been recorded in the relevant registers. There are books that have already been destroyed or run the risk of being destroyed due to the unsuitability of storage spaces. The Ministry informed me that efforts are made for the recording of the books and that the ex "Philoxenia" hotel, after a Council of Ministers decision, will be modified, in order to house the Cyprus Library. 4.57.13 Internal control. In many cases there is still no control exercised over the cash held by cashiers of Lyceums, Gymnasiums, Technical Schools, Night Schools and other Services of the Ministry, contrary to the existing Regulations. The Ministry informed me that the problem is due to the lack of staff. 4.57.14 The Elementary and Secondary Education Legislation. As I stated in my previous Report, the Ministry prepared a relevant Bill for the modernisation of the above Legislation, which was submitted to the Law Office for legal processing. I was informed that there is communication with the Law Office for the acceleration of the process. 4.57.15 Allowances to teachers. In my previous Reports I recommended the reconsideration, by the Ministry, of all the allowances, for the purpose of deciding either their continuance or their revision on a more correct basis, or even their abolition, if the reasons for their approval are not valid. Up to now, no action has been taken towards this direction. The Ministry agrees with my observation and every effort will be made for the re-examination/ re-evaluation of all the allowances to teachers. 4.57.16 Arrears of revenue. Despite the efforts made the amount of £465.440 continues to be 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 management of the canteen of the A' Technical School Nicosia (£11.992), Dianellos Technical School Larnaka (£79.518) and Technical School Agios Lazaros (£12.813). The matter of delay in the collection of rents of the above canteens is now before the courts. 4.57.17 The "House of Cyprus" in Athens. No report is prepared on the operations, in order to be verified to which degree the objectives of the establishment of the "House of Cyprus" in Athens are achieved. The objectives are stated in the Proposal of the Ministerial Committee, which was approved by the Council of Ministers under decision No. 27.406 dated 17.7.86. Despite the directions given to the Cultural Attaché to prepare an operations report, up to now no such report has, however, been submitted. 4.57.18 Scheme for the teaching of the Greek language to emigrants and repatriates. An amount of £90.000 was approved in the Development Budget for the above Scheme, which is subdivided into four programmes. The expenditure amounted to £20.000 for covering part of the emoluments of the teaching staff the Night Educational Institutes. Scientific Research Centre 4.57.19 Library. Due to weaknesses in the system of lending of books before 1996, it is possible for books given on loan, not to be returned. My recommendation is that a stock count of books should be carried out as soon as possible, as provided in the relevant Stores Regulations, also due to the invaluable historical value of the books of the Centre. The Director General of the Ministry informed me that efforts would be made for the implementation of my recommendation.

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4.58 EDUCATION "A" FUND Part A 4.58.1 Operating results. The accounts for the year ended 31.8.99, which have not yet been audited by my Office, showed a deficit of £50.511, compared to a surplus of £175 for the previous year. 4.58.2 Revenue. The revenue amounted to £8.215.568, compared to £8.034.901 for the previous year. These include government subsidy amounting to £7.489.948 and school tax £559.371, compared to £7.404.771 and £547.341 for the previous year, respectively. 4.58.3 Expenditure. The total expenditure was £9.790.908, compared to £7.540.202 for the previous year. These include subsidies to School Committees for operational expenses amounting to £3.912.196, compared to £3.589.419 for the previous year, and for capital expenditure £5.342.660, compared to £3.346.878 for the previous year. In addition £517.340 has been spent for interest on loans, compared to £588.009 for the previous year. 4.58.4 Books store. The books store showed a profit totalling £55.239, compared to £2.517 for the previous year. 4.58.5 Computerisation. For several years now my Office recommends the introduction of a computerised system for keeping the books of the Fund. The matter is still pending. Part B 4.58.6 Accounting System. The accounting system of the Fund must be reconsidered and improved, so that all the expenses of the Elementary Education are presented in the accounts of the Fund. To achieve this, however, a change must be made in the structure of the budgets. 4.58.7 Arrears of taxes. The amount of £171.735 is included in the accounts, for taxes imposed up to 1974, in villages in the occupied part of Cyprus. On my recommendation, the approval of the Minister of Finance was requested to write off this amount, but the request was denied. 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. 4.58.8 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, that he should take the necessary action for the collection of amounts due, which according to the contract, amounted to £12 daily since 17.8.88. A meeting has recently taken place of all the parties involved, without, however, any substantial decision taken, which would change the situation.

4.59 SCHOOL COMMITTEES Part A 4.59.1 Financial position. The financial position of School Committees depends, mainly, on Government subsidies. Government also raises loans on behalf of School Committees, for the

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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. 4.59.2 Final Accounts. According to the new School Committees Law of 1997, the accounts of School Committees should be prepared in accordance with the Financial Instructions 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. I suggested further that the Ministry should request School Committees to add more information, in the form of notes, in the financial statements submitted to my Office for audit. 4.59.3 Delay in the submission of accounts for audit. A great delay is observed in the preparation of the accounts, their approval by the relevant School Committee and their submission for audit. A number of School Committees has not yet submitted their accounts for the school year 1998/99, which should have been submitted by September 1999. One School Committee has not yet submitted the accounts for the year 1997/98. 4.59.4 Regulations pursuant to the School Committees Law of 1997. In view of the enactment of the School Committee Law, and section 13, which refers to Financial Instructions applied for School Committees, I recommended that the Ministry should direct the School Committees to follow Government Financial Instructions and Regulations. I recommended further that the Public Tenders Law should be applied. As I was informed a circular has been sent to all School Committees requesting them to apply the new Public Tenders Law and Regulations, whenever possible. The Ministry has already communicated to my Office, for views, Regulations regarding the construction and improvement of buildings, the preparation, however, of several other Regulations is still pending. I have been informed that draft Regulations, with regard to personnel, have already been submitted to the Law Office for legal processing. 4.59.5 School Committees in rural areas. Law No. 108(1)/1997 provides for the establishment and operation of new School Committees in rural areas. In June 2000 the Ministry of Education and Culture notified to me a list of 154 new School Committees in rural areas, which consist of the relevant numbers of the Community Boards. Up to now these Committees do not appear to have taken any kind of action, or undertaken their duties and responsibilities, as these are specified in the above Law. As a result no financial statements have been submitted to my Office for audit. 4.59.6 School Committees' staff – Keeping of books and preparation of accounts. In most School Committees weaknesses are observed regarding the keeping of books and the preparation of accounts, which are, mainly, due to the assignment of duties to unspecialised and not suitably trained staff. It is further observed that School Clerks, at the stage prior to retirement, are transferred to take up duties for the administration of School Committees. With the enactment of the School Committees Law of 1997 and the assignment of further responsibilities to School Committees, the problem is expected to increase. For the settlement of the matter I recommended that School Committees should employ staff appointed by them, whereas the School Clerks should be placed at schools, according to requirements in each case. I have been informed that, regarding the recent transfer of School

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Clerks to the Accounts Branches of the School Committees, consideration was given to those who possess the necessary qualifications. 4.59.7 Schemes of Service of the staff of School Committees – Regulations etc. Up to now, no Regulations have been prepared and processed for approval, providing and regulating personnel matters, such as schemes of service, salary scales, appointments, promotions, retirements etc. The Director General informed me that these have been submitted to the Law Office for legal processing. 4.59.8 Computerisation. With the commencement of computerisation of works of the various School Committees, on their own initiative, my Office recommended that the computerisation of all School Committees be coordinated by the Ministry of Education and Culture, so that the systems introduced to be complete and uniform. 4.59.9 Salaries and wages. There is no uniformity between School Committees, regarding concession of increments or extension of salary scales for their employees, despite the fact that the Ministry of Education and Culture has issued a relevant memorandum to be applied, before the renewal of the collective agreements. Due to ambiguities of the memorandum, the problem continues to exist. 4.59.10 Headmaster's fund. Several School Headmasters are managing various funds, the revenue of which comes from contributions/donations or from various activities, without, however, the correct procedures followed, regarding the collection and disposal of the above revenue. The Ministry of Education and Culture has prepared draft Regulations, the issue of which is still pending. Part B 4.59.11 School canteens (a) The certificates of health and of no criminal record are not submitted by all successful tenderers for each year of operation of the canteen, for themselves and their employees, contrary to the provisions of the tenders. (b) Tenders for the management of school canteens (i) It was again observed that the tender terms for the management of school canteens vary in each case. I suggested that relevant legislation be processed, providing for the inclusion of basic terms in the tenders proclaimed. (ii) Cases continue to be observed where the management of canteens has not been awarded to the highest tenderers, without sufficient justification, resulting to considerable loss of revenue for the School Committees. (c) Operation of Canteens. In several canteens problems are presented from time to time, regarding the implementation of directions for cleanliness, quality and prices of items offered to students. Recently the School Canteens Law of 2000 60(1)/2000, has been approved by the House of Representatives, which provides for the establishment and operation of a Central Committee for the Control of School Canteens, which, according to the Law, will be carrying out relevant examinations. 4.59.12 Register of computer equipment. 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 relevant registers should be used, suitably devised, where all the elements of the

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equipment could be recorded, for purposes of follow up and where placed. It is also necessary that a system should be adopted for their follow up and maintenance, in accordance with the contracts signed. My suggestion has not yet been implemented. 4.59.13 Inventory registers. There are still weaknesses regarding the correct keeping of inventory registers. 4.59.14 Purchase of photocopying machines, musical instruments, air conditioning units etc. I recommended that such purchases should be made through the Ministry of Education and Culture. In case of difficulty to do so, I recommended that for the preparation of specifications, for such purchases, School Committees should refer to the Technical Services of the Ministry of Education and Culture. 4.59.15 Stationery, sports items and musical instruments. School Committees continue to be supplied with the above items from the private sector, with the justification, in some cases, the inferior quality of items, which can be found at the Ministry's store. I recommended to the Ministry that efforts should be made for the limitation of the items moving through the store, in order to improve the store's operation, and to facilitate the purchases made by School Committees. 4.59.16 Preparation of Budgets and Final Accounts. The Budgets and the Final Accounts of Secondary Education do not show the receipts and payments made directly by the Ministry of Education and Culture, on behalf of School Committees, and consequently they do not show a complete picture, whereas, for the Elementary Education the receipts and payments, although not shown in the Budgets, these, however, are included in the Committee's accounts, in Education "A" Fund. With the approval of the School Committees Law of 1997, I suggested that this matter be regulated during the preparation and approval of the budgets of School Committees. The Ministry informed me that from 2000 to 2001, the receipts and payments effected by the Ministry would be included in the Budgets of the Secondary and Elementary Education. 4.59.17 Execution of Budgets. In some cases amounts approved in the Budgets of School Committees remained unspent. 4.59.18 Special subsidies. Amounts conceded to School Committees for specific purposes are not spent during the school year. In some cases this is due to the fact that the payment of subsidies is delayed and in others because there is a provision in Budgets of School Committees which satisfies their needs. Recently instructions were given for subsidies to be paid immediately after the approval of the Budgets. 4.59.19 Libraries. In several libraries no examination is carried out of the books, mainly, due to the insufficient staffing of schools with librarians. 4.59.20 Displaced School Committees – Cash in hand. The displaced School Committees have at their disposal cash balances in cooperative institutions and banks, which are under their administration. All School Committees failed to submit for audit the necessary documents. 4.59.21 Immovable property. The investigation carried out by the Department of Lands and Surveys for the verification and evaluation of the immovable property of School Committees and issue of new titles of ownership, has not yet been completed. This is necessary for the preparation of Final Accounts as provided in the Regulations of School Committees.

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4.59.22 Provident Funds. In my Previous Reports I stated that the operation of Provident Funds of School Committees is not covered by Regulations. With the approval of the School Committees Law of 1997, a relevant provision is included, and the approval of relevant Regulations will be pursued.

4.60 NICOSIA SCHOOL COMMITTEE Part A 4.60.1 Accounts. Delay has been observed in the preparation and submission for audit of the accounts for the school year 1998/99. As a result of the weaknesses faced each year for the preparation of the accounts, I suggested that qualified staff should be appointed in the Accounts Department. Since 2000–2001 the School Committee has secured the services of a Financial Adviser. 4.60.2 Internal audit. The system of internal control of the activities of the School Committee, as well as the administration of legacies, present weaknesses and omissions. The Ministry of Education and Culture will provide assistance for the organisation and efficient operation of the system of internal control. 4.60.3 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 objectives of which have ceased to exist or are not in line with the present state of affairs, so that a more appropriate utilization of the relevant revenue can be made. I was informed that the advice of the legal advisers would be sought for the amendment of the terms of the legacies. Part B 4.60.4 Government loans for Elementary Education. Considerable delay was again observed in the repayment of government loans amounting to £990.000, which was conceded to the Committee since 1986 to cover deficient Budgets. The instalments in arrear at 31.8.99 amounted to £830.039, for capital, and £462.494 for interest. The matter has been referred to the Ministry of Finance for the settlement of loans. 4.60.5 Inventory register (General). This register continues not to be kept, contrary to Store Regulation No. 5, resulting to difficulties in the preparation of the accounts and the follow up and control of assets. Furthermore, no sufficient records are kept for the land and buildings under the possession and administration of the School Committee. I was informed that a computer programme has been purchased for the keeping of the inventory register. Also a personnel training is under way and the above will be implemented in the year 2000–2001. 4.60.6 Arrears of tuition fees and amounts due because of damages. The amount of £8.014, which was outstanding since 1985, was written off on the approval of the Ministry of Finance (£6.703) and the relevant decision of the Committee (£1.311). 4.60.7 Advertising boards at the bastion. Fees for advertisements at the bastion continue not to be collected. Recently it has been agreed that the token amount of £10 per annum will be paid by "Olympiakos" club Nicosia, with effect from 2000.

4.61 LARNAKA SCHOOL COMMITTEE Part A 4.61.1 Tender for the exploitation of school canteens for the period 1.9.99–15.7.2002. In several cases the award of tenders was not made to the highest tenderers and the relevant

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decision was taken on the basis of documents which were not included in the tender terms, such as unreal prices, testimonial letters for previous administrations, war disability etc. Also, in some cases higher tenderers for specific canteens were excluded, with the excuse that they would be awarded tenders for other canteens, in which they were again the highest bidders, without any calculations made justifying the specific award. It must be stated that the disqualification of a tenderer, with the excuse of submitting unreal prices, is contrary to paragraph 5 of the relevant minutes of award, according to which the School Committee does not have the means in order to distinguish a rational from an irrational tender. As a result of the procedure followed by the School Committee, tender procedure was defeated, with consequent loss of revenue of the region of £80.000 for the Secondary and Elementary Education. 4.61.2 Internal audit. Omissions and weaknesses have been observed in the systems of internal control. Specifically: • The vouchers for the employment of staff were not always up to date, and as a result they could not form a reliable basis for audit. • Substantial amounts are collected from tenderers without the issue of a receipt. • The register of tenders and contracts is not properly kept, and it is not fully up to date, in order to be utilized for purposes of follow up of the tenders. • The tenders are not recorded in a special register. • Wrong payments are made and import duty has been paid, although the Committee is exempted, pursuant to section 15(a) of Law 108(1)/97. The Director General of the Ministry informed me that some of the weaknesses have been corrected and efforts are made for the implementation of the remaining of my suggestions.

4.62 GERI SCHOOL COMMITTEE Part A 4.62.1 Preparation of submission of accounts for audit. A great delay was observed in the preparation and submission for audit of the accounts of the Committee. The accounts for the years 1996/97 and 1997/98 were submitted for audit, together with the accounts for the year 1998/99. From the commencement of audit, mistakes and omissions were observed regarding recordings in the Ledger, and as a result no reconciliation can be carried out between the bank balances and book balances. Due to the seriousness of the matter the audit could not be completed. I pointed out the necessity for the correct updating of the accounting books of the Committee and the full compliance to the provisions of the Law, for the prompt submission of the accounts for audit, something that has recently occurred. The Ministry attributes the above to the fact that the School Committee has been recently established and to the inexperience of the appropriate officer.

4.63 ARMENIAN SCHOOL COMMITTEE Part A 4.63.1 Preparation and submission of accounts for audit. Delay has been observed, for several years, in the preparation and submission for audit of the accounts of the Committee.

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4.63.2 Keeping of records. Serious weaknesses and omissions have been observed in the keeping of the necessary documents, accounting books and other registers.

4.64 MINISTRY OF COMMUNICATIONS AND WORKS Part A 4.65.1 Budget execution - Unspent amounts. Substantial amounts under various Budget Votes remained unspent, relating mainly to execution of projects. I pointed out that better planning of the needs should be made, so that budgeted amounts would correspond to feasible implementation of projects. 4.65.2 Carpentry workshop. At the carpentry workshop which is situated at the Nicosia Airport area in the buffer zone, the appropriate procedures regarding the receipt and disposal of wood materials are not always followed, and the Stores Regulations are not applied. I pointed out the necessity for compliance to Stores Regulations and the carrying out of periodical examinations. The Director of the Department informed me that strict directions were given for full compliance to any recommendations. 4.65.3 Cast and transcript workshop. From a site inspection it was observed that appropriate procedures are not followed regarding the supply of materials for the construction and disposal of casts and transcripts. My Office has repeatedly pointed out the necessity for compliance to Stores Regulations and the exercise of efficient internal control. The Director of the Department informed me that instructions were given to the officer in charge of the workshop for full compliance as from year 2000. 4.65.4 Regulations. The issue of the following Regulations is still pending: • Deposit Accounts - Cyprus Antiquities Fund. • Antiquities Regulations. The Director of the Department informed me that the above Regulations, after relevant processing by the Law Office, were returned to the Department for corrections and additions of new sections, and submission again to the Law Office for legal processing. Part B 4.65.5 Stocks of antiquities. In my previous Reports I recommended the computerisation of the antiquities registers for purposes of better control and follow up. The Director of the Department informed me that the relevant hardware and software have been secured, but the electrical works for the installation of the computers, which are expected to be carried out by the Department of Electrical and Mechanical Services, are delayed. The computerisation of the antiquities registers will be processed as soon as the necessary technical infrastructure is completed. 4.65.6 Archaeological site in Pafos (a) At the above site a large parking place has been constructed, which cannot be utilized financially, because, according to the Attorney General’s ruling, it is not covered by the purposes defined in the relevant order for the acquisition of the land. As the cost of construction of the parking place was high (£800.000), I requested to be informed of any further actions of the Department, in order to make possible the financial exploitation of the area. I

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stated further, that the Department should take such measures, so that the area will not be illegally exploited by third parties. As I was informed, the area remains open for free use. (b) During the execution of the project it was realised that the plans and specifications presented considerable ambiguities and omissions, resulting to many delays of the contract for the execution of the project. In addition the frequent discovery of antiquities imposed the cessation of works and the alteration of plans according to the directions of the department of Antiquities. As a result of the above problems, the project was completed with a delay of 20 months, on 17.7.1998, with consequent claims for compensations submitted by the contractor, amounting to £1.523.925. After the evaluation of the claims by the engineer of the project, the Central Committee for Variations and Claims examined the matter and decided the payment of compensations amounting to £925.000, which has already been paid.

4.66 DEPARTMENT OF PUBLIC WORKS Part A 4.66.1 Deposits account. At 31.12.99 the balance of the account was £10.903.739. Included in the above is the amount of £8.725.647, which refers to deductions and guarantees for contracts executed or in progress, as well as unspent balances of deposits by third parties, for the execution of various works. Many of these balances are pending for long periods of time and must be investigated and settled accordingly. 4.66.2 Tenders. In several cases, purchases of various materials are made by the District Offices, through many small departmental tenders or written quotations, the total value of which exceeds the maximum limit up to which, the approval of the Main Tender Board is not required. This, in my opinion, constitutes a deviation from tender procedure. I recommended that, in these cases, a small number of tenders should be invited for larger quantities of materials, which will be approved by the Main Tender Board. In other cases payments were made to the successful tenderers before the deposit of bank guarantees provided in the contracts. 4.66.3 Establishment of Departmental Tender Boards and Departmental Evaluation Committees. Due to the small number of the technical staff in the Offices of the District Engineers, a problem is presented in the composition of the departmental Tender Boards and the Departmental Tender Evaluation Committees. Consequently officers without the required technical qualifications participated in these committees. 4.66.4 Lease of motor vehicles. In some cases lease of motor vehicles was made, at a relatively high cost, up to £26 daily, without the relevant approval of the Department of Electrical and Mechanical Services. It was observed that the log books of these vehicles are not always kept, and consequently it cannot be verified whether these are efficiently used. 4.66.5 Traffic lights. In several cases the whole expenditure for the purchase and installation of traffic lights in Municipal Areas is undertaken by Government, and as a result the contributions of Municipalities for the above expenditure, as per the Council of Ministers decision No. 21.669 dated 29.4.82, remain unspent in the deposit accounts of the Department or are used for purposes other than those of the deposit. 4.66.6 Overtime work. Overtime pay for the supervision of projects continues to increase considerably during the last years, mainly, because of the considerable increase of projects executed. I recommended that efforts be made and measures taken for the limitation of

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overtime work to absolutely necessary cases only and that, whenever possible, free time be allowed, instead of compensation. 4.66.7 Surcharges due to weaknesses in the planning/coordination in 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 the carrying out of 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 belatedly completed, 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 to £150 m. and £50 m., 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 the new airports will operate in 2005, that is, 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. (b) Dhekelia - Famagusta Highway. In April 1992 the Council of Ministers decided the design of the Highway, according to the direction specified by the technical and financial study and the recommendations of the appropriate Services. After the reactions of the communities influenced and of the Municipal Council of Famagusta, the Council of Ministers proceeded to, repeated alterations of the direction of the highway and in September 1996 decided that the construction be made south of Xylophagou community, towards the tourist area of Paralimni - Agia Napa. Up to the end of June 2000 the amount of £640.000 was paid to the Consulting Engineers, for works according to the contract, and the amount of £310.000 for additional works, as compensations for changes and delays. In addition the Consulting Engineers claim the amount of £150.000, for delays and postponements of their contract. In October 1996 the construction of the project commenced and it is expected to be completed in about, December 2001, for an amount of about £35 m. (c) New building of the House of Representatives. The Council of Ministers decided in July 1993, with the agreement 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 Communications 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. My Office observed that a considerable part of the delays is due to the delay for the moving of the Ministry of Communications and Works and to the slow pace of execution of archaeological excavations. In January 2000 it was decided that the construction of the new building of the House of Representatives be moved to a new

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area with the required alterations in the plans and designs. Up to June 2000 the expenditure for studies amounted to about £650.000, whereas claims of the consultants are pending for compensations of about £800.000. In the meantime, due to delays in the implementation of the project, the invitation of tenders was decided for the temporary accommodation of the House of Representatives in an existing building. (d) New Nicosia Hospital. After invitation of tenders, the execution of the project was assigned for the amount of £37,5m., with commencement in May 1997 and completion in February 2002. In January 1998, on a Council of Ministers decision, an agreement was reached with the contractor, according to which the project would be accelerated by 65 weeks and would have been completed in May 2001, for an additional expenditure of about £2,9 m. After the Attorney General’s ruling, however, that the acceleration does not fall in the changes that can be made according to the Public Tenders Law, the agreement was cancelled. In June 2000 the project presented delays of 70 weeks, which were, mainly, attributed to the contractor and partly to other reasons. Up to June 2000, justified time extension of the contract of 37 weeks was approved to the contractor, which transfers the contractual completion of the project to November 2002. In July 2000 the architect of the project decided that the contractor is eligible for 32 more weeks extension, because of the addition of the Paraplegic Centre. Over and above of the reasons that contributed to delays of construction works, a serious delay was observed in the preparation of specifications for the medical equipment of the hospital, which is due to the special consultants, and the considerable increase of the estimated expenditure from £12m. to £25m., due to the increase of the volume of the required equipment. (e) New Famagusta Hospital. The design study of the project, the cost of which is estimated to £7,5m. was assigned to private architects in July 1997 and should have been completed in March 1998. The study as well as the proclamation of tenders presents a delay of about 28 months, part of which is due to the Architects and part to delays in decision making by Government. Meanwhile the estimate of the final construction cost has amounted to £9,2m., mainly due to alterations in the outside works, revision of the cost of electromechanical works and increases in wages. In January 2000 I suggested to the Director of the Department that instructions should be issued to the consultants for reformation of the study of electromechanical works and limitation of the cost, on the basis of specifications of the New Nicosia Hospital. In April 2000 the electromechanical consultants, adopting the recommendations of my Office, submitted a revised expenditure estimated for Phase A, which amounts to £2.690.000, compared to £2.990.000, which was the initial estimate. (f) Construction of Government Offices Complex in Nicosia. In 1994 it was decided that a new study be carried out for Phase A of the Government Offices by the firm of consultants, to whom the initial study was assigned in 1980. In February 1995 the relevant contract was signed, which provided for the completion of the study and invitation of tenders up to November 1995, for the construction of the Offices. After a delay of about 20 months in the preparation of the study, in March 1998 the construction of the project was assigned for the amount of £16,5 m. with completion time provided for 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 Committee for Variations and Claims of the Department, after negotiations with the

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contractor, suggested the concession of a time extension of 30 weeks, with monetary compensation, and five weeks without monetary compensation. (g) Study for the improvement of the round abouts at Polemidhia and the Port of the by pass Limassol. In November 1999 the Ministry of Communications and Works decided the alteration of the pre study for the improvement of the round abouts at Polemidhia and the Port of the by pass Limassol, with a design proposal for the construction of the intermediary hightened part of the road between the round abouts in the form of a bridge, instead of its support with reinforcement walls. As a result of the change an increase in the cost of execution of the project is expected of £1 m. - £1,5 m. The main reason for the change is that the proposed solution is considered environmentally and aesthetically as the most appropriate. My Office observed that no environmental study was initially carried out, but it was decided, for purposes o hastening the construction of the project, to carry out a study for the reduction of implications, on the environment at the stage of the construction designs. (h) Construction of underground warehouses in Famagusta District. From a site inspection of the project I observed that, on the directions of the General Staff of the National Guard, the Department modified the length of two warehouses from 14 to 20 meters, at an extra cost of about £16.000, without the approval of the Central Committee for Variations and Claims, according to the approved procedures. I observed further that the project presented a delay of two months, due to unforeseen land conditions, and quantity increases through changes and additions in the designs. (i) Improvement of roads Nikoklia - Arminou - Filousa (Section C) and Nikoklia - Mammonia -Agios Nikolaos (Section E). The Council of Ministers decided in February 2000 the asphalting of the supports of the above roads, for the purpose of upgrading/improvement of road security and the long-term reduction of the cost of supports. I observed that this matter was examined before tender invitation for the project and it was considered that the technical and financial data of the roads did not justify the asphalting of supports and it was decided that these be made with earthen materials. The two projects are in progress and the extra work will be executed by the contractors of the projects, at an extra total cost of £122.000. (j) Round about No. 6 in Limassol - Intersection of roads Griva Digeni -Linopetra - Kolonaki. 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, in agreement with the Department of Planning and Housing and the Municipalities involved, 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. The objections raised were due to the fact that the constructions which would be carried out according to the existing contract would be temporary and could not be kept, when the final regulating scheme of the Department of Planning and Housing would be implemented, which has not yet been prepared. In May 1999 the Central Committee for Variations and Claims decided to cancel the contract, while the contractor submitted claims for compensation amounting to £206.695, which was considered excessive and he was asked to submit further details. In my view the annulment of the contract is due to insufficient planning and coordination between the Government Departments involved, resulting to serious compensations paid by Government. At the same time delays have been created in the materialization of this important project and the integrity of Public Tenders procedure has been undermined.

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(k) Upgrading/improvement of the round about at the intersection of Archibishop Makarios III avenue with Yian Sibellious and Apostolos Varnavas roads in Limassol. The study for the project was completed in January 1995 and in September 1997 the contract was signed with a private contractor for the construction of the project for the amount of £360.000. Before the project commenced, the Department postponed the commencement of works, due to the revision of studies for Public Organisations. In May 1998, on the Minister’s of Interior directions, the Department of Planning and Housing prepared a new regulating scheme and in November 1998 the Council of Ministers approved the new regulating scheme and the new works. After consultations of the Department with the contractor, it was suggested that the contractor should carry out the works included in the new regulating scheme for the amount of £825.387. The matter was examined before the Central committee for Variations and Claims, which approved the execution of works. 4.66.8 Errors and omissions in studies (a) Dhekelia - Famagusta Highway. As a result of errors and omissions presented in the study, delays have been caused in the progress of works, and also alterations in the designs, resulting to the contractors submitting claims for compensations. The Department is considering the matter and proposes to submit counterclaims to the Consulting Engineers. The Central Committee for Variations and Claims approved the alterations and requested, in September 1999, the Department of Public Works to prepare a claims report on behalf of the Government, for compensations by the Consulting Engineers. (b) Limassol - Pafos Highway (Section Timi-Geroskipou). During the construction of Timi- Geroskipou section of the road, it was observed that the resistance of the subsoil, onto which the foundations of Ezoussa bridge would be placed, was much lower than the one estimated by the Consulting Engineers in the design study. As a result, the placing of the skates of the bridge on poles was considered necessary, for which the contractor claims additional cost of about £1m. The Central Committee for Variations and Claims decided in March 1998 the imputation of responsibility and the taking of measures against the Consulting Engineers, because the results of the geotechnical examination carried out at the stage of the design of the project were not correct. In February 1999 the Ministry of Communications and Works, with a letter to the Consulting Engineers imputes responsibility to them for breach of the terms of their contract and reserves the Republic’s rights for claims above £110.000, for damages that will be suffered by Government. (c) 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 represents 32% of the contract amount. Furthermore, due to the proposed changes, it was suggested that an extension of the contract time should be allowed by 50 working days, 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 consultant, which were made at the stage of study, and in which an exceptionally unstable formation of the ground was pointed out, as well as the existence of fountains at the length of the axis of the road. Due to the seriousness of the matter I recommended the carrying out of an investigation, for the purpose of attributing responsibility, regarding omissions observed in the study.

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(d) Nikoklia - Arminou - Filousa road (Section C). At the stage of study and preparation of tender documents for the above road, no consideration was taken for the placement of surface crowning material, wherever there is unsuitable ground. At the stage of construction of the project the need for placement of crowning material was realised and it was estimated that the quantity of the material required is about 10 000c.m., at an extra cost of about £40.000. The matter was approved by the Central Committee for Variations and Claims, which, however, requested the examination by the Department of the issue of responsibilities of the consultants. (e) Formation of road network towards Nicosia new Stadium. The study of the road surface was based on the soil research carried out for the construction of the new Nicosia Stadium. At the stage of construction it was observed that the underground was unsuitable, resulting to the modification of the study and the cause of five weeks delay in the programme of works at an extra cost of about £52.000. I observed that the existing procedure, according to which, at the stage of study, a soil research is carried out, was not followed, much more in this case, where, from the available soil data of the Nicosia Stadium area, an in uniformity appeared in the quality of the underground. The Director of the Department informed me that no soil research was carried out at the stage of study, for the road, because there was urgent need for the execution of the project before the completion of construction of the new Nicosia Stadium. He informed me further that his department, in cooperation with the Department of Geological Survey is processing the working out of soil researches before the commencement of studies for road works, so that there will be a clear indication of the underground, in order that similar situations will be avoided. (f) Through road towards “Vathia Gonia”. From a site inspection considerable delay (5-6 months) was observed in the progress of works, which was due to the large increase of ground works, because of the change of the initial direction of the road and the increased movements of services, which were not provided at the stage of study. The project was completed in May 1999, with nine months delay. The contractor has submitted claims for compensations amounting to £455.000, which are being examined by the Department. (g) Improvements of Larnaka and Aglantzia Avenues in Aglantzia. During the construction of the project it was observed that the height of the reinforcement walls provided in the study of total length of about 80m., had to be increased, resulting to an extra charge on the contract of about £17.400. 4.66.9 Weaknesses in the organisation and control procedures of projects. (a) Independent laboratory tests for projects by the Main Laboratory. From a sample audit of the files of the Main Laboratory of the Department of the large road works’ contracts, it was observed that the examination carried out by the Main Laboratory is not enough and systematic, because of the gradual reduction of the staff of the Laboratory. As a result of the existing situation, the system of control of the quality 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 stuff, so that the laboratory’s potentialities will be fully utilized. In June 2000, after a new audit carried out by my Office, it was observed that, contrary to the above affirmations, the laboratory was further weakened with the secondment of a number of experienced employees to site inspections and supervision of road projects.

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(b) New Limassol - Pafos road, section Timi Geroskipou, Contract IB. From a site inspection of the project, it was observed that there is unjustifiable delay in the removal of a mosaics factory which is situated in the sit-in lane, at the end of the highway, resulting to the creation of presumptions for delays of the project and the submission of claims by the contractor for compensations. In a relevant observation, the Director of the Department informed me that the order for acquisition has not yet been published, because the owner submitted an objection, the examination of which is delayed for various reasons. The Department of Lands and Surveys offered the owner the amount of £119.130, as compensation, but the owner claimed the amount of £784.583. Finally in January 2000, at a meeting in the Office of the Attorney General, in the presence of the owner of the factory and his lawyers, an initial agreement was reached that the owner will surrender the area of the factory involved to the contractor and Government will pay him the amount of £325.000, as compensation, with the reservation of both parties for final settlement of the matter, either by arbitration or court decision. (c) Archaeological site at Kato Pafos. During the execution of the contract it was observed that the designs and specifications presented considerable ambiguities and omissions, resulting to the cause of many delays of the contract. In addition, the frequent findings of antiquities necessitated the cessation of works and the alteration of the designs according to the directions of the Department of Antiquities. As a result of the above problems, the project was completed, after a delay of 20 months, on 17.7.98, and in consequence the contractor submitted claims for compensations amounting to £1.523.925. After the evaluation of the claims by the engineer of the project and the Department, the Central Committee for Variations and Claims considered the matter and decided the payment of compensation amounting to £925.000. In July 2000 the Ministry of Communications and Works decided the carrying out of an investigation regarding the causes and the persons responsible for the creation of the problems observed in the planning and execution of the project. (d) Limassol - Pafos Highway (Section Petra tou Romiou - Aspros). According to the contract, which was assigned, after international tenders, to a joint venture of a foreign firm with a Cyprus company, for the amount of £10,5m., the execution of which commenced in March 1998 and should have been completed in June 2000. After the commencement of works it was observed that the foundation under soil of the valley bridge at the area of Petra tou Romiou was more adverse than what was expected, according to the soil research carried out at the stage of study by the consultants. As a result the modification of the foundation study was decided, but disagreement occurred between the consultants and the contractor, regarding the type of foundation that had to done. The problem was created because the geological study carried out by the consultants was wrong, while at the same time the consultants, pursuant to a relevant provision in the contractor’s contract and contrary to their contractual obligations, transferred the responsibility for the final study of the bridge to the contractor. In my view this action of the consultants should have been spotted and stopped by the Department. Due to the disagreement serious delay was caused in the construction of the bridge resulting to the submission of claims for compensations by the contractor. For the purpose of minimising delays, the Central Committee for Variations and Claims approved the recommendation of the Ministry of Communications and Works for acceleration and sectional construction of the bridge, with delivery of the northern section up to 28.12.2000 and of the southern up to 26.8.2001, at an additional cost of £275.000. The Committee decided also that this expenditure should be claimed from the consultants.

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(e) Calculation of quantities and payments for works for contracts in road construction projects. From a sample audit of the payments for road construction projects, my Office observed that, while the contractors design road intersections and calculate the quantities of ground works with the use of computer programmes, the Department, in most cases, proceeds to the examination of intersections and quantities with area counting, without the use of a computer. My Office recommended that, for more efficient administration and control of payments, it is imperative that the Department he supplied with the respective programmes used by the contractors. The Director of the Department informed me, in May 2000, that the Computerisation Unit of the department is processing the securing and use by the resident engineers of the suitable programmes. (f) Sub contracts for the electrical and mechanical installations of the New Nicosia Hospital and the New Government Offices. An investigation carried out by my Office revealed that the qualifications and experience of the personnel in charge of sub contractors for electrical works for the New Nicosia Hospital and the New Government Offices, as well as the sub contractor for mechanical works for the New Government Offices, did not meet the requirements of the terms for the pre-selection of subcontractors. In March 2000, the Director of the Department informed me that, regarding the New Government Offices, letters have been sent to the sub contractors, asking them to keep their contractual obligations, regarding the personnel in charge of the project. 4.66.10 Weaknesses in the administration of contracts (a) Periodical maintenance of roads in the Districts of Nicosia - Larnaka - Famagusta. From a site inspection of the project I observed that directions were given for the commencement of the project, while works were still carried out on Larnaka - Dhekelia road (B3) by Larnaka Sewerage Board, resulting to the creation of presumptions for claims by the contractor due to delays. Finally the execution of works was carried out four months after the expiry period of the contract, due to delays in the completion of works carried out in this road by the Sewerage Board of Larnaka. I observed further that on the instructions of the Ministry of Communications and Works, during the execution of the project, the widening by one meter of the asphalt surface was decided, in a section of the above road of 3,2 km. length, at an extra charge of £17.704, without approval, as per the approved procedure. (b) Improvement of Agia Triada - Kavo Greco road. According to the terms of the contract the project is expected to commence in December 1999 and executed in two parts (A and B). Part A will be completed in 18 months and part B in five months. I observed that according to the programme submitted by the contractor, the commencement of work for part A is expected to take place after completion of works in Part B, contrary to the provisions and the terms of the contract which provide for the simultaneous commencement of works in both parts. In March 2000, with my letter to the Director of the Department, I requested the investigation of the matter and to be informed of the reasons of deviation from the provisions of the contract. (c) Improvement of Nikoklia - Mamonia - Agios Nikolaos road - Movement of the axis. The Department decided the movement of the axis of the road by three meters, on the request of the owner of the land involved. The contractor has expressed his intention to claim extension of time and compensation for this change, which was effected without the approval of the Central Committee for Variations and Claims. Finally the Committee decided to approve the change, under protest, requesting the Department to follow strictly the approved procedure for changes.

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(d) Construction of underground warehouses in Limassol District area. At the stage of submission of the tenders, the exact position for the construction of the warehouses, as well as the access road to them, were not known, resulting to the quantities included in Quantities Way Bill of the contract for ground works to be substantially smaller than the actual ones. The extra cost, which resulted from the increase of quantities amounts to £63.432. In my letter to the Director of the Department I observed that, although the above problem was known to the Department before commencement of works, the Engineer of the project was asked to issue directions to the contractor for commencement of works, resulting to the creation of delays for the project, until the preparation of the required designs for the position of the warehouses and the construction of the access road. For this reason the contractor was allowed justified extension of time of 32 working days, while the submission of claims for compensations is expected on his part. The Central Committee for Variations and Claims, called the Department, during the examination of the case, in future not to accept the proclamation of tenders for other Services (including the Ministry of Defence), if the construction designs and quantity bills have not previously been prepared. The Department in cooperation with the Ministry of Defence and the Control Division decided, in February 1999, the adoption of «stages control» procedures, in order to reduce to the minimum the possibility of omissions and the avoidance of delays and surcharges for projects. (e) Contract of the Limassol - Pafos road (Section Aspros - Petra tou Romiou) - Change of foundation of the Valley bridge. After the modification of the designs of the foundation of the Valley bridge, the contractor refused to give to the Engineer of the project the necessary documents (tenders for subcontractors etc.), for the accurate calculation of the cost of the work, claiming that he has no such obligation. My Office pointed out that the position of the contractor is contrary to the terms of the contract and international practice, according to which he is obliged to cooperate with the Engineer for the costing and execution of work in the most economical way. In April 1999 the Engineer of the project sent a letter to the contractor, under which he informs him that the costing of work will be done on the basis of the terms of the contract and international practice. (f) Tender for the placement and construction of curbs and bases in Famagusta District. The above tender concerned a “running” contract, into which the quantity of work executed was not specified, but the maximum amount and the maximum/minimum time for the execution of the contract. Three months after the commencement of the contract, works were terminated on the directions of the Department. The instructions for the termination of works were given for the purpose of their continuance by working crews of the Department, which were idle. The contractor in his letter to the Department claimed the amount of £26.518 as compensation for the termination of works. In a relative ruling the Attorney General reprimanded the Department for its decision, which he considered wrong, and called the Department to negotiate the matter with the contractor, for a compromising solution and settlement of his claims.

4.67 DEPARTMENT OF MERCHANT SHIPPING Part A 4.67.1 Arrears of revenue. The arrears of revenue as at 31.12.99 amounted to £969.496, compared to £813.717 for the previous year. The arrears include the amount of £31.063 for

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inspection fees, £6.731 for crew fees and £37.517 for wireless licences. The amount of £183.731, relating to surcharges on overdue tonnage tax is not included, because this is effectively payable at the time of payment of the tax due. I recommended the investigation of all arrears due for the purpose of collection or write off, as well as the taking of legal measures, where considered appropriate. With the approval of the Ministry of Finance, the amount of £813.960 for the years 1995-1999 was written off. 4.67.2 Arrears of revenue from taxes on small boats and yachts - Submission of guarantee. The arrears of revenue include arrears relating to taxes of small boats and yachts, several of which go as far back as 1992 and their collection is very doubtful. The tracing of the debtors in these cases is very difficult, because there is no regular communication with the department, and consequently the arrears remain outstanding for several years. To face this problem I recommended the consideration of possible submission of guarantee at the stage of registration of small boats in the ships register. 4.67.3 Rotterdam Consulate/Shipping Office. The officer in charge of the Office had not settled the outstanding matters in the Consulate’s accounts, while, as from 31 May 1999 has been transferred to another Office. Due to the seriousness of the matter a spot inspection was carried out by a representative of the Accountant General and instructions were given for the settlement of all outstanding matters. As the Department informed me, the matter is expected to be settled. 4.67.4 Cooperation with the Cyprus Buraeu of Shipping (CBS) in matters of Merchant Shipping. Although it has not been certified that the Cyprus Buraeu of Shipping satisfies the quantity criteria required by the decisions of the International Merchant shipping Organisation and the Community Directive of the European Union, it was suggested, however, and, with the Council of Ministers decision dated 29.1.98, was approved to assign the inspections of boats at Peiraeas to the CBS, under a contract for the period of one year. Furthermore, the assignment of inspections was made without following tender procedure, contrary to the Public Tenders Law. 4.67.5 Creation of a network of independent inspectors for the control of safety standards of the Cyprus ships. The creation of a network of independent inspectors, which was approved under the Council of Ministers decision No. 42.695, dated 7.6.95, was not completed, because of difficulty in finding inspectors. The Council of Ministers, with the new decision No. 50.816 dated 17.10.99, has approved new conditions and criteria for the employment of independent inspectors, for the settlement of the matter. From the operation of the system of inspections of the Cyprus boats by the independent inspectors, during the years 1996-1999, it appears that the inspections carried out were very limited and have not produced the expected revenue to Government, whereas the cost of employment of the inspectors is disproportionately high, compared to the revenue realised. Also the implementation of this institution does not appear to have produced substantial improvement to the image of the Cyprus flag, since the reports/withholding of Cyprus boats by the ports authorities of foreign countries do not present substantial decrease. With regard to the above it is obvious that the way of supervision of the Cyprus boats must be reconsidered. 4.67.6 Imposition of fines. During 1999 no fine was imposed for violations/omissions observed during the inspections of boats by the independent inspectors, or for reports made in

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previous years and their examination was pending. Furthermore, the practice of the Department is not to impose fines for offences/omissions observed by the permanent inspectors of the Department, unless the irregularities justify the withholding of the boat. The above are not in line with the provisions of the relevant Laws, which provide for the imposition of fines according to the seriousness of the case, resulting to loss of public revenue. 4.67.7 Outstanding reports by foreign authorities for deficiencies in ships. Despite the effort made by the Department for the imposition of fines, for reports against boats by the ports authorities of foreign countries, there is still relative delay, and the risk of loss of public revenue. It was observed that in several cases the Department could not impose or collect the respective fines, because in the meantime the ships have been written off the Cyprus Register or have been sold, transferred etc. 4.67.8 Out of court settlement of offences regarding violations of the agreement for avoiding collisions in the sea. According to the Ratification Law 18/80, the appropriate authority has power to accept the payment of an amount agreed, after discussion, with the ship owner, for out of court settlement of offences regarding the above agreement. I recommended the amendment of the Ratification Law, so that the appropriate authority will have power to impose and not to accept fines for violations of the agreement, as it happens with other Ratification Laws. The Department informed me that it would pursue the above amendment. 4.67.9 Determination of fines for violations of International Merchant Shipping Agreements. In certain Ratification Laws no provisions have been included for the imposition of fines for violations of International Merchant Shipping Agreements, and as a result the determination and imposition of such penalties cannot be effected. In other Ratification Laws, while such provisions have been included, the respective fines have not been determined, resulting to considerable loss of revenues for Government, since for many reports no fines can be imposed. 4.67.10 Rent for the Merchant Shipping Office in Rotterdam. For the lease period 1.3.96 – 28.2.2001, the Department is expected to pay the amount of £123.461, as rent for the Shipping Office in Rotterdam. In view of the fact that in the terms of the relevant contract there is a provision for renewal of the lease for another five years, and as the amount of rent to be paid will be very high, and the use of the Offices in Rotterdam will be permanent, I recommended the examination of the possibility for the purchase of freehold premises. As the Department informed me, instructions have been given for gathering information about the prices of immovables, for the purpose of purchase of freehold premises. Part B 4.67.11 Ships registers. The reconciliation of the ships registers continues not to be carried out at the end of each year, for the verification of the correctness of new registrations and write offs. I recommended the acceleration of computerisation of the ships registers and the statements regarding charges of ships, so that the updating will be promptly made and the procedure of collection of the relevant fees will be processed more effectively.

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4.67.12 Printing of forms, handbooks, shipping documents and sailors’ certificates. In the budgets of the last years there is a provision for the printing of the above forms, for purposes of keeping official diaries and naval master roll, as provided by the Merchant Shipping Legislation. The Department has not yet proceeded to the printing of the above and the ships under the Cyprus flag are supplied with the various shipping documents from the market. This constitutes loss of revenue, since those forms would have been sold to ships by the Department. It is pointed out that the budgeted revenue from the sale of shipping documents amount to £200.00. As the Director of the Department informed me, action is taken for invitation of tenders. 4.67.13 Weaknesses of the computerised system. As I have repeatedly stated, the imposition of tonnage tax for boats, which is operated through the computerised system continues to present problems and much work, due to the limited potentiality of the programme, has to be carried out by hand. For the computerisation of the Department, tenders were invited on 8.3.98 by the Department of Information Technology Services and the award of the tender was made by the Main Tender Board on 26.6.2000.

4.68 DEPARTMENT OF ELECTRICAL AND MECHANICAL SERVICES Part A 4.68.1 Workshop for hydraulic and steel constructions and workshop for the construction of boards. From a site inspection carried out at the above workshops of the District Office Larnaka, weaknesses were observed in the system of internal control, and especially regarding the receipt and issue of materials. 4.68.2 Concession of free time. It has been observed that the accumulated hours of free time, which are credited to the labourers employed at the workshops of Larnaka Airport and the Hospital, are very high. Specifically, the total balance credited is 6 416 accumulated hours of free time, out of which 4 592 or 71,57% related to the electrical workshop of Larnaka Airport, without these being conceded. I recommended that ways must be considered for the gradual decrease/concession of the hours of free time. 4.68.3 Deposit account. The balance of the Deposit Account (Sundries) at 31.12.99 amounted to £770.545. Included in this amount are several credit balances, which are outstanding for several years and related to deductions from contracts. 4.68.4 Weaknesses/omission in the preparation of specifications/handling of tenders (a) Tenders for the operation and maintenance of sewerage treatment plants. The three year contracts for the maintenance of seven Sewerage Treatment Plants would expire on 31.3.98. The Department proclaimed, with considerable delay, tenders for their maintenance on 10.7.98. According to the evaluation report submitted in September 1998 to the Main Tender Board, the Department suggested the award of the tender for a total amount of £455.614, for 3 years maintenance, including spare parts. My Office, in a letter to the Accountant General, Chairman of the Main Tender Board, expressed the view that the tender prices were exceedingly high, stating comparative figures for the actual maintenance cost and recommended the appointment of a special committee for examination of the matter. Finally the

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Main Tender Board decided, in December 1998, to cancel the tender, which was proclaimed again in April 1999, with modified terms, which included additional corrective operations for each Station, but did not include the cost for spare parts. Also on the recommendation of my Office, the criteria were modified, so that more tenderers could participate. In the evaluation report of the Department, which was prepared in June 1999, a recommendation for the award of the new tender was made for a total amount of £699.731, for 5 years maintenance, including also corrective works at the cost of about £60.000. On the observation of the Technical Committee of the Tender Board, the Department prepared a new report in August 1999, in which it was suggested that negotiations should be carried out with the tenderers for the reduction of prices. In my letter to the Accountant General in September 1999, I recommended that the possibility of cancelling the tender should be considered, and its re-proclamation on the basis of the negotiations procedure, because the prices of the tenders submitted were exceedingly high. In November 1999 the Tender Board decided to cancel the tender, which was proclaimed again according to my recommendations. Finally the tender was awarded in March 2000, for a total amount of £363.067 for five years, including corrective works amounting to about £21.000. The cost of maintenance, therefore, was reduced by £297.664 and the cost of corrective works by £39.000. (b) Tender for a complete security system in a Military Camp. The tender was proclaimed in April 1999, with an estimated cost of £521.500. Previously (March 1999) the specifications had been approved by the Technical Committee of the Tender Board, since the Department confirmed in writing to the Accountant General that these are similar, with certain improvements, with the specifications of a previous tender of the Ministry of Defence, which had been prepared by a private consultant. At the same time the Department confirmed that the specifications, for the main perimeter security system, satisfied at least five construction companies, which were referred to by name in the tender documents. From an investigation carried out by my Office, it was observed that the specifications for the equipment of the three out of the fine construction companies were similar and, from the remaining elements of these companies, a substantial relation between them was shown. In view of the above, the fact that the Department revised the evaluated cost – from £521.500 to £680.000 – as well as the fact that substantial clarification/information had been orally given to some tenderers, instead of written to all of them, I requested the Accountant General that the whole matter be reconsidered by a special committee, for the purpose of modification of the specifications, so that it could be possible for a greater number of tenderers/construction companies to participate and a considerable reduction of the cost to be achieved. In July 1999 the Department, after investigation of the matters raised by my Office, confirmed that the three of the five construction companies for the main equipment, were in fact related and in cooperation between them. At the same time the specifications were changed, with a reduction of the estimated cost to £480.000 (i.e. by £200.000), keeping, however, the minimum acceptable security levels, with the agreement of the General Staff of the National Guard. Finally, from the preliminary evaluation of the tenders submitted with the modified specifications, it was revealed that the price of the lowest tender within specifications was about £900.000, that is, almost double than the estimated expenditure. In July 2000 the Ministry of Defence decided to cancel the tenders. With regard to the handling of the tender by the appropriate officer of the Department, I requested the Director General of the Ministry of communications and Works to investigate the matter. In February 2000 the Director General informed me that, according to the results of a departmental investigation, it is possible that the above officer had not shown the appropriate care and attention during the execution of his duties, regarding the preparation and

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proclamation of the tender, and that the appropriate authority has transferred its powers to the Director of the Department to, concisely, deal with the matter. In May 2000, the Director General of the Ministry informed me that the Director of the Department, after investigation, verified that the officer who handled the tender did not commit a disciplinary offence, but as the way be handled the tender did not contribute to the desired result, the appropriate authority warned him in writing that in future he must be more careful in the handling of tenders. (c) Tender for the supply, installation and maintenance of telephone systems for the National Guard. The above tender was proclaimed for a second time – as the previous one was cancelled – and, because of the emergency needs of the National Guard, it was decided that new tenders would be invited from selected tenderers, with special terns and procedures, for the accelerated purchase of the equipment. The tenders were submitted on 5.2.99 and while, according to the terms of the tender documents, the lowest, within specifications, tenderer would undergo, within 15 days, field tests and within 30 days factory demonstration, the evaluation report of the tender was submitted to the Accountant general on 15.7.99, i.e. after 5½ months. The tender was finally awarded by the Tender Board on 2.12.99. (d) Supply installation and maintenance of a closed circuit television unit for Lefkara Museum. While the specifications for tender invitation were prepared by the Department and approved by the Technical committee of the Tender Board in 1997, tenders were proclaimed in April 1999. From the evaluation report of the tenders, which was submitted in October 1999 to the Tender Board of the Ministry for award, it was observed that, out of the five tenders submitted, only the two most expensive ones were within specifications and the main equipment included was of the same manufacturing company. The manufacturing company referred to above appeared to be the only once which could satisfy the specifications, regarding the filming equipment which represented about 40% of the total cost of the tender. Finally the tenders were cancelled by the appropriate Tender Board. (e) Electric lighting of soccer and basketball grounds at Malounta. At the stage of preparation of the tenders, specific questions/suggestions were submitted by a tenderer, which the Department examined, and prepared a supplementary note with clarifications/ modifications of the specifications. The note, due to omission of the Department to secure promptly the approval of the Accountant General, was not sent to the tenderers, and consequently the tenders were submitted according to the initial specifications. Finally, the Tender Board of the Ministry of Communications and Works decided in January 2000 to cancel the tenders. It is pointed out that the tenderer, who had submitted the questions/suggestions, without receiving promptly any reply, did not submit a tender. (f) Supply and installation of decorative lighting and pillars of street lighting. The evaluation report of the tenders was submitted to the Tender Board for a decision in November 1999, 17½ months after the date of submission of the tenders, which was in June 1998. I expressed the view that the time period required for the evaluation of the tenders was unjustifiably long, with which view the Department agreed. (g) Mechanical installations in the building of the Department of Road Transport in Limassol. In March 2000 6 tenders were submitted, while 5 other tenderers who had purchased the documents, did not submit a tender. In the evaluation report of the tenders it was suggested to cancel the tenders, because all tenderers were not within specifications in substantial parts. From the examination of the tenders and the evaluation report, it was found out that the specifications for the specific size of Freezer, as described by the Department,

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excluded all known Freezer manufacturers. Finally, in April 2000, the Tender Board cancelled the tenders. 4.68.5 Weaknesses/omission in the handling of contracts. From the audit carried out by my Office in tenders and contracts handled by the Department, the following were observed: (a) Electrical works at a military camp of the National Guard at Polemidhia. In August 1996, the renovation of 20 buildings was assigned, after drawing lots, to a firm of private electromechanical consultants, for the amount of £31.914. On the directions of the General Staff of the National Guard and the approval of the Department in December 1996, the consultants proceeded to the preparation of a study for renovations/new installations for a total of 127 buildings, at an extra cost of £12.188. Invitation of tenders followed - on the basis of the revised study of the consultants – and in September 1998 a contract was signed with a contractor for the execution of works for the amount of £195.582. In January 1999 the General Staff of the National Guard requested the Department to implement the decisions taken between September – November 1998, during the site visits of representatives of the Department, the General Staff of the National Guard and the Commander of the camp, which referred to substantial changes/additions/deductions in the works of the contract. In December 1999 the Departmental Committee for Variations and Claims suggested the covering approval for a total extra value of £16.575 and to the minimum value of £35.336, as well as time delays of 60 days. The above works had already been executed, while other works were pending, according to instructions which had already been given, of estimated value of about £50.000. The Director of the Department, in reply to my observation, informed me, in June 2000, that the changes were decided by the General Staff of the National Guard and that, in order to avoid in future similar problems, has checked all the studies, which followed, for reconstruction of camps, and modified the tender documents, according to the final needs of the General Staff of the National Guard. (b) Mechanical Installations at the International Airport Larnaka – “Check – In Hall”. In February 2000, from a site inspection carried out by my Office it was found out that, while the tender was awarded on 27.10.99, the contract with the appointed sub contractors for mechanical installations had not up to then been signed, the air ducts/isolation which had been installed were not according to the provisions of the contract, while part of the spare parts of the air ducts had not been installed. It was also observed that the installation of the air ducts was not in accordance with the respective designs of the contract, since the contractor had proceeded, without approval, to the abolition/modification of part of the air ducts, their spare parts, as well as the air inlets in a way effecting financial implications on the cost of the whole work. The Director of the Department to whom I submitted my observations, informed me that the contract was finally signed on 6.3.2000 and the work had to be urgently delivered up to 20.5.2000, and as a result there was no time to ask the contractor to replace the isolations/isolations which were not within specifications, for which the Departmental Committee for Variations suggested the deduction of the amount of £5.000 from the payments to the contractor. He also informed me that the whole behaviour and response of the contractor will be taken into consideration in the drafting of the efficiency report, which will be prepared by the department in accordance with the Tender Regulations. (c) New Government Offices Nicosia – Phase A – Mechanical Installations (i) Fan coil units. The contract included units from two manufacturers, which, according to the evaluation report of the private consultants of the project, which was prepared at the

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stage before the award of the tender, were acceptable. At the stage of the final approval of the machinery, the consultants suggested the acceptance of units from a third manufacturer, who was proposed by the contractor for approval, with the justification that the units of the first two were not within specifications. From an investigation carried out by my Office it was revealed out that the units of the third manufacturer were not within specifications in substantial parts. The Central Committee for Variations and Claims, to which I submitted my observations, rejected the recommendation of the consultants for change of manufacturer of the units. (ii) Changes/modifications/omissions in relation to the specifications of the contract. From a site inspection of the electromechanical installations, substantial changes/omissions were observed, in relation to the provisions of the contract documents, regarding the air-conditioning air ducts, which had direct implications in the quality, operation and cost of the installations. As the private consultants of the project, who are responsible for the supervision and implementation of the terms of the contract, interpreted differently the relevant provisions of the specifications, I requested that the relevant views of the Department be submitted. In July 2000, the Department agreed with my observations and instructions were given to the consultants to ensure the faithful implementation of specifications of the contract on the part of the contractor. (iii) Boilers. As the manufacturer of the boilers included in the contract ceased to manufacture the specific type, the contractor of mechanical works suggested their replacement with boilers from another manufacturer. The Central Committee for Variations and Claims approved the change, taking into consideration the opinion/suggestion of the private consultants and the Department. Finally it was realised that the technical characteristics of the boilers delivered to the worksite were not in accordance with the approved, but inferior, regarding the weight and the pressure of operation. The consultants of the project recommended the deduction of the amount of £500 and the acceptance of the inferior boilers. The final decision for the boilers is pending. (d) Electrical works at a military camp of the National Guard in Aplanta. As I stated in my previous Report, the period for the execution of the contract was 6 months and provided the issue of entrance licences to the staff of the contractor, after the required documents had been submitted by him. The contractor submitted promptly the required documents but approval was given after 5½ months. As a result of this delay, the redesigning due to changes in the use of shelters and delay in the delivery of materials, which would be supplied by the Department, the contractor requested 5 months extension for the execution of the contract and financial compensation amounting to £36.486. The Departmental Committee for Variations and Claims considered the request for time extension justified and in June 1999 referred it to the Central committee for Variations and Claims for approval. On the recommendation of my Office, the matter was investigated further and it was revealed that the contractor’s staff entered the camp and executed normally the works of the contract, despite the fact that they had not been issued with entrance licences. In view of the above, the Departmental Committee for Variations, in February 2000, reconsidered the matter and decided that the justified delay of the contractor was only 8 days, instead of 5 months originally recommended. In April 2000 the Central Committee for Variations approved as justified delay for the contractor 8 days only. (e) Extension of contracts for complete programmes of water processing. The initial contracts were for the period of 18.10.96 to 17.10.97, with the right for renewal up to 17.10.98.

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One month after the renewed validity of the contracts, the Department requested the approval of the Accountant General for a 5½ months extension, until new tenders be proclaimed and awarded. Finally the initial contracts were successively renewed up to 31.3.2000, since the new ones were signed in April 2000. (f) Structured cabling at Police Headquarters. The contract for the above works was signed on 1.7.99 for the amount of £15.814, with period of execution three months. The contract was based on a study prepared in 1997, without reconsideration, since then, of the needs of the police. As a result two weeks after the signing of the contract, extra works/upgradings were requested by the Police of a total cost of about £7.300 or 53% of the initial amount of the contract. Whereas the contractor submitted promptly his claims for the required changes, stating that, if he is given a reply by the end of July 1999, no extension of time for the execution of the contract will be required, the appropriate officer/coordinator of the Department submitted the relevant recommendation note to the Committee for Variations for approval on 15.9.99, i.e. with considerable delay. (g) Electrical works at the Police chemical laboratory. The period of execution of the contract was one month. Due to delays in construction works and requirements of the Electricity Authority which had not been taken into consideration at the stage of study, the Department suggested justified extension of works for five months. (h) Lightning protection at the “Dolphin” and Nature Museum in Troodos. Fifteen days after the signing of the contract, the appropriate officer/coordinator of the Department recommended to the committee for Variations the change of equipment valued 26% of the total amount of the contract, with the justification that it was not suitable. I expressed the view that the suitability of the equipment should have been examined during the evaluation of the tender, before the sighing of the contract. (i) Execution of electrical works in residence No. 18 of the Ministry of foreign Affairs. While the period of execution of the work was April 1997 – February 1998 and the final certificate for payment, which included the amount of £1.374 for additional works, was issued by the private consultant of the project in March 1998, the appropriate officer/coordinator of the Department submitted the relevant recommendation note for approval by the Committee for Variations on 27.5.1999, i.e. with a delay of 14 months.

4.69 DEPARTMENT OF ROAD TRANSPORT Part A 4.69.1 Renewal of 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 1999, was 64 215, compared to 69 720 for 1998.During 1999 a total of 433 066 circulation licences were issued and the fees collected amounted to £33,1 m., compared to 421 231 licences and £30,9 m. fees for 1998. 21 221 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 14,8% of the registered vehicles have not renewed their circulation licences, which corresponds to £4,9 m. revenue which should have been collected, provided the above vehicles are in circulation. 4.69.2 Collection of wrong fees for circulation licences and delay in the collection of differences. Cases were observed where wrong fees were collected for circulation licences, and as a result the amount of £31.826 was outstanding at 31.12.99. The greatest amount

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relates to arrears of fees for previous years, which, according to the Department, is very difficult, if not impossible, to be collected. 4.69.3 Cheques returned. At 31.12.99 the total amount of £5.831 was pending, for 34 cheques returned which relate to the period 1989-1998. 4.69.4 Revision of circulation fees of motor vehicles. The present circulation fees have been determined under Law 241/91, and have not been revised since then. In April 1996 a study for the revision of the above fees was assigned to the firm “Hughes Economic Planning”, which was completed in March 1997, at a total cost of £50.858, including V.A.T. According to this report an amendment bill was prepared, which, however, was not submitted to the House of Representatives for approval, because the Ministry of finance submitted another bill, proposing a general increase of the fees of 35%. I requested the Department to inform me whether and to what degree this report was utilized. 4.69.5 Tourist vehicles - Registration and circulation licence. According to Regulation 25(3)(c)(iii) (the Motor Vehicles and Road Traffic Regulations 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 after payment of the regular registration fees. The Department informed me that an amendment bill has been prepared according to my suggestion. 4.69.6 Drivers training vehicles (a) Reduced registration and circulation fees. According to the Motor Vehicles and Road Traffic Law of 1972, all drivers training vehicles pay reduced registration and circulation fees, as non-private motor vehicles. As this tax relief is conceded to a small group of people and is of no service to the wider social public, I have been recommending, for several years now, the abolition of this privilege, without, up to this day, any response and respective amendment of the Law. As the Department informed me a relevant amendment bill is being prepared. (b) Vehicles, which have not been used for driver’s examination. Out of the 464 drivers training vehicles, 224 have not been used for drivers’ examination in 1999 (48%). Taking into consideration the reduced registration and circulation fees of these vehicles, I requested to be informed whether any investigation has been carried out to verify whether these continue to be training vehicles used for training purposes. 4.69.7 Driving Schools - Revocation of operation licences. The operation licence of some Driving Schools has been revoked, without tax settlement and change of their training vehicles to private. Furthermore, for these vehicles a reduced circulation fee was issued after the date of revocation.

