Special Report No 19/2000

on the management by the Commission of the programme of assistance to Palestinian society, together with the Commission's replies

(pursuant to Article 248(4) second subparagraph of the EC Treaty)

(2001/C 32/01)

CONTENTS

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GLOSSARY OF ACRONYMS

AHLC Ad Hoc Liaison Committee

CFSP Common Foreign and Security Policy

CG Consultative Group

CSP Country Strategy Paper

DG Directorate-General

EC European Community

ECRO European Commission Representative Office

ECTAO European Commission Technical Assistance Office

EIB European Investment Bank

EU European Union

IMT International Management Team

JLC Joint Liaison Committee

LACC Local Aid Coordination Committee

LRDP Local Rural Development Programme

MEDA Mediterranean Partnership

NGO Non-Governmental Organisation

NIP National Indicative Programme

PA Palestinian Authority

PHC Palestine Housing Council

PLC Palestinian Legislative Council

PLO Palestine Liberation Organisation

SCR Service Commun RELEX (Joint External Relations Service)

SWG Sector Working Group

TAO Technical Assistance Office

TAP Tripartite Action Plan on Revenues, Expenditure and Donor Funding for the Palestinian Authority

TFPI Task Force on Project Implementation

UN United Nations

UNDP United Nations Development Programme

UNRWA United Nations Relief and Works Agency

USAID United States Agency for International Development

EXECUTIVE SUMMARY

1. Following the Oslo Accords of September 1993, the European Community (EC) started a special programme to support the Middle East peace process and the development of Palestinian society, and substantially increased the financial assistance it had already provided in this field. From 1994 to 1999, EC total commitments financed under the three main budget headings devoted to support the development of Palestinian society amounted to 639 million euro, and total payments to 447 million euro (see Chart 1).

2. The Court has carried out an audit with the objective to assess the extent to which the Commission has taken the measures necessary to ensure the best possible implementation of the EU policy of support to the peace process and the development of Palestinian society. The audit has taken into account the various external constraints affecting the Commission management, such as the complexity and the volatility of the local political situation, the lack of territorial contiguity between the areas under Palestinian administration, Israeli government policy towards Palestinian society, and the weakness of Palestinian institutions (see paragraphs16- 22). The situation in the area is also marked by a high overall influx of aid, by a limited capacity of the Palestinian institutions to absorb assistance and by drawbacks at the operational level in donors' coordination (see paragraphs 50, 79, 86).

3. The Commission's management of the programme of assistance to Palestinian society has had positive results. The programme has supported the peace process, in particular by funding the Palestinian Authority (PA); it has also contributed to economic and social development by financing education and infrastructure projects (see paragraphs 23-24).

4. However, the impact of the programme has been reduced by structural weaknesses in the Commission's programming and management procedures and systems. It was found that:

(a) decision-making is heavily centralised, slow and cumbersome; responsibilities are fragmented and coordination between units needs to be improved (see paragraphs 38-42). The number and skills of staff available are not adequate to manage effectively a programme of this size and scope (see paragraphs 29-37). Furthermore, adequate management information tools are lacking (see paragraphs 60-61);

(b) there are no indicators against which the Commission's performance in managing the programme can be assessed (see paragraphs 54-55). In addition, the results of an external evaluation of the programme were not adequately followed up since the Commission did not set up a precise timetable of actions to be taken (see paragraph 64);

(c) there is no pipeline of projects, to be identified, prepared, approved and launched in a continuous process. In order to commit the large volume of budgetary funds available annually, many projects were decided under pressure and without sufficient preparation (see paragraphs 47-53). Shortcomings were also noted in the implementation and monitoring of certain projects (see paragraphs 56-59, 66-83);

(d) coordination with the other donors, including the Member States, was insufficient, particularly at the operational level. The Commission should play a major role in coordinating the donors, in accordance with the relative size of its programme of assistance (see paragraphs 85-87).

INTRODUCTION

Context and background of European Union (EU) assistance to Palestinian society

5. The EC started to provide assistance to Palestinian society in 1971. Initially, aid was limited to Palestinian refugees and channelled through UNRWA(1). In 1981, in connection with its political support for the Middle East peace process, the EC started to provide direct aid, through non-governmental organisations (NGOs); this new approach was subsequently stepped up in 1991 following the Gulf crisis.

6. After the Oslo Accords of September 1993 (also known as Declaration of Principles), the international community, at the donors' conference of Washington, pledged 2400 Mio USD over five years (1994-1998) to the development of the Palestinian economy, in order to underpin the peace process. The EC started a special programme of assistance(2) by pledging 500 Mio ECU from 1994 to 1998: each year, 50 Mio ECU was to be provided in grants; 250 Mio ECU in long-term loans would be made available for the whole period by the European Investment Bank (EIB). The EU pledge was renewed for the same amounts for the years 1999-2003 at the Washington ministerial meeting of November 1998, where donors' representatives pledged an additional amount of over 3000 Mio USD. Per head of population, Palestinian society is one of the main recipients of EU aid in the world; the EU is the largest donor to Palestinian society(3).

7. The influx of aid from donors is considerable, and concentrated in a limited geographical area. For the 1994-1999 period, total commitments amounted to 4039 Mio USD and total disbursements to 2613 Mio USD(4). The number and variety of donors are also considerable: more than 50 official aid agencies are involved, along with a highly developed NGO sector(5).

The legal and budgetary framework of the programme

8. Since 1994, EU actions in support of Palestinian society have been financed mainly on three budget headings(6): B7-4 2 0 0 (Community operations connected with the Israeli-PLO peace agreement), with yearly commitment appropriations of 50 million euro, intended to honour the Washington pledge; B7-4 2 1 0 (Aid to UNRWA), which provides financing for the EC-UNRWA Conventions(7); and B7-4 1 0 0 (MEDA), on which projects of assistance to Palestinian society have been funded along with those for other Mediterranean non-member countries. From 1994 to 1999, total commitments for the Palestinians on these three budget headings amounted to 639,1 million euro, and total payments to 447 million euro (see Chart 1).

9. The regulations applicable to the three budget headings are respectively: Council Regulation (EC) No 1734/94, as amended by Council Regulations (EC) No 2824/98(8) and (EC) No 2840/98(9); the EC-UNRWA Conventions; and Council Regulation (EC) No 1488/96(10). A bilateral Framework Convention on the implementation of financial and technical cooperation was signed in 1998.

10. The EU continued to support projects carried out by NGOs and specific actions implemented by UNRWA; other actions were decided in the framework of the Common Foreign and Security Policy (CFSP). In addition to the projects financed from the abovementioned three main budget headings, the Court identified commitments for more than 66 million euro, which at the end of 1998 were available for ongoing measures in support of Palestinian society under 12 other budget headings of subsections B7 and B8 (External actions) of the budget(11). Different regulations are applicable to these 12 budget headings. One project examined in the context of the audit was financed under three different budget headings (see paragraph 80).

11. From 1995 to 1999, the European Investment Bank (EIB) made available 214 million euro in loans and risk capital for 11 projects.

Chart 1

EU ASSISTANCE TO PALESTINIAN SOCIETY 1994-1999

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The Court's audit

12. Previous Court audits have been carried out on specific aspects of EU assistance to Palestinian society. The results of these audits were published in the Annual Report concerning the financial year 1995(12) and in Special Report No 4/96 on the accounts of the European electoral unit, set up by the Joint Common Foreign and Security Policy Action concerning the observation of the Palestinian elections(13).

13. The European Parliament has always been keenly interested in the implementation of the programme of assistance to Palestinian society and in the Commission's management of it. The issue was dealt with in the context of the 1997 discharge procedure, in particular concerning the European Gaza Hospital, the Palestine Housing Council (PHC) and the projects in support of the Palestinian Legislative Council (PLC). In its resolution concerning the role of the EU in the peace process and its future assistance to the Middle East, adopted in March 1999, the European Parliament stated that it awaited with interest the results of the work of the Court of Auditors on the effectiveness and the regularity of the EU financial assistance(14).

14. The Court's audit essentially focused on the three main budget headings mentioned in paragraph 8. The audit included checks at the Commission's central services in Brussels and a mission on the spot, in November 1999, to the Gaza Strip and the West Bank, and to the European Commission Representative Office (ECRO) in Jerusalem. A selection of 18 projects, representative of all main sectors of intervention (health, housing, infrastructures, support to the private sector, education, institutional capacity building, recurrent costs), and the ninth and 10th EC-UNRWA Conventions, were examined. These projects were implemented in the period from 1995 to 1999, with the exception of the Palestinian Housing Council and the European Gaza Hospital, which started at the beginning of the 1990s. The commitments relating to these projects and to the Conventions amount to 527 million euro in total.

