EN Official Journal of the European Union C 174/1

SPECIAL REPORT No 4/2006

concerning Phare investment projects in Bulgaria and Romania, together with the replies of the Commission

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

(2006/C 174/01)

CONTENTS

LIST OF ABBREVIATIONS

I-VII SUMMARY

1-11 INTRODUCTION

1-4 Overall Phare objective

5-10 Phare programming and implementation

11 Financial significance of investment support in national programmes

12-14 AUDIT SCOPE AND APPROACH

15-56 OBSERVATIONS

15-16 Projects were in line with overall Phare objectives

17-18 Investments took place

19-42 Over half of projects not operating as intended at the time of audit

20-23 Strengthening the Public Prosecutor's Office in Bulgaria

24-25 Strengthening the Romanian judicial and penitentiary system

26-28 Investment in SME business incubators in areas of industrial decline in Bulgaria

29-31 Local and regional infrastructure projects in Romania

32-36 Bulgarian Post-Privatisation Fund (BPPF)

37-38 Energy sector liberalisation in Romania

39 Agrostatistics in Bulgaria

40-42 Asylum in Romania

43-56 In most projects audited sustainability was not assured

44-50 Risks to technical viability

51-56 Risks to economic viability

57-61 CONCLUSIONS AND RECOMMENDATIONS

The Commission's replies

LIST OF ABBREVIATIONSAcquis communautaire Entire body of EU law as expressed in the treaties, in the secondary legislation and policies of the Union, as well as in the case-law of the European Court of JusticeAP Accession PartnershipASNS Agricultural statistical network systemBPPF Bulgarian Post-Privatisation FundCDMS Case and document management systemCEEC Central and eastern European countriesDIS Decentralised implementation systemEBRD European Bank for Reconstruction and DevelopmentESC Economic and social cohesionNBPS National Border Police Service (Bulgaria)NRO National Refugee Office (Romania)Phare The Phare programme is currently the EU's main instrument of financial and technical cooperation with the candidate central and eastern European countries (CEECs). It was set up in 1989 and originally aimed only at two countries: Poland and HungaryPO Prosecutor's OfficeSME Small and medium-sized enterprisesUIS Unified information filing system

SUMMARY

I. The Phare programme provides financial assistance to countries in central and eastern Europe which are candidates to join the European Union. The Commission and the national authorities share the management of the Phare programme. The Commission has overall responsibility for managing the programme. Recipient countries have primary responsibility for undertaking and operating the projects (see paragraphs 8 to 10).

II. The purpose of the Court's audit was to assess the performance of Phare supported investment projects in Bulgaria and Romania. The conclusions are based on the examination of a sample of projects financed under the Phare National Programmes 2000. The final payments for these programmes were made in 2005 (see paragraphs 12 to 14).

III. The audited projects were generally in line with the overall investment objectives of Phare, namely to facilitate the alignment with EU norms and standards or to assist in the context of economic and social cohesion (ESC) programmes (see paragraphs 15 and 16). The Court also got assurance that, in general, the projects were put into place in accordance with the conditions of the supply and works contracts (see paragraphs 17 and 18).

IV. For over half of the investment projects audited, assets were not, or only partially, being used for the intended purpose. Output and results lagged considerably behind schedule, sometimes by up to two years. These shortcomings were due to the continuing lack of both administrative capacity and national resources. This illustrates the need for the national authorities to make further substantial efforts to finalise the projects and to achieve the underlying project objectives (see paragraphs 19 to 42).

V. Phare support for the two projects led by international financial institutions was problematic. In Bulgaria, the Post-Privatisation Fund lacked efficiency and effectiveness (low level of equity investments opposed to high management costs), whereas in Romania the Phare contribution did not provide clear added value for a better regulatory infrastructure in the electricity market (see paragraphs 32 to 36 and paragraphs 37 and 38).

VI. The technical viability of the investment goods is not assured and their longevity is at risk. With regard to the supported business parks and incubators many management problems are still to be solved to achieve the desired economic viability (see paragraphs 43 to 56).

VII. The Commission is responsible in particular for the development of Phare policy, the programming of Phare aid and for its supervision. While its checking of projects prior to financing (ex ante control) proved to be effective, the Court criticises the Commission's overall management of investment projects in three particular areas: — it overestimated the management capacity of the public authorities in Bulgaria and Romania and often agreed with their overambitious targets and deadlines, — it neglected the principles of sustainability and co-financing, — it did not consider enough the expected added value and catalytic effect of Phare money in activities led by international financial institutions.