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4.69.8 Tares of motor vehicles. In my previous Reports I stated that, for a period of more than 15 years, a large number of vehicles of the same type and model and with the same equipment are classified, regarding tare, to different categories, which do not agree with the manufacturers’ particulars either. In my Reports I stated at various times several cases of vehicles of various types and models, where vehicles of the same type and model were registered with different tare, usually smaller than the regular, paying reduced registration and circulation fees. From a sample audit carried out by my Office, it was observed that, out of the 15 used vehicles of a specific type which have been registered in July of 1999, 11 of these have been registered with tare of category 763-1 016 kg. and registration fees @ £154 and circulation licence £49 per annum., and 4 in category 1 017-1 270 k.g., and registration fees £275 and circulation licence £93. As continued shortcomings are observed in the system, I recommended the adoption of an older view of the Attorney General for amendment of the Law, so that the criterion for registration and circulation fees will be the cubic capacity of the vehicles, a criterion used for the imposition of excise duty, which relates to a higher amount than the registration and circulation fee. As the Minister of Communications and Works informed me my recommendation was accepted and a relevant amendment of the Law will be pursued 4.69.9 Modification of vehicles after clearance and before registration. Several vehicles are cleared in one category, and due to changes or modifications, which are effected after clearance, these are registered by the Department in a different category. Due to a legal omission the Department of customs and Excise ceased to collect the difference of tax and duty between the two categories. In my letter to the Department of road Transport I suggested the amendment of Regulation 55(1) of the Motor Vehicles and Road Transport Regulations of 1984, so that the provisions of the Regulation for the collection of the difference of taxes and duties in cases of changes or modifications, to cover not only registered vehicles but also vehicles which have been cleared but not yet registered. The Department prepared an amendment bill, which was submitted to the Attorney General of the Republic. 4.69.10 Registration of saloon vehicles in the van category. During the year the clearance by the Department of Customs and Excise of vehicles, which by construction cannot be considered as commercial (van), continued, and their registration in this category by the Department of Road Transport. As a result there was considerable loss of duties and taxes. The decrease of revenue, because these vehicles are registered as van, instead of saloon, in registration fees and circulation licences are estimated to £158 and £186, respectively, for each vehicle. Since 1990 and up to date 16 399 saloon type vehicles have been irregularly registered as van. For the same period, and provided that the above vehicles were registered in the saloon category, Government would have collected more than £5,5 m. for circulation and registration licences. I repeated my recommendation that the relevant Law and Regulations should be strictly implemented, so that vehicles which cannot be considered as commercial by construction not to be registered in this category. The legal opinion of the attorney General dated 18.12.97 is relevant.

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The Director of the Department, in his letter to the association of Vehicles Importers, informed them that, for vehicles imported as from 5.6.2000 and afterwards, the Regulations 2(1) and 6(4)(a) of the Motor Vehicles and Road Traffic Regulations, will be implemented and, therefore, the registration of vehicles as van, which are not specified by the manufacturers as such, will be ruled out. Part B 4.69.11 Payment of reduced circulation licence fees for private motor vehicles. In my previous Reports, and for a period of more than 10 years, 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 consequent 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 Reports, an amendment bill has been prepared, which was submitted for approval to the Ministry of finance, according to which the reduced fees for private vehicles are abolished. 4.69.12 Returned cheques. As I stated in my previous Report, a number of cheques have been returned by the banks and the accounts Branch of the Department agreed that the issuers of the cheques, of a total amount of £13.047,23, pay these amounts gradually, without any surcharge. I observed that, regarding the above, the amount of £831,10 is still outstanding, and despite the long period of time the above amount is due. 4.69.13 Registration of buses. The registration of buses with one, instead of two passenger doors on the left hand side, is being continued. I understand that the amendment Regulations which were approved by the Council of Ministers (Decision No. 49.832, dated 17 June 1999) have not been submitted to the House of Representatives, because new amendments have to be done, for harmonisation with European Directives.

4.70 DEPARTMENT OF CIVIL AVIATION Part A 4.70.1 Arrears of revenue. At 31.12.99 the arrears of revenue were £2.476.836, compared to £4.138.015 for the previous year. The arrears include the amount of £508.755 for airport fees (out of which £237.203 relate to invoices of December 1999), £795.549 for rents, £716.286 for passenger fees (out of which £637.416 relate to invoices of December 1999) and £261.333 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 £295.404, which represents interest for the period 1989-1999, which is due by Cyprus Airways and which the above company refuses to pay, because, as it claims, this was not provided in the decision of the Ministerial committee. - For the amount of £406.658 a Lawsuit is pending before the Courts since 1995. - The amount of £79.875 is due by an advertising company since 1998. The case is before the Law Office for the taking of legal measures.

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4.70.2 Use of space by Cyprus airways at the airports of Larnaka and Pafos. While contracts have been signed by Cyprus Airways for the offices and warehouses at the airports, they have not yet signed contracts for the use of open spaces. As I was informed contracts are expected to be signed for the open spaces, after their recent law processing by the Attorney General. 4.70.3 Passenger fees – Airport fees – Interest. Several airport companies have not settled certain old balances for passenger fees and airport fees. It is stated that the amount of £100.759 is due by five companies for passenger fees, for the period 1998-1996, and the amount of £189.792 is due by five other companies for passenger fees, for the period 1987-1999. The amount of £108.898 is due by an airline company for airport fees. The Department requested the Attorney General to take legal measures and submitted a relevant data report on 18.11.96. The matter is pending before the Attorney General for legal action to be taken. 4.70.4 Overtime. During 1999 the amount of £540.344 was paid for overtime work of the employees of the department, compared to £506.390 for 1998.The Department submitted specific suggestions to the Service of Public Administration and Personnel for the reduction of overtime. 4.70.5 Lease of a building for the accommodation of the Department’s Headquarters. The lease of the building, which accommodates the Department’s Headquarters, has been renewed, with the approval of the Ministry of finance, for a period of five years, at an annual rent of £3 per square foot (previously £2,74), which was decided by the District committee for the Determination of Rents. Besides the rent, the amount of £500 per month will be paid to the owners for five years, for the depreciation of additional expenditure (replacement of elevator, replacement of entrance door and all the windows with double glazing), which amounted to £24.000. I expressed the view that this additional amount is disproportionately high, in relation to the improvements expenditure made. Part B 4.70.6 Travelling expenses of Larnaka Airport employees. The employees of Larnaka Airport, who before 1974 worked 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 appointed working base. This settlement was followed 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 with the Joint Personnel Committee for final decision. 4.70.7 Aircraft towing vehicles at the Airport of Larnaka. The two lowing vehicles of Larnaka airport continue to be used by Cyprus Airways for towing aircraft, 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 recommended a long time ago, that the Department should study ways for the utilization of the towing vehicles, in relation to the collection of fees on the basis of Regulations. The Department informed me that the introduction of a new aircraft towing system, as well as the legal regulation of the collection of towing fees from airline companies, is under consideration. The matter is still pending.

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4.70.8 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 larger aircraft and £600 - £1.700 for smaller aircraft. On the basis of this information, there is considerable loss of revenue. The matter is under consideration by the Department, in relation to the European Union directive, with regard to liberalisation of ground service at airports. 4.70.9 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 hand and, in some cases, wrong collection of fees were 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 for the computerization of the system. 4.70.10 The Amendment Air Navigation Order Law of 1989. It has been observed that certain services, which, are provided for in the Law are not provided by the Department, while other services are assigned to private individuals and the relevant fees are paid by the applicants directly to them, although this is not provided for in the Regulations. Also several of these fees are very low and they are not in line with the present state of affairs. I recommended that the above Law should be modernised and that the fees should be revised.

4.71 DEPARTMENT OF POSTAL SERVICES Part A 4.71.1 Purchase, installation and operation of a stamp-affixing machine. The above machine was received by the Department without being tested. Due to the serious operational problems presented, on the directions of the Accountant General, the Department requested the manufacturer to take the machine and refund its value, which amounts to St£64.407. As I was informed the matter is in the hands of the Law Office for legal proceedings. 4.71.2 Transport of inland mail. As a result of limitations of the legislation and of the procedure followed during the proclamation and award of the tenders, it appears that competition has been minimised and a continued increase of the expenditure is observed, which in 1999 amounted to £169.000, compared to £162.000 for 1998. On the recommendation of the Department, the Law Office prepared a bill for the amendment of the Law, which, however, has not been processed by the appropriate Ministry, in view of the fact that the matter of transportation of the mail by bus owners, is pending for consideration by the appropriate Parliamentary Committee. Also for the purpose of reduction of the expenditure required for the transportation of the nail to rural communities, the Department recommended that the transportation be carried out on a five day instead of a six day basis, as it happens in the case of urban areas. The Ministry of Communications and works gave its consent for the evaluation and promotion of this recommendation. 4.71.3 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

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£6.000 per annum. The administration of the Museum was assigned, after tender invitation, 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 the reduction of the rent to the symbolic amount of £10 monthly. As a result of the above the Department is burdened with almost the whole amount of the rent for the premises. I expressed the view that efforts must be made for moving the Museum to a place with tourist and commercial character, and with the corresponding benefits. Part B 4.71.4 Specimens of commemorative stamps. In my previous Reports I stated that specimens of commemorative stamps, which were printed by mistake and, according to the procedures of the Department should have been destroyed by a special committee, were sold abroad at quite high prices. With regard to this matter a police investigation was carried out and the case was submitted to the Attorney General of the Republic. As I was informed the case now is under the jurisdiction of the courts.

4.72 MINISTRY OF HEALTH Part A 4.72.1 Internal Control. Weaknesses and omissions continue to be observed in the systems of internal control, which cover the activities of the Ministry and its Services, due to the insufficient number of staff and organisation of the accounts branch and other Services. The computerisation of the accounting works, which aimed at the saving of time and the part solution of this very serious problem of inadequate staff and organisation, was not achieved and the problem continues to exist. 4.72.2 Unspent amounts of the Development Budget. A large part of the expenditure of the Development Budget during the last three years, as it is shown in the table below, remained unspent: Unspent Year Budget Actual expenditure amount £m £m £m % 1999 15,1 11,1 4 26,49 1998 14 7,9 6,1 43,57 1997 13,1 7 6,1 46,56 It was suggested that better planning should be made in the preparation of the Budget, in order to be within feasible execution limits. 4.72.3 Evaluation of tenders for the supply of drugs. Cases were observed where the evaluation of the tenders for the supply of drugs was based on a drags financial study, without this being referred to in the terms of the tenders. My Office expressed the view that, wherever it is considered appropriate that the evaluation of the tenders has to be carried out on the basis of a drugs financial study, this must be included in the terms of the tender. The Ministry accepted this position.

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4.72.4 Arrears of revenue. The total of arrears of revenue of the various Departments and Services of the Ministry, according to the statements of arrears of revenue, amounted at 31.12.99 to £1.697.705, compared to £885.314 for the previous year. Included in this amount are arrears for previous years amounting to £733.788. The arrears of revenue are due by subsidised patients (£257.560), amounts due to Government Laboratory (£145.761), amounts due to Hospitals (in-patients) (£435.489) and Pharmaceutical Services (£838.096). The amount due to Pharmaceutical Services represents the value of drugs and pharmaceutical material supplied, up to 31.12.99, to the Oncological Centre of the Bank of Cyprus, which, due to its outstanding status of operation, has not paid any amount up to now and the amounts due are continually increasing. The amounts due to Hospitals mainly come from foreigners, who after being treated, were released without paying the relevant fees. The taking of measures against them is almost impossible and the matter has already taken serious dimensions. For the improvement of the situation I recommended again, the strict implementation of the Regulations, the collection of fees before the release of the inpatients and the write off of the amounts considered impossible to collect. 4.72.5 Supply and use of medical and other equipment. In my previous Reports it was stated that, in several cases, purchases of equipment were made, without proper planning and study regarding the needs and priorities of Hospitals, and consequently medical and other equipment purchased remains idle, running the risk of being destroyed. I recommended the establishment of a special committee, which will undertake matters of purchase and use of equipment. The Ministry informed me that as from 1998 the planning of the needs and priorities of the Hospitals is carried out on a two year basis and that the procedure of verification, recording and transfer of equipment to other Hospitals has already commenced. From recent audits, however, at the Hospitals, it is observed that medical equipment continues to remain idle. In addition it has been observed that, although the needs for purchase of medical equipment are considerable and several times urgent, during the last two years, however, the available funds were not completely utilized, despite the fact that the heads of Hospitals keep requesting, for a number of years, the inclusion of equipment in the approved purchases catalogues and the processing of their purchase. As the Ministry also observes, there is considerable delay in the preparation of documents for the proclamation and award of tenders. My Office recommended that the possibility should be examined for the establishment at the Ministry of Health of a Supplies Branch, staffed with special technicians, which will undertake the supply and use of medical equipment as well as the verification and disposal of idle equipment. 4.72.6 Library register. The library register has been lost and since December 1999 a new register is kept. For the settlement of the matter it was suggested that, after the approval of the Ministry of finance is secured, a physical stocktaking and recording of the books to registers should take place and the relevant certificate submitted to my Office. Part B 4.72.7 Organisational Structure of the Ministry of Health. In my Report for 1998, I stated that, according to studies made in the past, by foreign consultants, in view of the fact that the Health system in Cyprus is expected to be replaced soon, it is imperative that the organisational structure of the Ministry and its Services be accordingly reformed, so that it will be possible to respond to the new demands. The foreign consultants recommend, inter alia, the establishment of departments, which now do not exist, and the operation of which is imperative.

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Examples for the above are the Department of Planning and Research and the Department of Personnel Administration and Development. On this basis of the recommendations of the foreign consultants, a draft has recently been prepared of the new organisational structure for the Medical Services and the Services of Public Health, without, however, any changes effected up to now in the organisational structure of the Ministry, for the reason, according to the Ministry, that the required personnel posts have not been secured. In the meantime the medical staff which in the last years is seconded from the Hospital to the Ministry or the other Medical Services to carry out duties other than medical, such as the undertaking of studies, the coordination of various activities, for purchases planning etc., without the existence in the Budget of approved permanent posts, is continually increasing. I expressed the view that this practice could probably cause staff problems at the Hospitals. 4.72.8 National health Scheme. The relevant Bill for the National Health Scheme has been laid before the House of Representatives. My Office expressed the view that no substantial improvements were effected in certain sections, such as improvement in Hospitals potential, the organisational structure and human resources, so as to form the necessary infrastructure for its correct implementation, and running the risk, in case the Bill is enacted to a Law, the National Health Scheme will not be possible to be implemented. 4.72.9 Provision of quality medical service to patients. In my previous Report 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 to expenditure (drugs, use of beds in hospitals, surgical operations etc.), it was suggested that the Ministry should proceed to the commencement of such a system on, at least, a partly basis. It was relevantly stated that the implementation of such a system is considered necessary for the introduction of a National Health Scheme. It has been observed that the Ministry has proceeded to some action, such as the training of officers abroad, and the organisation of seminars, but it is not yet in a position to implement such a system. 4.72.10 Financial charge of patients sent abroad for treatment under the care of Government. The expenditure for the Scheme of sending patients abroad during the last three years were as follows: Patients Amount Amount sent refunded abroad £ £ 1997 7.381.156 1337 837.300 1998 8.777.666 1446 791.313 1999 8.737.574 1315 965.055 According to the new Regulations of the Scheme for sending patients abroad for treatment under the care of Government, according to the financial condition of the patients or their families, these may be charged with part or with the whole of treatment expenditure or be fully relieved. For purposes of verification of their financial position, a social financial investigation is carried out by Social Welfare Services, the results of which are submitted to the Ministry of

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Health. As it was again observed, the Social Welfare Services were not in a position to verify fully the financial condition of patients and therefore a basic provision of the Regulations cannot be implemented in an equitable way. The Ministry stated that it had no other choice but to adopt the results of the investigations. 4.72.11 Medical treatment of Cypriot patients in Hospitals abroad. In my previous Reports I stated that the Ministry, in the effort to facilitate Cypriot patients sent abroad for medical treatment, proceeded to cooperation arrangements with various Hospitals and companies abroad, without invitation to tenders and without signing of any agreement. Regarding patients sent to a Hospital in Israel for treatment, an agreement was signed with the interested company, without, however, covering all cases, resulting to problems presented, in relation to the amounts required and presented in the invoices. For the correct administration of the expenditure, and for the resolving of the cooperation problems presented, it was suggested that, for the securing of the above services, the Ministry proceeds to proclamation of tenders. As I have been already informed, the Accountant General, Chairman of the Main Tender Board, has pointed out the adoption of tender procedure through negotiations, for the purpose of signing agreements with Hospitals abroad. As I was informed the Ministry of health has completed the process of gathering information regarding Hospitals in Greece and Israel, delay is, however, observed in gathering information from Hospitals of the United Kingdom. It was suggested that the Ministry’s actions should be accelerated, so that it will be possible to adopt the recommendations of my Office and of the Accountant General. 4.72.12 Hospital costs for medical treatment of persons injured in traffic accidents. With the exception of Larnaka Hospital, in the other Hospitals the provisions of the Motor Vehicles (Third Party Insurance) law, Cap. 333 (section 4(2)) have been implemented and fees are claimed from insurance companies for persons who receive treatment at the hospitals, after their injuries in traffic accidents. Problems are, however, presented in their implementation, which are focussed to the non-cooperation of patients, the difficulties in verifying the names of insurance companies, as well as the late response of these companies in the payment of relevant fees because of the time consuming legal proceedings, which, as it has been stated, are followed. My Office recommended the consideration of the matter between all the parties involved (Ministry of Health, Police, insurance companies and others) and ways of settlement be found. 4.72.13 Allowances to medical staff. The active duty system has not yet been implemented and as a result the on call duty continues to be paid. With regard to the on call system a performance audit was carried out by my Office, the results of which are presented in Part 3 of my 1998 Report. It must be pointed out that, from recent audits carried out, it was observed that no substantial improvement was noted as to the way of operation of the on call system. 4.72.14 Laboratories – 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 quality improvement. The Ministry informed me that all recommendations have not been implemented, because additional staff is required, efforts are, however, being made for the further upgrading of the quality control of the operation of laboratories. I recommended that the report be reconsidered and, at least at the first stage, regarding laboratories at the hospitals, the implementation of the most important suggestions be processed, for the purpose of their, at least, part upgrading.

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4.72.15 Oxygen shortage in Hospitals. In my previous Reports it was stated that Hospitals faced 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 supplies of oxygen to be made during the non working days also. My Office pointed out that this settlement requires additional expenditure in the transport and other expenses and suggested the acceleration of the Ministry’s actions for the purchase of a satisfactory number of bottles, for the final solution of the matter. It has been observed that the purchase of a satisfactory number of bottles was not realised and the situation continues to remain the same. 4.72.16 Assignment to private clinics of lithotripsy operations. In my previous Report it was stated that, due to delay in the proclamation of tenders for the purchase of lithotripsy services, the carrying out of lithotripsies was assigned, with the approval of the Accountant General, to four private clinics, to which patients were referred to in turns. The relevant approval expired on 30.6.99 and an extension was granted, because it was under consideration as to whether the tender proclaimed would be cancelled, for the reason that, as stated by my Office also, the relevant terms of the tender presented serious weaknesses. The tenders were not cancelled and the Main Tender Board proceeded to their award. Taking into consideration, however, the position of my Office, requested the Ministry of Health to prepare promptly new tender terms. 4.72.17 Inventory registers. With the moving of the Ministry to new premises, part of the equipment, which remained in the old building, could not be found and I suggested that the necessary action must be taken to find it. Although, on the recommendation of my Office, the relevant approval of the Ministry of Finance has been secured, for the preparation of new registers for the movable property transferred to the new buildings, and the relevant stocktaking certificate submitted to by Office, these have not yet been prepared. 4.72.18 Oncological Centre of the Bank of Cyprus. 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 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 cash collections. At 31.12.99 the value of drugs supplied amounted to £838.018. The cost of supplied foodstuffs, which continue to be provided by Makarios Hospital, is not known, as there has not yet been any invoicing. Up to date, no amount has been paid to the Centre for the administration expenses, and Government appears as a debtor, at 31.12.99, in the financial statements of the Centre for the amount of £663.443. In the meantime the Centre is financed through loans under government guarantee and credit facilities form the Bank of Cyprus. 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, I expressed the view that its operational regime must be decided as soon as possible. In the alternative solutions that could be considered, I stated that the possibility of having the Centre under the Medical Services should not be ruled out, as it happens with Government Medical Institutions, the taking over of the operation and all the expenses by the Medical Institution of the Bank of Cyprus, or any other intermediary solution which could be considered that secures public

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interest. In the case of Government taking over the administration expenses of the Centre, I stated that Government should have the power to approve/control this expenditure, before it is incurred. I also expressed the view that the renegotiation of the agreement should be finalised in such a way, so as not to be in conflict with the Public tenders Law 102(1)/1997. 4.7219 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 inadvisable. A suggestion was again made for consideration of their unification. 4.72.20 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 1999 was £1.367.341, compared to £1.148.653 for 1998, on the condition that the above cooperation will be regulated through a relevant agreement. The relative memorandum of cooperation between the Ministry of Health and the Cyprus Muscular Dystrophy Research Fund was signed in October 1999. As it emanates from the contents of the memorandum of cooperation, certain matters, such as the way of calculation of the amount of the annual subsidy to the Institution, remain unclarified, my Office recommended that these 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. 4.73 MEDICAL AND PUBLIC HEALTH SERVICES Part A 4.73.1 Delay in the payment of staff employed on a 15 day basis. A great delay is observed in the payment of staff employed on a 15 day basis. From the audit carried out by my Office the following were observed. -The Medical Services employ a large number of casual employees at the Hospitals and elsewhere, for a period of more than 15 working ways, without securing the prior approval of the Council of Ministers, or the submission of the application for approval is considerably delayed, resulting, in several cases, to the staff remaining unpaid for periods up to 12 months. My Office expressed the view that the time limits referred to in the Budget Law, are very limited, for the prompt securing of the approval of the Council of Ministers, and recommended that the whole matter be reconsidered by the parties involved. It was further noted that the employment of casuals on a 15 day basis has become an institution and most appointments are made for the strengthening of the existing Services. Part B General matters 4.73.2 Patients’ charges. According to the Regulations, the patients, who receive medical treatment at the Hospitals, are separated, for charge purposes, according to their emoluments into three categories: • Patients eligible for free medical care. • Patients eligible to pay reduced fees, and • Paying patients.

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It was again observed that, due to weaknesses in the verification of the correctness of the emoluments declared by patients, a large number of patients secure free medical care, without being eligible, and as a result the expenses in drugs, medical and other expenses increase continually, while the respective revenue is reduced. Recently new Regulations have been approved by the House of Representatives for the revision of fees for medical care provided to patients, where provision is made for the submission of information and documents with which to prove the emoluments of patients who apply for the issue of a medical identity card, the holders of which will be eligible for free medical care or for paying reduced fees. 4.73.3 In-patients treatment fees. According to the Regulations, the fees of the paying inpatients must be costed and collected in advance and any difference to be collected before the discharge of patients from Hospitals. It was again observed that the Regulations are not implemented and paying inpatients receive treatment and are discharged, without collection of the relevant fees. As a result several amounts due are pending .for years and are finally written off, resulting to the losses of revenue being increased, since the necessary legal and other measures for collection are not taken. 4.73.4 Provision of medical care to foreigners. I was again observed that foreigners employed in Cyprus and tourists, to whom medical treatment is provided, after they receive medical treatment they are discharged without paying the relevant fees. The collection of fees at a later stage is almost impossible. For the settlement of the problem, regarding foreigners employed in Cyprus, a relevant bill had been submitted to the House of Representatives, for the establishment of a medical treatment fund for foreigners employed in Cyprus, which was withdrawn, for the purpose of a different settlement of the matter, which is still pending. 4.73.5 Inventory registers. The inventory registers of the Hospitals, with the exception of the Limassol Hospital, continue not to be properly updated, and as a result the physical existence of the movable property cannot be verified, the cost of which is quite substantial. 4.73.6 Library registers. The library registers continue not to be updated with all books received and therefore the relevant audit cannot be carried out. At the Hospital in Nicosia, due to lack of space, several books are kept unutilized in boxes. In addition, equipment and training material which form part of the library, and for which substantial amounts are spent each year (during 1999 the expenditure incurred exceeded the amount of £44.000) besides donations of considerable value provided each year by the various foreign Health Organisations, remain unutilized. The Department’s view is that this is due to lack of space and the non-existence of a library and information officer. 4.73.7 Idle equipment. Despite the considerable improvement observed regarding the tracing and use of idle equipment, there are still, however, weaknesses in the tracing of all the idle equipment. It is pointed out that the idle equipment in all Hospitals is of considerable value. I pointed out again the need for the prompt tracing of all the idle equipment and the taking of measures for its utilization. 4.74.8 Lack of storage space. It was again observed that drugs and pharmaceutical materials, as well as other equipment, are often stored in the corridors of Hospitals with flammable materials or items intended for disposal, instead of being kept in a separate room, for security reasons, and recorded in a separate register, as provided for in the Regulations. 4.73.9 Computerisation. The first phase, the completion of which delayed considerably, covered the computerisation of the basic archives for the inpatients and outpatients of the

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Hospitals of Limassol, Larnaka, Pafos and Makarios Hospital in Nicosia. It was again recommended that the computerisation be accelerated and extended, so as to cover the accounting part and other activities of Hospitals, which are considered important for their smooth operation. 4.73.10 Internal control. It was again observed that there are serious weaknesses and omissions in the systems of internal control, which cover the activities of Hospitals. 4.73.11 Working time schedule of the staff. Contrary to the provisions of the relevant circulars of the Service of Public Administration and Personnel, the operation of the electronic system for the recording of the time of arrival and departure of the staff of Hospitals has not yet been put into operation. The Ministry stated that the staff, through its union, refuses to use it. On 28.3.2000, the Ministry with a letter to the Director of the Department of Public Administration and Personnel requested that the above staff be exempted from the application of the provisions of the above circulars. The matter is still pending. Nicosia General Hospital Part A 4.73.12 Inventory registers. In my previous Reports it was repeatedly stated that the inventory registers of the hospital had not been updated with the receipts and issues of movable assets (medical, office and other equipment), which were effected since 1.1.85. Due to this omission, it is not possible to certify the physical existence of the movable assets and the write off of equipment which is considered useless each year, which is either destroyed, or processed to the Department of Government Purchasing and Supply for disposal. During 1998 the Ministry of Finance approved the preparation of new registers, after a physical stocktaking. For the preparation of the registers, one person worked overtime for 100 hours, due, however, to the vast volume of work, the physical stocktaking appears to have been impossible to be completed by one person, within the above time limits, and therefore the anticipated results were not achieved. The approval of the Ministry of Finance was requested for overtime work of two officers, who will be assigned a new preparation of the registers. It was suggested that all measures should be taken, in order to overcome all previous problems which prevented the completion of the physical stock taking and, additionally, an appropriate officer should be specified, to whom, after the completion of the stocktaking, the keeping of the registers will be assigned. Part B 4.73.13 Operation of a Photocopying Centre. In my previous Reports it was stated that a room in the second floor of the Nursing College has been conceded to a person, for the operation of a private photocopying centre, without any approval and without the proper procedures followed which govern the concession/lease of government space. The Ministry requested the Law Office to proceed with legal measures against the individual. During the examination of the case it was found out that there was an agreement between the individual and the students of the college, which expires on 31.8.2000. The Attorney General recommended that, with the expiration of the agreement, measures must be taken for the termination of the operation of the photocopying centre. 4.73.14 Laboratory equipment and machinery. In my previous Reports it was stated that the equipment and the machinery of the laboratory are old fashioned and present problems. While

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some new machinery has been secured, there is still some old technology machinery, which often needs repairs, with consequent inefficient operation of the Laboratory. 4.73.15 Registers of laboratory tests. It was again observed that the tests relating to inpatients are not recorded in the registers. The Department attributes this weakness to shortage of staff. Archbishop Makarios III Hospital Part B 4.73.16 Crematorium. The crematorium continues to be kept in a special area at the basement of the Hospital in a non operational condition for 14 years, resulting to the use, after special arrangements, of the crematorium of the Veterinary Services, with all adverse consequences from the transfer of refuse etc. Its disposal was approved recently through the Department of Government Purchasing and Supply. Limassol Hospital Part A 4.73.17 C.T. Scan. The C. T. Scan of the Hospital often presents operational problems, and consequently the patients are not smoothly cared for. According to Hospital records, the number of patients requesting examination by the C. T. Scan has increased, resulting to its increased use. 4.73.18 Rigid endoscope. The rigid endoscope, since June 1998, when a malfunction occurred, is out of operation, and up to this day no action has been taken for its repair, or for the purchase of a new one, and consequently problems are faced in the operating theatre. 4.73.19 Crematorium. The operation of the crematorium continues to present problems, and as a result complains are expressed by the neighbours. Part B 4.73.20 Storage of inflammable and corrosive items. As it was stated in my previous Reports, despite the recommendations of the fire Service that the above materials should be kept in a separate store, these continue, however, to be kept in a basement store, together with other pharmaceutical materials. As it was ascertained, the Hospital is facing a serious problem regarding storage spaces and for this reason several stores materials and drugs, are kept in unsuitable places, without the required protection, and running the risk for loss or destruction. In the Budgets for 2000 funds have been approved for the construction of a store, the relevant works, however, have not yet commenced. 4.73.21 Tritoftides clinic. The clinic ceased to be used as a Hospital, after the erection of the new Limassol Hospital. As I have been informed a study is being carried out for the purpose of its utilization. Larnaka Hospital Part A 4.73.22 Lack of storage spaces. It has been ascertained that the problem of lack of storage spaces is becoming year by year more acute, resulting to lasting problems in the storage of various stores and pharmaceutical items, and the keeping, classification and movement of patients files, for the keeping of which kitchen spaces are also used. The Director of the

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MEDICAL Services and Public Health Services informed me that, for the solution of the problem, the only way is the creation of additional storage spaces. To this end studies are being made and relevant decisions are expected to be taken. 4,73,23 Computerisation. Computerisation continues to cover only the inpatients of two specialities. The Director of Medical Services and Public Health Services informed my Office that this is due to shortage of staff and that the placement of additional staff is expected. 4.73.24 Medical expenses for Hospital treatment after injuries in traffic accidents. It has been observed that at Larnaka Hospital, the procedures specified by the Ministry of health, regarding claims from insurance companies, for medical frees of persons, after injuries in traffic accidents, according to the provisions of the Motor Vehicles (third Party Insurance) Law, Cap. 333 (section 4(2), have not been implemented. 4.73.25 Disposal of sterilizer. As stated in my previous Reports, this sterilizer, valued at £24.055, which was purchased in 1984, was not put into operation after the employee’s reaction that health problems will be caused. It is pointed out that my Office realised promptly that, for technical reasons, the above equipment could not be installed at Larnaka Hospital and recommended that ways be found for its utilization or return to the supplier. Although the supplier proposed its replacement, his proposal was rejected, because, as it was stated, this sterilizer would be used at the General Hospital of Nicosia. Since then it remained idle and finally on 17.9.97 the sterilizer was sent to the Department of Government Purchasing and supply for disposal. Due to the seriousness of the matter, my Office, in a letter to the director of Medical Services and Public Health Services, stated that the matter should be investigated to verify the reasons for its non-utilization since 1987, when the supplier had proposed its replacement. The Ministry of Health, to which the matter was referred, confirmed the above, and informed me that, in the light of the above, the disposal of the sterilizer was the only solution. My Office observed that with better handling and prompt action, a saving of public expenditure could be effected. Pafos Hospital Part A 4.73.26 Depressurisation chamber. The depressurisation chamber was sent from Larnaka Hospital to Pafos Hospital on 6.10.97 and, because of technical deficiencies presented and which could not be possible to be repaired, continues since then to be in a non operational condition. My Office in a letter to the Director of Medical Services and Public Health Services, expressed the view that Pafos Hospital is not in a position to provide this kind of service and requested him to give the matter serious consideration. Part B 4,73,27 Laboratory. It has been again observed that the test apparatus has not yet been provided to the Hospital, whereas the existing apparatus continues to be problematic and cannot serve all the needs of the Hospital. This has been repeatedly observed by the District Engineer of the Department of Electromechanical Services, who, in his relevant report to the Medical Officer in charge of the Hospital, dated 2.1.97, stated, inter alia, that this apparatus is not trustworthy. As a result of these problems, the Hospital continues to use the services of the private sector, with all consequent difficulties and expenses.

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4.73.28 Vacant post of housekeeper at the Hospital. Since 1994, when the housekeeper was transferred to Limassol Hospital, Pafos Hospital remains without a housekeeper. My Office in a relevant correspondence to the Director General of the Ministry of Health, expressed the view that the non filling of the post of housekeeper hinders the smooth running of the kitchen, the control of foodstuffs, the diet regulation of the patients, the planning and generally the execution of works relating to the duties of housekeeper. It was recommended that the matter should be reconsidered and decisions taken for its settlement. The director of Medical Services informed my Office that the procedure for filling two vacant posts has already commenced. 4.73.29 Idle equipment. At the Hospital store idle equipment continues to be kept, which was purchased for the pathology chamber, without this being put into operation, due to shortage of nursing staff. The view was again expressed that the non-operation of the pathology chamber creates problems at the Hospital, regarding patients’ care. Paralimni Hospital Part A 4.73.30 Computerisation. Although the computerisation of Hospital works has not yet commenced, it has been observed, however, that, since April 1999, Paralimni Hospital has been supplied with computer equipment, which, up to now, is kept in boxes. The Audit Office expressed the view that the matter of computerisation of Hospital works must be very carefully planned and coordinated between all Services involved, so that purchases of equipment are utilized promptly, otherwise, due to the rapid technological developments, it is possible that, when the equipment is finally used, it could be obsolete. In addition it was stated that immediate action must be taken by the Medical Services, so that the computerisation of Hospital works be implemented as soon as possible. The medical Services informed me that the cabling and installation of telecommunication equipment has already been planned for the implementation of computerisation of Hospital works as soon as possible. 4,73,31 Internal control. Due to the inadequate number of staff in the accounts branch of the Hospital, all accounting works are carried out by the same person, and, therefore, no internal control can be exercised.

4.74 PHARMACEUTICAL SERVICES Part A 4.74.1 Expenditure and consumption of drugs and medical supplies. The expenditure and the consumption of drugs and medical supplies for the last three years, as shown in the following table, present an increasing trend: 1999 1998 1997 £m. £m. £m. Expenditure 19,7 16,3 14,7 Consumption 13,4 12,8 11,2

As the Ministry stated this is due to the introduction of new drugs and to their incalculable use, because these are issued free to those eligible for free treatment.

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4.74.2 Placing of orders without available funds. Several quantities of drugs, pharmaceutical materials and other stores items, of a total value of £0,6 m., were ordered and received in 1999, without having secured prior approval for the required funds. This amount was charged to Votes of 2000 Budget. 4.74.3 Shortage of drugs. From the audit of the receipts/issues vouchers of drugs, it was again observed that, in several cases, the Pharmaceutical Stores were unable to respond to the demand for drugs from Hospitals and other Medical Centres. The period during which exhaustion/shortage is observed of drugs/pharmaceutical materials exceeds two months and this causes negative implications in the smooth and regular operation of the Hospitals and to the efficient provision of care to patients. The shortages of drugs are basically due to the serious weaknesses presented in the whole system of planning and control of drugs. The problem becomes even greater, with the considerable delay observed from the proclamation to the award of tenders, the existence of expired drugs which are included in the stocks, the delay in execution of orders, the receipt of drugs with expiry period smaller than normal, as well as lack of specific directives, regarding the necessary action to be taken to face the problem. On the recommendation of my Office aiming at the follow up of the system of the provision of drugs, for the reduction of the relevant expenditure and the minimisation of multidrugs issues, a special committee was set up under the chairmanship of the Director General of the Ministry, which, in November 1998, prepared a relevant study on the matter. The problem, however, of drugs shortage continued to exist, as it appeared in the case of erythropeietin. In May 1999 my Office carried out an investigation in relation to this matter, out of which the following were observed: According to the requested quantities of the above drug, the expected consumption for 1997/98 was about 1 000 syringes per month, with contents 4 000 I.U., while for 1998/99 the expected consumption was 900 syringes per month, with contents 4 000 I.U, and 800 syringes per month with contents 2 000 I.U. The ordered quantity for 1998/99 was 9 000 syringes, i.e. 1 800 less than the quantity requested in the tender documents, which correspond to consumption of 2¼ months. This happened because of their contents, which was 5 000 I.U each, instead of 4 000 I.U, as requested in the tender documents. The quantity purchased was equal to the one requested, but in I.U, instead of syringes, resulting to purchasing less syringes. Besides this the quantity received was even less by 20 syringes. The purchased quantity of 8 880 syringes in 1998/99 was received in the Pharmaceutical Stores in three stages as follows: Number of Date of exhaustion of Date syringes stocks before delivery 9.7.98 3.000 18.6.98 21.10.98 3.000 30.9.98 18.2.99 2.880 23.12.98

The stocks of the dug, as shown above, were exhausted before the following delivery, which should have raised additional questions, i.e. as to whether the following deliveries were enough to cover the needs of the following months.

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On the basis of the above, the shortage of the drug before June 1999 (for 2¼ months) should have been foreseeable for July 1998, when a smaller quantity was being ordered, and the necessary measures should have been taken for covering the shortage. Indications of the coming shortage of the drug appeared also during 1997/98. My Office expressed the view that measures could have been taken promptly to avoid the shortage, with the purchase of additional quantities, up to 25%, as provided in the tender documents, with proclamation of new tenders and the acceleration of the study of the tender by the Departmental Evaluation Committee. From the investigation other serious matters were also raised regarding the evaluation of tenders for the purchase of erythropeietin by the Pharmaceutical Services Evaluation Committee, both for 1998 and 1999, which I submitted to the Director General of the Ministry to deal with accordingly. The Director General informed me that, as the matter of the tender award was the object of police investigation, he considered the matter as closed. I continue to believe, however, that matters which formed the object of administrative, disciplinary or police investigation do not concern the way of evaluation by the Evaluation committee, which should have been investigated by the Ministry. It is relatively stated that object of police investigation, which is continued, was also the matter of possible use of a quantity of erythropeietin for illegal purposes. 4.74.4 Purchase and provision of the drugs Sunquinavir Invirase and Sanquinavir Fortovase. After an investigation carried out by my Office regarding the purchase and disposal of the above drugs, it was ascertained that, while there was enough stock of drugs (90% of the previous order), other considerable quantities were ordered and received, with life period of less than 18 months specified by the terms of the tender, which, even though were considered necessary, were not consumed and their return was requested. The results of my investigation were submitted to the Director General of the Ministry of Health in a relevant letter dated 28.1.2000, who in his letter dated 11.4.2000 informed me that he appointed an investigative officer for carrying out an investigation of the mater. 4.74.5 Purchases of drugs under special authorisation. The total value of drugs purchased under special authorisation in 1999, amounted to £1.575.829. An amount of £114.051, refers to drugs, not available in Government Hospitals, which were purchased from the local market as per medical officers’ prescriptions, whereas the remaining amount of £1.285.312 refers to drugs supplied by a sole manufacturer, and £176.466 for drugs ordered to suppliers through the Embassies abroad. These purchases are made for specific drugs and for the care of special cases of patients. My Office expressed again the view that the purchase of drugs under special authorisation must be limited to the minimum and to be allowed only in cases where their purchase is considered absolutely necessary. 4.74.6 Deliveries of drugs with shorter expiry period. It was again observed that some drugs are received with expiry period shorter than the one specified in the tenders. My Office expressed again the view that the receipt of drugs with shorter expiry period violates basic terms of the tenders, creates operational problems and burdens the Department with additional transport costs, follow up etc., and therefore this practice must be terminated. It is pointed out that for this matter my Office conducted a special investigation, the results of which were presented before the Parliamentary Control Committee, and communicated to the Director of Pharmaceutical Services. From the investigation regarding drugs and other pharmaceutical materials purchased in 1999 (1.1 – 30.11.99), the following were observed: • About 9,2% of drugs and other pharmaceutical materials were delivered with shorter life, contrary to the terms of the tenders. Their value is estimated to about £1,8 m. (for the 30%

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of the sample the value is about £540.000). The value of purchases up to 30.11.99 amounted to £16,5 m. i.e. 10,9% of the value of the drugs and other pharmaceutical materials delivered with shorter period of life. • Drugs and other materials with reduced life period had been delivered by all suppliers. The deficient life period varies from 1 – 18 months, whereas their value varies from a few pounds to more than ten thousand pounds. As it was ascertained, 68% of drugs and other materials, which were delivered with shorter expiry date, had deficient period of life exceeding 3 months. For the purpose of study of the matter and determination of new tender terms for drugs, a committee was set up in which my Office participates as observer. This committee convened for the first meeting on 8.3.2000 and, after examining the matter arrived at various conclusions, without, however, taking any decisions. Since then the matter has not been considered by this committee and the situation remains the same. 4.74.7 Delivery and examination of drugs. It has been observed that the examination and receipt of drugs purchased through tenders, was carried out by one person, instead of a two member committee, as provided by the Tender Regulations. 4.74.8 Revision of fees. The revision of fees collected by the Pharmaceutical Services is still pending. Part B 4.74.9 Laboratory tests of drugs. As it was stated in the past, due to the delay observed in the issue of the results of the laboratory tests of drugs by the Government General Laboratory, the Drugs Council, in order to overcome the situation, decided, on 5.8.96, that all drugs tests of the private sector and of the biological products be assigned to the Pharmaceutical Laboratory and all other tests be undertaken by the General Laboratory. I expressed the view that this decision is not in line with the provisions of the Law and the Attorney General’s ruling, which provide that the relevant tests certificates must be issued by the Government Laboratory. 4.74.10 Delay in the execution of orders for the supply of drugs. Cases were again observed where suppliers delayed to execute orders, and consequently, in order to satisfy certain needs, either purchases are made from the local market, at higher than tender prices, or drugs were supplied on loan, which were settled after the execution of the order. Notwithstanding the fact that, in all cases, any loss would be charged to the suppliers, my Office expressed again the view that the above arrangements cause additional operational problems, such as follow up of expiry dates, shortages of drugs etc., and repeated its suggestion that the suppliers should be obliged to execute their orders promptly. 4.74.11 Slow moving stocks. Despite the improvement observed, there are still, in stock, drugs and pharmaceutical supplies purchased years ago, which presented very slow or no movement at all. In some cases the date of use had already expired, making the drugs unsuitable, while in other cases the expiry date was very close. It was suggested that, regarding drugs with close expiry date, effort be made for their disposal. 4.74.12 Storage of drugs and other materials. It was again observed that, due to lack of storage spaces, hundreds of boxes with drugs and other materials of considerable value continue to be kept in the corridors of the Pharmaceutical Stores, under unsuitable conditions, resulting to the possibility of destruction or loss. Furthermore, the security measures of stores,

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in which drugs, equipment, clothing and other items are kept, valued at millions of pounds, are insufficient. The 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, additional operational problems and costs are created for the transportation of drugs. It is expected that the problem will be finally settled with the construction of Pharmaceutical Warehouses in the area of the New Hospital of Nicosia. 4.74.13 Performance guarantees. It was again observed that there is no suitable internal control system for the follow up of guarantees, which relate to two or more tenders. As I was informed, efforts will be made for the improvement of the system.

4.75 MEDICAL TREATMENT AND WELFARE SCHEME FOR GOVERNMENT LABOURERS Part A 4.75.1 Operating results. The income of the Scheme for 1999 was £2.356.798 and the expenditure £2.133.550, i.e. there was a surplus of £223,249, compared to £281.027 for 1998. The reserve fund of the Scheme at 31.12.99 was £803.328, compared to £996.849 at 31.12.98.

4.76 GENERAL LABORATORY Part A 4.76.1 Internal control. As a result of the insufficient number of staff of the accounts branch of the Department, the relevant works continue to be carried out by one person alone, with consequent weakness in the systems of internal control. The Department informed me that one clerk, at least, was requested for the accounts branch, but up to now this was not made possible. 4.76.2 Clothing tests for the National Guard and the Government Stores. It has been observed that the tests of clothing supplied to the above Government Services are not carried out any more by the Government Laboratory, but these are assigned to laboratories abroad. This, as I have been informed, is due to shortage of staff. My Office expressed the view that the matter should investigated and, if it is verified that the cost of tests carried out at the General Laboratory is lower than what is paid to laboratories abroad, the necessary action must be taken for the employment of staff at the Laboratory, so that these tests be carried out again by the Government Laboratory. The Department informed me that on 125.6.2000 in his letter to the Accountant General, which was copied to the Director of the Department of government Purchasing and Supply, requested him to take the necessary action on the matter. 4.76.3 Improvements and extensions of the building installations of the Laboratory. In the 1999 Budget the amount of £275.000 was provided for the improvements and extensions of the building installations of the Laboratory. These works had been assigned to the Departments of Public Works and Electromechanical Services. It has been again observed that there is considerable delay in the execution of these works, and as a result of this delay the problems of the Laboratory continue to be pending. The Department informed my Office that on 15.6.2000 in his letter to the Directors of these Departments requested the taking of measures for the completion of the works.

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Part B 4.76.4 Costing of laboratory tests. As it was stated in my previous Reports, for the purpose of determination of the fees of laboratory tests on a correct basis, a study commenced, in cooperation with the Ministry, which, however, did not progress, because of the replacement/transfer of the Accounting Officers service at the General laboratory and the Ministry. The study continues to be pending. It was recommended that the possibility should be considered for securing the services of a special consultant, while the Department informed me that, in a letter dated 15.6.2000 the views of the Accountant General on the matter were sought. 4.76.5 Computerisation of the tests samples. As a result of the delay in the cabling works, the computerisation of the register is still pending. 4.76.6 Fees for the tests carried out for the Municipalities. The amount of £144.363 is due by various Municipalities, for tests carried out during the period from 1992 up to end of June 1996. As from July 1996, the Municipalities are not charged with laboratory test fees, after a legal ruling that the decision of the Council of Ministers for the payment of fees by the Municipalities is contrary to the provisions of the Law regarding health and food sales. The matter was submitted to the Council of Ministers which appointed a committee of the Ministers of Health and Finance, to consider the matter and submit a relevant report, which is still pending. On 19.5.2000 the Minister of Health sent a letter to the Minister of Finance, for considering and pursuing the whole matter. 4.76.7 Destruction of dangerous chemical substances. It was again observed that several quantities of chemical substances, dangerous for humans and the environment, which were approved for destruction, continue to be kept at the Laboratory. As I was informed, the matter of destruction of dangerous substances is more general and concerns other Services also. As the Department informed my Office, the matter is handled by the Service of Environment of the Ministry of Agriculture, Natural Resources and Environment.

4.77 LOCAL AUTHORITIES

4.78 MUNICIPALITIES – GENERAL OBSERVATIONS Part A 4.78.1 Up to the end of 1999, 33 Municipalities had been established, out of which nine 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 comes, 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. 4.78.2 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 Mayors. With the exception of the Municipalities of Nicosia, Athienou and Dherynia, the remaining Municipalities have not submitted their final accounts for audit by the 30th April, 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.

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I have observed that the non-prompt preparation and submission for audit of the accounts, does not help 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, by the Municipal Councils. In addition, it deprives the House of Representatives and the citizens from the right of prompt knowledge of the affairs of the Municipalities. (b) Final Accounts. According to the Municipalities Law the final accounts must be prepared on the accrual basis of accounting. It has been again observed that the Municipalities of Limassol, Poli Chrysochou, Lefkara, Athienou, Agios Dhometios, Pegia, Agia Napa, Dherynia, Geroskipou, Germasogeia and Idalion have not prepared their final accounts in order to present the complete financial position and their assets, but the accounts prepared, show the cash position only. 4.78.3 Financial position. Almost all Municipalities are facing serious financial problems, and, therefore, they are unable to meet all their current liabilities. In order to avoid financial breakdown, the Municipalities must prepare a framework of financial policy measures, aiming at the reduction or extinction of deficits and the balancing of their annual budgets. The Ministry of Interior, in conjunction with the Ministry of Finance, reserves the right of 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), which are stated in the conditions for approval of the Budgets. 4.78.4 Internal control. In almost all Municipalities weaknesses and omissions have been 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. 4.78.5 Employees Schemes of Service. With the exception of the Municipalities of Nicosia and Pafos, the remaining Municipalities have not prepared Regulations provided under section 53(2) of the Municipalities Law, according to which appointments, promotions, establishments etc. are made. Also in some Municipalities there are no schemes of service, which are provided under section 53(1) of the same Law. 4.78.6 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 must be carefully examined, for verifying the amounts which can be collected, and effective measures to be taken for their collection. The amounts, which are considered impossible to collect to be written off, according to the provisions of the Law.

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4.78.7 Pensions and Gratuities Funds. Due to financial difficulties, most Municipalities do not contribute to the above Funds and continue to pay the pensions and gratuities of the staff out of their annual income. 4.78.8 Financing of the Municipal fund from the loans account. Certain Municipalities continue to use, irregularly, the loans account for the financing of the Municipal Fund, instead of financing development projects, contrary to the agreements signed for the concession of the loans and contrary to the provisions of the Law. 4.78.9 Verification of cash balances. At the end of the year cash counts were carried out by my Office for all Municipalities and the balances were verified with the accounting records. 4.78.10 Execution of the Budget – Excesses. It was again observed that the expenditure of some Municipalities was in excess of the approved, contrary to sections 66 and 69 of the Law. For these excesses no covering approval can be obtained. 4.78.11 Bank overdraft. Contrary to section 85(2)(a) of the Law, the amount of the overdraft at 31.12.99 is some Municipalities exceeded by far the specified proportion of 20% of the budgeted income of the Municipalities for the current period. 4.78.12 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 stocktaking certificate provided by the Regulations. 4.78.13 Contribution to the Defence fund. In some Municipalities no deduction is made from the representation allowances of the Mayors and the Municipal Counsellors for the Defence Fund. According to a ruling of the Attorney General of the republic, the representation allowance falls within the term “emoluments” and is subject to deduction of special contribution for defence. 4.78.14 Licences for the operation of petroleum products stations. Several Municipalities failed to issue, during the years 1996-1999, licences for the operation of petroleum products stations and collect the relevant fees. The responsibility for the issue of operation licences of stations was assigned since 1994 to the Municipalities. 4.78.15 Deviation from tender procedure. In several Municipalities the procedure of invitation and award of tenders for the purchase of services and goods, was not followed. 4.78.16 Loan instalments in arrear. Several Municipalities do not pay promptly the instalments of their loans, resulting to accumulation of arrears and charges of overdue interest. 4.78.17 Upgrading of posts. In the Municipalities of Limassol, Larnaka, Latsia, Agios Dhometios, Aradhippou, Strovolos, Kato Polemidhia, Germasogeia, Geroskipou, Poli Crhysochou and Idalion wrong salary placements were observed in upgraded posts, due to the non-implementation of the relevant Regulations and provisions. 4.78.18 Collective agreements. Although the adoption was decided and application of the Public Service (Emoluments, allowances and other financial Benefits of civil Servants) Regulations of 1995 (S.L. 175/95), several Municipalities signed collective agreements, the provisions of which are contrary to the above Regulations. 4.78.19 Schemes of Service of Municipal employees and Municipal Council’s authority. In several Municipalities it was observed that the Municipal councils placed employees at higher salary scale points than the initial or conceded additional annual increments, actions, which are

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not provided in the schemes of service. In addition cases were observed where increases of salaries were effected, beyond salary scales, on the basis of collective agreements. According to a relevant ruling of the Attorney General of the Republic, the Municipal Councils have to act within the limits of the schemes of service and any action over and above or contrary to the schemes of service, in force, is not allowed. 4.78.20 Violation of sections 68 and 69 of the Municipal Corporations Law. In the Municipalities of Germasogeia and Agios Athanasios it was observed that the amount contributed by a commercial firm had been used for an excursion to Greece of Municipal Counsellors and employees with their wives, contrary to sections 68 and 69 of the Municipal Corporations Law, which provide that donations and other income of the Municipal Fund are used only for the objectives of the Municipality. 4.78.21 Computerisation. Delay is observed in the completion of computerisation of the services of Nicosia Municipality, whereas the computerisation of the Municipalities of Strovolos, Lefkara, Agia Napa, Mesa Gitonia and Geroskipou presents weaknesses, resulting to the creation of operational problems in their accounting and financial services. 4.78.22 Amounts due for the purchase of water. The Municipalities of Latsia, Paralimni, Agia Napa, Dherynia, Aradhippou, Lefkara and Idalion fail to pay all their debts for the purchase of water, and as a result considerable amounts are due to the Department of Water Development and to Water Boards. 4.78.23 Loss of water. It has been observed that in the Municipalities of Lefkara, Aradhippou and Agios Athanasios the proportion of loss of water was exceedingly high (26% - 28%). I requested the investigation and verification of the high percentage of the loss. 4.78.24 Issues raised during the audit of the accounts of Municipalities. With my letters to the Director General of the Ministry of Interior, I requested that meeting be convened of representatives of his Ministry, the Ministry of finance, my Office and the Municipalities Union, for the discussion of matters raised repeatedly during the audit of the accounts and for which no corrective measures are taken. 4.78.25 Financial Instructions and Stores Regulations. As I stated in my previous Reports, on my recommendation, a special committee was set up of representatives of the Municipalities and my Office, which revised and prepared 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. 4.78.26 Regulations. Some Municipalities have not yet adopted Regulations relating to matters of financial administration and operation.

4.79 NICOSIA MUNICIPALITY Part B 4.79.1 Proclamation of the post of Municipal Treasurer. It has been observed that the port of Municipal Treasurer was proclaimed and filled with the same salary scale (A14) and the same qualifications as the post of financial Controller, which because vacant with the implementation of the Scheme of Successful Early Retirement. I pointed out that with this appointment for the above post, the objective of the above scheme is not achieved, which is the saving of financial resources, with the reduction of the high salaried staff, the abolition of certain posts and personnel salary scales and the appointment of new staff with lower emoluments.

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The Municipality in reply supported that, as the Council has absolute discretion to decide for the early retirement of employees, it is not possible for any Organisation, including the auditor General of the republic, to be involved in the examination of this matter, unless the decision of the council is illegal. My Office pointed out again to the Municipality that, besides the legality of the decisions of the auditees, has to examine as to whether the expenditure had been incurred in the most efficient way, as well as the objective, for which the specific expenditure was incurred, has been achieved, applying the relevant Regulations. I repeated, however, the view that, in this case, the objectives for which the provisions of the Regulations for early retirement were applied were not achieved. I stated further that the early retirement of senior officers to whom, besides the pension benefits, additional compensation is paid, amounting up to £30.000, does not contribute to the achievement of the objective for savings in the financial resources, because, for the smooth and unhindered operation of the Municipality, the filling of these posts is legally justified. The Municipal Council continues to preserve its views on this matter. 4.79.2 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 top the Attorney General for advice, as to whether the legal impediment could be overcome, so that the transfer of ownership could be made possible.

4.80 LIMASSOL MUNICIPALITY Part A 4.80.1 Criminal investigation. Following a council of Ministers decision, the Attorney General of the Republic appointed, in December 1998, for 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 investigation for the issue of building permit/permits was completed and the relevant report was submitted to the Attorney General, while the investigation for illicit wealth of the Municipal officer is being continued. 4.80.2 Accounts and audit. The Municipality has not submitted, up to this day, the final accounts for the years 1997, 1998 and 1999 for audit, which, according to section 81(1) of the Municipal Corporations Law, should have been submitted by the 30th April of the year following their financial year. In my letter to the Mayor I requested that instructions be issued for the preparation and submission of the above accounts for audit, pointing out, at the same time, that the belated preparation and submission of the accounts does not facilitate the smooth operation of the Municipality and reduces considerably the potential of utilization, for purposes of planning, of the accounts by the Municipal Council. The Municipal Council agrees with my observations and has issued instructions for the prompt preparation and submission of the final accounts to my Office for audit. 4.80.3 Financial position. (a) Operating results. The accounts for 1996 showed a deficit of £1.127.271, compared to £648.841 for the previous year.

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(b) Income. The income of the Municipality amounted to £8.234.250, compared to £7.083.945 for 1995, showing an increase of £1.150.305 or 16,2%. The income of the Municipality includes government subsidy amounting to £1.283.042. (c) Expenditure. The expenditure of the Ordinary Budget of the Municipality amounted to £9.361.971, compared to £7.732.786 for 1995, i.e. there was an increase of £1.629.185 or 21%. (d) Liquidity. The financial position and administration of the Municipality is not satisfactory, resulting to serious liquidity problems presented. Contrary to section 85(2)(a) of the Law, the overdraft amount of the General Account amounted to £1.729.848 and exceeded by far the specified proportion of 20% of the budgeted income of the Municipality. The above overdraft would have been far greater if a transfer was not irregularly made from the Loans Account and the Pensions and Gratuities Fund of the amounts £3.142.201 and £775.000, respectively, in order to meet the current liabilities of the ordinary Budget. I requested the Municipal Council to consider ways for the improvement of the Municipality’s finances and to prepare a long-term strategic programme, for the settlement of the accumulated deficits, and for the determination of targets and objectives. 4.80.4 Replies to my letters. The letters sent by my Office are not replied, in spite of the repeated reminders. This practice does not serve the good interests of the Municipality, and consequently matters raised remain pending, without any measures taken for their prompt settlement. 4.80.5 Scheme for successful early retirement. The Municipal Council decided, on 19.1.2000, the reemployment on contract, for a period of four months at a fee of £500 per month, of the Town Clerk, who had retired on 1.12.99, under the Scheme of Successful Early Retirement while on 31.1.2000 proclaimed the post of Town clerk, with the same salary scale, A15. I pointed out that with the temporary reemployment of the ex Town clerk and the filling of the above post, the objective of the above scheme for savings in the financial resources, with the reduction of the high salaried staff, the abolition of certain parts and the appointment of staff with lower emoluments, is not achieved. I also expressed the view that the early retirement of officers holding permanent posts and to whom, besides the 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 unhindered operation of the Municipality, the filling of permanent posts is legally justified. 4.80.6 Renewal of collective agreement - Reorganisation (a) Retrospectiveness of reorganisation. The renewal of the collective agreement of the period 1998-2000, with retrospective effect from 1.1.96, for purposes of placement into the various salary scales, and from 1.9.98, for purposes of payment of arrears, had resulted to financial implications for the Municipality and the favouring the certain officers, who were on salary scale A10 and were placed on salary scale A11 as from 1.1.96. These officers retire early, in the period October – December 1999, from the top scale of salary scale A11. (b) Cost of retrospectiveness due to reorganisation. The estimate of the Municipality for the cost of arrears paid as from 1.9.98, due to the reorganisation, as presented to the Municipal council, was £25.000, whereas this will exceed £100.000. The Municipal council agrees that the cost of retrospectiveness, due to reorganisation, will be greater than what was initially

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estimated, expresses, however, the view that in the long term the Municipality will be benefited, a view with which I do not agree. (c) Placement of labourers to the permanent and pensionable personnel (salary scales A1-A3-A4) as from 1.1.2000. As the placement of labourers to the permanent personnel (salary scales A1-A3-A4) from 1.1.2000 was not based on study, I expressed my reservations as to whether this would have any long-term benefits for the Municipality. The Municipal Council has its reservations also, because it concerns a new idea, at the same time, however, believes that this institution will prove fruitful. (d) Ambiguities, omissions, and misinterpretations in the collective agreement. In the collective agreement there are various omissions and ambiguities or contradictions, in relation to the existing Regulations, which are the same of misinterpretations. For example, while, according to Regulation 206(a) of the Pensions and Gratuities fund, the permanent pensionable employees retire on 60th year, section 16 of the collective agreement (1995-1997) specifies as the year of retirement of labourers the 65th year. (e) Incorporation of allowances to the pensionalbe emoluments. The decision for the incorporation of the various allowances to the pensionable emoluments of employees, the posts of which are upgraded, is, in my opinion, contrary to the interpretation of the term “emoluments” specified by the Municipal Regulation 192. (f) Salary placements according to the reorganisation. Due to wrong placements, during the changeover from one salary scale to another and during the incorporation of allowances, in the case of appointment of labourers to permanent posts, the salaries of most employees are wrong, and as a result the Municipality is burdened with considerable additional cost. Despite the observations of my Office, that corrections to the salaries of most employees should be made prior to the reorganisation, the appropriate officers of the Municipality proceeded to the reorganisation of the basis of wrong salaries. I requested that the reorganisation should be carried out again on the basis of the correct data. As I was informed my recommendations are implemented as from 1.1.2000. 4.80.7 Personnel. At 31.12.96 the Municipality employed 457 persons, out of which 287 were serving in permanent posts, while 170 belonged to the labour force (160 permanent and 10- casuals), with total emoluments expenditure amounting to £5.424,874. 4.80.8 Schemes of service. The schemes of service present serious deficiencies and omissions and I suggested their amendment, in order to be in line with the present state of affairs. As I was informed, the gradual amendment of the schemes of service has commenced, and their harmonisation, where possible with Public Service. 4.80.9 Weaknesses in the operation of the Services of the Municipality, the financial administration and the systems of internal control. The Municipal council requested my Office to carry out a study, for the purpose of verification of operational problems of the Municipality. My Office carried out two separate investigations, one for the operation of the Technical Services of the Municipality and one for the operation of the financial and other Services. The main issues where serious weaknesses were observed and for which specific recommendations are made for their settlement, refer to the organisation structure of the technical services, the appointments/promotions of the technical staff, the interchangeability, the reduction of the cost of the labour force and the coordination and follow up of studies and projects designed/supervised by private consultants.

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In May 1999 the report was submitted to the Municipality, regarding the operational weaknesses of the financial and other Services of the Municipality. The main findings and recommendations of my Office regarded the organisational structure, personnel matters, such as cost, appointments, evaluations and education, operational problems of the financial Services, the great delay observed in the completion of computerisation, the weaknesses in the Department of internal audit and problems of organisation and administration of the Archives. The Municipal Council before studying and processing the serious weaknesses verified in the operation of the Services of the Municipality, for which specific recommendations were made for their settlement, agreed on 30.9.99 for the renewal of the collective agreement reorganisation, for the period 1998-2000. With regard to the operational weaknesses of the Services of the Municipality and the systems of internal control, the following examples are stated: • The non-taking of measures for the collection of taxes in arrear. • The absence of procedures in the operation of the Municipal Workshop and the purchase and use of spare parts. • The non-collection of fees and tolls provided by the Municipality’s Regulations. • The non-keeping of the appropriate registers. • The direct purchase of materials by the Departments, without notifying the Municipality’s Store. • The non-signing of the payment vouchers by the authorising officers and the non- attachment of the necessary documentation. The Municipal council informed me that, with the reorganisation, the determination of specific duties to employees and the adoption of procedures, the operational problems in the Services of the Municipality will be settled. 4.80.10 Salaries bank accounts. In the accounts of the Municipality the above bank accounts are not shown, which in the last years are not reconciled with the bank statements, are not followed up and are examined by any officer of the Municipality. During 1996 transfers amounting to £17.357,99 were made from the General Account to the above accounts charging the expenditure vote “Interest Payable”, without these representing interest or bank charges in bank statements. Due to the seriousness of the matter and the impending risks, my Office repeatedly requested an in-depth investigation of the above matter, which, however, up to July 200, had not been informed of any developments. As I was informed the matter is investigated by the Financial Controller of the Municipality. 4.80.11 Loans. The balance of the Municipality’s loans from the Loan Commissioners and the commercial banks amounted, at 31.12.96, to £3.418.720 and £9.664.746, respectively. It has been observed that during 1996 no loan instalments have been paid, resulting to the increase of amounts in arrear and the Municipality to be charged with overdue interest. At 31.12.96 the instalments of capital and interest in arrear of the loans amounted to £3.646.949, compare to £2.474.038 at 31.12.95. 4.80.12 Contract for the reconstruction and maintenance of the quay at the old port of Limassol. In paragraph 4.81.5 of my 1997 Report I stated that, following a complaint and a consequent investigation carried out by my Office, serious deviations from the contract

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provisions were observed. At a meeting in May 1998, the contractor was committed to proceed with the necessary repairs, so as to ensure full compliance to the provisions of the contract before handing over of the project. In April 1999 I asked the Municipality to inform me whether the above commitments of the contractor were materialised and if the project has been delivered. The Municipality informed me that, for purposes of delivery of the project, requested the Technical Chamber of Cyprus the establishment of a committee of coast engineers and proceeded also to the appointment of an Ad-Hoc Committee of members of the Municipal council, and also two engineers appointed by the Technical Chamber, the findings of which are expected to be submitted in October 2000. 4.80.13 N.P. Lanitis Ltd Warehouses. The Municipality requisitioned the above warehouses under Acquisition Order No. 456 dated 21.5.82, for the amount of £144.345. On 17.10.96 the Municipal council decided, after a lawsuit of the above company, to return to the ex owners the warehouses because the objective of the acquisition had not been fulfilled, and on 28.11.96 the Municipality collected the amount of £144.345. The lack of strategic planning resulted to the non-utilization of the acquisitioned warehouses and consequent loss of revenue by the Municipality, because the above amount was returned, after several years, without interest. The Municipal council informed me that the non-utilization of the acquisitioned warehouse was, initially, due to the lack of financial resources and mainly to the weaknesses of Government to contribute the 2/3 of the expenditure, for the execution of the project. I was also informed that the above warehouses, under present conditions, are considered as remarkable architectural buildings and their preservation is imperative. Part B 4.80.14 Theodossiou warehouses. A lawsuit against the Municipality is pending for the payment of compensation to the owner company of the warehouses which were requisitioned under a compulsory acquisition order, which was pending since 1972. Meanwhile the company has collected the initially specified by the Department of Lands and Surveys value of the property, with reservation of its rights. 4.80.15 Scholarships to children of Municipal employees. Scholarships are granted by the Municipality to children of Municipal employees, contrary to the provisions of sections 83-86 of the Municipal Corporations Law which do not cover such payments. As I have been informed, the amounts for the scholarships emanate from similar benefits of employees agreed from time to time in the collective agreements. 4.80.16 Management of contracts for the design and construction of Municipality projects. Serious weaknesses have been observed in the management and follow up of contracts with private consultants and contractors. In May 1998 I submitted specific recommendations for strengthening the system of internal control and the proper supervision and management of contracts. 4.80.17 Insurance of the Art Gallery. The painting and the other contents of the Municipal Art Gallery have been insured for the amount of £400.000. As the insurance contract is not supported by an itemised schedule stipulating the insurable values, it is possible, in case of damage, serious problems to be presented in the determination of the amount of compensation.