15. The objective of the audit was, taking into account the various external constraints affecting the Palestinian situation (see paragraphs 16-22), to assess the extent to which the Commission has taken the measures necessary to ensure the best possible implementation of the EU policy of support to the Middle East peace process and the development of Palestinian society. In some cases, these external constraints can prevent implementation as planned, or can even block implementation completely. When examining whether the performance of the Commission has been effective as the organisation responsible for implementation, the Court has sought to separate those matters over which the Commission has control, from those which, due to the external constraints, are considered to be essentially outside the Commission's control. The Court also examined whether the Commission has identified performance indicators and applied them in order to assess the effectiveness of its management, at the level of the global programme and of its main components(15). In carrying out the audit, the findings of a recent evaluation of the programme(16) and a number of other evaluations and audit reports on individual projects or actions were taken into account.

EXTERNAL CONSTRAINTS ON THE PROGRAMME

The complexity of the political situation

16. The Oslo Accords started a process involving the redeployment by Israel from some of the territories occupied in 1967, and the establishment of Palestinian self-government in those areas; this process is still ongoing. Due to the effects of the occupation, which has lasted for more than 30 years, the land property registry is incomplete and sometimes unclear. Moreover, the situation may change rapidly as a result of political developments, or setbacks, in the peace process. All these factors must be taken into account when deciding the location, the objectives and the components of a project, and subsequently, during its implementation.

17. The Gaza Strip and the West Bank areas under Palestinian administration lack territorial contiguity, which, under the local political circumstances, makes the circulation of people and goods complicated, sometimes uncertain or even impossible. Palestinians living in the Gaza Strip are only allowed to travel to the West Bank, and Palestinian residents of the West Bank to the Gaza Strip, provided they have special permits, issued by the Israeli authorities. Border security checks are time-consuming, even in periods of relative calm.

18. In periods of tension, Israel has adopted the policy of sealing off the West Bank and the Gaza Strip, which has had a considerable negative impact on the Palestinian economy, by increasing unemployment(17), hindering trade, increasing costs, and slowing down the implementation of development projects.

19. All Palestinian trade with the rest of the world has to go through Israel or Israeli-controlled border points. All goods imported from third countries to the Palestinian self-ruled areas are physically inspected by the Israeli customs, and can be blocked for security reasons. A similar treatment is applied by the Israeli authorities to Palestinian exports(18).

20. The PA is still dependent on transfers by Israel for a large part of the resources of its operational budget(19). In 1997, Israel blocked all such transfers, causing a financial crisis, which prompted the EU to intervene in favour of the PA by the adoption of the Special Cash Facility.

The weakness of Palestinian institutions

21. In 1999, the report " Strengthening Palestinian Public Institutions "(20), prepared by an independent Task Force(21) and supported, among other donors, by the EU, provided a comprehensive and systematic assessment of the institutional structure and capacities of the PA. According to the report, the PA, in the short period of time since its establishment, has managed, under complex conditions and with limited territorial jurisdiction, to achieve a number of important objectives(22).

22. However, important reforms still have to be implemented in order to ensure a constitutional government, political accountability, judicial review and the transparent management of public resources. Accounting for the domestic revenues and expenditures of the PA lacks transparency and completeness. Cases of financial waste and mismanagement had already been observed by the Palestinian national audit institution(23).

POSITIVE RESULTS OF THE PROGRAMME

23. The audit highlighted a number of positive results of the programme. The grants pledged have actually been committed, and the programme has provided important political support to the peace process: in particular, the Commission has played an important role in sensitive and urgent political situations, in which it has shown itself able to respond quickly. As examples, mention may be made of the decisions to provide significant budgetary support to the PA after its establishment, by financing recurrent education costs, and in 1997 through the Special Cash Facility (see paragraph 20). Also, the Commission, in 1999, led the work on the updating of the Tripartite Action Plan on Revenue, Expenditure and Donor Funding for the Palestinian Authority (TAP)(24).

24. Moreover, the programme is implemented through a significant proportion of local tenders, thus supporting the local economy. It provides for the financing of sectors which are important for the social development of the population, such as higher education. Infrastructure projects (e.g. roads, water supply, sewerage and stormwater drainage networks, school construction) have also improved the quality of life of Palestinians.

THE COMMISSION'S FORMULATION AND MANAGEMENT OF THE PROGRAMME

25. However, the audit has also shown a number of important structural weaknesses and failures in the Commission's programming and management procedures and systems, which have had the effect of reducing the impact of the programme, and which are summarised in this report. While the external constraints have affected considerably and adversely the effective implementation of the programme, matters for which the Commission has responsibility and over which it should exercise control are also important in explaining unsatisfactory performances.

Budgetary execution

26. The Court has carried out an analysis of the budgetary execution of the projects and actions financed for the Palestinians under the three main budget headings B7-4 1 0 0, 4 2 0 0 and 4 2 1 0 from 1994 to 1999, on the basis of the data contained in the Commission's accounting system (see Chart 1). The trend in the volume of assistance provided has been influenced by the financing of the PA recurrent costs and by the Special Cash Facility. In 1995 and 1996 the financing of recurrent costs accounted for 30 % of the total commitments, but was gradually phased out in the following years. In 1997, the volume of assistance was influenced by the Special Cash Facility, which alone accounted for 20 % of commitments and 28 % of payments. In 1998 and 1999, in contrast, almost the total amount of funds was committed for projects of a more complex nature, for which disbursements are generally less rapid.

27. Concerning budget heading B7-4 2 0 0, payment appropriations equal to 14 million euro were carried over to the financial year 1999. Therefore, at the beginning of the financial year 1999, payment appropriations available for the budget heading totalled 64 million euro. According to the Financial Regulation(25), payment appropriations may be carried over when the appropriations provided for the heading concerned in the budget for the following financial year do not cover requirements. However, in 1999, only 16 million euro was paid from this budget heading. Due to this low rate of disbursements, payment appropriations totalling 40 million euro were transferred during 1999 from this budget heading to other chapters of the budget.

28. Structural weaknesses and failures in the Commission's programming and management procedures and systems have contributed to slowing down the implementation of projects and therefore to reducing the rate of disbursements. In particular, by the end of 1999 there had been no payments on 10 important projects committed from 1996 to 1998 under budget heading B7-4 2 0 0 and totalling 49,5 million euro. Six of these projects, corresponding, with one exception, to the oldest commitments, were examined in the context of the audit(26) (see paragraphs 38, 51, 57-59, 66-68, 76-79).

Human resources

Number of staff

The Commission's central services

29. At the Commission's central services in Brussels, the responsibility for the management of the projects and actions financed under the B7-4 1 0 0, 4 2 0 0 and 4 2 1 0 budget headings is mainly shared between the geographical unit of the External Relations Directorate-General (formerly DG I. B) and the technical unit of the Joint External Relations Service (SCR). In neither service, however, does the allocation of Commission staff reflect the priority given by the EU, financially and politically, to the programme. The Court was not able to find analyses and assessments, carried out as part of the normal management processes, of how many, and what type of staff, the responsible services of the Commission considered necessary at the central level for the implementation of the programme itself and all the other responsibilities of the West Bank and Gaza Strip desk(27). At the RELEX DG, the programme is handled on a full-time basis by two people: the desk officer and an assistant. In the technical unit of the SCR, most of the projects are the responsibility of one official, who is also responsible for other non-Palestine projects.

30. Notwithstanding the recent reinforcement of the geographical desk, and the fact that staff of other services also participate(28), the total number of staff available is insufficient to manage a programme of this size and scope effectively.

The field office

31. Following a request from the Dublin European Council in 1990, the Commission, in 1991, appointed a Representative to the Occupied Territories, who initially worked in Brussels. In February 1994, the Representative moved to Jerusalem with three technical assistants. The Israeli authorities did not allow the Commission Representative to open and operate an office in that capacity. Therefore, a European Commission Technical Assistance Office (ECTAO) was set up locally for the management of the aid programme. The conditions for the work of the ECTAO were defined in 1994, on the basis of an exchange of letters between the Commission and the Israeli authorities. According to this agreement, the office would be staffed by a maximum of six people who would be granted privileges and immunities identical to those enjoyed by United Nations (UN) officials(29) in Israel and in the territories under Israeli administration, plus some local personnel. The agreement, which places an external constraint on the number of staff, is still in force.

32. In 1998, the activities of ECTAO were taken over by the European Commission Representative Office (ECRO) which, at the end of 1999, was staffed, in addition to the Commission's Representative, by three officials and two European experts on two-year contracts. The Representative has had diplomatic status since 1992, whereas the three officials and two European experts are covered by the agreement with the Israeli authorities. Additionally, the staff of the office was completed by nine local agents. Technical expertise was provided by a new TAO, the MEDA team, consisting of six professionals, plus administrative support (see also paragraphs 35-36).

33. At the end of 1999, therefore, the number of ECRO's officials and experts was below the ceiling fixed by the agreement with the Israeli authorities. Following an inspection in 1996, the Inspection des Délégations recommended reinforcing ECRO by two A posts and one C post. The Commission, because of a lack of budgetary funds, did not allocate the second senior permanent post, which was allowed for under the abovementioned agreement. This post could have been entirely devoted to the management of development issues.