Accordingly the Commission should take steps to improve its management regarding these three aspects (see paragraphs 57 to 61).

INTRODUCTION

Overall Phare objective

1. Since 1997 the overall objective of the Phare programme has been to help the central and eastern European countries (CEEC) to prepare to join the European Union. In order to support the reforms required for EU membership, the Phare programme provides financial assistance as part of the Union's pre-accession strategy.

2. In October 1999 the Commission adopted specific guidelines for the implementation of the Phare programme for the period 2000 to 2006 (1). According to these guidelines Phare support had to focus on two main priorities, investment and institution building (2).

3. After the accession of 10 countries in May 2004 a major focus of the enlargement policy became the implementation of the accession roadmaps for Bulgaria and Romania.

4. After the closure of the accession negotiations in December 2004 the Commission adopted in February 2005 a favourable opinion on the accession of these two countries to the EU. Following the green light given by the European Parliament, the Treaty of Accession with Bulgaria and Romania was signed in April 2005 in Luxembourg. This signature paves the way for the ratification procedures that will formalise Bulgaria's and Romania's membership on 1 January 2007. However the Council may decide to postpone the date of accession by one year to 1 January 2008 if either State does not fulfil the commitments undertaken during the negotiations.

Phare programming and implementation

5. The EU's ongoing pre-accession strategy for Bulgaria and Romania is based on the Accession Partnerships (AP), which provide a framework for the programming of priorities and financial resources. On the basis of the priorities identified in the APs, financial assistance is made available through annual financing decisions taken by the Commission.

6. These financing decisions are followed by financing memoranda agreed between the Commission and the Bulgarian and Romanian authorities. Financing memoranda are concluded regarding national programmes and specific subjects such as cross-border cooperation programmes, multicountry programmes or nuclear safety programmes. The annual national programmes finance priority needs related to accession.

7. Financing memoranda are accompanied by the so-called Project Fiches which set out the details of all projects to be implemented. Project Fiches are key planning documents, giving the objectives of each project including indicators of achievement and the timetable for implementation. As a rule, projects have to be implemented within three years of the signature of the financing memorandum.

8. The management of the Phare programme is shared between the Commission and the national authorities. The Commission (Headquarters and Delegations in Sofia and Bucharest) is responsible for the overall management of the Phare programme and in particular for the development of Phare policy, the programming of Phare aid and for its supervision. Primary responsibility for undertaking and operating the projects lies with Bulgaria and Romania.

9. The Phare programme is currently operating in Bulgaria and Romania under the so-called ‘decentralised implementation system’ (DIS). This means that the public authorities in Bulgaria and Romania themselves carry out the procurement procedures for investments. However, before it comes to contracting, the regularity of the procedures is checked by the Commission Delegations in each country (ex ante control).

10. Monitoring of programme implementation is the joint responsibility of the acceding countries and the Commission, through the Joint Monitoring Committee. The role of monitoring is to steer the programme and the underlying projects towards their agreed objectives.

Financial significance of investment support in national programmes

11. The Phare national programmes for the years 2000 to 2004 allocated a total of 511 million euro to Bulgaria and 1 400 million euro to Romania, of which 262 million euro (51,3 %) and 806 million euro (57,6 %) for Bulgaria and Romania respectively were devoted to investment support (see Annex I).

AUDIT SCOPE AND APPROACH

12. The primary objective of the Court's audit was to conclude on the outputs and results of the investment components of Phare supported projects in Bulgaria and Romania. The audit asked four questions: — Were the projects in line with overall Phare objectives? — Did the projects take place? — Were the projects operating as intended? — Were the projects sustainable? Diagram shows the focus of the Court's audit.

13. The audit examined projects which were fully implemented or were close to completion. These projects were drawn from the Phare National Programmes 2000 which were due to be completed by the end of 2003 but for which some projects continued until the end of 2005.

14. Phare national programmes for the year 2000 allocated 34,6 million euro to investment components in Bulgaria and 146,6 million euro to those in Romania (see Annexes II and III). The Court audited 11 projects (3) involving 48 supply and works contracts which represent Phare support of 14 million euro for Bulgaria and 51 million euro for Romania. The audit team examined the projects on the spot in the first half of 2005, including visits to national implementing bodies and interim evaluation units (4).

OBSERVATIONS

Projects were in line with overall Phare objectives

15. The overall objective of the Phare programme is to help candidate countries prepare for EU membership. This involves investments with the aim of strengthening: (a) the regulatory infrastructure needed to ensure compliance with the acquis communautaire (5); (b) Economic and social cohesion (ESC) through measures similar to those supported in Member States through the Structural Funds, including addressing the effects of restructuring in important sectors of the economy.