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4.80.18 Contribution to the Defence Fund. For many years no returns have been submitted to the Department of Inland Revenue for rents and other fees collected by the Municipality, which are liable to defence contribution. 4.80.19 Land parcellation permits. The Municipality continued to collect fees for land parcellation permits, higher than those provided by the Streets and Buildings Regulations. As I have been informed, the extra fees collected relate to laboratory tests carried out by private laboratories, the expenses of which are paid by the Municipality. 4.80.20 Taxes. The belated imposition and approval of taxes by the Municipal Council continues, resulting to delayed collections and the creation of liquidity problems for the Municipality. 4.80.21 Entertainment tax. It was again observed that no entertainment tax is levied on cinema performances, contrary to the relevant section of the Law. It has been further observed that the whole or part of the entertainment tax on theatrical shows is refunded, contrary to the relevant section of the Law, which provides for the exemption from payment or refund of the entertainment only in cases where the collections are used for charity or other equivalent purposes. Purchase of the shares of the company “Pallas Ltd”. In my previous Reports I stated that the Municipality purchased all the shares of the above company and transferred one share to the Town Clerk for the purpose of maintaining the legal status of the company. Following the advice of the Attorney General of the republic that the Municipality cannot legally be a shareholder of a private limited company, as this is not compatible with the authorities, objectives, the operation and, generally of its mission, I requested the Mayor to proceed to the liquidation of the company and the transfer of all its assets to the Municipality. The Mayor informed me that all cash balances of the company have been transferred to the General Fund of the Municipality. The liquidation of the company is still pending. 4.80.22 Purchase of the shares of the company “Pallas Ltd”. In my previous Reports I stated that the Municipality purchased all the shares of the above company and transferred one share to the Town Clerk for the purpose of maintaining the legal status of the company. Following the advice of the Attorney General of the Republic that the Municipality cannot legally be a shareholder of a private limited company, as this is not compatible with the authorities, objectives, the operation and, generally of its mission, I requested the Mayor to proceed to the liquidation of the company and the transfer of all its assets to the Municipality. The Mayor informed me that all cash balances of the company have been transferred to the General Fund of the Municipality. The liquidation of the company is still pending.

4.81 LARNAKA MUNICIPALITY Part A 4.81.1 Accounts and audit. The Municipality has not yet submitted the final accounts for 1999 for audit, which should have been submitted up to the 30th April of 2000, as specified in section 81(1) of the Municipal Corporations Law, and consequently the required audit could not be carried out by my Office. As I was informed, the delay and submission of the final accounts for 1999, was due to problems presented, in relation to the computerisation of the estate duty.

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Part B 4.81.2 Creation and filling of new posts. New supernumerary posts were created which were filled by specific municipal employees, without following the proper procedures and the relevant Regulations. As I was informed this was the result of persistent negotiations with employees Unions, within the framework of the maintenance of good labour relations and the smooth running of the Municipal Services. 4.81.3 Fees for buying off of parking places. Pursuant to a Municipal Council’s decision, in certain cases and for special reasons, lower or no fees are collected for the buying off of parking places, contrary to paragraph 5 and 5(1)(a) and (b) of section 43 of the Town and Country Planning Law, resulting to the loss of a considerable amount of revenue. As I was informed the Municipal Council decided not to collect the above fees, due to practical difficulties that arose, mainly due to the pedestrianisation of the Popular Neighbourhood. 4.81.4 Loans for the construction of kiosks at the Makenzy area. The repayment of the above loans by the restaurant owners is delayed, because the apportionment of the amounts and the sighing of the relevant contracts have not yet taken place. As I was informed, the Municipality has repeatedly requested the appropriate Government Departments to accelerate the process of apportionment of the amounts to the restaurant owners, so that their collection will be possible. The whole matter is under consideration by the Ministry of Interior.

4.82 PAFOS MUNICIPALITY Part A 4.82.1 Accounts and audit. The Municipality has not yet submitted the final accounts for 1999 for audit, which should have been submitted up to the 30th April 2000, as specified by section 81(1) of the Municipal Corporations Law. Part B 4.82.2 Municipal Slaughter House. The Municipal Slaughter House is making losses. Specifically, for the year 1987-1999, a loss resulted for a total amount of £1.575.597, not considering the state subsidy of £816.635, and I recommended to the Municipal Council to consider and find ways for the limitation or/and the extinction of losses. As I was informed, the Municipal council and the Board of the Central Slaughter House of Kofinou decided the carrying out of a study with the objective of joining the two Slaughter Houses or and the undertaking of one by the other, under commonly accepted terms. The Council of Ministers decided also (decision No. 51.465 dated 22 and 23.3.2000) the subsidisation of each year’s annual loss, beginning from the year 2000 up to the implementation of the decision for the liberalisation of Slaughter Houses. 4.82.3 Entertainment tax. The Municipality does not collect entertainment tax on all performances and cultural events, contrary to the Municipal corporations Law. A decision was taken recently for the determination of new fees, without the amendment of the relevant Regulations.

4.83 STROVOLOS MUNICIPALITY Part A 4.83.1 Accounts and audit. The Municipality submitted belatedly, on 13.7.2000, the final accounts for 1999 for audit, instead of the 30th April 2000, as specified by section 81(1) of the

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Municipal Corporations Law. As I was informed, the delay in the submission of the final accounts for 1999 was due to the involvement of the staff in the resolving of “Problem 2000”. 4.83.2 Financial position. (a) Operating results. The accounts for the years 1996 and 1997 showed a surplus of £457.225 and £142.411, respectively, compared to a deficit of £103.964 for 1995. (b) Income. The income of the Municipality for 1996 and 1997 amounted to £3.729.553 and £4.016.279, respectively, compared to £3.005.521 for 1995. The income includes government subsidy amounting to £476.369 for 1996 and £430.891 for 1997. (c) Expenditure. The expenditure of the Municipality for 1996 and 1997 amounted to £3.272.328 and £3.873.868, respectively, compared to £3.109.485 for 1995. (d) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Municipality: 1997 1996 1995 Current Assets to Current Liabilities 1,50 1,18 0,46 Personal Emoluments to Expenditure 50,7% 53,5% 53,8% Government Subsidy to Revenue 10,7% 12,8% 9,6%

4.83.3 Personnel. The Municipality employed at 31.12.96 53 permanent employees, 24 casuals and 92 labourers, with total emoluments of £1.751.917. The average expenditure for each employee amounted to £10.366. At 31.12.97 there were 63 permanent employees, 25 casuals and 105 labourers, with total emoluments of £1.965.781. 4.83.4 Unspent amounts of the development Budget. During the years 1996 and 1997 considerable expenditure amounts, which were included in the Development budget, remained unspent, mainly due to the non-execution or non-completion of projects: Actual Unspent Year Budget Deviation Expenditure amounts £ £ £ % 1996 995.100 607.771 387.329 39 1997 6.532.100 2.131.605 4.400.495 67

4.83.5 Salaries. Due to the non application of the Public Service (Emoluments, allowances and other Financial Benefits of Civil Servants) Regulations of 1995 (S.L. 175/95), during the change of scales/upgrading of posts provided for in the new collective agreement, as well as to the concession of additional increments which are not provided in the schemes of service, the salaries of most employees were wrong, and consequently the Municipality was charged with additional cost. I requested that the necessary corrections bed made in the salaries of employees. The Municipality informed me that my observations will be taken into consideration for future handling of similar cases, but has no intention, however, to give instructions for the correction of the existing wrong salaries of the employees. 4.83.6 Creation of nine posts of foremen. The Municipal council approved the creation of nine monthly posts of “Foreman” (A2-A5-A7), against the abolition of an equal number of the posts of “Head Supervisor”, without a documented study taking place, in order that the actual

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needs of the Municipality be verified, as well as the resulting additional cost. The Municipal Council informed me that the above were decided after serious study and consideration, having in mind the interest of the services of the Municipality. I continue, however, to insist on my views, regarding the procedure followed and for the additional cost that the Municipality will be burdened with. 4.83.7 Internal control. The system of internal control presents weaknesses and omissions in the various activities of the Municipality and requested that ways must be found for its improvement. Indicative of the above situation is the overpayment of £2.564 for the purchase of 260 natrium bulbs 70w for street lighting, for which £764 were irregularly paid to the Municipalities Union, and the payment to a private company of £2.561 instead of 2.561 Dutch florins, as stated in the relevant invoice (£1.800 overpayment). On the observation of my Office, the overpaid amount was refunded to the Municipality. As stated by the Municipality, the overpayment was due to the fact that on the supplier’s invoice the currency to be used was not clear and, that, however, the internal control procedures have been assigned by the Municipality to an auditing firm, through the invitation of public tenders. 4.83.8 Store. Stores Regulations are not applied in all cases, and proper procedures are not followed, resulting to operational and other problems in the Store. As I have been informed, as from 1.1.2000 the store has been fully computerised.

4.84 AGIOS DHOMETIOS MUNICIPALITY Part A 4.84.1 Accounts and audit. The Municipality submitted belatedly, on 16.10.2000, the final accounts for 1999 for audit, instead of the 30th April 2000, as provided by section 81(1) of the Municipal Corporation Law. Part B 4.84.2 Agreement for the early retirement of a clerk. The Municipality came to an agreement with a clerk for early retirement on 8.12.2000, after the completion of 400 months of service and the concession to him of eight additional increments, contrary to section 51(3) of the Municipal Corporations Law and the schemes of service. 4.84.3 Taxes Department. The Taxes Department faces serious operational problems, resulting to loss of revenue and to delays in the collection of taxes, fees and tolls. I recommended the strengthening of the Department with employees from services of the Municipality. As I was informed my recommendation was accepted by the Municipal Council. 4.84.4 Sale of burial sites. During the period 1990-1997 117 burial sites were sold and out of the collectible fees, amounting to £42.700, only £5.276 (12,4%) were collected up to 31.12.97, whereas the amount of £37.424 remains uncollected. As I was informed, the Municipality has sent written notifications to the owners of the graves, for settlement of the amounts due, and decided that, as from 26.10.99, the sale of burial sites by instalments, be terminated. 4.84.5 Construction of pavements according to section 17. As a result of the non-keeping of the necessary records and the non-application of the appropriate procedures, the Municipality does not have correct records regarding the total amount of arrears or the debtors. This is substantiated through reports of citizens to my Office, to whom notifications were sent for payment of instalments, although they had already settled the amounts due by them.

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4.84.6 Payments to a former Mayor. Payments were made to former Mayor amounting to £12.079, which are not covered by section 69 of the Municipal Corporation Law. With regard to this matter I submitted a report to the Municipal council, which on the recommendation of its legal adviser, accepted that the former Mayor undertakes legal obligation for the refund of the amount of £10.104 and the remaining amount of £1.975 to be considered as hospitality expenses. It was observed that the agreement signed regarding the way of repayment of the above amount was not implemented, resulting to the payment of only £1.404, instead of £4.104 which correspond to the period 30.8.98-30.7.99. As I was informed the Municipal Council decided, on 31.12.98, the suspension of implementation of the agreement, because of the serious health problems faced by the former Mayor, without up to now the matter be reconsidered and a new date fixed for the recommencement of the repayment of the amount due, according to the agreement signed.

4.85 ATHIENOU MUNICIPALITY Part A 4.85.1 Power supply to stock-breeding units. A delay is observed in the collection of amounts due to the Municipality by stock-breeders for power supply to their units, which was their responsibility, and which, at 31.12.99, amounted to £91.350, including interest amounting to £35.415. I was informed that the Municipality has requested the stock-breeders to settle the amounts due in the monthly instalments beginning on 1.3.99, without, however any response from the debtors.

4.86 ARADHIPPOU MUNICIPALITY Part A 4.86.1 Accounts and audit. The Municipality has belatedly submitted the final accounts, on 16.10.2000, for 1999 for audit, which should have been submitted up to the 30th April 2000, as specified by section 81(1) of the Municipal Corporations Law. Part B 4.86.2 Deviation from tender procedure. The Municipality does not follow the tender procedure in all cases of execution of important projects and for the purchase of materials and services, contrary to the principles of virtuous administration and equal treatment of citizens. It was further observed that no satisfactory control is exercised, both for payments and executed work, resulting to considerable amounts paid, which the Services of the Municipality cannot justify. I recommended that the Municipal Council considers the matter seriously, aiming at the absolute implementation of the tender procedure. 4.86.3 Construction of cemetery. The contract amount was £412.187 (without V.A.T.) and the project was completed in 1996, when a quantity surveyor was appointed for the preparation of the final account. Up to March 1997 the amount of £458.874 was paid to the contractor, according to the payment orders of the Municipal Engineer. During the construction of the project several additional works were carried out, for which there are not written documents. The final amount, which the contractor claims with his letter dated 26.11.97, amounts to £703.661. With a Municipal council’s decision the amount of £150.000 was paid on 25.2.98, in advance against the balances of the account, without any certification by an appropriate engineer. Up to now the final account has not been prepared by the quantity surveyor, and,

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therefore, the appropriate Services of the Municipality do not know the actual value of the work executed and the correctness of payments cannot be verified. 4.86.4 Construction of road in the industrial zone. The work was assigned without proclamation of tenders to two companies. The initial expenditure of the project was estimated to £97.348, whereas the actual expenditure amounted to £122.724, which shows that the initial expenditure was not based on the correct data. The two companies did not submit a guarantee and no deductions were made from the amounts paid. 4.86.5 Maintenance of roads and repairs of damages. The works were assigned without proclamation of tenders and the signing of contracts and without deposit of guarantee by the contractor. 4.86.6 Construction of secondary roads. The completion of the project was planned to be carried out in three phases. For phase A no tenders were invited, whereas phases B and C were assigned to the same contractor, without signing new contracts or submission of guarantee, and the contractor was paid, up to 30.6.200, the amount of £432.651.

4.87 POLI CHRYSOCHOUS MUNICIPALITY Part A 4.87.1 Accounts and audit. The Municipality has not yet submitted the final accounts for 1999 for audit, whereas the accounts for 1998 were submitted on 2.2.2000, instead of up to the 30th April 1999 and 2000 respectively, as specified by section 81(1) of the Municipal Corporations Law. 4.87.2 Budgets (a) Ordinary Budget. The Ordinary Budget of the Municipality for the years 1996 and 1997 was deficient, contrary to the terms of approval of the budget, which were presented by the council of Ministers, which provide for the surplus Ordinary Budget, for the self financing of investment expenditure. (b) Development Budget. During the years 1996 and 1997 considerable expenditure amounts included in the Development budget remained unspent, mainly due to the non- execution or non-completion of projects. Actual Unspent Year Budget Expenditure amounts Deviation £ £ £ % 1996 2.345.000 339.333 2.014.667 86 1997 2.319.000 120.336 2.198.664 95

(c) Excess expenditure. During the years 1996 and 1997 excess expenditure was observed which exceeded the 20% of the approved budgeted amounts, for which the approval of the council of Ministers was not secured, as provided by section 66(1) of the Municipal Corporations Law. 4.87.3 Internal control. Due to the shortage of staff in the accounts branch, the receipts and payments, as well as the updating of the accounts are carried out by the same person, and consequently the system of internal control presents serious weaknesses. I requested the Municipal Council to consider and find ways for the solution of the problems created.

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4.87.4 Regulations. No Regulations have yet been approved which would govern the terms of service of employees and the financial administration and operation of the Municipality, as provided by section 53(2) and 87(1) of the Municipal Corporations Law. 4.87.5 Financial Instructions and Stores Regulations. The Municipality has not adopted the above Instructions and regulations, which were prepared by a special committee, which was established by representatives of Municipalities and of my Office. 4.87.6 Salaries. Due to wrong placements in salary scales, in cases of upgradings/change of scales, and the concession of additional increments by the Municipal council, the salaries of certain officers were wrong. I pointed out that according to a relevant opinion of the Attorney General of the Republic, the Municipal Councils have to act within the framework of the schemes of service and any action is excess and contrary to the schemes of service in force at the specific time, is not allowed and that the Public Service (Emoluments, Allowances and Other Financial Benefits of the Civil Servants) Regulations of 1995 (S.L. 175/95) must be followed. 4.87.7 Contribution to the defence Fund. Contrary to the Special Contribution for the Defence of the republic Law, the Municipality does not submit promptly statements for the rents collected. Specifically the cost statement was made in 1996 and referred to 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 burdened with interest. 4.87.8 Non imposition of surcharge. Contrary to section 134 of the Municipal Corporations Law, on 3 and 4 January 2000 collections were made of refuse fees and professional licence fees of 1999, without the imposition of surcharge. According to paragraph (4) of Regulation 81, the refuse and professional licence fees are collectible up to 1st September and 31st December respectively. As it was stated, the non-imposition of the surcharge is due to the fact that tax notifications were not sent to the citizens. 4.87.9 Determination of fees and tolls. The Municipal council delayed to determine, on 18.10.99, the amounts of refuse fees and professional licence fees, and consequently the tax registers for 1999 were not prepared and the collections were made on the basis of 1998 tax registers. 4.87.10 Water supply fees. It was observed that, contrary to Regulation 115J(11), no fees are collected for the supply of water to new constructions the volume of which exceeds 50 000 c.f., resulting to loss of revenue. 4.87.11 Provident Fund Regulations. The Municipality operates a Provident fund without having approved Regulations governing its operation.

4.88 PARALIMNI MUNICIPALITY Part a 4.88.1 Accounts and audit. The Municipality has not yet submitted the final accounts for 1999 for audit, which should have been submitted by the 30th April 2000, as specified by section 81(1) of the Municipal Corporations Law. 4.88.2 Repair of the fence of the stadium. In October 1996 the Municipal council assigned the repair/improvement of the fence of the stadium to the contractor, who was then executing

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the contract for the seats of the stadium. In December 1996 the work was completed and the Municipality paid the contractor the agreed amount (£50.000 plus V.A.T.). In June 1997 the final account of the contract for the seats of the stadium was prepared, included in which was the amount of £50.000 for the fence. In May 1999, on the Municipality’s request, my Office examined the matter and realised that, while the amount of £50.000 was paid by the Municipality in 1996, it was paid again in 1999, with its inclusion in the final account of the contract for the seats. The quantity surveyors of the contract for the seats of the stadium supported that the inclusion of this amount in the final account was doe on the instructions of the Municipality, which, however, had not informed them that it had already paid this amount in December of 1996. I observed that the recommendation of the Municipality, for the inclusion in the final account for the seats of works, which had already been certified and paid, was a serious mistake and that it was equivalent to certification for payment for a second time. I further observed that the mistake would have been avoided if: (a) The Municipality had informed the consultants that had already paid the amount of £50.000 without the consultant’s certificate, or (b) The Head of the Technical Services deducted the amount of £50.000 from the amount, which he recommended for payment on 1.8.1997, for the work of the contract for the seats. Up to June 2000 the refund of the amount by the contractor had not been achieved. Part B 4.88.3 Immovable property tax. The Municipality continu9es not to impose the municipal immovable property tax, which could have imposed under section 74 of the Municipal corporations Law, resulting to considerable loss of revenue. 4.88.4 Construction of Agios Panteleimonas road. The construction of the project, the study of which was assigned to a private consultant, was completed in August 1997, for an expenditure of about £1,3 m. As the preparation of the final account of the contract was unjustifiably delayed, at a meeting which took place in November 1998 at the Municipality, my Office requested the private consultant and it was agreed to deliver to the Municipality up to 15.12.98 the final construction designs/evaluations of the works and give the necessary information for the evaluation/payment of the workshop, of the top soil and the over excavations. As the private consultant did not respond to the above agreement, in June 2000 a new agreement was reached between the parties, according to which the private consultant will submit to the Municipality the designs and other necessary documents, the latest up to 31.1.2001.

4.89 AGIA NAPA MUNICIPALITY Part A 4.89.1 Accounts and audit. The Municipality has not yet submitted the final accounts for 1999 for audit, which should have been submitted up to the 30th April 2000, as provided by section 81(1) of the Municipal corporations Law.

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4.90 LEFKARA MUNICIPALITY Part A 4.90.1 Accounts and audit. The Municipality has not yet submitted the accounts for 1999 for audit, which should have been submitted up to the 30th April 2000, as provided by section 81(1) of the Municipal Corporations Law. Part B 4.90.2 Personnel. For the smooth and unhindered operation of the Municipality, I recommended the staffing of the Departments with the required personnel. Up to now no schemes of service have yet been approved, and the permanent posts have not been filled, including the basic permanent posts of Town Clerk, Municipal engineer and Treasurer which are provided for by the Law. Provident fund Regulations. The Municipality operates a Provident fund without approved Regulations governing its operation.

4.91 GEROSKIPOU MUNICIPALITY Part A 4.91.1 Accounts and audit. The Municipality has not yet submitted the final accounts for 1999 for audit, which should have been submitted up to the 30th April 2000, as provided by section 81(1) of the Municipal Corporations Law. Part B 4.91.2 Beach services. Due to the non-implementation of sections 5(C)(2) and 5(H)(1)(a) of the Foreshore Protection (Amendment) (No. 4) Law of 1994, the Municipality has suffered significant loss of revenue. According to the above sections, the Municipality would have to decide whether to provide the beach services itself or proclaim tenders and assign the above services to individuals. The Municipal council informed me that for the year 2000 assigned the administration of the beaches to hotel owners and that the revenue will amount to £20.000, while as from 1.1.2001 it will fully implement the Foreshore Protection Law. 4.91.3 Tolls for fruit markets. No tolls are collected for the products displayed for sale at fruit markets, as provided by section 122(1) of the Municipal Corporations Law, resulting to considerable loss of revenue. As I was informed the Municipality has not processed for approval Regulations for the collection of tolls from fruit markets, because of discussions of the Municipalities Union with the Ministries of finance, Interior and Agriculture, natural Resources and Environment, for the amendment of the Municipal Corporations Law and abolition of tolls.

4.92 PEGEIA MUNICIPALITY Part A 4.92.1 Accounts and audit. The Municipality has not yet submitted the final accounts for 1999 for audit, which should have been submitted up to the 30th April 2000, as provided by section 81(1) of the Municipal Corporations Law. Part B 4.92.2 Increase of water supply fees. The water supply fees were increased without the amendment of Regulations. As I was informed the approval of the amendment Regulations is expected for the revision of the fees.

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4.93 MESA GEITONIA MUNICIPALITY Part A 4.93.1 Accounts and audit. The Municipality belatedly on 23.5.2000, date of commencement of the audit, submitted the final accounts for the years 1997, 1998 and 1999, instead of up to the 30th April of the year following the financial year, as provided by section 81(1) of the Municipal Corporations Law. 4.93.2 Financial position (a) Operating results. The accounts for the years 1997 and 1998 shoed a deficit of £31.007 and £326.824, respectively, whereas for 1998 showed a surplus of £16.423. (b) Income. The income of the Municipality for the years 1997, 1998 and 199 amounted to £645.997, £806.958 and £759.241, respectively. The income includes government subsidy amounting to £179.684 for 1997, £172.520 for 1998 and £121.557 for 1999. (c) Expenditure. The expenditure of the Municipality for the years 1997, 1998 and 1999 amounted to £677.004, £790.535 and £1.086.065, respectively. The expenditure for salaries amounted to £366.085 for 1997, £444.291 for 1998 and £547.242 for 1999. (d) Accounting ratios. The following accounting ratios give a general picture of the financial position of the Municipality: 1999 1998 1997 Current Assets to Current Liabilities 0,76 1,36 1,37 Personal Emoluments to Expenditure 50,3% 56,2% 54,1% Government Subsidy to Revenue 16% 21,4% 27,8% Surplus/(Deficit) to Capital Employed (53,9%) 1,95% (5,6%)

(e) Liquidity. The financial position of the Municipality was not satisfactory and in order to meet current needs, the amount of £150.000 was irregularly transferred tin 1999 from the Development Fund to the General Account. I requested the Municipal council to consider ways for the improvement of the Municipality’s finances and to prepare a long term strategic programme, for covering the accumulated deficits. As I was informed, a study has been carried out by a professional firm, regarding the financial position of the Municipality, on the basis of which, a long term strategic programme will be prepared for covering the accumulated deficits. 4.93.3 Long term and short-term liabilities. The long term liabilities at 31.12.97, at 31.12.98 and at 31.12.99 amounted to £110.269, £348.237 and £420.331, respectively, whereas the short term liabilities amounted to £303.875, £424.296 and £816.298. The short term liabilities include loan instalments payable within one year, amounting to £65.367, £76.664 and £133.286, respectively. 4.93.4 Loan repayment. Due to the financial problems faced, the Municipality is not in a position to pay the instalments of its loans, resulting to the accumulation of arrears, which at 31.12.99 amounted to £56.622, and to be charged with overdue interest. Despite the

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unification of its loans by the loan commissioners on 31.5.98, the Municipality failed to pay, on 31.5.99, the first instalment of the unified loan, amounting to £9.464. 4.93.5 Budgets (a) Ordinary Budget. The budgets of the Municipality for the years 1997, 1998 and 1999 were deficient by £280.450, £354.600 and £244.750, respectively, contrary to the conditions of approval of the budget by the Council of Ministers, which provide that the Ordinary Budget must show a surplus, for the self financing of part of the investment expenditure. (b) Development Budget. During the years 1997, 1998 and 1999 considerable expenditure amounts included in Development Budget remained unspent, mainly due to the non finding of land, the non execution of projects by Government services and the non securing of finances. Actual Unspent Year Budget Expenditure amounts Deviation £ £ £ % 1997 454.000 71.414 282.586 84,3 1998 855.000 406.161 448.849 52,5 1999 3.104.750 285.108 2.819.642 90,8 (c) Excess expenditure. Excess expenditure was observed during the years 1997, 1998 and 1999, which exceeded the 20% of approved budgeted amounts, for which the approval of the Council of Ministers was not secured, as provided by section 66(1) of the Municipal corporations Law. 4.93.6 Personnel. The following table shows the persons employed by the Municipality during the years 1997, 1998 and 1999, with the respective cost: 1999 1998 1997 Permanent staff 24 21 21 Casuals/on contract -- 4 -- Labourers 21 13 11 45 38 32 Total emoluments £547.242 £449.291 £366.085

4.93.7 Upgrading of the salary scale of the Town Clerk. The Municipal Council decided on 18.6.98 the upgrading of the salary scale of the Town Clerk from A8-A9-A11(+2) to A9-A11-A13 and his placement to the initial step of A13, as from 1.6.98, contrary to the Public Service (Emoluments, allowances and other Financial Benefits of Civil Servants) Regulations of 1995 (S.L. 175/95), which provide for the way of adjustment of an employee’s salary whose post is upgraded. According to the above Regulations, the town Clerk would have reached the initial step of A13 (£4.939) on 1.10.2000, whereas the Municipal Council irregularly placed him on 1.6.98. I requested the Municipal council to effect the necessary corrections. 4.93.8 Concession of additional increments. The Municipal council, without authority and acting beyond the provisions of the schemes of service, conceded to three employees one additional increment to each one of them.

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4.93.9 Filling of new posts. The Municipal council on 24.6.99 appointed three persons to the permanent post of Clerk 2nd Grade and one person to the permanent post of Traffic Officer, with which an employment agreement was signed, without proclaiming the new posts and without following the approved procedure for filling of posts. I pointed out to the Municipal Council that the above appointments are irregular and illegal. 4.93.10 Employees collective agreement. Contrary to the council of Ministers decision No. 40.385 dated 6.4.94, the Municipality signed a collective agreement with the employees for the years 1997-2000, under which side benefits were granted, such as 14th salary and life and accident insurance, without the approval of the Ministry of Interior. 4.93.11 Internal control. The system of internal control presents weaknesses and omissions in the various activities of the Municipality. The following examples are stated: • The non-taking of effective measures for the collection of taxes in arrear. • The non-keeping of the appropriate registers. • The non-certification of the assets of the Municipality. • The non completion of computerisation, • The non-carrying out of periodical audits by a responsible officer. I requested the Municipal council to consider ways for the strengthening of internal controls. As I was informed measures are taken for the strengthening of internal controls. 4.93.12 Arrears of taxes. The taxes in arrear at 31.12.97, 31.12.98 and 31.12.99 amounted to £224.125, £278.666 and £297.334, respectively. The arrears include amounts due for previous years, for which, in the last years, no significant collections are shown. I requested the Municipality to examine carefully the lists of arrears in order to verify the collectible amounts and take the necessary measures for collection. The amounts, which cannot be collected, to be written off according to the provisions of the Law. The Mayor informed me that the ways of collection of arrears of taxes have been examined and that the approval of the Municipal council is expected for the write off of the amounts that cannot be collected.

4.94 GERMASOGEIA MUNICIPALITY Part A 4.94.1 Accounts and audit. The Municipality has not yet submitted the final accounts for 1999 for audit, which should have been submitted up to the 30th April 2000, as provided by section 81(1) of the Municipal Corporations Law. 4.94.2 Amounts due for water pumping. The Municipality has failed, since 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 to the Department of Water Development amounted to £508.357. As I have been informed the Municipal council has no intention of paying any amount to the Department of Water Development, for various reasons.

4.95 KATO POLEMIDIA MUNICIPALITY Part A 4.95.1 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

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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. (b) The Treasurer submitted his requisition on 8.9.99, after the charges against him by an officer of the Municipality for financial offences, and refunded to the Municipality the amount of £100.000 (£20.000 on 8.9.99 and £80.000 on 17.9.99). 4.95.2 Submission of report under reservation. As a result of the case deficit observed and the seriousness of the matters found out during the investigation, my report was submitted with the relevant reservation. 4.95.3 Internal control. The lack of internal control in the receipts and payments and other activities and fields of the Municipality, resulted to the non-verification of the cash deficit and the non-application 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 of computerised systems. 4.95.4 Accounts and audit. The Municipality has not submitted the final accounts for the years 1997, 1998 and by the 30th April of the following year, as provided by section 81(1) of the Municipal corporations Law. The accounts for the years 1997 and 1998 were prepared during the investigation and showed the cash balances and the revenue reduced as per the amount of the deficit, which for the years 1997 and 1998 amounted to £13.010 and £66.202, respectively. For the period 1.1.99 – 8.9.99 a trial balance was prepared showing debit and credit balances amounting to £3.242.818 and £3.264.818, respectively, i.e. there was a credit difference of £22.000, which resulted through an irregular credit (reduction of cash) in the Cashbook. The cash balances and the revenue shown in the trial balance of the period 1.1.99 – 8.9.99 are reduced with the amount of the cash deficit, which amounted to £69.477. 4.95.5 Financial position (a) Operating results. The accounts for the years 1997 and 1998 showed a surplus of £52.649 and £36.266, respectively, compared to a deficit of £30.029 for 1996. (b) Income. The income of the Municipality for 1997 and 1998 amounted to £1.029.186 and £1.141.187, respectively, compared to £918.041 for 1996. The income includes government subsidy amounting to £218.832 for 1997 and £317.764 for 1998. (c) Expenditure. The expenditure of the Municipality amounted to £976.537 for 1999 and £1.104.921 for 1998, respectively, compared to £948.070 for 1996. (d) Accounting rations. The following accounting rations give a general picture of the financial situation of the Municipality: 1998 1997 1996 Current Assets to Current Liabilities 0,57 0,58 0,52 Personal Emoluments to Expenditure 54,4% 57,9% 56,1% Government Subsidy to Revenue 28,8% 21,3% 16,6% Surplus/(Deficit) to Capital Employed 26,8% 66% (113,5%0

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(e) Liquidity. The financial position and administration of the Municipality is not satisfactory, resulting to serious liquidity problems faced. I pointed out to the Municipal council that ways must be considered for the improvement of the Municipality’s finances and that a long term strategic programme must be prepared, for covering the accumulated deficits. (f) Bank overdraft. Contrary to section 85(2)(a) of the Law, the amount of the overdraft, exceeded the proportion of 20% of the budgeted income for the current period, as shown in the following table: Budgeted

Year Income Total overdraft £ £ % 1997 1.060.200 303.126 28,6 1998 1.417.800 551.229 38,9

4.95.6 Personnel. At 31.12.98 the Municipality employed 59 persons, out of which 34 to permanent posts, whereas 25 belonged to the labour force (22 permanent and 3 casuals), with total emoluments £601.488. 4.95.7 Salaries. The salaries paid to the staff are in most cases wrong, due to wrong placements, ex-gratia increments, non-payment of the whole amount of the increment or the increase of cost of living allowance. I requested that the necessary corrections be made in the salaries of the staff. 4.95.8 Schemes of Service. The schemes of service of the staff were not amended after the implementation of section 2(a) of the collective agreement for the period 1996-1997. 4.95.9 Appointment of labourers to permanent posts. During 1996 eight labourers were promoted and placed in permanent posts, without approval for the creation and filling of the posts, from the Ministries of Interior and finance. 4.95.10 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 to tenders, resulting to the Municipality being burdened with additional expenses. 4.95.11 Licences for the operation of petroleum products stations. The Municipality failed to issue, for the years 1997, 1998 and 1999 licences for the operation of petroleum products stations and collect the relevant fees. The responsibility for the issue of licences for the operation of stations has been, since 1994, to the Municipalities. 4.95.12 Licences for the operation of premises. The Municipality issues licences for the operation of premises, without these being suitable as provided by the relevant legislation. I pointed out that this practice must be terminated, because basic terms governing the issue of operation licences to premises, relate to the sensitive matters of public security and health. 4.95.13 Cultural events. An investigation carried out revealed that no control is exercised over the cultural events of the Municipality, and consequently substantial amounts collected during the events, are not deposited to the Municipal Fund.

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4.95.14 Taxes in arrear. The arrears of taxes, fees and other income of the Municipality amounted at 31.12.97 and 31.12.98 to £206.217 and £270.505, respectively, compared to £180.519 at 31.12.96.

4.96 AGIOS ATHANASSIOS MUNICIPALITY Part A 4.96.1 Accounts and audit. The Municipality submitted late, on 14.9.2000, the final accounts for 1999 for audit, instead of up to the 30th April 2000, as provided by section 81(1) of the Municipal Corporations Law.

4.97 AGLANTZIA MUNICIPALITY Part A 4.97.1 Accounts and audit. The Municipality submitted late, on 14.9.2000, the final accounts for 1999 for audit, instead of up to the 30th April 2000, as provided by section 81(1) of the Municipal Corporations Law. As the Municipality informed me, specific instructions were given to the appropriate Service for compliance to the provisions of the Law, regarding the prompt preparation and submission of the final accounts for audit. 4.97.2 Financial position (a) Operating results. The income of the Municipality for 1997 and 1998 showed a surplus of £284.752 and a deficit of £2.009, respectively, compared to a surplus of £79.006 for 1996. (b) Income. The income of the Municipality for 1997 and 1998 amounted to £1.790.754 and £1.781.447, respectively, compared to £1.186.957 for 1996. The income includes government subsidy amounting to £702.462 for 1997 and £568.641 for 1998. (c) Expenditure. The expenditure of the Municipality for 1997 and 1998 amounted to £1.506.002 and £1.783.456, respectively, compared to £1.107.951 for 1996. (d) Accounting ratios. The following accounting ratios give a general picture of the financial position of the Municipality: 1998 1997 1996 Current Assets to Current Liabilities 2,77 2,77 1,13 Personal Emoluments to Expenditure 33,93% 33,23% 40,63% Government Subsidy to Revenue 31,92% 39,23% 14,06% Surplus/(Deficit) to Capital Employed (0,03%) 4,85% 1,62%

(e) Liquidity. The financial position of the Municipality was not satisfactory and in order to meet current needs, amounts from the loan account were irregularly transferred to the general account. The cash balances of the Municipality for 1997 and 1998 include the amount of £213.196 and £95.619, respectively, which relate to unspent loan amounts.

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4.97.3 Long term and short term liabilities. The long term liabilities of the Municipality at 31.12.97 and 31.12.98 amounted to £4.806.899 and £5.158.058, respectively, and the short term to £1.495.668 and £1.763,847. The short term liabilities include loan instalments payable within one year, amounting to £1.105.210 and £1.147.500 respectively. 4.97.4 Personnel. At 31.12.98 the Municipality employed 64 persons, out of which 20 in permanent posts, 6 casuals, while the remaining 38 belonged to the labour force (23 permanent and 15 casuals), with total emoluments £605.128. 4.97.5 Re-adjustment of salaries and upgrading of scales of the Treasurer and the Inspector of Gardens and Places of Greenery. The Municipal Council decided on 10.12.98 the upgrading of the salary scales of the Treasurer and the Inspector of Gardens and Places of Greenery to the combined salary scales of A9-A11-A12, and their placement to the initial step of A11, retrospectively from 1.1.98, without exhausting, as they should, the salary scale A9. According to section 53(1) of the Municipal Corporations Law and a relevant letter, dated 10.5.93, of the Attorney General of the Republic, the Municipal council must act within the provisions of the schemes of service applicable at the specific time. To the above employees arrears were also irregularly paid the amounts of £2.532 and £998, respectively. The Municipal council informed me that the matter is under consideration. 4.97.6 Lease agreement for handicraft area. Basic provisions of the agreement for the lease of premises in the handicraft area, which relate to the way of repayment of the lease, are not implemented, and consequently the arrears at 31.12.97 and 31.12.98 amounted to £32.898 and £224.094, respectively. As I was informed, the Municipality signed an agreement with a commercial bank and as from 1.3.2000 the collection of the rent is carried out through the “factoring “ services. I recommended to the Municipality to assign to the “factoring” service the collection also of all arrears due, as this is provided in the agreement. The Municipal council informed me that my recommendation is under serious consideration. 4.97.7 Taxes in arrear. The taxes in arrear at 31.12.97 and 31.12.98 amounted to £400.635 and £504.489, respectively, compared to £346.142for 1996, i.e. there was an increase of £54.493 (15,74%) and £103.854 (25,92%) for 1997 and 1998, respectively. The arrears include amounts due for the period 1987-1994, amounting to £86.934, which in the last years shows no collections. I repeatedly requested the Municipality to examine carefully the lists of arrears for the verification of amounts which can actually be collected, and effective measures, including legal, taken for this collection. The amounts considered impossible to collect must be written off according to the provisions of the Law. As I was informed, the Services of the Municipality carry out a full examination of the lists of taxes in arrear and legal action is taken for the arrears the collection of which is possible. I pointed out that the measures for the collection of arrears must be taken promptly, because with the lapse of time the risk of non-collection is increased. 4.97.8 Entertainment tax. Contrary to section 85(2)(I)(i) of the Municipal Corporations Law, the Municipality does not collect entertainment tax for performances and cultural events. 4.97.9 Licences for the operation of petroleum products stations. Out of the six petroleum products stations operating in the Municipality’s area, only three fulfilled the conditions provided by the Regulating of Petroleum Products Stations (Amendment) Law, for which an operation licences was issued, while the other operated illegally, without any measures taken against them.

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4.97.10 Internal control. Despite the corrective measures taken, the system of internal control continues to present weaknesses and its further strengthening is imperative. As I was informed the matter will be considered by the Municipal Council.

4.98 ENGOMI MUNICIPALITY Part A 4.98.1 Accounts and audit. The Municipality submitted late, on 6.11.2000, the final accounts for 1999 for audit, instead of up to the 30th April 2000, as provided by section 81(1) of the Municipal Corporations Law. 4.98.2 Land parcellation licence of a plot affected by the design of a main road. An audit carried out by my Office in December 1999, revealed that the Municipal Council proceeded to the issue of land parcellation licence for 25 building plots, of a piece of land affected by the design of a main road, under Nicosia Local Plan. The licence was issued with the justification that the Municipality is against the construction of the road, ignoring the opposite views of the Department of Planning and Housing and the Ministry of Interior, and also the decision of the previous Municipal Council, which was confirmed with a decision of the Supreme Court. I observed that the above decision of the Municipal Council, the Government and the Municipality will have to pay increased compensation, about £0,5 m., for the acquisition of the land affected by the 11 plots, for purposes of realization of the project. In January 2000 the Director General of the Ministry of Interior requested the Attorney General to advise the Ministry regarding the handling of the case, with a view to reinstatement of legality or, otherwise, the payment by the Municipality of additional compensation of £0,5 m. In October 2000 the Mayor of Engomi informed me that, after the publication of requisition in July 2000, the parcellation works had been suspended, resulting to the considerable reduction of the future cost of compensation. He expressed also the view that the Municipality had the right to issue the licence applied for in 1987 for the parcellation for 25 plots and, since Government wishes the construction of the main road, has to acquisition and compensate the owners of land affected. 4.98.3 Tender No. 8/99 for the supply of a refuse collection vehicle. The Municipal Council awarded, in October 1999, the tender to a more expensive tenderer, after taking into consideration the recommendations of a private consultant, to whom the evaluation of the tenders was assigned. An investigation of my Office which was carried out after a complaint submitted by a lower tenderer revealed the following: (a) The recommendation of the consultant was based on certain advantages of the vehicle presented by the more expensive tenderer, without his being provided in the terms of the tender. (b) The price of award of the tender resulted through negotiations of the consultant with the successful tenderer and alteration of his tender regarding the equipment of the vehicle, a procedure which was not provided in the terms of the tender. In December 1999 I submitted my views to the Mayor, observing that, once the award would be made to the most financially beneficial tender, their criteria and weight should have been included in the tender documents, in accordance with the basic principles of tender procedure. Furthermore, the private consultant to whom the evaluation of the tenders was assigned, should

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have been instructed of the method of evaluation, so that this would be in line with the administrative law, which Public Authorities have to follow. As the Mayor informed me that for this matter recourse to the Supreme Court is pending, which has been filed by one of the tenderers. Part B 4.98.4 Tolls for fruit markets. No tolls are collected for goods displayed for sale at fruit markets, as provided by section 122(1) of the Municipal Corporations Law. For the settlement of the matter, Regulations were prepared, which were published in the Official Gazette of the Republic No. 3358, dated 22.10.99, which, however, as I was informed, have not been implemented, because action is taken by the Ministry of Interior and the Municipalities Union, for the abolition of tolls. 4.98.5 Upgrading of the salary scale of the Municipal Engineer. According to a decision of the Ministerial committee, the upgrading of the salary scale of the above post should have been effective as from 1.1.94 and not as from 13.4.92, as the Municipal council decided on 24.10.95 and 5.12.95. Consequently an overpayment occurred, which has not yet been reclaimed. The Municipal council on its decisions, despite my repeated observations.

4.99 LATSIA MUNICIPALITY Part A 4,99.1 Accounts and audit. The Municipality has not yet submitted the final accounts for the years 1998 and 1999, whereas these of 1997 were submitted on 4.7.2000, instead of the 30th April, 1998, as provided by section 81(1) of the Municipal Corporations Law. With a letter I requested the Mayor to issue instructions for the prompt preparation and submission of the accounts for 1998 and 1999 for the required audit. 4.99.2 Financial position. (a) Operating results. The accounts for the years 1995 and 1996 showed a deficit of £57.260 and a surplus of £143.536, respectively, compared to a surplus of £42.889 for 1994. (b) Income. The income of the Municipality for the years 1995 and 1996 amounted to £820.037 and £1.177.566, respectively, compared to £822.514 for 1994. The income includes government subsidy amounting to £32.200 for 1995 and £130.203 for 1996. (c) Expenditure. The expenditure of the Municipality for the years 1995 and 1996 amounted to £877.297 and £1.034.030, respectively, compared to £779.625 for 1994. The expenditure for personal emoluments amounted to £455.649 for 1995 and £509.772 for 1996. (d) Accounting ratios. The following accounting ratios give a general picture of the financial situation of the Municipality: 1996 1995 1994 Current Assets to Current Liabilities 1,23 1,20 1,59 Personal Emoluments to Expenditure 49,3% 51,9% 49,2% Government Subsidy to Revenue 11% 3,9% 7,5%

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4.99.3 Budgets (a) Ordinary Budget. The Ordinary Budget of the Municipality for the years 1995 and 1996 was deficient by £248.620 and £180.850, respectively, contrary to the terms of approval of the budget set by the council of Ministers, which provide that the Ordinary Budget must be a surplus budget, for the self financing of part of the investment expenditure. (b) Development Budget. During 1995 and 1996 substantial expenditure amounts included in the Development Budget remained unspent, mainly due to the non-execution or the non- completion of projects. Actual Unspent Year Budget Expenditure amounts Deviation £ £ £ % 1995 540.000 126.911 413.089 76 1996 787.000 205.143 581.857 74

(c) Excess expenditure. Excess expenditure was observed during the years 1995 and 1996, which exceed the 20% of the approved budgeted amounts, for which the approval of the Council of Ministers was not secured, as provided by section 66(1) of the Municipal Corporations Law. 4.99.4 Fees for the supervision of the application of the terms for water supply. These fees which are collected on the issue of parcellation of plots licences are not covered by Regulations. As I was informed the Municipality and their legal adviser are considering as to whether such Regulations can be enacted. 4.99.5 Tolls for fruit markets. No tolls are collected for goods displayed for sale at fruit markets, as provided by section 122(1) of the Municipal Corporations Law. As I was informed, the Municipality believes that the collection of the above tolls is not worthwhile financial. 4.99.6 Pensions and Gratuities Fund. Contrary to Regulation 6/23 (S.L. 281/94), which provides that the contribution to be paid to the Pensions and Gratuities Fund is equal to 0,75% of the annual pensionable emoluments, up to an amount equal to the insurable emoluments, which are determined in accordance with the social Insurance Laws, and 1,75% of the annual pensionalbe emoluments, for amounts above the insurable emoluments, the employees of the Municipality contribute to the above fund 0,75% on the whole amount of their pensionable emoluments. As I was informed, the Municipality agreed with my observations and the contributions to the above Fund are made in accordance with the provisions of the Regulations.

4.100 IDALION MUNICIPALITY Part A 4.100.1 Accounts and audit. The Municipality has not yet submitted the final accounts for 1999 for audit, which should have been submitted up to the 30th April 2000, as provided by section 81(1) of the Municipal Corporations Law. 4.100.2 Financial position (a) Operating results. The accounts for the years 1997 and 1998 showed a surplus of £149.030 and £172.612, respectively.

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(b) Income. The income of the Municipality for 1997 and 1998 amounted to £834.269 and £1.096.444, respectively. The income includes government subsidy amounting to £209.454 for 1997 and £249.027 for 1998. (c) Expenditure. The expenditure of the Municipality for 1997 and 1998 amounted to £685.239 and £923.831, respectively. 4.100.3 Regulations. No Regulation have yet been approved governing the terms of service of employees and the financial administration and operation of the Municipality, as provided by sections 53(2) and 87(1) of the Municipal Corporations Law. 4.100.4 Financial Instructions and Stores Regulations. The Municipality has not adopted the above Instructions and Regulations, which have been prepared by a special committee, set up with representatives of the Municipalities and my Office. 4.100.5 Personnel. At 31.12.97 the Municipality employed 11 persons, out of which 4 in permanent posts, while 7 belonged to the labour force (3 permanent and 4 casuals), with total emoluments £75.260. At 31.12.98 the Municipality employed 16 persons, out of which 6 in permanent posts and 4 casuals, while 6 belonged to the labour force, with total emoluments £121.129. 4.100.6 Internal control. Serious weaknesses and omissions were observed in the systems of internal control, covering the various activities of the Municipality, with consequent observation of mistakes and irregularities, both in revenue and expenditure. 4.100.7 Concession of additional increments. The Municipal Council irregularly conceded additional increments to certain officers. According a relevant ruling of the Attorney General of the Republic, Municipal councils have to act within the provisions of the schemes of service and any act or action over and above and contrary to the schemes of service, applicable at the specific time, is not allowed. 4.100.8 Tolls for fruit markets. No tolls are collected for goods displayed for sale at fruit markets, as provided by section 122(1) of the Municipal Corporations Law.

4.101 LAKATAMEIA MUNICIPALITY Part A 4.101.1 Accounts and audit. The Municipality submitted late, on 14.9.2000, the final accounts for 1999 for audit, instead of up to the 30th April 2000, as provided by section 81(1) of the Municipal Corporations Law. The Mayor informed me that strict instructions have been issued to the finance Services of the Municipality, for the preparation and submission of the accounts to my Office for audit, within the provisions of the Municipal Corporation Law.

4.102 COMMUNITY BOARDS – GENERAL Part A 4.102.1 Establishment of community boards. With the enactment and implementation of the communities Law 86(1)/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 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. As a result the

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Auditor General undertook in addition to the audit of the accounts of the ex Improvement Boards, which had always been carrying out, the audit of the accounts of 281 ex Village Authorities. 4.102.2 Surprise surveys. During 1999 surprise surveys were carried out by my Office on the cash balances of Community boards. In certain Boards, during 1999, only one surprise survey was carried out and, in some cases, non at all, by the Chairman of the respective Board, instead of two, as provided by the Financial Instructions. 4.102.3 Excess expenditure. In some cases excesses were observed in Expenditure Votes, without the prior approval of the Boards/District Officers. For these excesses covering approval was later secured. 4.102.4 Cash balances. The cash balances at 31.12.99, of certain ex Improvement Boards exceeded by far the approved limits. From the deposits made in January 2000, it emanates that, in some of these, collections of taxes were made after the end of 1999, but dated 31.12.99, without the additional 25% surcharge, contrary to the provisions of the Law. The above procedure was followed by all the ex Village Authorities. 4.102.5 Schemes of Service and Staff Regulations of Community Boards. Losses have been observed where Community Boards irregularly place employees to salary scale steps higher than the initial or concede additional annual increments or/and place 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. 4.102.6 Deviation of tender procedure. In certain Boards the approved tender procedure for the purchase of goods or services, has not been followed. 4.102.7 Pensions and Gratuities Fund. Certain Boards pay a fixed amount each year, as contribution to the Pensions and Gratuities Fund, instead of contributory the amount provided by the Regulations. 4.102.8 Employment of casual employees. Several Boards often employ labourers for various works, without deduction from their emoluments of any amount, for purposes of contributions to the various funds. 4.102.9 Arrears of loan instalments. Some Boards have not paid their loan instalments at the specified dates, and were charged with overdue interest. 4.102.10 Water consumption – Arrears. To several Boards considerable amounts are due by consumers, without any measures taken for their collection. 4.102.11 Purchase of Water. Certain Boards use the collections from water supply fees for other purposes, and consequently they cannot settle the amounts due to the Department of Water Development or/and Government Water Projects. 4.102.12 Imposition of tax lower than the amounts provided by the Regulations. In certain Boards cases were observed where taxes imposed were lower than those provided by the Regulations. 4.102.13 Approval of posts as pensionable. Certain Boards approve posts as pensionable, without the prior approval of the Minister of Interior. The Ministry of Interior informed me that instructions were given the respective District Officers, to ensure that Community Boards operate in accordance with the provisions of the relevant Law.

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4.102.14 Central Community Boards Service. In each District a Central Community Boards Service operates, the purpose of which is the provision of services to the Boards. Although I suggested to the respective District Officers that for each Service separate accounts be kept and preparation at the end of the year of financial statement of income and expenditure for submission to my Office for audit, the Central Services, however, of the Community Boards Famagusta has not submitted accounts, whereas the Central Service Limassol submitted, in August 2000, accounts for the years 1988-1990 only. Furthermore, the Central Service of Community Boards Nicosia has not submitted accounts for the years 1988-1994, and, therefore, no audit could be carried out for the accounts of the following years, which were submitted, either. It was further observed that no Regulations were issued regulating all the issues relating to the operation and the employees of the Central Services, as provided by section 58(4) of the Communities Law. 4.102.15 Audit of Community Boards (ex Village Authorities). From the audit of a number of Community Boards (ex Village Authorities), which commenced, a few months ago, the following were observed: (a) The accounting system followed is based on the actual receipts and payments, which relate to one calendar year. In most cases, however, recordings are observed in the Cashbook of the receipts and payments, which were made in the following year, and consequently no coherence existed in the financial results of each year separately. (b) It was observed that, as a rule, the additional 25% surcharge in the payment of taxes, fees etc. as provided by the Law, whereas in most cases, to overcome this provision, the receipts are dated with the year ended, while the collection is made in the following year. As a result of this practice, huge amounts of cash are, theoretically, shown to be in the hands of Community Chairmen at the end of the year. This procedure is confirmed through the deposit of substantial amounts in Cooperative Institutions/Banks at the beginning of the following year. (c) The recordings of collections of Public Health and Water supply fees, are made, in many cases in total, with one recording at the end of the year, which shows the total amounts of tax registers, after deduction of write offs, decreases and arrears, without, however, taking into consideration the receipt books, according to which collections are made. This practice renders the audit very difficult, as collections are mainly verified through the receipts issued. My Office, therefore, is obliged to increase the audit percentages, up to 100%, in order to confirm the inclusion in the accounts of the amounts for which receipt vouchers were issued. In several cases differences are observed in the amounts of the receipt vouchers and respective recordings in the Cashbook, which are pointed out for the necessary corrections. 4.102.16 Enactment of Regulations. For the more effective and smooth operation of the Boards, several sections of the Law provide for the enactment of Regulations. In view of the seriousness of the matters which the Regulations are expected to regulate, 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 the procedure for the enactment of the above Regulations has been processed in order that the targets and objectives of the Community Boards will be better achieved.

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Part B 4.102.17 Provident Funds. In certain Boards Provident Funds operate without approved Regulations. 4.102.18 Collection of fees without Regulations. It was again observed that certain Boards collect various fees, which are not covered by Regulations. 4.102.19 Additional fee. According to the Communities Law, each Board imposes 25% additional fee 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 fee cannot be imposed. For this reason I recommended their amendment. 4.102.20 Arrears of taxes. It has been observed that there are still arrears of several thousands of pounds and I requested that the appropriate measures must be taken for their collection or write off. 4.102.21 Professional tax. It was again observed that in certain Boards no information is provided regarding taxpayers emoluments, which are necessary for purposes of verification of the professional tax. The Minister of Interior agreed with my observations and informed me that instructions have been given to the respective District Officers, to ensure that Community boards act within the provisions of the relevant legislation and comply with my observations.

4.103 AGIOS TYCHONAS COMMUNITY BOARD Part A 4.103.1 Bank accounts of the Board at the Cooperative Credit Society of Agios Tychonas. The bank account balances of the Board which were deposited, at 31.12.99, at Cooperative Credit Society of Agios Tychonas, which were frozen since 29.5.98, due to embezzlement, amounted, according to information provided by the Board, to £242.169. It was observed that the Board did not act properly, and did not take the necessary measures, including legal, in order to achieve the withdrawal of the above amount. 4.103.2 Amounts due to various Community Boards due to the abolition of Amathus Improvement Board. The Board contrary to S.L. 280/95, Regulation 3(iii) regarding the abolition of Amathus Improvement Board, fails to refund the amounts which emanated from collections made in 1995 for taxes, fees, rates or any other similar amount due. At 31.12.99 this sum amounted to £214.284. Agios Tychonas Community Board questions the obligation for the refund of 1995 collections to the various Community boards, and as a result certain of these (Community Boards of Pyrghos and Pareklisia) are taking legal measures against it. 4.103.3 Amount due to Government Water supply Project. The amount of £224.066 was due, at 31.12.99, to the Government Water supply Project. 4.103.4 Irregular employment of staff. According to the Villages (Administration and Improvement) Law, section 20(4), the Chairman of the Board may employ in the service of the Board “… any servants or labourers necessary for the execution of any works…” Taking advantage of the above section of the Law, the Chairman of the Board appointed a member of the Board as a specialised labourer for the execution of special duties, who finally carried out clerical duties, which are not in line with the duties of a labourer.

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With regard to the above appointment I expressed the view that the appointment was contrary to the provisions of the Law and entirely out of line with his position as member of the Board, as he had not previously resigned in writing. Later on the Board created the post of Technician, which was filled with the above person, while he was still a member of the Board, without previous proclamation of the post. In addition, in the same way he appointed a close relative as cultural officer, which, after the observations of the district Officer and my Office, renamed as specialised labourer. I expressed the view that the above appointment is not in line with the provisions of the Law and that the approved procedures for employment of staff were not followed. The Attorney General of the Republic, in a relevant ruling to the Director General of the Ministry of Interior, characterised the above appointments legally faulty and requested their annulment. As the Board, based on the advise of its legal adviser, decided that there is no reason for the annulment of its decisions, the District Officer Limassol referred the matter to the director General of the Ministry of Interior, either for the examination of the possibility regarding criminal responsibility, or for purchasing the procedure for a decision to be taken by the Minister of Interior, according to the provisions of the Law.

PUBLIC CORPORATIONS AND OTHER ORGANISATIONS

4.104 INDUSTRIAL TRAINING AUTHORITY Part A 4.104.1 Financial position (a) Operating results. The accounts of the Authority for 1999 showed a deficit of £1.418.492, compared to £311.069 for 1998, i.e. there was an increase of the deficit of £1.107.423 or 356%. (b) Income. The income of the Authority was £6.636.211, compared to £6.711.714 for 1998. It does not include the amount of £280.269, which represents industrial training fees and fines due by employers, against whom a court decision has been issued. (c) Expenditure. The expenditure amounted to £8.054.703, compared to £7.022.783 for 1998. The increase of £1.031.920 is mainly due to the expenditure for the training programmes (£820.106). (d) Accounting ratios. The following accounting ratios give a general picture of the financial position of the Authority: 1999 1998 Current Assets to Current Liabilities 62 153 Personal Emoluments to Expenditure 18% 19% Industrial Training Expenses to Expenditure 74% 73% Deficit to Capital Employed 12% 2%

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4.104.2 Personnel. The permanent posts of the Authority, at 31.12.99, were 83, out of which 14 were vacant. The total emoluments of the staff, including employers contribution to the various funds, amounted to £1.486.655, compared to £1.368.900 for 1998, i.e. there was an increase of £117.755 or 8,6%, which is mainly due to the annual increments and the increase of cost of living allowance. At 31.12.99 four casual assistants were employed on a four months basis and a regular female labourer. The average expenditure per employee amounts to about £20.000.

4.104.3 Budget (a) Approval. The budget of the authority for 1999 was enacted into a Law, which was published in the Official Gazette of the Republic on 16.4.99, despite the fact that it was approved by the Board of Management of the Authority and submitted to the appropriate Authorities since early September 1999. Also, a supplementary budget for £900.000, for continuous training programmes was approved by the House of Representatives and published in the Official Gazette of the Republic on 12.11.99. For the period of January and February 1999 duodecimals were approved, but for the period of March 1999 up to April 1999 expenditure was incurred without authorisation. (b) Deficient budget – Use of budget. The approved budget of the Authority for 1999 was deficient by £2,4 m., whereas the deficit according to the actual revenue and expenditure through the use of the budget was £1,3 m. Deficient were also both the budget and budgeted results during 1998. As the budget for the year 2000, which was expected to be approved by the House of Representatives, showed a deficit of the region of £1,3 m., I expressed the view that all necessary measures must be taken, so that the financial administration of the Authority is carried out in such a way in order to avoid future viability problems and safeguard the smooth and unhindered provision of services. The Chairman of the Authority stated that the preservation of deficient budgets during the last three years formed one of the strategic objectives of the Authority, in order to satisfy increased needs for training and promotion of new schemes and activities, through the use of its cash surpluses. He further pointed out that the objective of the authority is not the accumulation of cash reserves, but the disposal of its resources for the fulfilment of its mission, and the keeping, at the same time, of an acceptable limit of reserves for facing emergency needs. 4.104.4 Continuous Training Programmes – Multi business – Ordinary and of Vital importance to Cyprus. (a) Differences between the submitted and approved programmes. It was again observed that the information relating to Multi business Continuous Training Programmes – Ordinary and of vital Importance to Cyprus, submitted and approved by the director General, which are kept separately in the General Files, do not agree with the respective computerised statements. The Authority informed me that these differences have been investigated and are, mainly, due to mistakes in the use of codes, regarding programmes which have been withdrawn or cancelled and to programmes which by mistake were not included in the list submitted to the director General for approval, but are referred to as approved in the Authority’s letter to the Institutions. My relevant recommendation that no covering approval should be granted by the

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Director General to out of date applications, except in very special cases, has already been implemented. (b) Programmes withdrawn or cancelled/suspended by the Institutions. It was observed that during the first half of 1999, out of the 1077 Multi business Programmes and Vital Importance to Cyprus, which were approved by the Director General, 3999 programmes or 37% were cancelled or suspended by the Institutions, whereas 48 programmes initially submitted to the Authority, were withdrawn before their final approval. For the second half of 1999, out of the 833 approved programmes, 159 programmes or 19% were cancelled or suspended by the Institutions before their final approval. The Authority informed me, inter alia, that, within the pursued Regulations for the Payment of Grants, various measures are being considered, including an examination of programmes fees, in order to deter Institutions from submitting a large number of programmes for examination. (c) Programmes of the first and second half of 1999, which have not been cleared. A large number of programmes and specifically 1 011 programmes for the first half year of 1999 or 96% of the approved, and 439 programmes for the second half of 1999, or 54%, have not yet been cleared. Several of these programmes have already been completed, while other were cancelled by the Institutions, without, however, the proper updating made of the computerised system of the programmes. I recommended that all the necessary measures be taken so that Institutions submit, immediately after the expiry of the six months period, the statement of training activities, in order that no delay will be observed in the updating of the computerised system for the programmes, with the programmes cancelled by the Institutions. The Authority informed me that it will intensify its efforts for the prompt submission of the statements by the Institutions, so as the updating of the computerised system for programmes will not be delayed. Also within the framework of the pursued Regulations for the Payment of Grants, the Authority proposes to determine a six months period, from the last day of the month during which each programme expires, for the submission of an application for the payment of the grant. 4.104.5 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 on the part of the Institutions of the training programmes included in the Agreement signed with the Authority, which they undertook to implement, in return, and for the refund of part of the amount they received from the Authority. The Authority informed me that the decrease observed in some cases in the degree of implementation of programmes included in the Agreement is due, inter alia, to the weakness of Institutions to implement all the programmes, the substantial decrease of programmes approved and to the differentiation of subjects, which are considered as priority subjects by the authority, for purposes of approval of programmes. He informed me further that, in the case where delay is observed in the degree of implementation of programmes and the return of amounts due, the Authority follows a relevant procedure, which has been processed by its legal adviser.

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Part B 4.104.6 Enactment of Regulations. The processing of the enactment of Regulations governing the payment of grants was pending, due to the delay in the approval of the new legislation of the Authority, which was finally approved and published on 1.11.99. The Authority informed me that the preparation of Regulations has been completed and these are being processed by the legal adviser of the Authority. 4.104.7 Apprenticeship system in Cyprus. As I stated in my Report for the previous year, the council of Ministers decided on 19.2.97 that the expenditure for the operation of the apprenticeship system be undertaken by the Authority and requested the Minister of Labour and social Insurance to take the necessary measures for the implementation of this decision. As I was informed, the Ministry of Labour and Social Insurance invited tenders for the carrying out of a study by an expert consultant, regarding the future role, objectives and operation of the apprenticeship system. The Authority informed me that the tender for the appointment of an expert consultant for the carrying out of the above study has been awarded on the 1st June 2000 to a group of consultants of the Research and Development Centre Intercollege. The signing of the relevant contract is expected soon for the commencement and completion of the project within six months from the date of signing of the contract.

