I was honoured to deliver some opening remarks at the Best Invest 2024 Conference at the Four Seasons Hotel in Limassol. Best Invest was started by my friend Natalia Kardash in 2015, and since then she has successfully implemented 9 events, which is a remarkable achievement. I would like to take a moment to clarify some of my thoughts relating to the current situation Cyprus finds itself in. Part of this was covered by my presentation (which was very brief); and part is the result of intensive consulting here dating back to 1993.
Cyprus is an Economy of (at least) Two Speeds
One of the reasons there is a dissonance between reality and advertising copy in Cyprus is because the private sector’s capability for investment and innovation has far outstripped public sector performance. This was not always so.
In 1993, when I first worked in Cyprus on a public sector restructuring project, the public sector was definitely in the avante garde. Public sector institutions were rapidly adapting information technology. They had 3 and 5-year organisational strategies and masterplans for sectoral development. They attracted the best talent, often trained abroad, and regularly invested in their staff.
Fast forward to 2024 and the situation is vastly different. Twenty years of EU membership have, regrettably, encouraged a culture of statism and dominance in the public sector. An authorisation culture has arisen, exacerbated by the fact that the government refuses to modernise digitally in order to preserve a complex and tangled web of local interests.
Political parties have had free reign to wreck whatever talent and excellence was left in the public sector since EU admission in 2024 with consistent policies of nepotism and electoral rent-seeking. This is most clearly seen in the catalogue of public sector failures over the past few years, which have resulted in billions of Euro in damage to the economy:
- The Mari Explosion (2011)
- The Cyprus Bail In (2013)
- The Cooperative Bank Liquidation (2018)
- The Citizenship by Investment scandals (2020)
- The current Gas Terminal Delay.
In each of these cases, the hand of political decisions is clearly seen. And yet there is no accountability, and no indication that the political system’s ability to handle complex projects or incidents has improved.
Cyprus is far from being unique in this situation: the quality of public sector management as well as the competence and integrity of political personalities engaged in politics has clearly declined in many countries. The United States, the United Kingdom, Germany and France could be considered leading examples of this.
Contrast this with the private sector (which is far from angelic, but is at least more competent). Since Cyprus started a determined effort to attract foreign investment decades ago, Cyprus has been transformed. We now have some of the most competitive and expert companies in the world based here in terms of fintech, IT, shipping, tourism and other sectors.
This investment dynamic brings clear requirements of its own:
- Good companies want good schools for their employee families;
- Social infrastructure in the form of sport or culture is equally necessary;
- Competent governance with digital access to citizen services is considered standard;
- Talented experts and dynamic companies want to see an equivalent state engagement.
As a result, we find ourselves in a situation where enterprises and entrepreneurs in Cyprus, both startups and large corporates, are working at the speed of light, innovating and competing internationally under difficult conditions, while the political system and the public sector continually stagnates and causes significant damage to the reputation of the country.
In my opinion, this should be considered a structural factor: part of the “new normal” business environment. I do not expect this to change.
We face Massive Technological Change
The second issue is that we are at the beginning of massive technological change which will affect every part of our economy and society. This is not just digital transformation: this is the impact of digital transformation together with big data, artificial intelligence and a range of other technologies that, taken together, will fundamentally transform everything we are doing.
Let’s take the example of accounting: Cyprus is an international business centre, and so has a large number of accountants and accounting firms. Yet approximately 90% of an accountant’s work relates to routine tasks of expenditure and income reporting and classification, together with bank account reconciliation. This is essentially a tax reporting function.
Accounting platforms today already allow:
- Scanning of expenditure paper and digital (PDF) receipts;
- Optical character recognition of vendor, date, amount, tax, etc.;
- Automatic classification of all data scanned by OCR, with human editing;
- Automated bank account data reconciliation.
This essentially means that the future of accounting, driven by machine learning and big data, is already capable of eliminating 90% of accountant routine work. This also implies, as with most other technological trends, that in the future most enterprises will be able to automate their accounting function, requiring far fewer staff.
Technology will have a similar impact on a wide range of professions and sectors: consultants, lawyers, architects, software programmers, public sector record-keeping, banking, education, insurance, shipping, transport … and more.
By my estimate, 50% of Cyprus’ GDP will be radically transformed by the impact of technology in the next 5-6 years.
