EUROPEAN COMMISSION Brussels, 8.7.2021 SWD(2021) 196 final COMMISSION STAFF WORKING DOCUMENT Analysis of the recovery and resilience plan of Cyprus Accompanying the document Proposal for a COUNCIL IMPLEMENTING DECISION on the approval of the assessment of the recovery and resilience plan for Cyprus {COM(2021) 398 final}



Table of contents 1. Executive summary 2. Recovery and resilience challenges: scene-setter 2.1. Macroeconomic outlook and developments since the 2020 country report 2.2. Challenges related to sustainable growth, cohesion, resilience and policies for the next generation 2.3. Challenges related to the green and digital transition Green dimension Digital dimension 3. Objectives, structure and governance of the plan 3.1. Overall strategy of the plan 3.2. Implementation aspects of the plan 4. Summary of the assessment of the plan 4.1. Comprehensive and adequately balanced response to the economic and social situation 4.2. Link with country-specific recommendations and the European Semester 4.3. Growth potential, job creation, economic, institutional and social resilience, European Pillar of Social Rights, mitigating the impact of the crisis, and social territorial cohesion and convergence 4.4. The principle of ‘do no significant harm’ 4.5. Green transition 4.6. Digital transition

4.7. Lasting impact of the plan 4.8. Milestones, targets, monitoring and implementation 4.9. Costing 4.10. Controls and audit 4.11. Coherence Annex: Climate tracking and digital tagging table



1.Executive summary The COVID-19 pandemic and the related lockdowns pushed Cyprus’ economy into a deep recession in 2020 and had serious adverse effects on the social situation and business activity, especially on the country’s hospitality sector. Real GDP contracted by 5,1% in 2020, reflecting in particular the restrictions in international travel and their negative impact on the tourism sector. The impact on domestic demand was somewhat mitigated by the government’s support measures. In 2021, according to the Commission’s 2021 Spring forecast, a modest recovery is expected, with GDP to grow by 3,1%, as the renewed lockdown at the beginning of the year has clouded the short-term growth outlook of the Cypriot economy. In 2022, the recovery is forecast to accelerate to 3,8%, mainly on the back of rising domestic demand and a small positive contribution from net exports. Unemployment increased only moderately in 2020 to 7,6% from 7,1% in 2019, helped by income support measures to preserve employment, which were partly financed under the Support to mitigate Unemployment Risks in an Emergency (SURE). In 2022, unemployment is expected to decrease to 7,2%. Public finances have been heavily impacted by the COVID-19 pandemic and, as a result, the government budget turned around from a surplus of 1,5% of GDP in 2019 to a deficit of 5,7% of GDP in 2020. In 2021, the deficit is expected to narrow to 5,1%, mainly on the back of the gradual phase-out of supporting measures, and to 2,0% in 2022. After reaching a peak of 118,2% in 2020, the debt-to-GDP ratio is expected to fall to 112,2% in 2021 and 106,6% in 2022. The Cypriot recovery and resilience plan (hereafter “the plan”) amounts to EUR 1 206 400 000. This is to be financed mainly through non-repayable financial support of EUR 1 006 080 000 (at current prices, equivalent to 4,5% of GDP). Cyprus’ loan request for an amount of EUR 200 320 000 covers the remaining estimated cost of the plan. The plan represents a comprehensive and adequate response to the challenges faced by Cyprus’ economy and society and its implementation is expected to support the correction of the identified excessive macroeconomic imbalances, while promoting a more inclusive and sustainable growth model. The implementation of reforms and investments is expected to gradually have a positive impact on the economy as of the end of 2021 and, ultimately, to boost the growth potential of the country over the medium term and contribute to a green, digital, inclusive and resilient future. The plan contains a balanced set of mutually reinforcing reforms and investments, with a total of 133 measures structured around 13 components grouped in 5 policy axes. These are (i) public health, civil protection and lessons learned from the pandemic, (ii) accelerated transition to a green economy, (iii) strengthening the resilience and competitiveness of the economy, (iv) towards a digital era, and (v) labour market, social protection, education and human capital. The measures are mainly future-oriented with a strong focus on the green and digital transition and reflecting a coherent overall strategy. The proposed reforms and investments in the plan address to a large extent the structural challenges Cyprus faces, as identified under the European Semester. Relevant country-specific recommendations (CSRs), in particular the most recent ones in 2019 and 2020, mainly relate to public finances and health care, labour market and social policy, education and skills, public and private investment and green and digital transitions, structural reforms to improve the functioning of the public sector, fight corruption and facilitate the reduction of non-performing loans in the banking sector. The plan is also consistent with the challenges and priorities identified in the most recent draft Council Recommendation on the economic policy in the euro area , which recommended to euro area Member States to take action, including through their recovery and resilience plans, to, inter alia, ensure a policy stance which supports the recovery and to further improve convergence, resilience and sustainable and inclusive growth. The implementation of the plan is expected to support financial stability, including by addressing long-standing challenges such as high private indebtedness and non-performing loans (NPLs). Crucially, the measures implemented under the plan are expected to improve the working environment for NPLs management for credit acquirers and credit servicers through adoption of dedicated legislation. The measures are also expected to tackle high private indebtedness, through improving monitoring, enhancing insolvency frameworks and improving financial literacy. By addressing the aforementioned challenges, the implementation of the plan is also expected to contribute to correcting the excessive macroeconomic imbalances that Cyprus is experiencing in this respect. The plan contributes to the six pillars referred to in Article 3 of the Regulation establishing the Recovery and Resilience Facility (RRF Regulation) . The plan’s reforms and investments are designed around the overarching objective of strengthening the economy’s resilience and the country’s potential for economically, socially and environmentally sustainable long-term growth and welfare. The plan addresses each of the six policy pillars in a comprehensive and coherent manner. The recovery and resilience plan is expected to ensure that no measure for the implementation of reforms and investment projects does significant harm to environmental objectives within the meaning of Article 17 of Regulation (EU) 2020/852. The assessment has been carried out in compliance with the methodology set out in the Commission’s Technical guidance on the application of ‘do no significant harm’ under the Recovery and Resilience Facility Regulation (2021/C 58/01). The plan has a strategic focus on the challenges of the green and digital transitions. It has a dedicated policy axis tackling the accelerated transition to a green economy and includes measures supporting the achievement of climate change objectives for an amount which represents 41% of the financial allocation, above the 37% minimum requirement of the RRF Regulation. The largest contribution stems from component 2.1 (Climate neutrality, energy efficiency and renewable energy penetration) followed by components 2.2 (Sustainable transport) and 2.3 (Smart and sustainable water management). The measure with the largest contribution to the climate target is the ‘EuroAsia Interconnector’ project, which, when completed, is expected to connect the electricity network of Cyprus to the Greek network in Crete. There are also measures aiming at making a substantial contribution to the achievement of the national targets in energy efficiency and renewable energy, at addressing existing challenges in the transport sector and improving water and waste management. The plan puts forward a number of key reforms to underpin the green transition. Regarding biodiversity, Cyprus proposes one measure aiming at protecting the marine ecosystem and improving the level of efficacy as regards oil spills prevention and response mechanisms. As regards the digital transition, the measures contributing to the achievement of digital objectives account for 23% of the financial allocation, which is above the 20% minimum requirement of the RRF Regulation. The components of Policy Axis 4 (Towards a Digital Era) focus solely on the digital transition but other components also contain measures that contribute to it. In particular, the plan presents a series of measures aiming at ensuring coverage with very high-capacity broadband for the whole population and addressing the low level of digital skills. It also contains digital projects expected to promote e-government and to result in a digital transformation of courts.

The milestones and targets of the Cypriot plan constitute an appropriate system for monitoring the plan’s implementation. They are clear, realistic and relevant for the implementation of the plan and they reflect the plan’s overall level of ambition. The governance arrangements proposed by Cyprus for implementation of the overall recovery and resilience plan are robust and the monitoring and reporting mechanism is adequate. The main actors have distinct roles and clear responsibilities. The Monitoring Committee, mandated by the Council of Ministers, is expected to oversee the progress in the implementation of the plan. The Coordinating Authority has the role of monitoring the implementation of the plan at an operational level, certifying the achievement of the milestones and targets, drafting progress reports, performing checks and controls and liaising with the European Commission, including submitting payment requests under the Facility. The costs of implementing the measures in the plan are deemed reasonable, plausible, in line with the principle of cost-efficiency and commensurate. For the majority of the measures, the costing information is generally detailed, the methodology is mostly well explained with calculations that are easy to follow and supported by evidence. The information provided suggests that costs would be in line with the nature and type of the envisaged reforms and investments, thus supporting their plausibility. However, a small amount of the costs were assessed as reasonable and plausible only up to a medium extent. The amount of the estimated total costs of the plan appears commensurate to the expected social and economic impact of the funded measures and in line with the principle of cost-efficiency and are expected to have a substantial positive impact on the Cypriot economy. Cyprus has also demonstrated that the measures in the plan will be subject to strong governance and control systems and has given assurances that the measures funded under the Cyprus recovery and resilience plan will not receive funding from other existing or planned European Union financing. The recovery and resilience plan for Cyprus is a comprehensive plan, which ensures its coherence towards contributing to smart, inclusive and sustainable economic development. Within components, there is a holistic approach towards addressing different elements of each sectoral system in a mutually reinforcing way. All components contain strategic reforms, which were frontloaded to the extent possible in order to facilitate the implementation of the investments and induce behavioural changes in a sustainable way. Moreover, in all components there are elements in the reforms that contribute to the green and the digital transition, as well as elements that reinforce the plan’s overall goal of sustainable growth. A lasting impact of the plan can also be enhanced through synergies, complementarity and consistency between the plan and other programmes, including those financed by the cohesion policy funds, notably by addressing in a substantive manner the territorial challenges and promoting a balanced development through a balanced territorial allocation of resources. (1)