16. The investment projects audited were in line with these overall Phare objectives. The projects examined were accession-driven, either by addressing the capacity to monitor and enforce the acquis communautaire (e.g. implementation of environmental regulations) or by addressing Economic and Social Cohesion (e.g. creation of business parks for small and medium-sized enterprises (SMEs)).

Investments took place

17. In general, the investments audited were physically in place in accordance with the conditions of the supply and works contracts. This means that an initial condition for project success was generally fulfilled based on the joint efforts of the authorities in the two acceding States and of the Commission.

18. Some examples from all projects audited are given in Box 1 to illustrate the investments in place. Box 1 — The digital mobile radio communication system delivered to the National Border Police Service (NBPS) in Bulgaria (contract value of 6,0 million euro). The system operates in the Lyubimetz border region (adjacent to Turkey) which is according to the Commission one of the most critical areas of Bulgaria in terms of cross-border criminality and a major transit route and conduit for illegal immigration. — The equipment supporting the border police of Romania in respect of mobility (4,4 million euro) and surveillance (5,0 million euro) at the eastern border with Moldova and Ukraine. — Monitoring equipment in the areas of industrial pollution and radiation protection (Bulgaria). — Infrastructure needed for improved accommodation of asylum seekers/refugees (Romania). — Computer equipment for the Ministry of Agriculture and Forestry (Bulgaria). — A prisoner management database for the penitentiary system (Romania).

Over half of projects not operating as intended at the time of audit

19. It is not sufficient simply to have the investments in place. For over half of the investment projects audited, the assets were not, or were only partially, being properly used for the intended purpose. Output and results lagged considerably behind schedule, sometimes by up to two years. The following cases show that progress towards the achievement of specific project objectives has been less than planned (paragraphs 20 to 42).

Strengthening the Public Prosecutor's Office in Bulgaria

20. The specific objective of this project was the modernisation of all Prosecutors' Office (PO) units at central, regional and local levels. The investment support (total contract value of 1,8 million euro) comprised the supply of computer and networking equipment and the implementation of a unified information filing system (UIS).

21. The UIS software was delivered in 2003 but only used in one of the eight locations visited by the Court. A final acceptance certificate for the UIS software had not been issued at the time of the audit in May 2005, because too many errors had been found in its functioning.

22. Furthermore inconsistencies in the IT strategy and imbalances between software and hardware were identified (e.g. integration problems with existing software; 37 workstations not used but put in a store room at one PO unit; risk to the intended wider use of the UIS due to Internet provider problems).

23. Therefore, 18 months after the target date for completion (end of 2003) the new UIS system was still in the testing phase and could not yet serve as an important tool in the fight against organised crime and corruption. The complexity, technical feasibility and compatibility with existing systems had been underestimated when the project was designed by the Commission and the Bulgarian authorities.

Strengthening the Romanian judicial and penitentiary system

24. A similar project was implemented in Romania (three supply contracts with a total value of 8,4 million euro) with the objective of creating a Case and Document Management System (CDMS) which would link all the courts and prosecutorial offices in the country. Software for a CDMS system was already developed under an earlier Phare project and delivered in September 2002. The goal of the Phare 2000 project was to be ‘the last step in linking all the courts and prosecutorial offices in the system’.

25. At the beginning of 2005, the overall objective of the project (having a functioning countrywide application of CDMS) was still not achieved, although original project completion was foreseen by the end of November 2003. At each location visited by the Court the hardware had been installed in accordance with the contracts. However, the software delivered under the earlier Phare programme was only partially used. Moreover, large parts of the judicial network in Romania were still untouched by CDMS, because the Romanian authorities did not respect their substantial co-financing commitments namely to make available 12 million euro to the Ministry of Justice and 10 million euro to the Public Ministry within the duration of the programme (6). The absence of these financial commitments showed that this project for the reform of the judicial system to meet EU standards was not treated as a priority by the Romanian Government.

Investment in SME business incubators in areas of industrial decline in Bulgaria

26. The SME Business Incubators project (allocated budget of 2,7 million euro for investment) had the objective of strengthening the SME sector in the north-west and south-central regions of Bulgaria. Business incubators were supposed to be created by renovating old buildings in areas of industrial decline in the two regions. Individuals should be encouraged to start up new enterprises to create new employment opportunities to replace those lost in traditional industries that had been forced to restructure.

