Special Report No 9/2000

concerning trans-European-networks (TEN) - telecommunications, accompanied by the Commission's replies

(pursuant to Article 248(4), second subparagraph, EC)

(2000/C 166/01)

CONTENTS

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INTRODUCTION

1. Telecommunication is a fast-developing and fast-changing sector, with the Internet and the World Wide Web creating an information and communication highway for industry and the citizen. This report examines the development and implementation of EU policy concerning the trans-European-network-telecommunications programme (hereafter referred to as TEN-telecom) and the related measures.

SUMMARY OF PRINCIPAL OBSERVATIONS

2. The TEN general rules which are directed towards larger-scale infrastructure measures are less appropriate to TEN-telecom which promotes near-market projects for telematic applications and services (paragraphs 16 and 17).

3. The assessment and reporting of results of the TEN-telecom programme by the Commission were not comprehensive (paragraphs 18, 36, 38 and 56).

4. The Commission's description of the TEN-telecom support measures in its various reports as co-financing feasibility studies is misleading as it contracted projects which included multiannual activities rather than pure studies (paragraphs 20 and 25).

5. There are similarities with the research programme on telematics applications of common interest, which may also finance near-market feasibility studies, validation tests and pilot projects but at lower rates of aid (paragraphs 20 and 48).

6. The EU's consultative and decision-making procedure for setting out the guidelines, on two occasions took two years. This did not suit the requirements of an innovative and highly-dynamic sector. The first guidelines were out of date almost before they came into force, because they concentrated on a particular technology; projects under the new guidelines started late (paragraphs 21, 28(b) and 32).

7. The Commission made only one check of a contract on the spot. This revealed substantial irregularities. The Court's audit of a large contractor found that not all of the contract obligations were fulfilled (paragraphs 29 to 31).

8. Evaluation of TEN-telecom revealed weaknesses; an external mid-term evaluation was too late to have an impact for the selection of the projects which started in 1999 under the new guidelines; the Commission has not carried out a full examination of the continuing need for support for near-market projects under TEN-telecom (paragraphs 40 to 45).

9. The improvements made to national telecommunications infrastructures using Structural Funds had little emphasis on the trans-European dimension, e.g. by promoting the investments necessary for the interconnection and interoperability of national networks (paragraphs 49 to 51).

10. The Commission's coordination of TEN-telecom with other related EU activities was not sufficiently developed to facilitate synergy and avoid the possibility of duplication. In each case where aid is granted for near-market feasibility studies and pilot projects, it needs to be clearly shown that the specific objectives of these types of action are well-justified and that they are unlikely to be achieved without EU subsidy. The Court notes that the telecommunications sector is currently very competitive and expanding rapidly without substantial public subsidies from any source, in response to the liberalisation of the sector and the development of mobile communications (paragraphs 55 and 56 and 62 to 68).

11. The Commission has not developed a clear strategy in the Structural Funds vis-à-vis market liberalisation and privatisation of telecommunications. It made Structural Fund payments for telecommunications despite ongoing infringement procedures against the Member State concerned, for failing to transpose market-liberalisation directives (paragraphs 57 to 61).

THE COURT'S AUDIT

12. The EU TEN-telecom policy, inter alia, aims at establishing and developing trans-European networks and promoting access to them (see paragraph 14). The audit examined how far the Commission has succeeded in implementing this policy and its coordination with related measures in the research programme and in the Structural Funds. Information on support granted to telecommunications projects was also provided by the European Investment Bank (EIB) and the European Investment Fund (EIF). An audit was undertaken of the payments to the largest beneficiary of TEN-telecom to examine management on-the-spot.

BUDGET SIGNIFICANCE FOR TEN-TELECOM AND RELATED MEASURES

13. In this report the term "TEN-telecom" refers to budget article B5 - 720 "Trans-European telecommunications networks" (ECU 115 million in financial commitments from 1993 to 1998). The term "TEN-telecom-related expenditure" refers to all telecommunications expenditure, other than that financed via Article B5 - 720 of the budget. This comprises the research measures (ECU 3668 million, including ECU 2084 million for information technologies), the interventions by the Structural Funds (planned spending for the period 1994 to 1999 is approximately ECU 2000 million), the loans from the EIB (ECU 10860 million for 1993 to 1998) and the amounts supported by loan guarantees from the EIF (ECU 697 million for 1993 to 1998).

TRANS-EUROPEAN TELECOMMUNICATIONS NETWORKS (TEN-TELECOM)

The TEN policy

14. With the entry into force in 1993 of the Treaty on European Union ("the Maastricht Treaty") a new Title XII, comprising Articles 129b, c and d, was added to the EC Treaty under the heading "Trans-European networks"(1). As a result the EU is required to:

(a) contribute to the establishment and development of trans-European networks in the areas of transport, telecommunications and energy infrastructures (Article 129b(1));

(b) promote the interconnection and interoperability of national networks (Article 129b(2));

(c) promote access to such networks (Article 129b(2));

(d) take into account the need to link island, landlocked and peripheral regions with the central regions of the Community (Article 129b(2)).

15. Article 129c stipulates how the EU is to proceed when carrying out these responsibilities. It:

(a) shall establish a series of guidelines covering the objectives, priorities and broad lines of the measures envisaged in the sphere of trans-European networks; these guidelines are to identify projects of common interest;

(b) shall implement any measures that may prove necessary to ensure the interoperability of the networks, in particular in the field of technical standardisation;

(c) may support the financial efforts made by the Member States for projects of common interest financed by Member States, which are identified in the framework of the guidelines, "... particularly through feasibility studies, loan guarantees or interest-rate subsidies...".

The TEN general rules

16. Council Regulation (EC) No 2236/95 lays down general rules for the granting of Community financial aid in the field of trans-European networks for transport, telecommunications and energy infrastructures(2). Article 4 sets out the types of aid:

(a) co-financing of studies related to projects, including preparatory, feasibility and evaluation studies, and other technical support measures for these studies; EU funding should not exceed 50 % of the total cost of a study;

(b) interest subsidies for loans granted by the EIB or other financial bodies;

(c) contributions towards fees for guarantees for loans from the EIF or other financial bodies;

(d) direct grants to investments in duly justified cases;

(e) a combination of the possibilities available under (a) to (d) up to a maximum of 10 % of the total investment cost of a project.

According to the Commission only instrument (a) has been used for TEN-telecom.

17. These TEN general rules are directed towards larger-scale infrastructure measures, for which the Community seeks to provide incentives, chiefly by co-financing feasibility studies and providing assistance with the search for suitable sources of finance. However, the TEN general rules are less appropriate to TEN-telecom(3) as TEN-telecom does not provide aid for infrastructure projects. The TEN-telecom projects financed by the Commission under the relevant guidelines (see paragraphs 21 and 32) mainly concern the development of applications and services in areas such as education, health, transport, culture, tourism and electronic commerce.

Use of resources and summary of results

18. The commitments and payments for TEN-telecom over the period 1993 to 1998 are shown in Table 1. The Court has analysed the measures financed. The Commission itself has not produced a detailed survey of all the studies and projects financed for TEN-telecom.

Table 1

Commitments and payments under Article B5 - 720 "Trans-European telecommunications networks"

1993 to 1998

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19. Table 2 shows that in the period 1993 to 1998 a total of 143 studies and projects were assisted for a total amount of ECU 103,2 million. This amounts to an average contribution of ECU 722000 per project. The 143 projects were selected in response to the publication of 16 calls for proposals or tenders. The three categories of support (Euro-ISDN guidelines 1995, new guidelines 1997 and joint measures) are shown in Table 2 and are examined in more detail in the following paragraphs. ECU 11,4 million (10 % of the overall resources) was used for administrative and associated measures (meetings of experts, conferences and congresses, information measures and publications, and studies), an average of ECU 1,9 million per year. In 1997, for the first time, a limit of ECU 1 million was laid down in the budget for such support measures. In 1998 it was increased to ECU 1,2 million.

20. Although the Commission only carried out "feasibility studies" for TEN-telecom it interpreted the term in a wide sense as many of the feasibility studies include multiannual activities such as pilot deployment and field trials. Such projects are classed as project financing in the research area. The research programme on telematics applications of common interest(4) may also finance feasibility studies, validation tests and pilot projects, but such projects are not as close to the market as those of TEN-telecom (see paragraph 48). For both research projects and for TEN-telecom "studies" the Commission uses a standard research contract. The allowable costs may include all or any of the following categories of costs: personnel, equipment, third-party assistance, travel and subsistence, consumables, computing and overheads.

Table 2

Systematic overview of TEN-telecom studies and projects 1993 to 1998

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Euro-ISDN guidelines of 1995

21. ISDN has been a central theme of Community telecommunications policy since 1984. In December 1986 the Council published a recommendation on the coordinated introduction of ISDN in the European Community(5). Despite this longstanding commitment the guidelines(6) envisaged by Article 129c of the EC Treaty were not adopted until 9 November 1995, more than two years after the Commission's proposal (1 September 1993). The time taken for the decision-making process did not suit a highly dynamic field like telecommunications, as a consequence the Commission commenced the programme on an ad hoc basis.

22. The projects of common interest detailed in Annex II to the guidelines are not actual projects, but general areas of interest (e.g. Euro-ISDN for education, training and research or health care).