Balanced response (2)

CSRs (3)

Growth, jobs… (4)

DNSH (5)

Green target (6)

Digital target (7)

Lasting impact (8)

M & T (9)

Costing (10)

Control systems (11)

Coherence A A A A A A A A B A A 2.Recovery and resilience challenges: scene-setter 2.1.Macroeconomic outlook and developments since the 2020 country report The pandemic pushed the economy into a deep recession in 2020 before entering a recovery path in 2021 and 2022. Real GDP contracted by 5,1% in 2020, reflecting in particular the restrictions in international travel and their negative impact on the tourism sector. The impact on domestic demand was somewhat mitigated by the government’s support measures. According to the plan, GDP is expected to grow by 3,6% in 2021 and 3,8% in 2022, before decelerating to 3,2% in 2023 and 2,8% in 2024. In 2021, the recovery is expected to be supported by government spending and will be reinforced by a normalisation in private spending and investments, driven by the implementation of a several infrastructure projects in the area of tourism, energy and education. Inflation was negative in 2020 (-1,1%) due to the drop in oil prices and the value-added tax (VAT) rate reduction for the hospitality sector. However, in 2021, according to the plan, it is expected to rebound, to 1,2%, and further pick up in 2022, to 1,5%. Cyprus’ labour market and household incomes have been cushioned by the government’s support measures financed by EU funds, but challenges remain. The temporary Support to mitigate Unemployment Risks in an Emergency (SURE) contributed to moderate any severe negative employment consequences by providing financial support amounting to EUR 603,7 million. In addition, wage subsidisation and support schemes for businesses have been undertaken by the government in order to support employment. Unemployment rose to 7,6% in 2020, only a 0,5 percentage points increase from 2019. The hours worked decreased significantly, by 6,4%, exhibiting a higher decrease than the reduction in persons employed, indicating that employers selected to avoid massive laying offs. Employment loss was more prominent in the sector of hotels and restaurants and other tourism-related sectors. According to the plan, unemployment is expected to return to a decreasing path from the second half of the 2021 following the recovery of the economy, 7,2% in 2021 and gradually reach 5,5% in 2024. Youth unemployment remains high, at 18,2% in 2020 as compared to the average of the EU27, 16,8%, reflecting persisting skills mismatches as well as the negative effects from the pandemic. Cyprus’ public finances have been heavily impacted by the COVID-19 pandemic and the related measures adopted to support the economy in 2020. According to the Stability Programme, the budget balance deteriorated substantially in 2020 and reached a deficit of 5,8% of GDP. Government revenue decreased by around 7% compared to 2019, with revenue from taxes dropping the most. On the other hand, public expenditure increased by 9,8% in 2020, compared to the previous year. This expansion of public spending is mainly attributed to the policy response undertaken by the government in order to tackle the effects of the crisis. The fiscal impact of support measures targeting the consequences of the pandemic on health, businesses and employment positions reached 3,6% of GDP. For 2021, the Stability Programme projects a deficit of 4,7%, a decrease mainly attributed to the gradual phase-out of supporting measures. After reaching a peak of 118,2% in 2020, the Stability Programme foresees a decrease of the debt-to-GDP ratio to 111,6% in 2021. Overall, Cyprus is expected to face medium fiscal sustainability risk in the medium term based on the S1 indicator and the country’s debt sustainability analysis. Under the baseline scenario, the government debt level is expected to decrease until 2031, supported by the assumed fiscal effort and a favourable differential between the implicit interest rate on government debt and the growth rate of the economy – it would reach 83% of GDP in 2031. The deterioration in the fiscal and macroeconomic situation in the context of the COVID-19 pandemic has increased the short-term fiscal sustainability risks in Cyprus. However, the extraordinary monetary policy interventions that took place since March 2020, together with decisive EU actions since March 2020, have contributed to stabilising sovereign financing conditions, lessening significantly the risks of short-term fiscal stress. Currently, Cyprus enjoys favourable yields and favourable financing conditions. Major credit rating agencies continue to assign investment grade rating to Cyprus’ sovereign debt, except for Moody’s which maintains its sovereign rating in the sub-investment category. Gross financing needs are expected to decrease from around 16% of GDP in 2020 to around 14% of GDP in 2021, and around 10% of GDP in 2022. Moreover, throughout 2020, Cyprus’ government built a significant cash buffer to secure the necessary funds to address possible adverse scenarios. Main contingent liability risks relate to the banking sector. Contingent liability risks are concentrated in the short term, mainly due to the still high, albeit decreasing, ratio of non-performing loans (NPLs). Nonetheless, the Cypriot debt structure and cost have continued to develop favourably. The debt maturity profile is well balanced over forthcoming years, not exceeding EUR 2,6 billion of debt redemption related financing needs per year until 2030. In terms of structure of debt, at the end of 2020, 50% of debt was composed of foreign bonds and 32% of official loans, the rest consisted of domestic and retail securities and T-bills. Concerning the buyers of foreign bonds (EMTNs) upon issuance, over the last years there was a positive shift from hedge funds to fund managers and insurance and pension funds as major investors. Cyprus is experiencing excessive macroeconomic imbalances related to high stocks of external, government and private debt, and still high non-performing loans, alongside a substantial current account deficit. The current account deficit deteriorated substantially in 2020 to a double-digit reading, 11,7% of GDP, reflecting a marked drop in tourism exports amid the COVID-19 crisis and it is forecast to improve only slightly in the near term. External debt remains high and the negative net international investment position, even when excluding special purpose entities, is worsening in part due to the large current account deficits. The COVID-19 crisis interrupted the private sector’s deleveraging as the high debt ratios increased in 2020 mostly on account of the drop in GDP. NPLs remain among the highest in the EU, despite visible reductions in recent years. About 50% of performing loans benefited from the first loan payment moratorium - representing the highest share in the EU. While early signs were encouraging following the lifting of the 2020 moratorium, the outlook is uncertain with respect to the new inflows of NPLs. Prolonged financial problems for firms and households could pose threats to their debt repayments, and ultimately weaken banks’ balance sheets. Looking forward, developments in the NPL stock would crucially depend on well-functioning insolvency and foreclosure frameworks. Table 1: Comparison of macroeconomic developments and forecasts 2019 2020 2021 2022 2023 2024 2025 2026 COM COM RRP COM RRP COM RRP RRP RRP RRP RRP Real GDP (% change) 3,1 -5,1 -5,1 3,1 3,6 3,8 3,8 3,2 2,8 n.a. n.a. HICP inflation (% change) 0,5 -1,1 -1,1 1,7 1,2 1,1 1,5 1,5 2,0 n.a. n.a. Employment (15-74 years, % change) 3,1 -0,6 -0,6 0,6 0,7 1,0 1,5 2,5 2,5 n.a. n.a. Unemployment rate (%) 7,1 7,6 7,6 7,5 7,2 7,2 6,7 6,0 5,5 n.a. n.a. General government balance (% of GDP) 1,5 -5,7 -5,8 -5,1 -4,7 -2,0 -0,9 0,1 1,6 n.a. n.a. General government gross debt (% of GDP) 94 118,2 118,2 112,2 111,9 106,6 103,9 99,5 92,9 n.a. n.a. Sources: Cyprus’ recovery and resilience plan (“RRP” in the table), Commission 2021 spring forecast (“COM” in the table) Compared with the Commission 2021 spring forecast, the macroeconomic scenario underpinning the recovery and resilience plan is based on slightly more cautious macroeconomic assumptions. The macroeconomic scenario underpinning the Cyprus recovery and resilience plan and the Stability Programme is favourable in both 2021 and 2022. It projects GDP growth of 3,6% in 2021 and 3,8% in 2022, compared to the Commission 2021 spring forecast projections of 3,1% and 3,8%, respectively. The Cyprus recovery and resilience plan and the Stability Programme anticipate a stronger recovery in private consumption. For 2022, the Commission forecast is driven by a strong rebound in tourism. Projections in the Cyprus recovery and resilience plan and the Stability Programme foresee a return to the pre-crisis level of output and employment in the course of 2022. Real GDP in 2022 is expected to exceed its level in 2019 by 1,6% according to the Commission forecast and by 1,7% according to the Cyprus recovery and resilience plan and the Stability Programme. Cyprus faces a number of challenges according to the Social Scoreboard indicators underpinning the European Pillar of Social Rights and certain vulnerable groups are at risk of poverty. The youth unemployment (18,2%) and the share of young people not in employment, education or training (NEETs aged 15-29) (15,3%) remain high. Formal early childhood education and care for children younger than three is well below the EU average and the gender employment gap remains wide, with one of the highest shares in the EU of inactive women due to caring responsibilities. Furthermore, growth of the real gross disposable household income (GDHI) per capita was one of the slowest in Cyprus in 2019. Before the COVID-19 crisis, as a result of the strong economic growth and the social protection reforms that have been implemented since 2014, the at-risk-of-poverty or social inclusion (AROPE) indicator was dropping but remained above the EU average, especially its sub-components relating to the severe material deprivation rate. The share of poorest people is increasing, while the risk of poverty or social exclusion is higher for children and people with disabilities. On a positive side, Cyprus is one of the best performers in the EU in terms of the net income of minimum income recipients as a share of the income of a low wage earner and of the poverty threshold. A new social policy strategy is under preparation and expected to be completed by mid-2021. 2.2.Challenges related to sustainable growth, cohesion, resilience and policies for the next generation