27. Six buildings were finally selected for renovation. At the time of the audit in July 2005 only one (Montana) was starting to operate as a business incubator. Five years after the needs assessment, no regional impact in terms of the creation of alternative jobs in areas of industrial decline had materialised.

28. The lack of progress was mainly due to the weak implementation capacity of the national authorities. Weak administrative capacity was also the main reason that a further project in the area of SMEs was cancelled (see Box 2). Box 2The intended project in Bulgaria with the title ‘SME Quality Certification’ (allocated budget of 4,8 million euro) was not carried out at all in the end. It had the specific objective of improving the competitiveness and export capability of the manufacturing sector. The ex ante control (see paragraph 9) by the Delegation in Sofia worked efficiently rejecting the first call for proposal documentation because of a lack of adequate implementation structures and procedures for grant schemes in the relevant Ministries. In the end, the Delegation did not approve the grant award process because the assessment of administrative compliance and eligibility of applicants by the Bulgarians was not consistent and the companies were not equally treated. The Bulgarian authorities, for their part, blamed the Delegation for not delivering consistent information about the EU legal framework to be applied.

Local and regional infrastructure projects in Romania

29. At the time of the audit in March 2005, major efforts were also still necessary for the achievement of the objectives for two business infrastructure development parks in Romania (total contract value of 13,7 million euro). Construction was still underway, whereas the original completion date according to the project fiche was October 2004. Design flaws contributed to the prolongation of the works contracts. Concerning the future of these two projects, a series of management problems still had to be solved (see paragraphs 53 to 56 under the title ‘Risks to economic viability’).

30. A further project in Romania was entitled ‘Modernisation and development of tourist infrastructure in Piatra Neamt’ (contract value of 2,3 million euro). The infrastructure was in place, in accordance with the works contract. The project title was, however, misleading, because there was little in the renovated area to attract tourists. Major items financed were a bridge and a 3 km street, both outside the leisure area and regularly used by local traffic. The ‘tourist’ area itself is an entertainment facility mainly used (in spring and summer) by the local community. Furthermore the site contains an eyesore, an empty, degraded Olympic-size swimming pool. Thus the area, known as the Strand, looks only half rehabilitated and could not create new employment, as intended, by attracting tourists.

31. Two other infrastructure projects in Romania were blocked from achieving their objectives: (a) the bridge linking Romania and Moldova over the River Prut was completed in December 2004 (total contract price of 3,1 million euro). Unfortunately it cannot be used since the access road on the Moldovan side has yet to be built. Moreover, border checkpoints are missing on either side; (b) construction work on a hall for international fairs in Constanta (6,4 million euro project) stopped in September 2004 when Constanta County Council withdrew its construction permit, claiming technical discrepancies. Since then, continued and reasoned efforts by the different stakeholders failed to persuade the Council to issue a new permit. Although real costs of about 3 million euro have been incurred, the project is in serious jeopardy.

Bulgarian Post-Privatisation Fund (BPPF)

32. A special case of investment support was the Phare spending on the Bulgarian Post-Privatisation Fund (BPPF). The European Bank for Reconstruction and Development (EBRD) created the BPPF in 1998 as a fund of 10 years' duration. The objective was to contribute to the development of the private sector in Bulgaria and to improve the performance of selected Bulgarian private enterprises by providing them with long-term equity finance and know-how.

33. The EBRD had the overall responsibility for the BPPF and used an asset management company as fund manager. The EBRD capitalised the BPPF with 30 million euro of equity funds and received 6,5 million euro of Phare payments from Bulgaria's 1997 to 2000 Phare national programmes. The Phare money, since it was not a form of a direct investment, was used for the operating expenses of the Fund Manager, consultancy advice to enterprises and the EBRD's own management fee.

34. Several factors indicate that Phare spending was neither efficient nor effective: (a) instead of investing in 12 to 15 companies, the BPPF had acquired stakes in only six; (b) one of these six companies — one in which the Fund had made by far the largest investment (4 million euro) — went bankrupt; (c) the Fund Manager's management costs were disproportionately high: 4,5 million euro were used for the Fund's administrative costs during the period 1998 to 2002, whereas the total amount for direct equity investments in the six companies after their privatisation was only 11,6 million euro.

35. The Bulgarian authorities were not satisfied with the fund and the Commission intervened to stop any more EU money being spent. The EBRD wound up the BPPF ahead of schedule at the end of 2002.

36. The main reason for the BPPF's failure, apparently, was the performance of the Fund Management Company, which was making incorrect appraisals (investment decisions) in the generally difficult post-privatisation situation. The incentive to work cost-effectively was reduced because all operating expenses were taken over by Phare. Because it was being used to support the normal business of the EBRD, the catalytical (7) effect of the investment was not achieved.