Euro-ISDN preparatory measures 1993 to 1995

23. In the first three years of TEN-telecom (1993 to 1995) EU subsidies were granted for 45 projects (31 feasibility studies and 14 preparatory actions, see Table 2) for a total amount of ECU 20,4 million, before the objectives and priorities for identifying projects of common interest had been put on a legal basis. Thus, 45 projects were selected and subsidised before the necessary guidelines were laid down in compliance with Article 129c of the Treaty.

24. Under the first five calls for tender the Commission placed contracts for feasibility studies on a large number of topics, including a series of Euro-ISDN market surveys(7). The Commission could not document the use that it had made of these studies. In addition, under two of the calls for tender (those of July 1994 and May 1995), a total of five studies were financed under budget Article B5 - 401(8). This indicates that although the promoters of the projects concerned had responded with tenders under Euro-ISDN, the Commission had adopted a "flexible" approach and decided to fund some projects from another budget heading.

25. The Commission's last call for proposals before the guidelines came into operation was no longer designated "feasibility studies" but was, for the first time, entitled "preparatory actions"(9) and provided for up to 50 % funding of the cost of pilot deployment and field trials. The projects in question concerned the use of Euro-ISDN for a wide range of applications(10). Thus, TEN-telecom was no longer only financing pure studies, but also the execution of pilot projects.

Euro-ISDN projects

26. Under Article 3 of the Euro-ISDN guidelines laid down in November 1995, the ISDN was to be developed as a first trans-European network and an element of the "universal service". Development was to be carried out in the form of "projects of common interest" (i.e. covering areas of common interest).

27. Between 13 April 1996 and 7 August 1997 two calls for proposals and two calls for tender for Euro-ISDN as a trans-European telecommunications network were published. A total of 25 projects were selected for assistance under TEN-telecom (total amount ECU 26,5 million) (see Table 2). Two studies (ECU 753900) received 100 % funding, contrary to the TEN general rules. A further three studies were also funded 100 % under Article B5 - 401 of the 1996 budget, rather than under TEN-telecom (B5 - 720) although presented by the Commission in its project lists as TEN-telecom projects.

28. The projects are subject to annual review by the Commission. As a rule the study phase of projects usually runs for a period of two years, so that by 31 December 1998 the financial and technical aspects of one study (Euro-ISDN status study) and only three Euro-ISDN projects (GTS, No problems and Medsalus) had been completed. A review of their final reports gives rise to a number of comments:

(a) The two-year "Global telecommunications services" (GTS) project involved a total Community expenditure on the project of ECU 0,4 million, for the promotion of new IT telecommunications applications for undertakings in Greece; the project included extensive market surveys in the enterprise sector, a feasibility study and the subsequent installation and pilot operation of eight telecommunications nodes. The project contractors included a Greek private telecommunications company which regarded the project as a very successful investment because the rate of return was high and the project helped to "retain a leading position amongst Greek companies becoming active in the liberalised market of value-added network services". In such circumstances, it is questionable if Community aid was necessary.

(b) The "No problems" project (non-proprietary reliable electronic mail system), which received a Community contribution of ECU 1,5 million was carried out in Austria, with the object of developing new electronic services for electronic commerce and the e-mail sector. One of the initial aims of the project was to contribute to the promotion of ISDN as a trans-European telecommunications network; once the project started, however, it became apparent that the Internet was the dominant technology and, in order to keep up-to-date, the technical Annex to the contract was amended and an Internet-oriented strategy developed. While ISDN proved to be a worthwhile vehicle for Internet access the project is evidence that the Euro-ISDN guidelines had led to an over-concentration on a particular technology; in addition, the project leader found that other companies had reached the commercial exploitation of one of the applications aimed at before the Euro-ISDN feasibility study had been completed.

(c) The aim of the "Medsalus" project in Spain was to establish an Euro-ISDN-based health-care network in the Mediterranean basin. There is provision for three kinds of long-distance cooperation between health specialists and centres: remote diagnosis, distance learning and teleinformation. It was not clear whether this service has become operational.

29. The only checks that the Commission carried out on-the-spot were at two of the four contractors for the project "Digital content for culture" (amount disbursed: ECU 0,5 million) which was part of Europe's cultural heritage (a museum inventory on the Internet). It found that the work had not progressed satisfactorily. Almost all of the project had been subcontracted by the main contractor without the Commission's knowledge and in breach of the contract terms. In any case, standard software appeared on the market so that parts of the project became redundant. The main subcontractor, a firm in the Republic of South Africa, was unable to provide evidence of work on the project (apart from producing invoices). In August 1998, the Commission issued a recovery order for most of the amounts disbursed(11). In October 1998 the main contractor paid the amount to be recovered, including the amounts due in respect of the associated contractors (total ECU 301292); The second contractor has not paid (ECU 148382), and legal action by the Commission is under way to enforce the payment.

30. In order to obtain additional information about the performance of contracts, the Court carried out an on-the-spot audit of the most important contractor in the field of TEN-telecom(12). The contractor did not execute the work with its own staff, but used staff from associated companies. As all salaries were paid by the related companies and were unknown to the contractor, the budgeted rates were declared to the Commission instead of the amounts incurred. This should not have been accepted by the Commission. In addition, the contractor frequently subcontracted part of its work to external consultants without the Commission's prior written approval. This was not in line with the contractor's obligations.

31. The errors found by the Court's audit and that of the Commission in projects in Member States indicate that significant errors and irregularities may occur which will remain undetected without on-the-spot checks.

New guidelines of 1997

32. On 17 June 1997, new TEN-telecom guidelines entered into force in parallel with the Euro-ISDN guidelines. The adoption of the new guidelines again took two years, the Commission having made a first proposal on 7 June 1995(13). The new guidelines(14) state that "ISDN is only a first step". In addition to supporting Euro-ISDN, they provide for assistance for integrated broadband communication (IBC) networks, mobile and satellite services. They continue to specify general areas or themes for the projects of common interest.

33. The guidelines also define a new plan for trans-European telecommunications networks. This is a three-layer model comprising basic networks, generic services and applications(15). A further innovation was an annual work programme produced by the Commission which specifies in more detail the projects of common interest and which also aims at ensuring that the priorities of the projects of common interest keep pace with technological developments.

Preparatory actions for the new guidelines

34. In its communication of 22 July 1993 to the Council and the European Parliament(16) the Commission identified the need for preparatory measures in the field of IBC. Following a call for tenders in July 1993 contracts were signed for 14 projects. The basic conditions and specifications for ATM pilot networks were examined in particular. In mid-199411 of these projects were extended and broadband trials were carried out in close conjunction with the JAMES research project(17). In September 1995 a second extension was granted to nine projects and these trials were eventually concluded between December 1996 and April 1997(18).

35. The preparatory actions for TEN-telecom IBC thus extended over three years. The total Community contribution for the 14 projects as shown in Table 2 amounted to ECU 18,0 million, of which ECU 1,9 million was for Phase I, ECU 7,8 million for Phase II and ECU 8,3 million for Phase III. These actions were EU financed for 100 % of the costs of studies and 50 % of the costs for trials. However, the TEN general rules which entered into force in September 1995 and which set a limit of 50 % of the total costs of a study and a maximum of 10 % of the total investment cost of a project should have been applied to the Phase III projects, indicating an estimated overpayment of over ECU 3 million.

36. Although the IBC preparatory actions were funded by TEN-telecom, they were not included in the annual reports on the trans-European networks(19) whereas all other preparatory actions were. Thus, the information provided by the Commission in the TEN-telecom report was incomplete.

Projects under the new guidelines of 1997

37. A call for proposals under the new guidelines was published on 15 January 1998 and two further calls on 14 March 1998(20). Table 3 shows the results of the selection procedure. A total of 160 proposals were received, from which 31 projects were selected with an EU contribution of ECU 26,4 million. The relatively large number of proposals received is partly attributable to the fact that no more funds were available for 1998 for the specific telematics research programme, so that alternative sources of finance were being sought. The first actions started at the beginning of 1999 and will not be completed until 2000 or 2001.

Table 3

Result of the project selection in 1998 using the new TEN-telecom guidelines

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Joint measures with other programmes

38. Article 5 of the TEN general rules state: "The financial resources provided for under this Regulation shall not in principle, be assigned to projects or stages of projects which benefit from other sources of Community funding". Notwithstanding this, the TEN-telecom programme contributes to 28 projects, for a total amount of ECU 11,9 million, under two measures, which are carried out jointly with other programmes. None of the projects had been completed by 31 December 1998. The first joint measure concerned the promotion via the Internet of small and medium-sized enterprises (SMEs), tourism publicity and commerce. The call for proposals(21) did not make it clear that TEN-telecom was participating in the measures for SMEs in the tourism sector. It only stated that the measures were being funded by the information society initiatives and the SME Community initiative reserve of technical assistance.

39. The second measure concerns educational multimedia activities. In 1995 the Commission had set up a multimedia educational programmes task force, which proposed more dovetailing of the various Community programmes(22). Four directorates-general and six programmes (including TEN-telecom) are involved(23). The Commission improved procedures by introducing a standard contract for these projects which removed the difference in the contract conditions that had previously existed(24). Having made this consolidation, the Commission has not examined whether there is a need for so many different sources of EU finance for similar purposes, with a view to simplifying management and improving efficiency.