Access to finance for small and medium-sized enterprises (SMEs) has to some extent been improved, but the COVID-19 crisis is adding obstacles. Despite the measures taken by the government, the COVID-19 pandemic has severely impacted the liquidity of firms, particularly in the tourism sector. Because of late payments by struggling firms, cash flow problems can spread through the economy. Notwithstanding lending programmes supported by the European Investment Bank (EIB) and other international development banks, banks are reluctant to lend due to the high debt overhang, which underlines the need to develop alternative funding sources, notably equity and risk capital financing. Private investments and local capital markets are highly underdeveloped, weighing on access to equity finance for innovative SMEs. Cyprus can further improve its research and innovation (R&I) and education systems to support productivity growth. Reforming the higher education system and enhancing science, technology, engineering and mathematics (STEM) courses in secondary education are essential for allowing R&I to play a greater role in the country’s socio-economic development. Increased R&I funding geared towards identified or potential new smart specialisation areas, combined with targeted measures for academia-business cooperation, innovative SMEs and start-ups could support the country’s competitiveness and accelerate the green and digital transition. Cyprus experiences low levels of labour productivity. In 2018, Cyprus’ labour productivity per person employed and hour worked was around 76% of the EU27 and it has been largely stagnant over the past decade, increasing by only 1% over the past four years. Total Factor Productivity (TFP) growth has not been the key driver for Cyprus’ growth. During the period 2015-2018 more than half of the growth in GDP was driven by employment. Since 2013, TFP growth has picked up to some extent but remains relatively low. The COVID-19 crisis has highlighted the need to further diversify the economy and to strengthen the sustainability of the tourism sector. The economy relies heavily on a few sectors, such as tourism, foreign-funded residential construction and professional services linked to foreign companies. The digital transition can help to diversify the economy to sectors with growth potential. The sustainable management and efficient use of the country’s natural resources are essential for Cyprus, in particular for the tourism sector, to ensure sustainable economic growth in the long term. The sector of tourism, even before the pandemic, was facing long-term structural challenges such as high dependence on a limited number of markets, low productivity and innovation absorption. Moreover, as far as the size and composition of investments is concerned, since 2011, gross fixed capital formation as a percentage of GDP is below the euro area average, by 3,7 percentage points. From 2015 onwards, the gap narrowed to 2,8 percentage points, however the COVID-19 crisis has caused it to worsen further and is currently projected to rise to 3,8 percentage points by 2022. Safeguarding the banking systems’ overall soundness and managing financial stability risks are essential for recovering from the COVID-19 crisis and for supporting the economy. While the stability of the banking sector improved significantly in recent years, the pandemic is posing strains on banks, through an increase in credit risk and pressures on profitability and capitalisation. Vulnerabilities and challenges stem from an over-indebted private sector and a high stock of NPLs, which limit the scope of credit support. The banking sector in Cyprus has the second highest NPL ratio in the euro area. Therefore, efforts to reduce NPLs remain a priority, in particular addressing ‘legacy NPLs’ that were long overdue before the onset of the COVID-19 pandemic. Considerable challenges lie ahead, as support measures such as payment moratoria and associated regulatory forbearance and relaxation of loan origination requirements expire. Further progress on the state-owned bank asset management company (KEDIPES), including on its organisational model and strategy, remains essential. The take-up of ESTIA (a government support scheme meant to foster the reduction of NPLs) has been disappointing, which implies that any future measures should take into account the social dimension and balance better the aim to protect vulnerable borrowers and to improve payment culture. The amendments to the foreclosure framework as endorsed by the Supreme Court in June 2020 may cause delays and undermine legal certainty for creditors. In this respect, strengthening the enforcement of claims and enhancing the use of the insolvency framework would help to underpin a sustainable workout of bad loans. Reducing the backlog in the issuance of title deeds by implementing a structural solution to address the inadequacies of the property transaction system (i.e. the issuance and transfer of title deeds) remains an important task. The business environment in Cyprus, although improving, continues to present obstacles to boosting investments in the country. The law aiming to simplify the procedure for strategic investors to obtain permits and licences to invest in Cyprus has been amended, but it is still pending enactment. The procedures for issuing building permits are complex and lengthy. Investment potential is also hindered by slow progress in privatisations. Cyprus performs well in entrepreneurship, but the insolvency framework does not help honest entrepreneurs to get a second chance. Although the regulatory burden is overall moderate, Cyprus has more restrictive regulations than the EU average in some regulated professions. In retail, reducing regulatory barriers and investment in digitalisation are needed. Cyprus also has limited resources devoted to applying EU single market rules, which harms the further integration of the single market for goods and services. Cyprus has made good progress in public procurement, but weak competition (in the form of single-bid procedures or direct awards) persists. Addressing the challenges and inefficiencies of Cyprus’ public administration will increase the potential for a speedy recovery from the COVID-19 crisis. Firstly, improving the coordination between central and local government and tackling the fragmentation in many municipalities is critical for ensuring coherent implementation, investments and service delivery in the country. Secondly, the public administration reform that aims to move towards performance, mobility and promotion of talented staff and move away from a seniority-based system towards one rewarding performance, is still pending. In particular, important draft legislation on a new appraisal and promotion system needs to be adopted and implemented. Thirdly, improving the public administration’s eGovernment, interoperability and interconnection of IT systems and the general government is key in delivering better quality services to the public. The appointment of a Deputy Minister of Research, Innovation and Digital Policy is a first step in the right direction. The justice system suffers from a near complete lack of digitalisation and very limited information about the judicial system is available to the public. There is no electronic information on case progress and no electronic case management system. This issue has also been highlighted in the Commission’s 2020 Rule of Law Report Country Chapter on the rule of law situation in Cyprus adopted on 30 September 2020. The introduction of an electronic court administration system is one of the main objectives of the ongoing reforms. However, its implementation and the relevant public procurement procedures have been delayed since 2017. The introduction of modern civil procedure rules is also long overdue. On the basis of the findings of the EU Justice Scoreboard 2021 (forthcoming), the time needed to resolve civil, commercial and administrative cases in first instance courts (882 days in 2019 compared to 737 days in 2018) still remains among the highest in the EU. In administrative justice at first instance, the length of proceedings increased (495 days in 2019 compared to 487 days in 2018) and clearance rates decreased (around 170% in 2019 compared to around 219% in 2018). Perception of corruption in Cyprus remains high in the business context. The Worldwide Governance Indicators and other indexes show a decline in Cyprus’ performance on control of corruption (WGI, 2019, TI, 2019). Corruption perception ameliorated in the latest Eurobarometer survey, although the scores remain high, with 88% of Cypriot businesses thinking that corruption is widespread in their country (as compared to 100% in 2017). 86% of businesses believe that bribery and networking is often the easiest way to obtain certain public services, one of the highest scores in the EU (European Commission, 2019). Implementation of actions to fight corruption is progressing but coordination capacity remains insufficient and key legislation for the prevention of corruption is pending. Diversifying the tax structure is key to improving the sustainability of public finances, while fostering inclusive growth. Cyprus’ tax revenues as a share of GDP remain below the EU average and revenue growth is strongly concentrated on a few revenue items (VAT and corporate income tax). Reforms to broaden the tax base and diversify revenue sources will not only support the sustainability of public finances but carry also great potential to improve the efficiency of the tax system and make it more redistributive. To that end, there is scope for measures relating to green taxation, while in the same vein facilitating the green transition. Cyprus’ tax rules are used by companies and individuals that engage in aggressive tax planning. It is crucial to strengthen the fight against tax avoidance and close loopholes that can lead to situations of double non-taxation. The high levels of inward and outward foreign direct investment, in addition to the high levels of dividend and interest payments as a percentage of GDP, suggest that Cyprus’ tax rules are used by companies and individuals that engage in aggressive tax planning. Eurostat data show that, on average, 90% of total dividend payments from Cyprus were sent to non-EU countries in 2013-2017. Cyprus is facing a number of structural social and labour market challenges. The share of people at risk of poverty or social exclusion – though decreasing – was still higher than the EU average in 2019 in general (CY 22,3% vs EU 20,9%) for children (CY 23% vs EU 22,2%), people with disabilities (CY 38,7% vs EU 34,6%) as well as people living outside the major cities (CY 24,6% vs EU 22,4%). Labour market inefficiencies and a low-skilled work force particularly in rural areas translate into higher unemployment rates among the rural population than in the urban areas. Current efforts to increase the quality and affordability of early childhood education and care (ECEC) are steps in the right direction. ECEC provides high returns in terms of inclusive education outcomes as well as female labour market participation and given the challenges and current low capacity it should be further developed, especially for children below the age of three. The adoption and promotion of flexible working arrangements in the public and private sector could further support the labour market activation of persons with care responsibilities and mobility issues. Social services need to be strengthened also taking into account territorial disparities within Cyprus to provide support to the most vulnerable, and cooperate with the public employment services (PES) to facilitate their activation support. Issues remain regarding the coverage of benefits, especially in the COVID-19 crisis (people in low work intensity or undeclared work and non-standard workers are less covered by social protection). It is important to strengthen outreach and scale-up policies targeting job creation and easing job transitions as well as reinforce the public employment services and activation support measures, especially for young people not in employment, education or training (NEETs), in line with the Recommendation for Effective Active Support to Employment (EASE), as part of the new active labour market policy strategy to be completed by mid-2021. Reinforcing the initiatives in the Youth Employment Support (YES) package could help young people to develop their potential and support the twin transitions. Actions to mitigate the socio-economic impact, promote social inclusion and territorial cohesion and contribute to implementing the European Pillar of Social Rights, are key to safeguarding inclusive growth and making the green and digital transitions fair. The digital and green transitions call for more focus on education, training and skills. The education reform is progressing at a slow pace. Learning outcomes and performance in basic skills, as measured by the Programme for International Student Assessment (PISA), have yet to improve for students of all socio-economic backgrounds, as there is a wide gap in achievements of students from low and high socio-economic status (CY 29,2 percentage points vs EU 25,5 percentage points, 2018). Integrating asylum seekers into education remains a challenge. Improved recruitment and training of teachers and implementing the long-standing reform of teacher evaluation would increase the effectiveness of the education system. Despite Cyprus’ highly educated population (59,8% of people aged 30-34 have tertiary education qualifications, 2020), health as well as science, technology, engineering and mathematics (STEM) graduates remain scarce, and skills mismatches prevail. Digital education is a policy focus, but implementation needs to be improved, as low digital penetration also acts as a barrier to distance learning. Although vocational education and training (VET) offers several new and updated curricula to improve links to the labour market, low participation rates in upper secondary VET make it difficult to meet labour demands. Participation in adult learning remains low, especially among the low-skilled and the unemployed who are in most need of upgrading their skills and acquiring new ones. Accelerating the education reform and developing a national skills strategy that addresses the challenges that have been identified in an integrated manner could support Cyprus’ post-COVID-19 crisis recovery and contribute to the green and digital transitions. The COVID-19 crisis has put additional strain on the health and long-term care systems’ limited resources, highlighting the need for reform. The pandemic and an ageing population pose numerous economic and social challenges, putting pressure in particular on Cyprus’ health care and long-term care system. The COVID-19 crisis brought to the fore the need for sound coordination mechanisms on the health system linked to streamlining the provision of care, including the integration of the long-term care system. Consolidating the recent National Health System reform is expected to foster patient equity by reducing a historically high reliance on out-of-pocket payments. In future, the resilience of the health system will be hampered in particular by a suboptimal deployment of e-Health tools and challenges in recruitment and retention of health staff. Moreover, compatibility of e-Health solutions and interoperability among the existing systems present important challenges. Improving access, affordability and quality of long-term care services for the older people and most vulnerable, including for people with disabilities, would improve their quality of life, facilitate activation of working-age family carers, who are mainly women, and contribute to reducing inequality and poverty levels. The recent pandemic further highlighted the importance of the preparedness of both the State and the general population to deal with emergencies and, in particular, the role of civil protection. 2.3.Challenges related to the green and digital transition Green dimension The recovery and resilience plans should contribute to the green transition and must therefore include a minimum level of 37% of expenditure related to the green dimension. The measures in the plan must contribute to achieving the climate neutrality and the 2030 energy and climate targets set out in the national energy and climate plans. They should also contribute to meeting environmental targets for waste, water, pollution control, sustainable mobility, biodiversity protection and restoration, marine and water resources and support the transition to sustainable food systems as well as to a circular economy as appropriate, while ensuring that nobody is left behind. Cyprus is facing major challenges in relation to green growth as its economic growth model has a negative impact on the environment and hinders climate neutrality. Decisive efforts to transition to a more climate-friendly growth model are essential to improving the competitiveness and the long-term potential of the economy. Cyprus is among the Member States with the highest greenhouse gas emissions per head at 11,6 tonnes of CO₂ equivalent per head in 2017, compared with the EU average of 8,8 tonnes. Moreover, emissions increased significantly by 56% between 1990 and 2017 – among the highest increases in the EU. They are dominated by energy production in the two oil- / gas-fired power plants in Vassilikos and Dhekelia, which amounted to 33% of total emissions in 2017, closely followed by transport with a share of 21% of total emissions and the cement plant in Vassilikos. Cyprus is far from meeting its 2030 greenhouse gas emission reduction targets (gap estimated at 24 percentage points), compromising significantly the transition to climate neutrality and sustainable growth. Ensuring sustainable and green mobility is key for Cyprus due to the large and growing proportion of CO2 emissions in transport. Transport, which currently accounts for 40% of final energy demand, is the most energy intensive sector in the economy. The increasing CO2 emissions from transport risks meeting the 2030 climate and energy targets. The use of private cars is well above the EU average, while the use of public transport is very low (3% of total trips). Cyprus has a very low share of renewables in transport (2,5%), and the uptake of alternative fuels in the road transport is extremely low. In addition, the national authorities’ plans to increase the share of electric vehicles in the car fleet appear modest and they would not deliver results if energy keeps being produced from fossil fuels. Cyprus is unlikely to comply with requirements on renewable energy sources for road transport fuels. In 2018, the percentage of biofuels was only 2,69%, which is far from the 10% renewable energy sources target for the transport sector for 2021 to 2030. Sustainable public urban and inter-urban transport is essential, through implementing integrated and multimodal sustainable urban mobility strategies, including a shift to clean and sustainable transport modes.