Energy sector liberalisation in Romania

37. In Romania, the project to modernise the electricity industries has suffered considerable delays, slowing down Romania's preparation for entry into the EU internal energy market. Phare covers 11 % of the 203 million euro investment part of the programme, the remainder being supported by national co-financing (24 %) and loans from the EBRD (25 %) and the European Investment Bank (40 %). The original target for completing improvements to the transmission grid (including all Phare elements) was August 2002. This was put back twice, first to November 2004 and then to June 2005. Contracting was stalled by the hesitancy of the Government in meeting one of the project conditions: satisfactory progress in the privatisation of two electricity distribution companies.

38. The project contributed to the restructuring of the sector in line with EU directives. However, with this project being mainly implemented via loans by the EBRD and the European Investment Bank, the additionality (8) of the Phare component is not evident. Furthermore the Phare-funded components assisted the transmission provider and the commercial market operator rather than the electricity regulatory authority directly.

Agrostatistics in Bulgaria

39. In Bulgaria, completion of the ‘Restructuring the agricultural statistics system’ project (total contracted value of 0,4 million euro) was planned for January 2002. IT equipment was installed at the beginning of 2003, but has not yet been used for the intended purpose. This is because the software that was delivered was faulty, due to the poor performance of the software supplier. As a result, the agricultural statistical network system (ASNS) was not yet operational in January 2005, although the Commission indicated that significant progress has since been made. The Ministry of Agriculture and Forestry suffers from not having the ASNS in place which would facilitate the implementation of the common agricultural policy of the EU in future.

Asylum in Romania

40. The asylum project in Romania (total contract value of 1,6 million euro) aims to further develop the asylum system, towards harmonisation with European procedures and practice. The funding was mainly used for the creation of two new accommodation centres in Galati (eastern border) and Timisoara (western border).

41. The facilities of the Galati centre were to a large extent not used. The number of asylum-seekers accommodated in the centre at the time of the audit was only 19, which means an occupancy rate of 7,6 % (9). The persons accommodated in June 2005 were not local applicants, but a group of Bangladeshis transported to the centre from other parts of Romania. According to the National Refugee Office (NRO), there have never been any applications for asylum at border crossing points along the eastern border (or at scarcely any of Romania's external borders, apart from Bucharest airport). The overall picture in Galati — no applicants entering from the eastern border, two floors of the building unused, household goods untouched, medical supplies unopened, cars barely used — suggests that it was not really necessary to create this new accommodation centre in Galati.

42. The overall picture for Romania was that there were more facilities for asylum seekers and refugees than actually needed. On the other hand, it is hard to predict the number of future asylum seekers, because of the uncertainty regarding the future economic environment and the stability of the region. If low occupancy continues in the coming years, there will be a pressing need to consider alternative uses for these buildings and their equipment, especially the perishable part.

In most projects audited sustainability was not assured

43. According to the Phare guidelines the investment projects must be sustainable beyond the date of accession, including financial means to cover future maintenance and operation costs. The Court audited sustainability based on two aspects: technical viability for investment goods (see paragraphs 44 to 50) and economic viability for business incubators and industrial parks (see paragraphs 51 to 56).

Risks to technical viability

44. Expensive investments have to be properly maintained in order to produce long-lasting results. Generally, there were no clear plans for covering future maintenance costs once the warranty period ends. The general lack of national finance became evident in many cases. The Prosecutor's Office (PO) in Bulgaria had an insufficient budget to cover basic requirements such as adequately qualified IT experts, scanners or adequately cooled rooms for servers. In the judicial sector of Romania (CDMS system), there were similar problems.

45. A lack of available national resources, together with the intricacy of some equipment, had already caused difficulty in some projects. The following examples in the area of border police equipment show the consequences of maintenance problems.

46. The NBPS in Bulgaria indicated that the national financing for the maintenance of the radio communication system after the guarantee period had not been earmarked. In addition, electronic parts of the thermal imaging surveillance systems would need to be renewed after a life of five to seven years. In 2007 the thermovision cameras will have been in service for five years.

47. The proper use of new and modern equipment enhances its longevity. Officers must be trained to operate the equipment in order to get the best from it. In this case the training component of the project (0,5 million euro), which was also intended to strengthen inter-agency cooperation, had not taken place.