4.105 ELECTRICITY AUTHORITY OF CYPRUS Part A 4.105.1 Audit of the accounts. The accounts of the Authority for 1999 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 of 1983 and 1984. In accordance with the provisions of the same Law, additional financial and management audit was carried out by my Office. 4.105.2 Budget (a) Approval. The Authority’s budget for 1999 was submitted to the Minister of Commerce, Industry and tourism on 31.7.98 and, after consultations with the Ministry of Finance, it was approved by the Council of Ministers on 3.3.99 and was submitted to the House of Representatives pursuant to section 3 of the Public corporate Bodies (Approval of Budgets) Laws. The budget was enacted to a Law, which was published in the Official Gazette of the Republic on 30.4.99 (22(11)/99). For the months of January and February duodecimals were approved, for the period, however, of March up to April 1999 expenditure was incurred without authority. The Chairman of the Authority informed me that it was not considered appropriate for the Authority to lease operations due to delayed approval of the budget. (b) Unspent amounts of the Development Budget. While the budgeted expenditure for 1999 was £96,2 m., the actual expenditure amounted to £76,4 m., i.e. the amount of £19,8 m. or 20,6% remained unspent, mainly due to the non execution or non completion of the following projects:

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Vote Budgeted Unspent

Capital amount amount Expenditure £m. £m. 4/509 Vasiliko Station, Units 3 & 4 1,2 1,2 4-510 Improvement of Moni Station 0,1 0,1 4-512 Improvement and Extension of transport network 11,0 7,6 4-518 Improvement and Construction of buildings and premises 4,2 3,6 4-528 Information System 3,1 2,9

The Chairman of the Authority informed me that the difference between budgeted and actual expenditure is due to the considerable time period between the preparation and execution of the budget and also to other factors, which are beyond the control of the authority. 4.105.3 Financial position (a) Operating results. The accounts show a surplus of £26,09m. before taxation. In summary the operating results for the last two years are as follows: 1999 1998 £m. £m. Income 129,69 117,05 Expenditure 103,60 81,57 Surplus 26,09 35,48

(b) Accounting ratios. The following accounting rations give a general picture of the financial situation of the Authority for the last two years: 1999 1998 Current Assets to Current Liabilities 1,13 1,76 Surplus to Capital Employed 6,75% 8,88%

4.105.4 Pension Schemes (a) The Authority’s contribution to the employees Pension Schemes for the last two years were as follows: 1999 1998 £000 £000 For current service 5.066 4.845 For past service 2.485 2.486 7.552 7.331

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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. (b) Selection of Pension Scheme. With the amendment of the Regulations of the Pension Scheme effected in 1990, the employees had the right, either to join the non-contributory Pension Scheme, or remain with the Authority’s contributory Pension Scheme. The majority of employees selected the non-contributory Pension Scheme, while with the contributory Pension Scheme remained 17 employees, who reserve the right to change over to the non-contributory Pension Scheme at the time of their retirement. 4.105.5 Employees - Salaries, allowances and employer’s contributions. The authority employed 2 107 persons (2 064 for 1998), out of which 1 942 (1 955 for 1998) were serving in permanent posts and 165 in temporary posts. The expenditure for salaries, allowances, overtime and employer’s contribution for the last two years are shown in the following table: 1999 1998 £000 £000 (a) Permanent employees Salaries and cost of living allowances 22.986 21.940 Other allowances and overtime 2.940 2.591 Employer’s contributions 2.486 2.381 Employees’ benefits 2.284 2.252 Contribution to Pension Fund 7.552 7.331 38.158 36.495 (b) Temporary employees: 888 866 39.046 37.361

Based on the above data, the average cost of the permanent employees, without taking into consideration the deficient contribution to the Pensions fund, was as follows: 1999 1998 Increase £ £ % 18.369 17.396 5,59

4.105.6 Personnel benefits. The personnel benefits for the last two years are, analytically, as follows: 1999 1998 £ £ Medical Fund 1.090.713 1.065.871 Welfare Fund 469.959 452.541 Benevolent Fund 208.408 212.578 Scholarships Scheme 146.900 138.400 Canteens Subsidy 114.991 158.949 Interest subsidy on educational loans 83.667 38.195 Group Life Insurance 138.098 155.479 Personal Accident Insurance 31.239 29.747 2.283.975 2.251.760

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4.105.7 Development Programme of the authority 1995-2003. After the disagreement which occurred with Development Bank (former social Development Fund) of the Council of Europe, as to the interpretation by the appropriate body of the 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 £15 m. from the local banks. At the same time approval was secured from the Parliamentary committee for the Budget and finance for the raising of a loan amounting up to 50 m. Euros. Furthermore, in January 2000 the Authority submitted a third application to the Development Bank of the Council of Europe for withdrawal of 37 m. Euros, as per the proportion of the approved loan for the Development Programme and the expenditure of the Authority regarding transport and Distribution projects. 4.105.8 Early retirement scheme. After the approval of the Amendment Regulation 29A of the E.A.C. (Conditions of Service) Regulations of 1986-1996, the authority may, with a relevant decision, allow an employee, who has completed the age of 50 years and, at least, 25 years actual service, to retire early. Since the date of publication of the Regulation (19.4.96) up to the end of 1999, 93 persons have retired for a total expenditure of £1.410.383. Analytically the number of retirements for each year, with the relevant expenditure, are shown in the following table: Number of Year Expenditure retirements £ 1999 31 500.849 1998 25 398.653 1997 28 414.138 1996 9 96.743 93 1.410.383

4.105.9 Cash and Bank balances. The cash and bank balances of the Authority, at 31.12.99, amounted to £4,5 m., out of which the amount of £2,5 m. was deposited in commercial banks, in one year notice accounts and 6,5% interest. 4.105.10 Taxes imposed by Local Authorities. Several Local Authorities (Community Boards, Municipalities and Sewerage Boards) impose to the Authority several taxes and fees, such as immovable property taxes, refuse taxes, operation taxes, sewerage fees etc. The reason these taxes are imposed is that in the regions of the above Local Authorities substations or other premises operate, where, however, no staff is employed. I have been informed that amendment of the relevant legislation is pursued, for the Authority to be relieved from the payment of the above taxes and fees. 4.105.11 Financing of development projects in the seven Communities of Vassilikos Area. The Board of Management decided, on 21.12.99 (decision No. 8309) that the Authority will deposit financial assistance amounting to £8 m. to the name of the communities, in interest bearing accounts, selected by the Communities in consultation with the district Officers. Eligible for the interest will be the Communities and withdrawals will be made on the approval of the District Officer and the authority.

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4.105.12 Rural Policy Scheme. Since 1990 the charging policy for rural areas, aiming at the revitalisation of rural areas and the keeping of population in the country, is subsidised through a special vote approved by the House of Representatives. The subsidisation of the charging policy aims at the reduction of the applicant’s contribution for electricity supply in rural areas, in such a way, so the Authority will undertake the greater part of the required expenditure. An examination carried out, on the recommendation of my Office, revealed that the District Offices of Nicosia, Kyrenia and Morphou have reconsidered cases, in which electricity was supplied under the rural Subsidy Policy and for which it was not certain that the applicants, did in fact, fulfil the necessary criteria. In five of the cases reconsidered, the refund of the subsidy amounting to £5.136,56 was requested. The amount reclaimed was from Nicosia District only. I asked to be informed whether such an examination was carried out in the other Districts also and of the relevant results. As the Chairman of the authority informed me, investigation was carried out in other Districts but no irregularities were observed. Furthermore, the E.A.C. in the draft amendment Bill which was finally approved by the House of Representatives on 3.12.99 had included a provision for the refund of the subsidy in case the applicant did fulfil the criteria. The above provision was finally removed, but the Authority includes this provision in the agreements with the applicants. 4.105.13 Repayment facilities to non domestic consumers for capital contributions. Under decision No. 5600 dated 2.2.88, the Authority concedes the non-domestic applicants the facility of repayment of the required capital contribution for power supply to their premises, by two monthly instalments. From an audit carried out at the District Office Nicosia, cases have been observed where consumers delay for long periods of time the repayment of the instalments, and as a result of the Authority becomes involved in a time consuming process for the recovery of the required contribution. Examples are shown below: (a) Account No. Amount £ 818 96 06300 50 8.818,30 414 01 80000 20 15.131,17 After a revision of the existing policy, in February 1999, the new policy requires the submission of a bank guarantee for the amount to be repaid by two monthly instalments. (b) Legal action against “Klatsias Developments Ltd”. Against the above company a lawsuit was filed on 4.3.999 (law suit No. 2693/99) for amounts due to the Authority since 1993 for power supply to new building plots of the company at Dhali. While initially accepted the Authority’s conditions and deposited the down payment, finally ceased to pay the instalments since 1995, and consequently on the day of the lawsuit, the amount due was £37.083 plus interest. I hold the view that legal measures against the above company should have been taken much sooner and not after a period of 3-4 years. In addition I recommended that the possibility of exercising pressure, should be considered, on the new company established by the owner of the above company, in consultation with the legal advisers of the Authority.

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4.105.14 Crude oil tests at the laboratory of Dhekelia Power supply Station. According to a report of the Internal Auditor for the period 1.7 – 30.9.99, variations were observed between the results of the tests of the Authority’s laboratory at Dhekelia station and those of the independent laboratories SGS Redwood. In some cases the Authority’s laboratory test showed that the crude oil received regarding asphalting, surplus and density, varied considerably from the specifications of the contract. I hold the view that, in cases where the results of the Authority’s laboratory vary considerably from the tests of the independent laboratory, a test of the arbitration sample must be requested. If the tests of the Authority’s laboratory are not considered reliable, then the necessary measures must be taken for the establishment of a reliable laboratory. The Chairman of the Authority informed me that the results of the laboratory are considered reliable, but at the same time improvement is prepared of the procedure of submission of arbitration samples abroad, in cases where the test of the Authority’s laboratory differs from that of the independent laboratory. 4.105.15 Claim of Glencore for Gross Calorific Value. The supplier of the authority for crude oil Glencore International claimed compensation amounting to £200.000 for a mistake made by the independent laboratories on Gross Galorific Value” during the last two years. As I was informed the Authority rejected the claim, because there was no arbitration sample, as this was destroyed due to the long time lapse. 4.105.16 Recording of meters (a) Electricity invoices with substantial variations. The computerised centre of the authority issues a daily statement, which shows consumers with substantial variations in electricity consumption, which is submitted to the Recording of Meters Branch for examination. I believe the system must be improved, in order to show which cases have been examined the way of examination, the results etc. The Chairman of the Authority informed me that an examination is carried out for all monthly consumers, while for the remaining it is carried out for those showing substantial differences, because it is considered uneconomical to carry out examinations for all those presenting minor differences. (b) Recording of retrospective consumption. Cases have been observed where, for several two monthly periods, reduced consumption is recorded, either due to a faulty counter of the meter, or the disc of the meter is turning, without, however, recording the consumption, resulting to the submission of invoices with reduced or fixed charge. During 1999 61 such cases have been spotted, compared to 67 for 1998. I asked to be informed of the action the Authority takes for the verification of such cases, considering the fact that the recording is carried out every two months, as well as the way of estimating the financial charge of the estimated retrospective consumption. The Chairman of the Authority informed me that there are 370 000 customers all over Cyprus, and that there are specific instructions to the meter readers to be very careful in the cases of meters with reduced recordings due to faults or other reasons. 4.105.17 Wrong recording of meter indications. On the request of a consumer, in November 1993, for the transfer of his account to another name, it was observed that the charge of the consumers account, for the period from the day of connection to September

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1992, was reduced by £28.843,87. The low charge was the result of a mistake in the recording of the multiplication factor of the indications of the respective meter reading system, and consequently the consumer was charged with the 1/10 of the chargeable consumption. As I was informed the consumer refuses to pay the above amount and the Authority has taken legal action against him, under lawsuit No. 1150794. The hiring of the case was fixed for 9.11.2000. 4.105.18 Stores materials. (a) Variations in the materials, which are recorded in the computerised system. During the transfer from the old to the new computerised system of keeping stocks, the carrying out of a detailed physical stocktaking (100%) was decided of all the codified stores materials. The physical stock counts have revealed substantial variations, as shown below: Store Deficiencies Surpluses £ £ Nicosia/Kyrenia District 1.996,33 23.410,80 Limassol/Pafos District 71.738,61 62.221,77 Larnaka District 17.829,59 36.280,94 91.564,53 121.913,51

The Chairman of the Authority informed me that the differences are due to wrong recordings, which will be corrected when the quantities counted will be finally recorded in the accounting books. (b) Materials, which are not recorded in the stores computerised system but in a cards hand written system. As I stated in my Report for 1998, it was observed that a large number of materials (amount 1 500 items), valued at £1.051.637, up to 31.12.98, are not recorded in the stores computer system but in cards, which are kept at the Main Offices of the Authority. For an amount of £271.207, which is included in the above amount and relates to the substation “Dhekelia A”, provision has been made for its write off. As the Authority assured me, in reply to my previous reference of the matter, the introduction of information to the new computerised system for the administration of materials has already commenced. As I was informed, the physical stocktaking and comparison with the existing information is being continued and has not yet been completed up to this day. (c) Materials, which are not utilised. Various machinery items and stores materials of considerable value are in the stores for years, without being utilised. I recommended that a special investigation be carried out for the verification of all cases of machinery/materials etc., for the purpose of: i. The verification of the reasons that warranted their purchase, and ii. The ways with which the Authority prepares to utilise the above materials. In addition I recommended that the above materials be separated in maintenance materials and materials for network development. Materials, which are purchased through a tender as part of new equipment installed, could be depreciated with the equipment, independent of their use or not. It is understood of course that these materials should be kept separately and reference should be made to the equipment they support.

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As the Chairman of the Authority informed me, there are materials, which have not been used for several years, because they are considered as necessary stock. Also, part of the materials is expected to be used in the following 2-3 years. 4.105.19 Purchases without tenders (a) Order No. 242/99. Under this order, in December 1999, 180 oil switches, together with other spare parts, of total value St£207.960, from the English company W. Lucy & Co. Ltd, without invitation to tenders. Similar switches had been purchased around the end of 1998, after international tender No. 340/98, but at prices about 5% cheaper. According to a report of the appropriate committee, the oil switches should have been purchased from the same manufacturer who supplied the loop switches. On the basis of the above the following questions must be answered: (i) Why under tender 340/98 only 50 switches were ordered and a few months later 180 switches were ordered, without tenders. (ii) Why are tenders not invited, at the same time, for loop switches and oil switches, for the purpose of securing better prices. (b) Order No. 241/99. Under this order, in October 1999, 180 olive switches were purchased and other spare parts of total value of Stg£275.310. The purchase was made from the English company Alstom Long & Crawford. According to a relevant report of the technical committee, in the distribution system of the Authority loop switches are installed from the companies W. Lucy and Alstom Long & Crawford, therefore the oil switches should come from the same manufacturer. The following questions are raised: (i) Why were tenders not invited initially for all switches. (ii) Why a satisfactory number of oil switches was not ordered under the international tender No. 340/98. (c) Cases of purchase of equipment and other parts of high cost, without tenders, have been observed in the past and have been included in my previous Reports. The Chairman of the authority informed me that with regard to the above two orders, at the time of invitation of international tender No. 340/98 the stocks had been considered satisfactory and the purchase of additional quantities would create idle stocks and occupation of valuable space in the Stores. 4.105.20 Tender No. 348/98. The above tender included totally 35 items (galvanised materials) separated in 5 groups. Group No. 3 included items 22-32 and was awarded to the company “Modern Malleables” of India, for a total amount of £140.849. Company “B.B. Price Ltd” of England was placed second, but was awarded additional order for items 23, 24 and 31 for a total amount of Stg£52.286. According to the tender amounts, if these items had been purchased from the successful tenderer, the respective amount would be U.S.$54.873. As this practice was followed in other tenders also, I recommended that in the contracts a term is included providing that, any additional cost resulting from the non-execution of a tender, is charged to the supplier. The Chairman of the Authority informed me that the additional purchases were made because the “Modern Malleables” factory in India was striken by a cyclone and a delay was observed in the delivery of materials.

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4.105.21 Tender for the excavation of ditches in Limassol District, Tender No. 1309/1999, and Tender No. 349/98 Excavation of ditches in Nicosia District. From the audit of the documents and the evaluation report of the tender 1309/99, it was observed that the Technical committee of the authority recommended the award of the tender to a company, which is not registered in the Contractors Register. I observed that this action is contrary to the provisions of the documents of the tender and the provisions of the Registration and Control of Contractors Law. In his reply letter the Manager of Transport/Distribution of the authority informed my Office that my observations have been noted and will be followed in future competitions of the Authority. The same way and to the same company tender No. 349/98 was awarded (excavation of ditches and placement of underground cables in Nicosia District). From an examination of the file of the tender it was observed that on 17.1.2000 both the Legal Adviser of the Authority and the Legal/Asset Secretary advised that the above company “had no legal right to participate in the competitions under reference and should have been disqualified from the beginning”. They stated further that the authority was obliged to recall immediately both administrative acts (meaning the tenders 1309/99 of Limassol and349/98 of Nicosia) without this being done. Also, against the decision of the Authority for tender 1309/99 recourse No. 245/2000 to the Supreme Court has been filed. The Chairman of the authority informed me that for the award of the competition it was taken into consideration that these companies cooperated with other, which were registered in the Register of Contractors. He stated further that a relevant report has been prepared for securing the necessary approval from the appropriate bodies of the Authority, for the annulment of the decisions and proclamation of new competitions. 4.105.22 Vassilikos Power supply Station. (a) General. The project consists of 11 contracts with total expenditure, according to contract prices, £142.864.238. The cost of the works is expected to increase by £5,5 m. due to changes in the designs, while the various contractors have submitted or propose to submit claims amounting to about £15 m. Unit No. 1 was connected with the Authority’s System on 20.12.99, presented problems, was disconnected and has not yet been connected. The commercial operation of the unit is estimated to be transferred from 18.11.1999 to June 2000, with a delay of 7 months, while the commercial operation of unit No. 2 is estimated to be transferred from 17.2.2000 to June 2000, with a delay of 4 months. (b) Civil Engineering Works, Contract No. 302/96. The cost of works, which according to the contract is £21.934.000, is expected to increase by about £3 m. The additional cost is mainly due to the increase of the size of the buildings and the bases of the turbo generators, because the initial designs did not correspond to the requirements of the equipment and the machinery of the station, which were awarded under separate tenders. The contractor is expected to submit claims for compensations, for delays and other matters amounting to amount £7,8 m. (c) Delays. Considerable delays have been observed in the project, which are due to changes, and also due to the contractor. In the meantime, as the delay of the projects influences the progress of other contracts and the completion of the Station, the Authority came to a special agreement with the contractor for the acceleration and prompt completion of the various parts of the project.

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4.105.23 Construction of building and other works at Anatoliko Substation. From an audit of the Final Account a contradiction was observed in two provisions of the contract regarding the unit prices used plus/minus purposes, which affects the costing of changes. For the avoidance of similar problems, my Office recommended that the provisions of the contract be clarified, so that the invoicing of changes and plus/minuses is effected on the basis of unit prices submitted by tenderers and which must be in line with the total amount of the tender. The above recommendation secures the interests of the Authority and is in line with the appropriate practice. It was further observed that substantial changes were made in the outside works (valued about £49.000) without the approval of the employer. In my view, changes of designs and specifications, beyond a specified amount, should be examined and approved by a Special committee. The Authority informed me that agrees with the recommendations of my Office and has proceeded to the amendment of the tender documents. At the same time the board of Management of the authority decided that the alterations in projects are approved, according to the amount of the expenditure, by the Project director, the appropriate Head of department or by a Committee consisting of the Director General of the Financial Controller and the appropriate Head of Department. 4.105.24 Comprehensive Insurance cover for the Authority’s property. With the expiry of the contract for the above insurance and on my recommendation, the Authority decided to renew the cover through tenders, instead of through insurance representatives. After a competition the tender was awarded directly to the insurance company American Home Insurance Co. As a result of the above action a decrease was observed in the insurance premium, from £280.989 for the period 1.1.98 – 31.12.98 to £200.906 for the period 1.4.99 – 31.3.02. Part B 4.105.25 Revision of Schemes of Service – Amendment of Schemes of Service of Accounting Officer and Clerical Officer (salary scales A8-A9). According to amendments of the above Schemes of Service, employees with total service of 10 years in the post of Clerk or/and in the previous posts of clerk 1st and 2nd grade are eligible for promotion to the posts of Accounting or Clerical Officer. Also, where the number of applicants is smaller than what is provided for in the Regulations, applications will be accepted from employees with eight years total service. This had resulted to the promotion of several officers from salary scales A2-A5- A7 to salary scales A8-A9, with considerable charge on the Authority’s Votes. In my Report for 1998 I expressed the view that the amendment of basic provisions of the schemes of service (except in the case of amendments for a category of posts with agreement of the Authority and the Unions) must be approved by the House of Representatives. The view of the board that the amendments are not subject to approval by the House of Representatives, according to Law 157/90, coincides with the advice of the legal advisers of the Authority, which was expressed in their letter dated 8.6.99. I recommended that for reasons of virtual administration, the revisions or amendments of Schemes of Service should be submitted for approval to the House of Representatives, after the necessary amendment of the Law is made. 4.105.26 Overtime pay of senior officers of the Authority. Up to now no Regulations have been approved, as I recommended in previous letters, specifying the conditions under which overtime will be paid. The lack of Regulations led in the past to convictions against the Authority for overtime relating to ex Managers of Directors General. Relevant to the matter is

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the ruling of the Legal adviser of the Authority under reference EAC/1193/LS dated 17.11.98, where it is clearly stated that “… only with a relevant amendment of the Regulations certain limits can be set in the exercise of the right for overtime pay….” The Chairman informed me that the matter of overtime is under consideration in the process of the revision of Regulations, which is in progress. 4.105.27 Tender 305/95 – Steam boilers and relevant equipment – Vassilikos Power supply Station. The above tender was awarded on 21.2.97 to the company “Austrian Energy” for a total amount of £34.963.157, which includes discount, under recent rates amounting to about £493.000 (ATS 11.700.000). The Authority claimed additional discount amounting to about £1.353.000, which the company did not accept, resulting to agreement that the matter be referred to arbitration. The bank guarantee, which had to be deposited by Austrian Energy, was deposited on 25.8.99, with expiry date 31.10.2000, while the matter of arbitration remains pending. 4.105.28 Wrong meter recording. In August 1974 new meters were installed at the premises of a mining company. An examination of the meters carried out in April 1988, revealed that the recordings shown were lower than the actual, resulting to wrong charges. The Authority estimated the power supply not charged to £874.334 and requested the company to pay this amount, plus interest. The hearing of the case was completed with the presentation of the final speeches of two sides. The Court reserved its decision. 4.105.29 Outstanding claims of the Authority from suppliers and insurances. With regard to the insurance claim MC-4-91 Voest Alpine Interlarding Austria, amounting to £19.316, from Orphanides and Murat, the Legal Advisers of the authority hold the view that the claim through legal course is not advisable, because of possible weakness in proving the claim, and also the relevant expenditure could possibly exceed the claim. The Authority set off the amount of £15.499,20 against amounts due to Orphanides & Murat regarding insurance premiums before 31.12.97. As I was informed, the balance of the Authority’s claim amounting to £3.816,62 was written off in 1999. 4.105.30 Third party insurance policy. With the expiry of the contract of the above insurance policy, two types of tenders were proclaimed, one with the right for termination of the contract and one without such a right. The tender was awarded to the insurance company, with the right of termination of contract, due to lower cost. As a result of my recommendation, that the terms of the contract should allow the Authority sufficient time for the proclamation of tenders, the relevant provision has been amended and the deadline of 7 days notice was changed to 30 days. 4.105.31 Delay in the settlement of claims by an insurance company. After the power supply failure in about 2/3 of Cyprus, which occurred on 5.8.96, claims were submitted by consumers for compensations amounting to £190.269. Finally the Authority paid the amount of £77.017, while two cases regarding a total amount of £25.171, are still pending and handled by the Legal Advisers of the Authority. On 25.5.98 a claim was submitted to the insurance company for the amount of £92.017 (£77.017 which was paid, plus £15.000 for the expenses of the Authority). This amount has not yet been collected. Through an out of court settlement the Authority collected on 20.4.99 the amount of £50.000 for the full settlement of the matter.

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4.105.32 Fire and other risks insurance. The Authority signed a contract for the period 1.1.91 – 31.12.95 with insurance companies for the insurance of all buildings, machineries and stocks, against fire and other risks. In September 1993 the two insurance companies notified the Authority that they intended to terminate the contract as from 1.1.94. The Authority before the danger of remaining without insurance cover, proceed to the signing of new contracts with new insurers for a five year period, with increased premiums, resulting to an additional charge of £120.000 for the years 1994 – 1995. The case is pending before the court and, while it was fixed for further hearing on 10.5.2000, the two insurance companies appeared willing for an out of court settlement. 4.105.33 Interest free loans to employees for the purchase of motor vehicles. In May 1994 an agreement was reached with the Employees Union for the revision of certain conditions governing the grant of the above interest free loans, such as the amount of the loan, the number of monthly repayment instalments etc. The agreement was immediately implemented, without, however, any relevant amendment of Regulation 43 of the Electricity Authority of Cyprus (Conditions of Service) Regulations of 1986, regarding this matter. As I was informed, the procedure of submission of the above Regulation, and some other as well, to the House of Representatives for approval is, for several years, pending. 4.105.34 Travelling expenses abroad. In my previous Reports I pointed out that all the expenses relating to travelling abroad are shown under the same Vote of the Budget, instead of being charged to various Votes. In his reply the chairman of the Authority stated that the matter would be considered with the introduction of the new Information Technology System. I observed that although the Information Technology System has been implemented in March 1999, the previous is, however, still continued. The chairman of the Authority informed me that the Authority decided to implement my recommendation. 4.105.35 Study for the reorganisation of the authority. The authority has assigned to a foreign firm the preparation of a study for the reorganisation of the Authority, for the amount of £158.000, which, however has not been utilised. The Chairman of the authority informed me that the consideration of the study by the Board of Management has commenced. 4.105.36 Purchase of land by the Electricity Authority for the construction of Offices in Limassol. The Council of Ministers under decision No. 48.611 dated 5.11.98, approved the agreement reached between the Minister of Commerce, Industries and Tourism and the Bishopric of Limassol. The Bishopric of Limassol returned to the authority the amount of £1.100.000 on 28.9.99, while on 27.9.99 registered in the name of the Republic of Cyprus nine plots of land valued at £325.415, which amount has not yet been refunded to the Authority. 4.105.37 Compatibility of equipment or/and software for the year 2000. The Authority assigned to foreign consultants the submission of a study for the compatibility of equipment/software in the year 2000, for the amount of Stg£175.000. The Report was completed in June 1999 and was submitted to the authority in July 1999. According to the findings of the report, the authority was not expected to face, and actually did not face, any problems. 4.105.38 Contracts register. Despite the assurances that with the introduction of the new information technology system my recommendation for the keeping of a contracts register, would be adopted, the necessary action, however, towards this purpose, has not been taken.

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4.106 STATE FAIRS AUTHORITY Part A 4.106.1 Financial position (a) Operating results. The accounts showed a surplus of £256.971, compared to £194.376 for 1998, i.e. there was an increase of £62.595 or 32,2%. The surplus emanated after the deduction of corporation tax and defence contribution of a total amount of £79.780, for a contingent liability of the Authority up to 31.12.99. It is pointed out that the accounts for 1999 and 1q998 do not include a provision for deferred tax, the relevant calculations of which, for both years, had not been completed up to the date of preparation of my report. (b) Deficit in working capital. At 31.12.99 the current liabilities of the authority amounted to £723.049, whereas the current assets were £722.269, i.e. there was a deficit in the working capital amounting to £780 (£226.074 at 31.12.98). (c) Revenue. The revenue of the Authority, excluding government subsidy, amounted to £1.794.362, compared to £1.689.508 for 1998, i.e. there was an increase of £104.854, or 6,2%, which is mainly due to the increase of income from participation fees (£124.170). (d) Expenditure. The expenditure amounted to £1.518.302, compared to £1.506.515 for 1998, i.e. there was an increase of £11.787 or 0,8%. (e) Long term liabilities. The long term liabilities of the Authority amounted, at 31.12.99, to £684.090, compared to £827.100 for 1998. (f) Government subsidy for interest. Government subsidy for interest on loans, in 1999, amounted to £60.691,for 1998. (g) Government guarantees. At 31.12.99 there were government guarantees amounting to £951.711, in respect of loans from the Bank of Cyprus (£193.489), the Central Cooperative Bank (£602.000) and for a claim of interest on an old loan from the Popular Bank (£156.222). The respective amount for 1998 was £1.135.383. (h) Accounting ratios. The following accounting ratios give a general picture of the financial position of the Authority: 1999 1998 Current Assets to Current Liabilities 1,00 0,70 Personal Emoluments to Expenditure 37,9% 36,5%

4.106.2 Budget (a) Delay in the approval of the Budget. The Budget of the Authority for 1999 was promptly approved by the Board of Management of the Authority on 28.7.98 and was submitted to the Minister of Commerce, Industry and Tourism on 29.7.98. According to the Public Corporate Bodies (approval of Budgets) Law, the Budget of the authority should have been submitted to the House of Representatives up to 30.9.98, while it was submitted on 17.6.99 and was approved to a Law (No. 34(11)/99) on 8.7.99, which was published on 16.7.99. Considering that the House of Representatives approved duodecimals for the months of January and February 1999, the expenditure incurred by the Authority for the period 1.3 – 16.7.99 was not legally covered.

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(b) Budget Excesses. In seventeen Votes of the Budget there were excesses totalling £75.153, which were covered with savings from other Votes and from the Contingencies and Reserve Vote. The above excesses were approved by the Board of Management of the Authority on 27.7.2000 and the covering approval of the Minister of commerce, Industry and Tourism was sought. 4.106.3 Personnel. The Authority employed 22 persons in permanent posts (including seven casuals who were established on 16.4.99) and nine labourers. It also employed, during exhibitions, 43 persons. The total expenditure for salaries and wages amounted to £575.174, compared to £550.034 for 1998, i.e. there was an increase of £25.140 or 4,6%. The expenditure includes the amount of £29.542 (£29.919 for 1998) for overtime work. 4.106.4 Debtors. At 31.12.99 the accounts receivable showed a balance of £273.202, compared to £228.356 for 1998, which is mainly due to exhibitors fees outstanding, which, according to the Regulations, should have been promptly settled. Included also is the amount of £33.671 which is due for the use of space during December 1997, for the organisation of an artistic event, and also smaller amounts pending for several years, which must be investigated and settled accordingly. The Chairman of the Authority informed me in September 2000, that the amount of £33.671 should not be considered collectible and approval will be sought from the appropriate Ministry of commerce, Industry and tourism for its write off, in accordance with the provisions of the relevant legislation. 4.106.5 Doubtful Debtors. At 31.12.99 the accumulated provision for doubtful debtors was £71.047 (£57.800 for 1998), a large part of which concerns cases for which court decisions have been issued for collection, without, however, any result. I recommended that, in cooperation with the legal advisers of the authority, amended procedures be followed for the prompt collection of fees due, and legal measures be processed, regarding cases, which have been adjudicated. The Chairman of the Authority informed me in September 2000, that efforts are made for collection and final settlement of amounts due, as per my recommendations. Part B 4.106.6 Participation fees. In my previous Reports I stated that the provisions of the Regulations for participation, are not followed in all cases, regarding the collection of participation fees and the imposition of interest in case of delay. The Authority considers the possibility of the amendment of the Regulations, if it is considered that such a settlement will not have a negative effect on participations. The situation still remains the same. 4.106.7 Overtime work during the Annual General Exhibition. In my previous Reports I stated that, according to section 58 of the State Fairs Authority (Conditions of Service) Regulations of 1977, the employees, if requested by the Authority, should work beyond office hours during the annual General Exhibition, and for two weeks before and one week after the exhibition, without additional pay. Contrary to the above provision of the regulations, the collective agreement between the Authority and the Employees Union provides for the payment of 75% of overtime work in cash and 25% in free time. It is provided further that the part of the 25%, which remains to the credit of employees at 31st March of the following year, will be paid in cash. It was also observed that the payment effected in March of the following year is based on the salary of that Month, instead of the salary of the period of overtime worked (May – June of the previous year). The same procedure was followed in 1999 also. The Chairman of the authority informed me that,

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regarding the method of payment of the 25%, effort will be made for settlement of the matter in the following collective agreement, which will be implemented as from 1.1.2001. In the meantime in May 2000, Draft amendment Regulation was submitted by the authority to the Minister of Commerce, Industry and Tourism, providing that the time for the above overtime work will be compensated in a way that will be decided by the Authority. 4.106.8 Assets. (a) Leasehold land. The leasehold land used for the exhibitions has not yet been registered in the name of the authority. The Chairman of the Authority informed me in September 2000, that the legal and financial aspect will be examined and action will be taken accordingly. (b) Physical stocktaking. No physical stocktaking has been carried on the movable property of the authority for several years and relevant comparison with the inventory registers. I understand that the stocktaking procedure and comparison with the registers has commenced but is not yet completed. 4.106.9 Building permits. For a number of pavilions erected at the exhibition area, no building permits have yet been secured from the Appropriate Authority. The Chairman of the Authority informed me in September 2000, that the matter will be considered and necessary action taken. 4.106.10 Advertising spaces. As I pointed out in my previous reports, ways must be considered for better utilisation of advertising spaces. The Chairman of the Authority informed me in September 2000, that the Authority continues the effort to attract advertisers, offering special packets, but it seems that the renting of a large number of advertising spaces is not possible, because these are not in conspicuous parts of the fence wall and therefore interest for them is minimal. 4.106.11 Personnel benefits. As I stated in my previous Reports, several of the employees’ benefits are granted according to the provisions of the collective agreements, without these being covered by the Authority’s Regulations. The Authority has taken steps for the amendment of the Regulations, but government did not agree with their amendment. The Chairman of the Authority informed me in September 2000, that he will resubmit the matter of amendment of the Regulations to the Minister of Commerce, Industry and Tourism.

4.107 CYPRUS PORTS AUTHORITY Part A 4,107,1 Delay in the approval of the Budget. The Budget of the authority for 1999 was submitted promptly to the Ministry of Communications and Works on 23.9.98 and to the House of Representatives on 12.3.99. Finally it was enacted to a Law on 12.3.99. It is pointed out that the Budget of the Authority for 1998 has not yet been approved by the House of Representatives. 4.107.2 Financial position (a) Operating results. The operating surplus after deduction of interest amounted to £1.213.602, compared to £258.404 for 1998. After the addition of exchange loss amounting to £6.065.569 (1998 profit £389.902), a loss resulted amounting to £4.851.967, compared to a profit of £648.306 for 1998.

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(b) Revenue. The revenue amounted to £16.601.224, compared to £15.988.236 for 1998, i.e. there was an increase of £612.988 or 3,7%. (c) Expenditure. The expenditure, including interest for long term liabilities amounted to £15.387.622, compared to £15.729.832 for 1998, i.e. there was a decrease of £342.210 or 2,2%. (d) Long term liabilities. The long term liabilities at 31.12.99 amounted to £52.003.195, including the amount of £5.584.422, which is due to government for the transfer of assets at the time of establishment of the Authority in 1976. For the remaining liabilities of the Authority amounting to £46.418.773, there are government guarantees. (e) Accounting ratios. The following accounting ratios give a general picture of the financial position of the Authority: 1999 1998 Current Assets to Current Liabilities 0,57 1,32 Personal Emoluments to Expenditure (excluding depreciation and interest) 67,22% 66,61% Net (loss)/Surplus to Capital Employed (6,1%) 0,7%

4.107.3 Personnel and emoluments. The permanent posts of the Authority were 390, out of which 112 were vacant. Nine persons were serving on a casual basis. The personal emoluments, including overtime, 13th salary and contributions of the Authority to the various funds, amounted to £6.044.506, compared to £6.010.975 for 1998. On the basis of the above, the average annual cost per employee amounted to £21.061. The main allowances and contributions of the Authority to the various Funds were the following: 1999 1998 £ £ Overtime 1.142.554 1.099.445 Social Insurance Fund 436.957 430.489 Redundancy Fund 58.016 57.026 Industrial Training Fund 24.188 23.774 Expenses for uniforms 16.194 25.058 Medical Care Contribution 300.152 284.725 Employees Welfare Fund 40.370 40.795 Defence Fund 156.826 128.065

4.107.4 Expenditure for overtime work in the Operations Department. The expenditure for overtime work in the Operations Department amounted to £1.129.983, compared to £1.086.821 for 1998, while the respective revenue for overtime work, mainly from services provided to the private sector, were £759.188, compared to £732.223 for 1998. It is pointed out that collectible fees have not been revised since 1.6.1992. As it appears the amount spent in 1999 exceeded the amount collected by £340.795. The Chairman of the Authority informed me that consultations are in progress for the introduction of the shift system, which is expected to reduce the problem to a certain degree, and instructions were given for measures to be taken towards the reduction of overtime work.

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4.107.5 Utilization of the new terminal at Limassol Port. Since the commencement of its operation in 1996, the above terminal, for the construction of which the amount of about £75 m. was spent, has not been fully utilised and the benefits derived are not satisfactory. According to a study by a foreign consultant for the financial viability and expansion of the port, the whole project would have been viable if the Authority proceeded to a radical revision of its fees, which was not done. I asked to be informed of the measures the Authority intends to take for more effective utilization of the terminal. I was informed that the Authority in cooperation with the appropriate Ministry, make serious efforts for the solution of problems relating to the inside and the outside environment, where the authority operates, so that it will be possible to attract a larger volume of transit trade which, as it is known, was the main reason and objective for the expansion of the port of Limassol. 4.107.6 Debtors. I observed that various debit balances for which legal action was taken and were adjudicated in favour of the authority, still remain uncollected. Indicative cases are I.B.S. and Christoudias Beverages, with debit balances of £28.940,56 and £82.557,92, which were pending since 1990 and 1993, respectively. The Authority informed me that efforts are made for their collection. 4.107.7 Lease of land at Pafos Port area. During the audit of the district Office Pafos it was observed that five tenants of sunshades at Pafos Port area refused to sign the relevant agreement for the period 1.7.98 – 30.6.2002, and they don’t pay the relevant fees either. It is noted that the above fees due amounted, at 31.12.99, to £19.534. Part B 4.107.8 Transfer of assets. The relevant agreement for the transfer of assets and liabilities from Government to the authority, 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 made for signing the above agreement. 4.107.9 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. 4.107.10 Handling of containers at Limassol and Larnaka Ports. As I stated in my previous reports, as from 2.1.91, the Licensed 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 Chairman of the Authority informed me that the matter is connected with the operation of the container terminal and is examined as a whole, with the objective of facing the problems and outstanding matters

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existing, within the framework of the development and exploitation of the new western quay. The Authority must take immediately 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 had no revenue at all from the above. 4.107.11 Fees of the Authority. The Authority submitted in 1996 to the Council of Ministers, through the Ministry of communications and Works, a proposal for the revision of fees. To strengthen the necessity for the revision of its fees, the Authority assigned on 21.2.97 the study of the matter to Special Consultants, for the amount of £49.500. The report of the Consultants was completed and submitted to the Board on 19.1.98. This report with the comments of the board for the financial position was submitted to the Ministry of communications and works on 29.6.98 and on 27.1.99 a request was submitted to the same Ministry for the processing of approval of amendment Regulations, for the general increase of fees by 30%, including the cost of living readjustment system. The matter has not yet been submitted to the Council of Ministers. 4.107.12 Purchase of programmer’s services. The Authority purchased the services of a programmer from a private company, for an initial period of six months (since March 1996) and the agreement is being renewed ever since. The expenditure up to 31.12.99 exceeded the amount of £149.000. It is pointed out that the charge as from 1.1.2000 is increased from £175 to £200 per day. I repeated my previous recommendation for consideration as to whether the services of a programmer are necessary on a long term basis, in which case the possibility must be examined for the employment of a programmer on a continuous basis, either as permanent or casual, depending on the Authority’s needs. 4.107.13 Macadam at Pafos Port. In my previous reports I stated that, following the repeated destruction of the macadam, claimed in October 1996 compensations, amounting to £152.145, from the Consulting Engineers for damages suffered. The Consultants did not accept the Authority’s claims, while the Authority withholds the amount of £36.000 of the amounts due to them. The Authority made efforts for a compromise, while a technical report prepared for the authority by a private firm was not accepted by the Consultants. In July 1999 the Consultants suggested settlement of the difference, with the payment to the Authority the amount of £18.000. The Authority rejected in October 1999 the proposal and the matter is handled by the Legal Advisers of the Authority.

4.108 CYPRUS TELECOMMUNICATIONS AUTHORITY Part A 4.108.1 The accounts of the Authority for 1999 have been audited by a private auditor appointed by the authority, on my approval, in accordance with section 3(1) of the Public corporate bodies (Audit of accounts) Law of 1983 and 1984. In accordance with the provisions of the same Law, my Office carried out additional financial and performance audit. 4.108.2 Budget (a) Delay in the approval of the Budget. The authority’s Budget for 1999 was approved by the Board of Management on 5.11.98 and by the Council of Ministers on 18.3.99. It was submitted to the House of Representatives on 23.3.99 and was approved on 10.6.99.

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As a result of the delay observed, the expenditure incurred from 1.3.99 to 10.6.99, were not authorised, because the House of Representatives authorised, according to the Constitution and Law 52 of 1988, the payments for January and February 1999 only.

The Chairman of the Authority informed me that the delay is not attributed to the Authority, while the expenditure incurred during the period for which the budget was not approved, contributed to the smooth carrying out of operations.

(b) Unexpended amounts of the Development Budget. The budgeted expenditure for 1999 amounted to £55,4 m. while the actual expenditure was £48,6 m. the unspent amount of £6,8 m. (12%) is mainly attributed to the non-execution or the non-completion of the following projects: Project £m Transmission Network 1,05 Information Technology 2,12 Satellite Stations 0,89 Motor Vehicles 1,19 Buildings 0,59 Land 0,45 International Underwater cables 3,91 Cable Network 1,95

The following table shows the execution of the Development Budget during the last years, which shows the considerable development observed. Actual expenditure Year Budget Unspent amounts £m £m £m % 1996 45 34 11 24 1997 51 34 17 33 1998 58 46 12 20 1999 55 49 6 12

The Chairman of the Authority informed me that a large part of the variances is attributed to the international underwater cables, the laying of which is the responsibility of third parties.

4.108.3 Financial position

(a) Operating results. The net surplus for 1999 amounted to £60,2 m. compared to £49,9 m. for the previous year.

The operating results of the last two years are presented as follows:

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Increase/ 1999 1998 (Decrease) £000 £000 % Operating revenue 167.439 154.970 8,0 Investment Income 11.499 11.627 (1,1) Foreign exchange profit (loss) (357) (33) -- 178.581 166.564 7,2 Operating expenditure 102.101 95.091 7,4 Finance and other expenditure 6.828 5.048 35,3 Interest and Pension Fund 9.437 16.464 (42,7) deficits 118.366 116.603 1,5 Surplus before Corporation tax 60.215 49.961 20,5

As shown above, the increase in the surplus by £10,3 m. is attributed to an increase of revenue by £12 m., while the corresponding increase of expenditure was £1,7 m. In the operating revenue several increases were observed, compared to the previous year, the most important of which are the following: • Increase in telephone service rentals by £3,4 m. (17,8%), compared to £2,8 m. (16,9%) for 1998. • Increase in internal calls by £12,6 m. (31,3%), compared to £6,4% (18,7%) for 1998. • Decrease in revenue from international calls by £6,9 m., compared to an increase of £7,1 m. for 1998. (b) Accounting Ratios. The following accounting ratios give a general picture of the financial situation of the Authority. 1999 1998 Current Assets to Current Liabilities 3,6 3,2 Surplus before Corporation Tax to Capital Employed (Reserves and Long Term Liabilities) 18,6% 17,6% 4.108.4 Cash and bank balances and government bonds. The cash and bank balances, at 31.12.99, amounted to £95,5 m., compared to £76,3 m. for 1998. The greatest part of the above is deposited in three commercial banks, in one year notice accounts, with 6,5% interest rate. In addition, the authority had, at the same date, investments in government bonds amounting to £47,5 m., compared to £37,3 m. for 1998. 4.108.5 Personnel (a) The Authority employed 2 392 persons, out of which 2 391 were permanent and 1 on a weekly basis. The expenditure for salaries, allowances, overtime and employer’s contributions amounted to £46,2 m. (including arrears of £2,6 m.), compared to £41,0 m. for 1998. The

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expenditure for interest and deficits in the Pension Scheme and Pension Fund were £9,4 m. and £16,5 m. for the years 1999 and 1998, respectively. It is pointed out that at the end of 1999 there were 45 vacant permanent posts. Based on the above, the average cost per employee for 1999, excluding the deficient contribution to the Pension Fund of £9,4 m. and the arrears of £2,6 m., was about £18.220. (b) Other employees benefits. Pursuant to the Regulations and the labour collective agreements, the following amounts were paid for the years 1997 – 1999: 1999 1998 1997 £ £ £ Personnel financial assistance 347.644 363.086 318.733 Personnel functions 33.841 28.736 19.298 Subsidies to the Welfare Fund and to employees subscriptions to Cyprus Theatrical Organisation 674.945 610.607 498.787 Personnel and Pensioners collective insurance 229.822 217.433 201.142 Total 1.286.252 1.219.862 1.037.960

(c) Compensation for early retirement. The scheme for early retirement continued also in 1999 and for this purpose a total amount of £1.803.117 was paid to 65 employees as compensation, in addition to their pension benefits. Since the implementation of the scheme in 1988 a total amount of £11,5 m. has been paid for the retirement of 496 employees. It is pointed out that the compensation for early retirement is not liable to tax. The position of the authority on this matter is that it is useful in handling surplus personnel as a result of technological developments, and that it is to the benefit of the Authority. (d) Schemes of Service. The approved schemes of service of the staff, which are included in the Staff of the Cyprus Telecommunications Authority General Regulations of 1982-1990, relate only to the duties and qualifications of the staff, without specifying the salary scale, the appointments and promotions. The Authority’s position is that it facilitates proper staff administration and especially its interchangeability. (e) Disciplinary Regulations. With the decision of the Supreme Court in recourses Nos 502/87 and 584/87 issued on 15.7.88, the Regulations relating to the setting up of disciplinary committees were declared as made in excess of power. Since then they fell into disuse and disciplinary cases are handled by the Board of Management of the Authority. The Chairman of the Authority stated that the Regulations were approved by the council of Ministers and on 19.11.99 were submitted by the Ministry of communications and Works to the Attorney General for legal processing and completion. (f) Transfer of accumulated vacation leave to the following years. According to the existing Regulations of the authority, the accumulated vacation leave, which can be transferred, to the following years cannot exceed 30 days. According to the collective agreement, however,

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dated 31.5.93, the maximum number of annual leave that the staff is eligible to transfer to the following year is 70 working days for a five day week. The Board of Management of the Authority, under decisions 292/99 and 323/99, approved, in certain cases, the transfer of accumulated leave in excess of 70 days. The Chairman of the Authority informed me that this was done, because the presence of specific employees was considered imperative and because, according to the Regulations, the staff cannot disclaim vacation leave. He pointed out, however, that the matter is expected to be settled with the amendment of the Regulation. 4.108.6 Stores (a) Stocks of equipment/materials. The quantity of material stocks of the Authority continues to be at high levels and at 31.12.99 it was £9,6 m., compared to £14,9 m. for 1998. Since 1999 a new accounting principle has been followed, according to which the equipment/materials, which will be used for development projects are shown in the assets of the Authority. In case the above principle was followed in 1998, and then the stocks for 1998 would amount to £8,7 m. Aiming at better follow up and control of stocks, the authority proceeds to the separation from the general stocks, the equipment and materials, which will be used for development projects. I suggested that the development stocks be separated in the store, so that each type of stock is placed according to the related project. As I stated in my previous Reports, with the lapse of time certain stocks become obsolete due to technology developments. It is noted that for the current year obsolete materials valued at £550.854 were written off and a provision was made for £1.005.859 for obsolete stocks. Furthermore the slow moving stocks at 31.12.99 amounted to £1.664.987. The Chairman of the Authority informed me that stocks are at high levels because of the considerable distance of the premises of manufacturers of several materials, the time consuming supplies procedures and the small size of the Organisation. (b) New unused equipment and materials. In the stores of the Authority there are new unused equipment and materials of considerable value, purchased several years ago and which are not estimated to be used because they are obsolete. When it is verified that these are beyond the needs of the Authority, action must be taken for their disposal. Examples of the above are shown below: i. Electronic cards equipment. The quantity of stocks of equipment and materials of the departmental stores amounts to about £3,8 m. and which month consists of electronic cards equipment, which was purchased a long time ago and remains unused. This equipment is purchased as supporting spare parts for various installations and, according the Authority’s policy it is depreciated with the same annual depreciation proportion applied for these installations. It must be investigated, however, whether part of the equipment is related to telecommunication installations, which are already out of use and have been written off, so that effort will be made for its disposal or write off. The Chairman of the Authority stated that electronic cards are maintenance materials, kept as stock and used for the replacement of faulty cards. The value of the total of these cards is a very small proportion of the installed equipment. The Authority decided to capitalise the relevant stocks and write off depreciation from the date of installation of the relevant equipment.

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ii. Go Axial type cables. At the time of audit there were 171 512 meters of a total value of £235.185. These have been purchased a long time ago and only a small part has been used. iii. Aerials. In the various stores of the Authority there are 72 new aerials of various types, of total value of £25.600, which were purchased several years ago (before 1995), without having been installed yet. (c) Central store at Dhali. From a site inspection carried out at Dhali store, the following were observed: i. New unused equipment. In the above store there still new unused equipment and materials of considerable value, which were purchased several years ago. In a relevant reply of the Authority, regarding the audit of accounts for 1998, states that this equipment (Code 14338 Cabinets - £23.894, Code 14458 Cabinets - £24.000) will be used in new telephone centres. As I was informed, a study for the utilisation of the equipment is in progress. ii. Equipment/materials, which have been returned to Store. In the Store there is used equipment and materials, which were returned from various places. In case it is ascertained that these are not needed by the Authority, efforts must be made for their disposal. Some examples are stated below: (d) Drawing boards. There are 30 used drawing boards, which were transferred to the store in January 1998, due to their replacement with computers. (e) Road Side Emergency Pillars. There are 30 used street telephones (SOS), which were transferred to the store since January 1999. (f) Card telephones. There are 1 574 used card telephones, valued at £14.892, which were transferred to the store during 1999, due to their replacement with new technology telephones. The Chairman of the Authority informed me that part of the above will be sold as useless materials and other equipment will be installed in development projects. (g) Latsia Telephone Centre Store. From a site inspection carried out in the store of Latsia Telephone Centre, the following were observed: i. The amount of £280.513, which represents the value of stocks of the above store at 31.12.99, includes the amount of £240.426 or 85%, which represents used terminal telecommunication equipment. Still pending is the carrying out of an investigation for the determination as to whether this equipment is obsolete. ii. There are several thousands of meters of unused cables of various types, which were purchased several years ago, without any issue being effected in the last years. Several quantities of new unused electronic cards are kept in boxes, with zero value, which, as I have been informed are going to be declared obsolete. The Chairman of the authority informed me that the utilisation of part of the equipment is under consideration, as well as the disposal of the remaining, which will be considered as obsolete. 4.108.7 Investments – Participation of the Authority in EAST satellite programme. For the participation of the Authority in EAST satellite programme, an agreement has been signed on

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5.12.97 between the subsidiary of Digimed Communications Ltd and Matra Marconi Space U.K. Ltd., for the establishment of EAST (UK) Ltd, with the objective of carrying out a feasibility study and preparation of an operation plan for the supply of stable and mobile satellite telecommunication services in Europe, Middle East and Africa. For the above programme the Authority, through its subsidiary company Digimed, has contributed/invested the amount of £1.142.861, as follows: £ Loan to EAST (UK) Ltd 1.089.575 Share Capital (1 000 shares) 53.286 1.142.861

In addition, the amount of £67.035 is due by EAST company to Digimed for various services, mainly for the employment of officers of the Authority in matters concerning EAST. While the feasibility study has been completed since July 1998, according to the terms of the agreement, the programme has been frozen. At the meeting of the Board of Management of the authority No. 14/99 dated 23.6.99 (Minutes 170/99) it is stated that Digimed has informed EAST Ltd that there is no possibility of cooperation as per the agreement, so it is possible for a proposal to be submitted for the liquidation of EAST, because there is no reason for its existence. In view of the above, I requested the Authority to inform me of the proposed measures that must be taken for safeguarding its interests. It is pointed out that, according to the terms of the agreement and the terms set by the Central Bank regarding the issue of foreign exchange licence, in case of implementation of the programme by one part, then the part withdrawn is eligible for the refund of the amount of its investment, plus 9% interest. The Authority informed me that due to the negative investment conditions in the satellite systems industry for mobile telephones, the decision regarding the future of the above programme has been postponed for the beginning of the second half year of 2000. 4.108.8 Investments of the Authority in ICO Global Communications (Holdings) Ltd. Under the decision of the Board of Management of the Authority No. 10/95 dated 4.1.95, the entering of an agreement was approved for the purchase of shares of Inmarsat (ICO Global Communications (Holdings) Ltd), for a total amount of $1 m. (£498.806). In the accounts of the Authority for 1999, a provision was made for the write off of the above investment (it remains in the books with the nominal amount of £1.000 only) because the company is under the protection of Cap.11 of U.S.A. legislation for bankruptcy. The Authority is following up the whole matter, for the eventuality of reactivation of the company. 4.108.9 Tenders. (a) Tender AT 14/98 – Supply and installation of equipment for the new Flight Information Region Centre Nicosia (Project LEFCO). The Authority invited on 6.2.98 tenders for the supply, installation and delivery of equipment for the new Flight Information Region Centre Nicosia, at an estimated cost of £9 m.

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The tenders were submitted on 16.6.98 by four companies and the Board of Management of the Authority, on 21.12.99, that is, after about 18 months, decided, on the basis of the technical evaluation, that the two tenders which met the specifications be: i. Evaluated further. ii. Given to the two tenderers a revised table of quantities for invoicing. iii. Requested from the two tenderers to submit a proposal/cost for maintenance and support of equipment. According to the minutes of the relevant meeting of the Board of Management, the decision was taken with the agreement of the Department of Civil Aviation, the Euro control Organisation and the European Investment Bank. From the procedure followed, the report of the Evaluation Committee and the relevant correspondence, the following were observed: − The requirements since the initial date of tender invitation have been differentiated (addition of support maintenance, changes in quantities etc.). − The request for submission of a revised tender from only tenderers minimised completion. − The Authority expects that the cost of equipment has decreased since the date of the initial invitation for tenders. In view of the above and the considerable differentiation in the items and the quantities of the tender, a new analytical evaluation of the expenditure should, in my opinion, be prepared, before the opening of the tenders. Furthermore, due to the considerable lapse of time since the preparation of the specifications (more that 2 years), the technology of such type of equipment has probably developed/changed. Further investigation carried out by my Office in July 2000, revealed that both tenderers who were asked to submit a revised tender, had not renewed the validity of their initial tender within the required time limits. The Chairman of the Authority to whom I submitted the above observation, informed me in July 2000 that the legal aspect of the delayed renewal of guarantees of both tenderers was discussed with the legal advisers of the Authority and it was considered that this had no implication on the validity of the tenders. (b) Tender AT 47/98 – Tender contract of a specified period for the execution of various constructional and electrical works. Under the tender Board decision No. 508/98 dated 17.7.98, the award was approved of the above tender to a company, at the indicative amount of £194.961, for a specified period contract for the execution of various constructional and electrical works, in Nicosia – Larnaka – Famagusta region, with time limits 4.9.98 – 3.3.2000. Under decision No. 18/99 dated 28.7.99 (Minutes 211/99), the Board of Management of the Authority approved the amount of £450.000 as the total amount for the works executed or are expected to be executed, regarding this tender, while up to the day of audit, payments were effected for a total amount of £439.093 for works executed. In view of the above and for the improvement of the audit of this type of expenditure, I recommended the following: i. Better planning/evaluation of the works must be made, in such a way, so that in the final execution the expenditure not to exceed ± 30%.

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ii. In cases where due to unforeseen works the expenditure is expected to exceed the above proportion, new tenders must be proclaimed. The Chairman of the Authority informed me that bills of quantity are used only for purposes of comparative evaluation and award of unit prices of the tender and that the Authority is not bound with the quantities of works. (c) Tender AT 38/97 – Supply of office furniture. Under the decision of the Tender Board No. 681/97, dated 29.9.97, the signing of an agreement was approved for the supply of ergonomic furniture and chairs up to 31.12.99. Part A of the above tender, which relates to the supply of ergonomic desks, has been awarded for the amount of £111.255. The successful tenderer with a letter dated 22.12.97, that is 3 months after the award of the tender, informed the Authority that it was not possible to find soft board HPL, as provided by the specifications and the terms of the contract, resulting to the use of marine plywood (which is much cheaper) from the Forest Industries. It is pointed out that in a note of the Constructional works Service dated 27.1.98, it is stated that, the experience of the last years shows that the above specification is considered excessive and it is suggested that the specific material be replaced with marine plywood. This, however, was not taken into consideration for the above tender. The Chairman of the authority informed me that the change related to the 16% of total surface of the furniture, and it was necessary because the manufacture of HPL of the same colour as the Cyprus marine plywood was terminated. The change did not affect the serial classifications of the tenderers. (d) Tender for the construction of the new telephone Centre Limassol – AT 71/95 – Compensation claims. In my Report for 1998, I stated that, due to delays on the part of the contractor, the Authority has suffered damages amounting to £222.734. On my recommendation the Authority exercised its right for the imposition of compensations, by withholding/cashing the guarantee, as well as keeping the contract amounts deducted. There is still, however, an amount of £75.424, which must be claimed/collected from the contractor. The Authority proceeds to the taking of legal measures. (e) Law suit No. 2984/98 against the Authority (Tender AT 11/95 for a complete security system). As I have stated in my Report for the audit of the accounts for 1998, the successful tenderer for the above tender, filed Law suit No. 2984/98, against the authority, as a result of the termination of the contract by the Authority, claiming compensations exceeding the amount of £1.000.000. For the above reasons and according to the evaluation of the legal adviser of the Authority, the accounts for 1999 show as contingent liability for the amount of £1.000.000. (f) Tender No. AT 8/99 for the supply, installation and maintenance of reserve electric generators. The tender related to the supply/installation of generators of power capacity from 15 KVA to 500 KVA, of total value of about £400.000, to cover the requirements of the Authority for a period of three years. From the examination of the terms and specifications of the tender

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as well as the evaluation report, it was realised that the evaluation method provided was complicated and allowed the submission by the tenderers of their own formula for readjustment of the unit prices of additional quantities. Furthermore, the evaluation/award of the tender is carried out on the basis of the total price of all the categories of generators, which excludes the part award of the tender to more than one tenderers, according to the lowest price of each category/size of generators, and limits competition, especially in smaller size generators up to 150 KVA. Finally the terms were satisfied by only one of the six tenderers who participated in the competition, and it was the same one to whom the previous three year contract had been awarded. The Authority, in reply to my observations, informed me that the possibility would be considered for the grouping of generators in future tenders.

4.108.10 Lease of building in Limassol. Under the decision of the Tender Board No. 70/99 dated 31.12.99 (Minutes 1124/99), and without proclamation of public tenders, the lease of a building was approved (Kato Polemidhia), at a monthly rent of £800, for the purpose of concentrating in a unified space the personnel of the Administration Access Network of Limassol District, for a two year lease period (1.3.2000 – 28.2.2002).

In order to make this pace suitable for office operation, adjustments/alterations will have to be made, at an estimated cost of £30.000, while the cost for the authority will be even higher, because, according to term 3 of the contract, the tenant, after the expiry of the lese period, is obliged to deliver the immovable property at the state it was at the commencement of the lease. On the basis of the above, the actual cost of the lease amounts to £2.050 per month.

It is pointed out that initially the Tender Board, at its meetings No. 218/99 dated 12.3.99 and 237/99 dated 19.3.99, decided not to approve the lease of the above offices, because of the considerable cost involved for a short period of time and suggested the extension of the existing building at Ypsonas (it is noted that for the securing of a housing permit for the above extension, the matter of deviation would have to be examined, with the approval of Regulations by the House of Representatives, because the property of the authority is outside the housing zone).

I recommended that in future, in similar cases, the lease of buildings be carried out through tenders, with the determination of space/area, as well as the specifications/criteria, which a building must satisfy.

4.108.11 Doubtful debtors. The annual charge for the provision of doubtful debtors amounts to £1,54 m., compared to £1,98 m. for the previous year. At 31.12.99 the accumulated provision for doubtful debtors was £9,57 m., compared to £8,03 m. for 1998.

Since June 1999 the Department of Administration of Doubtful Debtors was established for the purpose of the verification of consumers and the collection of the amounts due. The results appear to be positive and the efforts must be intensified towards this direction. At the same time, however, preventive measures must be taken for the minimisation of doubtful debtors.

4.108.12 Use of vehicles. It was observed that during 1999 the use of the vehicles of the Authority was limited. For example during March 1999, out of 652 vehicles 18(2,8%) had no movement at all, 135 (20,7%) travelled up to 400 km. And 78 (11,7%) travelled up to 600 km., i.e. the use of 229 (35%) vehicles was limited.

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I recommended that ways must be studied for better utilization of vehicles and the possibility to be considered for the reduction of the number of vehicles to what is absolutely necessary. It was also observed that a large number of vehicles (43,4%) are more than 8 years old, resulting to the increase of maintenance and repairs costs. It is noted that the average cost of maintenance for kilometre was 4,7 cents. It is additionally noted that the average cost of maintenance per kilometre was 3,6 cents for 1996 and 3,42 cents for 1995. The Chairman of the Authority informed me that the existing fleet of vehicles is necessary to serve the requirements of the Authority. Regarding the matter of maintenance a study is being prepared, the results of which will be evaluated, and, with new purchases of vehicles, their age will gradually decrease from eighteen to nine years. 4.108.13 Overtime. The overtime expenditure for 1999 amounted to £2.075.336, compared to £2.040.565 for 1998, i.e. there was an increase of £34.771 or 1,7%. This amount consists of £343.153 for shift allowance and £1.732.182 for overtime work. Out of this amount £957.426 or 46% was paid to the staff for overtime work carried out during Sundays and public holidays. As it has been pointed out in my previous Reports, the amount of overtime pay is considered high, and, therefore, it is imperative for ways to be found for the decrease of overtime compensation. The Authority informed me that overtime is followed up and controlled, aiming at its reduction. 4.108.14 Travelling abroad. During 1999 408 trips abroad took place by 181 officers of the Authority. For these trips £240.299 were paid for travelling abroad. I recommended that all travelling abroad be charged to a special Vote of the budget, independently of how these will be finally allocated for purposes of accounts. In addition educational expenses for the staff both in Cyprus and abroad were paid amounting to £499.424, which do not appear separately in the accounts. I recommended that the relevant Vote be separated, so that the amount for education abroad is shown separately. With regard to the above the following were observed: (a) Purchase of airline tickets. For several years the Authority is supplied all its airline tickets from a specific company, for the reason that cooperation with this company is excellent and possible change to this practice will cause problems regarding the issue, control, follow up and settlement of ticket values. General Management is processing a new policy for 2000, aiming at better ticket prices. (b) Hotel reservations made directly by the same company. It was observed that in cases where the staff of the Authority travels abroad and the reservations are made through the above company, payments are made on the basis of invoices issued by this company, without any hotel bills submitted, and as a result the dates of arrival and departure, the terms of accommodation and the actual cost of the hotel accommodation are not shown. The Chairman of the Authority informed me that, according to the new procedure now followed, tenders would be invited from three travel agencies. Part B 4.108.15 Approval of fees for services rendered by the Authority. The approval of the Telecommunications Service Regulations is pending before the House of Representatives, for the determination of all the fees collected by the Authority for services rendered.

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4.108.16 Tender Regulations. The Tender Regulations of the authority continue to present certain omissions and weaknesses. In my previous Report I recommended that in the new Regulations new suitable provisions be included. The revision of the Regulations is pursued. 4.108.17 Immovable property purchased without ownership titles being issued. Immovable property valued at £273.770 which was purchased/acquisitioned a long time ago, has not been transferred to the Authority, and the relevant ownership titles were not issued, due to problems in building plots parcellations. 4.108.18 Considerable stock of magnetic telecards. It was observed that it was not possible to dispose of the large stock of telecards, which was created through the replacement of magnetic technology card telephones with new technology card telephones for which complete circuit telecards are used. Ways for their disposal are being considered and relevant recommendations are expected to be submitted.