34. In 1999-2000, it took the Commission five months to appoint a new Representative. During this time, and pending the accreditation procedure which has followed, there was only one official to manage all the activities. In view of the size and the high profile of this politically sensitive programme, this was insufficient to carry out the task.

The MEDA team

35. From its establishment, ECRO depended for the management of assistance actions on the support of technical assistants. From 1998 onwards, this support was provided by TAOs, called MEDA teams. The MEDA teams provide an important technical input, but the limited duration of the contracts makes them only a short-term solution. The scope of their action is also limited, since they cannot carry out public authority tasks. A further limitation to the effectiveness of the MEDA team based in Palestine has stemmed from the high rate of replacement: at the end of 1999, about one and a half years after the signature of the contract, only one member of the original team of six was still in post. One reason for this high turnover is the fact that the contract has to be renewed every year, which leads many experts to look for longer-term assignments.

36. Since the beginning of 1999, the Commission had been unable, for more than one year, to decide on the replacement of the Palestine MEDA team private sector expert. Initially this was for procedural reasons, then it was because the responsible services could not agree on the choice of the candidate. In the absence of the expert, adequate planning and monitoring has not been carried out in this essential component of the programme.

Skills of staff

37. A large and complex programme such as that in favour of Palestinian society should preferably be managed by staff with experience of comparable programmes. This has not, however, been the case. In addition to the insufficient number of staff in ECRO and at the central services, the educational and experience profiles of those who are there do not always correspond to the tasks to be performed. As a result, key members of staff have in practice had to learn by doing. Also, because of the stretched resources and heavy workload, staff can devote only limited time to professional training. This should not in any way detract from the commitment and hard work demonstrated by the staff on the programme. Their contribution is highly regarded by the Palestinian authorities and by their interlocutors in other agencies.

Organisation

38. In addition to the geographical unit in the RELEX DG, and the technical unit in the SCR, several other services in the SCR, such as the legal affairs, public procurement, financial and audit units, and the Financial Controller, are involved in the management and control of the programme. Within each service the decision-making process involves several levels. As a result, decision-making is slow, cumbersome and sometimes even unclear. This caused implementation delays to and blockages of projects examined during the audit(30).

39. Moreover, responsibilities are fragmented and coordination between units needs to be improved. Currently, despite the creation of the SCR, the respective tasks of the units are not clearly defined. Some project files have been transferred from the geographical unit to the SCR; others have stayed in the geographical unit. Also, the technical unit in the SCR is not responsible for the implementation of all new projects. In some cases, the allocation of responsibilities for project implementation and monitoring is unclear, with the result that ultimately no action is taken(31).

40. Within units, comprehensive job descriptions, including tasks to be performed, are lacking at the central services; for ECRO, they were prepared only at the end of 1999.

41. At the moment, procedures are heavily centralised: in practice ECRO must refer to the central services for all important decisions. This not only creates implementation delays, but also undermines ECRO's profile when dealing with other major donors on the spot. Interlocutors, beneficiaries, other donors, commented that it was very frustrating for them that people on the spot in ECRO, who were clearly in a position to take a decision, were unable to do so because they lacked the appropriate authority. This contrasts with the example of the World Bank's local office. Because of the special situation in Palestine, the Country Director, based on the spot, is the head of the World Bank programme, with full authority.

42. In order to be able to take action quickly and effectively in the complex and rapidly evolving Palestinian scenario, the Commission needs to devolve substantial authority, including financial authority, from the central services to ECRO. The devolution can, however, only take place by reinforcing ECRO, through the provision of adequate human resources and management tools, such as access to Sincom and databases. In this respect, the Commission's pilot exercise in devolving responsibility to field offices, first of all in the special case of Sarajevo, and more recently to South Africa, Morocco, Egypt, Jordan, and in the context of the post-hurricane Mitch reconstruction programme in Central America, is to be welcomed. It is to be hoped that this pilot exercise will enable the Commission to extend the process of devolution of authority and responsibility to Delegations.

Strategy and planning

43. The Commission's strategy for the assistance to Palestinian society is set out in:

(a) Country Strategy Papers (CSP), which state the general long-term strategy;

(b) triennial National Indicative Programmes (NIP), which formulate the mid-term sectoral strategies;

(c) annual financing plans, in which projects to be funded are identified.

This strategy is developed within the context of the Euro-Mediterranean Partnership and of the Palestinian Development Plan, prepared by the PA with the support of the World Bank, and which constitutes the basis of the international donor community's strategy.

44. In the 1996-1998 NIP no performance indicators or quantified objectives were set out, with a view to assessing the degree of progress made in the implementation of EU cooperation policy towards Palestinian society. Although there was a description of past assistance, both the NIP and its update, relating to 1997-1999, lacked an assessment of the lessons learnt from previous experiences, which should be taken into account in the context of the planned activities. Moreover, the issue of coordination with the strategies of other donors was not addressed(32).

45. At the end of 1999, a 2000-2006 CSP and a 2000-2002 NIP were being respectively finalised and prepared. For these documents, compared to the past, the consultation procedure with the Member States, which takes place notably at the Med-Committee level, has been set out in more detail in order to take their observations better into account.

46. The PA's institution building capacity is a key priority of the programme. The Court, while acknowledging the support recently given by the Commission to the preparation of the abovementioned report " Strengthening Palestinian Public Institutions ", notes that up to now the Commission has started projects in this field, but achieved few concrete results. Most results have been in the form of the supply of equipment to the Palestinian institutions, whereas little progress has been made on the more substantial issue of upgrading the structures, systems and administrative capacities of the Palestinian institutions. In this respect, the failure of the project OT/96/03 to provide technical assistance to the Palestinian Legislative Council (PLC) was particularly serious (see paragraphs 77-79).

47. The Commission has not yet been able to set up a pipeline of projects, to be identified, prepared, approved and launched in a continuous process. Instead, many projects are prepared and decided under pressure, in order to commit the large volume of budgetary funds available annually. Most of the decisions and commitments for projects are actually made at the end of the financial year. Little consideration is given to the size of project portfolio which can be managed effectively by the Commission's services, in Brussels and on the spot, and to the capacity of the Palestinian institutions to absorb assistance.

Project preparation: taking into account risks, constraints and procedural implications

48. Preparation was inadequate for some projects decided in the early 1990s(33); this was partly due to the fact that, at that time, the PA did not yet exist, ECRO had not yet been established and the programme had to be managed from Brussels. However, inadequate preparation has also been observed for more recent projects(34). A significant reason for this is the pressure on the Commission to commit all available funds by the end of the year (see paragraph 47).

49. In particular, the technical unit responsible for implementation should be closely associated with project preparation; currently, this is often not the case. The creation of the SCR and the splitting of the project cycle have exacerbated this unsatisfactory situation. In 1999, some financing proposals, for a total of 9,5 million euro of EU financing, were presented to the Med-Committee, for the Member States representatives' consideration, before all the Commission units involved were agreed; as a result, these proposals required further work, after the positive opinion from the Committee, but before the Commission's decision(35). This is most unsatisfactory: projects should not be submitted to the advisory committee before the service responsible for their implementation is in agreement with the proposal.

50. At the operational level of the projects the coordination mechanisms do not work as effectively as they should to take account of the intense donor activity and the huge influx of funds. The audit has shown cases where, since the aid pledged by the Commission for a certain action did not come with the expected rapidity, the Palestinian authorities turned to other donors to obtain the funding. The Commission's preparation has thus been done in vain, which implies a waste of its resources (see paragraphs 77-79, 81, 82).

51. In general, the logical framework analyses annexed to the Financing Proposals examined lack a thorough risk/constraint assessment. For some of the projects examined(36), specific procedural implications and constraints on the ground were not taken into account, with the consequence that subsequently implementation was blocked or delayed; this in turn has contributed to reducing disbursements.

52. For both the ninth and 10th Conventions with UNRWA, the Commission was late in concluding the negotiations, with the result that fund transfers to UNRWA were significantly delayed(37). In the case of the 10th Convention, a significant reason for the delay was an internal debate within the Commission about the extent to which the EC's contribution to UNRWA's General Fund should be specifically earmarked to identified items. As earmarking a contribution to the General Fund would be neither appropriate nor feasible, the debate was purely academic and time-consuming. Contrary to the final decision not to earmark, the text of the Convention in a number of articles allows earmarking, in particular on the Commission's reporting requirements. UNRWA reports on specified parts of its programmes which happen, incidentally, to amount to approximately the amount of the Commission's contribution. This reporting is, however, purely notional as the Commission's funds are co-mingled with all other donors' contributions to the General Fund(38).

53. In the case of the Local Rural Development Programme (LRDP), the Commission insisted on separate reporting by UNDP, which is the implementing agency. This requires UNDP to create special management information and accounting systems. At the end of 1999, the UNDP office in Jerusalem was still unsure of the form this information should be presented in. As the EU contribution is by far the largest part of the project financing, it would be preferable for the Commission, together with UNDP, to have defined one single management reporting, monitoring and control system for the whole programme.