The transition from highly polluting oil power plants to increased use of renewable energy sources for electricity production is urgent. Apart from addressing environmental and climate concerns, a transition to renewable energy sources would also substantially reduce the costs of energy generation, especially given Cyprus’ potential for solar energy generation. In addition, it would also reduce the reliance on imported fossil fuels and therefore, reduce the current account deficit and the exposure to fluctuations in global oil prices. According to the Cyprus’ 2020 national energy and climate plan, the country estimates that it will reach a final share of renewable energy sources of 15% by 2021 and 22,6% by 2030. To reach these targets, policy and investment measures, especially in storage technologies, need to be stepped up. More decisive action is needed to open up the electricity market to renewable energy sources producers, to introduce a carbon tax and to promote investments in large-scale renewables. That would significantly increase electricity production from renewable energy sources, eventually replacing oil and natural gas power plants. Improving the energy efficiency of buildings has great potential for unlocking economic, social and environmental benefits. Most buildings in Cyprus were constructed with no or low levels of thermal protection, which is a substantial source of energy inefficiency. Higher energy efficiency of buildings would alleviate the rates of ‘energy poverty’ in Cyprus, as inability to keep homes adequately warm and in arrears on utility bills are higher than the EU average. In addition, the energy renovation at a cost optimal level of 79% of existing homes by 2050 is expected to bring primary energy savings of 2.2 TWh and to generate about 94,000 full time equivalent jobs. Water scarcity leads to unsustainable water abstraction levels. The existing water pricing policy does not include sufficient behavioural incentives to encourage water saving behaviour. Agriculture puts significant pressure on surface waters, with 41% of surface waters in less than good ecological status and 3% failing to achieve good chemical status under the Water Framework Directive. Collection of wastewater and the connection to public sanitation infrastructure is still incomplete, with 34 agglomerations failing to comply with the Urban Waste Water Treatment Directive. The latest reported compliance (2016 data) showed that CY is 76% compliant with the Urban Waste Water Treatment Directive (Reference: 10th UWWTD implementation report, European Commission, 2020). On the positive side, the percentage of treated wastewater that is reused reaches 97% in Cyprus (the highest in the EU-12). Cyprus’ weak performance in waste management is worrying, while the transition towards a circular economy has barely begun. The current facilities for waste treatment are based on mechanical and biological treatment, mainly of mixed waste. The absence of financial incentives makes recycling unattractive. In 2018, Cyprus recycled only 17% of waste, well below the EU-27 average for recycling (38%) and considerably lower than the 2025 target of 55%. An overarching policy framework for the circular economy is lacking. The circular material use rate in 2018 was 2,7%, while the EU-27 average was 11,6%. Promoting waste prevention and putting in place the necessary infrastructure for re-use, source separation, recycling and high-level composting remains a challenge. On biodiversity, only 45% of habitats of community interest in Cyprus are in favourable conservation status, according to the latest reporting on the progress made with the implementation of the Habitats Directive. Incompatible activities and infrastructure, such as construction, agriculture, tourism and transport, pose a great threat to Natura 2000 sites, especially coastal zone areas. Table 2 gives an overview of Cyprus’ objectives, targets and contributions under Regulation (EU) 2018/1999 of the European Parliament and of the Council of 11 December 2018 on the Governance of the Energy Union and Climate Action. Table 2: Overview of Cyprus’ objectives, targets and contributions under the Governance Regulation National targets and contributions Latest available data 2020 2030 Assessment of 2030 ambition level Binding target for greenhouse gas emissions compared to 2005 under the Effort Sharing Regulation (%) 0% -5% -24% As in ESR National target / contribution for renewable energy: Share of energy from renewable sources in gross final consumption of energy (%) 13,6% 13% 22,6% Slightly below 23% (result of RES formula) National contribution for energy efficiency: Primary energy consumption (Mtoe) 2,55 Mtoe 2,5 Mtoe 2,4 Mtoe Low Final energy consumption (Mtoe) 1,86 Mtoe 1,9 Mtoe 2,0 Mtoe Very low Level of electricity interconnectivity (%) Non-interconnec ted Non-interconnec ted 200% N.A. Source: Assessment of the final national energy and climate plan of Cyprus, SWD (2020) 912 final. Digital dimension The recovery and resilience plan should contribute to the digital transition and at least 20% of the financial allocation needs to contribute to digital objectives. The measures in the plan should among other things contribute to the digital transformation of the economic and social sectors (including public administration, public services, and the justice and health systems). The objective of the measures in the plan should be to not only improve competitiveness, but also resilience, agility, and security of companies and public actors, all while ensuring inclusiveness. Cyprus ranks among the last Member States (24 out of 27) in the Commission’s DESI Report for 2020 and falls short of the EU average in all 5 sub-dimensions. On connectivity, in DESI 2021, Cyprus is below the EU average in most performance indicators. It performs well in fast broadband coverage (100%, ranking at the top exceeding the EU average of 87%) and also ranks above the EU average in the overall fixed broadband take-up (92%, compared to the EU average of 77%) and mobile broadband take-up (117 subscriptions per 100 people). However, despite significant progress, from 10% in 2019 to 26% in 2020, it still lags behind in the coverage of fixed very high capacity network (VHCN) (26% against 59% of the EU average). It also ranks among the lowest in the EU in the ultrafast fixed broadband take-up (3% of the total households against the EU average of 34%), as well as in the broadband price index, where Cyprus scores below the EU average (42 against 69 of the EU average in 2020). Cyprus’ 4G performance is better, with coverage 99,6%, reaching the EU average (99,7%). For 5G, Cyprus has assigned spectrum in the 700 MHz and the 3,4-3,8GHz band (pioneer bands), whereas the award assignment of the 26 GHz band is pending. The relevant processes in the ‘5G ready’ bands (the paired terrestrial 2 GHz band and the 2,6 GHz band) are expected to start still in 2021 and must be completed before 2026. While current 5G coverage stands at 0% against EU average of 14%, it is noted that Cyprus has assigned 67% of the total harmonised spectrum for 5G, with the EU average being 39%. Even though some submarine cables land in Cyprus, the cost of backbone connectivity is very high. Cyprus ranks below the EU average on digital skills. Despite the progress made in recent years, the level of basic digital skills remains below the EU average. Only 45% of people aged 16 to 74 have at least basic digital skills (against the EU average of 56%). The share of ICT specialists in the workforce is lower than the EU average (3,1% compared to 4,3% for ages of 15-74). The share of ICT specialists that are female is at 18% in Cyprus, almost reaching the EU average of 19%. Cyprus needs to make efforts to enhance digital skills in all population groups (public administration, enterprises and society at large), as well as to promote Science, Technology, Engineering and Maths (STEM) education and professional path, also amongst girls and women, in order to effectively address the market shortage in ICT professionals. On the integration of digital technology in business activities, Cyprus ranks below the EU average but is making progress. Cypriot businesses take advantage of new technologies using social media (38% compared to the EU average of 23%), while 15% of SMEs are selling online (below the EU average of 17%). The adoption of new dynamic technologies is improving but still relatively low, in particular regarding cloud services (22% compared to the EU average of 26%), Big Data analytics for business purposes (6%, below the EU average of 14%), while no data on Artificial Intelligence (AI) is provided. Businesses are increasingly taking advantage of the opportunities offered online, but 41% of businesses that recruited ICT specialists had difficulties in doing so, although Cypriot companies are still better off than the EU average (55%) in this respect. In digital public services Cyprus ranks below the average in the EU. Cyprus performs well in digital public services for businesses as it scores above the EU average (86 against 8416 of the EU). It also performs above the EU average on open data with 87%. However, the level of online interaction between public authorities and the general public could be improved as 59% of Cypriot internet users are actively engaged in e-government services, compared to the EU average of 64%. Finally, in digital public services for citizens, Cyprus scores below the EU average of 7516 with a score of 6615. It should be noted that the government is developing the national eID scheme following the eIDAS Regulation . However, Cyprus has not yet notified an eID scheme to the Commission, which is a pre-condition for the cross-border recognition of national eIDs. On e-Health, Cyprus is moving towards cross-border integration . Cyprus will be part of a secure peer-to-peer network allowing the exchange of patient summaries and e-prescriptions via MyHealth@EU using the eHealth Digital Service Infrastructure (eHDSI). In future, further possible support by EU4Health funding may help expand and deploy the technical functionalities of the system, enabling the exchange of other structured documents, such as medical images and reports, laboratory reports, hospital discharge letters and finally the complete electronic health record. The objective is to align the Cypriot health infrastructure with the standards set by the Commission for exchanging health data, across national borders within the EU, and to provide interoperable e-Health services. Cyprus is one of the signatories of the ‘Declaration towards access to at least 1 million sequenced genomes in the EU by 2022’ and part of the ‘1+Million Genomes’ initiative . Cyprus is committed to advancing on new digital technologies and investing in them through EU-coordinated programmes and plans It concerns, among others, HPC, Blockchain and artificial intelligence . In addition, Cyprus signed in 2019 a declaration agreeing to explore, together with 24 Member States, how to develop and deploy a quantum communication infrastructure across the EU over the next 10 years. Although the digital sector is currently responsible for just 3,5% of global CO2 emissions, efforts must also be made to reduce its own footprint, in order to work towards the future objectives of decarbonisation and climate neutrality. The energy, climate and environmental impacts of the digital sector can be alleviated by adopting energy efficient policies, including renewables and complying with the ‘do no significant harm’ principle. In addition, the EU circular action plan needs to be strengthened to harness the full potential of digital technologies to achieve its objectives. Figure 1. DESI 2020 - relative performance of Cyprus by dimension

