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COVER STORY: Rebuilding Cyprus to cost 1 bln euros

13 July, 2011

 * Public deficit to surge to 7%; “Recession is here” say analysts *

The power blackout caused by the deadly blast at a naval base that knocked out the island’s biggest power station will push the fragile economy deeper into recession this year, as the reconstruction cost of the Vassiliko plant and damages to nearby communities, as well as the impact on the economy in general is expected to cost more than 1 bln euros.
The government will have to resort to further borrowing, pushing the already-high public sector deficit to beyond 7% from the current 6% and the only way to contain the economic impact is to introduce even more drastic cost-cutting measures, as opposed to higher taxation that would infuriate labour unions and businesses.
The Electricity Authority of Cyprus is desperately racing against time to get part of Vassiliko back on line in an attempt to restore the devastating damage caused by Monday’s blast of a dangerously stored arms cache at a nearby naval base that killed 12 soldiers and fire fighters. Another soldier is in critical condition with little hopes of survival.
The blast caused a crater 50 metres wide and 20 metres deep, ripping through the 860MW facility and bringing the island’s main power supplier to its knees. But experts believe that the utility will try to repair the damage and gradually restore power supply, initially from the newer gas turbines that were harmed less and later from the older diesel-burning steam turbines.
With the damage to Vassiliko initially estimated at 700 mln to 1 bln euros, a large part of which is insured, help is on its way from the EU Cohesion Fund that is expected to pick up about 50% of the overall cost of the disaster.
Patrick Elston, General Manager of loss adjusters Lindsay Cunningham Cyprus, described the Vassiliko power station as having suffered “a tremendous amount of devastation. The main impact of the blast affected the administration building and the water treatment plants. Whatever was further west of the plant was the nearest to the blast.”
“This will be a slow process to assess the whole damage and will take some time,” Elston said, explaining that his company has five people on site at Vassiliko and at nearby Mari village, hurt most by the blast, visiting a rapidly rising number of homes for damage claims. This team will be reinforced in the coming days with Cunningham Lindsey's specialist power engineers and adjusters.
On the bright side, economist Fiona Mullen believes that the crisis “will create jobs, particularly in the reconstruction, services and supplies sectors, but if we don’t have electricity in the summer our mini tourist revival is doomed.”
Economist and opposition MP Marios Mavrides also played down the enormity of the reconstruction cost, saying he does not see that exceeding 1 bln euros, including claims for damages to nearby villages and homes.
“The economy will underperform and sectors, such as services, will not be at full capacity because of power and other shortages. For sure, we are now in recession,” he said.
Mavrides said that beyond the measures that the government and all political parties and social parties are currently discussing in order to bolster the economy and keep it competitive, more drastic cuts in the public sector will be necessary.
“Our economy is already heavily burdened with banks contributing to an emergency fund, property taxes rising for the next three years and companies paying in about 1,000 euros each for two years. The rest has to come from further cuts in the civil service, higher social insurance payments by government employees and lowering the entry-level salaries for new hirings.”
The reconstruction cost of about 1 bln euros represents nearly 5.7% of the gross domestic product, but national output will also be hurt as confidence will remain low and tourism may be affected in the short-term with operators diverting holidaymakers to less-costly destinations where smoother utility services are available.

POWER CUTS
The EAC has introduced rationing by cutting power daily at two or three hours at a time in most areas, while the whole island has been divided into a grid of 13 sectors representing higher and lower-priority areas. Government offices and essential services (hospitals, airports, ports, utility facilities, etc.) will be free of rationing, but Environment Commissioner Charalambos Theopemptou has urged all consumers, as well as public services to switch off unnecessary equipment and limit the use of air conditioning units so as not to burden the EAC’s power network.
The energy distribution regulator, RAEK, has issued an emergency decree requisitioning all private power generators that are currently connected to the EAC grid and ordering them to continue producing, even during low-demand hours.
Power cuts have also shut down the island’s water desalination units, affecting clean water supplies to the capital Nicosia, as well as Larnaca and Famagusta area. Limassol and Paphos districts rely on supplies from dams.
The employers and industrialists federation, OEV, urged all businesses to save as much energy as possible and switch off unnecessary light displays, saying its executive council will convene on Wednesday to review the whole situation and see the impact it had has on the economy.

FALL-OUT
President Christofias will have to pay dearly for the political fall-out from the disaster. Already, his loyal Defence Minister and the National Guard chief resigned over allegations that the arms cache confiscated from a ship three years ago were poorly stored.
"The explosion occurred in material held since 2009 by the Republic from an Iranian vessel which was sailing to Syria... there are 12 dead and 62 injured," government spokesman Stefanos Stefanou said on Monday.
He said that defence minister Costas Papacostas and National Guard chief Petros Tsalikidis handed in their resignations to President Demetris Christofias but remain in office until replacements were found.
The Iranian armaments were in the cargo of the Monchegorksk, a ship intercepted off the coast of Cyprus in 2009 after pressure from the U.S., sailing from Iran to Syria in violation of U.N. sanctions on Iran.
All 98 containers of the Iranian arms, kept exposed in scorching temperatures, exploded at 5.45am following a fire that broke out and was being doused by firefighters.
The intensity of the blast caused extensive damage to property nearby and to a popular tourist resort 3 km away, where windows and doors of beachside restaurants were blown out.
Stefanou declined to give details on the storage conditions of the material, but said there had been a meeting on the issue last week.
Press reports suggested that a recent assessment found the material to be in a “critical state”.

"CRIMINAL"
An uncle of twin soldiers who were killed, as well as other relatives of the dead, have called for the criminal prosecution of anyone responsible for the causes leading to the disaster. They said that explosions had been heard from within the containers over the past few weeks.
Opposition DISY press spokesman Haris Georgiades said during a morning TV show on Tuesday that “the commander of the naval base had asked for the hazardous material to be removed, or at least a simple canopy be built over them and not be exposed to the scorching heat.”
The request had reportedly been denied by Ministry of Defence officials due to budget cuts in government spending.
Former foreign minister and European Popular Party MEP Ioannis Kasoulides criticised the government for not considering offers from France and Germany to remove and destroy the material.
“[In 2009] the Iran Sanctions Committee of the UN Security Council encouraged the Republic of Cyprus to take up on the offers from assistance from other countries to remove or destroy the shipment,” DISY’s Georgiades said.

DEBRIS
The explosions threw debris onto the highway several hundred metres away, injuring some motorists.
"We can't assess the extent of the damage, but it's a biblical disaster," Costas Gavrielides, spokesman for the state-run electricity authority told Reuters.
The EAC appealed to consumers to cut down their consumption of electricity to the bare minimum, as Vasilikos is out of use and the auxiliary power station at Dhekelia has reached its output capacity, generating 460MW.
An smaller, older power station at Moni, several kilometres west of Vasiliko had recently been decommissioned and was brought back online with a production capacity of 206MW, raising the EAC’s total output capacity, including from alternative sources, solar and wind farms, to 696 MW.