Performance indicators

54. Performance indicators are necessary to enable assessments to be made of whether or not the objectives of programmes are being met, results are being achieved, and whether the Commission services are performing adequately. In the context of a programme where external constraints as described above can disrupt significantly the implementation of the programme, it is important for the Commission to identify some indicators that refer to those parts for which it has direct responsibility. It is only in this way that it can separate out its own performance and determine whether it is performing as well as it should, notwithstanding what happens in those areas over which it has no direct control.

55. Performance indicators could be established for such matters as the speed with which internal decisions are taken and inputs are delivered at all stages of implementation, and for deadlines by which adequate management resources, procedures and systems should be in place. The Commission has not, however, identified any such indicators against which its own performance in managing the programme can be assessed. In such circumstances, there can too easily be a tendency to consider that it is the external constraints within which the Commission has to try to implement the programme that are the main reasons for all failures of implementation. For example, the Commission's report on the lack of progress with the implementation of the programme(39) highlights a number of constraints affecting the programme, but makes virtually no reference to shortcomings in its own management.

Project implementation

Timing of action and responsiveness

56. The Palestinian situation, for the reasons explained above, requires quick action and the ability to respond effectively to changing circumstances. However, as described in paragraphs 57-59 and 66-83, project implementation has often been marked by long delays caused by cumbersome procedures within the Commission, or by management deficiencies. For some of the projects examined(40), the services in charge of implementation have taken action without proper consideration of the practical consequences of their decisions; procedural arguments have also hindered implementation.

Public procurement

57. The majority of the projects examined have experienced delays and blockages in the various procedures related to the preparation and implementation of invitations to tender for technical assistance(41) and for equipment(42). This had a negative impact on project activities and results and contributed to reducing disbursements.

58. The Commission services consider that a tendering procedure should on average take six to nine months. However, in six of the nine cases observed by the Court it took from one to more than three years to carry out the whole procurement procedure; in the remaining three cases, following the suspension or the cancellation of the invitations to tender, the procedures have not been relaunched at all and the contracts have never been awarded, although the projects, formally, have not been modified. For two of the projects audited, extensions of the Financing Agreements became necessary only because of delays in procedures related to invitations to tender(43).

59. The delays have often been caused by communication and coordination difficulties between ECRO and the central services, and between different services in Brussels. In some of the cases examined, the Commission services did not take action for months; the relevant files did not provide any information about the reasons(44).

Monitoring and reporting

60. The geographical desk at the RELEX DG (formerly DG I. B) should be the focal point for coordination and the flow of information on the programme between the different Commission services involved. At the end of 1999, however, the Commission did not have an effective management information system, covering all budget headings: it has not been able, either at the level of the desk, or of ECRO, to provide the Court with a complete list of all projects financed in support of Palestinian society, under all budget headings, from 1995 to 1999. Neither does the way in which projects are coded within the Commission's Sincom accounting system allow all the relevant projects to be identified. In the current state of the information systems, it is only possible to compile a complete list by examining the accounting records for each budget heading manually and extracting the individual transactions.

61. Since ECRO only has a list of the projects financed under the three main budget headings, but no complete list of the projects funded under all the budget headings, it has no means of monitoring the latter systematically, but only on a case by case basis. Also, ECRO and the MEDA team do not have up-to-date information on the financial progress of projects, or online access to Sincom.

62. Among the projects examined, two completely different ones were financed under the same budgetary commitment(45), with the consequence that it is not possible to carry out the financial monitoring of the individual projects on the basis of the data in the Commission's Sincom accounting system, unless each and every payment is examined.

63. In some cases the reporting provisions in the Financing Agreement were inadequate or unclear, resulting in delays in the payments, blockages and ineffectiveness in the implementing phase(46).

Evaluation

64. Pursuant to Article 6(2) of Council Regulation (EC) No 1734/94, the Commission carried out an external evaluation of the programme's main projects. The evaluation focused on projects in the fields of support to the private sector, infrastructure, education and institutional capacity building. The Commission set out its comments on the follow-up of the evaluation in two documents of September and November 1999, which were presented to a Council Working Group. However, the list of the actions to be taken was insufficiently precise and did not have a definite timetable.

65. Apart from the global evaluation mentioned in the previous paragraph, concerning one project examined which was implemented in two subsequent phases, the Commission stated, at the request of the Member States' representatives in the Med-Committee, that it would carry out an evaluation of the first phase; however, the second phase was prepared and approved before that evaluation report was available(47).

FINDINGS ON THE PROJECTS EXAMINED

The European Gaza Hospital

66. The European Gaza Hospital is a huge project (32,4 million euro committed), in an area and field where aid is much needed, and has a very high visibility. In this case, the Commission did not take active responsibility in the early years of the project, other than by providing the funds, while leaving everything else to UNRWA. Although the Commission had no representation on the spot until 1994, it did not consider it necessary to arrange for any form of expert-type independent monitoring of the project.

67. From the beginning of 1995 the question of the operation and management of the hospital was under discussion between the three parties involved (PA, UNRWA, EC). In April 1996 the Commission for the first time expressed the need for an international management consultant to be engaged, but no concrete action was taken. When UNRWA's financial problems became apparent in September 1996, the Commission felt that UNRWA might have lost control of the project, and it decided (September 1996) to take action and sent in consultants to review the situation (end 1996).

68. In the light of their reports, the Commission started to take control of the project (March 1997) and was able:

(a) to convince UNRWA to take responsibility for the project until the Palestinian authority was able to take over ownership;

(b) to obtain the agreement of the Palestinian authorities to take over the running of and the financial responsibility for the hospital; and

(c) to obtain the agreement of both parties for an international management team in charge of commissionning.

The Commission initiated three different lines of action to provide funds for physical alterations to the hospital, for the purchase of final equipment and supplies and for the International Management Team (IMT). However, the administrative process leading up to the three related Financing Agreements was rather poorly handled by the Commission(48). All deadlines and/or timetables set/prepared by the Commission were grossly optimistic and systematically overestimated the Commission's own capacity to get the necessary administrative actions prepared, decided and implemented. Consequently, it took the Commission more than two years (counting from March 1997) before its activities resulted in any action on the ground, i.e. the arrival of the IMT in August 1999. At that time however, the Financing Agreement for the remodelling work on the hospital had still not been signed by UNRWA.

The Palestine Housing Council (PHC)

69. At the beginning of its programme of assistance to Palestinian society, in 1991 the Commission decided to provide assistance to the newly-established Palestine Housing Council (PHC). In view of the political as well as social importance of housing for the Palestinians at this time, as well as the untried nature of the PHC, this was an ambitious step for which the Commission deserves credit.

70. The intention, as expressed in the Financing Agreements of 1991 and 1994, was to establish a credit-funded housing programme. Although beneficiaries were not required to pay the full economic cost of the units, the repayment terms were to be established so as to create a revolving fund for future housing development. The initial project documents referred to housing for lower or modest income families, but the project was not established as a social housing programme. Other objectives fixed for the programme were to provide employment to Palestinians who had lost their jobs in Israel, stimulate internal economic activity in the Gaza Strip and in the West Bank, encourage training in construction methods and management, and institution building(49).

71. As the PHC was a new organisation, the Financing Agreements provided for technical assistance of a technical and management nature to be provided to it. USAID was also supporting the organisation at this time. However, for several reasons, some of which clearly attributable to the PHC, the main technical assistance input to improve its management did not arrive. Various technical assistance inputs were, however, provided by the Commission during the life of the project.

72. In 1998, the Financial Controller of the Commission reported the following weaknesses in the project(50):

(a) there had been significant cost increases, which meant that the housing units were no longer affordable for Palestinians earning low and average incomes;

(b) part of these cost increases were due to inappropriate architectural design, the use of Italian marble in the flats, and the increased size of the units;

(c) the rate of sales was low (30 %) so that the revolving fund was not being established;

(d) the PHC was in breach of the Financing Agreements(51);

(e) the provisions of the Financing Agreements, notably in the areas of reporting and Commission influence on key decisions, were deficient.

The operational services did not reply to these observations.

73. Following the mission of the Financial Controller, a further audit of the PHC projects was launched by the Commission's operational services. This found that, while it was true that there had been cost overruns, the PHC suffered from various management deficiencies, and the allocation of the units in Gaza had not been in accordance with the terms of the Financing Agreement, the Commission had, however, not provided the technical assistance to the PHC provided for in the Financing Agreement. It was, therefore, not in a strong position to reclaim any funds from the PHC. Further, with regard to the final payment due of 6,7 million euro (out of total funding of 39 million euro), it argued that the Commission could either decide to withhold it or set certain strict conditions on its payment. At the end of 1999, more than one year had passed without any action on this audit report, and with no service of the Commission aware of the need to react one way or the other - the matter was entirely blocked. At the end of 1999 the management of the PHC was still hoping that the Commission would resume its support.

