Competitive Challenges for Cyprus: a view from the Doing Business Report

1. Competitive Challenges for Cyprus: a view from the Doing Business Report Augusto Lopez-Claros  Director - Global Indicators and Analysis Central Bank of Cyprus Nicosia January 21, 2013

2. What does Doing Business measure? • Doing Business indicators: • Focus on regulations relevant to the life cycle of a small to medium-sized domestic business. • Are built on standardized case scenarios. • Are measured for the most populous city in each country. • Are focused on the formal sector. • DO NOT measure all aspects of the business environment such as macroeconomic stability, corruption, level of labor skills, proximity to markets, or of regulation specific to foreign investment or financial markets. 2 2

3. Doing Business indicators – 11 areas of business regulation 3

4. OECD high-income economies combine efficient regulatory practices with strong legal institutions 4

5. Cyprus has relatively strong legal institutions and less expensive regulatory processes Stronger legal institutions but more expensive regulatory processes Stronger legal institutions and less expensive regulatory processes Ireland Denmark Latvia Finland Austria Sweden Netherlands Cyprus Estonia Bulgaria Slovenia Strength of legal institutions Weaker legal institutions but less expensive regulatory processes Weaker legal institutions and more expensive regulatory processes Complexityand cost of regulatory processes 5 Bubble size reflects population

6. 11 European Union economies are among the top 30 on the ease of doing business index 6

7. Almost all economies are closer to the frontier in regulatory practice today than they were in 2005 7

8. 5 economies from the EU are among the 50 economies narrowing the distance to frontier the most since 2005 8

9. Reforms making it easier to start a business were once again most common in 2011/12 – and show results over time in reduced delays… 2005 • It was possible to start a business in less than 20 days in only 40 economies, mostly in North America and Northern and Central Europe • Only 10 EU economies made it possible for entrepreneurs to start a business in less than 20 days 2012* • Now, the time to start a business is less than 20 days for entrepreneurs in 105 economies • Now it is possible to start a business in less than 20 days in 19 EU economies *Based on samples of 174 economies in 2005 and 185 economies in 2012 Development impact: Countries that regulate entry more heavily have greater corruption and larger unofficial economies, but not better quality of public or private goods. (Quarterly Journal of Economics, February 2002, Djankov, La Porta, Lopez de Silanes, Shleifer.) 9

10. … and big reductions in the cost to start a business around the world Cost of Starting a Business (% of income per capita) 32.5

11. Developing economies around the world have reduced delays for exporting and importing through seaport

12. All regions have reduced the time it takes to transfer property between local firms Average time to register property (days) Global Average 52

13. Strong convergence across economies since 2005 13

14. Doing business is easier today than in 2005, particularly in Eastern Europe and Central Asia and Sub-Saharan Africa 14

15. Cyprus ranks slightly above the EU-27 average on the ease of doing business 15

16. Cyprus ranks higher than the EU-27 average in 6 out of 10 areas of business regulation 36 36 47 54 62 62 69 74 68 74 16

17. Pace of reforms remains strong in 2011/12: share of economies with at least one reform making it easier to do business OECD high Income EU-27 Eastern Europe and Central Asia 88% 47% Middle East and North Africa East Asia and Pacific Latin America & the Caribbean 38% 45% 46% South Asia 68% 67% 61% Sub-Saharan Africa Worldwide, 108 economies implemented 201 reforms in 2011/2012. About two-thirds of European union economies carried out reforms improving their business regulations for small and medium sized business in 2011/12 17 17

18. 2 EU economies are among the 10 the most-improved economies in 2011/12 18

19. Cyprus reformed in the area of property registration in 2011/12 • Cyprus made property transfers faster by computerizing its land registry. • Over the last 10 years, Cyprus has been computerizing the Land Registry. As a result of this computerization, the Registry needs less time to process property transfer applications and issue the new title deed. -14 days 19

20. Cyprus has made progress towards the frontier comparable with other EU economies, despite being tracked by Doing Business only since 2009 *Cyprus was included in the sample for the first time in Doing Business 2010, therefore progress shown is between 2009 and 2012. 20