Evaluation of performance

40. The Commission had planned to evaluate all of the TEN-telecom preparatory activities for the period 1993 to 1995 in order to be able to draw final conclusions for follow-up activities, under a study entitled "Lessons to be learnt from the preparatory actions". However, the evaluation, for which an invitation to tender was issued in 1996, was not carried out because of a negative opinion from the Advisory Committee on Procurements and Contracts (ACPC) that it was too expensive(25). The Commission did not seek further satisfactory tenders. The Court considers that this has had the result that successful and worthwhile studies were not identified and used as the basis for future measures.

41. Although the original objective of developing Euro-ISDN as part of the universal service was not achieved, a Commission study(26) found that Euro-ISDN is an example of successful European cooperation on the grounds that:

(a) the market penetration in eight Member States was more than 5 % (at the end of 1997) and further growth could be expected;

(b) Euro-ISDN played an important part as an Internet-access technology;

(c) prices of ISDN services and equipment had fallen considerably and were continuing to fall;

(d) the European industry had become a leader in ISDN equipment.

42. The study also pointed out that new technical developments such as ADSL would play an increasing role but that "Euro-ISDN would remain the only stable digital communication interface for the next few years". It did, however, qualify this overall positive assessment. There was still a shortage of simple applications connections ("plug-in and play") and there were continuing problems with the interoperability of equipment and networks. Some Member States did not have full geographical access to ISDN and both SMEs and private individuals were not fully aware of the advantages of ISDN.

43. In May 1997 the Commission charged external experts to carry out an intermediate evaluation of the TEN-telecom action (1993 to 1997). The final results were only available in February 1999. According to this intermediate evaluation "all the projects undertaken contributed materially to the achievement of the guidelines objectives and met the requirements of the TEN Financial Regulations, and the choice of activities for support was conducted in a fair and transparent way"(27). However, "the evaluators found that the TEN-ISDN action does not yet have any systematic monitoring indicators or success criteria for the direct assessment of the achievement of the strategic and operational objectives". It was also stated that "one of the main real risks to the programme is that of failing completely to see the importance of some new as yet unimplemented technological chance which might then render much existing work irrelevant, as happened to some extent to research programmes for the Internet and World Wide Web".

44. Although most Euro-ISDN projects had not been completed by 31 December 1998, initial conclusions may be drawn. The EU's lengthy consultative and decision-making procedure for setting out the guidelines did not suit the requirements of an innovative and highly dynamic sector where market forces gained acceptance for the Internet as a World Wide Web. There is a risk that assisted projects will not reflect current market trends.

45. In addition, the delay in producing the intermediate evaluation meant that it could not be used for the orientation of the actions under the new guidelines. It recommended strengthening the impact on peripheral areas, where access was less well met. This was not one of the selection criteria used for the 1998 projects. Equally importantly it concluded that projects with substantial technology and commercial elements should not exceed 18 months, in order to keep pace with rapid change. However, about half of the projects selected under the new guidelines will last two years even without any extensions, which have occurred in the past. It is still necessary to carry out a full evaluation of the continuing need of support for near-market projects under TEN-telecom.

COORDINATION WITH RELATED MEASURES

46. The TEN general rules stipulate that the Commission must ensure coordination of all Community activities that affect trans-European networks. They specifically mention coordination between financing under TEN and financing from the Structural Funds, Cohesion Fund(28), EIF and EIB. The TEN measures must also be compatible with other Community policies.

Telecommunication in the research policy

47. The fourth framework programme of the European Community for research, technological development and demonstration activities (1994 to 1998) includes three specific research programmes in support of the information and communication technologies: the "Telematics applications" programme(29) with a budget of ECU 913 million, the "Communications technologies" programme (ACTS)(30) with a budget of ECU 671 million and the "Information technologies" programme (Esprit) with a budget of ECU 2084 million(31).

48. The Commission stated in its 1998 annual report on research and technological development activities(32) that the Union's major weakness lies not in its research potential but rather in translating the results of this research in economic and commercial terms and that therefore one of the objectives of the framework programme is to improve this state of affairs. The Telematics applications programme in particular is a user-driven research programme, having the objective of bridging the gap between results and their economic use in common with TEN-telecom. Both programmes may finance feasibility studies, validation tests and pilot projects in areas of common interest. The difference is that, by comparison with the research measures, the projects assisted under TEN-telecom are more mature and closer to the market (as shown by the examples detailed in paragraph 28). Near-market projects funded under the research programme would have a lower rate of subsidy as, in the research sector, the community financing is usually not more than 50 % of the project cost, and the contribution diminishes gradually with the project's proximity to the market. It is therefore necessary to define clear rules to avoid overlap between the two actions.

The importance of the Structural Funds

49. In the communication on cohesion and the information society(33) the Commission provided an overview of the importance of the Structural Funds for the telecommunications sector. According to this, the Structural Fund's programmes envisage total expenditure of around ECU 1769 million for Objectives 1, 2, 3, 4, 5(b) and 6 in the telecommunications sector, plus ECU 207 million from Community initiatives (CI) for the 1994 to 1999 programming period. In that communication the Commission states that "only a surprisingly small part (about 2 %)" of total Structural Funds' expenditure has been earmarked for the telecommunications sector.

50. Although the Commission communication does not analyse this total by Member State, an internal study by DG XIII produced a country-by-country breakdown and examined the priorities, measures and actions of all of the operational programmes (OPs) and CIs concerning telecommunications. The results are summarised in Table 4. Italy (ECU 542 million), Spain (ECU 516 million), Greece (ECU 380 million) and Portugal (ECU 282 million) were identified by the Commission as the largest recipients of Structural Funds' support for the telecommunications sector in the period 1994 to 1999(34).

Table 4

Telecommunication expenditure as part of structural intervention plans for 1994 to 1999 (all objectives)

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51. Although the Interreg CI has a trans-European aspect, for example by providing aid for a fibre-optic link between Portugal and Spain, Structural Funds finance is primarily directed towards measures for extending, modernising or improving national telecommunications infrastructures. The corresponding OP's or subprogrammes were, in general, the subject of a mid-term review under the Commission's evaluation policy, although the evaluation for Italy was delayed due to national management problems. While the evaluations for the different countries identified progress concerning extending, modernising or improving the national infrastructure, the question of interconnection and interoperability of the national networks was not analysed and the benefit to the trans-European aspects was not established. However, interconnection and cross-border links have a particularly important role to play under the TEN policy, especially with regard to the future, where new links with central and east European candidate countries will have to be created(35).

The significance of the EIB and the EIF

52. The TEN general rules provide that the Community may grant interest subsidies for EIB loans and contributions towards the cost of guarantees for loans from the EIF. The Commission has not made any use of this possibility for TEN-telecom choosing instead to concentrate funding on near-market projects. EIB loans and EIF guarantees for projects are not covered by the TEN-telecom guidelines(36). The EIB loan agreements concluded for telecommunications networks 1993 to 1998 which have a total value of ECU 12022 million comprise ECU 10860 million for projects in the EU and ECU 1162 million for projects with neighbouring countries (see Table 5). The EIB is thus a most significant provider of finance in the area of TEN policy. It primarily responds to proposals from the Member States under its own policy directives.

53. The EIF loan guarantees for telecommunications are less financially significant (ECU 697 million for 1993 to 1998, see Table 6). Decisions relating to guarantee operations must be adopted unanimously by the Financial Committee consisting of a representative of the EIB, a representative of the Commission and a representative of the national financial institutions being members of the EIF. The EIF guarantees may cover large infrastructure projects (including optical-fibre networks, GSM, satellites) and thereby provide funding for projects not covered by TEN-telecom.

Table 5

EIB lending telecommunications 1993 to 1998

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Table 6

EIF loan guarantees for telecommunications 1993 to 1998

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Coordinating instruments

54. The eighth annual report on the Structural Funds (1996)(37) stated that TEN financing, the Structural Funds, EIB loans and EIF guarantees are coordinated using three instruments: schematic plans for monitoring funding, advisory committees of Member State representatives and internal consultations. Furthermore, in 1997 a special interdepartmental working party was formed by the Commission as a fourth instrument of coordination.

The schematic plans

55. In 1994 the Commission instructed its Secretariat-General to set up and maintain a schematic plan of TEN finance. The purpose of this internal working document was to provide a general overview of TEN financial support for all the services of the Commission, the EIB and the EIF, in order to facilitate synergy and avoid duplication. The schematic plan also aimed at enabling the Commission to provide the Member States with comprehensive, up-to-date information on all TEN financing.

56. The schematic plans include a table which shows the EIB loans, EIF guarantees, ERDF subsidies and the assistance supplied through the TEN budget headings. Analysis of the "TEN-telecom-related expenditure" reveals, however, that the commitments mentioned against ERDF (ECU 467,7 million for the period 1993 to 1997) only concern telecommunications expenditure in Ireland and Greece. The telecommunications expenditure for other countries is not recorded. This incomplete picture was also published in the TEN 1997 and 1998 annual reports(38) and in a 1999 report from the Commission to the Council(39). The Commission had envisaged developing a database with query possibilities but this was not done. The last version of the schematic plan was produced on 10 October 1997. The data was not revised nor updated and no supplementary planning measures made. In its present form the schematic plan is not a suitable coordination tool for the telecommunications sector as it is not only out of date and incomplete but is also not in a user-friendly format.