48. The Bulgarian border police foresees problems in maintaining the four-wheel drive vehicles. The brand introduced by the winning tender has no local maintenance facilities. The usual fleet car of the NBPS is a Russian-built car, costing one third of the price of the type of car delivered under Phare and with cheaper spare parts. However, the Phare rules on European origin prevent the purchase of vehicles from outside the EU or candidate countries.

49. Having resources available for maintenance is all the more important as some of the equipment was unreliable or its technical capabilities did not meet the requirements of the users: (a) in Bulgaria the availability of the night vision goggles was limited because 65 pairs out of 112 originally delivered had been sent back to the supplier for repair; (b) Romanian records show that the eight Phare-funded custom-built surveillance vehicles (total cost 2,1 million euro) were not operational for a third of the time since coming into service in November 2003. Repair of the surveillance machinery has to be carried out abroad, which adds to the period of inactivity. A similar level of inactivity applied to 35 nationally funded surveillance vehicles of the same make. The prior deployment of national vehicles to the same sectors of the border raises the further question of the additionality of the Phare vehicles. The project fiche does not mention these nationally funded vehicles, when it justifies the Phare purchase of surveillance equipment (10); (c) according to the Romanian Border Police, two of the fluvial patrol boats (each costing 300 000 euro) could not be used in the Danube delta during the winter, i.e. for two to three months each year, due to the freezing of the river. The technical specifications had stated that the boats should be able to be operated day and night, through broken ice and in temperatures from – 15 to 45 °.

50. Without ensuring that resources are made available to replace or overhaul equipment or components which are reaching the end of their useful life, e.g. the engines of the fluvial patrol boats in Romania, there is a risk that the border equipment audited will no longer be fully operational when Bulgaria and Romania accede to the EU (or even the Schengen space) and their borders form part of the EU external border.

Risks to economic viability

51. In Bulgaria six buildings had undergone renovation to be used as business incubators, of which five were not yet being used as such (see paragraph 27). In Romania the two business infrastructure parks audited were not yet in operation. While it is hard to assess the future economic viability of insufficiently advanced projects, a number of significant risks were identified.

52. The long-term success and economic viability of the Bulgarian business incubators will depend on numerous factors which at the time of the audit had not yet been addressed: performance of management teams, support and contributions from the municipalities for the maintaining of premises, rental income from tenants and income from services to SMEs, such as counselling (e.g. on credit/loan applications, legal advice). Successful operating depends on the ministries supporting fully the incubators' management teams, which now have to perform proactively to start up.

53. In Romania, industrial parks are a relatively new phenomenon and there is a lack of experience of park management. The National Development Plan for 2004 to 2006 expressed doubts about some of the newly emerging parks, stating that a number of the current industrial development plans were not based on a very rigorous demand analysis.

54. The park in Iasi, with dynamic management and additional investment, has the potential for considerable growth. However, the Court found that the number of new jobs to be created was unlikely to approach half the 1 100 predicted in the feasibility study which supported the Phare project.

55. While the target of 300 new jobs for the park in Bacau is relatively prudent, it is not certain to be reached. A key source of new employment is start-up companies, but the prospectus did not describe how the park intended to attract and foster them.

56. The Implementing Agency in Romania was supposed to monitor the achievement of the objectives of these infrastructure projects. However, they focused merely on the successful completion of construction, without checking whether the projects were on target to meet their broader economic objectives, such as creating new employment.

CONCLUSIONS AND RECOMMENDATIONS

57. The Commission's checking of projects prior to financing (ex ante control) proved to be effective in preventing irregularities in the procurement process.

58. The projects audited were generally in line with the overall Phare objectives and were also physically in place in accordance with the conditions of the supply and works contracts. However, for over half of the projects audited assets were not, or were only partially, being used for the intended purpose. These shortcomings resulted from weak administrative capacity and a lack of national resources in Bulgaria and Romania. Recommendation 1The national authorities should make further substantial efforts to finalise the projects and to achieve the underlying project objectives.The Commission should closely follow that the audited projects will finally operate as intended. The Commission should also contribute to improved functioning of the Monitoring Committees as a key system for corrective policy actions in the event of underperformance.

59. The Commission overestimated the management capacity of the public authorities in Bulgaria and Romania and often agreed with their overambitious targets and deadlines. This overambitious target setting is reflected in the project fiches, which contain a mixture of ambitious ‘wider’ and ‘immediate’ objectives, outputs, purposes, results, activities and a set of often invalid ‘indicators of achievement’ (11) frequently characterised by a lack of systematic clarification. As a result, the project fiches could hardly be used as a meaningful management tool. Recommendation 2The Commission should adopt a more realistic programming approach for Bulgaria and Romania and the new candidate countries. This includes an improved needs assessment ensuring complementarity with other sources of investment support. A key element is to improve the project fiche, which can better fulfil its functions of directing and monitoring. External experts have already proposed that the bodies involved in the planning process should systematically set up a quality control function for the production of project documents (12).