4.109 CYPRUS GRAIN COMMISSION Part A 4.109.1 Financial position (a) Operating results. The accounts for the financial year 1.5.98 - 30.4.99 showed a deficit of £9,2 m., compared to £24,2 m. for the previous year, i.e. there was a decrease of the deficit of £15 m. or 62%, which is mainly due to the achievement of lower costs, regarding sales, as compared to the previous year. The net deficit is covered by government subsidy. (b) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Commission: 1999 1998 Operating Deficit to Sales 25% 65,9% Current Assets to Current Liabilities 2,1 1,91 State Subsidy to Total Revenue 25% 65%

The operation of the Commission depends to a large extent on the Government’s policy to cover deficits through state subsidy. (c) Long-term liabilities. The long-term liabilities of the Commission at 30.4.99 amounted to £3,9 m. compared to £4,3 m. at 30.4.98. These represent Government loans (£3,7 m.) and the Commission’s liability to the Employees Pension Fund for previous service (£202,958). (d) Government guarantees and bank overdraft. Government guarantees, at 30.4.99, for credit facilities to the Commission amounted to £5,6 m. and the bank overdraft amounted to £5,5 m.

4.109.2 Personnel. The total permanent posts were 81, out of which 10 were vacant, there was one supernumerary post and two casuals were employed. The expenditure for salaries, allowances, overtime and employer’s contributions for the last two years were as follows:

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Increase/ 1999 1998 Percentage (Decrease) £ £ £ % Salaries and cost of living allowances 1.059.513 1.036.764 22.749 2,0 Various allowances and overtime 159.873 176.618 (16.745) 9,5 1.219.386 1.213.382 6.004 0,5 Employer' s Contributions and other benefits 580.137 605.469 (25.332) 4,2 1.799.523 1.818.851 (19.328) 1,0 Contribution to the Pension Fund for past service 322.633 132.400 190.233 143,7 2.122.156 1.951.251 170.905 8,8

4.109.3 Employees benefits. During the last two years the Commission was charged with the following expenses in respect of employees benefits: 1999 1998 £ £ Medical Fund 100.461 97.115 Welfare Fund 47.112 87.648 Staff Insurance 5.982 7.601 Staff Training 1.793 5.439 155.348 197.800

4.109.4 Capital expenditure. The budgeted expenditure amounted to £3.619.550 and the actual expenditure was £1.614.901, i.e. the unspent amount was £2.004.649 or 55%. The degree of implementation of the budget is considered very law. In understand that with the delivery of the silo the situation is expected to be improved. 4.109.5 Investment of the Commission’s reserve through purchase of bonds. The investment committee of the Cyprus Grain Commission approved the investment of £1.000.000 from the Commission’s reserve to Popular Bank bonds. According to Law 100/91 and circular 642/90 dated 19.10.90 of the Ministry of Finance, Public Corporate Bodies should invest their available funds to government bonds only. The Chairman of the Commission informed me that covering approval has been secured for the above. 4.109.6 Study of the procedure of concentration, administration and marketing of cereals in European Union Countries and formation of the Cyprus model. The Consultant of the Commission for European Union matters, who was appointed without tenders in 1999, advised the Board of Management that a study should be carried out regarding the harmonisation of the Commission with the European Union. The Board of Management assigned the study to the above consultant for the amount of £60.000, without invitation to tenders and without costing

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the relevant work. In addition, I expressed the view that the assignment of the above work directly to the Consultant is not in line with the rules of virtual administration and is contrary to the entire philosophy of the status of the Consultant. 4.109.7 Tender for the transport of local and imported cereals. On 17.3.98 a declaration of interest for the above tender was published, specifying 27.3.98 as the last date for the submission of the tenders. Before the approval of the terms by the Board of Management and even before the publication in the press for declaration of interest, an officer of the commission negotiated the terms with the company with which there was a contract, which had expired on 30.4.98. The Board of Management, at a meeting on 27.3.98, authorised the Chairman to negotiate and come to an agreement with the above company for the renewal of their contract, while on 27.3.98 there was a declaration of interest from another tenderer, who, after he came to the offices of the Commission, withdrew his interest. The contract was renewed, although important documents, which were required according to the terms of the tender, had not been submitted at the time the decision was taken. The Chairman of the Commission informed me that the final negotiations, carried out with the above company before the signing of the new contract, aimed at the protection of the interests of the Commission from monopoly pressures, which could be exercised by this company. 4.109.8 Contract 98.29.0 for the purchase of corn. The terms of the above contract, which was awarded to Toepfer Company, included, inter alia, a provision that the percentage of broken seeds and foreign materials would not exceed 5%. The company to which the Grain Commission assigned the control and supervision of the loading of corn, promptly warmed that the percentage of broken seeds exceeded by far the limit of 5% and that continuation of the loading would be against the interests of the Commission. The Grain Commission, however, altered the terms, increasing the acceptable limit of broken seeds from 5% to 6% and set as a prerequisite that, in no case, the percentage would exceed 7%. For this change the deduction of one dollar, was agreed with the supplier, for each tone supplied, from the total price of the corn. These terms, however, were not observed either by the supplier and it appeared that the limit of 7% was exceeded. Finally the deduction of a further amount of 150.000 dollars was agreed. The Chairman of the Commission informed me that the alteration was based in the general tender terms, which make use of contract terms GAFTA (Grain and Feed Trade Association), which allow deviations from parameters of the contract with regard to quality. Part B 4.109.9 Extension of silo. In understand that there are still several problems regarding this matter. 4.109.10 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 strengthened, by the adoption of corresponding provisions of the Public Tenders Laws and Regulations.

4.110 NICOSIA WATER COMMISSION Part B 4.110.1 Transfer of rights and obligations. Pursuant to the decision of the Council of Ministers No. 43.044 dated 14.9.95, all the rights and obligations of the Nicosia Water

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Commission have been transferred, as from 1.1.95, to Nicosia Water Board, for an annual fee amounting to £1.000. The net assets of the commission, the value of which at 1.1.95 was £247.407, and at 31.12.99 was £252.407 as shown in the accounts of Nicosia Water Board, but ownership continues to remain with the Commission.

4.111 CYPRUS THEATRICAL ORGANISATION Part A 4.111.1 Operating results. The income and the expenditure of the Organisation for 1999 amounted to £2.529.388 and £2.475.895, respectively, compared to £2.311.626 and £2.226.558 for the previous year, i.e. there was surplus of £53.493, compared to £85.068 for 1998. The income includes state subsidy amounting to £2.289.501 and other grants and contributions for an amount of £13.698. As I stated in my previous Reports, the Organisation depends to a large extend on government subsidy and I recommended that ways must be considered for the increase of revenue and the decrease of the expenditure of the Organisation. It is also pointed out that the current assets of the Organisation for 1999 exceeded the current liabilities by £232.673, compared to a deficit in the working capital amounting to £44.596 for 1998. 4.111.2 Budget. The budget of the Organisation for 1999 was approved by the Board of Management of the Organisation on 16.11.98, by the Council of Ministers on 24.2.99 and was enacted to a Law by the House of Representatives on 2.4.99. Provided that the House of Representatives approved duodecimals for the months of January and February 1999, the expenditure of the Organisation for the period 1.3.99 – 1.4.99 was not legally covered. 4.111.3 Accounting Ratios. The following accounting rations give a general picture of the financial position of the Organisation. 1999 1998 Current Assets to Current Liabilities 1,25 0,96 State Subsidy to Total Revenue 90,5% 89,1% Income from Tours Abroad to Total Revenue 2,3% 3,8% Income from Performances in Cyprus to Total Revenue 5,3% 4,6% 4.111.4 Personnel. The Organisation employed 32 persons in permanent posts, 23 on a temporary basis and 5 casuals, with total emoluments amounting to £1.097.633, compared to £1.005.457 for 1998. The personal emoluments include an amount of £124.713, which represents the contributions of the Organisation to the Pension Fund and the Provident Fund, and an amount of £97.091 for contribution of the Organisation to Social Insurance Fund, Redundancy Fund etc., an amount of £92.550 for medical treatment and an amount of £18.525 for overtime and allowances. In addition the Organisation has spent the amount of £71.275 for insurance and other indirect benefits for the staff. According to the above, the annual average cost per employee was about £19.480 for 1999, compared to £17.800 for 1998. Additionally the Organisation employed five labourers, with total emoluments of £32.898 and 36 casual, part time, actors, with total emoluments £120.238.

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4.111.5 Ticket sales. In 1999, 69 745 entrance tickets were sold, compared to 58 000 in 1998, i.e. there was an increase of 11 745 which is mainly due to the increased attendance at the theatrical performances in Cyprus. 4.111.6 Independent theatre subsidy. To the independent theatres “SATIRIKO”, “ENA”, “ETHAL” and “SKALA” a subsidy is paid according to specified terms and criteria. For 1999 the amount of the subsidy to the four theatres was £104.000, £99.000, £98.000 and £81.000, respectively, compared to £97.500, £92.100, £91.500 and £50.000, respectively, for 1998. On the request of the Minister of Education and Culture and the written consent of the four theatres, the Audit Office carries out an annual audit aiming at the verification that the subsidy is used for the purposes for which it was approved. From the audit the following were observed. (a) Theatre personnel. There is no uniformity in the employment and emoluments of the staff of the four theatres, which has a direct effect on the subsidy. I recommended that the acceptable limits should be determined, both for the number and the emoluments of the staff, for purposes of determination of the subsidy granted. The Chairman of the Organisation stated that my recommendations would be under consideration. (b) Subsidy per spectator. A considerable variation is observed in the amount of subsidy per spectator, which is paid to the four theatres. For a fair allocation and control of the subsidy paid by the Organisation to the independent theatres, I recommended that criteria should be set which would facilitate the determination of the amount of the subsidy paid. 4.111.7 Excess expenditure. The amounts of £47.833 and £17.392 which relate to 1999 expenditure, for performances of 1999 and 2000, respectively, were not charged to the income and expenditure account of 1999, but were shown in the Balance Sheet (Debtors and Advances Account), resulting to the presentation of increased surplus and working capital of 1999 accounts. Under the above accounting adjustment, for which a relevant decision was taken by the Board of Management, the Organisation avoided the covering of an excess amounting to £65.225, as per the appropriate procedure provided by sub-sections (1) and (3) of section 4 of the Cyprus Theatrical Organisation Budget Law No. 18(II)/99. The Chairman of the Organisation stated that the covering of the excess was not pursued according to the appropriate procedure, because the consent of the Ministry of Finance could not be secured. 4.111.8 Administrative and Financial Regulations. 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 per the Attorney General’s recommendation. 4.111.9 Telephone bills. The telephone bills for the period 12/98-11/99 amounted to £7.302, compared to £5.700 for the previous period, i.e. there was an increase of £1.602 or 28,1%. From the audit it was observed that telephone calls abroad were made outside office hours. I recommended that the matter be investigated for the purpose of collection of the cost of telephone calls abroad, which were probably made by employees of the Organisation. Part B 4.111.10 Physical stocktaking certificate. It was again observed that no physical stocktaking was carried out, at the end of the year, of the technical equipment of the Organisation.

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4.112 YOUTH BOARD Part A 4.112.1 Operating results (a) Revenue. The revenue of the Organisation amounted to £807.018, compared to £579.186 for 1998. The revenue includes government subsidy amounting to £767.050, upon which the operation of the Organisation is based, the amount of £18.933 granted by the European Union for implementation of the program “Youth for Europe”, and the amount of £19.460 from the “Youth Card”. (b) Expenditure. The expenditure of the Organisation amounted to £806.360, compared to £595.538 for 1998. The expenditure includes the emoluments of civil servants who have been seconded to the Organisation. 4.112.2 “Youth Card”. The council of Ministers assigned on 28.11.95 the “Youth Card” administration to the Youth Organisation. The income from the “Youth Card” administration was £19.460 and the expenditure £21.838, compared to £8.914 and £17.461, respectively, for 1998. 4.112.3 Personnel. The Budget of the Organisation provides for 13 permanent posts, out of which seven have been filled on contract, with total emoluments £68.137, compared to £69.875 for 1998. 4.112.4 Regulations. The preparation of regulations of the Organisation is pending, which will regulate matters relating to the structure, the terms of service of the staff and other matters referred to in sections 11 and 33 of Law 33(I) of 1994.

4.113 CYPRUS NEWS AGENCY Part A 4.113.1 Financial position (a) Operating results. The accounts showed a surplus of £49.931, compared to £19.537 for 1998, i.e. there was an increase of £30.394, which is due to the decrease of expenditure, as shown below. (b) Revenue. The revenue amounted to £492.862, compared to £493.107 for 1998. The revenue includes state subsidy amounting to £419.436 (£420.034 for 1998). Consequently, the operation of the Agency depends to a large extend on the continued financial assistance provided by Government. (c) Expenditure. The expenditure was £442.931, compared to £473.570 for 1998, i.e. there was a decrease of £30.639 or 6,47%, which is mainly due to the decrease of Vote “Other Administration Expenses” (£35.347). 4.113.2 Delay in the approval of the Budget. The Budget for 1999 was promptly approved by the Board of Management of the Agency, it was submitted to the Ministry of Interior on 9.7.98 and was approved by the Council of Ministers on 18.11.98. According to the Public Corporate Bodies (Approval of Budgets) Law, the Budget of the Agency should have been submitted to the House of Representatives up to 30.9.98, whereas it was submitted on 10.12.98 and was enacted to a Law (No. 5(II)/99) on 28.1.99.

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4.113.3 Personnel. The Agency employed 15 persons in permanent posts, with total expenditure of £260.000, compared to £270.599 for 1998, i.e. there was a decrease of £10.399 or 3,8%. The personal emoluments include the amount of £10.594 for overtime work (£14.645 for 1998), the amount of £25.741 (£25.748 for 1998) for contributors/correspondents, as well as the amount of £34.449 (£33.028 for 1998), for the employment of 8 contributors on a casual basis, with three monthly contracts. Part B 4.113.4 Personnel pension benefits. The approval of Regulations for personnel pension benefits is still pending. I understand that, for the settlement of the matter an actuarial study has already been prepared and regulations are now pursued adopting the Public Service Pensions Law, as the previous procedure for approval of separate Regulations for the Agency has been abandoned.

4.114 CYPRUS SPORTS ORGANISATION Part A 4.114.1 Financial position (a) Operating results. The Organisation showed a deficit of £2,3 m., compared to a surplus of 0,25 m. for 1998, which is attributed to the decrease of revenue and the increase of expenditure. (b) Revenue. The revenue of the Organisation amounted to £13.199.422, compared to £14.113.576 for 1998, i.e. there was a decrease of £914.154, which is mainly attributed to the decrease of government subsidy by £660.000 and to the decrease of income from PRO-PO by 171.586. The government subsidy amounting to £530.778 (£749.461 for 1998) is not included in the revenue, which was withheld by the Ministry of Education and Culture to be paid to the Police in order to cover the cost of policing of athletic events. (c) Expenditure. The expenditure of the Organisation amounted to £15.500.501, compared to £13.859.430 for 1998, i.e. there was an increase of £1.641.071, which is mainly attributed to the considerable increase of expenditure by £1.698.950, for the creation and improvement of non-owned athletic installations, and the increase of interest payable by £196.271. Other increases in expenditure of £50.000 - £80.000 were shown in the personal emoluments, the general administrative expenses, the international athletic relations, in sports for all and the depreciation. It is pointed out that the subsidies to the various athletic groups, for covering administrative expenses, were decreased by £695.308. (d) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Organisation: 1999 1998 Current Assets to Current Liabilities 0,16 0,18 Government Subsidy to Revenue 0,92% 0,90%

(e) Liquidity. In 1999 the Organisation presented a serious liquidity problem, which was faced with a bank overdraft, and which at 31.7.1999 amounted to £3.335.454 and was settled later by the raising of two loans totalling £4.137.526.

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(f) Government guarantees. All the loans of the Organisation, the balance of which at 31.12.99 amounted to £6,38 m., compared to £2,25 m. for 1998, are guaranteed by Government. (g) Current liabilities. At 31.12.99 the current liabilities of the Organisation amounted to £2,34 m., compared to 3,12 m. for 1998, while the current assets were only £0,37 m., compared to £0,58 m. for 1998, i.e. there was a deficit in the working capital amounting to £1,97 m., compared to £2,54 m. for 1998. (h) Debtors. The debtors at 31.12.99 amounted to £238.640, compared to £227.220 for 1998. The increase is attributed to the increase of advances by £32.291. The debtors include amounts of over £50.000, which are due by clubs and federations in previous years. 4.114.2 Budget (a) Delay in the approval of the Budget. The Budget of the Organisation for 1999 was approved by the House of Representatives on 16.4.99, resulting to the expenditure for the period 1.3.99 – 15.4.99 to be effected without the approval of the House of Representatives. (b) Budget excesses by Chapter. In three Chapters of the Budget excesses were observed totalling £338.128, without the prior submission and approval of supplementary Budget. I stated that the preparation and submission for approval of supplementary budget was done with considerable delay, after the excesses were effected. (c) Budget excesses by Vote. In several Expenditure Budget Votes excesses were observed totalling £153.575, without the approval of the Minister of Education and Culture. 4.114.3 Personnel. (a) Salaries, allowances and employer’s contributions for permanent and casual employees. At 31.12.99 the Organisation employed 37 permanent employees (out of 42 permanent posts) and 4 casuals. The expenditure for salaries, allowances, overtime and employers contributions to the various funds was £775.202. (b) Permanent labour force. At 31.12.99 the Organisation employed also 33 persons in the permanent labour force, for a total expenditure of £246.173, which was allocated to the operation expenses areas. (c) Physical Training Teachers on contract. During the year the Organisation employed at various periods, under special agreement, 79 physical training teachers for the programme “Sports for All” for a total amount of £284.400. (d) Trainers and special coordinators. The Organisation paid the salaries of about 330 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 28 persons for coordination or administrative duties, which vary from £200 to £800 per month. 4.114.4 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, regarding the financial administration, as well as full compliance to the decisions of the Board of Management and the provisions of Laws and relevant Regulations.

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I expressed the view that the Board of Management should proceed towards the strengthening of internal control, improving the procedures followed and establishing a separate Internal Audit Department. As examples of insufficient exercise of internal control I stated the following: (a) The unsatisfactory control of grants paid to Associations and Sports Clubs. (b) The unsatisfactory documentation of payment vouchers. (c) The non-keeping or the existence of weaknesses in the keeping of suitable registers, as the registers for tenders, travelling, property, maintenance and projects. (d) The unsatisfactory updating of service records of employees. (e) The absence of an organisation chart, which will present the line of responsibility, the various working sectors, the officers in charge for each sector, as well as the staff. (f) The unsatisfactory keeping of employee records Although my Office recommends, every year, measures of the improvement of the system of internal control, it is realised that the necessary measures are not taken, resulting to the perpetuation of weaknesses. The Chairman of the Organisation informed me that the weaknesses are attributed to shortage of staff. 4.114.5 Financial Regulations. The Board of Management, under decision No. 42 dated 5.12.98, issued Financial Regulations relating to and governing matters of the budget, financial administration, accounting procedures and tenders. I stated that the Regulations, as they have been approved by the Board of Management, have to be partly improved and for this reason I recommended their reconsideration and revision. Towards this end I submitted specific suggestions relating to salaries and allowances, the payments procedures and relevant forms, tender evaluations etc. 4.114.6 Tenders (a) Opening of the tender box. With regard to the opening of the tender box I submitted specific recommendations, in order that the whole procedure would ensure that the opening of the box is promptly made by authorised personnel and that the recording of the correct records is properly made. (b) Publications in the press and written tenders. The Internal Financial Regulations of the Organisation, regarding tenders, are not always followed. Specifically cases were observed for which the Regulation regarding tenders from £2.000 to £10.000, for which publication must be made in the local press and, at least, three written tenders must be requested by telephone, was not followed. (c) Tenders regarding systems for violence control in stadiums. In my 1998 Annual Report, I stated that, as my Office observed, i. omissions/weaknesses/deficiencies in the procedures for the appointment of consultants, the preparation of tender documents, the evaluation/award of the tenders for the above systems, ii. the tenders were handled by the same officer and the same consultants, and

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iii. the three contracts had been awarded to two companies, which had a direct relation between them. I informed the Attorney General accordingly, on 7.1.99, who on 19.1.99 appointed three criminal investigators, for the investigation of the findings of my Office. The law Office of the Republic announced on 14.4.2000, that the three criminal investigators submitted, because of disagreements between them, two reports to the Attorney General who assigned their evaluation to a Counsel of the Republic. The Counsel of the Republic, after studying the matter, submitted a note to the Attorney General, with the conclusion that, considering all documents and the reports of the criminal investigators as a whole, no evidence resulted, documenting the commitment of any criminal offence. She concluded, however to the above, adding the phrase although possibly disciplinary offences might have been committed”, for which, according to the existing legislation the Attorney General has no jurisdiction. As it is stated in the announcement, copies of the reports of the criminal investigators will be submitted by the attorney General to the Board of Management of the Organisation. As the Chairman of the Organisation informed me, the reports have been submitted to the Board of Management, which delivered them to the Legal Adviser of the Organisation, to examine the possibility of commitment of disciplinary offences. (d) Tender No. 30/99 for the construction of a sports hall at Stelios Mavromatis Military Camp at Stavrovouni. During a site inspection carried out by my Office, in September 1999, after the submission of an oral report, the following were observed: i. The last day of submission of the tenders was 3.9.99. The tenders were opened on 16.9.99, were date stamped 3.9.99 and were signed by the Chairman and the Director General of the Organisation. ii. On 17.9.99 – the following day of opening of the tenders – the appropriate officer of the Organisation received important documents of the tender from the lowest tenderer, date stamped them 3.9.99 and gave them to the Director General, who signed them, after he was assured that those were not important documents. It is pointed out that, according to the terms of the tender, those documents were required to be submitted together with the tender. iii. Until the time of audit the Chairman of the Organisation had not signed the documents. iv. As the Director General of the Organisation informed me, his own key of the tender box was given at a previous date – around the 10.9.99 – to an officer of the Organisation to open the tender box, but he returned it later, without opening, as he stated, the tender box. On 16.9.99, the day of opening of the tenders, he gave the key again to the same officer. It is pointed out that according to the Regulations of the Organisation, the tender box is opened by the Director General or properly authorised representative, and the Chairman of the Organisation or his properly authorised representative, at the specified date and expiry time of each tender. v. Consequent to the above actions, all the tender documents placed in the file of the project had the same indication regarding the date of their receipt, i.e. “3.9.99”, without showing that certain tender documents of the lowest tenderer were received after the due date, on 17.9.99, and after the tenders had been opened. I considered the matter very serious, and on 24.9.99 I submitted the findings of my Office to the Attorney General, who ordered the carrying out of a criminal investigation.

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As the Attorney General informed me in October 2000, from the investigation it was ascertained that the appropriate officer of the Organisation has probably committed a criminal offence and has already been charged in writing by the Police. (e) Consultancy services for the construction of grass surface of the soccer pitch at Makarios Sports Centre. The Organisation decided on 11.1.2000 the direct assignment of consultancy services, for the construction of grass surface of the soccer pitch at Makarios sports Centre, to a specific firm of foreign consultants, for the amount of £29.700 plus £750 per month for other services, as well as all transport and accommodation expenses. My Office expressed its reservations regarding the assignment and the amount agreed, which is considered high, compared to similar services assigned in other cases, through invitation of tenders. The Chairman of the Organisation informed me that the assignment was made after serious consideration and legal advice and that he does not consider the amount of the fee to an international firm high, without, however, any documentation for his position. 4.114.7 Administration of owned and other sports facilities by the Organisation. From the administration of the above a net loss resulted amounting to £494.451, compared to £346.054 for 1998, i.e. there was an increase of £148.397 or 43%, in relation to the previous year. No sports facilities area has shown a surplus. The revenue showed a decrease of 26%, while the expenditure increased by 15%. As I was informed, the Organisation is considering the establishment of an institution, which will undertake the administration of all sports facilities areas, a procedure followed by several foreign countries. 4.114.8 National Scheme for the Support of sports Development. (a) With regard to the above Scheme the budget approved for 1999 was £950.000, while the amount for 1997/98 was £1.058.150 and £1.180.350 for the sports year 1998/99. It is understood that part of the budget for the sports year 1998/99 was added to the budget for 1999. (b) The amount of the actual expenditure has not been considered, because the accounts of the Scheme have not yet been prepared. As a result no comparison could be made between budgeted amounts and actual expenditure, and no conclusions could be drawn, regarding the correct execution of the budget. It is pointed out, however, that, after the preparation of the accounts for the sports year 1997/98, weaknesses were observed in the whole system of follow up and control. (c) The employment of staff for the above Scheme, with the Organisation or other Government Departments/Services is being continued. As I stated in my previous Report, regarding double duties, because of the considerable volume of work with the Scheme, it is possible that government duties are neglected. Furthermore, no authorisation appears to have been secured for those employed by Government. (d) The employment of two officers in charge and two clerks is continued, contrary to the Appointment of Casual Assistants in the Service of Public Corporate Bodies, Law of 1985 (169/85).

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The Chairman of the Organisation stated that the officer in charge of the Scheme was asked to prepare accounts for 1999, the employment of two experts for the Scheme who are employed in other Government Services will be terminated in the new sports period, unless permission is granted by the appropriate Ministry, and that the employment of the officers in charge of the Scheme and the two clerks is under consideration by the Ministry of Labour and the Legal Adviser of the Organisation. (e) Deductions and contributions to Social Insurance and Defence Funds. For the salaries of trainers, special coordinators and other personnel, which the Organisation pays various amounts for their services, for the Scheme’s Programme, no contributions or deductions are made, contrary to the provisions of the relevant Laws and Regulations. It is pointed out that, besides the two officers in charge and the two clerks employed by the scheme, the remaining are not considered as employees of the Organisation, and although they are employed by Sports Clubs and Associations, their salary is paid by the Organisation. The Chairman of the Organisation stated that the matter of contribution to the Social Insurance and Defence Funds is under consideration, in cooperation with the Legal Advisers and the Services of Social Insurance, because my recommendation will have other implications also. 4.114.9 Operation of the system of issuing of tickets. For the supply/installation of the system of issuing of tickets, the Organisation came to an agreement, in 1998, with two companies – after tender invitation – for the purchase of software and the necessary equipment of computers and printers. The provisions of the above agreements included the training of officers of the Organisation for the operation of the system. The system was expected to operate in the period 1998-1999. On 8.9.99 the Organisation agreed with company, which supplied the software, for the provision of services for the operation of the system for 3 years. The agreement was made after negotiation with the specific company, without invitation of tenders. A study of the contract revealed that, while this is a contract for the provision of services, the amount of £20.000 is provided to be paid, upon signature, and the remaining amount will be paid in three annual instalments of £3.000 each. As a result the Organisation has paid in August 1999, the amount of £20.000, while up to this day the system has not yet operated. The agreement includes, inter alia, a provision for the use of space in the offices of the private company for the installation of the main computers of the system. The Chairman of the Organisation informed me that this work was assigned directly to the supplier of the software, because it was the only one who could respond to the relevant requirements. Since, however, this was known to the Organisation, a relevant provision should have been made, in my opinion, for the inclusion of the whole work in the initial tender for the purchase of the software, so that better prices could be secured. With regard to the advance payment of £20.000, this represents – as he informed me – the work for the input of data and records in the system, but he does not clarify, however, the reasons for which this work had to be prepaid. Part B 4.114.10 Development Budget. The Capital Expenditure of the Organisation under the title “Creation and Improvement of Sports Facilities”, without providing, either in the Budget or the explanatory note, an analysis of the projects planned for execution. While the expenditure for

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the above purpose was £7,45 m., the Board of Management of the Organisation approved projects exceeding the above amount. With the view for better presentation, follow up, execution and transparency, I recommended that Development Budget expenditure are analysed to expenditure for owned and not owned facilities, with analysis of each expenditure either in the budget or the explanatory note. I stated further that the total expenditure in the explanatory note must be equal to the approved budgeted amount. The Ministry of Finance agrees with the above. 4.114.11 “Sports for All” programme. Cases were again observed of late deposit of collections by Physical Training Teachers. 4.114.12 Agreement between the Cyprus Sports Organisation and Nicosia Municipality for the Swimming Pool Nicosia. Negotiation with Nicosia Municipality are continued, in relation to differences as to the way of implementation of the above agreement, regarding the administration of the Swimming Pool. As I was informed the signing of a new agreement is expected. 4.114.13 Subsidies to non-owned installations. (a) Criteria for subsidies granted to Sports installations. Three years after the relevant decision of the Board of Management the above criteria are still not followed. It is pointed out that the total of subsidies amounted to £6,4 m., compared to £4,7 m. for the previous year. The criteria are the following: − The applicants should provide documentation that they possess or can secure the amount for the expenditure required, irrespective of the assistance provided by the Organisation. − The applicants before receiving the subsidy, should sign a relevant agreement, specifying the status of operation and administration of the sports installation (to this end the Organisation should request its legal advisers to prepare a relevant agreement). The Chairman of the Organisation informed me that the above decision of the Board of Management presents actual implementation problems. (b) As the investments for the construction of sports installations are significant (they represent 40% of the annual expenditure of the Organisation), the appropriate degree of utilisation should be verified before the construction of the installations. My Office recommended that the Organisation should examine the degree of utilisation of all sports installations, which have been constructed with substantial subsidy from the Organisation and, based on the results, to reconsider the subsidy policy followed up to now. 4.114.14 Computerisation of the Accounts Department and other Services of the Organisation. As I stated in my previous Reports, in October 1995 the award of the tender for the above computerisation was made to a company, for the amount of £11.080, without, however, a large part of it being implemented. As a result, several operations of the Accounts Department continue to be carried out by hand, with consequent accumulation of considerable volume of work and weakening to a great extend internal control. Specific examples of problems were relevantly stated, which, as the Chairman of the Organisation informed me, will be settled with the new computerisation.

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As a result of the long period of time since the award of the above tender, the requirements of the Organisation, as I stated in my previous Reports, have changed and I recommended that the whole matter be reconsidered, specifying the new requirements. I understand that the efforts made by the Organisation, for the tenderer to satisfy the tender requirements, failed. Recently after the audit and relevant recommendations of my Office, the appropriate officer commenced the preparation of a proposal to the board of Management for the purchase of services of consultants, who will determine the new requirements of the Organisation. 4.114.15 Physical stocktaking of assets. It was again observed that no physical stocktaking was carried out at the end of the year, of the assets at the owned sports facilities premises, with the exception of Pafos stadium. 4.114.16 Insurance premiums. The existing contracts continue not to cover a considerable part of the value of assets. 4.114.17 Official visits abroad. No criteria have been set for the official visits abroad. 4.114.18 Pensions and Gratuities Fund Accounts. The accounts up to the year 1997 have been recently submitted to my Office for audit. The submission of the accounts for the years 1998 and 1999 is still pending. 4.114.19 Guarantee cheques. The situation has improved although some cheques submitted as performance guarantees, continue not to be deposited. 4.114.20 Hospitality expenses. The necessary details are again not shown on the payment vouchers for hospitality expenses, as the number of guests and the names of officers of the Organisation, in order to facilitate audit.

4.115 CYPRUS LAND DEVELOPMENT CORPORATION Pat a 4.115.1 Financial position (a) Operating results. The accounts of the Corporation showed a surplus of £300.148, compared to £361.086 for 1998. (b) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Corporation: 1999 1998 Surplus to Capital and Reserve 5,38% 6,88% Current Assets to Current Liabilities 4,98 3,64

4.115.2 Personnel. The corporation employed 19 persons in permanent posts, with total emoluments £307.868. According to the above, the annual average of emoluments per employee for 1999 was £16.203. 4.115.3 Budget (a) Delay in the approval of the Budget. According to section 3 of the Public Corporate Bodies (Approval of Budgets) Laws of 1987 to 1993, the Budget should have been submitted to the House of Representatives, at least, three months before the commencement of the financial

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year. The Budget was submitted to the House of Representatives on 29.3.99 and was approved on 7.5.99. It is pointed out that the Corporation submitted promptly the Budget to the appropriate Ministry on 24.9.98. Consequently, the expenditure effected from 1.3.99 up to 7.5.99, date at which the Budget was approved, were not authorised, because the House of Representatives authorised the payments for January and February 1999 only. (b) Cash position. While the budgeted collections for 1999 were £8.958.900, the actual amounted to £5.145.383, i.e. there was a decrease of £3.813.517. The decrease of collections from the sale of houses and plots is attributed mainly to delays in the execution of projects, which resulted from delays in securing the necessary permits. 4.115.4 Unexpended amounts of the Development Budget. The following table shows the unexpended amounts for projects included in the Development Budget for the years 1997- 1999: Actual Unexpended Year Budget expenditure amounts Percentage £ £ £ % 1997 9.287.050 5.628.447 3.658.603 39,39 1998 8.035.000 3.055.417 4.979.583 61,97 1999 6.721.000 3.243.369 3.477.631 51,74

With regard to projects expenditure, the main reason these were not made is related to delays in securing the relevant permits. 4.115.5 Instalments in arrear. At 31.12.99 the total of outstanding instalments due by various buyers was £587.878. Out of this amount, about £342.000 concern 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, while the remaining part relates to delays of one to two instalments. At the same date outstanding instalments were also due, amounting to £156.928, from hire purchasers of houses of the government housing estate “Zenon” Larnaka, the sale of which was undertaken by the Corporation. It is noted that the Council of Ministers under decision No. 50.030 dated 14.7.99, pointed out that the whole matter of collection of the instalments in arrear of the Housing Estate falls within the absolute jurisdiction of the Corporation. The Corporation takes several measures for the collection of the amounts due and, the debtors who do not respond are referred to the lawyers, for the termination of the relevant agreements and repossession of the houses. 4.115.6 Utilization of land for development. At 31.12.99 the value of land for development was £5.680.848. The amount of £1.307.038 relates to a provision for covering the cost of financing of the land, the amount of £111.319 relates to a piece of land for the construction of the offices of the Corporation and the amount of £2.347.110 relates to various pieces of land, which cannot be developed for the time being, either because the land is not within 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, amounts to £1.915.381 only. The delay in land development carries considerable cost for the Corporation

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and efforts must be made for its development the soonest possible. The Corporation attributes the delay to the fact that many Government Services are involved for securing the required permits for land development. For the improvement of the situation the Corporation is in touch with the Ministry of Interior. 4.115.7 Development projects – Final Accounts. For several projects, which have been completed and delivered to the buyers, the final clearance accounts have not been prepared, so that the respective accounting settlement can be made, because the transfer of ownership to buyers is pending and also because of the non-completion of works of minor importance, such as greenery areas. Meanwhile this delay causes other problems, which cause further delay, e.g. various buyers have proceeded to alterations of their immovables and the Corporation faces difficulties in securing final approval and transfer of ownership. 4.115.8 Unsold housing units. The value of unsold plots, flats and shops at 31.12.99 amounted to £1.387.839. The Board of Management in an effort to accelerate disposal of the various units, took a series of measures, including the reduction of prices. The reasons for which certain units remain unsold relate mainly to the area, the landscape and the lack of interest by eligible persons, factors that must be examined and evaluated before the purchase of the land. 4.115.9 Insurance of houses sold and repaid by monthly instalments. It was observed that no control is exercised on the part of the Corporation, regarding the insurance of immovables by the buyers, for the period from the date of delivery of the immovables up to the date of their transfer, and the Corporation does not proceed to the relevant insurance, in case these are not insured by the buyers, as provided by the relevant term of the sale agreement. The above refers to houses the settlement of which is made directly to the Corporation. I recommended that the Corporation should request the buyers to present documents for insurance cover before delivery of the immovable, otherwise, the Corporation should insure the immovable and charge the buyers.

4.116 CYPRUS TOURISM ORGANISATION Part A 4.116.1 Preparation of accounts. According to the Regulations the accounts of the Organisation for 1999 should have been ready up to 30.4.2000, whereas these were prepared with considerable delay in July 2000. Because of the delay the audit of the accounts had not been completed by the date of preparation of my Report for 1999. 4.116.2 Financial position (a) Operating results. The accounts showed a surplus of £410.771, compared to £305.708 for 1998. The surplus resulted after the transfer of the amount of £961.231 from the reserve account. (b) Revenue. The revenue of the Organisation amounted to £15.927.849, compared to £14.994.892 for 1998, i.e. there was an increase of £932.957 or 6,2%, which is attributed mainly to the increased government subsidy by £1,0 m. (c) Expenditure. The expenditure of the Organisation amounted to £16.478.309, compared to £15.800.340 for 1998, i.e. there was an increase of £677.969 or 4,3%, which is mainly attributed to the increase of Vote “Promotion and Publicity” (£632.396).

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(d) Government subsidy. The government subsidy to the Organisation for 1999 was £14 m. (13 m. for 1998), to cover the expenses of the Organisation, consequent to the suspension since 1.10.93 of the 3% charge on the bills of recreation clubs, tourist establishments and accommodation fees. It is pointed out that the Council of Ministers with a decision in May 2000, approved the reinstatement, as from 1.7.2000, of the 3% imposition in favour of the Organisation, on the bills of recreation clubs operating within hotel units, as well as the differentiation to 3% of the accommodation fees in the hotel industry, for the purpose of the smooth operation of the Organisation, after the decision for the reduction of the government subsidy. (e) Accounting Ratios. The Following accounting ratios give a general picture of the financial position of the Organisation: 1999 1998 Current Assets to Current Liabilities 1,71 1,73 Personal Emoluments to Expenditure 24,9% 24,4% Government Subsidy to Revenue 87,9% 86,7% 4.116.3 Delay in the approval of the Budget. The Budget of the Organisation was promptly approved by the Board of Management of the Organisation on 11.8.98 and was submitted to the Ministry of Commerce, Industry and Tourism on 18.8.98. According to the Public corporate Bodies (approval of Budgets) Law, the Budget of the Organisation should have been submitted to the House of representatives up to 30.9.98, whereas it was submitted on 17.6.99 and was enacted to a Law (No. 35(II)/99) on 8.7.99, which was published on 16.7.99. Provided that the House of Representatives approved duodecimals for the months of January and February 1999 and the Organisation was facing legality of payments problem for the period 1.3.99 – 16.7.99, under decision of the Council of Ministers No. 49.430 dated 31.3.99, an advance of £4.000.000 was issued, in April 1999, by Government, which was repaid in August of the same year, through the government subsidy. 4.116.4 Personnel. The Organisation employed 208 persons in permanent posts and one on contract, with total emoluments £4.100.803, compared to £3.847.702 for 1998. The personal emoluments include the amount of £843.194, which represents the contributions of the Organisation to the Pensions and Provident Funds, and an amount of £369.993 for the contributions of the Organisation to Social Insurance, Redundancy Funds etc. In addition the Organisation has spent the amount of £347.584 for medical treatment, insurance and for indirect benefits of the staff. 4.116.5 Audit of C.T.O. Offices abroad. The audit of C.T.O. offices abroad is carried out by my Office at the Headquarters in Cyprus and it is supplemented by spot inspections carried out, at various periods, in conjunction with the audit of diplomatic Missions in the respective countries. During 1999 spot inspections were carried out at Milan, Brussels and Tokyo. For each Office a relevant report was prepared, which was submitted to the Cyprus Tourism Organisation. 4.116.6 Tenders for the selection of an advertising firm for the world advertising campaign of C.T.O. for the years 2000-2001. On the request of the Public Accounts Committee of the House of Representatives, as well as the submission to my Office of written reports by unsuccessful tenderers, a special investigation was carried out by my Office, for the purpose of evaluation of the whole procedure followed by the Organisation, up to the final

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selection of the advertising firm, which was made by the Board of Management on 5.1.99. In the above investigation deviations were observed in the approved procedure of publication, receipt, keeping, opening, examination and compliance to the terms and documentation of the evaluation of the tenders. The Board of Management of the Organisation, on the advice of its legal advisers, decided, at its meeting dated 9.12.99, not to cancel the tender. Finally, after the Attorney General’s ruling dated 4.1.2000 that no intervention will be made by the appropriate Minister of Commerce, Industry and Tourism, regarding the last decision of the Board of Management of the Organisation for non-cancelling the award of the tender to the specific company, and the Organisation proceeded on 20.1.2000 to the signing of the contract with this company. 4.116.7 Internal Audit Department. In a relevant report of my Office, which was submitted to the Organisation on 6.8.98, I suggested, inter alia, the preparation and application of specific internal audit programmes, which will cover all fields of activities of the Organisation. The Organisation informed me in July 2000 that certain programmes have been prepared and their implementation had already commenced, whereas within 2000 the other programmes will be prepared, which will cover the remaining fields, and that the delay was attributed mainly to the shortage of staff of the Internal Audit Service and to their assignment of other duties. 4.116.8 Advertising campaign in countries abroad (a) Advertisements in the United Kingdom. For the summer campaign of the Organisation in the United Kingdom, the amount of Stg£410.423 was prepaid to an advertising firm, on the approval of the Board of Management, without any guarantee submitted or deduction for the proper execution of the terms of the contract or/and probable differences. From the audit of invoices, several omissions and differences were observed, which, as the Chairman of the Organisation informed me in October 2000, about 70% - 80% of the amount under examination has been investigated and justified. He also informed me that recently additional documentations and clarifications were received regarding the remaining amount, which will be examined by the Accounts Department. (b) Advertisements in Germany. The advertising firm to which the tender for the Organisation’s advertising campaign had been awarded, the contract of which, after the extension granted, expired on 31.5.99, established in 1996 a subsidiary company, which is occupied in type settings, lithography etc. This company submitted for the years 1997 and 1998 tenders to the above advertising firm for the production expenses of the advertising campaign of the Organisation. For 1997 the tender was awarded to the subsidiary company and the amount of D.M. 19.554 was paid to the advertising firm, including its commission, for work executed by the subsidiary company. For the year 1998 the Board of management decided that for the production expenses tenders to be invited directly from C.T.O. Office in Germany, where it was observed that, in many cases, the tenders were much lower than the tenders submitted by the subsidiary company of the advertising firm. The board of Management of the Organisation decided to request the refund of the commission amount for 1997 and in December 1999 the commission amount of D.M. 1.364,25 was deducted from the payments to the advertising firm. It is noted that the above firm claims through court, inter alia, the payment of the amount of the commission. It is also noted that the officer in charge of the Office in Germany had, in December 1996, informed Headquarters about the relation of the advertising firm with the company, while in August 1998 the legal adviser of the Organisation expressed the view that the Organisation

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should proceed to the termination of the contract, in view of the above actions of the advertising firm. The Chairman of the Organisation informed me in October 2000 that on 8.10.1998 the Board of Management, taking into consideration that, in case of termination of the contract with the above firm, there will probably be a time consuming court process and probably it will not be possible to carry out the summer advertising campaign in Germany, which is the second biggest tourist market for Cyprus, and also because the above contract finally expires in May 1999, decided to continue the cooperation with this firm until the expiry of the contract on 31.5.1999, with the existing terms. (c) Advertisements in Northern Countries. The advertising firm does not always submit the necessary documentation with the invoices, resulting to delays in the settlement of the invoices. The advertising firm has referred the case to court in Sweden, claiming the amount due plus interest. It is expected that with the adoption by the Organisation of the procedure of assignment of the creative part of advertising campaigns in all countries to one advertising firm, considerable improvement will be noted. Part B 4.116.9 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 awarded by the Board of Management to a company, was not possible to be implemented, because of the refusal of the previous licensee to deliver possession and use of the Anchorage. At the same time lawsuits were filed by all parties involved, which complicated the situation further. The new licensee commenced using and exploiting the Anchorage since March 1998, while the former licensee continues to occupy the Office and the premises with his own vehicles/machinery parked in the area. It must be pointed out that the new licensee has not complied with all the terms of the agreement he signed with the Organisation and, in addition, he has paid fees for one month only amounting to £2.755. With the expiry of the agreement on 31.12.99 the new licensee gave to the Organisation free possession and use of the Anchorage, while the Organisation proceeded to the confiscation of the bank guarantee for the amount of £33.060, for the amounts due. For the collection of the remaining amount of £24.508, legal measures were taken by the Organisation. On the advice of the legal adviser of the Organisation, the Board of Management decided, in June 2000, to proceed to invitation for tenders for the use and exploitation of the Anchorage, as well as the deprivation of the right of participation in tenders of the Organisation, for a period of one year, of the above two former licensees, because of non-compliances to the terms of the agreements they signed with the Organisation. The above tenders were expiring on 2.8.2000. It is pointed out that since 1.1.2000 and until the assignment to the new tenderer of the services of handling up – launching, transport and support of boats, the Organisation notified the owners of boats that any company which can provide the above services, may use the Anchorage, if requested by the owners of the boats and permission is granted by the management of the Marina of Larnaka. Both the former licensees continue to provide their services, while the first former licensee proposed a compromise for all legal cases pending against him. The whole

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matter is under consideration by the Organisation. The Chairman of the Organisation informed me in October 2000 that the whole matter had been examined and it was decided that all pending legal cases regarding the Anchorage be pursued to court. The proposal of the former first licensee for compromise of all legal cases pending against him was not accepted by the Board of Management at its meeting on 22.1.1999. 4.116.10 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, which for 1999 amounted to £129.364 (£104.800 for 1998). In addition a supplementary Medical Treatment Scheme was established with a 3% contribution by the Organisation on gross emoluments, while the amendment of Regulations is pending for approval, inter alia, of an additional 0,85% from 1992, for which a provision is made in the accounts. The total cost for staff medical treatment for 1999, on the basis of the above two Schemes, amounted to £243.806 (£219.259 for 1998. The board of Management decided on 28.4.99, the assignment to an insurance company the medical treatment cover for the staff. Towards this end the terms and specifications were prepared for tender invitation. 4.116.11 C.T.O. advertisements in Belgium. In my previous reports it was stated that after a report made by the Manager of the C.T.O. Office in Brussels, a relevant investigation was carried out by my Office, which revealed over invoicing by a foreign advertising firm for C.T.O. advertisements in Belgium. My relevant report was submitted to the Chairman of C.T.O. on 4.11.97. According to an agreement between C.T.O. and the advertising firm, the firm agreed not to be paid for advertisements valued at about £52.325, provided that the charges faced will be withdrawn and their cooperation terminated. The Board of Management of the Organisation decided on 18.9.97 that an administrative investigation be carried out and the opinion of the Attorney General was sought, regarding the way to be carried out, and on 3.11.97 the Ministry of Commerce, Industry and tourism submitted a proposal to the Council of Ministers for carrying out this investigation for the following purposes: • The examination of the procedure of evaluation and selection of the advertising firm for Belgium and Holland, and • the examination regarding the follow up and control by the appropriate officers of the quality and degree of implementation of the advertising campaign in Belgium and Holland and the keeping of contractual obligations of the advertising firm, especially regarding the Organisation’s benefits for mass media discounts, as well as the examination of invoices. The Council of Ministers accepted the proposal and on 14.11.97 decided the appointment of a person as commissioner of the investigative committee for the above matter. The investigation commenced on 31.3.98 and the report/conclusion of the committee was submitted to the Council of Ministers on 4.8.99. I understand that the council of Ministers referred the conclusion to the Attorney General of the Republic. Meanwhile the Organisation is considering relevant rulings of the Attorney General issued in April and June 2000, relating to disciplinary measures being taken against certain officers, and also for final decision to be taken for £1.048.215, compared to probable commitment of a criminal offence.

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4.117 AGRICULTURAL INSURANCE ORGANISATION Part A 4.117.1 Financial position (a) Operating results. The accounts showed a surplus of £1.048.215, compared to £1.483.975 for 1998. (b) Revenue. The revenue amounted to £4.991.467, compared to £15.469.026 for 1998. The decrease of £10.477.559 is attributed mainly to decreased government subsidy. (c) Expenditure. The expenditure amounted to £3.943.252, compared to £13.985.051 for 1998. The decrease of £10.041.799 is mainly attributed to the payments of reduced compensations and “ex gratia” financial assistance to producers, because of smaller damages suffered. (d) Compensations. The compensations paid for the years 1999 and 1998 are shown as follows: 1999 1998 £ £ (i) Compensations covered by A.I.O: Deciduous fruit trees 1.014.569 83.707 Vineyards 379.816 688.143 Cereals 720.998 3.964.574 Forage 12.234 87.924 Beans 270 9.446 Citrus trees 22.409 55.899 Artichokes 528 4.050 Potatoes 163.525 435.682 Loquat 5.368 16.631 Total 2.324.717 5.346.056 (ii) Additional financial assistance: Deciduous fruit trees ------1999 1998 £ £ Vineyards 554 115 Cereals 388.144 3.363.959 Forage 9.306 --- Citrus trees ------Potatoes --- 4.002.997 Beans ------Artichokes ------“Loquat” ------398.004 7.367.071

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(e) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Organisation: 1999 1998 Current Assets (Less amounts due by Government) to Current Liabilities 7,71 1,49 State Subsidy to Total Revenue 49,13% 86,50% Surplus/(Deficit) to Capital Employed 2,74% 5,33%

4.117.2 Personnel. The Organisation employed 41 persons and the expenditure in salaries, allowances and employer’s contributions to the various funds was £947.809, compared to £1.045.712 for the previous year. The cost of employment of casual personnel amounted to £82.582 (£191.049 for 1998) and is included in the personal emoluments. 4.117.3 Government subsidies and guaranteed loans. The Council of Ministers approved in 1999 ex gratia financial assistance amounting to £0,4 m. to producers, in excess of what was provided in the relevant legislation. In addition the amount of £2,3 m. was paid according to the relevant legislation. Government paid to the Central Cooperative Bank, through the Organisation, the amount of £3,6 m., which represents the instalments of guaranteed loans raised by the Organisation. 4.117.4 Insurance premiums in arrear. The insurance premiums in arrear at 31.12.99 were £471.463, compared to £623.210 for 1998. Up to 18 July 2000 insurance premiums in arrears mounting to £213.974 had been collected and I suggested that measures must be taken for the collection of the remaining amounts, and all cases, which cannot be collected, must be investigated and written off. The Director of the Organisation informed me that, on the decision of the Board of Management, a list has been prepared with amounts considered impossible to collect and, soon, a proposal will be submitted to the council of Ministers for approval of their write off. 4.117.5 Economic viability of the Organisation. At 31.12.99 the reserves amounted to £7,1 m., after the Organisation settled most of its liabilities for compensations to producers for damages suffered in 1999. Despite the increase of government subsidy 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 extend, on government support. For the study of the economic viability of the Organisation a foreign consultant has been requested to carry out an actuarial study. The consultant has already submitted his preliminary report. As the Director of the Organisation informed me, the Board of Management is expected soon to take decisions regarding the implementation of the recommendations of the actuary. 4.117.6 Internal control systems. I pointed out the necessity for examination and evaluation of all internal control system which must be applied in each case, especially in the field of evaluations/compensations and, at the same time the extension and improvement of the various systems and the preparation of suitable programmes of work which will cover all fields of activities of the Organisation, in accordance with the International auditing Standards. As I have been informed, the board of Management will examine this matter within the general consideration for human resources, which has been decided to be carried out by the

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Organisation, aiming at the adoption of an efficient system of internal control for the Organisation. Part B 4.117.7 Insurance premiums for potatoes, grapes and citrus. For the potatoes, grapes and citrus traded in the local market, no insurance premium is collected, except for a small proportion of premiums collected on the basis of declarations for cultivations or damages. As the Organisation holds the view that the administrative expenses for the collection of these premiums could exceed the income from the collection of the premiums, I requested specific documentation for this matter. The study of the matter was not possible because of shortage of staff in the research branch. I understand that in the preliminary actuarial study submitted specific recommendations are made for the whole insurance system, which is expected to be set on a more rational basis. 4.117.8 Purchase of air-mixers for potato plantations. In my Report for 1995 I stated that the Organisation purchased in 1992 twelve air-mixers, which were placed at Kokkinochoria area for the protection of potato plantations from frost, for a total amount of £174.738. The experimental work was continued and completed in 1998, the results, however, were not considered satisfactory and the air mixers were given free of charge to two agricultural estates in Limassol. In addition the Board subsidised, with the amount of £5.835, the cost of dismantling, transport and installation of the air mixers. I expressed the view that the above arrangements were not financially beneficial for the Organisation, since, according to the provisions of paragraphs 5 and 6 of the relevant agreements, the Organisation is not totally relieved from the obligation of payment of compensation, in case of damages from frost during the following five years, because, if the operational alertness of the air-mixers is affected at a given time by factors beyond the control of the companies, then the Organisation has to pay compensations.

4.118 CYPRUS DAIRY INDUSTRY ORGANISATION Part A 4.118.1 Financial position. The Organisation showed a deficit for 1999 amounting to £363.719, compared to a surplus of £385.094 for 1998. The decrease by £648.813 is attributed mainly to the decrease of gross profit due to loss of income as a result of the destruction of a quantity of 4,9 m. litres of milk, which was not absorbed by the industry, and because of decreased sale prices of meat. 4.118.2 Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Organisation: 1999 1998 Current Assets to Current Liabilities 1,13 1,56 Gross Profit to Sales of Milk 2,64% 5,41%

4.118.3 Guarantees (a) Guarantees granted by the Organisation. At 31.12.99 the guarantees granted by the Organisation to cattle breeders and milk transporters amounted to £170.535.

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(b) Government guarantees. Government granted to the Organisation a guarantee for the amount of £900.000, for bank credit facilities. 4.118.4 Personnel. The Organisation employed 37 permanent officers, with total emoluments £640.759, including employer’s contributions to the various Funds, and annual average emoluments for employee £17.318. It also employed 22 labourers, with total emoluments £179.263. At 31.12.99 there were 6 vacant permanent posts. 4.118.5 Liquidity. The Organisation in order to face the acute problem of liquidity had to raise a loan/credit facility, amounting to £900.000, from the Central Cooperative Bank Ltd, under government guarantee. The bank and cash balances, from £915.751 at 31.12.98, turned to an overdraft amounting to £116.230 at 31.12.99, i.e. there was a decrease of £1.031,981. As I understand, the serious problem of liquidity appears to have been created from the following: (a) The delay on the part of the industrialists to pay for the milk they receive. (b) The destruction of a large quantity of milk for which the Organisation was burdened with a considerable cost. (c) The freezing of debts amounting to £335.380 of a specific industry for two years and the increase, at the same time, of the credit facility of this industry from one to two months. 4.118.6 Credit policy of the Organisation (a) Submission of guarantees by dairy industries to the Organisation. As I stated in my previous Reports, for the credit facility of 45 days provided by the Organisation to the industries for the payment of the milk they receive, no guarantee or other security has been secured from all industrialists. The Chairman of the Organisation informed me that the largest processors continue to refuse to deposit the relevant guarantees, taking advantage of the surplus milk produced in the last years. (b) Delay in the repayment to the Organisation of the value of milk and meat. In some cases considerable delay is observed in the repayment to the Organisation of the value of milk, which is received by the dairy industries and also of the meat sold by the Organisation. It must be pointed out that the specific industry, for which the Board of Management at its meeting dated 5.5.99, decided the freezing of its debt amounting to £335.380 and the increase of the credit period for the value of milk delivered, from one to two months, continues to delay the payment for the value of milk received from the Organisation, and in consequence the liquidity problem of the Organisation becomes more acute. The Chairman of the Organisation informed me that, in cases where serious delays were observed, measures have been taken and a number of industrialists receive the milk on prepayment of its value or on payment of a deposit covering the value of milk for a period of more than one month etc. Furthermore, the balances of debtors are followed up on a weekly basis and legal measures have been taken, for securing the interests of the Organisation. For the specific industry he stated that the matter is closely followed up by the Board of Management and it is expected that the situation regarding the amounts due to the Organisation will soon be improved.

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(c) Interest on debts of industrialists. Under a decision of the Board of Management interest is imposed on debts in arrear by industrialists. During 1999 interest has been imposed amounting to £26.964. The Chairman of the Organisation informed me that, despite the fact that some industrialists did not accept it, the Organisation takes all the appropriate measures for their collection. 4.118.7 Dumping of surplus milk. During 1999 a quantity of 4,9 m. litres of milk was dumped, valued at £889.689, on the basis of the weighted average price for the years which was not possible to be received by the industries, compared to 2,1 m. litres value at £382.434 for 1998, as shown below. In addition the Organisation was charged with the amount of £35.560 for the transportation of the surplus milk to the dumping area. Value of surplus milk for the years 1998 and 1999: 1999 1998 Purchase Purchase Milk Type Litres Value Litres Value Price Price Cents £ Cents £ Cow milk 4.785.778 17,84 853.783 2.025.631 17,5 354.485 Sheep 10.825 36,30 3.929 20.951 36,43 8.328 milk Goat milk 134.810 23,72 31.977 72.111 23,94 19.621 4.931.413 889.689 2.118.693 382.434 According to the Chairman of the Organisation, the dumping of surplus milk is mainly due to delay on Government’s part to take measures in order to restrict the imports of imitation cheese, resulting to the refusal of the Cyprus dairy industries to receive all the milk they declared they needed for the manufacture of EDAM type cheese, as well as to the production of milk by certain producers in excess of their individual quotas, and to the fact that some industries did not receive all the quantities of milk during holidays. 4.118.8 Payment of surplus cow milk to producers for 1998. In my report for 1998 I stated that a provision was made in the accounts for an amount of £62.656, which was preliminarily estimated, with a possibility of alteration, regarding 2,4 m. litres of surplus milk which the producers delivered to the Organisation in excess of their individual annual quotas. The provision was made after a decision of the Board of Management for paying cattle breeders at a “clearing price” for the above quantity of milk, without any final decision taken for the price of payment. With regard to the above decision, I stated that this is not in line with the provisions of the set of measures approved by the council of Ministers for the stabilization of production. As the above provision is included in the accounts for the year 1999, I requested to be informed of the action taken for this matter. The Chairman of the Organisation informed me that the Board took the above decision after considering the following: • The supply and demand of milk during 1999.

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• the pressure exercised by industrialists to the Organisation for increased deliveries of milk to them, and • that the surplus milk would be paid at a clearing price and that the Organisation would not be burdened financially with any amount. In addition the Chairman of the Organisation stated that this provision of the decision of the council of Ministers is very difficult, if not impossible, to be implemented, because no producer would be willing to deliver surplus milk at zero price, and in addition to pay a fine. The producers would simply dump the milk or dispose of it outside the Organisation, with the risk of collapse of the whole system of production planning. He stated further that the provision made for payment at a clearing price, in the accounts for 1998, for the amount of £62.656, is still pending, because the producers refuse to be paid at the price of 2,1 cents per litre of milk. 4.118.9 Collection and distribution of sheep and goat milk (a) Pafos District. From the collection and distribution of sheep and goat milk at Pafos district, of total value of £118.157, the Organisation suffered a loss amounting to £161.470, compared to £214.663 for 1998. The loss includes the amount of £23.679, which relates to subsidies for export of sheep and goat milk products, for which reference is made in the following paragraph of this Report. (b) Larnaka and Famagusta Districts. As I stated in my Report for the previous year, despite the decision of the council of Ministers No. 35.122 dated 28.2.91 for the simultaneous commencement of the distribution of sheep and goat milk at Pafos, Larnaka and Famagusta Districts, it appears that this cannot be undertaken by the Organisation in the Districts of Larnaka and Famagusta, since the collection and distribution of sheep and goat milk is carried out by a private individual. It is noted, however, that for the collection and distribution of milk in Larnaka and Famagusta Districts, equipment of total value of £66.923 was purchased, of which, equipment valued at £18.009 was transferred and installed at the freezing centres of Pafos District, for purposes of distribution of sheep and goad milk in this District. The remaining equipment continues to remain idle. It is additionally noted that the Organisation proceeded to the processing of a Scheme for carrying out of tests of sheep and goat milk for the Districts of Larnaka and Famagusta, which was submitted to the Minister of Commerce, Industry and Tourism, for the purpose of distribution of milk by private industries, and the payment of producers, on the basis of the quality of their milk. The approval of this Scheme is still pending. The Chairman of the Organisation informed me that the loss from the distribution of 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.). As far as the delay in the distribution of milk in Larnaka and Famagusta Districts is concerned, this is due to the conflicting views of the various parts represented at the Board, as well as the differentiation of the facts, in view of the Cyprus course for accession to the European Union, and the policy for harmonization of the economy with “acquis communautaire”.

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4.118.10 Subsidies on sheep and goat milk products for export (a) Subsidies on products for export manufactured with surplus milk, of 1998 production. Under relevant decisions of the board of Management, the Organisation proceeded to the subsidisation of an industry for the amount of £23.679, in 1999, for exports of dairy products during the period 1.1- 30.4.99 and specifically for the export of 15 786 kilos of “Kaskavalli/Kasseri” type. These subsidies, as well as the respective subsidies for 1998 to the same industry, totalling £79.829, were made after the decisions of the Council of Ministers No. 47.882 dated 27.5.98 and 48.862 dated 16.12.98, according to which the relevant assistance from the Organisation for the export of the above products will be given for the products which will be produced from surplus quantities of sheep and goat milk. As the quantities of milk used for the production of the products exported were not distributed through the Organisation, there is no indication and it cannot be verified whether the above were surplus quantities of sheep and goat milk. The Chairman of the Organisation informed me that the amounts paid by the Organisation, amounting to £79.829 for 1998 and £23.679 for 1999, were for products made from milk which was not distributed through the Organisation, but by a specific dairy industry. The above procedures were followed on the recommendation and encouragement of the Ministry of Commerce, Industry and Tourism, according to the decisions of the Council of Ministers No. 47.882 dated 27.5.98 and 48.862 dated 16.12.98. The above subsidization related to quantities of finished products, which were in the stores of this industry, which requested subsidization on the exports of these quantities, in order to continue to receive the milk. During this period there were surplus quantities of sheep and goat milk and the Organisation was facing difficulties in the disposal of milk distributed from Pafos district, and as a result a similar scheme for export subsidies was introduced. The Organisation undertook the implementation of this Scheme in order to face a pressing situation from the Industry, on the presumption that Government would compensate the Organisation for the respective expenditure. The above amount is still claimed by the Organisation. (b) Subsidization of products for export produced from surplus milk of 1999 production. The Board of Management of the Organisation, at its meeting No. 635 dated 23.6.99, decided the subsidization of products for export, made from sheep and goat milk, which were produced from surplus milk delivered by the Organisation to processors during the period 1.2.99 – 30.6.99. According to the above decision, products, which are totally produced from goat milk, will be fully subsidized. In the cases where the proportion of goat milk in the finished product cannot be determined (e.g. halloumi), then the subsidy will be made on the basis of 30% capacity, unless it can be proved that the proportion is different. It was observed that during the above period 969 533 litres of surplus goat milk were delivered by the Organisation to five industries, while up to now only one industry was subsidised with the amount of £18.516, for exports of products which correspond to 194 335 litres of milk. For the remaining 775 198 litres, possible subsidies are pending of a total amount of about £69.845. It is noted that, while three of the above industries initially submitted to the Organisation the relevant documents for subsidization of exports for 73 814 kilos of halloumi and 18 410 kilos of

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feta, requested the Organisation not to proceed to the relevant subsidies amounting to about £17.450, estimated on the basis of 30% capacity of goat milk, because, as I was informed, they expect payment of a bigger subsidy from Government. I requested to be informed whether, in case the Organisation finally proceeds to the relevant subsidizations, will be in a position to confirm the percentage of goat milk in the products for export, in order to pay the correct subsidies, applying the above decision. The Chairman of the Organisation informed me that he agrees with the above and that, in case these exports are finally subsidised by the Organisation with the amount of about £70.000, it is doubtful as to whether the Organisation will be in a position to confirm the proportion of goat milk in the case of halloumi, because, as the General Laboratory informed them, there is no suitable method for such tests. He stated further that the Organisation has assigned to two research centres abroad (Greece, Spain) the processing of a method for the determination of the proportions of the various types of milk in halloumi. 4.118.11 Payment of the amount of £16.626 to a producer for surplus cow’s milk which he delivered to the Organisation. For the surplus quantity of milk which the specific producer delivered in 1999, exceeding his annual specified quota by 141 705 litres, was paid, on the decision of the Board of Management of the Organisation on 25.10.99 and 12.1.2000, the amount of £16.626, contrary to the decision of the council of Ministers No. 44.301 dated 22.5.96, which approved, inter alia, measures for stabilization of production, which provide that the surplus quantity of milk is delivered to the Organisation at zero price and a fine is imposed to the producer of 4 cents per surplus litre of milk. This producer, up to April 1999, delivered, irregularly, the surplus quantity of milk to a specific industry, instead of the Organisation, and without payment of the relevant fees. As it is stated in the minutes of the Ad Hoc Committee for this matter, dated 12.1.2000, the committee decided to consider that the quantities received by the Organisation from this producer, as received by the specific industry and the payment to be made directly by this industry to the producer, which was finally the case. The Chairman of the Organisation informed me that the thinking behind the decision to pay the above amount was as follows: (a) The milk of this producer was distributed by an industrialist, which, either way would be paid by the industrialist, at least up to the quantity of 180 000 litres which was determined as the maximum production without quotas, and (b) the milk of the producer would continue to be distributed by this industry, unless its factory suffered fire damages. 4.118.12 Income and Expenditure Account for Meat at 31.12.99. During 1999 the following four Meat Trading Schemes of the Organisation operated: (a) Scheme for slaughtering and deboning of cows for Government. (b) Scheme for slaughtering of lambs and kids for Government. (c) Scheme for slaughtering of calves for the Organisation. (d) Scheme for slaughtering of lambs and kids for the Organisation.