Committees and coordination by the Commission

57. The consultation that takes place in the various committees should also bring about coordination of telecommunications measures including finance. The monitoring committees, comprising national and Commission representatives, which monitor the Structural Funds play an important role(40). During the period under review, the Commission department responsible for the telecommunications sector was represented on several of them. Two examples of the positive work undertaken by the Commission illustrate the importance of coordinating EU measures:

(a) The Commission examined the implementation of the 1994 to 1999 telecommunications OP in Greece. Greece had made relatively little progress in transposing the various market liberalisation regulations, and the Commission introduced infringement procedures(41) under Article 169 of the EC Treaty. The State monopoly, OTE, benefits from the transposition delays because it is still able to make profits from its monopoly in non-liberalised areas. It is also the main recipient of Structural Funds' finance from the telecommunications OP, which is at odds with the Commission's policy towards the treaty-infringement proceedings. Following an on-the-spot enquiry in 1997 the responsible department of the Commission recommended that further funding should cease until the Member State had complied with EU obligations on liberalisation and harmonisation. The Commission eventually froze payments in August 1998, but by then Greece had received 75,8 % (ECU 131,4 million) of the EU funds provided for in the OP;

(b) The directorate-general responsible for the regional policy initially proposed co-financing the setting up of mobile radio networks in Objective 1 areas in Italy. Following objections from two other directorates-general, the co-financing was finally dropped. There were three grounds for the objections:

(i) distortions of competition as a result of the strengthening of what were already market-dominant positions;

(ii) failure to transpose the relevant Directives and the consequent treaty-infringement procedure;

(iii) EU financing was unnecessary on the grounds that the profitability forecasts were favourable.

58. These examples show how contradictions in the Community measures were uncovered by means of coordinated approach. However, it is clear that the Commission's strategy for, and monitoring of, market liberalisation and privatisation following Structural Fund aid needs to be strengthened.

59. In 1993, when the 1994 to 1999 programming period was being planned, the fact that the main beneficiaries of the assistance would be State monopolies did not appear to pose a major problem. However, the market liberalisation and privatisations which subsequently took place call into question whether capital investment that had been co-financed by the Structural Funds may be transferred to the private sector without some form of recovery. A general approach was not laid down and the Commission has decided, on a case-by-case basis, the extent to which the post-privatisation companies continue to pursue the regional-policy objectives agreed earlier.

60. Two examples illustrate the solutions found by the Commission:

(a) As regards the privatisation of the company Telefónica, in Spain, the Commission decided at the end of 1998 that it would not seek to recover any funds; an external assessment carried out by a Spanish consultant concluded that the regional policy objectives had been met(42); the Commission nevertheless attached a number of recommendations to its decision that no reimbursement of ERDF funding was necessary, including one which stated that Telefónica should concentrate the implementation of projects co-financed by the ERDF outside highly profitable zones and facilitate access to the market for new operators;

(b) In the case of Telecom-Italia an assessment stated that the company had not invested sufficiently in disadvantaged Objective 1 areas; the 1994 to 1999 telecommunications OP was amended to the effect that the ERDF assistance would remain the same, but Telecom-Italia must invest an additional ECU 78,5 million in Objective 1 areas.

61. Even if solutions were found in these cases and implementation of the recommendations is confirmed by evaluation of the relevant OPs, the Structural Funds' aid policy for telecommunication infrastructure should be re-examined in the light of liberalisation and privatisation. Although the TEN general rules do not apply to the Structural Funds and thus are not applied to the larger-scale telecommunications measures for which they were designed, they could be used to orient this examination. For example, they permit direct subsidies only in duly justified cases and instead concentrate on loans with interest subsidies and guarantees. Such means of funding merit further examination given the usually profitable nature of investments in the telecommunications sector and the possible distortion of competition that may be caused by subsidies.

The consultation procedure for projects

62. The financing decisions on TEN-telecom projects are preceded by a internal written consultation procedure which aims at ensuring that there is coordination within the Commission. The Court analysed the results of this internal consultation procedure for the 1998 TEN-telecom project selection using the new TEN-telecom guidelines.

63. The TEN-telecom project proposals concerning the calls of 1998 were evaluated by the services of the Commission with the help of external experts. After the project selection was done, the directorate-general responsible sent letters to 13 other DGs with a request for an opinion on the selected proposals within 10 working days. Most DGs sent brief notes saying that they had no comments and agreed with the projects selected. In one case there was a criticism that the deadline was very short and thus it was very difficult to provide a reasoned reply. Four DGs pointed out that similar projects were in progress in their own areas of responsibility. One DG stated that, for one project, there was a high risk of duplication with a research project of the Esprit programme being carried out by the same consortium and that there were possible overlaps with two other research projects. Another DG stated that one project had a possible conflict with a study launched by its own services. Two further DGs warned of possible duplication of work.

64. The overall picture this provides is that during the selection procedure and project evaluation stage there was a lack of coordinated information between Commission departments. Coordination should take place much earlier. While the internal consultation procedure facilitates cooperation at particular points, it does not at present provide coordination of ideas and strategies between DGs. Internal procedures and equipment have not been developed to meet this need; for example, a DG is unable to call up on-screen details of contracts planned and undertaken by another DG. The written internal consultation procedure appears to be a routine in which approval may be given or no reply made at all, under pressure of time, without detailed consideration.

65. As regards EIB and EIF funding, there was very little evidence that the Commission is systematically taking into account EIB loans and EIF guarantees at both the planning and implementation stages. For example, the financial summaries of the two specific OPs in the telecommunications sector (Greece and Italy) do not contain any planning data for EIB and EIF intervention. A comment made by the Court in respect of financial year 1995(43) is also applicable to the telecommunications sector:

"At the programming stage, there is still very little complementarity between the two types of instrument, loans and grants, because of the difficulty of reconciling the project-based approach peculiar to the EIB with the programme-based one used by the Structural Funds".

66. The Commission does however have a written consultation procedure with the EIB concerning projects which are, in principle, to be financed by the bank (a similar system does not exist for EIF guarantees). The EIB submits the selected Member States' financing applications to the Commission which must deliver its opinion within two months in accordance with Article 21(2) of the Protocol on the Statute of the EIB. Since 1975 there has been an inter-departmental group of representatives from various DGs which is responsible for delivering opinions to the EIB. The group allows the individual departments of the Commission 10 working days in which to give their opinions. If no answer is received this is construed as tacit approval. The Commission's opinion is almost always affirmative. In 1998, for example, the decisions on all the 334 EIB requests (including 12 for the telecommunications sector) were positive. While this procedure may provide a two-way flow of information it does not ensure strategic coordination, for example, between EU aid managed by the Commission and the EIB loans.

Special interdepartmental working party

67. In April 1997 the Commission decided to improve coordination of the use of the TEN Instruments. A special interdepartmental working party was set up to prepare recommendations. The working party delivered three main recommendations in September 1997:

(a) a group of directors was to meet regularly with the EIB and the EIF to ensure consistency in the setting of priorities;

(b) seminars should be organised with EU, national and regional representatives to ensure that TEN policies are taken into account during the ERDF planning process;

(c) special project teams for large-scale multifund projects should be set up to ensure that the financing has the right mix of subsidies and loans and to facilitate public/private partnerships.

No progress towards implementing these recommendations was made in the telecommunications sector.

CONCLUSION AND RECOMMENDATIONS

68. The Commission should provide the Council and the Parliament with details of the TEN-telecom actions and its assessment of the extent to which their objectives have been achieved. In each case where aid is granted for near-market feasibility studies and pilot projects, it needs to be clearly shown that the specific objectives of these types of action are well justified, and that they are unlikely to be achieved without EU subsidy. At the same time consideration should be given to a closer linking between the telematic research, development and demonstration activities (RTD) co-financed through the research programme and the near-market projects supported through TEN-telecom, including an assessment of the scope for further improvements in efficiencies if the RTD-telematic projects and the related market-validation activities were managed together. The Court notes that the telecommunications sector is currently very competitive and expanding rapidly without substantial public subsidies from any source, in response to the liberalisation of the sector and the development of mobile communications. Furthermore, in commercial terms, telecommunications companies are amongst the largest companies in Europe, with ready access through the markets to investment funds of all types. The Commission should ensure that it closely monitors the technical developments in this fast-moving field to better focus its expenditure in order to maximise its impact.

69. The Commission should develop new guidance for the Structural Fund interventions in the field of telecommunication, where liberalisation, privatisation and increased competition are key developments. The TEN general rules, which were conceived to promote infrastructure projects, though not applicable to the Structural Funds, can provide a basis for this reorientation, by allowing direct grants to investment only in duly justified cases and by favouring Community aid in the form of interest subsidies and loan guarantees. In addition, the coordination between financing under TEN-telecom and financing from the Structural Funds, EIB and EIF should be intensified, so that the necessary complementarity and synergy between the different types of instrument may be achieved. In its 1999 report to the Council the Commission itself stressed this necessity(44) (paragraphs 54 to 67).

70. The issue of interconnection and interoperability will have an increasingly important role to play especially with regard to the development of new links with the central and east European candidate countries (paragraphs 49 to 51). The trans-European aspect of the TEN policy will need to be evaluated in this light.

71. The Commission should carry out more on-the-spot checks to ensure that the execution of TEN-telecom projects and the results achieved are in accordance with the rules and objectives identified in the contracts (paragraphs 29 to 31).

