25 Jun 2017 An investment fund for a united Cyprus

If the talks among all parties that are due to take place in Crans-Montana from June 28 go the way of the optimists, and a settlement of the Cyprus problem is finally in sight, then the next focus for those involved will be how to ensure that the settlement passes a referendum in each community.

This will involve a vast range of efforts to inform the public about the details of a settlement. As I have written before, a settlement also needs a big idea to get people excited about a solution, something that helps them see it can bring real jobs and real wealth.

One way to focus minds is to announce the creation of a united Cyprus investment fund.

For the fund to be successful, it will need to attract private capital, in particular capital from ‘institutional investors’ – the big banks, pension funds and insurance companies that make the world’s money go round.

However, to ensure that the fund does not end up the way of other schemes in the past, it will also need to be very well managed.

Below are a few ideas about what should go into the investment fund, who should run it and how we can ensure that it is managed in a way that benefits all stakeholders, not just the well-connected few.

What goes into the fund?

The fund will need seed capital. Much of the seed capital can come from EU structural funds. The European Commission President, Jean-Claude Juncker, has been reported as saying that the EU can find €3.1 billion. If true, this will be an important chunk of the initial capital.

Given the desire among Greek Cypriots to see ‘Turkey pay’, there may be scope for donations from Turkey and/or other guarantor powers. In addition, if (and it is a big if) there is any appetite among other countries for direct donations, as opposed to loans, then they should be directed to the fund, too.

In addition to money, the fund will need assets that can bring a return. The UK has offered land from the British Bases. I understand that it is around 11,500 hectares, of which around 2,000 hectares is state land, as opposed to private land. The state land can also go into the fund.

Some of the affected property (that is, property owned by displaced Greek and Turkish Cypriots) could also go into this fund. As I have noted before, there are around 0.4 million donums (54,000 hectares) of Turkish Cypriot land in the south.

We can work out how much it might be worth from the Land Registry valuations of private-sector Greek Cypriot land in the south. This 331,000 hectares was valued in 2012 at €150bn. We can therefore infer that the 54,000 hectares of Turkish Cypriot land has a potential long-term value of around €24bn.

If we can find incentives to encourage Turkish Cypriots to put half of that into the fund for the purposes of long-term development, in exchange for Greek Cypriot property in the north, then you have an asset of €12bn with a potential long-term return, based on current returns, of about €600 million per year. This will go a long way towards financing property compensation.

The fund could include Greek Cypriot-affected property too – large tracts of land or even parts of Varosha. Again, this could be exchanged for other land or for a return on the fund’s profits.

One way of getting even more return out of these assets is with guarantees from AAA-rated institutions, as this will allow the fund to make bigger investments at lower cost.

There are plenty of AAA-rated institutions with which Cyprus already has a relationship. These include the European Bank for Reconstruction and Development (EBRD), which has the advantage of already being active on both sides of the island; the European Investment Bank (EIB); and the Council of Europe Development Bank (COEDB).

As someone noted to me, the US guarantees an awful lot of Israeli debt. If you can get it past the US Congress, perhaps there is scope for a US guarantee in the united Cyprus investment fund as well.

What is the fund’s mandate?

One critical feature of the fund will be long-term, sustainable returns. This is important, as the requirement for quarterly financial reporting means that other funds tend to be under pressure to make a quick buck, with little thought about the impact of property development on the environment, on social cohesion and so on.

In return for their AAA guarantees, the institutions should insist on green investment, inclusive investment and investments with long-term social, as well as economic, returns. This means ensuring that those often excluded from economic growth – the less-well-educated, the young and women – also benefit from the fund’s investments.

It also means major developments should follow all the best practices about involving all stakeholders very early in the process.

Who should run and own it?

In my debates about this with others, they mention two potential risks about ownership. First, that if it is owned and run only by the private sector, then it could fall prey to short-term unsustainable investments.

If it is run by the private sector, but owned by the government and the private sector messes up, then you are looking at potentially large ‘contingent liabilities’ for the state. This is why the abovementioned long-term, sustainable mandate is important.

On the other hand, if it is both owned and run by the federal government, then it is bound to fall prey to a lot of politics.

This brings me to the third aspect. The fund, its management and its managers need to be frequently audited by someone of the highest calibre who is also completely independent. This probably means a non-Cypriot.

An investor roadshow

Once these details have been agreed, then some ‘big ideas’ need to be formulated to make the fund attractive to outside investors.

Here, I take the opportunity to plug the Famagusta Ecocity Project in which I am involved – a big idea that could attract a lot more than just another pile of concrete or string of casinos, including many more tourists, research centres and a lot of companies showcasing their green credentials.

Finally, the united Cyprus investment fund needs a charismatic individual to take the fund and its investment ideas around the globe: to all the major sovereign wealth funds and financial centres.

This person will remind them that, in this era of low investment returns, a safe united Cyprus, confidently looking to the future instead of its past, will be one of the most exciting places for investment in the coming decade.