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On 28.2.99 the scheme for slaughtering lambs and kids for Government was terminated and the total loss amounting to £105.602, which resulted from the operation of this scheme for the period 1.1.96 up to 28.2.99, has been covered by Government. The operating results of the remaining schemes are as follows: (Deficit)/ Scheme Income Expenditure Surplus £ £ £ Cows Scheme for Government 1.929.018 2.103.089 (174.071) Calves Scheme for the Organisation 867.745 837.927 29.818 Lambs and Kids Scheme for the Organisation 868.786 864.800 3.986 3.665.549 3.805.816 (140.267)

The scheme which operated for the Republic shows a deficit amounting to £174.071, while the schemes of the Organisation show a surplus of £33.804, and the result is shown in the income and expenditure account of the Organisation. 4.118.13 Audit of personal emoluments. The matters that have been observed from the audit of personal emoluments are mainly attributed to the non-securing of the required by the Law approval of the Minister of Commerce, Industry and Tourism and include the following: (a) Changes of titles of posts. Four posts of Clerks (Scale A2) were re-titled to Accounting Officers 3rd Grade (Scale A4-A7). Also the post of Clerk 2nd Grade (Scale A2-A5) was re-titled to Assistant Transport Officer (Scale A4-A7). (b) Upgrading of posts and date of implementation. For three out of the four upgradings, which were approved with a letter of the Ministry of commerce, Industry and tourism, dated 25.10.99, the Board specified as effective date the 4.12.98, without this being provided in the relevant approval. The fourth upgrading is still pending, due to disagreements on the part of the Board of Management. The Chairman of the Organisation informed me that for the three upgradings the management would take the necessary action for the determination of the date of effectiveness of the decision. For the fourth upgrading the matter was referred to the personnel committee of the Organisation for further consideration and return to the Board of Management. (c) Schemes of Service. No scheme of service was presented providing for the placement of two officers, appointed on 1.6.95, to the post of Laboratory Technician 2nd Grade, at the 4th step of Salary Scale A4. Furthermore, no new schemes of service have been approved for the implementation of the institution of the replacement of combined posts/grades with combined salary scales (A2-A5-A7 and A4-A7), according to Law 8(II) of 1996. The Chairman of the Organisation informed me that for the posts of laboratory Technician 2nd Grade, Management is taking the necessary action for securing the relevant approval. The new schemes of service are now before the appropriate Minister for approval, and then these will be submitted to the council of Ministers and the House of Representatives. (d) Post of Storekeeper of Cheese Dairy and secondment of the holder of the post to the deboning branch. The holder of the post does not appear to have succeeded in the relevant

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examination provided by the Scheme of Service. Also, since 1.7.96, due to suspension of operations of the Cheese dairy, he was seconded to the deboning branch of the Organisation and carries out duties outside the scheme of service of the post, with an additional monthly commuted compensation. The Chairman of the Organisation informed me, inter alia, that the post of storekeeper must be abolished and a new scheme of service prepared, which will respond to the requirements of the deboning branch. (e) Analytical presentation of the permanent posts in the Budget of the Organisation. The Budget does not present all the required information regarding the personal emoluments of the staff. I recommended that the Budget shows details of the salary scales, basic salary, increases, allowances etc., with corresponding notes. The Chairman of the Organisation informed me that my recommendation would be implemented with the preparation of the next Budget for 2001. (f) Regulations for appointments and employee’s service. I recommended the preparation and approval of the above Regulations, regarding the terms of appointment and service of the employees of the Organisation, as provided by the relevant legislation. The Chairman of the Organisation is to follow, where possible, the Regulations applied in the Public Service and that the matter will be considered by the Board of Management, as to whether separate Regulations must be prepared. 4.118.14 Payment of freezing expenses amounting to £13.895. The above amount was paid by the Organisation to a company irregularly, because it represented a liability of the Cattle breeders Association of Aradhippou-Athienou Ltd to this company for freezing expenses for the period 1.1 –30.11.96. The Organisation undertook the trading of meat on 15.6.96 and had no relation at all with the above freezing expenses. The Board of Management, however, decided on 16.6.99 the payment of the above amount. The Chairman, the Director and two members of the Board disagreed with this decision for the reasons stated above.

4.119 HOUSING FINANCE CORPORATION Part A 4.119.1 Operating results. The Corporation showed a surplus of £2.639.370, compared to £2.320.181 for 1998. 4.119.2 Accounting Ratios. The following accounting ratios give a general picture of the financial situation of the Corporation: 1999 1998 Return on Capital Employed 1,09% 1,11% Deposits to Loans 0,92 1,00 Average Yield of Loans, excluding Loans from Government Schemes 7,49% 7,71%

4.119.3 Deposits. The deposits made by the public amounted at 31.12.99 to £185,16 m., compared to £167,21 m. for 1998, i.e. there was an increase of £17,95 m. or 10,74%. 4.119.4 Housing loans. Since 1983, when the granting of loans commenced, up to 31.12.99, 10 647 housing loans were approved, for a total amount of £251,96 m. In 1999, 1 025 housing

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loans were approved, amounting to £34,82 m., compared to 1 253 for 1998, for the amount of £41,58 m. At 31.12.99 the balance of the loans account was £200,42 m., compared to £167,80 m. for the previous year, i.e. there was an increase of £32,62 m. or 19,44%. 4.119.5 Loan instalments in arrear. Loan instalments in arrear on 15.6.2000 amounted to £5,1 m., compared to £3,7 m. for 1998. Due to the change of the computerised system, the preparation of a statement of overdue loans at 31.12.99 was not possible. 4.119.6 Personnel. The corporation employed 54 persons and total emoluments, excluding pension contribution, amounted to £765.776, compared to £728.127 for 1998. The average annual emoluments for each employee amounts to £14.181.

4.120 UNIVERSITY OF CYPRUS Part A 4.120.1 Financial position. The financial position of the University, according to the non- audited accounts for 1999, was as follows: (a) Operating results. For 1999 there was a deficit, before the transfer to deferred revenue, amounting to ££375.475, compared to £2.030.108 for 1998. The deficit was basically decreased due to the increase of the government subsidy and the tuition fees. The deficit was financed from previous years revenue. (b) Revenue. The revenue amounted to £10.829.904, compared to £8.142.447 for 1998. It includes general government subsidy £3.216.183 and tuition fees £5.325.000, compares to £1.081.727 and £4.998.000, respectively, for 1998. (c) Expenditure. The expenditure amounted to £11.205.379, compared to £10.172.555 for 1998. The increase is attributed mainly to the increase of expenditure for salaries and allowances of the staff and the Research Activities/Programmes, which amounted to £7.424.540 and £769.528, compared to £6.678.010 and £588.796, respectively, for 1998. A decrease was noted in the expenditure for temporary housing and for participations in conventions/seminars, which amounted to £88.044 and £62.766, compared to £223.632 and £155.624, respectively, for 1998. (d) Government subsidy. The total of government subsidy to the University for 1999 amounted to £8.000.000, compared to £3.007.750 for 1998. Out of this amount, £4.783.817 (£1.926.023 for 1998) was spent for the purchase of fixed assets. It is evident that the operation of the University is highly depended on the continuation of the provision of the Government subsidy. 4.120.2 Submission of financial statements for audit. Considerable delay was observed in the submission of the financial statements of the University to my Office for audit. The Chairman of the University informed me that this is due to the increased volume of work, without corresponding increase in human resources. Although considerable effort was made, and the financial statements for 1999 were submitted earlier than in the past, my Office, however, considers that there must be further improvement. 4.120.3 Unspent Budgeted amounts. Out of the amount of £21.490.274, budgeted for the year 1999, the amount of £6.729.688 (£8.318.543 for 1998) or 31,32% (43,5 for 1998) remained unspent at the end of the year. The unspent amounts relate mainly to the permanent housing for the University Campus projects (£5.383.012), the non-filling of 57 vacant posts of

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Academic Personnel and 13 vacant posts of Administrative Personnel (£710.618) and the temporary housing, for purposes of reformation of existing buildings (£236.265). The Chairman of the University informed me that, this is mainly due to delay in the approval of the Budget, the late release of Funds relating to the University Campus, and to the non-approval of the necessary administrative posts, so that the University could proceed and promote its programmes. 4.120.4 Personnel. The University employed 152 members of the Academic Staff, 31 members of the Special Education Staff, 17 Postgraduate Associates and 22 Visiting Professors, as well as 150 members of the Administrative Staff and 18 hourly paid, with total emoluments and allowances £7.424.540. 4.120.5 Personal emoluments. It was observed that the system of operation regarding salaries is not appropriate, resulting to weaknesses in procedures and mistakes in the calculations. I recommended measures for improvement, such as the amendment of procedures, the adoption of suitable forms and the re-housing of the salaries personnel of the Accounts Department to Headquarters, close to the Personnel Department. 4.120.6 Internal Audit Department. I recommended again that the works of the above Department be planned with the commencement of each financial year. I stated further that a comprehensive report must be submitted to the Council and the Senate of the University regarding the findings and conclusions of the audits carried out. The Chairman of the University informed me that he agrees with my recommendations and that the objective of the University is the strengthening of the Department of Internal Audit, which is expected to be effected around the end of 2000. 4.120.7 University’s Theatrical Workshop. Serious weaknesses were observed, regarding the financial administration of the collections from various events. After the observations of my Office, the University acted immediately, and the financial administration of the above workshop is now based on all the appropriate procedures. For the previous situation, however, it is not possible to carry out an examination and verify possible deficits. 4.120.8 Sciences and Technology building installations – Cost of Electromechanical Installations. I observed that, while the estimated expenditure for the above works – as included in the documents of the Architectural Competition – was £1.870.000, the budgeted cost given by the consultants in September 1999 – during the preparation of the study – was £2.870.000, while in January 2000 they gave a new budget amounting to £3.015.000. In view of the above, I recommended to the Financial Manager of the University to request the consultants to present an analytical documentation of their estimate and justify the reasons for the substantial increase. My Office made specific recommendations, which were adopted regarding amendments to the specifications/study, for the purpose of reducing the cost. Finally the total amount of the contracts signed for the above works is £2.322.144 and, considering the estimated expenditure for the systems, which is not included in the above contracts, the total cost is expected to amount to £2.815.000. 4.120.9 Research programs. The income from carrying out research programmes amounted, in 1999, to £749.399, compared to £693.296 for 1998. The respective expenditure amounted to £769.528 for 1999, compared to £588.796 for 1998. Regarding the administration of research programmes, I stated that the rules governing the planning, execution and monitoring of research programmes are still not implemented, and the necessary records of research programs are not kept. Although in the past instructions were given for strict implementation of

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the Regulations, no progress was, however, observed. I stated further that expenses are incurred without verification that these are consistent with the objectives of the research programmes, and without proper authorisation. During 1999 new Regulations were approved, which, however, present substantial omissions, and have to be revised again. Part B 4.120.10 Rules and Regulations. In my previous Report I stated that the Rules, which were issued in order to regulate various matters, are not included in the regulations, according to which they were issued, as provided by the University of Cyprus Law. The Committees of Personnel and Rules and Regulations, at a common meeting, decided the renaming of Rules to Administrative Circulars Rules and that reference is made in the Rules of the number of the Administrative Act, according to which they were issued. The above decision has not yet been implemented. The issue of some Regulations is still pending. 4.120.11 Fixed Assets register. The above register, which is considered necessary for purposes of monitoring and control of the fixed assets of the University, is still not kept. As I have been informed the preparation of the register is in progress. 4.120.12 Terms of employment of the Academic Staff. Despite the considerable improvement observed, it has been noted that certain matters, such as the vacation leave of the Academic Staff and the sick leave of the Special Education Staff and 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.

4.121 CYPRUS BROADCASTING CORPORATION Part A 4.121.1 Audit of accounts. The financial statements of the Corporation for 1999 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. 4.121.2 Financial position (a) Deficit in working capital. The current liabilities of the Corporation at 31.12.99 amounted to £18,64 m. compared to £18,60 for 1998, while the current assets were £4,87 m. (£5,57 m. for 1998), i.e. there was a deficit in working capital amounting to £13,77 m., compared to 13,23 m. for 1998. The financial position of the Corporation continued in 1999 to be problematic and its operation depended to a considerable extend on the continuation of the financial support provided by Government, as well as the continuation of credit facilities provided by the Pension funds of the employees of the Corporation. It is pointed out that the liability of the Corporation to the above Funds at 31.12.99 amounted to £10,2 m. (£9,6 m. for 1998). (b) Operating results. The Corporation showed for 1999 a deficit (before taxation) amounting to £0,8 m., compared to £0,1 m. for 1998. The increase of the deficit is attributed mainly to the decrease in revenue, as shown below. (c) Revenue. The revenue amounted to £16,5 m., compared to £17,2 m. for the previous year, i.e. there was a decrease of £0,7 m. Substantial decreases were noted on Votes “Commercial

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Advertisements” (£1.134.188) and “Lottery – Happy Saturday Night” (£167.264). An increase was noted on Vote “Contribution for C.B.C. (£587.045). The revenue includes Government subsidy amounting to £2.271.595 (£2.242.022 for 1998). (d) Expenditure. The expenditure amounted to £15,5 m., compared to £16,3 m. for the previous year, i.e. there was a decrease of £0,8 m. or 4,9%. A substantial decrease was noted on Vote “Pensions and other Benefits of the Staff” (£1.040.963). An increase was noted on Vote “Programmes Expenses and General Expenses” (£192.188). The expenditure does not include the amount of £893.430 for compensations of early successful retirements, which is shown in the accounts as “Extraordinary Vote”. (e) Government guarantees. At 31.12.99 the government guarantees for the loans of the Corporation amounted to £3,16 m. and for bank overdrafts to £2,85 m. (f) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Corporation: 1999 1998 Current Assets to Current Liabilities 0,26 0,30 Gross Emoluments and Other Benefits (including employer’s contributions) to Expenditure 59,2% 62,5%

4.121.3 Personnel. The Corporation employed 273 permanent employees (283 for 1998) and 25 labourers (26 for 1998). Out of the 273 employees 36 retired on 31.12.99 under the early voluntary retirement scheme. The personal emoluments and other benefits of the staff amounted to £10,1 m., compared to £10,2 m. for 1998. These include £0,4 m. for overtime work, £0,2 m. for shift allowance, £1,8 m. contribution to the Pension funds for employees’ past service, £0,8 m. for current service, £0,4 m. for contribution to the Welfare Fund and £0,9 m. for compensations for early successful service retirements. The average cost per employee for 1999, without taking into consideration the deficient contribution to the Pension Funds and the compensation for early successful service retirements, amounted to £24.662 (£23.302 for 1998). 4.121.4 Budget (a) Approval. The Budget for the financial year 1999 was prepared and initially approved by the Board of Management of the Corporation on 31.8.98 and was finally approved on 7.9.98. The Budget was approved by the Council of Ministers on 18.11.98 and was enacted to a Law by the House of Representatives on 22.4.99. Provided that the House of Representatives approved duodecimals for the months of January and February 1999, the expenditure incurred for the period 1.3 – 22.4.99 was not legally covered. (b) Excesses. Excesses amounting to £421.079 were noted on various Votes of the Budget, which were 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 26.4.2000. A Supplementary Budget bill for the amount of £1.320.000, which was submitted with delay, for covering 1996 Budget excesses and approved by the Council of Ministers on 16.10.97, is still pending for approval before the House of Representatives. It is noted that, on the request of the Finance Committee of the House of Representatives, a special investigation has been carried out by my Office regarding the circumstances and the reasons under which the

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excesses were created. My relevant report has been submitted to the House of Representatives on 19.1.98. It must also be pointed out that the bill for supplementary appropriation for the covering of excesses of the 1995 Budget, amounting to £995.700, is still pending and has not been submitted to the House of Representatives. The Acting Director General of the Corporation, with his letter dated 11.4.2000, requested the Director General of the Ministry of Interior to pursue the matter of approval of the excesses for the years 1995 and 1996. 4.121.5 Lottery – Happy Saturday night (a) The net revenue from the Lottery amounted to £500.814, compared to £668.078 for 1998, i.e. there was a decrease of £167.264 or 25%. The collections from the sale of lottery tickets were decreased by £615.907, due to the decrease of the number of lottery tickets sold by 703 595 tickets or 27,9%. Also the payments for prize tickets were decreased by £439.168, mainly due to the decrease of the prizes offered as from 17.7.99, according to the provisions of the terms of the licence issued by the Ministry of Finance. (b) Under the decision of the Board of Management of the Corporation dated 19.5.99, the correct procedure was adopted, in accordance with the recommendations of my Office and the Ministry of Finance, and as from draw No. 21/99 dated 29.5.99 draws are carried out the same way as the Government Lottery, that is, the draw for the first prize is repeated, in the case of the winning ticket being unsold, until the corresponding amount is won. 4.121.6 Commercial advertisements debtors (a) At 31.12.99 the advertisements debtors amounted to £1.708.161, compared to £2.231.196 for 1998, i.e. there was a decrease of £523.035 or 23,4% which is attributed mainly to the decrease of advertisements by £1.134.188 or 29,7%. Chronologically the arrears due are as follows: £ Up to 3 months 958.384 From 3-6 months 157.440 From 6 – 12 months 273.100 Over 12 months 319.237 1.708.161

It is noted that the above debtors include the amount of £958.384, which relates to invoices for advertisements for the months of October – December 1999, which were not overdue at 31.12.99. (b) Although the total of advertisements debtors showed a decrease, the old balances of debtors, however (over 12 months), showed an increase of £54.953 or 20,8%, and I requested to be informed of the measures that have been taken for their collection. (c) Debtors from Radio and TV Programme advertisements. The balance of the above debtors at 31.12.99 amounted to £17.956. Provided that the publication of the Radio and TB Program was suspended as from 25.4.98, action must be taken for the collection of the

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amounts due, for which certain debtors have not paid any amount to the Corporation during 1999. Regarding the matter of collection of debts, generally, the Chairman of the Board of Directors informed me that continual pressure is exercised by the Commercial Department to the debtors to settle their debts, some Advertising Firms, however, delay or are unable to respond because of the conditions and circumstances prevailing in the market. (d) Factoring Services. In the Corporation’s reply letter for the accounts for 1998 it was stated that the matter would be presented to the Board of Management for examination and decision as to whether the continuation of the above services is advisable. It has been observed that, up to the time of audit, the above matter was not considered by the Board of Management, although the cooperation with Factoring services is still continued, without the anticipated results. It is noted that for the provision of the above services the Corporation has been charged, in 1999, with the amount of £34.079 (£41.593 for 1998). The Chairman of the Board of Management informed me that the recommendation of the Services of the Corporation for the termination of these services was not pursued, because of the acute financial problem which C.B.C. continuously faces, and that in case of termination of these services, a substantial amount must be paid by the Corporation, which was received from the bank in the form of pre settlement of invoices. 4.121.7 Advertisements (a) Competition results. Although the number of advertisement spots shown during 1999 have increased by 23,99%, compared to 1998 (1999: 59 100, 1998: 47 666), the revenue from advertisements in 1999 decreased by 29,66%, compared to 1998 (1999: £2.689.641, 1998: £3.823.829). The major reason for this disproportionate relation is the increase of free advertisements from 14 585 spots in 1998 (30,60% of the total of spots shown) to 27 099 spots in 1999 (45,85% of the total of spots shown), which was the result of the practice of the discounts allowed in the form of free advertising time, because the Corporation could not otherwise compete with the advertisement prices of other private channels. In order to avoid mass concession of free advertisements, which the Corporation is obliged to do, I recommended that each revision of advertisement prices be made on the basis of viewing proportions, according to the radio-television ratings, the market conditions and the competition situation. I expressed the view that, otherwise, all advertisements should be invoiced and the value of free advertisements should be shown as discounts allowed, so that the accounts will present the actual results regarding advertisements. It is also noted that during 1999 the C.B.C. transmitted free advertisements for public interest amounting to £85.610 (£40.845 for 1998). The chairman of the Board of Management informed me that my observations have been noted. (b) Advertisements – internal control. For purposes of internal control I recommended the following:

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i. A proper separation of duties must be made, e.g. one person to update the register of advertisements and another person to undertake invoicing. ii. A reconciliation to be carried out between the invoiced and free advertisements (register of advertisements and invoices) with the total transmitted advertisements (certificates of transmissions). The Chairman of the Board of management expressed the view that, with the staffing of the Internal Audit Department, all the relevant audits will be carried out for advertisements, and the expenditure incurred for all departments generally. 4.121.8 Barter Agreements. As several such agreements have been signed, I recommended the keeping of a unified register, which to be up dated with the following: (a) The consecutive number of the agreement, so that the total number of the agreements be presented and the new agreements made during the year to be easily shown. (b) The proper accounting recordings, with references to the numbers of the relevant accounts and the Budget. I recommended further the examination as to whether certain barter agreements are not consistent with the provisions of the Tender Regulations. The Chairman of the Board of Management informed me that instructions have been given for the keeping of a unified register. 4.121.9 Securing of foreign programmes (a) Approval of agreements for hiring films. As considerable amounts are involved in several of the above agreements, I recommended that the Board of Management should specify the appropriate officers to carry out these agreements, according to the expenditure amount, or/and securing the approval of the Board of Management, even the covering approval where this is considered appropriate. It is noted that the expenditure for hiring films in 1999 amounted to £1,2 m. (1,4 m. in 1998). (b) Implementation of agreements for hiring films. From a sample audit carried out in certain agreements for hiring films the following were observed: (i) Agreement with a company for hiring greek films - According to term 1 of the above agreement the right of projection of the films ceases to be valid two years after the signing of the agreement, that is up to 4.9.99, for 6 films which have not yet been received, the Corporation has no right of projection, even if these are received later. I recommended that the possibility should be considered, in similar agreement terms, a term to be included providing for an extension of the right of projection in the cases so selected by the Corporation. - The term 2 is not followed, which provides that the 80% of the price amount of $93.500 will be paid with the dispatch of the materials and the remaining 20% one year later, but the whole amount is paid, which corresponds to each film, on its receipt and projection. (ii) Agreement with a Hungarian company for hiring films The payments dates specified are not followed and the company will probably claim from C.B.C. 1% late charges for each month, as provided by the agreement.

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In view of the above, I recommended that the differentiation of the terms of payment should be considered, so that these will be in line with the practice followed. (c) Programmes not projected, the value of unprojected programs/films at 30.6.99, which have been paid amounted to £524.600. It was observed that it couldn’t be verified whether the keeping of the above stock of unprojected films is necessary for the Corporation’s requirements, because in the relevant computer programme no reference is made of the following information: − If the programme (film) exists or was written off. − Date of termination of the right of projection. − Determination of a maximum amount for C.B.C. requirements for a specific period. It is noted that the basic reason for the existence of a large number of unprojected programmes is the lack of equipment for copying the films. With regard to the above matter, as well as the matter of the films Archives, the Chairman of the Board of Management informed me that my observations have been noted and he expressed the view that many of the weaknesses presented will be terminated with the change of the software, for which relevant instructions have already been issued. 4.121.10 Films Archives. In order to facilitate finding and spotting these films, and the verification of their existence and safekeeping, I recommended the following: (a) A physical stocktaking to be carried out and reconciliation with the computer statements. (b) To be classified in specially arranged and numbered spaces, with parallel keeping of special cards. (c) A procedure to be determined for the issue and receipt of the films. 4.121.11 Payment of representation, hospitality and telephone allowances and other benefits. It was observed that the payment of the above allowances to eligible persons was continued during the period that these were not in active service, that is, during the period of their leave prior to retirement. It is pointed out that, in the case of the respective government officials, the above benefits are terminated with the commencement of their leave prior to retirement, according to a relevant circular of the Ministry of Finance. The Chairman of the Board of Management informed me that my observations have been noted. 4.121.12 Telephone expenses (a) The expenditure for telephones during the last two years, which has been charged to the Vote “General Services”, shows a considerable increase. Specifically, for 1999 and 1998 it amounted to £45.038 and £45.294, respectively, compared to £30.744 for 1997. The increase was mainly the result of the installation and operation, since February 1998, of the new telephone system, which provides considerable facilities (e.g. continuous free time potential for trunk calls/overseas calls through a greater number of telephone apparatuses), in relation to the old system, as well as keeping, additionally, the existing lines, because of the limited potential of the old telephone systems. I pointed out the necessity for consideration of the matter and the taking of measures for the reduction of the expenditure.

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(b) The above expenditure includes the amount of £14.412, which relates to telephone calls through the Corporation’s mobile telephones, which have been given personally to certain officers or for general use by various Departments. I expressed the view that procedures must be determined for the control of calls, aiming at their limitation to those absolutely necessary. (c) In addition, the amount of £47.205 (£69.185 for 1998) was spent, for calls, subscriptions and circuits rentals, which were charged on Vote “Programmes Expenses”. The Chairman of the Board of Management informed me that the old lines have already been disconnected and that representations will be made, wherever appropriate, for telephone calls abroad or long inland telephone calls. 4.121.13 Operation and structure of the Archives Department. Weaknesses were observed in the keeping and filing of correspondence and documents, resulting to difficulties in finding and handling the various matters. Specifically, for the same subject more than one files are kept, the documents are not numbered, no references are made to related documents or previous correspondence, and notes are not always made for views/instructions and necessary action. For the smooth running of the Archives, I recommended the consideration for the adoption of a computerised or automated filing system. The Chairman of the Board of Management informed me that instructions have been issued to the departments for the proper filing of correspondence and other documents. 4.121.14 Personnel matters (a) Working hours – electronic control. From the audit of the monthly analytical computer statements of the employee’s working hours, the following were observed: i. A number of permanent employees and permanent contributors do not punch their card, contrary to the relevant instructions. ii. The electronic control system records only the time of arrival and departure, despite the fact that this has the potential of recording other information also (e.g. deficient/surplus time etc.). iii. In spite of the fact that the system has been put into operation since June 1994 on a trial basis, for a period of three months, no improvements have been made for facing practical difficulties, such as the uniformity of working hours and the nature of work, the recording of overtime and other information, in order to facilitate control of payments by the Accounts Department. (b) Allowance of free time. Weaknesses were observed regarding the procedures followed and the documents kept for the allowance of free time as compensation for work in excess of normal working hours. Specifically: i. The required form for the assignment of overtime work is not completed, under which the work is authorised, and for which free time will be allowed. An oral approval is given instead. ii. The procedures for allowance of free time and its deduction from the total number of hours due to each employee are not uniform for each department. For example, in the music department the deduction is carried out in a hand written register (employees

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account), without completing an application and without the signature of the Head of Department. iii. I recommended that the keeping of the records be assigned to the Administration Department, which is responsible for the keeping of the leave files etc. of the staff. The relevant forms, authorised by the Heads of Departments, will be submitted to the Administration Department for recording and updating of the relevant files. The Chairman of the Board of Management informed me that my observations have been noted. 4.121.15 Employment of contributors (a) During 1999 the Corporation employed, according to the contributors emoluments register, 588 contributors, out of which about 100 are permanent contributors (601 for 1998). The above do not include contributors secured through companies, in increased numbers, for which payment would be made directly to the companies. The total expenditure, including contributions to the various Funds, amounted to £2.242.686 (£2.076.796 for 1998), and has been charged to Programmes Expenditure and Personal Emoluments. (b) The employment of contributors regime remains unclarified, which, according to the Corporation’s reply letter for the accounts of 1998, would have been settled within the framework of the Five Year Action Plan. (c) The procedure followed at present, however, regarding the employment of associates is not fully consistent with the procedure specified and approved on 7.2.92. Specifically the following were observed: i. The employment of permanent contributors is effected for a six months trial period, for which the interested person is notified in writing, at the expiry of which a recommendation is made by the relevant Head of Department for satisfactory or not performance and the necessity for further employment, without, however, being specified as to the length of further cooperation, and without the interested person being informed. Furthermore, no evaluation is made later at specified intervals and reference as to the necessity or not for further employment. It is pointed out that between the parties (employer and employee) no contract for cooperation/employment is signed, which will include, inter alia, the terms of employment. ii. It was observed that the form provided by the above instructions regarding probable relation of a candidate with a member or members of the staff, is not completed. iii. In spite of the fact that the final decision for the employment of contributors is taken by Management or/and the Board of Management, in actual fact the decision is finalised by the Joint Selection Committee, after an oral examination, in which neither Management nor the Board of Management participate. (d) In view of the above and to the fact that several matters are not provided for in the instructions for the employment of contributors, which have been issued in 1992, I hold the view that these must be revised, after taking into consideration the following matters which have been observed:

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i. Several of the co operations, with commuted monthly allowance for specific work, probably do not fall within the meaning “contributor” and should be treated as “work on contract”, so that the matter of contributions by the Corporation to the various Funds will not arise. ii. In several cases the emoluments of permanent contributors are determined at a higher point than the initial step of the salary scale of the respective post, the duties of which will undertake, according to their qualifications and experience, without the existence, however, of specified criteria for the way of determination of the emoluments. Indicatively stated is the case of a technician contributor, who was placed, according to his experience and qualifications to the top step of salary scale A7 (Salary scale of the respective post A4-A7). (e) As I was informed, since the beginning of the year 2000 the procedure of employment of contributors has changed, and includes a provision for carrying out a written examination. The Chairman of the Board of Management informed me that all the contributors will be required to sign contracts and that the establishment of a Special Provident Fund is pursued. 4.121.16 Tenders For the purpose of better follow up and control of tenders, I recommended the following: i. The keeping of a tender register. ii. The keeping of all relevant document of each tender from the proclamation up to the execution, in one envelope only. iii. The safe keeping of the relevant cheques and guarantee letters of tenderers. (b) In cases where written proposals for prices/quotations are requested, as per written terms and specifications, I recommended that these should be required to be deposited in the tender box, at a specified date and time. (c) In the specified by the Board of Management composition of the Committee and Sub- Committee for tenders no provision is made for the participation of another authorised representative, in case of absence of a member. As the positions of the two members are vacant, a problem is, in my opinion, created for the smooth operation or/and quorum of the Committees. (d) Cases of purchases or securing of services were observed, without tender invitation, as well as other deviations from the approved procedures of tender invitation. The following cases are indicative: i. The supply of stationery etc. is carried out at gradual stages from specific suppliers without invitation for tenders. The total expenditure for 1999 amounted to £23.668. I expressed the view that the annual requirements should be planned and tenders invited for their supply, for securing better prices. ii. It was observed that to the successful tenderer for the construction of a TV studio (new C.B.C. studio III), in addition to the amount of his tender, he was paid a 7% proportion of profit (£3.289) on the cost of two sub contracts for electrical and air conditioning system,

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for which separate tenders were invited, without this being provided for in the terms of the tenders.

The Chairman of the Board of Management informed me that relevant instructions have been issued for the follow up and control of tenders and that the Board of Management will take action in order to regulate the proper composition of the Tenders Committee.

He also informed me that instructions have been issued, for tenders to be invited for the supply of stationery.

4.121.17 Insurance of fixed assets. It was observed that no additional insurance cover was made for covering the additions during the year, beyond the amount covered by the existing contract. Besides, for the technical equipment and the contents of buildings, the insured amount is larger than the amount shown in the accounts.

Furthermore, it appears that there is no insurance cover for the stocks of the Corporation, the value of which, at 31.12.99, was about £630.000.

The Chairman of the Board of Management informed me that the matter of the proper insurance cover of all the fixed assets of the Corporation has been regulated through the insurance contracts for the year 2000.

Part B

4.121.18 Five Year Action Plan. Considerable deviations were observed from the time schedule for the implementation of the Plan, as well as from the expected achievement of financial projections. To these contributed the delay in the approval by the House of Representatives of the three bills which formed the basic prerequisite for the successful implementation of the above Plan, as well as the non achievement of the expected early retirements, the long lasting negotiations between the Corporation and the Unions regarding the new Organisational Structure and relevant matters, and the reduced government financial support, as compared to the assistance expected.

Specifically the following are stated:

(a) Structure, staffing and operation of the new C.B.C. - Organisational Structure. Considerable delay is observed in the implementation of the new Organisational Structure and the approval of the new Schemes of Service, which are being discussed for several months with the Unions for the achievement of an agreement. At a recent meeting the Board of Management concluded to its final proposals, which were submitted on 16,3,2000 to the Unions, the reply of which is expected within the time limit set. It is pointed out that, contrary to the provisions of the Scheme and the Organisational Structure, which was approved on 14.9.98, the final proposals provide that “the Heads of Departments are renamed to Managers”.

Meanwhile, as I understand, the Board of Management is considering the possibility of revising the Scheme for Early Successful Service Retirement, for the purpose of further reduction of the number of the permanent staff.

− Terms and status of employment of contributors. The status and the terms of employment of associates will be regulated in conjunction with the new Organisational Structure. As a result of the delay observed in its implementation, no progress has been

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achieved in the whole matter, although it was considered repeatedly by the Board of Management and a special committee was set up for consideration of the matter and submission of recommendations.

− Vested rights and restricting practices. Some progress has been achieved, although pending is the regulation of substantial “rights and practices”. E.g. shift allowance, overtime, the regulation of which depends to a great extend on the cooperation with the Unions.

(b) Financial aspect. As in the two previous years, the projections of the five Year Action Plan regarding the amounts of revenue and expenditure have not been achieved. Specifically a projection was made for 1999 revenue amounting to £18,8 m., whereas the actual was £16,5 m., and for expenditure amounting to £18,3 m., whereas the actual was £16,4 m.

The Chairman of the Board of Management informed me that he agrees with the finding that the deviations from the time schedule are not attributed to Management, but to outside factors and that, very soon, the final position of the Unions will be submitted, in relation to the Organisational Structure, and expressed the view that, with the new Organisational Structure, the matters pending for a long time will be settled.

4.121.19 Terms of employment of the General Manager and staff benefits. The regulation of these two matters with Regulations is still pending, while, in the Corporations reply letters for the accounts of the last three years, it is stated that these will be settled within the framework of the Five Year Action Plan.

4,121,20 Films Archives. In the Corporation’s reply for the accounts of 1998 regarding the above matter, it was stated that this was considered as urgent and would be treated in top priority, after a report was submitted to the Board of Management by the appropriate Special Committee. Up to the time of audit no development was observed regarding this matter.

4.121.21 Internal Audit Department. No internal audit is carried out on the activities of the Corporation, because the post of the Internal Auditor remains vacant and the Department of Internal Audit without personnel.

I expressed the view that, with the process already in motion for the filling of the post of the Internal Auditor, as well as the corresponding provision in the new Organisational Structure of the Corporation for the expansion of the Department of Internal Audit, the matter is expected to be settled soon.

4.122 VINE PRODUCTS COMMISSION

Part A

4.122.1 Financial position

(a) Operating results. The accounts showed a deficit of £1.032.144 (before government subsidy), compared to £1.027.492 for the previous financial year.

(b) Government subsidy. The government subsidy amounted to £1.027.272, compared to £1.085,787 for the previous year.

In addition the following subsidies were paid by Government through the Commission:

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1999 1998 £ £ Subsidy on grapes 2.490.205 3.504.581 Subsidy on vineyards 2.596.969 5.263.068 Subsidy on commandaria 38.805 29.157 Subsidy on vine products for export 1.460.419 1.217.700 Subsidy of interest on loans raised by wine industries 8.380 10.364 Financial assistance for improving commandaria produce installations --- 52.450 Subsidy on dumped grapes 1.492.263 4.821 8.087.041 10.082.141

4.122.2 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 30.9.99 the bank overdraft was £1,28 m., compared to £1,29 m. at 30.9.98. 4.122.3 Personnel. The Commission employed 32 permanent employees. The expenditure for personal emoluments, including employer’s contributions to the various funds, amounted to £579.367, compared to £583.481 for the previous year. 4.122.4 Budget. The Budget for the financial year 1.10.98 – 30.9.99 was approved by the Commission on 22.7.98 and by the Council of Ministers on 5.11.98, i.e. it was again approved after the commencement of the financial year. 4.122.5 Tender Regulations. The Government Tender Regulations, which were adopted by the Commission, are not always properly implemented in all cases. In view of the suspension of the decision by the appropriate Ministerial Committee, regarding the extension of the implementation of all or part of the provisions of the Public Tenders Law by statutory bodies, I recommended that the whole matter be regulated with internal regulations. The Chairman of the Commission informed me on 20.9.2000 that the Commission proceeded to the preparation and approval of internal regulations.

4.123 NICOSIA SEWERAGE BOARD Part A 4.123.1 Delay in the approval of the Budget. The Budget for 1999 was promptly approved by the Board on 29.10.98. The Minister of Interior approved the Budget on 29.6.99, whereas, according to the Law, it should have been approved before the commencement of the financial year. It is expected that, in future, the Ministry of Interior will provide for the prompt approval of the Budget. 4.123.2 Financial position (a) Operating results. The accounts showed a surplus of £601.613, compared to £464.589 for 1998, i.e. there was an increase of £137.024. The revenue amounted to £2.267.558 and the expenditure to £1.665.945, compared to £2.158.481 and £1.693.892, respectively, for 1998. The decrease in the expenditure is, mainly, attributed to the decrease in the operational and maintenance expenditure of the system.

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(b) Accounting Ratios. The following accounting ratios give a general picture of the financial situation of the Board: 1999 1998 Current Assets to Current Liabilities 9,0 10,2 Long-term Liabilities to Fixed Assets 19,5% 20,6% Surplus to Capital Employed 3,6% 2,8% Surplus to Fixed Assets 5,1% 4,0%

4.123.3 Personnel – Salaries and employer’s contributions. The board employed 27 permanent employees, one casual and 16 labourers. The expenditure for salaries and employer’s contributions amounted to £922.785, compared to £867.892 for 1998, i.e. there was an increase of £54.893 or 6,4\3%. 4.123.4 Promotion of an employee with retrospective effect. The Sewerage Systems Law 1/71 and the Regulations issued pursuant to the above Law, do not provide for the appointment or promotion of an employee with retrospective effect. The Board, however, decided the retrospective promotion of an employee as from 1.1.93, ignoring, both, the advice of its legal adviser and of the Attorney General of the Republic. If the Board considers that amendment of the Law and Regulations is necessary, the appropriate action must be taken towards this direction. In addition, instead of making the necessary calculations and paying the employee the correct amount, after the required by the Law deductions, an agreement was reached between the Board and the employee’s Attorney, that an advance payment would be made to the employee in lieu of salary, increments and other benefits from 1.3.93 to 31.10.98, without payment to the various government funds the corresponding amounts of income tax, social insurance etc. With regard to the above the Chairman of the Board informed me that he refused to implement the decision of the retrospective promotion and that the employee appealed to the Supreme Court against the Board and the Chairman. For the above matter, after negotiations made between the employee’s Attorney and the Board’s Attorney, and under the condition that the employee would withdraw the relevant appeal, a compromise was made and the payment of £3.500 was agreed as compensation and legal expenses. The Chairman of the Board believes that, under this arrangement the Board saved about £3.000, whereas the promotion was effected on the date decided by the Board. 4.123.5 Debtors. The balance of debtors includes an amount of £36.478, which is due by various taxpayers for the years 1973-75, and its collection was the responsibility of the Department of Inland revenue. Despite the efforts made the collection of the above amount was not possible, and I suggested that the matter be referred to the Board of Management for a relevant decision. It is pointed out that the matter of debtors’ balances and the taking of legal measures must be continuously followed up. 4.123.6 Tenders for consultancy services for Greater Nicosia Sewerage System. The tenders were proclaimed under the method of submission of technical and financial proposals and, according to the provisions of the terms of the tenders, the successful tender would be selected between the tenders, the technical proposal of which would be evaluated as suitable,

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on the basis of specific criteria. During the evaluation of the technical tender proposals, there were differences of opinion between the members of the Evaluation Committee and between the members of the Board. Finally the Board awarded the tender to the consultancy firm, which submitted the third in line of prices tender, for the amount of about £3,2 m. At the stage of award of the tenders, my Office, the views of which were sought for certain points, recommended that the successful tenderer should be selected on the basis of a combined evaluation of technical and financial proposals, as provided in the tender terms. My Office also expressed the view that, according to international practice, the safest method of evaluation of the technical proposals was on the basis of the average grading of the member of the Evaluation Committee.

4.124 LIMASSOL – AMATHUS SEWERAGE BOARD Part A 4.124.1 Delay in the approval of the Budget. The Budget for the year 1999 was promptly approved by the Board on 17.11.98. It was approved by the Minister of Interior on 27.5.99, whereas, under the Law it should have been approved prior to the commencement of the financial year. It is expected that in future the Ministry of Interior will approve the Budget promptly. 4.124.2 Financial position (a) Reservation. The accounts for 1999 include income amounting to £613.678, which, according to the Board, represent amounts due by Government for capital expenditure, regarding third degree dirt and water processing, plus corresponding interest, which amounts are not accepted by Government. As a result my Report for the accounts of the Board for 1999 included a relevant reservation. (b) Operating results. With the inclusion of income for which I expressed a reservation, the accounts of the Board for 1999 showed a surplus of £604.584, compared to £536.117 for 1998. The surplus resulted after taking into consideration an exchange loss of £1.293.722. (c) Revenue. The revenue amounted to £7.479.635, compared to £5.318.496 for 1998. (d) Expenditure. The expenditure amounted to £5.581.329, compared to £5.568.799 for 1998. (e) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Board: 1999 1998 Current Assets to Current Liabilities 1,42 1,94 Long term Liabilities to Fixed Assets 0,8 0,8

4.124.3 Personnel – Salaries and employer’s contributions. The board employed 26 permanent officers, 12 casuals and 15 labourers. The expenditure for salaries and employer’s contributions amounted to £695.346, compared to £649.188 for 1998, i.e. there was an increase of £46.158 or 7%, which is mainly attributed to the appointment of one clerk and two accounting officers. 4.124.4 Sewerage fees outstanding. The total of sewerage fees outstanding at 31.12.99, including the surcharge was £4.873.797, out of which an amount of £2.430.358 is due by

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hotels. Considerable amounts are due by several taxpayers and the Board is taking the relevant legal measures. 4.124.5 Overtime. The overtime expenditure amounted to £40.477, compared to £45.950 for 1998. The effort for the reduction of overtime has to be continued. 4.124.6 Fees for the use of the sewerage system. Germasogeia Municipality continues not to pay the fees for the use of the sewerage system, and does not submit analytical statements for the collections of the fees, despite the agreement signed with Limassol-Amathus Sewerage Board, and as a result these are not included in the accounts. According to preliminary calculations, the amount due by Germasogeia Municipality is estimated to about £150.000 to £200.000. 4.124.7 Long term liabilities. The total of log term liabilities at 31.12.99 were £29.887.290, compared to £31.808.637 for 1998. 4.124.8 Capital expenditure. The budgeted capital expenditure was £9.596.500, whereas the actual amounted to £1.337.502. There was, therefore, an unexpended amount of £8.258.998. It is imperative that the Budget is prepared on a more realistic basis, so that the amounts approved should correspond to the expenditure for the projects that can be executed. 4.124.9 Advertising campaign. The Board assigns since 1991 to a specific company, inter alia, the organisation of the public relation campaign, aiming at the connection of households with the sewerage system, and to an advertising firm for the advertisements through radio and television stations. I repeatedly recommended that the Board should take the necessary measures against all these who refuse to be connected, because connection with the sewerage system is a legal obligation of the citizens. The Board of Management believes that the advertising campaign is necessary, although no other Sewerage Board undertakes such a campaign. 4.124.10 Supply and installation of five automatic power correction systems. According to the evaluations of the electrical engineer of the board and of the independent consultant appointed for the purpose, all the tenders received were not within specifications. Finally after a long delay (requirement of additional information and extension of the expiry time of the tender) the Board of Management awarded the tender to the lowest tenderer, whose tender presented several deviations from specifications. In my opinion the tenders should, without delay, be cancelled and new tenders invited. 4.124.11 Tender Regulations. The Tender Regulations were approved by the Board of Management on 20.6.96 and were submitted to the Ministry of Interior on 18.9.96 for further processing according to the relevant legislation. I recommended that the procedure of modernisation, approval and publication of the Regulations be completed as soon as possible. Part B 4.124.12 Advance payments to Limassol Municipality. An advance of £500.289 was paid by the Board to Limassol Municipality in 1992. The collection of the balance of £380.289 is still pending.

4.125 FAMAGUSTA SEWERAGE BOARD Part A 4.125.1 As a result of the turkish invasion and occupation of Famagusta, the Board is under functioning and for this reason no accounts were submitted for the years 1992-1999 and the

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appropriate audit was not carried out. The Mayor of Famagusta informed me that the accounts for the years 1992-1994 would be submitted for audit soon.

4.126 LARNAKA SEWERAGE BOARD Part a 4.126.1 Delay in the approval of the Budget. The Budget for 1999 was approved by the Board on 30.10.98 and by the Minister of Interior on 10.5.99, whereas under the Law it should have been approved prior to the commencement of the financial year. It is expected that in future the Ministry of Interior will approve the Budget promptly. 4.126.2 Financial position (a) Operating results. The accounts showed a deficit of £609.545, compared to a surplus of £733.855 for 1998, i.e. there was a decrease in the surplus of £1.343.400 or 183,15%. This is attributed mainly to a loss amounting to £823.810, which emanated from exchange differences (a surplus of £59.985 for 1998), as well as to increased depreciation, because in 1999 projects under construction amounting to £14.778.679 were capitalised. (b) Revenue. The revenue amounted to £2.334.820, compared to £2.242.030 for 1998, i.e. there was an increase of £92.790 or 4,14%, mainly through vote “Subsidies Write Off”. (c) Expenditure. The expenditure amounted to £2.120.555, compared to £1.568.160 for 1998. The increase of £552.395 was mainly due to depreciation (£517.620) and to operational and maintenance expenses of the sewerage system (£25.869). (d) Accounting Ratios. The following accounting ratios give a general picture of the financial situation of the Board: 1999 1998 Current Assets to Current Liabilities 1,4 1,6 Long term Liabilities to Fixed Assets 60,3% 56,4% (Deficit)/Surplus to Capital Employed (2%) 2,6% (Deficit)/Surplus to Fixed Assets (2,15%) 2,8% 4.126.3 Personnel. The Board employed 15 permanent employees, one casual and 12 labourers. The total personal emoluments, including employer’s contributions, amounted to £344.067, compared to £310.828 for 1998, i.e. there was an increase of £33.239 or 10,7%. 4.126.4 Liquidity. The Board will be facing an increased liquidity problem in the coming years because of the high interest bearing loan instalments, which will influence considerably its capability for the repayment of the instalments of, mainly, the foreign loans, after the expiry of the facilities granted by Government for the refinancing of the loan instalments. The Board decided to increase the fees in order to face the problem. 4.126.5 Debtors. Although several cases of arrears of fees have been taken to court, there are, however, cases where considerable amounts are due, without legal measures taken. The Chairman of the Board informed me that he is cooperating closely with Larnaka Municipality and the legal advisers for the settlement of outstanding cases or the taking of legal measures against the debtors.

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4.126.6 Larnaka Sewerage System – Contracts C2, C3 and C4. With my letter to the Chairman of the Board, in September 1999, I expressed my concern, because for the above contracts of total value of about £15,2 m., the contractor claims compensations amounting to £2,2 m. for contract C2, £0,84 m. for contract C3, while for contract C4 there are indications for similar claims. Furthermore, the contractor has stated that the above amounts do not include all his claims, which will be submitted at a later stage. With regard to the evaluation of the claims of the contractor for Contract C2, in my opinion, the consulting engineers did not safeguard the interests of the Board. After the recommendations of my Office, the time extensions of the contract were reduced considerably, the allowance of which was recommended by the Consulting Engineers. In view of the substantial specialised claims of the contractor, I expressed the view that the Board should assign the handling of these matters to an experienced quantity surveyor, in order to safeguard the interests of the Board. The Chairman of the Board informed me that the adoption of my recommendation was decided. Part B 4.126.7 Planning of projects. With the completion in 1999 of the contracts for Phase A’, the already planned projects are completed. I expressed the view that the Board should have already proceeded to studies and other procedures for the planning of further extensions and, generally, for future development. I understand that the Board at a meeting in 1998, decided to set up a technical committee for the study and planning of the future development of the system. The study was continued further in 1999.

4.127 PAFOS SEWERAGE BOARD Part A 4.127.1 Delay in the approval of the Budget. The Budget for 1999 was approved by the Board on 10.12.98. The Minister of Interior approved the Budget on 9.6.99, whereas, under the Law, it should have been approved prior to the commencement of the financial year. It is expected that in future the Ministry of Interior will approve the Budget promptly. 4.127.2 Financial position (a) Operating results. The accounts showed a surplus of £1.861.531, compared to a deficit of £92.995 for 1998, i.e. there was an increase of £1.954.526. The substantial increase is attributed to the fact that in 1999 taxation was imposed for the first time for a total amount of £1.980.901. The revenue amounted to £2.011.437 and the expenditure to £149.906, compared to £7.541 and £100.536, respectively, for 1998. (b) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Board: 1999 Current Assets to Current Liabilities 7,19 Long term Liabilities to Fixed Assets 140,77% Surplus to Capital Employed 40,93% Surplus to Fixed Assets 90,98%

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4.127.3 Personnel. The Board employed three permanent employees and three casuals. Their total emoluments, including employer’s contributions, amounted to £75.089. 4.127.4 Debtors. It is noted that in October 1999 taxation was imposed, for the first time, amounting to £1.980.901. The amount due at 31.12.99 was £1.395.338 and an extension was granted for the payment of fees up to the end of February 2000 including facilities, without additional surcharge, for amounts in excess of £3.000 up to 15.6.2000. The balance due at 30.6.2000 amounted to £280.409. 4.127.5 Approval of Regulations. Still pending is the approval of the following Regulations, which will facilitate the smooth and efficient operation of the Board: • Structure, Terms of Service and Employee’s Discipline. • Tenders • Keeping and operation of Stores. • Accounting and Financial Procedures.

4.128 PARALIMNI SEWERAGE BOARD Part A 4.128.1 Financial position (a) Operating results. The accounts for 1999 showed a surplus of £899.459, compared to £834.683 for the previous year. (b) Revenue. The revenue of the Board amounted to £1.043.428, compared to £983.889 for the previous year, i.e. there was an increase of £59.539 or 6%. (c) Expenditure. The expenditure of the Board was £143.969, compared to £149.206 for the previous year, i.e. there was a decrease of £5.237 or 3,5%. 4.128.2 Personnel. The Board employed eight persons on a fulltime basis, as well as a Financial Manager in common with Agia Napa Sewerage Board, with total emoluments of £94.505, compared to £87.853 for 1998. 4.128.3 Long term liabilities. The long term liabilities of the Board at 31.12.99 amounted to £10.015.676, compared to £4.788.004 for the previous year. 4.128.4 Accounting Ratios. The following accounting ratios give a general picture of the financial situation of the Board: 1999 1998 Current Assets to Current Liabilities 3,2 3,2 Personal Emoluments to Expenditure 65,5% 58,9% Surplus to Capital Employed 6% 9,4%

4.128.5 Debtors – sewerage fees. The debtors for sewerage fees at 31.12.99 were £1.685.796, compared to £1.503.858 for 1998. The amount of £1.685.796 includes the taxation for 1999, amounting to £915.290, which was issued at the end of 1999. As the outstanding amounts include amounts due since 1993, I recommended the taking of the appropriate measures, including legal measures for their collection. My recommendation,

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however, was not adopted, and as a result the proportion of collection of arrears due was very low. The Board informed me that with the completion of the project in 2001, measures would be taken for the collection of arrears due. 4.128.6 Schemes of Service. No schemes of service have been approved for the employees of the Board, who have been appointed since 1993, and consequently these are employed on a casual basis. As I was informed, the schemes of service of the post of clerk have been approved and all clerks have been established, whereas the schemes of service of the remaining personnel are being processed by the Board and will be submitted for approval soon. 4.128.7 Reduction of sewerage fees. After a hand written letter of the district Lands and Surveys Officer Famagusta, the Board accepted the reduction of the value of land where a hotel complex was erected, from £5 m. to £2,5 m., and consequently reducing the sewerage fees from £32.000 to £16.000 annually. I requested the Department of Lands and Surveys to inform me of the reasons for the reduction of the value of land to one half and I suggested that the Board should not accept revision of the evaluated value of land/buildings without an official letter from the Director of the Department of Lands and Surveys. The Board agreed with my suggestion. 4.128.8 Regulations. No Regulations have yet been approved governing the terms of service of the employees of the Board. 4.128.9 Paralimni sewerage system – Contract II – Pumping units. According to the contract, the construction of the above pumping units should have been completed in May 1999. As the Sewerage Board did not deliver the worksite promptly and has proceeded to serious changes after the signing of the contracts, the contractor requests extension for the completion of the construction of the pumping units up to the end of August 2000. Although this delay does not affect the sewerage system, which is expected to operate in March 2001, the contractor may take the opportunity to file compensation claims, as a result of the delays caused. 4.128.10 Joint venture of Paralimni – Agia Napa Sewerage Boards – Sewerage Treatment Plant. According to the terms of the contract the project must be completed in July 2001, for the amount of £9,5 m. In December 1999 the contractor claimed 234 days time extension of the contract, for delays, which he claims that were caused by the Consulting Engineers and the employer. In April 2000 a justified extension of 133 days was approved, which allows the contractor to claim corresponding financial compensations. The major reasons for the time extension are delays in the delivery of the worksite by the employer, the delay of the Consulting Engineers to approve promptly the constructional designs and changes in the designs of the project.

4.129 AGIA NAPA SEWERAGE BOARD Part A 4.129.1 Financial position (a) Operating results. The accounts for 1999 showed a surplus of £630.500, compared to £564.370 for the previous year.

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(b) Revenue. The revenue of the Board amounted to £744.552, compared to £641.851 for the previous year, i.e. there was an increase of £102.701 or 16%. (c) Expenditure. The expenditure of the board was £114.052, compared to £77.481 for the previous year, i.e. there was an increase of £36.571 or 47,2%. 4.129.2 Personnel. The Board employed three persons on a full time basis, as well as a Financial Manager in common with Paralimni Sewerage Board, with total emoluments of £49.245, compared to £41.363 for 1998. 4.129.3 Long term liabilities. The long term liabilities of the Board at 31.12.99 amounted to £4.700.868, compared to £1.777.480 for the previous year. 4.129.4 Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Board: 1999 1998 Current Assets to Current Liabilities 4,4 5,4 Personal Emoluments to Expenditure 43,2% 53,4% Surplus to Capital Employed 7,3% 11%

4.129.5 Debtors – sewerage fees. The debtors for sewerage fees at 31.12.99 were £1.049.230 for 1998. The amount of £1.148.018 includes the taxation for 1999, amounting to £635.394, which was issued at the end of 1999. As the arrears include amounts due since 1992, I recommended that all appropriate measures should be taken, including legal measures, for the collection of the arrears. The Board informed me that legal measures would be taken. 4.129.6 Pension Scheme and Regulations. Still pending is the approval of Regulations for the Pension Scheme and the smooth operation of the Board, because during their legal and technical processing at the Law Office it was observed that corrections and improvements must be made. As I have been informed, the legal and technical processing of the Pension Scheme has been completed and will be submitted for approval. 4.129.7 Joint venture of Paralimni – Agia Napa Sewerage Boards – Sewerage Treatment Plan. According to the provision of the contract the project must be completed in July 2001, for the amount of £9,5 m. In December 1999 the contractor claimed 234 days time extension of the contract, for delays which claims were caused by the Consulting Engineers and the employer. In April 2000 a justified extension of 133 days was approved, which allows the contractor to claim corresponding financial compensations. The major reason for the time extension are delays in the delivery of the worksite by the employer, the delay of the Consulting Engineers to approve promptly the constructional designs and changes in the designs of the project.

4.130 COUNCIL FOR THE REGISTRATION AND CONTROL OF CONTRACTORS FOR BUILDING AND TECHNICAL WORKS Part A 4.130.1 Operating results. The revenue and expenditure of the Board amounted to £182.369 and £189.787, i.e. there was a deficit of £7.418, compared to a surplus of £993 for 1998.

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4.130.2 Personnel. The Council employed 12 persons, with total emoluments of £134.347, including employer’s contributions to the various Funds, compared to £127.769 for 1998. The average of personal emoluments for each employee amounts to £11.196. Part B 4.130.3 Taxation. According to a ruling of the Attorney General dated 12 November 1996, under which the previous ruling of the Law Office is reversed, the income of the Council is not relieved from the payment of income tax. No provision has been made, however, in the accounts of the Council for income tax, because efforts are made for the amendment of legislation, aiming at the relief from payment of income tax. The Department of Inland Revenue submitted a notification on 9.9.99 requesting the Council to pay, within 15 days, the amount of £190.866, which relates to taxes in arrear for the years 1986-1996. On 24.4.2000 the Council was summoned to appear before the District Count Nicosia, to submit documentation relating to its financial position. 4.130.4 Determination and collection of fees not provided by the legislation and Regulations. Under a decision of the Board of Management the imposition and collection of fees not provided by the Law and regulations is continued. The legal regulation of the matter is being processed. 4.130.5 Regulations. No Regulations have yet been prepared and approved governing the structure and terms of service of the staff, the duties and responsibilities of contractors, the financial administration and the regulation of disciplinary offences of contractors. As I have been informed the preparation of Regulations is being processed. 4.130.6 Revision of fees. As the fees paid by contractors for the examination of applications for registration and issue of annual licence were fixed in 1983 (S.L. 93/83 dated 22.4.83), I recommended that the possibility of their revision should be considered, so as to be in line with the present state of affairs. 4.130.7 Fines. The fines imposed by the District court Nicosia for violations of the legislation continue not to be paid to the Council. This amount has amounted, up to now, to about £20.900. I suggested the amendment of the legislation, so that these fines should form part of the revenue of the Council. As the Director informed me, a relevant bill has already been submitted.

4.131 CYPRUS OLIVE PRODUCTS MARKETING BOARD Part A 4.131.1 Financial position (a) Operating results. The accounts showed a deficit of £122.560, compared to £37.594 for 1998. According to the Chairman of the Board, the deficit is mainly attributed to the loss by the board of 1/3 of the market, because of imports of virgin olive oil by private individuals, as well as the high proportion of import duty, which did not allow the Board to increase the price, in order to cover its expenses. (b) Sales of olive products. The following statement shows the sales of olive oil and olives during the last five years:

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Year Olives Olives Oil Total £ £ £ 1995 87.485 2.383.431 2.470.916 1996 36.463 2.023.135 2.059.598 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

(c) Accounting Ratios. The following accounting ratios give a general picture of the financial situation of the Board for the years 1999 and 1998: 1999 1998 Current Assets to Current Liabilities 3,71 8,16 Current Assets (less stocks) to Current 2,82 6,30 Liabilities Gross Profit to Sales of Olive Products 1,38% 6,21%

The gross profit shown in the Profit and Loss Account amounts to £93.666, whereas, if the same procedure was followed as in previous years, it should have been £20.837. The difference of £72.829 relates to salaries, labour and other administrative expenses, which were not included in the cost of sales, as in previous years, but were considered as indirect production expenses. I expressed the view that the deficit shown in the accounts, as well as the very low proportion of gross profit to sales, do not form an encouraging factor towards the viability and the smooth and unhindered continuation of the works of the Board. Its viability, however, cannot be improved with the differentiation of the way of charging expenditure, and ways therefore, must be studied and found for the immediate facing of the problem. The Chairman of the Board informed me that the change of accounting ratios is attributed to the import duties paid by the board in order to protect local production and for the accomplishment of its social contribution. 4.131.2 Personnel. The Board employed during the year six persons in permanent posts and four labourers. The expenditure for salaries, benefits and contributions to the various funds, for the permanent posts, amounted to £136.881. The average expenditure per person amounts to £22.813. In addition the expenditure for labour was £32.979. 4.131.3 Internal control. In my Report for the previous year I referred to the weaknesses observed in the system of internal control covering the receipt, keeping, processing and disposal of olive oil and I recommended the taking of the appropriate measures for strengthening the system of internal control, so that mistakes and deliberate actions will be avoided. 4.131.4 Olive oil issued free of charge for advertising purposes. On 15.4.99 the Board decided, inter alia that the quantity of olive oil issued free of charge for advertising purposes, is approved by the Board before delivery. In 1999, however, olive oil valued £5.087 was issued for advertising purposes, without the approval of the Board. I suggested that, in case this

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practice is continued, the free olive oil is issued in small advertising bottles and not in the trading package. The Chairman of the Board informed me that he gave instructions for the implementation of the Board’s decision, otherwise, he would not approve the free issue of olive oil. 4.131.5 Disposal of olive oil in the Cyprus market by non licensed bottlers. Two former licensed olive oil bottlers, continue to dispose in the Cyprus market bottled olive oil, without the Board’s approval, contrary to section 42 of the Olive Products Marketing Law. On 13.7.99 the Board discussed the matter of prices of olive products sold by competitors in the Cyprus market and, in a relevant report dated 6.7.99, which is attached to the minutes, it is stated, inter alia, that these competitors offer better terms of sale of olive oil and in lower prices than those of the Board. I stated that all above affect negatively, the smooth operation of the Board, and I suggested that the whole matter be considered in cooperation with its legal advisers. Furthermore, under section 81A of the Cyprus Olive Products Marketing Law, the Council of Ministers may approve Regulations, published in the Official Gazette of the Republic, for the accomplishment of the objectives of the Law, something that has not yet been done. I recommended that a provision should be included in the Regulations to be approved, allowing the Board to exercise quality control over the olive oil bottled by private individuals. The Chairman of the Board informed me that legal measures have been taken against the two olive oil bottlers and that, in cooperation with its legal adviser, Regulations will be prepared, which will be submitted to the Council of Ministers for approval. 4.131.6 Collection and disposal of olives. At the meeting of the Board dated 30.9.99, it was stated, inter alia, that the olives are facing disposal problems and it was decided to send a letter to the distributor and also other distributors interested for the marketing of olives to be approached, for purposes of sales increase. Also the concentration price of olives for category A was fixed at 75 cents/kilo. It was observed, however, that purchases where also made of olives of categories B and C at the prices of 58, 67, 57 and 53 cents/kilo, without the approval of the Board. In a relevant study carried out by the Financial Manager of the Board dated 1.3.99, it is stated, inter alia, that the sales of olives in the last years present a vertical fall, because of the liberalisation of the marketing of olives on 5.12.97 and the weakness of the Board to compete the private sector. In the same report it is also stated that the marketing of olives during the last years is at a loss and the department of olives processing is not viable. An example is shown below with receipts and sales of olives during the last three years, where the stocks are increasing, since the sales were drastically reduced. Year Stock 1.1 Receipts Sales Stock 31.12 Metric Metric Value Metric tonnes tonnes £ tonnes Metric tonnes 1997 29 10 30.112 29 10 1998 10 17 9.371 9 18 1999 18 8 4.045 3 23

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In view of the seriousness of the matter I recommended its total reconsideration. The Chairman of the board informed me that the Board approves the price for category A, and, accordingly the other categories are paid and that, with the full liberalisation of olives and the uncontrolled imports at under invoiced prices (20 cents/kilo), the Cyprus olives shall in no case be able to compete these prices, or the marketing of olives to be carried out by the Board or by any other private individual. 4.131.7 Sale of vehicle under registration number UA 446. Although the sale of the above vehicle was effected on 2.10.97 for the amount of £4.800, no amount has yet been collected, and as a result the above amount is shown in the debtors account. The Chairman of the Board informed me that the above debt would be settled the soonest possible. 4.131.8 Outstanding legal cases against the Board. My Office was not informed by the Legal Advisers of the Board for possible outstanding legal cases against the Board at 31.12.98 and at 31.12.99, for the relevant appropriate reference in the accounts. Part B 4.131.9 Packing materials. No physical stocktaking is carried out at the end of the year on the stocks of packing materials, The Chairman of the Board informed me that, for all packing materials this is possible, stocktaking will be carried out. For all materials for which stocktaking is not possible, an as far accurate as possible evaluation will be made. 4.131.10 Commission to the successful tenderer for the distribution of olive products. (a) As I stated in my Report for the previous year the following commission percentages were granted to the above tenderer, contrary to provision 2 of the tender, which specifies that the commission percentage granted to the distributor/agent will be only 5% of the wholesale value of the olive products sold, and specifically: • 5% commission on olive oil in plastic bottles. • 7.5% commission on olive oil in glass bottles, and • 10% - 13% commission on olives. I stated further that the validity of the contract documents signed with the successful tenderer is for three years, from 1.1.98 – 31.12.2000, whereas in the tender terms the time period is not specified, but it is stated that an open contract will be signed, if it is considered that the distributor serves the interests of the Board, a term which, in my opinion, is not clear. (b) Credit facilities to the distributor. On 27.12.97 the Board decided that as from 1.6.98 the credit facilities of £40.000 granted to the distributor will be terminated and, as from that date the sales to him will be conducted in cash. As it was stated in my Report for the previous year, the above decision did not make any difference to the way the distributor was dealing with the Board and his debit balance with the Board, at 31.12.99, was £22.154. The Chairman of the Board assured me that the new tender terms, regarding the time period of the contract and the amount of the commission, would be clear. With regard to the credit facilities to the distributor he stated that, although the Board decided not to grant them, as a result, however, of the way of payment by supermarkets (120 days

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credit), it was obliged to follow the old credit policy, which, according to the Chairman, is covered by bank guarantees.