The only thing holding this back is outmoded government procedures and regulations that protect certain domestic monopolies and deliberately create complexity where none is needed.
We know that this technological change is occurring. Why aren’t we doing anything about it?
Why don’t we have a real national AI strategy? Why is there no public sector or sectoral urgency? Where are the foresight committees and scenario planning exercises? How is the educational system adapting? Where is the digital transformation effort needed?
(Yes, Cyprus has a National AI Strategy, drafted in 2019, but this is a political exercise so theoretical as to be unuseful, and in any case has been shelved – another report collecting dust).
There is one certainty to reflect upon as a citizen and an entrepreneur:
If public sector operations are already outmoded and irrelevant in the age of “standard” digital technology, the impact of AI will be to render these operations as museum quality.
Absent radical and immediate action, Cyprus will fall even further behind the trend we see in more politically and technologically mature countries.
We face Massive Regulatory Change – Particularly in Climate
As a European Union Member State, we have made some very clear commitments to climate change. These include:
- The principle of restricting CO2 emissions in an attempt to prevent climate change and global warming. Where CO2 emissions cannot be restricted below a certain national quote, we have to pay fines based on the globally-traded CO2 emissions price.
- By 2027, building and transport will be integrated into the emissions trading scheme. This means that our emissions output will rise significantly, since building and transport emissions are not currently being counted as part of our quota.
- By 2035, the European Union has committed to eliminating sales of vehicles with an internal combustion engine.
- By 2050, the European Union has committed to a Net Zero carbon environment: after accounting for total carbon emissions and carbon captured or replaced, we should have a carbon balance of zero in each EU Member State.
These regulatory commitments alone carry a tremendous commitment to change, and a tremendous cost. For example, the fact that we are still using a high carbon feedstocks for energy generation means that in recent years, the Electricity Authority of Cyprus has been paying carbon fines of up to € 300 million per year. That’s 1% of our Gross Domestic Product (GDP).
It also means tremendous structural changes. By 2035 – just 11 years from today - the petrol stations we see across Cyprus may continue, but they need to be supplemented by a network of charging stations all over, including in front of houses and stores so that cars can be plugged in to recharge while parked.
The electricity grid needs to be upgraded using smart metering and reinforced transmission lines to deal with a distributed energy environment, including energy generation and storage.
We need to consider how battery technology will work at the household and enterprise level.
Our network of garages and auto dealers will need to adapt to a hybrid, biofuel and all electric vehicle mix, creating new demand for skills, equipment and spare parts.
And yet, there is no urgency about this – no planning, no awareness, no understanding of how far things need to change.
As a result, we will most likely be very late with the transition, and pay much higher costs for it because we did not adequately prepare for it. This is shameful, given the scale of financial, technical and policy resources available today for this.
Conclusions
I will write more about the risks I identify that are facing Cyprus, but for now I wanted to leave these three thoughts with you:
- The public sector lags far behind the private sector, creating a drag on growth and in some cases very real harm to society. The damage of growing statism and over-regulation prompted by EU policy and ambition as it has been implemented in Cyprus cannot be overstated.
- The rapid rate of technological change, particularly in AI, machine learning and big data, but also across the entire tech spectrum, will cause radical disruption to sectors and professions that deal with non-automated routine tasks. We are not preparing for this adequately enough at the national, sectoral or even enterprise level.
- The rapid date of climate regulation (not to mention climate change) will impose real costs of the energy transition. Despite clear national commitments under EU policy, we are ignoring most of these, despite the rapid timeline for implementation.
The resulting years are going to see a further struggle between:
- Inefficient national monopolies, especially in the power-generation space, but extending through transport, healthcare, and government operations.
- A galloping private sector being dragged back by an inefficient public sector.
- Lightspeed technologies that will rapidly and inexorably replace older ways of managing predictable procedures and tasks.
- A political system driven by nepotism and rent-seeking rather than visionary innovation and state-of-the-art management.
This situation creates incredible opportunities as it creates incredible challenges. We rarely have the opportunity to witness a major technological transition like this, but it is similar to the First Agricultural Revolution in Neolithic times, or to the Industrial Revolution some 300 years ago.
Philip Ammerman
Managing Partner, Navigator Consulting Group