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 22 and 23 March 2000.

For the Court of Auditors

Jan O. Karlsson

President

(1) Now set out in Title XV Articles 154 to 156 of the Treaty on European Union.

(2) Council Regulation (EC) No 2236/95 of 18 September 1995 laying down general rules for the granting of Community financial aid in the field of trans-European networks (OJ L 228, 23.9.1995, p.1).

(3) The recent amendments of the TEN general rules do not change this. Council Regulation (EC) No 2236/95 was amended by Parliament and Council Regulation No 1655/1999 of 19 July 1999 (OJ L 197, 29.7.1999, p. 1). The amendments aim at improving the application of the existing regulation mainly for large infrastructure projects, for example by the introduction of a multiannual indicative programme indicating the overall level of TEN support for these large infrastructure projects or by the use of a modest share of the TEN budget for participation in risk-capital funding of TEN infrastructure.

(4) Council Decision 94/801/EC of 23 November 1994 adopting a specific programme for research and technological development, including demonstration in the field of telematics applications of common interest (1994 to 1998) (OJ L 334, 22.12.1994). The measures are continuing under the fifth research framework programme for the period 1998 to 2002 as part of a new overall structure.

(5) Council Recommendation of 22 December 1986 on the coordinated introduction of the integrated services digital network (ISDN) in the European Community, (OJ L 382, 31.12.1986, p. 36).

(6) Decision No 2717/95/EC of the European Parliament and of the Council of 9 November 1995 on a set of guidelines for the development of the Euro-ISDN as a trans-European network (OJ L 282, 24.11.1995, p. 16).

(7) Including file transfer, electronic mail, terminals, network management, telesurveillance and remote protection. Studies of potential applications and investigations of the impact of Euro-ISDN were also carried out for the Commission.

(8) Budget Article B5 - 401 "Definition and implementation of Community policy in the field of telecommunications".

(9) Call for proposals for preparatory actions in the domain of Euro-ISDN (OJ C 227, 1.9.1995, p. 14).

(10) Use of Euro-ISDN within the health sector, interconnection of traffic information centres, tertiary distance learning, as a platform for teleworking or electronic trading for small and medium-sized enterprises (SMEs).

(11) The claim also covers another project within the Info 2000 programme with the same contractors, where false cost claims were established.

(12) France Telecom Expertel participating in 11 contracts with a total Community contribution of ECU 7,9 million.

(13) Proposal for a decision of the European Parliament and of the Council on a series of guidelines for trans-European telecommunications networks (OJ C 302, 14.11.1995, p. 23).

(14) Decision No 1336/97/EC of the European Parliament and of the Council of 17 June 1997 on a series of guidelines for trans-European telecommunications networks (OJ L 183, 11.7.1997, p. 12).

(15) The three-layer model is explained in Annex I to the guidelines.

(16) COM(93) 372 final.

(17) Within the framework of the specific research programmes ACTS, Telematik and Esprit 18 European network operators participated in this project and developed and implemented ATM interconnections.

(18) Final report concerning preparatory actions in the field of trans-European networks: integrated broadband communications, COM(98) 45 final.

(19) Under Article 16 of the TEN general rules, the Commission must make an annual activity report to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions.

(20) OJ C 10, 15.1.1998, p. 16 (basic networks); OJ C 79, 14.3.1998, p. 15 (generic services and applications); idem, p. 14 (support and coordination actions).

(21) OJ C 162, 6.6.1996, p. 21.

(22) Report of the "Educational software and multimedia" Task Force, European Commission Working Paper, SEC(96) 1426.

(23) DG III with the information-technology research programme (OJ L 334, 22.12.1994, p. 24);

DG XII with the targeted socioeconomic research programme (OJ L 361, 31.12.1994, p. 77);

DG XIII with the telematics applications of common interest research programme (OJ L 334, 22.12.1994, p. 1);

DG XXII with the Socrates (OJ L 87, 20.4.1995, p. 10) and Leonardo da Vinci (OJ L 340, 29.12.1994, p. 8) education programmes.

(24) DG XVI, for example, drew attention to the problem of differing contractual provisions in connection with the implementation of innovative measures (Article 10 of the ERDF Regulation): it was, for example, unacceptable for a subsidy recipient to be required by DG XVI to submit a bank guarantee when it was not required to do so by another directorate-general. Another example is provided by the daily rates for travel expenses: sometimes maximum rates are specified, sometimes not.

(25) Meeting No 872 of 25 November 1996. ("The stated reason for the negative opinion was that the expenditure would be disproportionate in comparison to the aim and contrary to sound financial management") (page 24 of the Vademecum of the ACPC).

(26) According to Article 10 of the Euro-ISDN guidelines the Commission was to undertake a general evaluation of the guidelines in 1997. The Commission put the evaluation out to tender in August 1997, placed the contract at the end of 1997 and the evaluation was completed in mid-1998 (cost: ECU 147000).

(27) TEN-telecommunications, TEN-ISDN, Intermediate evaluation 1993 to 1997, p. 4.

(28) The Cohesion Fund supports TEN-transport but not TEN-telecom. However, telematics applications also receive funding in the TEN-transport area, so that there can be some overlap (e.g. satellite navigation systems).

(29) See footnote 1, page 5.

(30) Advanced communications technologies and services, Council Decision 94/572/EC of 27 July 1994 adopting a specific programme for research and technological development, including demonstration, in the field of advanced communication technologies and services (1994 to 1998) (OJ L 222, 26.8.1997, p. 35).

(31) European strategic programme for research and development in information technologies. Council Decision 94/802/EC of 23 November 1994 adopting a specific programme for research and technological development, including demonstration, in the field of information technologies (1994 to 1998) (OJ L 334, 22.12.1994, p. 24).

(32) COM(1998) 439 final, 15.7.1998, p. 14.

(33) Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions - Cohesion and the information society, COM(97) 7 final.

(34) The Commission's calculations are partly based on estimates as the telecommunications expenditure was not always differentiated clearly. Only Italy and Greece have their own OPs for telecommunications.

(35) See Agenda 2000, For a stronger and wider Union, Part 1, Section I, subsection 1, p. 18.

(36) See trans-European networks 1997 annual report, COM(98) 391 final, 2.10.1998, Sections 4.5 and 4.6.

(37) COM(97) 526 final, Chapter II (D)(9).

(38) See trans-European networks 1998 annual report COM(1999) 410 final, 15.9.1999.

(39) Report on " Investment in infrastructure in the European Union" by the European Commission to the Council, Brussels, 18.5.1999.

(40) The special TEN-telecom committees (finance and guidelines committees) are less important for coordination questions, because they are primarily concerned with the definition of projects of common interest and with project selection.

(41) Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions - Fourth report on the implementation of the telecommunications regulatory package, COM(98) 594 final and XXVIIth report on competition policy 1997.

(42) However, the methodical approach followed in the assessment was not undisputed.

(43) European Court of Auditors, Annual Report concerning the financial year 1995 together with the institutions' replies (OJ C 340, 12.11.1996, paragraph 5.61).

(44) See footnote 3, page 14.

Glossary of technical terms

ISDN:

Integrated Services Digital Network

Universal Service:

A defined minimum set of services of specified quality which is available to all users independent of their geographical location and, in the light of specific national conditions, at an affordable price, See first monitoring report on universal service in telecommunications in the European Union, COM(1998) 101 final, p. 8.

Integrated broadband communications (IBC)

"Integrated" points to integrity of the whole network, and therefore to the proper interworking of all its essential constituent parts, including the existing and emerging ones, voice telephony, packer, ISDN, broadband, satellite and mobile. It also signifies the integration of services (at the user and the appropriate network levels).

"Broadband" designates the total mix of services, to be considered, starting from ISDN, up to what will be required by a realistic introduction of video (interactive and distributive services) (i.e. 140 Mbit/second and more at the user interface).

"Communication" includes the conventional switching/transmission, consumer private network functions, but also advanced features to make service provision user-friendly, performing and economically sound (COM(93) 372 final p. 6).

ATM:

Asynchronous transfer mode, whereby the transfer rate can be increased to a theoretical 155 Mbit/second.

ADSL:

Asynchronous digital subscriber line. ADSL does not require an ISDN connection. This technical improvement uses an analogue connection to provide benefits that were previously available only with ISDN (e.g. diverting calls, recording caller numbers). Satellite and cable TV network operators are also experimenting with their own mass-market rapid Internet access techniques.

The Commission's replies

SUMMARY OF PRINCIPAL OBSERVATIONS

3. All TEN-ISDN preparatory studies (1993 to 1995) have been filed by the Commission, and were well identified on the occasion of the TEN-ISDN intermediate evaluation report, which was communicated to the Court in February 1999(1). Further TEN-telecom projects from 1996 onwards were included in a database which is accessible online by every project officer and provides updated information on the status and deliverables of a project from its initial appraisal, up to monitoring and evaluation.

The difficulties encountered in achieving a comprehensive description of the TEN-telecom activity lay in the complex structure of the projects:

- on the one hand, the TEN-telecom "projects of common interest" appeared in the guidelines adopted in June 1997, three years after the adoption of the Structural Funds programmes,

- on the other hand, by their very nature, the regional plans are organised around themes reflecting the priorities of each Member State (improving the business environment, modernising public administration), and do not identify telecommunication-related investments as such.