4.132 CYPRUS TABLE GRAPES EXPORT BOARD Part A 4.132.1 Operating results. The income of the board, representing annual export licence fees, amounted to £18.406, whereas the expenditure was £10.650, i.e. there was a surplus of £7.756, compared to £9.487 for 1998.

4.133 CYPRUS POTATO MARKETING BOARD Part A 4.133.1 Financial position (a) Operating results. The sales of potatoes amounted to £23,75 m., compared to £28,40 m. for the previous year. The decrease is attributed to marketing problems due to competition from the disposal of potatoes from other sources, which resulted to the breakdown of the market and the sale of potatoes at very low prices. The sales expenditure amounted to £13,22 m., compared to £11,12 m. for the previous year. These represent 56% of the sales, compared to 39% for the previous year. This increase is attributed to the increase of packing quantity and the reduced selling prices of potatoes, as well as the granting free of charge of a large quantity of potatoes, which remained in the stores abroad for a long period of time. The packing tonnes were 116 241 for 1999, compared to 96 289 for 1998. The sales expenses per packing tonne for the two years is £113,7 and £115,5, respectively. The amount of £9,92 m. was paid to the producers, which represents 42% of sales, compared to 50% for the previous year. In addition, the amount of £9 m. was paid to the producers as government grant, after deduction of £1,92 m. for the repayment of loan instalments due. The total sales of potatoes for 1999 and 1998 are summarised as follows: Crop 1999 1998

kilos £m. kilos £m. Winter 9370300 3,25 15915675 5,36 Spring 101664788 20,50 79953227 23,04 111035088 23,75 95868902 28,40

(b) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Board: 1999 1998 Current Assets to Current Liabilities 1,92 1,13 Currents Assets (less Stocks) to Current Liabilities 1,76 0,59 Selling Expenses to Sales 0,56 0,39 Payments to Producers (not including A.I.O. insurance) to Sales 0,68 0,49

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(c) Price Stabilisation Fund. The balance of the Fund amounts to £635.331, compared to a debit balance of £1.129.073 at 31.12.98. During the year the Fund was credited with £622.100 and £1.298.235, which were deducted from the payments to producers for the repayment of the loans of 1997 and 1992, respectively, as it happens every year. 4.132.2 Personnel. During the year the Board employed 29 permanent employees with total emoluments of £581.558, including employer’s contributions to the various funds, and average emoluments for each employee £20.770, and two persons as local staff at the London Office, with total emoluments £39.063. The above amounts do not include overseas allowances and rent allowance paid to the permanent staff of the London Office. The board also employed 557 seasonal labourers at various time intervals, with total emoluments £1.307.485. 4.133.3 Discounts due to quality problems and price reductions. The discounts due to quality problems and price reductions in the United Kingdom amounted to £0,8 m. (11,96% of sales) and in Continental Europe to £0,2 m. (1,16% of sales). As it has been stated in the past, this is due to the different characteristics of the two markets, i.e. the marketing system, the pricing policy, the different varieties of potatoes supplied top the two markets and the storage conditions. The Board should be seriously concerned with the high percentage of discounts allowed in the United Kingdom. It is pointed out that out of the total discounts allowed in the United Kingdom, an amount of Stg£626.740 relates to discounts for quality problems of the Spring crop. Out of this, 76% was allowed to the two best buyers, without, in many cases, any documentation provided in order to support their claims. As it is shown in the following table, the percentage of the discounts allowed to the two buyers is far greater than the discounts allowed to the remaining buyers. Buyers Sales Discounts Percentage Stg£000 Stg£000 % J & JM Bennet Ltd 1.890 307 16,2 Hoche International Ltd 505 169 33,5 Others 4.940 151 3,1 7.335 627

The Chairman of the Board informed me that these buyers received “bakers” potatoes, which had rust spot problems. 4.133.4 Government grant of £9 m. As a result of the problems presented in the marketing of the Spring crop 1999 potatoes, the Council of Ministers decided the granting of government subsidy of a total amount of £9 m. The subsidy was granted in the form of loans to the board, through the Central Cooperative Bank, which are fully guaranteed and repayable by Government, in five equal annual instalments, which was allocated as follows: • An amount of £1.920.335 was paid by farmers to the Central Cooperative Bank for the settlement of loan instalments due, according to the instructions of the Minister of Finance. • The remaining amount of £7.079.665 was paid directly to the producers. 4.133.5 Scheme for the production of small potatoes. The Board in order to satisfy the requirements of foreign markets, commenced in 1998 a scheme for the production of small

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potatoes, which is still at the experimental stage. For the promotion of the scheme the Board provides to the participating producers motives, such as the guaranteed price of £350 per tonne. From the initial results of the marketing of the potatoes of the scheme, it appears that, in spite of the high prices secured (mainly in the English market), the Board suffers a small loss. This is due to the high price paid to the producers, as motivation for the promotion of the scheme, and to compensations for the quantity of potatoes damaged by diseases. 4.133.6 Free issue of 4 200 tonnes of NICOLA variety potatoes. During the 1999 Spring crop, a quantity of NICOLA variety potatoes was reserved in the United Kingdom, on behalf of a Supermarket, which finally was not interested to receive it. The Board in an effort to dispose as much greater quantity as possible, reduced the selling price up to STG£1,30 per package of 20 kilos, whereas a quantity of about 261 kilos was disposed at Stg£0,50 per package of 20 kilos. After the completion of the trade a quantity of about 4 200 tonnes remained indisposed. The Board in order not to be charged with storage and freezing expenses and to avoid disposal expenses, decided their free issue to charitable institutions. This was not made possible and the potatoes were issued free of charge to prime buyers in the United Kingdom and to associates in Germany and Belgium and a quantity of 1 800 tonnes was issued, also free of charge, to a Cyprus company for export to Greece. I expressed the view that in cases of reserved quantities of potatoes by buyers, these should pay an advance amount for the Board’s costs. The Board informed me that this was not accepted by its clients. With regard to the free issue of 1 800 tonnes to a Cyprus company, the following were observed: According to a relevant correspondence it appears that there was an initial interest from the Cyprus company to purchase 9 000 tonne (plus 20 dollars commission) for export to Greece. At a later stage, when the available quantity was reduced to 4 200 tonnes, this was offered by the Board at £25 per tonne. Meanwhile, as a result of the free issue of certain quantities to others, the available quantity was reduced to 1 800 tonnes, which, finally, was issued to the above company free of charge. The Chairman of the Board informed me that the whole effort failed, because of the back out of the above company. 4.133.7 Issue of 530 700 kilos of potatoes, of 1999 Spring crop to livestock breeders, as fodders. Out of the 1999 Spring crop, a quantity of 530 700 kilos of potatoes of the basic varieties of “kara” and “diamond”, was decided to be received but not exported, because of the rust spot quality problem. Out of this quantity, 500 175 kilos of “kara” variety size 40-55 m.m. was entirely destroyed because it was affected by “lita” and was issued to livestock breeders as fodders. 4.133.8 Destruction of 100 tonnes of local potato seed. Out of a quantity of 2 108 tonnes of local potato seed which was placed in refrigeration, a quantity of 100 tonnes remained in the refrigerators and the Board, at its meeting No. 1336 dated 15.12.98, decided its destruction because there was no further demand for it. 4.133.9 Renovation of the Packing Plant Larnaka. The budgeted expenditure for the renovation of the packing plant Larnaka was £206.290. As a result of additional works carried out the total cost amounted to £303.556. Meanwhile, tenders for additional alterations have been received and evaluated, the cost of which is estimated to amount to £80.000.

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The supervision of the renovation works of the packing plant has been assigned to a firm of architects-consulting engineers, for the amount of £3.700. As a result of the additional works carried out, their fee, up to 30.9.99, amounted to £8.750 and it is expected to exceed £9.525. The same firm has undertaken the supervision of the additional alterations decided. 4.133.10 Supply of wooden palettes. Under tender No. 30/98, the Board assigned to two tenderers the supply of a total quantity of 70 000 palettes at £4,25 each. The Board had the right for the purchase of an additional quantity of 30 000 pieces at the same price. The Board did not exercise this right by the specified date. Due to lack of timber, the two tenderers were unable to deliver the palettes promptly and according to the terms of the tender. The Board had to proceed to the purchase of wooden palettes from various suppliers, without tenders, at prices from £4,00 to £4,60 each, and 4 993 plastic palettes, at the price of £4,95 each. Furthermore, while very few quantities of the initial tender had been delivered, the supply of an additional quantity of 38 370, at the same price, was assigned to one of the two tenderers. A total of 122 361 pieces were purchased, out of which 102 000 pieces were received from one of the two tenderers, who was initially assigned a quantity of 63 630 pieces, With the completion of the packing, a quantity of 30 628 pieces remained in stock and the postponement of the delivery of an additional quantity of 8 000 pieces was requested, which appeared to be beyond the requirements of the Board. The Board filed a law suit against the one of the two tenderers, for the differences of the cost of the purchase of palettes from third parties at higher prices, whereas for the second tenderer no legal measures were taken, on the advice of the legal adviser, because he had proceeded to satisfactory corrective actions. 4.133.11 Construction of an overturning equipment and special machinery for the packing of potatoes in jumbo bags. On the recommendation of a specific supermarket of the United Kingdom and declaration of intention for the purchase up to 12 000 tonnes of potatoes, for special packing, the Board decided on 25.5.99 the construction of an overturning equipment and special machinery, which was assigned, without invitation to tenders and without the preparation of specifications, to a company which, in the past, undertook the construction of packing machinery for the Board. The total cost for the construction and installation amounted to £14.000. The machinery was delivered on 7.6.99, without being satisfactorily tested, since, in the meantime, the supermarket was not interested to receive the quantity of potatoes initially requested. The machinery presents operational problems and alterations and improvements are necessary, the responsibility of which partly lies with the construction company, which, however, in order to undertake the required work claims an additional amount of £4.000. The Board has not decided as to whether to proceed to the construction of new machinery or to the improvement of the existing one, paying the extra cost required. 4.133.12 Construction of new packing equipment. The Board, on the recommendation of the director General, approved the purchase of a new packing equipment, without tenders, which, as it was stated, was ready in the hands of the manufacturer, at the same price of equipment purchased during 1996, and with the right for the Board for purchase of one more. The cost for the purchase of the new equipment was £111.485, plus V.A.T., i.e. £120.404.

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It is pointed out that the same manufacturer was assigned in 1996, without tenders again, the construction of three such equipment, valued at £112.485 plus V.A.T., each. 4.133.13 Outstanding producers’ contributions to Social Insurance Fund for the employment of foreign labourers. The Council of Ministers, under decision No. 5-.248 dated 25.8.99, decided that the contributions due to the Social Insurance Fund, for the years 1997- 1999, for the employment of seasonal foreign labourers, be deducted from the subsidies granted to them. For this purpose, the Services of Social Insurance prepared personal lists, with the actual amount due by each farmer, which were submitted to the Board through the Ministry of finance, for the deduction of the relevant amounts due. The total amount due amounts to about £590.000 and relates to 719 producers. The Board decided not to proceed to the deduction of the amounts due from the payments to producers, made after the Government financial assistance grant amounting to £4 m., taking into consideration that this would result to a large number of producers not receiving any subsidy. 4.133.14 Amount due by Unifruit Hellas. The above company, whose headquarters are in Greece, owes to the Board the amount of £5.600 for the value of potatoes purchased in December 1998. The sale was made without the required guarantee, and as a result the amount due has not yet been collected. On 25.4.2000 the legal adviser of the board was instructed to take legal measures against the above company. 4.133.15 Claims of the Board from SOMAT Bulgaria transport company. The amount of DM 9.132 (about £2.691) is due by the above company, since 1997, regarding losses during the transport of potatoes. The advice of the legal adviser of the Board is that, legal measures against the above foreign company will serve no useful purpose and will be very costly. He recommended, however, the taking of legal measures against the agent of the company in Cyprus. The case is pending with the legal advisers, without any instructions given for filing a lawsuit or not. The Chairman of the Board informed me that efforts are made for the collection of the above amount, without additional expenses for legal measures. 4.133.16 Amount due to the Van Bon cold Stores (U.K.) Ltd. The amount of Stg£75.560 is due by the Board to the above company for storage fees of 1994. This amount remains pending because the Board claims the amount of Stg£204.000, for damaged potatoes which were under the responsibility of the company. Meanwhile, the company, which has taken legal measures against the Board, is now under liquidation and, according to correspondence between the liquidator and the Board’s Attorneys, it appears that, due to the long time lapse, the case will probably close, without payment of any amount from either side. The Chairman of the Board informed me that, on the recommendation of the legal adviser in the United Kingdom, the Board considers to withdraw its claim, provided that the company will, at the same time, withdraw its case against the Board. Part B 4.133.17 Destruction of fixed assets, which were written off. The fixed assets, which were written off from the accounts of 1997 to 1999, have not been removed and destroyed, and consequently the relevant destruction certificate has not been prepared. I understand that this will be done after the completion of the renovations of the packing plant Larnaka.

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4.133.18 Machinery of the packing plant. (a) The machinery allocated to the various packing plants for the packing of potatoes, has, as I understand, been recorded. Still pending, however, is their embossed stamping by the Board, and the preparation of the relevant recording certificate in each packing plant. (b) The matter of ownership of the machinery purchased by the packing plant Units, used for the packing of potatoes for which the Board pays 10% for depreciation and 9% for interest, on their purchase value, has not been clarified. 4.133.19 Income tax and special contribution for the Defence. No final decision has yet been taken by appropriate Government Services, as to whether the Board is relieved from payment of the above taxes. 4.133.20 Financial Instructions and Stores Regulations. A relevant draft has been prepared, which, however, has not been submitted to the Board for approval. 4.133.21 Regulations governing the terms of employment of the staff. The above Regulations have been prepared and submitted to the legal adviser of the board for legal processing. 4.133.22 Foreign debtors. No decision has been taken by the Board regarding the matter of the preparation of agreements and guarantees on the part of prime buyers and representatives abroad. 4.133.23 Debtors accounts. The debtors accounts include the following amounts, for which there are differences and which are pending for several years. (a) £14.717 – Relates to the subsidy of interest of the loan from the Central Cooperative Bank, which results from the different way of calculation of interest. (b) £7.620 – Relates to the sale of potato seed in 1993 to a specific producer. In addition a loan is due by the producer to the Board amounting to £23.705 since 1992, without payment of any amount yet. The Board has taken legal measures for the collection of the above amounts.

4.134 CENTRAL SLAUGHTER HOUSE BOARD Part A 4.134.1 Financial position (a) Liquidity. The Board continues to face serious liquidity problems, resulting to its inability to meet the current liabilities, which at 31.12.99 amounted to £6,74 m. while the current assets were £0,44 m., i.e. there was a deficit in working capital of £6,3 m. Consequently, the operation of the Board depends to a large extend on the continuation of financial assistance provided by Government, either in the form of subsidy or guarantees. (b) Operating results. The accounts for 1999 showed a deficit of £997.535, compared to £807.405 for 1998. The accumulated deficit at 31.12.99 amounted to £7,26 m., compared to £6,26 m. for 1998. (c) Revenue. The revenue amounted to £3,24 m. compared to £3,37 m. for 1998, i.e. there was a decrease of £0,13 m. This is mainly attributed to the decrease of collections from slaughterhouse fees, from £2,98 m. in 1998 to £2,87 m. in 1999. The revenue includes state subsidy amounting to £0,2 m., the same as for the previous year.

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(d) Expenditure. The expenditure amounted to £4,24 m., compared to £4,18 m. for the previous year, i.e. there was an increase of £0,06 m., which is mainly due to the increase of personal emoluments. (e) Long term liabilities. The long term liabilities at 31.12.99 amounted to £2,30 m., compared to £2,32 m. for 1998. (f) Accounting Ratios. The following accounting ratios give a general picture of the financial situation of the Board: 1999 1998 Current Assets to Current Liabilities 0,065 0,067 Personal Emoluments to Expenditure 72,17% 72,11% 4.134.2 Personnel. The Board employed 43 permanent employees and 193 labourers (43 permanent employees and 196 labourers in 1998), with total emoluments £3,06 m. (£664.092 for the permanent staff and £2.392.857 for the labour force), compared to £3,01 m. for 1998 (£658.369 for the permanent staff and £2.353.423 for the labour force), i.e. there was an increase of £0,05 m. or 1,7%, which is mainly attributed to the increase of wages. On the basis of the above, the average annual expenditure for each permanent employee amounts to £15.444, compared to £15.310 for 1998, and for each labourer to £12.398, compared to £12.007 for 1998. The amount of £84.664 is included in the total emoluments, which was paid to the permanent staff for overtime work (£98.074 for 1998). Also included is the amount of £240.305, which was paid to the labour staff for the same purpose (£274.908 for 1998). 4.134.3 Compensation for overtime work as a result of emergency calls. When employees of the Board are called for overtime work as a result of emergency needs, are paid, at least, for four hours overtime work, even if their actual overtime work is for a shorter period, without this being provided in the relevant collective agreement. According to the Board, the four hours overtime compensation is paid to the employees in cases of emergency slaughter of cattle, mainly during weekends and holidays, taking into consideration the distance of the Central Slaughter House from the towns, as well as its obligation to implement the relevant legislation. The matter will be considered by the Board during the discussions for the annual collective agreements with the Unions. 4.134.4 Allowance for hard/unhygienic work. Contrary to the collective agreement, the above allowance is estimated on the total emoluments, instead of the basic salary only. It is pointed out that the payment of the above is not provided for in the Regulations or in the Budget. An allowance of 5% is also paid on total emoluments, for special conditions of work, without being specified in the collective agreement on which amount this will be calculated and without this being provided for in the Regulations. The Chairman of the Board informed me that, personnel benefits are regulated through free negotiations between the two parties and are recorded in the relevant collective agreements, which, in future, will be more clearly stated. 4.134.5 Revision of slaughter fees. With amendment Regulations the House of Representatives approved the increase of slaughter fees and the imposition of transportation fees. The Board of Management decided to suspend the collection of the new fees and set as the appropriate time for the implementation of the Regulation the time of submission of the programme for the upgrading of the Slaughter House installations, for the purpose of securing the approval of the European Union. The relevant legislation does not appear to provide such

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authority to the Board of Management. The Chairman of the board informed me that the Board of Management is considering the matter of the revision of the slaughter fees, so that these will correspond to the approved fees, and that their non-implementation is due to the illegitimate competition of the Community Board’s slaughterhouses. 4.134.6 Matters referred to in the minutes of the Board of management. (a) Appointment of Investigative Officer. On the recommendation of the Board of Management an Investigative Officer was appointed by the Minister of Interior, for the investigation of offences, possibly committed by senior officers of the Board. (b) Police investigation. For possible offences, regarding financial matters, a police investigation is being carried out against senior officers of the Board. The police investigation is carried out after specific reports to the Board of Management. Meanwhile, two senior officers have been interdicted as from 2.6.2000. (c) Appointment of Consultant and Supervisor. After it was ascertained by the Board of Management that the Slaughter House is not properly administered, a Consultant and supervisor was appointed on temporary basis, for the purpose of supervising the operation of the Slaughter House. Under a relevant decision of the Board the Consultant and Supervisor has been appointed, as from 2.6.2000, as Acting General Manager. 4.134.7 Budget. The Budget for 1999 has not been submitted to the House of Representatives, according to the Public corporate Bodies (Approval of Budgets) Amendment Law No. 186/91 dated 1.11.91. 4.134.8 Outstanding loan instalments. As a result of financial problems faced, the Board is unable to pay, since 1989, the interest bearing loan instalments due to Banks and Government, amounting to £4.704.555. Under Council of Ministers decision No. 51.465, dated 22 and 23.3.2000, the unification of the total loans due was approved, which amounted to about £8,3 m., and the granting of a corresponding loan by the Loan Commissioners, under a reduced interest rate and 20 years repayment period. 4.134.9 Employees Medical Treatment Fund. The Fund has been operating in accordance with regulations approved by the Board of Management of the Central Slaughter House. The audit of the Fund was carried out by a private auditor, although the reply to the request of the board for the audit to be carried out by my Office was positive, provided that the relevant Regulations would be approved by the Council of Ministers. The Regulations have not yet been submitted to the Council of Ministers. As I have been informed the matter will be considered by the Board of Management for final decision. 4.134.10 Imposition of a fine as a result of delay in the payment of social insurance contributions and income tax. As a result of delays in the payment of the amounts due, the Board was charged for 1999 also with a fine of £4.478 for social insurance contributions and £9.687 for income tax. The delay in the payment of the amounts due is a direct consequence of the liquidity problem, which the Board faces for several years. The Chairman of the board informed me that with the unification of the loans, the outstanding amounts would be repaid. 4.134.11 Tenders. No proper updating is made of the tender register with the purchases of supplies, and as a result it is not possible to examine the quantities received, in relation to the quantities ordered.

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For several tenders general specifications are presented, instead of detailed, and consequently the Tender Board is unable to evaluate properly the tenders submitted. 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, with three members of the Board and the intention is to implement the new Municipal Tender Regulations which are being prepared by the Municipalities Union, in cooperation with the Law Office. 4.134.12 Upgrading of installations. The council of Ministers under decision No. 51.465 dated 22 and 23.3.2000, approved government grants to the Central Slaughter House amounting to £1.065.000, for the upgrading of installations and the harmonisation with the requirements of the European Union, and £300.000 for facing the problem of environmental pollution. Part B 4.134.13 Contract for the sale of intestines. As I stated in my Report for 1998, from an investigation regarding the above contract, which was carried out on the request of the Chairman of the Board of Management, the following were observed: (a) Maintenance/repair of machinery for the separation of intestines. Although, according to term 10 of the contract, the expenses for the maintenance/repair of the machinery for the separation of intestines should be charged to the buyer, these expenses are paid by the Board. The account of the buyer commenced being charged with the above expenses since 1.7.98, a practice followed with the new buyer also. (b) Water consumption. While, according to the contract, the cost of water consumed by the machinery for the separation of intestines is charged to the buyer, there was no separate water meter for this machinery, so that a corresponding charge could be made. The buyer was charged only with the consumption of water supplied to other installations outside the Slaughter House, and at higher than ordinary prices, in order to cover the cost of water supplied to the machinery for the separation of intestines. As this arrangement was, according to an evaluation of my Office, against the interests of the Board, I recommended the installation of separate water meters. These meters were installed in September 1998, without, however, any charge made to the buyer. As I have been informed, since November 1999, the buyer is properly charged according to the water meter indications. (c) Electricity consumption. While, according to the terms of the contract, the cost of electricity consumption of the above machinery should be charged to the buyer, a fixed charge was made amounting to £70 per month. I recommended the installation of a separate meter for purposes of charging the actual electricity consumption. The meter was installed without, however, the Board changing the way of charging the buyer with the cost of the electricity consumed. As I have been informed, since November 1999, the electricity consumption is charged according to the meter indications. (d) Destroyed intestines. The destroyed intestines are, daily, counted and recorded in a special statement, which is signed by an employee and the Slaughter House Manager. I recommended the use of a special form, which to be issued daily, for destroyed intestines, signed by an employee of the board and a representative of the buyer. Also the Slaughter

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House Manager or his representative to carry out a relevant examination. My recommendation was accepted. With regard to the proper implementation of the above contract, the Board appointed an investigative committee, the conclusion of which was submitted to the Law Office, which, after the relevant processing, was submitted to the Board of Management, where disciplinary prosecution is pending. As I have been informed, in the new contract, which is effective as from November 1999, there is no provision for compensation to the buyer for destroyed intestines. 4.134.14 Personnel Welfare Fund. It was observed that no Regulations have been approved for the operation of the Fund, as provided in the Municipal Corporations Law. As I have been informed, the slaughter House Personnel Welfare Fund operates on the basis of a constitution, which has been approved by the Registrar of societies and Institutions, and a similar arrangement has already been made by the Municipality of Nicosia and other Public organisations. The intention, however, of the Board is seek legal advice and for the need to apply for the approval of Regulations.

4.135 WATER BOARD – GENERAL Part A 4.135.1 Income tax and special contribution. The Water boards fully comply, since 1995, with the income tax requirements provided by the existing legislation. 4.135.2 Internal control. As a result of the continually increasing volume of activities of the Boars, makes imperative the establishment of well organised Departments of Internal Audit, staffed with suitable, experienced and qualified personnel, and the preparation of programmes of work, according to the International Auditing Standards. 4.135.3 Purchase of water from the Department of Water Development – Outstanding liabilities. The total of the amounts due by Water Boards to the Department of Water Development amounted, at 31.12.99, to £15,6 m. An amount of £6,2 m. is not included in the respective accounts of the Boards, because it represents the increase in the price of purchase of water from 27 cents per c.m. to 33,5 cents per c.m., which the Boards do not accept. An amount of £6,9 m. is shown in the accounts, but this is not acceptable, for the following reasons: (a) The water supplied by the Limassol Refinery (£5,8 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. (b) Water valued £1,1 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 compensation for losses caused from the loss of water supply sources, as a result of the construction of Kourris Dam at Alassa. 4.135.4 Irregular sale of water. The sale of water in areas outside water supply limits by the Boards, as per the provisions of the Law, was continued in 1999. 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

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recommended the consideration of the possibility of inclusion of these areas in the Boards boundaries, under an appropriate legal arrangement. 4.135.5 Early retirement with concession of additional increments. To members of the staff of the Boards, who apply for early retirement, two additional increments are granted, over and above the top scale of their salary scale, without a relevant provision existing in the Law and the schemes of service allowing the concession of these increments. 4.135.6 Appointments/promotions to first entry and promotion posts. Contrary to the provisions of the existing Regulations and the Schemes of Service, the practice of appointments or/and promotions to first appointment and promotion posts, without these posts being previously published, is continued. 4.135.7 Tenders. I have suggested the improvement of the way of classification and filing of the tenders and the contracts, as well as the keeping of specially arranged registers, for the proper and correct follow up of the execution of tenders. I recommended further the preparation and submission for approval, according to section 40(1)(g) and (2) of the Water Boards Law (Cap. 350), modern Tender Regulations, taking into consideration also the provisions of the Public Tenders Laws and Regulations. Part B 4.135.8 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 under section 14(3) of the Water Supply (Municipal and Other Areas) Law (Cap. 350). 4.135.9 Permanent 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 the creation of 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. 4.135.10 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 Law (Cap. 350). 4.135.11 Discounts allowed. The Boards continue to approve discounts to consumers, because of leakages in underground installations, although the existing Regulations do not include such provisions. All the Boards have included a clear provision in the new amendment Regulations, which have not yet been approved.

4.136 NICOSIA WATER BOARD Part a 4.136.1 Financial position (a) Operation results. The accounts showed a deficit of £270.445, compared to £255.376 for 1998. (b) Revenue. The revenue amounted to £5.653.168, compared to £4.945.251 for 1998, i.e. there was an increase of £707.917, which is attributed mainly to the increased sales of water,

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the provision of services to consumers and the return of value added tax amounting to £191.353, for the years 1993-1998. (c) Expenditure. The expenditure amounted to £5.923.613, compared to £5.200.627 for 1998, i.e. there was an increase of £722.986, which is attributed mainly to the increased cost of sales of water and the increased contribution to the Pensions and Gratuities Fund. (d) Outstanding liabilities. The amounts of £697.915 and £3.927.985, which represent the increase of the purchase of water from the Department of Water Development, for the period 1.1.90 – 31.12.91 and 1.1.94 – 31.12.99, respectively, are not included in the accounts. The Board did not accept the payment of these amounts, because the increase of the fees for the sale of water to consumers was approved, with delay, on 27.12.91, for the first case, whereas for the second case, although the increase of the fees was promptly requested, it has not yet been approved. (e) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Board: 1999 1998 Current Assets to Current Liabilities 1,60 1,96 Surplus (Deficit) to Capital Employed (3,56%) (3,45%)

4.136.2 Personnel. The Board employed 134 persons and the expenditure for salaries, allowances and employer’s contributions to the various funds was £2.546.467, compared to £2.199.433 for 1998. 4.136.3 Long term liabilities. The long term liabilities, at 31.12.99, for loans from the Loan Commissioners amounted to £970.695. 4.136.4 Loss of water. The proportion of the loss of water between the quantity purchased and the quantity sold was 16,43%, compared to 10,47% for 1998. 4.136.5 Internal control. As a result of the continually increasing volume of work of the Board, the gradual improvement and expansion of audit programmes is imperative, in order to cover all fields of activities of the board. The operation of the Department of Internal Audit is expected to be set on a more organised basis, with the filling of the post of Internal Auditor, which has been recently proclaimed. 4.136.6 Early retirement with concession of additional increments. To three members of the staff who retired early in the beginning of 2000, two additional increments were granted, over and above the top of their salary scale, without this being provided for in the Law and the schemes of service. 4.136.7 Appointments/promotions. During the year appointments/promotions were made to first entry and promotion posts, without relevant publication of the posts, contrary to the provisions of the existing Regulations and the Schemes of Service. 4.136.8 Sale of water outside the board’s limits. The Board continued in 1999 the supply of water to areas outside the Board’s water supply limits, contrary to the provisions of the relevant Law, at the price of 27 cents per c.m., i.e. the same as its purchase price from the Department of Water Development. I expressed the view that the above action of the Board is irregular, because these areas are beyond water supply limits and the selling price is higher than the

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price charged to the consumers. I recommended the consideration of the possibility for inclusion of these areas in the Board’s limits, through the appropriate legal channels. 4.136.9 Water supply to the New Nicosia Stadium. The expenditure for the connection of the New Nicosia Stadium with the Board’s aqueduct, as well as the fees for the utilisation of land and volume of construction amounting to £58.256, has not yet been paid by Government, contrary to the provision of paragraph 6 of the concession agreement between the Stadium and Government, which states that “Government undertakes to transfer electricity and water to the above area”. 4.136.10 Tenders. I have recommended improvements in the way of classification and filing of the tenders and the contracts, as well as the keeping of specially arranged registers, for the follow up of the correct and proper execution of the tenders. I recommended further the preparation and submission for approval, according to section 40(1)(g) and (2) of the Law, modern Tender Regulations, taking into consideration also the provisions of the Public Tenders Laws and Regulations. 4.136.11 Debtors – consumers. The balance of the account for the consumers debtors was £721.325, compared to £866.261 for 1998. This includes the invoices of the last period of 1999 (£360.047) and consumer invoices of which the supply of water has been disconnected. Part B 4.136.12 Supply of water to the Turkish Cypriot citizens of Nicosia. The value of water supplied by the Board to the Turkish Cypriot citizens of Nicosia since 1963 up to 31.12.81 was £1.779.330. This amount has not been collected and it is not shown in the accounts of the Board. Since 1.1.82 the expenditure for the supply of water to the Turkish Cypriot citizens of Nicosia is charged to Government.

4.137 LIMASSOL WATER BOARD Part A 4.137.1 Financial position (a) Operating results. The accounts showed a deficit of £1.542.482, compared to £1.236.462 for 1998. (b) Revenue. The revenue amounted to £2.642.827, compared to £2.644.111 for 1998, i.e. there was a decrease of £1.284. (c) Expenditure. The expenditure amounted to £4.185.309, compared to £3.880.573 for 1998, i.e. there was an increase of £304.736, which is attributed, mainly, to the increase of the cost of the purchase of water, the general operational expenses, as well as the expenses for the maintenance and operation of fixed assets. (d) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Board: 1999 1998 Current Assets to Current Liabilities 0,20 0,27 Currents Assets (less Stocks) to Current Liabilities (32,54%) (13,74%)

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4.137.2 Personnel. The Board employed 106 persons and the expenditure for salaries, allowances and employer’s contributions to the various funds were £1.709.993, compared to £1.700.732 for the previous year. 4.137.3 Long term liabilities. The loans due by the Board at 31.12.99 to the Loan Commissioners and government amounted to £677.701. 4.137.4 Loss of water. The loss of water during 1999 was 0,86 m. cub. metres or 8,71%, compared to 1,17 m. cub. metres or 12,78% in 1998. 4.137.5 Purchase of water from Limassol Refinery and the Department of Water Development. For the period 11.4.94 up to 31.12.99 the Board was supplied about 27,5 m. cub. metres of water from Limassol Refinery, which initially accepted the supply to the Board of an annual quantity of water of 1,7 m. cub. metres, without charge, because of the loss of water supply sources at Alassa area, as a result of the construction of Kourris Dam. For a quantity of water of 17,26 m. cub. metres, the accounts show a liability to the Department of Water Development, amounting to £5.783.206, despite the fact that the Board has not accepted the purchase price amount for the water. 4.137.6 Fees and charges. Cases have been observed of collection of fees and charges, without these being provided for by the Regulations. The approval of modern Regulations is pending before the House of Representatives since 1995. 4.137.7 Amount of £118.081 due by Agios Athanassios Municipality. The total value of water, which the Board conceded to Agios Athanassios Municipality at the price of 35 cents per cub. metre, which is still due, was, at 31.12.99, £118.081. I expressed the view that the above action of the Board was irregular, because Agios Athanassios Municipality is outside the water supply area of the Board, according to the provisions of the Law, and the selling price is higher than the price charged to the consumers. I recommended consideration of the possibility of inclusion of Agios Athanassios Municipality within the boundaries of the Board, with an appropriate legal arrangement. As the Manager of the Board informed me, negotiations are being carried out between the Water Board and Agios Athanassios Municipality. 4.137.8 Pensions and Gratuities. 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 their period of 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. 4.137.9 Financial contribution of £8.000 to the Municipalities of Limassol, Mesa Geitonia, Kato Polemidhia and Agios Athanassios. The Board repeated in 1999 the financial contribution to each of the above Municipalities. I expressed the view that such expenditure is irregular, because it is not provided for by the Law and it is contrary to the board’s objectives. 4.137.10 Application by a company for water supply of plots parcellation in Mesa Gitonia – Fassoula. The total expenditure for the execution of the above project, according to the evaluation of the Research Department of the Technical Services of the Board, amounted to £257.640. The evaluation does not include the cost of the required extension of Limassol – Fassoula aqueduct, which at 31.12.99 amounted to £45.631, plus V.A.T. and departmental

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charges. Up to this day the amount of £129.600 only has been deposited. For the water supply requirements of the above plots an aqueduct was placed, which was connected with the Limassol – Fassoula aqueduct and extended to point Z7E, where a pool of 500 c.m. quantity was built on government land. The part of the aqueduct which covers the distance from the Limassol Refinery of the Department of Water Development up to the point of connection with the aqueduct to the plots of the applicant company, of total expenditure of about £23.290, was constructed without an immediate need for providing service to anyone. I requested to be informed the reasons for which the provisions of the relevant Regulations were not followed, and why works commenced before securing the whole of the required amount and also why works commenced before securing the whole of the required amount and also why the Board was, irregularly, burdened with part of the whole expenditure. The Board of Management at its meeting on 28.7.2000, decided the carrying out of an internal administrative investigation, appointing at the same time a two member committee with terms of reference to study fully and in depth the information provided to the Board that, inter alia, the Board or the Manager, with regard to the water supply of the above plots parcellation, have acted favourably or irregularly and submit a relevant report soon. 4.137.11 Employees Provident Fund. The Administrative Committee of the Provident fund purchased in 1999 shares of public companies, contrary to the provision of section 16(2) of the Regulations, which specifies that the cash reserves are invested to such bonds as the Committee should decide. Contrary to the provisions of sections 14 and 15 of the Water Supply (Municipal and Other Areas) (Pensions and Gratuities) Regulations of the Board, the Board of Management recognised the previous service of the Manager at the Cyprus Grain Commission for the period 15.7.76-23.10.80. The Administrative Committee of the Provident fund was committed and returned on 23.6.2000, to a member of the Provident fund who retired on 30.4.2000 his contributions on the basis of the prices of shares at 31.12.99. I expressed the view that such selective decisions do not show a correct financial administration and do not contribute to the viability of the fund, so that this would respond to its liabilities, in case of new retirements or/and exercise of selection on the part of the members to retire on the basis of the Pension Scheme. I recommended that it would be to the interest of the Fund, if the contributions were returned on the basis of the current prices at the time of retirement of each member. I recommended further that a proposal for amendment of Regulation 16(2) should be submitted for approval, without delay, so that the Board would have the right of investments in shares of public companies. Part B 4.137.12 Pumping rights of water from boreholes at Germasogeia. The Board delays to pay the fees due to the Department of Water Development for the pumping of water from the boreholes at Germasogeia, because of the pending settlement of compensations to the Board, regarding the loss of water supply sources at Alassa area, as a result of the construction of Kourris Dam. The amount of these fees due up to 31.12.99, was £1.111.089. As I have been informed, the three part committee, which was set up to study the matter, has submitted a draft agreement for submission to the Council of Ministers for approval.

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4.137.13 Computerisation of Services. The settlement of the matter regarding the non- fulfilment of the obligations of the tenderer for the computerisation of the Services of the Board is still pending. As I was informed the Board authorised the Chairman to proceed, if necessary, to the termination of the agreement and the taking of measures against the tenderer, for breach of contract.

4.138 FAMAGUSTA WATER BOARD Part A 4.138.1 Operating results. The revenue of the board amounted to £344.035, compared to £319.654 for 1998. This amount includes the government subsidy from the Budget of the Fund for the Development of Displaced and Affected Persons, amounting to £236.205, and income from the employment of the staff of the Board in other Services, amounting to £84.416. The respective expenditure amounted to £344.035. 4.138.2 Assets and liabilities. The assets and liabilities shown in the Balance Sheet at 31.12.99, include only the balances of the accounts which have been created 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. 4.138.3 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, employers’ contributions to the various funds and other benefits of the above employees amounted to £168.908. 4.138.4 Outstanding liabilities. The accounts do not show the amount of £3.310.981, which is due to the Department of Water Development for water supplied, to the Board during the period 14.8.74 – 31.12.99, for the needs of the Turkish Cypriots citizens of Famagusta. The water is provided directly from the department of Water Development and the Board does not participate, or is in any way involved in the whole procedure, since 1974 and up to the present time.

4.139 LARNAKA WATER BOARD Part A 4.139.1 Financial position (a) Operating results. The accounts showed a deficit of £507.031, compared to £340.460 for 1998. (b) Revenue. The revenue amounted to £1.592.807, compared to £1.613.624 for 1998. (c) Expenditure. The expenditure amounted to £2.099.838, compared to £1.954.084 for 1998. (d) Outstanding liabilities. The accounts do not include the amounts of £321.116 and £1.261.274, which represent the increase in the purchase price of water from the Department of Water Development, for the periods 1.1.90 – 31.12.91 and 1.1.94 – 31.12.99, respectively. The Board does not accept the increase of the purchase price of water, because the increase of the

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fees for the sale of water to the consumers was approved on 27.12.91, for the first case, while for the second case it has not yet been approved. (e) Liquidity. The financial position of the Board presents continual deterioration, with an acute liquidity problem, and as a result it cannot meet its current liabilities, which at 31.12.99 amounted to £1,7 m. (f) Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Board: 1999 1998 Current Assets (less Pensions and Provident Fund Cash) to Current Liabilities 0,86 1,22 Surplus(Deficit) to Capital Employed (15,98%) (9,52%) 4.139.2 Personnel. The Board employed 54 persons and the expenditure for salaries, allowances and employer’s contributions to the various funds amounted to £957.210, compared to £940.479 for 1998. 4.139.3 Fees of the Consulting Engineers. The contract which was signed on 27.2.98, provided for the completion and submission to the Board of the final report, regarding the improvement and extension of the system of supply, storing and distribution of the water and the viability of the system up to the year 2020. The final report was submitted, with considerable delay, on 8.2.2000, and as a result no amount was paid up to the end of 1999, because the time schedules of the contract were not observed. Provided that the contractual obligation of the Board, which amounts to £62.524, will be settled within the year 2000, it is expected to cost to the Board about £75.156, due to the increase of the foreign exchange rate. I requested to be informed how the Board proposes to deal with the extra cost, which is expected to emanate as a result of the delay. The Chairman of the Board of Management informed me that the Board does not recognise any extra cost, because it considers that the delay observed was due to the Consulting Engineers. 4.139.4 Tenders. For the purpose of exercising more efficient internal control, I have suggested improvements in the way of classification and filing of the tenders and the contracts, as well as the keeping of specially arranged registers for the follow up of the correct and appropriate execution of the tenders. I recommended further the preparation and submission for approval, according to section 40(1)(g) and (2), of modern Tender Regulations, taking into consideration the provisions of the Public Tenders Laws and Regulations. 4.139.5 Loss of water. The proportion of the loss of water between the quantity purchased and the quantity sold was 14,36%, compared to 12,44% for 1998. As I was informed efforts are made for its further reduction. Part B 4.139.6 Extension of aqueduct. As I have been informed, construction works for the above aqueduct commenced in February 2000 and the whole project is expected to be completed around the end of the year.

4.140 FUND FOR THE ERECTION OF CYPRUS MUSEUM Part A 4.140.1 Financial position. The receipts of the Fund amounted to £1.224.709, compared to £1.193.446 for 1998. The receipts represent revenue from LOTTO/PROTO (£500.000),

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entrance fees to Museums and archaeological areas (£374.029) and interest (£348.802). The accumulated balance of the Fund at 31.12.99 was £8.892.149, compared to £7.667.440 for 1998.

4.141 PUBLIC LOANS FUND Part A 4.141.1 Operating results. The accounts showed a surplus of £3.889.015, compared to £3.732.525 for 1998, i.e. there was an increase of £156.490, which emanated mainly from the reduction of interest credited for overpayments and the reduction of the commission for interest received. The loans issued in 1999 were £4,3 m., compared to £6 m. for 1998. The balance of the Reserve Account at 31 December 1999 was £55,6 m., compared to £51,7 m. for 1998. 4.141.2 Outstanding loan instalments. At 31.12.99 the outstanding loan instalments amounted, according to the accounts, to £24,2 m., after deduction of the provision of £4,2 m., for doubtful debts and £2,2 m. for debts written off. The provision for doubtful debts includes the amount of £2,9 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 £0,6 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, as due by refugees and affected persons as a result of the Turkish invasion. It in includes additionally an amount of £1 m., which represents loans, which will possibly be written off as per court decisions. The greatest part of the 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. 4.141.3 Cash surplus. At 31.12.99 the Public Loans Fund showed a cash surplus of £9.585.913, compared to £6.839.107 for 1998. 4.141.4 Statement of outstanding loans. The following statement shows the balances of the outstanding loans, by economic sector, due to the Fund at 31 December 1999 and 1998: 1999 1998 £000 £000 Loan Commissioners: Water Development 7.112 7.471 Agricultural Development 11.860 12.314 Rural Development 11.283 11.498 Fisheries Development 367 389 Education and other Services 9.600 9.322 Tourism Development 7.829 7.892 Public Corporations 17.446 16.023 Commerce and Industry Development 243 243 Agricultural Credits 242 369 Fund for the Cultivation of T/C Land 949 949 66.931 66.470

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4.142 CYPRUS CHILDREN’S ASSISTANCE FUND COMMITTEE Part A 4.142.1 Operating results. The accounts showed a surplus of £1.181, compared to £3.164 for 1998. The Committee granted, in 1999, financial assistance to needy children, amounting to £94.753, compared to £101.694 for 1998.

4.143 GAME FUND Part A 4.143.1 Collections. The collections of the Fund for 1999 amounted to £1.933.120, compared to £1.791.209 for 1998. Most of the collections represent fees for the issue of game and firearms licences. 4.143.2 Payments. The payments amounted to £2.106.524, compared to £1.508.502 for 1998. 4.143.3 Accumulated Fund. The balance of the Accumulated Fund, at 31.12.99, amounted to £2.206.705, compared to £2.380.109 for 1998. 4.143.4 Subsidies to the Cyprus Game Association. Subsidies amounting to £60.000 were again granted to the above Association for various purposes, according to the provisions of the Fund’s budget, without any documentation as to whether these amounts have been used for the purposes for which they were granted. I recommended that the amount and objectives of the subsidies be re-examined, in consideration of the way these subsidies have been used during the last years, aiming at the more efficient use of the fund’s sources. 4.143.5 Improvement of wild life sanctuaries. An amount of more than £65.785 is spent each year for the improvement of wild life sanctuaries, with cultivation of about 12 000 acres in various areas. As it has been observed that no sufficient internal control is exercised for this programme, I recommended ways for the improvement of internal control procedures and the carrying out of a study to verify whether a substantial benefit is derived, corresponding to the amount spent. A research is being carried out since 1999 regarding the benefits derived from the improvements of the wild life sanctuaries and it is expected that by the end of 2000 specific recommendations will be submitted.

4.144 PROVIDENT LOTTERY FUND Part A 4.144.1 Operating results. The collections of the Fund amounted to £81.867 and the payments £71.187, compared to £80.702 and £99.222 for 1998, respectively. The reserve of the Fund at 31.12.99 was £57.136, compared to £46.456 for the previous year. 4.144.2 Reconsideration of the institution for the issue and circulation of the Providence Lottery. During the years 1997, 1998 and 1999 the Provident Lottery was not issued and the expenses of the Provident Lottery Fund were mainly covered through Government Subsidy. I expressed the view that the reconsideration of the issue of the Provident Lottery should be made in such a way as to secure the continuation of the assistance now granted through the Provident Lottery Fund to disabled and affected persons.

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4.145 ADVOCATES PENSION FUND Part A 4.145.1 Financial position and operating results. The revenue and expenditure of the Fund amounted to £1.233.406 and £354.964, respectively, compared to £1.178.823 and £255.814 of the previous year, i.e. there was a surplus of £878.442, compared to £923.009 for 1998. The cash balances at 31.12.99 were £4.743.402, compared to £5.156.076 for 1998. 4.145.2 Contributions in arrear. At the end of the year the contributions in arrear amounted to £109.456, compared to £115.465 for 1998. 4.145.3 Members and pensioners. The members and pensioners of the Fund were 1 584 and 66, respectively, compared to 1 537 and 54 in 1998. 4.145.4 Investments. During 1999 the Fund proceeded to investments in land, purchasing four plots of total value of £1.212.282. A decision of the Board of Management of the Fund for the investment of £500.000 in shares, was not covered by the existing Regulations and towards this purpose an amendment was made which was approved by the House of Representatives on 9.6.2000. 4.145.5 Law suits filed by members of the Fund. The Fund rejected certain applications of its members for payment of gratuity, because they could not meet the provisions of the relevant Regulation, and consequently two lawsuits were filed against it at the Supreme Court and two at the District court Nicosia. I stated that in case of a favourable decision for the plaintiffs, the financial cost for the Fund would be considerable, as other members, whose applications for the payment of a gratuity were rejected, will possibly refer to justice. Part B 4.145.6 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, would cease to be contributors to the Fund. Against the above decision a lawsuit was filed at the Supreme Court, which was accepted. The Board of Management of the fund appealed to the Supreme Court where the case is still pending. 4.145.7 Contribution surcharge. In the relevant Regulations it is not specified as from which date the monthly contributions can be considered overdue, so that a surcharge, equal to the amount of the contribution can be imposed. As a result of this vagueness, the surcharge is only charged and collected for contributions that are overdue for more than two years. For the settlement of the matter, relevant amendment Regulations have been approved by the House of Representatives on 9.6.2000. 4.145.8 Calculation of 13th and 14th pension. The method of calculation of the 13th and 14th pension in the case of new pensioners, or pensioners who die during the year, is not provided for in the Regulations. For the settlement of the matter, relevant amendment Regulations have been approved by the House of Representatives on 9.6.2000.

4.146 CHRISTOS STELIOU IOANNOU FOUNDATION Part A 4.146.1 Operating results. The accounts showed a deficit of £66.278, compared to £55.245 for 1998. The revenue amounted to £921.271 (£901.511 for 1998) and includes Government

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Subsidy amounting to £824.422, compared to £803.144 for 1998. The expenditure amounted to £987.549 (£956.756 for 1998) and includes personal emoluments and allowances of £757.705, compared to £724.329 for 1998. 4.146.2 Personnel. The Foundation employed 40 permanent, two casual and 23 weekly paid employees. At 31.12.98 there were seven vacant posts (three Boarding House Officers, two Special Paedagogical Officers, one Administrative Officer and one Physical Education Officer. 4.146.3 Accounting Ratios. The following accounting ratios give a general picture of the financial position of the Foundation: 1999 1998 Current Assets to Current Liabilities 1,2 1,3 Government Subsidy to Revenue 89,5% 89,1

4.146.4 Budget (a) The Board of Management at its meeting on 7.10.99 approved the revised Budget of the Foundation for 1999. I requested to be informed whether the relevant approval of the Council of Ministers was secured. (b) Excess expenditure: Actual Approved Expenditure Vote Expenditure amount 31.12.99 Excess £ £ £ 368 Workshop supplies 8.800 9.032 232 369 Food 32.682 33.316 634 The covering approval of the Council of Ministers for the above excesses has not been secured. (c) Upgrading of the salary scale of the Logotherapist. The Board of Management approved on 16.2.99 the upgrading of the salary scale of the post of Logotherapist, from A4-A7 to A8-A10, to which the relevant appointment was made on 19.4.99. I requested to be informed of the relevant approval of the Board of Management for this appointment, as well as the approval of the Council of Ministers for the upgrading. 4.146.5 Biological treatment plant (a) At the meeting of the Board of management, dated 16.2.99, it was decided, inter alia, according to the evaluation of an expert consultant, that the treatment plant of the Foundation must be replaced, the cost of which was estimated to £75.000. Its immediate repair was also agreed, the cost of which amounted to £2.924, without following, the tender procedure. (b) At the meeting of the Board of Management on 7.10.99 the concern of the Ministry of Finance was, inter alia, expressed with regard to the fact that the Budget of the Foundation for 2000 will exceed the amount of £1 m. Towards the reduction of the expenses paid by Government it was decided that the Association of the Friends of the Foundation should be requested to undertake certain maintenance expenses and specifically the replacement of the treatment plant.

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4.146.6 Schemes of Service. It has been observed that in most Schemes of Service, the salary scale of the post is not stated. Furthermore, the system of combined salary scales has been implemented, as provided under circular No. 1100 of the Public Administration and Personnel Service, dated 27.2.96, without the approval of the Board of management and without the previous appropriate amendment of the Schemes of Service of the posts involved.

4.147 CENTRAL AGENCY FOR EQUAL DISTRIBUTION OF BURDENTS Part A 4.147.1 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. 4.147.2 Accounts. The accounts for 1999 have not been promptly submitted for audit. During 1998 Government granted no subsidy to the Agency, regarding its operational expenses, and part of the deficit at the end of the year, which amounted to £403.466, was covered from the subsidy of previous years. Also, at 31.12.98 the collectible and payable loans were £6.971.765 and £7.921.652, respectively, while the collectible deposits were £949.887. 4.147.3 Loans. After the enlargement of the criteria for the granting of loans through the “Scheme for the Reinstatement of Credit-Worthiness”, which was made on the approval of the House of Representatives at 31 December 1998, a considerable delay was observed in the examination and approval of applications for loans, which, in most cases, exceeded one year. This is attributed to the substantial increase of new applications, but mainly due to the reconsideration of a large number of old applications, where, according to the new criteria, the applicants become eligible or are eligible for an increased loan amount. The chronological sequence of the applicants was not, however, strictly observed and in several cases applications were processed and approved within a period of a few months or even days. 4.147.4 Tender and Stores Regulations. Tender and Stores Regulations, as well as financial and Accounting Instructions have not yet been adopted by the Central Agency, the promotion of which is imperative and must be made the soonest possible.

4.148 CYPRUS FOUNDATION FOR MUSCULAR DYSTROPHY RESEARCH Part A 4.148.1 Financial position. The financial position of the Foundation, according to the non- audited accounts, was as follows: (a) Operating results. The accounts showed a surplus of £236.744, compared to £142.709 for 1998. The surplus resulted because of the inclusion in the income of TELETHON. Excluding this income the accounts showed a deficit of £22.559, compared to £213.890 for 1998. (b) Revenue. The revenue amounted to £2.462.290, compared to £2.092.068 for 1998. These include subsidies from Government amounting to £1.367.341, compared to £1.151.521

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for 1998. They also include income from services rendered of £412.549, compared to £306.459 for 1998. In addition, the new revenue of the Foundation from TELETHON amounted to £259.303, compared to £356.599 for 1998. (c) Expenditure. The expenditure amounted to £2.484.849, compared to £2.305.958 for 1998. The increase was mainly due to the personal emoluments, which amounted to £1.042.380, compared to £939.893 for 1998. 4.148.2 Personnel. The foundation employed 93 persons, 86 on a full time basis and seven on a part time basis, with total emoluments of £1.042.380. 4.148.3 Operation of the Foundation. The operation of the Foundation depends to a large extend on Government financial support, provided either as subsidies or as guarantees. During the previous years the foundation faced a serious liquidity problem, which, after the raising of a loan amounting to £575.000, under government guarantee and Government commitment for the payment of 70% of the instalments of the loan, as well as an additional loan of £140.000, raised in July 1998, appeared to have been solved, but in 1999, the liquidity problem was again presented. This was met with an additional government subsidy amounting to £300.000. The Foundation informed my Office that, for the settlement of the matter, efforts are made for the development of new services, which will increase its revenue. 4.148.4 Research Programme for the efficiency of a drug. The research programme was carried out on the basis of an agreement signed between an international pharmaceutical company and a medical officer of the foundation. A study of the appendix of the agreement revealed that the payment of substantial amounts is provided as a fee to the researcher whose obligation is to meet the various expenses regarding the research. Although the research was carried out with the use of the installations and all the facilities of the Institute of Neurology and Genetics and also the pharmaceutical products and services secured by the Institute free of charge, the resulting revenue, however, was not paid to the foundation. For the whole matter a report has been prepared which was submitted to the Attorney General, under the instructions of which a police investigation is being carried out. 4.148.5 Financial and accounting Instructions and stores and tenders Regulations. The above Regulations have already been approved by the Board of Management of the Foundation. As basic provisions were not included in the Regulations, with a relevant letter I requested their inclusion. In addition a suggestion was made for the preparation and approval of Regulations governing the carrying out of research programmes, which will be included in the financial and Accounting Regulations of the foundation. The Foundation informed me that my recommendations are under consideration. 4.148.6 Staff Regulations. While the above Regulations regarding the obligations and benefits of the staff have been approved, for a number of employees no contracts have yet been signed, resulting to inability of implementation of these Regulations in the above cases. The Foundation informed my Office that measures will be taken for the settlement of the matter. Part B 4.148.7 Defects of the building. In my previous report I stated that the building housing the Foundation presented defects, such as settlement, cracks in the external paving and serious cracks in the partition walls. Although these defects had not been repaired, the contractor was paid the amount of £250.000, on the recommendation of the legal adviser of the Foundation, for

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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 presented. The relevant report from the Technical Chamber of Cyprus, regarding the defects of the building, which was requested in 1998, has not yet been received, resulting to delay in their repair. 4.148.8 Memorandum of Scientific Cooperation between the Foundation and the Ministry of Health. The agreement of Cooperation between the Foundation and the Ministry of Health, for services rendered to Government, was signed 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. It was further observed that the Memorandum does not clarify the way of determination of patients eligible to free medical treatment. The foundation continues to render free services to all patients referred to by the hospitals, without examining as to whether these are eligible to free medical treatment or not. The Foundation informed my Office that the matter was raised with the Ministry of health.

4.149 CYPRUS STOCK EXCHANGE Part A 4.149.1 General. The Cyprus Stock Exchange was set up under Law 14(1) of 1993, as a public corporate body, with the main objective the exercise of activities relating to the development and control of the stock market, serving the public interest. The Cyprus Stock Exchange is under the supervision of the Minister of Finance, through the Capital Market Committee, and commenced official operation on the 29th March 1996, following the approval of Regulations by the House of Representatives in July 1995. For the purpose of support for the proper operation of the Stock Exchange, relevant amendments to the Laws and Regulations are being made. 4.149.2 Accounts. The final accounts for 1999 were submitted to my Office late, on 1st September 2000, and it is expected that, according to the relevant legislation recently approved by the House of Representatives, the accounts will be submitted to my Office promptly in the future. 4.149.3 Financial position (a) Operating results. The accounts showed a surplus of £5.621.290, compared to £494.182 for 1998 (prior to the readjustment of £44.372, relating to deferred expenditure for 1998, which was made in 1999 and increased the surplus of 1998 to £538.556). The increase of the surplus is attributed mainly to the increase of fees and annual subscriptions. (b) Revenue. After the deduction of the operational expenditure of the Capital Market Committee, the revenue amounted to £7.014.038, compared to £1.242.051 for 1998. The increase of £5.771.987 is attributed mainly to the increased collections of fees and annual subscriptions. (c) Expenditure. The expenditure amounted to £1.392.748, compared to £703.495 for 1998 (£747.867 after the readjustment referred to above). The increase of £689.253 is attributed mainly to personal emoluments and operational expenses. 4.149.4 Personnel – Salaries and allowances. The Stock Exchange employed 100 employees, 51 permanent and 49 casuals, with total expenditure for salaries, allowances and

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employer’s contributions to the various Funds £690.894, compared to £311.847 for 1998. The average expenditure for each employee amounted to £6.909 for 1999 and £8.910 for 1998. 4.149.5 Organisational structure and schemes of service. The organisation structure of the Stock Exchange has been completed, but it has not yet been implemented. Still pending is the approval of the Schemes of Service of the staff, which will facilitate in the determination and separation of the duties of the officers and the more efficient operation of the Stock Exchange. 4.149.6 Suspension of the operation of the Stock Exchange. During 1999 the Stock Exchange suspended its operations four times, in order to make possible the processing of delayed work which was due to lack of sufficient under structure to deal with the increased volume of the resulting activities. This undermined seriously the trustworthiness of the institution and resulted to the enclaving of the capital of investors, which run the danger of being exploited, and also being the cause for illegal enrichment. I hold the view that, although the facts that led to the suspension of operation of the Stock Exchange were complicated, public corporations, as the Stock Exchange, which render services to the public, should take proper care and have satisfactory emergency plans, so as to respond efficiently and promptly in periods of crises. The responsibility is even greater in the case where these corporations enjoy a monopoly regime, and the public is obliged to depend entirely on the services offered. The Director of the Stock Exchange holds the view that the suspension of operation for the two times that this occurred for a considerable period, was due to outside factors. 4.149.7 Computerisation. The computerisation of the Stock Exchange, which would effect the dematerialisation of Stock Exchange transactions, undertook to complete a specific foreign company by the end of January 1998. The project, however, has not yet been completed. The initial contract specified the cost to the amount of £520.000 and provided for the payment of reasonable and specific expenses for the staff of the company travelling to Cyprus. Up to 31 December 1999 the amount of £935.505 was spent for the project. Regarding the delay, the relevant contract provides for compensations, but part of the responsibility, according to the contracting company, is due to the Stock Exchange, a view that is rejected by the Board of Management. It is pointed out that, with regard to computerisation, it was agreed with the company that further services would be provided without invitation to tenders, a decision with which the Capital Market Committee strongly disagreed. Furthermore the private consultants, who had undertaken, after tenders, the evaluation of security and software control systems, completed their study, where serious weaknesses are observed, which the Stock Exchange has to face immediately. The Director of the Stock Exchange informed me that the Stock Exchange is working towards the completion of the project the soonest possible and that the delay observed is due to external factors. 4.149.8 Leasing of Offices. The Board of Management of the Stock Exchange has signed an agreement for the leasing of a building at a suburb of Nicosia for it’s re-housing, without invitation to tenders. The lease period is for six years, with the right for renewal for ten further years, and specific provision that the securing of the required licences is the responsibility of the owners. The agreement determines an annual rent of £340.164 (£5,50 per s.m. monthly), with 10% increase every two years, and it is estimated that for the lease period of the first six years the amount of £2 m. will be paid to the owners as rents. The right is also given, up to 31 December 2001, for leasing the third floor of the building at £6 per square metre. No independent study was, however, carried out and a relevant evaluation regarding the amount of rent determined has not been secured.

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Part B 4.149.9 Income tax. As the Stock Exchange holds the view that, according to a relevant legal advice, it is not liable to taxation, has not paid any tax since 1993 and filed a relevant legal recourse. 4.149.10 Internal Audit. As I stated in my previous report I recommended the establishment of an Internal Audit Department of the Stock Exchange, due to its rapid development, for better monitoring and supervision of its operations. An Internal auditor has already been appointed.

4.150 SECURITIES AND EXCHANGE COMMISSION Part A 4.150.1 General. The Securities and Exchange Commission was set up under the Stock Exchange Laws and has authority to supervise its operation, according to the provisions of the above Laws. 4.150.2 Financial position (a) Operating results. The accounts showed a surplus of £680.378, compared to £77.911 for 1998. (b) Revenue. The revenue amounted to £802.507, compared to £150.659 for 1998, and was mainly derived from the 10% charge on the income of the Stock Exchange (£780.076 for 1999 and £137.763 for 1998). (c) Expenditure. The expenditure amounted to £99.698, compared to £72.748 for 1998. 4.150.3 Personnel. The Commission employed seven employees and the total expenditure for salaries, allowances and employer’s contributions to the various Funds amounted to £56.670, compared to £44.592 for 1998. 4.150.4 Supervision of the Stock Exchange Market. For the improvement of the efficiency of the supervision of the Stock Exchange Market and the capital market generally, I suggested that the Commission should examine the possibility for the implementation of improved systems for the follow up of the market, including the direct access to the data of Stock Exchange transactions. 4.150.5 Revenue from the Cyprus Stock Exchange. It was observed in 1999 that there was considerable delay in the payment of the appropriate amounts to the Commission (10% on Stock Exchange income). I recommended that ways must be found for their prompt payment in future.

4.151 TECHNICAL CHAMBER OF CYPRUS Part A 4.151.1 Accounts for 1999. The accounts for 1999 were not submitted promptly to my Office, and as a result the annual audit could not be carried out, as provided under section 31(2) of Law 224/90. I observed that the non prompt preparation and submission of the accounts for audit does not facilitate the smooth operation of the Chamber and at the same time reduces to a considerable degree the potential for utilisation of the accounts by the Chamber, for prompt decisions and corrective and other measures relating to any weaknesses or omissions possibly

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observed. In addition it deprives the House of Representatives and the citizens of the right to be informed of the Chamber’s operations. 4.151.2 Annual Report for 1998. As the annual audit of the accounts for 1999 has not been carried out, I could not verify whether the matters raised in my previous Report have been settled. The Chamber attributes this delay to the fact that the efforts were directed to the improvement of its operations, according to the recommendations of the auditor General, and considerable time was spent in retrospective audit work, resulting to delay in the preparation of the financial statements for 1999.