74. In some respects, the PHC project can be considered a success. 1100 flats were constructed on 19 sites, to a reasonably good standard(52). In addition to the employment of building workers, Palestinian professionals (architects etc.) found employment after being expelled from the Gulf. The claims concerning the use of Italian marble are not confirmed by any objective evidence, and it is surprising that the operational services of the Commission failed to rebut the charges emphatically. While it is true that the unit costs rose because of lack of financial planning and poor cost control by the PHC, including relaxing the size of the accommodation, some, at least, of the cost increases(53) were due to the impact of closures and strikes on the cost of building materials. Although the PHC failed initially to stop its Director in Gaza from allocating units without applying the repayment conditions provided for, which subsequently led to a decline in repayments on the units in the West Bank(54), at the end of 1999 there was some evidence that the PHC was in the process of turning this round.

75. The Financing Agreement was incomplete in that it failed to provide for the Commission's involvement in key decisions concerning implementation. Reporting provisions were weak. In the first Financing Agreement, insufficient provision was provided for managerial technical assistance, despite this project having an important institution-building component. Although the Commission followed the project closely, by means of ECTAO staff and technical assistants, the records of meetings reveal at times considerable tension, indeed breakdown in communication, between the PHC and the Commission. While the direct cause of the failure of the major technical assistance tender can be attributed to the PHC, the fact remains that, for whatever reason, a key component of the PHC project, to be provided by the Commission, failed to materialise, weakening the PHC's ability to manage the project as required by the Commission.

Projects in support of the Palestinian Legislative Council (PLC)

Construction of a building for the temporary seat of the PLC

76. In 1997, the Commission committed 5 million euro to finance the construction of a building for the temporary seat of the Palestinian Legislative Council in Ramallah. Delays in approving the Financing Agreement were caused in part by the PA changing the location of the building. According to the Financing Agreement, the project had an implementation period of two years, from August 1999 to August 2001. However, at the end of 1999, after several denials from the Palestinian authorities it was found that they had already begun to construct a building for the Palestinian Legislative Council in another location, in the context of a different project, not funded by the EU; this rendered the EU project superfluous.

Provision of technical assistance and equipment to the PLC

77. Another high profile project, involving the provision of technical assistance and equipment to the PLC, for which 3 million euro was committed, has suffered particularly badly as a result of the Commission's handling of procurement procedures. The Commission's service responsible for the implementation of the project included in its invitation to tender for the provision of technical assistance the same firm which, under a short-term technical assistance contract in the preparatory phase of the same project, had drafted the terms of reference for the invitation to tender and the project definition report; these documents were annexed to the tender documentation. Of the five firms which had been invited to tender, this one was the only bidder. As a result, the invitation to tender was cancelled.

78. The short-term technical assistance contract with the abovementioned consultant, which had been concluded by private treaty, was extended until January 1997. The consultant was then awarded a new contract, from May to September 1997, also by private treaty(55). Although the activities carried out, as described in the final report by the consultant, were in accordance with the terms of reference of the contracts, the PLC representatives, met by the auditors on the spot, stated that they were not satisfied mainly because of a lack of consultation with the PLC on the matter.

79. A second invitation to tender was suspended in February 1998, after a request for clarifications from the services of the Commission's Financial Controller, and subsequently it was never awarded, or relaunched. The invitation to tender for equipment has never been launched. As no progress has been made since 1997, other donors moved in to finance the activities originally foreseen for this key EU project. However, until the time of the audit, at the end of 1999, the Commission had neither reformulated nor cancelled the project.

Other projects

80. The implementation of the project on counter-terrorist assistance to the PA(56) has been complicated and delayed by the fact that funds were coming from three different budget headings, with different procedures and financing decisions.

81. Because of the very high influx of aid and the insufficient coordination between donors on the ground, delays in starting implementation meant that micro-projects which were supposed to receive EU financing had already been funded by other donors or were no longer of high priority, because of changing circumstances. As a result, project identification had to be carried out twice, causing more delays and a waste of technical assistance financial resources(57). Also, the heavily centralised procedures which are currently used to decide on project identification are inappropriate for this kind of programme involving micro-projects(58). The responsibility for the decision on the selection of the micro-projects should be devolved to ECRO, in order to make the implementation quicker and easier, without impairing the Commission's monitoring and control.

82. In the case of a large Primary Health Care Programme, because of insufficient preparation and coordination of donors, even before the implementation had started the project was already out-dated and needed to be thoroughly reformulated.

83. For another project, the local account was to be replenished by the Commission provided that the Palestinian implementing agency justified the use of at least 80 % of the previous advance. However, because of the time necessary for the Commission to process payment requests (up to three months), this provision meant that advance funds were used up before the next payments were received, with the result that the Palestinian implementing agency had to pre-finance the project from its own funds for more than 1 million euro(59).

COORDINATION WITH OTHER DONORS AND THE PALESTINIAN AUTHORITY

84. The structures and arrangements for coordination between donors are well developed. Structures for aid coordination include the Ad Hoc Liaison Committee (AHLC), with senior representatives of the major donors, and the Consultative Group (CG), with senior technical representatives of all donors and UN agencies. At the local level, the corresponding venues are respectively the Joint Liaison Committee (JLC) and the Local Aid Coordination Committee (LACC); in addition, Sector Working Groups (SWG) provide a forum for discussion, between the PA and the donors, of the sectoral policies and programmes; the Task Force on Project Implementation (TFPI) focuses in particular on the implementation constraints.

85. At the AHLC level, the Commission, in 1999, took a leading role in the updating of the Tripartite Action Plan on Revenue, Expenditure and Donor Funding for the Palestinian Authority (TAP). In general, however, despite the efforts of ECRO's staff, the Commission, in Palestine, has not been able to exercise a coordination role commensurate with the size of its programme of assistance. In 1999 it was not Shepherd(60) of any SWG. This was mainly due to the organisation and management weaknesses described above, in particular the lack of authority at the local level and the shortage of resources.

86. The Commission has recently improved its coordination with the Member States, particularly concerning the adoption of the CSP and the NIP. Nevertheless, at the operational level, coordination with the Member States should be further improved and developed, for instance concerning the exchange of information from both sides on project identification and preparation, and on specific issues related to implementation. In this regard the meetings, which are organised on the spot in order to discuss projects before they are presented to the Med-Committee, are certainly useful, but not sufficient.

87. Because of a lack of representatives at senior level at the meetings, the Commission has not played the active, high-profile role in UNRWA's reform process that the size of its contribution would have justified, unlike other donors, such as the EU Member States and Switzerland.

88. The PA appreciates the Commission's contribution to its development. However, although the coordination mechanisms are being improved and the related activities intensified, the effectiveness of the coordination, according to the information obtained on the spot, is not yet considered on a par with other donors, because of the Commission's planning weaknesses mentioned above.

CONCLUSIONS AND RECOMMENDATIONS

89. The Commission's management of the programme of assistance to Palestinian society has had positive aspects and results (see paragraphs 23-24), and has encountered considerable external constraints (see paragraphs 16-22). The special local conditions and their dynamic nature require, to an even greater extent than for other developing countries, adequate resources, good interservice coordination, an authoritative presence on the ground, clear objectives, timely decisions, efficient systems and operational procedures, as well as close monitoring and control. In this respect, nevertheless, the impact of the programme has been reduced by structural weaknesses and failures in the Commission's programming and management procedures and systems, which are the responsibility of the Commission and independent of local constraints (see paragraphs 28-83). These deficiencies are not unique to the programme of assistance to Palestine, but affect EU cooperation policy generally. The remedies, therefore, should be seen in the perspective of a more general reform of Commission structures and procedures in this field.

90. The Commission's management has sometimes focused its attention on the procedural details, at the expense of the results which were expected from the actions financed. The implementation setbacks experienced by highly visible projects (such as the European Gaza Hospital and the technical assistance to the PLC), to which factors within the Commission's control contributed, have had the consequence of undermining the EU's image as a manager of much needed aid.

91. The Court recommends, in particular, that:

(a) the Commission should reassess its priorities: either allocating adequate resources (crucially, adequate staff and effective management information systems) to such an ambitious programme, or reducing the scope of the programme to a manageable size if the available resources are limited;

(b) given the present programme, ECRO should be considerably reinforced and given substantial authority, including financial authority. Devolution of greater authority to field offices is generally needed in order to improve the effectiveness of the EU cooperation policy. The prevention and eventual detection of mismanagement could also be further improved through the reinforcement of the financial control function at ECRO, which at the moment is weak, due to the lack of staff and technical resources, such as databases. The Commission should assess its staff needs in Palestine and, if necessary, start negotiations with Israel for an increase in the number of staff, as ECRO itself had already suggested in 1996;

(c) an effort at rationalisation, simplification and clarification concerning management systems and procedures is urgently needed; the focus should be on results;

(d) as in other areas of EU cooperation policy, the current split in the project cycle should be overcome. Coordination and collaboration between different services need to be substantially improved, with a view to fostering the sharing of responsibilities and the pooling of expertise, simplifying and shortening the decision-making process and reacting rapidly to changing circumstances;

(e) project preparation should be substantially improved, and a pipeline of projects should be created. The current situation, whereby project preparation tends to be too quick and superficial, and implementation consequently often delayed, should be corrected;

(f) indicators should be introduced in order to allow the Commission to assess its own performances in achieving the objectives that it has fixed.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 11 and 12 October 2000.