Note: EU aggregate corresponds to EU28, based on 2020 DESI report.

Box 1: Progress towards the Sustainable Development Goals The objectives of the Sustainable Development Goals (SDG) are integrated in the European Semester since the 2020 cycle. This provides a strong commitment towards sustainability in coordination of economic and employment policies in the EU. In that respect, this section outlines Cyprus’ performance with respect to SDGs with particular relevance for the four dimensions underpinning the 2021 Annual Sustainable Growth Strategy and of relevance to the recovery and resilience plans (green transition, fairness, digital transition and productivity, and macroeconomic stability), indicating possible areas where investments and reforms in line with the objectives of the Facility could further accelerate the progress on the SDGs. Figure 2: SDGs and key dimensions of the recovery and resilience plan Green Transition Cyprus does not perform well on many SDGs linked to the green transition. The country performs below EU average with respect to environmental impact of agriculture (SDG 2), clean water and sanitation (SDG 6), affordable and clean energy (SDG 7), responsible consumption and production (SDG 12), climate action (SDG 13) and life on land (SDG 5). Many of the indicators in those areas are further deteriorating from already sub-par levels and this is particularly the case for nitrate in groundwater and soil sealing index, which seems consistent with the fact that Cyprus scores below the EU average and has further deteriorated when it comes to the waste generation and recycling rate. Cyprus’ position regarding final energy consumption, resource productivity and climate mitigation has also worsened, which does not bode well for its environmental outcomes in the future. Cyprus is among the Member States with the highest greenhouse gas emissions per person at 11,6 tonnes of CO₂ equivalent per person in 2017 (versus 8,8 tonnes EU average). Reducing the carbon-intensity of the Cypriot economy would lead to progress on affordable and clean energy (SDG 7) and climate action (SDG 13). Fairness Cyprus’ performance on indicators assessing the fairness of society and economy is uneven. Overall, Cyprus progresses towards ending poverty (SDG 1), notably regarding the share of people living in households with very low work intensity (CY 6,8% vs. EU-27 8,3%, 2019) and the in work at-risk-of-poverty rate (CY 6,7% vs. EU-27 9%, 2019). However, the rate of people at risk of poverty or social exclusion (22,3%, 2019), though declining, is still above the EU average (20,9%). Further, Cyprus has one of the highest shares of people unable to keep their houses adequately warm in the EU (CY 21% vs. EU-27 6,9%, 2019) and the share of population living in poor housing conditions has increased (CY 31,1% vs. EU-27 12,7%, 2019). Cyprus performs slightly above the EU average on good health and well-being (SDG 3), showing a considerable improvement on self-reported unmet need for medical care (CY 4,7%, 2014 vs. 1%, 2019). However, the proportion of adults smoking is still higher than the EU average (CY 28% vs. EU-27 25%, 2020). Compared to the EU average, Cyprus is underperforming when it comes to gender equality (SDG 5) particularly as regards the gender gap for tertiary educational attainment and the gender gap in the inactive population due to caring responsibilities. Although Cyprus scores above the EU average for tertiary educational attainment, major challenges remain regarding quality education (SDG 4). The situation is further deteriorating regarding underachievement in reading and science, as well as regarding adult participation in learning (CY 4,7% vs. EU-27 9,2%, 2020). Digital transition and productivity There is significant room for improvement regarding Cyprus’ performance in industry, innovation, and infrastructure (SDG 9). With 0,6% of GDP allocated to R&D in 2019, Cyprus has a substantially lower R&D spending compared to the EU average (2,2%). Cyprus ranks below the EU average on digital skills: Only 45% of people between 16 and 74 years of age have at least basic digital skills (compared to the EU average of 56%, 2019). The share of ICT specialists in the workforce is lower than the EU average (2,7% compared to 3,6%). The level of e-commerce is low (CY 31,8% vs. EU-27 40,1%, 2019). In 2020, Cyprus had 0% 5G readiness compared to 21% in the EU. Increased R&D funding combined with targeted measures for skills development, academia-business cooperation, innovative SMEs and start-ups could support the country’s productivity growth, competitiveness and accelerate the digital transition. Macroeconomic stability Cyprus shows overall good progress on decent work and economic growth (SDG 8), with an increasing employment and decreasing long term unemployment rate. However, notably, the increasing share of young people aged 15-29 that are not in employment, education or training (NEETs) in the current economic downturn (CY 15,3% vs. EU-27 13,7%, 2020) calls for targeted measures supporting the next generation. Real GDP per person and the investment share of GDP are still below the EU average with the former having further decreased in 2020. Cyprus still needs to improve towards objectives of peace, justice and strong institutions (SDG 16), including reducing corruption. This would also contribute to a strong business environment. The percentage of the population with confidence in the European Institutions and, therefore, trust in European policies, increased in 2020. 3.Objectives, structure and governance of the plan 3.1.Overall strategy of the plan The Cyprus recovery and resilience plan is a forceful response to the economic repercussions from the COVID-19 pandemic and consists mainly of future-oriented measures, with a strong focus on the green transition and digital transformation. It is composed of 13 components grouped in five policy axes: (i) public health, civil protection and lessons learned from the pandemic (ii) accelerated transition to a green economy, (iii) strengthening the resilience and competitiveness of the economy, (iv) towards a digital era, and (v) labour market, social protection, education and human capital. Policy Axis 1 focuses on health and civil protection ·Component 1.1 (Resilient and effective health system, enhanced civil protection) consists of 3 reforms and 7 investments, for a total financial envelope of EUR 74,1 million. The component addresses the challenge of universal access to high-quality healthcare in Cyprus as well as civil protection’s overall emergency preparedness and response. Its objective is to strengthen the effectiveness, accessibility and overall resilience of the healthcare sector supporting the recently introduced National Health System through various interventions. These include the (i) modernisation and digitalisation of health care infrastructure and equipment, (ii) stepping-up of e-Health services, (iii) accreditation of provided health care services and introduction of evidence-based clinical protocols and quality monitoring systems, as well as (iv) upskilling opportunities for health workers. It further aims at enhancing Cyprus’ civil protection system by stablishing a modern Public Warning System. The reforms and investments included in the component contribute to addressing CSR 1 of 2020 and CSR 3 in 2019.