4.152 INSTITUTE OF TECHNOLOGY Part A 4.152.1 Submission of financial statements for audit. While the financial statements for the years 1997 and 1998 were audited by my Office, the relevant audit reports have not yet been submitted, because the financial statements have not been approved by the Board of the Institute and have not been submitted to my Office properly signed. The financial statements for 1999 have not been audited, because they have only been recently submitted to my Office. 4.152.2 Approval of the Budget. The Budget of the Institute for 1999 was approved with considerable delay in December 1999. I pointed out that the approval of the Budget at the end of the year, to which it refers, renders the objective of its preparation useless, and also its role in the smooth operation of the Institute. The Chairman of the Institute informed me that efforts will be made so that the Budgets will be prepared and approved within the time limits specified by the constitution of the Institute. 4.152.3 Financial position (a) Operating results. The accounts of the Institute for 1998 (the submission of the accounts for 1999 is pending) showed a surplus of £286.826, compared to £146.091 for 1997. (b) Revenue. The revenue amounted to £735.687, compared to £521.763 for 1997. The increase of £213.924 was mainly derived from the rendering of services to Government (£186.340) and from the Fund for Subsidisation of Industrial Studies (£43.481). (c) Expenditure. The expenditure amounted to £448.861, compared to £375.672 for 1997. The increase is mainly due to the subsidies to industrial units, which amounted to £261.622, compared to £218.141 for 1997. 4.152.4 Personnel. The Institute employed during 1998 10 persons and the total expenditure for salaries, allowances and employer’s contributions to the various Funds amounted to £96.217. 4.152.5 Operation of the Institute. As it was stated in my previous report, the operation of the Institute depends to a large extend on the assignment of services by Government to the Institute. With regard to the above, an agreement was made between the Government and the Institute, covering the period 1996-1998, which provided for the assignment to the Institute of the administration of the Technical Part of the Industrial Restructuring Scheme. On the basis of the agreement, the revenue of the Institute for the years 1996, 1997 and 1998 amounted to £180.362, £240.847 and £406.371, respectively, which, on average, represent the 80% of total revenue (excluding subsidies). As it was observed, the administration expenses charged to

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Government for the three years the agreement was effective, exceed by far the amounts of the subsidies to industrial units. The following table is indicative of the above situation: Administrative Year expenses Subsidies £ £ 1996 180.362 120.521 1997 240.847 218.141 1998 406.371 261.622 827.580 600.284 After a relevant study carried out by the appropriate Ministries of Commerce, Industry and Tourism and Finance, in 1999, the revision of the agreement was decided, with retrospective effect from 1996, providing for covering by Government of the Institute’s deficit, up to a maximum amount of £120.000. The Institute has not yet decided whether to accept Government’s decision for the retrospectivenes of the revised agreement, and the accounts which have been prepared include as revenue the amount derived from the administration of the Technical Part of the Scheme, on the basis of the agreement. The amount due by Government according to the accounts amounts to £580.260, whereas, according to the revised way of determining the fees for the Institute, the amount due by Government at 31.12.98, as estimated by the Ministry of Commerce, Industry and Tourism amounts to £80.606. As it has been observed that the Institute is not certain of Government financial support in future, it was suggested that greater efforts must be made to increase its revenue, in order to become, gradually, self supported. The Chairman of the Institute informed me that every possible effort is made, so that in future charges will be made for all services rendered. Part B 4.152.6 Regulations. In my previous Report I suggested that, for the smooth operation of the Institute, Regulations should be prepared governing the terms of service of the staff, as well as financial and Accounting Instructions regulating financial matters. It appears that the staff Regulations have been prepared but have not yet been approved by the Board of Management, whereas the preparation of the financial and Accounting Instructions is still pending. Also, regarding the Regulations “Approval of Administrative Expenses and Purchases of fixed Assets”, which have already been approved by the Board of Management, it was suggested that these be studied further and revised in order to be in line with the new Public Tenders Laws and Regulations. The Chairman informed me that the matter will be considered by the Board of Management of the Institute. 4.152.7 Tax liabilities. The tax liabilities of the Institute have not yet been clarified. The Ministry of Finance informed the Institute that the matter is under consideration.

4.153 CLINICAL LABORATORIES FUND Part A 4.153.1 Accounts. Although my Office repeatedly requested the submission for audit of the books and accounts of the Fund, for the years 1992-1999, which are provided for under section

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5 of the Clinical Laboratories Regulations of 1990, these, however, have not yet been submitted.

4.154 CYPRUS STATE SCHOLARSHIPS CORPORATION

Part A

4.154.1 Establishment. The Cyprus State Scholarships Corporation (Establishment and Operation) Law No. 109(1) 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.

4.154.2 Expenditure. During 1999 the amount of £1.202.670 was spent, as educational grants for scholarships, compared to £1.513.350 for the previous year. In addition, loans were approved in 1999 from the Loan commissioners, amounting to £129.000, compared to £104.000 in 1998.

4.154.3 Personnel and Operation Regulations. No schemes of service have yet been approved, the Secretary of the Corporation and the necessary staff have not been appointed, and no Regulations have been issued by the Council of Ministers for the proper implementation of the Law, as well as other internal regulations relating to procedures or/and operation of the corporation, as these are provided for in the various sections of the Law.

4.154.4 Operation of the Corporation. As a result of the above, the previous regime of operation of the Scholarships Committee does not appear to have changed.

(a) The Corporation commenced and continues its operation with the staff of the Service of Public administration and Personnel, which covers its operational expenses.

(b) The agreements relating to scholarships continue to be signed by the persons involved and the Director of the Service of Public Administration and Personnel, instead of the Chairman of the Corporation (section 10(c) of the Law), and are, possibly, not legally covered.

(c) No separate Fund is operating, and the required books and management accounts are not kept, as provided under section 23 and 22 of the Law.

4.154.5 Overdue applications. It was observed that contrary to the terms of the scholarships proclamation for the period 1998/99, applications submitted after the due date were accepted and examined.

4.154.6 Contract violations. According to the records of the corporation, 35 persons should have returned the money they received, because of contract violations, while 35 other cases are pending before the Law Office.

4.154.7 Follow up of collections as a result of suspension of contracts. There is no system for the follow up of the collections of the amounts, which must be reclaimed, after suspension of contracts, resulting to possible loss of revenue.

4.154.8 Accounts and financial administration. The final accounts have not been prepared and submitted for audit by the Auditor General, contrary to section 25 of the Law.

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4.155 EOKA 1955-59 HISTORICAL MEMORY FUND Part A 4.155.1 Financial position (a) Operating results. The collections of the Fund during 1999 amounted to £424.722 and the payments to £550.065, compared to £522.228 and £426.656, respectively, for 1998. The cash balances at 31.12.99 were £32.985, compared to £158.328 for 1998. (b) Revenue. The greatest part of the revenue of the Fund is derived from government subsidy, through the Ordinary Budget, amounting to £410.000 per annum. (c) Expenditure. The main categories of expenditure during 1999 are analysed as follows: Erections/Improvements/Maintenance of Monuments and other Historical Places (£370.630), Subsidies to Fighters Associations, Clubs and Heroes Families (£57.145), Employment of Casual Assistants (£42.964) and Events (£30.876).

4.156 BANK OF CYPRUS ONCOLOGICAL CENTRE Part A 4.156.1 Approval of Budget. The Budget of the Centre for 1998, which includes provisions for expenditure 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 the year 1999, as well as for the year 2000, Budgets were prepared for purposes of negotiation of the agreement and were sent to the Ministries of Finance and Health in January 1999 and March 2000, respectively, without, however, being submitted yet for approval, because of the renegotiation of the agreement. 4.156.2 Financial position. The financial position of the Centre, according to 1998 accounts was as shown below. The accounts for 1999 have not yet been prepared, because of outstanding issues regarding the pensions of medical officers. (a) Operating results. The accounts showed, at 31.12.98, a surplus of £9.895, compared to £1.429 for 1997 and £21.290 for 1996. The income and expenditure of the Centre during the last three years were as follows: 1998 1997 1996 £ £ £ Income 578.761 123.895 51.810 Expenditure 568.866 122.469 30.520

(b) Accounting Ratios. The following accounting ratios give a general picture of the financial situation of the Centre: 1998 1997 1996 Current Assets to Current Liabilities 1,04 1,22 2,42 Government Subsidy to Revenue 87,78% 73% 29,04%

4.156.3 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,

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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. Government has not yet paid any amount for covering its operational expenses, because of the issue of renegotiation of the agreement. Meanwhile the Centre is financed through loans under government guarantee and credit facilities from the Bank of Cyprus. 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 to the services offered by the Centre are also offered by Government Hospitals, my Office expressed the view that its operational regime must be decided as soon as possible. Among the alternative solutions that could be examined and must not be excluded is the possibility of the Centre being placed under the jurisdiction of the Medical Services, as the Government Hospitals, 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) Government guarantees. 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 proceeded to the raising of a loan, amounting to £975.000, from the Bank of Cyprus, under Government guarantee. The balance of the loan at 31.12.98 was £710.689. 4.156.4 Amount due by Government. In the accounts of the Centre government is shown as a debtor. The amount shown as due by Government at 31.12.98 amounts to £613.524 and represents almost all the operational expenses of the Centre, from its establishment up to 31.12.98. 4.156.5 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 tests were carried out at the laboratory of the General Hospital. The cost of both the food and the tests are not shown in the accounts. The Director General of the Centre stated that the accounts for 1999 show this cost, including a retrospective charge for 1998. (b) Supply of drugs. Government provides to the Centre drugs and pharmaceutical supplies through the Pharmaceutical Services. Up to 31.12.98, according to the accounts of the Centre, their cost amounted to £75.867. According to the records of the Pharmaceutical Services, up to 31.12.99, the cost of drugs and pharmaceutical supplies provided to the Centre amounted to £838.018.

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(c) Operation of the Laboratory. The Board decided not to operate the laboratory of the Centre and for this reason the necessary staff was not employed and the required equipment was not purchased. The tests were initially carried out at the Laboratory of the General Hospital Nicosia and since May 1999 these are carried out at a private laboratory. Up to 31.12.99 the amount of £90.000 was paid for these tests. As Government, according to the agreement which was not revised, undertook to provide to the Centre the services in the field of Oncology, which the Centre cannot provide, and because these expenses are finally charged to Government, it was suggested that the Centre should utilise the Services of government, wherever these can be offered. The Director General of the Centre stated that the objective of the Centre was to obtain service from the Laboratory of Makarios Hospital. Because, however, the discussions for the upgrading of the Laboratory of Makarios Hospital were not fruitful, with a unanimous decision of the Board, the tests were assigned, through tenders, to a private laboratory whose services can be terminated at a short notice, if Government begins to provide the required service to the Centre. 4.156.6 Personnel and benefits. At 31.12.98 the Centre employed 63 persons (4 persons in 1997). The expenditure amounted to £355.135, compared to £79.270 for 1997.

4.157 KARAISKAKION FOUNDATION Part A 4.157.1 Establishment of Karaiskakion Foundation. (a) Karaiskakis Foundation was established as a Charitable Institution, under a relevant decision of the Council of Ministers. Its establishment was declared on 18.9.96 by the Minister of Health at that time, with co-founders the Ministry of Health, Mr Michalis Karaiskakis, the Association for the Provision of Platelets and the Leukaemia Association of the United Kingdom. Its establishment was made possible with an initial donation of £45.000, by Mr Michalis Karaiskakis, an amount which he collected through contributions, for the financing of a bone marrow transplant for his son. The income of the foundation is derived from the annual government subsidy and through contributions of friends and supporters of the Foundation. (b) Administration of the Foundation. The Foundation is administered by a Board of Management. Is composition and appointment is provided for under sections 7-8.2 of the establishment act of 1996. Its powers and duties are also provided for in the same establishment act. (c) Objective of the Foundation. The objective of the foundation is the organisation of a Bone Barrow and Platelets Bank, for an offer of hope for life to suffering fellow human beings. Towards this objective the Foundation targets for the organisation of a suitable laboratory, which will have the potential of carrying out histocompatibility tests free, promptly and trustworthy, and to the finding of volunteers for making these tests possible, for the purpose of information regarding their blood, such as bone marrow, stem cells, white blood cells platelets etc. (d) Premises of the Foundation. The Foundation is housed in a government building, which was provided by Government under a nominal rent. 4.157.2 Operation of the Foundation. The continuation of the operation of the Foundation depends, mainly, on government subsidy and other contributions.

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4.157.3 Preparation of the Budget. No annual Budget is prepared by the Foundation. For purposes of better planning and administration I recommended the preparation and approval of an Income and Expenditure Budget, before the commencement of the financial year. 4.157.4 Financial position (a) Operating results. The accounts showed a deficit of £7.774 for 1998, compared to a surplus of £95.995 for the period ended 31.12.97. The summarised results are as follows: 1998 1.1.96 - 31.12.1997 £ £ Income 87.836 119.580 Expenditure 95.610 23.585 (Deficit)/Surplus (7.774) 95.995

(b) The revenue of the Foundation is mainly derived from contributions and subsidies. The government subsidy for 1998 amounted to £70.000, compared to £35.710 (value of reactors) for the period 1.10.96 – 31.12.97. The contributions from the founders and co-founders for the period ended 31.12.97 amounted to £70.582. 4.157.5 Personnel. The Foundation employed during 1998 three officers, with total expenditure for salaries, allowances and employer’s contributions to the various Funds amounting to £24.970, compared to £12.800 for the previous period. 4.157.6 Regulations. For the smooth operation of the Foundation it was suggested that, pursuant to section 29 of the establishment act, Regulations be prepared governing the financial administration of the Foundation, such as revenue, expenditure, tenders etc., as well as Regulations governing the terms of service of the staff, benefits, duties and responsibilities. 4.157.7 Collections. The counterfoil books used for collections during the period 1996 to 1999 were not official or controlled. These were not recorded in a register of counterfoil books and the actual number issued could not be verified. Furthermore it could not be verified whether all the books had been presented for audit. It was also observed that collections from private individuals’ events were received without the issue of a relevant receipt.

4.158 TAX TRIBUNAL 4.158.1 General. The Tax Tribunal was established pursuant to section 4A(1) of Law 80(1) 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 Members of the Board on 2.1.2000. The Law, under which the Tax Tribunal was established, specified as the date of commencement of its effectiveness 6 months after the approval of the Law, i.e. 2.1.2000.

4.159 RADIO TELEVISION AUTHORITY 4.159.1 Financial position (a) Operating results. The accounts for the period 1.5 – 31.12.98 and for the year 1999, which have been very recently submitted, and consequently the relevant audit has not yet been completed, showed a surplus of £224.739 for 1999 and £3.432 for the previous period.

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(b) Revenue. The revenue was £362.617 for 1999 and £49.607 for the previous period. (c) Expenditure. The expenditure was £137.878 for 1999 and £46.175 for the previous period. 4.159.2 Delay in the approval of the Budget for 1998. According to section 36 of the Radio and Television Stations Law No. 7(1)/98, the Budget of the Authority must be prepared by the 1st October each year and is subject to approval by the Council of Ministers and the House of Representatives. The Budget for 1998 was approved by the Authority on 20.5.98, was submitted to the Ministry of Interior on 22.5.98 and approved by the Council of Ministers on 14.10.98. It was submitted to the House of Representatives on 16.10.98 and was enacted to a Law (No. 43(II)/98) on 3.12.98. As a result of the above delays, and in order to make the Authority’s operation possible a Government advance was secured, amounting to £75.000, under the Advances Vouchers Law 168/85 and S.L. 78/86, which was repaid in June 2000. 4.159.3 Personnel. At the end of 1999 the Authority employed 3 permanent employees. The personal emoluments amounted to £52.130 (£21.469 for the previous period) and included an amount of £17.360 for the services of a consultant (£8.600 for the previous period) and £32.019 for the services of 4 persons for clerical and other duties (£11.545 for the previous period. 4.159.4 Fees on the revenue from advertisements. There is no provision in the accounts for collectible revenue from fees from advertisements, because a considerable number of stations have not submitted statements for the income from advertisements. With the approval of the relevant Regulations (S.L. 10/2000) in January 2000, the Authority, with appropriate action, has already collected a substantial part of the above fees. 4.159.5 Pension benefits of the staff. The approval of Regulations for the pension benefits of the staff, as provided by section 9(5) of Law 7(I)/98, is still pending. A symbolic provision has, however, been included in the Budget for the year 2000.

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PART 5 – STATE BUDGETS AND FINAL ACCOUNTS 5.1 APPROVAL OF STATE BUDGETS FOR 1999 The three Budgets, i.e. the Ordinary, the Development and the Special Relief Fund, were submitted to the House of Representatives on 18.10.98 and, after their approval to a Law, were published in the Official Gazette of the Republic on 29.1.99. 5.2 ORDINARY BUDGET 5.2.1 Consolidated Fund. The Consolidated Fund of the Republic showed in 1999 the following movement: £m. Debit balance 1.1.99 2.674,0 Plus: Expenditure 1.546,4 4.220,4 Less: Revenue 1.101,3 Debit balance 31.12.99 3.119,1

5.2.2 Operating results. The deficit for 1999 amounted to £445,1 million, compared to the budgeted deficit of £505,8 million, as shown in the following statement: Budgeted Actual £000 £000 Revenue 1.110.634 1.101.288 Expenditure 1.616.412 1.546.359 Deficit 505.778 445.071

5.2.3 Revenue. The actual revenue amounted to £1.101,3 m., compared to the budgeted amount of £1.110,6 m., i.e. there was a decrease of £9,3 m. or 0,84%. The actual revenue for the last two years is shown as follows: 1 9 9 9 1 9 9 8 £000 % £000 % Direct Taxes: Income Tax 188.139 17,08 171.741 16,61 Corporation Tax and Tax on Dividends 159.406 14,47 127.782 12,36 Other Direct Taxes 51.225 4,66 48.497 4,69 398.770 36,21 348.020 33,66 Indirect Taxes: Value Added Tax 254.340 23,09 245.038 23,70 Excise Duties 128.478 11,67 120.011 11,61 Import Duties 58.423 5,30 56.263 5,44 Other Indirect Taxes 62.478 5,68 60.877 5,89

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1 9 9 9 1 9 9 8 £000 % £000 % 503.719 45,74 482.189 46,64 Other Revenue: Sale of Goods and Services 61.789 5,61 59.686 5,77 Dividend, Rents and Royalties 25.657 2,33 25.885 2,50 Transfers 81.930 7,44 81.206 7,85 Grants 942 0,09 610 0,06 Loan Proceeds 18.786 1,70 24.848 2,40 Other Receipts 9.696 0,88 11.515 1,12 198.799 18,05 203.750 19,70 1.101.288 100,00 1.033.959 100,00

5.2.4 The original budgeted expenditure was increased from £1.616,4 m. to £1.691 m. and the actual expenditure amounted to £1.546,4 m., i.e. there was an unspent amount of £144,6 m. or 8,55%.

COMPARISON OF REVENUE AND EXPENDITURE OF THE ORDINARY BUDGET FOR THE YEARS 1995 – 1999 (LOANS NOT INCLUDED IN REVENUE)

1600 1546,4 1458,9 1400 1341,4 1282,3 1200 1112,0 1084,4 1000 1009,1 991,2 963,9 926,3 800

600

400

200

0 1995 1996 1997 1998 1999

EXPENDITURE REVENUE

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

5.3 DEVELOPMENT BUDGET 5.3.1 Development Fund The Development fund showed the following movement during 1999: £m. Balance 1.1.99 (167,1) Plus: Loan proceeds 317,5 150,4 Less: Development expenditure 205,1 Balance 31.12.1999 (54,7)

5.3.2 Expenditure

The original budgeted expenditure was increased from £264,2 m. to £290 m. and the actual expenditure amounted to £205,1 m., i.e. there was an unspent amount of £84,9 m. or 29,28%.

5.4 BUDGET OF RELIEF FUND FOR DISPLACED AND AFFECTED PERSONS 5.4.1 General The movement of the Fund for the years 1999–1998 was as follows: 1999 1998 £000 £000 Deficit at 1st January (284.459) (215.971) Issue of Previous Years Loans of the Agency for Equal Distribution of Burdens 7.488 - (276.971) (215.971) Revenue 6.058 6.405 (270.913) (209.566) Expenditure (78.135) (75.853) (349.048) (285.419) Transfer to the Revolving Fund for the Housing of Displaced Civil Servants 304 960 Deficit at 31 December 1999 (348.744) (284.459)

The revenue does not include collections from the repayment of loans, the total of which amounted to £420.115 in 1999. Also the expenditure does not include payments amounting to £6.973.950, which represent issues of new loans. During 1999 an amount of £3.347 was written off from loans issued out of the Revolving Fund for the housing of displaced civil servants, after a Council of Ministers decision. 5.4.2 Receipts The actual receipts for the years 1999 and 1998 are shown in the following statement:

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1999 1998 £000 £000 Contribution: Local 1.509 1.723 Foreign ― ―

Other Receipts: Temporary refugee levy on imports 1.691 2.268 Refugee stamp 424 397 Interest on arrears of special contribution 871 869 Interest on loans issued 852 426 Rents 188 185 Refund of unclaimed financial assistance to refugees 13 16 Overpayments in previous years 62 82 Other revenue 7 7 Fees from inmates of various institutions 388 382 Hire-Purchase system for Housing Estates 53 50 6.058 6.405

5.4.3 Payments. The actual payments for the years 1999 and 1998 are shown in the following statement: 1999 1998 £000 £000 Welfare Service and Relief 34.815 29.488 Housing of Refugees and Affected Persons 28.127 27.779 Infrastructure Works 3.063 5.562 Education 1.613 1.305 Sundry Expenditure 10.517 11.720 78.135 75.854 Self-Housing Loans 6.974 1.206 85.109 77.060

5.5 GENERAL

5.5.1 Budgetary excesses

It was again observed that budgetary excesses were incurred, for which approval has been sought. Pursuant to section 4 of the Budget Law, the Minister of Finance issued 46 Special Warrants for a total amount of £122.064.009. These are analysed as follows:

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

No. of Net S.W. Categories S.W. Amount Revotes amount

£ £ £ Direct charge to the Consolidated Fund 4 ― 36.327.055 36.327.055

Under the Law 12 71.913.089 ― 71.913.089

Other 30 13.823.865 (959.780) 12.864.085

Total 46 122.064.009 (959.780) 121.104.229

The category Other Special Warrants is analysed as follows: Description Amount £ Allocation from 18.30.2.348 Ordinary Budget – Contingencies and Reserve 1.494.208 Allocation from 18.30.4.348 Relief Fund – Contingencies and Reserve 158.635 Allocation from 19.26.3.349 Development Budget – Contractual Liabilities not

Otherwise Provided 802.014 Allocation from 19.30.3.348 Development Budget – Contingencies and Reserve 417.408 Allocation from savings from subheads of the same Head 9.991.820 Total 12.864.085

The total of funds transferred either from savings from subheads of the same Head, or from the Heads "Contingencies and Reserve" of the Ordinary Budget and the Development Budget, amounted to £11.903.436 and 755 Subheads were involved (if one Subhead was involved more than once by different Special Warrants it was counted only once). In the year 2000 twelve (12) Special Warrants were issued to cover 1999 excesses, out of which two referred to direct charges to the Consolidated Fund. For the remaining ten (10) which referred to transfers of funds, either through savings from Subheads of the same Head, or from the Heads "Contingencies and Reserve", 388 Subheads were involved. The last Special Warrant issued was dated 30 June 2000.

The Special Warrants issued under the Law are analysed as follows:

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S/N S.W. Law Description Amount £ 1 6(ΙΙ)/99 Supplementary Budget (No. 1) 10 9 26(ΙΙ)/99 Supplementary Budget (No. 2) 6.000.000 10 28(ΙΙ)/99 Supplementary Appropriation (F.F.D.A.P.) (No.1) 350.000 12 30(ΙΙ)/99 Supplementary Budget (No. 3) 10.421.180 12 31(ΙΙ)/99 Supplementary Appropriation (Development Fund) (No. 1) 11.207.100 13 33(ΙΙ)/99 Supplementary Budget (No. 4) 257.381 15 36(ΙΙ)/99 Supplementary Budget (No. 5) 284.511 19 37(ΙΙ)/99 Supplementary Budget (No. 6) 12.192 24 39(ΙΙ)/99 Supplementary Budget (No. 7) 16.563.392 24 40(ΙΙ)/99 Supplementary Appropriation (F.F.D.A.P.) (No.2) 7.124.000 26 42(ΙΙ)/99 Supplementary Appropriation (Development Fund) (No.2) 14.670.596 28 44(ΙΙ)/99 Supplementary Budget (No. 8) 1.511.850 30 46(ΙΙ)/99 Supplementary Budget (No. 9) 190.000 30 48(ΙΙ)/99 Supplementary Budget (No. 10) 450.000 32 50(ΙΙ)/99 Supplementary Budget (No. 11) 977.802 32 51(ΙΙ)/99 Supplementary Appropriation (Development Fund) (No.3) 83.113 32 50 & 51/99 Savings (Sections 102, 103, 106, 107, 108, 121) 1.809.962 71.913.089

5.5.2 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 complied with, resulting to payments effected up to 1.9.2000 from the 2000 Budget, for 1999 liabilities, for a total amount of £4.258.745. The above Instructions provide further that the returns for outstanding liabilities should be submitted not later than the 31st January of the following year.

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

Payments of 1999 Budgets

Total

£1.836,6m

£78,1 m

£205,2 m £1.546,4 m

Ordinary Budget

Development Budget Budget of Relief Fund for Displaced and Affected Persons

Total

Recipts of 1999 Budgets

£1.425,5m

£6,1 m

£1.101,3 m

£317,5 m

Ordinary Budget Development Budget

Budget of Relief Fund for Displaced and Affected Persons

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

Comparison of Receipts of Ordinary Budget 1998-1999

1999 = £1.101.288 ths

500.000 1998 = £1.033.959 ths

400.000

1999 1998

300.000

200.000

100.000

0 Indirect Taxes Direct Taxes (36%) Transfers (7%) Revenue from Sale Loan Proceeds Dividents, Other Receipts (1%) (46%) of Goods and (2%) Rents,and Royalties Services (6%) (2%)

Comparison of Payments of Ordinary Budget 1998-1999

£(000)

1999 = £1.546.359 ths

600.000 1998 = £1.458.944 ths

500.000

1999 1998

400.000

300.000

200.000

100.000

0 Staff Public Loan Social Loans to 3rd Grants Defence Subsidies (4%) Maintenace and Expenditure to Investments and Emoluments Interest (17%) Welfare(13%) Parties and (6%) Operation (4%) Revenue (2%) Other Capital (40%) Repayments Expenditure (12%) (1%)

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

Receipts of 1999 Ordinary Budget

2% 2% 1%

46%

36%

Indirect Taxes (46%) Direct Taxes (36%)

Transfers (7%) Revenue from Sale of Goods and Services (6%)

Loan Proceeds (2%) Dividents, Rents,and Royalties (2%) Other Receipts (1%)

Payments of 1999 Ordinary Budget

2% 1%

4% 40%

12%

13%

17%

Staff Emoluments (40%) Public Loan Interest (17%)

Social Welfare(13%) Loans to 3rd Parties and Repayments (12%)

Grants Defence (6%) Subsidies (4%)

Maintenace and Operation (4%) Expenditure to Revenue (2%)

Investments and Other Capital Expenditure (1%)

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

Direct Taxes 1999

Total £398,771 £44.946,0 m £6.508,0 m

11% 2%

£187.910,0 m

47%

£159.407,0 m

40%

Employees Income Tax(47%) Companies (40%) Other Direct Taxes(11%) Estate Duties (2%)

Indirect Taxes 1999 Total £503,718 m £10.939,0 m £11.299,0 m

£245.340,0 m

£51.538,0 m 2% 2%

10%

49%

£58.423,0 m

12%

£117.179,0 m 23%

Value Added Tax (49%) Excise Duties (23%)

Import Duties (12%) Other Indirect Taxes (10%)

Land and Survey Duties (2%) Excise Duties (Other) (2%)

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

5.6 FINAL ACCOUNTS 5.6.1 Certification of Final Accounts The Final Accounts of the Republic for the financial year ended 31st December 1999 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 observed that considerable improvement has been noted in the systems of internal control of public revenue and expenditure, resulting to the minimisation of arithmetical mistakes. Still pending, however, is the enactment and amendment of legislation, which will contribute towards the final removal of weaknesses and omissions observed in certain fields, especially the imposition and collection of public revenue. The continual upgrading of the public sector is also imperative, with the introduction of computerised systems in all fields, and appropriate training of the staff for the use and utilisation of technology, for the provision of prompt and efficient service to the citizens with the minimum possible cost. 5.6.2 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 1999 have not been submitted within the above time limits. 5.6.3 Statement of Assets and Liabilities. The following statement shows the Assets and Liabilities of the Republic as at 31st December 1999 and 31st December 1998. 1999 1998 £m. £m. ASSETS Cash and Short-term Deposits 10,3 7,5 Investments and Deposits: Development Fund 0,1 0,1 Relief Fund for Displaced and Affected Persons 48,5 34,5 Revolving Fund for the Housing of Displaced Civil Servants: Loans to Societies 2,7 2,9 61,6 45,0 Amount due by: Cyprus Relief Fund for Displaced and Affected Persons 348,7 284,4 Development Fund 54,7 167,1 403,4 451,5 Advances and Debit Balances 199,0 332,7

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

1999 1998 £m. £m. 664,0 829,2 LIABILITIES Consolidated Funds: Balance 1st January (2.674,0) (2.249,0) Deficit for the year (445,1) (425,0) (3.119,1) (2.674,0) Treasury Bills 3.301,5 3.033,9 182,4 359,9 Special Funds 13,6 12,6 Central Bank of Cyprus: Government General Account 405,4 398,6 Salaries Account 2,7 1,9 Public Loans Fund 9,6 6,8 Revolving Fund for the Housing of Displaced Civil Servants: Loans to Societies 2,7 2,9 Cash at Treasury - 0,1 Deposits and Credit Balances 47,6 46,4 664,0 829,2

5.7 ASSETS 5.7.1 Cash and Bank balances etc. at 31.12.99 £000 Imprests, Cash in hand etc. 10.247 Deposits at short notice 11 10.258

Analytical statement of Imprests, cash in hand etc.: £000 Imprests, Cash in hand and Special Accounts 9.094,1 Embassies Revenue Accounts 642,1 Cash with Post Office 509,5 Cash with Crown Agents 1,3 10.247

The above balances have been verified from certificates submitted by boards of surveys and banks.

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

5.7.2 Advances and debit balances £199 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. -School Committees £1,1 m. This amount was paid during the years 1983–1985 as a loan to various School Committees, in order to cover their deficits. The repayment of the loans will take place when the finances of the School Committees will be improved. -Hellenic Chemical Industries Ltd. £1 m. This amount was paid in 1983, to enable the company to continue its operation. -Cyprus Theatrical Organisation £0,47 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. The settlement of these advances will depend on the solution of the political problem of Cyprus. (c) Guarantee payments -Famagusta Sewerage Board £1,7 m. This amount was advanced 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 £2,2 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 compensation, to industrialists for exports to Libya, Iraq–Kuwait and for certain other isolated cases. 5.7.3 Assets not included in the Balance Sheet Government has the following shareholdings, which are shown as a footnote to the Balance Sheet:

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

Share Government Name of Company Capital Shareholding £000 £000 % Cyprus Development Bank Ltd 12.440 10.948 88,01 Cyprus Tourism Development Co. Ltd 3.000 2.440 81,34 Cyprus Petroleum Refinery Ltd 2.991 1.944 65,00 Cyprus Forest Industries Ltd 2.448 1.250 51,06 Cyprus Immovable Property Development Ltd 421 348 82,66 Cyprus Pipes Industries Ltd 700 140 20,00 Hellenic Chemical Industries Ltd 8.001 2.201 27,51 Cyprus Airways Ltd 25.000 20.115 80,46 Pancyprian Bakers Company Ltd 1.515 253 15,53 Bank of Cyprus Ltd 159.578 8 0,00

5.7.4 Loans from Public Funds. The outstanding loans at 31 December 1999, due by Municipal Corporations, Public Corporations, Loan Commissioners etc. amounted to £119,2 m. During the year, new loans amounting to £0,9 m. were issued and £28,9 m. were collected for the repayment of capital and interest. The arrears due amounted to £5,3 m. 5.7.5 Statement of outstanding loans at 31st December 1999 and 1998 1999 1998 £000 £000 Loan Commissioners 18.188 18.292 Municipal Corporations and Improvement Boards 532 535 Cyprus Grain Commission 3.597 3.681 Cyprus Ports Authority 5.992 6.560 Housing Finance Corporation 606 669 Land Development Corporation 1.021 1.127 Cyprus Broadcasting Corporation 246 246 Cooperative Central Bank Ltd. 66.237 66.237 Cyprus 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 646 785 Limassol Water Board 351 677 Nicosia Sewerage Board 2.207 2.267 Electricity Authority of Cyprus 121 117 Savings Bank “Aigialousa Ltd.” 300 450

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

1999 1998 £000 £000 Cooperative Society of Deaf Ltd. 60 60 Liquidator of the Company “The Cyprus Asbestos Mines Ltd” 228 278 Cypriot Community of Brisbane 58 47 Laiki Investment Ltd. 349 370 Cyprus Investments and Shares Organizations Ltd. 810 810 Cyprus Development Bank Ltd. 735 775 Hellenic Bank – “Vassiliko Cement Works Ltd.” 301 300 Popular Bank - “Premier Chemical Ltd” 188 221 Popular Bank - “Yiannoplast Ltd” 201 231 Popular Bank – Georghios Tsappis 235 233 Ayios Sozomenos Sewerage Committee 20 20 Hellenic Bank - Dhalico Enterprises Ltd 241 240 Popular Bank - G. & M. Ioannides Ltd 58 67 Popular Bank - Trikoza Knitting Industry Ltd 177 204 Popular Bank - Nicobutton Enterprises Ltd 69 80 Bank of Cyprus - A. Epiphaniou Industries Ltd 105 135 Larnaka Sewerage Board 5.100 4.200 Limassol Sewerage Board 4.177 4.273 Miscellaneous 54 45 119.156 120.188

5.8 LIABILITIES 5.8.1 Consolidated Fund £3.119,1 million (debit), Development Fund £54,7 million (debit) and Relief Fund for Displaced and Affected persons £348,7 million (debit). Details for the movement of these Funds are given in paragraphs 5.2.1, 5.3.1 and 5.4.1 of my Report. 5.8.2 Special Funds £13,6 million. This amount represents the balances of various Funds administered by Government. In the Financial Report separate accounts are shown for each Fund. 5.8.3 Deposits and other credit balances £47,6 million. 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. 5.8.4 Public Debt. The following statement shows the movement of the Public Debt for the years 1999 and 1998:

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

1999 1998 £m. £m. Balance 1st January 1.056,8 978,3 Collections from new loans 334,3 334,9 1.391,1 1.313,2 Repayment of loans 226,8 252,7 1.164,3 1.060,5 Increase/(Decrease) due to exchange fluctuations 24,5 (3,7) Balance 31st December 1.188,8 1.056,8

The Sinking Fund Account, kept for the repayment of Public Debt for the years 1999 and 1998 appears as follows: 1999 1998 £m. £m. Balance 1st January 286,0 296,0 Contribution 157,0 151,0 Interest received 18,6 19,3 461,6 466,3 Repayments 202,7 178,0 258,9 288,3 Increase/(Decrease) due to exchange fluctuations 7,3 (2,3) Balance 31st December 266,2 286,0

5.8.5 Other liabilities. Government has deposited with the Central Bank non–negotiable interest free notes, payable to international organisations. The value of these notes, at 31.12.99, amounted to £76,2 m. as follows: £000 International Monetary funds 67.635 International Bank for Reconstruction and Development 7.509 International Development Association 943 International Investment Guarantee Agency 113 76,200

5.8.6 Summary of Outstanding Guarantees. The total of government guarantees, at 31.12.99, amounted to £554,6 m. for loans issued to the following: £000 Electricity Authority of Cyprus 83.219 Cyprus State Fairs Authority 1.034 Cyprus Ports Authority 46.419 Ayia Napa Municipality 2.983 Ayios Athanasios Municipality 1.295

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£000 Ayios Dometios Municipality 565 Aglantzia Municipality 8.514 Athienou Municipality 90 Aradipou Municipality 1.191 Germasogeia Municipality 4.757 Geroskipou Municipality 1 Deryneia Municipality 203 Dali Municipality 1.158 Lakatameia Municipality 1.149 Larnaka Municipality 4.280 Limassol Municipality 14.815 Lefkara Municipality 225 Nicosia Municipality 5.345 Mesa Geitonia Municipality 237 Paralimni Municipality 4.882 Paphos Municipality 8.187 Pegeia Municipality 142 Polis Municipality 1.773 Strovolos Municipality 215 Cyprus Grain Commission 5.463 Cyprus Theatrical Organization 113 Cyprus Airways Ltd. 55.657 Cyprus Development Bank Ltd. 103.804 Cyprus Sports Organization 6.236 Cyprus Land Development Corporation 7.133 Cyprus Organization for the Hall Marking of Precious Metals 126 Agricultural Insurance Organization 29.999 Cyprus Dairy Industry Organization 496 Cyprus Agency for Equal Distribution of Burdens 5.832 Cyprus Broadcasting Corporation 4.038 Ayia Napa Sewerage Board 6.734 Dali – Pera Horio Nissou Sewerage Board 688 Larnaka Sewerage Board 14.140 Limassol – Amathous Sewerage Board 29.504 Pano Platres Sewerage Board 211 Paralimni Sewerage Board 14.133 Paphos Sewerage Board 17.492 Kyperounta Sewerage Board 1.652

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£000 Pelendri Sewerage Board 50 Agros Improvement Board 217 Achna Improvement Board 126 Dromolaksia – Meneou Improvement Board 462 Empa Improvement Board 32 Episkopi Improvement Board 6 Kato Pyrgos Improvement Board 1.672 Kiti Improvement Board 1.105 Kyperounta Improvement Board 512 Leivadia Improvement Board 61 Moniatis Improvement Board 35 Ormideia Improvement Board 175 Pano Platres Improvement Board 108 Pachna Improvement Board 175 Pelendri Improvement Board 230 Pera Paidi Improvement Board 53 Pervolia Improvement Board 2.027 Pissouri Improvement Board 123 Tala Improvement Board 34 Xylofagou Improvement Board 181 Ayios Tyhonas Improvement Board 804 Tsada Improvement Board 29 Ipsonas Improvement Board 69 Frenaros Improvement Board 243 Ayia Varvara Village Authority 149 Kofinou Village Authority 57 Potamia Village Authority 144 Sounio – Zanatzia Village Authority 29 Statos – Ayios Fotios Village Authority 109 Stroumpi Village Authority 52 Trimiklini Village Authority 84 Choletria Village Authority 75 Choulou Village Authority 7 Avgorou Improvement Board 123 Parekklissia Improvement Board 1.332 Sotera Improvement Board 557 Chloraka Improvement Board 111 Louvaras Improvement Board 95

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£000 Kalavassos Improvement Board 20 Oroklini Improvement Board 115 Lofou Village Authority 86 Peristerona Paphos Village Authority 134 Akroterio Village Authority 48 Ayia Marina Xyliatou Village Authority 125 Trachoni Village Authority 157 Sykopetra Village Authority 44 Finikaria Village Authority 50 Limnatia Village Authority 40 Apaisia Village Authority 32 Pyrga Larnaka Village Authority 92 Ayios Ioannis Agrou Village Authority 153 Ayios Therapontas Village Authority 126 Ayia Anna Village Authority 27 Moutagiaka Village Authority 207 Ayioi Trimithias Village Authority 74 Kalo Chorio Village Authority 111 Konia Village Authority 41 Malounta Village Authority 63 Pyla Village Authority 135 Tersefanou Village Authority 31 Kato Amiantos Village Authority 58 Anogyras Village Authority 29 Arakapas Village Authority 17 Apsiou Village Authority 12 Doros Village Authority 8 Eptagonia Village Authority 8 Erimi Village Authority 9 Zoopigi Village Authority 20 Kapedes Village Authority 80 Koilani Village Authority 132 Lania Village Authority 45 Mathikoloni Village Authority 200 Vouni Village Authority 107 Moni Village Authority 4 Pano Kyvides Village Authority 21 Silikou Village Authority 17

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£000 Fassoula Village Authority 70 S.O.D.A.P. Ltd. 4.854 SE.DI.GE.P. Pelendri – Kato Amiantos Ltd. 70 SE.DI.GE.P. Stroumpi – Polemi Ltd. 346 District SE.DI.GE.P. Agros Ltd. 292 SE.DI.GE.P. Chloraka Ltd. 364 SE.DI.GE.P. Argaka Ltd. 168 SE.DI.GE.P. Lysi Ltd. 41 District SE.DI.GE.P. Maroni Ltd. 296 SE.DI.GE.P. Farmakas – Odou Ltd. 85 SE.DI.GE.P. Ayia Manina Chrysochous Ltd. 70 District SE.DI.GE.P. Palaichori Ltd. 78 Cooperative Deaf Society Ltd. 262 Cooperative Credit Society Liopetri 10 Cooperative Credit Society Sotera 63 SE.DI.GE.P. Statou Agiou Fotiou Ltd 130 SE.DI.GE.P. Kyperountas, Dymon and Chandrion 45 SE.DI.GE.P. Parekklesias 30 Cooperative Credit Society Avgorou 404 E.T.K.O Ltd. 5.956 K.E.O. Ltd. 2.687 LOEL Ltd. 6.458 Audit Office of the Cooperative Societies 15 E.O.K.A. Fighters Mansion 235 Vine Products Commission 1.493 Central Abattoir Board 6.195 Cyprus Association for Muscular Dystrophy Research 437 Cyprus Potato Marketing Board 7.434 Bank of Cyprus – Oncology Centre 975 Various Cooperative Establishments 15 Various Persons 4.100 Labertas Fisheries 265 Wines Industry Nicolaides Ltd. 114 L. L. Artos Art Trading 33 Vassos Charalambides 197 554.548

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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 1999, was as follows:

AUDITOR GENERAL OF THE REPUBLIC

DEPUTY AUDITOR GENERAL

ADMINISTR. ACCOUNTS REGISTRY

A B C DIVISIONS

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

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

6.1.1 Personnel. The approved permanent posts of the Audit Office are 102. In addition 13 persons are employed as auxiliary personnel and 3 casual assistants, totalling 118 employees. At 1.1.1999 there were 33 permanent vacant posts and 35 at 31.12.1999. Out of the above vacant posts, 26 have been filled by 1.4.2000. 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 audit. Each of these Divisions is headed by a Director of Audit. Division B incorporates the Computer Audit Service. 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 1999 under Head 05.01.2 "Audit Office of the Republic" was increased from £1.683.335 to £1.689.067 and the actual expenditure amounted to £1.344.104.

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-Revenue. The budgeted revenue for 1999, under Vote 3/127 "Audit Office – Fees for Audit Services", was £160.000 and the actual revenue amounted to £137.015

6.3 LAW GOVERNING THE FUNCTIONS OF THE AUDIT OFFICE OF THE REPUBLIC AND RELATED MATTERS For the regulation of the operation of the Audit Office of the Republic, a draft bill was prepared, which was approved by the Council of Ministers and submitted to the House of Representatives in October 1989. The bill was withdrawn in May 1995 and, after its reconsideration and legal processing, was approved by the Council of Ministers on 25.2.98 and was submitted again to the House of Representatives. On 6.5.1999 the bill was preliminarily considered by the Public Accounts Committee of the House of Representatives.

6.4 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.

6.5 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.

6.6 PERFORMANCE AUDITS 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 audits, 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 years 1988–1999 are given in Part 3 of my Report.

6.7 AUDIT OF CAPITAL PROJECTS The audit of capital projects continued throughout 1999 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.

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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.

6.8 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 1999, 21 officers participated in educational programmes in Cyprus, for which the amount of £1.495 was spent, while, in addition, the participation of 18 other officers was financed by the Service of Public Administration and Personnel for various seminars organised by private organisations. Within the year, eight officers participated in respective seminars and educational programmes abroad and one officer was awarded a state scholarship for post graduate studies in Public Administration.

6.9 VISITS IN CYPRUS OF AUDITORS GENERAL AND REPRESENTATIVES OF SUPREME AUDIT INSTITUTIONS Two representations of the European Audit Office visited the Audit Office of the Republic from 1 to 2.2.2000, aiming at the proper preparation of the Audit Office, in view of the accession course of Cyprus to the European Union. The representatives presented to the staff of the Audit Office matters regarding the role of the European Audit Office, as well as the relations and cooperation developing between the Audit Offices of the countries under accession. They further evaluated the level of State Audit in Cyprus, for purposes of harmonisation with Acquis Communautaire, which was found to be exceptional. The Auditor General of the United Kingdom Sir John Bourn, leading a two member representation, paid an official visit to Cyprus, from 16 to 22.4.2000, on the invitation of the Auditor General of the Republic. Within the framework of the visit he delivered a lecture to the staff of the Audit Office on matters regarding the role and activities of the National Audit Office of the United Kingdom. The Auditors General of the first cycle of the countries under accession to the European Union (Hungary, Poland, Czech Republic, Esthonia, Slovenia), leading representations of their countries, had meetings, from 1 to 5.6.2000, with the Auditor General of the Republic, for consideration of the consequences and the adoption of the appropriate strategies, in view of their impending accession course to the European Union.

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6.10 ADVISORY SERVICES OF THE AUDITOR GENERAL OF THE REPUBLIC

The Auditor General assists the Executive Authority in the public financial administration of the Republic, through the provision of consultancy work 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.

6.11 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(1)/97. Experience so far has shown that the Auditor's General presence has proved most beneficial and constructive.

6.12 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.

6.13 ANNUAL REPORT FOR 1998

Pursuant to article 116(4) of the Constitution, my Annual Report for 1998 was submitted to the President of the Republic on 8 November 1999, who laid it before the House of Representatives. The Council of Ministers, at its meeting on 16.10.97, determined the procedure to be followed for the study of the Annual Report by the Ministries concerned and the submission in writing of the corrective or/and preventive measures, suggested to be taken, in each case. The House of Representatives under circular dated 25.2.2000 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. It is pointed out that it is the first time that the above Committee discussed the Report to such an extent, covering all the Ministries.

6.14 QUARTERLY REPORTS OF THE AUDITOR GENERAL OF THE REPUBLIC

During 1999 I continued to brief the Ministers quarterly 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.

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6.15 AUDITOR GENERAL OF THE REPUBLIC The Auditor General of the Republic accepted the invitation by the Auditor General of the U.K. and she officially visited the Audit Office of the United Kingdom from 12.5.99 to 13.5.99. She also represented Cyprus at the 4th Meeting of the European Supreme Audit Institutions (EUROSAI), which took place in Paris from 30.5.99–5.6.99, as well as at the 17th Meeting of the Auditors General of Commonwealth Countries which took place at Sun City of South Africa from 10.10.99 to 13.10.99. Mrs Chrystalla Georgadji participated also at the Meeting of the Auditors General of the countries under accession to the European Union with the European Audit Council, which took place in Prague from 25.10.99 to 26.10.99. On the invitation of the Chairman of the European Audit Council she visited, leading an Office mission, the European Audit Council in Luxembourg, and also the European Council in Brussels from 19.3.2000 to 23.3.2000.

6.16 DEPUTY AUDITOR GENERAL OF THE REPUBLIC The Deputy Auditor General of the Republic Mr George Kyriakides is one of the two members of the Audit Council for the external audit of the European Organisation for the Safety of Air– Navigation (EUROCONTROL), of which Cyprus is also a member. The Deputy Auditor General participated in the Meeting of the Auditors General, of the candidate countries for accession to the European Union, which took place in Budapest from 6–8.4.99. He also participated in the official visit to the Auditor General of the United Kingdom from 12–13.5.99, as well as to the 16th Conference of Intergovernmental Committee of Experts on International Accounting Standards and Reports of the United Nations, which took place in Geneva from 17–19.2.99. Mr George Kyriakides also participated in the Conference of External Auditors of European International Organisations, which took place in Brussels from 25.4.99 to 28.4.99, and was part of the mission which had meetings with the European Audit Council, for matters of harmonisation with Acquis Communautaire, in Luxemburg and Brussels from 19 to 23.3.2000, as well as in the 17th Conference of the Intergovernmental Committee of Experts for the International Accounting Standards and Reports of the United Nations, which took place in Geneva from 3 to 5.7.2000.

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PART 7 - APPENDICES APPENDIX I BUDGETARY RESULTS

(a) Ordinary Budget 1999

Actual Original Final Appropriation Expenditure Appropriation Savings / (Excesses)

H E A D £ £ £ £ % Presidency and Presidential 1.159.229 1.165.885 1.243.409 84.180 6,77 Palace Council of Ministers 452.540 465.117 465.547 13.007 2,79 House of Representatives 3.418.875 3.782.060 3.811.302 392.427 10,30 Judicial 5.654.511 5.950.754 6.226.602 572.091 9,19 Law Office 2.056.106 2.128.815 2.286.309 230.203 10,07 Audit Office 1.344.104 1.683.335 1.689.067 344.963 20,42 Public Service Commission 272.979 276.742 283.739 10.760 3,79 Educational Service 264.477 227.803 272.939 8.462 3,10 Commission Office of the Commissioner 206.122 238.543 239.366 33.244 13,89 of Administration Ministry of Defence - 1.177.512 1.262.955 1.286.992 109.480 8,51 Administration Cyprus Army 25.372.187 25.276.400 25.746.400 374.213 1,45 National Guard 36.395.871 39.404.670 40.504.670 4.108.799 10,14 Ministry of Agriculture, 15.139.368 14.347.878 16.383.535 1.244.167 7,59 Natural Resources and Environment - Administration Agriculture 5.930.923 6.706.495 6.612.223 681.300 10,30 Veterinary Services 2.932.222 3.214.586 3.211.656 279.434 8,70 Forests 5.322.816 5.605.258 5.786.521 463.705 8,01 Water Development 19.346.137 21.943.781 22.427.373 3.081.236 13,74 Geological Survey 1.137.981 1.248.019 1.248.019 110.038 8,82 Meteorological Service 1.241.654 1.380.713 1.386.279 144.625 10,43 Land Consolidation 1.324.073 1.398.536 1.404.235 80.162 5,71 Mines 164.224 157.352 175.469 11.245 6,41

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Ministry of Justice and Public 573.026 654.666 660.735 87.709 13,27 Order – Administration Prisons 3.371.532 3.403.610 3.416.017 44.485 1,30 Police 65.426.000 72.452.842 75.848.996 10.422.996 13,74 Fire Service 8.587.894 8.026.966 9.147.691 559.798 6,12 Ministry of Commerce, 163.192 172.878 172.878 9.686 5,60 Industry and Tourism - Administration Commerce and Industry 4.364.763 5.014.237 5.016.356 651.593 12,99 Services Cooperative Development 652.957 746.481 746.481 93.524 12,53 Registrar of Companies 891.713 930.757 1.034.757 143.044 13,82 and Official Receiver Ministry of Labour and Social 294.964 346.728 346.728 51.764 14,93 Insurance - Administration Labour 3.015.435 3.126.859 3.155.597 140.162 4,44 Social Insurance 41.978.475 44.180.695 44.285.426 2.306.951 5,21 Welfare Services 5.670.245 5.739.706 5.894.240 223.995 3,80 Industrial Relations 110.118 124.652 135.370 25.252 18,65 Service 0 0 641.370 641.370 100,00 Ministry of Interior - Administration 10.972.551 11.958.859 13.327.634 2.355.083 17,67 District Administrations 3.383.931 3.590.902 3.661.083 277.152 7,57 Town Planning and Housing 4.365.194 4.675.157 4.695.780 330.586 7,04 Migration 214.652 169.830 230.302 15.650 6,80 Lands and Surveys 13.080.259 15.062.229 15.692.953 2.612.694 16,65 Press and Information Office 4.304.909 5.146.470 5.149.400 844.491 16,40 Ministry of Foreign Affairs - Administration 2.002.524 2.074.697 2.188.513 185.989 8,50 Foreign Services 9.715.398 10.871.356 10.943.515 1.228.117 11,22 Ministry of Finance - Administration 1.092.900 1.166.764 1.224.645 131.745 10,76 Treasury 3.211.857 3.595.656 3.595.656 383.799 10,67 Customs and Excise 30.903.805 39.881.335 39.881.335 8.977.530 22,51 Inland Revenue 23.968.113 28.805.058 28.850.691 4.882.578 16,92 Statistics and Research 1.279.157 1.374.619 1.392.375 113.218 8,13

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

Government Purchasing and Supply 1.855.937 2.023.087 2.023.087 167.150 8,26 Public Administration and Personnel Service 305.459 405.443 414.891 109.432 26,38 Printing Office 2.070.653 2.270.109 2.295.163 224.510 9,78 Department of Information Technology Services 1.265.709 1.645.117 1.736.097 470.368 27,09 Public Debt Services 457.188.765 478.652.910 507.016.210 49.827.445 9,83 Pensions and Gratuities 94.588.724 96.515.000 97.051.640 2.462.916 2,54 Subsidies 29.308.033 37.143.000 37.143.000 7.834.967 21,09 Long-term Loans and Advances 900.000 70 900.070 70 0,01 Subventions/Contributions 190.868.444 182.483.820 199.763.381 8.894.937 4,45 Miscellaneous 13.057.299 16.469.199 17.460.699 4.403.400 25,22 Contingencies and Reserve 0 2.000.000 505.943 505.943 100,00 Ministry of Education and Culture - Administration 15.315.038 8.827.598 15.467.790 152.752 0,99 Education 164.638.696 167.735.379 168.361.021 3.722.325 2,21 Culture and Other Services 1.969.951 2.005.885 2.109.331 139.380 6,61 Ministry of Communications and Works – Administration 1.721.839 2.086.793 2.098.634 376.795 17,95 Public Works 5.906.944 6.602.416 6.601.396 694.452 10,52 Public Works Expenditure 12.140.893 14.975.500 16.533.300 4.392.407 26,57 Antiquities 1.787.801 1.875.808 1.888.408 100.607 5,33 Civil Aviation 20.746.167 20.482.941 21.582.941 836.774 3,88 Merchant Shipping 1.731.670 2.408.302 2.423.202 691.532 28,54 Postal Services 7.229.953 7.826.608 7.829.278 599.325 7,65 Road Transport 1.542.879 1.645.267 1.684.939 142.060 8,43 Electrical and Mechanical Services 7.909.880 9.121.172 9.117.594 1.207.714 13,25 Ministry of Health – Administration 11.866.590 10.656.760 12.817.320 950.730 7,42 Medical and Public Health Services 57.686.519 59.732.954 60.009.425 2.322.906 3,87 Mental Health Services 8.255.069 8.955.711 8.601.383 346.314 4,03 Dental Services 1.411.166 1.611.014 1.617.183 206.017 12,74

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Pharmaceutical Services 24.262.062 22.264.391 25.069.041 806.979 3,22 General Laboratory 1.347.735 1.478.823 1.497.186 149.451 9,98 General Categories of Staff 33.569.442 35.351.175 35.348.152 1.778.710 5,03 1.546.358.793 1.616.411.958 1.690.995.881 144.637.088 8,55 TOTAL

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

(b) Development Budget 1999

Actual Original Final Expenditure Appropriation Appropriation Savings / (Excesses)

H E A D £ £ £ £ % Ministry of Agriculture, Natural Resources and Environment 536.744 1.141.000 1.141.000 604.256 52,96 Agriculture 7.017.636 6.501.850 7.960.990 943.354 11,85 Animal Husbandry 1.029.830 1.709.200 1.709.200 679.370 39,75 Veterinary Services 517.569 811.900 873.745 356.176 40,76 Forest Development 4.651.702 5.924.500 5.998.600 1.346.898 22,45 Water Development 9.690.650 21.323.000 21.888.610 12.197.960 55,73 Geological Survey 1.155.438 1.186.550 1.297.655 142.217 10,96 Meteorological Survey 232.792 348.000 348.000 115.208 33,11 Land Consolidation 905.414 1.063.000 1.171.000 265.586 22,68 Agricultural Research Institute 2.993.277 3.279.122 3.290.394 297.117 9,03 Fisheries Development 1.612.260 1.660.974 1.907.335 295.075 15,47 Ministry of Justice and Public Order 773.058 1.290.000 1.290.000 516.942 40,07 Prisons 7.571 9.500 9.500 1.929 20,31 Ministry of Commerce, Industry and Tourism - Administration 559.612 920.000 980.000 420.388 42,90 Commerce and Industry 10.199.550 12.257.000 15.357.000 5.157.450 33,58 Ministry of Labour and Social Insurance 12.050 100.000 100.000 87.950 87,95 Labour 265.405 580.690 576.195 310.790 53,94 Welfare Services 3.921.006 4.106.335 4.155.955 234.949 5,65 Productivity Centre 954.061 1.118.035 1.118.035 163.974 14,67 Cyprus Higher Hotel Institute 718.896 865.453 935.662 216.766 23,17 Cyprus Higher Institute of Technology 2.082.258 2.345.272 2.399.476 317.218 13,22 Ministry of the Interior 5.750.205 6.651.000 8.087.000 2.336.795 28,90 Town Planning and Housing 6.645.072 14.106.500 14.116.638 7.471.566 52,93

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

Rural Development 11.502.556 13.970.000 13.970.000 2.467.444 17,66 Ministry of Finance 625.551 1.378.000 1.378.000 752.449 54,60 Planning Commission 4.695.340 6.865.265 7.302.304 2.606.964 35,70 Miscellaneous 20.302.601 11.610.000 20.807.986 505.385 2,43 Contingencies and Reserve 0 500.000 82.592 82.592 100,00 Ministry of Education and Culture 15.988.813 16.854.400 16.863.400 874.587 5,19 Education 11.826.600 13.813.800 14.169.131 2.342.531 16,53 Cultural Development 2.429.488 2.731.000 2.731.000 301.512 11,04 Ministry of Communications and Works 2.080.459 2.960.000 3.160.000 1.079.541 34,16 Public Works 1.190.763 1.954.000 1.954.000 763.237 39,06 Road Development 43.257.218 52.340.000 59.410.000 16.152.782 27,19 Airports 9.934.243 14.249.800 14.521.025 4.586.782 31,59 Public Buildings 5.516.351 15.672.000 16.935.150 11.418.799 67,43 Antiquities 1.707.334 3.847.500 3.847.500 2.140.166 55,62 Ports and Merchant Shipping 170.630 173.000 173.000 2.370 1,37 Postal Services 519.754 625.000 629.000 109.246 17,37 Ministry of Health 94.425 340.000 340.000 245.575 72,23 Health 11.075.774 14.991.700 15.048.103 3.972.329 26,40 TOTAL 205.149.954 264.174.346 290.034.181 84.884.227 29,27

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Actual Original Final Expenditure Appropriation Appropriation Savings / (Excesses)

H E A D £ £ £ £ %

Presidency and Presidential Palace 575.109 174.560 674.560 99.451 14,74

Ministry of Justice and Public Order 1.865.026 1.752.612 1.865.956 930 0,05 Welfare Services 32.526.167 27.109.892 32.843.892 317.725 0,97

Ministry of Interior – Other Expenditures 2.209.966 2.283.184 2.295.387 85.421 3,72

Town Planning and Housing 6.690.173 7.985.095 8.017.783 1.327.610 16,56

Service for the Care and Rehabilitation of Displaced Persons 360.367 397.066 397.066 36.699 9,24

Service for the Administration of T/C Properties 2.754.751 2.800.000 2.800.000 45.249 1,62 Self Housing Schemes 17.216.663 25.784.000 25.784.400 8.567.737 33,23

Ministry of Interior Other Services 3.667.630 4.055.000 4.145.000 477.370 11,52 Ministry of Finance 5.825.000 7.000.000 8.000.000 2.175.000 27,19 Treasury 9.518.968 9.614.877 9.764.877 245.909 2,52

Department of Government Purchasing and Supply 287.495 340.508 340.508 53.013 15,57 Miscellaneous 0 50.000 6.203 6.203 100,00 Contingencies and Reserve 0 500.000 341.365 341.365 100,00

Ministry of Education and Culture 1.612.673 1.812.800 1.856.597 243.924 13,14 TOTAL 85.109.988 91.659.594 99.102.844 13.992.856 14,12

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

APPENDIX II

ARREARS OF REVENUE AS AT 31ST DECEMBER 1999

Total Amount For previous Ministry/Department years For 1999 31.12.99 31.12.98 £ £ £ £ JUDICIAL 1.537.266 1.513.533 3.050.799 2.926.535 MINISTRY OF AGRICULTURE, NATURAL RESOURCES AND ENVIRONMENT Water Development 22.641.655 9.217.426 31.859.081 27.146.657 Forests 251.710 126.371 378.081 298.666 Agriculture 60.379 1.503.236 1.563.615 1.641.291 Mines 125.415 18.238 143.653 127.397 Other Departments/Services 389 1.801 2.190 9.966 MINISTRY OF COMMERCE, INDUSTRY AND TOURISM Ministry 694.801 440.198 1.134.999 1.034.722 Registrar of Companies and Official Receiver 3.835 209 4.044 3.920 MINISTRY OF LABOUR AND SOCIAL INSURANCE Higher Hotel Institute of Cyprus 135.058 15.698 150.756 164.722 Other Departments/Services 258.859 267.086 525.945 292.665 MINISTRY OF INTERIOR Ministry 428.719 -- 428.719 428.719 Town Planning and Housing 249.855 18.172 268.027 270.388 District Administrations 109.914 42.655 152.569 158.421 Lands and Surveys -- -- *1.079.264 873.102 Other Departments/Services 5.957 2.778 8.735 7.762 MINISTRY OF FINANCE Ministry ------Treasury 1.976.539 269.828 2.246.367 1.979.261 Customs and Excise 144.208 354.830 499.038 429.356 VAT Service *21.393.939 18.038.620 Inland Revenue

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

Estate Duty *4.452.593 3.710.994 Income Tax *111.112.758 101.312.270 Capital Gains Tax *20.100.551 20.344.843 Immovable Property Tax Law 30/77 *23.622 24.262 Immovable Property Tax Law 24/80 *6.048.478 5.596.131 Special Contribution *6.549.777 8.254.324 P.A.Y.E. *7.129.783 6.444.655 Defence Fund Contribution *9.588.935 10.424.414 Tax on Services *208.478 208.478 Other Taxes *1.991.453 1.966.725 MINISTRY OF EDUCATION AND CULTURE 323.370 256.440 579.810 559.061 MINISTRY OF COMMUNICATIONS AND WORKS Ministry -- -- *838.178 806.219 Civil Aviation 1.413.297 1.063.539 2.476.836 4.138.015 Merchant Shipping 538.777 430.719 969.496 813.717 Other Departments 68.668 280.886 349.554 421.994 MINISTRY OF HEALTH 733.948 965.267 1.699.215 885.362 OTHER SERVICES 1.176 2.238 3.414 1.446 31.703.795 16.791.148 239.012.752 221.745.080

*No distinction has been made between arrears of revenue for 1999 and previous years.

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

APPENDIX III

STATEMENT OF PERMANENT POSTS OF THE ORDINARY AND DEVELOPMENT BUDGETS

Approved Filled in Posts Vacant Posts for 1999 31.12.1999 Posts Presidency and Presidential Palace 6 4 2 Council of Ministers 12 10 2 House of Representatives 50 43 7 Planning Commission 44 40 4 Judicial 265 211 54 Law Office 61 51 10 Audit Office 102 68 34 Public Service Commission 5 5 0 Educational Service Commission 5 5 0 Administration Commissioner’s Office 11 7 4 Ministry of Defence - Administration 96 73 23 Cyprus Army 3232 1883 1349 Ministry of Agriculture, Natural Resources and Environment Administration 18 7 11 Agricultural Research Institute 120 100 20 Agriculture 353 295 58 Veterinary Services 164 136 28 Forests 294 238 56 Water Development 360 333 27 Geological Survey 69 56 13 Meteorological Service 72 56 16 Land Consolidation 83 71 12 Fisheries 54 45 9 Mines 7 7 0 Ministry of Justice and Public Order Administration 12 8 4 Prisons 211 182 29 Police and Fire Service 4890 4855 35 Ministry of Commerce, Industry and Tourism Commerce and Industry Services 177 149 28

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AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

Cooperative Development 45 30 15 Registrar of Companies and Official Receiver 52 42 10 Ministry of Labour and Social Insurance Industrial Relations Service 8 5 3 Labour 133 102 31 Social Insurance 240 206 34 Welfare Services 392 340 52 Productivity Centre 45 37 8 Centre for Professional Rehabilitation of Disabled 6 6 0 Persons

Higher Hotel Institute of Cyprus 36 24 12 Higher Technical Institute 92 85 7 Ministry of Interior Administration 101 60 41 District Administrations 6 6 0 Town Planning and Housing 236 210 26 Migration Services 1 1 0 Lands and Surveys 671 627 44 Press and Information Office 99 89 10 Ministry of Foreign Affairs Administration 21 10 11 Foreign Services 140 118 22 Ministry of Finance Administration 41 33 8 Treasury 228 203 25 Customs and Excise 377 294 83 Value Added Tax 144 123 21 Inland Revenue 374 308 66 Statistics and Research 80 71 9 Government Purchasing and Supply 107 96 11 Public Administration and Personnel Service 23 9 14 Printing Office 99 84 15 Information Technology Services 86 61 25 Ministry of Education and Culture 8948 8543 405 Ministry of Communications and Works Administration 16 14 2

380

AUDITOR GENERAL OF THE REPUBLIC ANNUAL REPORT 1999

Public Works 373 306 67 Antiquities 77 69 8 Civil Aviation 207 179 28 Merchant Shipping 39 34 5 Postal Services 391 307 84 Road Transport 92 52 40 Electrical and Mechanical Services 122 104 18 Ministry of Health Administration 28 20 8 Medical and Public Health Services 2670 2323 347 Mental Health Services 458 424 34 Dental Services 83 74 9 Pharmaceutical Services 121 109 12 General Laboratory 66 56 10 Other Services: General Administrative Staff 233 210 23 General Duties Clerical Staff 2285 2099 186 General Auxiliary Staff 327 304 23 TOTAL 31192 27445 3747

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