21. Thank you. For more information:www.doingbusiness.org 21

22. Registering Property Nicosia, Cyprus 22

23. Nicosia 6 procedures, 28 days, 9.7% cost to complete property transfers 23

24. Cyprus’ areas of improvement in property registration Average Time to Register Property DB13 Global Average : 55 days |DB13 Cyprus: 28 days 24

25. Cyprus’s areas of improvement in property registration Cyprus’ performance across three sub-indicators of property registration indicates that there is room for improvement 25

26. Enforcing Contracts in Cyprus 26

27. What does it take to enforce a contract in Cyprus? Note: No reforms have been recorded for Cyprus in Enforcing contracts, as measured by Doing Business. 27

28. How does Cyprus compare to other economies? 28

29. Good practices going forward 29

30. Dealing with Construction Permits in Cyprus 30

31. Why does dealing with construction permits matter? • Good construction regulation matters for public safety Poor quality construction can carry high human costs in terms of injury and death. • Revenue and competitiveness For many entrepreneurs construction regulations- costs and permitting process- are critical when deciding the location of a start- up. Construction that supports an environment of poor project selection and insufficient maintenance can significantly reduce the economic return to investments. • Efficiency and transparency The industry is perceived as one of the less transparent: large payments to gain or alter contracts and circumvent regulations are common. The lack of transparency leads to difficulties in the access to information that can make compliance with regulation easier and reduce transaction costs for businesses. Striking the right balance is the challenge when it comes to construction regulation. Appropriate regulations that ensure safety standards, and that protect the public while making the process efficient and transparent for those who use it. 31

32. What the indicator measures: procedures, time and cost • Procedures to legally build a warehouse: • Every interaction with an external party (i.e. municipality, inspectors, utilities) • Procedure starts with the first filing of the application or request and is completed when final document or service is received (construction permits, inspections and utility connections) • Time required to complete each procedure: • Recorded in calendar days • Captures the median duration of each procedure • Cost required to complete each procedure: • Calculated as % of income per capita • Only official fees are counted 32

33. Dealing with Construction Permits Case study assumptions The business (BuildCo): • Is a limited liability company. • Operates in the economy’s largest business city. • Is 100% domestically and privately owned. • Is fully licensed and insured to carry out construction projects, such as building warehouses. • Has at least 1 employee who is a licensed architect and registered with the local association of architects. • Owns the land on which the warehouse is built. The warehouse: • Is located in the peri-urban area of the economy’s largest business city. • Is located on a land plot of 929 square meters (10,000 square feet) that is accurately registered in the cadastre and land registry. • Has 2 stories with a total surface of approximately 1,300.6 square meters (14,000 square feet). Each floor is 3 meters (9 feet, 10 inches) high. • Will be connected to water, sewerage and a telephone land line. The connection to each utility network will be 10 meters long. • Will be used for general storage activities, such as storing books. 33

34. Where is dealing with construction permits easiest? What do they have in common? • Global good practices • Risk-based systems • Rigorous yet differentiated construction permitting processes to treat buildings according to their risk-level and location. • Building codes; setting rules • A coherent body of rules that defines what is required from builders, and its uniform implementation. • One-stop shops • Improvements on the organization of the review process—by better coordinating the efforts of different agencies. • Electronic platforms or online services • Allows easier access to information, follow-up and compliance with building formalities in shorter times. Hong Kong SAR, China Singapore Georgia Marshall Islands St. Vincent and the Grenadines New Zealand Bahrain Denmark Taiwan, China Grenada 34

35. What does it take to comply with the formalities to build a warehouse in Cyprus? • Obtaining construction permits and approvals to build a warehouse in Nicosia requires on average 9 procedures, takes 677 days and costs 51.1% of income per capita. 35

36. What are the procedures, time and cost associated with obtaining a construction permit in Cyprus? * Takes place simultaneously with another procedure. Source: Doing Business database. 36

37. Dealing with construction permits is a very time-consuming process in Cyprus • Cyprus ranks 80th on the ease of dealing with construction permits. 37