Policy Axis 2 focuses on green economy and contains measures within the domains of energy policy, urban mobility and transport and water resource management. ·Component 2.1 (Climate neutrality, energy efficiency and renewable energy penetration) consists of 4 reforms and 11 investments, for a total financial envelope of EUR 269,1 million. The component addresses the challenge of climate change mitigation and contribute to the country’s transition to climate neutrality through measures relating to green taxation, the opening up of the electricity market and the facilitation of licensing of renewable energy and renovation projects. The component seeks to contribute to the achievement of the national energy efficiency and renewable energy targets for 2030 by improving the energy efficiency of the building stock and other infrastructure and supporting green investments for SMEs, households, the wider public sector and NGOs. The component also targets the alleviation of energy poverty and addresses Cyprus’ energy isolation. The component supports addressing the CSRs that recommend focusing investment and investment-related policies on energy efficiency and renewable energy (CSR 4 in 2019 and CSR 3 in 2020). ·Component 2.2 (Sustainable transport) consists of 3 reforms and 3 investments, for a total financial envelope of EUR 91,3 million. The component aims at promoting cleaner, smarter, safer and fairer urban mobility by encouraging a modal shift from private cars to more sustainable modes of transport such as public transport, cycling, walking, and to promote the use of zero or low-emission vehicles (LEVs) as well as the use of digital systems in the transport sector. The component addresses the CSRs on investment in sustainable transport (CSR 4 in 2019 and CSR 3 in 2020). ·Component 2.3 (Smart and sustainable water management) consists of 1 reform and 8 investments, for a total financial envelope of EUR 87,3 million. The component aims to ensure adequate and uninterrupted supply of good quality drinking water, maximising the infrastructure for waste water collection systems, waste water treatment and reuse of treated effluent in agriculture; reducing water supply and distribution system water losses, reducing the non-revenue water and groundwater abstraction, improving operational efficiency of the services being provided to the consumers through technological advances and establishing transparency in financial transactions. The component aims to achieve three strategic goals in the water management sector: (i) promote green and blue development, (ii) protect the environment while promoting the efficient use of resources and (iii) reduce greenhouse gas emissions and adapt to climate change. The component addresses the CSRs related to water management (CSR 3 in 2020 and CSR 4 in 2019). Policy Axis 3 focuses on strengthening the resilience and competitiveness of the economy, through its diversification and integrating elements, such as of the circular economy, that support resilience and competitiveness, the enhancement of research and innovation, and the legislative and financial support to businesses. In addition, it aims at improving administrative efficiency of the public sector, including local authorities, and of the justice system, supporting the competitiveness of the business environment. Moreover, it includes measures to safeguard the fiscal and financial stability of the economy. ·Component 3.1 (New growth model and diversification of the economy) consists of 5 reforms and 13 investments, for a total financial envelope of EUR 166,4 million. The component addresses the challenges of the Cypriot economy with regard to competitiveness, productivity and investment. It also aims to reduce overreliance on certain economic sectors, such as tourism, by helping the economy move to a new economic growth model (of Sustainable Business and Trade Centre of Europe) by addressing sectoral challenges in the primary and secondary sectors as well as by promoting sustainable tourism and reputable healthcare. Moreover, it aims to promote circular economy (with emphasis on waste management). The component contributes to addressing the country specific recommendation related to focus investment on the green and digital transition and on waste and water management (CSR 3 in 2020), to focus investment-related economic policy on sustainable transport and on environment, in particular waste and water management (CSR 4 in 2019). All that is in line with the recently adopted Commission Communication “Updating the 2020 New Industrial Strategy: Building a stronger Single Market for Europe’s recovery”. ·Component 3.2 (Enhanced research and innovation) consists of 3 reforms and 4 investments, for a total financial envelope of EUR 64 million. The component addresses the challenges that Cyprus faces as regards the Research and Development (R&D) ecosystem that plays a relatively limited role in economic growth, by strengthening links between research organisations and enterprises, facilitating commercialisation of research results, increasing intensity in R&D and investments by both public and private organisations therein. The component also aims to make all publicly funded research infrastructure accessible to the entire ecosystem. Furthermore, it aims to enhance financial support to start-ups, scale-ups, SMEs, internationalisation, to develop local talent and attract talent from abroad to work in research and innovation, with emphasis on specific thematic areas, including ICT. The component addresses the CSR on increasing the focus on investment-related economic policy on research and innovation (CSR 3 in 2020 and CSR 4 in 2019). ·Component 3.3 (Business support for competitiveness) consists of 6 reforms and 6 investments, for a total financial envelope of EUR 51,44 million.

The component addresses the challenges of low productivity and competitiveness of the economy, driven by the enterprises’ small size on average, the complex licensing process requested for an investment and difficulties of access to funding to business. In particular, it aims to support entrepreneurs and enterprises and improve their competitiveness and contribution to the growth of the economy by improving the regulatory framework regarding investment and entrepreneurial activity and to enhance SMEs productivity, mainly through digitalisation. The component addresses the parts of CSR 3 in 2020 and CSR 4 in 2019. ·Component 3.4 (Modernising public and local authorities, making justice more efficient and fighting corruption) consists of 10 reforms and 9 investments, for a total financial envelope of EUR 96 million. The component aims to (i) increase the effectiveness, efficiency and relevance of government processes, (ii) strengthen the administrative capacity and cooperation of the Ministry of Interior and local governments to ensure the effective implementation of the new local administration model, (iii) improve the quality and efficiency of the justice system, through accelerating the delivery of justice and reducing the backlog of cases, and (iv) achieve greater coherence to the government’s efforts to fight corruption. The reforms and investments included in the component contribute to addressing the CSRs on improving efficiency in the public sector, in particular as regards the functioning of the public administration and of local governments (CSRs 1 in 2019 and CSR 4 in 2020), on promoting flexible working arrangements (CSR 2 of 2020), on improving the efficiency and digitalisation of the judicial system (CSR 5 in 2019 and CSR 4 in 2020) and on anti-corruption reforms (CSR 5 in 2019). ·Component 3.5 (Safeguarding fiscal and financial stability) consists of 10 reforms and 2 investments, for a total financial envelope of EUR 44,5 million. The component addresses the challenges of fiscal and financial vulnerabilities, as well as the related excessive macroeconomic imbalances. The objective is to safeguard financial stability by (i) reducing legacy risks in the banking sector, to a large extent related to remaining stocks of non-performing loans, (ii) putting in place measures against high private indebtedness, such as improving monitoring, enhancing insolvency frameworks and improving financial literacy, and (iii) improving supervision in the non-bank sector (insurance, pension funds, and securities markets). To ensure fiscal stability, Cyprus aims at combating tax evasion, tax avoidance and aggressive tax planning; and providing policy makers with comprehensive data in order to design a fair tax system. The envisaged measures are expected to make revenue collection more efficient and Cyprus’ tax system fairer, reducing the spill-over effects from aggressive tax planning. Specifically, Cyprus plans to introduce a withholding tax on dividends, interest, and royalty payments in a first step to jurisdictions included in the EU list of non-cooperative jurisdictions and in a second step to low corporate tax jurisdictions. Regarding low tax jurisdictions and in respect of interest and royalty payments, the Cypriot authorities may explore instead the approach of applying non-deductibility. Importantly, Cyprus also envisages to make a subsequent holistic evaluation of various measures related to aggressive tax planning, including those adopted under the plan to tackle aggressive tax planning. The evaluation is expected to, among others, estimate the expected impact of the measures on relevant cross-border flows. The evaluation is also expected to include the 17 July 2020 measure on intangible assets. If the evaluation identifies shortcomings, Cyprus will follow up with policy action, including through legislative changes. The component supports addressing the CSRs on financial stability and private indebtedness (CSRs 2 and 5 in 2019), and on addressing features of the tax system that facilitate aggressive tax planning by individuals and multinationals (CSR 4 of 2020 and CSR 1 in 2019). Policy Axis 4 focuses on driving forward Cyprus’ digital transformation notably by addressing infrastructure challenges in the area of data connectivity and by achieving the digital transformation of the public sector. ·Component 4.1 (Upgrade infrastructure for connectivity) consists of 2 reforms and 3 investments, for a total financial envelope of EUR 53 million. The component addresses infrastructure challenges and shortcomings in the area of connectivity, particularly in rural areas, with a view to narrowing the rural-urban divide, as well as differences along gender, age, income and education. The objective of the component is to enhance access to communication infrastructure for all citizens, thus bridging the digital divide and supporting an inclusive digital transformation. The component addresses the CSRs on investment in the digital transition and the digitalisation (CSR 4 in 2019 and CSR 3 in 2020). ·Component 4.2 (Promote e-government) consists of 4 reforms and 2 investments, for a total financial envelope of EUR 36,4 million. The component aims to contribute to accelerating the digital transformation of Cyprus through the digitalisation of government services (G2G), as well as by enhancing the efficiency and the provision of online, secure and prompt services to citizens, in a user friendly, efficient and effective way. This is expected to facilitate the interaction between citizens and the public services, without the need for physical presence. The objective of the component is to build a secured, integrated and modern digital architecture to achieve the transformation to a digital government. The component addresses the CSR on investment in the digital transition and the digitalisation (CSR 4 in 2019 and CSR 3 in 2020). Policy Axis 5 targets education and training, labour market and social policies. It focuses on the development of skills of the current and future workforce in order to respond effectively to the trends and needs of the labour market, including those arising from the green and digital transition. In addition, the Axis includes actions on early childhood education and care and social welfare, and it addresses employment weaknesses such as gaps in social protection, limited flexible working arrangements and youth activation. ·Component 5.1 (Educational system modernisation, upskilling and retraining) consists of 5 reforms and 2 investments, for a total financial envelope of EUR 94 million.