4. The Financial Regulation stipulates that "studies" can always be accompanied by "technical support measures", which is reflected in the glossary of terms approved by the TEN Financial Committee and confirms a larger acceptance in the meaning of "studies".

In addition, Article 3 of the guidelines clearly states as a priority "study and validation of the technical and commercial feasibility, followed by the deployment of applications supporting the development of a European information society, in particular applications of collective interest". Studies have been carefully defined following this model, with a greater emphasis put on market feasibility and validation so that the action could be best differentiated from what is supported in the research.

5. TEN-telecom starts from results of technological developments whose marketability is not yet clear. TEN-telecom was presented to the research audience as a follow-on action. Indeed there exist similarities with the research programme on telematics applications in "areas of collective interest" (such as education, environment, transport), since the guidelines were conceived originally as a follow-on action to research assessing the marketability and the business case for products which present sufficient technological maturity but require clarification for future market deployment and for establishing a convincing business plan to secure internal or external project financing by well-committed partners. These issues are marginally addressed by RTD projects in their exploitation plans, where the core of the action addresses the conditions of adoption of advanced technologies or methodologies in cooperation between users and suppliers, and not market or financial package assessment. (See also the Commission's reply to paragraph 48).

6. The decision-making process is outside the control of the Commission. When the guidelines are adopted, the regular updating of the work programme and the definition of the calls introduce the necessary element of flexibility in the design process of the action.

7. Following close monitoring actions, on-the-spot checks were carried out of both contractors and the two associated contractors. A legal action by the Commission is pending on one contractor.

Concerning the audit carried out by the Court of a large contractor, the Commission has implemented an on-the-spot audit.

Projects' monitoring, reviews and controls on the basis of contractual specifications enable the Commission to ensure proper execution of the contract, and, possibly, to detect irregularities. More on-the-spot checks could be carried out with appropriate resources devoted to them.

8. The mid-term evaluation report indicates that the objectives of the ISDN guidelines for developing a range of services based on ISDN were well met.

The intermediate evaluation of the TEN-telecom action (1993 to 1997) also raised additional recommendations which have been taken into consideration in the continuation of the action (see reply to paragraph 43).

9. The telecommunication gap in the majority of the regions eligible under the Structural Funds (SFs) is concentrated in the national and regional/local networks rather than in the international links. In addition, the operations of the SFs are based on the principle of subsidiarity and partnership with Member States. It is the responsibility of Member States to define the development plans, which will receive SFs funding. Interventions have therefore a strong national/regional character.

10. An in-depth evaluation of the action, will take place from May to September 2000, where the specific issues to be evaluated are the following: relevance of the action's objectives, priorities and implementing measures; the effectiveness and impact of the action; its efficiency and cost-effectiveness; its utility and sustainability; causal links from resources used through to activities and presumed impacts (the intervention logic); lessons to be learnt in terms of legal base, resources and delivery mechanisms for possible future interventions of similar type. The Commission shall then submit proposals for revision of the guidelines on the basis of such an evaluation and technical developments. Without pre-empting political decisions, critical points for revision could be the following:

- the action would be clearly differentiated from what is covered by the research. A segmentation into three distinct domains would be proposed, where the nature of actors involved, the market potential and business definition, the investment perspectives and financial packages are different: the public-service domain, the global service domain, and the growth-enhancing service domain addressing the risk-capital market,

- the action would be more focused. Annex 1 to the present guidelines provides for both too large and too complex area coverage. A simplified scheme would be proposed, building on priority actions of the Europe initiative,

- the work programme would remain sufficiently general to reflect technology changes and new market trends in the definition of calls for proposals,

- the structuring of projects and related Community support would also be made clearer,

- greater emphasis would need to be placed on the trans-European dimension of the action,

- the external dimension would also have to be considered, allowing primarily for participation of associated countries within the framework of their agreements with the European Community, and of countries from the EEA.

The TEN-telecom action will build on the political support provided by the e-Europe initiative which concentrates on priority actions for overcoming the handicaps that are holding back the rapid development of an information society in Europe, in particular "a public sector which is not playing a sufficiently active role in enabling the development of new applications and services" and "a lack of sufficiently dynamic, entrepreneurial, service-oriented culture". TEN-telecom is a relevant Community Instrument to focus on the defined targets in the following areas: access to multimedia educational and training resources, SMEs' support services for trans-European e-commerce and secured-access, risk-capital participation in investment funds for high-growth innovative projects, healthcare networked-management services, enhanced transport services such as innovative security emergency and maintenance support services or dynamic and location-based travel and traffic information, emergency management and public safety systems, online access to public-sector information.

11. The 1994 to 1999 Structural Funds' programming period constituted a transition period from a monopolistic to an open market. The Commission opted for a case-by-case approach, which helped to solve many problems in compliance with the new regulatory framework, and in respect of regional-development objectives, and to accelerate the liberalisation process in Cohesion countries. For the new period 2000 to 2006, rules for ensuring transparency and compliance with competition rules have been established in the framework of the operations of the Funds.

TRANS-EUROPEAN TELECOMMUNICATIONS NETWORKS (TEN-TELECOM)

Use of resources and summary of results

18. All TEN-ISDN preparatory studies (1993 to 1995) have been filed by the Commission, and were well identified on the occasion of the TEN-ISDN intermediate evaluation report, which was communicated to the Court in February 1999(2). Further TEN-telecom projects from 1996 onwards were included in a database which is accessible online by every project officer and provides updated information on the status and deliverables of a project from its initial appraisal, up to monitoring and evaluation.

19. Table 2 gives an overview of the type of actions financed from 1993 to 1998: preparatory actions from 1993 to 1995 (TEN-ISDN and TEN-IBC), projects under the TEN-ISDN guidelines of 1995, projects under the TEN-telecom guidelines of 1997, and joint measures with other programmes in 1996. In 1998, administrative and associated measures accounted for ECU 1 million (3,6 % of total commitments).

20. The Financial Regulation stipulates that "studies" can always be accompanied by "technical support measures", which is reflected in the glossary of terms adopted by the TEN Financial Committee and confirms a wider acceptance of the meaning of "studies".

In addition, Article 3 of the guidelines clearly states as a priority "study and validation of the technical and commercial feasibility, followed by the deployment of applications supporting the development of a European information society, in particular applications of collective interest". Studies have been carefully defined following this model, with a greater emphasis put on market feasibility and validation so that the action could be best differentiated from what is supported in the research: the study phase covers the preparation of a business plan, identifying, in a convincing manner, the market viability of the proposed venture, followed by the validation and demonstration of the project in a real on-site commercial trans-European context. At this stage, the business plan would have been finalised and the total investment cost of the overall commercial exploitation of the project would have been well evaluated. A further initial market deployment phase could also be aided, in duly justified cases, by up to 10 % of the total investment cost, in order to complete the investment-financing scheme.

Euro-ISDN guidelines of 1995

21. The delay in the decision-making process on the Euro-ISDN guidelines is outside the control of the Commission.

22. Proposals must refer to these "projects of common interest" when calls are published.

Euro-ISDN preparatory measures (1993 to 1995)

23. Forty-five projects were indeed selected and subsidised between 1993 and 1995, as preparatory measures, before the Euro-ISDN guidelines were adopted. The Commission started initiatives concerning the implementation of ISDN, taking into account the general framework of trans-European networks, following the Council resolution of 25 May 1992(3).

24. Although the use that the Commission has made of these studies has not been fully documented, the impact of the supported activities in this first implementation period of preparatory actions was significant:

- the preparatory actions were contributing to the identification of the projects of common interest in the ISDN guidelines; they addressed hurdles to the development of ISDN, potentially fruitful fields for expansion of ISDN and necessary background information for the development of ISDN policy,

- the outcome of these studies was used internally and externally for discussions and consensus building in external bodies concerned with standards for Euro-ISDN (IMIMG(4) body) and in the promotion of ISDN use through external events such as EIUF(5) plenaries and workshops.

25. The last call of September 1995 anticipated the future Euro-ISDN guidelines and TEN Financial Regulation adoption and, as a consequence, applies the rules of cost-sharing contract for studies, which may include market-validation pilot projects.

Euro-ISDN projects

27. The five mentioned studies, which cover migration strategies from Euro-ISDN onwards, related to policy aspects of the development of telecommunications infrastructures, and, as a consequence received 100 % funding after an open call for tenders. They were studies which prepared the next steps of the Euro-ISDN action.

28. (a) The "GTS" market research and analysis provided insight into the telecommunication infrastructure and the requirements of customers from selected market segments for ISDN services in Greece. It provided an additional impulse for ISDN access in a country where it was notably lagging behind. The funds accelerated the implementation of the necessary equipment supporting multi-site and multinational interoperable telecommunication services. The Commission considers such an aid useful to enable SMEs in a peripheral region of the Union to gain access to advanced generic services and hence better links to other European companies and international operability. In addition, it established an operational alternative position to the incumbent in the value-added telematic services sector.

(b) The "No problems" project (NP) can also be considered a success story. It shaped the provision of Internet services in Austria, integrating traditional generic services such as security services into the Internet platform. The NP service was defined for 300000 customers. Today, it gives 70 application providers access to the platform for generic services such as directories, micropayments, secure e-mails and light EDI(6).