38. How does Cyprus compare with other economies today? 38

39. Good practices to implement going forward • Establish & implement time limits • It takes on average 6 months to obtain the town planning permit and another 6 months to obtain the building permit. • Once the building has been completed, it takes on average another 75 days to obtain the final inspection and the conformity certificate. • By implementing strict time limits for both permits to be processed and for the final inspection to be carried out, Cyprus can significantly reduce the time required to obtain a construction permit. • Introduce risk-based classification with fast-track systems • Risk-based classification is a system where buildings are classified according to their size and use and inspections during construction are carried out according to building classification. This allows countries to implement a simpler process to obtain a construction permit for buildings that do not pose a great risk (i.e., smaller buildings, buildings used for basic purposes such as storage, etc.). • For example, Australia implemented a risk-based system and has only 5 steps in the pre-construction phase and only 2 inspections during construction. 39

40. Getting Electricity in Cyprus 40

41. How electricity services matter for businesses ? World Bank Enterprise Surveys show that managers in 109 economies, 71 of them low or lower middle income, consider electricity to be among the biggest constraints to their business. In addition, managers estimate losses due to power outages at an average 5.1% of annual sales. 41

42. Getting Electricity indicators – of what use are they to policy makers? Getting Electricity correlates with other sector challenges…. …and can support regulators in their dialogue with the utility…… • Distribution utilities retain monopolistic positions even in otherwise liberalized markets • Customers are captive • Benchmarking utility performance helps regulators help customers • Great majority of distribution utilities surveyed are only “game in town” • Benchmarking against utilities in other countries needed • Regulatory agencies often have to rely on self-reporting of utilities: • Limits effective monitoring of utility performance (especially in such areas as quality of service regulation) • Independent benchmarking can fill a gap • Time and cost to obtain an electricity connection are negatively correlated with the electrification rate. • The cost to obtain an electricity connection is negatively correlated with the % of transmission and distribution losses • Simpler connection processes are associated with higher firm sales, in particular in industries with high electricity needs 42

43. What Getting Electricity measures: procedures, time and cost Based on a standardized case study: • Newly built warehouse • Located in the main business city • Modest but non-trivial load of 140 kVA Data Collection Process: • Contact main distribution utility in the business capital of each country • Verify with independent professionals, like electrical contractors, electrical engineers and regulatory agencies. 43

44. Where is getting electricity easy – and where not? • Iceland • Germany • Korea, Rep • Hong Kong, China • Singapore • Taiwan, China • United Arab Emirates • Switzerland • Sweden • Thailand • In economies where getting electricity is most efficient, requiring fewer interactions • with authorities and less time, utilities often carry out the external connection works themselves. • They also obtain the necessary approvals and streamline procedures with other agencies. 44

45. What does it take to connect to electricity in Cyprus? • Obtaining a new electricity connection in Nicosia requires on average 5 procedures, takes 247 days, and costs 86.5% of income per capita. Cost 86.5% income per capita 45

46. What are the procedures, time and cost associated with obtaining an electricity connection in Cyprus? * Takes place simultaneously with another procedure. Source: Doing Business database. 46

47. Getting electricity in Cyprus is a time-consuming process • Cyprus ranks 98th on the ease of getting electricity. 47

48. How does Cyprus compare with other economies today in getting electricity? 48

49. Potential areas for improvement in Getting Electricity in Cyprus • Streamline the process of obtaining internal approvals for providing the estimate (Procedure 1) • Before the utility can provide the customer with the estimate, it submits the estimate for clearance and approval to several government authorities including: telecom, sewerage, public works, municipality, archeological department and fire brigade. This process can take several months. If better co-ordination could be achieved between these various agencies, the turn-around time for providing the estimate to the customer could be greatly reduced. • Streamline the process of conducting external connection works, meter installation (Procedure 3) • It takes nearly three months for the utility to conduct external connection works and meter installation, which adds to the long wait time before a customer can get their business connected to electricity. The utility should study its internal workflow to increase its efficiency in completing external connection works. In 2011/2012, Italy reduced the time taken for external connection works by re-organizing its departmental workflow and gain efficiencies of time for conducting external connection works. • Ensuring safety of internal wiring by regulating the electrical profession rather than the connection process (Procedure 4) • By regulating the electrical profession and establishing clear liability arrangement for electrical contractors (utility to request certification by the electrical contractor that the internal wiring was done in accordance with the prevailing standards, usually established by the relevant professional bodies). In Iceland the electrician in charge of the internal wiring must be approved by and registered with the consumer agency, which is responsible for the safety of electrical housing installation. The utility refuses applications for new connections if they involve an electrician who is not registered. 49