For the Court of Auditors

Jan O. Karlsson

President

(1) The United Nations Relief and Works Agency, in charge of Palestinian refugees in the West Bank, Gaza Strip, Jordan, Lebanon and Syria.

(2) Council Regulation (EC) No 1734/94 of 11 July 1994, on financial and technical cooperation with the Occupied Territories (OJ L 182, 16.7.1994, p. 4).

(3) In a document published in 1998, the Commission calculated that budget aid per capita over the period 1991-1995 was ECU 258 for the Palestinians, ECU 23 for the ACP countries and ECU 11 for the other Mediterranean countries (COM(97) 715 final).

(4) PA Ministry of Planning and International Cooperation (MOPIC), 1999 Third Quarterly Monitoring Report on Donors' Assistance.

(5) The Secretariat of the AHLC: " Improvement of Aid Coordination for West Bank and Gaza ", 30.9.1999.

(6) The budget heading references in the report follow the 1999 budget.

(7) The ninth EC-UNRWA Convention (OJ L 282, 1.11.1996, p. 68) provided for 105,9 million euro from 1996 to 1998; the 10th EC-UNRWA Convention (OJ L 261, 7.10.1999, p. 36) provided for 120,8 million euro from 1999 to 2001.

(8) OJ L 351, 29.12.1998, p. 13.

(9) OJ L 354, 30.12.1998, p. 14.

(10) Council Regulation (EC) No 1488/96 of 23 July 1996, on financial and technical measures to accompany (MEDA) the reform of economic and social structures in the framework of the Euro-Mediterranean partnership (OJ L 189, 30.7.1996, p.1).

(11) These 12 budget headings concern food aid, humanitarian aid, help to refugees, measures to support NGOs, environment, aid for population policies and programmes, rehabilitation, human rights and democracy, prevention of conflicts and support for peace processes.

(12) OJ C 340, 12.11.1996.

(13) OJ C 57, 24.2.1997.

(14) Point 21 of the resolution (OJ C 175,21.6.1999, p. 282).

(15) The task essentially consisted of assessing whether the Commission has established the means of judging whether its own performance is satisfactory.

(16) CEPT II: " Evaluation of the EC programme of assistance to the West Bank and Gaza Strip - Final report and annexes ", January 1999, set out in the Commission's staff working paper SEC(1999) 408.

(17) On a daily average, Palestinian workers in Israel dropped from 116000 in 1993 to about 30000 in 1996 (Source: World Bank, quoted in The Economist Intelligence Unit: " Country Profile, Israel/The Occupied Territories, 1999-2000").

(18) SEC(98) 1769.

(19) In 1998, Israel collected on behalf of the PA and then transferred to it taxes and duties amounting to 40 % of the PA's domestic revenue (Report of the Independent Task Force, chaired by M. Rocard and directed by H. Siegman: "Strengthening Palestinian Public Institutions", sponsored by the Council on Foreign Relations, 1999).

(20) In 1998, Israel collected on behalf of the PA and then transferred to it taxes and duties amounting to 40 % of the PA's domestic revenue (Report of the Independent Task Force, chaired by M. Rocard and directed by H. Siegman: "Strengthening Palestinian Public Institutions", sponsored by the Council on Foreign Relations, 1999).

(21) The independent Task Force was created to assist the PA and the donor community to improve the efficiency and credibility of the emerging Palestinian self-governing institutions.

(22) In particular, the election of the President and of the Legislative Council, the setting up of a cabinet, the creation of a public administration and the maintaining of public order.

(23) Palestinian General Control Institution, First Annual Report, 1996.

(24) The TAP, agreed in 1995, sets out the respective commitments of the PA, Israel and the donor community in order to overcome the existing constraints to development in the West Bank and Gaza Strip.

(25) Article 7 of the Financial Regulation of 21 December 1977 applicable to the general budget of the European Communities (OJ L 356, 31.12.1977, p.1), as last amended by Council Regulation (EC) No 2673/1999 of 13 December 1999 (OJ L 326, 18.12.1999, p. 1).

(26) Technical assistance and temporary seat building for the PLC; final equipment for the European Gaza Hospital; Ramallah Radio Station; MSP III; PDF (PLE/98/06).

(27) There have been assessments made of a global nature of requirements as part of the Decode exercise, but this was a special exercise to prepare for the "Commission of tomorrow". This is not the same as the responsible services making, on a regular basis, assessments of need in order to support bids for additional staff as part of the normal budgetary process.

(28) For instance, the financial, tendering and contract units of the SCR.

(29) The Commission Representative had already been granted diplomatic status in 1992.

(30) Palestinian Development Fund (PDF), Centre for Private Enterprise Development (CPED).

(31) PHC, technical assistance for customs administration (PLE/97/11).

(32) In 1996, the Commission recognised the need to assess previous experiences and deal with donor coordination in these documents (note No 11771 of 24 July 1996 by Mr Prat, Acting Director-General of DG I. B).

(33) European Gaza Hospital, PHC.

(34) Cargo-handling facility (PLE/99/0217), social rehabilitation programme for Palestinian ex-detainees (PLE/99/02).

(35) Gaza solid waste consolidation (PLE/99/01), primary health care (PLE/99/0215), social rehabilitation programme for Palestinian ex-detainees (PLE/99/02).

(36) CPED, MSP I-II, counter-terrorist assistance to the PA.

(37) For example, the first transfer for 1999 under the 1999-2001 Convention was not made until the end of October 1999. As the Commission is a major donor to UNRWA, and as UNRWA is chronically short of funds, such delays cause difficulty to UNRWA.

(38) On the issue of earmarking, see also the Court's Special Reports No 2/97 on humanitarian aid (OJ C 143, 12.5.1997, p. 1), and No 5/98 on reconstruction in former Yugoslavia (OJ C 241, 31.7.1998, p. 1).

(39) Justification for the transfer of appropriation No 53A/99 (1999 Notenboom procedure), SEC(1999) 1608 final, p. 26.

(40) European Gaza Hospital, CPED, technical assistance to the PLC, institutional capacity building, counter-terrorist assistance to the PA.

(41) School construction, MSP III, technical assistance to the PLC, PHC, European Gaza Hospital.

(42) MSP I-II, university equipment, institutional capacity building, school construction.

(43) MSP I-II, university equipment.

(44) MSP I-II, MSP III, school construction, technical assistance to the PLC, institutional capacity building, PHC.

(45) University equipment, OT/96/02a, and school construction, OT/96/02b.

(46) European Gaza Hospital, PHC, institutional capacity building, family planning.

(47) School construction phase II.

(48) This refers to: changing the nature of one draft Financing Agreement from completion of construction to remodelling, plus the problem of the proper signatory to this Financing Agreement, UNRWA or the PA; changing a global commitment for various other technical assistance tasks in order to include the technical assistance for the hospital management, necessitating a last-minute re-submission to the Med-Committee; changing its position on who should contract the management team, UNRWA or the EU, all of which caused further delay in the signing of the management contract.

(49) It can be argued that there were too many, too ambitious objectives for the project.

(50) All of these criticisms were based on documents in ECRO and discussions with ECTAO personnel.

(51) ECRO had formally pointed this out to the management of the PHC in March 1996.

(52) The European Parliament's rapporteur noted that the USAID units were finished to a higher, more expensive, standard than those funded by the Commission. The units seen by the Court's auditors were not luxurious by the standards of the area.

(53) It is a valid point of criticism that the reporting provisions and the Commission's monitoring of the project did not permit cost variances to be identified and explained in the normal manner.

(54) Which had been allocated in accordance with the agreed terms and conditions, and where the beneficiaries had started to repay the loans correctly.

(55) The total amount of these contracts is EUR 595009.

(56) Joint Action 97/289/CFSP and PLE/97/10.

(57) MSP I-II; at the end of 1999, the problem was already foreseen also for MSP III, even before the start of its implementation.

(58) This issue concerns also the implementation of LRDP, which, at the end of 1999, had not started yet.

(59) MSP I-II.

(60) The Shepherd is the donor who plays the key coordinating role in an SWG.

The commission's replies

EXECUTIVE SUMMARY

1 to 3. Assistance to the Palestinians has been and is one of the EU's political priorities.

Ever since the beginning of Community assistance in 1971 and in particular during the uprising of the Palestinians (1988 to 1993) the environment in which Community assistance was provided, has been very unstable and difficult.

