Report-The day after-2 ENG:Layout 1 1/21/09 2:33 PM Page I The day after II Reconstructing a reunited Cyprus By PRAXOULA ANTONIADOU KYRIACOU ÖZLEM OĞUZ FIONA MULLEN PCC Paper 1/2009 Report-The day after-2 ENG:Layout 1 1/21/09 2:33 PM Page II Institutt for fredforskning International Peace Research Institute, Oslo (PRIO) Hausmanns gate 7, NO-0186 OSLO, Norway Tel. +47 22 54 77 00 Fax +47 22 54 77 01 Email: [email protected] Web: www.prio.no PRIO encourages its researchers and research affiliates to publish their work in peer-reviewed journals and book series, as well as in PRIOʼs own Report, Paper and Policy Brief series. In editing these series, we undertake a basic quality control, but PRIO does not as such have any view on political issues. We encourage our researchers actively to take part in public debates and give them full freedom of opinion. The responsibility and honour for the hypotheses, theories, findings and views expressed in our publications thus rests with the authors themselves. Disclaimer As a piece of independent research, the opinions and terminology contained in this report do not necessarily reflect the views of the British High Commission, which funded the research. Views and opinions expressed in this report are those of the authors and not of any companies or organizations with which they may have professional connections. © International Peace Research Institute, Oslo (PRIO), 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or utilized in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without permission in writing from the copyright holder(s). ISBN 978-82-7288-278-4 Photograph: Bente Karlsen Cover design: hotpinkdesign Report-The day after-2 ENG:Layout 1 1/21/09 2:33 PM Page III III CONTENTS CONTENTS ........................................................................................................................III ACKNOWLEDGEMENTS .........................................................................................................V EXECUTIVE SUMMARY ..........................................................................................................1 CHAPTER 1: INTRODUCTION AND APPROACH TO RESEARCH .....................................................5 CHAPTER 2: BASIC ASSUMPTIONS.........................................................................................9 DISPLACED POPULATION ESTIMATES .................................................................................9 CONSTRUCTION COSTS.................................................................................................10 CHAPTER 3: FOUR SCENARIA FOR NEW HOUSING AND RENOVATION........................................15 MAXIMUM SCENARIO 1 .................................................................................................15 MAXIMUM SCENARIO 2 .................................................................................................17 SCENARIOS 3 AND 4: ADJUSTED PROVISIONS OF ANNAN III AND V....................................20 SUMMARY: HOUSING COSTS UNDER THE FOUR SCENARIA .................................................27 CHAPTER 4: INVESTMENT IN VAROSHA................................................................................29 CHAPTER 5: OTHER NECESSARY INFRASTRUCTURE ..............................................................35 TOTAL VALUE OF INFRASTRUCTURE AND HOUSING INVESTMENT .........................................38 CHAPTER 6: PRELIMINARY ESTIMATES FOR PROPERTY COMPENSATION ...................................39 CHAPTER 7: HOW CAN IT BE FINANCED?.............................................................................43 THE ROLE OF GUARANTEES...........................................................................................44 SPECIAL EU FINANCING ...............................................................................................44 STANDARD EU FINANCING ............................................................................................45 MULTILATERAL FINANCING .............................................................................................51 THE EIB AND CEB .....................................................................................................52 BORROWING FROM INTERNATIONAL BANKS (SYNDICATED LOANS).......................................53 GREEK AND TURKISH BANKS .........................................................................................54 THE DOMESTIC MARKET................................................................................................55 INTERNATIONAL BOND ISSUES ........................................................................................57 PUBLIC-PRIVATE PARTNERSHIPS .....................................................................................59 CHAPTER 8: THE INTERNATIONAL ASSISTANCE REQUIREMENT.................................................61 IMPACT ON THE GROWTH AND STABILITY PACT ...............................................................63 Report-The day after-2 ENG:Layout 1 1/21/09 2:33 PM Page IV IV CHAPTER 9: WHAT WILL BE THE IMPACT ON ECONOMIC GROWTH? .........................................65 THE IMPACT ON JOBS ...................................................................................................69 THE PEACE DIVIDEND REVISITED ....................................................................................70 CHAPTER 10: CONCLUSIONS .............................................................................................71 TOTAL INVESTMENT COSTS RANGE FROM €6.3 BILLION TO €8.6 BILLION ............................71 IT CAN BE FINANCED—WITH THE HELP OF INTERNATIONAL ASSISTANCE ..............................72 THE IMPACT ON GROWTH AND JOBS WILL BE CONSIDERABLE.............................................72 CONCLUDING REMARKS ................................................................................................72 REFERENCES....................................................................................................................75 BIBLIOGRAPHY.............................................................................................................75 SOURCES....................................................................................................................76 APPENDIX TABLES ........................................................................................................78 Report-The day after-2 ENG:Layout 1 1/21/09 2:33 PM Page V V ACKNOWLEDGEMENTS he authors express their deep appreciation to the Cyprus Centre of the International Research Institute, Oslo (PRIO), which published the research, and to the British High TCommission in Cyprus, which funded this second report on the economics of a reunified Cyprus. By supporting a second project by “the three ladies”, the sponsors are addressing more than one objective. While contributing to the presentation of hard figures concerning the financial aspects of the possible reunification of Cyprus, they are also supporting multicultural cooperation between professionals, at the same time as illustrating how a positive approach towards gender equality in Cyprus can support the settlement process. Our thanks also go to all the statisticians in both parts of the island who have made possible the presentation of detailed statistical data, as well as to Antonis Loizou and Associates for certain construction-related data. We would also like to thank business professionals in the construction and financing sectors who provided us with information and shared their views with us (including, in one case, when in bed suffering from a bad cold). We would like to thank Ayla Gürel at PRIO for reviewing the work twice and patiently explaining some of the more opaque provisions of the third and fifth versions of the Annan Plan. Finally, we would like to thank fellow economists who were kind enough to review our report: Erol Riza and another economist who carried out his work on a confidential basis. All of the feedback we received was extremely valuable. We hope that the explicit information that our work provides may serve as a tool in facilitating the dialogue between the two leaders in their search for a reunited, peaceful and prosperous future on the island. Report-The day after-2 ENG:Layout 1 1/21/09 2:33 PM Page 1 1 EXECUTIVE SUMMARY his report does not aim to propose any specific solution to the Cyprus problem. Rather, by examining a range of scenaria, it attempts to answer some of the key questions Tuppermost in Cypriotsʼ minds: “How much will the solution cost? How can it be financed? What will be the impact on jobs and growth?” In order to answer these questions, we first examine four different scenaria to estimate the amount of new housing, renovation and infrastructure investment by the public and private sectors that will arise as a result of a settlement. We focus our examination on investment that will be necessary to implement a solution, rather than on other, longer-term development goals. We conclude that the amount of new housing, renovation and infrastructure investment by both the public and private sector that will be made necessary as a result of the settlement would range from €6.3 billion to €8.6 billion depending on which scenario is taken, or an average of €7.2 billion over five years. Spending by the public sector would amount to €4.3 billion, while spending by the private sector would amount to €2.9 billion. For the purposes of our financing