60. The technical viability of some of the assets is in doubt due to a lack of national funding. With regard to the supported business parks and incubators many questions of economic viability remain to be solved. The Commission did not sufficiently supervise the principles of sustainability and co-financing as it is laid down in the guidelines for implementation of the Phare programme. Recommendation 3The Commission should specify the resources for maintenance and the requirements for co-financing as early as the programming stage and introduce a formalised procedure for the verification of these principles. The monitoring of sustainability should include the monitoring of economic targets, e.g. in terms of job creation.

61. The Commission did not give enough consideration to the added value and catalytic effect of Phare money in activities led by the international financial institutions. Enormous investments in the regulatory infrastructure are needed for the implementation and enforcement of the acquis communautaire. Phare can only cover a part of these overall needs. That is why the Phare guidelines require that the investment support has to be focused on actions which would otherwise not take place and which promise a high catalytic effect. Recommendation 4The Commission should improve its analysis of the aspect of additionality and catalytic effects, especially in projects which are led by international financial institutions or other third parties.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 11 May 2006. For the Court of Auditors Hubert WEBER The President

(1) SEC(1999) 1596 final: Guidelines for Phare programme implementation in candidate countries for the period 2000 to 2006 in application of Article 8 of Council Regulation (EEC) No 3906/89, Brussels, 13.10.1999. The guidelines were revised in September 2002 and in December 2003.

(2) Investment normally means buildings and equipment, for which the National Authorities conclude works and supply contracts. Institution building is defined as the process of helping the candidate countries to develop the structures, strategies, human resources and management skills needed to strengthen their economic, social, regulatory and administrative capacity. The main instrument is Twinning (see the Court's Special Report No 6/2003 concerning Twinning as the main instrument to support institution building in candidate countries).

(3) A project in a national programme usually consists of numerous components, which all contribute to the same objective.

(4) A consortium is contracted under Phare to carry out annual interim evaluations of the projects.

(5) The entire body of EU law as expressed in the treaties, in the secondary legislation and policies of the Union, as well as in the case-law of the European Court of Justice.

(6) The purpose of the loans was to provide hardware in the majority of judicial locations throughout the country.

(7) The Phare implementing guidelines state that the support for investment ‘must act as a catalyst for a priority, accession-driven actions which would otherwise not take place or which would only take place at a later date’.

(8) Phare implementing guidelines state that the support for investment ‘should not displace other financiers, especially from the private sector or from the internal financial institutions’.

(9) The Galati centre has appropriate facilities for processing and accommodating up to 250 asylum seekers.

(10) The risk of potential overlaps between large nationally funded investments now under way and previous Phare supported investments in the border management area was highlighted in Romania's comprehensive monitoring report for 2005.

(11) See indicators which are formulated like broad objectives (e.g. ‘creation and operation of an electricity wholesale market in conformity with the electricity single market directive’ or ‘meeting the requirements of the EU in combating organised crime and corruption’).

(12) From Pre-Accession to Accession, Interim Evaluation of Phare support allocated in 1999-2002 and implemented until November 2003, Consolidated Summary Report, March 2004 (published by European Commission).

ANNEX I ALLOCATION OF PHARE MONEY TO NATIONAL PROGRAMMES (million euro) National programmes (1) Bulgaria Romania Investment Institution building Total Investment Institution building Total 2000 34,625 31,095 65,720 146,595 68,425 215,020 2001 44,588 38,235 82,823 120,920 127,970 248,890 2002 54,112 40,788 94,900 147,436 118,064 265,500 2003 47,476 47,424 94,900 168,365 97,135 265,500 2004 81,511 91,014 172,525 223,010 182,290 405,300 Total 262,312 248,556 510,868 806,326 593,884 1 400,210 Percentage 51,3 % 48,7 % 100 % 57,6 % 42,4 % 100,0 % (1) National programmes are executed over a period of years. For instance, the Bulgaria 2004 National Programme was agreed in September 2004, with a general deadline for the execution of projects of 30 November 2007.