The Community's programme of assistance was hampered by the difficult circumstances prevailing in the area.

These were extraordinary circumstances that required continuous adaptation with limited resources. The increase in the volume of assistance, as well as the change of orientation of the programme compounded by the limitation of human resources made it difficult to respond to the needs and the principles defined by both the Council and the European Parliament.

4. The Commission considers that the overriding factor affecting the impact of the programme was the lack of human resources. The Commission concedes that there were weaknesses in management, mostly as a result of this. Plans are in hand for changing both the structures and the systems used within the Commission, as follows.

(a) The Commission has embarked on an overhaul of the management of its external aid programme as part of the wider Commission reform effort.

(b) The Commission's efforts to promote the use of performance indicators will be renewed.

(c) The whole question of project preparation and planning is being addressed as part of the overall reform process.

(d) The question of coordination with other donors and Member States will continue to be kept under review.

INTRODUCTION

Context and background of European Union (EU) assistance to Palestinian society

5. In 1987 a new budget line was established for the West Bank and Gaza Strip.

6. The Council adopted Regulation (EC) No 1734/94 as the legal instrument regulating the pledge. According to that Regulation the Community should implement financial and technical cooperation with the West Bank and Gaza Strip under a five-year programme, 1994 to 1998.

As the figures in paragraph 8 of the Court's report show, since 1994 the Community has far exceeded this pledge.

Grant support has been concentrated on three areas: infrastructure rehabilitation, institution building (including recurrent cost support to the education sector) and private sector development.

The legal and budgetary framework of the programme

8. This assistance to UNRWA continues to this day, with triennial conventions between the EC and UNRWA governing the Community contribution to the operations of UNRWA in its fields of operation (health and education).

The previous EC-UNRWA Convention expired at the end of 1998. In November 1998, the Council adopted the directives for the Commission to negotiate the 10th EC-UNRWA Convention, covering the period 1999 to 2001. The negotiations with UNRWA are concluded allowing for the signature of the Convention and disbursement of funds in early autumn 1999. In addition to the conventional contribution, some specific UNRWA projects are supported by the Commission, amongst others, on food aid (Directorate-General - DG Development) and humanitarian aid (ECHO).

EXTERNAL CONSTRAINTS ON THE PROGRAMME

The weakness of Palestinian institutions

22. The Commission and other donors have pushed hard for corrective measures. As a consequence of this the Palestinian authority has already taken the first steps to improve its budgetary transparency.

THE COMMISSION'S FORMULATION AND MANAGEMENT OF THE PROGRAMME

Budgetary execution

26 and 27. The overriding political situation in the area and the complexity of the projects make it particularly difficult to foresee how quickly projects can be implemented or even whether financing agreements will be signed. This uncertainty makes it difficult to predict the actual level of disbursement, but there have been improvements in forecasts over the last year.

Human resources

Number of staff

The Commission's central services

29. The Court recognises the staff shortages in the geographical and technical units. The financial units have been equally under resourced, and the Commission has recognised the problem and is addressing the issue of staffing in general.

30. The Commission recognises the shortage of administrative resources devoted to the external aid programmes and has drawn this to the attention of the budgetary authority on several occasions, and most recently in the communication on reform adopted by the Commission on 16 May 2000.

The field office

31. Between February and November 1994, work was carried out without authorisation from the Israeli authorities.

33. The Commission did reinforce ECRO staff following the recommendations of the 1996 inspection report according to the then existing possibilities. Appointments were made for one A official (24 August 1997) and one C official (7 January 1997).

A second ALAT (agent local d'assistance technique) post was also added in February 2000.

The MEDA team

35. The Commission agrees with the Court's observations. MEDA teams were created to provide human resources in addition to the technical assistants, not to substitute for existing staff or experts.

The Commission has to respect the current rules for technical assistance offices (TAOs/BATs) which allow for one year renewable contracts only. It considers that, in the light of insufficient resources, recourse to technical assistance offices was the only solution possible. This problem is not restricted to the MEDA teams but is common to all external assistance offices. The Commission's services are working towards a solution, and this is an important aspect of the reform proposals both in the management of external assistance and more widely.

36. The Commission agrees that these types of delay must be avoided. It took some time to find a suitable replacement, but the successful candidate took up post on 28 August 2000.

Organisation

38. The Commission has adhered closely to the rules and regulations, and although this has had the advantage of greater transparency, it has also contributed to slow decision-making.

39. A clearer definition of responsibilities and better coordination will result from the Commission's plans for reform, which are already under way (see answers to paragraphs 90 to 92). In particular, the project cycle will be reunited with the expected result that responsibilities will be clear.

40. Posts are published with a job description. Comprehensive job descriptions for each member of staff are currently under preparation as part of the overall Commission reform.

41. The Court's point is being taken up in the reform plan for the Commission's external services. Decentralisation and devolution to delegations is a major feature of the forthcoming reform.

42. The Commission shares the Court's opinion that decentralisation cannot take place if the appropriate tools as well as qualified human resources are not available. The advantages are that decentralisation affords greater control over the disbursement of funds.

The Commission has been working towards the establishment of an appropriate information system. CRIS (common RELEX information system) will give Delegations access to financial information for the different projects.

Strategy and planning

43. Since 1997, the Palestinian Authority, with the support of the World Bank, has been preparing the Palestinian development plan which constitutes the basis of the international donor community's strategy. The key to increasing Palestinian Authority ownership of its own development is the further strengthening of this plan.

In parallel with the development plan, and with informal and formal consultations with the Ministry of Planning and International Cooperation (MoPIC), the E4 strategy is to be found in the underlying rationale of the Euro-Mediterranean Partnership.

In order to provide the European Institutions, Member States and our counterparts with an elaborated view of the Commission's long-term development strategy, a country strategy paper for the West Bank and Gaza Strip was prepared covering the period 2000 to 2006.

In the mid-term perspective, and as required by the MEDA Regulation, triennial national indicative programmes are to be prepared, and the work for the document covering the years 2000 to 2002 has been finalised.

In the short term, the Commission has prepared an annual financing plan in accordance with its proposal for a new MEDA Regulation. This plan has been prepared following discussions and consultations with MoPIC.

44 and 45. It is true that performance indicators were not set for the NIP. Indicators were set at the project and programme level. Experience gained from implementing programmes and projects was duly taken into consideration when the NIP 2000 to 2002 was prepared and when new projects were developed.

46. The Commission agrees that the results in institution building have not, until now, been very good. This is one of the reasons why the Commission funded the report " Strengthening Palestinian public institutions ". It is too early to evaluate its results since the report was finalised only in the summer of 1999.

Regarding the Palestinian Legislative Council (PLC) the Commission's participation in the elections was central to setting up the PLC. The Commission's overall assistance to the PLC should be considered a success.

47. The need to improve project planning and preparation has been recognised and is being addressed in the current reform process. A pipeline of projects has been prepared.

Project preparation: taking into account risks, constraints and procedural implications

48. The European Gaza Hospital and the Palestinian Housing Council projects were initiated in 1990 to 1991. ECRO was only set up in 1994, and until 1994 when the Palestinian Authority was established, there was no formal counterpart responsible for the definition of a development strategy and coordination with the donor community. The Commission is undertaking steps within its own means to address this problem by preparing a three-year project pipeline.

49. The Court's comments are valid. The current reorganisation of the RELEX (external relations) services should contribute to resolving the problems.

50. The problems of effective coordination and, on occasion, wasted effort on the part of the Commission are not easy to solve given the scale of the aid and the number of donors involved, as well as the institutional weaknesses of the Palestinian Authority (PA).

51. For the projects examined by the Court, the Commission undertook thorough risk/constraint assessments, as far as it was possible.

52, 53. Earmarking enables to Commission to meet requests made by the European Parliament and Member States for precise information on how the funds are used, especially following the adverse media coverage of the donor programmes in Palestine.

There were several reasons for the delays in concluding negotiations with UNRWA - amongst them, the generally difficult climate due to allegations of fraud on the part of UNRWA Lebanon in October 1998. Earmarking did cause complications and delays to the 10th EC-UNRWA Convention, but every effort was made to make the convention clearer and more transparent as compared with previous conventions by introducing payment schedules, clear reporting mechanisms, etc. This view is shared by the Member States and by UNRWA itself.

53. In the case of the local rural development programme, the separate accounting window for EC funds allows full transparency and accountability and enables the Commission to track the activities financed with EC funds.

Performance indicators

54. The Commission agrees that the use of performance indicators could improve project management. The reorganisation within the Commission during the past two years has made this task more difficult. However, the Commission intends to make a renewed effort in this area following the adoption of the communication on reform of external aid management.

Project implementation

Timing of action and responsiveness

56. Since the SCR (service commun RELEX) became fully operational in mid-1999, there has been a substantial acceleration in the time taken for tenders and payments and an improvement in overall project implementation.