(c) "Medsalus" considered the establishment of an ISDN value-added network of tele-collaboration among healthcare professionals including teleconsultation, training, research, directories and news. The project has allowed the partners to define pricing and marketing strategy for such services and to determine the most appropriate organisational structure. According to an independent final review, the current situation is the following:

- for the exploitation of the results from the market feasibility phase, the project was reshaped in some respects. In addition to the main industrial partner (a telecommunication operator and service provider), new major actors were taken on board from the healthcare area. The Medsalus services have been taken up under the umbrella of these organisations with new labels,

- on the clinical side of the project, partners from the feasibility phase (hospitals, research institutes) have also maintained contacts and cooperation at trans-European level.

29. Following close monitoring actions, financial audits were carried out in respect of both contractors and the two associated contractors. This means that all organisations involved were audited.

As a result of the audit, substantial subcontractor costs were rejected because the contractor concerned had failed to request the Commission's written approval before entering into the subcontracts. Apart from that, the contractor was not able to provide evidence of the work done.

30. Following the audit carried out by the Court, a letter was sent on 15 April 1999 asking for the necessary information and documentation that would allow completion of the audit.

In response to the above letter, the company provided the requested documentation and a full set of revised cost statements in October 1999. After verification of these documents, it was decided to carry out a further audit (29 and 30 November 1999) at the contractor's premises in order to verify the original supporting documents. The Commission draft report is due in early 2000. From an initial calculation, significant amounts could be recovered.

31. The Commission agrees that, in view of the present contractual provisions in respect of allowable costs, there is a risk of not detecting overcharging costs. The Commission is in a process of reviewing the research contracts. The Commission has increased its ex ante verifications and the reviewing of contracts in research and TEN-telecom. More on-the-spot checks could be carried out with appropriate resources devoted to it. These checks could replace some of the annual reviews which take place in Brussels.

New guidelines of 1997

32. The delay in political agreement on the new TEN-telecom guidelines is outside the control of the Commission. The technological changes prompted legal adaptations that finally resulted in the 1997 TEN-telecom guidelines, which adopted a user's point of view and hence a multi-network approach, and neutrality towards the technical platform over which services are delivered.

Preparatory actions for the new guidelines

35. The IBC preparatory actions were carried out before the entry into force of the TEN Financial Regulation, as a follow-up to the communication to the European Parliament and the Council on the preparatory actions in the field of trans-European networks (integrated broadband communications (TEN-IBC)(7) and were intended to help develop a framework of actions, with a strong technology focus, in broadband communications. These actions were 100 % funded studies (specifications for IBC), or 50 % funded trials, and did not address implementation of projects on which the 10 % co-investment rule would apply.

36. Indeed such actions were not included in the annual report on the trans-European networks. However, they were the subject of a specific final report to the European Parliament and the Council(8).

Joint measures with other programmes

38. For the SME initiative, the projects were eligible under the TEN-ISDN guidelines, and adopted under the procedures of the TEN Financial Regulation. The specific circumstances of the initiative: "establishment of a network of regional platforms for the development of electronic commerce among SMEs operating in the tourism sector in the less-favoured regions of the Union", have been documented, and received a favourable opinion of the Member States' TEN-telecom Committee.

39. The efficient cooperation of six programmes in the area of educational multimedia activities is a response to industry requests and should be put to the credit of the Commission.

Evaluation of performance

40. Despite the negative opinion of the ACPC in late 1996, a new open call for tenders was prepared in 1997 which led to an intermediate evaluation of the TEN-ISDN action over the period 1993 to 1997 by external experts.

43. The report became available in February 1999(9) and was communicated to the Court. This report indicated that the objective of the ISDN guidelines' objectives for developing a range of services based on ISDN was well met. Most of the projects of common interest identified in the ISDN guidelines, were addressed during this period.

Although the TEN-ISDN action did not have success criteria for the direct assessment of the achievement of objectives, it had contractual monitoring indicators at project level, as a result of contract negotiations. The intermediate evaluation of the TEN-telecom action (1993 to 1997) also raised additional recommendations which have been taken into consideration in the continuation of the action:

- a work programme has been defined and updated with comments from the industry,

- assessment of the guidelines objectives was carried out for the first time in the 1999 reviews of projects,

- significant improvements have also been made in the course of the action in call for proposals' preparation and appraisal of bids, in the projects' monitoring and review, and in the dissemination and support measures of the action.

44. The delay in political agreement on the guidelines is outside the control of the Commission. When the guidelines are adopted, the regular updating of the work programme and the definition of the calls will enable reflection of market trends.

45. Several recommendations have been used for the orientation of the actions under the new guidelines, as mentioned in paragraph 43. Impact on peripheral areas is not an explicit selection criterion in Article 6(3) of the TEN Financial Regulation. However several 1998 proposals included partners originating in peripheral regions of the Union. In addition, an important modification in the updated work programme has been to put emphasis and bring support to the business plan preparation in the study phase, which should not last more than 18 months.

Finally, in accordance with the specifications of the guidelines, a full evaluation of the TEN-telecom action will take place in the second quarter of 2000. The report will assess the relevance of the objectives, priorities and implementing measures of the action, as well as its effectiveness and impact. It will comprise several parts: one core study of the mid-term evaluation of the action (1998 and 1999), one study on the status and validity of the present TEN-telecom guidelines, and several reviews of running projects bringing an overview of their contributions to the general objectives of the action.

COORDINATION WITH RELATED MEASURES

Telecommunication in the research policy

48. TEN-telecom starts from results of technological developments whose marketability is not yet clear. TEN-telecom was presented to the research audience as a follow-on action, each project being defined in the wider context of a specific investment which is being prepared. Indeed there exist similarities with the research programme on telematics applications in "areas of collective interest" (such as education, environment, transport), since the guidelines were conceived originally as a follow-on action to research assessing the marketability and the business case for products which present sufficient technological maturity but require clarification for future market deployment and for establishing a convincing business plan to secure internal or external project financing by well-committed partners. These issues are marginally addressed by RTD projects in their exploitation plans, where the core of the action addresses the conditions of adoption of advanced technologies or methodologies in cooperation between users and suppliers, and not market or financial package assessment.

In order to maximise the synergies between the TEN and the research instruments, TEN-telecom has been fully integrated into the Directorate in charge of the horizontal aspects of IST research and development working in the context of the information society but with clear, distinct orientations.

The justification of the TEN-telecom action appears to be twofold:

- firstly, there is wide scope for supporting products which have achieved their technological phase, in their preparation for successful market deployment (business/market plan preparation and consolidation of consortia which can be a long and risky process), and this is not normally the focus for research actions,

- secondly, Community aid lies in areas of general interest where uncertainty of short-term viability and difficult organisational requirements at trans-European level discourage purely private initiative, and thus impair the development of the information society for all in the Union. Examples can be found in the environment (risk-management systems), transport (mobile emergency road services), health (continuity of care and healthcare management systems), education (telematic-based learning and vocational training services), or in growth areas generating new activities, such as generic Internet-based support services for trading and management of SMEs. These examples form part of the priority actions of the Commission's e-Europe initiative.

The importance of the Structural Funds

51. The main objective of the Structural Funds (SFs) is to reduce the socioeconomic disparities among the regions of the EU. Interventions are therefore a function of regional needs and characteristics. The telecommunication infrastructure gap in the majority of regions eligible under the SFs is concentrated in the national and regional/local networks rather than in the international links. Accordingly, SF interventions during 1994 to 1999 - and those of the ERDF in particular - have been, by and large, limited to investments aimed at upgrading and completing the (basic) telecommunications infrastructures.

In addition, the operations of the SFs are based on the principle of subsidiarity and partnership with Member States. It is the responsibility of Member States to define the development plans, which will receive SF funding. Interventions have therefore a strong national/regional character.

Yet, such investments, together with those aided by the EIB or the EIF (networks and trunk exchanges, mobile telephony networks, satellites networks, wireless local loops) contribute globally to the trans-European interconnection of countries, and will enable further interoperability of services and applications which are the subject of the TEN-telecom aid.

The significance of the EIB and the EIF

52. The liberalisation and privatisation process of the telecommunications industry has led to important changes in the regulatory and policy framework for telecommunications. The Community promotion and support activities have to be adapted to this new environment in a consistent way. To meet this new challenge, coordination between Commission services has been set up with the aim of clarifying the impact of the new regulatory framework more particularly on the grants for physical infrastructure provided by the EIB and under the Structural Funds. Adaptation measures have been negotiated with the Member States who had selected the telecommunications sector as a priority for investments. In this new regulatory context, it would have been difficult to direct the TEN-telecom aid towards subsidies of the interest on loans from the EIB, or on contributions towards guarantees from the EIF.

53. To date the EIF has not guaranteed any satellite project, nor any optical network as such.

Coordinating Instruments

The schematic plans

55. The coordination required by the TEN Financial Regulation(10) aims at the coordination and coherence between projects of common interest supported under the TEN Regulation and projects undertaken with the help of contributions from the Community budget, the European Investment Bank and other Financial Instruments.

In the field of telecommunications, the nature of these two groups of projects differs substantially in nature. The projects funded under the TEN Regulation are user-oriented application projects which make use of the underlying physical infrastructure, whereas the infrastructure attracts most of the funds and loans available from the ERDF, EIB and EIF.

These differences explain the limited potential for cooperation between these Instruments, which may include, on the one hand, a grant for a feasibility study for a schools network under the TEN Regulation (in the region of ECU 600000) and, on the other, a major EIB loan to a telecommunications operator (in the region of ECU 200 million).