The component addresses the challenges of low participation in vocational education and training (VET) and lifelong learning, rising skills mismatches (particularly among young graduates) and poor digital skills. It further addresses the quality of teaching and the availability and affordability of early childhood education and care (ECEC) for children aged four years old. Its objective is to (i) improve the quality and effectiveness of education and training at all levels, (ii) foster the uptake of labour market-relevant reskilling and upskilling opportunities, in particular regarding the twin transitions, across society regardless of employment status, skills level or age, and (iii) modernise the school structures making them fit for the digital transition. The reforms and investments included in the component contribute to addressing the CSR on education and skills (CSR 2 in 2020 and CSR 3 in 2019), early childhood education and care (CSR 3 in 2019) as well as on digital skills (CSR 4 in 2019 and CSR 3 in 2020). ·Component 5.2 (Labour Market, social protection, social welfare and inclusion) consists of 2 reforms and 5 investments, for a total financial envelope of EUR 78,9 million. The component addresses (i) inefficiencies and gaps in social protection notably for the self-employed and people working in non-standard forms of employment, (ii) the lack of legislation for flexible working arrangements in the form of teleworking, (iii) challenges related to unemployment and youth unemployment and the high level of young people not in employment, education or training (NEETs), (iv) gaps in early childhood education and care (ECEC) and (v) challenges with respect to social inclusion and welfare, including a high level of people at risk of poverty or social exclusion (AROPE) and increasing needs in long-term care. The reforms and investments included in the component contribute towards addressing the CSRs on improving the effectiveness of the public employment services and the education and training system (CSR 3 in 2019 and CSR 2 in 2020), providing social protection for all and introducing flexible working arrangements (CSR 2 of 2020), and improving the efficiency and digitalisation of the public sector (CSR 1 in 2019 and CSR 4 in 2020). Table 3: Components and associated costs Component Costs (EUR million) 1.1 Resilient and effective health system, enhanced civil protection 74,1 2.1 Climate neutrality, energy efficiency and renewable energy penetration 269,1 2.2 Sustainable transport 91,3 2.3 Smart and sustainable water management 87,3 3.1 New growth model and diversification of the economy 166,4 3.2 Enhanced research and innovation 64,0 3.3 Business support for competitiveness 51,4 3.4 Modernising public and local authorities, making justice more efficient and fighting corruption 96,0 3.5 Safeguarding fiscal and financial stability 44,5 4.1 Upgrade infrastructure for connectivity 53,0 4.2 Promote e-government 36,4 5.1 Educational system modernisation and reform 94,0 5.2 Labour market, social protection, social welfare and inclusion 78,9 Total cost of Cyprus’ plan 1 206,4 3.2.Implementation aspects of the plan Consistency with other programmes The plan contributes to, and is aligned with, the following programmes: 1.The Integrated National Energy and Climate Action Plan (INECP): The national targets for the next decade are monitored in detail in the INECP until 2030 and serves as a basis for the long-term strategy aiming towards the minimisation of greenhouse gas emissions by 2050. The recovery and resilience plan supports and promotes investments and reforms to improve climate resilience through the implementation of the national strategy and action plan on climate change adaptation that was adopted in 2017. Most of the priority areas of the NECP overlap with those of the RRF, regarding the green transition. These include the building renovation and affordable, energy-efficient housing, deployment of renewables, sustainable transport, energy system integration, dealing with negative externalities, energy efficiency measures, clean industry, other clean energy technologies, and including environmental impacts (i.e. on natural resources and biodiversity). The recovery and resilience plan ensures consistency and complementarity with these policy areas through the components of Policy Axis 2 (Accelerated transition to a green economy), which are component 2.1 (Climate neutrality, energy efficiency and renewable energy penetration), component 2.2 (Sustainable transport) and component 2.3 (Smart and sustainable water management). In general, the implementation of the reforms and investments envisaged in the context of these components will assist with achieving the targets in the context of attaining the national energy and climate objectives for 2030 and beyond. 2.The Youth Guarantee implementation plan, and the Territorial Just Transition plan under the Just Transition Fund: The Cypriot recovery and resilience plan is consistent with the reinforced Youth Guarantee and the short- and medium-term investment priorities and the ambition “Youth Employment Support: A Bridge to Jobs for the Next Generation”. Measures under the reinforced Youth Guarantee are financed by national resources, the RRF, the Union instruments under cohesion policy and in particular the Youth Employment Initiative, the European Social Fund (ESF) and other EU funding sources in line with their legal framework. The consistency between the plan and the reinforced Youth Guarantee will be primarily achieved through the investment Improving the effectiveness of the Department of Labour and Public Employment Services and reinforcing support for young people in component 5.2 (Labour market, social protection, social welfare and inclusion) and the investment Skilling, reskilling and upskilling in component 5.1 (Educational system modernisation, upskilling and retraining). 3.The partnership agreements and operational programmes under the Union funds while they are at the stage of negotiation, Table A and Table B of Annex I of the plan provide a mapping of the plan and Cohesion Policy mapping with the CSRs. They also provide the full list of Cohesion Policy objectives and projects contributing to CSRs. The RRP is also consistent and complementary with the Common Agricultural Policy in terms of the planned reforms/investments for agriculture and rural development. 4.The Technical Support Instrument (TSI) provides expertise in building capacities to implement the plan in a number of areas covered such as healthcare, education, labour market, green and digital transition, public financial management and revenue administration, as well as for the overall implementation of the plan. Sectoral support for the design, implementation and evaluation of research and innovation policy reforms will also be available via the Horizon Policy Support Facility. Consistency with the challenges and priorities identified in the most recent euro area recommendation

The plan is also consistent with the challenges and priorities identified in the most recent euro area recommendation. In particular, the plan includes reforms linked to improving the business environment in component 3.3 (Business support for competitiveness), to the efficiency of public administration and the effectiveness of the justice system, including anti-corruption in component 3.4 (Modernising public and local authorities, making justice more efficient and fighting corruption), and to securing tax collection capacity and improving tax administration in component 3.5 (Safeguarding fiscal and financial stability). Coordination and implementation framework The coordinating structure for the plan for Cyprus was endorsed by the Council of Ministers, as described in Section 4.8. This is presented in the governance, control and audit part of the plan. The Coordinating Authority of the plan of Cyprus is the European Commission's Directorate General for European Programmes, Coordination and Development (DG-EPCD). This is done in cooperation with the Ministry of Finance. Gender equality and equal opportunities for all With regard to gender equality and equal opportunities for all, the plan describes existing national challenges, explains which reforms and investments are expected to contribute to overcoming them and contains a series of measures across several components that contribute to addressing the challenges in this area. The plan provides information about the country’s governance structure for equality, and underlines that the promotion of equality, non-discrimination and accessibility during the implementation of the plan will be ensured through the involvement of the competent authorities. The plan describes the views of these authorities on the potential equality impacts of the measures included in the plans. It includes data disaggregated by sex to a limited extent. Relevant measures aim to improve the access to affordable quality early childhood education and care and long-term care as well as to promote flexible working arrangements facilitating labour market activation for people with caring responsibilities, particularly women, social inclusion and the reduction of socio-economic disadvantages. Challenges regarding female entrepreneurship or financial illiteracy of older women are also addressed. Support for young people not in employment, education or training (NEETs) is expected to over-proportionally benefit young people from vulnerable backgrounds, including with migration backgrounds. Throughout the plan needs of persons with disabilities are taken into account and a quantitative target for the improvement of energy performance in households with persons with disabilities is included. Stakeholder consultations Based on the summary of the consultation process included in the plan, all relevant stakeholders such as social partners, civil society organisations and youth organisations have been consulted in the preparation phase of the plan in accordance with the national legal framework. Within the scope of their responsibilities, the different Ministries, governmental services and local authorities have been involved at an early stage and in numerous steps in the elaboration of the plan. The Parliament has been regularly informed about the content of the plan. Also, the Cypriot Economy and Competitiveness Council, equivalent to a national productivity board, has been consulted. Specifically, the authorities ran a consultation with social partners and political parties. They met separately with: ·the employers’ association and the Chamber of Commerce; ·the trade unions; ·the Youth Board of Cyprus; ·the Cyprus Scientific and Technical Chamber; ·the Pancyprian Teachers Association; ·Birdlife Cyprus; ·the Federation of Environmental Organisations of Cyprus; ·representatives from all political parties (at a frequent basis). Each counterpart submitted project proposals for the plan, for consideration by the government. Following the consultation of all relevant stakeholders, part of the initially planned reforms and investments have been adapted from the plan. Acoordination process with all relevant stakeholders, including social partners and civil society, is expected to take place also for the implementation phase of the plan. To ensure ownership by the relevant actors, it is crucial to involve all local authorities and stakeholders concerned, including social partners and civil society, throughout the implementation of the investments and reforms included in the plan. Security self-assessment