Public procurement

57. The new manual of instructions for the external aid tender procedures will lead to greater efficiency. At mid-2000 there were no unduly delayed tenders, at least not centralised ones. Nevertheless, there could still be delays in the launching of tenders and in the time from the launch of a tender until the award of a contract if there are inadequate resources.

Procurement procedures are deliberately rigorous in order to avoid disputes which could lead to delays, and the procedures must be followed correctly.

58. Delays in the tendering procedures were caused by staff shortages.

The Commission's decision to establish the SCR was designed in part to overcome these problems. Since the SCR became fully operational in mid-1999, there have been improvements in the time needed to conduct tenders. In a large and increasing number of cases the average time of six to nine months to conduct a tender is adhered to.

Delays continue to occur due to reasons beyond the Commission's control such as in the time taken for approval by the Palestinian Authority, or for contract signature.

59. In deciding to create the SCR the Commission has succeeded in substantially diminishing the delays. Coordination between both European Commission Representation Office (ECRO) and the central services, as well as between services, has been improved greatly. This has been acknowledged by ECRO. An example of improved coordination is the recent creation of the GIV group (Groupe interservice de visas), which has resulted in diminishing the time needed to approve a draft financing proposal to two weeks.

Monitoring and reporting

60. A basic programme of tracking has been established through the use of spreadsheets, and a series of improvements have been put in place to have information on hand, including a targeted plan to use the management information systems

61. There is no single list of projects. This has to do with the structure of Community funding, which is by budget line. On some projects, particularly those co-financed with NGOs (non-governmental organisations), the Commission is consulted at the start and periodically provided with summary tables.

The Commission agrees that management information systems could be improved, and work is in hand to address the problem.

FINDINGS ON THE PROJECTS EXAMINED

The European Gaza Hospital

66 to 68. It was always the intention that the Commission involvement in this project would be limited to the construction and equipment of the hospital, with UNRWA taking responsibility for everything else.

In 1996 and with active Commission involvement, the hospital was practically completed (97 %). At that time, it was not expected that the Commission would become involved at all in the arrangements for the operation of the hospital, and this became an issue only when it became clear that the responsible authorities were not in a position to fulfil their obligations to commission and operate the hospital.

67. The sequence of events as described by the Court shows flexibility and a willingness to adapt.

68. The financing agreement for remodelling works was signed by the Commission on 20 July 1999 and by UNRWA on 11 January 2000.

The Palestine Housing Council (PHC)

73. The project agreement expired and the funds were decommitted in June 2000. Any proposals for further funding from the PHC management will have to be considered as a new project, and processed through the usual channels

75. The standard text of financing agreements has been revised and the quality improved.

The tender failed because the PHC was in breach of the tendering procedures. Subsequent attempts by the Commission to offer solutions were rejected by the PHC.

Projects in support of the Palestinian Legislative Council (PLC)

Construction of a building for the temporary seat of the PLC

Provision of technical assistance and equipment to the PLC

76 and 77. The project has therefore been cancelled and funds were decommitted in June 2000.

77 to 79. The project is in the process of being cancelled.

Other projects

81. In the case of the municipal support programme, phase III (MSP III), the projects that were identified in the financial agreement (FA) were only indicative. It is not necessary to know at the time of the project preparation the precise list of micro-projects that will be funded under the project.

The list of projects will be updated by the consultants and by the Palestinian Economic Council for Development and Reconstruction (Pecdar) once the consultants take up their duties.

A local rural development programme (LRDP) has been under full-scale implementation since February 2000.

In the case of the LRDP, the Commission headquarters do not approve the micro-projects. The projects are approved by the Project Steering Committee (PSC) which acts as the authority on financing decisions. The projects approved by the PSC are included in the work programmes and cost estimates, which are submitted to Commission headquarters for approval. They are required to give approval mainly for the technical, financial and administrative aspects of the implementation and not the selection of the projects.

82. The prime responsibility for the coordination of donors rests with the Palestinian Ministry of Health. The project has now been decommitted, and a reformulated project is in the pipeline.

COORDINATION WITH OTHER DONORS AND THE PALESTINIAN AUTHORITY

85. The Commission's efforts to play a high-profile role have been hampered by such factors as lack of resources, and its attempts to take a leading role in the international aid coordination structure has been opposed by other parties, notably the United States.

86. Coordination with Member States could be further improved. However, prior to project presentation at the MED Committee, ECRO convenes information meetings with the Member States. There are limits to what coordination can achieve in particular when there are differences in opinion between capitals and local delegations. Decisions are taken by qualified majority which may lead to a situation where the opinion of one or more MS is not reflected in the final project design.

87. The reform process within UNRWA relates to their internal operations and as to how in the future they will respond to donor needs. The Commission, as a major donor, should be actively involved in this reform process and will be represented at the appropriate level.

88. The Commission has strengthened coordination with the Palestinian authority and will continue to do so. A more active and frequent coordination structure has been instituted with the Minister for Planning and International Cooperation. Since October 1999, two coordination meetings (on 4 November 1999 and 24 January 2000) on project implementation have taken place in Brussels. This effort has already been appreciated by MoPIC.

CONCLUSIONS AND RECOMMENDATIONS

89. The Commission vision continues to be to establish a Palestinian State with a prosperous economy in a free, pluralistic society. The Court recognises the special and considerable constraints affecting the Commission's work in Palestine, but concludes that structural weaknesses in the Commission's internal systems reduced the impact of the programme. The Commission's view is that the principal obstacle to efficient project management has been the lack of human resources.

The Commission has already embarked on an overhaul of the management of its external assistance programme, as part of the wider Commission reform effort. The Court's recommendations in relation to this report will be taken into consideration fully. The reform aims for enhanced multiannual programming; reform of comitology arrangements, reunification of the project cycle from identification to implementation. A new body to implement Community aid will be created, and this will lead to more local management of the project cycle by way of devolution and decentralisation.

90. The Commission would like to point out that (a) the body of procedure applied to external aid has been growing continuously and in complexity and (b) the Commission has been criticised in the past for not following these procedures meticulously. It is the Commission's aim, however, to achieve the results envisaged by the action financed. There were delays with the Gaza Hospital, but, they were caused by the then prevailing political circumstances. The situation on the ground has considerably changed from 1991, when the European Gaza Hospital was started, and it continues to change. It was the Commission who kept the project alive. The Commission may however not have done enough to publicise its decisive role in preventing the project from failing.

91. (a) A central theme of the overall Commission plans for reform, announced on 16 May 2000, is to focus scarce resources on core activities. In future the geographic departments of the Directorates General for External Relations and Development will focus on programming, amongst other things, the strategic policy decisions on funding allocations per sector, to be established in close dialogue with the beneficiary countries. The involvement of Member States will in future focus on policies and strategies, rather than on micro-management of projects.

(b) Proposals for creating a new body responsible for the implementation of EC assistance (see point (d)) should also remedy the very serious staff shortfalls, while terminating the current dependency on outside consultants for the fulfilment of Commission tasks. ECRO should be considerably reinforced.

Any discussion with Israel on ECRO, especially its status, its staffing and its physical location depend on the outcome of the final political settlement between Israel and the Palestinians. On mismanagement the Commission can exert a certain influence and may even improve its control mechanism. It should be noted however that the management or mismanagement by other important players, such as the United Nations, as in the case of the Gaza Hospital, lay beyond its control.

(c) Further efforts are being made to rationalise systems and procedures in general. The MEDA Regulations were revised in September 2000. Commission proposals which would lead to a simplification of procedures have not yet been positively received by Member States in the MED-Committee.

A new manual of instructions relating to contracting procedures has been in use since the beginning of 2000. Such procedures necessarily have a degree of complexity in order to avoid undue claims or legal disputes which could lead to delays. Other areas, however, such as the procedures for approving country strategies, national indicative programmes and annual work plans are being looked at with a view to simplifying matters. This coupled with the reform of the external services should lead to improved results.

(d) The Commission has already decided that the project cycle will be unified. The majority of EC assistance programmes, including those to Palestine, will be managed by a new body, responsible for all project stages from identification to full implementation. The present SCR will be converted into an Office, reporting to a Board of External Relations Commissioners. The legal and budgetary framework for the body in its final form will depend on the wider discussions on externalisation as part of the wider Commission reform efforts and on a proper evaluation of the first stage. The new entity will allow the Commission to retain full managerial control over the provision of external assistance

(e) New working methods will be introduced for the geographical departments and the SCR, and the consistency and quality of programming will be closely monitored. Evaluation will be given a substantially higher profile.

(f) The logical framework, which normally is to be attached to every financing proposal, makes specific provision for a column on objectively verifiable indicators, but due mainly to constraints of staff and time to ensure sufficient attention to detail in the process of preparing/designing projects, indicators are indeed sometimes inadequate. In this regard the Commission's decision of 16 May 2000 on the reform of its external assistance programmes makes specific provision to further strengthen both its methodology and its training arrangements. In the last two years the Commission has greatly expanded training in project preparation for both headquarters and field staff, as well as for counterpart officials of partner governments.