56. The difficulties encountered in completing the schematic plans on telecommunications are manifold.

The first concerns the notion of TEN-telecom "projects of common interests" whose definition (except for the ISDN projects) only appeared in the guidelines adopted in June 1997, three years after the adoption of the Structural Funds programmes. It is clear therefore that it was not possible to propose a clear taxonomy to Member States for organising their plans in accordance with TENs' priorities.

The second difficulty has to do with the very nature of the regional plans which are organised around themes reflecting the priorities of each Member State. Only two countries (Italy and Greece) had explicitly mentioned telecommunications as a separate area of intervention, as can be seen from the Community support frameworks (CSFs) and Single Programming Documents (SPDs) which were published in 1995 and have been available on the Internet since 1997. This means that, in most cases, it was not possible to isolate telecom-related investments which are often hidden under different headings (e.g. "improving the business environment" or "modernising public administration").

Besides these difficulties specific to the telecommunications sector, the schematic plan is considered more generally to have lost some of its usefulness and priority, as the coordination between the services was gradually strengthened and allowed an efficient development of TENs, in particular in sectors where the projects supported by different instruments are of a similar nature. In particular, the plan to upgrade the schematic plan into a fully automated database was not considered to be a priority or a core activity of the services concerned and has not been pursued further.

Committees and coordination by the Commission

57. The Monitoring Committees of the SFs are the lowest level of coordination of the SFs' interventions where the Commission participates. It is here that the coordination among the different Community policies is best accomplished: representatives of Community sectoral policies are invited to attend the Monitoring Committees together with the representative of regional policy whenever decisions have to be taken on a specific sector. It is this close collaboration that has allowed the identification of a balanced Commission position in relation to complex and very different situations.

During the negotiation of the operational programme (OP), the transposition of the Community legislation into Greek law was examined. This resulted in the introduction of an Article in the Commission's decision for granting SF aid stipulating that the payment flow had to be conditioned by advancements in transposition of the relevant Community legislation. In August 1998, the payments were frozen.

In the Italian case, the request, which was based on the 1994 to 1999 CSF and which took the form of two operational programme proposals by the Italian authorities, was treated in the same way as any other application for assistance. Following the evaluation of the proposal by the Commission, it was decided to reallocate the resources concerned in the CSF mid-term review decision of April 1998.

58 - 59. The content of the plans to be financed in the current programming period (1994 to 1999) were discussed and negotiated with Member States when the telecom markets were not yet liberalised and the debate on the information society had just started.

The Commission opted for a case-by-case approach. In such a way many problems were successfully solved in compliance with the new regulatory framework and with respect to regional development objectives. For example, the telecom-related programmes supported by the ERDF were used to accelerate the liberalisation process in Greece (where the derogation period has been reduced by two years from 2003 to 2001).

In its communication on "Cohesion and the information society"(11), the Commission recognised that the majority of telecom investments are profitable, though there may be a few cases where public support is needed. In any case, the focus of SFs interventions had to shift from infrastructure upgrading towards demand stimulation, awareness raising, development of applications and local content.

This new approach has been further developed in the draft guidance for programmes for 2000 to 2006 setting the Commission priorities for the interventions of the Funds.

Concerning privatisation, the general approach adopted by the Commission (and this since before the 1998 reform) reflects the fact that within the context of multiannual co-financed programmes, the current ERDF Regulations have, at project level, been indifferent as to whether matching finance for ERDF resources is from public or private sources. This means that - provided, inter alia, that the nature and the characteristics (public use) of an infrastructure scheme do not change after privatisation - no claw-back of Community finance should be envisaged.

The Commission has adapted its approach for the next round of structural interventions. Under the new general regulations, Member States will be obliged to inform the Commission of any substantial modification (such as privatisation) to a co-financed infrastructure scheme which affects its nature or its implementation conditions. Financial corrections may be applied following such a modification.

61. Commission services will examine the suggestions of the Court.

The consultation procedure for projects

64. The interservice consultation is a standard procedure in the Commission which applies to all decisions which will be presented to the Commission. It is based on the principle of the unity of the Commission administration. The purpose of this consultation is to inform and obtain advice from the other Commission services and to achieve consistency and transparency. The TEN-telecom consultation routinely involves 15 different services, each in their own area of responsibility.

The Commission selection decision is not a "fait accompli" in the sense that input from other DGs is most welcome and can be taken into account in the negotiation of contracts.

A consultation on a Commission decision on the selection of projects is an implementation decision(12). It takes place in the strategic context established by the founding act. The coordination of ideas and strategies takes place when new Commission proposals are put forward and are subject to the same interservice consultation procedures. They are also preceded by ad hoc preparatory work and meetings at services level.

65. Since EIB loans on individual projects are, in most cases, generated by an explicit request from regional or national operators, the EIB provided a global estimate of its activity within a multiannual programme. For the period 2000 to 2006 the Bank has declared its willingness to develop a closer operational cooperation between its services and those of the Commission so as to ensure the EIB's participation in SFs' plans and programmes at the earliest possible stage of their preparation.

66. The written consultation procedure does improve strategic coordination as:

- it functions as a filter adding discipline to the EIB's selection and structuring of proposals brought forward for Commission opinion,

- it allows individual Commission services to review proposals against their policy area and potentially propose changes. Commission opinions are frequently preceded by requests for further information from the EIB and discussions between Commission services.

Special interdepartmental working party

67. While the specific recommendations have not been applied, the Commission has adopted other coordinating measures. A specific coordination of the three TEN sectors was established. The group of Commissioners responsible for TENs(13) met several times between 1995 and 1999. The group of Commissioners recommended in October 1997 specific coordination measures(14), while taking into account the specificity of each instrument. Although this coordination primarily concerns sectors where the nature of the projects supported by the different instruments is similar, the future of coordination in the field of telecommunications has been kept under review. There has been inter-service cooperation concerning the guidelines for the next programming period (2000 to 2006) of Structural Funds interventions. An EIB representative takes part in TEN-telecom workshops and Member States' TEN-telecom committees. Contact is also established with the EIF about the financing of telecommunications infrastructure.

CONCLUSION AND RECOMMENDATIONS

68. An in-depth evaluation of the action will take place from May to September 2000, where the specific issues to be evaluated are the following: relevance of the action's objectives, priorities and implementing measures; the effectiveness and impact of the action; its efficiency and cost-effectiveness; its utility and sustainability; causal links from resources used through to activities and presumed impacts (the intervention logic); lessons to be learnt in terms of legal base, resources and delivery mechanisms for possible future interventions of similar type. The Commission will then submit proposals for revision of the guidelines on the basis of such an evaluation and technical developments. Without pre-empting political decisions, critical points for revision could be the following:

- the action would be clearly differentiated from what is covered by the research. A segmentation into three distinct domains would be proposed, where the nature of actors involved, the market potential and business definition, the investment perspectives and financial packages are different: the public-service domain, the global-service domain, and the growth-enhancing service domain addressing the risk capital market,

- the action would be more focused. Annex 1 to the present guidelines provides for both too large and too complex area coverage. A simplified scheme would be proposed, building on priority actions of the eEurope initiative,

- the work programme would remain sufficiently general to reflect technology changes and new market trends in the definition of calls for proposals,

- the structuring of projects and related Community support would also be made clearer,

- greater emphasis would need to be placed on the trans-European dimension of the action,

- the external dimension would also have to be considered, allowing primarily for participation of associated countries within the framework of their agreements with the European Community, and of countries from the EEA.

The TEN-telecom action will build on the political support provided by the e-Europe initiative which concentrates on priority actions for overcoming the handicaps that are holding back the rapid development of an information society in Europe, in particular "a public sector which is not playing a sufficiently active role in enabling the development of new applications and services" and "a lack of sufficiently dynamic, entrepreneurial, service-oriented culture". TEN-telecom is a relevant Community Instrument to focus on the defined targets in the following areas: access to multimedia educational and training resources, SMEs support services for trans-European e-commerce and secured access, risk capital participation in investment funds for high growth innovative projects, healthcare networked management services, enhanced transport services such as innovative security emergency and maintenance support services or dynamic and location based travel and traffic information, emergency management and public safety systems, online access to public sector information.

69. The Commission has developed new guidelines for the Structural Funds interventions in the field of telecommunications in the framework of the new 2000 to 2006 programming period. Such guidelines have already been submitted to the attention of Member States in the context of the works of the Committee for the Development and Reconversion of Regions.

70. In the telecommunication sector which is global and made up of several layers (basic infrastructure, generic services/service "middleware" and applications), the coordination between the various financing instruments will be intensified, taking into consideration the different nature of projects, infrastructure projects on the one side, generic services and applications of general interest on the other, making use of the underlying infrastructure. This applies in particular to adhesion countries where synergy is critical between investment in infrastructure supported by the international financial institutions (IFIs), such as the EIB or the EBRD, and Community interventions from the Structural Funds or TEN-telecom on the development of applications. In any case the principles of promoting liberalisation and establishing a stable and competitive regulatory framework in the sector should be adhered to and implemented by these countries, in order to secure commercial financing sources on the infrastructures. The issue of developing new links with central and east European candidate countries appears more complex than simply interconnecting cross-border infrastructures.

71. Beyond project monitoring, reviews and controls which are made on