The Cypriot plan includes a security self-assessment for investments in digital capacities and connectivity, in line with the Article 18(4) point (g) of the RRF Regulation. As regards investments in connectivity, in particular in 5G networks, the plan identifies relevant security issues. It also details how they will be addressed, based on the common objective criteria included in the EU toolbox for 5G networks Cybersecurity. Strategic measures mentioned in the security self-assessment would need to be closely monitored during the implementation of the plan. Cross-border projects Cyprus included two cross-border projects in its plan for an electricity interconnector and submarine cables for connectivity. Both projects would have a cross border element with Greece. First, the ‘EuroAsia Interconnector’ in component 2.1 (Climate neutrality, energy efficiency and renewable energy penetration) aims to ensure security of supply and more competitive wholesale electricity prices, and to enable the increased use of electricity from cleaner sources, in particular renewables, by connecting the electricity network of Cyprus to the Greek network in Crete. This is part of a broader investment building a cross-border interconnector with a total length of 1 208 km between Crete, Cyprus and Israel. The project is expected to end the energy isolation of Cyprus. Second, the project for the submarine cables in component 4.1 (Upgrade infrastructure for connectivity) aims at creating high-capacity resilient backbone internet connectivity for Cyprus through a new submarine link for data connectivity between Cyprus and Greece. The deployment of a new separate backbone route between Cyprus and Greece should strategically support connectivity in the island. It is also expected to have a positive impact on the available capacity and the commercial offers of backbone connectivity needed to provide very-high-speed services to end-users. Finally, it should offer significantly higher performance compared to existing dated cables. Communication Regarding communication, the recovery and resilience plan presents a detailed communication strategy. Cyprus foresees an estimated budget of EUR 1 million for the implementation of the envisaged communication strategy. The objectives of the communication strategy are consistent with the RRF Regulation. The strategy aims to ensure awareness about the EU’s contribution to mitigate the economic and social consequences of the COVID-19 pandemic and to the twin transition. The overall responsibility for the implementation of the communication strategy and plan, coordinating and supervising all communication activities, is under the Coordinating Authority of the plan (the DG-EPCD). In this context, the DG-EPCD presents its plan in relation to the aims of the communication strategy, as well as its implementation phases. In particular, the DG-EPCD main aim is to set up the most appropriate mechanisms and tools for maximum visibility and communication impact (including of a website on which the plan is uploaded). Moreover, the communication strategy will be closely linked with the implementation of the plan. At times when important milestones have been achieved, it will display its results when these are visible and measurable. Thus, the communication activities presented will be planned in three phases, each of which addresses a separate audience. Communication activities will be monitored through a set of qualitative and quantitative indicators to ensure high-quality implementation. The target audiences are clearly defined and justified based on their specific role in relation to the RRF. These are expected to cover beneficiaries, stakeholders and media, reaching also to under-represented groups of the society, such as people with disabilities, and promote how the RRP invests in such under-represented groups, including women, youth and elderly. The communication strategy will emphasise customised messages that will resonate with citizens and businesses. Innovative ideas will be put in place to increase the engagement. The main channels of disseminating information will be media coverage, online communication tools, events, printed communication material and outdoor advertising. Key reforms and investment projects from the plan will be selected for communication and promotion purposes. The plan foresees close cooperation with the Commission on the implementation of the communication strategy. State aid State aid and competition rules fully apply to the measures funded by the RRF. Union funds channelled through the authorities of Member States, like the RRF funds, become State resources and can constitute State aid if all the other criteria of Article 107(1) TFEU are met. When this is the case and State aid is present, these measures must be notified and approved by the Commission before Member States can grant the aid, unless those measures are covered by an existing aid scheme or comply with the applicable conditions of a block exemption regulation, in particular the General Block Exemption Regulation (GBER) declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 TFEU. When State aid is present and it requires notification, it is the duty of the Member State to notify State aid measures to the Commission before granting them, in compliance with Article 108(3) TFEU. In this respect, the State aid analysis carried out by Cyprus in the recovery and resilience plan cannot be deemed a State aid notification. In as far as Cyprus considers that a specific measure contained in the recovery and resilience plan entails de minimis aid or aid exempted from the notification requirement, it is the responsibility of Cyprus to ensure full compliance with the applicable rules. Irrespective of whether they comply with the EU’s State aid regime, measures taken under this framework should be compatible with the EU’s international obligations, in particular under World Trade Organization rules. 4.Summary of the assessment of the plan 4.1.Comprehensive and adequately balanced response to the economic and social situation The plan puts forward a well-balanced package of reforms and investments that jointly cover in a comprehensive manner the six pillars of the Recovery and Resilience Facility, taking into account the specific policy challenges of the Cypriot economy and society. The plan features 75 investments and 58 reforms, spread out over 13 components that each have a particular focus (see Section 3.1) and are designed around the overarching objective of strengthening the economy’s resilience and the country’s potential for economically, socially and environmentally sustainable long-term growth and welfare. The plan provides a detailed explanation of its contributions to the six pillars of the RRF. The coverage of the six pillars of the Facility is summarised in Table 4. All pillars are covered by at least one component, while each component contributes to several pillars. The pillar “Smart, sustainable and inclusive growth” is covered by a large majority of components, reflecting its close link to the overarching objective of the plan as described above. This predominant position is therefore justified by the country-specific challenges faced by Cyprus. In summary, the plan ensures that each pillar is addressed in a comprehensive and coherent manner. Table 4: Coverage of the six pillars of the Facility by the Cypriot plan’s components Green transition Digital transformation Smart, sustainable & inclusive growth Social and territorial cohesion Health, and economic, social and institutional resilience Policies for the next genera-tion 1.1 Resilient and effective health system, enhanced civil protection ○ ● ○ ● ● ● 2.1 Climate neutrality, energy efficiency and renewable energy penetration ● ○ ● ● ○ ○ 2.2 Sustainable transport ● ○ ● ○ ○ 2.3 Smart and sustainable water management ● ○ ○ 3.1 New growth model and diversification of the economy ○ ○ ● ● ○ ○ 3.2 Enhanced research and innovation ○ ○ ● ○ 3.3 Business support for competitiveness ○ ● ○ 3.4 Modernising public and local authorities, making justice more efficient and fighting corruption ○ ● ● ○ ● ○ 3.5 Safeguarding fiscal and financial stability ○ ● ● 4.1 Upgrade infrastructure for connectivity ● ● ● ○ ● 4.2 Promote e-government ● ● ● ○ ● 5.1 Educational system modernisation, upskilling and retraining ● ● ● ○ ● ● 5.2 Labour market, social protection, social welfare and inclusion ○ ● ● ● ● ● Key: “●” investments and reforms of the component significantly contribute to the pillar; “○” the component partially contributes to the pillar Green transition The plan addresses key challenges related to the green transition, which are substantial. Cyprus has relatively high greenhouse gas emissions per head, notably in energy generation, energy efficiency of buildings and transport sectors (see Section 2.3). Emissions have been increasing over the years, contrasting with ambitious EU and Cyprus’ targets toward the green transition. Cyprus also faces challenges in water and waste management and in enhancing biodiversity and wildlife. The plan dedicates 41% of the total allocation to measures contributing to the green transition. With a total climate allocation of approximately EUR 491 million, the plan therefore complies with the minimum requirement of at least 37% of the total allocation supporting climate change objectives. The proposed measures reflect the identified challenges and are in line with the comprehensive Integrated National Energy and Climate Plan (INECP) of January 2020. Policy Axis 2 represents the main lever of the green transition in the plan. It includes measures that contribute to Cyprus’ transition to climate neutrality through energy efficiency, renewable energy, promotion of sustainable transport and improved water management. Specifically, it envisages to improve the environmental and climate policy through the introduction of green taxation, the opening-up of the electricity market and the facilitation of licensing of renewable energy and renovation projects. It aims to improve the energy efficiency of the building stock and other infrastructure and to support green investments. Furthermore, an envisaged electricity interconnector aims to tackle Cyprus’ energy isolation and thus its vulnerability to energy supply and price shocks. Dedicated measures aim at accelerating the replacement of conventional transport rolling stock with zero and low emission vehicles accompanied with the necessary infrastructure and the use of alternative and cleaner means of transport. The axis further envisages smart and efficient water management mainly through introduction of new technology. The axis further addresses the challenges of climate change adaptation through a number of protective and preventive measures in the areas of forest fire protection and anti-flood management. Biodiversity preservation is addressed with one measure focusing on the protection of the marine ecosystem from hazards. Other components of the plan also contribute to the green transition. In particular, the plan includes envisaged construction of energy efficient buildings and energy efficient renovation of existing ones in component 1.1 (Resilient and effective health system, enhanced civil protection), the development and promotion of circular economy and investment in new port infrastructure for the aquaculture sector in component 3.1 (New growth model and diversification of the economy), and support for smart cities and the renovation of Nicosia inner city in component 3.4 (Modernising public and local authorities, making justice more efficient and fighting corruption). Also, a share of funding programmes is dedicated to research and innovation on green transition in component 3.2 (Enhanced research and innovation). Policy Axis 5 contributes through dedicated investment in green skills and indirectly through measures promoting flexible working arrangements, mostly telework, thus reducing commuting to work and in turn carbon footprint.

Digital transformation

The plan’s measures related to digital transformation are well anchored in the analysis of Cyprus’ main challenges in digitalisation. Cyprus lies at the lower end of the ranking of EU Member States in the DESI. While improving on some of the dimensions over past years, Cyprus has not succeeded in reducing the gap to the EU average. The relative performance gap is particularly marked in connectivity (mostly in terms of fixed broadband, above 100 Mbps) and digital skills where the gap has recently increased. The plan dedicates about 23% of the total allocation to measures contributing to digital objectives. With a digital contribution of EUR 282 million, the plan complies with the minimum requirement of at least 20% of the total allocation supporting digital transition. The proposed measures reflect recommendations of the new National Digital Strategy of June 2020, whose objectives are the digital transformation of the public and private sectors and promotion of digital innovation. Policy Axis 4 represents the main lever of digitalisation in the plan. Component 4.1 (Upgrade infrastructure for connectivity) and component 4.2 (Promote e-government) aim to improve connectivity infrastructure and developing e-government solutions. The plan’s objective of ensuring high-capacity connectivity for the whole population living in organised communities, together with 5G coverage of main corridors, is expected to foster the use of digital services by both the private and public sectors and ensure an inclusive digital transformation. Measures promoting e-government are expected to simplify the communication of citizens and businesses with the authorities, reduce the administrative burden and benefit the business environment. In addition, the creation of a Public and Governmental Cloud environment is expected to significantly contribute to the digital transformation of Cyprus. Sever