ANNEX II National Programme 2000 — Bulgaria BUDGET BREAKDOWN BY PROJECT (million euro) Project code Objective and projects (short title) Total Phare support Institution building Investment Economic reform 5,500 4,000 1,500 0002.01 Strengthening the Ministry of Economy 2,000 2,000 0,000 0002.02 Further support for Bulgarian Post-Privatisation Fund 1,500 0,000 1,500 0002.03 Railway organisation restructuring 2,000 2,000 0,000 Adoption of the acquis and strengthening the regulatory framework 15,400 11,025 4,375 0003.01 Strengthening regulatory framework for telecoms 2,450 1,750 0,700 0003.02 Establishing a conformity assessment system 3,000 2,325 0,675 0003.03 Implementing a public procurement system 1,300 1,000 0,300 0003.04 Institution building at the energy regulator 1,100 1,000 0,100 0003.05 Institution building at energy efficiency agency 2,200 1,600 0,600 0003.06 Environment acquis and institution building 5,350 3,350 2,000 Economic and social cohesion 15,000 1,080 13,920 0004.01 SME quality certification 5,000 0,200 4,800 0004.02 SME business incubators 3,000 0,320 2,680 0004.03 Vocational training 5,000 0,240 4,760 0004.04 Renovating vocational training institutes 2,000 0,320 1,680 Strengthening the rule of law and protection of vulnerable groups 16,500 4,555 11,945 0005.01 Strengthening the Public Prosecutor's Office 3,000 1,200 1,800 0005.02 Border police equipment at Turkish border 9,000 0,500 8,500 0005.03 Developing a national anti-drugs strategy 1,000 0,705 0,295 0005.04 Child welfare reform 3,500 2,450 1,050 Public finance and management of EU funds 13,320 10,435 2,885 0006.01 Strengthening public internal financial control 2,000 1,500 0,500 0006.02 Strengthening the public external audit institution 2,000 1,400 0,600 0006.03 Reform and modernisation of tax administration 2,000 1,800 0,200 0006.04 Institution building and development of national statistics 2,000 1,315 0,685 0006.05 Restructuring agro-statistics 2,000 1,200 0,800 0006.06 SAPARD implementation capacity 1,000 0,900 0,100 0006.07 CFCU capacity building 0,320 0,320 0,000 0006.08 Phare project preparation facility 2,000 2,000 0,000 Total 65,720 31,095 34,625

ANNEX III National Programme 2000 — Romania BUDGET BREAKDOWN BY PROJECT (million euro) Project code Objective and project (short title) Total Phare support Institution building Investment Political criteria 13,00 5,75 7,25 RO–0004.01 Strengthening the judicial and penitentiary systems 8,00 0,75 7,25 RO–0004.02 Civil society 5,00 5,00 Economic criteria 40,90 12,975 27,925 RO–0005.01 Energy sector liberalisation 28,90 8,50 20,40 RO–0005.02 Inter-bank payments system 10,00 3,00 7,00 RO–0005.03 Securities market regulation 2,00 1,475 0,525 Meeting the obligations of the acquis 73,12 36,70 36,42 RO–0006.01 Industrial policy 0,60 0,60 RO–0006.02 Quality infrastructure 4,40 1,40 3,00 RO–0006.03 Mutual recognition of qualifications for professional purposes 1,65 1,35 0,30 RO–0006.04 Improving the revenue collection system 2,00 1,50 0,50 RO–0006.05 Public procurement 2,00 1,55 0,45 RO–0006.06 Strengthening internal audit and financial control 2,40 1,95 0,45 RO–0006.07 Strengthening the Romanian Court of Audit 1,60 0,90 0,70 RO–0006.08 Agricultural policy and coordination 4,00 3,50 0,50 RO–0006.09 Agri-food quality control 2,55 1,55 1,00 RO–0006.10 Phytosanitary acquis 2,00 0,35 1,65 RO–0006.11 Strengthening the capacity to manage the veterinary acquis 4,00 1,00 3,00 RO–0006.12 Strengthening the capacity to manage the acquis on wine 2,00 1,00 1,00 RO–0006.13 Agricultural and regional statistics 6,00 5,20 0,80 RO–0006.14 Implementation of the environmental acquis 8,00 5,50 2,50 RO–0006.15 Road worthiness enforcement 3,00 3,00 RO–0006.16 Strengthening border management 18,92 1,60 17,32 RO–0006.17 Fight against drugs 1,00 0,75 0,25 RO–0006.18 Support activities to strengthen the European integration process 7,00 7,00 Economic and social cohesion 88,00 13,00 75,00 RO–0007.01 NDP implementation IB 13,00 13,00 RO–0007.02 Regional development 75,00 75,00 Total 215,02 68,425 146,595